OraSure Technologies, Inc. (NASDAQ:OSUR)
Citi Global Healthcare Conference Call
February 25, 2014 1:50 PM ET
Douglas Michels - President and CEO
Ron Spair - COO and CFO
Nick Nolan - Citi
Thanks Nick and good afternoon everyone, and thanks to everyone online that’s following our presentation and discussion this afternoon, it’s a pleasure to be with you. As Nick said my name is Doug Michels, I am the CEO of OraSure Technologies, and I am here with Ron Spair, OraSure’s Chief Operating Officer and Chief Financial Officer.
Before we get into the presentation, I’ll just share with you our forward-looking statement. We’ll be talking about the future and obviously there is always uncertainty when you’re talking about future events. So we invite you to review the Company’s SEC filings 10-K and 10-Q for a more fulsome description of those factors that might impact future results.
For those of you who may be new to OraSure Technologies and our story, we are an industry leader in rapid point-of-care infectious disease testing and in oral collection systems for molecular diagnostics. The Company has significant growth opportunities in front of us and our core business or the business that we’ve been in for several years now the rapid infectious disease space and our oral drug testing business, both address very large markets on a global basis and we’re less than 20% penetrated at least by our estimates. And so we believe there continues to be nice growth opportunities in our core businesses and core technologies.
And we also recently launched a new rapid test either tests for hepatitis C which I’ll talk about in some detail today. New test for HIV which is available over-the-counter or direct to consumers which I’ll talk about. And then our molecular collection business is an acquisition that we made about two years ago. Each of those three businesses, the over-the-counter HIV test, the hepatitis C rapid test, and the molecular collection businesses, they are expected to be key growth drivers for the future of the Company.
So they contributed significantly to a record year we had in 2013 and we expect that they’re going to continue to significant growth for OraSure Technologies in ’14 and beyond. So we’ll spend a little bit more time this afternoon talking about those businesses and the exciting opportunities that they represent.
Before I get into those, let me just give you some information about one of our most important franchises that’s important part of our core business, that’s our rapid HIV testing business. It’s rounded on this platform technology which is OraQuick ADVANCE, this is the only FDA approved and clear waved oral fluid rapid test for HIV-1/2. The test delivers highly accurate, highly sensitive and specific test results in 20 minutes. It is the market leading rapid test for HIV-1/2 here in the United States.
And we sell this product into a very diverse collection of customers, whether it is in the public health market where the product is used in all 50 states, in public health clinics, in substance abuse clinics, in other types of points of care where it’s important to get into the community and to make this kind of technology available to people who need access. As well as the product is deployed in hospitals and other traditional points of care like physicians’ offices across the country. And we sell the product in over 35 different countries around the world, although most of our business has been generated here in the United States.
We sold over 30 million of these tests since FDA approval back in 2002. And we market this product here in the United States through a direct sales force that calls on public health clinic at the state, county, city level, as well as a direct sales force that calls on hospitals. We serve the physician office through the network of physician office distributors here in the United States and we then sell this product throughout the world through a network of distributors.
It’s the same product that is now available direct to consumers and you can see here is the package, and this product was approved for sale OTC in July 2012. We actually launched the product in the fourth quarter of 2012, so 2013 was the first full year when this product was made available both at retail as well as online.
And you may be asked why did we decide to pursue this? Well the fact is that here in the United States there is estimated to be about 1.2 million Americans infected with HIV and 20% to 25% of those infected are unaware that they have HIV infection, and unfortunately it’s that 20% to 25% that are undiagnosed that are responsible for 50% to 70% of the forward transmission of HIV. So one of the key strategies among public health officials and healthcare providers across the country is to deploy whatever tools we can to identify those individuals, get them connected to care, get them antiretroviral therapy; if appropriate reduce their viral load, the viral burden and ultimately their infectivity. And everyone agrees that that is the strategy we need to execute to ultimately reduce and minimize the burden of HIV infection here in the United States.
The OraQuick In-Home HIV Test is important because it provides additional testing opportunities for people who might not otherwise be tested in a professional or clinical setting. Unfortunately there continues to be a fair amount of stigma associated with HIV infection. And so people can be reluctant to ask their physician for an HIV test or may -- people are reluctant to talk about their sexual activities or sexual history. And the availability of an over-the-counter HIV test now gives all consumers the ability to test themselves in the comfort and privacy of their own home, to know their HIV status and then to get connected to the healthcare professional as appropriate.
I mentioned that we received approval for this product in July of 2012 and we formally launched the product in October of that same year. And the product has been welcomed by the retailers and upon launch the product went into very broad distribution. The product is currently available in more than 30,000 stores across the United States it’s in every CVS, every Rite Aid, every Walgreens, every Wal-Mart, and a number of other retailers. And it’s also available broadly online through a number of those retailers’ branded websites as well as our own branded website oraquick.com. As well as other .com entities like drugstore.com, and the like. So the product is broadly available.
Our advertising and promotion strategy has been directed to drive awareness amongst those target consumers that are at highest risk for HIV infection and amongst those populations where the burden of HIV is the greatest, and that happens to be in the MSM community that’s men that have sex with men, the African American community and the Hispanic community, as well as a focus on certain geographies, particularly urban areas that have the highest prevalence of HIV infection.
Along with the product, as you can see here, we also, as part of our FDA approval, created a consumer support network, which consist of a 24x7 live call center and a website, and that system has performed exceptionally well since the product was made available and is really providing very important support to consumers who either want information about HIV, who want some support as they take the test or have questions on how to either perform the test or interpret results. Or then very importantly the support center also provides linkage to care, referrals to care and can manage a whole host of situations in support of the consumer.
As I mentioned we’ve -- well I don’t believe I mentioned this I’m sorry. We’ve sold over 300,000 units since launch. And we had a number of successes. Purchase interest remains very high among those key targets and we continuously update the purchase interest among those important target consumer groups. We are definitely building traction with the MSM and African American female consumers. And retail support remains exceptionally high. And we continue to add new distribution, particularly on the .com front as well as with some specific specialty retailers.
And there is a growing public health interest in using this new tool. In addition to their routine professional HIV testing efforts, some public health jurisdictions now are offering consumer home tests for certain populations that they may be serving.
We also have opportunities to continue to improve our performance in the marketplace and those opportunities really hinge on a couple of very important factors that to-date have governed the consumption of our product. One of those is obviously awareness that this product exists and that it’s appropriate for really anybody who is sexually active older than 17, which is what the labeled claim is for use.
And what we’re particularly focused on is driving awareness within those key consumer targets, like I mentioned the MSM community, African American women and the Hispanic community. The second major opportunity we have is to improve the situation at retail. And since the launch of the product, we’ve been wrestling with a couple of issues. One of those that I think we’ve largely solved is making sure that we’ve got the right inventory in the right places, in the right stores, at the right moment, so that when a consumer goes in to buy the product that’s available on shelf. And what we found is that, in some markets, around some certain times of the year we see a higher consumption rates than others.
For example, around New Years, people perhaps make New Year’s resolutions and tend to go get tested, Valentine’s Day ends up being a high consumption time of the year, and there’s other holidays that seem to drive consumers to retail and consider purchasing an in-home HIV test and obviously we’ve learned those things over the last 15 months and OraSure along with the retailers then had to adjust inventories and consumption to make sure we are capitalized on that demand.
I think we’ve got that pretty well in hand now that we have been out in the market for more than 15 months or so. But one of the challenges that we continue to have has to do with some barriers to access at retail. This is when the product is placed behind the counter, at a retail pharmacy or maybe in a locked case, or sometimes with some other kind of a theft deterrent device like spider wire on the box. And obviously the retailers take those actions at the store level because they have some concerns about theft or shrinkage, but that also places a barrier between the product and the consumer.
And as I mentioned there continues to be stigma associated with HIV and so when a shopper at store looking to buy the home HIV test, having to engage with a retailer, or a clerk in the store can be enough to send them out the front door without a sale. And we have done market research around this and we know that there is a certain percentage of consumers that will be reluctant to speak to a clerk, certain percentage will walk out and go across the street, see if the product is available at another retail location, some will go online. But in any case if they don’t make that purchase at that point in time it’s a lost opportunity.
And so we are trying to work with the retailers to impact this. This is a store-by-store effort. So it’s a bit challenging despite the fact that at the national level the retailers have all recommended through their store sets that the product be readily available on the shelf with ready access for consumers, ultimately it becomes a store manager’s decision how they want to place the product and manage the access to their product. So this is something that we’re going to continue to work with. We are making progress, but there’s more work to be done.
We also have worked over the last four or five months on refining on messaging to speak more clearly to those target consumers with segmentation on both the national and local level and that program is still being rolled out although most of the elements are now in the market and we are seeing some nice impact from our refined messaging and this refined program. So I highlight a couple aspects of that here. What I’m speaking to you as we change the campaign around a theme called life as we know it. And the objective of this new campaign was to really, as the slide depicts ignite a personal conversation with our target consumers about HIV and about the relevant issues that HIV plays in these different target consumers’ lives.
And obviously the messaging in this campaign then is very different for the MSM consumer versus the African American female consumer. And one of the ways that we have chosen to deliver some of that target consumer relevant message is through the use of celebrity influences. Celebrities from those communities that we are targeting; and here is just a list of some of those well known consumers to each or well known spokespeople to each of those consumer targets.
We have also used a variety of media to reach those target consumers -- digital advertising, traditional TV and print messaging through channels like BET or properties like Essence Magazine or the Logo Network and then of course we supplement all of that with event marketing and PR marketing to tie all of that messaging together. This is that refined message that I have said we have rolled out during the fourth quarter and continues to roll out here in the first quarter, and it has delivered results. So we have seen a nice pickup in consumption coming into 2014 we still need to see more, okay.
So I want to be clear that we’re looking for even stronger results than we have seen to-date. But this revised approach seems to be having a very positive effect. So I’ll say in summary on this exciting opportunity, we continue to execute on the new campaign. We are going to continue to work with the retailers to expand access to the product, that’s very important. And we will continue to support the testing efforts of both advocates as well as the public health customers.
And then we continue to explore and actually pursue international opportunities. And we have talked about this in some of our previous earnings calls but we’re working in several geographies right now and we have actually fielded some volumetric studies in both Europe as well as in Central America and we should have the results from those coming very soon. We have been actively engaged with potential partners in each of these geographies. And our objective obviously is to get the product approved for sale in some targeted geographies, pull together the appropriate partners to help execute on the launch of the product in those different geographies and add that to the growth opportunities for the in-home HIV test. So, some positive developments on that front and will share more as we continue to make progress on the international front.
I am going switch over now to hepatitis C, yes you know what why don’t we come back to it and I will just kind of get through this and try to keep enough time for questions, okay. Okay good. I am switching to HCV and now this is the rapid hepatitis C test that’s on the same platform as the OraQuick ADVANCE, market leading HIV test, an exciting opportunity for the Company. Obviously there is five times as many people infected with HCV around the world and here in the United Stated then there are HIV infected individuals.
Unlike HIV, where the majority of HIV infected are diagnosed with hepatitis C, most of the individuals infected are undiagnosed as many as two-thirds of individuals. So, obviously with now newly approved therapies that are highly effective, the demand for diagnostics is starting to grow. And we expect that as more companies receive approval for these new therapies that the demand for new diagnosis is going to become even greater and the availability of a rapid test now makes it easier than ever for clinicians and other healthcare providers to identify those infected individuals.
There have been a lot of very exciting developments on the hepatitis front outside of the new therapies, one of which was obviously the approval of this product but that was quickly followed by health and human services acknowledging that viral hepatitis is a major health issue here in the United States and they needed an action plan to deal with it. There is a multi-point action plan that was published in May of 2011 that speaks to the importance of increasing diagnosis and increasing testing and specifically reference our rapid test that was followed within a year or so of new guidelines being issued by the CDC which recommends screening all baby boomers born between 1945 and 1965 for hepatitis C infection.
There is about 80 million baby boomers here in the United States and based on data that the CDC generated, it’s estimated that the prevalence of hepatitis C infection within that population is somewhere between 3% and 3.5%. So, if we could test all the baby boomers at least once, we would have a very high yield of those infected but undiagnosed patients. And so that’s clearly an objective for public health officials and for the healthcare community across the country.
Testing all the baby boomers would represent a significant opportunity for HCV diagnostics here in the United States. And then to top all that of, last year the United States Public Service Task Force upgraded their recommendation for a routine testing of this birth cohort along with individuals at risk and gave it a B grade meaning that it should be done, it should be offered and we will be reimbursed.
So, these are all very important developments along with the new therapies that now set the stage for what we believe will be significant growth in hepatitis C testing and being that OraSure Technologies has the only FDA approved rapid test for hepatitis C, we think we are in a wonderful position to capitalize on these opportunities. I am we will talk about little bit more about that in the Q&A session.
Finally, I want to highlight the third significant growth driver for the business in 2014 and beyond and that’s the acquisition that we made of DNA Genotek, which is Ottawa-based subsidiary now. And DNA Genotek is the market leader in oral collection systems for molecular diagnostics. DNA Genotek developed both a device which is a appended device as well as a chemistry which enables the collection, stabilization and storage of an oral sample for molecular diagnostics at room temperature and provides a stable sample for four to five years.
And obviously the opportunity here is, as already been demonstrated as the Company builds a very position, selling this technology to academic researchers who are doing broad-based large population studies across a large geography and instead of having to send a phlebotomist out to each of the study subjects and collect the blood sample or have those subjects go to a central collection facility, they could simply ship them this kit, the individual could spit in the tube collect 2 MLs of saliva, they close the cap here this is a proprietary reagent, now this reagent is introduced into the saliva sample, the saliva sample is stabilized now and available for transport at room temperature and then the study subject simply sends this back to the laboratory where it will be analyzed.
The same technology has been now deployed in a number of commercial applications some of which you probably have heard about whether its 23andMe and ancestry.com or others who have used the product successfully to engage consumers and self collect the sample for further analysis. So this has been a very important contributor to our growth. This business alone grew about 40 plus percent. In 2013 we expect strong growth in 2014 and has been a very good acquisition for the Company. This slide just gives you a little perspective on the both geographic sales mix as well as the mix, the distribution of revenues between the academic research and the commercial market in 2013.
2013 was important from a number of perspectives not just in this part of our business delivered strong growth but also this was the first year that revenues from commercial customers eclipsed revenues from academic research community. When we made the acquisition about 70% of the Company’s revenues were generated out of the academic research space. And while that continues to be very important because that’s where the discovery is happening, our ultimate objective is to translate those discoveries in the research space and capitalize on them with commercial opportunities, and that’s exactly what’s happening now. And I don’t expect to actually that on a go forward basis that we’ll be reverting back, I think that commercial will continue to represent the lion share of revenues for DNA Genotek on a go forward basis and that’s a good thing and obviously by design.
I want to mention one other part of our business, just think of this as part of our core business. I mentioned we have a line of oral drug testing assays and in 2013 we were happy to pull together a relationship with Thermo Fisher scientific through which we will collaborate on the development of fully automated oral fluid drugs of abuse assays. And we have internal to OraSure developed a oral collection device that will be paired with the assays developed by Thermo and we will begin to roll out these new assays actually in 2014.
So our improved and enhanced collector should be available for sale in the second quarter or we’ll be selling that into some non-regulated markets and then some of the Thermo assays that will be paired with that collector for those same markets will be available later in 2014. We will jointly pursue 510(k) approval for that combined systems so that we can sell the combined assays and collector into the workplace market. That will likely take place in 2015 and contribute to our revenues down the road.
So this is also a very important program for OraSure but those other three programs that I spoke to previously are going to be the key growth drivers for sure in 2014.
So in summary, we’ve got a lot of exciting opportunities for the Company across a number of different fronts. You can see we got a very diversified revenue stream and while I didn’t mention it you can look at our financial situation, we got a very strong balance sheet, at year-end we had about 93 million in cash on hand and we have no debt. So we certainly have the capacity and the capability to finance all these growth opportunities and at the same time we’re looking for opportunities to -- we're looking for other DNA Genotek. They have been great acquisitions and opportunities where we can deploy some of that capital to drive future growth. So that’s pretty much all I had from a prepared remarks, perspectives, so I’d be happy to take some questions.
Nick Nolan - Citi
Okay, thanks Doug. Let me open up for Q&A in the audience first, anybody here?
Yes we do, yes. So in 2013 as an example our revenues from HIV OTC product approximated $9.1 million and our professional marketplace were in the neighborhood of approximately 36 million and that would be split between.
Yes, yes it is. Right, the HIV OTC market estimate is actually larger than that.
Nick Nolan - Citi
What have you said that about potential for the OTC?
Through the work that we’ve done as well as work that’s been corroborated by others, we believe that the U.S. market for an over-the-counter HIV test is in excess of 500 million that’s our retail and using that $40 price point.
Nick Nolan - Citi
$40, okay and just the professional price is what?
The professional price is variable depending on whether we’re selling into distribution or whether we’re selling direct. But I would say a good proxy to use would be a $11 to $12.
Nick Nolan - Citi
Okay and I have one just on the barrier thing. Do you have a sense of what proportion of your retail base in America has it if those barriers versus doesn’t because I am going to see this all kind of I never look for it but I think we see it.
Well, if you are going to look for it unfortunately you’re going to see it and we’ve shared some data on that estimates in high prevalence markets which are important. Obviously, they would be generally urban can be as high as 50% of the stores have some kind of a barrier to access. So it’s definitely governing consumption and to the extent we can work on that with the retailers and the community, we believe that…
Nick Nolan - Citi
Wouldn’t you indemnify them say book up the loss, what are you…?
There is a lot of strategies. Actually, we sent a sales force out to call on I believe it was 5,000 stores in urban areas and where there was a barrier met directly with that store manager, the senior person in the store, and asked them if they would be willing to explain the situation, explain that it’s important for the public health to have this product available. And if they would consider moving the product out on shelf, we’ve got some results from a limited portion of that activity. But we were able to move product in more than 30% of those cases. So it is possible that specific example was labor intensive, resource intensive but we can make an impact.
And we’ll continue to work with the retailers to increase accessibly. We also I should mention and I will get to that question in just a minute. Very shortly, we’re going to be introducing retail display units into the retailers just to increase product placement and to make the product more visible. And the response from the retailers on those display units has been very positive. Those are going to shift in a couple of weeks. Obviously, it will take a couple of weeks beyond that for the retailers to get them out of the storeroom and out into the store. Our expectation is that, that will have a positive impact as well.
Nick Nolan - Citi
Just to finish up the same line of question. I am new to the story so sorry for the rudimentary but could you fill out the revenue split across all the commercial line right now? And then talk a little bit cash flow profitability last year and what you’re spending for ’14?
Sure, so if you want to look at the 2013 contribution by market segment, the Infectious Disease area contributed about $51 million in revenues in 2013. Our substance abuse business that Doug just spoke off contributed of, just under 9 million, our cryo business which is a wart removal and lesion where we sell both into the professional and to the OTC market that contributed about $14.5 million. The molecular collection systems which represents the Oragene product line from DNA Genotek contributed just over 20 million. And our insurance risk assessment contributed 4 million or so for a total all in of approximately $99 million worth of revenues in 2013.
How much was the insurance?
Insurance was about $4 million.
And this has no HCV in it?
HCV is included within the Infectious Disease category. And for year, the HCV production line contributed approximately little over 5 million which was up 32% over the little less than 4 million that we had in 2012. And you spoke a little bit about our operating performance from a cash flow basis during the year for 2013 we actually generated $8.3 million worth of cash flow from operations. And in some part to the settlement payment that we received in the fourth quarter from Roche $8.3 million, so if you strip that out basically the business ran at a cash flow from ops breakeven despite a pretty significant investment that was made during the year in support of the HIV OTC advertising and promotional campaigns.
We ended the year with $93 million in cash on board which was actually up from the 88 million that we started the year with so pretty solid balance sheet. And as Doug pointed out, we have no debt and we own all of our plant equipment. And we have very strong financial position.
Sorry one quickly, what have you said about ’14 profitability?
We’ve not spoken to profitability for any year we’ve given guidance only for the in quarter which is Q1 where we indicated that we expect revenues of 23 million to 23.5 million and a net loss of approximately $0.13 to $0.14 per share.
First of all I just wonder, look they’re asking what percentage of Genotek is on 23andMe? And then secondly what percentage of HCV revenues from government funding and could you also provide some color on the New York State mandate on HCV testing? Thank you.
Ron can you?
Sure, as far as the HCV revenues, the splits that we have given visibility to on HCV are more around the domestic versus the international contributions and the domestic HCV revenues were approximately $2.8 million in 2013 which was somewhat consistent with what we had seen in the prior period, internationally HCV revenues were up fairly significantly approximately 114% as a result of a non-governmental organization contract that we entered into in the midyear period.
As far as the contribution from 23andMe, when we actually had the, thanks Doug, the warning letter came out to 23andMe, we indicated in the press release that we made at the time that that business, overall contributed about 5% to the total OraSure revenues and so if you took that and annualized it you’d be looking at a revenue of approximately in the 5 million plus range, I can say though that they have already ordered product from us during 2014 year and we expect additional contributions on the revenue line from 23andMe during the course of 2014 albeit at a level less than what we had experienced in 2013, absent a change in the regulatory status and for the New York legislation I’ll turn it over to Doug.
Yes, so and I think it’s important to understand that 23andMe continues to market their full line of services outside the United States, and they continue to provide genetic information for Ancestry and other lineage kinds of information. Here in the United States we know that they’re working with the FDA to resolve the FDA’s concerns about their previous product offering, to understanding they expect to file for the 510(k) approval sometime in the near future so, we believe they’ll resolve these issues, the question is just when, and we look forward to them coming back online either with the full offering or some reduced product offering down the road, but in the meantime we expect that they will contribute to 2014 revenues albeit at a diminished level from 2013.
You asked a question about the New York State law now that mandates Hepatitis C testing of baby boomers, and this was signed into law in the fourth quarter and was just effective in 2014, so obviously it’s early to see the impact of that but it’s a broad ranging program actually that the program details are available on health.ny.gov and you can see that that includes the New York State Department of Health for writing healthcare providers as well as organizations, materials to educate their constituents on Hepatitis not just Hepatitis C, but Hepatitis A & B as well, but they also have a rapid testing program for Hepatitis C where agencies that meet certain eligibility requirements which are also defined online can actually petition the state for no charge tests and controls to implement their rapid hepatitis C testing program.
So obviously we’re very pleased with this type of a program. We believe it’ll drive more people to know their hepatitis C status, there are other laws, that are pending right now in other states that are very similar to the New York State law and obviously we’re trying to work with other states to develop similar kinds of programs and look forward to that being a nice contributor to our growth in ’14 and beyond.
Nick Nolan - Citi
Okay, well I think that’s all the time we have today so thanks Doug and Ron for sharing the story.
Thanks for having us.
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