OraSure Technologies Inc (OSUR) 2004 Q2 法說會逐字稿

Good day, everyone, and welcome to the OraSure Technologies 2004 second-quarter financial results conference call and simultaneous webcast. As a reminder, today's conference is being recorded. (OPERATOR INSTRUCTIONS) For opening remarks and introductions, I will now turn this call over to Shannon Morin at OraSure Technologies. Please go ahead.

Good afternoon, everyone, and thank you for joining us today. I would like to begin by telling you that OraSure Technologies issued a press release shortly after 4 PM Eastern Time today regarding its 2004 second-quarter financial results and certain other matters. The press release is available to you on our website at www.OraSure.com, or by calling 610-882-1820.

This call is also available real-time on our website and will be archived there for 7 days. Alternatively you can listen to an archive of this call until midnight August 6, 2004, by calling 800-642-1687 for domestic or 706-645-9291 for international. The access code is 812- 1210.

With us today are Doug Michels, President and Chief Executive Officer, and Ron Spair, Chief Financial Officer. Doug and Ron will begin with opening statements and then follow with a question-and-answer session. Before I turn the call over to Doug, 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 Securities and Exchange Commission filings of OraSure Technologies, including its registration statement, its annual report on Form 10-K for the year ended December 31, 2003, its quarterly report 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 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 Doug Michels.

Thanks, Shannon. Good afternoon, everyone, and welcome to our 2004 second-quarter earnings conference call. Today, I will begin by providing a brief overview of our financial performance for the second quarter, including an update to our financial guidance for 2004. I will then give you my initial perspective on the Company now that I have been on the job for about a month. Specifically, I will address several focus areas for the continued growth of our business. Lastly, Ron Spair, our Chief Financial Officer, will provide a more detailed review of our financial results for the quarter. We will then open the floor for questions.

As you know, we established 3 major financial objectives for 2004, which were to, 1, increase revenues for the year by at least 25 percent, from 40 million to more than 50 million; 2, to achieve profitability for the year as a whole; and 3, to retain a strong cash position. I am happy to report that second-quarter sales results set another record and were stronger than expected, with total revenues at 13.2 million, up 37 percent over last year. This continued the trend started in the first quarter and supports our belief that 2004 will be a very good year financially.

With regard to profitability, second-quarter net income of $142,000 is also higher than expected and is due in large part to revenues exceeding prior projections, which Ron will cover in more detail. Our cash and liquidity position remained strong. At quarter's end, we had about 66 million of cash in the bank and $8 million in available credit facilities. With such a strong balance sheet, we remain well positioned for further investment into our business and to consider possible strategic acquisitions.

Given the strong growth in revenues during the first 2 quarters of this year, we believe that total revenues for 2004 will exceed our original target of $50 million and will finish in the range of 51.5 to 52.5 million.

With regard to profitability, we now believe that full-year profitability will be difficult to achieve primarily because of the continuing need to invest in our various productlines and other events that were not anticipated at the beginning of the year. For example, as Ron will explain, we expect our costs to increase substantially as a result of additional expenses associated with our change in leadership and the patent litigation recently initiated against Schering-Plough.

Turning to my views on the business, I have spent a lot of time speaking with and getting to know the management team and our employees; reviewing the Company's productlines and operations; and studying the Company's strategic business plan. It is clear that OraSure has made great strides these past few years, including the many regulatory approvals for the OraQuick rapid HIV antibody test and successful commercialization of that product; the successful entry into the over-the-counter market with Freeze Off; the increasing acceptance of the Intercept drug test; the strengthening and expansion of its sales and marketing capabilities; the consolidation of manufacturing and construction of a world-class manufacturing facility in Pennsylvania; and last but not least, the Company's strong financial performance. With all of this in place, the Company can now focus on execution and continuing its strong performance.

All of this is extremely positive, and I believe the Company must now move to a new level. Management must increase sales and further develop the Company's product and technology pipeline in order to take OraSure to the next level and create value for our investors. To maximize our success, our strategy must be clear. Now is the time to refine the Company's strategic business plans, which will be a priority in the coming months. As our strategies and business plans are refined we will aggressively pursue new product development and potential acquisitions consistent with these plans.

I continue to be impressed with our management team. They are dedicated, hard-working, and very strong. I am not surprised that OraSure has achieved the success that it has enjoyed in recent years; and I again thank and commend my predecessor Mike Gausling for his leadership of the Company.

Although the management team is strong, it is not quite complete. As you know, Sam Niedbala, the Company's Chief Science Officer, retired earlier this year and the R&D function has been under the direction of our Executive Vice President of Operations Mike Formica for several months. Mike has done an excellent job in handling these additional responsibilities; but this structure is not for the long run. I recently initiated efforts to recruit a new Chief Science Officer with the leadership and technical skills needed to help us meet our growth objectives.

In addition, I believe the company needs an officer whose job will be to lead our business development efforts. I believe both of these individuals will ultimately be needed in order to round out the management team with the scientific, business, and leadership skills required to achieve our long-term strategic goals.

As I previously noted, the Company's focus is now on execution and driving sales growth and perhaps the most visible example of that relates to OraQuick. There have been a number of significant achievements for OraQuick during the past several months. We now have a new OraQuick test approved by the FDA for detecting both HIV-1 and HIV-2 in fingerstick and venous whole blood, plasma, and oral fluid samples; and it's CLIA-waived as to all specimen types except plasma. Pricing for the new HIV-1/2 test is being finalized. But with the inclusion of a label claim for HIV-2 and the oral fluid approval, I would expect our price to be somewhat higher than we now charge for the current HIV-1 product.

As part of our launch readiness efforts to introduce our new oral fluid rapid HIV-1/2 antibody test, we have been working diligently to finalize our product labeling and get everything in place to ensure a successful launch. And as part of our prelaunch effort, we typically support ongoing investigational product trials and targeted user studies.

We have recently received results from an isolated clinical trial of our new oral fluid rapid HIV-1/2 antibody test that may indicate a higher rate of unconfirmed positive results for oral fluid than we observed in the clinical data compiled by the Company which included data from larger Company-sponsored trials as well as data from independent CDC studies in support of our FDA approval for oral fluid. A thorough assessment is underway to better understand this situation. One of our core values is to adhere to the highest quality standards in all manufactured product. As a result, we intend to delay the launch until the assessment is complete and we can take appropriate corrective measures if any are required.

To be very clear, this technical and procedural assessment is specific only to our new oral fluid rapid HIV-1/2 antibody test, which has not been introduced to the market. The assessment does not relate to any of our current HIV testing products, including the OraQuick rapid HIV-1 antibody test currently being sold for use with fingerstick and venous whole blood, or our OraSure HIV-1 oral fluid test kit. We understand the market is eagerly awaiting our new oral fluid product, and we're committed to moving expeditiously but prudently to ensure a very successful introduction. In terms of guidance with regard to this issue, we anticipate that our current customers and any new customers will continue to purchase our existing HIV testing products, including our OraQuick rapid HIV-1 test for fingerstick and venous whole blood.

The second quarter was also the first in which our hospital sales force was fully deployed. I'm impressed with the caliber of this team, and I'm encouraged by their initial sales efforts during the second quarter. We also in discussions with various potential distributors for the physician offices market.

We have continued to pursue both purchase orders by the CDC and other government agencies primarily for further distribution in the public health market. Our approach here is twofold. In addition to the agency purchases we're also directly marketing to the public health entities that will be the end-users of our OraQuick test. To the extent these entities do not buy directly from us, our marketing efforts should help create demand for use of OraQuick tests distributed by the CDC.

Another government agency that we're working to sell OraQuick to in bulk is the Substance Abuse and Mental Health Services Administration or SAMHSA. This is an agency within the U.S. Department of Health and Human Services that would use OraQuick in the drug rehab and substance abuse treatment in criminal justice markets. A Request for Proposal was recently issued by SAMHSA for the sole source supply of OraQuick tests, along with OraSure collection devices and oral fluid Western Blots for confirmation testing. We have responded to this RFP, and hope to move into direct negotiation with SAMHSA for final purchase.

Finally, now that we have an HIV-2 license we plan to develop an international strategy for distributing the OraQuick HIV-1/2 test outside the United States. In this regard, there is still quite a bit of work to do, especially for the developed countries in Europe and Asia-Pacific. We need to develop and execute a plan to obtain required regulatory approvals and registrations, identify appropriate distribution channels, and put agreements in place, and arrange for product transfers. However, receipt of the HIV-2 license is a major accomplishment that now allows us to move forward in these international markets.

In the developing parts of the world such as Africa, things are a bit easier, as we're generally free to sell an FDA-approved product there. In countries where the economics make sense, we are selling OraQuick and expect to continue to do so. One international market opportunity that we're starting to focus on relates to the large employers in Africa, many of whom have adopted policies under which they will pay for the HIV testing and treatment of their employees.

A specific example is Anglo American, a large mining company in Africa that has already purchased and is using our OraQuick oral fluid test for initial testing under its program. In fact, one mine at the company reported that because of the ease of using our OraQuick rapid oral fluid HIV test, it had tested as many people in 3 weeks as it had in the previous year. Anglo American has indicated that it has received funding from the U.S. government and plans to offer the program to the partners and children of its employees. Although early, we're excited about this potential opportunity with Anglo America and other employers in Africa with similar programs.

Turning next to our cryosurgical systems products, Histofreezer and Freeze Off, the Company continues to make good progress in its execution. Histofreezer sales have rebounded from a challenging year in 2003 largely as a result of our refocused marketing efforts. Freeze Off is again exceeding expectations, with expected sales of more than 11 million in total for the full-year 2004. We believe we have a strong patent portfolio for our Histofreezer and Freeze Off products; and sales of these products are a very important part of our business.

It is not surprising then that we decided to aggressively defend our intellectual property position by filing a lawsuit against Schering-Plough for patent infringement. The suit relates to the Dr. Scholl's Freeze Away cryosurgical wart removal product sold by Schering-Plough, which is being offered in the over-the-counter market here in the United States in competition with our Freeze Off product. We intend to vigorously defend our intellectual property rights.

Intercept, our lab-based oral fluid drug test sold in the workplace and criminal justice markets, showed significant growth in the second quarter compared to last year. In fact, the number of oral fluid specimens processed in June 2004 in both markets increased to over 102,000 or 64 percent more than the comparable period last year. This growth reflects the impact of our continuing sales and marketing initiatives, and more widespread acceptance of oral fluid testing as an alternative to traditional urine drug testing.

With respect to other products, several points are worth noting. Our insurance risk assessment testing business continues to be negatively impacted not only by the loss of urine assay sales but also increasing competition for our oral fluid assays, primarily from home-brewed assays internally developed by our lab customers. We are discussing ways to rebuild this productline through additional development and product enhancements.

In addition, as you know, we launched our UPlink rapid drug detection system with our partner Drager in the European roadside testing market in April of this year. We now helping Drager complete trials throughout Europe and Australia conducted as part of the launch for this product. Parallel to the field trials, we're completing the transfer to operations and the process of scaling up manufacturing.

With respect to the U.S. opportunity for this product, we will focus on the additional data requested by the FDA in order to obtain 510(k) clearance after completion of the European trials and scale-up of the manufacturing processes. Unfortunately, it is not clear when we will be in a position to refile for 510(k) clearance, or if we will need to modify our UPlink system to meet the FDA's requirements.

Obviously how the Company executes in the future will be guided by its strategic plans. Since joining the Company I have been reviewing the strategic plans that had been put in place by the Board and management, and I intend to provide input into these plans. At this point I do not expect wholesale changes to OraSure's strategy. However I do expect that our plans will be refined in light of my experiences and additional strategic analysis that we will perform.

Although there has been a change in leadership and our strategic plans are undergoing review, I want to be clear about where I see OraSure heading. My expectation is that OraSure will remain committed to oral fluid testing and to expanding its presence in the infectious disease testing market. We will work to expand our business internationally as rapidly and aggressively as possible. Once our strategic plans are reviewed and refined, new product development and product enhancement opportunities will be identified and resources will be applied against those projects.

For example, one new product opportunity under serious consideration is a hepatitis C test using our OraQuick platform. Our ability to develop and market this product requires the receipt of an HCV patent license, which we intend to pursue. We may also consider developing an oral fluid HCV test to be used in conjunction -- in connection with oral fluid samples collected with our OraSure collection device.

As previously noted, the Company's recent financial performance has been very good. We have a strong cash and liquidity position. As a result, we will not hesitate to pursue appropriate M&A opportunities, which are consistent with our strategies.

Before turning the call over to Ron, one final matter I wanted to address it the proposed drug testing guidelines recently issued by SAMHSA. If adopted these guidelines would for the first time allow oral fluid drug testing for federal workers. We recently submitted comments to the proposed guidelines, as did many of our lab partners and customers. The comment period closed in July, and we expect final guidelines to be issued in about 6 months, with a final implementation date a year or so thereafter.

Our Intercept drug test has been selling quite nicely in the non-federal workplace and criminal justice markets, which are not cover by the SAMHSA guidelines. Our hope is to sell our oral fluid drug testing products for use with federal workers and other industries that follow the SAMHSA guidelines. With that, I will turn the call over to Ron Spair, who will provide a more detailed review of the second-quarter financial results.

Thanks, Doug. Let's start with the income statement. Total revenues for the second quarter were 13.2 million, or 37 percent higher than the same period in 2003. Product revenues were 13.1 million for the quarter, which was a 39 percent increase over Q2 of '03. Both revenue amounts are records for the Company; and in fact this is the sixth consecutive quarter of record revenues. It is also the ninth consecutive quarter of increasing revenues.

The revenue increase is well balanced across each of the Company's Freeze Off and Histofreezer cryosurgical products, the OraQuick rapid HIV antibody test, and the Intercept oral fluid drug test productlines. We sold over 2.3 million of OraQuick and over 3.3 million of Freeze Off during the second quarter.

Included in the OraQuick numbers were 923,000 in sales to the CDC; 720,000 in direct sales to the public health marketplace; 401,000 to Abbott; 228,000 into the international marketplace; and 67,000 of direct sales to hospitals. Partially offsetting these increases were reduced sales to the insurance risk assessment market, due primarily to the loss of urine assay sales. Sales to this market are down 22 percent when compared to Q2 of '03.

As we look forward to Q3 we expect total revenues in the range of 13 to 13.5 million, an increase of 26 to 31 percent over the third quarter of 2003. The primary revenue drivers are expected to be increasing sales of our Freeze Off product, the continued rebound of our Histofreezer sales to the U.S. professional market, and higher sales of Intercept.

The gross margin for the second quarter of 2004 was 58 percent compared to the 60 percent we recorded for Q2 of last year. Our gross margin was positively affected by our more efficient utilization of our manufacturing facilities, offset by unfavorable change in product mix and higher startup production costs associated with both the products transferred to our Bethlehem facilities and our recently launched UPlink drug detection system.

Our operating expenses for Q2 increased by 22 percent or approximately 1.4 million, to 7.7 million when compared to last year. This increase is primarily attributable to higher advertising costs, including our continuing reimbursement of a portion of MedTech's advertising expenses relating to the Freeze Off product; higher fees incurred in deploying our new hospital sales team; higher staffing and travel expenses for our sales and marketing group; higher legal fees related to the initiation of the Schering-Plough patent litigation; transition costs for the CEO position; and higher professional fees related to compliance with our Sarbanes-Oxley Act of 2002.

These increases were partially offset by a reduction in bad debt expense and lower R&D expenses resulting primarily from the lower cost associated with the transfer of manufacturing operations from Oregon to Pennsylvania, and lower clinical trial and staffing expenditures.

Our net profit for Q2 was 142,000 or zero cents per share, which compares favorably to a loss of 1 cent per share for the comparable quarter last year. Because of higher costs associated with the launch of our new OraQuick HIV-1/2 test, the additional expenses associated with the hiring of our new CEO, and higher legal fees expected from the Schering-Plough litigation, we're likely to see a net loss in Q3 of roughly 2 cents a share, and a loss for the year as a whole. Legal expenses for the Schering-Plough litigation will depend on how the lawsuit proceeds and will likely add between 250 and 350,000 in expense for Q3 alone.

Turning to cash flow, our balance sheet and cash flow continues to be a bright spot once again, and of course our liquidity position does as well, as it remains strong at the end of Q2. The Company's cash and short-term investments were 66 million; and working capital was 67.9 million at June 30. Cash flow from operations was positive at 1.7 million for the second quarter, and a positive 1.9 million for the 6 months ended June 30, 2004. This represents the ninth consecutive quarter of positive cash flow from ops.

Capital expenditures amounted to 600,000 in the second quarter; and our Days Sales Outstanding and accounts receivable totaled 48 days at June 30, 2004. With that, I would like to now turn the call back to Doug for some final comments.

Needless to say I'm very pleased with the Company's financial performance for the second quarter and for the year-to-date. I'm also impressed with the progress OraSure has made in meeting its business objectives. I am very optimistic about our future. I am looking forward to delivering the second half of 2004 revenues, laying the groundwork for a strong 2005, and obviously working hard to create an exciting future for our employees, our customers, and our stockholders. With that, I would like to open the floor for questions.

+++ q-and-aOperator: (OPERATOR INSTRUCTIONS) Bill Quirk, RBC Capital Markets.

I wanted to I guess dig into this HIV-1/2 aftermarket trial results a little deeper if we could. First question is, the patient population that you studied in this trial; does that differ materially from what you used for your clinical trials?

No, the patient population was similar. This was an isolated trial. It is a trial that is expected to continue until the end of August.

Can you give us some sort of sense about the different rates in positives? Can you just give us some sense to -- is this double the number of positives or do you have some sort of concrete figures behind that you can share with us?

The data is very preliminary right now. As you know in our clinical data, the oral fluid rapid HIV-1 antibody test performed at greater than 99 percent accuracy. So we have some very preliminary data that we're working with the investigator to evaluate; and at this time, we're not prepared to release any of that information. But I would like to emphasize that it is an isolated trial.

Understood. Lastly, I don't think you mentioned a timeline for resolution. Is there anything that we should be thinking about? Or maybe a better way to ask the question is, how long was the trial scheduled to run?

Like I just mentioned, the trial is expected to run through August. We are continuing to work with the investigator, and we will wait until all the results are in before we draw any conclusions. Obviously we continue to work with the investigator to understand some of these results.

Understood. I will jump back in queue. Thanks, guys.

Wade King with Wells Fargo securities.

Pursuing the same line of questioning, could I ask this? Is it your expectation that after observing the trial results in August that you referenced, that you will do additional trials -- once again not for FDA approval -- but to confirm the ongoing sensitivity and specificity of the OraQuick HIV-1 product?

At this time, we don't have any expectations for doing additional trials. We are going to wait and see exactly what we learn from this study. We will make the appropriate decisions on next steps after we have analyzed all the data.

Are there any labeling implications you believe for OraQuick HIV-1/2 as relates to the trial results that you referenced? Or do you believe that the results of the trial will modify to some degree the sales message in the field? How do you think it's going to change your actions going forward? That is really what I'm trying to understand better.

At this point in time, we don't have any expectation for any impact in that regard. We're going to rely on our investigation to guide our next actions. We should remember the thousands and thousands of specimens that have been tested successfully where the test is performed with a greater than 99 percent accuracy on both specificity and sensitivity.

This is an isolated trial. And we are very committed to quality as I mentioned earlier, and we have got the luxury right now, being that this product is not launched, of taking a conservative approach; making sure we understand what is going on in this isolated situation before taking any further action.

This is once again -- this is not a CDC-based trial, this is a different entity? Is that right?

This is a trial going on under our IDE.

Very good. We will get back in line. Thank you very much.

Sara Michelmore, SG Cowen.

Just a few questions on Freeze Off it I could. First, could you just remind us what exactly is your IT position on the product? What exactly are the patents that you are alleging that the Schering-Plough guys infringed?

Secondly, I have seen some DTC ads recently for the Freeze Away product. Wondering if that it has had any beneficial impact on your market? And if MedTech as far as you know has considered any DTC ads themselves?

With respect to your first question, Sara, we had announced the institution of that litigation with Schering-Plough. It surrounds 3 of the patents that we have within the portfolio related to our cryosurgery business. We believe that their Freeze Away patent -- Freeze Away device, excuse me, infringes those 3 patents; and that is the basis of our assertion.

With respect to the advertising that you spoke of, I personally am not aware of MedTech's activity in that regard.

Ron, I don't know if it has been too early, but if Schering has -- I don't know if you have had this discussion -- but do you think Schering's tack is a tack to prove noninfringement of your patent? Or invalidity of your patent?

Sara, I really couldn't comment on that at the moment. Sorry.

Okay. You're not aware of MedTech doing any -- I will get back in the queue. Thank you.

David Lewis, Thomas Weisel Partners.

A couple questions, either Doug or Ron. First of all on the insurance risk assessment business, you mentioned urine assays as well as homebrew being an issue. What percent of this is actually urine degradation? And what percent is homebrew competition?

I would suggest to you that the urine assay business has been degraded almost completely by the homebrew phenomenon that we've seen at Lab One, David. That is really what we're referring to. They have decided to make the urine assays themselves.

Okay. I thought you were referring to 2 separate issues. I know the urine issue is a homebrew issue. I thought you were talking about other homebrew collection methodologies that was something new.

No. Sorry.

So it is the same old urine homebrew issue as before.

Yes, it was.

Generally speaking, though, you know the amount of urine assay you were selling to Lab One. I was under the impression that phased out 6 months ago. Is there another pool of business that is now being attacked? Or just help me understand what we can assume is a reasonable base? And should we assume this business pops back up next quarter? Or should we assume 1.9 million as the new base?

I think the business and some of the fluctuations that you're seeing in the revenues in the insurance risk assessment area relate also to actual purchases of OraSure devices that previously last year were under a purchase order arrangement with Lab One, where the purchasing was rather predictable every month. Now we have seen some variability enter into the equation as we don't have that predictable shipment of OraSure devices. So I think the revenues are jumping around a little bit with respect to those device sales, David, and that is what you are probably picking up.

Sure, we had the same dip in the fourth quarter. I'm just trying to figure out how much is the dip there and how much is the urine.

Right. In this particular quarter, we were at the very end of the month preparing to ship another device order that went out in the early part of the third quarter here, as the purchase order was received very late in the second quarter. That was probably another approximately 300,000 in revenues.

Okay. So, it is possible that the business would be sequentially up?

That is possible, yes.

Great. In terms of hospital market sales, a question for Doug or for Ron, hospital market sales were not quite what we were expecting this particular quarter. Is that because Abbott is having more success, so we saw higher revenue from Abbott they were (ph) modeling, and lower revenue from core OraSure hospital sales? Can you just kind of talk through the dynamics you are seeing in the hospital sales channel?

I think that it's early days in the hospital sales marketplace, and I don't think that the results that were recorded in the second quarter are necessarily predictive of what we can expect on a going-forward basis here. The folks are making great strides with multiple accounts that they are pursuing. They did not turn into shipments in the second quarter, but that does not mean that that is the level of sales that we will anticipate recording on a going-forward basis.

Okay. Last question I will jump back in the queue. Ron, on gross margins, what percent was currency versus what percent was truly ramping up production cost?

The currency really wasn't an issue in this particular quarter, David. I think we had mix more than anything. It was about 230 basis points to the negative. More efficient operations were about 250 basis points to the positive. And then some of the startup costs with the new products were about 220 basis points to the negative.

But when you are saying mix aren't you referring to more cryosurgical?

That's correct; but not from a currency standpoint.

But it does have a lower gross margin. And if the product is manufactured in Europe, it certainly can't help you.

Certainly the euro has hurt us. But when you talk about the currency costs, we really didn't feel the same kind of degradation that we had in the second quarter, as we did previously here.

Okay. Thank you very much.

Aaron Lindberg, Wm Smith & Co.

Given your discussions with Schering-Plough in September of 2002, do you believe it is clear to them that they are infringing your patents?

We believe that they are infringing our patents, which is why we filed suit.

Clearly you do, but given those discussions -- I guess this question is pretty much for you, Ron, because it was 2 years ago at this point. But given those discussions, do you believe it is clear to them? Clearly they came to talk to you about licensing the technology, so from the outside looking in it appears it would be awful clear to them as well.

I really couldn't comment on that at the moment, Aaron.

Were the remainder of the CDC orders shipped?

During the 6 months, we have shipped approximately 1.6 million CDC orders, so we have a little bit more to go in the third quarter here.

Those are allocated to facilities currently?

We expect to ship them all by the end of the third quarter.

Can you give us a feel of how the direct hospital OraQuick sales were distributed through the quarter?

That I could not help you with. I don't have that information inter-quarter. But I would suspect --.

Broad strokes as far as call it --

I would suspect that we ramped up during the quarter.

Okay. Last question is, are there similar trials running for OraQuick, that combined HIV-1/2 device, in addition to the one that you referenced earlier on the call?

Yes, there are; and we have not received any similar reports. That is why I mentioned earlier this is isolated. And I didn't mentioned this -- this is quite common in the course of these kinds of pre-introduction trials.

With those other trials, do they have similar timing to the one with the higher false positive rates?

Yes, they do.

Excellent. Thanks.

Wade King, Wells Fargo Securities.

I have a question and Ed has a question as well. How do you expect the breakout of OraQuick sales to change, looking ahead? You talked about a change in the paradigm as relates to CDC versus state public health versus other in terms of purchasing OraQuick. You gave us a breakout for the second quarter.

Could you give us an idea of how you expect that to change in the second half? Do you expect it to be more heavily weighted towards the public health customers? Or what other changes do you expect in terms of the breakout?

I think you have hit on it, Wade. Absent an additional order, which obviously we are continuing to chase with the CDC, then Joe Zack and his public health sales group have been working very hard for several months now and going after the direct revenues in the public health direct segment.

They have been doing a great job there. They will continue to execute against that program. We think we will see folks that have been using the free devices from the CDC begin to purchase directly from us, absent the source of free devices.

Okay. Would you mind just reviewing once again the breakout of cryosurgical product sales? The total as relates to Freeze Off; and also the Histofreezer component, please?

Sure. In the quarter we had 3.3 million in MedTech revenues. You noted from the press release that we had 4,858,000 in total sales into the cryosurgery state; and we had 1,165,000 of Histofreezer sales into the professional marketplace here in the states; and approximately 350 international Histofreezer sales.

Okay. Very good. Ed Shinken (ph) had a question as well.

By the way we also filed our -- will be filing our 10-Q; so all of this information will be available in the MD&A, all the breakout data.

Thank you.

Ron, as far as OraSure revenues, the public health front, from my math it looks like about $1.6 million there.

You're an excellent mathematician.

I do my best. Can you just tell us -- it looks like that is a huge uptick. What do you attribute it to? And going forward do you expect it to continue at that rate? Just give us a little bit of color.

Sure. It was a very robust quarter with respect to the OraSure device. I think in large part, due to some of the promotional programs that we were engaged in with respect to national HIV Testing Day, which was if you recall at the end of June 2004.

As we have indicated previously, we believe that OraSure in the public health marketplace will be subject to some degree of cannibalization by the OraQuick oral fluid test when it is out there -- although we continue to be very pleased with the resilience of this product side-by-side with the strides that we are making with OraQuick in both the public health marketplace.

I'm sorry was the uptick there with the OraSure, was that the kits or was that the lab tests?

I think we saw a little bit of both there.

A little both. Would you expect then third quarter sequentially to be at least flat for OraSure, flat to up? Or do you expect it to go back down to where it was in the first quarter?

You know, we have not given that granularity of guidance on those revenue numbers. I think that at the moment we will continue to stay that way. We would be very pleased if it stayed at that level.

I guess another way to phrase it would be, how was July compared to the previous quarter?

I don't have that data in front of me.

Okay. We will get back in queue.

Dick Drury (ph) with Constitution Research.

Can you just -- how many patients were in this isolated trial? What was the nature of the isolated trial? And how many patients were in the trial where UPlink got approval?

We are not going to disclose any specific numbers out of the trial at this stage of the game. It is too early in our assessment. But --

How about the purpose of the trial?

The purpose of the trial is quite standard. It is like many other trials. There are prelaunch trials; they are used to evaluate the test performance in normal populations and high risk populations. It is just very standard procedure.

Okay. Can you give me the standard purpose for this trial?

I can't expand on it any more than what I described.

Okay. Is there any possibility if this was a smaller trial in the overall trial that there could be some kind of statistical aberration produced in the higher positives?

At this time, we can't speculate on that. No.

Okay. Thank you.

Bill Quirk, RBC Capital Markets.

Ron, can you give us the D&A number for the quarter? You might have mentioned it earlier, but I am afraid I must have missed it.

I'm sorry?

The depreciation and amortization number for the quarter?

Sure, I'm sorry. For the quarter, let's see; we had 607,000 depreciation and amortization.

CapEx I think you mentioned; was that also 600?

That was 600 for the full 6 months. For the quarter it was 254.

254, okay, perfect. If we think about legal expenses for the balance of the year here, related to the Schering-Plough lawsuit, I know you made a comment with respect to what you expect during the third quarter. Are you willing to share any sort of full-year estimates or I guess second half of the year estimates for this?

Bill, for lack of better knowledge, I would model comparability to what we anticipate in the third quarter here. And when we have better visibility, then we will certainly share that with you.

Fair enough. Last question. Nice improvement or continuing nice improvements on both DSOs as well as DIOs. Ron, any comment on -- can we expect to see these continue to come down? Or any comments just on working cap trends in general?

I would say that Days Sales Outstanding was just a great number that our folks delivered. They do just a great job in the accounting and finance group.

As far as our inventories are concerned, you note that they are up a bit. I think that that has been pretty well telegraphed by us with respect to bringing in-house the manufacturer of Intercept and OraSure; and the increase in work in process, raw materials, finished goods that you experience when you bring that in, as opposed to having it subcontracted out. So, I would say that our inventory levels are approaching what I think might be the levels that we should see in the near term here. But obviously, as production picks up and demand picks up, we will respond accordingly.

All right. Thanks a lot guys.

David Lewis, Thomas Weisel Partners.

Doug, I hate to beat a dead horse here. You mentioned the trial was an IDE. When was the trial initiated? It was run under IDE. I am wondering when the trial was initiated?

That is a great question. Dave, I will have to get back to you on that.

If it was started after the PMA, I am having a hard time seeing why it was under IDE, I guess, at that point.

No, no. It was not. I believe that it was actually started before the actual PMA approval.

That would make more sense. Have you been able to rule out a manufacturing or lot specific issue?

We haven't ruled out anything right now. The investigation is just beginning; and that is why we felt the responsibility just to let you guys know what was going on. So we're working on it real hard.

When did you become aware of this issue?

We got some preliminary information in mid July. Then we got additional information just last Friday, I believe, which caused us to make a decision that we were going to let you know we are investigating this pretty aggressively.

Okay. What is the timeline in terms of the investigation and when you would update?

Like I said, this trial is supposed to last through the end of August. I would expect that at that time after we have all of the data from this, we will have a good handle on what our next steps are.

But just to summarize, you have got a whole bunch of trial data; you have never seen a specificity or false positive issue like this; you have one trial where you saw this issue; you don't know whether it is manufacturing, lot specific, trial design. So basically nothing. You are just saying, it popped up. We are letting you know. We will update you in a month.

That is exactly right. We have had -- I will say none. We have had a total of 10 complaints on OraQuick since its launch early in 2003. That is over 1.5 million units produced; 10 complaints; very, very few. We're just taking a conservative approach here and letting you guys know what's going on.

Great. Ron, in terms of -- we understand legal expenses in the third quarter and fourth quarter. What about cash flow third quarter, fourth quarter? Will you still be cash flow positive, or will that slip a little bit with the expenses?

We will have to see how we manage our payables there, David, but we could see a little slippage.

Okay. Thank you.

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

For closing remarks, let me just reiterate what I said earlier. I'm very impressed with the progress that OraSure has made in meeting our business objectives. I am particularly impressed with the balanced performance that we have turned in so far in the first half of the year. I'm very optimistic about our future across all these different productlines. And I am looking forward to talking with you again in a few months, letting you know how the third quarter went, and how we are going to finish up the year. Thanks, everybody.

This concludes today's conference call. You may now disconnect.