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OraSure Strives for End-to-End Presence in Microbiome Market with Diversigen Buy

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NEW YORK – With the acquisition of Diversigen announced on Wednesday, OraSure Technologies expects to position itself as an industry leader in microbiome analysis. The firm plans to combine Diversigen's metagenomics sequencing with the microbiome services and sample collection technologies of its CoreBiome and DNA GenoTek subsidiaries to provide an end-to-end solution for microbiome analysis.

In a call to recap the its third quarter earnings, OraSure also described new developments in international HIV self-testing and drugs of abuse testing markets that could become revenue boosters in the future, despite recent trends negatively affecting the firm's consumer genomics business.

Although the firm's revenues in the quarter fell 22 percent year-over-year, and it lowered its full year guidance by approximately $11 million, Stephen Tang, president and CEO of OraSure, asserted on the call that its business is largely on track, with the exception of consumer genomics.

As part of an "innovation-driven growth strategy," the firm has completed three strategic acquisitions this year, and divested its cryosurgery business line.

OraSure's sales in its microbiome business increased 81 percent in the quarter, primarily due to the inclusion of lab services revenues generated by the CoreBiome subsidiary that it acquired in January, as well as from "healthy double-digit organic growth," the firm's CFO, Roberto Cuca, said on the call.

The highest growth rates for the microbiome business came from Asia-Pacific and European markets, Tang noted, with double-digit growth across the business in new customer acquisitions.

Diversigen "is an exceptional company, and a proven leader in the microbiome laboratory and analytic services industry," Tang said. The firm has developed nucleic acid extraction techniques for a variety of sample types, using technology licensed from the Baylor College of Medicine. It also has "an impressive customer list," Tang said, including many of the top-ten pharmaceutical companies, as well as a leading microbiome therapeutics provider.

The acquisition will strengthen the firm's microbiome business and improve the ability to provide customers with industry leading end-to-end microbiome products and service offerings, he said.

The firm is nearing completion of the CoreBiome integration process. Tang also said that the subsidiary was chosen as the sequencing and custom bioinformatics partner for the development of a new microbiome diagnostic test by an unnamed collaborator.

DNA Genotek, a firm acquired in 2011 for $50.6 million, also makes microbiome sample collection and stabilization devices, and Tang said combining these three businesses, "will give us industry-leading products and service offerings, from sampling to rich analytics that can provide actionable insights."

Brandon Couillard at Jefferies highlighted in an analyst note that Diversigen operates the only CAP/CLIA-certified lab focused on microbiome-related testing services, and its whole-genome sequencing and 16S test services, offered mainly to biopharma, complement CoreBiome's shotgun sequencing services to academic clients. The deal could add $4 million to $7 million in annual revenues, making it "roughly breakeven" with the $12 million cash purchase price. Couillard maintains a cautious stance overall, given limited visibility around HIV self-testing and the rest of consumer genomics, adding, "We struggle to see the catalyst for multiple expansion[s]."

HIV bright spots and consumer genomics sour notes

Within OraSure's HIV testing business, a drop in over-the-counter sales led to a 4 percent decrease in the firm's US HIV business revenues, offset by 36 percent growth internationally.

A newly announced 10-year program, Ending HIV in America, being spearheaded by the US Department of Health and Human Services will also likely engage the firm's OraQuick home-use HIV test, Tang said. Funding in the amount of $291 million is currently in the administration's 2020 budget and is working its way through congressional approval, he said.

Internationally, three large orders of HIV self-test valued at $1.9 million could not be delivered until the first week of October because of unexpected logistical delays, which contributed to the firm's miss on its previous guidance, Tang said.

Still, OraSure sold approximately 1.5 million HIV self-tests in the third quarter, Tang said, and sales of self-tests were also the primary motivation for the firm to continue to project double-digit revenue growth through the end of this year for its international HIV franchise. That said, the firm is anticipating lowering its fourth quarter guidance due to an order slipping into next year.

OraSure previously participated in a program called Self-Test Africa Initiative (STAR), which has encouraged uptake of HIV self-testing in 13 countries. Now, OraSure is also seeing new countries wishing to adopt more self-testing, with 19 new country registrations from countries outside the STAR program to date, and 13 additional submissions pending.

In particular, the firm is expecting an initial scale-up order from health ministries in Nigeria in the fourth quarter. "We believe the Nigerian program will eventually be one of the largest programs deploying our test," Tang said. OraSure is also participating in the formal launch of HIV self-testing in Uganda, "with the full support of the ministry of health's permanent secretary and USAID," Tang said, with an initial shipment also expected in Q4.

"Under STAR, the ordering and shipping processes were consistent from country to country, with long, predictable lead times," Tang said, but expanding the addressable markets has "increased exposure to significant variability to ordering and shipping processes and timelines." Still, he asserted that once each new market is established, this slippage should subside.

The World Health Organization has also added a pediatric test claim to the OraSure pre-qualified professional HIV test and the firm's HIV self-test, which, in turn, allows OraSure to participate with PEPFAR in the Rome Action Plan for pediatric HIV. Tang said OraSure is now undertaking impact studies of its tests in a pediatric setting using funds from the Centers for Disease Control and Prevention.

The firm' risk assessment business, which includes tests for drugs of abuse, grew 17 percent in the quarter compared to the prior-year period. This growth could be sustained in the future due to new federal drug testing guidelines issued by the Substance Abuse and Mental Health Services Administration permitting oral fluid drug testing in federally regulated workplace settings and in markets that follow federal guidelines.

Tang noted that SAMHSA estimates approximately 30 percent of federally funded and regulated drug testing will eventually be performed using oral fluids, translating into roughly 12 million tests each year at the low end of the range.

"We believe that these guidelines will open up a large potential market for us that we are currently not serving," he said.

The use of oral fluids allows for better differentiation between recent drug use and historical use, so it can be used to tell is a person is impaired while on the job, and the guidelines stipulate test parameters and oral fluid device requirements for manufacturers, Tang said. He added that OraSure has finalized the design of an oral fluid collection device that it believes will meet these federal requirements and it is working with Thermo Fisher Scientific to develop automated drug test assays.

The firm expects some growth in its consumer genomics business in Q4 due to seasonality, namely people buying genomics tests as holiday gifts. But other trends in the consumer genomics market have impacted OraSure's business, Tang said.

Sales of OraSure's genomics products declined 41 percent in the quarter largely due to lower customer demand, "primarily from a large consumer genomics customer that changed its promotional strategy, which impacted its purchasing pattern."

Excluding this single customer, however, genomics products revenues grew 30 percent year-over-year. The firm still lowered its forecast for genomics revenues in the fourth quarter, however.

Tang said this was due in part to the fact that media attention surrounding a US Department of Justice case regarding improper ordering of PGx tests may have created "mistrust and cynicism" toward genetic testing among consumers and uncertainty among customers, which "may be contributing to the more general slowdown that we and others are seeing in the broader consumer genomics space."  

And, despite the underlying strength in genomics, the ancestry and genealogy testing segment within consumer genomics continues to decline, Tang said, which is impacting the firm's product revenues and royalty income. OraSure receives royalties from Ancestry.com as part of a legal dispute settlement.

"Over time, we expect that other submarkets within genetic testing — most notably disease risk management, augmented by animal health and lifestyle genomics — will eventually offset these declines," Tang said.

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