OraSure Technologies Inc (OSUR) 2002 Q1 法說會逐字稿

Good day everyone, and welcome to OraSure Technologies first 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 speaker's remarks, there will be a question and answer period. If you would like to ask a question during this time, simply press star then the number one on your telephone keypad. If you would like to withdraw your question press star then the number two.

For opening remarks and introductions, I will now turn this call over to at OraSure Technologies.

Please go ahead.

Good morning everyone and thank you for joining us today.

I would like to begin by telling you that OraSure Technologies issued a press release earlier this morning regarding our first-quarter financial results. The press release is available to you on our Web site at www.orasure.com or by calling 610-882-1820.

This call is also available real-time on our Web site and will be archived there for seven days. Alternatively, you can listen to an archive of this call until midnight, May 3, by calling 800-642-1687 for domestic or 706-645-9291 for international, and enter in the conference ID number, 385-5928.

With us today are Mike Gausling, president and chief executive officer, Ron Spair, chief financial officer, and Sam Niedbala, chief science officer.

Mike will begin with an opening statement and then follow with a question and answer session.

Before I turn the call over to Mike, I must remind you that this call may contain certain forward-looking statements, including statements with respect to revenues and other financial performance, product development, performance, shipments, and markets, and regulatory filings, and approvals. Actual results could be significantly different.

Factors that could affect results are discussed more fully in the securities and exchange commission filings of OraSure Technologies including its registration statements and its annual report on form 10-K for the year ending December 31, 2001.

Although forward-looking statements help to provide complete information about future prospects, listeners should keep in mind that forward-looking statements may not be reliable. A 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 Mike Gausling.

Thank you, Shannon, and good morning everyone.

The agenda for today will first include a financial review of the first quarter. Second, my perspective on Q2. Third, a brief update on our progress with OraQuick, UPlink, and Intercept, and last but not least, certain other business developments that occurred during the quarter.

Let's begin with a discussion of our Q1 financial performance. Total revenues for Q1 grew to approximately $7.7 million or 4 percent over 2001, with product revenues up about 8 percent over last year. Although we continually strive to do better, I'm satisfied with our sales performance against our realistic goals since it succeeded the previously announced expectation of flat sales for Q1.

The principal reason revenues were somewhat higher than expected in Q1 is that Histofreezer sales were up about $800,000 or 62 percent as we reported approximately $2 million of revenues for the first quarter versus $1.2 million last year. This was due in large part to an announced price increase, effective as the beginning of the second quarter. Historically, when we've announced a price increase, there's typically been an increase in sales and advance of the price increase.

We experienced a similar result in Q4 of 2000 in advance of a January 1, 2001 Histofreezer price increase which magnifies the differential from year-to-year. Because of the build-up Histofreezer inventories in Q1, I would expect the HistoFreezer sales will be sluggish during Q2. It is worth noting that sales in the infectious disease market increased 14 percent from $1.3 million to $1.5 million.

However, if we exclude the impact of OraQuick sales in 2001, primarily internationally, domestic sales for the infectious disease market grew 34 percent further supporting our success in converting customers to oral fluid infectious disease testing in the United States. Offsetting these revenue gains were lower sales of urine-based in the insurance risk assessment market, reflecting continued operating efficiencies at LabOne resulting from the LabOne and Osborne merger.

I would also note that sales of our Intercept device and oral fluid assays to LabOne were disappointing and lower than expected. Since their arrangement with us was converted to a non-exclusive distribution deal for Intercept, Lab One has not performed satisfactorily. Consequently, we are even more anxious to get our new intercept labs up and running as soon as possible.

During the first quarter, licensing and product development revenues were also down about $250 thousand, a reduction of 50 percent over last year. In the first quarter of 2001, we recorded product development revenues from both Drager and Meridian under our agreements with these partners which were not repeated in Q1 of 2002. Although we obviously need to improve our sales growth, there were several bright spots during the quarter.

First, we made significant progress in helping our new Intercept lab distributor set up their back-room operations. And I'll provide more on that later on. Second, recent difficulties at two of our competitors may provide opportunities for sales of our oral fluid products yet this year. Specifically, with recent announcement that it is winding down operations, who is a major supplier of urine HIV tests and western bloc kits primarily to the life insurance market, these will be eliminated.

In addition, the product distributed by Roche Diagnostics which competes with our QED saliva alcohol test was recently recalled. Although difficult to quantify at this time, we will aggressively pursue these opportunities to convert new accounts to our oral fluid products as we prepare for our other major launches in the second half of 2002.

With respect to our gross margin, it decreased slightly from 64 to 63 percent, and was primarily due to the result of lower product and licensing development revenues for Q1 of 2002. With respect to operating expenses, the principal variance in 2001 was a $600,000 severance charge that we took in the first quarter of 2002 related to the departure of the company's former CEO, Bob Thompson as well as a 10 percent work force reduction that was implemented in the first quarter.

Research and development expenses increased in support of our recent FDA submissions and the termination of certain development projects. Sales and marketing costs also increase as we prepare for expected product launches in the second half of 2002.

Additionally, it should be noted that in 2001 we recorded a $450,000 restructuring charge related to manufacturing operations on the west coast, which was not recorded in the first quarter of 2002.

The net loss for the first quarter was $0.04 a share, in line with the street expectations. This compares to a net loss of three cents per share last year, and was significantly influenced by the severance charges and other expenses that I had mentioned earlier.

Finally, though I do not want to begin providing specific guidance on a quarterly basis, I would like to share some of my expectations for the second quarter.

I previously told you that we expected revenues to be flat for the first half of 2002, which would be about $16 million in total. The first quarter was slightly above last year, primarily due to Histofreezer sales.

The second quarter is not expected to be much better than the first quarter, as we continue to see lower sales , lower Histofreezer sales, and no international sales of OraQuick, and obviously no launches till at least the third quarter.

While it is still early in the second quarter, I believe total revenues for the first half of 2002 could range from $15 to $16 million. You can be assured, however, that we're working very hard to maximize our sales efforts.

Now I'd like to turn to our new products and the exciting opportunities that we have. The first is Intercept. We started the first quarter by signing Intercept distribution agreements with Quest, CRL, and Northwest Tox, three preeminent labs in the workplace drug testing market.

This expands the number of labs selling Intercept in the workplace from one to four, and will increase the number of sales reps in the street for this product from three to more than 50, once the laboratories have built up their back room infrastructures and commenced their marketing efforts.

With regard to this last point, we made significant progress during the quarter working with these lab partners to set up their back room infrastructures. This involves the purchase of specialized equipment by the labs to be used for high-volume testing of oral fluid samples.

This process in the case of CRL has been completed, and I'm pleased to say that CRL has just started selling Intercept drug testing service in the workplace market.

Northwest Tox is expected to be in a position to roll out Intercept to their customers in the next month or so.

We anticipate that Quest, which currently analyzes approximately 8 million drug specimens per year and has been bulked up since the acquisitions of AML and Unilab since our last announcement, should put us in a position to begin selling Intercept product with Quest early in the third quarter of 2002.

Although the workplace market has been highlighted and focused on, I would be remiss if I did not also point out our progress in the criminal justice market. Last year, during the first quarter, we signed up several new criminal justice labs as Intercept distributors.

Our efforts to help start up these labs are beginning to bear fruit. For example, we've seen a significant up-tick in Intercept sales volumes in the criminal justice market, with one criminal justice lab in New York currently processing approximately 1000 Intercept drug specimens per night.

Although we are in the process of finalizing our business and marketing strategy, I can assure you that we will aggressively support the expansion of the Intercept drug testing service to both the workplace and criminal justice markets in the second half of 2002.

Our Intercept product was also strengthened with the recent receipt of FDA clearance for a test for detecting in oral fluid. This is the company's ninth oral fluid drug test cleared by the FDA. This latest approval is expected to help us further penetrate the workplace, drug rehabilitation and criminal justice markets with our Intercept product line.

It also validates the great job our development team is doing to expand the product menu for Intercept for an oral fluid specimen.

Turning to OraQuick, I previously announced that I would not provide any details on the FDA review until May 13, when we expect the FDA to formally give us a decision on our pre-market application, or PMA, for the OraQuick finger-stick whole blood test.

However, I will stray slightly from this and share with you that the FDA's manufacturing inspection has been completed and everything remains on track for the FDA to meet its May 13 deadline to provide us with a completed review.

Though I will not comment on the probability of approval or specific discussions with or findings by the FDA, I can say that discussions have been cooperative, and that the FDA has made certain observations that we are evaluating and diligently working to address. It is premature for me to speculate on if or when we will get approval, or when we can begin sales of OraQuick. But for now, I will stick to my objective in previous guidance, that we will expect to be selling OraQuick sometime in the second half of 2002.

Our application for an IDE, investigational device exemption, to begin the OraQuick oral fluid clinical trials, remains pending. As previously announced, the FDA told us that they would not...

... more to report on this in the near future.

Concurrently with our work with the FDA and from a business development standpoint, we've been in discussions with a number of potential corporate partners for distribution arrangement of the OraQuick cold blood test and the hospital and physicians' office lab markets. This dialogue continues as we work towards securing this partner to maximize the market penetration of OraQuick here in the United States as soon as possible.

Internationally, we did not record any revenue from the sale of OraQuick in the first quarter and are not optimistic of our ability to do so in the near-term, without an alternative distribution channel and strategy. Finally, with respect to UPlink, as you know from the announcement earlier this month, we secured FDA clearance for this test system together with the opiates test in approximately 65 days from our last submission.

This is the first and only FDA-cleared point of care oral fluid drug abuse testing system in the United States. Clearing the opiates test with the FDA provides a road map to follow as we work to prepare our submission for the full NIDA 5 panel. For those of you who are unfamiliar with the NIDA 5 Panel, this is a series of tests that are specified by the National Institute of Drugs Abuse, NIDA, for opiates, marijuana, cocaine, amphetamines, and PCP. We now have a road map with the opiates clearance that we will hopefully allow us to complete submission of the entire NIDA 5 Panel on one cassette by mid-summer of 2002, consistent with previous expectations. Meanwhile, we expect to commence beta site testing of a four panel UPlink drugs abuse system in the criminal justice market over the next several months.

This beta testing will involve a select number of criminal justice sites that will focus on using the UPlink test system in lieu of current existing technologies which in almost all cases involve the testing of urine for drugs of abuse. I'm also pleased to announce today that we've made significant progress in the development of the UPlink assay for RSV for our partner, Meridian Biosciences.

We expect to be in a position in the next few months to turn over that assay to Meridian for their use in conducting clinical trials and preparing an application for FDA FI10-K clearance with the ultimate goal of having the tests available for sale by Meridian to their customers. As you may recall, OraSure has maintained manufacturing rights, pursuant to its arrangement with Meridian and will supply Meridian with UPlink analyzers, collectors, and cassettes.

This is indicative of the broad application of the UPT technology and more specifically the UPlink system which can be leveraged into drug reviews, infectious disease, and other marketplaces. I'm also pleased to inform you we're continuing to make good progress with our international drug testing partner, Drager, supporting their beta site testing in several European countries.

We will be supplying Drager with a two-panel test, cocaine and opiates for their use in these beta-site tests.

Moving on, I'd like to briefly discuss some other important developments that have occurred during the first quarter. Shortly after taking over as CEO of the company on January 31, I reassessed the staffing levels within the company in light of our recent performance and concluded that we were over-staffed in some areas. Additionally, we re-examined the development projects that were underway and decided some of the projects would not provide a sufficient return to the company.

We made some tough decisions with respect to cutting back on our operations, primarily in manufacturing and research and development, and decided to implement a 10 percent work force reduction which had an equal impact on both our West and East Coast operations. We also decided that it would be prudent to permanently close our operations in Beaverton, OR. Closing this facility is a complicated process. It will involve months of planning and approvals to be obtained from the FDA.

In the end, we intend to move the company's oral western blot manufacturing operations to Bethlehem, which ultimately require the submission to the FDA of an application for a biologics license. This process is underway, but realistically will take us well into 2003 before we are able to affect such a change.

We also expect that the research and development activities in Beaverton will be moved to Bethlehem by year-end of 2002. There are several very talented people working in Beaverton, and we are optimistic that a number of them will remain with us, either by telecommuting or in some instances relocating to Bethlehem, where together with our existing operations, they will continue to contribute to the world-class organization that we are currently building.

As many of you know, the company will be leasing a new building adjacent to the company's headquarters in Bethlehem. This exciting new project will provide 48,000 square feet of additional space, primarily for automated manufacturing operations. The addition of this space in automated manufacturing is the key reason why we can consolidate the manufacturing operations from the West Coast and operate with a smaller manufacturing staff that resulted from the work force reduction. We also moved the manufacturing of Intercept and OraSure collection devices to this facility, which are currently assembled by a contractor in Oregon.

For perspective, the cost savings associated with the relocation of Intercept and OraSure alone to Bethlehem are anticipated to be more than sufficient to cover the entire annual lease expense of the new building, once we have converted 100 percent of the manufacturing to in-house. This is a terrific savings opportunity that we are taking advantage of. We anticipate the building to be complete in August of this year.

And finally, as you can see the company is making significant progress on many fronts. And in the second quarter of 2002, together with the balance of the year, looks to be full of great business opportunities. However, it is a challenging time and I've mentioned to you previously that one area that requires bulking up is our sales and marketing organization and development of our business and marketing strategies. As I said before, my biggest area of near-term concern and attention is around the lumpiness and unpredictable nature of our revenues and sales.

In response to this lingering concern, I've decided that we must take some dramatic action in this area to better position the company to maximize its opportunities with our current products and expected product launches in the future. Consequently and after consultation with senior management and the board of directors, we've decided to bring in outside consultants to assist us in optimizing our strategic business in marketing plans with a goal of delivering $100 million sales over the next three to five years.

In my opinion, this is necessary to maximize our launch plans for UPlink and OraQuick products and to expand Intercept sales. This work will involve an initial unbudgeted expenditure of approximately a half a million dollars, which will be primarily incurred during the second quarter.

As we announced yesterday, Bill Bruckner has joined the company as vice president in strategic marketing. Bill brings a wealth of experience in brand management and strategic marketing. And we look for him to take a leadership role in helping us design, develop and execute the marketing plans for UPlink, OraQuick and Intercept.

Additionally, as previously disclosed, we have initiated a search to secure the services of a senior sales and marketing executive to help guide the company's strategic sales and marketing efforts as we aggressively pursue our goal of $100 million in sales. These are very important investments in amassing long-term shareholder value. And I will take the necessary steps to build a world-class team to deliver against our substantial business objectives.

And finally, before taking your questions, I would like to remind everyone that our annual meeting is scheduled for May 20 at 10 a.m. here in Bethlehem. If you're unable to attend in person, you will be able to listen to the meeting over the Internet. Additional information on how to access the web cast of the meeting will be announced in the next several weeks.

So with that, I'd like to open the call for questions.

At this time, I would like to remind everyone in order to ask a question, please press star, then the number one on your telephone keypad. We'll pause for just a moment to compile the Q&A roster.

Your first question comes from with Robertson Stephens.

Good morning. Thanks for the summary. I have a couple of questions, if I may? The first relates to a couple of balance sheet items. Obviously, DSOs were controlled nicely as the inventories ballooned. Can you provide better color on inventory days going forward? Can you breakout the inventory a little bit more specifically for us and give us an idea of where you think it's going?

Thanks, . This is Ron Spair.

The inventory levels that we see here on the balance sheet at March 31 represent amounts not only for our base business and our existing business, but those that we have built up in anticipation of launching UPlink and being able to provide our customers with UPlink readers.

And so, consequently, we have in excess of $1 million worth of inventory associated with UPlink readers and components in inventory at March 31. Additionally, there are inventory levels that we have on board at March 31 related to OraQuick for delivery when that product is approved as well and that's in the million dollar range as well.

That is in the $1 million range as well?

Yes, that's correct.

OK. So once again, $1 million of UPlink, primarily readers, and $1 million worth of...

About $1.5 million worth of UPlink readers and components that we have in inventory at March 31, and possibly...

About $1 million of OraQuick.

Right.

OK. Very good. And obviously, that will change pending the turn around from the FDA on OraQuick on blood-based specimens and how quickly you advance through on oral fluid specimens; is that right?

That's correct.

And so, given the anticipation that the UPlink reader will not be fully launched with the full complement of drugs of abuse tests necessary for your customers, presumably that inventory level's going to stay there through the summer, at least?

Yes, that's correct, Wayne. And we also have, you know, put out purchasing orders to -- you know, to be in a position to have sufficient inventory to meet the anticipated need when the approvals come through. Also to meet our needs for Drager, for their use internationally, as well as for our partner Meridian, for their use in trials. And we have sole sources in some areas, so we want to make sure that we have sufficient components on hand and in stock to allow us to meet the demand at it materializes.

Sure. OK, can I ask you -- the inventory issues as relates to Histofreezer, that you discussed in your last quarterly conference call. Given those revenues were a little bit higher than we expected this quarter, do you think that that issue is behind you now? Or do you think that the sustained higher level of Histofreezer sales is going to continue henceforth?

The Histofreezer inventory levels, with respect to -- you are referring to our European distributors?

Yes. That's right.

The European inventory situation is probably going to result in flat sales going forward, compared to where we were in Q1 of 2002 here. We wouldn't anticipate, you know, an up-tick in inventory or in revenues in Europe until the latter part of 2002 for Histofreezer. That price increase that we spoke of in Q1 was really related for the U.S. market.

OK. Thanks for the clarification.

Mike, you referenced some of the company's strategic objectives as relates to what you had previously about the workplace force reduction, etc. Can you tell me -- your planned reduction by 10 percent, can we consider that effectively complete now, as of the end of April? Or are there still things as related to that that will be a significant -- provide a significant benefit going ahead near-term in terms of sequential SG&A comparisons?

The bulk of -- I'd say over 90 percent of -- that reduction occurred before March 31.

Any severance was included in that. And we'll start to get the benefit immediately and for the balance every year from that reduction.

And the half-a-million-dollar-expense you alluded to as relates to advising you on the various sales and marketing options for the company along various products, that, you would say, is a one-time expense in the second quarter? Is that correct?

Correct.

OK. And I apologize if I missed it -- did you give any or reiteration of specific guidance going forward for the year, Mike?

We did not.

OK. Is that something you were planning to do today?

I was not.

OK.

The timing of the introductions and approvals continues to be, you know, one of the most difficult things to sort of quantify. And, you know, just the timing and the qualifiers that I put on there before in terms of timing on approvals and everything.

We're on track to do what we said we're going to do on approvals. But acceptance rates and time to get to market -- you know, I still remain in the same space, that that's a goal but it's a stretch goal.

OK, very good. All right, we will get back in line. Thank you very much.

OK. Thanks, Wade.

The next question comes from with UBS Warburg.

Good morning.

Hi, Benner.

Hi. Several questions. The first question I had was the price increases that you discussed for the Histofreezer in the first quarter, and then the subsequent inventory build-up that could have an impact on the second quarter. I guess, first, I was wondering ,when was the last time you had a price increase there? And do you have a sense for what sales would have looked like had that price increase not have happened?

The last price increase was effective 1/1/2000.

OK.

We typically take one annually, so this was a five-quarter period between it. Which was a little longer that normal, than we normally take for the product.

I would say of the $800,000 difference, between $400,000 and $500,000 I would put as a result of the price increase.

OK. OK. And then, just a point of clarification on the guidance for the year. Some of the, I guess, continued weakness in substance abuser pre-employment screening that's been reported by the clinical or reference laboratories -- is that something that has been contemplated in the guidance that you provided for the year? I mean, are you assuming to see some continued weakness there?

Clearly it's a risk factor. It's far more out of our control banner than conversion of people from a urine to oral fluid model. I mean, you know, when your denominator is close to zero, it's all incremental. And although there's clearly flatness of the entire market, the opportunity to convert the market completely and totally remains ours. And we're going to pursue it aggressively.

So that's not something that necessarily would impact conversion from urine-based to oral fluid?

I can't use that as one of my top five risk factors.

Right. OK.

And then one last question. You had made some progress on the development of the assay for RSV that you would send to Meridian for their trials. Do you have a time frame on that?

Over the next...

I mean, when...

... I'm sorry.

I was -- go ahead.

Over the next several months.

OK. And then they would begin trials, and -- so, you're not really expecting sales from that until, sort of, end of '02, early '03?

Correct. I mean, that's right, it's outside of our control. But I wouldn't put anything in this year.

Right. OK. Thank you very much. I appreciate it.

Thanks, .

Your next question comes from with Sidoti.

Yes, hi, good morning, guys.

Good morning.

Most of my questions were answered. But Mike, I was wondering if you can touch a little more in terms of, I think you'd mentioned that in regards to Intercept, Lab One sales were disappointing. If you could maybe touch a little more in terms of what really happened, and what should we expect from the Lab One relationship?

Well, LabOne is our largest customer, especially post-merger, or always were, so it's about 29 percent of total revenues. And our relationship with LabOne is good and it's a long-term relationship. We're going through, again, some growing pains of them absorbing a merger, where their operating efficiencies, which, if I was sitting on their side of the table, you know, I'd be happy about it and have built into my virtually related savings. And we happen to be on the back end of that with respect to insurance testing products that affect us in the short-term. As we still see our business grow, the relationship remains good. It's just the fact that it's painful to take a hit.

On the drugs of abuse side, I can't answer specifically other than, you know, when we got into the deal the number of reps that they have is half of what it used to be. It's not clear to me that oral food drug testing is a focus of theirs. And clearly, as we took the exclusive away and made it non-exclusive, and we brought major competitors on like Quest, Northwest Tox and CRL, and we went from three to 50 reps. I'm not sure that they sort of thought that that battle was a battle worth fighting.

OK. Thanks.

Again, if you have a question at this time, please press star, then the number one on your telephone keypad.

The next question comes from with Salomon Smith Barney.

Good morning.

We're not getting a response from that line. We now have a follow-up question from with UBS Warburg.

I apologize if I missed this during the call. You had previously said that you expected the three new Intercept distributors to be in the market in July, I believe, is that correct and is that still what you expect?

CRL went live this past week, in terms of their ability to process samples in the back of the lab so they can begin marketing efforts. I did say it earlier, but Northwest Tox, we expect over the next month or so. And, you know, we're working as hard as we can, you know, celebrate the 4th of July with Quest down in the marketplace.

OK. Great. Thanks.

Your next question comes from with Salomon Smith Barney.

Hi. Can you hear me now? Hi. How are you doing, guys?

A couple of months ago True Guide got approval for a test for blood banks to use to test the evidence of HIV in transfused blood. Is that not something that your product would do, as well? That's question number one.

Then the second one is, CDC has gone out on a limb and petitioned FDA to get OraQuick some exemption use in certain instances, one to be mentioned, pregnant women. There's some pretty good evidence that FDA can rely on, yet they say to you that you can't start oral fluid testing on OraQuick until they've approved blood. Now, that doesn't seem to follow or is it the fact that once you get the approval for blood that they think that it would be a fast-track or you would think there would be a fast-track for oral fluids? Or why are they not letting you start oral fluid testing now, given the history that they have so far?

OK. I'll break it up into two questions. Obviously, blood banks is, obviously, an area where there's a substantial amount of HIV testing, but it's not limited to HIV testing. There's a full panel that's done, and you need to do the full panel in order before, you know, blood bank will accept the use of a sample. Although the quality of our tests, you know, be proud to put it and hold up to anybody. Because you don't have a panel to do all of the tests, one test is not sufficient, you know, to pursue that opportunity at this point.

With respect to the CDC and their support of OraQuick, it's been terrific. You know, clearly, they see substantial opportunities for the product, both whole blood and in oral use of the product. And in particularly, the myriad project, you know when it's of the...

... studies are under way.

And I don't have any -- I can't -- I don't have any results on how to report on how they've gone. But you know clearly the CDC we cooperated with, we got an IDE exemption and those studies are ongoing. With respect to the FDA and the focus on oral fluids and why they wouldn't fast track that. If I misled anybody in terms of the FDA lack of support of us then I want to clarify.

They've been working their butts off to help us get the whole blood FDA submission reviewed, and be in a position to give us feedback on that application. I mean, that's a 24-hour effort on both parties' parts and simply we were told let's get this done and then we will address that issue.

It's a linear type of logic. It has no bearing on FDA's willingness and cooperation to move forward on the project. On the last part of that, fast track and oral fluid approval, I can't answer that intelligently. We submit a PMA. We require 180 days' review, but you know, the good news is they went and recently inspected our facilities. We will have met the requirements there. Otherwise, we wouldn't be able to sell our whole blood product.

The clinical trial protocol, and most of the modules, will be virtually identical, a mirror image of our whole blood application. And that simplifies the review process if you make reference to certain modules, and you're consistent between modules. So we're doing everything to allow an opportunity for a fast-track review, but the FDA's very busy with a limited amount of staff. since they got 180 days to do what they need to do, but we'll give them every opportunity to fast-track it by having a concise application consistent as closely as possible mirror-imaging our whole blood application.

Your next question comes from with RBC Dain Rauscher.

Hi, Mike.

Good morning, Harry.

Thanks for having this, and I kind of want to quote Bob Thompson from the last time he was on. He said, we all don't own the stock because of today's revenue. We own it for the future, but piggybacking on that, could you kind of give us -- and I know you have qualifications looking forward -- but if we were sitting out two years from now, can you kind of give us some of your vision as to where you think the UPlink products are going to go?

I mean, can we get into college testing with this case in front of the Supreme Court? Where does the criminal justice expand to ? Can you expand a little bit on those thoughts? Do you think UPlink will have multiple specimens that we'll be able to use in different areas?

Well...

I know I tried to cover a lot there but I am looking for something out two years as to where we're going to be, because you have a lot of different products and they could all hit at once sometime.

Let's prioritize it in order of the top four or five that really are going to drive revenues over the next couple of years, and I would say that all of this work that we're doing in terms of focus of our team and the outside help is in preparation to articulate, Harry, that plan, the $100 million plan, with the top priority is our annual meeting on May 20. So sort of stay tuned. That's really where I'm going to focus on articulating better those priorities better than I've done in the past as the CEO right now.

But to name just a few, clearly the opportunity for oral fluid drug testing, 45 million tests are done a year in urine. We have both a laboratory-based test and care test with a liter system, and it's our goal -- you know, if I'm looking back over the next two years from now is what portion of the market was I able to convert to an oral fluid deferred testing specimen over urine testing with great corporate partners like Qwest and partners to be determined.

And you know you do your own math, but I clearly am almost 20 percent a marketshare kind of guide. If I can use a target call it out two to three years, and at a price point that sort of allows nine million tests and some price points it ranges anywhere from $3 to $10. So let's call it five. There are $45 million or $50 million of opportunity just by executing our plans well in owning oral fluids and convincing the marketplace to convert to an oral fluid drug and review sample versus urine.

So it's substantial in the space that we're at. We need approvals. We need to aggressively support it. On the infectious disease side in the United States only, there's about 3.5 million tests done a year, 2.5 million done in public health, a million done in hospital labs. Clearly, we think that -- and that doesn't include as we were asked earlier by Mr. about the mother-to-infant transmissions which is not included in that 3.5 million tests a year, which you know obviously provides a couple more million tests. So let's call it a 5 million unit test opportunity.

When we have an opportunity to be either first or think first with the whole blood application followed by the only oral fluid, participate in the space that doesn't exist today with a price point that's someplace between five dollars and $15 dollars. So it's a $40 million, $50 million opportunity grossly simplified.

So when I look at sort of our conversion opportunities with our near-term products, you know, I can see a $100 million of space that's wide open for the company that has oral fluids platforms move forward. And that's us. With respect to other applications of UPlink, hospitals is clearly an opportunity in the future for drugs abuse testing as our entry point into the emergency room and to take on biosite who has done a phenomenal job of owning that space for drug testing.

UPlink's a perfect platform with either urine and/or an oral fluid specimen to go in there and attack that market. Great incremental market opportunity for us, and clearly with the platform in the United States and elsewhere, Hepatitis C is a must-have in the future.

UPlink, outside of use -- drugs abuse or infectious disease, which is our focus, clearly to help Meridian be successful with up to a panel of 30 tests in the future on an OEM basis is substantial. Clearly, from our perspective, I call that a $10 to $20 million incremental opportunity over the next two to three years in terms of space for us to partner with Meridian to be successful, and obviously Drager's creating a new market in terms of roadside drug-testing that doesn't exist today.

So market size is very, very difficult to quantify, and clearly an incremental opportunity. And if you compare it to evidential breathalyzers, and you can make any kind of correlation that for every breath test, a drug test will be done -- it becomes an enormous opportunity for us, as big as any of the rest of the opportunities.

So when I look at sort of the near-term mix of opportunities that we have without even going outside to therapeutic drug monitoring or cancer marketing, or cardiac markers which have been three of the ones we've thrown out periodically either to go alone or with partners. The opportunities are immense and substantial. And it's crucial to get our plans fine-tuned and put together, so we can chase that $100 million plan.

Because we have a huge mix opportunity that if we're right on one side and slightly wrong on the other, we've got a great mix opportunity that's not a one-stick pony.

Very good. Thank you.

Very good. Thank you. Your next question comes from with Robertson Stephens.

Hi gentlemen, this is .

Good morning.

Hi, Mike. Earlier in the conference call, you briefly stated some changes in the competitive dynamic within a few different select markets. I wanted you to further outline what these changes are and how do you think it's going to alter your outlook going forward?

Well, I think I just said -- you know, as the previous answer I gave to the last person, it just increases the mix of opportunities we have.

Right.

We have the right opportunities with products and technologies to pursue opportunities. With respect to , is not very large, but they compete in two spaces of which we have products. Number one, for our insurance risk assessment segment, policies that are somewhere between the low-end of oral fluid testing and the high end of a blood test, urine testing is done.

And so if urine testing goes away for insurance applications, the insurance industry has to choose between going to a full screening -- with a paramed -- or go to an oral fluid sample. We are aggressively pursuing to convince those parties that an oral fluid option is a very viable option.

But clearly we don't lose the business either way, because we have the urine assay business with LabOne for many of the tests. But clearly oral fluids is more profitable for us and we'll aggressively pursue it on that basis. Secondarily, Caliptay had a serum western blot test. We used to have a serum western blot test. We discontinued it last year.

I said one too many times or Bob did last year that excluding discontinued products, sales would have grown 20 percent versus 13. So, with 7 percent of revenues last year, there's down to one supplier of serum western blot products in the United States. If Caliptay goes out of business, and we're re-evaluating an opportunity to re-enter that market through our West Coast operations with the intent of consolidating that on the East Coast.

We have to be careful not to be a distraction, but it would provide an opportunity for several million dollars in incremental revenues and we had a product that was very, very good. But it was low profitability and had regulatory problems. We think we fixed both of those issues, and we're going to evaluate whether we can get back in the market at 7 percent of revenues last year to incrementally put a product in that we have manufacturing know how for we can't overlook that as an opportunity in the near-term.

A smaller opportunity but clearly one for another oral product which is QED, a lower-priced quick test that's in primarily the criminal justice market sold by Roche has been recently recalled. And we view that as an opportunity to be agile, and use our distributors to pursue that opportunity while the product's recalled.

The -- as I said earlier, it's difficult to quantify either opportunity...

... portion of business or regulatory hurdles we can overcome, but as a benchmark, obviously, the 7 percent of revenues last year is a benchmark for incremental that we could, you know, conceivably get relatively straightforward and if we're successful with the regulatory hurdles.

And there's probably somewhere between $500,000 and $1 million of incremental QED opportunities, depending on who seizes that business.

Great. Thanks.

Your next question comes from with Deep Haven Capital.

Gentlemen, can you expand at all on, to color anything about the distributors that you're looking at right now in terms of negotiations? Are you...

Which product?

I'm sorry. OraQuick. You're talking about right now a blood-based approval pending, and you're having discussions with hospital distributors.

Mike, is it possible you can expand on, would it be someone who has either the license or sub-license with type 2?

I don't think that's relevant to whether we have a distributor of our OraQuick HIV-1 product. In, you know, in the evaluation of who's a distributor, that's not one of the three top variables we're looking at.

OK. Is there any more that you can elaborate on in terms of the Meridian opportunity, how this works, the economics for you? You're going to put a box into their distribution where they have an established marketing and sales force, a reimbursement that's defined. Can you expand on how that works for you from both a disposable and maybe an up-front R&D fee, is there anything you can give more color to how that opportunity works...

Well, clearly -- sure. With respect to Meridian we have received a nominal amount of funding for R&D last year. There's other payments that are contingent on our performance to provide a product that gets FDA approval, and that triggers some other R&D payments in terms of milestones upon approval of the product.

And then, upon the successful approval of the first product, it triggers R&D investment on their part of no less than 5 projects simultaneously for the foreseeable future, with a list right now that's over 30 products long on specialized infectious diseases products, primarily but not exclusively in the market.

Meridian is, you know, a market leader in that space, in some of these esoteric markets. They have a number of platforms that they've been very, very successful with, and they look at us as an opportunity, I believe, to consolidate on one platform a number of test systems that they've been successful with, with the opportunity for flexibility of a universal test platform with their name on the reader, you know, because we would really, frankly, be OEMing to them the reader for their applications. And we clearly would sell them devices at a competitive price and participate on a royalty basis on the upside sales of their sales.

So clearly you could expand more assays with Meridian today.

Absolutely. The problem been so far is getting the first one out of the lab and FDA approval, you know. Optimistically and hypothetically, we should be putting ourselves in a position where it becomes a turnkey opportunity, you know, to crank out a number of tests. The greater the panel, the more revenue for both Meridian and ourselves.

Meridian would experience a better margin with your products, that's right, than their current technology.

I can't answer that for Meridian, but those guys do a great job with margins, and I can't fathom that they wouldn't, you know, demand and require and expect the same margins on the same platform as they grow their business from the levels it is to a next level.

OK. Thanks, Mike. Good luck.

Sure. Thanks.

With that, we will conclude the question and answer session.

We will now turn the call over to Mr. Mike Gausling for closing remarks.

Well, I'd just like to take this opportunity to thank all of you for your support. It's been a busy time, you know, through the first quarter since my becoming CEO on January 31. And from my perspective, I'm, you know, extremely optimistic and I see a path and opportunities ahead, and I can assure you that together with our management team we'll make every effort to achieve our goals for the year and maximize shareholder value.

And with that, thanks again.

END