OraSure Technologies Inc (OSUR) 2003 Q3 法說會逐字稿

Good day, everyone. Welcome to OraSure Technologies Third 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 *, then the number 1, on your telephone keypad. If you would like to withdraw your question, press *, then the number 2. For opening remarks and introductions, I will now turn the call over to Ms. Shannon Morin, 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 pm Eastern Time today, regarding our third quarter financial results and certain other matters.

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 October 31, 2003, by calling 800.642.1687 for domestic, or 706.645.9291 for international, and entering the conference ID number 3261825.

With us today are Mike Gausling, President and Chief Executive Officer, and Ron Spair, Chief Financial 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, profitability and other financial performance, product development, performance, shipments and markets and regulatory filings and approvals.

Actual results could be significantly different. Factors that could affect results are discussed more fully in the SEC filings of OraSure Technologies, including its registration statement, its Annual Report on Form 10K for the year ended December 31, 2002, its quarterly reports on form 10Q, and its other SEC filings.

Although forward-looking statements help to provide complete information about future prospects, listeners should keep in mind that forward-looking statements may not be reliable. The company undertakes no obligation to update any forward-looking statements to reflect events or circumstances after this call. With that, I would like to turn the call over to Mike Gausling.

Thanks, Shannon. Good afternoon, everyone, and welcome to our third 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, a summary of our financial results for the third quarter, and first nine months of 2003, and guidance regarding the full year of 2003 and 2004.

Last but not least, I'll provide some color commentary on our major activities in Q3, including an update on the broad scope of OraQuick initiatives, an update on our strategy to distribute OraQuick to the hospital market, the status of our efforts to obtain an HIV2 patent license, the strong performance of our OTC wart-removal product, Freeze Off, and highlight some of our recent stock offerings. We'll then open the floor for questions.

Okay, let's dive in. As previously stated, we've been pursuing a number of financial and business objectives during 2003. On the financial side, our stated 2003 objectives are as follows. To increase revenues for the year by 25%, from $32m to $40m. To obtain a strong cash position, and transition to profitability in the second half of the year.

First, despite some unforeseen surprises with the sales mix, we remain confident in our guidance to increase revenues 25% to $40m for the year. We've also now gone on record that we expect revenue growth of at least 25% for next year, as well.

Second, with $17.7m of cash in the bank, $8m in available credit facilities, and continued positive cash flow from operations, our cash and liquidity is very strong. Coupled with net proceeds of over $42m from our recent stock offerings, our cash management and liquidity position under Ron Spair's leadership is outstanding, at this time.

And third, regarding profitability, we continue to steadily demonstrate improved operating performance. In Q3, we actually beat street estimates by turning a small profit. Although nominal, it is quite symbolic of the progress that we've made in tightening up our cost structure, while beginning to demonstrate sustainable revenue growth, despite lower sales to Lab One and Abbott, and lower sales of Histofreezer to the physician office market.

As was previously-stated, we expect to be profitable in Q4, with anticipated revenues of at least $11.5m. Although near-term profitability remains a priority, it will probably be lumpy, still a bit unpredictable over the next several quarters, as we continue to make the necessary investments to fuel sustainable revenue growth for 2004 and beyond. However, we continue to expect to be profitable for the year 2004 as a whole.

In addition to our financial objectives, we had 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 our OraQuick rapid-HIV1 antibody test. During the course of the year, our results against this objective have greatly exceeded expectations.

The trials for the venous whole-blood claim were completed, and we submitted our PMA supplemental application to the FDA during Q2. Following an approximate 120-day review cycle, we received FDA approval of this claim on September 5th and the final labelling was approved by the FDA on September 30th.

In Q2, we expanded our oral fluid trial to include the additional collection of blood specimens, in order to secure a plasma claim, as well. These trials were completed during the second and third quarters, and we made our PMA submission with the FDA for both claims in late September.

These claims are subject to a 180-day review cycle by the FDA. Although we will not comment specifically on the clinical trial performance of our products prior to receipt of FDA approval, I'm extremely proud of the performance results-especially with oral fluids. I'm highly encouraged that once the data is published, it will reinforce our claim to being the market leader in developing the most versatile HIV test in the world.

Finally, although a bit of surprise to many, we've gone even further to bulk up the versatility of the OraQuick test, with the completion of clinical trials for an HIV2 claim, and the submission of a supplemental PMA in the second quarter. This claim is subject to a 135-day review cycle. We expect to hear from the FDA regarding this application sometime in November.

A second objective is to increase Histofreezer sales with the addition of new specialized sales forces, and the extended market reach. As I previously reported, Joe Zack and his sales team have added two different contract sales forces with a total of roughly 140 reps, to assist us to get Histofreezer back on track in the physician's office market.

These groups have not yet performed as well as we'd anticipated, but we seem to be finally gaining some traction with our mix of new sales and marketing initiatives. We're remaining cautiously optimistic that these initiatives will get us back on track in the physician office market, beginning in Q4 of 2003, and during 2004.

Additionally, sales of the over the counter version of Histofreezer in the United States, called Freeze Off, were much better than expected, with over $1.6m in Q3, alone. For the year, we would expect Freeze Off sales to more than double our additional estimates, and now are expecting to exceed $4m. We're also very encouraged this may lead to even bigger and better things in 2004.

The third objective was to support our UK Intercept distributor, Altrex Health Care, with an eye toward expanding more broadly in Europe. I continue to be impressed with the progress that Altrex is making in the UK to sell our Intercept drug testing system, as we see the number of Intercept specimens processed in the UK continuing to steadily grow in the criminal justice market.

We're also continuing to evaluate how best to maximize our opportunity for selling oral fluid drug testing products in Europe, which has historically been very slow to adopt a drug-testing program into the traditional workplace and criminal justice drug-testing markets. However, with the expected addition of the launch of our UPlink DOA detection system in the European roadside testing market in 2004, we are very optimistic about our prospects in the European market in the future.

Our fourth objective was to submit a 510K application to the FDA for our UPlink DOA product, including a full 9-5 panel of assays by mid-summer. I'm proud to say that despite the prior delays in completing development of this product, we have successfully completed our clinical trials. In September, we filed for 510K clearance for UPlink.

It's been quite an effort, but in the end with over 677 specimens collected and tested in the field trial, the performance characteristics with UPlink for all five commonly tested drugs of abuse is very good, and equivalent to Intercept-the only FDA-cleared, lab-based, oral fluid drug-testing system in the United States, today.

I want to take a moment to thank Sam for his leadership, and the UPlink DOA team for their dedication, perseverance and quality outcomes.

Additionally, we're working with our partner Drayer, to finalize their launch, scheduled for early UPlink DOA out to the roadside testing market in Europe, hopefully early next year.

Our fifth objective was to complete the consolidation of our manufacturing operations from Oregon into Bethlehem. Under Mike Formica's leadership, we continue to make significant progress, here. As I previously reported, the FDA has given us the green light on a series of non-clinical crossover studies, in order to approve the transfer of the manufacturing of our OralSure HIV1 western device confirmatory tests, and OraSure collection device to Bethlehem, which is helping to accelerate our consolidation efforts.

The studies for transfer of the Oral Western blood product were completed, and we made our FDA submission in August. The studies for OraSure are nearing completion, and we expect to file for approval of the transfer of this product later this month. Both submissions have 135-day review requirements by the FDA. This type of transfer is a complicated and time-consuming process, and the progress we've made so far is attributable to the hard work of our regulatory and manufacturing teams, under Mike Formica's leadership. The savings from the consolidation are expected to approximate $1m annually, and we are anxious to successfully complete this important project, as soon as possible.

The final objective is to continue to build trust with our investors by being transparent and communicating frequently. I believe that we continue to do a good job in this area with conference calls such as this, where we report progress against our stated objectives, the webcasting of our annual meeting of stockholders, and at investor conferences, our frequent press releases and our normal SEC disclosure documents.

In addition, Ron and I have communicated frequently with our investors. Last month, we completed an extensive road show, in connection with our recent stock offering, during which we met with over 117 potential institutional investors, to get our story out to as many new investors as possible.

Additionally, we are pleased to have added new analyst coverage from David Lewis from Tom Wiesel Partners, and from Sara Mitchell Moore at SG Cowan. This brings us to a total of five analysts that currently cover the company.

Overall, I continue to be very proud of our team at OraSure, and I'm pleased with our progress and solid performance against our stated 2003 business and financial objectives. 2003 continues to shape up to be a great year, and we are seeding the path for a terrific 2004, as well.

Let's now dive into our financial results for the third quarter. Total revenues for Q3 were $10.3m, or 27% higher than the same period of 2002. Product revenues were $10.2m for the quarter, which was a 26% increase over Q3 of last year. I'm pleased to say that both total revenues and product sales are records for the company. In fact, this is the third consecutive quarter of record revenues. It is also the sixth consecutive quarter of increased revenues.

The nine months of 2003, we had total revenues of $28.6m, and product revenues of $28m, which represented increases of 20% and 19%, respectively, over the comparable periods for last year.

The revenue increase is primarily attributable to higher sales of OraQuick and higher-than-expected sales of Freeze Off, our OTC wart-removal product. I'm pleased to report that we sold over $1.6m in Freeze Off during this quarter, as well.

In addition, we completed an initial $280,000 shipment of OraQuick devices in response to the CDC's $2m purchase order.

Although on the surface, it appears that sales to the substance-abuse market were flat for the quarter compared to 2002, it is a bit misleading, and I continue to see good progress with our Intercept drug test. When we strip out sales of equipment that occurred last year, we find that for Q3 and for the first 9 months of 2003, combined sales of Intercept devices and related oral fluid assays increased 26% and 36%, respectively, from the same period a year ago. We are encouraged at the number of new workplace accounts closed during 2003 is over 220 new accounts.

This is a great trend line. We are cautiously optimistic that this will soon translate more visibly into our financial results over the next several quarters as we work to create a basic paradigm shift from urine to oral-fluid drug testing in the US drug-testing markets.

Partially offsetting the steady increase in overall revenues has been the disappointing performance of Histofreezer in the physician office segment of the market. The loss of urine assays in the life insurance testing market to Lab 1, and lower than anticipated sales of OraQuick to Abbott.

As we look forward to Q4, as I stated earlier, we expect total revenues to continue to increase steadily, and reach at least 11.5m, an increase of 40% over last year. The primary drivers will be steadily increasing OraQuick sales, including the remaining shipments required to fill the CDC's $2m purchase order, and continued increases and freeze off the Intercept product sales.

The gross margin for Q3 was 61%--up from 59% last year. The improvement in Q3 is primarily the result of lower scrap and spoilage over last year. This also represents a slight improvement from the 60% reported for Q2 of this year.

For the fourth quarter, for the year as a whole, our gross margin is expected to remain flat as the impact of higher revenues and lower scrap are expected to be offset by a somewhat less favorable sales mix.

Operating expenses for Q3 increased by 22%, or $1.2m, to $6.3m, compared to last year. This increase is primarily attributable to increased advertising expenses for OraQuick, Intercept and Freeze Off, increased travel expenses for our sales force, additional costs related to the occupancy of our new corporate headquarters in Bethlehem, and higher expenses primarily associated with the OraQuick clinical trials for the oral fluid and plasma claims, and UPlink clinical trials for the five-panel DOA test. In Q4, we would expect operating expenses to remain relatively flat, compared to the third quarter.

I'm also extremely pleased to report a net profit for Q3 of $53,000. These results are better than Street estimates of a loss of $0.01, and compare to a loss of $0.01 per share for the same quarter last year.

Our continuing bright spot is, once again, our liquidity position, which remains strong at the end of Q3. The company's cash and short-term investments were $17.7m. Working capital was $21.5m at September 30th. Cash flow from operations was positive, at $661,000, as well. This represents the sixth consecutive quarter of positive cash flow from operations.

Additionally, during September, we entered into an amendment with Comerica Bank, amending and renewing our existing credit facility. The net result of this amendment is that we now have $8m of credit available to finance our operations and future growth, if required. Even more importantly, I believe this renewal demonstrates the strong relationship we have with Comerica, and the bank's confidence in our company and its prospects. Although we'll discuss it in greater detail later, we received over $42m in net proceeds from the stock offering, which further strengthens our liquidity position, going forward.

Shifting now from our financial results to our most visible developments in the third quarter. Not surprisingly, the most significant developments in Q3 are again related to OraQuick, which include the following. Earlier in the year, the CDC issued OraSure a purchase order for 250,000 OraQuick devices, or $2m, with shipment by year-end. We shipped approximately $280,000 of this order in the quarter, with the balance expected to be shipped in Q4.

We are assisting the CDC with the rollout of this exciting program, and are cautiously optimistic that this will lead to a much bigger program with the CDC for next year. We also shipped 214,000 OraQuick devices during Q3-an increase of 19% over the second quarter of this year.

In July, we received approval from the Mexican Ministry of Health to distribute OraQuick to healthcare professionals in Mexico for use with both finger-stick, whole blood, and for oral fluids. This approval came much faster than we expected, and we're actively evaluating a number of distribution options, while having discussions with the Mexican government, regarding potential bulk purchases of OraQuick.

In September, we received FDA approval of a [inaudible] whole blood claim for OraQuick, as signed off by the FDA on the final product labelling concluding this claim. This is a crucial part of the puzzle to have the most appropriate product at the hospital physician-office lab markets, and we intent to aggressively expand in this important market in the near future.

We also completed the clinical trials and filed the related FDA submission for both an oral fluid and plasma client for OraQuick in September. We expect to get a response regarding these submissions sometime in the first quarter of 2004. We are optimistic that we will have the best product available for the public health market in the future, once oral fluids is approved.

The completion of this work was a huge effort, and I'd like to thank our operating and regulatory teams under Mike Formica and Eve Damiano's leadership for their great work.

The CDC also published findings from its Myriad study, indicating that the use of OraQuick in the delivery room provided equivalent results four times faster than when OraQuick was used in a hospital lab. This study reinforced the commitments that the CDC has for expanding the use of Rapid Test, to affirm the HIV status of women, to reduce the risk of mother-to-infant transmission of HIV, here in the United States.

We are pleased and somewhat surprised to hear last Friday about a new 5-year, $157m initiative being rolled out by SAMSHA, to provide funding for integrated substance abuse prevention, and HIV services in high-risk populations. We believe this program could also provide further support for rapid HIV testing in the future.

Additionally, the awareness level for OraQuick continues to remain high. During the third quarter, we had placements in over 70 national publications, with feature articles in the New York Times, the Los Angeles Times, the Chicago Tribune, and Popular Science magazine, among others. It's obviously been incredibly satisfying for the company that OraQuick has been so newsworthy, as a tool to reduce the spread of HIV virus in the United States market in such a short time, since our initial approval in November of last year.

Turning now to our new strategy for selling OraQuick into the hospital market. As you all know, Abbott Labs has been a co-exclusive distributor of the company's OraQuick Rapid HIV1 test in the United States. The agreement required minimum monthly purchases by Abbott, and as previously reported, Abbott has failed to meet these obligations. We notified Abbott of this deficiency, and requested that it be cured. Abbott failed to cure its purchase deficiency, and negotiations on amendment to resolve this matter recently stalled. As a result, we have terminated our agreement with Abbott, although Abbott has advised us that they dispute the termination of the agreement. We are now actively evaluating alternative distribution strategies, including most likely, the expansion of our own sales force to sell directly to the hospital market.

Long-term, we believe that expanding our direct sales effort for OraQuick beyond the public health market to include the hospital market, will provide us with greater control over distribution, result in higher margins, and provide a channel for distributing other high-value added products to these customers in the future.

We believe that OraQuick is an important product for hospitals in physician's offices labs, and we're committed to doing everything possible to maximize this exciting market opportunity for the company in the future.

We estimate that the available market for HIV testing in the United States is currently 17 million potential tests, consisting of 10 million tests in hospital labs, 3 million in physician's office labs, 3 million in the public health market, and roughly 1 million to the military and CDC markets.

With over 10 million tests currently done in the lab market each year, an additional testing anticipated due to the CDC's new initiatives for advancing HIV prevention is part of their initiative entitled, "Advancing HIV Prevention-New Strategies for a Changing Epidemic," we believe that it may be in our own best interest to take direct control of our own destiny, with what we believe is the best product in the market for years to come.

With the full support of the Board, we believe that by investing into our own sales force and that by developing high-impact sales-and-marketing initiatives, we can capture the greater share of this market over the long term. Our current thinking is to establish a small but highly effective sales force, focusing on the top metropolitan areas in the country. Possibly supplementing this with selective telemarketing and outside sales forces.

Obviously, there will need to be some upfront investment to establish and scale up a new hospital sales force, which will probably impact our profitability expectations in the near-term, but this does not in any way change our overall guidance.

Just to be clear, as previously noted, we reaffirm our projection of revenues totalling at least $40m for 2003, and profitability during the second half of the year. In addition, we reaffirm our expectations of revenue growth of at least 25% in profitability for 2004.

We believe that any short-term loss of revenues resulting from the termination of the Abbott agreement will be offset by increased sales of the OraQuick test to virtually all markets, higher sales of Freeze Off in the OTC market, and improved sales of Intercept in the workplace and criminal justice markets, and initial sales of the UPlink rapid oral fluid drug detection system into the roadside testing market in Europe.

Finally, it should be noted that although Abbott does dispute our termination, we believe that they failed to perform at the minimum contractual levels in a market offering a substantial business opportunity that must be pursued aggressively. At this time, we expect to move on with a more focused execution in the US market, in the balance of 2003, and for 2004 as a whole, on our own.

Moving to HIV2 patent license. As I also stated on the Q2 earnings call, in order to fully develop our global sales strategy for OraQuick, we believe it is important that we offer our product for the detection of the HIV2 virus. Consequently, we approached Biolab about securing a worldwide non-exclusive license for HIV2. I'm pleased to announce today that we have completed negotiations and have a license agreement that we believe is complete, to the satisfaction of both parties. Biolab is now in the process of securing the necessary signatures and approval from several other licensees and other relevant parties. Although there can be no assurance that we will secure all of the necessary signatures, or a deal will be completed in the same substantial form, we remain cautiously optimistic that a deal will get done with Biolab in the near future.

As you know, because of our optimism that we could reach an agreement for HIV2 with Biolab, we unilaterally decided to shorten the timetable to commercialization by pursuing a parallel effort to secure an HIV2 claim for OraQuick from the FDA, while we attempted to secure worldwide non-exclusive HIV2 license. We completed those trials and submitted our application with performance data for HIV2 claim for OraQuick at the end of June.

This submission has a 135-day review cycle with the FDA, and as previously stated, we would expect to hear from the FDA sometime in November, regarding our application. If for any reason we're unable to secure the license on commercially reasonable terms, then we can always abandon our application or seek other commercial partners to take advantage of the HIV2 performance of OraQuick.

Ultimately, our goal is to secure license. With it, we will move closer to our vision of making OraQuick the most versatile device available anywhere in the world for fighting world HIV AIDS pandemic.

Shifting to sales of Freeze Off. Except for OraQuick, perhaps the largest and most pleasant surprise during 2003 has been the sales performance of our Freeze Off wart removal product, which as you know is now being sold on the OTC market under the Compound W trademark for wart treatment products. We originally entered in our distribution agreement with MedTec to distribute this product, primarily as a way to expand our sales of our Cryosurgical wart removal line, which had experienced little or no growth in the professional markets during the past several years. We initially expected MedTec to purchase about $2m of this product in 2003, based on minimums in the contract. However, as previously stated, the rollout has gone extremely well. We now expect sales to top $4m in this year.

With a significant year, these orders have been placed for delivery of product outside the normal work season, which typically runs from May through September. The reasons for the outstanding performance of this product seem to be first and foremost the high quality of the product and the ease of use for customers, and secondly the strength of MedTec's Compound W brand name and its distribution reach. On this latter point, it is my understanding that MedTec's largest customer is Wal-Mart, and Freeze Off is now on the shelves of about 2,500 Wal-Mart stores across the United States. We remain very optimistic that we'll see even better performance next year from this exciting new market opportunity for the company.

Switching now to the stock offering. As you know, earlier this month we successfully closed on the sale of 5 million shares of common stock, and generated net proceeds of $42.5m. These shares were sold under our shelf registration statement. The purpose for the offering was to allow us to finance our growth strategy. In addition to raising the capital, we were pleased that we got the opportunity to present our story to 117 potential new institutional investors in 23 cities, on 2 continents, over 13 business days. It was quite satisfying to report that our offering was a big success, and in fact was oversubscribed, and resulted in many new institutional investors. In fact, since 12/31 of 2002, we have experienced an increase of institutional ownership from roughly 30% to 40%. Overall, we are very pleased with the success of our offering, and I'd like to recognize Ron Spair, our CFO, for his leadership in completing this transaction.

Importantly, as I've stated before, the purpose of the offering is to allow us to finance our three-part growth strategy, which consists of the following. Number one; maximize the sales potential of our existing product portfolio in current target markets in the United States. Second, expand the use of existing products and technology platforms in the global markets into new product applications. Third is to evaluate potential acquisitions that supplement our existing product pipeline.

Obviously, I believe that the proceeds from the offering, in combination with our other liquidity sources, that we are now well positioned to fund sustainable growth of our business in the future. With that, I'd like to open up the floor for questions.

Again, ladies and gentlemen, as a reminder, if you do have any questions or comments, press * then the number 1 on your telephone keypad. One moment, please, for your first response.

Your first question is from Wade King with Wells Fargo Securities.

Hi, Wade.

Hi, Mike and Ron. Can you hear me?

Yes. Hi, Wade.

Congratulations on the performance in the quarter, and thanks for the detail. This relates to the efforts looking ahead in both hospitals and physician's office market. Could you lay out the different strategies that you might pursue, related to the two markets themselves? Is it possible you'd end up with a hybrid distribution strategy entailing both some direct efforts and also either a contract sales force or another brand name distribution partner?

I think you answered the question. I think those are the logical extensions. I think that, we've offered up, although we've stalled, that we could continue with Abbott. We've assumed that that won't happen, so we're looking at direct sales efforts, supplemented by either telemarketing or selective use of regional or national firms to either fill in the cracks or supplement what we're doing into those marketplaces. We're evaluating each of those options. But we’re clearly bulking up our team to take control of our own destiny. When the awareness level of OraQuick in all markets is substantially high, we want to ensure that the greatest penetrations. So clearly, we'll aggressively take the lead to control our own destiny.

Could you just talk a little bit about what's changed in the hospital market over the past year? Last year, of course, Abbott had a large market share in this area. Previously, we were under the impression, they sold about a million tests in the US hospital market for HIV. Since they stopped their six product production and were early in the game ordering obviously OraQuick devices and then were waiting for the venous whole-blood claim, can you tell us what's happened in the hospital market interim? Based on that, how do you expect to tackle the opportunity, going forward? What's exactly changed in the past ten months that would lead to impacting your strategy significantly, looking ahead?

I think first and foremost, in your own review of the company and your latest analyst report, you talked about the major obstacle to selling here was the lack of venous whole-blood claim. Frankly, the finger stick claim the product was originally designed that we could sell outside the lab. We wanted to do finger stick and oral fluid, and we were going to own the spaces where no one else was, with a CLEO waiver for public health, CDC, military opportunities. It became clear, post our deal with Abbott that if we secured a venous whole-blood claim, based on the sensitivity and specificity and ease of use of our device, that there was a substantial opportunity in the hospital market.

We dropped everything to try to get the appropriate claim, first-venous whole-blood which we secured very quickly. Then we piggybacked our oral fluid trials to do plasma, as well, to be able to have the appropriate specimen type for that market.

Prior to the venous whole-blood claim, it was a round peg in a square hole. The opportunity was extremely limited until we had the right claim. The sensitivity and specificity of the venous whole-blood is equivalent to what finger stick was. With sensitivity and specificity outstanding, and the ease of use clear, we're ready to rock and roll in that market, now.

Could I just ask one more question? Then I'll get back in line. Could you lay out the ongoing dialogue that you're having with the CDC, as relates to their September 2004 budget? Could you also review specifically what your expectations are for the timeline of the oral fluid-based application with the FDA?

Okay. I'll go back with you. The second one's easier than the first. We submitted on September 30th-it's a 180-day typical review cycle. That's what we'll say for both oral fluids and plasma is the review period, of which the FDA has to review our applications.

Hopefully, they'll look at it sooner, but that's the standard review time. We'll expect something before the end of the first quarter if they review the data. Importantly, it's physically the same device. The manufacturing's identical. It's a focus on clinical trial data and the package inserts. It's in with the FDA, and we hope for the best with both oral fluids and plasma, and we're very confident of the performance characteristics that it will meet the requirements of the FDA.

With respect to a dialogue for the CDC, clearly the most important dialogue that we have right now is to efficiently roll out the 250,000 tests for the test market and be successful. If we do a good job there and the organizations of which are getting the products, part of the training and the initial implementation-if they scream loud that this is a viable end solution for testing in the public health market that will build the opportunity for a substantial growth in business, next year.

Our focus is on being successful right now in the trial market, while having an active dialogue of what's working and what's not working-what we can do better and what we need to expand the program nationally from this initial test market. Success with the test market will breed a greater opportunity, and that's where we're focusing our efforts.

All right. Thanks very much.

Your next question is from David Lewis with Thomas Weisel Partners.

Hey, David.

Hi, guys. Mike, a couple of questions, jumping back to Abbott, here. I'm calling from an airport, right now.

Hopefully you’re not in San Diego.

Not San Diego. No smoke in my eyes. Would you expect further negotiations of Abbott, or would you characterize the current stand on negotiations as this is just a legitimate business decision on the part of OraSure to move in a different direction?

You know, we've terminated the agreement for non-performance. We've offered up if they'd like to come back and discuss an amendment. At this point, we're preparing our plans to roll out with our own direct sales force. I don't have any clarity on anything else, except it's turning our destiny to what we think is the best opportunity for the company, going forward.

The implications sound like, given the Q4 guidance, there are really more implications for 2004 than the current year. So maybe Ron or Mike, walk us through the kind of penetration between revenue and profitability, going direct into this market and what it can mean for 2004.

This is Ron on the call. As far as 2004, that's going direct. Obviously, David, there will be some initial costs as Mike had spoken about earlier, that would be related to the deployment of the sales force. That's the direct sales force. We would anticipate that those costs would begin toward the latter part of Q4 here, and then continue on in Q1, before the sales force would begin to sustain traction in the hospital market, selling directly.

As far as total overall revenues, it's difficult for us to indicate what level of revenues would be achieved by the sales force selling directly into the hospital market, as well as what type of incremental revenue we would expect from selling through a distribution partner, possibly into the physician's office marketplace, at this point. But, the bottom line is that we would have to sell a fraction of the number of the total overall devices that we otherwise would have had to have sold to generate a comparable amount of revenue, because we would be capturing all the economics for ourselves.

So short-term visibilities have somewhat declined in 2004? Maybe you would get the sales force ramped up in the second quarter, but this ability is [inaudible] of less devices selling, and theoretically, in this case it would come in at a higher gross margin.

That's correct. As well as our expectations, as Mike had indicated previously, that we have other revenue drivers that we feel have opportunities to fill that gap, even in the short-term, here.

Sure, as a segue, I won't count on the CDC point. It sounds like MedTec traction is going better than expected, based on those trends in 2004. Specifically, they're tied to UPlink. Any additional data points out of the last six to eight weeks that give you more confidence that Uplink would be a material contributor to 2004, in excess of existing expectations?

Clearly, we're focused initially on roadside testing with Draeger. I think that everyone has very conservative estimates with respect to what the rollout will be, albeit that the performance data and the success in the trials in Germany were just outstanding. They seem to be discussing moving up the rollout day from late in the first quarter or early second quarter to sooner in the year. We're encouraged by that.

We're also seeing that there are some purchase orders that are pending. They've been working this for the better part of the year with the product, because we've had our delays with the studies and the interest levels that have been seated for over a year. We're very concerned with respect to what we expect they're going to do as a part of our $50m next year. We just guide it to protect all its upside. That one has been worked well over a year to prepare the market for. Sam and the team have been doing multiple studies with the police, and they're ready to go.

Okay, Mike. This last question. Could you comment in terms of the relative percentage of your existing sales force? The size of the force you look toward in hospital markets? Then any discussions you've had with third-parties, to penetrate the position on this lab market or physician's market.

I don't want to get into details at this point, in terms of as we evaluate complete direct sales force versus hybrid sales force, but I will give you just a piece of visibility here. When you look at our infectious disease business right now, which is $2.3m here, that's focused entirely on the public health market, with 5 sales people. It's $10m business today. If you look at the number of outlets in places they call on, it's equal to or greater than the number of hospitals.

We've been very successful with a great group of people in public health, with sales of $10m worth of business for 5 people. They have a passion for our product. They understand it. No one does it better than our team. I think we can translate that, in terms of a dedicated sales force, quite well. The awareness level of our product is just absolutely outstanding, right now. There's no lack of knowledge about our product, right now. The selling proposition is pretty straightforward.

Last question. I'll jump back in the queue, but maybe one for Ron. In terms of next year, you said you're still comfortable with profitability for next year. I guess for a full year, weighted average. Is it safe to assume that any decline in business that you thought was going to come through Abbott would be made up and approximately staying put from the better than expected gross margins? Is that a safe assumption, at this point? Or is it too early to tell?

I think it's a little early to tell. Plus, we need to understand how the actual substitution will take place for the revenues that we see coming off the table from Abbott, the ramp-up of the direct sales force, and also-quite frankly, David-the additional costs associated with deploying that sales force. And how quickly they get traction in the marketplace.

I believe that the mix is more profitable of a mix with Abbott out. I also would give you some feedback that in our guidance of $11.5m for the fourth quarter of this year, less than $100,000 of that comes from sales of Abbott to the hospital market.

It's a rounding error in terms of where we are, with a record quarter that we're expecting right now. And we have multiple drivers, with OraQuick and the multiple-we haven't even talked about international, where we continue to sort of create great opportunities for that product, and for Intercept and for MedTec.

We're comfortable with the mix. The timing of the profitability that follows, because of the investment, is probably the only tricky part.

Okay. Thank you very much.

Sure.

Your next question is from Sara Mitchell Moore, with SG Cowan.

Hi, Sara.

Hi. Michael, I think you answered one of my questions, which was are you still shipping product to Abbott? It sounds like you may have, up until recently in this quarter. But just if you're still actively shipping product to them, or if they're ordering product from you.

Up through the time of the termination, we filled all orders.

Okay. Then, Abbott's focus in the hospital market, it sounds from my conversations with them, is sort of limited to their existing lab customers, and working with needle sticks-things like that. Could you just contrast some of the market opportunities that you see in the hospital market, and how that may have been different than what Abbott was focused on?

I think to be fair, for the hospital market, 'til the time the venous whole-blood claim, it would've been difficult for anyone to be successful in that space. Abbott was not limited to sales of the physician office market. This was a co-exclusive, where they could sell anywhere. Their ability to meet their minimums wasn't predicated only on abilities to sell to hospitals. We've been very successful in other markets, because of the finger stick whole-blood claim. It was not a limiting factor in other markets. The limiting factor in hospitals clearly was not having a venous whole-blood claim. We now have that claim.

We're only going to begin to have the gun go off in terms of seizing the opportunity in hospitals. I would say that versus sort of what you had with their product SUDS, we have a one-step product with higher sensitivity and specificity. We have all these CDC initiatives. The results of the Myriad study from mother-to-infant were outstanding. Needle stick incidences for rapid testing is a substantial opportunity. We see just numerous opportunities for this product to fit into the hospital market with the venous whole-blood claim approved.

The question on Abbott, you may or may not be able to answer. It sounds like you've come to a deal on economic terms. I was just wondering if you could give us any indication of what the economics are. Is it a royalty stream that you'd be paying off the product? Are there up front payments or anything like that we should be aware of?

I'd rather not get into the mix of that, but I think it's on economically-reasonable terms. Wait and see if the deal stays the same, to get signed. We're okay with it, but I don't want to get into details.

Okay. Last question on OraSure. Could you just talk about some trends there, and if you've seen any cannibalization from OraQuick?

So far, we've not seen the cannibalization that we expected. It's difficult to tell why. Part of the reason, we believe right now, is a lot of the public health customers held off potentially converting from OraSure to OraQuick, until they saw where they fit in the allocation from the CDC, in terms of product. They kept doing business as usual for our customers.

That extended to where, in the third quarter, they'd heard at the end of June that the CDC was buying all this product. They quickly got in line to kind of buy the rapid testing, because nothing's free, but it was for free, and it was the wave of the future. But the product didn't really get rolled out 'til the fourth quarter. So we didn't see the cannibalization, yet. We've still been ultra conservative and expect it to occur as soon as the product starts seeing the shelves from the CDC rollout-but so far, not yet.

Okay. My last question is a question on the MedTec relationship. Can you tell us what is your visibility on how those guys order? Do you have any data that allows you to track end-user demand, versus what you're sending to them?

They've been sharing some of that data, so far. I'm not privy to share it beyond this, but they've been very successful with Wal-Mart, so far.

Thank you.

Your next question is from Aaron Lindberg with William Smith.

Hello, gentlemen.

Hey, Aaron.

A couple of questions for you. I wanted to kind of follow up on the public health market. Can you provide any additional color around the sales strategy, given the uncertainty of who's going to pay for what between the CDC and the clinics? Particularly over the next nine months?

We are assuming that the CDC will not continue the program, that we've got to touch every customer who could be a purchaser of a rapid HIV test, so that they can consider buying, in case the CDC seeds the market through the trial period and doesn't continue the program. We figure that's the most conservative way.

We also want to be available to touch those customers so that if training is required in terms of how to use the product, that we're there to help them be successful. We believe that although it's more predictable to have a bulk order from the CDC that we can talk about like we can in the fourth quarter in terms of specific revenue streams in the shipment, it would be far more lumpy selling one box at a time to our customers in the public health market.

But we know who the customers are. We've been meeting with them with our sales force for five years. We have a great relationship with them, and we're helping them transition to the product if and when they're ready. We're covering both ways, but we prefer to have the bulk order and normalized shipping, instead of having the more lumpy revenue stream.

The price points might be better if you sell direct, I suppose. Can you comment on the responses that you're receiving from those individual clients?

Overall, the response that's drifted back to me is that the products work great. It's still very much an unmet need, because of being able to give a result immediately. So far, the feedback has been positive.

Great. How is the training going with the CDC?

I believe it's going fine.

What's a reasonable expectation for resolution of the agreement with Biolab, as related to HIV2, kind of wrapping up the rest of their portion?

It's entirely in their camp, on their timing. That's all I can say. I think we've got ourselves to a point where we think we have a signable agreement, and it's up for signatures. All we can do is wait impatiently.

Very well. As it relates to the 10 million hospital tests for rapid HIV, can you provide how you feel those would be distributed between various claims such as venous whole-blood or fluid?

I think for the 10 million tests, what's important is that it includes everything that would be the automated tests. It includes, clearly, with the exception of the SUDS product, which in round numbers was 10% of that market. The rest of the tests were done using different technologies and some form of automation, because no rapid tests were approved.

To be fair, with the existing 10 million unit market, one would have to say that in today's time, 1 million or so of those tests have gone in some form of a rapid test. Both the sensitivity and specificity, ease of use of a test like ours, we think that could be substantially greater.

We're seeing that the usage of it in things like delivery room and emergency room and other parts of the hospital will increase. We're encouraged that although there's not an opportunity for conversion of 10 million tests, that's only probably 10% of the market, now, but there's a great upside, in terms of conversion to rapid test.

Unlike public health, which has 3 million tests a year, there's no reason that grossly simplifies that that can't be a complete conversion opportunity in the future. We compete with many different types of technology. If you're a high-volume situation, you'll probably put in on an automated reader and walk away. If you need a quick result in 20 minutes, we've got the test for you.

What do you believe are broad [inaudible] half of it based on the lab-based analyzers? A quarter is the finger stick or fluid, and a quarter is...

Clearly, the only thing I think that's visible for me is that almost everything that will be sold in the hospital market will be venous whole-blood or plasma. Only on rare occasions, in the emergency room, maybe for a mother coming in who's being tested before the delivery of a child, will they do all fluids.

Gotcha.

And probably a needle stick.

Have you received any comments from the FDA on your recent submission?

No.

When do you plan to submit or clear a waiver of the OraQuick oral fluid base?

The studies were done to be considered for CLEO waiver at the time that we did our studies. The venous whole-blood-the difference between when we got approval early in September and the end of the month to get the final labelling approval was that it had to go through the committee that overseas the CLEO waiver. It is a CLEO-waged product.

We would consider that, in the ordinary courses of review, as a consideration for CLEO waiver.

Sometime between now and submitting a labelling claim?

I'm sorry; I'm confused. We submitted on September 30th for both oral fluids and plasma.

For approval?

For approval.

When do you plan to submit for CLEO waiver?

No, it's the same application. There's nothing new we have to do.

Okay. So when you submitted for approval, you submitted for the waiver at the same time?

It's all in the same package.

Gotcha. Can you comment on how many OraQuick devices were produced in the quarter?

I said I think it was 217,000 devices were sold in the quarter.

How about produced?

For all practical purposes, they're one in the same.

Can you comment on how much was shipped to Abbott?

We shipped approximately 90,000 devices to Abbott.

Great.

Thanks, Aaron.

I appreciate it. Thanks, guys.

Your next question is from Ed Schenken, with Wells Fargo Security.

Congratulations again on reaching profitability ahead of our expectations.

Thanks, Ed.

A couple of quick questions on OraSure. Could you tell us what the revenues were for the quarter?

Revenues for OraSure in the quarter amounted to $1.2m in the infectious disease market.

For OraQuick, thinking about international. What were the revenues? Have you started shipping to Mexico? Have you also submitted to any other countries? Are there any other updates you can give us, there?

We have not shipped any product into Mexico, as related to OraQuick. We have not registered in any other countries. Our revenues for international OraQuick sales in the third quarter were slightly less than a couple hundred thousand.

Okay. Then the public health market. What were your OraQuick revenues?

Our OraQuick revenues in public health were approximately $0.5m.

As far as manufacturing goes, you've talked about ramping up manufacturing. Could you tell us where you're at now, and if you will be ramping up soon, or where you stand on that?

It's all function and demand. With the 217,000 units that we've sold, we’re not even denting the capacity, the constraints, you know what we've said before. In a one-shift operation, we can produce 300,000 units on a single-shift operation.

Congratulations again on a great quarter.

Thank you.

Thanks, Ed.

Your next question is from Elma Pyrus, with Rob Smith.

Good afternoon. Michael, I was wondering if you could perhaps help us understand the competitive landscape, as you view it. Trinity Biotech is anticipated to get FDA approval for a rapid HIV test during the next few months. They hope for a label on both plasma serum and venous blood. Just last week, they disclosed that they're also ramping up their internal sales force, to address both the hospital and the public health markets. Could you please tell us how you view them and how you view your position in the marketplace?

They have great guys at Trinity. I wish them the best of luck. I think they're going to help like midvera [sp] and us in the hospital market, open it up for rapid testing into the marketplace. I view that as a good thing for overall market dynamics.

It's a hospital product, and that's where their focus will be. We'll see them in the marketplace. They have a good product. We'll see when they get approved.

Is there a particularly large difference between if you have a claim for venous blood only, or if you tag along plasma and serum?

We're going to have a plasma claim that we've already submitted for. So that's in the mix of what we have. Frankly, serum is a last resort, because it just doesn't become a rapid test anymore, almost for anybody.

I think that in order, people want venous whole blood, plasma and then serum as a distant third. That is the least interesting. Abbott terminated their SUDS product, which was a serum-based product, upon approval of ours. I believe, as my own interpretation, that they've made it obsolete.

Sure. One last question. As you look at it in about six to nine months time, if Trinity gets approval, both you and Trinity would have a roughly similar offering, with the exception of the finger stick label, of course.

And oral fluids.

And oral fluids.

And sensitivity and specificity. And a single step in 20 minutes. And hopefully, HIV2. I think the competitive landscape's going to be a fun place, but we've got a device that'll do it all. I think we'll be very competitive.

Thank you very much, Michael.

Thank you.

You have a follow-up response from Wade King with Wells Fargo Securities.

Hi, Mike. Can you hear me?

Yes.

A couple of follow-up questions, if I can. First, per the BioRad interaction, is there anything you can say as relates to which signatures are pending? I presume these would be from the existing licensees about the HIV2 patents. Specifically, do you know whether Abbott has already signed off on the agreement?

I don't know the answers, really, to any of those questions. But I don't believe Abbott's a bottleneck to this at all.

You do not?

I do not believe at all that they're a bottleneck to this.

Okay.

There’s multiple signatures required and, it's in process, and the mix is unclear, but I don't believe it's Abbott.

Okay. Secondly, is the deal with BioRad related to OraQuick based on blood specimens? Does it include oral fluid specimens?

It's the OraQuick device for any specimen type.

For any specimen type-so-comprehensive?

Absolutely.

Very good. Let me just turn to the CDC order that you alluded to previously. You said that the CDD, you shipped $280,000 worth of OraQuick devices to the CDC. Is that correct?

Correct.

In the latest quarter. So given the CDC's total order, what are your expectations for the Q4-either unit or dollar volume-going to the CDC? Would it have to be a large one?

1.7 million.

[Crossing / inaudible] It's the net difference.

You expect the whole thing to go in the fourth quarter? You don't expect there to be any lag into the first quarter of next year?

Our purchase order is for delivery in the fourth quarter. That's our expectation. We're hustling to work with them to ensure that it can be distributed during that timeframe. I don't have any visibility to the contrary, right now.

Very good. Lastly, I believe you indicated that the MedTec contribution to OraSure in 2003, I believe you alluded to a $4m figure. Is that correct?

That’s the expectations for the year. Correct.

So looking ahead to 2004, could you provide any suggestion as to what you think the 2004 MedTec contribution would be?

Not really. Right now, we rolled the product out after the work season was well underway. The work season is May to September, and we got out in July. The sell in itself through, with Wal-Mart and the other customers, so far in the months of October and November, has been nothing short of outstanding.

We have no visibility on repurchase intent, or anything else, other than the customer's happy in Wal-Mart. Our partner's happy. We're all laying out plans for next year, and we are doing visuals of a much greater opportunity, albeit the minimum is $2m, just like last year.

All $4m is not building up inventory for next year. It's blowing through the shelves. We've actually air freighted some stuff to keep up with demand. The 4 million is just blowing through, and that's a great sign for next year.

Importantly, from a modeling perspective, MedTec and OraSure, for that matter, have to really do a good job of planning on the front end of the year. With the season from May to September, the bulk of the purchases to prepare for the year have to be front-end loaded. They’re advertising programs, everything that they'll be doing is during the summer. The last thing any of us want to do is run out of product when you're being successful.

Can I just ask, given the $4m contribution in 2003, despite a $2m minimum, I presume that your expectation would be and that was over three quarters, that’s for the year 2004 that the MedTec contribution would be at least $4m? Is that correct?

Absolutely.

Are there any manufacturing constraints? We talked about manufacturing issues for OraQuick. Can you talk about the Cryogenic wart removal in manufacturing issues? Are there any constraints of note?

Just the fact that this newly created market has created an enormous $4m of product. After the course of this year, it was twice as much as we had planned for. So we've been scrambling to make sure that there were adequate raw materials. It's been a great team effort between MedTec, ourselves and our contract manufacturer that we've been using since the beginning of time. We actually bought the product line from back in the mid-90s.

Everybody's stepping up. It's a great collaborative effort, and it's a great problem to double expectations over a seven-to-eight-month period.

One last question, if you don't mind. There was a prior question about competitive landscape. Would you just review the differentiation that you folks expect to have relative to Trinity-but there are others. Do you expect to continue to have the only CLEO wave product on the market that also can be performed out of an oral fluids specimen and potentially carry both strains of the virus? I presume that's part of your differentiation, looking ahead.

Are there others you're aware of that have the same kind of clinical efficacy? Specifically sensitivity and specificity with especially blood-based specimen?

A couple of points, here. Number one here is that I have no visibility of anywhere I've seen with anybody with oral fluids anywhere in the world. I've been to Barcelona, to the World's AIDS Conference. I've been to Dusseldorf, to the biggest healthcare, medical device tradeshow in the world. There's no one else who's done oral fluids, much less go through the rigors of the US approval process, and oh, by the way, have the CDC use it in an investigational device exemption successfully.

We're just light-years ahead of everyone in that sensitivity and specificity in oral fluids, once the trials are done. We'll make it competitive with anyone. It's still a single-step test that you can use on any specimen type.

When it comes to blood, everybody has sensitivity and specificity are so close. It's not a competitive advantage for us over anyone else in terms of something that's a driver, in terms of success in the hospital market. I can't differentiate it in a meaningful way. The strength of your distribution channel, the awareness you have on your product-those are all things that are going to be drivers.

Okay, very good. Thanks, again.

Okay. Thanks, Wade.

There are no further questions, at this time. We'll now turn the call back over to Mike Gausling for any closing remarks.

I just really appreciate everybody joining us, today. It was a phenomenal quarter for us, bottom line. It was our best, ever. We see profitability that we had for the first time in a long time. There is just a rich pipeline of multiple opportunities in the multiple market segments.

We look forward to having these kinds of calls. We'll continue to bring you great news as we expand in multiple different directions, going forward. Thanks a lot.

Thank you, ladies and gentlemen, for your participation. This does conclude today's conference. You may now disconnect.