Feb 23, 2022
Operator
Welcome to the OraSure Technologies, Incorporated 2021 Fourth Quarter Earnings Conference Call. My name is Darrel and I'll be your operator for today's call.
[Operator Instructions] I'll now turn the call over to Scott Gleason, Interim CFO. Scott, you may begin.
Scott Gleason
Good afternoon, and welcome to the OraSure Technologies fourth quarter 2021 earnings call. I am Scott Gleason, the Interim CFO and SVP of Investor Relations and Communications.
Presenting with me today is from OraSure is Dr. Stephen Tang, our President and Chief Executive Officer, Lisa Nibauer, Our President of Diagnostics and Kathleen Weber, Our President of Molecular Solutions.
As a reminder, today's webcast is being recorded and a recording along with the presentation accompanying the webcast can be found on our Investor Relations website. Before we begin, you should know that this call may contain certain forward-looking statements, including statements with respect to revenues, expenses, profitability, earnings or loss per share and other financial performance, product development, performance, shipments and markets, business plans, regulatory filings and approvals, expectations and strategies.
Actual results could be significantly different. Factors that could affect results are discussed more fully in the company's SEC filings, including its registration statements, its annual reports on Form 10-K for the year ended December 31, 2021, its quarterly reports on Form 10-Q and other SEC filings.
Although forward-looking statements help to provide complete information about future prospects, listeners should keep in mind that forward-looking statements are based solely on information available to management as of today. The company undertakes no obligation to update any forward-looking statements to reflect events or circumstances after this call.
With that, I'm pleased to turn the call over to Dr. Steve Tang.
Stephen Tang
Thank you, Scott. And thank you for everyone for joining our call today.
In 2021 OraSure delivered record revenue for both our diagnostics and molecular solutions businesses. Our total company revenue growing at a 25% compounded annual growth rate since the pre-pandemic period in 2019.
Revenue in the fourth quarter was $63.6 million above our pre-release range and the guidance we provided in the third quarter and a new record for the company. We achieve total InteliSwab revenue of $14.7 million, an increase of 92% on a sequential basis, we are making significant progress scaling up production.
While there's still more to do, we believe we are in a position to growing InteliSwab revenue meaningfully throughout the year. In the fourth quarter, we once again saw outperformance from our molecular solutions business.
And despite major direct-to-consumer customers taking larger inventory positions in the third quarter. We demonstrated sequential growth and had our third straight quarter with revenue exceeding $30 million.
We believe that our multi-omic strategy of expanding our sample collection and molecular services businesses coupled with new customer additions, positions us well as we look forward to 2022. Finally, our executive leadership team and our board of directors is focused on maximizing shareholder value and our strategic alternative process is underway.
Until the board reaches a decision, we will not be making any comments other than to say we are dedicated to identifying the best path forward for a company to further create value for our shareholders. In any scenario, we believe we're well positioned to scale the business meaningfully in 2022, with an eye towards driving profitable growth.
With that, I'm pleased to turn the call over to Lisa Nibauer, for an update on the diagnostic business unit.
Lisa Nibauer
Thanks Steve. I would first like to provide a quick overview of our core diagnostic business followed by an update on our progress with InteliSwab.
First, for the full year 2021, the overall diagnostic business unit revenue was $90 million and grew 38% versus last year. Our global core diagnostic business excluding InteliSwab product revenue grew 3.5% versus prior year.
If you exclude the impact of the June 2021 expiry of the Bill and Melinda Gates Foundation subsidy for our international HIV self-test, the core diagnostic business grew 8.6% versus prior year. In the US, core diagnostic grew 13.3% for the full year 2021.
This was driven by strong performance across HIV. HCV and our drug testing business with the reopening of clinics, and new employee hiring, as well as CDC orders for HIV OTC test to mail-to-home as part of the CDCs Let's stop HIV together program.
Outside the US, the international diagnostic business declined 6.2% versus prior year, but excluding the Gate subsidy impact, the business was up 3.4%. In addition, we experienced logistical disruptions from the pandemic all year, which impacted the timing of shipments including those at year end.
Part of our strategy with our diagnostic business is to accelerate growth by expanding globally, and we have made significant strides on that initiative this past year. In late 2021, we received our Thailand Free Sales Certification, which will allow us to register the product in Asia and Latin American countries, regions we were unable to access without the certification from the country of origin.
In addition, early in the first quarter of this year, we launched our HIV self-test into six European countries, including the United Kingdom, Germany, France, Spain and Portugal, where the test will be available in retail pharmacies. This year, the World Health Organization also issued the first guidelines on HCV self-testing, the WHO estimates that 58 million people in the world have Hepatitis C, yet less than one quarter know they are infected.
That is over 45 million people who have this disease and do not know it. Importantly, Hepatitis C is curable with medication, if detected early.
If not detected Hepatitis C can result in significant liver damage and possibly death. And as stated, quote, the WHO has set a global goal to eliminate HCV as a public health problem by 2030.
Meeting this goal requires innovative approaches and service delivery models for reaching the people who remain unaware of their HCV infection and linking them to treatment and care services. Self-testing is one such approach, unquote.
These guidelines represent strong support for the continued need for ease of use self-testing by lay users an area where OraSure has a strong product and many years of expertise. In addition, the US also issued its first viral hepatitis elimination plan also focused on eliminating this disease by 2030.
The expansion of self-test is core to our strategy to drive both revenue and gross margin growth moving forward. Now, I would like to discuss InteliSwab and the important tailwinds, which now support further COVID-19 self-testing in the United States in particular.
As we previously announced in January, while we experienced lower than expected InteliSwab sales per quarter due solely to our supply, we are optimistic about the future trajectory. In January, the Biden administration announced a federal government commitment to purchase a total of 1 billion COVID-19 Rapid antigen tests, distribute them free directly to individuals that request them online, OraSure with our existing US government procurement contract will be able to supply this program in addition to other federal programs as dictated by HHS.
In addition to this 1 billion test procurement program, in January, the Biden administration also mandated that commercial insurers as well as Medicare and Medicaid, provide reimbursement for OTC COVID-19 rapid test. Under this program, consumers can now purchase up to eight COVID-19 Rapid home tests per month per person and receive reimbursement from their insurance provider with no associated co pays or deductibles.
For those insurers who established preferred retail partners, consumers will be able to obtain tests free of charge by showing their insurance card right in store. The payers will then reimburse retailers at $12 per test, or $24 per two pack.
If an insurer does not establish preferred retail partners, then the consumer will need to pay out of pocket and send receipts to their insurer to receive reimbursement. This reimbursement will be at the retail price paid.
Given the almost 300 million individuals in this country with health insurance. We believe this expands the theoretical market opportunity for COVID-19 testing in the US to over $150 billion.
Furthermore, we would highlight the potential benefits this may have as we look to the future for self-testing, as these types of payer models could be used to empower patients and reduce healthcare costs with other disease states. As a reminder, the market model we shared with investors last quarter, based on epidemiology have less than a 0.5 billion tests assumed as the US market size in fiscal year 2022.
Now with these new developments in procurement and reimbursement for OTC rapid tests, we believe the 2022 COVID-19 rapid test market in the United States will be significantly larger than we anticipated. Overall, these changes also make us more optimistic on the long-term durability of the COVID-19 market in the United States, as we plan to scale our production capacity to over 200 million tests per year.
We also continue to garner data to support InteliSwab accuracy and to expand indications. At the start of 2022, we added a number of important label expansions for the test.
First, in early January, the FDA announced concern that certain lateral flow tests may not be as accurate with the Omicron variant, as required with our emergency use authorization, OraSure initiated studies using live SARS-CoV-2 Omicron virus in an independent third party laboratory to evaluate our testability to detect variants of concern. Importantly, the data indicates that InteliSwab detects Omicron at the same level of detection, as it did with all other variants of concern, and the original Wuhan string.
Second, we also recently announced that our InteliSwab tests have been authorized by the US FDA for use in children ages 2 to 14. Prior to this announcement, InteliSwab was authorized for self-testing use in adults 18 and older and in children 15 to 17 when administered by an adult.
This is an important indication expansion which enables us to provide tests with numerous test to stay programs being rolled out in many school districts, as well as many other state testing programs focused on household testing. Finally, the company recently announced the launch of a new reporting app InteliSwab Connect, which will allow people to save images of their own results.
To easily report their test results to public health authorities and to also provide results to employers. The app will be available on the Apple App Store and via Google Play.
In 2022, the US market provides significant demand via both our US government procurement contracts also numerous non-government customers, we will be able to sell all that we can produce. That said we are working to create certain packaging configurations specifically for markets outside the US.
And we'll be conducting the necessary studies this year to enable international sales in 2023. In addition, we have plans to improve gross margin for InteliSwab with these configuration changes, and other savings as we scale.
Lastly, I would like to discuss our manufacturing scale up with InteliSwab. As part of our organizational restructuring, I assume leadership of the diagnostics operations team at the start of the year.
From a background perspective, I'm a chemical engineer with extensive medical device operations management experience. I started my career in engineering and plant management in large chemical plant operation.
And in my most recent role prior to OraSure, I lead the Becton Dickinson global Vacutainer business as well as BDS global syringe needle and IV catheter businesses. Collectively, these business manufacture 10s of billions of medical devices in numerous production facilities around the world and represented billions of dollars in annual revenue.
To further aid in our operational scale up and in addition to other ongoing efforts, I hired an operations consulting firm used by the National Institute of Health RADx program, with deep expertise in manufacturing scale up in rapid antigen testing. We've been working on process mapping and identifying major bottlenecks where resolution can lead to the greatest incremental efficiency.
We also have experts at our contract assembly sites to help identify areas of opportunity for further efficiency. The team has already identified a number of significant areas for improvement to accelerate our scale up and improve our operational efficiency throughout 2022 and beyond, and I am confident in their leadership and ability to assist in our scale throughout 2022.
Some of the operational improvements the team has recommended will take time to implement and are exacerbated by the challenges we face in terms of the challenging labor market and global logistical and supply shortages as a result of COVID-19. While we are not providing former InteliSwab guidance or capacity expectations given our strategic alternative process, we do expect to scale InteliSwab modestly in the first quarter with more meaningful gains throughout the remainder of fiscal year 2022.
With that, I am pleased to turn the call over to Kathy to discuss our molecular solutions business unit.
Kathleen Weber
Thank you, Lisa. As Steve previously stated, our molecular solutions business unit had another exceptional year with total revenue growing 35% despite a more modest 7% increase in COVID-19 collection kits year-over-year.
In the fourth quarter, we saw sequential revenue growth despite change in the ordering patterns for our major direct-to-consumer customers who took the majority of their seasonal holiday inventory in the third quarter earlier than their historical fourth quarter purchasing. In 2021, we added 650 new customers and extended our multi-year contracts with six large existing customers, positioning us well for future growth.
This quarter, our Diversigen services revenue, and our microbiome kits revenue was $5.9 million for our second highest quarter ever. Our overall microbiome kits and services business grew at almost 40% in calendar year 2021.
And we anticipate this to be a strong source of growth looking forward. This slide shows a representation of our multi-omic strategy.
Our strategy of enabling multi-omic discovery and diagnostics is grounded in a strong backdrop of high growth ohm’s and high growth customer segments, including disease risk management, diagnostics, research and discovery, animal and environmental. We continue to expand our product and service offerings to extend both patient access and insight to a wider range of samples and analytes of high interest to these customers.
The shaded boxes on this slide show areas where we currently compete, the dashed bars show areas of interest, and the stars show planned product or service launches. In late 2021, we launched our new gut meta-transcriptome service offering through our Diversigen subsidiary.
For those who don't know, the meta-transcriptome looks at gene expression levels across the Meta genome. Our pharmaceutical and research customers have been highly interested in this technology, which can provide important insight into mechanism of action for IP and regulatory filings.
We believe the meta-transcriptome will provide a new avenue for growth in both collection kits and services, with additional launches planned for this year. In the fourth quarter, we also received FDA clearance for Omnigene-Gut DX collection product.
Importantly, this action marks the first time that the FDA has cleared a device specifically for the collection and stabilization of the microbiome for diagnostic or clinical purposes. This innovation will support our commercial customers as they seek to launch clinical assays based on the microbiome, or want the reliability of an FDA cleared device in their therapeutic development programs.
In the second half of 2021, we saw a number of very positive phase two data readouts from industry leaders, developing microbiome based therapeutics in disease areas such as C difficile, ulcerative colitis, and cancer. This progress is a strong leading indicator for the successful clinical use and continued expansion of the microbiome research, diagnostic and therapeutic fields.
Finally, in late 2021, we advanced the potential of our urine collection business with the launch of a new preservation chemistry for use with our Colli-Pee urine collection device. This new chemistry is specifically designed to stabilize analytes in urine critical to oncology applications such as liquid biopsy, we continue to advance our work toward incorporating Colli-Pee into multiple applications in the infectious disease and oncology fields.
As you can see, we are aggressively supporting our vision of enabling multi-omic discovery and diagnostics through innovation. Finally, I would highlight that our COVID-19 collection kit business outperformed expectation in the fourth quarter, given the surge in testing activity around the Omicron variants.
As we look forward to 2022, we will be expanding internationally in six target countries in Europe and Asia. Additionally, we plan to launch a new product format, which we believe will further aid our expansion into viral surveillance and screening.
Despite these positive developments, we continue to anticipate volatility in this segment based on COVID-19 prevalence rates, and as the market increasingly transitions to over-the-counter and point-of-care testing solutions. With that, I'm pleased to turn the call back over to Scott.
Scott Gleason
Thanks Kathy. I'm pleased to discuss our financial results for the fourth quarter and provide updates on our financial outlook.
First, from a top line perspective, we delivered total revenue of $63.6 million in the fourth quarter of 2021 compared to $62.9 million in the prior year representing year-over-year growth of 1%. I would highlight a few items.
First, as Steve mentioned, this quarter was a record revenue quarter for the company. And despite the shortfall InteliSwab revenue relative to expectations, we were able to exceed our financial guidance given strength across the remainder of the portfolio.
Additionally, from a growth perspective, last year’s fourth quarter was a tough comp for a number of reasons. First, the fourth quarter of last year contained $22.8 million in COVID molecular kit revenue, essentially offsetting all the positive growth we received from InteliSwab in the quarter.
Additionally, the fourth quarter of last year had exceptionally high international HIV sales, and different ordering patterns for our direct-to-consumer customers in our genomics kit business. Overall, with the exception of the InteliSwab shortfall relative to our expectations, we are exceptionally pleased with strong fourth quarter results.
Turning to our gross margin, our gross margin percentage in the third quarter was 42.7% and improved approximately 290 basis points relative to 39.8% gross margins we saw in the third quarter despite the higher InteliSwab mix and key manufacturing efficiencies in the quarter with our scale up process. This quarter, we did receive a benefit associated with the employee retention credit, which is part of the CARES Act, which offsets the payroll tax contributions and accounted for our portion of the total sequential improvement.
As we look to InteliSwab, we continue to expect transitory margin pressures, as we scale our process and improvement production efficiencies. This will be driven by higher scrap rates, lower overhead absorption, labor inefficiencies, and as we train new personnel, and higher shipping costs associated with the global supply chain crisis.
Additionally, in the near term, our margins will be impacted by our government procurement contract for InteliSwab, which has pricing below market rates. While these pressures will weigh on our near-term gross margin profile, we have line of sight to a number of potential significant improvements and InteliSwab gross margins that we believe will begin to manifest throughout 2022 and beyond.
First, we expect to become a more efficient as we transition through the year from a labor and scrap perspective. And as we grow revenue will be greater overhead absorption.
Second, we anticipate a significant reduction in our freight costs. And we expect to transition to sea shipments from air shipments in 2023.
Air shipment rates have increased dramatically with the global logistic crisis. Finally, we expect price improvement as our mix becomes increasingly commercial beginning of the fourth quarter of this fiscal year.
We also are evaluating a number of efficiency programs for InteliSwab and Lisa mentioned we are working on a package configuration change for next year with significant positive cost implications. Overall, review efficiencies in our manufacturing processes strategically important for the company, and our InteliSwab scale up present long-term opportunities to improve our overall manufacturing efficiency.
Ultimately, we expect InteliSwab gross margins to be at or above our gross margins for our overall diagnostic business unit. From an expense perspective, total operating expenses, expenses in the quarter were $36.5 million, an increase 6% on a sequential basis.
We have placed a high emphasis on expense control, and this quarter our operating loss improved by approximately $3.8 million sequentially. [Indiscernible] look for efficiencies across the organization as we transition to 2022 with an eye to driving profitable growth looking forward.
From a financial outlook perspective, we are not providing financial guidance as we work through the strategic alternative process. We would highlight the typically our core business experiences significant seasonality in the first quarter given reductions in international test shipments at the start of the calendar year to our NGO partners, and seasonality associated with the molecular kit and services business.
We look to reinstate financial guidance following the completion of our strategic alternative process. With that I'm pleased to turn the call back over to Steve for concluding remarks.
Stephen Tang
Thank you, Scott. As you know, this is my last earnings call with OraSure.
And I would like to personally thank all of our employees across the globe for the tremendous work they've done and their dedication to our mission. I also want to thank our investors who have supported us over the years, and our board of directors for the opportunity to serve both as Chairman of the Board and Chief Executive Officer over the past 11 years.
I'm extremely confident in our outlook and the capabilities of our executive leadership team to transform the company in the coming years. The power and sustainability of OraSure comes in our focus on smart science made simple.
And I'm firmly convinced that the growth in areas such as point-of-care testing, self-testing, consumer and clinical genomics and new areas of discovery like the microbiome, because of these factors, I will leave knowing the company has a strong foundation and is an extremely capable hands. And with that, I'd like to turn the call back to Scott for questions and answers.
Scott Gleason
Thanks, Steve. Operator, we're now ready to begin the Q&A portion of the call.
We'd ask that you limit your questions to one question and one follow up to ensure broad participation.
Operator
[Operator Instructions] And our first question comes from Tyco. Peterson.
Kevin Casey
Hi guys, this is Casey on for Tyco. Thanks for taking my questions.
First one is last quarter, you gave a purchase order number, and I think its $400 million for the COVID test that you couldn't fill because of supply constraint. I'm curious if you could provide us with the number for this quarter?
Is it the client sequentially? And can you maybe breakouts demand here between retailers and government orders?
Stephen Tang
Yes, thanks, Casey. It’s Steve, we aren't going to give a specific number.
But I think I'll turn it to Lisa, who provided I think, some great commentary about strong demand so far, and the momentum we've had since we announced that $400 million in the third quarter. Lisa?
Lisa Nibauer
Yes. Thanks, Steve.
And thanks for the question. We continue to have very strong demand for our test.
We are currently able to sell everything we can make. Our US government relationship is very strong, as you know, we have a government contract.
And we meet with them every week. And basically, they've told us to prioritize orders for our OTC retailers and non-government customers.
And then they will take whatever we have we tweak beyond that. So that's pretty much of what we can share at this point.
We do indeed have again, more orders and interest coming in than we have product to fill currently.
Kevin Casey
Got you. Maybe that leads into my next question.
So I know you guys aren't guiding for capacity expectations. But it sounds like the $4 million per month in 1Q 2022 that had been previous guidance.
It's safe to say that isn't really realistic for this quarter. Just wondering, I know that the prior plans were to scale up to $8 million per month by the end of June.
Is that still kind of a realistic number to be modeling or any sort of directional guidance, in terms of the cadence as capacity scale up would be helpful for modeling purposes?
Stephen Tang
Yes, so Casey, we're not going to offer specific guidance against those numbers. I think we stopped doing that in January with our announcements.
So I think what you can rely on is Lisa's comments about selling everything we can make in the progress or making in production, which we have defined as modest for the first quarter, and more significant throughout the year.
Kevin Casey
Okay, fair enough. And then maybe my last one before I'll hop back in the queue is around the international HIV business.
So the roll off of the Bill and Melinda Gates Foundation subsidies are obviously kind of impacting things here. Just wondering what we can expect in 2022 in terms of revenues, relative to 2019 levels?
Is there sort of any visibility into maybe a new subsidy agreement in 2022? And anything to kind of talk towards on the international business?
Thank you.
Stephen Tang
Yes. Thanks Casey.
So we don't expect a new subsidy agreement in 2022. But Scott, maybe you'd like to just generally comment about the outlook for HIV.
Scott Gleason
Yes. Thanks Steve.
Thanks Casey, for the question. Yes, as we look to the international HIV plus cases, that subsidy rolled off in the June quarter of last year, and had been declining for some time.
And so we'll fully annualize that subsidy, as we get through June this year. I think importantly, from a volume standpoint, from volume growth outside of the United States.
And so I think the good news is the annualized business subsidy, we should start to see improvements in upper grades with our international business.
Operator
And our next question comes from Brandon Couillard from Jefferies.
Unidentified Analyst
Hey, guys, this is Matt on for Brandon today. Just quickly, can you give kind of your high level pricing outlook?
I think you talked about the government contracts being a little bit below commercial pricing and mix improving the end of this year, but just kind of high level pricing outlook, both US and no US and any color you can add on your government contracts versus commercial or retail contracts. Thanks.
Stephen Tang
Yes, thanks Matt. Scott, do you want to comment?
Scott Gleason
Yes, Matt. We don't give specific pricing information.
It varies across customers. I mean I think the one area where obviously our pricing is on the government contract which was publicize our pricing there was about $5 a test or $10 per OTC kit that we supply to the government.
What we've seen from commercial pricing is that commercial pricing is higher than that. But we haven't given any kind of specific information.
I think if we look at the pricing environment, we really haven't seen anything change dramatically. Obviously, there's still a supply imbalance where demand exceeds supply.
And so I think that's about all we can really say, at this point.
Unidentified Analyst
Okay, thanks. And then just talking about the restructuring, and kind of designed to vertically integrate the business on the DX side and molecular solutions.
Why is now the right time to do that, and any way to kind of talk about or quantify some of the benefits you expect to realize from this?
Stephen Tang
Sure, Matt, I'll start, I think it's very clear that the needs and capabilities of each business unit core operations is different. And that's why we made the change in what we announced in January.
I think Lisa gave some great commentary in terms of her background and some new capability that she brought on board, but it's designed to focus operations to the needs of the specific business units, rather than have operations to be a corporate function. So we haven't quantified that as yet.
But I think our expectation is it will help overall performance and operations both in quality and quantity, and efficiency and productivity for both business units.
Unidentified Analyst
Okay, great. And then this last one, I think you said microbiome, all in kits and services was kind of $6 million in the quarter.
So kind of a $25 million run rate business. Can you talk about how big this business can kind of get over the next few years?
And you're in a number of clinical trials, how do we think about as those move along as a kind of a hockey stick in Phase 3? Or how do we think about the contribution to you guys as those moves through the clinical pipeline?
Thanks.
Stephen Tang
Yes, of course, we've always viewed microbiome as a high growth business, both from a products and services side. So I'll turn it over to Kathy for some further comments there.
Kathleen Weber
Yes, sure, thanks for the question. As Steve said, microbiome is viewed as a very high growth market, we study all the ohm’s genome, microbiome, transcriptome, and of all of the microbiome is projected to have the highest growth rate over the next five years.
And our business really benefits in multiple ways, to your point, the clinical trials that are progressing are revenue for us today, as we support those both with kits and with Diversigen services. But also as assays, customers start to look at microbiome based assays, and DTC applications in the microbiome field that benefits us as well.
So a lot of factors driving that high projected growth for the microbiome, and we're clearly investing in that growth on both the kits and the services side.
Stephen Tang
Matt, if I could just add one nice thing. One nice part about the agreements that we have is a lot of these studies are in the early stages, Phase 1, Phase 2, as they advanced into the Phase 3 setting, typically the number of samples that you're dealing with expands dramatically, so the revenue associated with those contracts, as you move into your later stage studies, also increases and so that's a trend that we would expect to see over the next few years.
Operator
And our next question comes from Patrick Donnelly from Citi.
Unidentified Analyst
Hi, this is Lizzie on for Patrick, thanks for taking my question. The first -- my first question is on the margin impact from InteliSwab.
Can you talk about, you said the impact will be transitory. I guess how do you plan on improving that margin pressure this year, I guess and beyond?
Thanks.
Stephen Tang
Yes. Thanks, Lizzie.
I'll turn it over to Scott for that one.
Scott Gleason
Yes, thanks, Lindsay for the question. Yes, I think as we look at the InteliSwab gross margin I think that you just have to think about kind of the situation we're in and how that transitions as we go through the year.
First off, we obviously have a lot of equipment overhead, that as we increase the volume of testing, that overhead gets stored over a larger volume base. And so that will provide a benefit from a gross margin standpoint.
Secondly, when we look at equipment, labor, materials as you're in the scale of phase, as Lisa discussed, you're not using those efficiently. And so there's a lot of efficiency gains that we would expect as we transition throughout the year.
I think the third factor that we talked about was the government contract. And as we move beyond that government contract to essentially our assumption is 100% commercial business in the fourth quarter we'll see higher pricing which obviously have a positive margin benefit and then there's number of thing as we think about this, from a transitory standpoint that we talked about like shipping cost, eventually we're going to transition from air shipments to sea shipments, these shipments significantly cheaper.
Also, we would expect some logistical challenges that are being faced on a global basis with the cost reductions from a shipping standpoint going forward. And then there's a number of things from an efficiency standpoint, that we're working on, that Lisa mentioned, packaging configuration on the call.
But there's another, other items that we have visibility to longer term. And so it's a huge area of focus for the organization.
And there's a number of drivers we expect to drive improvement as we go through the year and beyond.
Unidentified Analyst
Great, thank you. And then just as a follow up, you guys said that you're seeing I guess, an improved labor outlook, can you just I guess share I guess give a little bit more color on that?
What gives you confidence and given that the hiring environment is pretty tough right now. Thanks.
Stephen Tang
Yes, Lizzie, hire environment remains tough, but I think we are making good progress. Overall, we've adjusted our approach to hiring and made our offers much more market competitive.
In particularly high value where we do most of the operations associated with InteliSwab in our diagnostic products. It's been a very tight labor market, due to the demand for both manufacturing and distribution jobs.
So we monitor that very closely. We just had a call about that today.
And I think we're seeing an uptick, in terms of responsiveness to our offers in filling key positions. So that's what's driving our optimism overall there.
Operator
And our next question comes from Andrew Cooper from Raymond James.
Andrew Cooper
Hi, everybody. Thanks for the questions here.
Maybe first for, Scott, appreciate the color you've given on the gross margin. I guess can you help us think a little bit more in terms of InteliSwab about the timeline of some of these coming in?
Obviously, we understand the government contract components, but some of the repack or reconfiguration of packaging efficiency items. Can you give a sense for what throughout the year?
And when you made the comment about reaching at least two consolidated gross margin levels, was there a timeframe associated with that? Is that exiting 4Q?
Or how do we think about what it takes to get there?
Scott Gleason
Yes, Andrew, thanks for the question. We're not providing specific guidance on any of the timelines there.
As we think about things that we talked about obviously, use the timing of the government contract, as you said known, I think in general, as we go through the year, as folks become trained and more efficient, as we our processes, you're going to see a general trend towards efficiency, things like the shipping changes those, we have to strategically time those and they're based on studies that have to be completed. And so that's going to be more of 2023 phenomenon.
And things like the packaging configuration also will be more 2023 phenomenon from endpoint. And so there's number of things happening this year, and then in the next year and beyond, as we continue to make the process more efficient.
I think the general trend, we would expect to see improve over time.
Andrew Cooper
Okay, helpful. And then just one more for me, but kind of taking the step back, it just feels like we spent more energy talking about where some of the innovations are, and more clear color in terms of Colli-Pee and getting some FDA approvals and microbiome and things like that.
So with this new kind of split business structure, vertically integrated structure, how does that change maybe the way you're thinking about prioritization of R&D and innovation efforts and where that energy and effort is going?
Stephen Tang
Yes, Andrew, thanks for the question. I think it will only help the speed of innovation and our velocity moving from R&D to up to manufacturing and operations.
So that's really what the vertical integration is really designed to do. In terms of investment in R&D, obviously, those are viewed on a corporate basis.
But both business units have the opportunity to make their case for their innovation pipeline and the impact on revenue and profitability over time. So I think the new configuration actually helps innovation overall.
That's why, as you noted correctly, we've been talking much more about that over time. And we have no more questions at this time.
I'll turn it back to the speakers for closing comments.
Stephen Tang
I want to thank everyone for participating in today's call and for your continued interest in OraSure. We wish you a pleasant afternoon or evening.
Stay safe and be well. Thank you.
Operator
Thank you, ladies and gentlemen, this concludes today's conference. Thank you for participating.
You may now disconnect.