Good day, and thank you for standing by. Welcome to the OraSure Technologies Inc. 2023 Fourth Quarter Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to your first speaker today Jason Plagman, Vice President of Investor Relations. Please go ahead.

Good afternoon, and welcome to OraSure Technologies' fourth quarter 2023 earnings call. Participating in the call today for OTI are Carrie Eglinton Manner, our President and Chief Executive Officer; and Ken McGrath our Chief Financial Officer. As a reminder today's webcast is being recorded, and the recording 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 and guidance, expenses, profitability, earnings or loss per share and other financial performance, product development, performance, shipments in markets, business plans, regulatory filings and approvals, expectations and strategies. Actual results could significantly differ. Factors that could affect results are discussed more fully in OTI's SEC filings including its registration statements its annual report on Form 10-K for the year ended December 31, 2022, 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. OTI undertakes no obligation to update any forward-looking statements to reflect events or circumstances after this call. With that I am pleased to turn the call over to Carrie.

Thanks, Jason and thank you to everyone for joining us today. We are pleased to provide an update on the progress OraSure is making on the three pillars of our strategic transformation: one, strengthening our foundation; two, elevating our core growth; and three accelerating profitable growth. A few notable items since last quarter include that we generated $41 million of operating cash flow in Q4 and grew our cash balance to $290 million. For the full year 2023, our cash and short-term investments increased by $180 million. We continue to execute on our COVID-19 contract and we delivered stronger than anticipated InteliSwab volumes during the quarter. Our enterprise-wide focus on driving improved operating efficiency continues to unlock incremental cost savings including gross margin expansion and reduced overhead expenses. In February, we signed a strategic distribution agreement with Diagnostics Direct, which allows us to enter the US Syphilis testing market with the first CLIA-waived treponemal test. Of course, earlier in the quarter we also announced our investments and strategic distribution relationship with Sapphiros a consumer diagnostics company with unique technology platforms that plan to enable low-cost high-performance next-generation diagnostics and sample collection devices. We expect the distribution of Sapphiros' products will add at least two percentage points to revenue growth in our core business beginning in 2025. Starting with costs as we continue to strengthen our foundation. For the full year of 2023, we exceeded our target of $15 million in annualized cost savings. Over the last 18 months we have developed an enterprise-wide mindset that is focused on continuous improvement and operational efficiency. As such we have identified and are working on a number of opportunities that are expected to generate additional productivity enhancements and cost reductions in 2024 and beyond, including consolidating facilities, further leveraging our automation capabilities and…

Thanks, Carrie. I'm happy to discuss our results for the fourth quarter of 2023 and provide updates on our financial outlook. In Q4, we delivered total revenue of $75.9 million. COVID-19 products predominantly InteliSwab contributed $41.7 million of revenue in the fourth quarter, which was above the high end of our guidance range. Purchasing patterns under our contract with the US government were slightly stronger than expected during the quarter. Core revenue which excludes COVID-19 products was $34.2 million in the fourth quarter, representing 0.4% year-over-year growth. Within core revenue, our diagnostic products generated $17.2 million of revenue in Q4 and grew 19% year-over-year. This growth was driven by HIV test sales in the US and international markets. Looking at molecular sample management solutions. Fourth quarter revenue of $13 million increased 9% on a year-over-year basis which was in line with our expectations. Core revenue growth from diagnostics and molecular sample management solutions in the fourth quarter was offset by year-over-year declines in non-product revenue and molecular services revenue. As a reminder, non-product revenue is primarily related to funded R&D projects, grants and royalties, which are lumpy and not key growth drivers within our long-term strategy. From a gross margin perspective, our GAAP gross margin in the fourth quarter was 46.3% compared to 40.5% in last year's fourth quarter. Non-GAAP gross margin was 49.7% compared to 40.9% in the prior year period. Non-GAAP gross margin expansion in Q4 was driven by production efficiencies and cost reduction initiatives. For the full year 2023, our GAAP gross margin of 42.3% increased by 400 basis points compared to 2022 and our non-GAAP gross margin of 45.5% expanded by 540 basis points versus the prior year. Overall, we believe we can drive additional gross margin expansion over the coming years and we remain focused…

Thanks, Ken. Over the past year, OTI delivered meaningful progress on our strategic imperatives. We've strengthened our foundation including strong cash flow generation, improved operating efficiency and instilling an enterprise-wide focus on continuous improvement to fuel how we serve customers and grow. We completed the milestones included in our contract with the US government related to our capacity expansion at our Opus Wave facility earlier than expected and we made progress in streamlining our operational footprint in order to leverage the automation and infrastructure at our new facility. We grew core revenue by 2% in 2023 while navigating macro and industry headwinds. We expanded the portfolio of products that our sales team can provide to our customers in several important segments, including entering the US Syphilis testing market with Diagnostics Direct here in 2024. And in early January, we announced our strategic partnership and investment in Sapphiros, which is expected to expand and accelerate our product and innovation pipeline. We expect our partnership with Sapphiros will accelerate our core revenue growth beginning in 2025. Overall, OTI continues to execute in order to deliver on our vision of transforming health through actionable insights, powering the shift that connects people to healthcare wherever they are. Our mission to improve access quality and value of health care with innovation in effortless tests, sample management solutions and services is aligned with where healthcare is headed in the coming years. With that, I'm pleased to turn the call over to the operator for Q&A. Stephen?

Thank you. At this time, we will conduct the question-and-answer session. [Operator Instructions] And our first question comes from the line of Patrick Donnelly of Citi. Please go ahead.

Hey guys. Thanks so much for taking the question. Hey. How are you? I guess when we look at the 2024 kind of OpEx piece, can you just talk about it seems like a little bit of a ramp there. You guys still talking about being cash flow breakeven. How does the partnership piece impact that just in terms of the OpEx side and again, the cash flow breakeven just would love to talk through the impact there?

Yes, Patrick and thank you for the question. During the year 2024, we do expect some quarterly fluctuations throughout OpEx given legal expenses R&D funding and the implication time of our cost savings. When it comes to some of those partnerships one of the key strengths of those partnerships is allowing us to leverage our existing infrastructure, which minimizes the investments we need directly to support them. So that's the area when -- and we -- during the last quarter we talked a little bit about it where when you look at some of these partnerships -- while the gross margins may be lower than our overall gross margins the operating income is higher because what we do is we leverage all of that infrastructure, again, not having to add a lot of extra resources to support.

Okay. That’s helpful. And I guess staying on the partnership, I think you talked about the potential for it to add a couple of percent to 2025 revenue growth. Is that just kind of on that self-collected blood products? Are there other products that should be launched? And again, I guess on the self-collected one maybe just an update just on the timelines there. The approval process would be helpful.

Yes. And you call this out and you're right on that it's regulatory approvals that kind of dictate the timing of that Sapphiros self-collected small-volume blood offering, which is why we're really planning for the ramp up this year and the revenue -- the incremental revenue for 2025. To answer the other part of your question about what else has included that, we are looking towards the potential to launch other diagnostic tests. And while they -- and we haven't talked about, specifically what those are, I would say that it's a plan that contemplates the launch of the blood test this year with some line of sight into launch of additional diagnostic tests next year. And did I -- is there a part of that that I still need to address, Patrick?

Yes. No, that covers it. And one last quick one. Just on the COVID piece. You talked a little bit about the government contract. Just the cadence of COVID revs after a nice number this quarter and then just the update on how you're thinking about the endemic run rate would be really appreciated. Thank you guys.

Yes. Right now, we have visibility as you recall -- as you mentioned to about $40 million from the main contract. Most of that will be in the first half. After that we will enter the endemic phase. I believe what we guided last quarter for the full year was $40 million to $45 million in total InteliSwab revenue. So you can infer from that a couple of million going forward beyond that from that first contract.

And I'd just add a little color to de minimis volumes outside of the government contracts. We definitely compete in every state local level as well. We have a few of the kind of regional grocery chains and otherwise that we've talked about in the past, but it really in comparison small dollars versus the contracts which is again why Ken said that, we've guided to that $40 million to $45 million range. So we just describe it as small volume.

Great. Thank you, guys.

Thanks, Patrick.

Thank you. One moment for our next question. Our next question comes from the line of Jacob Johnson of Stephens. Please go head.

Hey, Jacob.

Hey, Carrie. Hey, Ken. Good evening. Maybe just starting on the 1Q guidance. It implies the base business is going to be down somewhere in the teens in 1Q. But Carrie you talked about kind of growth in the back half and you mentioned a number of opportunities but also cited the macro. I'm just curious kind of as we think about that return to growth in the back half of the year how much of that is within your control? Or how much visibility do you have in that return to growth?

Yeah. So I'll start Jacob with some of our -- some of the visibility and kind of the path that we see in the second half. That includes what I talked about in the prepared remarks, which is the distribution agreements for 2024. We're very excited about Diagnostics Direct and entering the US. Syphilis testing market. That's an add that comes in with our public health infectious disease portfolio and really nice momentum that we have in HIV for example. And we have a number of other partnerships as well includes international diagnostic tests we talked about last year. That's -- we have a partner in international Syphilis for example Hep C and Hep B. We also have three other partnerships in substance abuse testing. It includes one of our recently announced partnerships with SwabTek. I won't list them all but I would say those distribution agreements and the ramp-up in 2024. We've talked about Sapphiros for 2025 but I'd point to some of these other opportunities in 2024 as one element. Another and I won't list all of these but another that I would just highlight for you here is the diversification of our customer base. We've been talking about that along the way. We've shared highlights of that. And it's both new customers as well as new agreements with sort of valued key customers that we've been working with. And just the outlook, we have on their ordering patterns for total year. Again, I just sort of reiterate this we see this path and the path really is in a strength in the second half.

Got it. Thanks, Carrie. And that kind of leads to my next question. You mentioned a variety of these kind of distribution type agreements. You've been clear that kind of partnerships were key to your strategy especially as it relates to capital allocation. But I feel like on this call we've talked a little bit more about distribution agreements. Can you just kind of discuss the strategy there? It sounds like its kind of leveraging your existing infrastructure but I'm just kind of curious your thought process about doing more of these distribution type deals.

Yeah, you're exactly right. And you know, we've been talking about this for at least 18 months as long as I've been here. Part of what we have as a company that turned in the face of COVID to serve the pandemic was both on the sample collection side where a huge number of that effort went to COVID collection for molecular tests and then obviously on the diagnostics side in InteliSwab. And what that did and I think we were transparent about it we tried to be transparent about it was that it took an innovation pipeline and really focuses around a key public health need. And that's why we started talking about partnerships. It was so that we could both invest internally in the areas of our development strengths, but also put more of those complementary portfolios very quickly into our sales team's offerings, so that we could better serve the market with while we were simultaneously strengthening our financial foundation that opportunity to better serve, while we're completely leveraging the capabilities of very strong sales channel, really strong customer relationships and just a credibility and a longevity of having served in this space whether it'd be public health, clinical or on the sample collection side, our extensive diagnostic pharma, biotech, customers and our expansion into areas like animal health, environmental research and beyond. So I'd say we did it, because we needed to. We knew we needed to. And we leveraged our strength to really put together some great agreements with great partners. And we're going to leverage all that's good about our capabilities and strengths to change the acceleration on that success.

Got it. Yeah. That’s helpful, Carrie. Thanks for taking my questions. So I leave it there.

Great. Thanks Jacob.

Thank you. One moment for our next question. Next question comes from the line of Brandon Couillard of Jefferies. Please go ahead.

Hi thanks. This is Matt on for Brandon. Maybe one for Ken, I think prior you talked about gross margins in the mid-40s for 2024. It sounds like InteliSwab assumptions haven't changed much. Maybe some of these newer partnerships are lower gross margin but better operating margin is mid-40s still the right range as we think about gross margins for full year 2024 year?

Yeah. As you mentioned we guided towards mid-40s last call. We're maintaining that outlook for the full year. Recognize that within the between quarters there may be some fluctuations based on how we ramp up cost savings the InteliSwab volume as you mentioned and overall product mix. So, there could be fluctuation quarter-to-quarter. But for the whole year we're still maintaining mid-40s.

Okay. Thanks. And then, on the cost savings here it sounds like you exceeded the $15 million in 2023 and maybe unlock some additional productivity enhancements beyond that. Is that the right way to think about it? And then, maybe talk about some of the impact and timing of some of the other items you called out like site consolidation among other things. Thanks.

Yeah. And you'll see those, impact or implemented throughout the year and you nailed it right? One of the big areas is consolidation. The other is automation. It's leveraging our existing processes. And as we highlighted, we've identified a list of those projects and are implementing those projects now throughout the year and maintaining our target of -- by exiting 2024 our core business cash flow from operations will be breakeven.

Super. Thank you.

Thanks Matt.

All right. Thank you for your question. One moment for the next one. Next question comes from the line of Andrew Cooper of Raymond James. Your line is now open.

Hi, everybody. Thanks for the question. Maybe just first kind of a high level one, I think you talked about it a little bit already but just adding a lot of products for distribution which I think makes sense, given the business that you have and the capabilities to distribute. But just how do you think about that view on trending more towards the distribution business versus wanting to have more proprietary offerings? And then, how do you think about the opportunities I think with at least some of these to maybe bring them in-house down the road? What are some of the puts and takes as you contemplate them? And what could the margin increase look like should that actually occur for some of these distributed products today?

Yeah. Thanks Andrew. I'll leave margin to the end and will address that at the end. I'll just say philosophically we really like the partnership model that allows us to leverage our strengths and access innovation now with -- these are -- we're a fairly small company and these are pretty small partners. And we have spent a lot of time, while rebuilding our financial base by which to do this to have the opportunity to be very thoughtful and judicious about what we pick. And we're picking products and partnerships that really fit in our portfolio. And you'll see sort of buy partner where we choose to be exclusive. And we think that that makes sense and where some we've made a strategic investments like we did in Sapphiros, because there are sort of more elements to that strategic agreement and we have the potential to co-fund and co-develop. What I would say by giving you those examples is, this is a part of a big picture strategy that we've been very thoughtful about and aligned with our multiyear innovation road map that we put together and landscaped and went out looking for these pieces that I would just describe as very thoughtfully come into our portfolio because we truly believe we have an opportunity to accelerate them. You'll also see that that mix is across portfolios and sales teams. So we're intentional about what we're adding to diagnostics both domestically and internationally. I mean, the amount you hear about Syphilis US testing probably not a big surprise, but really great news but not a big surprise to see us entering that market. So whether it's the diagnostics play we're picking or the team that we're putting it into the substance abuse partnerships for example are a very different sales team than our core diagnostic sales team. So just to bring it all together, I would say it's a part of our -- a well-defined strategy. We've been communicating. We've been forecasting that this was an important part of our growth plan and we're excited to share more about each of these along the way to deliver as proof points the growth -- the elevating our core growth and doing that just like we've been talking about. In terms of margin, Ken maybe back to the previous one.

And to build on and add also to what Carrie said, we're exploring all types of growth still when it comes to our strategy both organic inorganic all different deal types to Carrie's point that really fit with our strategy. And we have the luxury right now being in pretty strong financial position to really look and choose the ones that are the best fit. When it comes to margins, when you think about distribution specifically, again think of it a P&L geography. The gross margins may be a little bit lower than our overall gross margins. But because we leverage significantly kind of the OpEx the existing OpEx infrastructure there's not a lot of incremental cost on that end. So when you go to the bottom line it's actually incremental and accretive to our overall operating income margins.

And I know I'm making this a long answer Andrew, but I'm going to add this. We think it's important to have multiple shots on goal. We use that phrase and we talk about it. We are very much open to M&A. Again, just as the size of the company we are, we think we will continue to be super judicious about that. Many of our agreements are exclusive. Many are multiyear. We put a lot of effort into how we make those durable and partnerships that can really pay off. But we have opportunities to do more. And our modeling doesn't require that every single one be the blockbuster. We're sure going to put the effort into that which is why we've diversified across teams in our strategy. But a part of this is ensuring that we make smart selections and really leverage our strength. And I think I just said to you we're really clear on what those strengths are.

Super, super, helpful. Maybe just one more for me. Just when we think about that core growth improving through the year and the commentary about the partnership starting to contribute more through that year, just to kind of level set, what sort of growth expectations do you have for, let's call it the historical core, the business that we've known for some time? What is the outlook as we think about kind of that traditional product suite relative to what's being contributed from the partnerships?

Yeah. Well, we don't provide product-specific guidance. We are looking for growth across all aspects of the portfolio. But just from the distribution agreements, obviously that will add incremental growth, but we are looking for growth in all avenues depending on the particular opportunities that present themselves and the market conditions.

Okay. Great. I will stop there. Thank you.

Thanks, Andrew.

Yeah. Thank you for your questions. This does conclude the question-and-answer session. I would now like to turn it back to Carrie for closing remarks.

Great. Thank you so much for everyone's participation and we thank you for your continued interest in OraSure. Have a great night. Thank you, Stephen. Bye-bye.

Okay. Thank you for your participation in today's conference. This does conclude the program. You may now disconnect.