Aug 5, 2015
Executives
Doug Michels - President and CEO Ron Spair - COO and CFO
Analysts
Kate Blanton - Jefferies Peter Lawson - Mizuho Securities Nicholas Jansen - Raymond James Dave Westenberg - Canaccord Genuity
Operator
Good afternoon, everyone and welcome to OraSure Technologies 2015 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] To allow time for as many questions as possible questioners are asked to limit themselves to only a single question with no more than one follow-up question related to the same topic. Once the follow-up is completed the questioner can rejoin the queue for further questions.
OraSure Technologies issued a press release at approximately 04:00 PM Eastern Time today regarding its 2015 second quarter financial results and certain other matters. The press release is available on our Web site at www.orasure.com or by calling 610-882-1820.
If you go to our Web site, 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 Web site and will be archived there for seven days.
Alternatively, you can listen to an archive of this call until midnight August 12, 2015, by calling 855-859-2056 for domestic or 404-537-3406 for international. The access code is 78882836.
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, regulatory filings and approvals. 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, 2014, 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.
Doug Michels
Okay. Thank you, Rena and good afternoon everyone and welcome to our call.
We delivered strong performance in the second quarter. Consolidated net revenues reached a he record high and exceeded $30 million for the time in our history.
As a result we exceeded our guidance on both the top and bottom line. The primary driver for this performance was our molecular collection systems business which also delivered a record level of revenues.
This segment increased 65% over the prior year period. Domestic sales of our OraQuick rapid HCV test increased 39% over the second quarter of 2014.
This also represents 41% sequential growth from first quarter of this year. Together with the $3.4 million in exclusivity payments recognized under our HCV co-promotion agreement with AbbVie, total HCV related revenues were $5.7 million for the second quarter.
The revenue growth combined with favourable margins generated a $2 million net profit for the second quarter. Ron will provide more detail on our second quarter performance and following his financial overview I will provide additional commentary on specific segments of our business including recent developments involving our rapid Ebola test.
So with that, let me turn the call over to Ron.
Ron Spair
Okay. Thanks, Doug and good afternoon everyone.
Our second quarter 2015 consolidated net revenues increased 15% to 30.4 million compared to 26.4 million reported in 2014. Our consolidated net product revenues of 26.3 million increased 3% largely as a result of higher sales of our molecular collection systems, OraQuick HCV and intercept products.
Other revenues were 4.1 million in the current quarter of which 3.4 million represents the recognition of exclusivity payments under the AbbVie agreement. In addition $714,000 represents revenue associated with Ebola related funding we are receiving from the Biomedical Advanced Research and Development Authority or BARDA.
Other revenues in the second quarter of 2014 included $775,000 of AbbVie exclusivity payments. Our overall infectious disease testing revenues decreased 7% in the second quarter of 2015 when compared to the second quarter of 2014.
Total HCV related revenues, including the recognition of AbbVie exclusivity payments, increased 92% to 5.7 million in the second quarter of 2015 compared to 3 million in the second quarter of 2014. HCV product revenues increased 7% to 2.3 million in Q2 from 2.2 million in the prior year.
Sales of our OraQuick HCV professional product in the domestic market increased 39% in the second quarter of 2015 to 1.7 million from 1.2 million in the prior year. This increase is largely due to the addition of new HCV customers and higher sales to current customers who have expanded their HCV testing programs.
International sales of our HCV test in the second quarter of 2015 decreased 34% to 646,000 from 974,000 in the same period last year, primarily due to lower purchases by a multinational humanitarian organization. Purchases by this organization can be variable.
Influenced by its worldwide field activities and our thus difficult to predict. Domestic sales of our professional HIV product decreased 15% to 6.6 million in the second quarter of 2015 compared to 7.7 million in the second quarter of 2014.
This decrease was the result of customers moving to some of their testing to fourth-generation automated HIV immunoassays, price competition and the timing of orders. We expect continued pressure on our professional HIV business for the foreseeable future.
International sales of our professional HIV product decreased 30% to 596,000 in Q2 when compared to 848,000 in the same period of last year. This change is a result of the inclusion of bulk purchases associated with the significant African testing program in the second quarter of last year, which did not repeat in Q2 of 2015 but which are expected to occur again in the future periods.
Our molecular collection systems revenues primarily representing sales of the Oragene product line in the genomics market increased 65% to 8.1 million in the second quarter of 2015 compared to 4.9 million in the second quarter of 2014. Commercial sales increased 82% approximately half of which came from existing U.S.
based customers and the other half from new customers acquired in 2015. Sales to academic customers increased 44% largely due to variability in ordering patterns.
And because of this variability we expect sales to the academic market to be down sequentially in Q3. Turning to substance abuse our substance abuse testing revenues increased 14% to 2.5 million in the second quarter of 2015 compared to 2.2 million in 2014.
This increase was largely due to higher sales of our intercept device as a result of the recovery of customers previously lost to competition also improved domestic employment conditions and an increase in all fluid testing due to certain customers recognizing the advantage of its ability to detect recent drug use. Second quarter 2015 cryo revenues decreased 40% to 3 million from 4.9 million in the second quarter of 2014.
Domestic sales of our professional product decreased 31% to $1 million in Q2 from 1.5 million last year as a result of distributor consolidation and competition from new private label brands. Sales of our OTC products in the international markets decreased 47% to 1.7 million in the second quarter of 2015 compared to 3.2 million in the second quarter of 2014 due to lower sales to both our European and Latin American distributors.
The decline in sales to Europe was due to customer ordering patterns. The lower Latin American sales are due challenges faced in the local market including declining economic conditions in Argentina and a restructuring of our distributor’s business in Mexico.
Turning to gross margin. Our gross margin for the second quarter of 2015 was 68% compared to 61% reported for the second quarter of 2014.
The current quarter margin benefited primarily from the 4.1 million of other revenues associated with the AbbVie co-promotion agreement and the BARDA contract. These are the revenues contributed approximately 500 basis points to gross margin in the current quarter of 2015.
Margin for the current quarter also benefitted from a reduction in royalty expense and a more favourable product mix partially offset by higher scrap and spoilage costs. Our consolidated operating expenses for the second quarter of 2015 were $18 million.
If you exclude the $5.5 million settlement payment from Roche Diagnostics under the terms of the termination agreement of our oral fluid collaboration which was recorded as an expense offset in 2014. Our operating expense performance would have improved by about $1 million from the year ago period.
During the current quarter lower promotional expenses associated with our OraQuick in-home HIV test were partially offset by higher spending on R&D projects by DNA Genotek and increased sales and marketing costs associated with our HCV co-promotion agreement with AbbVie. From a bottom-line perspective, as thus indicated we reported net income of 3 million or $0.03 per share on a fully diluted basis for the second quarter of 2015, compared to 2.5 million or $0.04 per share for the same period of 2014.
Turning briefly to our balance sheet and cash flow, we continue to maintain a solid cash and liquidity position. Our cash and short-term investments balance at June 30, 2015 was 91.4 million compared to 97.9 million at December 31, 2014.
Cash generated by operating activities in the second quarter of 2015 was 3.2 million compared to 2.7 million used in the second quarter of 2014. You should know that an additional $15 million payment was received in mid-July under our HCV co-promotion agreement with AbbVie, bringing our current cash holdings to over $109 million.
Turning to guidance for the third quarter of 2015 we are projecting consolidated net revenues of approximately 29.5 million to 30 million. We are also projecting a consolidated bottom-line performance of approximately breakeven to a net loss of $0.01 per share for the quarter, primarily due to significantly higher costs expected under our HCV co-promotion agreement coupled with the lower consolidated revenues.
With that, I'll turn the call back over to Doug.
Doug Michels
Okay. Thanks, Ron.
As previously indicated DNA Genotek had another record quarter with revenues 65% higher than the year ago period. In fact the $8.1 million in revenues reported by DNA Genotek exceeded its previous record revenue level by almost 20%.
This performance was above expectation and was driven by very strong sales in the commercial market and continued strength in the academic market. Revenues from commercial customers comprised approximately 66% of DNA Genotek second quarter total while academic revenues represented the remaining 34%.
A big contributor on the commercial side was 23andMe which delivered almost $1.5 million of revenue for the quarter compared to no revenue in the comparable 2014 period. But even without the 23andMe contribution our molecular collection systems segment grew approximately 40%.
This is strong evidence of the benefits of customer diversification which has been a priority for this part of our business. As I noted during our last earnings call one promising new area of focus is the breast cancer screening market.
During the second quarter we experienced almost 800% growth in that market compared to the year ago quarter primarily because of the addition of one of the largest breast cancer screening providers in the market. Our pharmacogenomics revenue also showed good growth with an almost 80% improvement compared to 2Q 2014.
The increase in DNA Genotek’s product sales has led to further expansion of our manufacturing capacity. As you may recall a new automated manufacturing line was installed at DNA Genotek's contract during the summer of 2014.
In order to continue to meet product demand, we are now in the early stages of purchasing additional automated manufacturing equipment which is expected to become operational early next year. This additional equipment should double our existing production capacity.
In addition to diversifying its commercial customer base for oral DNA sample collection devices, DNA Genotek is continuing to develop new product offerings particularly in the areas of Microbiome and infectious disease testing. After launching a fecal sample collection device for Microbiome in mid-2014 DNA Genotek has acquired a number of new academic and commercial customers for this device.
For example since April 2015, the Company has won two contracts with early stage companies that are looking to develop Microbiome tests. Some of the world's leading Microbiome academic institutions are also purchasing our Microbiome product.
And in addition we've recently received authorization to our success for eMAR to our collection device which will help us access the European clinical market. We continue to believe the Microbiome market represents an attractive and substantial opportunity for future growth.
With respect to infectious disease testing DNA Genotek has continued to develop its proprietary reagent technology for the liquefaction and decontamination of sputum samples for tuberculosis. With the rise of antibiotic resistant TB we have an opportunity to deliver innovative solutions to improve management of this very large scale global disease.
One primary challenge related to TB is how to transport sputum samples in a stable and cost effective manner to a testing laboratory. Our technology can be added at the point of collection and allow samples to be transported without refrigeration for at least give days.
Our technology is also designed to be completely operable all of the methodologies currently used by laboratories that test for tuberculosis. And because of these benefits we’re in discussions with some of the leading TB diagnostic companies and our technology is now in the hands of TB testing laboratories in well over 40 countries around the world.
In developing our market opportunity one of our priorities has been to establish relationships with key funding agencies and non-governmental organizations and the breadth of these relationships expanded in the second quarter. Although this part of our business is still in its early stages the initial indications are quite promising.
Turning to our HCV business we shipped product to our 500 customers during the second quarter and 68% of our revenues came from repeat customers. As Ron explained our domestic business had a particularly solid performance with 41% sequential and 39% year-on-year growth driven primarily by new customers and the expansion of existing programs.
We've seen public health jurisdictions expand existing programs and new programs are getting started. We expect this growth to continue into the next quarter and beyond as previously communicated.
During the second quarter we also continued to focus on the major marketing initiatives under our co-promotion agreement with AbbVie. In July AbbVie's detailing of our HCV test to physicians began increasing to prior levels.
At the same time we began refresher training for both the AbbVie and OraSure field sales teams and we included enhanced OraQuick messaging and certain process improvements intended to enhance our customer's experience. Our goal is to streamline the customer experience with more flexible options for training, and implementation of testing programs along with the patient support program.
In the retail pharmacy space the pilot testing programs we previously mentioned have continued to progress. OraSure and AbbVie will continue to seek out additional retail pharmacy initiatives as opportunities arise.
We've also continued working with AbbVie to identify new employer groups to target for HCV testing. These will likely be employers that have higher prevalence employee populations.
We hope to begin moving forward to execute against some of these opportunities in the relatively near future. As we've indicated in prior calls the various co-promotion initiatives we’re launching with AbbVie have taken somewhat longer to implement and have been refocused due to market challenges.
As a result we now believe it is unlikely that we’ll be able to earn a performance fee for this year. We’ll continue to update you on the developments related to our co-promotion efforts in future calls.
A final area I would like to address are our ongoing efforts to commercialize the rapid Ebola test on our OraQuick platform. Over the past several months we've been working to obtain regulatory approval for this product.
And as we announced just this past Monday the FDA has now issued an emergency use authorization for the test. This authorization allows the temporary use of our OraQuick Ebola test in actual or potential emergency circumstances.
I would like to take this opportunity to recognize the hard work of our team and express our appreciation to several agencies that have helped with the clinical development and approval of this product, including the CDC the FDA and NIH as well as the U.S. Navy Medical Research Center and the Viral Hemorrhagic Fever Consortium these latter two agencies are supplying reagents which are used in this product.
As you may recall we also received an award of up to $10.4 million in funding for this product from BARDA. The initial commitment is for 1.8 million with the remaining 8.6 million dependent upon BARDA's election of certain options under the contract.
These funds will be used primarily to pay for the scale up of manufacturing and the field and clinical testing required for regulatory approvals. In this regard we’re continuing to work closely with the CDC to complete various field studies in order to generate performance data in support of additional regulatory submissions.
And finally we’re pursuing procurement contracts with various government and non-governmental organizations. And as I have said on prior calls obtaining substantial and sustainable purchase commitments is a key objective for this product and we continue to make progress in this regard.
So as you have heard today our financial performance for the second quarter has been very strong with record revenues and solid profitability. Our molecular collection system business continues to perform very well and our HCV business continues to grow nicely.
We’re also making good progress towards the commercialization of OraQuick Ebola test. We built a solid foundation for the rest of 2015 and I look forward to updating you on our progress and additional developments during our next call.
And so with that, let's open up the floor to your questions, operator if you please proceed.
Operator
[Operator Instructions] Our first question comes from the line of Brandon Couillard from Jefferies. Your line is open.
Kate Blanton
This is actually Kate in for Brandon. And thanks for taking the questions.
Just to start I guess first on the AbbVie relationship so is it fair to say you didn’t see any progress on AbbVie’s contractual obligations in the period in the second quarter and are you so confident they are going to meet these minimums throughout the second half?
Doug Michels
Yes. Absolutely like I mentioned, we've seen detailing activities increase to what we saw at the end of 2014 and we fully expect that they will meet their obligations.
Kate Blanton
And maybe Ron then can you discuss how we should expect sales and marketings tend to step up in the second half as a result of those recent activities and how that will pace for maybe 3Q to 4Q?
Ron Spair
Right, so that's a great point and with the increased detail and our activities in the domestic marketplace will come additional expenditures for our sales and marketing and right now we are anticipating that that will step up by from Q2 to Q3 by over $1 million dollars in expenditures and we don’t have a perfect view on Q4, but we certainly expect it to be significantly higher than where we were at Q2 and it will depend on the activities that we’re engaged in at that time, but I think it's safe to say that the second half expenditures to sales and marketing will be sequentially higher than the first half.
Kate Blanton
And just one last one on Ebola maybe did you recognize any orders to CDC in the second quarter and do you expect they are going to come through in the second half now with the approval, what are observations?
Doug Michels
We did we recognized about a little shy of $400,000 in Q2 in Ebola revenues. And we’re working to secure additional revenues in the back half of the year we believe that we will realize revenues not prepared right now to dimensionalize those, but as I mentioned in my prepared remarks we are looking to secure significant and sustainable procurement contracts.
Operator
Thank you. Our next question comes from the line of Peter Lawson from Mizuho Securities.
Your line is open.
Peter Lawson
Wondering if you’d give anymore color around the increased detailing you are seeing with AbbVie?
Doug Michels
Well. I think the only color we can provide is, is that AbbVie as we indicated last quarter has stepped up their activity and they are back providing primary or secondary details into the physician office market for the agreement.
And we've spent time refreshing training with their organization and with ours and the two organizations continue to work together in the field to promote both the rapid test as well as the patient support program so it's back being executed as we indicated and anticipated.
Peter Lawson
And then just any additional color you can give around the refocusing of the co-promotes with AbbVie and where is that headed and I wonder if you could elaborate upon the markets challenges anything new emerging?
Doug Michels
No I don’t think it's anything new but clearly there have been challenges in terms of encouraging adoption in terms of transitioning from interest to deployment and we've taken steps through the training to streamline some of those processes with AbbVie to make it easier both for their organization as well as ours to implement training on a more timely basis. Certainly there have been challenges on the broader therapeutic front with authorizations and challenges like debt with insurers but those things are working through the system and one thing is for certain these drugs whether delivered by Gilead or AbbVie are working people that have been quietly infected are getting cured and all indications are is that we continue to work through the large number of warehouse patients that have been previously diagnosed and as we continue to work through that patient population interest in identifying new patients is going to continue to increase.
Operator
Our next question comes from the line of Nicholas Jansen from Raymond James. Your line is open.
Nicholas Jansen
A couple of quick questions, first on the strength in DNA Genotek just wanted to kind of get a better sense I think Ron you said that the academic customer revenue might step down sequentially, but bigger picture is this an asset that continues to reprise more and more every quarter how should we think about the sustainability of the long-term revenue here and even more importantly as you add more product to the platform with the -- you have got Microbiome and thinking on those lines how do we think about those being incremental to the revenue trajectory?
Doug Michels
Yes so Nick this is Ron here, I think if you look at the long-term prospects we're very bullish on the future growth opportunities for the molecular collection business. In the quarter we saw strength both academic and commercial.
The academic strength is a little bit a timing of orders and so that's why we indicated we're probably going to see a decrease in revenues from the academic market in Q3, but still business is very strong. Commercial was up significantly, we highlighted the order from 23andMe in the quarter that or the contribution from 23andMe in the end of quarter that we didn't have in Q2.
We also secured a couple of new significant customers, particularly in the breast cancer screening area and one of those was substantial such that they placed large orders on us in the quarter, some of that is stocking, some of that is to provide our collector to their customers. We expect that customer to continue to purchase through the remainder of the year probably not at the same level that they did in Q2 but again significant contributor to the business.
With regards to new products, we did realize about $100,000 from contribution from the Microbiome in the quarter. And we have a lot of interest in that product offering and we expect that's going to continue throughout the remainder of 2015, I caution that I really -- I don't expect significant contribution from that product line this year as we continue to validate its value but interest level is extremely high and we expect that will contribute more substantially in 2016.
The OMNIgene Sputum product directed to the tuberculosis market, wow, I mean it's in the hands of researchers all around the world. We're beginning to generate data on the performance of that product that is in the early days, they are encouraging.
But once again, it's not going to contribute in any significant way to revenues in '15, but will begin in '16 and probably a little bit more towards the end of '16 and into '17. So, the business is very healthy, and the team is really doing good job managing both the revenue as well as the expense line at DNA Genotek.
Nicholas Jansen
Then secondly, Ron, the strength in gross margin I would assume some of that has to do with mix on HCV bouncing back, DNA Genotek obviously quite strong, just wanted to get a better sense of -- and then you have the royalty -- incremental royalty from the BARDA contract but just want to kind of get your views of how we should be thinking about gross margins over the near to intermediate term?
Ron Spair
Sure, so your observations are spot on Nick the mix did contribute and certainly the magnitude of the other revenues, the amortization of the exclusivity payments as well as the BARDA revenues have contributed approximately 500 basis points of a difference between 2014’s Q2 and 2015’s Q2, looking forward I think some of them -- a lot of that will be sustainable from the exclusivity payments as well as ongoing contributions from BARDA assuming obviously that we continue work with them which we have every expectation to doing so. Then it will come down to the mix and the contribution from the DNA Genotek HCV revenues as you pointed out and the magnitude and proportion of them in relation to the other pieces of the business.
So, looking at it we feel comfortable that gross margins will comfortably stay in the mid-60s and on occasion trend up towards the higher 60s where we have the kind of mix that we had in Q2.
Nicholas Jansen
And then lastly, Doug, the HIV franchisee obviously is going from some pressures associated with next generation devices and tests and I was wondering if there's anything that you could do from an FDA standpoint in terms of enhancing your product capabilities or from a competitive standpoint in terms of pricing or something along those lines where you can see less pressure then down low-teens that you have seen in the first half of this year? Thanks.
Doug Michels
Yes so we've indicated previously that we were going to -- we expected continued pressure on that business at least for the remainder of this year, and revenues were soft in the public health and hospital market. Our business in the physician office lab was up actually.
It's a challenging situation with challenges on the funding front, point of care, HIV testing is actually down here in the United States with this migration to lab based fourth generation test systems, I hate to say this but that’s true and it's a good thing incidence is down, right. So as we have made progress over the years with testing more people and identifying more positives the incident HIV infections continues to decrease here in the United States, the number of people who are unaware of their infection continues to be reduced and that all puts pressure on the HIV testing business, and obviously being a leader in rapid point of care testing here in the United States we get disproportionally impacted.
We have been able to maintain our pricing pretty effectively and we’re going to continue to try to manage that as best we can. We’re looking for growth opportunities where we can leverage the technology advantage we have with HIV and hepatitis C from a deployment, execution and ease of use perspective and then we believe there is some opportunities on the international front.
So we’re still swinging hard at the ball but like I said we expect to have continued pressure on that franchise for the rest of this year for sure.
Operator
[Operator Instructions] Our next question comes from the line of Mark Massaro from Canaccord Genuity. Your line is open.
Dave Westenberg
So I wanted to ask just on the strategic front. Is there any sort of opportunity you are looking for in the M&A front, and what sort of areas that I think we would or would you think sort of benefit you right now?
Ron Spair
Yes so Dave it's Ron here and we’re actively looking and evaluating a number of different opportunities out in the marketplace. As we have talked about before looking at products licensing of products and those technologies, companies that would generally compliment what we’re doing in the DNA Genotek area more in the molecular than in the immuno-acid area.
And so we continue to look but we’re maintaining our discipline as far as criteria to move forward and execute a transaction.
Dave Westenberg
And then on DNA Genotek, can you maybe highlight some of the high profile wins or if not that I know you've given sort of some of the customer types but maybe just on a go forward basis maybe some of the areas that you are looking into for new customers on the DNA Genotek?
Ron Spair
Yes for competitive reasons we’re reluctant to disclose who some of these new customers are, but suffice it to say a big focus area has been in the pharmacogenomics area in the carrier screening area in reproductive medicine and then of course more broadly on the academic front. So pretty broad focus but certainly those areas that I highlighted represent we believe to be some of the bigger opportunities in the growth areas for DNA Genotek's business.
Operator
Thank you. [Operator Instructions] And it looks everybody is in the queue at this time.
So I would like to turn the call back over to Doug Michels for closing comments.
Doug Michels
Okay. I just want to thank everybody for dialing into our call this afternoon.
And appreciate your time. Look forward to updating you on our Q3 performance in a few months.
Have a great afternoon and evening everyone.
Operator
Ladies and gentlemen thank you again for your participation in today's conference. This now concludes the program.
And you may all disconnect your telephone lines at this time. Everyone, have a great day.