Good afternoon, everyone, and welcome to the OraSure Technologies 2018 Third Quarter Financial Results Conference Call and Simultaneous Webcast. As a reminder, today’s conference is being recorded. [Operator Instructions] OraSure Technologies issued a press release at approximately 4:00 p.m. Eastern Time today regarding its 2018 third quarter financial results and certain other matters. The press release is available 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 press releases. With us today are Dr. Stephen Tang, President and Chief Executive Officer; and Mr. Roberto Cuca, Chief Financial Officer. Dr. Tang and Mr. Cuca will begin with opening statements, which will be followed with a question-and-answer session. Before I turn the call over to Dr. Tang, 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 the results are discussed more fully in the company’s SEC filings, including its registration statements, its annual report on Form 10-K for the year ended December 31, 2017, 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 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 would like to turn the call over to Dr. Stephen Tang.

Thank you, Jean. Good afternoon, everyone, and welcome to our call. I’m pleased to report that our third quarter results were strong, driven by continued growth from our molecular collections in HIV Self-Test businesses. Net revenues for the quarter increased 8% from a year-ago period and rose 14% during the first nine months of this year, and that was on top of a very strong 2017 performance. Some specific highlights include the following: net monocular revenues increased 37% for the third quarter and 35% for the nine month period. International HIV sales grew 41% and 125% for the quarter and nine months ended September 30, 2018, respectively. This growth was primarily the result of higher sales of our HIV Self-Test. We reported quarterly net income of $8.1 million, and we ended the third quarter with over $192 million in cash and cash equivalents on our balance sheet with no debt. I would also point out that not only was Q3 a success from a financial performance standpoint, but we also advanced on the goals we adopted from our strategic review. That type of important progress cannot always be detailed in real time due to competitive and other reasons, but I can say that we’re actively working to implement our new strategy and expect that these efforts will further enhance our growth potential. Starting with today’s call, we are taking a somewhat different approach with our prepared remarks, in part, based on your feedback. Our prepared comments will focus more on the drivers of our current and future growth, and we will spend time discussing key factors that will impact the business going forward. We’ve also received feedback concerning the length of our prepared remarks and believe these changes will help streamline the process. As always, we’ll gladly take your questions on any aspect of the business. For more detailed information about our quarterly performance, I would refer you to our earnings release and the 10-Q when it’s filed in the next day or so. So with that, let me turn the call now over to Roberto for his financial review of the quarter. And after that, I’ll provide some business updates and then we’ll open it up for questions.

Thanks, Steve, and good afternoon, everyone. As Steve mentioned, we’re very pleased with our results for the third quarter of 2018 as OraSure continued its progress towards a very successful year. Our third quarter net revenues increased 8% to $45.9 million compared to $42.3 million reported in the third quarter of 2017. Our net product revenues increased 6% to $43.5 million compared to the prior year period. Higher sales of our molecular collections product and OraQuick HIV Self-Test more than offset declines in other product lines. Our molecular revenues rose 37% to $25.5 million in the third quarter of 2018 compared to $18.6 million in the third quarter of 2017. Sales of our genomic products to commercial customers increased 48% to $21.5 million, largely due to higher customer demand primarily from a large consumer genomics customer. Microbiome sales also continued to expand, growing 118% to $1.7 million in the third quarter of 2018 from the same period last year. International HIV sales increased 41% to $4.3 million from $3.1 million in the third quarter of 2017 due to higher sales of our OraQuick HIV Self-Test into Africa. A majority of our volume this quarter came from countries outside of the UNITAID Population Services International Self-Testing Africa, or STAR initiative, demonstrating continued growth of countrywide pilots and initiatives. Test shift to African countries both in and outside the STAR initiative during the quarter were subject to support payments under our charitable support agreement with the Bill & Melinda Gates Foundation. Domestic HIV sales decreased 13% to $4.5 million in the third quarter of 2018 compared to $5.1 million in the third quarter of 2017. International HCV sales in the third quarter of 2018 decreased 81% to $1.2 million from $6.2 million in the same period of 2017, primarily due to the…

Thank you, Roberto. Let me start with more detail on our molecular collections business. Our Q3 molecular revenues grew 48% sequentially over the previous period and, as Roberto noted, 37% over the prior year quarter. Continued strong sales in the consumers genomics market was the primary growth driver. This reflects the seasonal variability of our molecular revenues as I mentioned in our last earnings call, as our customers purchased in preparation for annual retail promotional events in the winter holiday shopping season. As a reminder, this large component of our revenue tracks like a consumer product rather than a typical health care diagnostic test, and this should be factored in when developing quarterly expectations. [indiscernible] growth of the consumer genomics business on an annual basis, since the quarterly progressions may vary. Our overall molecular performance reflects a consistent level of new business coming from first-time purchasers. 3Q was the second consecutive quarter, with over 100 new customers for this segment. There was also continued strength from our top 20 customers, with 19 of the 20 showing double or triple-digit growth in the trailing 12-month period as compared with the previous 12-month period. This strong performance from both new and existing molecular customers further supports our expectation the full year growth rate for 2018 will be solidly in the double-digit range. Several international markets have also shown growth in Q3 versus the prior period. Specific markets include the Asia Pacific region, with growth of 12% over 3Q 2017 and the Middle East and North Africa, which collectively increased 219% over Q3 2017. We believe that each of these regions could continue to show significant growth as our products achieve greater penetration and brand awareness. In the genomics part of our business, sales to commercial customers drove 75% sequential revenue growth over…

Thank you so much. [Operator Instructions] Our first question comes from Brandon Couillard with Jefferies. Your line is open.

Hi, thanks. Good afternoon. Roberto and Steven, with respect to the fourth quarter guidance, you seem to suggest pretty minimal quarter-over-quarter growth and about 9% decline year-over-year. Are there any specific kind of one-time headwinds baked into that outlook that you could speak to? And it would be helpful if you could sort of speak specifically with respect to the fourth quarter outlook for molecular collection systems. Understanding your comments about the most balanced ordering pattern this year, but could you just help us understand your visibility on how you expect that business specifically to trend sequentially in the fourth quarter?

Sure. Thanks for the question, Brandon. So as we talked with you all and with investors in the past, we’ve described that fourth quarter of last year is a particularly difficult comp because one of the things that happened was, as we mentioned in our guidance, several of our customers had pretty significant demand beyond what they were expecting for the quarter. So rather than doing their stocking in the third quarter, which is more typical for retail-type products that gets sold in the holiday season, they did the majority of their stocking in the fourth quarter, including stocking to fulfill shortages at the time of ordering ahead of the holidays. This year, they’ve been better prepared and flattened their ordering and are expected to be flattening their ordering between the third and fourth quarters. So it’s not so much a headwind as a normalization of what would be more typical ordering patterns for well-planned holiday season shopping stocking.

Okay. And then I guess, one more. Understanding you guys are having an ongoing M&A process, but given where valuations for target assets in the tools and diagnostic space are today and in light of where OraSure stock is trading, have you or would you consider actually a buyback as opposed to M&A, which is inherently riskier?

So Brandon, the subject of buybacks is regularly discussed at the board level and with the management team. So it’s not how the question, but our preference is, clearly, to pursue business development opportunities with our balance sheet. So we’ll keep that in mind, but we feel very confident about our future and our ability to bring companies into our fold and integrate them. And as I said before, we’ll do the right deal at the right time at the right valuation.

Thanks.

Our following question comes from David Westerberg with CLK. Your line is open.

Hi, guys. Thanks for taking the question. So I know you don’t like to give product-specific color, but the guidance as Brandon mentioned, even if the high end is 8% year-over-year. So just kind of a continuation on the molecular collections business, I’m just trying to understand this a little bit. You did $41 million in the back half 2017. When you look at 2018, I don’t – I know you don’t want to get too specific, but I mean, should we be anticipating growth year-over-year here? Thank you.

Thanks for the question, Dave. So as Steve said in his prepared remarks, we do expect in the molecular business year-over-year growth as he put it solidly in the double-digit range. So there will be some differences between the third to fourth quarter cadence this year compared to last year as a result of that better visibility into responsiveness to promotion and discounting that our customers have in selling to end-users. But there’s nothing unusual about this year that suggests that the market generally is changing, rather simply that the stocking pattern last year was unusual and has been corrected for in the year-over-year comps.

Great. I appreciate it. I guess, I’m piggybacking on Brandon’s question again. In regards to the one-time items, I know you called out, I think it was last quarter, that you did lose a customer that wasn’t buying the actual collection kit, but they were buying reagents. Is that a headwind you’re still facing in Q3 and Q4 or – you faced in Q3 and will face again in Q4? And if it is significant, is there – should – can you quantify it?

So firstly, it isn’t significant. It was a contributor to the decline that we’ve seen – the decline in the commercial business or the flatness in the commercial business that we’d seen previously, but it’s not a significant portion of the overall sales. It’s just a significant portion of the reagent sales. So I think we weren’t as clear on that in the prior quarter’s call as we could have been on that. We don’t expect it to be driving significant year-over-year negative comps going forward.

Got it. Thank you very much. I’m just going to ask one more and then I’ll jump back in queue. I do have a few more. Infectious disease was down 25% year-over-year, 22% sequentially. And then in the fourth quarter, you no longer – you no longer have the HCV comp with the countrywide elimination deal. So could you maybe – you have these programs, there is lumpiness. Can you maybe just discuss a little bit in terms of what your visibility is in terms of these big orders? If you do get them fairly well ahead of time, do you have maybe some orders that could be coming in Q1, but maybe are short of in Q4? And I’m sorry to keep on harping on this, but we are getting several questions on the guidance here. Thank you.

David, are you referring to HCV or you’re referring to the entire infectious disease franchise?

I’m not referring to the entire infectious disease franchise. Apologies if I’m looking at this incorrectly, but I’m seeing $12.4 million versus $16.6 million a year before, I’m seeing almost $16 million in Q2. I’m seeing it jumped to – jumped down to $12 million. And then the comps in Q4 will not, again, include any of the really tough comps in HCV. So I’m just – it seems like to me when I was looking at my model for getting guidance in line with Q4, the bucket that you would most logically probably hit on kind of a dive down would be the infectious disease business. And so if you can just maybe give us color in terms of what order patterns might be looking like? And should we – what we should expect in terms of if there was maybe some drag out of that Q4 quarter into maybe Q1? Or just way to look at that.

Yes. We don’t expect anything extraordinary between the fourth quarter this year and the first quarter of next year. We expect continued strong growth in HIV international, so our self-test. And I think we shared previously, David, there is nothing in international HCV in our guidance. So as we get projects for eradication at the country level for HCV, we will certainly add those. But we’re not starting from anything for those projections. And HCV domestic has been growing, and as I indicated in my remarks, we expect 2019 for there to be more funding available for domestic HCV related to the opioid crisis.

Got it. Okay, thank you. So we should start thinking about the HCV business as kind of more of the shot on goal kind of way to look at it. I appreciate that. Thank you guys.

[Operator Instructions] Our following question comes from Mark Massaro with Canaccord. Your line is now open.

This is Max Masucci on for Mark. So we’ve seen a few population sequencing projects which stand over the recent few months, including the Healthy Nevada project, which is expanding tenfold. Can you speak to your involvement in population sequencing projects, including the All of Us project and Healthy Nevada? And could these mark upside to molecular collections?

Hi, Max. So we are actively involved with population studies although we don’t name which ones. So I will just share, I think, what I’ve said previously on other calls, which is, we have a significant advantage in these population studies because the ability to collect DNA through saliva and not go through a blood draw and not having to have a cold chain to preserve the sample means that you can get higher enrollment over time and higher quality of samples to process. And so that can be a significant upside for us. And as I mentioned, large epidemiological studies are one of our strengths and has been one of the reasons for our tremendous growth and bridge between our research applications and commercial applications. So that segment remains strong and a great opportunity for us.

All right. Thanks. And on gross margins, you’ve been driving solid international HIV volumes driven by the self-tests. How confident are you that you can drive, say, 60% plus margins over time even with the drag from a lower margin self-test?

So we expect to have gross margin at least as good in the fourth quarter as it was in the third quarter. That’s driven in part by strength from the molecular business, which is a higher-margin business generally. But we expect that as other parts of the business outside of the international HIV Self Testing continue to grow, we’ll be able to maintain those margins. And as we’ve described in the past, we are working on gross profit, COGS improvement initiatives even in the international HIV self-testing space.

Great. And then one more, if I can squeeze one in. It’s been roughly one quarter since you guys completed the strategic review. Can you just give us a broad update on how things are going? Are you thinking about anything differently now compared to last quarter? Thanks.

Sure, Max, great question. We – quite a lot is going on. We are in implementation mode on the strategy and that means that we are creating a budget for 2019 based on that strategic plan and the long-range plan that the company did. And so we expect the investments that we need to drive innovation and, therefore, growth in our existing businesses, in infectious disease and molecular. And we have a very active business development funnel right now. We don’t have anything to announce at the moment and, certainly, we will at the appropriate time. But we are pursuing a number of things, which are – either directly support the existing businesses or are in related businesses for which the adjacencies will be obvious. So I’m very confident that we’re off to a fast start to successfully implement our strategy. And you’ll certainly hear more over time.

That’s all for me. Thanks guys.

We have a follow-up question from David Westenberg with CLK. Your line is now open.

Hey guys. Thanks for taking the follow-up. So can you talk about the penetration rate in consumer genomics. Our conversations with Helix and 23andMe, when you ask them about competition between the two, a lot of times they’ll say, you know, a lot of times, our customers will overlap. In fact, we kind of think that genomics kind of breeds more interest in genomics. So is that kind of the correct way to think about penetration rate as being something that people can do – consumers can do multiple tests. And if that’s not just the rate, just, generally, can you just talk about what you think penetration is at in that market?

So I certainly won’t speak for 23andMe and Helix and their business models, but clearly, the interest in human genomics comes from two basic consumer segments: one is, little eye Ancestry, which is what your heritage is; and the second is, in the broad field of health and wellness. And as you know 23andMe is the only company that has FDA approval to provide health results directly to consumers and we have the only FDA-cleared 510(k) device for use in FDA protocol. So that puts us in a very strong position there. So I think you’ll continue to see growth in human genomics and the established geographies here in the U.S., and I think that their penetration into the overall population is still relatively low. You will also start begin to see greater uptake in human genomics across the globe, and certainly we reported high growth rates in Asia Pacific, the Middle East, and Africa as examples of that. So we’re starting to reach geographies that have been untapped before, they may involve the incumbent large players in the U.S., and they might involve other players. And then I think finally it’s the interplay between what we see in human genomics and the microbiome, which is the rise of the multi-omic approach, which essentially says looking at ones DNA, RNA and metabolites as a way of getting a much more robust profile of what influences your health and your wellness. So that area is just being – just begun to being tapped right now, because we have strong products in the microbiome and in human genomics, I think we’re uniquely qualified and positioned as a company to capitalize on those. So this is one of those opportunities which I refer to as early stages of market penetration of development, and I think we are very optimistic that human genomics and microbiome and the combination of multi-omics leading to a really systems biology approach to defining your health and wellness and heritage, all coming together nicely.

All right. Thank you for taking my follow-up.

Thanks, David.

Thanks, Dave.

Thank you so much. I’m showing no further questions at this time. I would now like to turn the call back to Dr. Tang for any closing remarks.

We want to thank you for participating on today’s call and for your continued interest in OraSure. Have a great afternoon and evening.

Ladies and gentlemen, thank you for participating in today’s conference. This does conclude the program and you may all disconnect. Everyone, have a great day.