Good day, and thank you for standing by. Welcome to the OraSure Technologies Incorporated 2024 Second Quarter Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised, today's conference is being recorded. I would now like to hand the conference over to your first speaker today, Jason Plagman, VP of Investor Relations.

Good afternoon, and welcome to OraSure Technologies' second quarter 2024 earnings call. Participating in the call today for OTI are Carrie Eglinton Manner, our President and Chief Executive Officer; and Ken McGrath our Chief Financial Officer. As a reminder today's webcast is being recorded, and the recording can be found on our Investor Relations website. Before we begin, you should know that, this call may contain certain forward-looking statements including statements with respect to revenues, expenses, profitability, earnings or loss per share and other financial performance, product development, performance, shipments in markets, business plans, regulatory filings and approvals, expectations and strategies. Actual results could be significantly different. Factors that could affect results are discussed more fully in OTI's SEC filings including its registration statements its annual report on Form 10-K for the year ended December 31, 2023, its quarterly reports on Form 10-Q and its other SEC filings. Although, forward-looking statements help to provide more complete information about future prospects, listeners should keep in mind that, forward-looking statements are based solely on information available to management as of today. OTI undertakes no obligation to update any forward-looking statements to reflect events or circumstances after this call. With that, I am pleased to turn the call over to Carrie.

Thanks, Jason, and thank you to everyone for joining us today. We are pleased to provide an update on the progress OraSure is making on the three pillars of our strategic transformation: strengthening our foundation, elevating our core growth and accelerating profitable growth. A few notable highlights during the second quarter include that, we delivered Q2 revenue that was near the top of our guidance ranges for both core revenue and for COVID-19 products, where we successfully fulfilled the remaining portion of our largest contract with the federal government. In product extensions, we earned World Health Organization prequalification for our OraQuick HCV self test, representing the first hepatitis C self test to achieve this designation. OraSure is proud to add the WHO PQ milestone to our legacy of first in the diagnostics industry and we look forward to working with the global health community to expand market access and bring this test to populations in need. We launched new FDA-cleared packaging and labeling for our OraQuick HIV self test, which is expected to increase shipping efficiencies and reduce shelf space and plastic usage. Hang on. Sorry about that. The new labeling also removes the contraindication for users on PrEP, potentially expanding access for a population that is recommended to test 4x per year. We are seeing positive momentum with Syphilis Health Check following our launch of this key sexual health portfolio product at the end of Q1. We broadened relationships with several leading oncology companies to expand ORAcollect Dx collection devices into saliva-based liquid biopsy. We expanded our agreement to become a supplier of saliva collection devices for Exact Sciences. Our ORAcollect Dx saliva collection device will be utilized in Exact's hereditary cancer and therapy selection tests. And with our healthy balance sheet, we continue investing in our innovation roadmap…

Thanks, Carrie. I'm happy to discuss our results for the second quarter of 2024 and provide updates on our financial outlook. In Q2, we delivered total revenue of $54.3 million. Core revenue, which excludes COVID-19 products, was $35.4 million in the second quarter. Within core revenue, our diagnostic products generated $18.7 million of revenue in Q2 and decreased 5% year-over-year. Sample Management revenue in the second quarter was $12.6 million and decreased 3% year-over-year. Total core revenue growth declined 7% on a year over year basis in Q2 and was impacted by a 40% decrease in revenues from the Diversigen Molecular Sequencing Services business that we are exiting, as well as a decline in non-product and services revenue. COVID-19 products, predominantly InteliSwab, contributed $18.9 million of revenue in the second quarter. As anticipated, we fulfilled the remaining $17 million of our largest contract with the U.S. Government during the quarter. Our GAAP gross margin in the second quarter was 45.4% and non-GAAP gross margin was 47.4%. Gross margin was at the high end of our expectations and was driven by continued progress in our operational efficiency initiatives and our investments in automation. Our GAAP operating expenses in the quarter were $27.4 million, which includes $3.1 million of non-cash stock compensation expense, $1.1 million for impairment of assets, and $763,000 for reduction in workforce severance. Our GAAP operating loss in Q2 was negative $2.7 million and non-GAAP soperating income was $3.3 million. As we discussed last quarter, as part of our transformation journey, we initiated several additional actions to rebalance our cost structure, consolidate our operational footprint, and streamline our portfolio of offerings to focus on our strengths. We have made good progress on these three initiatives over the last 3 months. For Diversigen, we have been transitioning customers and expect…

Thanks, Ken. As we detailed today, we continue to make solid progress on our strategic transformation. This quarter, we generated positive operating cash flow and we continue to streamline our operations and unlock efficiency gains. In our core business, we are seeing positive momentum with the launch of Syphilis along with product extensions and enhancements that expand access to our products and address the needs of patients and our customers. And, we continue to strengthen our existing customer relationships while adding new customers. Overall, we are confident that OTI is well-positioned to leverage the strength of our differentiated assets and organizational capabilities to drive sustainable, profitable, long-term growth as key end segments further recover in 2025 and beyond. With that, I'm pleased to turn the call over to the operator for Q&A. Haley?

Thank you. [Operator Instructions] Our first question comes from the line of Jacob Johnson from Stephens. Your line is now open.

Good afternoon. It's, Mac on for Jacob today.

Hi, Matt.

Hi. Appreciate the color around the margin progression in 3Q. I think you cited low 40% given the efforts there. But I was curious how that should progress in 4Q and maybe into 2025 as we start to roll off some of these different costs that are kind of feeding into the P&L at the moment?

Yes. Thanks, Mac. I appreciate the question. Yes, so just to reiterate, our drivers for Q2 to Q3 margins, the first is that we expect to have a higher percentage of international revenue. And as you know that carries with it a little bit below our average of our gross margin, so not all the negative draw on the margins. Also, we're still going to remaining having diversogen expenses in Q3. So, as far as we progress to Q4, we expect to get a benefit from the overall mix, the mix between international and domestic. We'll be eliminating those diversaging expenses. So that will help us in Q4. In addition, we're continuing our operational efficiencies. I think we said last quarter about our version to packaging improvements, our footprint consolidations. We're continuing to progress in those areas, which drive overall efficiencies.

Appreciate the color there. And just in light of the improvements in the overall backdrop and funding of some of your end markets, I think you called out Sample Management as one that's gradually recovering. But can you highlight any particular areas of strength and weakness that you are currently seeing?

Yes. Mac, in Sample Management, we are seeing strong volume of new customer entities. And what we've talked about in prior quarters is the offset of some of our largest customers, while we add a high volume of new customers, new applications for those customers, new segments. It's part of the reason that we've highlighted liquid biopsy applications, animal health applications, and we continue to share that strength in those green shoots of the volume of those customers. What we're really looking for is, for their growth to that trajectory to change and with that we believe we're very well-positioned to grow with them. We don't think we're losing share. We actually think, we remain really strong adding net customers and that it's about that market turn, a matter of when not if is what we believe and lots of segments, many customers and really just well-positioned to grow as they grow.

Our next question comes from the line of Patrick Donnelly from Citi. Go ahead.

Hi. You have, Brendan on for, Patrick. To start off, it was good to see a nice sequential step-up within diagnostics segment. Can you walk through some of the moving pieces within that and different trends that you may have seen? Were there any tests that were really driving growth in revenue there?

Yes. We saw some several areas of improvement quarter over quarter. We saw HCV increase in some of our contracts with the Department of Health in several states. In addition, as we mentioned last year or last quarter, we launched our Syphilis test, which we are starting to see growth there. So those are two of the areas. And then internationally, we saw growth in HIV.

Got it. Thank you for the color on that. And then actually on the HP, so it's great to hear about the, WHO prequalification there. Can you talk about, like, the opportunity that kind of presents for the company, both kind of in the near-term and long-term?

Yes. We love to be a leader in WHO PQ. And for those who know the global markets, that's really about future procurement for by UN agencies. It is a key designation that really can help to open up donor funding. I would describe that as quite a lengthy process, can definitely take many months. We never conjecture on the timing, but just to sort of give a range, that can be 12, 24 months onward. But WHO PQ is a really important qualification to be on the list that open up donor funding. So, terrific news on the potential market access expansion. We're not sizing it right now other than to point out, it's $50 million individuals living with HCV around the globe. It's a million individuals who acquire it each year. There is more funding for treatments being available. That's actually one of the drivers internationally in that and Ken mentioned our HCV strength in second quarter, and with that increase in funding comes a desire for more diagnostic testing. So timing TBD, but I think obviously great news to become the first, HCV self test with the designation and it opens up some global market expansion possibilities.

Great. And thanks again for the color and congrats again on the quarter.

Our next question comes from the line of Casey Woodring from JPMorgan. Your line is now open.

Great. Thanks for fitting me in. So I just had a question. Can you just elaborate on the international revenue step-up in the back half that you called out? Where is that coming from? What sort of visibility do you have? And just any more color on what your expectations are there, internationally?

Internationally, we were continuing to have another strong year just like we did last year. Part of it is timing that happens within internationally, where the orders are fairly large relative to other books of business. And so, some of it happens with timing. And what we are expecting to see in Q3 is a step-up relative to Q2 orders and Q4 quarters. But really it's about the offerings that we have. Our HIV testing, our oral fluid testing is really is preferred versus other blood testing. In addition, we have good relationships with a lot of our public health distributors. And so those are driving the preference for our products internationally. But the Q3 step-up is really driven by timing of orders. But overall, we're seeing another strong full year in 2024 versus in addition just like we did in 2023.

And that's exactly right and we said it in the scripted comments, but it is similar to 2023 and 2022, in terms of that seasonality. So strong year in total, Q3 particularly strong.

Okay. Got it. That's helpful. And then, maybe just one follow-up, apologize if I missed in the script, joined late. But what are you guys expecting in terms of revenue contribution from Syphilis in 3Q? And then I guess just generally how are you seeing that test ramp over time? Thank you.

Thanks, Casey. Well, we aren't calling out the segment yet for Syphilis. What we're highlighting is a really strong launch. We launched that product in Q1. We have strong pandemic testing trends, which is the HIV, HCV, Syphilis, testing and the overlap in the vulnerable populations for that. So our public health partners are in the private markets as well, have really been asking for that test to able to bring that first FDA cleared clearwave test to market has just been a great opportunity. So we'll continue to share more, but it's an important part of our diagnostics portfolio and really goes hand-in-hand with that those HIV and HCV test.

[Operator Instructions] Our next question comes from the line of Andrew Cooper from Raymond Jones. Your line is now open.

Thanks for the questions. Maybe just first, thinking about new products. I think back to I think it was the Sapphiros deal you talked about adding two points of growth in '25. Can you just give an update on that as we think about both those products and what the progress is and then what things like Syphilis, et cetera, maybe are, are doing relative to your prior expectations and how you think about that beyond 2024?

Yes. It's great to talk about our partnership and Sapphiros as well as new products. You've got a couple of things layered, and I'll start with the start of your question, which was Sapphiros. Partnership is off to a very good start. Our teams are collaborating, and we have codevelopment opportunities across multiple product portfolios, both in Diagnostics and Sample Management. As we shared when we talked about the strategic partnership, we are not expecting a meaningful revenue contribution. Just as a reminder, in 2024. As you referenced, we did call out growth in 2025. We still expect that modest contribution to growth from Sapphiros next year. We will describe more about the technology road map. What we have shared so far is, the first product we expect is in Sample Management and aligned with our strategy to add more sample types. The first product is for small volume self collected blood and that's the satio product line. We I should say satio small volume self collected blood. In '25, we are expecting to also be adding diagnostic testing progress and we'll talk more about that as we get closer. On track, we are still expecting the contribution in '25, did not expect a '24 impact. And I think just excitements around the partnership and what we've gotten off to a good launch with them. Was there another part of your question, Andrew?

No, that was the bulk of it. Maybe just to shift gears then with a follow-up. Back to gross margin timing, I mean, you've got revenue stepping up, but gross margin is kind of stepping down and doing the opposite. I know the O-U.S. piece weighs, but can you size how much of that headwind is diversaging? Just because we end up with the second half, that looks like it'll be a little bit lower than at least what you just did in the second quarter. And I would think that international timing is really something that washes out over the course of a broader year. So just would love a little bit more color on kind of what normal is, at least now that InteliSwab is sort of at a new normal.

Yes. It's a great question. Thank you. Yes, just to reiterate kind of what we said just for context. So, international is driving most of it. Typically, our international is about 20% to 25% of our core revenue, our total core revenue. In Q3, we expect it to be at a higher range than that getting up into the mid-30s range of total core revenue. So it is a significant contributor in that sense. As far as Diversagen, we do have some remaining expenses, which will contribute probably 100 or so basis points in that range of headwinds to the gross margins. But overall, going forward, once we remove that and continue operating efficiencies, we're expecting Q4 in the mid-40s and then our plan is to get into the 50s long-term. That is our plan, as we progress with our operational efficiencies that we've driven as well as the mix balances out and we see growth in other parts of the business.

Our next question comes from the line of Vijay Kumar from Evercore ISI. Your line is now open.

This is Kevin on for Vijay. Just a clarifying question on the 3Q margin outlook. You talked about international diagnostics and Diversigen, but was there any contribution from COVID revenues dropping off there? This is one of the first quarters in a while where there's no InteliSwab, so wanted some color there?

Yes. No, great question. For the impact of InteliSwab, we've known this drop-off several quarters in advance given the timing of the purchase orders. So, we've been planning accordingly, and by driving out operational efficiencies, improving automation. So, yes, it has some impact, but not as much as you'd expect, because we've been planning for the last several quarters now.

Alright. I am seeing no further questions at this time. I would like to turn the call back over to Carrie for closing remarks.

Thank you, Haley, and thank you for everyone joining. We appreciate your interest in OTI, and we look forward to talking again with you next quarter. With that, we'll close the call.

Wonderful. Thank you for participating in today's conference. This concludes our program. You may now disconnect.