OraSure Technologies, Inc. (OSUR) Earnings Call Transcript & Summary

Thank you for standing by, and welcome to the OraSure Technologies Inc. Acquisition of Sherlock Biosciences. [Operator Instructions] As a reminder, today's program is being recorded. And now I'd like to introduce your host for today's program, Jason Plagman, Vice President, Investor Relations. Please go ahead, sir.

Thank you for joining OraSure Technologies call to discuss our acquisition of Sherlock Biosciences. 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, expenses, profitability, earnings or loss per share and other financial performance, product development, performance, shipments and markets, business plans, regulatory filings and approvals, expectations and strategies. Actual results could be significantly different. Factors that could affect results are discussed more fully in OTI's SEC filings, its annual report on Form 10-K for the year ended December 31, 2023, its quarterly reports on Form 10-Q and its other SEC filings. Although forward-looking statements help to provide more 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. I'd also like to mention that we posted a slide presentation on our Investor Relations website that summarizes some of the details regarding our acquisition of Sherlock Biosciences. With that, I am pleased to turn the call over to Carrie.

Thank you, Jason, and thanks to everyone for joining us. We are excited to announce our acquisition of Sherlock Biosciences. And before we get into the specifics of the acquisition, I want to remind you of our journey to get here. Over the last 2.5 years, OraSure has made significant progress on our strategic transformation and our 3 pillars to strengthen our foundation, elevate our core and accelerate profitable growth. As we've discussed previously, we've rebuilt our cash balance from less than $100 million in June of 2022 to $279 million at the end of Q3 this year. Through our focus on operational efficiency, during Q3, we achieved our target of operating cash breakeven for the core business. It is our stronger foundation that is enabling OTI to advance our internal innovation road map and to invest in external innovation, in order to advance our strategy to expand our portfolio of diagnostic tests and sample management solutions. The acquisition of Sherlock represents another example of progress on our strategy through disciplined capital deployment. Starting with a high-level summary of Sherlock and the strategic fit with OraSure. As background, Sherlock was founded in 2019 with a focus on developing rapid, accurate and affordable diagnostic tests that are accessible to people at the point of need. Over the past 5 years, Sherlock, together with its Sense technology, has developed a next-generation molecular diagnostics platform that is able to deliver rapid results on lab-like accuracy in the disposable self-test format planned for over-the-counter use. Sherlock molecular self-test for Chlamydia and Gonorrhea, or CT/NG, is currently in clinical studies. We anticipate submitting data to the FDA for review by the end of 2025. And if approved, we expect the CT/NG test to contribute to OTI's revenue beginning in 2026. The acquisition of Sherlock represents another step in OTI's innovation strategy and aligns with our focus on expanding our portfolio of rapid diagnostic tests that increase access to care. Sherlock CT/NG test further bolsters our strength in diagnostic testing for infectious diseases and sexual health. In addition, we believe there is a significant opportunity for commercial expansion in public health and to partner with online health channels and retailers to offer an innovative instrument-free OTC test that can serve a large market opportunity that has significant unmet need through improved access and affordability. Additionally, we are excited to welcome Sherlock's talented team to OTI as our organizations come together to advance our shared purpose of improving access, quality and affordability of health care while creating meaningful value for stakeholders. As we think about our opportunities, we believe OTI is well aligned to participate in several key long-term trends in the health care industry, such as innovation that facilitates greater access to diagnostic insights of a point of need and through self-testing. Growth in precision medicine, such as genomic, proteomic and other insights that are enabled by our sample management solutions, and consumers' increasing desire to seek out and access important insights in order to take charge of their health. This alignment around key trends gives us confidence in the opportunity for sustainable long-term growth in the segments we serve and in new ones. As a reminder, OTI's vision is to power the shift that connects people to health care wherever they are. And our mission is to improve access, quality and value of health care with innovation and effortless tests and sample management solutions. Our vision and mission are reflected in our innovation strategy that we've been executing over the last 2 years. In sample management solutions, that means building on our leadership in sample collection and stabilization by expanding our products to more sample types, more anolytes and more applications, as well as potential value chain expansion. And in Diagnostics, it means adding more tests to our portfolio with a priority on affordable instrument-free test that increase access to care. To accelerate our innovation, you'll recall that at the beginning of 2024, we announced 2 partnerships. One with Sapphiros for Diagnostics and sample management solutions and another with Diagnostics Direct for its Syphilis Health Check test. Both of those partnerships have made strong progress this year, and we're pleased to continue building that momentum. Our acquisition of Sherlock is an exciting step in our innovation strategy. We believe Sherlock is a great fit with our diagnostics portfolio, our pipeline priorities, our road map and our culture. Sherlock is an innovation-driven organization that has developed unique capabilities and platforms that we believe will help expand OTI's product pipeline and accelerate our growth while leveraging our existing strength, capabilities and infrastructure. You may remember, and will see on Slide #7, we are focused on adding more diagnostic tests and next-generation platforms of increasing performance on the technology spectrum that fit our strategy and their affordability and accessibility and are able to leverage OTI's strong infrastructure, commercial organization and customer relationships and that builds on our leading position in rapid testing for infectious diseases and sexual health. The acquisition of Sherlock is well aligned with our focus. Sherlock expands our portfolio beyond our current lateral flow diagnostics with the addition of a platform for molecular tests that can offer a unique combination of attractive attributes, including rapid results, with lab-like accuracy and its strong sensitivity and specificity and instrument-free form factor and at reasonable cost. From a technology standpoint, Sherlock adds molecular testing options that strengthen and broaden our diagnostic portfolio. Sherlock has developed a unique single-use disposable form factor that fits in the palm of the hand and delivers lab-like clinical performance and quality at an affordable price. Sherlock's CT/NG test uses this disposable form factor, and we believe there is potential to develop molecular tests for other disease applications on this platform as well. Plus Sherlock's design allows the ability to multiplex and is open to other swab-based assay. Sherlock is also developing several next-generation technology platforms, including ambient temperature amplification that is aimed at delivering robust molecular sensitivity without strict temperature requirements and CRISPR-based technologies that enable high specificity nucleic acid detection. These technologies have the potential to reduce costs and improve performance of Sherlock's molecular platforms and associated assays. Sherlock enables entry into attractive markets while leveraging OTI's existing strength. CT/NG represents a large addressable market of more than $1.5 billion that has been growing and is anticipated to continue expanding. Of the tens of millions of CT/NG tests performed in the U.S. each year, the vast majority are currently processed in a centralized lab. We believe the introduction of an affordable, rapid self-test has the potential to drive incremental market expansion through improved access to convenience private testing options in a segment where privacy is a key priority for people concerned about sexually transmitted infections. Additionally, public health channels play a key role in screening, which is an area where OraSure has a strong presence. The addition of Sherlock's molecular cell test for CT/NG expands OTI's portfolio of rapid diagnostics for STI and is expected to benefit from leveraging our existing customer relationships, commercial capabilities and infrastructure. We believe that adding Sherlock's CT/NG test will position us to have continued success with multiproduct sales across our portfolio of sexual health and infectious disease testing, particularly as health care providers and public health organizations recognize the need for a syndemic approach to rapid testing, given the significant overlap in patients at risk for these infections. In terms of market expansion, we believe there is a significant opportunity to partner in providing diagnostic content for online health channels, including telehealth, tele pharmacies, and other consumer initiated testing services. Those that have developed meaningful brand awareness and are interested in adding new use cases and offerings, such as options for at-home STI testing and treatment. Now on Slide 10. I mentioned earlier that Sherlock's CT/NG test is currently in clinical studies, and we anticipate submission to the FDA by the end of 2025, with commercial launch and revenue anticipated in 2026, pending regulatory approval. From an ongoing investment standpoint, we expect $20 million to $25 million of investments in operating expenses in 2025 related to Sherlock, including completing the CT/NG clinical trial and FDA submission, scaling up of Sherlock's manufacturing capacity and preparing to enter the market in 2026, while continuing to invest in R&D to advance Sherlock's molecular platform and broader product pipeline. In addition to the strategic benefits, the transaction is also attractive from a deal structure standpoint. As the majority of the acquisition consideration is dependent on securing FDA approval for applications of the molecular CT/NG self test. The upfront cash consideration is $5 million, with an additional $20 million in potential milestone payments contingent on FDA approvals for Sherlock CT/NG test plus a low single-digit royalty on sales of the CT/NG test over a 10-year period. In summary, we are very excited that Sherlock is now part of OraSure and we believe the acquisition supports multiple important elements for OTI's long-term success. First, it expands and diversifies our product portfolio and pipeline into molecular diagnostics, starting with the CT/NG self-test that we expect to submit to the FDA by the end of 2025. Second, Sherlock's technology platforms enable molecular performance in a rapid, low-cost instrument-free format. Additionally, the design allows the ability to multiplex and is open to other swap-based assays. Third, there is a strong commercial fit, Sherlock's molecular tests allow OTI to access attractive new markets, starting with CT/NG and with the potential for additional tests in the future, that build on our strength in infectious disease and sexual health and leverage our strong commercial team, customer relationships and our capabilities in infrastructure. Fourth, from a financial perspective, we expect to generate revenue in 2026 following regulatory approval of Sherlock's CT/NG test and the acquisition agreement has an attractive deal structure with the majority of the acquisition consideration dependent on successfully receiving FDA approval. Fifth and finally, we are excited to welcome Sherlock's talented team to OTI and to add their expertise in new areas such as isothermal amplification technologies, fluidics, electronics, CRISPR and beyond. Overall, we are thrilled to bring Sherlock into the OTI family as we take an exciting next step in our innovation and growth journey. We look forward to working with our Sherlock colleagues to advance our vision, deliver on our mission while creating value for our shareholders, employees, customers and communities. With that, I'm pleased to turn the call over to Jonathan, our operator, for Q&A. Jonathan?

[Operator Instructions] Our first question comes from the line of Casey Woodring from JPMorgan.

Congrats on the deal. I guess, my first question is just on the CRISPR technology for Sherlock, how do you see that translating into clinical setting? What do those diagnostic opportunities look like? And why is now the right time to get involved? And then maybe just talk about the R&D spend associated with some of those CRISPR-related pipeline projects?

Thanks, Casey. To be clear, the CT/NG cell test on the molecular platform currently in clinical trial does not leverage the CRISPR technologies and applications. So that test and the development of it in the molecular platform as it stands is independent of it. What we like about the next-generation technologies that Sherlock has been advancing, including CRISPR, is they represent opportunities for ongoing improvement in performance. And CRISPR in particular, has the potential to improve detection. So while there are different amplification technologies and different detection technologies, it's really in the future development potential down the road that CRISPR comes in, and that's an attractive part of the assets that we have gained through Sherlock. So that's -- I'll pause there. And then on the investment side, we shared an expectation of $20 million to $25 million. So a big portion of that is onetime. That includes a good amount to finish those clinical trials. Those will not be recurring. It is to scale up in manufacturing and launch. And as we move forward beyond '25, we'll share more about what you see as ongoing investment amounts. But you can imagine with onetime spend, clinical trial is a very significant portion, and that's a good portion of that $20 million to $25 million for next year.

Got it. That's helpful. And then yes, on the molecular piece on CT/NG, you mentioned the addressable market there is $1.5 billion, but also noted the vast majority of that testing capacity is done via centralized lab. So maybe walk us through how much you see the market, that $1.5 billion expanding with the addition of Rapid Test coming to market? And what's your go-to-market strategy there to help expand that market given the fact that a lot of that volume is more routine testing done in a centralized manner?

Yes. So I'd say it's twofold in our commercial approach. One is to build on the syndemic testing where we have success in sexual health, STI diagnostics today. HIV, HCV, we added Diagnostics Direct, Syphilis and have nice progress. This is that addition to it. In the very large -- it's the largest of the markets that we serve, CT/NG is. And we do think it has the potential to become one of the biggest revenue contributors in, say, 3 to 5 years. How we see that expansion is both in the markets in which we play today. And then increasingly becoming the content provider for other health care services players who serve markets for expansion, including an online and private spaces. That includes consumer-initiated testing through major clinical labs as they're increasingly making testing accessible through physician mediation, of course. So our approach is to build on the channels in which we play today, including public health and clinical channels. A small portion of that testing where somebody can self collection get a result in rapid test and privacy, we think there's some share capture there, but increasingly providing rapid diagnostic content to the industry for other health care services providers to include in their portfolio, we think, is a significant opportunity as well.

Great. Maybe if I could just slip one last one in. Can you just maybe talk about the scalability of Sherlock's platform? And maybe what the margin profile looks like once the CT/NG test be launched in '26? And then I think I was reading that Sherlock has a pretty large manufacturing facility in the United Kingdom. So just maybe wondering what sort of synergies there are there and how to think about all that?

Thanks, Casey. As far as the platform goes, we do see this as a very flexible and attractive molecular diagnostics platform with CT/NG as its first test but with real potential to expand to other assays and leveraging the molecular technology. And that's where next-gen technologies can continue to help improved margin profile. While we won't describe in detail today, we'll share more as we get closer to launch around what that looks like for 2026. What we say is, we expect it to be attractive. We do intend this as an affordable self-test option that has the potential for high-volume manufacturing and for improvements in the platform like this, the potential for ambient temperature amplification, which can decrease the weight of the unit and has the potential to reduce the cost as well. From a manufacturing perspective, Sherlock has been the systems in clinical trial use a contract manufacturer, one that we intend to keep, and to ramp up with. And in terms of their manufacturing in the U.K., that's for specialized components of it. And we will be assessing as you would expect after some rigorous due diligence that we've already done, we will very much together with the Sherlock team be evaluating all synergies and opportunities to do what we've done on our own internally in the last 2 years, which has looked for every operational efficiency and productivity play that we can. So we'll be looking together with them. That will be one of our early priorities.

And our next question comes from the line of Jacob Johnson from Stephens.

Carrie, congrats on the deal. Maybe 2 questions for me. First, just as we look out over the next couple of years and thinking about how Sherlock complements your lateral flow test, how do you think about segmenting tests between your kind of legacy lateral flow test and Sherlock's molecular approach is something you segment by indication? Or could this be something that's kind of geographic cost consideration segmented?

I think it's both. You will describe it, quite frankly, Molecular testing is the only way that we're, as an industry, doing CT/NG testing today. So I think a part of it is the excitement around expansion of high science tests that become affordable and accessible for more people and specifically rapid results in private settings. So there is -- we do think about segmentation. We think about the right format with a cost that allows access for the people who need it, and I think what we'll share more about in 2025 as we plan for launch is, where do we plan for those price points, the channels where we're launching I've already sort of described as public health, clinical and then what I would point -- I'm not pointing the term, the term exists. But what we call B2B2C, which is really business to the businesses that sell to consumers. And that's what we're referring to in that becoming the content provider or increasing our ability to add more and more content for online health channel. So yes, and I think we -- what is -- we are planning to share more in 2025 is our pipeline and the road map strategy. We plan to share more on that, and you'll see that sort of segmentation by test and by platform, but I think you get a good feel just because with the first molecular test, we're going after the biggest market and CT/NG can't be done with lateral flow today.

Okay. That's helpful. And then I appreciate the comment and the prior question about the -- a good chunk of the $20 million to $25 million OpEx this year kind of onetime for the clinical trials, but I think there's also kind of a pipeline at tested at Sherlock. Could there be the potential that there are additional cost like that clinical trial down the road? Or is there something not kind of the first approval that requires a greater kind of more intensive spend than maybe additional indications thereafter?

We would love to be spending more and more clinical trials and all I would say is that while we have a good estimate looking in the '25 and because it's already in clinical trial, I think we have a good feel for that. Our goal is to develop more tests. And I would hope that we'd be sharing with all of you. Our plan is to share more that we are developing that pipeline and that we can say we've moved beyond feasibility on other tests to be running those clinical trials. So we'll share more about that. But I'd say as far as next year goes, that's -- we feel pretty good that that's the ballpark of spend based on what's in the pipeline, but we'll very much call out clinical trials because there are always a huge chunk one-off amount when you're in development. So I mean we're not giving guidance for '25 or beyond, but those are sort of the things that we are sharing. I hope that kind of answers your question.

And our next question comes from the line of Andrew Cooper from Raymond James.

Maybe just first, high level, there has been other platforms aimed at point-of-care molecular, including CT/NG. What kind of makes Sherlock the right asset at the right time in terms of the actual platform? Like is it the lack of needing an instrument? Is it some of the characteristics in terms of time to result and performance. Just help us think about when you were diligencing this particular asset? Why is the right one to act on today?

Yes. Andrew, I think we may have talked about this with you before, but I'm going to repeat it. And our strategy around molecular and the advancement of Rapid Diagnostics has been and continues to be that the winners should have fast enough turnaround time, low enough cost and broad enough menu. And why we're so excited about Sherlock and this was a first acquisition for us and molecular that made sense, is our belief that this platform has those capabilities. And we have said consistently in the past 2.5 years and our more tests, bring more test focused that instrument-free was a priority for us because that follows the workflow that our customers use today. And so the potential to serve our customers in a more meaningful way, add content and that this is instrument-free with that potential to be at affordable cost, of course, high quality, fast enough turnaround time and a broad enough menu again, starting with CT/NG, but building out with more of a pipeline, those are the factors that made this our first move.

Okay. Helpful. And then maybe a little bit on the cost side. Just it sounds like not a kind of incremental CapEx investment, given you commented on a contract manufacturer. But can you maybe just confirm that? And then from a go-to-market perspective, I know you talked about Public Health, you talked about OTC. Just is there incremental spend to drive those channels with what is a new test, even though certainly aligns really closely? And then lastly, just on the $1.5 billion, I think there's a distinction between symptomatic versus screening for CT/NG, just maybe a little bit of color on your approach there and how you feel Sherlock is going to fit into the environment from that perspective?

As far as the CapEx...

Ken, do you want to start?

Yes. Sure. And Andrew, as far as the CapEx, you're right, the way you think of it not a ton of incremental CapEx associated with this investment. As far as the spend, as we said, we expect in 2025 to spend between $20 million and $25 million of OpEx, and a chunk of that is related to clinical trials and then the ramp up -- commercial ramp-up. So if we don't have another clinical trial in over years, you can imagine that spend going down. And as far as the incremental channel spend, one of the things that's attractive about this acquisition is synergies with some of our own channel capabilities that we can leverage, so that helps us from that perspective as far as to your point about any -- avoiding any incremental costs or a significant incremental costs associated with that. As far as the target market, Carrie, if you want to cover the $1.5 billion portion?

Yes. And I'll add on to that, that yes, we do expect to spend some incremental dollars. I'd say it's a small part of the 2025 -- but 2025, but it is included in there, because that's our go-to-market plan is building on public health and clinical strength but the content to B2B2C and content providing for consumer-initiated testing, we gained a lot of momentum through COVID, and you see that momentum continue. But with the introduction of this kind of novel molecular diagnostics, self-test at affordable cost will require some of that as well. So it is included in the 20 to 25. In terms of the addressable market, I mean, what I'd reiterate is we all know how big the CT/NG market is. And we were not expecting to convert the entire existing centralized lab to get people not going in to their physician or the current places. But to add and to supplement it, and regarding your point around symptomatic, asymptomatic, the clinical trials looking at both. So the -- I guess I'll leave you with that. But the clinical trial is looking at both and the opportunity to add rapid results in privacy of self-testing, we think, is a significant market expansion opportunity in any case.

Perfect. I'll stop there. I apologize if you heard the dog barking, but thanks for the question.

This does conclude the question-and-answer session of today's program. I'd like to hand the program back to Carrie Eglinton Manner for any further remarks.

Thank you, Jonathan, and thank you to each of you for joining. We know it was a short notice for the call. We appreciate your interest, and we look forward to talking again in 2025. Thank you so much. With that, we'll close the call.

Thank you, ladies and gentlemen, for your participation in today's conference. This does conclude the program. You may now disconnect. Good day.