OraSure Technologies Inc (OSUR) 2003 Q1 法說會逐字稿

Good day, everyone, and welcome to Orasure Technology's first quarter financial results conference call and simultaneous webcast. As a reminder, today's conference is being recorded. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer period. If you would like to ask a question during this time, simply press star, then the number 1 on your telephone keypad. If you would like to withdraw your question, press star, then the number 2. For opening remarks and introductions, I will now turn this call over to Shannon Warren at Orasure Technologies. Please go ahead.

Good afternoon, everyone, and thank you for joining us today. I would like to begin by telling you that Orasure Technologies issued a press release shortly after 4 p.m. Eastern time today regarding our first quarter financial results. The press release is available to you on our website at www.orasure.com, or by calling 610-882-1820. This call is also available real time on our website and will be archived there for seven days. Alternatively, you can listen to an archive of this call until midnight May 3, 2003, by calling 800-642-1687 for domestic or 706-645-9291 for international and entering the conference ID number 9418965.

With us today are Mike Gausling, President and Chief Executive Officer; Ron Spair, Chief Financial Officer; and Sam Niedbala, Chief Science Officer. Mike will begin with an opening statement and then follow with a question-and-answer session.

Before I turn the call over to Mike, I must remind you that this call may contain certain forward-looking statements including statements with respect to revenues and other financial performance, product development performance, shipments in 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 and its annual report on Form 10-K for the year ended December 31, 2002. Although forward-looking statements help to provide complete information about future prospects, listeners should keep in mind the 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 to all of our listeners out there. Thanks for joining us. Today's first quarter earnings call will include first a summary of our stated 2003 financial and business objectives; second, a summary of our Q1 financial results and some guidance regarding Q2 and for the year as a whole; third, a summary of the major business activities for the quarter; and, last but not least, I will comment on the startup with Abbott and the approval of MedMira's HIV-1 test. We will then open the floor for questions.

Hopefully, by this time, you have all received a copy of the 2002 annual report. In the stockholders' letter, I listed the company's 2003 major financial and business objectives. Our three major financial objectives are as follows -- we expect revenues to increase 25% for the year and to be at least $40m; we expect to be profitable in the second half of the year; and we expect to retain a strong cash position. Our six major business objectives are as follows -- number 1, we intend to complete clinical trials for both an oral fluid and venous whole blood claim for OraQuick; second, we will support Altrix [ph], our UK distributor for Intercept with an eye towards expanding more broadly into Europe; third, we intend to submit the UPlink rapid detection system and the full 9 to 5 panel of assays for FDA clearance by midsummer; fourth, we will work to increase HistoFreezer sales with the addition of certain new specialized sales forces in expanded reach; fifth, subject to FDA approval, we will consolidate all manufacturing operations in Bethlehem; and, last but not least, we will continue to build trust with our investors by being transparent in communicating frequently.

As I've done for the past five quarters as the company's CEO, I will continue to measure our progress against our stated objectives. I believe that this is the most transparent way to give you the most insightful perspective on our creation of substantial stockholder value, going forward.

Okay, let's now dive into our financial and operating results for the first quarter. Total revenue for the quarter was $8.6m, or 11% higher than the same period last year. Product revenues were 8.3m for the quarter, which was a 12% increase over Q1 of last year. I am pleased to say that both total revenues and product sales were the best so far, and it was the fourth consecutive quarter of increased revenues.

The revenue increase for the quarter is primarily attributable to 1.4m of incremental or quick sales, a $327,000 increase in Intercept sales, and an additional $350,000 per Orasure devices sold into the insurance risk assessment market. These increases were partially offset by an approximate $1m decrease in domestic HistoFreezer sales and a $200,000 reduction in insurance urine assay sales.

OraQuick and Intercept are both off to a great start this year, but the only major surprise was larger-than-expected shortfall in HistoFreezer sales in Q1. The reduction in HistoFreezer sales was a result of the buildup of inventory by our distributors and in advance of an announced price increase, which took effect in December of 2002. Compared to last year, the shortfall is further magnified, since we previously announced a price increase effective April 1st of 2002, and there was a buildup of inventory at that time as well. We fully expect HistoFreezer to rebound nicely in the second quarter.

As we look forward to Q2, we expect sales to continue to increase steadily and to be in excess of $9m for the quarter, but the sales mix will be different. First, I do not expect OraQuick sales in Q2 to be quite as robust as Q1 due to high inventory levels at Abbott and the affect of pipeline fill traditionally found the introduction of virtually any new product. Although a very rough estimate, I believe that at least 65% of Q1 OraQuick sales were sold but have not yet actually been used in the field.

Consequently, until this inventory is at least partially depleted, it is very difficult to predict the ordering patterns from Abbott and/or any of our other new customers, although demand for OraQuick continues to grow by the day.

However, due to our diversified portfolio of products and markets, we expect sales to continue to increase quarter-to-quarter due to steady progress with Intercept and a nice rebound in HistoFreezer sales. We also expect to manufacture and ship our opening orders of FreezeOff, our new cryosurgical wart removal product, especially designed for the OTC market to our new partners at Medtech, the owners of the Compound W line of wart-removal products. Their opening orders are expected to exceed $1m.

For the year we are encouraged by the early awareness, approvals, and pent-up demand for OraQuick, the increased penetration of Intercept, and the re-igniting of the HistoFreezer business franchise. Partially offsetting these new opportunities is a continued downward pressure from LabOne. As stated in our 2002 10-K, we can see as much as a $1.5m decrease in LabOne revenues yet this year, primarily in the second half of the year, so I'm a little bit reluctant at this point to increase our revenue guidance for the year until we see some measurable traction with OraQuick and Intercept in the second quarter, and we see the fruits of our efforts to re-ignite the HistoFreezer business franchise.

The gross margin for Q1 of 2003 decreased to 58% from 63% last year primarily as a result the decrease in domestic HistoFreezer sales and startup costs incurred with the initial production runs of OraQuick. The decrease in HistoFreezer sales accounted for roughly 4 margin points, or 80% of the margin reduction. Additionally, the mix of OraQuick sales negatively impacted margins as well, since only 13% resulted from direct sales from OraSure sales reps to our public health and military customers. The balance was to Abbott ongoing CDC studies and sales internationally.

For the second quarter and for the year as a whole, gross margins are expected to continue to improve steadily as a result of higher revenues, lower scrap, full deployment of the OraQuick fixed-cost infrastructure, and more direct sales of OraQuick as a percentage of total OraQuick sales. This will be partially offset by lower sales of urine assays to LabOne and ongoing tough economic conditions.

Operating expenses for Q1 declined 5%, or $300,000 to $6.2m compared to last year. This decline is primarily attributable to lower staffing levels, lower clinical trial expenses, and the absence of certain large severance charges that we had last year. These declines were partially offset by increased sales and marketing expenses for OraQuick and additional costs related to the occupancy of our new corporate headquarters in Bethlehem.

In the second quarter we would expect operating expenses to be quite a bit higher than Q1 due to a large number of strategic investments into the business. They are as follows: Number one is completion of the OraQuick clinical trials for both oral fluids and plasma and anticipation of FDA submission by midsummer; number two, completion of the UPlink clinical trials for both the five-panel DOA test and for the RSV assay in anticipation of FDA submission, again, in midsummer; third is the cost associated with the installation and validation of equipment required for the transfer of the oral western blot Intercept and Orasure products to our new manufacturing facility here in Bethlehem; fourth is the cost for expanding our OraQuick manufacturing operations in order to double our capacity to up to 300,000 tests per month on a one-shift operation; and, fifth, is the rollout of our sales and marketing programs for OraQuick in the public health market.

For the year, operating expenses are expected to increase roughly 15% over last year, in total, as we invest heavily in paving the way for the future by expanding the claims for OraQuick, consolidating all manufacturing operations, promoting OraQuick and Intercept with innovative and impactful sales and marketing programs, and by completing the development and the clinical trials for the UPlink DOA system.

Our net loss for the first quarter was $1.1m, or 3 cents per share. These results are in line with our most recent guidance and are somewhat better than Street estimates. For the second quarter, despite a revenue forecast in excess of 9m, we would expect the loss to be comparable or slightly higher than Q1 due to the high level of strategic investments that were just discussed. Importantly, these were fully anticipated and are fully in line with our expectations and past guidance regarding our drive towards profitability.

For the year we have previously stated that we expect to be profitable in the second half of the year. This is largely predicated on our ability to reach or exceed our revenues for our growth target of 25%.

A continuing bright spot is our liquidity position, which remains strong at the end of the quarter. The company's cash and short-term investments were $15.3m and working capital was $19m at March 31st. Cash flow from operations was positive at $172,000, an improvement of over $2.3m over last year, and this represents the fourth consecutive quarter of positive cash flow from operations.

In the second quarter, due to higher-than-normal operating expenses, it may be difficult to generate positive cash flow from operations, but we expect to remain in a very strong and liquidity position. As I stated earlier, one of our three financial objectives for the year is to retain a strong cash position. We expect to achieve this objective as a result of our anticipated revenue growth of 25% and profitability in the second half of the year.

Shifting now from our financials to our operating results, the following are the major advances that the company made in the first quarter. As I stated in our annual report and in my 2002 year-end earnings call at the end of January of this year, we could never have scripted a more incredible way to end last year and to start the new year than to secure FDA approval for our OraQuick Rapid HIV-1 Test on November 7, 2002, and to follow that up with President George W. Bush announcing our CLIA waiver on January 31, 2003. These events helped raise global awareness for the ease and outstanding performance of our product. It highlighted the substantial unmet need that currently exists in our domestic public health market for Rapid HIV testing to be used in the field, and it reinforced this administration's commitment to fight the global HIV-AIDS pandemic with the best tools available.

This commitment was fully reinforced when, on April 17th of this year, the CDC announced its new initiatives entitled "Advancing HIV Prevention, New Strategies for a Changing Epidemic," which is aimed at making HIV tests a more routine part of medical practice for pregnant women and the estimated 180,000 to 280,000 people in the U.S. who currently have the HIV virus, who may not be aware that they are infected. In their announcement, the CDC identified $35m to support the project and announce that in 2003 the CDC will fund new demonstration projects using OraQuick to increase early diagnosis and referral for treatment and prevention services in high HIV-prevalent settings including correctional institutions.

These approvals and programs are obviously terrific, but they're only the tip of the iceberg. In the first quarter we accomplished many other noteworthy goals with OraQuick. We produced roughly 280,000 OraQuick tests in the first quarter. Our manufacturing team did a terrific job of meeting their production plans. We shipped everything we produced. The sales mix was diverse. It included shipments to Abbott, the military, the CDC, our public health customers, and to the international markets. We completed studies for the venous whole blood claim and we'll submit the data for that claim sometime early in the second quarter.

We initiated the clinical plan, and we anticipate completion of the OraQuick oral fluid trials with submission of our data by midsummer. We've expanded the clinical trial efforts to also gather data for a plasma claim to support Abbott in their hospital sales efforts as well. We reached final agreement with the FDA regarding the language to be used for the CLIA waiver on the OraQuick packaging, and we began to integrate that into our manufacturing operations as well. We completed the application, are now listed on the government supply agreement, or the GSA listing, or any U.S. government agency can now order OraQuick electronically from virtually anywhere in the world. And, last, we began to develop OraQuick advertising programs and completed most of the training materials, established our advertising themes in preparation for the rollout of our programs to the public health market in the second and third quarter of this year.

The OraQuick was not the only success story in the first quarter. Substance abuse testing increased 35% as we began to make new inroads with sales of Intercept. LabOne continues to set the pace and is doing a great job, and they're the biggest seller of the Intercept drugs of abuse testing system. But for the first time, we started to see some real traction from Quest, as they closed 84 small but new accounts for Intercept. And, last but not least, our Intercept distribution partner in the UK, Altrix [ph], continues to make slow but steady progress in growing their drugs of abuse testing business in the UK.

Behind the scenes, Joe Zack and his team have been investigating ways to re-ignite sales of HistoFreezer. In Q1 we added a specialty sales force to sell the product into the OB-GYN market. Early indications are that they will add some nice incremental business as the year progresses, and on April 25th, we announced that we were expanding HistoFreezer into the OTC market under the Compound W family of products. This is expected to add at least $2m in 2003 revenues and is a great market extension for the HistoFreezer product line.

Sam Niedbala, our Chief Science Officer, deserves a great deal of credit for securing the necessary FDA clearances for the OTC market over the past several months, which allowed us the opportunity to partner up with the people from Compound W to expand into this new market segment.

Although less visible today, but a big part of our future, we were greatly encouraged by the progress that we have made with finalizing the development of both our UPlink five-panel oral fluid drug test in the RSV assay.

In preclinical field trials, the UPlink five-panel DOA test has performed equal to or better than Intercept, the oral fluid gold standard. We are in the process of optimizing the collection systems, and we remain cautiously optimistic that we will be submitting the system for FDA 510-K clearance by midsummer.

And with the RSV assay, we are about 50% through our clinical trials, and the assay is substantially outperforming the market-leading assay in head-to-head comparisons. Despite the performance of the assay, we have agreed, in principle, to terminate our business relationship with Meridien. A combination of unforeseen delays on our part over the past year, and a change in their strategic direction, have prompted both of us to evaluate the status and future of our partnership, and we both mutually agree that terminating the relationship is the best for both parties at this time. We've not included any revenues in 2003 from this partnership, and we are now reevaluating our strategy for going forward with the RSV assay. In the meantime, we do expect to complete the trials, and if the remaining trial data is as compelling as the first 50%, then we will pursue 510-K clearance for the product this year.

In summary, we are quite proud of our first quarter financial and operating performance against our stated objectives and look forward to continued momentum for Q2 and for the year as a whole.

And, last, before we open the floor for questions, I'd like to make a few editorial comments regarding Abbott and MedMira. First, we've repeatedly been asked specific questions about Abbott's performance under our contract with them, so I want to give you a brief summary of my perspective on Abbott's Q1 performance. Bottom line in Q1 Abbott ordered more than their contractual minimums, and they accounted for 70% of the total unit volume of sales of OraQuick in the first quarter. In January they trained their sales teams and since that time they've been aggressively selling the product virtually everywhere in the U.S. marketplace.

From my perspective, Abbott's commitment to OraQuick was further reinforced in the first quarter when they unexpectedly announced that they were going to permanently shut down the SUDS product line and replace it with OraQuick. Although I cannot be certain about the actual volume of SUDS, we believe that this alone represents at least 1 million units of incremental opportunity for us as a result of the cannibalization of the SUDS business alone.

However, Abbott's decision to replace SUDS with OraQuick is not trivial or automatic, since SUDS was a plasma serum test and OraQuick is currently only approved for fingerstick whole blood. Although Abbott will attempt to convert their customers to the fingerstick format, we both understand that you need to give that customer exactly what they want and in the hospital market that would include a venous whole blood and/or a plasma claim. So consequently in response to this customer need, we have scrambled to complete certain studies required by the FDA in order to apply for a venous whole blood claim. We expect to submit that data shortly, and then we will wait on the FDA to review the data and consider expansion of our claims.

We also expanded our oral fluid trials to include the collection of blood samples to file for a plasma claim in the future. Again, we are working closely with Abbott to meet the needs of their customers and expand the reach of the OraQuick product as demonstrated by its substantial versatility and performance with multiple sample types. Over the long run, this will be great for the both of us but, for now, we are scrambling to file for expansion of these claims as soon as possible.

Regarding their sales effort, the only visibility that I have in the hospital markets is that they need additional claim support as soon as possible. I believe that with CLIA waiver, they are now able to start to develop a meaningful strategy for entering into the physician office market, but that has yet to begin. In the public health, government, and military markets, since we have a co-exclusive selling arrangement, we have bumped into each other in a number of these accounts, and although this has caused some confusion with our customers and a large amount of anxiety with both sales teams, I am satisfied at this time that the combination of our sales force is maximizing the penetration of the product into the greatest number of locations and ultimately we all want the broadest coverage and deepest penetration possible.

And Abbott has reinforced their commitment by building up their inventories in anticipation of the product launch. This obviously has put additional pressure on their sales force to perform, and I believe they will step up to that challenge very effectively.

So, in summary, we're off and running and both of us are trying our best to sell OraQuick. We are communicating openly and frequently, and we remain bullish that the combination of an Abbott and OraSure is a powerful team to most effectively maximize sales of the product in the near future.

Regarding MedMira, as most of you already know, on April 17th of this year, MedMira announced that they had received FDA approval for the company's Reveal HIV-1 test. With the FDA approval, MedMira can market the Reveal Test for the detection of HIV-1 antibodies in serum or plasma in the United States. First, I'd like to congratulate them on their achievement. It is no trivial event to meet the stringent requirements of the FDA, and I applaud them for their approval. I know the great sense of pride and accomplishment that I felt, and our entire company felt, on our approval, and they should savor that moment as well.

Second, I would congratulate the FDA and the CDC for working to expand the use of Rapid HIV Tests in the United States. That is an integral part of their effort to fight this epidemic and the more tools that are made available the better.

However, as I dig deeper and look at them from a competitive perspective, their product is a moderately complex test that is designed for use almost exclusively in hospitals and clinics, certified to perform moderately complex tests that require centrifugation of a serum or plasma sample. Their three-minute claim is confusing, since we believe that a clinician must perform at least eight steps including spinning down a sample and then must reconstitute a conjugate and controls. No way -- absolutely no way can you do all that in three minutes. To me, the test is closer to a SUDS-type product. As we know, Abbott is replacing SUDS with the next generation of improved technology, our OraQuick test.

However, in the short term, the customers in the hospital market may prefer the use of a serum or plasma sample due to their current usage patterns, and that could cause us to have a temporary void in the preferred sample type for the hospital market only. To meet this customer need and to fill this void, we are working nonstop to secure the data to expand our claims for both venous whole blood and plasma, so that Abbott can provide the most comprehensive, accurate, and easy-to-use test to effectively compete in the hospital labs and clinical market settings.

Importantly, please don't forget that OraQuick was developed to serve the point-of-care market with its simple, rapid, and accurate design for use with a fingerstick or an oral fluid sample. At times, it has seemed totally counterintuitive to me that we would rush to put resources against secured venous whole blood and plasma claims because it's not the market that the product was designed to capture. However, we are extremely proud of the incredible versatility of OraQuick as we believe that we will get good clinical results with venous whole blood and plasma as well. With the firepower of Abbott, we can substantially increase the size of the potential market for OraQuick by securing additional claims to maximize the opportunity in the hospital, physician office, and clinic markets while not losing sight of the biggest opportunity of all -- that of being the world's best, rapid, point-of-care, HIV test.

And with that, I'd like to open the floor for questions.

At this time, I would like to remind everyone in order to ask a question, please press star, then the number 1 on your telephone keypad. We'll pause for just a moment to compile the Q&A roster. Your first question comes from Wade King with Wells Fargo.

Hi, Wade.

Hi, good afternoon, can you hear me?

Yes.

Thanks for all the detail -- very helpful. Congratulations on the accomplishments. A couple of questions, if I may -- you reiterated that product growth guidance for '03 of 25%, and then you indicated in your comments, Mike, that you expected your new arrangements for OTC wart-removal products to add $2m to revenues in 2003. I'm just trying to assess -- is that included in the 25% product growth, especially given the lumpiness of HistoFreezer to some degree that we've seen in the past? How should we assume the $2m fits in?

I'll state it this way -- when we put our budgets together, we had no idea whether or not we could ever secure OTC approval for HistoFreezer. And so we had no visibility, and it did not end up in our budget when we put our 25% projections together. So if everything holds together as the year goes on, it's incremental. But, for now, until I get the lumpiness out of OraQuick and start to see some regular ordering patterns, it just is a great insurance policy to help us ensure the 25% deliverable and as soon as I feel more comfortable about the continuity of, especially OraQuick, we'll be back to you as soon as we can.

Okay, that's very helpful. Also, given OraQuick, especially domestically, is such a high-margin product, can you comment on margins expected associated with the OTC side of that business?

The HistoFreezer do you mean?

Yes.

They'll be comparable, equal to or better, than our current overall average margin.

Okay, very good. You mentioned, Mike, that as relates to Abbott, gave us some good detail there and it's, of course, very gratifying to see them shut down the SUDS manufacturing process and focus on OraQuick, but as it relates to putting into place metrics that you can follow reliably on assessing their inventories, yes, it's normal for them to take on product to supply to their sales reps and make it available for their, especially, high-priority accounts, but can you give some reassurance, going forward, that there will be some metrics put into place, such that you have a very strong sense of where their inventories are, especially as the sales ramp builds such that you always know that you're dealing with sell through on a steady-state level as opposed to, obviously, any significant inventory build?

Okay, a couple of things -- number one, the purchase orders we got from Abbott for the whole first quarter, we got at the beginning of the quarter, and it was greater than what their contractual minimum obligations were, and it just reinforced how bullish they were with the product. So for the quarter we were producing against that, but if you recall, we were sort of in our scale-up mode, and so when you look at the 280,000 devices we made, 150,000 of those were in the third month of the quarter, and we proved that we could produce that many, but we clearly were in a sloping [ph] increase. So disproportionately, the shipments that we could make, you know, increased by month and so, disproportionately, that volume they got just happened to be close to the end of the third quarter, although they had given us the orders at the beginning of the year. So it was sort of just kind of really what -- as soon as we could make it, and we were sure that it was -- the integrity and the quality were there, then we shipped it to them and to our other customers but, you know, it was kind of an allocation basis at that point. With that slope with the curve, it tended to be in inventory.

The CLIA waiver caused great opportunities but confusion, because we had a product out there without a CLIA waiver package to insert, and so the number of questions and degree of confusion and how we sorted through that everybody had to work through. So I believe at the pipeline fill, you know, is just the way that it fell out in the first quarter.

The metrics -- you know, the best metrics that we can give you, over time, is in our market segmentation is to start to see infectious disease start to grow, you know, at the kind of rates on a regular basis that we're seeing in the first quarter. That's going to be the best metric of all. And so that would be the first level. So I'm going to break down the second tier, it's sort of -- you know, I hope we sell more directly than we sell to Abbott, because we've just got better margins on that product, and that, to me, is the second most important metric in terms of the public health market, which is our sweet spot for selling.

With respect to Abbott and their metrics, because of the shelf life of the product, you're not going to see -- neither party wants to build up any inventory. We all want to be just in time, but in the startup, without the continuity of regular purchases from customers, you can't be just in time because you're selling, and you're doing pilot programs, and they're hit and miss, and we'll work through that, but this is where we've got to grind it out.

Sure, and a last question, and we'll get back in line -- could you comment more specifically on the manufacturing scale-up efforts? From your comments, it sounds like you are at a production level of 150,000 units of OraQuick in the month of March, and our expectation is that you were going to virtually double that by the middle of the year. You mentioned something about single shift and 300,000 units. What is your monthly production capability? Is that dual production lines or expansion of the single shift? Could you comment on the manufacturing scale of expectations, please.

Sure. There's a difference between establishing capacity capabilities and what actual orders are, but in March, in round numbers, the team produced 150,000 units, which was our target, and for one-shift operation with quite a bit of overtime and some temps, we produced 150,000 units, because that was our goal. We had purchased additional equipment to allow us to run a dual line, which simplistically allows 150 to go to 300. The equipment will be here, and then we'll just have limitations on finding highly qualified staff and training them to ensure the integrity of the quality of the product.

Because it's largely a manual process, and the equipment is relatively straightforward, in terms of this form of the operation, you know, we'll be ready at the end of June to be able to do 300,000 tests a month from an equipment perspective, and we'll access good people here in Bethlehem.

Thank you very much.

Your next question comes from Benner Ulrich with UBS Warburg.

Hi, Benner.

Hello?

His question has been withdrawn, sir. Again, I would like to remind everyone if you would like to ask a question, please press star then the number 1 on your telephone keypad.

Do we have anybody else in the queue? Hello?

I don't see him. Your next question comes from Mitra Ramgopal.

Hi.

Hi. Hello? Hello?

His question has been withdrawn. One moment, please.

Who is withdrawing them -- you or him?

I open their lines, and they don't say anything, sir.

Okay.

One moment, please. Your next question comes from [Daniel Liu].

All right, I haven't withdrawn my question here -- I see you guys have had a busy quarter, and I congratulate you on all this good work. I have two questions -- first, the 35m that the CDC is allocating for testing -- how much of that is going towards OraQuick and is that included in your 25% revenue growth estimate?

The first part of the answer is, Dan, I have no idea. The $35m mentioned to OraQuick in terms of the usage for their programs, but we're not aware of what part of the budget could be used by us, but we have a meeting set up to go ask them that specific question, and we would expect to do that, you know, very soon.

What was your second question?

Did you have any of that included in your 25% revenue growth estimate?

In terms of the CDC and the mix, no, we really just simplistically had our MIRIAD studies and the other studies that we were doing with the CDC and programs like this, we had no visibility with those whatsoever. So until we get regular continuity of orders, you know, everything is still filling to get to 25, but like the argument I made earlier for the FreezeOff product for the OTC market, we had no visibility, and this was not in our mix, and if all the other things hold together, this could be nice incremental add-on at whatever level it is. I just don't know anymore than that, Dan, at this point.

Okay. My second question -- you didn't talk much about HIV testing in Africa, and I was wondering if you can give an update on that, and also I noted the other day Glaxo SmithKline stated that they're reducing their price for Combivir from a buck-seventy a day to 90 cents per day for AIDS in Africa. So I'm wondering if that frees up money for testing?

With respect to our strategy for international, which, of course, South Africa is a primary market opportunity, as I've said, and it's a good question, I actually forgot to include it in my comments earlier, but we are clearly actively working to resolve our HIV-2 strategy in terms of maximizing the opportunity to sell into international markets, especially developing world. And there's a lot of discussions in process -- no final arrangements -- but it's very, very complex, given especially the economics and how to work through that, and a year and a half ago we got singed pretty badly by not doing that one correctly, and so I'm kind of walking gingerly, but it's a priority, because we have the right product for the global marketplace, but I -- with limited manufacturing capacity now and full demand for that in the U.S., I don't want to get too distracted too quickly, because financially the greatest short-term return is doing the U.S. well, and then that funds a lot of things to go around the world.

Okay. Do you think the timeframe for that is going to happen sometime this year?

Absolutely.

Okay, great, thank you.

Take care.

Your next question comes from Benner Ulrich with UBS Warburg.

Hey, guys, can you hear me?

Welcome back.

Thank you. I apologize. Congratulations on the progress this quarter.

Thank you.

I just had a couple of questions -- I dialed in a little late, so you may have touched on some of these. First, just a followup to Wade's to the extent that you can comment on it, you know, obviously on a quarter-to-quarter basis, it's a little difficult, but for this year, what would you expect the mix for OraQuick to be? And maybe that's more a market opportunity question as well. You know, how much do you think would go to Abbott, how much do you think you would do independently? Is that something that you have visibility on yet?

Well, I'll tell you that -- I said it, if you didn't hear it earlier, I'll repeat the facts -- of the 280,000 units sold, 70% in the first quarter went to Abbott, and 13% was sold directly by us to our public health customers. The balance was to CDC and international.

But that's something that we would think would change, right, on a quarter-to-quarter basis? Because of the inventory issue that you discussed is all.

Well, you know, they placed orders for that amount and filled their pipeline at the beginning of the year, and we had a couple orders for the smallpox vaccines from the Navy and other things that were nice orders, but in public health, for our direct sales efforts, most of them needed CLIA waiver, they wanted to do pilot programs. So disproportionately, the product that was FDA-cleared in November was ideally suited for Abbott to exploit the opportunity and less obvious on how we were going to do it for public health.

Right, okay, and has the CDC -- and you may have said this as well -- did they give you, or have they given publicly any timeframe as to when they want to start some of those pilots. I know they said '03.

Dan Liu just asked the question about the $25m in the CDC, and, Benner, at this point, we have no visibility other than the good news we heard on their webcast, but we have a meeting set up to look at them eye-to-eye and ask the question in person.

Right, okay. And then one last question -- longer term, the fact that the Meridien agreement is no longer in place, my understanding is that would -- I guess essentially they had an exclusive on a number of tests using the UPlink technology, and so this would enable you to potentially pursue some other opportunities, if you were going to decide to go ahead and do things in house. Are there any other areas that you view as attractive in the near term and might explore?

That's a great question. Two parts -- number one, Meridien had a number of esoteric assays ideally suited for their current mix of products to put it all on one platform. When you look at the top five assays that are all on their list, and we looked at the market sizes of those top five for the physician office market only, they constituted what aggregately was about $100m opportunity.

Interestingly enough, since we have distribution directly to physician's offices, and probably most of those first five tests have an average CBT code of about $20, and an UPlink platform could be ideally suited for them, you know, we're kicking around and looking at it from a market-driven perspective, the opportunity to maybe kicking out the middleman in Meridien and exploiting this directly ourselves. So we're working through that right now, and I would say that, you know, our board has asked us -- and it's the right question -- don't lose sight to execute against OraQuick and Intercept and HistoFreezer because you need to get sales traction, but by the end of the year we really want the plan laid out of where our development efforts go from here, moving forward. Just very comfortable that we want to execute with what we have out there now and not get too distracted, but Meridien has been a patient and a good partner, but, moving forward, maximizing shareholder value for our investors, we're best to be free.

Okay. Sounds good. Thanks, guys.

Your next question comes from Mitra Ramgopal with Sidoti.

Yes, hi, guys. I'm not sure if you touched on it before, Mike, but in light of the clinical trials of both the OraQuick and UPlink five-panel tests, what's your best sense in terms of when you expect to have that on the market?

Well, the only thing I can control is when we get the trials done, and as long as the data is satisfactory with both, I stated that our expectation is to be in place to do the submissions for both OraQuick oral fluids and plasma by midsummer and the same for the UPlink DOA five-panel test.

Okay, so that's 2004-plus we're looking at.

Absolutely. These are value-added for 2004. They're not at all in my mix of revenues projected in the 25% increase.

Okay, and in terms of the one segment you had to physician office therapies, I'm not sure -- I know there was about a million drop-off in that?

Yes. I'm happy to repeat it -- what happened was we had a price increase that was going to be effective the beginning of this year, and so many of our regular customers built up some inventory at year-end, and to exasperate that from a year-to-year comparison perspective, in my first quarter as the CEO we hadn't taken a price increase at the end of the previous year, and I took one in 2002 effective April 1st. So I got kind of a double whammy out of price increases -- one on April 1st of 2002, one at December 31st that both exasperated the difference. We're back on track in the second quarter with that, and I mentioned, similarly, to that that we expect up to $1m in filling the initial order for FreezeOff for the OTC market in Q2 as well.

Okay, and the final question -- what is your best guess in terms of the size of that market?

Which one?

The HistoFreezer cryosurgical wart removal?

It's interesting, I have to tell you that I, having been sort of founder with Sam Niedbala of this company and having sort of seen that through its infancy, we've repeatedly been told that you only have about 5% or 10% penetration into the physicians' office market, and obviously non-OTC. And under Joe's leadership, we're going to attack two fronts-- one is to be OTC with a partner like Compound W that's just a great brand equity around that who is ideally suited to go to that market, and we really think there are two different buyers.

We hope, and we're going to -- if we made the commitment versus -- I would call it sort of a milking strategy -- to try to re-invigorate or re-ignite the HistoFreezer business and we're going to take a look at it and see if, instead of 5% penetration in the physician office market, which is really all that we had at the $6m level is our opportunity to double or triple that by hiring specialized sales forces and repositioning the product, and Joe and his team are taking a very hard look at that, and he's got the window of incremental sales by the OTC partner, because that's an OEM arrangement. So we've got the nice bump of at least $2m from that, and Joe's going to do great things as an encore in the physicians' office market as well.

Okay, thanks.

Your next question comes from [Mark Adelante] with Alliance Capital.

Hi, good afternoon. On the CDC announcement for the 35m, just going back down to the next paragraph, it says the initiative has four parts. Is that the $35m will be spent over those four initiatives? Am I understanding that correctly, or is it 35m for new HIV testing, period?

I believe it is spread out over the four initiatives, Mark.

Any thoughts on what percent of the 35m would go towards, then, just Rapid testing?

As I stated earlier, absolutely no idea, Mark, but we have a meeting set up shortly with the CDC to look them in the eyes and ask that specific question.

Okay, thank you.

Your next question comes from Wade King with Wells Fargo.

Good afternoon, it's actually [Ed Schenk] following up for Wade. The question about substance abuse testing, which was down in the quarter, and I'm wondering if you expect that to rebound in the second quarter and maybe how April is going?

Hold on a second, I'm confused, because it was actually -- it was actually up 35% quarter-to-quarter a year ago.

I guess we just expected more. The general market conditions of employment are down across the country, so there's less drug testing going on, and that's what we would attribute it to, but are you seeing a rebound? Do you expect it to grow quicker?

Well, I'll answer the question a couple of ways, Ed. Number one, obviously, it's a tough market out there for workplace testing. You know, to call on a workplace setting to ask them to focus on changing their methods of testing under current business and economic conditions isn't an ideal situation to go in and sell under. I think that we are -- we have a new leadership team here from sales and marketing, and we're really sort of re-evaluating how we went about doing things, and as I stated earlier, Quest is really starting to kick into gear, and we had 84 new accounts sign up. Those are small accounts, but we also have seen that Quest is sending out literature and materials on the product to all their customers, which is thousands of people, about a conversion opportunity. So we're seeing a better effort to sell. The translation to revenues like your comment -- I'm not happy with the progress so far, but year-to-year, how can I complain about 35% in a tough market.

Mike, it's Wade. Just to clarify -- obviously, very strong performance year-over-year. Sequentially, however, it was down at least as related to our breakout for the fourth quarter. So we're just trying to get a sense of the trend, looking ahead to the subsequent quarters of the year. I know you expect it to be up year-over-year but how about on a sequential basis?

First of all, I don't know to what degree, but we had some equipment sales in the fourth quarter, which it's kind of no-margin stuff that you put in place to have future business, and there was some of that, not a disproportionate amount, so that was one factor. I don't understand seasonality for this business yet. They tend to say the busiest two quarters are the fourth quarter, which is the whole Christmas season -- you know, the holiday season hirers, and then at the end of the second quarter you're starting to get the college graduates that are looking for jobs, and so this -- those are the two spike periods that we've been told are the best periods, but we have limited experience with it, and so I'm speculating a little bit, Wade, but seasonality may play out a little bit. Equipment was a factor, and it's erratic purchase patterns right now because people aren't hiring a lot.

Was there any equipment sales in that unit in the first quarter and do you expect any in the second quarter?

Ron?

Very little, Ed, in the first quarter. If I recall, I think we had something on the order of about 50,000 or so in equipment sales -- one personal lab, I believe, it was sold. And our salespeople are out there constantly trying to identify new accounts that can process the Intercept test, and if they want to have their laboratory set up to do so, then we will sell them equipment to put them into the business. So, in a way, it's difficult to predict the volume of equipment sales that we would expect, and they're relatively minor in comparison to some of the larger equipment purchases that were made by Quest Laboratories in the second and third quarters of 2002, where we sold $250,000, respectively, in each of those quarters to Quest so that they could set up their laboratories.

Obviously, down the road, and, again, depending upon the volume of samples processed in our lab partners, the need to acquire additional equipment will be there, it's just difficult to predict exactly when that will take place.

Okay, and shifting gears or OraQuick and an HIV-2 license -- could you give us an update of where you're at in the negotiation process of obtaining an HIV-2 license and how that will be important, going forward?

How we approach HIV-2 could be a number of ways. One would be to secure a license; two, would be to sell to Abbott or someone else who had the license through their licensed exclusively to them, and we are evaluating all our options and looking at the best distribution opportunities for us, and we haven't closed on whatever direction we're going to go yet, but we're spending -- I, personally, am spending quite a bit of time on that to make this a global product, and I hope to be able to talk to you sooner than later about that, but I can't get into it at this point.

Is there anything else that you can add about international sales of OraQuick? When to expect a ramp-up there?

Clearly, our focus is providing -- selling product to our public health customers, military, the government, and to Abbott before we prioritize international. So out of our top five opportunities, it's fifth right now until we get really good traction, you know, in each of those segments. So it's the lowest margin, lowest-priced stuff, and it's not going to move up to the top unless an agency comes to us with a demand for a large, a negotiated order, otherwise I'm going to prioritize to satisfy the U.S. market as we've heard from both the FDA and CDC, there's a large need right here, and I want to make sure I fulfill that demand first, and it's the greatest return for our investors.

Well, you've certainly had a great launch of OraQuick HIV in the United States. We've been very impressed. Could you tell us a little bit more about the launch as far as from the customer standpoint -- how the reimbursement goes -- do they bill under the same code that the labs bill under, you know, since this is not a lab-based test? What kind of reimbursement they're getting, you know, the customers?

I don't have good visibility to that yet. I can't give you a good answer, but we'll be prepared to talk about that in the next quarterly.

Okay, thank you very much and congratulations on a great quarter.

Thanks a lot.

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

Thank you, everyone, for joining us. It's a big sigh of relief to start the year off with a great quarter, record results, both from a revenue perspective and in terms of continue cash flow from operations being positive; strong cash position for the company; and we're hitting on all cylinders on all fronts between us and our partner, Abbott. Intercept and HistoFreezer have supplemented that effort to give us a one-two-three punch to support the case that we have that we're set up to increase the business 25%. Mix unknown, but it's exciting to see us hitting all cylinders on three different businesses. The fourth business will be coming into play soon, and we look forward to talking about the contribution of UPlink in with the other three drivers to our business model.

The second quarter -- we're not off the hook in terms of the amount of effort required from our team to continue to build additional shareholder value, and that's primarily led by the clinical trials for OraQuick and the submission for that approval, which was what the product was always designed for on a global basis. I've been asked several times about the HIV-2 issue, that's a high priority for the company with oral fluids in order to have the best product for the global marketplace, and we hope to give you visibility on that after we've sorted through it and optimized the opportunity for our company.

With that, I really appreciate everybody's questions, and the detail that you get into with the business, and we look forward to continue to give you good feedback as time goes on. We invite any of you that are available to join us at our annual meeting on May 20th -- see our new facility, see what we're doing here, sort of build shareholder value for yourselves.

With that, I'd close and say thanks a lot.

Thank you for participating in today's teleconference. You may now disconnect.