OraSure Technologies Inc (OSUR) 2003 Q4 法說會逐字稿

Good day and welcome to OraSure Technologies 2003 full year and fourth quarter financial results conference call and simultaneous Web cast. As a reminder today's conference is being recorded. For opening remarks and introductions, I will now turn this call over to Kate Owens at OraSure Technologies. Please go ahead ma'am.

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 4:00 p.m. eastern time today regarding our 2003 full year and fourth quarter financial results and certain other matters. The press release is available to you on our Web site at www.orasure.com or by calling 610-882-1820.

This call is also available real-time on our web site and will be archived there for seven days. Alternatively, you can listen to an archive of this call until midnight February 13th, 2004 by calling 800-642-1687 for domestic or 706-645-9291 for international. The access code is 4884253.

With us today are Mike Gausling President and Chief Executive Officer and Ron Spair, Chief Financial Officer. Mike and Ron will begin with opening statements 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 developments, performance, shipments and remarks, and regulatory filings and approval. 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 statements, its annual report on Form 10-K for the year ended December 31st, 2002, its quarterly reports on Form 10-Q and its other SEC filings. Although forward-looking statements hope 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, Kathy. Good afternoon everyone, and welcome to our 2003 fourth quarter and full year conference call. Today I will begin by providing everyone with a brief summary of our 2003 operating results. Ron Spair, our CFO, will then follow up with a detailed look at our 2003 financial results and I will then close with some guidance regarding our 2004 financial and operating objectives. We will then open the floor for questions. Let's jump in.

Bottom line, 2003 was a great year and it marks the beginning of what is expected to be a sustainable growth phase for the company. Last year we had strong revenue growth as demonstrated by our increase of 26% for the year and an increase of 44% in the fourth quarter compared to 2002. We also generated 2.7 million in positive cash flow from operations in 2003. A positive swing of 3.2 million over 2002 and an impressive $8 million swing over 2001. At the beginning of last year we also promised profitability in the second half of the year and we delivered in both the third and fourth quarters.

Our balance sheet was very strong at year-end, with working capital of $67.2 million including cash and cash equivalents of $64 million. Importantly our balance sheet puts us in a terrific position to pursue strategic and opportunistic acquisitions of products and technologies in the future.

Shifting from the top line financial highlights to the performance of our product portfolio, obviously the greatest visibility for the company last year came from OraQuick, a rapid HIV-1 antibody test. What a phenomenal year.

We started off with President Bush announcing our CLIA waiver less than 24 hours after we submitted our application. We closed the year with the honor of opening the NASDAQ market on December 1st for world AIDS day and on that day we announced our second bulk order from the CDC for 250,000 OraQuick tests. This brought the total orders from the CDC to 500,000 tests in the first 11 months since the CLIA waiver, and these events represent a clear and unambiguous statement from the US government that they are serious about fighting the AIDS pandemic.

In between these milestone events, we were diligent to make OraQuick the most versatile HIV test on the planet. We secured FDA clearance for venous whole blood claim and filed for claims for oral fluids and plasma and to expand the reach of the product to test for the HIV-2 virus as well. We sold more than 1 million units in 2003 and expect to substantially increase our sales volume again in 2004.

In 2003, we also completed negotiations with Bio-Rad for a patent license for HIV-2 and are waiting on all the signatures required by Bio-Rad before it is complete. Although it do not have anything new to report at this time and it has taken much longer than ever expected. I remain cautiously optimistic that we will secure the HIV-2 license from Bio-Rad sometime in the near future. In the midst there was lot of positive developments happening with OraQuick in 2003, we had to deal with the sub part performance of Abbott admitting their firm purchase commitment. As you may recall in June 2002, Abbott Labs became our co exclusive dist1ributor of the all OraQuick rapid HIV-1 test in the united states under a five-year agreement, which required minimum monthly purchases totaling approximately $4 million during a 15-month period following initial FDA approval of the product. The OraQuick test received its initial approval in November 2002. Abbott's purchases during the first 10 months of this period totaled approximately $1.5 million or substantially below its minimum obligations.

We notified Abbott of its deficiencies and requested that it be cured. We also attempted to work with Abbott in the context of negotiating an amendment to the agreement to among other things correct this deficiency and to leave Abbot of the consequences of its breach, address the market rights of each party and the increase the transfer size. Unfortunately these efforts failed to result in an agreement on an amendment. Abbott failed to cure its purchase deficiency and this failure resulted in termination of the agreement. Abbott disputed the termination in this matter was submitted to binding arbitration pursuant to the dispute resolution provisions in the agreement. The hearings for the arbitration were held last week on February 3 and 4 in Milwaukee, Wisconsin and we expect a final binding resolution in the next few weeks.

Regardless of the outcome of the arbitration, we are pressing ahead full steam to build a small but strong hospital sales force to serve the major US metropolitan markets to ensure the maximum penetration of OraQuick in the hospital market going forward. With approvals for oral fluids, plasma and HIV-2 expected sometime in the near future and our continued efforts to roll out OraQuick to the hospital physician office and public health markets, we are very optimistic that 2004 will be another great year of growth for OraQuick.

Shifting now to Histofreezer, we were committed to revitalize the class surgical systems business and we did it in a big way in 2003 with sales up 51% versus a year ago. We quietly pursued 5 -10K clearance from the FDA in the first quarter of last year to sell Histofreezer over-the-counter. In April we received FDA clearance and in parallel we have been working with Medtec, the owners of the Compound W franchise to sell Histofreezer under Freeze of trade market it into the OTC market. We completed that deal and launched the product in time for most of the summer wart season. And despite missing the beginning of the season, Medtec purchased roughly 5 million of product in 2003 as compared to contract minimums of $2 million. This is success largely offset a year for Histofreezer in the US physician office market where we saw sales slide 22% over 2002.

As we look forward to 2004, we are very optimistic about reenergizing our physician office business and gaining the benefit of a full calendar year and full wart season for Freeze Off in the OTC market. Our optimism in the OTC market is based on the fact that Medtec has already placed firm purchase orders for almost $5 million of product deliveries in the first two quarters of 2004. Stay tuned for further developments as the wart season approaches.

The substance abuse business grew 13% in 2003, and although that is below expectations, it is a bit deceiving because it does not clearly show the steady progress that we are making to grow Intercept Oral Fluid Drug testing business. For 2003, a total of 760,000 specimens were processed using Intercept system up 42% versus 2002. We also started to see an uptick and direct sales to small and medium size employers, which we believe is a substantial opportunity in the near term. This is logical target market for our sales team as it typically does not compete with our lab distribution partners who tend to be focused on the larger companies with substantial drug testing programs. With steady growth in both the criminal justice and workplace markets in 2003, we are targeting growth of 50% in specimen volume in 2004, which would result in roughly 1.2 million specimens being processed with our Intercept Oral Fluid Drug testing system in 2004.

To further supplement of substance abuse business, we are also being working diligently to complete the development of the UPlink Oral Fluid Point-Of-Care Drug testing system. In September we submitted the system for 5-10 k review by the FDA. There has been a series of follow-up questions asked of us by the FDA. We have responded promptly to all their questions, and are cautiously optimistic that we will receive FDA clearance in the near future for the UPlink DOA system. Although the development effort took much longer than originally anticipated, we are quite proud of the fact that the performance of the UPlink system is comparable to the gold standard for lab based Oral Fluid Drug testing, our Intercept DOA system.

Over the past year we've also continued to work closely with Draeger to prepare for the launch of UPlink DOA system to the roadside drug testing market in Europe. We are pleased that Draeger expects to launch UPlink in April of this year and anticipates of that launch Draeger has placed initial purchase orders for roughly $75,000 for readers and cassettes to get started.

In the United States, subject to FDA clearance, we anticipate that we will complete several pilot studies at certain high profile beta sites in both the criminal justice and workplace markets for the balance of 2004, and based on the results of these studies, we expect to launch nationally in the United States in the beginning of 2005. Sales to the insurance risk assessment market were up 19%, or 2.3 million for the year. The bulk of this decline is due to the loss of the year-end assay business that Lab-1 early in 2003.

Although we are not pleased that we lost this commodity side of the business we are doing everything possible to firm up our on going relationship with Lab-1, that includes the development of additional oral fluid assays that will allow us to build our oral fluid franchise in the assessment risk business in the future. With that, that concludes my summary of the highlights of our 2003, product portfolio, and I'd like to turn the podium over to Ron Spair, our CFO, who will provide you with a more detailed look at our 2003 financial results.

Thank you Mike and good afternoon everyone. On the financial side, our stated objectives for 2003 were as follows: Increase our revenues for the year by 25%, from 32 million to at least 40 million. Retain a strong cash position, and third, transition profitability in the second half of the year. I am very pleased to report that we have achieved all of these objectives.

Total revenues for 2003 were 40.5 million, or 26% higher than 2002. Product revenues were 39.7 million for the year, which was a 25%, increase over 2002. Both of these figures are records for the company. For the fourth quarter in 2003, we had total revenues of 11.9 million, and product revenues of a 11.7 million, which represent increases of 44% and 42% respectively over the comparable periods for 2002. Q4 was the fourth consecutive quarter of record revenues and the 7th consecutive quarter of increasing revenues. These revenue increases were primarily attributable to higher sales of OraQuick, the successful launch of Freeze Off, the over accounted wart removal product distributed by MedTec and higher sales of our Intercept Oral Fluid Drug test. With respect to Freeze Off I'm pleased to report we sold roughly 5 million of this product during the year with more than 2 million in the fourth quarter alone. In addition we sold 6.3 million of OraQuick devices including a $2 million bulk purchase by the CDC.

In December, of 2003, we received another $2 million order from the CDC for delivery in 2004. Partially offsetting these 2003 revenue increases was the disappointing performance of Histofreezer in the U.S. physician office segment of the cryosurgical market and the loss of the urine assay sales in the Life Insurance testing market to Lab-1. We are optimistic that our Histofreezer sales in the US professional marketplace will recover in 2004, but unfortunately do not have that same expectation for the urine assay business.

The gross margin for 2003 was 60%, unchanged from 2002. Our margin was positively impacted by the higher Intercept revenues and better utilization of our manufacturing facilities, which resulted in lower scrap, and spoilage and hire absorption of our overhead. Offsetting these items are the lower urine assay and domestic Histofreezer sales. For the fourth quarter, our gross margin was 61%, which was better than the 58% margin for Q4 of '02. This improvement was largely the result of lower scrap during the quarter.

From our operating expenses, our operating expenses for 2003 increased 13%, to 25.7 million compared to 22.7 million in 2002. This increase is primarily attributable to increased advertising expenses for the launches of OraQuick and Freeze Off and higher general administrative expenses primarily related to the occupancy of our new corporate headquarters in Bethlehem offset by lower compensation cost.

These increase were partially offset by a small decrease in R&D expenses primarily due to low in - lower staffing costs offset by increase in outside consulting expenses. Our net loss for 2003 was 1.1 million or 3 cents per share. This is a $2.2 million improvement over 2002. For Q4, we reported a net profit of $435,000 or 1 cent per share, which compares to a net loss of 82,000 or zero cents per share for Q4 of 2002. These results are inline with street estimates. Continuing bright spot is once again our liquidity position, which remains strong at the end of December.

The company's cash, cash equivalents and short-term investments were 64 million including net proceeds of 44.8 million received from our stock offering last year and working capital was 67.2 million at December 31st. Cash flow from ops was positive 2.7 for the year and 1.8 million for Q4 alone. This represents the 7th consecutive quarter of positive cash flow from operations.

As previously reported, during September of 2003, 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 8 million of credit available to finance our operations in future growth in additions to our already strong cash position. This amendment also further strengthened our relationship with Comerica bank.

In summary, I believe we are well positioned from a financial standpoint to support our projected growth and look forward to continued strong financial performance in 2004. With that, I would like to turn things back to Mike.

Thanks, Ron. At the beginning of 2003, we established some very specific measurable objectives for the year and throughout the year we bench marked our progress against those stated objectives. We received good feedback regarding this format so consequently, we intend on filing the same format again in 2004. As a result we have established the following financial and business objectives for 2004. They are as follows: First is our financial objective. Number one, we expect 2004 revenues to grow at least 25% and exceed $50 million. And second, we expect to achieve profitability for the year as a whole.

Regarding our business objectives, first, we will continue to aggressively expand OraQuick, specifically we will build a hospital sales force and expect to launch into the hospital market by the end of the first quarter. We will continue to take a leadership role in bringing rapid HIV testing into the public health market. We will continue to try and secure both purchases from key government agencies especially the CDC. We will try to secure FDA approvals for Oral Fluids Plasma and HIV-2 claims as early as possible and we will try to secure an HIV-2 license. Second, we will continue to aggressively expand Intercept. Specifically we expect to increase the number of specimens processed over 50% to 1.2 million units in 2004. We expect to expand direct sales of Intercept to small and medium workplace customers, and we will continue to support our lab partners' efforts to sell to large workplace and criminal justice accounts. Third, we will continue to aggressively expand Histofreezer, specifically we expect to revitalize our sales to the U.S. physician office market. We will continue to support MedTec's efforts to sell Freeze Off into the OTC market and we will explore expanding into new markets and territories in 2004.

Fourth, we will try to launch the UPlink DOA system, specifically we expect to launch UPlink with Draeger in Europe to the roadside testing market in April. We expect to get FDA 5 10-K approval in the near future and we expect to complete pilot studies in the United States with major beta sites in 2004. Fifth, we will try to stabilize the insurance risk assessment business. Specifically, we will try and build our relationship with Lab-1, and second we will investigate the development of new oral fluid assays for HSCRP and HCV in 2004. Sixth, we will consolidate manufacturing in Bethlehem the plan. Specifically, we will try to secure FDA approval to produce OraSure in Bethlehem by the end of the first quarter. We intend to start up manufacturing for Intercept and Ora Western Block in the first quarter. We expect to start up Offshore manufacturing in the second quarter and we will permanently close down the Beaverton office as soon as all the operations are rolled up into Bethlehem. Seventh, we will explore the utility of the UPT particles for high value applications. Specifically we will explore the sensitivity onuses of UPT during 2004. We will explore the utility of UPT for certain DNA applications and we will carefully evaluate our ongoing investment strategy for UPT. And last but not least, we will explore strategic and opportunistic acquisitions. And before we close and open the floor for questions I'd like to give some guidance regarding our first quarter financials.

We expect Q1 revenues to reach a range of $11.5 to $12 million. This would represent an increase of 33% to 40% over the first quarter of 2003, and compares quite favorably with consensus street estimates of about $10.6 million. We also expect a loss in the range of $400 to $700,000 in the first quarter of 2003. This is due to the start-up costs to set up the hospital sales force and for the investment into aggressive sales and marketing program for OraQuick, Intercept and Histofreezer. This excludes any positive or negative impact resulting from the outcome of the Abbott arbitration. With that I'd like to open the floor for questions.

(Operator Instructions) Your first question comes from David Lewis with Thomas Weisel Partners. Please go ahead.

Good afternoon, guys. A couple of quick questions. Ron, just real quick on the insurance business, we were modeling a sequential down tick in that business given the issue at Lab 1 and it was more significant than we were modeling. Maybe just talk about why that happened and do we expect that trend line to continue into 2004?

I think what happened there, David, was that there was an order that made it out the door in early January as opposed to late December. And so that took about $400,000 worth of devices into the first quarter of 2004 that otherwise would have been shipped in the fourth quarter here. So I think that accounted for a significant amount of the operation. And when you look back to 2002 comparing the fourth quarter to 2002, lab one had also purchased all of their signed reagents that we had out there in their facility back in the fourth quarter. So the revenues for Q4 of 2002 were inflated by that consignment purchase. And then, of course, the loss of the urine assays during the course of 2003 was really the bulk of the revenue diminishing as Mike had indicated during the call.

OK. The trend line, which we are carrying through is something like 1.4 million maybe plus 400,000 and kind of carry that through the year?

That is directionally correct, certainly 1.4 is not our expectation for a quarterly revenue number for insurance assessment.

OK. And Mike, you spent quite a bit of time talking about Intercept. I guess what the issue is up is SAMSHA been widely publicized in the plus series coming out with guidance and we expect this in the federal register here in the short-term but now while taking effect in 2005. So are you seeing some sort of pre those regs traction in market place. You are talking about 50% unique growth what's driving that is it tied to SAMSHA or is it just a reintegrated health affect?

Its completely independent of SAMSHA, because we don't know what they think what SAMSHA is going to come out with their draft regulations. This is the group grinding it out converting a paradigm shift from users from urine to oral fluids. You have got the early adopters onboard and we are starting to see just real nice trend line over -- every quarter last year in terms of the growth in both the criminal justice and workplace market from beginning to the end of the year and I think it's more of the same throughout 2004 that you know was happening at the end of last year.

And maybe two quick sub questions tied to the hospital market. First of which being the status of the sales force, Mike, you gave some visibility on that and you had publicly announced the new head of sales. In terms of the amount of people you wanted to have in that division by the end of March 30, are you still on pace to get that number of people? And can you update us on what number you're looking for in terms of the small sales force?

Sure. Targeted is 10 people, super star status in each of the major metropolitan areas where HIV testing is done which represents roughly 40% of the HIV testing in the United States in those metropolitan markets. We've not hired anyone specifically of the 10, but, you know, sort of we have a whole class of people coming in over the next, you know, two to three weeks to make final decisions. And we're moving on target and it's coming together.

OK lastly, Mike, one of your competitors, you've talked about how important venous whole blood has been for a more relevant product for the hospital market much more so than finger stick one of your competitors is saying is venous whole blood is simply not that compelling and that plasma is more compelling for the hospital market. Can you comment on that? And then obviously in conjunction with your pending approval how important that is to really get the hospital sales initiative moving?

Well, my guess is those that say those plasma is because they didn't have venous whole blood. That's the argument you make when you don't have something. Clearly in the processing and lab to have venous whole blood or plasma is advantageous and both useful in a variety of hospital situations. It is a tube of blood versus the drop of blood. That's really the biggest difference we can - we have seen. We have obviously submitted -- we have venous whole blood and submitted for plasma as well. And I don't think you're going to see any distinction in terms of added advantages for someone to have venous whole blood in terms of a selling proposition.

OK. I'll jump back in queue.

Your next question comes from Wade King with Wells Fargo Securities, please go ahead.

Good afternoon, thanks for the detail. A couple of questions, please. First, given the ongoing dynamics in the infectious disease market for you folks, can you give any inkling of the $50 million approximate guidance for next year, what percentage of that would be infectious disease sales? Is it close to 40%?

I would say we're looking at something on the order right now in the range of about 30% in the infectious disease market.

30% infectious disease.

Right.

And would you be willing to give an approximation as to the other parts of the business, cryosurgical, substance abuse, et cetera?

The mix can change obviously, Wade. And I think rather than locking in to a particular percentage as related to the various market segments, I think we feel comfortable with the 50 million and achieving it in a variety of different ways with different combinations of product revenue streams. And rather than drilling down into those numbers that would be likely to shift around, I rather would just stay with the 50 million and leave it at that.

OK. I assume that -- just one follow-up to that. I assume that the cryosurgical systems business would be the second largest part of your revenue breakout; is that correct?

Well, I think that's a close call. What's interesting, Wade, as we said earlier with the previous call with respect to target of 50% specimen growth in Intercept, the nice thing is we've got great growth drivers obviously because everybody expects OraQuick, Histofreezer has shown its life and Intercept is, you know, sort of hoping to throw in the air because it's been steady and we'll continue to see that kind of growth. I think all three of them are good growth drivers. And as Ron said, who is going to have the breakout party is unclear because all three could.

Very good. One question as relates to the balance sheet. You are obviously doing a nice job of inventory management. But the AR has increased steadily through the year and was up sequentially again in a significant increment. Can you comment on what's going on there and your expectations to keep it under good control?

I think you're absolutely right with increasing revenues come increasing AR and in this particular case, increasing or the appearance of increasing days sales outstanding. And at the December fourth quarter there, we had a day sales outstanding of approximately 64, which compares to 59 at the year-end previously. So, it is up. And we did ship a tremendous amount of product to the CDC in the actual month of December we shipped 150,000 OraQuick devices or $1.2 million worth of revenue to them in the month of December, as well as a significant amount of product to MedTec. Both of those firms are on 60-day terms and that will definitely effect our day sales outstanding.

Once again, the figure was 150,000 devices, OraQuick devices to the CDC alone in the month of December?

That's correct.

In the past you've commented on production capability for OraQuick devices on a quarterly or monthly basis. Could you give us an update there?

We're meeting demand and nowhere close to our capacity of 300,000 units a month.

OK but that capacity is 300,000 units a month. And that assumes 1 shift; is that correct, Mike?

That's correct.

OK. Could you tell us whether the guidance for '04, please, includes any significant sales of OraQuick devices to Mexico? And, you know, given the data out of Mexico and your -- I know it's very early efforts -- do you expect that to offer any potential upside?

I'm skittish based on some historical things that happened a couple of years ago about giving much, you know, value to any sales internationally until the purchase orders are there. And in the number from 40 to 50 million, we have very, very little dependency on any OraQuick sales outside the United States, virtually none.

And virtually none, once again, in the guidance for next year?

Correct.

Lastly, you mentioned in your comments, Mike, the exploration of additional oral fluid assays at '04 and also DNA applications for UPT. Could you be a little bit more specific as relates to, do you expect to be close to commercializing additional oral fluid assay by the end of '04? And do you expect in your exploration of DNA applications to be partnering with someone with a company that regards on a strategic basis?

I think I understood your question. These are all related to my points around the UPT applications, correct?

Well, you mentioned two things, additional oral fluid assays. You mentioned two. And then you mentioned DNA applications for UPT.

OK. I'm sorry. I wanted to make sure the classification. We are pursuing this year in terms of feasibility for life insurance two assays, oral fluids to help build that business. And those are for HFCRP and for HCV and we're in the stage of feasibility right now for both of those with the insurance lab customers and based on the success or failure of those initial feasibility studies, if they are successful as we expect them to be, we'll move forward with a more full-blown study. We've talked to the life insurance customers and the end users who buy it in a retreat this summer.

They have clearly said they are interested in both. So we're trying to listen to our customers and see what we can do with that to build the business that way. With regard to UPT, we're taking two big giant steps backwards, I think in terms of assessing the utility of the UPT particle for its most high value applications. Clearly the UPlink reader has been a terrific application for the system. But as we move forward, not limited to oral fluids, we're trying to understand the full utility of the particle. In terms of where we can push the sensitivity limits and whether or not we can detect particles down to the level that allow us to do DNA application without amplification. Both of those areas if we're successful can open up very, very high value added applications in terms of expansion of the company in the future. But we're also very critical of the fact that it was a substantial investment for UPlink DOA that took us a lot longer and a lot more money that we ever anticipated. And the board is rightfully so challenging us to, you know, to ensure that we have strong feasibility in terms of the applications in a well defined investment plan where there's a substantial return on that investment. And that's what we're working through.

OK. And I presume that given all the potential applications of UPT it might make strategic sense for you to license it out for some of these applications.

Absolutely. But first and foremost, I think we're really trying to see how far we can push the envelope in terms of the performance of the product. And then whether or not we develop it ourselves because clearly we have the capital to do so if we want to, or whether we want to partner, we want our walking papers to really validate the total utility of the technology in its broadest capabilities. If we fall out short, we may make some tougher decisions in terms of continuing the process because we can't have the same kind of investment horizon that we had with UPlink without, you know, really challenging, you know, utility of that investment.

Very good. Thank you very much.

Your next question comes from Sara Michelmore with SG Cowen.

Great. Thank you.

Hi Sara.

I was hoping you guys could break out the sales of the infectious disease testing business in Q4. Just give us a sense for how much of that was OraQuick. And then in that number, how much of it was CDC and how much of it did you actually sell through Abbott in the quarter?

OK. A lot of questions there but of the 4.1 million in infectious disease revenues in the quarter, we sold approximately 1.4 million of OraSure devices, and the rest was OraQuick. So 2.7 million in OraQuick revenues in the fourth quarter within that, there were 1.7 million of devices sold to the CDC during the quarter. Direct sales we had a little over a $0.5 million into our public health marketplace. Abbott was slightly less than 300,000. And we had approximately 100,000 of international revenues.

OK. And then what -- relative to consensus numbers for Q1 what's the big delta there? Is it infectious disease testing business or is it more along the lines of the Histofreezer and Freeze Off?

I think it's a little bit of both. I think you'll find that when we had spoke before and the estimates came out, I think there was an expectation at that time that there would be some lag between the sale of the initial CDC order and the receipt of a subsequent order to allow us to continue to sell OraQuick devices to the CDC. And in December, we received that second purchase order for 250,000 devices and the folks in public health have done a tremendous job in finding homes for the initial 250,000 devices pursuant to the CDC order, which necessitated the issuance of the second purchase order and we'll be shipping product against that second purchase order in the first quarter. And also as you quite correctly point out, the level of Histofreezer sales, Medtec sales, excuse me, Compound W product was much higher than what has been anticipated when we had the numbers come out before.

OK. And so you are expecting a portion of that CDC order to be shipped in Q1?

Yes.

OK. And then as far as the Histofreezer business is concerned, I know you guys had made some changes in high you sold that product last year and it really just hasn't seen a big pickup. What are your expectations specifically for that product this year? Are you expecting things to bottom out or expecting to drive growth with that product line? If so, what is the main growth driver?

For the physicians' office market, clearly last year was a surprise, negative surprise. And I hope that we bottomed out and we're getting a rebound on the product now. If you look at the third and fourth quarter as compared to the first two, we started to see, you know, improvement albeit not back at historical levels that we had seen in the past. But Joe Zack and his team did a couple of things very encouraging to me. Number one was because we had a new team we hired a product manager specifically to be on that business and we did some market research studies to ask the customers, you know, what their purchase intent was, how satisfied they were with the product and all the scores that came back in terms of satisfaction with the product and purchase intent were very strong. But they hadn't seen a sales rep in a long time, number one, and number two, I think we got a little worn out in our marketing and promotional programs because it was post merger and we got distracted and weren't paying attention to the business. So we've upgraded the sales and marketing leadership in terms of the product. We've asked you know questions of the marketplace and we expect this year to be back on track to, you know, what it looked like at 2001 levels -- is our expectation.

OK. And then my last question is on Abbott again. How much inventory do you think that they have currently? And are you continuing to ship to them in Q1.

They have no inventory best we can tell after the venous whole blood and the arbitration got started, as they would say, we helped them by giving them -- the FDA gave us permission to help them sell their existing product and be able to get out the instructions, package insert to the users. So they were able to go through all their existing inventory and they bought product in the fourth quarter, a little bit in December, that Ron already gave that number. And in January those have been until the time of arbitration in round numbers roughly they will purchase about 100,000 units.

So we've allowed continuity of getting the product to the customer while working through the arbitration. And as at least some of the feedback I've gotten is it's going out as quickly as we get it to them.

OK. Great. Thanks so much.

Your next question comes from Ed Schenken with Wells Fargo Securities.

Good afternoon.

Hi, Ed Schenken.

Can you hear me gentlemen.

Yes. Talk slightly louder, but we can hear you.

OK. I did want to follow with a few questions on sales force that you are hiring and you said 10 sales people and that would cover 40% of the market. Can you walk me through why you are not going to add you know 15 or 20. And do you in fact intend that you know may be add more reps as the year goes on? Well, what are your thoughts there?

First of all, 10 reps got to 40% of the market in the major metropolitan markets. How we expand from that basis as to whether we add more direct sales people or we supplement that with filling as Joe likes to call it the white space, through strategic distribution partners for both hospitals and physicians' office markets is to be determined. And we're still working through that. But that's hard to do until, frankly, the Abbott arbitration is behind us. But we're starting out with a strong albeit small group. And we can reach 40% of the market. So we think that's a good aggressive but, you know, pay-as-you-go model getting out to the marketplace.

OK. And what kind of sales quotas might you have for the different you know sales reps? Are some of them going to be in some windfall territories may take it where you know may be you have a great presence and a number in some tougher territories? You know how will you know manage the sales force with all that going on?

I hope I run into the problem that I'm paying everybody too much because we were too successful because demand was too great. You know, time will tell both in public health and in the hospital market in terms of, you know, what demand will be. Our expectations internally for our budget in terms of our success in the hospital are very, very conservative. So there's plenty of upside for the sales force to do very, very well.

But equally so, our public health sales force can do well with the momentum that we got last year from the CDC purchases of 500,000 units. A lot will play out as to the timing on our approvals for oral fluid, plasma and HIV-2 in terms of our penetration because of obviously unique features that each of those claims brings to the table. But as we said earlier in our 40% to 50% growth, we were only counting on 30% growth in this business and it leaves enormous upside in each one of our market segments going forward.

OK. And a follow-up question for Ron on the R&D spending. You know, it ticked down to a little bit in the quarter. What should we anticipate going forward? And can you tell us about what the important expenditures will be on the R&D side, especially since UPlink is you know pretty much behind you and I'm guessing that most of the OraQuick tests to spend is behind. Maybe you can just tell us what we should expect.

Well, the R&D expenditures that we're looking out for 2004 will be roughly in the ballpark of where we are at the levels for 2003. And we do have some critical trial work that we will be conducting with respect to our assay for OraSure tying with the DMX our (inaudible) microplate, that has to be done, as well as, as Mike had indicated before, looking at high sense sensitivity reactive protein, OraSure with HCV and continuing work with the UPT particle as far as maximizing and optimizing its sensitivity.

So there are projects that are continuing in the R&D area, although, as you quite correctly point out, most of the significant clinical trial expenditures related to OraQuick with oral fluid or with pure plasma and the like HIV-2 are all behind us.

OK. Are you having any down sizing of your R&D staff you know in December or looking forward to the next year?

We really right sized the organization in 2001 as we consolidated the operations from Bethlehem when we had two independent R&D organizations on the east and west coast. And our three-year strategic plan that we've reviewed with the board we're right sized for R&D projects we're working on right now and as long as they are continue to move forward and successfully we consider our self's right sized.

OK. And on the oral fluid version of OraQuick, can you tell us about clinical studies or what kind of work you'll do so that you get a CLIA waiver? And you know how maybe some of the studies are progressing.

Clearly, you know, we are working with the FDA answering questions on our oral fluid submission both on the basic submission and CLIA waiver. And those discussions are ongoing. I don't want to get into any specific studies other than just to say that things are progressing in a very positive way and constructive in the questions they've been asked are good questions and we're answering them quickly. And we're moving forward, you know, in a very positive way.

Thank you and congratulations on a good quarter.

Your next question comes from Aaron Lindberg with William Smith.

Congratulations. Question, can you just help us understand your approach to domestic sales and marketing in the public health market as it relates to 2004, tweaks adjustments from, you know, early laid plans?

If we were sitting here this time last year, I couldn't have ever speculated that the CDC would come out with a four part initiative for rapidly deploying -- deploying rapid HIV testing into the mainstream and they would purchase 500,000 units during the course of the year to deploy to make them available to their public health clients throughout the United States. We want to leverage what started off as a good program that's broken down barriers to entry because you have product available. You don't have to reallocate moneys for other important programs. The products are available. The sales force knows the customers in public health and they are helping to deploy and helping to train and helping to tell people the product is available from the CDC for various programs. Our best success will be to continue to help ensure the distribution of the CDC product because it's the second set 250,000 units started shipping in, you know, January effectively. And the quicker we deploy that successfully with their clients the more successful we'll be. We will continue to do what we've built on and what we'll get to do now that we weren't able to do a year ago is get feedback from the clients. And we're working really hard, our sales and marketing team, to assure that the feedback is positive about the experience they are having with training, deployment, and how to reach their customers in a more effective way they used to do.

Given that feedback about the training and drop ship to the customers, do you think that a plan similar to that in the hospital market targeting major metropolitan areas and things like that, big users that you have something like that makes sense? Or do you just continue to focus primarily on the CDC?

Radically different market strategies. You know, hospital is a traditional hospital-selling model; CDC won't be deploying, you know, tests to hospitals. Hospitals will each act as independent customers for us and we have to convince them that OraQuick -- that A, Rapid Testing is an effective way to do testing because its new and secondarily that our test is preferred over other options they may have.

I understand that. But I guess my question is more focused geographically. Do you take that same kind of approach and try to hit the big metro s and big users in those areas?

I'm sorry I misunderstood the question. Clearly with the 10 people we're hiring in the top 10 metropolitan areas for HIV testing, we're going to be focused on the largest accounts. But we're going to find ways to supplement and get out to other places through advertising, telemarketing or supplemental distributors to support us.

Great. You comment on product quality, ease of use of OraQuick device versus trinity and other folks that are on the market coming to market?

You know, I still continue to believe we have developed and are securing claim approvals for what's the most versatile and the best product on the planet, period. There are certain things that people like to pick up in terms of advantage of one feature over another, but overall, we're very confident that first of all, the public health market, we have CLIA waiver and soon we'll have oral fluid. And there's no looking back after that. Why would you ever want to do anything else, once you have oral fluids in the public health market? And hospitals are a little trickier. Because ultimately we have all the claims necessary and the purchase decision comes down to, you know, the quality of the training programs, the materials, and aggressive sales force. And we intend on doing all of the above as effectively as we can and seeing what happens.

Great. What do you think our realistic expectations in the hospital market relative to the void created by Abbott in the absence of SUDS as far as, say, there's roughly a mill tests done previously? What's a realistic approach for that for a full year 2004?

Well, interestingly enough, if you look at the product we're shipping to Abbott in December that I mentioned -- I'm sorry in January that I mentioned earlier, we're essentially shipping about 100,000 units in the first four to six weeks of this year, because they wanted to be able to sell to their customers and we agreed to it until arbitration was resolved. So in our understanding, although I can't confirm it, is that product is going out as quick as it's coming in. Arguably we're on a million unit run rate right now and we're going to find ways and we expect and hope to win the arbitration of finding the customers that are buying that product and continue that trend.

Two last questions. Very completed the termination of the relationship with Meridian?

That's been done, yes.

And then can you help us understand your approach to international OraQuick sales and how you leverage your existing relationships with the CDC and our organizations? I know you don't have significant results built in for 2004 as far as actual sales. But if you can speak a little bit to how you're going to approach that. Because obviously, that is a meaningful segment of the market going forward.

Clearly when we have FDA approval for oral fluids and FDA approval for HIV-2 and we have a license from Bio-Rad on a global basis for HIV-2, we believe we have our walking papers to have the best product to serve the world market in the most differentiated way possible. We are working diligently with people from the world help organization, Global AIDS and the U.S. government to understand the opportunities going forward for us. I've said this before, that our strategy in a perfect world will be to approach the U.S. government and say you're spending roughly $15 billion over the next five years, a certain amount of that is allocated to testing, why wouldn't you keep the money in the U.S., create U.S. jobs and send the best product on the planet where it's needed the most, testing with oral fluids with HIV-1 and 2.

Quick follow up to that. Given the point about the U.S. and jobs and things like that. Would you anticipate producing virtually all or all of that international product domestically and then maybe wrapping up the Thailand stuff?

If we get an order from the U.S. government to create U.S. jobs to satisfy South Africa in a heartbeat.

Thanks a lot.

Your next question is a follow-up question from Wade King with Wells Fargo securities.

Hi, guys. I don't mean to keep you on too long. Two additional follow-up areas. One, could you review the expected time-line as relates to product approval per year pending regulatory filings? You have already mentioned that you expect UPlink approval near-term for the five panel. However, could you give us your expectations as relates to the time-line associated with your OraQuick oral fluid submission?

What I'll give you, Wade, is, you know, clearly, you know, one wise board member said tell them when you submit it and what the review period is but never speculate on when the FDA will approve things. And every time I try to go back to the approval range I lose. So I'll go back to the basics here, which are important and sort of frame it up. Oral fluids and plasma for OraQuick were submitted on September 30th. It was 180 day review cycle which would put us to the end of the first quarter. The FDA has fully engaged in asking us questions on both of those submissions. As I said earlier, it's moving in the right direction. And we're within the 180-daytime frame, which is the initial review period. Whether it will be approved or not in that period of time, I don't know. But I'm encouraged that things are moving in the right direction within the 180-day time frame that they are entitled to review it.

Mike, have they asked you any questions as relates to the clinical study design or as relates to sensitivity specificity that would lead you to believe that the clock would be in any way reset at this juncture?

They reset the clock for HIV-2. And so I would have to say we've seen it happen before when we thought we were close to approval and had to go get some more data. And that started the clock all over. I mean, just to give you the other one on HIV-2 and then I'll come back. HIV-2, we thought we were, you know, goal line stance and we were asked to provide additional data, which we did very, very quickly. Our team provided the data, the 50 samples were, you know, 100% on the mark. But the clock started all over again for 135 days. And that was on, hold on just a second, at the beginning of December. So, the clock got started again on HIV-2, albeit we thought it was a very straightforward in the questions that we had, but it did start the clock all over again. So December 1st, roughly 135 days new clock for HIV-2. We believe they have what they need. Back to oral fluid and plasma, the submissions, the simplicity of our submissions are that the FDA can focus on our clinical data and package insert because it's physically the same product.

The complexity of incomes because we are the only oral fluid HIV test that they've ever seen and that's the gold standard. Unfortunately for us, OraSure sold 3.7 devices last year and were he well-established with oral fluid testing and its well accepted in the marketplace with our own products. So there are just different variables that have to be worked through with uniqueness of oral fluids and I think the collaboration to get over the finish line is good. It's healthy and the product works great. And when people see the performance of the product when we get done, I think that there will be no doubts that oral fluid is here to stay and it's competitive with any other specimen on the planet.

OK and the last question, please. Could you talk a bit, Mike, about the dynamics looking ahead to '04 and '05 in your US market for OraQuick? There are changing dynamics as relates to your history of selling to a variety of public health customers, the fact that you're selling large quantities of OraQuick devices to the CDC. The CDC is actually providing product to some of the Abutters that you've previously sold directly to. Could you just comment a little bit on a macro basis as to how you expect that to play out looking ahead over the next year to how it will impact to OraSure. And then, related to that, possibly, Ron, could you as relates to your infectious disease revenues, you know, for next year, just give us a ballpark estimate of what you expect, you know, on a percentage basis to sell the CDC versus direct public health versus hospitals? Or could you just talk about if anything, what the changing dynamics will mean for OraSure.

I want to know if that's one question.

It's 3:00 Pacific and I know you're going to cut us off, you know, shortly. So I just want to try to blow it out a --.

OK. I'll start with the front end. I'm sorry. I just thought, first part, market dynamics, the most incredible thing is we're getting paid trial to the market that needs the product the most. The CDC is breaking down barriers to entry and those barriers of resistance to change by making product available, training available, training for counseling, so that people can quickly deploy and change habits and practices for the way they do HIV testing. It's incredible that we had the opportunity to get paid trial that way. Looking at a crystal ball, whether the FDA, CDC wants to continue to be the clearinghouse because they got such strong leverage purchasing power through the GSA listing to get a best price and then deploy it out is one consideration. It could happen. It's really up to the government agencies themselves. But that's one thing that's been discussed.

Secondarily, we believe that once that public health clinics and facilities around the United States have had the opportunity to go to Rapid Testing, that they are never going to go back to lab based testing. Then, they get a result in 20 minutes and provide counseling right away to all the clients instead of a third of the people being missed. So, the paid trial allows the natural progression them to be fully certified and trained and convince themselves that they will never go back to the old way of doing business. Either way is OK with us. The fact is that they are all being trained and deployed on our product and certified with certificates on OraQuick is terrific either way that you look at it. And we'll support the CDC and get the materials out there. We'll support the customers as best we can to get them what they need so that whichever model falls out, OraQuick is and always will be the preferred product.

OK. And can, Ron, would you mind addressing the question of given that, how you expect possibly the infectious disease or I should say the OraQuick product sales to break out in '04?

I think following to Mike's point, I think, it's to be determined based on how that paradigm shift either occurs or does not. If the CDC is going to purchase, all the product and distribute it outward to the public health entities, then there's one answer. If they stop after 500,000, 750,000 devices then we have another answer. But the bottom line is in our sales force is out there every day calling on our public health clients and promoting OraQuick in that space. And, you know, we benefit strangely by, if the public health entities actually buy directly from us, our average selling prices is slightly higher than going through the CDC as Mike indicated, they do have purchasing leverage. But to give you a split between public health and CDC revenues on OraQuick for '04 or '05 is not possible. We look at it more as a blended type of phenomena.

I think importantly, Wade is, historically there are about 3 million tests estimated to be done in public health. And, you know, importantly what it's going to be is the size of that market going to double because they see these opportunities for Rapid Testing be more effective so they want to deploy for programs? Or are we going to see a conversion of 3 million to a large portion of doing Rapid Testing? I think, that's the bigger issue or opportunity for us in public health is if they continue to deploy new programs to the prisons and to schools and to other clinics in the SAMSHA situation that we read about in terms of drug clinics, those are all incremental opportunities that can grow the segment. And our hope is the segment gets twice as large versus worrying about what the shift is and who buys.

OK guys. Thank you very much.

You have no further questions at this time.

Are you sure? Not one more question from Wade King. Good. I thank everybody for joining us today. It was a great year and we really appreciate everyone's support and we look forward to an even better year in 2004. Thanks a lot everybody.