OraSure Technologies Inc (OSUR) 2004 Q1 法說會逐字稿

Good day, everyone, and welcome to the OraSure Technologies’ 2004 Q1 Financial Results Conference Call and simultaneous webcast. As a reminder, today’s conference is being recorded. (Caller instructions.)

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

Good afternoon, every, 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 PM ET today regarding its 2004 first 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, April 30, 2004 by calling 800-642-1687 for domestic or 706-645-9291 for international. The access code is 6819394.

With us today are Mike Gausling, President and CEO, and Ron Spair, CFO. Mike and Ron will begin with opening statements and then follow with Q&A 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, expenses 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 statements, its Annual Report on Form 10-K for the year ended December 31, 2003, its Quarterly Reports on Form 10-Q, 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 duty to update and 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 2004 first quarter earnings conference call.

Today I will begin by providing everyone with a brief update of our performance against our stated 2004 financial and business objectives. Second, Ron Spair, our CFO, will provide a summary of our financial results for the first quarter and guidance regarding the second quarter. Last but not least, I’ll provide some commentary on other major events that occurred, including the proposed drug testing regulations recently issued by SAMHSA, some upcoming management changes and the recent addition of another analyst who has initiated coverage on the Company. We will then open the floor for questions, so let’s dive in.

As previously stated, we are pursuing a number of financial and business objectives during 2004, which I first announced during our last investor conference call on February 10th and which were then listed in my letter to stockholders in the 2003 Annual Report.

On the financial side, our stated 2004 objectives are as follows. First, to increase revenues for the year by at least 25%, from $40m to more than $50m. Second, to achieve profitability for the year as whole and third, to retain a strong cash position.

Our first quarter was another record quarter and stronger than expected, with total revenues of $12.4m, up 44% over last year. This is a great start to 2004 and fully supports our guidance to achieve at least 25% growth and exceed $50m for 2004.

With regard to profitability for 2004, while we are still optimistic, profitability on a quarterly basis will continue to be lumpy and a bit unpredictable because of the need to continue to invest into our various product lines. And the inevitable occurrence of unpredictable events such as the Avid arbitration and the unbudgeted cost associated with a change in the leadership of the Company. However, with the anticipated revenue growth, we continue to believe that profitability will be achieved for the year as a whole.

Finally, our cash and liquidity position continue to remain strong. We had over $63m of cash in the bank at quarter-end and $8m in available credit facilities. With such a strong balance sheet, we are well positioned to further invest into our business and consider possible strategic acquisitions in the future.

In addition to our financial objectives, we have the following important business objectives for this year. They are as follows. The first objective was to aggressively expand sales of our OraQuick test into the hospital and physician office markets.

With regard to the hospital market, we are pleased to announce that we now have a team of highly qualified hospital salespeople under the leadership of David Stevans, our new Director of Hospital Sales. The team is now fully deployed in the field to start to sell OraQuick into the major metropolitan markets in the United States.

I had the personal opportunity to meet with most of these new salespeople during their first week of training and I have to say I am extremely impressed with their extensive experience in the hospital market, their professionalism, and their energy level. And I’m optimistic that good things will begin to happen over the next several months in this important market segment.

With the arbitration now behind us, we are also continuing to sell to Abbott under a nonexclusive arrangement. We believe Abbott will continue to be focused on the hospital market, although they are permitted to sell into other markets as well. At this point, we anticipate total sales to Abbott for the year will be roughly $1.5m to $2m.

In January, we received what I would characterize as a very strong validation of the performance of OraQuick versus our competitors when the CDC issued a report indicating that our OraQuick HIV-1 test produces substantially fewer false positive results than traditional lab-based HIV tests or other FDA approved Rapid HIV tests when used in a laboratory setting.

The report was issued as part of the CDC’s announced protocol for use of Rapid HIV testing during labor and delivery for women of unknown HIV status. We’re quite proud of the outcome of the report, since it reinforces our FDA claims of 100% specificity, which is a great accomplishment for our test.

With regard to the physician office market, Joe Zack and Ron Spair have had preliminary discussions with several potential distributors who expressed a strong initial interest in distributing OraQuick into the physician office market. We’re investigating this opportunity very carefully and expect to have more news about our strategy to reach this market over the next several months.

The second objective is to secure additional OraQuick purchases from government agencies such as the Center for Disease Control. As you know, the CDC has already committed to purchase 500,000 OraQuick devices. The first 250,000 devices were delivered in 2003 and the second 250,000 devices are expected to be delivered and deployed over the next several months.

Although we have no additional orders at this time from the CDC or other government agencies, we’ve been having active dialogs with several domestic and global agencies and we’re cautiously optimistic that additional bulk purchases for 2004 will be secured in the next several months. We are truly excited about the number of public health agencies beginning to use OraQuick and believe sales to this market will continue to increase steadily for the balance of 2004 and beyond. Especially when we are able to launch a CLIA-waived OraQuick HIV-1/2 oral fluid test.

The third objective is to obtain a CLIA waiver for our OraQuick Rapid HIV-1/2 test. As you know, in late March of this year, we received FDA approval for detecting antibodies not only to HIV-1, but also to a second type of the virus known as HIV-2 in finger stick and venepuncture whole blood specimens. A few days later, we received additional notification from the FDA approving the use of the test to detect HIV-1 in oral fluid specimens and both HIV-1 and HIV-2 for plasma specimens.

The oral fluid approval was a major milestone for the Company and it was announced by Health and Human Services (HHS) Secretary Tommy Thompson at a news conference in Washington, DC. The media attention was overwhelming, with more than 800 spots in print, broadcast, and online media outlets in the United States and abroad, including the New York Times, Wall Street Journal, Los Angeles Times, the Washington Post, CNN, Fox News, CNBC, Bloomberg News, MSNBC, and the BBC.

We also traded over 25 million shares in the two days after the announcement, which was absolutely unbelievable.

This is truly a historic milestone event for the Company, but we still have our work cut out for us, as Secretary Thompson encouraged us to apply for CLIA waiver as soon as possible. Consequently, we’ve been in regular discussions with the FDA regarding the next steps required to obtain the HIV-2 oral fluid approval and to secure CLIA waiver.

Based on these discussions, we are cautiously optimistic that we will be able to complete the requested studies and submit the results to the FDA in the next several weeks. If it all goes as planned, we would expect to finalize the labeling and begin selling the new OraQuick HIV-1/2 test, which is approved for finger stick, venepuncture whole blood, plasma, and oral fluid and which is CLIA-waived sometime this summer.

I’d also like to reiterate that our relationship with the FDA remains very cooperative and I once again would like to express our deep appreciation to the FDA staff for its diligence and hard work. Additionally, I would like to thank HHS Secretary Tommy Thompson for his support for Rapid HIV testing and for taking time out of his busy schedule to personally announce the oral fluid approval.

Secretary Thompson has also been supportive in our quest to create global demand for OraQuick by discussing OraQuick at the last meeting of the Board of Directors of the Global AIDS Fund in Geneva, Switzerland. And for your information, Secretary Thompson is the Chairman of the Global AIDS Fund, a leading global organization committed to fight HIV AIDS, TB, and malaria.

It must be noted that we’re still seeking to officially secure an HIV-2 license from Bio-Rad. As you know, we approached Bio-Rad about securing a worldwide nonexclusive license for HIV-2 earlier last year. We believe that we completed the negotiations on the terms of the license agreement to the satisfaction of both parties and that Bio-Rad has been in the process of securing the necessary signatures and approval from several other licensees since that time.

We’ve been in regular communications with Bio-Rad and continue to be told that they are very close to obtaining these other signatures, so we’re very hopeful that this will be resolved soon. Once we have the HIV-2 license and CLIA waiver for the OraQuick HIV-1/2 test, we’ll have come a long way towards creating the most versatile Rapid HIV test on the planet.

Although not related to the CLIA waiver, we received another boost to our already strong proprietary position regarding oral fluids when in January we received notice from the US Patent and Trademark Office that a new patent will be issued with broad claims, covering lateral flow diagnostics tests that can be used to test oral fluids or other specimen types for the presence of one or more analytes or antibodies. The patent claims will cover our current OraQuick test and it’s a great addition to the Company’s already extensive patent portfolio related to its oral fluid products and technologies.

The fourth objective is to continue to aggressively expand sales of our Intercept Oral Fluid lab-based drug test through both direct sales and support of our lab distribution partners. Sales of Intercept DOA testing products across the workplace and criminal justice markets in the US and in the UK increased 80% compared to the first quarter of last year.

The number of oral fluid specimens in March 2004 grew to almost 89,000 specimens, or 66% more than the comparable period last year. This largely reflects the impact of our continuing S&M initiatives and more widespread acceptance of oral fluid testing as a viable alternative to traditional urine drug testing. We’ve also started to see some positive results in our efforts to sell directly to small workplace accounts and we expect to continue to focus our attention to this important segment of the drug testing market in the future.

The fifth objective is to reenergize sales of our Histofreezer cryosurgical wart remover product in the US professional market. As the numbers for Q1 indicate, our new S&M initiatives are now starting to bear fruit. Histofreezer sales to physician offices in the US during the first quarter exceeded expectations and were up about 76% compared to the first quarter of last year.

Sales of our OTC version of Histofreezer called Freeze Off are also a great start in 2004 as well. Total sales of Freeze Off exceeded $3m for the quarter, compared to no sales a year ago. This, coupled with the rebound in the domestic Histofreezer sales in the professional market, resulted in a very strong showing in the cryosurgical systems market for Q1.

Our sixth objective is to submit a new 510k application with the FDA for Uplink Oral Fluid Rapid Drug Test Detection System. As you know, at the end of the third quarter of 2003, we submitted for FDA 510k clearance of our Uplink system, including the NIDA-5 panel of drug assays. During the next several months, the FDA asked us many questions regarding our submission and we thought we provided adequate answers to meet their needs.

However, we obviously did not meet all of those requirements. In March of this year the FDA told us that we need to resubmit another 510k application and must provide them with additional data before we can secure a 510k clearance. We’re obviously disappointed with the FDA’s actions. We are working diligently to address the FDA’s questions.

Our discussions with the FDA remain cooperative and we’re determining the scope of the additional studies that are required. I hope to have more to announce on this in the near future. I would note, however, that obtaining the 510k clearance was not a requirement to launching our Uplink product in Europe.

Which brings me to the seventh objective, which was to successfully launch Uplink Oral Fluids Drugs of Abuse Detection System to the roadside testing market in Europe. I’m happy to report that this launch commenced last week with our distribution partner, Drager Safety, which is located in Lubeck, Germany.

We believe that Drager is excited about the market potential for this product, and based on our projections, we expect to see at least $1m to 1.5m in sales of this product to Drager in 2004, primarily for distribution in the European roadside drug-testing market. I would note that we sold approximately $144,000 worth of product to Drager in the first quarter of this year.

The eighth objective is to stabilize the insurance risk assessment market through the development of new oral fluid assays. As previously reported, the insurance market segment has been problematic for us, as we saw a major decline in the urine assay business last year due to cheaper alternatives available to our insurance testing labs, including internally developed home-brew assays and assays offered by competitors.

We do not expect to recover the urine assay business and are trying to address that market through the development of additional oral fluid assay tests and the conversion of additional insurance customers from urine collection to oral fluids due to its convenience and inherent economic advantages. At this time, this continues to be a tough market for us. We are committed to working hard to try to stabilize this important market for us in the future.

The ninth objective is to complete the consolidation of manufacturing operations from Oregon to our Bethlehem, Pennsylvania facility and to prepare to permanently shut down our Oregon facility. As previously announced in March, we received the final regulatory approval, from the FDA, required to transfer manufacturing to Bethlehem.

The approvals received principally related to our OraSure and Intercept oral fluid collection devices and the Oral Fluid Western Blot HIV-1 confirmatory test. The manufacture of these products in Bethlehem has begun and we are on track to shut down the Oregon facilities as planned. This transfer has been a huge effort from our product development, regulatory, quality, and manufacturing teams and I’m extremely pleased with our success to secure these important approvals.

Once we are fully operational and the West Coast facility is completely closed, the transfer is expected to generate annual cost savings of approximately $1m and give us greater control over product quality for the long run.

The tenth objective is to continue to explore utility of the Up-Converting Phosphor Technology (or UPT). We’ve previously stated that we believe that UPT is a platform label technology with broad application in the in vitro diagnostics market. However, because of the repeated delays in developing our Uplink Oral Fluid Drugs of Abuse Testing system, which is the first application using UPT, we’ve really had to challenge ourselves to reevaluate the potential utility and the economic viablity of UPT as a technology platform.

A comprehensive technical and market evaluation is currently underway and we expect to report our findings to the Board over the next several months. We will use the results of that evaluation to reconsider our ongoing investment strategy into this technology in the future.

The eleventh and final objective is to explore potential strategic acquisitions. One of our primary growth strategies has always been to consider potential strategic acquisitions as a way of enhancing our existing product lines and technology platforms and as a way of acquiring new products and new technologies. With the strength of our balance sheet and projected revenue growth, we believe that we are well positioned to take advantage of any potential strategic opportunities that are consistent with our business plans.

In considering these future opportunities, we use several screening criteria, such as whether or not the transaction will be accretive: Does it build upon our point of care oral fluid expertise? Does it provide a growth driver resulting in accelerating revenues? Will it leverage our manufacturing infrastructure and/or distribution channels and will it help us to accelerate our expansion internationally? Although nothing is imminent, we will continue to explore these opportunities as they arise.

In summary, I’m very pleased with our progress in the first quarter against of our stated 2004 business objectives and I continue to be very bullish about our prospects for the rest of the year.

With that, I’ll turn the program over to Ron Spair, who will review our financial results for the first quarter.

Thanks Mike.

Total revenues for the first quarter were $12.4m or 44% higher than the same period in 2003. Product revenues were $12.3m for the quarter, which was a 47% increase over Q1 of ’03. I’m pleased to say that both revenue, total revenues and product revenues are records for the Company and in fact, this is the fifth consecutive quarter of record revenues. It’s also the eighth consecutive quarter of increasing revenues.

The revenue increase is primarily attributable to higher sales of the Company’s Freeze Off and Histofreezer cryosurgical periods, the OraQuick Rapid HIV-1 antibody test, and the Intercept Oral Fluid Drug Test. We sold $2.2 million of OraQuick in the first quarter and over $3m of Freeze Off. Included in the OraQuick numbers were $722,000 in sales to the CDC and $751,000 in sales to Abbott Labs.

Partially offsetting these increases has been the disappointing performance of the insurance risk assessment market, due primarily to the loss of the urine assay sales in the life insurance testing market to LabOne and other labs. Sales to this market are down 24% compared to Q1 of ’03, but up 61% from the fourth quarter of 2003.

As we look forward to Q2, we expect total revenues to be in the range of $12.5m to $13m, an increase of between 30% and 35% over the second quarter of 2003. The primary drivers here are expected to be steadily increasing OraQuick and Intercept sales, continued increases in sales of the Freeze Off product and the continuing rebound of our Histofreezer sales to the US professional market.

Turning to gross margins, the gross margin for Q1 of ’04 was 58%, or the same as for Q1 of last year. Gross margin was positively effected by our more efficient utilization of manufacturing facilities, offset by increased currency exchange costs associated with the purchase of our cryosurgical products, which are denominated in Euros.

Turning to operating expenses, our operating expenses for Q1 increased by 23%, or $1.4m, to $7.5m, when compared to last year. This increase is primarily attributable to our continuing reimbursement of a portion of MedTech’s advertising expenses related to the Freeze Off product, higher fees incurred in recruiting our new hospital sales team, higher staffing and travel expenses for our S&M group. And higher legal fees related to maintaining our patent portfolio and the Company’s recent arbitration proceedings with Abbott Labs.

These increases were partially offset by a reduction in R&D expenses resulting from the absence, during Q1 of ’04, of costs associated with the transfer of manufacturing operations from Oregon to Pennsylvania, and significant clinical trial expenditures that were incurred during the first quarter of 2003.

Our net loss for Q1 was $162,000 or $0.00 per share. These results are better than Street estimates of a loss of up to $0.01 per share and compared to a loss of $0.03 per share for the same quarter of last year. Because some S&M expenditures and certain clinical trials will likely occur in Q2 rather than Q1, as originally planned and because we will be incurring additional expenses associated with Mike Gausling’s transition and the expected hiring of a new CEO, we are likely to see a net loss in Q2 of roughly a penny a share.

Turning our attention briefly to our balance sheet and cash flow, a continuing bright spot is once again our liquidity position, which remained strong at the end of the first quarter. The Company’s cash and short-term investments were $63.8m and working capital was $67.3m at March 31, 2004. Cash flow from operations was positive at $139,000 for the first quarter. This represents the eighth consecutive quarter of positive cash flow from us.

I would also like to note that our accounts receivable DSO has dropped from 62 days at year-end to 54 days at March 31, 2004.

And with that, I’ll turn it back to Mike for some final comments.

Thanks Ron. Besides reviewing our progress against our stated objectives, I think it’s important to highlight a few other things before we open the floor for questions.

First, a few weeks ago the Substance Abuse and Mental Health Services Administration, which is commonly known as SAMHSA, issued proposed drug testing guidelines for federal workers. We’re certainly glad that these proposed guidelines have finally been issued and we’re pleased that they expressly permit oral fluid testing for federal workers, at least as currently drafted.

Obviously it is great that oral fluid drug testing is finally covered by the guidelines, but the current proposed guidelines contain some requirements for oral fluid collection and testing that are not currently met by our FDA-cleared Intercept collection device. We will be working during the comment period with the help of many satisfied lab partners and workplace and criminal justice customers to convince SAMHSA that certain other requirements should be amended or eliminated in the final guidelines.

We obviously feel strongly that our Intercept test, as currently configured, should be expressly permitted under the regulations, especially given it’s growing history of success here in the United States. Resolution of these issues and issuance of final regulations is not likely to occur for some time and it could take well over a year or more before they are finalized. We will certainly keep you posted on developments as they occur.

Second, as you know, I recently announced that it is my intention to retire from OraSure by year-end. While this type of decision is never easy, I’m convinced that it comes at a logical inflection point for the Company and for my family and it is in the best long-term interest for our stockholders. The Board has been very active in its search for a successor and the process is well underway.

Additionally, I would also like to formally announced today that Sam Niedbala, currently our Chief Science Officer and an original founder with me of the Company’s predecessor, STC Technologies, will also retire from the Company on May 21st of this year. Sam has been contemplating this retirement for some time and this announcement will make it official.

Mike Formica, our EVP of Operations will assume oversight responsibilities for the R&D function until a successor for Sam is found. Since there will be a new CEO in the near future, I would expect the Board to wait until the new CEO is onboard before selecting a new Chief Science Officer. In the meantime, the R&D group is in great hands under Mike Formica’s leadership.

Although he has roughly another month to go, I’d like to publicly thank Sam for his substantial contributions to the Company over the past 17 years. He’s been a great personal friend and a substantial contributor to the success of the Company and he certainly will be missed. With that said, I’m pleased that Sam is willing to stay on in a different capacity following his retirement, working as a consultant on special projects. Including our ongoing efforts to obtain FDA clearance of our Uplink Oral Fluid Drug Detection System and our continuing efforts to expand our intellectual property portfolio.

And last but certainly not least, I’m pleased to announce that yesterday Bill Quirk of RBC Capital Markets initiated coverage on the Company. With the addition of Bill, we now have five analysts coverage the Company. Many thanks to all of our analysts for their tireless efforts and for providing coverage on the Company.

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

(Caller instructions.) We’ll pause for just a moment to compile the Q&A roster.

Your first question comes from David Lewis with Thomas Weisel Partners.

Good afternoon, guys.

Hey David.

Hey David.

Ron, I wanted to just start out with a financial question. You’re talking about a whole bunch of different metrics here, which effect gross margin. I’m trying, frankly, to ferret them out. The first of which is you’ve got kind of a reverse hedging effect overseas. You also have success in the Freeze Off product and the retail channel pressuring corporate gross margins. But then you also have somewhat of a rebound in your physicians office segment for cryosurgical, which has a much higher gross margin than obviously the retail segment. So, I wonder if you could give us any kind of detailed breaking out of individual effects, which would help us model going forward, because you’ve got three different ones, two of which work one direction and one that works the other.

Well, I think your point is really well taken as far as the complexities, even in the guise of looking at the models ourselves, David and the level of ability for us to predict what the Euro/dollar relationship is going to do, coupled with the magnitude of the sales into the OTC marketplace. Which we get contracts from MedTech on a periodic basis, but clearly don’t have perfect visibility for the balance of the year as to how that revenue is going to roll out.

And then also, Joe Zack and his team have initiated a number of marketing programs on the Histofreezer product line in the domestic physicians’ office space, which are gaining some traction and resulting in revenue increases that we see from out-sales at the distributor level.

It’s difficult, with all those parameters, to adequately determine what the net effect is going to be on gross margin. Because the revenues we try to look out for the next quarter, but to be accurate about the effect of the Euro and the sell-through at the OTC level and also the distributor effect of the marketing initiatives it’s difficult to accurately predict that for Q3 and Q4 and what effect that might have on our gross margin.

What about the first quarter?

Well, clearly the first quarter cost us, as far as the MedTech revenues were, in the order of $3m for MedTech. In that, clearly the margins were below the corporate goal or the threshold that we ascribe to, which is at least 60% here and when we started out this relationship with them, it was very close to that and has drifted down as the Euro/dollar relationship has deteriorated.

You just can’t -- in terms of BP, effects of each one, you just don’t have that kind of detail?

Generally speaking, if you wanted a percentage effect on that piece of the margin alone, I would say that you’re probably talking in the 6% to 7% range on the MedTech revenue component alone, a negative effect from where we started to where we are currently. Now, of course, that can rebound, with the currency swinging back the other way, more towards the high end of the 50%-plus range in gross margin on that product.

Okay. That’s actually helpful and Mike, two issues. One, this reverse hedging effect is simply kind of a temporary issue. But given your success in bringing in manufacturing in other areas, have you considered bringing in manufacturing for cryosurgical from the UK over to the US?

Right now our contract relationship with the contract manufacturer goes on for another couple of years, so it’s the kind of status quo for the next couple years.

Okay. Just a couple more quick ones and I apologize. Degradation in the OraSure business, guys, we haven’t seen yet. Would you anticipate a higher level if we do get a CLIA waiver and begin to push Oral Fluid OraQuick more aggressively, given the propensity of public health directors towards oral fluid, do you think that’s when we’re going to start seeing the true degradation in the OraSure product line?

That’s the newest prediction, given the fact that we’ve predicted for the last nine months that last year our budget we put in to begin the year, we had 50% cannibalization and never saw any cannibalization. And without oral fluid approval, we really haven’t seen any yet, so the next sort of trigger event really, frankly, is whether or not when oral fluids is CLIA waived and out there, whether it will trigger or not. But we don’t have any other visibility that any other event other than that could cause cannibalization to start to be triggered, because it hasn’t happened yet.

Okay and then just a last question and I’ll get back in the queue, on DOA business. Quest reported in the fourth quarter a negative 10% hit to their business and in the first quarter reported a positive 5% increase. Is what you’re seeing in your DOA business simply DOA business rebounding, or are you taking market share?

The simple answer is you have 66% year to year. We’ve got to be taking market share.

Okay. I’ll jump back in queue. Thank you.

Your next question comes from Wade King with Wells Fargo Securities.

Hi Wade.

Hi guys. Can you hear me?

Yes.

Hi Dave.

Thanks for the detail. A couple of questions, please. First, you indicated your hospital sales team, your direct sales effort is now in place. Is this consistent with the numbers you spoke about previously, approximately 10 individuals?

Awful close.

Okay and where are the numbers going to go from here? You previously indicated you thought 10 individuals - that and some Internet-based efforts - could help you cover 40% of the metropolitan US market. Is that still consistent with your thoughts or are those numbers, in terms of direct sales, going to go up?

In terms of the direct sales force, they cover 40% of the marketplace without any sort of telemarketing support.

Okay. So you think those 10 individuals can keep you at 40% coverage and that’s what you plan to stick with for now. Is that right?

In terms of coverage of the major metropolitan areas that we estimate to be between 40% and 45%, that will have that coverage and we’ll evaluate over the next couple of months what their success is and then go from there. But we’re off to a fast start.

Okay and then the numbers I just to review with you that you said for OraQuick, you said $2.2m, of which $720,000 was CDC, $751,000 was Abbott. Is that right?

That’s correct.

Was there any international component in there?

Just a little over $200,000, Wade and then we also sold approximately $500,000 directly ourselves into the public health marketplace.

And how does that half of a million compare sequentially to the last quarter in terms of your direct sales effort? I presume it’s a dramatic increase?

No. Actually, I think, given the amount of volume that was put into the channel in the fourth quarter, into the CDC, which if I recall correctly was something along the order $1.7m, the direct sales, that we made this quarter of about $500,000 was approximately even with what we did last quarter. But we took a lot of satisfaction, given the amount that was placed into the public health channel through the CDC, with that number being where it was in the quarter.

Yeah.

Okay. I’m sorry. I should have clarified it. I’m saying your direct sales effort ex-CDC.

Yeah. Wade, it’s not really fair to break it out, because the same people in public health that are selling direct also are the people that have been responsible, when the product is shipped to the public health customers, for calling on them. Getting them set up and training them properly and making sure they’re a satisfied customer.

So, the public health sales force deserves full credit for both, because that’s been part of their responsibility, the big commissions appropriately for properly getting those customers set up. Because whether or not the CDC continues programs or not we want satisfied customers that’ll want to continue to buy the product long after the CDC allocations are gone.

Okay and Mike, on the last conference call you said that you expected approximately 30% of your revenues in 2004 to be related to infectious disease sales. Is that percentage changing now that you’re four months into the year? Do you still expect about 30%?

Well, we do. I think that the issue right now that skews the cryosurgical segment of the business is that’s a seasonal business and you have to sell in on the OTC product in the first two quarters of the year. So we’re going to see skewing early in the year in terms of the percentages, when you look at the first quarter, but you know infectious disease is coming on strong and the approvals are coming in as we expect. So, right now we don’t have any reason to believe that makes a change. Although it’s a good problem to have when Intercept and cryosurgical are both giving it a run for its money.

Sure and last question. Given your comment about “by the summer”, you expect to be in the market with an HIV-1/2 device that has a CLIA waiver, that can use a modality of either a finger stick, whole blood, or oral fluid testing. I presume that that suggests that you expect to kick off three significant milestones by the summer and that is complete the HIV-2 license from Bio-Rad, get approval for OraQuick on HIV-2, and obviously submit and get the CLIA waiver. Is that right?

If at the next earnings call conference I don’t have those I’ll be disappointed.

Okay, very good. Thank you very much.

Your next question comes from Bill Quirk with RBC Capital Markets.

Hi guys, how are you doing?

Hey Bill.

Hey Bill.

A couple questions for you on Histofreezer and Freeze Off. Mike, you made the comment just talking about kind of the seasonally with Freeze Off. I know we’re certainly kind of entering the wart season here. Can you tell us or give us some sort of indication what the sell-through to the end user is here? I mean, how much stocking do you think that we’re seeing in the Freeze Off category?

Well, you know the good news about this is when MedTech and we got started late in the second quarter of last year, really the third quarter, was when product hit the shelves.

We were at the tail end of the wart season, in terms of the summer season, and MedTech’s experience in off-season, without sort of the strong advertising program that goes with sort of the seasonal launch, had great sell-through.

And so the confidence of MedTech to fill the shelves with firm purchase orders for the first half is based on their experience and the successful experience in the off-season and so I don’t consider this pipeline fill at all. MedTech is very careful about that and I think it reflects what they believe their experience is going to be.

Okay and then on the Histofreezer side of things, obviously very, very strong rebound here in the first quarter. I guess directionally from here, kind of what should we be kind of thinking about with respect to kind of the reinvigoration, if you will, of the is product line?

The first quarter of ’03 was just an aberration down that we were all surprised about, so there’s a little bit of sort of buried in the good news is that last year was disturbing. So, just to be careful on it, we’re kind of back up to sort of old run rates in an average, sort of mediocre quarter, and first of all we want to sort of see that we’re maintained there. But we really have given the time and attention and we’re real pleased with the S&M initiatives and we’re hoping that we stabilize at this level and then we really start to sort of reinvigorate the business versus just getting out back to our old levels.

Okay, got you and then lastly just on the Abbott sales to the quarter. I think the comment was $751,000, but then the expectation for the year was going to be $1.5m to $2m. Is this kind of you guys being a little conservative here or are we kind of expecting that sales to Abbott might, I guess, kind of slowly trail off over the year here? Kind of how should we be thinking about this? I guess it just seems a little odd, given that we essentially should have some CLIA waiver coming and HIV-2, etc.

I don’t have very good clarity either. The orders that are in the first half of the year have to do with purchase orders that sort of precipitated and continue to post sort of during the arbitration period, which were orders that they needed to fulfill as part of their obligations last year.

We don’t have firm purchase orders for the second half of the year. We have some non-binding forecasts and at this point, they’re pretty conservative. So, we’ve taken a conservative stance on it and we’ll continue to take so until we get better visibility and firm orders from them. In the meantime, we’ll be driving our own direct sales as best we can.

Sounds good. Thanks a lot for the time, guys, and congratulations on the quarter.

Thanks.

Thanks, Bill.

Your next question comes from Aaron Lindberg with William Smith.

Good morning, Aaron.

Hello, a couple questions for you. First, Intercept sales were better than expected. Do you continue to anticipate sequential growth throughout the year in the Intercept line?

Absolutely.

And any comments on the lab distribution partners for Intercept?

LabOne continues to be the star and Quest is giving them a run for their money for the first time ever, which is good. So we’re real pleased with both of them and we’ve had a strong support in the criminal justice from [Ben Diner] [ph] and BioPartner, Alltrx in the UK. So, those are the four stars and some other people are starting to take a space, but it’s nice to see Quest giving LabOne a little run for their money.

And then as far as the SAMHSA requirements, as it currently stands, are they going to require urine to come side by side or confirmation? How are they doing that that’s making Intercept not fit into the current requirements?

I’m not very qualified to sort of answer that, to articulate specifically your question. This is the first draft of the guidelines. There’s a 90-day period to provide comments and we expect to have a substantial amount of comments supported by lots of good data, touting the success that we’ve had with our lab partners and with customers. And so we’re cautiously optimistic that real-time results with and FDA cleared product will convince them that it works just fine without any kind of quirky urine in the model or any other kinds of things that have come in the first draft.

But it’s really just a first draft. There’s a comment period and we expect that if we aggressively pursue supporting with data our position.

Is that the hurdle, though, in the draft is that they want to see urine as well?

No. That’s less of an issue than sample adequacy.

Okay.

You know right now, for those that are in the lab business, you can visually look at a tube of blood or you can physically look at a cup for urine and physically see the sample. On our collector, you can’t physically see it like you see the other two and that locks some people up, despite the product working successfully without that. And that’s one of the hurdles that we have to overcome, is that sort of the lack of visibility on how much sample is there.

Great. Thanks, Mike, two other quick questions. The hospital sales team selling OraQuick, are they spending any time in the public health market in their same geography or are they going to be focused exclusively in the hospital market?

For today. And the purpose is to be singularly focused on the hospital market. What we do in the future is for a future date.

Okay and last question. How may OraQuick units did you guys produce in Q1?

We were probably in the neighborhood of approximately 400,000 OraQuick devices for the first quarter of ’04.

Sounds good. Thanks Ron. I’m all set. Congratulations, guys.

Thanks, Aaron.

All right.

Your next question comes from Spencer [inaudible] with S.G. Cowen.

Hey Spencer.

Hey. How are you guys doing?

Doing all right.

Good.

Thanks for taking my question. I have just a couple of quick questions. I was curious if you have any thoughts on the outlook for the year at the top line and as well as the EPS?

For the year?

Yes.

Well, our guidance still is 25% growth and exceed $50m and the only guidance on the bottom line is to be profitable for the year as a whole.

Now, based on some of the performance in Q1 and also the upward guidance of Q2, I was just curious sort of why there is an additional thought on sort of the forward-looking performance for the year in terms of top line as well as the earnings.

I think the top line is clearly one that we’ve debated back and forth as to whether it should go up or down or stay at 25%. For the first time in a long time, for me, it’s great to sort of see a first quarter that’s got a run rate that looks like our guidance for the entire year. That’s just a phenomenal start and it says a lot for what our team is doing.

Uh-huh.

There’s some lumpiness with respect to the Freeze Off in the first quarter and the balance of the $250,000 units for the CDC that they’re in the first and second quarter of this year. But I don’t have as clear visibility in the second half of the year like those tangible big orders. And so till we get something that’s tangible and meaningful, we’re really proud of the performance we have so far and when we have something tangible and meaningful that gives us a meaningful bump in guidance on the top line, then we’ll give it to you.

Okay.

We’re still struggling with insurance a bit and that gets me nervous, at least in the short-term. With regard to the bottom line, you know this is an investment year and we’ve said over and over again that we’ll get profitability for the year. But we’re not going to be bashful to investing in our S&M initiatives into the programs that can sustain our competitive advantages for the long-term and this is the year to do it.

And I think where you look a the Histofreezer or Intercept or some of the things that are happening with OraQuick, we’re starting to hit on some cylinders and that’s because of some of the fruits of our efforts in the S&M initiatives.

I know that Q2 you’ve mentioned that, with some additional cost incurring, that you would have an earnings EPS of minis (-)$0.01. I was just curious, going forward into Q3 or Q4, if you see any additional areas of cost that you haven’t mentioned in the past that could add some -- could tag on to -- that’s already been communicated.

Really the biggest one that wasn’t in our budget really had to do with the change in leadership and my job, at this point. We’re always under pressure in terms of patents and other things that we have to look at. You know those unforeseens that happen when you’re in a dynamic growth phase of your business. But that’s the main one right now that was unbudgeted.

Got you. One final question on the patents and IP. This lateral flow technology that you mentioned in your call, do you have any sense how defensible that IP is, based on some of the other players who also use lateral flow technology out there? Is this fairly independent and well established or how do you see that?

When it comes to collecting an oral fluid sample and detecting for HIV or any other analyte on the same device, I’d look forward to somebody trying to design a device around ours and be able to have something that doesn’t infringe our patent.

The know-how around oral fluids exists in this building and very few other places in the world, including on the West Coast with some people that keep telling that they have the know-how. Right now, we’re the ones that have the proprietary edge on that, both from an intellectual property perspective and know-how and there’s nobody close.

Great. Thanks.

Your next question comes from Mark Attalienti with Alliance Capital.

Hey Mark.

Hi. Good afternoon and thank you, Mike, for your service and efforts and on that note, what the timeline for a replacement?

Well, the official line is year-end or when a new CEO is hired and right now I’m not involved in the actual search itself. My understanding is there’s been some good candidates that there have been discussions with, but no firm decision on anybody. So, I got to keep delivering results like the first quarter, which has been my job for the last two years.

I guess is there a list, then, a short list of several candidates that it’s been narrowed down to?

I’m not involved in that process, so I just don’t [inaudible] --

[Crosstalk]

Ron, are you involved?

No. That’s really a process that’s being driven by the Board, Mark.

Okay. Do you know if -- is anybody there from the Board that can answer a question, then?

You know I think that the answer that you’re going to hear is that, as our Chairman said in a couple press releases that have come out and local editorials that have come out in the local newspaper, they want to accept somebody that’s been there and done it before in the $50m to $500m range that has proven they have the skill sets to take the Company to the next level as quickly as possible. And I think that that’s a must-have for the mix of skills that they’re looking for.

And lastly, why would they exclude the current CEO and CFO from picking a new CEO?

Oh, I believe that we’ll both be involved in the process at the appropriate time in terms of the focus right now. You know this is about running the business right now. At the appropriate time I believe and would expect that the CEO would want to meet the team and team be fully supportive of that candidate. But you know, right now, we’re just trying to deliver results and we’re doing a darn good job of it.

Okay. Thank you.

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

Hey Mike, could you just talk about the sea of change happening in your HIV testing market as it relates to the CDC’s role early in the game?

They’re obviously helping to facilitate training on the OraQuick device and purchasing product and delivering it to some of your traditional public health customers at the same time you’ve been selling to those customers and have established relationships there. It has been a changing environment. Could you comment on that, how you expect that to impact the Company going forward and the potential distribution of sales, obviously, direct ex-CDC versus directly to government agencies, etc?

Part of this I’d be happy to try to address it, but I don’t really have clear visibility on what the CDC’s plans are long-term. It’s clear that the CDC continues to initiate programs to test different things, like they did with labor and delivery. There are other programs that they’re initiating now, both domestically and internationally where OraQuick is a preferred product to use, especially with oral fluids. And we would expense the CDC to continue to look at programs that way.

It’s not clear to us that it’s the CDC’s intent to long-term sort of be the clearinghouse for OraQuick devices, but rather they wanted to make product available to get people started in the programs. We have shipped the product directly to the customers throughout this process. We’ve used, as I said earlier, a public health sales force to help them get set up, get trained and properly administer the test, with good outcomes.

So, we’re comfortable that either way we look at it, that we have the relationship with the customer whom will be using the product. But where the budget money will come from longer-term is not so clear to us. There are other programs besides the CDC that are looking, both domestically and internationally, at programs for doing HIV testing and we’re pursuing those as well.

So, I by no means think that the government’s going to dry up in terms of programs. I think it’s going to increase instead of decrease over the next 12 to 24 months. But we’ll also see that there will be a lot more independent decisions out in the field and of course, with the CLIA-waived oral fluid product that we hope it to be the product of choice.

Okay. Thanks and my cohort Ed Shegan [ph] has a question also, please.

As far as international with work, have you applied in any other countries for approval? Has anything happening in Mexico that you can tell us about and just give us a little bit of feel for what’s happening there internationally?

I have clearly said that our first priority is to secure FDA approval for an HIV-1/2 product, get CLIA waiver and a Bio-Rad license and only at that time do we really have the product that allows us the most flexibility to really approach the global marketplace. So we’ve not tried to seek out registrations in individual countries, primarily those in South Africa where a lot of the volume is done or the Far East, although we have obviously done some work in Mexico.

We have continued to talk to the US government about programs that are funded from the US government, where we’ve said we think that it’s prudent for US dollars to go into international programs like the $15b AIDS program for South Africa and the Caribbean. That doesn’t it make sense to keep the dollars here in the United States to create jobs here in the US? To keep the money in the US, and to send product that’s the same quality demanded of the FDA here in the US to the people around the world that use the product? And that’s resonating well.

It’s not turned into purchase orders yet, but with people that we get exposure with like Tommy Thompson and people at the World Health Organization and clear decision-makers and visionary people, we continue to hope that that’s the way we can sell our strategy, to do it economically going forward.

Is there any specific updates for Mexico?

None that constitute any revenues any time soon. It’s sort of that it has that feel of sort of big bulk order but no visibility on timing where it could occur. So, we don’t have anything in our budget for that this year, although there’s regular dialog going on in terms of how we can properly pursue that opportunity.

Okay, changing gears to Uplink. Now that we have Drager rolling out Europe, can you tell us a little bit more about how this roadside testing sales will go? Will they be selling it to individual municipalities? Does the government buy it? How long is the sales cycle there? Could you just tell us a little bit about maybe ASP, if you could tell us that?

The part that I will tell you, Drager, Mike Formica, our EVP of Operations, had the pleasure or opportunity to work for Drager before he joined us two years ago and so he understands that organization very, very well.

With the delays we’ve had over the last 12 to 18 months with Uplink, that’s caused an opportunity for Drager to do many, many studies roadside in many different usage situations not only in Germany but across Europe and Australia as well. And the feedback they’ve gotten -- you know we’ve gone through our learning curve of getting the device where they got comfortable with it.

But just after this weekend we heard that the police were confident enough to start to be running the tests with results that were comparable to blood, which is the standard in Europe already. So, Drager is very comfortable with the performance of the test.

Importantly, depending on who you talked to, Drager is number one and number two in market share all across Europe, depending by country, on the sale of evidential Breathalyzers for doing roadside alcohol testing in Europe and the leader in Germany and few other countries.

So, they understand quite well the roadside alcohol testing market and they know that there’s high demand to do the drug testing. It’s the right partner. They’ve had the last year and a half to practice it before we got really where we’re ready to go and they’re excited to get started.

With respect to pricing and other things, we’re not going to get into that at this point.

Your final question comes from David Lewis with Thomas Weisel Partners.

I’m sorry, just two quick ones here.

You’re opening and closing on us.

Oh yeah. Is there a specific bulk purchase order tied to Drager in the second quarter that’s somewhat larger than hits we’ll see in the third and fourth?

There’re no contractual obligations on their part. They’re getting started and I’m not aware of any firm or substantial purchase orders for Q2 yet. We had $144,000 in sales, which was to place some initial readers to get started and probably a comparable sales level in the second quarter, but not a lot of visibility yet.

Okay and in terms of Sam’s departure, are you going to make a decision on kind of the future development of UPT prior to his departure or that’s going to be something for the new, incoming R&D head to do?

You know, it’s an ongoing review process. The decision is not expected to be made by the time Sam leaves on May 21st. We believe that there is still substantial potential with the technology and we’re doing it, as I said earlier, a very comprehensive technical and market assessment of the product. So we’ve put it in a position that new leadership of the CEO and the new Chief Science Officer can evaluate that as to whether it fits in their long-term strategy or not. But I don’t see that decision being made before Sam leaves.

Okay. Thank you very much.

With that, we will conclude the Q&A session. We will now turn the call back over to Mike Gausling for closing remarks.

Well, my remarks are few and far between. The revenue increase of 44% was terrific. It was above our expectations. We had a strong first quarter. It’s just the beginning of good things to come. Appreciate everybody’s support and look forward to another good quarter in the second quarter.

Thanks, everyone, for joining us.

This concludes today’s conference call. You may now disconnect. 3