OraSure Technologies Inc (OSUR) 2002 Q3 法說會逐字稿

Good day everyone and welcome to OraSure Technologies third quarter financial results. Today's conference is being recorded. All lines have been placed on mute to prevent any background noise. After the remarks by management, there will be a question and answer period. If you would like to ask a question during that time, simply press star, then the number one on telephone key pad. If you would like to with raw your question press star and two. For opening remarks and introductions, I will now turn this call over to Shannon Morin at OraSure Technologies. Miss Morin, please begin.

Good afternoon everyone. I would like to begin by telling that you OraSure Technologies issued a press release shortly after 4:00 p.m. eastern time today regarding its third quarter, 2002, financial results. The press release is available to you on OraSure Technologies Web site at www.OraSure.com or by calling 610-882-1820. This call is also available real time on OraSure Technologies Web site and will be archived there for seven days. Alternatively, you can listen to an archive of this call until midnight, October 31, 2002, by calling 800-642-1687 for domestic or 706-645-9291 for international and entering the conference I D number 6115750. 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 question and answer session. Before I turn the call over to Mike, I must remind you that this call will 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 statement, its annual report on form 10 K for year ended December 31, 2001 and its quarterly reports on form 10 Q. 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. 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 Mike Gausling.

Thank you Shannon and good afternoon everyone. The agenda for today's call will include: first, a review of our third quarter financial results, second, an update on progress towards meeting our stated 2002 business objectives and last, but not least, guidance for the fourth quarter of 2002 and for fiscal year 2003. We'll then open the floor with questions. Starting with our third quarter financial results. Revenues for the third quarter were $8.1 million. Q3 revenues were up 2.5 percent or $200, 000 over last quarter. And we beat the guidance, that we provided during our last earnings call, which was that revenues would be flat compared to last quarter. Compared to last year, revenues for the quarter were down 6 percent or $500,000. This was anticipated, as strong gains and sales of OraSure devices in the public health market and greater sales of Intercept (ph) devices to the substance abuse market were totally offset by three major factors. First, with an absence of $400,000 in revenues from the sale of OraQuick devices in the international markets last year. Second, was a $360,000 reduction in product development fees and last was about $250,000 in lower quarterly revenues from sales to LabOne, due to their improved operating efficiencies, that I have discussed in prior earnings calls. Collectively, these three items represented more than $1 million in lower revenues, year to year and we were only able to make up roughly $500,000 with the 20 percent increase over last year and sales of our oral fluid products. Our strong mix of products and markets helped to offset a whole host of tough economic, political and social challenges. Substantial revenue growth will continue to be difficult until we receive FDA approval for OraQuick and we start to reap the benefits from our efforts to expand sales of Intercept in the workplace drug testing market.

The gross margin for the third quarter was 59 percent and was essentially flat as compared to the gross margins of 60 percent last quarter, but was down 8 margin points from 67 percent during the same period last year. Gross margins were negatively impacted by the absence of the $360,000 in product development fees. The cost associated with the advanced preparation OraQuick manufacturing and higher than expected levels of scrap for our other diagnostic products. Improving our gross margin is a major priority for the company and I think that you will begin to see noticeably better margins, once revenues begin to pick up as anticipated. The unusually high scrap rates are unacceptable and remedial actions are being taken to fix those problems. Operating expenses declined for the quarter by $575,000 or more than 10 percent over last year and over $925,000 or 15 percent over last quarter. As we start to see the benefits from our aggressive cost reduction efforts. These efforts are ongoing and we will continue to work diligently to improve operating efficiencies. Our efforts to consolidate operations are moving forward. We just received our occupancy permit for the new manufacturing facility in Bethlehem and we expect to roll out all operations from the west coast by the end of next year. In the short term, this will result in additional costs to transfer all manufacturing for OraSure, Intercept and Oral Western Blot to our Bethlehem facility. Our net loss for the three months, ended September 30, 2002, was approximately $387,000 or penny per share compared to a loss of 1.3 million or 3 cents per share last quarter. We are pleased with $900,000 improvement over last quarter which was made possible by the $925,000 reduction in operating expenses. Importantly, this is a penny better than street estimates and represents the third consecutive quarter that we have beaten consensus earnings estimates. Compared to last year, our net loss is higher by a penny a share or roughly $400,000. This can be attributed virtually entirely to the impact of lower revenues. While moving to profitability is certainly important, cash flow from operations is an equally important fact to consider in measuring our progress. Consequently, I want to highlight the fact that we generated over $1.2 million in positive cash flow from operations in the third quarter, compared to $90,000 in positive cash flow last quarter and a negative cash flow of $1.8 million in the third quarter of last year.

I'm proud of the fact that in the third quarter we had over 1 million-dollar swing from last quarter and over a 3 million dollar positive swing in cash flow from operations compared to last year. This is huge for us and really exemplifies the strict cash management efforts undertaken by Ron Spair, our CFO and his team. Our liquidity position was further strengthened in the third quarter with the addition of our new banking relationship with Comerica. Comerica is among the 20 largest banking companies in the United States with $51 billion in total assets and over 11,000 employees. With our new financing arrangements we have reduced the effective interest rate on our borrowings by approximately 300 basis points, which will save us save us over $100,000 in annual interest expense on our current outstanding debt of $3.9 million. Furthermore, the $7 million in unused credit available to us, we've effectively secured a very attractive alternative to equity financing to fuel our growth. The company's cash, cash equivalents, and short term investments were 13.4 million with working capital of 17.2 million as of September 30, 2002. Ron and I have fielded numerous questions over the last two quarters regarding the need for cash to sustain operations. We repeatedly have stated that we are not in any need of immediate cash to fund the business and I hope our recent financial performance and new banking facilities will help to increase your confidence in our ability to manage cash during these tumultuous times in the marketplace.

Before turning to nonfinancial milestones, I want to mention during third quarter we added a key member to our senior management team. In early September, Joseph Zack joined us as Executive VP, Sales and Marketing. Joe brings a tremendous amount of experience in launching new products and technologies, from his work in OraPharma, Advanced Tissue Sciences, and over 20 years at [Sibagyge] . Joe is a great addition to our team, as we begin to build a world-class, market driven organization. Now turning to major 2002 business priorities, which I discussed in each of my prior earnings calls.

The first milestone was to sign up additional Intercept labs to supplement the efforts of LabOne, our first Intercept partner. This was accomplished earlier this year when we signed agreements with Quest Diagnostics, Clinical Reference Lab and Northwest Toxicology. The net impact has been to increase the number of field reps from three at LabOne to over 60 with the additional labs. The current market share available to OraSure through these labs as a function of work place testing increased from roughly 6 percent to 35 percent of the 21 million specimens analyzed annually in the work place drug testing market. After signing each of these labs we assisted them in installing new equipment and validating their laboratory operations, in order to process oral fluid specimens. This was a monumental effort on the part of each of the labs and on our field service staff. We had estimated that the labs would be set up and prepared to begin to accept samples by the end of June and we met that aggressive timetable. Starting in July the real sales effort began. Since that time we have been co-traveling with the new lab reps to many of their primary accounts, including trying to reach the top 150 accounts at Quest Diagnostics. Although we are still in the initial stage of the long selling cycle with most of the sales reps and their largest accounts, we are optimistic that despite challenging business climate to sell workplace drug testing services, which is mostly pre-employment screening, the market will be receptive to an oral fluid drug testing alternative to traditional urine screening programs. Just the fact that Quest has begin to offer the Intercept the drug testing serve is a great boost for credibility for the company and Intercept product. We are working very hard to build awareness and our own credibility by publishing data to support the performance of oral fluid compared to traditional urine methods. As mentioned previously, we will be featured in an upcoming issue of the "Journal of Analytical Toxicology", where in collaboration with LabOne, we will publish statistics regarding the performance of actual 2001 test results from over 77,000 Intercept oral fluid specimens. The results are quite powerful and truly support our proposition that oral fluid drug testing is a viable alternative to traditional urine drug testing.

Additionally, just last weik at the annual Society of Forensic Toxicology, Dr. Ed Cone (ph), a world recognized expert in drug testing methods, presented additional data from certain studies regarding oral fluid testing for drugs of abuse and the positive prevalence rate and suggested cut-off concentration for oral fluid specimens. His findings, which are a public record, indicate among other things, that the prevalence of regulated drugs and oral fluids is comparable and in some cases higher than the level of drugs of abuse found in urine. Last, but probably most important, although we have been highlighting our efforts to expend number of sales reps by the addition of new lab partners. I would be doing a huge disservice if I did not take a moment to thank LabOne for their great results. For example, over the past six months, average monthly specimens processed at LabOne has grown over 40 percent and LabOne still represents greater than 98 percent of our Intercept work place drug testing business. We simply have not cracked the surface of our potential with the new labs yet. And if their performance in any way can approach the great results from our largest customer, LabOne, then we are in for a huge return on our investment. In closing out this major business priority, I'd like to paraphrase a few quotes from a recent LabOne scientific symposium, where they were promoting Intercept . From Kevin Husted with Kroegers, the largest food retailer in the United States, we took current cost to administer the urine analysis program in six of eighteen of our divisions. The cost for the test, the cost for collection and administrative cost and we've been able to bring an entire company under one oral fluid testing program for the same price that we used to do a urine analysis in only six divisions. From Donald Barnhardt (ph) with Georgia Pacific, we have 270 bargaining units and they seem to like it because of the witness collection that it entails. From Lauren Cantor (ph) with Station Casinos (ph), we saw increase in positive rates just by utilizing oral fluids of about three percent. We are in Las Vegas and it is a party culture out here. That has definitely affected our positive rates. You can study for a urine test, you can't do that for an oral fluid. And last from Krista Mulner-Pedrero (ph) with Sykes Enterprises (ph), we are in a rural community and whenever contract employees are not on the job we use are losing money. Oral fluid was key in the convenience in how little time it took. I think these quotes are a great example of the diversity of benefits that our customers are securing by switching to Intercept.

Our second milestone was to secure a distribution partner for OraQuick, for the hospital and physician office market in the United States. We met this milestone in a big way when we signed Abbott Labs to a co-exclusive distribution arrangement for OraQuick. This new partnership was announced with a feature article in the health care section in "Wall Street Journal" on June 17 of this year. Since the deal was signed, we have been in routine contact with Abbott to prepare for the market launch of this important product. Like us, Abbott is anxious to get started selling. Besides securing a distribution partner, there have been a number of questions posed to the company in the past several months, regarding, number one, our plans to seek an HIV two claim for OraQuick in the US and number two, what is our international distribution strategy for OraQuick. First, as you know, Abbott has a worldwide nonexclusive HIV two license. Obviously this is an area we are exploring in great detail with Abbott, as we are fairly certain, based on clinical studies done in the past, outside the United States, that OraQuick is suitable for detecting HIV two in both blood and oral fluid (ph) specimens. An HIV two claim in the United States would require additional trials, if we were to pursue that product extension opportunity with Abbott. However, it is a complex business issue, given the mix of low prevalence rates for HIV two in the United States, the additional loyalty expenses associated with the use of the HIV two license, cost of clinical trials, possible reimbursement rates, and the lack of subdistribution rights for the company for an HIV two product. We are currently working through all these economic, social and political issues to arrive at a strategy that maximizes the value for our shareholders. This issue has not yet been resolved and we will update you once we reached a final conclusion in cooperation with our partner, Abbott. Regarding the international markets, on the surface, they appear to be enormous in size, yet establishing an economically reasonable business model is almost impossible to predict, especially when you consider risk factors such as lack of funding, credit risks, and the absence of efficient channels of distribution. Consequently, I'm still treading cautiously as we begin to understand how to maximize our efforts in these important regions of the world that are desperately in need of products like OraQuick. As announced last Thursday, we are proud to have been selected to join a U.S. trade mission to Ghana and South Africa with Secretary of Commerce Donald Evans, to explore opportunities to sell OraQuick to the African markets. Our selection is, in part, results of the efforts of David Oxley (ph), our new Director of Government Affairs. This a great way for us to gain exposure at the most important decision making levels as we attempt to finalize our international distribution strategy for OraQuick in the future. However with the limited resources that we have, our efforts must be prioritized and our success in receiving FDA approval in the United States and then following up with our old fluid trials remains a top priority for OraQuick.

Next, I will combine our third and fourth milestones which we're to prepare for an FDA inspection for our facility for OraQuick in the second quarter and to secure FDA approval of an OraQuick finger stick whole blood test by the end of the year. As you know, the first FDA inspection occurred in the second quarter resulting in the issuance of a approvable letter in May of this year. Since then we have been very busy pursuing final FDA approval. At this stage we believe we have given the FDA everything they have requested and have addressed all observations identified during their multiple inspections of our manufacturing facilities. Importantly our relationship with the FDA remains professional and very cooperative and we continue to have ongoing discussions with them to ensure we are answering any and all of their questions on a timely basis. Regarding the timing of approval, I must reiterate that our goal has always been at year end as indicated in our milestone. But we have been optimistic it would happen sooner and I went on record at the last earnings call that we were cautiously optimistic that there was a chance we might receive approval by the end of September. That obviously did not happen. Bottom line the timing of approval is at the sole discretion of the FDA and is virtually impossible to accurately predict. However in the last several months, there have been many events that support the proposition that it's just a matter of time before the FDA approving a rapid HIV test in the United States. The momentum and pent up demand for a rapid HIV test in the United States is highlighted by several recent events, including but not limited to the following; first in July the President's Council on HIV and AIDS voted 35 to zero to recommend to the President of the United States that rapid HIV test be approved immediately with a CLIA waiver. The Center for Disease Control called a special meeting in September in which we were invited to discuss the roll out of rapid HIV tests in the United States. On September 28, the LA Times featured and article entitled "Blood test to Detect HIV in 20 Minutes Nears Approval" and more recently on October 24 the AIDS Healthcare Foundation issued a press release titled "New 20 minute rapid HIV test nears FDA approval." The list goes on. These are just some of the many external events that help us conclude that momentum is building for an approval of a rapid HIV test in the United States sometime in the not too distant future. Last but not least I want to take a moment to recognize the substantial, behind the scene's efforts of our research operations, regulatory, quality assurance, and marketing teams, to meet the high standards established by the FDA to eventually receive FDA approval. The teams have been working virtually non-stop for almost nine months to get to where we are today and I'm extremely proud of their tireless commitment and dedication to this project.

Our fifth milestone was to begin clinical trials of OraQuick for oral fluid HIV 1 testing and submit an application to the FDA during the second half of 2002. As previously indicated the FDA is not expected to review our application, until we receive FDA approval of the finger stick whole blood test. Once that final approval is received, we expect to receive approval to begin oral fluid studies under an IDE. We would then expect to file our PMA with FDA within six months of receiving the IDE. During our last conference call I also briefly discussed the importance of securing a CLIA waiver for OraQuick. CLIA refers to the clinical LaboratoryImprovement Act of 1988, which prohibits laboratories from performing diagnostic testing without meeting certain quality control and other requirements. The practical effect of a CLIA waiver is that our OraQuick device would not need to be administered by a laboratory meeting the quality and other requirements imposed by the Act. We believe that a CLIA waiver should substantially expand the potential marketability of OraQuick in the United States for all segments of the market and especially for outreach programs for our public health customers and for other non-laboratory customers. Consequently, with a lot of public support for a CLIA waiver, in the third quarter we submitted a protocol for consideration by the FDA to support CLIA waiver of the product. While we remain unclear what studies the FDA will require for OraQuick to be considered for CLIA waiver, this is an important step in the evolution of the market for HIV tests to be administered in the United States and we will whenever reasonably possible, take a leadership role in pioneering this new area with the FDA. Please remember we do not expect the FDA to review our protocol until we receive FDA approval for the OraQuick finger stick whole blood product.

Our sixth milestone was to resubmit a five-panel uplink drug test for FDA review by mid year and secure FDA clearance by the end of 2002. As explained during our last conference call, the stability the full five panel test had not meet the high standards we set for this product, principally because of difficulty surrounding the assay (ph) for THC or marijuana. THC is the most difficult assay (ph) for anyone to optimize in this business. Our goal has always been and will remain to produce highest quality product possible, even if that delayed our FDA submission and negatively impacted the timing for meeting this important business objective. However, I am pleased to report during the past several months we have made significant progress towards improving the performance of the assays (ph) especially THC. We have devoted a large amount of resources to this project and I believe this effort is starting to pay off. This progress was recently confirmed in August and September when an uplink four panel test which included THC, was used in certain studies conducted with our partner Drayger (ph) at police road stops near two rave events in Germany. Rave events are essentially dance parties that can last for several days, but there is often heavy drug use. The data from these studies demonstrated that the assays compare favorably to urine tests and GCMS confirmation. Our results with 52 people and 146 tests indicated a 98 percent accuracy, 97 percent specificity and 100 percent sensitivity. Bottom line, the overall results were outstanding. Additionally a field study was recently completed in Germany by leading European researchers to assess the performance of the uplink Ora fluid collector, and this study 200 oral fluid and blood samples were collected at the road side from individuals suspected of driving under the influence of drugs. In Germany, for reference sake, blood is currently used to determine intoxication by drivers. The conclusion of these independent studies was that uplink Ora fluid collector is reliable and suitable for screening and confirming suspected individuals for the presence of drugs. Based on these positive results we will be conducting much larger studies using the five panel assay (ph) in Europe in November and December. If we continue to obtain the same type of positive results which we do expect, we would expect to begin our U.S. trials in the first quarter of 2003 with a submission sometime in the first half of next year. Although a setback from a timing perspective, we are doing this the right way and we'll commercialize a product that like intercept (ph), is expected to become the goal standard by which all others are measured. That is our goal, simply to be the best the first time.

Our seventh milestone was to focus on delivering against our two uplink partners Drayger (ph) and Meridian BioScience (ph). Obviously as stated in the preceding milestone we're actively working with Drayger (ph) to optimize the uplink (ph) DOA product in Europe for the roadside drugs of abuse testing market. It has taken longer than expected but Drayger (ph) is clearly the market leader for road side testing for alcohol with their evidential breathalyzer business and they are taking a totally German engineered approach to ensure integrity of the uplink system every step along the way. They have been a terrific partner for us and they will be participating actively in the European drug trial we will be conducting in November and December. Clearly there is pent up demand for road side drug solution in Europe and I am cautiously optimistic about the successes we had our recent field trials. Finally, we are pleased to share with you that we made some tremendous strides over the last several months with Meridian. The uplink RSV assay (ph) performance has shown preliminary results with RSV clinical samples that the analytical sensitivity is higher than the market leading onsite RSV test and overall has demonstrated substantially better clinical performance over the market-leading product. Consequently, we are bullish, that we are finally beginning to show the type of results we have expected out of the uplink reader system. With the winter RSV season quickly approaching, we are preparing to conduct further field studies to validate our preliminary findings for the RSV assay (ph).

The eighth and final objective was to seek additional uplink at OraQuick partnerships in the second half of 2002. We continue to have preliminary discussions with several parties regarding new applications for both the OraQuick and uplink platforms. No agreements have been reached but I hope to have more to report in the future, especially after we receive FDA approval for OraQuick and we finally submit our uplink DOA test to the FDA.

And last but not least, I want to spend a few minutes providing you with guidance for the remainder of the fourth quarter of 2002 and 2003 as a whole. As we previously indicated, revenues were expected to be flat for Q3 compared to Q2 of this year. We did somewhat better than our projections as total revenues for Q3 of 8.1 million left two-and-a-half percent over the 7.9 million we reported in Q2. We also projected revenues in the range of 17 to 18 million for the second half of 2002 and I noted our ability to achieve those revenues would depend upon the rate of conversion of potential intercept (ph) customers from urine to oral fluid testing and the timing of receipt of FDA approval for OraQuick. To meet these projections we would need fourth quarter revenues of nine to $10 million. Obviously since the OraQuick FDA approval did not occur in Q3 and this is entirely outside our control, our ability to hit this projection has been compromised. Consequently, depending on when the OraQuick approval is ultimately received I would only expect moderate growth at best in Q4 which puts us at a fourth quarter revenue range of eight to eight and half million, and flat for the year as a whole. Despite delays in the FDA approval of OraQuick, I believe we set the stage for a very strong 2003, primarily because of all the milestones that we have achieved this year and the improvements made to our cost structure. Assuming we'll receive FDA approval yet this year and even modest penetration of intercept (ph) by our new lab partners we still expect to increase revenues up to 25 percent in 2003.

With that I'd like to open up the call for questions thank you.

Ladies and gentlemen 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 key pad. We will pause for just a moment to compile the Q and A roster. You're first question comes from Benner Alridge (ph) with UBS Warburg.

Hi Benner (ph).

Benner Alridge (ph): Hi how are you?

OK.

Benner Alridge (ph): Two quick questions. First one, I guess for Ron. The operating cost level we saw this quarter is that something that's sustainable and similar to what we would expect to see I guess in the fourth quarter, maybe the first half of next year. Second question, I guess more for Mike, what type of feedback have you guys been receiving from Quest (ph) and other lab partners and have they communicated any goals or milestones for conversion of the test volumes to oral fluids in the next couple quarters, the next 12 to 18 months?.

As far as the first one is concerned, if you look back historically over the first couple quarters we had in 2002, we had what we consider one time charges related to severance in the first quarter and marketing and consulting fees that we incurred in the second quarter, which did not repeat themselves in the third quarter. And we -- that together with cost reductions that we have implemented should reduce our overall run rate down to a lower level more consistent with what you're seeing in the third quarter.

Okay, so the G & A that we saw in the third quarter, that's similar to what I would expect maybe next quarter or the next couple quarters.

We certainly are pushing that way, we don't see -a large uptick in G & A going forward thanks.

Benner, I would make one comment just to qualify that a little bit. You know we're really happy to have Joe Zack and Bill Bruckner and David Oxley (ph) and new players and bulk up our marketing efforts against our new products and it's been quite exciting as we develop plans to increase the growth of our products. We need to make investments and we're making the investments into a very strong marketing organization which we didn't have. So you know just going to be -- we're definitely making investments.

Fair enough.

The second question you asked with regard to Quest (ph), early on the last conference call there is a target by the end of next year that we all - Quest (ph) and OraSure wanted to target to see if they could convert up to 25 percent of their business. Quest (ph) responded once that we got the back room operation set up by providing us in their six districts around the U.S., their top 25 customers, to travel with them, that represented far greater than that in volume in terms of conversion.

Right.

These are big accounts all with long selling cycles and we're in the early stages of our first round of calls, sort of the end of the summer period. No push back. Clearly, there's cooperation to go after the biggest and best but it's going to take time.

Okay thank you.

Your next question comes from Bud Leadal (ph) with Wells Fargo Securities.

Hi Bud.

I got it (ph).

Nice cost cutting in the quarter. That was great to see. Just one question related to that. On the sales and marketing line itself, there was about a $400,000 or -- actually somewhere in that neighborhood decrease quarter to quarter and I was wondering, just given some of the new products in efforts you have on going, what was the reason for the lower number there and then sort of what do you see going forward over the next couple of quarters?

Well, clearly the $400,000 change we mention as at the last earning call that we had invested approximately $400,000 into certain strategic market research studies to better understand our market and that's the $400,000 delta that you had brought up.

So do you expect that number to slowly tick forward then as some of the new products come on line.

Yes.

Okay. And also do have you a capex figure for the quarter.

Sure, hold on one second. The capital expenditures for the quarter approximately $335,000.

Okay and as it relates to the -- just a follow up on the Quest (ph) situation, you had a slight uptick in quarterly results on the substance abuse test on the intercept (ph) there, can you sort of drill down into what contribution Quest (ph) may have made in Q3? I know the ramp up of sales force has taken a little longer than expectations and if it was minor there, whether you see a sort of a larger jump maybe over 2 million say in Q4 or how that may ramp up with Quest (ph) coming on line.

Well clearly -- as I said earlier in my statements that LabOne still represents 98 percent of the specimens being processed, so we have not gotten any traction from Quest (ph) or the other two labs in terms of actually processing oral fluid samples. And I think we're going to see a slow forth quarter as well.

Okay.

Ed Cone (ph): The focus has been right or wrong, and I think that we're understanding as we got under way that we focused on the larger accounts which have the largest selling cycle and we're trying to augment that now with smaller accounts that possibly we can get a faster hit rate for conversions. But the initial focus was on top 150 accounts with Quest (ph).

But at least in terms of sales force they're up to speed at this point, it's just a matter of hitting those accounts or is there still some work to be done there (ph).

Ed Cone (ph): Well's there's always work to be done. Quest (ph) is working very hard with us, but and we're not the only product they carry. It's important for our sales force to get out and travel with them and have them focus on our products over other opportunities they have.

Thanks Ed.

Again ladies and gentlemen, if you would like to ask a question, please press star one on your telephone key pad. Your next question comes from Ted Oakley (ph) with Herndon Plant and Oakley (ph)

Ted Oakley (ph): Hi Mike.

Hi Ted.

Ted Oakley (ph): Just one (ph)question -- on Drayger (ph) -- is the slow down on Drayger (ph) - I say it's a slow down, they haven't done anything yet - is that a regulatory problem over there or something similar (ph) to a slow process or it's just that Drayger (ph) themselves want more time before they actually sell it to their road side test.

The burden is entirely on OraSure we have not -- as I had said in the last quarter -- completed the five panel drug test the satisfaction of ourselves, much less our partner. We - you know over the last quarter we've been working to optimize the five panel assay and you know we're getting the test results to them, to get them comfortable and us, that we're close to having a very viable long term solution. But the burden stops with us not with Drayger (ph).

Ted Oakley (ph): So they only want the quick test. You can give them intercept (ph) like it is right now.

I'm sorry if I misunderstood the question. Clearly, with road side testing they want instant gratification.

Ted Oakley (ph): Secondly, is there somebody - I never quite understood this -- on approval for DOT for a drug test, who has to file that? Is that OraSure file or Quest (ph) or who does that?

I'm going to give that to Sam he's our expert here.

Hi Ted, the department of transportation approval for something like oral fluid test won't occur until the Department of Health and Human Services issues guidelines for federal testing of workers. So at that point in time, historically what happens is the DOT will release a framework by which each manufacturer must submit their test and they will have an approval process that they will go through and publish that as part of federal register as a DOT approved test.

Ted Oakley (ph): So where would we be in that cycle right now.

There are no federal guidelines covering workers for oral fluid testing yet, only drafts. So -- however long that takes for Health and Human services to go through is a bit of an unknown. But we're only at the beginning of that.

Ted Oakley (ph): Okay so it's up -- really in their court. Once you put it on there it's in their court to make sure to get it to that point for federal approval.

We've taken initial estimates inside before and said two to three years ahead, so there's no visibility that you're going to see that next year.

Ted Oakley (ph): Right. OK. That's the question I was asking. And thirdly, you said you were happy with Meridian in terms of what you think they're are doing and looking at bringing in new tests, et cetera. Have you included anything or are you at liberty to say you included anything for 2003 as far as what Meridian may be able to do.

Nothing really triggers future tests with Meridian until such time as we the RSV assay (ph) position handed over to them for clinical trials, and then once clinical trials are successfully completed, submission is done and that triggers a whole myriad of other things in dollars that come into the company in terms of moving forward. But clearly that doesn't come until there is FDA approval, which would be mid to late next year and revenue projections -- the guidance I gave does not include any revenue from them for next year. That's a bonus.

Ted Oakley (ph): And I'm assuming by what you said on one other item that on the marijuana side on the uplink piece that you made some progress as to last conference call.

Substantial progress, I mean, we've been out in the field sampling these rave parties in the midnight hours in a van on the side of the road with 56 people - I think was the number collecting samples and we had -- just terrific results.

Ted Oakley (ph): Okay, thank you.

Your next question comes from Wade King with Wells Fargo securities.

Hi guys.

Hi Wade.

Hey Wade.

A couple questions if I may. Could you lay out in as much detail as possible the manufacturing scale-up plans that you have for OraQuick. I realize that obviously that the approval is still pending, but if you could give it as much detail as possible, you're scale-up implementation plans that would be helpful.

Okay do you want to ask another question or do you want me to answer that one?

The other question I was going to ask is related to margin you laid out the specific components that restraint goes in the latest quarter. Could you also just on a forword looking basis layout and additional information that would help to obviously provide confidence that the gross margin will return, if not improve, to levels that we would expect going forth. That'd be great.

With respect to the first question Wade, on manufacturing scale-up -and I consider it conservative. But with our partner, Abbott, they've asked specifically the same question. And we've said it would take us 45 days to manufacture the first 50,000 units and we can manufacture 100,000 units thereafter. And give us 90 days notice and we'll scale up to whatever number you want.

That's in the Pennsylvania Facility?

That's' correct. That's the approved facility by the FDA.

Right.

With respect to margins, one of the component pieces which is always hard to predict and, you know, not indicative of selling product is, you know, the artificial bump up you get in margins by product licensing fees. And about half of the margin difference was a result of the $360,000 in fees. You know, the other part, you know, is - a big part of it is this scrap which is unacceptable and is worth a few margin points and we're going to fix. So I think that you will see us getting back to the ranges called 62 to 65 percent fairly quickly. But, you know, we're not having in the revenue increases we projected initially for next year any assumption for product fees, that which it was pure product revenue increase for next year.

Right. Mike, could you just go - could you go ahead back to the first question about manufacture scale up? I realize some of the volume figures you referenced, could you provide any other information as relates to, you know, production line readiness, you know, what is devoted to that within the company in terms of your, you know, square footage space on the production side currently. Are there things necessary, you know, once you get the approval really to scale up on a specific basis? Or do you consider that you're basically manufacturing-ready? And given the issue on, you know, scrap that you just referenced, you folks have a lot of expertise in mass scale production in this area. Could you just provide some - any tidbits that would, you know, lend the confidence to the investors as you scale up on OraQuick that you won't encounter similar challenges.

OK. We have the staff in place to manufacture OraQuick devices now. We've been doing that for several months and having to essentially throw the product away after we completed our validation studies for the FDA. So we feel very confident that we have a very experienced crew that's got pent up demand to sell product and make revenues because they' re all investors in the company as well but we're, you know, in a holding pattern. We have not made any product, call it at-risk or started to put any sub-assemblies together until such time as we actually get final approval. So I think we have a very experienced crew. The validation procedures were done on the equipment that we have. So the methods are going to be established, methods that we've proven those out beyond a reasonable doubt statistically in terms of our performance. The only piece that, you know, depending on when volume kicks into substantial levels, let's say 200,000 units a month then we'll be seeking automation as a cost-savings opportunity because part of the process is a manual operation. But really it will be sort of a payback calculation based on once we get volume up and running. And that would be the only thing that we need from - because it's just additional staffing to pack out product, so we don't feel any limitation on volume right now. There's a number of a variety of issues with respect to scrap that it just seemed as though, you know, everything crossed at the same time in terms some expired product from some projections we had of product that we thought we were going to sell several months ago. And had built up some inventories over a period of time. And the mix of sales didn't come to fruition, among a few other things. And we've addressed those issues. I think there's another piece of the puzzle that sort of increases scrap as we become much more efficient and become a world class manufacturing operation and that's how we account for it. We really feel (ph) - better than we ever have in the past understand the fully loaded cost of our product. And so when something has to be scrapped it's on a fully loaded base instead of just the material cost which was the only methods we had, you know, until probably a year ago. So I think we have it under control but it was at unacceptable levels this quarter.

All right. Thank you very much.

Sure.

Again, ladies and gentlemen, if you would like to ask a question, please press star, then the number one on your telephone keypad. Your next question comes from Mitra Ramgopaul (ph) with Sidoti and Company.

Mitra Ramgopaul (ph): Hi, guys. Mike, could you comment in terms of, I know you've announced that you're going to be participating in a U.S. trade mission to Africa in mid November. And I know under the previous team with Bob Thompson the efforts to really get traction in Africa didn't quite go through as planned. Are you considering reentering that arena again?

As I said earlier in the conference call we're treading lightly. But clearly Sam Neidbala will be going in behalf of OraSure. And, you know, we're going to get exposed at the highest levels of decision makers, having the opportunity to travel with Donald Evans (ph). And so we're going to evaluate the opportunity with the right kind of people that we could sell the product with, with all of the qualifiers that it's a very, very difficult economic model to justify. And it's not one of our highest priorities. But, you know, we clearly had the opportunity to be one of twelve companies chosen in the United States to go on this trade mission and it's a terrific opportunity for us to understand the situation better. But you're not going to see a shift in priorities away from OraQuick in the United States - it's a much higher priority.

OK. In terms of the guidance for 2003 that's not assuming anything from this?

Nothing.

Mitra Ramgopaul (ph): OK. Thanks.

With that, we will conclude the question-and-answer session. We will now turn the call back to Mr. Gausling for closing remarks.

I'd like to thank everyone for joining us today. Hopefully you've seen over the last several months or really since I became the CEO back in February that we continue to make slow but moderate progress both in revenues and improving our cost structure. Along that time I've also said that what was important to build value for our shareholders was to hit our milestones. We've communicated regularly how we've done against these milestones and I'm proud of our teams for having made substantial progress against virtually every milestone. We're impatiently waiting for OraQuick approval. We think it's not very far away. And we look forward to sharing with you some of the great, you know, results with respect to the performance of that product that we expect in terms of performance characteristics once we receive FDA approval. With that, I would like to say thank you and we look forward to continuing to bring you good results. Thank you.

Ladies and gentlemen, that concludes today's OraSure Technologies third quarter financial results conference. You may now disconnect.