OraSure Technologies Inc (OSUR) 2002 Q4 法說會逐字稿

Ladies and gentlemen this is the operator. The call is scheduled to begin shortly. Until then, the call is on music hold. Thank you for your patience.

Good day everyone and welcome to Orasure Technologies Inc full year and fourth quarter financial results conference call and web cast. As a reminder, today's conference is being recorded. For opening remarks I will now turn the call to Shannon Morin.

Good afternoon and thank you for joining us today. I would like to begin by telling you that OraSure Technologies issued a press release shortly after 4pm eastern time today regarding on our 2002 full year and fourth quarter financial results. The press release is available to you on our web-site at www.orasure.com or 610-882-1820. This call is also available real time on our web-site and will be there for 7 days. You can listen to an archive of this call until midnight February 10th2003 by calling 800-6421687 or. You can call 706-645-9191 for international access code. is 7605019 With us today are Michael Gausling President and CEO, Sam Niedbala, Exec VP and CSO and . Ronald Spair, Exec VP and CFO, Joe Zack, Exec VP of Marketing and Sales and Mike Formica, Senior VP of Operations.

Michael Gausling will begin with an opening statement and then follow with an question and answer session. I must remind you that this call may contain certain forward looking statements. Including statements with respect to revenues, earnings, expenses, gross margin, product development, performance, shipments and markets and regulatory filings and approvals.

Actual results could be significantly different. Factors that could effect results by discuss more fully in OraSure's FCC filings including registration statement it's form 10K for the year ended December 31,2001 and most recent form 10 Q. Although forward looking statements helps provide complete information about future prospects, listeners should keep in mind the forward looking statements may not be reliable.

The company under take no obligation to update any forward looking statements to reflect events or circumstances after this call. With that, I will like to turn the call over to Mike Gausling.

Thank you, Shannon. Good afternoon everyone. The agenda for today's call will first include the review of our financial results for 2002, second a brief review of our major accomplishments for last year and a outline for 2003 including updated financial guidance.

We will then open the floor for questions. However, before I dive into the financials I must share some of my enthusiasm m about our future.

How can you not get excited about our prospects when over if last week, our stock has been up grated for Wells Fargo. The President of the US announced the clear waver for Ore quakes less than 24 after our submit ion to the FDA

And we've got an order from the navy for 10,000 units for HIV testing as part of the government small pox vaccination program. It's been an unbelievable week for the company and for me personally. Last Friday marked by first anniversary as the CEO of OraSure which is when the waver was announced. What a great anniversary gift. Obviously the honeymoon is now over but the future is more exciting that I ever envisioned. Okay, back to reality. Let's start with our 2002 financial results.

Revenues for the year 2002 were $32 million at 2% decline over last year. Revenues for the fourth quarter were 8.25 million or 2% higher than the same period in 2001.

The 2% decline in annual revenues is attributable to the decrease of $1.1 million in license and product development revenues which was partially offset by a slight increase in product revenues. The 2% increase in 4th quarter was caused by increased sales and insurance risk assessment market due to a build up in inventory in 2002.

Offset by a declined in sales to the testing markets because of a one time sell to drainages in the fourth quarter of 2001.

I would also note that product revenues were 31.7 million for last year and 8.25 million for the fourth quarter representing increases of 2 and 5% respectively over the periods in 2001.

Undoubtedly, 2002 was a tough year due to our lack of new product sales, unforeseen regulatory delays, a loss of $1 million in insurance risk assessment revenues at lab one, lower than anticipated license and product development income and the overall difficult economic climate.

But we fought through these events I believe our significant behind the scenes efforts will pay off huge dividends in 2003. Obviously the FDA approval in November of last year the clear waver last Friday for OraQuick was huge.

Consequently, OraQuick is the biggest introduction for this year is going to have top line growth. Additionally, we will be directing a lot of effort to expand sales intercepted in the workplace drug testing market and expanding distribution of history-freezer. Unexpectedly delayed last year, but in 2003 we expect that to charge.

The gross margin for 2002 decreased to 60% from 62% the previous year due to lower license and product development revenues. The gross margin for the fourth quarter was 58% compared to 53% in 2001. The gross margin was negatively impacted by $600,000 inventory reserved recorded in the fourth quarter of 2001. Gross margins are expected to improve as a result of higher revenues, lower scrap and full deployment of the OraQuick fixed cost infrastructure.

This will be offset by the cost of transferring the manufacturing of the intercepted OraSure devises to our new facility in Bethlehem this year, and down with price pressure exhibited by some our largest customers Operating expenses for 2002 declined by 8% to 22.7 million compared to 2001.

Similarly, operating expenses for the fourth quarter declined to $4.9 million or 28% from a year ago. These declined reflects lower clinical trial, employee cost, relocation, travel, legal and consulting costs and attributable our ongoing efforts to control costs. In 2002, full time employment decreased 14% from 220 to 190 full time people and will continue to monitor our operating expenses carefully.

This year, we will make some substantial investments into growing our businesses especially during the first half of the year. These include supporting market roll out of OraQuick and the near term cost to provide additional product claims.

The net loss was $3.3 million or 9 cents per share and a looses of $82,000 or break even for the year. Over all our results are in line with our most recent guidance and are a penny better than street estimates. One of the bright spots was the dramatic improvement in cash flow from operations over 2001. Maybe it dates back as me as entrepreneur, personal guarantors of the company's debt as STC but I'm very proud to flat sales and similar overall losses to last year that we managed to improve cash flow from operations are more than 4.8 million over last year, including positive cash flow from operations in the second, third and four quarters of 2002.

As a result of this great effort from our team, our liquidity position remains strong at the end of the 2002. The company's cash equivalents and short-term investments were $14.9 million and working capital was 18.9 million at December 31, 2001.

Coupled with our $10.9 million dollar credit facility bank. We have a solid balance sheet and a great position in financial growth in 2003 and beyond.

Next, I'd like to briefly highlight some of the major accomplishments of 2002 which I believe lay the ground work for 2003. Clearly, the most significant milestone was to receive the FDA approval for our OraQuick, rapid HIV I anti-body test on November 7th,followed by a surprised news of receiving clear waver last Friday. In his remarks on Friday, Jan 31st president Bush requested $16 billion dollars for the prevention and treatment of aids in the United States and an additional five year 15 billion plan to provide additional drugs to help countries in Africa and in Caribbean to span the spread of the epidemic.

During that speech, president Bush went onto say, how can you treat if you don't test. How can you help if you don't know.

So the FDA has proved a new HIV one test which provide tests in less than 30 minutes with 99.6 accuracy. President Bush was talking about the OraQuick age HIV one test developed and manufactured in Bethlehem by OraSure.

As you can quickly conclude, as the only FDA approved clear waver the only HIV test in the United States We are qualified to provide an accurate for United States, African and Caribbean requirements for HIV testing. We announced that the United States navy command had purchased 10,000 OraQuick tests to screen its personnel participating in the small pox vaccination program directed by the federal government.

Over all involve volume are still being assessed and we're still trying to understand them, that the initial screening program have gone extraordinary well As I said before the FDA approval for this product is a huge credit to all of our employees. There's been effort from behind the scenes for all fiscal year 2002 by our research operations, regulatory, quality assurance and marketing teams to meet the FDA's requirements to set this product up for what we believe been a successful launch in 2003.

Another significant milestone with the execution arrangement for OraQuick with added labs. We accomplished this in June, and we are working on our relationship with ABBOT to launch OraQuick product has been excellent. In fact, as we announced, we filled an initial order with more than 50,000 of tests at the end of 2002. On January 30th ABBOT finally announced the availability of OraQuick to hospitals, physician offices and other health care facilities in the US. Turning now to intercept one of the significant developments with the additional intercept labs to supplement efforts of the lab one testing market. We entered agreements with quest diagnostics, clinical reference labs and northwest toxic last year.

This increased the number of field reps selling intercept from 3 in lab one to over 60 with the additional labs.

This also increased the available market share for work force testing from roughly 6% to 35% of the proximate 21 million for work force testing each year.

The start up has been completed, now it's a matter of hitting the pavement and selling more product which we're excited about and have higher work force of the end of 2003

Coupled with additional distribution to the criminal justice market in the U.S. and also the U.K. distribution partner, average monthly volume processed exceeded 60,000 specimens per month by year end.

During 2002, we also helped validate oral fluid drug testing and the intercept product line.

The result of a large study and private industry was published the December 2002 issue of the Journal of Analytical Toxicology. The study was performed with our partner Lab One and included testing of 77,000 Oral fluid specimens the basic panel of marijuana, cocaine, opium, PCP and feed means.

The results for outstanding Using intercept producing results equivalent to traditional year end testing.

This study provides another piece of ammunition as we use our drug testing business. Managing our costs is also important and we make great strides in this area last year as well.

We've tied up our cost structure. This is the second quarter in which we have shown dramatic improvement in our cost structure. This is a result of a conservative effort of our management team to review each budget line and reduce cost and improve efficiency whatever possible.

The cost structure play a major part in achieving major cash flow from operations on the second, third and fourth quarters of last year. Although we've had a strong relationship with a bank in Bethlehem.

We determined that we should establish a relationship with a larger bank in order to meet our future needs. After a lot of hard work by Ron and his team, we entered into a relationship with Co-America Bank. One of the benefits was a reduction of interest rates by approximately 300 basis points when we refinanced with bar rowing with Co America. This should generate sales of over 100,000 in annual interest expense, and this new relationship also provides us with approximately $7 million dollars in unused credit facilities available for our future needs.

Another highlight is the complete overhaul of the executive management team at OraSure. Just two years after the merger the leadership team has changed. Besides our core team, Mike Formica, Sam Neidbala, Jack Jerrett, Mark Kuna and Rich Hooper. Over the past 14 months, we've added Ron Spair, as our CFO, Salvatore Salamone, our Product Development, We've also made some significant changes in the Sales and Marketing side with the addition of Joe Zack, as the Exec VP of Marketing and Sales and Bill Brocktor as Vice President of Strategic Marketing.

Last but not least, just last month we added Susan Sheller as our Vice President Sales. Each of these individuals praise a wealth of industry experience and is already making significant contributions to our company.

I am delighted to have them with strong leadership rules within the company and believe we have an excellent management team to take our company to the next level.

Although we did not obtain FDA clearance of our link drug CAD during 2002 as we had anticipated. I believe we did make great progress with this product. As you know we experienced delays as we attempted with the THC and the insured that we are developing the highest quality product possible. In January of this year, we conducted several large studies in Europe with our partner Dreggier which included more than 620 people in various sites The results demonstrated that the results was greater than 90% and compares with the goal standard which is intercept.

We're very excited about finally achieving these quality results and now locking down our manufacturing processing in completing our studies. We are now back on track to get this important technology to market.

A final highlight that I want to mention. Our new manufacturing and office facilities are now complete and begun the process to slowly move staffing into that building. We expect to have all West Coast operations consolidated in Bethlehem by year end.

I think by any measure we made significant progress in 2002 and proud of our company's performance. Not all of our objectives were met. There are areas that need improvement.

We will continue to work to turn these areas of improvements into business drivers in 2003 and beyond. First, our top line revenues for 2002 were flat for the second year in a row.

This is unacceptable. We plan to do something substantial about this year. Second, we need to continue to reshape our organization to move from a technology focus to a market driven company. Meeting the needs should be the top priority which drives everything else we do.

We are clearly moving in the right direction but we still have a lot of work to do. Our new management team, and the sales and marketing area should help drive this charge over. Third, we need to get our drug test out of the lab and into the marketplace.

The delays in completing development are unavoidable and unfortunate, now that the hurdles have been overcome, we need to seek selling this product once the FDA clearance is obtained. Lastly the launch of our intercept lab base drug test service did not progress as quickly as we expected. I believe we have the right lab in place and the credibility of this product has been firmly established. It is now time to convert your drug testing accounts and drive sells of this product line in 2003.

With our major 2002 achievements as a frame of reference, I'd like to briefly describe our objectives for 2003. First on the financial side, our goals are straightforward and consistent of what I said in the previous calls. We continue to target revenue growth, at least 25%, which will improve our top line from 32 to 40 million. We are also targeting profitability in the second half of 2003 and for the year as a whole.

Finally, we expect to maintain a strong cash as we did during 2002.

Sales growth is expected to be moderate for the first and second quarter. We expect to pick up steam in Q 3 add and Q4 of this year. Our losses are expected to be similar to the first quarter of last year as we make substantial investments to extend to product claims for OraQuick and begin to invest in launching OraQuaick. Obviously our ability to hit these financial targets is qualified at the beginning of call.

I'd like to point out one over factor which might effect our financial performance. Lab one has achieved the processing of test in the insurance assessment risk market.

We think this is an indication that the market for insurance will continue to come under substantial pressure. All of our insurance labs are under pricing pressure and we expect them to continue to reduce their own costs by improving their efficiencies in using other competing products .

We cannot quantify this threat, it is something that we are concerned about. We will be devoting resources to managing our relationships with insurance labs in order to maintain as much business as possible.

The number of business objectives for this year are on our major product lines. First OraQuick as the most recent product to be commercialized, OraQuick is the priority. In fact we will perceive several initiatives.

As you know t OraQuick test is FDA approval only for cold blood specimens. This year we will be completing clinical trials and for whole blood. While oral fluids is obvious, we're also adding a whole blood to the claim so it can be in the hospital and emergency room settings.

Finally, we are reviewing our settings in the United States and abroad. As you know Abbott has a license and could distributor test if an HIV test. Of course additional clinical trials will be required in order to obtain approval if we pursue it.

However, in order to pursue that claim involves a complex analysis of several issues, including the fact that HIV II still has a relatively low prevalence rate in the US.

Such a claim would provide additional payment. This is an area that certainly what reimbursement rates would be available for HIV I. In fact this is an area that certain requires additional analysis and I hope to announce something more definitive in the future. On sales and marketing front we will continue to invest in advertising in order to increase public awareness of OraQuick test We will do this both in conjunction with Abbott and separately.

The public health market, military, CDC and international markets by distribution by OraSure. Requiring OraQuick internationally, we are continuing to review our options for OraQuick around the world. It is not an easy model evaluate. There are risks associated with lack of funding.

The absence of distribution channels. On top of this, in many countries we will need to offer HIV II claim, which again raises the need to HIV II patent license.

The economics are extremely challenging as the price line available are very low for HIV tests. We will continue to review our international opportunities and tend to finalize our strategy and begin its implementation in 2003. Turning to intercept, even though we have signed up high quality labs in both the workplace and high criminal markets the ram up of intercept drug test is not perceived as we would like

As a result, we will take a step back and reorganize our approach and re launch this product in 2003. Our efforts will focus in committing to support our lab partners and adding a few new ones

We will also increase the public awareness of our product including direct contact with the users.

The sales and marketing area have a lot of new ideas in their new commitment to this product. We intend to use the results of the private industry studies which lends credibility. On the international front, we believe our international distribution partner in the U.K. continues to make great progress.

Our plan is to continue support efforts in the U.K. with a possible expansion into other European countries later in the year. Next in line to come out from the lab is our up link drug testing service. 2002 was a year of delays and unfulfilled expectations, given our recent progress in optimizing the essays in completing development. I'm optimistic that we will finally [inaudible] available to submit by mid summer of this year. We will also continue to support the efforts to commercialize this product in the roadside testing market in Europe.

Although we have not build any revenue in the budget or our 45% growth target, we remain bullish and become a major factor in 2004 and beyond.

This [ Inaudible ] Sales which constitute $7.2 million dollar annually has been a contributor to the company's bottom line, but not a major focus on company's 5 year strategic plans However, this year, with renewed focus on expanding distribution, we expect to increase our penetration in the position office market and expand the reach of this product into potential new markets. One of our objectives last year was to seek additional OraQuick partner, Although we had discussions with many parties with both these technologies platforms, no agreements were reached.

Finally, as previously indicated we are in the process of consolidating our operations from the West Coast to our operations in Bethlehem. The manufacture from our facilities in Oregon to our facilities here in Bethlehem. Our objective is to obtain all the FDA approvals by the end of the year. As a final note, before I open the floor for questions, I'd like to thanks a moment to thanks the FDA again. Back on November 7, when I received the FDA approval for OraQuick as our model complex test Secretary Thompson [ Inaudible ] clear wavers soon as possible. Since that day, we've been working nonstop in collaboration with the FDA to answer hundreds of questions and complete the necessary field trials to complete our clear waver. When we finally submitted our application on Jan 30th I don't think there was with anything that was already discussed that was already to the satisfaction of the FDA.

We worked hard to get this done together. I can't tell you the number of times our Damiano, our VP of Regulatory Affairs was taking the phone calls late at night for the FDA to review and keep this project moving forward. It has been a major priority for the Bush administration. I take my hat off to the FDA for working very hard to get the job done.

We at OraSure are honored to be a part of the Bush commitment.

With that, I'd likes to open the call up for questions. Thank you again.

At this time, I would like to remind everyone if you would like to ask a question please press star and then the number one on your telephone key pad. We'll pause for a just a moment to compile the Q and A roster.

We'll take our first question from Wade King of Wells Fargo Securities.

Hi fell as , can you hear me?

Hi.

Thanks for the detail. Couple questions first, maybe from the operations standpoint could you just issues related to the scale and manufacturing of OraQuick and also any detail you can provide on your experience to date with yield and scrap and and this sort of thing.

I would say that right now we are very comfortable with our current operation producing 100-150,000 tests per month and our quarterly board meeting yesterday, we had discussions and our investing capital to be in position to move that up to over 300,000 tests per month by the end of June and have plans for automation that will allow for significant growth if the market war aren't thereafter with 6 months of lead time. Those are all one-chip operation numbers. With regards to scrap, Wade, I think all I'd say at this point is we're going through the ordinary start up curve that you expect at the new product. You've got to get started. We said on November 7th that we we'd take the weekend off and enjoy with our families and have 50,000 units out in the first 45 day. The team did a great job in pulling that off. We had a nice surprise orders that were not budgeted or planned. But what's a good problem.

Thank you. Can you give us any other visibility on additionally military orders specially for the Persian Gulf and secondly, your time line per the ID submission for the oral fluid clinical.

With respect to the military, we obviously announced the navy test and there's been a couple other small tests that occurred and the feed back has been terrific with respect to the use of the tests. How it's worked in their situation which includes on a submarine and carrier and all kinds of different things. But those haven't translated into big purchase orders yet. We're optimistic and expect it to turn into orders but we have no visibility yet wade on how l how much that could be. With respect to the IDE claims, clearly, the clear waver caught us all by surprise but we are being prepared to. get ready for oral fluid trial shortly. We got a little bit more complicated with the additional of what we call the red top that our partner Abbott has requested. Currently, that's the sources of the sample that they get is how it comes into the hospital labs for their normal processing. They've asked us if we could incorporate that into our next round in order to get that claim. That complicated things to get that prepared. That's additional business and we would expect to be ready in the next 30-45 days to get ready to go.

Thanks very much. Congratulations.

Your next question is from Erin Lynnberg with William Smith.

A couple quick questions to follow up on Wade's here relates to oral fluid trial Will that submission for the whole go in conjunction with the oral fluid.

That that's our current expectations. And one thing I didn't mention was We would still expect that to -- by the end of the second quarter that's our target still.

Can you provide any additional color progress with response to the pre step for the THC?

I'm sorry?

Can you provide any additional detail with the progress in up link that you talked earlier with the progress of the marijuana [ inaudible ] I know you talked earlier with your prepared remarks but any response from the people in the field regarding the pre step ?

Well, clearly in terms of performance we've been doing a number of studies in the Netherlands. We feel good about it.

You're feeling good of the Response as it relates to them having additional steps for the THC?

There's a couple additional steps that have been part of the development process but we're currently a basic engineering project consolidating of several steps into one with consumer and our end user would never see. We're addressing that issue. We're evaluating from a marketing prospective what that feed back is in terms of the steps and amount of time required for all our market segments. Whether those be criminal justice or placed in the US or roadside testing for dragger

Then would you expect by mid sum tore have it down to a one step process for them?

Well, I don't know what one step is, you've got to prepare the sample. It's only a few steps. and a very efficient easy process.

Thanks. Last question is can you provide any additional detail with the intercept distributors. It's lower than I would have expected. Are you seeing a pricing on That?.

What you noticed is in the fourth quarter of 2001 there was a $500,000 sale of equipment to Dragger that we did not have in the fourth quarter of '02.

That caused does biggest amount of one time evens to talk about but more specifically to your question, we're not happy of the actual revenue progress we have so far. We believe there's some trial things finished now that could lead to an announcement over the next 30-90 days or some household names that may be considering converting to fluid tests. Everyone one does trials before they're comfortable to conversion. This isn't the best economic climate to do drug screening or have someone focus on that as an conversion opportunity. If there's a third factor that's played out, at least we'll use quest as an example, the focus has been on their largest 150 accounts, which it takes 6 to 9 months to convert . So our lead times are such that we really are sort of the middle to later stage of their assessments for the larger accounts. I think we're going to start to see some traction this year. We would have clearly restructure this sales team under Joe's leadership.

Have you started to see results from that? I know you talked previously about is shifting from that. Maybe some smaller people to put them on the books.

Nothing that's material yet.

Thanks.

Your next question is from Ricky Goldwalter with UBS.

Just a couple questions. In regard of the OraQuick an the position in hospital market, have you had any initial feedback and are there any concerns what a physician would have regarding performing this test and the mediate results that you're aware of. Anything that you've heard?

We're completely on the front end of this selling cycle. I haven't heard anything that -- to that. I will say that my wife who's a pediatrician, a mom now, used to tell me in a physician's office, it's not an ideal setting that we do an HIV test Because of the counseling component The need to sit down with somebody versus the more traditional hospital where you go for a test or public health setting where the person knows they're going in for an HIV testing. The physician office is available and they can use the test. What acceptance level is unclear to us at this point.

Right. Okay. In regards to the intercept the 25% revenue growth that you're guiding for next year, how much do you anticipate the sales of the intercept will con tribute to that?

It's hard to know what the mix is. Clearly, predominately, OraQuick is the driver and intercept is second so if I had to split them up and not break them down. Disproportion would be OraQuick and intercept would be second.

Fair enough. Then finally question would be -- I know you discussed the up link, specifically for the drug use market, where do you stand with the infectious disease market in term of introducing the up link infection disease market and your relationship with Meridian?

Meridian on rocky ground. We've been delayed longer than they expected. Longer than we expected. We're currently doing clinical trials in two sites in the United States. It's just kicking into gear. Our in house studies show the tests blow away for the pred devise. We're hoping that the field trials give it the same results. But I'm not sure where it will go with Meridian given our delays. But we're at this point going through the trial stage and pretty bullish on how the results are going to be.

Okay. One final question if I could. Could you give any more detail on where you would expect the operating expenses to shake out in 2003. I know we're see some additional expense in the sales and marketing area as well as R&D. In this quarter, it will be a little lower than we will see in the next couple.

Just to re enforce what I said. I think we're going to see moderate top line growth in the first quarter unless we get a big surprise order. We're going to be producing but we can't comply plate that. I said that the earning will look similar to a year ago which is about a million five loss that resulted in investing to the clinical trial expense. You're cranking up our advertising programs with November approval and we really are just getting it under way with the tackling of advertising materials, training aids and all those kinds of things. That's how we look at the first quarter. We look at the year, I guess we told you the top line is $40 million. We expect margins to increase an expect to break even. So hopefully that will give you some guidance where the operating margins fit in and the overall things .

Right okay. Thanks.

Your next question is from Mitchell Romguball with Fidelity.

Hi guys. Great progress so far.

Thank you.

One thing I wanted to get some color on. In terms of the $40 million in revenue growth in you're looking for , are you assuming any significant sales in Africa?

None.

Okay. In terms of given the sense of the pricing per test, have you done that yet? I'm not sure if I missed it.

For OraQuick?

Yes.

We don't give visibility for pricing. Depending on whether it's sold to our partner or internationally or physician office or a product that goes to military, it's a complex web out there.

Quickly, again you made a lot of progress on the operating expense side I'm not sure how much more you have going forward. Would you say in terms of work force reduction that's pretty much done?

That part's done. This is all about revenue growth now. We need to get the top line growing.

Okay. Thanks.

))Operator: Your next is from Mark Attellientti with Alliance capital.

Hi Mark.

Good evening. It sounds like everybody's working hard. We appreciate it. The top line is '03 around $40 million Are you brave enough to give us some bottom line guidance at least in a range?

I said the profitability for third and fourth quarters the year as a whole.

Did you give a specific numbers or?

No, crossing a break even line is profitability in my description there.

Are we going to get more definitive numerical-type guidance that we can sink our teeth into at a point in time?

I think we've given out some numbers here, Mark, that talk about year as a whole and then also Mike gave some guidance on the first quarter with respect revenues being in and around where we were maybe slightly more from Q4 of '02 and then also looking at a loss in the range come comparable to that that we experienced in Q1 of last year which is in the $1.5 million dollar range. Beyond that, we had we're going to make up some ground as we go out through the course of the year. But we're looking at investing in sales and marketing expenses to promote and capitalize and realize fully the potential of OraQuick while running clinical trials to expand the label claims for oral fluid and the red top that Mike indicated was on Abbott's wish list.

I'm looking at my machine and I don't know if these numbers are stale or current. The only reason why I'm trying to get more concrete number, -- I don't know if they're accurate Wells Fargo has you at 18 cents UBS has you at 5 cents. William's Smith has you at a loss of 2 cents. It seems like numbers are far from a type consensus. That's the reason I was hoping maybe the company would put some sort of guidance that maybe get analysts some -- it's just a suggestion.

I think some of the numbers might be a little out of date. In a WADE came out with a piece last week and recently updated that piece in the last few days and I know William piece had a for about a month. Neither UBS nor Sedodee have updated there since the last call. I think some of the disclose we made here today we'll see some numbers that will bring the consensus in line with one another.

We'll get those sent to you Mark.

We'll take our next question from Daniel Lou of Strong Capital Management.

Hi, guys. Happy anniversary, Mike.

Thank you.

Nice to hear all the good news as well. I want to drill into the relationship with Abbott. As far as I understand you're guaranteed to receive minimum payment of 4 million through the end of 2003, I want to drill into how long does the exclusivity last , are there any pricing break points, also in the short-term, it sounds like you're going to have more orders than you can fill. What's going to be in the mix with what you sell to Abbott and what you sell directly.

A couple different questions there. Clearly the $4 million is a contract for the purchase of a certain amount of product during the course of year. Abbott's given us a non binding forecast for the year that clearly meets or exceeds that number. We're also very comfortable that visibility with Abbott with what they expect to do. We're not concerned about the minimum obligation about products that they think can be sold into the pipeline. It still early speculation. They just started to hit the road here now. With respect to co exclusivity with them , they sell exclusive with us. Any increasing rate of volume purchases over a multiyear purpose or multiyear basis. There's a discounting structure related to that. Related to the mix of sales to them or everyone else. Clearly at a minimum, my expectations takes are to fill all orders as quick as we can. If we get in back order because we have demand that's greater, we'll go on the proper allocation but that's a good problem we done have yet.

Okay. I'm trying to work through some algebra here. After you reach the $4 million with Abbot, is the product renegotiated there?

There's no clauses like that.

Okay. So you have pricing power which is the ultimate question I have.

I don't know about pricing power. They have volumes to hit. If they grow the business the way they expect then we mutually exist. It feels like we're going to mutually exist in good way right now.

Okay. Is there anything you can say about backlog of orders that you have now?

There's not a substantial backlog of orders. I would say thatin the first quarter we had a surprise order like the 10,000 unit that they needed them the next day kind of thing. They said you need to get them to these secret priority sites in the next day. And these ships are going out to sea. They moved to the front of the line with a national emergency. Those are some unforeseen nice opportunities that we were proud to fill. We're looking for more of those. All we got is fillers out for lots of different opportunities for that and few turned into orders yet.

Terrific.

))Operator: Our our next question is Ted Oakley of H & Plant Oakley

Hi Mike. Last time I was asking on DOT approval , is that something we filed or I'm not clear how you go by getting that approval?

I wish we could apply for it. To get oral fluids in terms of DOT prove is a long and drawn out process. I'm going to actually shift and let Sam quickly answer it.

The DOT will only have approval process for oral fluid after there are federal regulation available for all federal employees. That allows oral fluid for drug testing. Since that first step has not occurred, DOT cannot occur. There's draft guidelines that are already written but the department of health and human services is a group that deals with substance abuse had to take that through the process of public comment and then put that into law. . That will take -- but there will be a couple review after which we would hope that would occur. After that then DOT would take that as guide lines and begin the process to allow products to be approved.

We're not thinking that we in anything on our two year balance next two years that we have DOT as incremental opportunity in terms of that segment in the market. I hope I'm being conservative. I think we're about three years out for that. Sam has been in the leadership in terms of the team. We're giving it our best shot but what's a long process.

A follow up earlier. When you would file for the quick test on enter suspect.

On OraQuick?

Yes, no on up link. Do you think there's any possibility that we will go in the first quarter?

Mid summer is my expectation, I hope to beat that.

It's my interpretation that quest that they only have a couple testing points. What are the costs involved is that you have to attack on some cause for shipping to get that test over night. Am I right on that? On the drug test?

No different than it would be.

Okay. It seemed like that was driving the cost somewhat. And if they had more equipment that maybe it wouldn't be as expensive.

I done think that's a factor.

Thank you.

Our next question is a follow up from Wade King of Wells Fargo Securities.

Hi, a couple follow-ups. Just per the coments made Earlier about the manufacturing. You're talking about a single shift, correct?

Yes.

So right now, I believe what you said was monthly production was 100-150,000 OraQuick's in terms of your capability.

Correct.

I think you said going to 200 per month per the end of the second quarter.

300.

This is for a single 8 hour shift or 12 hour shift? What are we talking about?

8 hours -- we're talking 40-50 hour workweek.

You're working a single shift right now. Is that right, Mike?

Yes.

What would it take operationally. How prepared would you be working ahead over the next six months to implement a two shift environment for work production. How long would it take you to do that? Is that in your plan for a particular time?

Well, we're spending capital under $200,000 to have parallel lines for packaging and duble the manufacturing line personal from 15 of 30 to 35 if needed to go up to the 300 on a one ship operation. That can be increased by over time on our second shift. In a linear fashion, but that's a very sort of manual assembly process. We have options that would allow north of 4 million units on a single ship. With just a few people. It could be done in six months after we made the commitment on capital. We're trying to get visibility on the revenues. We feel like we can support this year's needs so far by making being ready for June with the equipment and training new people.

Just to clarify, by mid year on a single shift basis you expect to have the additional personnel in place to produce close to a million units a quarter.

Yup. 300,000 times 3.

Is there any over hurdle you have to scale up to that level, Mike?

Between stress factor and qualifying and adequate raw materials, those are the major ones. But there's a lot of people who like jobs here and we'll put some good choices here when that good problem occurs.

All right. Thanks. Secondly. Could you elaborate a bit more on your comments relative to Abbott and your co exclusive agreement. Our under understanding is there are some high public accounts that are your exclusive domain. I think some coments have been made some cross selling is by Abbott outside of hospitals but that there is with some high volume public health accounts that is your exclusive domain is that right?

There is a certain percentage of our existing volumes that is sort of an exclusive for us in public health but there's a large portion that's up for grabs and for everyone to husband toll get the business. I'm not sure of the number of people. With Abbott with 400 people on the streets in hospital and public health and PSS is a business partner for them Compared to 5 terrific people that we have on the streets, the ratio of that is that you're going to cross over for the bigger better accounts but we're working those hard. We have some lockouts in terms of the biggest ones for us. We're trying to get the biggest amount of penetration as quick as we can. If we run into each over and cross sell. As long as the customer's satisfied. We'll get over it.

can you comment on dealing with federal agencies, the military and other branches of the government for that matter, organization such as the world health organization is there something in the contract that prevent Abbott from selling no those organizations and once again is your exclusive domain?

Without trying to sort of get into the contract too much. This is a U.S. deal with Abbot. So the focus is on U.S. accounts. So U.S. ID that is going to be providing service to a foreign country is off limits. Military, we expect to sell to the military, we will win all those bids.

So once again, just to clarify, I expect you to sell to military too. But is Abbott precluded from selling to competing with you from a military business?

No.

Okay very good. Lastly. It does sound like there's some old estimates out there. The estimate that Mark quoted earlier was 04 estimate -that we have 18 cents reported 15 cents fully taxed?

Our 03 estimate is a loss of one penny reported for 03, so the figure he quoted which I gather out there on first call is our EPS estimate for '04.

Thanks for the update.

Your next question is from Jeff Myers of Idas.

Thanks. Just a question on the competitive landscape in the HIV test. If you can talk about anybody else you know of who is developing a similar test and what advantages you might have over them.

Jeff, I don't have any visibility on a competitive landscape that any more valid than the words you'd hear on the street. I don't know the answer to that. I do know that we are FDA cleared. 99.6% we are now clear waved. We've been inspected by the FDA and got a big first mover advantage. I don't know where anybody else stands in the queue. Bringing rapid test to the U.S. market or products that have gone through the rigorous FDA. We welcome because the market is a huge one for this. There's terrific conversion opportunities that haven't existed until we were improved in November. We hope it will open up market. Since I don't know anybody that's in the queue. I can't tell competitive advantages or disadvantages.

: Okay fair enough.

))Operator: We'll take our next question from Bill Smith of William Smith and company.

Hi, Mike. Congratulations to all of you. Great job.

Thank you.

Can you quantify your comments on lab one with respect to the insurance risks exposure. What you might have there in terms of exposure in what market. The dollar amount. How you see this playing out.

Clearly in 2002 their operating cost us about $1 million in business. There's probably $1 million more on exposure from efficiencies that they are looking to bring in. It will probably be on the high end for 2003 if they were to occur. But it's risk factor we're living with. But it doesn't at all effect my feelings with respect to our 25% growth at all. I do it as a risk factor but if it doesn't adjust at all, my feelings ward the 25% growth.

Okay. Thank you.

Ladies and gentlemen we have reached the end of the allowed time of questions and answers.

Are there any closing remarks?

This is our longest call by probably 35 minutes. More questions than we've ever taken. More visibility for the company than we've ever had since the merger was formed. It's an extraordinary time for us. Clearly last week to receive FDA clearance and less than 24 hours didn't happened without an enormous amount of cooperation by FDA and our staff. And it also played out that it supported the fact that this product was ideally suited to be used virtually anywhere. As you can see with our comments today, it can be used in hospitals, with finger stick whole blood once we get approvals in public health settings as long as counseling is attached. And just to reach out can go virtually anywhere. The opportunities are tremendous for us. Intercept the validations we've got in the marketplace are real and set a great foundation for us to pursue that. In up link, it took a little bit longer but we're back on track with revenues. Then you look at filling the pipeline for the future, it's an exciting story that we have. We appreciate everybody's support. We continue to look forward to telling you good news coming out. Especially on the top line revenues. With that, I'd like to say thanks and look forward to a great 2003.

This colludes OraSure Technologies full year financial conference call.