OraSure Technologies Inc (OSUR) 2010 Q2 法說會逐字稿

Good day, everyone, and welcome to the OraSure Technologies 2010 second-quarter financial results conference call and simultaneous webcast. As a reminder, today's conference is being recorded. (Operator Instructions).

For opening remarks and introductions, I would now like to turn this call over to Judy Clarke at OraSure Technologies. Please go ahead.

Good afternoon, everyone, and thank you for joining us. OraSure Technologies issued a press release at approximately 4 PM Eastern Time today, regarding its 2010 second-quarter financial results and certain other matters. The press release is available to you on our website at www.orasure.com or by calling 610-882-1820. If you go to our website, the press release can be found by opening the Investor Relations page and clicking on the link for news releases.

This call is also available real-time on our website and a recorded copy will be archived there for seven days. Alternatively, you can listen to an archive of this call until midnight, August 11, 2010, by calling 800-642-1687 for domestic or 706-645-9291 for international. The access code is 887-89490.

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, I must also remind you that this call may contain certain forward-looking statements including statements with respect to revenues, expenses, profitability, earnings-per-share and other financial performance, product development performance, shipments of markets, clinical studies and regulatory filings and approvals. Actual results could be significantly different. Factors that could affect results are discussed more fully in the SEC filings of OraSure Technologies, including its registration statements, its Annual Report on Form 10K for the year ended December 31, 22,009, 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 would like to turn the call to Doug Michels.

Thank you, Judy, and good afternoon, everyone. As indicated in our press release, both revenues and our bottom line exceeded our guidance and each of our business lines performed well during the second quarter. Our results also reflect a $1 million milestone payment under our hepatitis C collaboration with Merck, which we earned one quarter ahead of schedule.

Today, Ron will start the call with a detailed overview of our second-quarter financial results, and he will provide guidance for the third quarter. I will then review several recent regulatory approvals and provide an update on a major clinical programs and certain other business matters. We will then conclude by opening the floor for your questions.

And with that, I'll turn things over to Ron.

Okay. Thanks, Doug, and good afternoon, everyone. Before I get into the details, I'd like to put our Q2 results in context with the guidance provided during the first-quarter call.

Revenues for our second quarter of 2010 were $19.2 million, exceeding our guidance range of $17 million to $17.5 million. As Doug noted, our current quarter revenues include a $1 million payment received from Merck as a result of our achievement of commercial objectives pursuant to our collaboration agreement for the development and promotion of our OraQuick Rapid HCV test in Europe. After backing out the earlier-than-expected milestone payment, we still exceeded the high end of our guidance. In addition, we experienced sales growth across all of our product lines.

From a bottom-line perspective, we reported a net loss of $553,000 or $0.01 a share in the second quarter of 2010 compared to a forecasted loss of $0.07 to $0.08 per share. The higher revenues and lower-than-projected operating expenses helped to reduce our net loss for the quarter. R&D expenses came in lower, due to the timing of clinical trial spend our OraQuick HCV test and for other R&D projects. Sales and marketing and G&A a expenses were also lower than expected due to timing of recruiting and staffing expenses.

Turning to the second quarter, our second-quarter 2010 revenues of $19.2 million represented an 11% increase from the $17.3 million reported in 2009. As you may recall, our second-quarter 2009 revenues were negatively impacted by a manufacturing issue related to our OraQuick HIV tests, which resulted in a backlog at June 30, 2009, of $2.2 million.

Infectious disease testing revenues were $10 million in the second quarter of 2010, compared to $9.4 million in the second quarter of 2009. This also represents an approximate $493,000 increase from the first quarter of 2010. The overall 6% increase in our infectious disease revenues from the second quarter of 2010 compared to 2009 was the result of a 12% increase in OraQuick HIV sales in the domestic market, partially offset by a 36% decrease in international sales.

Domestic OraQuick sales during the second quarter of 2009 were negatively impacted by the OraQuick manufacturing issue. Had the $2.2 million backlog been filled in the prior year period, we would have experienced a decline in sales for the second quarter of 2010, when compared to the second quarter of 2009, primarily as a result of decreased sales volume resulting from reduced public health funding by state and local governments and slightly lower average selling prices.

International OraQuick HIV revenues declined largely as a result of some customer losses caused by price competition, changes in government testing algorithms and the non-recurrence of one-time customer orders from the prior year period.

Moving to substance abuse testing, revenues increased 4% from $2.9 million in the second quarter of 2009 to $3.1 million in the second quarter of 2010, as increased sales of our Intercept drug testing system in the domestic market were partially offset by decreased sales of Intercept in the international market. Second-quarter 2010 cryosurgical revenues increased 8% compared to the second quarter of 2009 due to a 95% increase in professional sales in the domestic market.

The higher US professional sales were caused by the continued elimination of the diversion issue, the introduction of a newly configured Histofreezer product line in the US, and an overall price increase implemented in April 2010, along with the impact of adding our new manufacturers as a present of organizations. International sales partially offset this increase with a 58% decline, largely due to decreases in the European and Latin American markets.

Our OTC cryosurgical sales decreased 13% to $1.3 million when compared to the same period of 2009, primarily as a result of decreased sales to our Latin American over-the-counter distributor [Hanoma], which were partially offset by higher sales to our European OTC distributor, SSL. Our insurance risk assessment sales increased to $1.6 million in 2010 from $1.5 million in 2009.

Turning to gross margin, our overall gross margin for Q2 of 2010 was 63%, a significant increase over the 57% reported for the second quarter of 2009. Gross margin in the current quarter benefited from the higher licensing and product development revenues and more favorable product revenue mix, and and improvement in scrap and spoilage expense levels when compared to the second quarter of 2009. These benefits were partially offset by an increase in non-absorbed overhead costs due to lower product production and severance costs related to a reduction in force during the second quarter.

Our total operating expenses for the second quarter decreased $2.5 million compared to 2009. Second-quarter 2009 operating expenses included a $3 million impairment charge related to license payments for certain HCV patents, which we had previously capitalized.

R&D expenses for Q2 increased 25% or approximately $596,000 from the second quarter of '09, primarily as a result of increased staffing costs, increased laboratory supplies expense related to new product development, and increased clinical trial spending associated with our OraQuick HIV over-the-counter program. These increases were partially offset by lower clinical costs for our OraQuick HCV test.

Sales and marketing expenses increased 6% or approximately $321,000 as a result of increased consulting and advertising expenses, partially offset by decreased staffing expenses. General and administrative expenses decreased approximately 8% or by $361,000, primarily due to lower legal expenses, partially offset by an increase in staffing costs.

On the bottom line, we reported a net loss of $553,000 or $0.01 a share for Q2 2010. This compares to a net loss of $5.2 million or $0.11 per share in the second quarter of 2009.

So, turning briefly to our balance sheet and cash flow, our cash balance remains strong with cash and short-term investments increasing during the quarter to $74.5 million. Our working capital of $77 million at June 30, 2010, is down compared to working capital balance at December 31, 2009, of $89.4 million, largely due to the reclassification of our long-term debt to a current liability as a result of its maturity date in June 2011, along with a reduction in cash and cash equivalents.

During the second quarter of 2010, we generated $1.9 million in cash flow from operations compared to $1 million generated during the second quarter of 2009. The increase is largely the result of our lower net loss, coupled with a decrease in prepaid expenses and other assets of $1.3 million, largely due to the collection of a federal tax refund of $673,000, a decrease in inventories and an increase in accrued expenses and other liabilities. Offsetting these increases in cash was an increase in accounts receivable and a decrease in AP.

Days sales outstanding was 62 days at June 30, 2010, compared to 58 days at June 30, 2009.

So turning to our guidance for the third quarter of 2010, we are now projecting revenues of approximately $17.5 million to $18 million and a loss per share of approximately $0.03 to $0.04. And with that, I'll turn things over to Doug.

Thanks, Ron. During the second quarter, we received several important regulatory approvals. The most important of these was the FDA approval of our OraQuick Hepatitis C test, for use with venous whole blood specimens, which we previously announced. It is the first rapid HCV test to be approved by the FDA and we formally launched this product at the annual meeting of the American Association for Clinical Chemistry, the AACC meeting, at the end of July just last week.

We are now actively selling this product to our customers. We expect sales of this product during the second half of 2010, but sales of any magnitude will likely require approval of one or more additional specimen types, along with the receipt of a CLIA waiver.

A second important approval we received to the shelf life for OraQuick quick HIV test. During the second quarter, the FDA approved the dating extension for this product from 12 to 18 months. We also received approval from our notified body to extend dating to 18 months in Europe. As a result, we will soon be selling our OraQuick HIV test, both domestically and around the world, with this longer dating.

Real-time stability studies are ongoing. And assuming the product continues to meet our stability criteria, we would expect to seek approval of further shelf life extensions in the future.

A final regulatory approval received during the second quarter relates to our manufacturing operations. As you may know, some time ago, we decided to invest in automated manufacturing equipment for our OraQuick ADVANCE HIV product. This equipment has now been validated and approved by the FDA for use in the manufacturing of our OraQuick HIV test.

This equipment will enable us to produce larger quantities at lower costs and will be critical to our ability to meet future demand for this important product. The first automated production lot will be coming off the line this week.

Turning to our major clinical programs, there are several important developments to report. Now that we've received venous whole blood approval for our OraQuick HCV test, we're focusing our efforts on gaining approval for additional specimen types and implementing our CLIA waiver studies.

As previously disclosed, the FDA required additional clinical studies to support claims for finger stick, whole blood and oral fluid. We completed these studies and we are prepared to submit a premarket approval, or PMA supplement, seeking approval of both claims once we received the venous whole blood approval.

However, prior to submitting the PMA supplements, we shared our data with the FDA as part of our discussions on the CLIA waiver study protocols, and the FDA recently provided feedback on our data. The FDA's primary comments related to the lower sensitivity of our test in oral fluid and finger stick whole blood when compared to venous whole blood.

And as a result of these comments and in consultation with the FDA, we've decided to separate the submissions for finger stick whole blood and oral fluid. A PMA supplement was recently sent to the FDA for the finger stick claim.

We still intend to pursue an oral fluid claim for OraQuick HCV test. However, the filing of a PMA supplement for oral fluid has been delayed, pending additional discussions with the FDA. It is likely that more clinical data will be needed to support our oral fluid PMA submission. And we will provide updates at appropriate times as to the timing and additional requirements for our oral fluid submission, once they are clarified.

We suspect to a CLIA waiver, we are working to finalize our protocols with the FDA. And in light of the feedback on the finger stick whole blood and oral fluid clinical data, our current plan is to pursue a CLIA waiver initially for finger stick and venous whole blood. Our filing with the FDA will be timed to occur if and when approval for the finger stick claim is received. And we would expect to pursue the CLIA waiver for oral fluid, once our passport on the PMA supplement for this specimen type is clarified, and we are in a position to make a submission and obtain approval.

Turning to our HIV OTC efforts, we have continued to test our product labeling and we have finalized our protocol for the final phase of clinical testing. We still expect to submit our labeling validation data and our final clinical study protocol for approval by the FDA later this year.

We have also initiated site selection for the final clinical studies. We expect to begin the final phase of clinical testing once the FDA approves our protocol. And assuming a timing approval -- a timely approval, of our labeling and final protocol, we still expect clinical testing to commence later this year and we expect that will extend into 2011.

In substance abuse testing, submissions for FDA 510(k) clearance remains pending for the high throughput oral fluid assays for opiates, PCP amphetamines, methamphetamines and cocaine developed under our collaboration with Roche Diagnostics.

Our initial expectation was that we would have received FDA clearance for these assays by year end. However, the FDA has requested some additional data and our expectation is that this data will be supplied prior to the end of this year. The likely impact of these additional requirements is that any FDA 510 (k) clearance would not be expected until sometime in 2011.

And finally, before we take your questions, I'd like to comment on several aspects of our major business lines. As discussed during the last call, continuing economic challenges have had an adverse impact on some of our OraQuick HIV customers, funding cuts at both the state and local levels have resulted in lower purchases, primarily in the public health market. And these economic conditions have also increased pressure on pricing.

Although we will continue to aggressively address these challenges in the marketplace, we believe these difficult conditions will continue to affect our business until such time as we see some improvement in the broader economy. But despite these challenges, HIV testing and human continues to be a priority for the federal government.

As you know, earlier this year the CDC announced an expansion of its program to fund HIV testing and prevention in healthcare settings. More recently, President Obama released his National HIV/AIDS strategy, which reaffirms the administration's focus on HIV/AIDS through increased testing and treatment, especially in communities where the disease has had the greatest impact.

We continue to believe that the federal government's ongoing support will help mitigate somewhat the impact of the current economic climate on our customers. And during the past several calls, we have also indicated that our substance abuse testing business appears to be stabilizing. Our second-quarter performance, particularly in the domestic workplace and criminal justice markets, provides further evidence of this as revenues were up slightly in both markets compared to the second quarter of 2009.

Our major workplace laboratories have also reported that the number of oral fluid specimens processed during the first half of 2010 is slightly ahead of the comparable period of 2009. And this is a nice improvement from the substantial declines in testing volumes these laboratories experienced during 2009 when compared to 2008.

And finally, with respect to Cryosurgical Systems, our business performed well during the quarter, particularly in the domestic professional market. As Ron explained, this part of the business benefited from our efforts to eliminate diversion by certain foreign distributors back into the United States, the deployment of two manufacturer sales representative organizations and the launch of a newly designed Histofreezer product for the US market.

We believe these factors will continue to positively impact our business for the remainder of 2010. And on the over-the-counter front, sales were for the quarter primarily due to the strong performance of our products in Europe.

So with that, I will now open the floor to any questions you might have.

(Operator Instructions). Sameer Harish. Needham & Company.

I was wondering if you guys could just talk a little bit more about what you saw in the data in regards to oral fluid and finger stick whole blood for hepatitis C with the supplemental data that you provided. Was there a difference in the performance of the product, or just can you talk a little bit more about that?

Well, as we mentioned and as we've shared with you in the data from our European approval, the sensitivity on the oral fluid in particular was slightly lower than it was in the other specimen matrices. And that was consistent with our US data. So the FDA raised some question about that. And based on the discussion we had with them, we made the decision to separate the finger stick submission from the oral fluid. We've submitted the finger stick submission to the FDA and we expect we are going to have continued dialogue about the oral fluid submission.

Okay. And I guess, in regards to the decision to separate finger stick and oral, was there a difference in the performance between those two groups that you felt even though finger stick may not have been as good as venous blood, it was sufficient to file now? What gives you confidence in that submission?

In our judgment and obviously in consultation with Bob Greg, our Senior Vice President of Regulatory Affairs, we feel very confident that the finger stick submission is strong and approvable. And, obviously, we are going to continue dialogue with the FDA about the oral fluid submission and if any additional data may be required to support that submission.

Okay. And if I could just sneak one more in, in the OraQuick HIV, nice performance there. Can you talk a little bit about, are you seeing additional contracts come in from hospitals, or was this kind of clients that maybe had delayed purchases before coming back to make some orders? And I will get back in queue.

The second quarter was a good quarter for us in the HIV space, particularly in the domestic market. The hospital business performed very well. Actually, it was one of our strongest quarters in the hospital segment. Public health was up quarter on quarter versus the first quarter of 2010. We are counting on the jurisdictions continuing to see some increased funding based on the Fed's commitment to increase the funding made available through the cooperative agreements, which will take effect as of October 1, 2010.

So our position is strong. We continue to work with our customers to expand testing. And looking forward to a good second half of the year.

Thank you.

Shawn Bevac. SIG.

Reminds me or correct me if I'm wrong, but in the HIV, OraQuick HIV, the oral fluid sensitivity is a little bit less there than the whole blood as well?

Yes, it is, Shawn. The oral fluid sensitivity in our HIV package insert is 99.3%, and in the blood matrices it's 99.6%. So it was slightly lower.

And did the FDA have similar issues when you guys submitted the [PMA] for that?

You know, it was before I joined the Company. Maybe I will let Ron respond to that. You know, I will make a comment. The HIV approvals were granted one specimen type at a time. So the original approvals for finger stick and venous whole blood was approved in, I believe, 2002, and then, we received the oral fluid approval couple of years later in 2004. Ron, I don't know if you have anything to add there.

That's right. The oral fluid was approved back in June of 2004, and I don't recall any issues comparable to issues that were raised with the HCV oral fluid sensitivity.

As a screening test, I'm just trying to figure out what their issue would be this go round versus previously, I guess.

Well, we will continue to engage with them. And as we get more clarity on the path forward, we will certainly communicate that.

And what's your best guess at a timeline now?

You know, I wouldn't speculate on that. Obviously, we've -- we want to get the finger stick approved. We are going to execute on our CLIA waiver studies in the next several months. And as we progress through those and as we continue dialogue with the FDA, we will give you as much information as we can on the path forward with oral fluid.

Can you start the CLIA waivers before you have the actual approval?

Absolutely. We just are not allowed to file them until we receive the approval. We decided to wait to conduct the CLIA waiver studies on the venous whole blood only because it's more efficient for us to consolidate those CLIA waiver studies. So we will be conducting the CLIA waiver study on venous whole blood and finger stick whole blood, effective within the next couple of months. And then as soon as we've got better clarity on the path forward with oral fluid, then at the appropriate time we'll conduct a CLIA waiver study for oral fluid.

And then two more quick ones. Do you think a PMA will be -- I mean a panel will be required for the oral fluid?

No.

And then did you have any HCV revenue in the quarter from Europe?

Not a significant amount, Shawn. We did have some revenues there, but not significant.

Okay. Thanks.

Caroline Corner. William Smith & Co.

Thanks for taking my call. Just a real quick question related to hepatitis C. With regard to your agreement with Merck, does this delay with oral fluid affect them in any way? And as you go forward and start thinking about the commercialization, do you think finger stick is going to be enough to really get broad adoption?

Let me address the relationship with Merck. By coincidence, I was at work this morning meeting with their Senior Vice President and General Manager of the infectious disease business. And I can tell you that their commitment is as strong as ever.

During the last call, we said that we were beginning to train and were planning to train. Their organizations were targeted focused right now on 29 different countries. Obviously, we have to be registered in all of those.

Today we are registered in 21 of the 29. We've got distribution in place in 24 of the 29. We've got seven different market valuations either completed or ongoing. And each one of the different countries have been contacted. We've rolled out training materials to those different organizations, promotional materials are going through the local approval process within those different countries. And there's a pretty well-developed timeline right now for when the physician office details are going to begin.

I think that we are all aware that right now is not the most active time in Europe, with everybody taking a holiday in July and August. But I think that come the end of August and September, we are going to see a lot of activity, obviously based on this schedule and Merck's commitment. Relative to, is finger stick enough to carry the day? I believe absolutely it's enough to launch this product and launch it effectively.

Will the oral fluid approval and application be beneficial? Yes, it will. Don't forget, in Europe we are approved for all five specimen types. So there is no restriction on use in Europe. And so it doesn't impact Merck's efforts in Europe, whatsoever.

In the United States, Merck's efforts won't start really until we get a CLIA waiver for the finger stick now, which will be in the first instance and then assuming oral fluid approval, once oral fluid is approved as well. So things are moving forward with Merck.

You probably heard or read that they released data from one of their pivotal trials on boceprevir this morning. The results were excellent. They indicated their clinical work is going to be complete on boceprevir this year. They will be filing in both the US and Europe before the end of 2010.

So timing is real good, I think. And obviously, if a test like we have, whether it's in finger stick or finger stick and oral fluid, is going to have, we believe, a significant impact on diagnosis and treatment of HCV.

Very good. Moving to your relationship with Roche on the drugs of abuse side, you said there was a delay with the 510(k)s for most of the different drug testing. Marijuana was expected to be a little later anyway. Is that now expected the same time as the others, or as marijuana also delayed?

It was to be probably a little bit behind our approval expectations for those first five assays. The FDA's requested some additional -- they are basically laboratory studies that will be conducted either at Roche or here at OraSure, comparing me to oral fluid measurements with the Roche Intercept test system to LC mass spec. And then as an additional purchase and study that has to be conducted.

But those are going to be internal studies that we think we can conduct relatively quickly. One of the challenges to that is obviously obtaining specimens. But that effort is in process and we will be able to complete those studies and get them to the FDA in a relatively short order.

And last one. Moving to the over-the-counter international cryo- products, Hanoma (inaudible) has kind of been a bumpy ride there a little bit with those. Can you talk a little bit about your expectations going forward with those two distributors and how you see that playing out?

Yes. I think that the ride has been a bit bumpy. And it depends on launches in various countries and promotional activities that they have going on. And for SSL, I think our expectations are that, over the course of 2010 here, we will actually have a reasonable performance from SSL, although in total we should approximate where we were last year. And with Hanoma, net for the year up a little bit, as a result of the Brazilian launch and some of the product was acquired in the early part of 2010.

Going forward, our expectations are as they have been before that any sizable increase in revenues in that area would be dependent on further geographic expansion in the over-the-counter market place. And right now, this moment, there is nothing scheduled for the balance of 2010.

Okay. Thanks very much. That's all I have.

Thank you, ma'am. (Operator Instructions). Jeff Frelick. ThinkEquity.

What's the timing for federal funding to impact, do you think, the sales and offset the decline in state and local funding?

Well, the cooperative agreements that the different jurisdictions had to respond to will take effect October 1. The applicants had until June 25 to get their applications in to the CDC. I believe the CDC committed to get back to them by the end of August with those grant awards.

You may recall that this represents near a 25% increase in grant levels, up from an average, I believe, of around $36 million up to $46 million for this next fiscal year. So a pretty substantial increase for the different jurisdictions.

There is a little different balancing between the jurisdictions. But that will all become effective October 1.

Okay. And just maybe some further clarity on oral HCV. What is different than the oral HIV test? Obviously you are breaking out the submissions, but where do you stand in number of samples that were submitted for review with the FDA? I mean, is there a significant difference? Are you behind? Where do you see the differences lying between the two oral products?

I think as we previously communicated, the number of clinical samples was approximately 2,000 or 2,200 in that range for the oral fluid submission. One of the differences that's been well documented is the antibody concentration in blood and oral fluid for HCV is less than HIV. And so that's always one of the challenges in detecting hepatitis C antibody.

Okay. Thanks.

Thank you, sir. Thank you, all, for your questions. I'll now turn the call over to Mr. Doug Michels for closing remarks.

Okay, well, I want to thank everyone for participating on today's call and for your continued interest in OraSure. I wish you all a good afternoon and evening. Thanks again, everyone.