OraSure Technologies, Inc. (NASDAQ:OSUR)
Deutsche Bank AG Health Care Conference Call
May 7, 2012 8:40 am ET
Douglas A. Michels – President and Chief Executive Officer
Ronald H. Spair – Chief Operating Officer and Chief Financial Officer
Good morning and welcome to the 37th Annual DB Healthcare Conference. My name is [Robert Karofsky] and I’m with the MedTech team here at DB. Kicking things off this morning we have OraSure Technologies. With us we have CEO, Doug Michels; and CFO, Ron Spair.
Douglas A. Michels
Good morning, everybody, and special thanks to Deutsche Bank for inviting us to speak to you today and to attend this year’s conference. As Rob mentioned, Ron Spair is here with me. Ron is our Chief Financial Officer and Chief Operating Officer and given that today we’re going to be spending a shorter amount of time with the presentation and more time with questions, got to be a great opportunity to have Ron up here taking difficult questions that you might ask.
Before we begin, let me remind you that through this morning’s presentation, we will be talking about the futures forward-looking statements and obviously whenever you are talking about the future, there is uncertainty and so we ask you to refer to the company’s SEC filings 10-K and 10-Q for a more complete description of those factors that might impact future results.
I’m going to start out this morning like I usually do with just a couple of comments on the investment rationale for OraSure Technologies. As many of know, OraSure is an industry leader in the point-of-care, infectious disease and biological sample collection space. Our base products today address in excess of a $600 million global market and we are less than 20% penetrated. So we believe that with our traditional products, we still have quite a bit of room to continue growing this very fine business.
We’ve also been investing very heavily over the last several years into real exciting new opportunities, one of which is the development of a rapid test for hepatitis C. That product is fully developed. We developed it on the very same platform that our market rapid HIV test has been developed and has been very successful.
We believe that the market opportunity here in the United States for rapid hepatitis C test is in excess of $250 million. This test is now FDA approved. It’s the only rapid test for hepatitis C that’s CLIA waived and FDA approved here in the United States and we are in the midst of a launch of that product and I’ll talk a little bit more about that later on in the presentation.
In addition, over the last six or seven years, we’ve been investing in clinical studies which would ultimately lead to FDA approval. Although, our rapid HIV test produced by consumers per se OTC in retail pharmacies and in mass retailers across the United States. We believe the market opportunity for on a self test or HIV sold OTC is an excess of $500 million. We’ve been working on this like I mentioned for quite sometime. We have a very exciting event coming up a week from tomorrow and in Hattiesburg, Marlin where we’re going to present our final clinical data to the Blood Product Advisory Committee and we look forward to having that discussion with them and our hope is that that will ultimately lead to a positive recommendation and ultimate approval of this product and then obviously subsequent commercialization.
Let me make a couple of comments about our market-leading position in rapid HIV testing. This is our current flagship product or a quick advance. It’s a rapid $20 million test for HIV-1 and 2, it is the only FDA approved and clear way of rapid test here in the United States that can be used with both a blood sample and an oral specimen. The product has been FDA approved and clear wave since 2002 and it is the market-leading rapid test here in the United States. We sell the product primarily into hospitals and into the public health systems where we have leading shares and we sell this product directly. So we have a direct sales force that calls on public health, as well as hospitals.
This is just a graphic of the competitive environment here in the United States. There is five other companies that market FDA approved rapid test and what we try to highlight here is the primary reasons why our product has been chosen as the preferred product in those markets in which we currently participate. I mentioned our [testing] has the ability to identify both HIV-1 and HIV-2 the product is clear waved, which is very important and that it enables the product to be used in a physicians office or in a distributed environment like so many public health jurisdictions use the product and as I mentioned it’s the only product that’s approved for use with both on blood specimen and in oral specimen and if that oral application that we’ve conducted our clinical studies on and that we intend to make available OTC assuming FDA approval.
Let me talk a little bit about this because this is an effort that we began back in 2005, when we initially approach the FDA with our thought of taking our professional product and making the very same product available for sale to consumers. We went to an Advisory Committee meeting in November of 2005 and again in March of 2006 and through those meetings there was a decision that indeed the FDA should work with sponsor companies to bring a product like this to market and in the March meeting we agreed with the FDA on the clinical studies protocols that would be executed that would ultimately lead to approval.
We’ve been executing on those studies since that time. We actually had an interim review with the Advisory Committee in November of 2009 and we presented all of the clinical data that had been generated to-date and as a result of that 2009 advisory review that we got the authorization to move to the final study, which was concluded last year and the data to which was submitted to the FDA just before the end of 2011.
This is a big day coming up for us next Tuesday. We’ve been waiting for quite sometime. The team has done a phenomenal job of executing all of the studies and compiling the data. We believe it is compelling and we look forward to having the discussion with the FDA and with the Advisory Committee on the results of those studies.
Obviously, with this date now at hand and hopefully a positive review and approval sometime thereafter, we have to be prepared to make the product available to the consumer. So, we’ve been working closely with the trade, with mass retailers, with retail pharmacies, with even some large food distributors that have a pharmacy within their operation. We’ve have a call center that was validated through the clinical studies that will be operational 24/7 [should the] product be approved and we have had to make sure that all of our call scripts are in placed at the systems that are validated, the complaint system is validated that we got the right connections back into OraSure as that becomes live coincident with launch.
We’ve had to work on public relations on advertising to ensure that once the product is available, we’ve got the right messaging, communicating with the consumer so that that awareness and motivation will drive products off-shelf and then we’ve had to do all of the backroom activities to make sure that all the operational contingencies are in place that we have all of our suppliers ready to go, that we’ve got supply ready to be ship to the distributors, as soon as possible after approval in a way.
So it’s been an extensive, cross-functional, cross company effort where I’m very proud of the work that the company’s done. We’re well prepared, should we and hopefully will get a positive nod, and we are very excited about this. It has the possibility of being a transformational opportunity obviously for the company.
The other very exciting opportunity that we have as I mentioned is this availability now of a rapid test for hepatitis C. I don’t think this opportunity has lost probably on too many of you I think you are all aware that Hepatitis C remains a global healthcare issue and it’s a very serious issue here in the United States. 4 million to 5 million people believe to be infected here in the United States, most of which are undiagnosed.
And so it’s always been our belief and the main reason we embarked on the development of a rapid Hepatitis C test was that the availability of a tool like this able to be used in the public health environment and in the physicians office environment would facilitate more testing and obviously now with advancements in therapy approvals that were obtained in 2011 by both Merck and Vertex and the promise of even more effective drugs to come. I think it’s very clear that we’re going to continue to see tremendous advancements in both diagnosis, in the prevention, the diagnosis and the treatment of Hepatitis C. And I think we’re in a wonderful position to facilitate more people knowing their Hepatitis C status and ultimately getting cured.
I mentioned in the intro slide, we see this opportunity in excess of a $250 million opportunity here in the United States that opportunity was not lost on Schering-Plough at the time several years ago and of course now Merck, about three maybe even three to four years ago now we agreed with Schering that we would work together on the development of this product. I mentioned it’s on the same platform that our HIV test was build towards a 20 minute test that can be used with both a blood specimen and an oral specimen. It’s approved for all five specimens outside the United States. Here in the United States, we have it approved for a finger-stick blood sample and a venous blood sample. But with Schering, we thought that a two or like this could really play a big role in identifying those people who are currently undiagnosed. So they agreed to help find some of the development of this product and an equally important agreed to deal this product two physicians on a worldwide basis and that physician detailing has begun now particularly here in the United States after the product was clear waved late in 2011.
So Merck now took over the contractual obligations from Schering. The Merck sales force has been out detailing since the third week of January, we had our earnings call here, this last Wednesday and I talked about some of the preliminary data from their detailing efforts, which is encouraging. Obviously, initially what they’re gathering our expressions of interest opportunities to follow-up with the physicians and we then have to turn that those expressions of interest into actual revenues. But we’ve got a follow-up process that in place right now. We look forward to continuing our work with Merck I think we will have more to say about the success of that program in our second quarter earnings call, which will happen later this year.
There is so many exciting things going on in the Hepatitis space right now both on the diagnostic side with our product, as well as on the therapy side. But the governments also keenly interested in this there is an Institute of Medicine report that was published in 2010 that talked about the need for more education, greater awareness, better surveillance, better intervention strategies, more testing and better linkage of all of those activities and out of that IOM report, HHS was directed to develop an Action Plan to address all of those issues. That Action Plan was across agency Action Plan each one of the Federal Agencies CDC, NIH, HRSA, SAMHSA and the like came together and that plan was published in the May of 2011 interesting that was published coincident with the approval of these exciting new therapies. And in that action plan it lays out specifically what we can expect from the federal government over the next several years in response to this urgent need.
One of those expectations is that the CDC is expected to revise their testing guidelines for Hepatitis C and specifically to expand the definition of individuals at risk for Hepatitis C to include the age cohort of U.S., of Americans more between 1945 and 1965, its estimated they’re somewhere in those 75 million number of American citizens that who were born within that timeframe and within that birth cohort its estimated that the prevalence of Hepatitis C infection is somewhere between 3% and 4%, and its believe that a one-time screening of those individuals would be a highly effective intervention strategy where we could identify those people chronically infected and immediately link them to care and treatment and ultimately cure them and would significantly reduce the burden of this disease both from a public health perspective and an economic perspective.
And we anticipate these guidelines would come out later on this year and we believe that they will be very helpful and that will be able to see a continued interest and an increased interest in using a tool like our product to help identify those people who are chronically infected, so more and have to come.
This is a status of the product, it’s obviously fully transferred to GMPS scale I mentioned its approved for use with five specimen types in Europe, the two specimen types here in the United States, we do intend and are working to pursue [oral] approval here in the Untied States and we’ll talk more about that as that progresses. And I think I’ve mentioned all of these other points on this slide, a very exciting opportunity for the company.
The last exciting opportunity I want to talk about is the company and acquisition we made in August of 2011. We acquired a Canadian based company called DNA Genotek. It’s a privately held company now part of OraSure Technologies. And DNA Genotek is a market leader in oral collection systems for molecular diagnosis.
The flagship product of DNA Genotek is there on the slide, it’s on the left-hand side Oragene DNA. DNA Genotek is the market leader now in oral collection for molecular testing. We built this position on a proprietary platform. This is the device right here, it’s a two part chamber. So it’s a collection system in a proprietary stabilization solution the individual subject whether it’s in a clinical study or consumer collects the saliva to 2 ml. They close the top of this – the stabilization solution is added to the human specimen. The tube, the top is unscrewed here and you put a cap on it and this goes of to a laboratory for analysis.
This specimen won’t stabilize to stable for four to five years at room temperature. And that’s really the invention along with the proprietary device and solution. It enables a whole new way of looking at large clinical studies, distributed studies you can image the blood sample. You have to have [flebamateous] there. You can’t self collect. You have to have your subjects go to a collection center. This enables self collection, highly distributed collections, specimens can be mailed once blood specimens can be mailed once blood specimens come into a study site or into a laboratory, they have to be obviously refrigerated for a short period of time or frozen for a longer period of time. These will stabilize the DNA for four to five years at any temperature.
They have developed the ancillary product as you can see here left hand side for RNA which stabilizes RNA for two to three years at a time the back of this technology that they built a very successful business. The product has a number of very exciting applications, obviously any kind of broad event where you want to collect a number of samples, self-collection like this event that was highlighted here for Susan G. Komen’s Fit for the Cure, [although] in donor registry collections where you are looking for HLA typing.
And this is an example, The Anthony Nolan Trust in the UK switched over from blood collection to oral collection using the Oragene product and they saw their donations double in the months following implementation of this technology, because its so easy, because its not invasive and because you can expand your reach of potential donors and that’s a key target for the company.
So that’s all I was going to say this morning about our company. It’s an extremely exciting time. We’ve got a very, very good base business. We are market leaders in the businesses in which we’ve chosen to participate. Our HIV product, as I described, is market leading with leading market shares in public health and hospital. Our hepatitis C product, I mentioned, is the only FDA approved and clear waiver to hepatitis C product and will be for many years as we look at other companies that maybe pursuing this. We have a distinct advantage in the marketplace with that product.
The over-the-counter HIV test, we’re the only company that’s been pursuing this and assuming approval. We will have a market advantage with that product for many, many years to come and obviously I mentioned DNA Genotek is the market leader in oral collection systems for molecular.
So with that let me stop. Thank you for your attention this morning and Ron and I are both eager to answer any questions you might have.
Douglas A. Michels
There is a microphone that’s coming around.
I was just curious about your viral test in general whether if they are positive, you have to reflex to a lab to confirm them?
Douglas A. Michels
No, which test is that?
HIV or HCV.
Douglas A. Michels
Yeah, any of them. Okay, so I don’t know with this webcast if you could hear but the question was, with any of our tests if you are positive, do you have to reflex for a confirmatory. And the answer to that is, yes, in all cases.
In HIV, it’s a Western Blot confirmatory and hepatitis-C, it’s a combatant immunoblot test. It’s very important to us whether it’s in the professional marketplace or OTC that people who initially test positive get connected to care and it’s a critical issue in the fight against HIV that unfortunately in traditional laboratory based testing.
Up to 20% of the individuals who have a blood draw and the specimen goes off for testing they never received their test result. They either had lost the follow up, there is no mechanism to find these individuals once their blood has been drawn and so it’s useless effort, right.
With the rapid test obviously greater than 99% of individuals get their test result because they are right here right now and it gives us an opportunity to hand them off directly to a healthcare professional. With our HIV product that we’re selling over-the-counter, we’ve gone to great lengths to make sure that our resource and referral system has that capability. So that when a consumer calls in and has a test result and they want to look for confirmatory testing services or they want to be connected to a service provider or some other intervention, we have the ability to warm transfer them to those resources and we’re also working with the public health community to expand our support system to be really a support network and we’ve had a lot of positive reinforcement of that concept from our existing public health customers.
I’m curious if you break out the trauma market as sub-sector of your market I would think people in extremis two questions. One is the providers in the field and in hospital I would think would want protection from those patients or knowing that these patients have Hep C being probably bigger than HIV. And secondarily, are there HIPAA considerations in testing somebody in extremis and can this be done without [consent].
Douglas A. Michels
Are there HIPAA considerations for what?
Testing somebody in extremis in trauma. Somebody has been gun shot wound, a motor vehicle accident, [they can be] transported by healthcare personnel, I would think that as a subset of a market would be a significant market, and secondarily for healthcare providers being exposed which is a big issue, and secondarily the patient themselves is because they are an extremist [that’s way] HIPAA requirements at that point.
Douglas A. Michels
Right. So most – so the CDC guidelines as it relates to Routine HIV testing recommend that all individuals ages 13 to 60 will be offered an HIV test in healthcare setting, so its an opt out kind of model. It relies on the patient to decide yes or no. So in a situation where you have an accidental exposure, that’s a different scenario, obviously rapid testing has been used very successfully in the occupational health scenarios whether its HIV and now even, even Hepatitis C. But in a situation where a patient is incapacitated, usually HIV and HCV are the biggest issues that the team is worried about. Obviously that will – I’ll deal with the accidental exposure I think after the fact and often times we will do that with the rapid test.
But we’ve also had a number of questions come in via yarn. First one is, are there any competitors working on an oral HIV offering that you aware of?
Douglas A. Michels
I don’t know if everyone could hear that. Question is, are there other competitors working on an oral HIV offering that we’re aware? There have been oral test that have been developed outside the United States and that have even been introduced. To our knowledge, they have not been particularly successful, it’s a challenge to be quite honest to develop an oral application as well as a bud application particularly on the same device. And I think the fact that we’ve been able to do that successfully and have demonstrated excellent sensitivity and specificity speaks not only to the great work of our scientific team, but also to this testing platform and its capabilities.
Here in the United States, I believe that there are some tests in development. I don’t believe that any of them are in the clinic right now. We have seen some protocols from products that maybe in development and none are as easy or simple and straightforward as [swapping], dropping the device into a vial or developer solution and 20 minutes later you have a test result.
I just share this, there is a lot of hurdles. These are PMA approved products, clinical studies are extensive and you not only have to get through those, but you have to develop data that’s going to support submission. So with all of that said, I think that we are in a remarkably strong position and have been for a number of years. There has been ample opportunity for people to develop a product, if they were so inclined and none have yet to take it through the clinic and get it approved.
Maybe you can be somehow quantitative with this, but how important is Merck’s commitment to HCV tests. Given that their position in HCV therapeutics is probably 10 years and limited.
Douglas A. Michels
Right, so the question is, how important is Merck’s commitment to this. First of all, let me say, I think from our perspective, it’s very important. We’ve been in this relationship with Merck for the last several years. We just got the product CLIA-waived here in the United States. Until we had it CLIA-waived, they were unable to begin their detailing efforts.
So in essence we are right in the initial launch of those activities and I think we will see just how successful we are in terms of driving adoption primarily in the physician office market. I think it is very important to understand Merck has two organizations that are detailing this product right now. One is their direct sales force, they’ve got about a 100 people that follow on infectious disease specialists whether that be ID doc, hepatologists, gastroenterologists, those physicians are primarily the [treaters]. As you can imagine, they do some testing. It’s more the testing they request or perform as more viral load and monitoring type testing of therapy not the initial diagnosis, which is what the screening test is used for.
So consequently, Merck also deploy their new business group of sales representative. This is over a 100 folks that are involved on the telephone calling on general practitioners, internal medicine doctors introducing the product to them and making them aware of this. And that’s where obviously you would expect to see more interest in a screening type test. We also know which of those general practitioners are the referring doctors to the specialists. And so with Merck we are able to target those physicians pretty effectively.
And remember, if I didn’t say it here as I’ve stated previously, Merck’s commitment is to raise awareness and to detail the product. They are actually not selling the product. So once they’ve generated interest and demand then our product get sold into the physician office through the PSSs, the Henry schein’s and the McKesson’s and we have a group of about 50 manufacturers perhaps that work with those physician office distributors to ultimately pull the sale and fulfill that demand.
So the way the system works is that Merck’s sales forces are out generating interest and demand they create leads which then get turned over to our MRO organization, which follows up with the physician office distributor to sell the product in. We’ll have more to talk about this as we go forward, but very important for us.
Two questions on the HIV over-the-counter test. One, you said that $500 million market opportunity, can you give us some idea of pricing and also volume, what give you the confidence that those volumes are there? And then secondly, I think there is a new – going retail is new for you guys, what gives you the confidence that you can do that, how much you have to spend, are you guys really the right ones to do that yourselfs, are you partner there, distributor, how do you think about that?
Douglas A. Michels
Okay. I’ll break that question up in two parts. I’ll let Ron handle what do we expect to spend question. Let me talk a little bit about our efforts to engage the retailers, what we’ve done to date and why we’re confident, we’ll have broad distribution upon FDA approval a launch assuming that that happens.
So obviously we’ve been working on this for a long time and we’ve talked to the retailers about their level of interest. And the interest has always been high. A) Because this is a new category for the retailers, it’s anticipated to be a high value product and many other retailers today, whether that be Wal-Mart, Walgreens, CVS, are involved in preventive health services and all of them have been very active in HIV prevention activities in their local community. So there is a social responsibility angle here as well. Not to mention, they believe that this is going to be an existing new product and an exiting new category.
Obviously now, since the clinical studies have progressed and we’re going into a very critical stage with the advisory committee review and hopefully approval, we’ve got to begin serious planning efforts that assuming this is approved. How many stores would they put it in, where it would be placed in the store, we have to set ourselves up as a vendor with them in the like all those activities are ongoing to the extent that they are allowed within FDA regulations. We are very confident based on those discussions that we will have broad distribution at those retailers that I talked about and others and the product is also expected to be carried online either through the various internet sites or our own or quick.com.
Our market estimates of the 500 million obviously are the result of work that were done five or six years ago that’s been since we validated and obviously it’s based on certain price assumptions. We haven’t released those or shared those yet, we don’t intent to until we have approval. And at that point in time, then we’ll talk about pricing.
But we believe that the product will be priced fairly. It’s important to understand this product is not intended as a substitute or a replacement for the good work that’s being done in public health jurisdictions around the country whether its here in Boston or in the state of Massachusetts or New York or California or Illinois or anywhere.
This is a product that’s in addition to, to provide the consumer with the opportunity to test at home in a private confidential setting and we believe we’ll encourage more people to test and also for those people who perhaps today do test, it might give them an opportunity to test more frequently which we think is also a good thing.
Ronald H. Spair
Okay, as far as, the actual spending is concerned, I’m assuming it’s really on the [prep work] for the launch of the product that you are interested in. Our spend levels in Q1 were slightly below what we had forecasted them to be originally. We thought we are going to come in about 1.75 million and it did come in slightly less than that. Some of that has moved over into the second quarter and I’m sure we’ll spill over a bit into the third, the level of spend for Q2 is estimated to be at or above that 1.75 million range that we had indicated, would likely be the case until we had full prep in place with collateral materials had worked on some of the advertising programs. Prep for the Blood Product Advisory Committee meeting, got our call center up in running and everything working and so there is a investment period that we associated with getting ready for the launch of the product assuming approval. After that the spend will be monitored based on how we envision rolling out the actual DTC program for the consumer base in the U.S.
Douglas A. Michels
Any other questions?
Probably I have time for one last quick one here. The question is do you see any options for the future use of DNA Genotek devices in diagnostics related application?
Douglas A. Michels
Yeah, that’s a great question and that’s one of the key reasons why we acquired the company. Obviously, I described some of the existing applications for the technology in donor registry or in the academic research space. Today, about 70% of the revenues at DNA Genotek come from the academic research market and about 30% come from the commercial space.
The company sells product in over 100 countries, they have over 3,000 customers. And so you can image they are involved in a broad base of academic research studies that address many different conditions from cardiovascular disease to cancer, autoimmune disease to infectious diseases and you name it. And obviously getting in on the ground floor of these research studies that establishing this collective technology as the base on which these studies are conducted and the results developed I think provides us with the unique opportunity and a very powerful opportunity to establish the Oragene product, DNA or RNA, as the future collection system for any commercial opportunities or applications that might develop.
So much like OraSure Technologies on the serology front, we started as an oral collection company and that’s translated then into the development of oral diagnostics that were built in our collection system. I believe the same opportunity can happen with DNA Genotek. And we are already seeing some of the applications come out with the use of the product in collecting specimens for 23andMe. Ancestry.com is using the product right now and others. So as we identify those opportunities, as we realize those opportunities, obviously we will report on them as we go forward.
I think I’m out of time right now, so I want to thank you all again for joining us this morning and for being with us. Thank you.
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