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OraSure Technologies, Inc. (NASDAQ:OSUR)

Q2 2014 Results Earnings Conference Call

August 6, 2014, 05:00 PM ET

Executives

Rena George-Beck - Investor Relations

Douglas Michels - President and CEO

Ronald Spair- COO and CFO

Analysts

Shaun Rodriguez - Cowen and Company

Katherine Blanton - Jefferies LLC

Nicholas Jansen - Raymond James

Mark Massaro - Canaccord Genuity

Eric Criscuolo - Mizuho Securities

Rena George-Beck

Good afternoon everyone, and welcome to OraSure Technologies' 2014 Second Quarter Financial Results Conference Call and simultaneous Webcast. As a reminder, today’s conference is being recorded. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer period. (Operator Instructions)

OraSure Technologies issued a press release at approximately 4:00 PM Eastern Time today regarding its 2014 second quarter financial results and certain other matters. The press release is available on our website at www.orasure.com or by calling 610-882-1820. If you go to our website, the press release can be found by opening the Investor Relations page and clicking on the link for press releases.

This call is also available real-time on our website and will be archived there for seven days. Alternatively, you can listen to an archive of this call until midnight August 13, 2014, by calling 855-859-2056 for domestic or 404-537-3406 for international. The access code is 74668640.

With us today are Doug Michels, President and Chief Executive Officer and Ron Spair, Chief Operating Officer and Chief Financial Officer. Doug and Ron will begin with opening statements, which will be followed with a question-and-answer session.

Before I turn the call over to Doug, 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 and markets, business plans and regulatory filings and approvals and other matters.

Actual results could be significantly different. Factors that could affect results are discussed more fully in the company’s SEC filings including its registration statements, its annual report on Form 10-K for the year-ended December 31, 2013, its quarterly reports on Form 10-Q, and its other SEC filings.

Although, forward-looking statements help to provide complete information about future prospects, listeners should keep in mind that forward-looking statements may not be reliable. The company undertakes no obligation to update any forward-looking statements to reflect events or circumstances after this call.

With that, I’d like to turn the call over to Doug Michels.

Douglas Michels

Okay. Thanks, Rena, and good afternoon everyone, and welcome to our call. Our financial performance for the second quarter was strong as we met our guidance on the top line and exceeded it on the bottom line.

Consolidated net revenues for the quarter were $26.4 million, an 8% increase from the second quarter of 2013. Our HCV business had a particularly good quarter, with sales growth of 134% from the prior year period. Our molecular collection systems revenues rose 5% over the prior year despite the absence of revenue DNA Genotek's largest customer.

We are also pleased to report a consolidated net profit of $2.5 million, primarily due to a $5.5 million payment that we received in connection with the termination of our drug assay collaboration with Roche Diagnostics.

In June, we announced a significant new agreement AbbVie for the co-promotion of our OraQuick HCV rapid antibody test. The company granted exclusive promotion rights to AbbVie for the OraQuick HCV test in certain U.S. markets. And in exchange for these rights and certain another services we will receive up to $75 million in payment over the term of the agreement which runs through December 31, 2019.

In addition, the company's eligible to receive annual fees based on performance. These fees can range from $3.5 million to $55.5 million per year and will be based on a number of patients that test positive with our OraQuick HCV test and enroll into a patient support program sponsored by AbbVie.

Since the announcement, we have received the first payment from AbbVie under that agreement and recognized a portion of that payment as revenue during the second quarter. In addition, we have made great progress in preparing for the launch of our co-promotion activities which get underway in earnest of this month. I will provide additional details on these activities later in the call.

So with that, let me turn the call over to Ron for his financial review.

Ronald Spair

Okay. Thanks Doug and good afternoon everyone. Let me start with our revenues. Our second quarter 2014 consolidated net revenues were $26.4 million compared to $24.3 million reported in 2013. Our consolidated product revenues increased 6% as a result of higher sales of our OraQuick HCV, cryosurgical systems and molecular collection systems products.

These increases were partially offset by lower domestic sales of our OraQuick professional HIV product, OraQuick In-Home HIV test and insurance risk assessment products. Licensing and product development revenues were $775,000 in the current quarter compared to $274,000 in 2013.

Our overall infectious disease testing revenues increased 6% to $12.7 million in the second quarter of 2014 compared to $12 million in the second quarter of 2013. Aggregate sales of our OraQuick HCV professional product in both the domestic and international markets increased 134%.

Higher demand in the domestic market among new and existing customers contributed to the increase in sales of our HCV test in Q2 to $1.2 million from $690,000 in the prior year.

International sales of our HCV test in the second quarter of 2014 increased to $974,000 from $247,000 in the same period last year, primarily due to sales and support of the significant testing program with an international NGO. We expect sales to this NGO will be at a much reduced rate in Q3 and Q4.

Domestic sales of our professional HIV products decreased to $7.7 million in the second quarter of 2014 from $8.1 million in the second quarter of 2013. This decrease was a result of continued pressure on government's budget, some customer migrations to automated fourth generation amino assay HIV as recommended under new testing guidelines issued by the CDC and changes in customer ordering patterns. We expect these headwinds to continue for the foreseeable future.

During the current quarter, net sales of our OraQuick In-Home HIV test were $1.7 million compared to $2 million in the second quarter of 2013. Net revenues for these periods were not recorded using the same revenue recognition policy and are not readily comparable.

Revenues in the current quarter were recognized upon shipment to the distribution channels, while revenues in the second quarter of 2013 were recognized upon consummation of a sale to the end user. To better evaluate the performance of this product as compared to the year ago period, we can look at the number of units purchased by consumers. Based on available point-of-sale data, unit consumption increased by approximately 1% in the second quarter which we believe was due to a decrease in broad based media advertising.

Second quarter 2014 cryosurgical revenues increased 18% to $4.9 million from $4.2 million in the second quarter of 2013, primarily as a result of higher OTC sales in Europe and Latin America. OTC sales increased to $3.2 million in the second quarter of 2014 from $2.4 million in the second quarter of 2013 due to higher sales to our European distributor as a result of the launch of our product into new geographic territories, continued market penetration and the ordering patterns of our Latin American distributor.

Our molecular collection system revenues primarily representing sales of the Oragene product line increased to $4.9 million in the second quarter of 2014 compared to $4.7 million in 2013. This 5% increase was the result of higher sales in the academic market due to the timing of orders placed by our distributors and studies performed by several larger academic customers.

Commercial sales remained flat, despite the fact that the current quarter did not include any sales to DNA Genotek's largest commercial customer. The prior year quarter included approximately $1.7 million in sales to this customer.

Licensing and product development revenues were $775,000 in the second quarter of 2014 and represented the amortization of revenues from AbbVie under our HCV collaboration agreement. In July, we received the first payment of $15 million as required under the agreement.

Second quarter 2013 licensing and product development revenues were $274,000 and represent royalties paid on domestic outsales of Merck's OTC cryosurgical wart removal product.

Turning to gross margin. Our gross margin for the quarter ended June 30th, 2014 was 61% compared to 60% reported for the quarter ended June 30th of last year. The current quarter margin benefited primarily from a more favorable product mix driven largely by the increase in DNAG sales to higher margin customers.

Our consolidated operating expenses for the second quarter of 2014 decreased to $13.5 million during the second quarter of 2014 compared to $20.1 million in the second quarter of 2013. Our current quarter expenses were reduced by $5.5 million settlement payment from Roche Diagnostics under the terms of the termination of our oral fluid assay collaboration agreement.

Also contributing to the decrease in operating expenses is lower advertising and promotional spending related to our OraQuick In-Home HIV test. Our advertising and promotional expenses for our OTC HIV test were $3 million in the second quarter of 2014 compared to $5.4 million in the second quarter of 2013. This decrease was partially offset by an increase in G&A expenses due to higher legal, staffing and consulting costs.

From a bottom line perspective, we reported net income of $2.5 million or $0.04 per share on a fully diluted basis for the second quarter of 2014 compared to a net loss of $5.3 million or $0.10 a share for the same period of 2013.

Turning briefly to our balance sheet and cash flow. Our cash and short-term investment balance at June 30, 2014 was $80.3 million compared to $93.2 million in cash at December 31, 2013. Cash used in operating activities in the second quarter of 2014 was $2.7 million compared to $1.6 million used in the second quarter of 2013.

Lastly, turning to guidance for the third quarter of 2014, we're projecting consolidated net revenues of approximately $27 million to $27.5 million, and a consolidated net loss per share of approximately $0.04 to $0.05 for the quarter.

And with that, I'll now turn the call back over to Doug.

Douglas Michels

Okay. Thanks Ron. As you know there have been many positive developments in our OraQuick HCV business. The most recent was the execution of our major agreement under which AbbVie and OraSure will co-promote our OraQuick rapid hepatitis C test here in the United States. A redacted copy of this agreement was filed today with the SEC along with our second quarter Form 10-Q and its available now and we encourage you to review this document.

Under our agreement with AbbVie, we will be focusing our co-promotional efforts on several specific markets in the United States. As you might expect the significant amount of work has already begun under this agreement.

The largest market segment consists of primary care and specialty physicians. AbbVie has agreed to detail our hepatitis C test into this market segment and we will be targeting in excess of 10,000 physicians. Training of the AbbVie representatives on our product has already occurred and product detailing started this week.

To support these efforts, AbbVie will be launching its patients' support program later this month to assist patients who screened positive for HCV. This program will help patients understand the implications of their diagnosis and the steps they can take to address their infection.

Our manufacturing representative organizations, the MROs, and our infectious disease sales team are coordinating with our AbbVie counterpart on all aspects of this co-promotion. We are providing product samples to qualified accounts along with personal and web-based training on the use of our products for physicians.

We are also implementing a co-payment assistance program to help reduce the cost for commercially insured and uninsured patients. Additionally, we are offering a telephone hot line for comprehensive customer support. Product sales driven by the co-promotional effort will be handout through our distributors and our direct sales team.

A second market segment targeted for co-promotion consist of employer or employer groups that are at high risk for hepatitis C and desire to make HCV testing available to their employees.

Our initial focus was in the transportation industry and specifically on commercial truck drivers who are five times more likely to have hepatitis C than other Americans according to a study published in the American Journal of Public Health.

We have been working closely with the Healthy Truckers Association of America or HTAA which is a trade association focused on improving the health and wellness of professional truck drivers. With HTAA's assistance, OraSure and AbbVie will work to increase awareness about hepatitis and the benefits of our OraQuick rapid hepatitis C test.

We will be specifically promoting the use of our test in physicians' offices, health clinics and in retail pharmacies where truckers received their healthcare, as well as at driving schools where newly hired drivers are required to take and pass a physical exam.

In addition, we will be promoting our test for used at health events sponsored by HTAA where trucker can take advantage of variety of health and wellness services. We will be kicking off these efforts with the trucking industry in the third week of August with a major testing event organized by HTAA at the Great American Trucking Show in Dallas, Texas.

Another major market segment we are working on consistent national retail pharmacies and retail clinics. As you know, an increasing number of vaccines and diagnostic tests are becoming available to consumers through local retail pharmacy outlets. OraSure and AbbVie are in discussions with several major retail pharmacies and clinics and are making good progress on this initiative.

As you might suspect the market segments covered by our collaboration with AbbVie are substantial. A great deal of work is required to build awareness, promote our test and implement the various support services that are needed including product training, co-payment assistance and patient support. Although, we are working to implement this collaboration as quickly as possible, we will likely not see any significant impact from these efforts until 2015.

Apart from all the work being done on the AbbVie collaboration, we continue to drive revenue growth in our existing hepatitis C business. The $2.2 million in revenues reported for the second quarter was a record and included record $1.2 million of revenues here in the United States.

We shipped product to over 500 customers during the quarter with 82% of our shipments being delivered to repeat customers. We also added over 90 new customers during the quarter.

As previously discussed, the number of states have passed laws that require doctors to offer hepatitis C testing as a routine part of healthcare provided to baby boomers. New York was the first state to pass such a law earlier this year. Legislation is now pending in at least eight other states and recently Colorado, Massachusetts and Connecticut have all passed laws requiring the offering of hepatitis C testing to baby boomers.

In addition, in June, the Centers for Medicare and Medicaid Services or CMS posted a final national coverage determination indicating that Medicare will now cover hepatitis C screening for persons at high risk for contracting the disease and for individuals that do not meet the high risk definition would fall within the baby boomer generation because they were born from 1945 through 1965.

The CMS determination is consistent with recent recommendations from the United States Preventive Services Task Force which assigned a B rating for this type of preventive services.

So as we plan for the future, we are very optimistic about this part of our business. We expect continued growth especially here in the United States to be driven by the continued positive marketing development -- market development effecting hepatitis C testing and from our hepatitis C collaboration with AbbVie. And I look forward to providing you with updates on this part of the business in future calls.

Turning now to our HIV over-the-counter business, as Ron explained, the lower net sales of our In-Home test during the second quarter are not really comparable to the year ago period because of the change in our revenue recognition policy last year, and alternative measures to compare actual shipment of product to retailers which increased 54% in Q2 versus the comparable quarter of 2013.

Retail out sales to customers as measured in the accounts for which we received point-of-sales data declined 1% in the current quarter compared to 2013 and declined 5% versus the first quarter of this year. These declines in retail sales were not surprising given our recent decision to reduce promotional spending for this business.

As you may recall we previously announced that we would implement a new promotional strategy which is focused on more cost effective methods of building awareness and consumer adoption at the retail store level.

Early in the second quarter we began reducing the more expensive broad-based consumer advertising and as of August 1st we had seized this form of advertising except for some residual or make good media owe to us by our media vendors.

As predicted we are seeing the initial impact of this reduction on our growth with average weekly retail out sales in April and May down 9% and 8% respectively versus the prior month. However, the average weekly sales grew in June by 4% over May and have remained roughly at that same level in July.

We may continue to see some sequential declines in August and September out sales as we fully implement our new promotional strategy. Our expectation is that these sales will eventually plateau and then resume growth in the fourth quarter, albeit at lower levels, driven by more tactical retail trade level programs we are implementing.

On this front we are working with retailers on select pricing promotions, in-store media and public relations tied to key moments of momentum for the category to drive awareness and purchase activation.

On prior calls we've noted the high proportion of stores that stock a product beyond the pharmacy counter. As a result, we've undertaken a survey of pharmacists who identify the best tools to overcome this barrier and facilitate education and purchase at the retail level.

Results indicate high product awareness, about 75%, and high acceptance and desire for materials and coupons to be distributed to consumers to motivate actual purchases. We will begin implementing these tools in the fourth quarter.

As a result of all of our changed strategy, our promotional cost will drop to a $1 million or less starting the third quarter. Our goal and expectation is to achieve profitability for this product line in 2015.

On the international front we are pleased to announce the submission of an application for CE Mark approval, a requirement for marketing the product in Europe. We are also evaluating several additional foreign markets where we see good potential for regulator and commercial success.

Our U.S. experience, and particularly the challenges we've seen in building this new brand here will be factored into our commercial assessments and potential new international markets.

As previously explained our OraQuick In-Home HIV test remains an important part of our business. We remain committed to the profitable growth of this product line. We still believe in the long-term potential for the product, but we recognize that it's going to take time to build awareness and stimulate further customer acceptance. Going forward we will continue to align spending with revenues and drive this product line towards profitability.

Another area I want to address on our call this afternoon is our molecular collections systems business. The DNA Genotek continued its strong performance during the second quarter by delivering $4.9 million in revenue.

This represents growth of 5% over 2013. Sales for the first six months of 2014 to both the academic and commercial markets were up a combined 24% when compared to the first half of last year.

I believe this performance is outstanding, especially when you consider that DNA Genotek received over a $1 million less revenue form 23andMe in the first half of this year compared to 2013. In fact, revenues from all other customers increased 63% during the first six months of this year compared to 2013.

During the quarter DNA Genotek also made significant progress in efforts to commercialize new products. In June DNA Genotek began shipping early prototypes of sample management products for research related to gut microbiome and tuberculosis. These prototypes represent two new long-term market opportunities that we are developing.

Gut microbiome studies are gaining momentum and our new sample management product will enable researchers to improve their results to better sample collection storage and handling.

In tuberculosis, we are again in early commercialization stages of a product that is expected to improve the work flow for testing sputum samples for tuberculosis. We are excited about these new opportunities and we believe they represent a logical extension of our current molecular collections business.

Final area I want to address is our substance abuse testing business. The primarily reason we reported a net profit for the second quarter was a $5.5 million received in connection with the termination of our drug assay collaboration with Roche Diagnostics.

A precondition for this payment was the submission of the final purchase order by the end of June for the high-throughput assays previously developed under this collaboration. We were able to submit this final order because of the good progress we've made under our new drug assay collaboration with Thermo Fisher Scientific.

As previously discussed we signed an agreement with Thermo Fisher in November 2013 that will enable us to provider our lab customers with fully automated oral fluid assays that can be used on existing chemical chemistry, automated analyzers to process samples collected with the new version of our Intercept collector. These assays along with improvements in our new Intercept device will enable us to better serve the needs of our drug testing customers.

So in conclusion, we have high expectations for our business, particular, our OraQuick hepatitis C test and our molecular collection systems segment are on track to deliver record results in 2014 and our efforts in the second half of this year will be instrumental in laying the ground work for a successful 2015.

And with that I will now open up for your questions. So operator please proceed.

Question-and-Answer Session

Operator

Thank you, sir. (Operator Instructions) Our first question comes from Shaun Rodriguez of Cowen and Company. Your line is now open.

Shaun Rodriguez - Cowen and Company

Hi, guys. Good afternoon. Thanks for taking the question. So maybe first on the AbbVie partnership, I was hoping you could help us understand a bit better what's meant by the patient support programs sponsored by AbbVie.

Does this mean that these patients are taking AbbVie's drug regimen or kind of patient beyond Gilead's drug regimen and still being in AbbVie's patient program? Or is this just going to include all positives regardless of ultimately what drug regimen they are on.

Douglas Michels

So AbbVie -- this is Doug and Shaun for the question. So, the AbbVie's patient support program is an opt-in program for patients that are tested with the rapid OraQuick hepatitis C test. And the way that the performance payments work is, as we enroll HCV positive patients tested with the rapid test into AbbVie care patient support program. That counts towards our annual performance milestones.

It is not necessary that those patients end up on AbbVie's therapy. But by being in the patient support program those patients will receive information about hepatitis C. They will receive about their -- the importance of getting a confirmatory test. And they will also understand their different options as to how they can manage their hepatitis C infection.

Shaun Rodriguez - Cowen and Company

Okay. So it sounds like there are two levels there then. There is having a positive test result, but also actually getting them to enroll into this program and getting them to enroll is actually what counts towards the triggers. Is that the right way to characterize that?

Douglas Michels

So a patient can opt into the patient support program upon testing. We generate credit towards the annual performance milestones for those HCV positive individuals that are -- that opt into the patient support program.

Shaun Rodriguez - Cowen and Company

Okay, okay. That’s helpful. So I have a few, but maybe on 23 or Genotek, given 23andMe didn’t buy in the quarter, that performance was really pretty impressive. But I guess where you expecting them to go to zero at any point in a quarter or was this even surprising to you? And the follow-up really is will you -- do you expect this improve from here or do you think that there are going to be quite for another few quarters.

Douglas Michels

Well, so it was in line with our expectations. Obviously, we are in regular contact with 23andMe and have some visibility to what their -- what the future demand is expected to be. We do expect some demand in the third quarter. Although it will not be substantial, so -- and we don’t have any visibility beyond that for the reminder of the year. It doesn’t mean that there will be zero. But at this point in time we see some demand coming in Q3 and that’s the extent of our visibility for right now.

Shaun Rodriguez - Cowen and Company

Okay. And then last on the Q3 revenue guide. I mean, I guess I'm just trying to understand the components there. So what's included for revenue from the AbbVie partnership payments, if any. Does anything change about how those are going to be recognized? So I'm just trying to understand kind of the sequential dynamics in the core business versus, obviously these dynamics from these payments coming in. So can you help me understand that Ron?

Ronald Spair

Sure, absolutely. So first off with respect to the AbbVie revenues that are included in the guidance, and specifically related to the amortization of the $75 million over the course of the agreement, we will include $3.4 million worth of revenues or they are included in the guidance that we have offered up to the Street.

I think though what you need to do is to focusing on a couple other areas specifically for Q3. Cryo, we expect that business to be down over $1 million sequentially as a result of the seasonal profile of that business.

Additionally, we do expect the HIV OTC business to be down sequentially, as result of the perceived relationship between the promotional spend and consumption. And as Doug pointed out, the reality is that we are backing all forms of spend levels there.

And lastly, our infectious disease business is expected to be down sequentially for the reasons given in our prepared remarks for both HIV and possibly in the international space for HCV. As I mentioned the non-governmental organization, NGO will be purchasing at levels significantly lower than what they had done in Q2, Shaun.

Shaun Rodriguez - Cowen and Company

Okay. And then last quarter, so finally it’s a follow-up there. But last quarter you said you expected U.S. HCV to be up sequentially every quarter for the year. It sounds like that’s still on the table then as an expectation and reflected within that guidance?

Ronald Spair

Absolutely, yes.

Shaun Rodriguez - Cowen and Company

Okay.

Ronald Spair

Absolutely. As the U.S. domestic HCV business is going very well.

Douglas Michels

And we -- I should add and we try to be realistic in terms of our expectations in terms of HCV product revenues that will result on the AbbVie OraSure co-promotion at least in the third quarter and likely in the fourth quarter simply because we mentioned just trained the AbbVie reps. Actually we are training our MRO reps on all the different components of the relationship and how that’s all going to play out in the field. And this has all been very carefully orchestrated and a lot of systems in place to make sure that all organizations are working in concert.

So that’s rolling out right now. These different initiatives are going to roll out through the reminder of the year and I will we will really the full impact of those beginning in 2015.

Shaun Rodriguez - Cowen and Company

Thank you guys.

Operator

Thank you. Our next question comes from Brandon Couillard of Jefferies. Your line is now open.

Katherine Blanton - Jefferies LLC

Hi this is Kate in for Brandon actually.

Douglas Michels

Hi, Kate.

Ronald Spair

Hey, Kate.

Katherine Blanton - Jefferies LLC

Hi, guys. First I was wondering if could quantify if there are any SG&A or HCV related SG&A investments in 3Q guidance and may be how that would expect to trend going forward?

Ronald Spair

Sure. It’s a great question. And there are investments that we're making in the program to support the initiatives that Doug spoke of in the prepared remarks. They are underway in the third quarter here 2014 and they are included in our guidance and actually our expectations are at the moment that they will likely be even higher in the fourth quarter of 2014 to support the program as more of the effort is captured for the entire quarter as opposed to a fraction of it in the third quarter here.

Katherine Blanton - Jefferies LLC

Okay, great. That's helpful. And then just back on 23andMe, is there any quality meeting where you can quantify how 23andMe sales in 3Q were relative to their 2Q order of 2013 last year?

Ronald Spair

So, in this most recent quarter Q2, we did not record any revenues from 23andMe and so the entire amount of revenues recorded here in 2014 of the $4.9 million is non-23andMe business. Whereas in the prior year's quarter, we had significant contribution from 23andMe such that if you strip it out and compare apples-to-apples, you're probably looking at growth rate just in Q2 alone of about 78% off of adjusted pro forma revenue base stripping 23andMe revenues.

Katherine Blanton - Jefferies LLC

Okay, great. Thanks. I'll jump back in the queue.

Ronald Spair

Okay.

Douglas Michels

Thank you.

Operator

Thank you. Our next question comes from Nicholas Jansen of Raymond James. Your line is now open.

Nicholas Jansen - Raymond James and Associates

Hey guys, thanks for the time here. In terms of the professional base domestic HIV franchise, I think you caught out some headwinds associated with the new testing, or recommendations from the FDA. And just trying to get a sense of how large of a headwind that could potentially be over time, just trying to get a sense to make sure we're modeling that appropriately as we look to 2015.

Douglas Michels

I think Ron highlighted a couple of challenges there; the funding challenge particularly on the public health front is not new. And I think we have to look at it by segment. Our hospital business has been relatively stable and we would expect that. Actually business has been growing in the physician office segment and we do expect that segment to continue to grow.

We also expect physician office testing to grow in total and the international components have been somewhat lumpy and I think we're going to see some of that impact in Q3 because we had nice contribution in last year from international -- a large international customer that's not going to repeat in Q3 of this year. Not that we've lost the business, but it's just the way some of these large government purchases go.

The competitive environment and in particular the competitive impact of lab automation is an issue that we've been wrestling with. It's here to stay and I think that's going to continue to be a challenge on a go-forward basis.

We mentioned in our prepared remarks the new CDC recommendation for laboratory testing of HIV and encouraging adoption of the laboratory-based automated analyzer fourth generation assays on slightly different confirmatory algorithm. So, that's the challenge that we're fighting.

And at the same time, the benefits of rapid testing are clear and so many of our customers, they will continue to use the product, benefits of the oral application are clear. But we've got to understand what's going on in the environment and some of these things are somewhat out of our control.

Nicholas Jansen - Raymond James and Associates

Thanks for the color there. And then switching gears to the AbbVie agreement, under the enrollment into the patient support programs, just wondering to get a sense of how easy that is for the customers just to get a sense of how progress can be made towards some of these milestones payments that you are looking to achieve?

Douglas Michels

Well, I don't want to share everything that's going on from a competitive perspective. But we believe that collective offer is very compelling. There's nothing like a 20-minute test and knowing whether you're HCV positive or not. And receiving that news can be life-changing.

And what we're trying to do is make it easier for both the patient and the provider to get through that process, to understand particularly today that being with HCV is something you can do -- you can do something about.

And -- but first of all, you got to have that initial result confirmed and then you need to get connected with the appropriate individuals that can support you, counsel you, and help you decide what the best treatment options are for your specific situation. And that's what the patient support program is all about.

So, is it easy or hard? Yes, it's all the above, but we think we've got the right approach to this and we've seen it in other disease state. We know in HIV space that we're intimately familiar with that when patients have support; they are more active follow-up on the things that they need to do to manage their infection or have get cured. They are more likely to be complaint with the treatment regimen that they ultimately select and so they are likely to have better outcomes. And that's what we're working to deliver across the Board to patients, the providers, and ultimately, the payers as well.

Nicholas Jansen - Raymond James and Associates

And I squeeze one more in terms of the balance sheet, may be this one might be for you Ron, but $80 million in cash on the balance sheet at the end of 2Q, I believe you get the $15 million cash payment from AbbVie in July or you already perceived it plus the Roche payment as well.

So, you might have pro forma cash flow of around $100 million sitting there today pretty much earning very little. How do we think about your act to deployment that in an accretive fashions in the short to intermediate terms? Thanks.

Ronald Spair

Yes, so our goal clearly is to continue to pursue our business development opportunities and we're looking hard at opportunities that are complementary, be they technologies, products, and/or companies that we could bring into fold here at OraSure. So, that's the mission that we have been on for some time and -- but we're very careful on how we wanted to deploy those resources because we can sit on very precious -- but yes that's where our focus of activity has been.

Nicholas Jansen - Raymond James and Associates

Thanks guy, nice quarter.

Douglas Michels

Thank you.

Ronald Spair

Thanks Nick.

Operator

Thank you. (Operator Instructions)

Our next question comes from Mark Massaro of Canaccord Genuity. Your line is now opened.

Mark Massaro - Canaccord Genuity

Hi guys. Thanks for taking the question. May be -- if we could may be discuss the $3.5 million to $55.5 million per year opportunity in front of you on the HCV test. How should we think -- how are you thinking about the number of folks who will opt in to the patient support system?

Douglas Michels

So, that's specifically defined in the agreement, but that has actually been redacted from the agreement that was filed as an exhibit to the 10-Q which was available to you today. So, I encourage you to get a copy of that to look at that. It gives a lot of good information about both parties' responsibilities and you can just assume that there's a scale and that is directly tied to the number of HCV positive individuals that enroll in the patient support program.

Mark Massaro - Canaccord Genuity

Okay, great. I'll take a look at it for sure. The other question related to opportunities potentially to sign a collaboration agreement outside the United States. I know you have a lot going on in the U.S. market, but can you may be share where you're at in terms of pursuing an international HCV collaboration agreement?

Douglas Michels

I don't have anything specific to report today, but we have had discussions and continue discussions about international opportunities. So, as soon as I have more report on that, I'll for sure do it.

Mark Massaro - Canaccord Genuity

Okay, great. And may just final question from me. Could you may be provide some more color on the opportunity with tuberculosis on DNA Genotek. How should we think about that as a potential -- even incremental revenue driver in the next couple of years?

Douglas Michels

Well, so understand that this is a pre-commercial product right now. But our tuberculosis collection and stabilization and sample preparation product offering actually includes two components. One is a reagent that stabilizes the sample -- the sputum sample upon collection and enables transport to a laboratory at ambient temperature, really any temperature for up to five days. And then a second reagent that once that sample is received in the laboratory and that sample then when received in the laboratory is able to be cultured and then is able to also then be processed for molecular analysis.

We have a prep-reagent that's been added to the sample once it's received in the laboratory which actually enhances the assay sensitivity by yielding a higher -- generating a higher yield of intact DNA from the tuberculosis bacterium that's in the sample.

This product has been in development for the last couple of years. It's out right now in the hands of researchers around the globe and we've -- we're seeing some very, very promising result. TB is a huge, huge problem. Every year there's more than a million people that die from TB and there's over 9 million people that develop new active infections on a global basis.

It's estimated they are somewhere between 80 million to 120 million sputum samples that are collected each year and there's an estimated 600,000 people that are infected with multi-drug-resistant or expensively drug-resistant strains of TB and the cost of dealing with those drug-resistant TB strains is extraordinary and that continues to grow.

Only one out of five active TB cases are accurately diagnosed and a lot of that has to do with sample collection, sample integrity when it gets into the laboratory and the archaic means of treating those samples when they get into the laboratory that beating method that the standard-of-care which really destroys a lot of the specimen and the material we're trying to diagnose.

What we've developed is an elegant solution to these two problems. One, transport of a sputum sample and resource for environment where they don't have good cold chain, and then specimen ends up growing a lot of gunk and often times gets to the laboratory and is non-viable or can't analyze it.

And then second a better way to break through that outer shell of the TB bacterium which preserves more of the DNA and enables better sensitivity in the laboratory particularly for low tighter samples.

And all this is being validated. It can be a real game-changer we believe and we're working with organizations around the world to validate that, very excited about it, bog market.

Mark Massaro - Canaccord Genuity

Great. Thanks Doug and nice quarter.

Douglas Michels

Thank you.

Operator

Thank you. And our next question comes from Eric Criscuolo of Mizuho. Your line is now open.

Eric Criscuolo - Mizuho Securities

Hi, good afternoon. Thanks for taking my call. Just filling in for Peter tonight.

Douglas Michels

Hi Eric.

Eric Criscuolo - Mizuho Securities

So, on the NGO purchases for HCV, what percentage did they make up of international revenue?

Douglas Michels

We don't specifically call that out, but I would say it's well more than 50% of the international, Eric.

Eric Criscuolo - Mizuho Securities

Got you. Thank you. And if I heard you right, I think you said that the HIV OTC shipments to retailers were up around 50% in the quarter, but retail sales were down 1%. Can you, kind of, may be explain why the shipments were up so much and may be the disparity between the shipments and sales?

Ronald Spair

Yeah part of it was some of our display volume that account for that and the rest is just some inventory management on the part of the retailers.

Eric Criscuolo - Mizuho Securities

Okay. So, I guess you expect that to kind of moderate third quarter?

Ronald Spair

That would be our expectation.

Eric Criscuolo - Mizuho Securities

Great.

Ronald Spair

Yeah, I think the inventory levels or the purchases Eric, are pretty much powering consumption. Although we have seen some indication that in some retailers as they are looking at their inventory levels, they may be ordering a little bit less than then consumption which under the new revenue recognition model results in lower revenues despite comparable consumption metrics.

Eric Criscuolo - Mizuho Securities

Got you. And then just lastly just a clarification on the HIV OTC, did you say you submitted for CE Mark or you will submit?

Douglas Michels

No, we made our submission this past month.

Eric Criscuolo - Mizuho Securities

Okay, great. Thank you very much.

Douglas Michels

Thank you.

Ronald Spair

Thanks Eric.

Operator

Thank you. That does bring us an end to the Q&A session of today's call. I will now turn the call over the Doug Michels for closing remarks.

Douglas Michels

Okay. I just want to everybody for participating on today's call and obviously for your continued interest in OraSure. Have a good afternoon and evening everyone. We'll talk to you next time. Good night.

Operator

Ladies and gentlemen thank you for participating in today's conference. This does conclude today's program, you may all disconnect. Everyone have a wonderful day.

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Source: OraSure Technologies' (OSUR) CEO Douglas Michels on Q2 2014 Results - Earnings Call Transcript
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