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Orasure Technologies Inc  (NASDAQ:OSUR)
Q3 2018 Earnings Conference Call
Nov. 07, 2018, 5:00 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

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. 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)

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 note 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 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.

Stephen Tang -- President and Chief Executive Officer

Thank you, Jane. 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 molecular 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 are 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'll spend time discussing key factors that will impact the business going forward. We have also received feedback concerning the length of our prepared remarks, and believe these changes will help streamline the process. As always, we will 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.

Roberto Cuca -- Chief Financial Officer

Thanks, Steve, and good afternoon, everyone.

As Steve mentioned, we are very pleased with our results for the third quarter of 2018 as OraSure continuous progress toward 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 continuing growth of countrywide pilots and initiatives. Test shipped 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 nonrenewal of the foreign government supply contract for a countrywide HCV eradication program. Domestic HCV sales increased 9% in the third quarter of 2018 to $2.1 million from $1.9 million in the prior year period. Other revenues were $2.4 million in the current quarter compared to $1.2 million in the prior year. The increase was largely due to royalty income associated with a litigation settlement agreement.

Gross profit percentage for the third quarter of 2018 was 62% compared to 58% reported for the third quarter of 2017. Gross profit percentage for the current quarter benefited from lower manufacturing costs associated with our Oragene product, lower royalty expense, and the increase in our other revenues. Our operating expenses for the third quarter of 2018 was $17.7 million compared to $17.3 million in the comparable period of 2017. This increase was largely due to higher spending in our research and development projects, and increased commissions and consulting costs, partially offset by decrease in staffing expenses.

Income tax expense was $3.3 million in the third quarter of 2018, compared to $1.7 million in the same period last year, and consists entirely of Canadian taxes due, and is reflective of the higher pre-tax earnings generated by our Canadian subsidiary. We reported net income of $8.1 million or $0.13 per share for Q3 2018, compared to net income of $5.8 million or $0.09 per share for Q3 '17.

We continue to maintain a solid cash and liquidity position. Our cash and investments balance at September 30, 2018 was $192.1 million compared to $176.6 million at December 31, 2017. Cash generated by operating activities during the first nine months of 2018 was $24.8 million compared to $30.4 million in the same period of 2017, which included a $12.5 million litigation settlement.

Turning to guidance for the fourth quarter of 2018, we are projecting revenues of $46.5 million to $48.0 million, a net income of $0.09 to $0.11 per share. Our revenue expectation implies full year 2018 revenue growth from 2017 of 7% and sequential growth from the third quarter of 1% to 5%. As we described previously, last year some of our consumer genomics customers experienced unexpectedly positive responsiveness for their winter holiday promotional activities and discounting with the result of this purchased inventory for the holidays, deeper into the fourth quarter than they otherwise might have. Based on recent discussions, we understand that they are better prepared for this year's holiday season and that their purchases will be more evenly distributed between the third and fourth quarters. As a result, we do not anticipate experiencing as substantial a revenue progression from the third and fourth quarters of this year as we saw last year.

And with that, I'll now turn the call back over to Steve.

Stephen Tang -- President and Chief Executive Officer

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 consumer 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 purchase and 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 healthcare diagnostic test, and this should be factored in when developing quarterly expectations. This best view of the 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 is 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 the previous quarter, and 48% growth over Q3 of the prior year. We won 29 new commercial accounts during Q3, and a total of 61 accounts during the first nine months of 2018, compared to 43 for the entire calendar year last year. Many of these new accounts are pharmacogenetic testing providers or customers in the health and wellness space. A positive sign for us that several customers are standardizing the collections using our FDA Class II cleared sponge (ph) base collector, ORAcollect-Dx. It's important to understand that the sales are not cannibalizing Oragene sales as these customers require a sponge or swap collector like ORAcollect for their analysis applications. We are seeing a trend of new commercial purchasers for this product coming primarily from diagnostic, pharmacogenomics and nutritional fields.

Sales in the Asia-Pacific market have also continued to grow with large accounts from the direct-to-consumer or DTC, pharmacogenomics and health and wellness test markets. The fact that we continue to secure large contracts in Asia indicates the preference of these customers for using our FDA-cleared high quality DNA sample collection kits with their test. On the academic front, we continue to see the impact of large epidemiological studies. One important example is from a hospital network in France dedicated to fighting cancer. That will be conducting a large study with a cohort of 50,000 breast cancer survivors in women with a family history of breast cancer using our Oragene kit. We are also encouraged by the recent announcements concerning the NIH budget increases that should directly impact the number and size of research studies in genomics.

Turning to the Microbiome business, our Q3 sales, which include both collection devices and services, were up 118% compared to 3Q 2017. In aggregate, approximately 80% of the revenue experienced in Q3 was a result of strengthening demand among existing customers, while 20% came from first-time purchasers. Our ability to continue attracting new customers is important because of the positive impact on future growth. Our experience with new customers is that they typically start with small pilot projects before moving into large studies and larger purchases. We expect continued new customer acquisition and increased sales to existing customers to be very important growth drivers for this part of the business.

Molecular sampling device revenues increased 83% in Q3 over the prior year period. The more -- majority of which came from companies offering microbiome consumer testing services. In fact, we've begun to see many new customers with unique types of direct-to-consumer offerings. One such customer recently signed a multi-year supply agreement to launch a new multi-'omic DTC offering in Europe. This customer analyzes both human DNA and gut microbiome data to provide personalized information on hereditary conditions, as well as digestive health. We expect this customer to contribute to microbiome revenues in future quarters.

Another new supply agreement was recently signed with a customer that will enable healthcare professionals to use the results of microbiome analysis to manage the nutritional health of patients. These types of agreements further underscore the utility of microbiome information and its potential impact to healthcare. Lastly, our microbiome services business continues to gain traction. Q3 was the best quarter ever for the service offering with the revenues growing 331% over prior year quarter. This growth is being driven mainly by pharmaceutical and small biotech companies using our GenoFIND laboratory and bioinformatic services to understand changes in the microbiome profile. In this space, we see the potential demand in many research fields. But we're focusing on customers that offer therapeutic, nutritional and cosmetic interventions. As microbiome discovery program is growing scale and complexity so do our service contracts. The average contract size in Q3 2018 was two times larger than in the prior year quarter. Based on the firsthand knowledge we have gained about this market through our participation in microbiome standard working groups, we expect the microbiome field to evolve to larger study sizes, longitudinal patient monitoring, and multi-'omic solution to enable meaningful discovery. All of these factors are expected to play toward strengths and support our long-term revenue growth.

Turning to Infectious Disease. Our Global HIV business grew 7% in the third quarter compared to the prior year period. A 41% increase in international sales, more than offset a decline in the domestic HIV business. Once again, the primary growth driver was our HIV Self-Test in the international marketplace. Over the past several quarters, much of the demand for this product has come from the STAR program, and we continue to ship product under Phase II of that program. However, I want to call your attention to an important aspect of our Global HIV business. The market is evolving and growing, and product sales supporting the STAR program are becoming a smaller percentage of our HIV Self-Test business, which bodes well for OraSure. We are now seeing a majority of the Self-Test demand coming from countries outside the STAR program, and we expect that to continue in Q4. It is important to understand that trend when assessing the future potential of this business.

As the Self-Testing market continues to develop in countries that have participated in the STAR project, start to scale their programs. We are seeing some distinctive ordering patterns driven largely by these countries in their implementations. When these countries start to scale their screening programs, they need to ensure that the programs can ramp without interruption. As a result, they're ordering large quantities of product upfront in order to execute their programs, and then do not have to order again until needed to continue their testing. This ordering pattern is also present in new countries that have not participated in the STAR program. This type of purchasing pattern inherently creates unevenness in the amount of product we supply on a quarter-to-quarter basis. So if we experience somewhat reduced purchases in a particular quarter, that does not necessarily indicate a negative trend for the market, rather it's likely part of normal purchasing pattern for new customers. As we've shared previously, our charitable support agreement with the Gates Foundation has been a key factor for this business, allowing us to offer a more favorable pricing to 50 countries in sub-Saharan Africa, West Africa, Asia, Central Asia and Latin America.

We continue to make great progress under this agreement with sales to new and existing customers in over 40 of the countries. To date, we have completed registrations for our Self-Test in 10 countries. Submissions are pending for an additional 10 countries, and new submissions are being prepared for 24 countries. The vast majority of this regulatory activity is targeted at the countries covered by the Gates agreement. The significant time we spent educating customers and promoting the pricing we can offer under the Gates agreement has paid dividends, and this should continue. Additionally it will be necessary for governance to develop and execute in country awareness campaigns to assist in motivating patients to Self-Test for HIV. We are currently working with countries for piloting such initiatives.

As I previously mentioned, the report issued by the World Health Organization and UNITAID on the global market for rapid HIV Self-Testing. That report recognized the importance of HIV Self-Testing to reach people at higher risk in developing countries. And status of that the available procurement forecast suggests that demand for Self-Test is expected to increase from about 1 million test in 2017, to an estimated 16.4 million tests by the end of 2020. While this is not our projection, we think the strong growth projected by this report is consistent with what we're seeing in the market.

On prior calls we also mentioned that UNITAID would be funding a Self-Testing program in West Africa. We're now seeing the impact of this additional funding and expect shipments supported by this program to begin as early as the fourth quarter of this year. While this is a certainly positive, it should be noted that the UNITAID program is quite a bit smaller than the STAR program. Nevertheless, it's evidence of the continued support HIV Self-Testing is receiving in the international market.

With respect to our global HCV business, revenues declined in the third quarter, primarily as a result of funding challenges and the difficult comparison caused by the non-renewal of a large foreign supply contract last year. Nevertheless, we remain confident that our overall HCV business, and believe it will continue to be a source of future growth, largely because interest in eradicating HCV and testing remains high, both here in the US and international markets. On the domestic front, our Q3 sales improved from the prior year period. And we think funding conditions may improve next year.

As discussed on our last call, some legislative development suggest that additional funding may become available. Recently a new piece of bipartisan legislation was signed into law, which is designed to help states and community-based organizations mobilize resources in response to new HIV and hepatitis infections, resulting from the ongoing opioid crisis. This new legislation authorizes annual funding of $40 million over a five-year period for the Centers for Disease Control and Prevention to support enhanced surveillance, increased HIV and HCV testing, and improve linkage to care. On the international front, interest in HCV testing and treatment remains strong, primarily as a result of the availability of low cost HCV therapies. We remain in active discussions with various countries as there are a number of attractive opportunities we hope to secure. I would also point out that we do not include any contribution from international HCV in our guidance. As government allocate funding for HCV, we would anticipate testing what needs to increase.

Lastly, as you will see it in a few days, the new Chief Accounting Officer will be starting our 10-Q for the third quarter. Michele Miller was recently promoted to Vice President, Finance and Controller, and will be responsible for all accounting functions, both in the US and in Canada. Michele began her career at Ernst & Young, and joined OraSure in 2007 starting as a Manager, Financial Reporting and serving as Director of Financial Reporting since December 2011. This shows 11 years with OraSure and a strong professional background in the Accounting and Finance position are well for this role. I would like to congratulate Michele on her promotion and look forward to working with her in this new role.

So, in conclusion, we have a great deal to offer current and potential investors. We continue to post strong performance and make progress toward our strategic initiatives. Our molecular and HIV Self-Test businesses are well positioned to remain solid contributor. We have a proven and experienced management team in place that's well suited to deliver on our objectives. Our key markets are well defined with several still in the early stages, and we are consistently adding a steady stream of new customers each quarter. There is no shortage of application these days that require genetic testing and we continue to see microbiome research growing at a rapid rate. Our high-quality HIV and HCV tests have proven their utility around the globe. We do think our HIV Self-Test will continue to flourish internationally and are hopeful that HCV once again regain its momentum. And lastly, we are actively exploring ways to leverage our very strong balance sheet to enhance our growth profile. For those reasons I believe the company is well positioned for future success, and that's why we believe our best days remain ahead of us.

And with that, we'll now take your questions. Operator, please proceed.

Questions and Answers:

Operator

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

Brandon Couillard -- Jefferies -- Analyst

Hi, thanks. Good afternoon.

Stephen Tang -- President and Chief Executive Officer

Hi, Brandon.

Brandon Couillard -- Jefferies -- Analyst

Roberto and Stephen, with respect to the fourth quarter guidance seem to suggest pretty minimal quarter-over-quarter growth and about a 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 more balanced ordering pattern this year. But can you just help us understand your visibility and how you expect that business specifically to trend sequentially in the fourth quarter?

Stephen Tang -- President and Chief Executive Officer

Sure. Thanks for the question, Brandon. So as we've 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 have 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 get 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 pattern for well planned holiday season shopping stocking.

Brandon Couillard -- Jefferies -- Analyst

Okay. And then, I guess one more, understanding you guys are -- have 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.

Roberto Cuca -- Chief Financial Officer

So, Brandon, the subject of buybacks is regularly discussed at the Board level and with the management team. So it's not out of 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 will do the right deal at the right time, at the right valuation.

Brandon Couillard -- Jefferies -- Analyst

I solely leave (ph) with those two. Thanks.

Roberto Cuca -- Chief Financial Officer

Thank you.

Operator

Thank you so much. Our following question comes from David Westenberg with CLK. Your line is open.

David Westenberg -- CL King -- Analyst

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

Roberto Cuca -- Chief Financial Officer

Yeah, 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 as being corrected for in the year-over-year comps.

David Westenberg -- CL King -- Analyst

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 loose a customer that wasn't buying the actual collection kit, but they are buying reagents. Is that a headwind you're still facing in Q3 and Q4? Or are you faced in Q3 and will face again in Q4 and if it is significant, is there -- should -- can you quantify it?

Stephen Tang -- President and Chief Executive Officer

So first, it isn't significant. It was a contributor to the decline that we've seen -- that decline in the commercial business or the flatness in the commercial business that we've 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 aren't as clear on that in the prior quarter's call as we could have been in that. We don't expect it to be driving significant year-over-year negative comps going forward.

David Westenberg -- CL King -- Analyst

Got it. Thank you very much. I'm just going to ask one, but I'll jump back in queue, so I do have the more. Infectious disease was down 25% year-over-year, 22% sequentially, and then in fourth quarter you no longer have that the HCV crone (ph) 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 builds ability is in terms of big orders. If you do get them fairly well ahead of time and do you have maybe some orders that would be coming in Q1 that maybe aren't shown up in Q4, and I'm sorry to keep harping on this, but we are getting several questions on the guidance here, and thank you.

Stephen Tang -- President and Chief Executive Officer

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

David Westenberg -- CL King -- Analyst

I'm referring to the entire infectious disease franchise. All of just if I'm looking at this is 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 down to $12 million, and then the comp 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've been most likely probably hit on kind of a guide 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, and just a way for look at that.

Stephen Tang -- President and Chief Executive Officer

Yeah. We don't expect anything extraordinary between the fourth quarter of this year and the first quarter of next year. We can sit -- we expect continued strong growth in HIV International, so our Self-Test. And I think as 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.

David Westenberg -- CL King -- Analyst

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

Stephen Tang -- President and Chief Executive Officer

Thank you, David.

Operator

Thank you. (Operator Instructions) Our following question comes from Mark Massaro with Canaccord. Your line is now open.

Max Masucci -- Canaccord Genuity -- Analyst

Hi. This is Max Masucci on for Mark. So we've seen a few population sequencing projects expand 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?

Roberto Cuca -- Chief Financial Officer

Hi Max. So we are actively involved with population studies that 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 remained strong and a great opportunity for us.

Max Masucci -- Canaccord Genuity -- Analyst

All right, thanks. And on gross margins, you have been driving solid international HIV volumes driven by the Self-Test. How confident are you, you can drive say 60% plus margins over time even with the drag from the lower margin Self-Test?

Stephen Tang -- President and Chief Executive Officer

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.

Max Masucci -- Canaccord Genuity -- Analyst

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.

Roberto Cuca -- Chief Financial Officer

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 this -- that strategic plan and the long-range plan that the company had (ph), and so we expect the investments that we need to drive innovation and therefore growth in our existing businesses and 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 interrelated 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.

Max Masucci -- Canaccord Genuity -- Analyst

That's all from me. Thanks guys.

Roberto Cuca -- Chief Financial Officer

Thank you.

Operator

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

David Westenberg -- CL King -- Analyst

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 the competition between the two, a lot of time to say, no a lot of time to our customers will overlap, in fact, we kind of think that genomics kind of breeds more interest in genomics. So, is that kind of a correct way to think about penetration rate as being something that people could do -- consumers can do multiple tests. And if that's not the rate, just generally, can you just talk about what you think penetration in that market?

Stephen Tang -- President and Chief Executive Officer

Okay. So I certainly won't speak for 23andMe in 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 feel 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 US, 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 US 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.

David Westenberg -- CL King -- Analyst

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

Stephen Tang -- President and Chief Executive Officer

Thanks, David.

Roberto Cuca -- Chief Financial Officer

Thanks, Dave.

Operator

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.

Stephen Tang -- President and Chief Executive Officer

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

Operator

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.

Duration: 43 minutes

Call participants:

Stephen Tang -- President and Chief Executive Officer

Roberto Cuca -- Chief Financial Officer

Brandon Couillard -- Jefferies -- Analyst

David Westenberg -- CL King -- Analyst

Max Masucci -- Canaccord Genuity -- Analyst

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