OraSure Technologies Inc (OSUR) 2010 Q4 法說會逐字稿

Good day, everyone, and welcome to OraSure Technologies' 2010 fourth-quarter and full-year 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, a questioner can rejoin the queue for further questions.

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

Thank you. Good afternoon, everyone, and thank you for joining us today. I would like to begin by telling you that OraSure Technologies issued a press release at approximately 4 PM Eastern Time today regarding our 2010 fourth-quarter and full-year 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 realtime on our website, and will be archived there for seven days. Alternatively, you can listen to an archive of this call until Midnight, February 16, 2011, by calling 800-642-1687 for domestic, or 706-645-9291 for international. The access code is 41326273.

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 be begin with opening statements, which will be followed with question-and-answer sessions.

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 and markets; 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 statement, its Annual Report on Form 10-K for the year ended December 31, 2009, 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 over to Doug Michels.

Well, thanks, Judy, and good afternoon, everyone. We ended 2010 on a strong note by exceeding our fourth-quarter guidance for both revenues and the bottom line. We're also generally pleased with our full-year performance, especially given the difficult economic conditions and funding challenges, which were encountered by our customers. Ron Spair will begin today's discussion with some financial highlights, and I will then discuss our major clinical programs and comment on other developments in our business. We will conclude by opening the floor for your questions.

And with that, let me turn things over to Ron.

Okay, thanks, Doug, and good afternoon, everyone. As Doug mentioned, our fourth-quarter performance exceeded our prior guidance on both the top and bottom lines. In addition, I'm pleased to say we generated $3.6 million in cash flow from operating activities for the quarter, which brings us to a total of $3.9 million for the whole year.

Turning to our revenues, our total revenues for Q4 2010 were $18.8 million compared to $20.9 million for Q4 2009. Overall, infectious disease revenues decreased 10% in the fourth quarter of 2010, primarily as a result of our performance overseas. OraQuick HIV revenues in the international market declined during the fourth quarter as a result of price competition, changes in the use of our test within government testing algorithms, and lower funding for HIV testing initiatives. Domestic OraQuick HIV revenues increased slightly as a result of higher volume, partially offset by a lower average selling price, which was forecasted.

In substance abuse testing, revenues decreased 8% from $3.1 million in the fourth quarter of 2009, to $2.9 million in the fourth quarter of 2010, as a result of lower sales of our Intercept drug testing system in the criminal justice market, lower sales of our QED Rapid Saliva Alcohol Test, and an absence of laboratory equipment sales. Fourth-quarter 2010 Cryo revenues decreased 10% compared to the fourth quarter of 2009, primarily due to lower sales to our Latin American over-the-counter distributor, Genomma. In the fourth quarter of 2009, Genomma increased its orders to prepare to launch our product in the Brazilian over-the-counter market at the end of the year. We did not have a similar pipeline fill in the fourth quarter of 2010.

Offsetting this decrease were increases in professional sales in both the domestic and international markets. The higher US professional sales were caused primarily by elimination of the diversion issue, and the impact of our manufacturer sales representative organizations, which we added earlier in 2010. International sales increased largely as a result of fluctuations in ordering patterns of our customers.

Turning to gross margin, our overall margin for Q4 of 2010 was 64% compared to 59% reported for the fourth quarter of 2009. Margins in the fourth quarter of 2010 benefited from a reduction in royalty expense related to our OraQuick HIV product as a result of a royalty buyout earlier in the year. Year-to-date margins increased to 63% compared to 61% for the full year of 2009, largely due to milestone payments received from Merck related to our HCV test.

Turning to operating expenses. Total operating expenses for the quarter were $12.9 million compared to $15.8 million in the fourth quarter of 2009. 2009 operating expenses included a $1.5 million expense related to a litigation settlement. R&D expenses decreased by approximately $613,000 due to a decrease in clinical trial costs associated with our OraQuick HCV test, partially offset by an increase in clinical trial costs associated with our OraQuick HIV over-the-counter program. Sales and marketing expenses decreased by approximately $854,000 as a result of lower market research, and also travel costs. G&A expenses remained flat in Q4 of 2010 at approximately $4 million compared to $3.9 million in Q4 of 2009.

On the bottom line, we reported a net loss of $1 million, or $0.02 per share for Q4 of 2010. This compares to a net loss of $2.8 million, or $0.06 per share in the fourth quarter of 2009. Our bottom line performance exceeded our previously-issued Q4 guidance for a number of reasons. Revenues exceeded the high end of the range, and our gross margin came in higher, as well. R&D costs were lower than projected, largely as a result of slower-than-expected patient accrual into the HIV OTC trial over the holidays. Finally, severance payments related to our Q4 reduction in force were lower than originally projected.

Turning briefly to our balance sheet and cash flow, our cash balance remains strong, with cash and short-term investments of $75.7 million at year end. As mentioned earlier, during the current quarter we generated $3.6 million in cash flow from operations, compared to $3 million used during the fourth quarter of 2009. Our full-year cash flow from ops totaled $3.9 million as we improved collections of our outstanding receivable balances, more effectively controlled our inventory levels, and reduced the amount of our prepayments.

Turning to guidance, for the first quarter of 2011 we are projecting revenues of approximately $16.75 million to $17.25 million, and a net loss per share of approximately $0.08.

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

Okay, thanks, Ron. During the fourth quarter and the first few weeks of the new year, we've continued to make good progress on our major clinical programs. Last year, as you may recall, we filed for FDA approval of our OraQuick HCV test for use with fingerstick whole-blood specimens. Based on our discussions with the FDA, we expect to see something on this approval very soon. Assuming things proceed as expected, fingerstick whole blood would be the second approved application for our test. This approval would also be another significant milestone, which, along with the CLIA waiver, will be critical to fully realizing the market potential for this product here in the United States.

Now that a fingerstick approval appears imminent, we are finalizing our strategy for obtaining FDA approval of an oral fluid claim. Our plan is to conduct some additional testing on oral fluid specimens, which we believe will provide further support for an oral fluid approval. We intend to meet with the FDA to discuss our oral fluid submission during the second quarter.

In December of last year we completed the studies required for a CLIA waiver for both fingerstick and venus whole blood, and we are pleased with the study results. Analysis of the resulting data and preparation of a final report for the FDA is nearing completion. Assuming that fingerstick approval is received shortly, we would expect to file our formal request for CLIA waiver in the very near future. We also plan to request a CLIA waiver for oral fluid once a PMA supplement for that claim is filed, and FDA approval is received.

Since our last earnings call, we received an investigational device exemption, or IDE, for the final phase of clinical testing for our Rapid HIV over-the-counter test. As a result, this final study was commenced at the end of 2010. Our call center is up and running, and we are in the process of adding the additional clinical sites required to complete the study. This final phase of testing will likely require 4,000 to 5,000 participants, and we will need to identify at least 100 newly-infected -- or newly-diagnosed HIV individuals in order to meet the parameter specified by the FDA. This study is on track, and as previously disclosed, we expect study enrollment to close in the third quarter of this year.

After the study's completed, we will analyze the data and we will complete our submission for filing with the FDA, which we will pursue as aggressively as possible. As discussed on prior calls, the results of our final clinical phase will need to be reviewed by an FDA Advisory Board, the Blood Product Advisory Committee. We will continue to provide you with appropriate updates as this exciting and important program progresses.

In the area of substance abuse testing, I am pleased to report that the FDA recently issued a 510(k) clearance for use of a high-throughput oral fluid PCP assay with our Intercept device. This is the first such clearance resulting from our joint collaboration with Roche Diagnostics. We believe the FDA clearance process is in the final stages for several of the other NIDA-5 assays that have been developed, and we would expect the FDA to issue additional 510(k) clearances in the near future.

As you know, and we've talked about previously, the submission for the THC assay is progressing on a somewhat later schedule. Since the last call, Roche completed a pre-IDE review of the study protocol for THC, and as a result, the THC clinical studies have now been started, and we expect that a submission for this assay will be filed with the FDA later this year.

The PCP approval is an exciting development for many of our laboratory customers who have expressed interest in utilizing integrated instrument platforms that can consolidate urine and oral fluid drug testing. By integrating oral fluid and urine samples on a single random access work station, labs can streamline work flow, they can decrease turn-around times, they can increase capacity, and they can reduce their costs, all valuable improvements to their operations.

And during our last call, I also mentioned that we had requested FDA approval of a shelf life extension for our OraQuick HIV test from 18 months to 24 months. I'm pleased to report that our request was granted in November of last year. We will likely see further extensions in the future when the required stability data is available.

I'm also very pleased that we now have new leadership in the sales and marketing areas, with the addition of Tony Zezzo. As the Company's new Executive Vice President of Marketing and Sales, Tony will have overall responsibility for our global marketing and sales operations, including both the domestic and international sales teams for our infectious disease, substance abuse testing, and insurance testing businesses. Our cryosurgical business will continue under the direction of Mike Formica. Tony brings an extensive and very successful resume in sales and marketing, with almost 30 years of diagnostic sales and marketing experience with Johnson & Johnson, with Dade International, and with Abbott Diagnostics. Tony has already hit the ground running, and we believe he will make a significant contribution to our Company.

And finally, before we take your questions, I'd like to comment on several other issues affecting our business. As discussed throughout 2010, the ongoing economic conditions and funding cuts have presented significant challenges for our OraQuick HIV business, particularly in the domestic public health and international markets. We believe that these conditions will continue in 2011, with some mitigation here in the United States as result of ongoing federal support for HIV testing.

As you know, last year we launched our OraQuick HCV test in Europe. Sales of this product are building, although adoption of point-of-care diagnostics continues to be challenging in European markets, where laboratory testing is entrenched, and healthcare delivery systems are structured around centralized testing models. Nevertheless, we have generated the first commercial sales of our OraQuick HCV test now in 13 countries in Europe, and under our collaboration with Merck, training and physician call decks have been prepared for a total of 18 countries. And Merck has now commenced detailing into physician offices in seven countries with more to come. This initiative is expected to raise awareness and drive preference for the OraQuick HCV test.

In the United States, the commercial prospects for the OraQuick HCV test will certainly improve with the receipt of an approved claim for fingerstick whole blood. We expect domestic revenues for this product to materialize once this additional approval and a CLIA waiver are received.

And as you may have read, we recently announced the addition of a new infectious disease testing product, the OraSure QuickFlu Rapid Flu A+B test. This test was recently approved by the FDA for the detection of influenza type A and B, including H1N1 viral infections, and it provides high-precision results in just 10 minutes with a nasal swab. We are really delighted to add another potentially life-saving test to our list of marketed products. This test is being manufactured for us on a private-label basis by Princeton BioMeditech, and we expect to aggressively compete in the domestic flu testing market in hospitals and public health.

Since we did not obtain rights to this product until recently, we do not expect significant revenues until later this year, when customers begin to purchase in advance of next year's flu season. Our team did a fine job identifying and working out mutually-favorable terms with Princeton BioMeditech for this product. Importantly, we were able to enter into this agreement without any up-front payments, and we will be able to leverage our existing sales force to market the product without incurring additional overhead expenses.

Finally, there are a number of factors we believe will have a positive affect on our substance abuse testing business. During 2011 we expect to expand our drug testing product business. Assuming the additional 510(k) clearances are received in the next couple of months, our plan is to begin selling the newly-developed, high-throughput oral fluid drug assays as part of a new Intercept drug testing system as early as this summer.

You may have seen that Quest Diagnostics, our largest laboratory customer, recently announced the issuance of its drug testing index, which contains a significant amount of data regarding the performance of oral fluid drug testing using our Intercept device as compared to urine testing. In particular, this data showed that oral fluid detected heroin use in the United States workplace at a rate five times higher than urine testing. This index is just the latest in a number of data sets confirming the accuracy and the value of oral fluid drug testing.

And lastly, at the end of January there was a meeting convened by the Drug Testing Advisory Board, or DTAB, which is part of the United States Substance Abuse and Mental Health Services Administration. One purpose of this meeting was for DTAB to consider whether oral fluid will be included as an approved matrix under the guidelines for federal workplace drug testing programs. Based on the outcomes from that meeting, we believe the guidelines will indeed be updated to include oral fluid. And while all of these guidelines will likely not be issued for some time, this would be a significant development, in that it would allow our Intercept drug testing system to be used for federal workers. In addition, we believe there are other non-regulated industries, which may be influenced by the federal guidelines, and thus, open up even more markets to our oral fluid drug testing products.

So overall, we're very encouraged by these positive developments and their potential impact on our business in the future. And with that, let's now open the floor to your questions.

(Operator Instructions) Our first question comes from Scott Gleason with Stephens Inc.

Doug and Ron, thanks for taking my questions today. Doug, I guess to start off -- I know you gave a little bit of clarity in terms of the HCV test volume, can you give us an idea maybe a little bit with a little more granularity of what that number looks like today? I imagine it's pretty small, but can you give us any more color there?

Yes, the number continues to be relatively small, although as I mentioned, it's building. The challenges in the European market we've talked about before, it's largely a centralized testing market. Rapid testing, whether it's HCV, certainly HIV is a good model for that, have not taken hold, primarily because the infrastructure and the reimbursement models are designed to support centralized laboratory testing. With that being said, however, we continue to make progress as I described with our relationship with Merck, we continue to increase trial and obviously, more customers are using the product. We are not in a position yet where we're going to provide guidance on a product-specific basis. But clearly, also, our biggest expectations are for the US market as we obtain our fingerstick and CLIA waiver approvals and then sometime down the road, hopefully our oral fluid approval, as well.

Great. And then, Doug, you know, you had kind of a pretty exciting partnership here with BioMeditech Corporation. Just looking at their product list, it seems like beyond influenza, they might have other products that would be pretty complimentary to your existing distribution. I guess, is there a chance for additional collaborations there down the line and how are you guys thinking about that process?

We have a real nice relationship with Princeton BioMeditech. Obviously, that resulted in this exciting new opportunity with the OraSure QuickFlu test. We're very excited about the possibilities to get this product out into the market and complete -- compete -- excuse me -- very effectively. We see, obviously, the flu market as being significant. There's several competitors in the marketplace, as you know, and whether it's the hospital public health market, which is primarily dominated by Quidel and Inverness or Alere, we think we can compete very effectively with them with this product. You mentioned Princeton BioMeditech has other products that could fit nicely into our bag. We'll see how discussions progress on the possibility of adding additional products. Right now, I don't want to comment on that. We're real focused on being successful with the QuickFlu product and assuming we are, hopefully that'll open up opportunities for other products down the road.

Okay. And along those same lines, just in terms of pursuing CLIA waiver status with the FDA for the flu test. Other companies have found that challenging. Can you talk a little bit about how that process is for us and what you guys are thinking there for maybe a timeline standpoint?

The QuickFlu -- OraSure QuickFlu test was just approved within the last couple of months, and so, obviously, Princeton BioMeditech has made their submission to the FDA. I know that they're in dialogue with the FDA about that submission. I don't think it's probably appropriate for me to comment on that dialog right now, but we believe and are confident, based on discussions we've had with Princeton BioMeditech, that this product is CLIA waivable and it, indeed, will indeed receive a CLIA waiver.

Great, and I guess just one last question for Ron. Congratulations on the expense control in the quarter. I think expenses came in quite a bit lower than you guys were initially projecting. I guess in light of that fact and in light of some of the personnel changes at the Company, can you guys maybe give us a little bit more color on how you're thinking about the expense ramp through 2011 here on the R&D and sales and marketing side?

Right. So with respect to the R&D line, as we've spoken about previously, there will be a higher level of clinical trial expenditures in the first part of the year and I would say extending into the third quarter, as we would expect accrual into the HIV OTC clinical trial effort to conclude in Q3, as Doug mentioned on the call. And so, R&D will be skewed more towards the front part of the year and our expectation is that it'll be higher than it was in 2010. As far as the sales and marketing expenditures are concerned, I would say that the distribution -- the entry year distribution of the sales and marketing spend is not unlike what it has been in the past and probably more geared a little bit now in the front end, a little bit higher than it will be in the tail end of the year. But generally, in the same proportions as we've had previously.

Great, thanks for taking my questions, guys.

Thanks.

Our next question comes from Sameer Harish with ThinkEquity.

Question on the hepatitis C rollout -- hi. Your relationships run pretty deep with the public health organizations, can you talk about the discussions that you're having with them on the hepatitis C front in terms of funding and rollout? How much can those institutions leverage their HIV infrastructure today and apply that towards hepatitis C?

Well, the public health market is going to be, obviously, one of our top-priority markets as we ultimately get the fingerstick approved and the CLIA waiver. They do have the infrastructure right now. They're dealing with the same clientele at risk for HIV and for hepatitis C; certainly in the segments dealing with substance abuse and mental health services, a big opportunity, higher prevalence for hepatitis C. We're in dialogue with virtually every one of our public health customers right now. They're eager to get their hands on the product. I want to emphasize, again, most of this testing takes place in a CLIA-waived environment so the CLIA waiver becomes essential, but they're very excited about this.

Funding, as you probably know, is not as robust for hepatitis prevention as it is for HIV prevention, but we're working on that front, too, through our government affairs effort to emphasize to Congress how important these new developments in hepatitis C are, whether it's the new drugs that are coming down the pike or with those new drugs the importance of diagnosing chronically-infected hepatitis C individuals and the marriage of highly-effective therapy with a new tool, a rapid hepatitis C test, really has the promise to transform how hepatitis is diagnosed and treated here in the United States and around the world.

And really, the promise of all this is to diagnose people sooner, to get them into care, and to actually cure them so that the entire healthcare system's costs are reduced in the long run. That's a message that resonates, not only within the public health community, but in the halls of Congress and we're working that real hard.

Okay. Are the policies being drafted already in terms of how they're going to -- the public health centers are going to implement hepatitis C testing, which patients -- which persons get tested and who gets just HIV, that kind of thing?

There's a lot of discussion about that right now and there's actually studies that are being conducted sponsored by the CDC in this regard. You may have heard about a study called the Best C study, which is a study where they're -- it's designed around an age cohort, I think it's individuals born between 1945 and 1965, to determine prevalence within that community and the right approach in terms of diagnosing chronic HCV infection within that kind of group. The CDC has said publicly that they intend to issue new guidelines around HCV prevention and testing in the first quarter of 2012. So given all that's going on in the hepatitis C space, I expect we're going to have just a significant amount of interest and certainly more guidance coming out of the federal government as to how different jurisdictions should deploy their prevention dollars and activities.

Okay, last question on hep C. Given that the organizations have a fair amount of leverage in their infrastructure, in terms of funding expectations, should we expect funding to be less than the historic $30 million to $50 million programs that the federal government has had towards hepatitis C? Could you expect the same, or potentially larger? How should we think about that?

I would expect that as we go through 2011 and certainly into the future years, 2012 and beyond, we're going to see -- our hope and belief is substantially-increased funding for hepatitis C prevention for all the reasons I previously described.

Okay. Last question for you, the DTAB meeting in January, did they vote for positive that oral testing will be implemented, or is it just the discussion leads you to believe that it will be?

No, they did not vote, but it was a robust discussion and they actually met in closed sessions to discuss this even further. There were some very compelling presentations made by, for example, Dr. Barry Sample, who's the Director of Science and Technology for Quest. He actually presented to the DTAB the same information that he presented at SOFT in October, where Quest had conducted a study comparing almost five million oral fluid specimens to 30 million urine specimens, which were submitted for routine testing over a five-year time period. And basically, the conclusion of that is that you had similar positivity rates.

That was also presented, along with -- or at the same time that this Quest Drug Testing Index data was presented, again, showing the effectiveness of oral fluid drug testing in detecting heroin use, primarily because the metabolite for heroin presents longer in oral fluid than it does in urine. So the data's pretty conclusive, we believe, anyway, that oral fluid is a highly-effective specimen type for drug testing, and this opportunity to access the federal market for federal drug testing actually increases the served market opportunity in excess of 20% to 25%.

Great, thank you guys.

Thanks, Sameer.

(Operator Instructions) Our next question comes from Jeff Frelick with Canaccord.

Doug, so is it fair to assume that with respect to the HCV filing, right now you're just in a holding pattern? I know, I think, the last call you talked about having a site inspection, so is pretty much everything done on your end and you're just now in a holding and waiting period?

Absolutely. Everything is done on our end and, based on discussions with the FDA, we expect to receive the approval letter just any day.

Okay. And then, so -- and then for Ron, with respect to the R&D spending for 2011, is that predominately HIV OTC, as well as the next gen OraQuick?

That's correct.

Anything else on that, Ron?

There's some other feasibility studies that are being conducted in the R&D area, and so that'll be included, although we've not identified the specific analytes that we're looking at. Other activity is ongoing.

Okay, and then one more question for Doug. Any visibility with respect to drug and abuse testing starting to pick up here into the new year? I know unemployment's coming down, I'm not sure with hirings improving yet, but do you have any early signs of improvement?

I wouldn't say that they're significant. We do expect our substance abuse testing to grow in 2011. We'll see how the economy performs and certainly as we receive additional approvals for these automated assays, that provides a nice opportunity for us to launch those later in 2011 and begin to gain some more momentum in the substance abuse business.

Great. Thanks guys.

I'm showing no further questions on the phones, I'll now turn the call back over to Doug Michels for closing remarks.

Okay. Well, I just want to thank everybody for being on the call this afternoon, I look forward to sharing our success through our future calls in 2011. Have a good afternoon and evening, everyone.

Ladies and gentlemen, thank you for your participation in today's conference. This concludes the program and you may now disconnect. Everyone have a great day.