OraSure Technologies Inc (OSUR) 2003 Q2 法說會逐字稿

Good day everyone and welcome to the OraSure Technology Second Quarter Financial Results Conference Call and simultaneous web cast. As a reminder, today's conference is being recorded. All lines have being placed mute to prevent any background noise. After the speaker's remarks, there will a question and answer period. If you would like to ask a question during this time, simply press star, then number one your telephone keypad. If you like to withdraw your question, press star, then the number two.

For opening remarks and introductions, I will now turn this call over to Shannon Warren at OraSure Technology. Please go ahead.

Good afternoon everyone and thank you for joining us today. I would like to begin by telling you that OraSure Technology issued a press release shortly after 4 pm. Eastern time today regarding our second 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 archive there for seven days. Alternatively, you can listen to an archive of this call until midnight August 1, 2003 by calling 800-642-1687 for domestic or 706-645-9291 for international and entering the conference ID number 1655901.

With us today are Mike Gausling, President and Chief Executive Officer, Ron Spair, Chief Financial Officer and Mike Formica, Executive Vice President, Operations. Mike Gausling will begin with an opening statement and then follow with the 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 Technology, including its registration statements, its annual report on Form 10-K for the year ended December 31, 2002, its quarterly reports on Form 10-Q and its other SEC filings. Although forward-looking statements help to provide conceded information about future prospects, listeners should keep in mind that forward-looking statements may not be reliable. The company undertakes no obligation to update any forward-looking statements to reflect events or circumstances after this call.

With that, I would like to turn the call over Mike Gausling.

Thanks Shannon. Good afternoon everyone and welcome to our second quarter earnings conference call. Today we will begin by providing everyone with a brief review of our performance against our stated 2003 financial and business objectives. Second, the summary of our financial results for the first six months of 2003, and guidance regarding the second half the year and last but not least, I will provide some colored commentary on our major milestone events for OraQuick in Q2. Our approval of OraQuick in Mexico which we announced earlier today, Abbots (ph) Q2 performance, the status of our efforts to obtain an HIV-2 patent license, and why we have filed for $75m universal shelf registration statements with the SEC, we'll then open the floor questions, okay let's dive-in.

As stated in our 2002 annual report, and discussed during our Q1 conference call we are perusing a number of financial and business objectives during 2003. Our performance against those objectives is summarized as follows, on the financial side, our objectives for 2003 are first to increase revenues for the year by 25% from 32 to at least $40m, to retain a strong cash position and be to profitable in the second half of the year.

First, although sales must grow 33% in the second half of 2003 compared to last year in order to achieved annualized growth 25%, we maintain our guidance of at least $40m in revenues in sales for 2003. Second, with $15.4m of cash in the bank, more than $7m in available credit facilities, positive cash flow from operations and the recent announcement of $75m universal shelf our cash management liquidity position remain the shining star under Ron Spair's leadership. And third, regarding profitability, we continue to demonstrate improved operating performance and as I've said before, *profitability clearly tracks revenue growth.

In Q3 we expect sales of at least $10m and a loss comparable to Q2 but we do expect to be profitable in Q4 due to anticipated revenues of at least $11.5m which is required to reach $40m in sales for the year. Importantly, for the balance of this year, our major priority, more importantly than year term profitability, is to ensure adequate investments that fuel sustainable revenue growth for 2004 and beyond.

In addition to our financial objectives, we have six major business objectives for 2003, they are as follows, the first objective was to complete clinical trials for both an oral fluid and venous whole blood claim for OraQuick rapid HIV-1 antibody test. We have completed the work required for the venous whole blood claim and submitted our PMA supplemental application to the FDA on April 29th of this year.

The FDA has indicated that this application will be subject to a 135-day review cycle and as of today we currently have about 45 days left in the initial review cycle. We believe that we have answered all the questions posed to us from the FDA regarding this claim and we are cautiously optimistic that we will secure approval within the remaining 45 days of the initial review cycle. We need this claim in order to help Abbott fully penetrate the hospital market. The oral fluid trials are underway and we are progressing nicely and expect to complete the trials and file the data with the FDA sometime in Q3. We would expect this to take on a 180-day review cycle once the data is submitted to the FDA.

We've also pursued two additional claims that were not contemplated we began the year. First, Abbott has requested that we try and secure a claim for plasma as well, which would further extend their reach in flexibility in the hospital market, consequently, we have piggybacked on the oral fluid trials to improve the collection of a blood sample to secure a plasma claim and expect to be able to complete these trials and submit the data to the FDA in a time frame similar to that of the oral fluid claims.

Second, but arguably more important, in order to pursue our vision of fully developing a global strategy for OraQuick, we knew that in addition to the venous whole blood, plasma, finger sticking, oral fluid claims that we should secure an HIV-2 claim in the United States if we were to fully establish ourselves as the most versatile rapid HIV test in the world. So late last year we consulted with the FDA in order to design a clinical trial protocol to allow us to pursue an HIV-2 claim here in the United States. I am pleased to announce at this time, that we have completed the trials required by the FDA and on June 30th we filed the supplemental PMA with the FDA for approval of an HIV-2 claim. We successfully completed this work and despite the absence of an HIV-2 license yet, we felt that it was in the best interest of Global Public Health and the United States having taken a strong leadership role in fighting HIV AIDS under President Bush, that we unilaterally decided to begin the trials and then run a parallel path of attempting to secure an HIV-2 license. More on the status of the HIV-2 license at the end of my update.

Our second objective is to increase Histofreezer (ph)sales with the addition of a new specialized sales force and an expanded market reach. Marginally through the efforts of Joe Zack and his sales team, we've made significant progress in this area as we've brought on two different contract sales forces with the total of roughly 140 reps to assist us get Histofreezer back on track in the physician's office market. We are in the process of completing the field training for another contract sales force of 50 reps and we are cautiously optimistic that these groups can collectively get us back on track in the physician office market in the second half of this year.

Additionally, Sam Nedbala (ph) our Chief Science Officer did a great job to secure FDA clearance to sell Histofreezer over the counter in Q1. This effort was in direct response to an opportunity to partner up with the owners of the Compound W line of wart-removable products to distribute an over the counter version of Histofreezer in the United States under the freeze-off trademark. The roll out is off to a great start and it's expected result and at least $2m in 2003 revenues. A third objective was to support our UK intercept distributor Altrix Healthcare with an eye towards expanding more broadly into Europe. I continue to be impressed with the progress that Altrix is making in the UK to sell the intercept drug testing system and this is supported by an impressive growth rate of 40% for the most recent fiscal year.

Additionally, contingent on successfully completing the UPlink DOA trial and submission to the FDA, we would expect Drager to roll out the road side drug testing system across Europe early next year. So consequently, we are still carefully evaluating how to maximize our opportunity in Europe, which has historically been very slow to adopt drug testing programs into the traditional work place and criminal justice drug testing markets.

Our fourth objective was to submit a 5-10(k) application to the FDA for UPlink DOA product. Including a full nitified (ph) panel assays by mid summer. Bottom-line, we are very close and have made substantial progress toward meeting our stringent design criteria. But we did not need to self imposed mid summer deadline of the 5-10(k) submission. However, we continue to have great results for our many field trails. And the team is working around the clock to improve and implement a more user friendly version of the system and to submit a world class drug detection system as soon as possible.

Our fifth objective was to complete the consolidation of our manufacturing operation from Oregon to Bethlehem, Pennsylvania. Under Mike Formica's leadership, we have made significant progress here. And I'm pleased to report that the FDA has given us the green light on a series of non-clinical cross over studies in order to approve the transfer of manufacturing our Oral Western Blot HIV-1 confirmatory test and OraSure collection devices to Bethlehem. Assuming these studies go as expected. This would help accelerate our consolidation efforts. This is great news and a testimony to the successful efforts of our regulatory and manufacturing teams under Mike Formica's leadership.

The final objective is to continue to build trust with our investors by being transparent and communicating frequently. I believe we've done a very respectable job in this area, with conference calls such as this, where we report progress against our stated objectives, the web casting of our annual meeting of stockholders, our frequent press releases and our normal SEC disclosure document. In addition, Ron's Spair and I have hit the road on numerous occasions to communicate directly with our existing investors and potential new investors. For example, after last quarter's earnings call, we traveled to Boston, New York City and to Philadelphia completing more than 20 presentations to potential institutional investors over a three day period. We are also getting a lot of new investor interest as a result of the filing of the $75m universal shelf registration statement. We obviously intend to continue this type of investor transparency as part of our routine business practices.

Overall and in summary, I continue to be very proud of our team at OraSure, and I am pleased with our progress and solid performance against our stated business and financial objectives. 2003 is shaping up to be a great year.

Okay let's now dive into our financial results for the second quarter.

Total revenues for Q1 was $9.6m or 21% higher than the same period in 2002 and 12% higher than Q1 of 2003. Product revenues were $9.4m for the quarter, which were at a 20% increase over Q2 of last year. I'm pleased to say that both total revenues and product sales are records for the company. And in fact, this is the second consecutive quarter record revenues. It is also the fifth consecutive quarter of increase in revenues. For the first six months of this year, we had total revenues of $18.2m and product revenues of $17.8m, which represent increases of 17 and 16% respectively over the comparable periods of last year. The revenue increase is primarily attributable to the launch of the OraQuick rapid HIV-1 test, and the first shipment of Freeze Off and increase sales of OraSure and Intercept. Primarily as a result of the successful launches of OraQuick and Freeze Off, sales to both the infectious disease and cryosurgical systems markets increased 73% over last year.

I am also greatly encouraged by the progress that we are making with Intercept into the drug testing market. For the first six months sales increased a respectable 16%. If we peel back the onion and a look a little closer, I'm pleased to see that we have closed roughly a 163 new accounts over the first six months of this year. And I'm encouraged to see that actual specimens process for month has increased 40% from roughly 45,000 specimens per month last June to more than 63,000 specimens per month in June of this year. This is a great trend line and we are cautiously optimistic this will soon translate more visibly into our quarterly financial statements under the drug testing market segment.

Partially offsetting a steady increase in overall revenues has been the disappointing performance of Histofreezer in the physician office segment of the cryosurgical market and the loss of urine assay sales in the life insurance market. As we look forward to Q3, as I stated earlier, we expect total revenues to continue to increase steadily and reach at least $10m, which will be yet another quarterly sales record. The primary drivers will be steadily increasing OraQuick sales including initial shipments in response to the CDC's $2m purchase order and continued increases in Intercept and cryosurgical products.

The gross margin for Q2 was 60% or essentially the same as last year. However, this represents an improvement from the 58% reported in Q1. Primarily as the result of a more favorable product mix.

For Q3 and the year as a whole, our gross margin is expected to continue to remain flat as a result of higher revenues and lower scrap being largely offset by substantially lower sale of our urine assays to the life insurance market.

Operating expenses for Q2 increased by 5% or $300,000 to $6.4m compared to last year. This increase is primarily attributable to increased sales and marketing expenses for OraQuick and Intercept costs related to the transfer of manufacturing operations from Oregon to Pennsylvania, and the additional cost related to the occupancy of our new corporate headquarters here in Bethlehem.

In Q3 and Q4, we had expected operating expenses continue to increase due to a large number of strategic investments into the business. They are as follows, completion of the OraQuick clinical trail for oral fluids and plasma in anticipation of our FDA submissions this quarter, completion of the UPlink clinical trials for the five panel DOA test, in anticipation of our FDA submission later this year.

Costs associated with the installation and validation of equipment are required for the transfer of the Oral Western Blot, Intercept and OraSure products to our new manufacturing facility, continued roll out of our sales and marketing progress for OraQuick to the public health market and for Intercept the workplace and criminal justice and drug testing markets and our obligation to co-invest with MedTech, a portion of its advertising expenses to market the Freeze Out product in the over-the-counter market.

For the year we still believe operating expenses will increase roughly 15% over last year, largely due to the investments I've just mentioned. Our net loss for Q2 was $530,000 or a penny per share. These results are better than street estimates of a loss of 3 cents per share. A continuing bright spot is our liquidity position, which remained strong at the end of Q2. The company's cash and short-term investments were $15.4m and working capital is $19.2m at June 30th.

Cash flow from operations was positive, at $101,000. This represents the fifth consecutive quarter of positive cash flow from operations. In Q3, due to timing of certain prepaid expenses, it may be difficult to generate positive cash flow from operations, but we obviously expect it to remain in a very strong cash and liquidity position. However, as I stated earlier, liquidity is expected to remain very strong for the year.

Not surprisingly, the most significant developments of this year, relate around OraQuick. What an incredible three months. Earlier in the quarter on April 17th, the CDC announced its new HIV prevention initiative, 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 US, who currently have the HIV virus but may be unaware that they are infected.

In their announcement the CDC identified $35m to support the project and announced that in 2003, the CDC will fund new demonstration projects using OraQuick to increase early diagnosis and referral for treatment and prevention services to high HIV prevalent settings, including correctional institutes.

Then on May 19th, the day before our 2003 annual meeting, we hosted a reception at our Bethlehem facilities in order to celebrate the FDA's approval of our OraQuick Test and to acknowledged the work of the federal state and local agencies and their initiatives on national and global HIV prevention.

Among the dignitaries attending were Claude Allen, Deputy Secretary of the US Department of Health & Human Services, Ambassador Jack Chow, Deputy Assistant Secretary for Health & Science of the US State Department, Dr. Joe O'Neil (ph), Director of the Whitehouse Office of National AIDS Policy and Bill Jimson (ph), the Chief Operating Officer of the CDC. A representative of Senator Specter's office also attended. And this was a wonderful celebration to mark the approval of OraQuick, but far more importantly, was an exemplary example of the commitment that our government officials have for fighting this dreaded disease, on a global basis.

Not less than a week and a half later, on May 27th, I had the distinct honor to be invited to Washington, to personally experience President Bush sign the $15b Global AIDS Bill. What a once in a lifetime *experience and again a testament to the commitment that President Bush has for fighting this dreaded pandemic both domestically and globally.

If this list weren't long enough, the quarter ended in grand style, when on June 26, as a direct result of the CDC's AIDS prevention initiatives, Pennsylvania Senator Arland Specter (ph) announced with the capitol building tin the background, that the CDC had just issued OraSure a purchase order for 250,000 OraQuick devices, or $2m worth of product, with shipments by year end. All of this was expedited so that the CDC could kick off national HIV testing in a big way, which was the next day.

There were other OraQuick developments during Q2 that were below the radar screen. First, we produced and shipped approximately 180,000 OraQuick Tests during Q2. Our manufacturing team did another outstanding job of meeting the demand for this product. We made great progress on the clinical trials and regulatory fronts for additional claims in the future, for venous whole blood, plasma, oral fluids and HIV-2.

We completed the installation of additional manufacturing equipment that will enable us to increase our production capacity to approximately 300,000 OraQuick devices per month, on a one shift operation, as dictated by future demand for the product. We've finalized most of our OraQuick training programs and commenced the rollout of our sales and marketing programs, primarily to the public health market.

In early June, OraQuick Test would receive the Gold Medal Designed Excellence Award in the in vitro diagnostics category, at the Sixth Annual Medical Design Excellence Awards, held at the Medical Design and Manufacturing East Exposition and Conference in New York City. Essentially this award evidences in advancing the design of a medical device based on design and engineering features, including innovative functions, features that provide enhanced benefits to the patient and ability of the product development team to overcome design and engineering challenges.

On June 27th, our nation observed National HIV Testing Day. As part of that celebration, OraSure donated OraQuick devices to numerous locations across the United States, to conduct free HIV testing. Throughout the entire quarter, with all the milestone events discussed above, there was an incredible amount of awareness generated on national TV, in newspapers, magazines and many other leading media outlets. It obviously has been both overwhelming and highly gratifying to witness the incredible news worthiness of our OraQuick Test and the small but important part that we are playing in helping to save lives, both in the United States and elsewhere.

And speaking of elsewhere, we announced today that the Ministry of Health in Mexico has approved our OraQuick Test for distribution to health professionals in that country. What is particularly gratifying about this approval, is that it not only - - does it cover finger stick whole blood, but it also permits sales of the device for use on oral fluids specimens.

This approval was based in part on a technical evaluation performed by the Mexican health authorities, which indicated 100% sensitivity and specificity in oral fluid samples. This is yet another validation of the OraQuick technology platform, as we build the most versatile rapid HIV test in the world. I also believe that this just the beginning of our international expansion south of the United States, starting in Mexico.

Although the regulatory requirements and markets for HIV testing differ by country within these regions, we still have an enormous of work to do in developing our strategy. I believe this is clearly an important step towards boosting our international reach for OraQuick.

Shifting to Abbott, after purchasing roughly 200,000 devices in Q1, Abbott purchased only 40,000 devices in the second quarter. We anticipated this shortfall, talked about it in the first quarter earnings call and can attribute part of it to a build up of inventory in Q1 and the time required to deplete those inventories.

Additionally, despite the shutdown of Abbott's (inaudible) business, Abbott continues to believe that their sales are hampered in the short-term by the lack of a venous whole and plasma claims for OraQuick. We are obviously scrambling to secure the venous whole blood and plasma claims as soon as possible. Additionally, we will continue to press Abbott to increase their purchases over the remainder of the year, in order for them to comply with their 2003 contractual obligations.

Shifting to HIV-2 Patent License, as I stated in several of my past quarterly conference calls, in order to fully develop our global sales strategy for OraQuick, it is imperative that we could detect the HIV-2 Virus. Although there could be no assurance that we can reach a mutually acceptable agreement with Bio-Rad, to secure worldwide non-exclusive license for HIV-2, we are in active discussions with them and we are cautiously optimistic that we will reach an agreement sometime in the future with them. Because of our optimism that we could reach an agreement for HIV-2 with Bio-Rad, we unilaterally decided Bio-Rad, we unilaterally decided to shorten the timetable to commercialization by pursuing a parallel effort to secure an HIV-2 claims for OraQuick from the FDA while we attempted to secure worldwide non-exclusive HIV-2 license from Bio-Rad.

We have successfully completed those trials as we discussed earlier and have submitted our application with performance data for an HIV-2 claim for OraQuick to the FDA on June 30th. We decided that if for any reason that we were unable to secure the license on commercially reasonable terms, that we could always abandon our application or otherwise seek another commercial *partner to take advantage of their HIV-2 license moving forward.

Ultimately we believe that we will secure a license and with it we will move closer to our vision of making OraQuick the most versatile device available anywhere in the world, for fighting the global HIV Aids epidemic. And finally as you know we recently filed the Universal Shelf Registration statement on Form S-3 for the registration and potential sale of up to $75m of our securities.

Securities that we may offer include common stock, preferred stock and debt securities. We're registering these securities on a delayed basis, using a shelf registration statement because we do not have a current intention to sell the securities, although we want to be prepared to do so in the future if and when market conditions are right.

The purpose for the shelf is to allow us to finance our growth strategy. Proceeds may be used for general corporate purposes, including on going R&D activities, commercialization of new products, potential acquisitions, capital expenditures, patent license fees, debt service and retirement and general working capital. As I've stated at our annual meeting and have said repeatedly at our investor presentations, we're pursuing a three part growth strategy that consist of number one of capitalizing on our existing product portfolio.

Number two expanding the use of Uplink, OraQuick and OraSure into new markets and applications and third is to opportunistically supplement our internal pipeline with strategic acquisitions. As you know we are not currently in need of any cash but I believe the proceeds from the shelf offering will allow us to accelerate our plans to facilitate even more aggressive growth in the foreseeable future. And with that I'd like to open the floor for questions.

At this time in order to ask a question please press star then the number one on your telephone keypad. Again in order to ask a question please press star one on your telephone key pad. We will pause for just a moment to compile the Q&A roster.

Your first question comes from the line of Wade King of Wells Fargo.

Hi Wade.

Hi Mike and Ron can you hear me?

Yes.

Congratulations on the quarterly performance and also the HIV-2 submission that's great. For the HIV-2 submission I believe that you may have stated it Mike but I just want to clarify do you expect the time line for a response from the FDA to be 180 days?

That's correct.

Okay and is there anything that you can share with us at this time related to the clinical trial results associated with the HIV-2 trials either, sensitivity, specificity, metrics, blood versus oral fluid modalities?

Clearly with respect to the initial application we wouldn't have submitted it unless we were confident that we reseeded the standard requirements, in terms of performance by the FDA. This product did not include oral fluid in this trial but it's focused on the different derivatives of blood.

I see so the submission is for an HIV-2 blood modality product is that right?

Correct.

And I presume that you would have in the future a similar submission for HIV-2 oral fluids modality is that correct?

Clearly to fit out to have the most versatile device we need to have venousal (ph) blood plasma, finger stick and oral fluids from both 1&2.

And just one additional follow-up in that regard your comment today related to your approval in Mexico included once again remarkable sensitivity and specificity data that was somewhat documented by the Ministry of Health in Mexico. I presumed that the 99% to a 100% sensitivity and specificity metrics that you've shown in the past and that they documented here, are at the kind of levels that you associate with expectations that the FDA would want to approve a product like this.

Absolutely I mean in this particular case done by Independent third party their conclusion was the test worked 100% at the time for both sensitivity and specificity and so it was a positive reinforcement that oral fluids work effectively, but we have to complete our U.S. trials to confirm that.

Of course moving to a different subject are there any metrics you can provide us Mike or Ron in the early going as relates to your progress in targeting your top public health accounts? You gave us some metrics that relates to Abbott and August and some of the things that will help Abbott penetrate the hospital market and ahead in terms of additional claims for OraQuick. Can you comment on your own internal efforts in targeting your top public health accounts and potentially other accounts that the company is dealing with directly?

Well clearly the biggest purchaser of this product over the long term if they so decide to take the leadership role is the CDC. And clearly with their four-part initiative that they've announced and the incredible accelerated time frame that they made a decision from the time that they announced in April the four part initiatives to the time they looked at us and said "We want to have this in place 250,000 test" and we agreed to *train at 50 cities the balance of this year, which was to get the programs off to a fast start.

So it doesn't get any better than that in terms of where the funding comes from for all public health, which is the government to have the government and the Center for Disease Control to take a leadership role with our product. And obviously all the events that we talked about in terms of that if it occurred with OraQuick were to supplement and support those relationships, everything from having them at the (indiscernible) facility, it's very kind of them all to come here to get them to sit in the third row of the President signing the global Aids bill for all of those organization was there and all of the key people were there that we could talk about the program.

To much of our team being in Atlanta this week because of HIV programs that are going on which includes an article that came up in the Wall Street journal even today because of what's going on. So that long winded answer is we focused entirely with the prominent leader in public health who will give guidance which is the CDC and everything will flow from there.

Last question and then I'll get back in line , given the comments about the CDC can you say anything about any discussions with the CDC as relates to future budget years? Given your recent announcement was actually as relates to the September '03 CDC budget? How about looking ahead Mike?

There's no way to look at it reasonably I mean clearly they reallocated $35m in the current year. We were fortunate enough to participate in that at the level - - the $2m for the 250,000 test, but I will tell you that, you know, what's exciting is that over the training in the fifty cities, we're going to get face time with all the agencies that will be getting the product as part of this program. We will be training their trainers, we will be, you know, getting accredited people in terms of using our products. So we'll get the opportunity by the training program with the CDC to have one on one, you know, with our product teams, frankly it doesn't get any better than that, whether or not later they have to come up with money out of their own program or, you know, whether it comes from the CDC later on with funding. We're getting access to train our customers, ceded by the CDC and that's just terrific.

Alright thanks very much, congratulations.

Thanks Wade.

You next question comes from the line of Mitchell Welconcaul (ph) of Fidelity.

Hey Mike, I just wanted to make sure I understood the guidance for the third and fourth quarters, I think you indicated that had EPS in the third quarter will be similar to what we saw in the second, but you expect to profitable in the fourth.

Correct.

Now for the full year I guess you're unlikely to be profitable.

Not for the year *as a whole.

Okay, and in terms of just looking at R&D spending, I assume we probably should look for a pick-up in the second half of the year in light of the trials on-going or should we just see it staying flat?

Pick-up in the additional R&D expenses?

Yeah.

It clearly, you know, when it's a part of - - I mean, I think we ran a pretty efficient operation in Q2 but part of our ability to beat the guidance that we gave for the second quarter was, that the trials are underway and it will be finished in the third quarter, that was sort of, you know, just a balancing orders for expenses, and you're absolutely right.

Okay. And I guess in terms of the SG&A, again, looking at it for the first half of the year, not changing significantly in the second half but a couple of initiatives could, in terms of your sales force, might bump it up a little.

Nominally, but nothing that - - you know, that would be out of line with anything that we've been doing.

Okay. Thanks.

Your next question comes from the line of Daniel Lew (ph) of Strong Capital Management.

Hi Guys.

Hi Dan.

Congratulations on all the nice progress.

Thanks.

The Mexico announcement came as a very nice positive surprise to me, I'm wondering if you're able to quantify what the impact might be, and if there are any other countries where such announcement might be coming forth.

Clearly, I don't know how to quantify Mexico at this point, we gave the UNAID, you know, data in terms of the size, you know, of what was estimated by them. I have to tell you the timing on the surprise or the timing on the approval came as just complete surprise to us, you know, we gave the agency what they asked for in terms of - - the government agency in Mexico, the test so that they could run their trials and we had no idea when they would run their trials, how the data would come in, when the data would come in, you know how it would, you know be processed by the government, and frankly everything happened in, you know, probably a 30 to 60 day time frame from the time that we got, you know, the full application in to them in terms of the turn-around time, it was just an extraordinarily quick turn-around time. So we frankly, you know, other than feeding it with our distribution partner there to start the process, you know, in my mind I put a year time frame on it before I could even have to think about, sort of commercial revenue opportunities and you know, they gave me an eleven month jump on where I could start. So, you know, we're going to pursue it and see how we can really help what the Mexican authority seem to be very interested in, obviously is oral fluids.

That's impressive, any other countries where you've submitted data or - -

Not anything meaningful at this time, I mean clearly the, you know, the HIV-2, one of the things its real important is, is that almost country by country, unless you have FDA approval before that in the United States, you have to do - - and some require it even if you do, but if you have FDA approval and clinical trials to support it, that usually allows you to bypass sort of, in country clinical trial. So part of a global strategy for HIV-2 here is to get the validation of an FDA claim in the U.S that we hope is the gold standard to help, you know, break barriers of entries into new countries with a recognition that don't lose focus on the U.S market first.

Okay. Second question I have is, with respect to your hospitals - - the testing there, what's more important, the Venous blood claim or the Plasma blood claim?

Honestly I don't know, I just - - each lab processes samples depending on how the sample came into the lab differently and, you know, how they batch with other test that they do. I've never gotten from Avid personally what a breakout would be, you know, clearly Venous whole blood was the baseline but Plasma would be nice to have. So if I was going to use that as a basis, I would say Venous whole blood we strongly prefer you get it first but if you could give us Plasma as well. So I put them in that order but I can't quantify it any better for you than that.

Okay, thank you guys.

Sure.

Your next question comes from the line of Atshin (ph) King of Wells Fargo Securities

Congratulations again on a great quarter gentlemen and making all those submissions so quickly, that's really great to see. To piggyback on the last caller on Mexico, could you tell us a little bit more about how the test will be performed, do you know will it be over the counter or you know, in the pharmacy with doctor's order. Anything else you could tell us about, you know how the test will be used in Mexico.

The only thing that I can tell you for sure because as I said in the last call, we really haven't developed our programs for rolling out there yet, but much like the U.S, we believe that its focus are limited to the professional health care community.

Okay. And what other countries, you know, will you target next? What's highest on your priority list?

Well, it clearly - - United States, United States, United States. And then as we sort of build out our claim base here and secure the rights, the HIV-2 license will allow us to have, you know a one-stop shop (inaudible) for everything we'll reach out. We clearly are focused on obviously Mexico, and Mexico really sort of leads itself to South America, because most partners, when you talk about Mexico really want rights to South America but you know, Mexico sort leads the charge for that part of the world. Clearly South Africa, you know, is a big opportunity, albeit confusing on how to get in distribution wise and you know, the Far East, you know Korea, China, Japan are all areas that we're evaluating as we speak. We have a terrific sales representative that works for our company that is located physically in Korea, and you know, he's everywhere trying to understand how to best approach that market.

Are there any of those markets that you have submitted already?

Not really.

Okay, and can you break out the OraSure infectious --- within infectious diseases you know, that market you are mostly converting to OraQuick HIV-1. Can you tell us about how the conversions is going, and what percent of that you have already converted? Maybe how the revenues break out just within the infectious diseases ---

I'm going to give this over to Ron but, so far we are not seeing conversion as incremental.

Its very surprising Ed, we actually had revenues from OraSure in the second quarter of 2003 and now it's a $1.6m of the $2.7 in the infectious disease market. And that compares quite favorably to the approximate $1.4m that we had in Q1 of '03. So actually sequential growth in OraSure and also a significant in the market for OraQuick where we went up about 40% in unit placements from Q1 to Q2 in our direct sales efforts in the United States, that's excluding that and went up approximately 80% in our international unit placements from Q1 to Q2. That was a very favorable quarter, very favorable.

You had 80% increase in units in the international front.

That's correct.

Where do you expect those to go in the third and fourth quarter, Ron?

Those opportunities are being pursued diligently by our international sales rep and those purchase orders will come in pretty much on ad hoc basis. So I would suggest that we're probably moving upwards in those sales areas, but to put a number on it or percent increase you know, its not a visibility that I have at the moment.

Okay. And within the military, were the sales up sequentially? Where do you have visibility that they are going right now for OraQuick?

We're seeing military orders coming in where the GSA and we're seeing some sales actually into the hospital market off of the GSA for veterans hospitals and the like. But not a significant amount of the total overall sales.

Okay. And how will Abbott go about promoting the plasma plane once you get that, you know, can you tell us a little bit about that?

Michael Gausling; Well I think that they are clearly calling their customers all, the time for this wide variety of products that they have. They are working with their customers because Suds (ph) has been discontinued, is not available anymore. They are trying to convert them to a finger stick test. But clearly in order for them not to loose that business they are having regular conversations with the labs and the hospitals to make them aware of how you can use the finger stick. But that venous whole blood and plasma are just round the corner and don't give up on them. So I think they are their all the time trying to educate their customer as an ordinary course of business.

And one more question on the Histofreezer product line. Earlier you put out a press release about a $1m order for the OTC product within that category. Can you quantify it more now, what it was for the quarter or what Histofreezer was?

it was specifically, I don't want to get onto doing this on a regular basis but the initial earnings were $1.2m.

Okay so the rest of that product line was Histofreezer we could assume then?

That's correct. That's sales into the professional marketplace both domestically and international.

Great. Well thanks very much I'll get back in queue.

Thanks Ed.

Our next question come from the line of Wade King of Wells Fargo Securities.

Hi again Wade.

Sorry I just couldn't stay away. My first question, why were you in the third row rather than the first row down there at the --- in Washington DC? I would not have expected them to put you in the cheap seats.

I was proud to be in the third row over on the side, and letting the people that were involved with part of the global AIDS program be front and center but I was glad to just be able to be in their shadow.

I agree, my seat was in San Francisco so---. Question please regarding the OraQuick production scale-up. In my recent tour of the facilities I was able to see couple of new lines available for the packaging part of OraQuick and I assumed that most of the scale-up that needs to be added to ramp up to the 300,000 units per month level is down to credit. Can you just comment on the time line for achieving the 300,000 units per month objective, number one? And number two, what on the front end of the production process is most critical to get there?

You know clearly we are comfortable that if we had an order for 300,000 units and we have the equipment to scale up although we have not done 300,000 in a month, to it with the equipment that we have right now, Wade. The front end of it that we need is just purchase orders. And otherwise we are just ready to go.

Okay, so once again that is a production level that you think you are capable of now and is that on a single shift Mike?

That's correct. You know all of our manufacturing people are listening and locking up right now that we feel comfortable that we can scale up to that. We've been at a 150,000, it stressed the system a little bit in the first quarter when we did it in a month. That's the most we have done in any one-month, we've not needed to do it because we're really trying to produce just in time. But the team's ready to go.

Thank you. Secondly, per the issue of the HIV-2 license, is there anything else that you can share with us at this time as relates to the option of interfacing with one of the existing licensees of the Bio-Rad HIV-2 patent estate as opposed to dealing with Bio-Rad directly? Obviously ideally you would secure that license directly and that would leave you a lot of options going forward as it relates to who you wanted to partner with for distribution in various markets for an HIV-1, HIV-2 product. But in the event that you do pursue another avenue, could you just comment on your vested interest in that regard and what you think might be most likely?

I stand behind the fact that our strong preference to secure licenses from Bio-Rad. I know who the other holders are of licenses but the flexibility and the economic value to our investors clearly and predominantly lies by getting a license with Bio-Rad and it's my singular and obsessive focus.

Okay very good and just lastly Ron would you just clarify the figures given a while ago as relates to quarter-over-quarter unit increases. I believe you said that Q2 compared to Q1 showed a 40% increase in units for the OraSure direct sales efforts for OraQuick.

That's the OraQuick direct sales. That's correct.

I'm sorry I meant companies.

Yes.

-- (inaudible) direct sales and internationally in the comparable period it was up 80%?

That's correct.

And can you give us an idea given the history internationally being lumpy. Could you give us an idea of where the international sales are going? And where you think your greatest prospects are in addition to obviously Mexico?

Well clearly you're right I mean the Mexican opportunity is a significant one going forward. But there have been purchases of the devise for use internationally in Africa and along with sales to the CDC for international utilization. But you're again right as far as the spotty nature of the international sales marketplace. And it's difficult at this point as I had indicated to Ed, Wade, that it's - the visibility is just not there to try to quantify our expectations for Q3 and 4 and whether or not we can kind of (inaudible) percent increase in total unit sold going forward.

Wade I would add to that you know I'm skittish of the international markets. We've had you know and I got - you know my job as the CEO one of the inherent risk factors that we got scarred with was the fact that the lumpiness, using your word, of the international markets. And you know we're just walking very, very cautiously right now. And it is spotty and we can't count on it. It's nice to get an order and we want money up front but you know there is now continuity we can count on yet.

Can I ask one additional question, for the international units were there Mexican distributor purchases of significance in the second quarter?

None.

None and once again the approval that came, announced today is, obviously there was no loading at the distribution channel for Mexico and anticipation of that?

There's not one dollar of revenues in this year's forecast for Mexico.

Okay that's great and just last question please, per the substance abuse testing market you indicated in I believe your summary comment Mike that you expected a submission for the five panel Uplink test platform drugs of abuse test later this year. Is that something that you're targeting for the end of the third quarter or the end of the year?

I target it for a year ago when you first heard me take over the job. We've slipped on this one. It's -- the performance of the product is great. We're sort of working through the bugs to be able to scale up and feel comfortable with the product. We just completed another trial at the love parade in Germany where the police loved the product. And we're finishing up these optimizations so that it's unequivocally comparable to intercept in terms of performance for on site reader. And we're not compromising that objective because frankly we didn't need it in the revenues this year in order to get our 25% growth.

So and I have to say also and I know it's sort of a skirting the initial issue but the same people are doing all the things when it comes to all these other clinical trials. And the roll outs of the products and the consolidation into the facility and something has to give every once in a while. You know when you run out of 24 hours a day as what generates a return in the short term. It's not an excuse but you know we've got some incredible things the same group of people have done on other fronts. We're not happy that we're not done but the system looks terrific. And I hope it's at the end of the third quarter but I can't say that for certain.

So you expected it by the end of the year and it's still possible that you could have that submission go in by the end of the third quarter is that right?

That's correct. I think importantly for investors the more important issue is the acceptance by our partner Drager or the road side testing market in Europe. That market is heating up you know I believe that if we don't get our test done that you're going to see you know people have to urinate in a cup on the side of the road because the European market is moving to road side drug testing at an extraordinarily fast pace. And Drager is a dominant market leader in that space and we're partnering with them and we're showing up every where to do clinical trial with the police (inaudible) mid-night shift at the love parade to collect samples. And it went well the police were ready to take it as it is. And we just weren't comfortable that it was a durable device that could stand the test of time on its own yet although everybody likes what they see. So we're way down the curve. This is just making sure we absolutely get it right the first time. And cut no corners because we don't benefit long term at it by doing that.

When Sam says that the love parade went well what exactly does that mean?

Well you know I just never pursue the end of the question you know, it's a - he tells us he's on best behavior and the results are good so we're happy.

I couldn't resist just a quick question for Ron the AR bumped up a bit quarter-over-quarter is that related to something specific Rod and where do you expect it to go from here please?

Yes it did Wade and what added the function of is the shipment to our partner MedTech of the OTC product literally in the last week of the month. And -- the month of June that is. And which caused us to experience a bump up in our receivables other you know other outside of a normalization of revenues. So that was a bolus of revenues that we recorded right at the last week of the quarter.

Yes for our organization our product manager in the Netherlands who facilitates the product where it is assembled you know typically in March lets say that you want to roll out a product and have it available to go on the shelf in the United States less than 90 days later when you've agreed to the contract which you know in the - obviously the packaging is cleared by the FDA. But to take it from that point to product being shipped you know in 90 days, it took us 88. And it's a heroic effort on the part of our team, (inaudible) leadership and MedTech for collaborating with us to get that to the goal line to meet the summer market. So just another great effort by the team.

Alright thanks very much keep up the good work.

Thanks Wade.

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

My closing remarks was it was another great quarter, people are tired, we've been working really hard. But we're really excited about what's going on here and the steady progress that we make. And we thank you for continuing to support us in what we do. Have a great day.

Thank you for participating on today's conference call. You may now disconnect.