OraSure Technologies Inc (OSUR) 2004 Q3 法說會逐字稿

Good day everyone. Welcome to OraSure Technologies' 2004 third quarter financial results conference call and simultaneous Web-cast. As a reminder, today's conference is being recorded. (Operator Instructions). For opening remarks and introductions, I will now turn the call over to Shannon Morin at OraSure Technologies. Please go ahead.

Good afternoon everyone. 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 third 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 7 days. Alternatively, you can listen to an archive of this call until midnight, November 5, 2004 by calling 800-642-1687 for domestic or 706-645-9291 for international. The access code is 211244.

With us today are Doug Michaels, President and Chief Executive Officer; and Ron Spair, Chief Financial Officer. Doug and Ron will begin with an opening statement 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 in markets; and regulatory filings and approvals. Actual results could be significantly different.

Factors that could affect results are discussed more fully in the Securities and Exchange Commission filings of OraSure 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 Michaels.

Thanks Shannon. Good afternoon everyone, and welcome to our 2004 third quarter earnings conference call. Today I will begin by providing a brief overview of our financial performance for the third quarter, including an update to our financial guidance for 2004. I will then address 2 pending items and review some noteworthy developments involving each of our major product lines.

Lastly, Ron Spair, our Chief Financial Officer will provide a more detailed review of our financial results for the quarter and some initial financial guidance for 2005. We will then open the floor for questions.

As previously discussed, our major financial objectives for 2004 were to increase revenues for the year by at least 25 percent, from 40 million to more than 50 million, to achieve profitability for the year as a whole and to retain a strong cash position. I am very pleased to report that third quarter sales results set another record, and were stronger than expected with total revenues of 14.2 million, up 37 percent over last year. This continues the trend started during the first 2 quarters, and confirms that 2004 will be a year of significant revenue growth for OraSure.

With regard to the bottom line, we recorded a third quarter net loss of $294,000 which is better than expected -- we expected a loss of 2 cents per share -- and is due in large part to revenues exceeding our projections, which Ron will cover in more detail.

Our cash and liquidity position remains strong. At quarter end, we had about 66 million of cash in the bank, working capital of 68.2 million, and $8 million in available credit facilities.

Given the strong growth in revenues during the first 9 months of this year, we now believe that total revenues for 2004 will exceed our most recent target range of 51.5 to 52.5 million and will finish at approximately 54 million.

With regard to profitability, we previously indicated that full year profitability would be difficult to achieve, primarily because of the continuing need to invest in our various product lines and other events that were not anticipated at the beginning of the year. We now believe profitability for the year will in fact not occur because of these factors.

For example, as Ron will explain, we expect our legal costs to increase substantially in the short-term as a result of the early trial schedule which was recently set by the court in the Schering-Plough patent litigation. And we expect higher consulting fees as a result of the strategic analysis we recently initiated.

Before turning to a specific review of the Company's product lines, I want to provide an update on 2 pending matters. First, as I previously indicated, it's critical that the Company continue to increase sales and further develop its product and technology pipeline in order to maximize value creation for our investors.

To do this, one of my priorities since I became CEO has been to refine the Company's strategic business plan. This process is well underway with outside consulting assistance. We believe this review will be completed in the next couple of months, and will help us focus our new product development efforts and potential acquisition activities.

Obviously, there's a cost whenever an analysis of this type is undertaken. So our level of consulting fees was higher in Q3 and is expected to be higher in Q4 of this year as well.

Second, we continued our search for a new chief science officer, as well as an officer to lead our business development efforts. Filling these positions is important to our Company and remains a top priority.

Turning now to the Company's product lines, OraQuick remained at the forefront with a number of significant developments. The biggest of these was a commercial launch of our new OraQuick Advance Rapid HIV-1/2 antibody test announced in late October. As you know, this is the only CLIA waived and FDA approved Rapid Test for detecting both HIV-1 and HIV-2 in a broader array of specimen types, which included fingerstick and venous whole blood, plasma and oral fluid.

The launch of this exciting new product was highly anticipated by our customers, and we're very bullish about its prospect. One highlight of the launch was that this product was featured at the U.S. conference on AIDS in Philadelphia held October 21 through 23. We've also continued to receive the same type of broad national media coverage that we have enjoyed for our OraQuick HIV-1 test.

In addition, a number of other important OraQuick developments have occurred recently. The overall amount of HIV testing seems to be increasing because of the availability of rapid testing with OraQuick. For example, the CDC has reported that in New York, 34 percent of clients said they would not have been tested if only the standard lab based testing were available. After OraQuick became available in New York, testing increased substantially -- by 42 percent for IV drug users and 96 percent for people with a history of sexually transmitted diseases.

In addition, according to a 14-state survey by the CDC, 98 to 100 percent of clients who used OraQuick actually received their test results, compared to only 62 percent under standard lab testing.

Additionally, state public health agencies are reporting a higher number of confirmed positive indications with the use of the OraQuick compared to more traditional non-rapid testing. This further demonstrates the benefits of rapid testing, which enables these agencies to test more high-risk individuals and clients who are more willing to get tested because they do not have to wait the usual one to two weeks for the results of a laboratory blood test.

Florida is particularly noteworthy. As reported at the U.S. conference on AIDS, this state reported a Western Blot confirmed positivity rate of 3.4 percent with OraQuick testing from January 1 through August 31, versus 1.7 percent with traditional laboratory blood tests over the same period of time.

This increase in testing in turn seems to be reinvigorating community awareness of HIV and improving disclosure rates, access to counseling and other services and general treatment and care. As an aside, I would like to point out that the customer base that is using OraQuick is becoming increasingly diverse and now includes community-based organizations and clinics, jails, STD clinics, and outreach initiatives using mobile vans, among others.

Our biggest single customer for OraQuick has been the CDC. And we have now completed fulfillment of all CDC bulk purchase orders previously received. One of our immediate priorities has been and continues to be to obtain an additional CDC bulk order for OraQuick Advance as soon as possible.

We're very proud that OraQuick Advance was recently recognized with the best new approved product award at the 17th Annual Biotech Meeting co-hosted by Burrill & Company in early October. This is an annual event in which the CEOs of the biotech industry recognize significant contributions to the biotech field.

As you know, in August we also received a $4 million bulk purchase order from the Substance Abuse and Medical Health Services Administration for rollout to more than 22,000 substance abuse treatment and prevention sites throughout the United States. We will be filling this order with the new OraQuick Advance product, with initial shipments expected to begin later this month.

Finally, on the international front, in order to sell into the European market we must obtain a CE-mark for OraQuick. We have initiated the process of obtaining a CE-mark, and we will make it a priority during 2005 as part of our strategy to expand OraQuick internationally.

Outside of Europe we continued to see steady growth, particularly in Africa where we are now selling to a total of 12 countries. International sales of OraQuick tripled to almost $500,000 for the third quarter of this year. Our immediate plan is to continue our efforts in Africa while implementing our strategy for accessing Europe and other developed countries.

With respect to our cryosurgical systems products, Histofreezer and Freeze Off, we continue to make great progress. Histofreezer sales continued their rebound from a challenging 2003, largely as a result of our refocused marketing efforts. These efforts, which include improved training, incentives and promotions, have resulted in an expanded number of independent distributors and re-energized distribution force here in the United States.

Currently, our market share with Histofreezer in the U.S. professional cryosurgical device market is estimated at 58 percent. We also continue to reinvigorate the international distributors selling our product. And we're looking for new distribution opportunities into the professional markets around the world.

Our over-the-counter product, Freeze Off, again has exceeded expectations with sales of about 12.5 million now expected for the full year 2004. This product has been a great success here in the United States. We're now prioritizing expanding into Europe and other international markets.

There is a particular urgency to securing the right distribution partner or partners for the E.U. as quickly as possible. We want to begin to supply product in advance of the spring and summer months in 2005, when demand for wart treatment products is highest.

As you know, we're also defending our cryosurgical patent portfolio with the filing of a lawsuit against Schering-Plough for patent infringement. This suit relates to Schering's Dr. Scholl's Freeze-Away cryosurgical product, which is being sold in the over-the-counter market here in the United States in competition with our Freeze Off product.

Although we initially intended to seek a preliminary injunction, the court recently adopted an early trial schedule with the final trial on the merit scheduled for February 2005. Long-term, we believe this course represents the best way to obtain a final decision in the most efficient and cost-effective manner. We will certainly keep you posted as material developments in this litigation occur.

Intercept, our lab-based oral fluid drug tests sold in the workplace and criminal justice markets, turned in another strong performance in the third quarter compared to last year. The number of oral fluid specimens processed during 2004 is up 57 percent in the workplace market, 77 percent in the criminal justice market, and 27 percent internationally, primarily in the UK when compared to last year.

Third quarter device sales are up 106 percent in the workplace market and 91 percent in the criminal justice market. Since the beginning of the year, we have converted over 150 workplace and criminal justice accounts from urine to oral fluid drug testing.

A recent example is a drug treatment network in Philadelphia that is now transitioning its entire testing network to Intercept. All of this demonstrates the growing acceptance of oral fluid testing as a viable alternative to traditional urine drug testing.

We also continue to receive reports from customers that test oral fluid with Intercept that they can reap substantial benefits. For example, one manufacturer has recently reported at least 1.5 million in direct costs and productivity savings since switching to Intercept 3 years ago.

In addition, a major grocery chain has reported that an employee called for random drug testing using Intercept can return to work in about 15 minutes. In the past, this took about 1 hour with urine testing. This faster turnaround is expected to contribute to annual productivity savings worth about $250,000 for this single customer.

Several points are also worth noting with respect to our other products. Our insurance risk assessment testing business continued to be negatively impacted by the loss of both urine and oral fluid assay sales. This is primarily the result of increasing competition from home-brewed assays internally developed by our lab partners.

We continue to pursue opportunities to rebuild this product line, particularly hour or oral fluid assays, through negotiations with our lab partners and additional development and product enhancements. On the brighter side, I think the slide in revenues that we have seen in this market for some time has finally stabilized a bit, and should remain at about the $2 million mark on a quarterly basis going forward.

Additionally, as you know, we launched our UPlink rapid drug detection system with our partner Draeger in the European roadside testing market in April of this year. We're continuing to help Draeger complete field trials throughout Europe and Australia conducted as part of the launch for this product. These trials are fairly extensive, and may involve about 15,000 tests performed with more than 100 UPlink systems in 23 different countries.

Parallel to the field trials, we're completing the transfer to operations and the process of scaling up manufacturing. As with any new product, we have had some scale up challenges with the transfer to manufacturing. And we are working through these issues.

With respect to the U.S. opportunity for UPlink, we still intend to 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 process -- processes.

It remains unclear when we will be in a position to re-file for 510(k) clearance, or if we will need to modify our UPlink system to meet the FDA's requirements. It is also unclear what, if any, changes will need to be made to our UPlink system in order to comply with SAMSHA's new oral fluid testing guidelines once they are issued in final form.

One final area I want to cover is the consolidation of manufacturing from Beaverton, Oregon to Bethlehem, Pennsylvania. The transfer of our OraSure, Intercept, and oral Western Blot products to Bethlehem is complete. And in September, we produced the final shipments of OraSure and Intercept devices made at the Oregon contractor we had used for many years.

Manufacturing in Bethlehem is going very well. Yields are up, costs are coming down, and utilization of our facilities is improving. We're starting to see some of the cost benefits expected from this transfer. And through a process improvement effort, we believe these benefits will only increase in the future.

For example, the yield from production of our Western Blot HIV-1 confirmatory test has historically been marginal. However, since the transfer to Bethlehem, our yield has improved by about 19 percent. We're also very pleased with the production of our Intercept and OraSure oral fluid collection devices. Costs are trending down and the contribution from these products is about where we expected it would be. We anticipate lowering our costs even further as the production volume of these products increases over time.

Finally, as a result of the transfer, we will be closing the facilities we had been leasing in Beaverton, Oregon effective as of the end of the end of January 2005. The closing of this facility will alone result in annual cost savings of about $600,000. With that, I will turn the call over to Ron Spair, who will provide a more detailed review of our third quarter financial results.

Thanks Doug. Starting with the income statement, total revenues for Q3 were 14.2 million or 37 percent higher than the same period 2003. Product revenues were 14.1 million for the quarter, which was a 38 percent increase over the third quarter of 2003. Both revenue amounts are records for the Company, and in fact this is the seventh consecutive quarter of record revenues. It also is the tenth consecutive quarter of increased revenues.

The increase was well balanced across the Company's Freeze Off cryosurgical product, the OraQuick Rapid HIV-1 antibody test, and the Intercept oral fluid drug test product line. Sales of Intercept were up 87 percent in the workplace market and 42 percent in criminal justice. We sold over 2.6 million of OraQuick and over 3.9 million of Freeze Off during the third quarter.

Included in the OraQuick numbers were 610,000 in sales to the CDC; 909,000 in direct sales to the public health marketplace; 350,000 to Abbott; 495,000 into the international marketplace; and 230,000 of direct sales to hospitals.

Partially offsetting these increases were reduced sales to the insurance risk assessment market, due primarily to a lower number of device sales in the quarter coupled with lower assay sales. Sales to this market are down 36 percent when compared the third quarter of '03.

As we look forward to Q4 and the year as a whole, we expect total revenues in the fourth quarter to be in the $14 million range, resulting in full year revenues of approximately 54 million. This level of full year performance would represent an approximate 33 percent increase over 2003 revenues.

Primary drivers for Q4 revenues are expected to be increasing sales into the infectious disease and substance abuse markets, along with a modest increase in the professional Histofreezer sales segment of the cryosurgical systems market, and an increase in insurance risk assessment.

As you may be aware, there is a seasonal demand pattern for the over-the-counter wart treatments which causes sales to be stronger in the warmer months and lower in the colder months. We currently believe that this pattern, together with increasing competition in the over-the-counter cryosurgery market segment, will result in lower sales of our Freeze Off product for the last quarter of 2004 and the first quarter of 2005. Our current expectations are that sales of Freeze Off for Q4 would be in the $2.5 million range, with a comparable amount in Q1 of '05.

With respect to 2005, we're committed to growing our top line at an annual rate of at least 25 percent. And we're developing our plans to deliver that. We also are confident of turning a profit for the year as a whole in 2005. Once our business plans for 2005 are completed and reviewed by our Board, we'll be able to give you a more precise estimate of the level of profitability that we expect. This additional guidance will likely come in the form of a future press release.

Turning to gross margins, the gross margin for Q3 was -- Q3 of 2004 was 60 percent, compared to 61 percent for Q3 of last year. Our gross margin in the quarter was positively affected by the positive resolution of an outstanding royalty obligation and the more efficient utilization of our manufacturing facilities, offset by an unfavorable change in product mix and higher startup production costs associated with our recently launched UPlink drug detection system and higher scrap and spoilage.

Turning to operating expenses, operating expenses for Q3 increased by 41 percent or approximately 2.6 million to 8.9 million compared to last year. This increase is primarily attributable to higher sales and marketing expenses, including our continuing reimbursement of a portion of MedTech's advertising expenses related to the Freeze Off product, costs associated with our hospital sales force, and higher staffing and travel expenses.

We've also incurred significantly higher legal fees related to the Schering-Plough patent litigation, the transition costs for the retirement of our former CEO, the additional costs of hiring our new CEO, higher outside consulting fees and higher professional fees related to compliance with the Sarbanes-Oxley Act of 2002.

These increases were partially offset by lower research and development expenses resulting primarily from the lower cost associated with transfer of manufacturing operations from Oregon to Pennsylvania and lower clinical trial and staffing expenditures.

That brings us to our net loss. Our net loss for Q3 was $294,000 or a penny per share. This compares to a profit of $53,000 or 0 cents per share reported for the same quarter of last year.

Primarily because of the higher legal fees expected from the Schering-Plough litigation and increased consulting expenditures related to the strategic planning exercise under way, we expect a net loss in Q4 of roughly 2 cents a share and a loss for the year as a whole of approximately 3 cents per share.

Trial preparation associated with the Schering-Plough litigation, which is now on a much more compressed schedule than originally expected, will likely add 3 to 400,000 in additional expense for Q4. And strategic planning will and approximately 2 to 300,000 in additional expense for Q4, in each case compared to Q3 of 2004.

Turning to cash-flow -- our balance sheet in cash-flow -- we continue to maintain a strong liquidity position. The Company's cash and short-term investments were 65.5 million. And working capital was 68.2 million at September 30.

Cash-flow from operations was positive at 342,000 for the third quarter and a positive 2.2 million for the 9 months ended September 30. This represents the tenth consecutive quarter of positive cash-flow from ops.

Capital expenditures and license fees in the third quarter amounted to 185,000 and 600,000 respectively.

Depreciation and amortization amounted to 620,000 for the quarter. And our days-sales-outstanding declined to 46 days at December 30.

Before turning the call back to Doug for closing comments, I want to update you on our efforts to comply with the requirements of Section 404 of the Sarbanes-Oxley Act of 2002.

As a public Company, we must thoroughly review and document all of our internal controls surrounding financial reporting, followed by testing, the taking of any necessary remedial action and finally re-testing to determine if there are any material deficiencies or weaknesses in these controls.

Our final assessment will then be evaluated by our outside auditors, KPMG. And a report on their evaluation of our assessment of the effectiveness of our internal controls will appear in our 2004 annual report.

I'm pleased to report that we're making significant progress and are in the testing phase of our efforts. The process, although burdensome from a personnel and financial resource perspective, should result in improved efficiencies at our Company as we fine-tune and improve processes that have been in place for number of years.

We will continue this effort throughout the balance of 2004 and through the year end closing cycle, and look forward to a successful conclusion of these efforts. I will now turn it back over to Doug for some final comments.

Thanks Ron. Once again, I would just like to say I am very pleased with the Company's financial performance for the third quarter and for the year-to-date. I continue to be extremely optimistic about our future. I'm looking forward to delivering full year 2004 revenues and an even stronger 2005. With that, I would like to open the floor for questions.

(Operator Instructions). Bill Quirk, RBC Capital Markets.

With respect to the guidance for the full year, does this include or assume, I should say, an additional CDC order?

The guidance that we have for 2004 includes shipments directly into public health and also the beginning shipment of our contract from the Substance Abuse and Mental Health Services Administration. We're certainly pursuing the CDC order, Bill. And as we had discussed with our investors previously, to the extent that we receive that CDC order, that may displace certain of the revenues that we might otherwise record in direct sales into public health.

So that is certainly a potential, but it's not necessarily significant incremental revenues that would accrue to us in the fourth quarter.

Okay, fair enough. With respect to the momentum that you guys were generating here in the third quarter, if I take a look at the full year guidance at 54 million, that effectively assumes a fairly flat sequential fourth quarter. Is this a case of you guys being pretty conservative here? Or do we really expect that the Freeze Off business, you know -- to show the seasonality that we've been talking about, vis-à-vis stronger in the summer months and weaker in the winter?

I think you hit on it exactly. That's exactly what we are previewing here. We expect the Freeze Off product to drop down from the 3.9 million that we recorded in the third quarter down to the $2.5 million range for the fourth quarter. And we will make up all that with increased revenues in the infectious disease, substance abuse and professional Histofreezer marketplace.

David Lewis, Thomas Weisel Partners.

I was wondering, Doug, if you could just give us a more general sense of maybe the 2 or 3 key areas that the strategic analysis that you have commissioned is focusing in on.

Hey, David. The strategic effort is all about identifying growth options for the Company. And we embarked on this about 4 to 8 weeks ago. And we're exploring a number of different strategies. A number of them are logical extensions from our current businesses. Some you could call major step outs from our existing business. And some are even a combination of both.

We're looking at a lot of different opportunities. The nice thing about our current business profile -- just as we described, we're growing nicely across a number of different segments. So we've got a lot of opportunities in front of us.

This was essential for me as I took over the Company. I want to make sure that we're crystal clear on our future direction and where we're going to invest our scarce resources for future growth.

Okay. But no specific areas that you're willing to share right now?

I don't think right now. I think it's a little early. We expect that we will be through this effort by the end of the year. And shortly thereafter, we'll be prepared to share some of our findings and thoughts with you.

Okay. So either for Doug or for Ron -- Quest is actually reporting that one of the key drivers of their drugs of abuse business rebounded, actually oral fluid testing, which is something that we're not heard from them -- say in the past. Maybe you could just talk about the trends you are seeing in drugs of abuse. And where is this new business coming from? And has your relationship with Quest changed? Or the market is starting to shift in your favor?

We're seeing nice growth in our business with Quest. And we've always said that one of the real benefits for the transition from traditional urine-based testing to oral fluid is the fact that the selection process becomes simpler and less costly. And that benefit translates directly to the commercial laboratories like a Quest, where they don't have to engage their collection center resources. So I think that's what they're talking about. I don't know specifically what was mentioned to you. But that's what we've been saying all long, and it seems to be playing out.

Sara Michelmore, SG Cowen & Co.

Just wondering on the infectious disease number, was it a weaker than expected quarter for OraSure?

I wouldn't say that it was necessarily so. I mean, clearly the third quarter on OraSure was down sequentially, Sarah, from where we were in the second quarter. We had a fairly robust 1.6 million that we put up there for OraSure in the second quarter. We're down in the $1.1 million range for Q3, but still a fine showing, given the increase in sales of OraQuick in the public health marketplace.

Okay. And you guys -- Ron, you broke out the sales of your direct hospital efforts. But that looks like that is ticking up. Can you just give us an update on where you stand with your direct sales efforts and how that's tracking towards your expectations?

Clearly, it is ticking up. And we're very pleased with the fine job that the folks are doing out there in the hospital marketplace. And our expectations -- they are meeting them as far as building a ramp and identifying additional hospital customers and fulfilling a need with the OraQuick product out there.

Sarah, this is Doug. When we also look at hospital sales, obviously we have to look at it in total. And if you look at not only our direct efforts but also the work that we're doing with Abbott Laboratories, you look our total hospital sales, and it is exceeding our plan to date.

And lastly, on the international sales, it seems like you guys have made some solid progress there, even from last quarter, particularly in Africa. Can you just go through your distribution strategy there? And if there's any comments you can make on pricing, relative to the pricing that you would have in the U.S. --?

Relative to pricing, obviously it's certainly not as high in the United States. But we have made substantial progress in terms of penetrating new customers, both in the workplace marketplace as well as through different governments.

And we are actively working another angle on the international front. And that is to work with our own government officials as well as people on a global front to see if we can't access some of the monies that have already been set aside through the Global Fund as well as through the President's Emergency Plan for AIDS Relief. We don't have anything to report on that at this call, but suffice it to say we're working aggressively and beginning to make progress there.

So, we're optimistic on the future of our business internationally. And we're definitely, as I mentioned in my remarks, trying to prioritize both the near-term and medium-term opportunities in the international space and trying to go after that aggressively.

So it sounds like you guys are going direct with people you have targeted that could be bulk purchasers?

We're trying to go after bulk purchasers, but we're also using a distribution network to address those markets where we need more local presence.

Wade King, Wells Fargo.

Hi guys, can you hear me? (multiple speakers) First question, just following up on the international question -- are you dealing more with payers at this juncture? Are you dealing with foreign governments? Are you dealing with local public health authorities?

And I ask that question because a number of who have followed the Company for years are familiar with the days a couple years back when you were dealing with lumpy international efforts. And it was quite fractionated. So I'm delighted with the pickup in the international OraQuick sales expected to go up from here.

But can you tell us, are you dealing once again mostly with foundations that are payers? Are you dealing with the local or country level public health officials? Can you give us more color?

I wish it was as simple as saying only one of the -- (technical difficulty) unfortunately it's all of the above. And that's why this space has been so challenging to penetrate.

But there's a governmental effort required. We have to work with the local agencies who are going to be able to administer the technology. We have to work with payors who have the financial ability to pay for these great products. So it's all of the above, Wade, and it's pretty complex. But like I said, we're making progress I believe.

Is it possible that you get some wind in your sails internationally by the feds who are involved in representing the Bush HIV funding initiatives, buying product from you for distribution to certain Third World countries where there is a vast need, and the U.S. government has decided to pay for that?

That's certainly one opportunity that works for us.

Is that something you are advancing the process in, or just making initial contacts?

We are in discussions, I would say. And we've been working on it for some time.

Okay. Thank you. Thanks for the breakout on OraQuick. Maybe I missed some of the numbers. But I believe you said, as it relates to the cryo product breakout, MedTech was 3.9 million. Is that right, Ron?

That is correct.

And can you give us the domestic and international Histofreezer numbers?

Sure. 1.5 million domestically and 400,000 internationally.

Okay. And also, on the drugs of abuse side, could you breakout the Intercept versus UPlink international?

Sure. Intercept international, approximately 400,000; and UPlink approximately 270,000.

I'm sorry, Intercept international was 400,000 and UPlink international was 270,000?

That's correct.

That's Intercept domestic was --?

Intercept domestic -- we had a combined, between workplace testing and the criminal justice marketplace, approximately 1.5 million.

And are you going to breakout those, too?

360,000 criminal justice and 1,000,070 in the Intercept workplace testing.

Okay. Thank you. Ron, on the OpEx side, I hear you loud and clear that you've got trial expenses, strategic planning expenses. Should we expect something close to the 9 million -- $8.9 to $9 million OpEx level that you posted in the third quarter, in the current quarter -- in the fourth quarter?

Actually, we would anticipate that it would be potentially higher (multiple speakers) due to these expenses (inaudible)

So at least the level you just posted and probably a little bit higher, is that right?

That's correct.

You didn't say it on the call, but I know you have expected to begin shipping OraQuick HIV-1/2 to customers. Are you shipping product now?

We started shipment this week.

Could you talk a little bit about manufacturing capacity? The last time you talked on the call about your manufacturing capacity, it was obviously with OraQuick HIV-1 blood only, I think. And you gave some metrics -- obviously I would expect you to be scaling that up considerably, given what you have accomplished to date and all the potential orders out there. Could you just talk about what you're doing to scale up capacity and what your objectives are there looking ahead?

It's funny you ask that, because we have just been spending a tremendous amount of time around here the last couple of days on exactly that subject. And yes, we currently are in the process of scaling up that capacity to address the demand that we see in the near-term here, Wade.

So as we had indicated previously, we believe that with our current resources we can do in and around 150,000 OraQuick devices per month on a one shift basis, although we have right now in place the ability to transition that over to approximately 300,000 devices per month on a one shift basis with the addition of more people to man the equipment and the processes that we have here.

And clearly we don't want to get ourselves in a position where we are behind the curve, operating out of a backwater position. So we're taking the steps necessary to make sure we're able to meet the demand as it is presented to us.

Now those metrics, Ron -- the 300,000 per month capable -- that's actually the same metrics that you put out previously as it relates to HIV-1 only and before, obviously, you started ramping up your direct sales effort in the public health direct. So I presume you have -- you will scale up demand as -- I'm sorry, you will scale up manufacturing capacity in line with demand. But your expectations are to grow that considerably?

I think it -- currently, we are satisfying what we need at the 150,000 devices per month capacity that we're currently tuned in to. As we see that increasing, we will of course increase the amount of time that the machines are up and running to meet the demand that is forecasted by the sales and marketing folks, and the contracts we're getting in that need to be satisfied. So I don't know whether your ultimate question is -- are we're expanding capacity to beyond 300,000? That's not what we're doing right at the moment.

All right. That is with semi-automated production; is that right?

That's correct.

Okay -- just lastly a question as relates to your distribution relationships for OraQuick. You know, you've got a relationship with Abbott for the OraQuick HIV-1 only product. My understanding has been that Abbott does not have rights to the HIV-1/2 product. Ultimately, I presume you expect the HIV-1/2 product to eclipse the HIV-1 only product. And to some degree, you are freed up as it relates to doing deals for the combined product and for your direct sales efforts, and for that matter your international distribution.

So could you talk a little bit about what you expect the Abbott business to decline considerably, go away? Do you expect to do distribution deals with a combined product in the U.S. and also for the international markets?

Well, everything you said is accurate relative to Abbott's existing rights to the HIV-1 product only. We are discussing possibly expanding those rights to include the OraQuick Advance product at this time; more to come on that later, depending on how those discussions progress.

Clearly, in the international space, HIV 1/2 testing has become the standard of care. And so the product that we will sell outside the United States is the OraQuick HIV-1/2 Advance product.

The reason we're so bullish on the Advance product is because of the increased value that it offers to our customers -- the fact that it can detect HIV-2, which is an important strain of the virus; and number 2, the fact that we have these additional claims, which make it much more attractive for use in different settings outside of hospitals and even within the hospital setting, when in clinics and outreach settings. So we expect that the market will convert to HIV-1/2 pretty rapidly.

Ed Shenkan, Wells Fargo Securities.

Just a follow-up on gross margins if I could, Ron. Margins increased in the current quarter. Where do you expect them to go in fourth quarter and 2005, especially as you're ramping manufacturing and have got products coming online like UPlink?

Right. I would say that for Q4 we're probably back in the neighborhood of what we had experienced for the first half of the year and back several quarters, more in the 58 percent range. For 2005, clearly there -- we're formulating our plans right now. And we certainly have seen operating efficiencies contribute to -- very favorably for gross margin here over the last couple of quarters. And we anticipate that would continue, although I'm not prepared at this point to put a stake in the ground as far as what we think the gross margin will be until we finish that exercise. And because -- clearly, as you point out, it's driven very much by volume and mix. And we have not locked in on that just yet.

Could you walk us through why it went up so much in the current quarter? And maybe that will help us better understand it for future quarters in the future.

Sure. I would be happy to. There's just many, many moving parts, as you well know, with the gross margins here at the Company. And this particular quarter was -- had its fair share.

I think we were negatively affected by mix. We were negatively affected by scrap and spoilage and some of the issues that we had related to scaling up manufacturing as Dough had mentioned on the UPlink product line.

We were favorably affected by the adjustment for a royalty accrual that we had out there, as well as helped by the efficiencies in manufacturing that we had experienced by bringing our products over from Oregon to Bethlehem. And that would be the OraSure, Intercept and Western Blot Products.

And what was the royalty accrual that you referenced?

We make estimates here with respect to what our royalty obligations would be under circumstances. And as it turned out, our -- we had an adjustment that we put through when we came to a realization that it was not going to be as significant as we had thought. And that's what that was all about.

Okay. And my last question is regarding litigation with Schering-Plough. Could you tell us when do you expect would be the best case scenario -- what might be the worst-case scenario of this litigation? And then tell us kind of what you think the likely scenario might be.

At this point in time, we're not really commenting on our expectations for the litigation. We know that we're scheduled for trial in February. We believe we've got a strong position. And we're eager to get this behind us.

One follow-up if I could, and a question further -- are you looking to try to put them out of the market or get a royalty? Or can't you say?

We're really not prepared to comment on that right now.

Aaron Lindberg, William Smith & Company.

Just a couple of quick (technical difficulty) first is -- the number of OraQuick units sold the quarter?

Let's hit (technical difficulty) the second one we liked (ph).

Okay. Broadly, can you give us an idea as to what you think is a reasonable proportional breakout between the HIV-1 and the Advance product in 2005?

This is very preliminary, but we would hope that going out of 2005, greater than 80 percent and perhaps even greater than 90 percent of all revenues are going to be with the Advance product.

And we sold just under 400,000 devices in the quarter.

And last quick question is -- can you just help us understand how you plan to leverage the existing CDC relationship into the strategy that you've discussed previously, both domestically and internationally as it relates to really utilizing those established relationships to drive sales in 2005?

The CDC has been a spectacular partner of ours for quite a while now, as we work together to try to encourage HIV testing and to encourage people to get tested so they understand their HIV status. We've worked with them on a two-pronged approach, where they are going to help facilitate testing at the state and local level through their bulk purchasing efforts. But we're also working at the state level to help them implement the testing and also arrange for appropriate budgeting so they can be self-sufficient.

The CDC -- we've also worked with the CDC on a number of different studies that prove the value of rapid testing. And that, in turn, has helped validate our value proposition, whether it is here in the United States or internationally. So it's been a phenomenal partnership.

And I think we are both helping one another doing what's good for the community and hopefully good for the world at large. So it's really worked out super.

Do you see any additional studies or trials in the near-term, either with the CDC or other partners for the same purposes? Not necessarily expanding indications, but just more marketing trials and demonstrating value in specific situations?

I am unaware, off the top of my head, of plans on a go forward basis. That doesn't mean that were not engaged with anything. But off the top of my head, I can't recall anything right now.

Mark Attalienti, Alliance Capital.

First of all, can Schering ask for a delay in February? Or is that date non-movable?

I cannot comment on that. I suppose they could ask for anything. But it's our understanding that the trial has been set and we're going to go to trial.

David Lewis touched on a couple of topics. I just wanted to drill down on first the strategic consultants that were hired -- how much it this costing?

We have -- our expectations are that it will run several hundred thousand dollars over the course of the last half of 2004, Mark.

In total or per quarter?

Actually both.

Okay. And this would be better use of money than hiring salespeople? Or what's the -- I'm trying to better understand the strategy behind strategic planning.

I think it's absolutely essential for our future as we identify the opportunities for future investment. We make sure that we've clearly defined the market opportunities that we're going to go after. And that aligns with our core capabilities where we identify what capabilities we need to go out and acquire.

Okay. And then lastly, Ron, your answer about if you receive an additional CDC order in the fourth quarter, that wouldn't necessarily add to potential outperformance of the stated guidance -- I didn't understand why that would not be the case.

The point I was trying to make, and I maybe didn't articulate it as well as I should have, Mark, is that the public health marketplace out there will either receive product from the CDC for free or will purchase product from us directly.

And we have seen that in instances where there is free product available that the public health entities will opt for accessing that free product as opposed to expanding funds they might have in their budgets. Now, that's not to say that there aren't some public health entities that would receive this free product on top of what has already potentially been ordered by public health during the fourth quarter.

So to the extent that happens, there would be some upside. But I don't want to position it as the order that we would receive could potentially be in its entirety all upside to what we're selling directly into public health. That's all I was trying (multiple speakers) (inaudible)

David Lewis, Thomas Weisel Partners.

A couple of quick follow-ups -- just on Mark's question here, obviously even the situation where you were going to get some cannibalization in your public health business, a CDC order -- the umbrella of that order obviously makes it a lot easier to sell in the public health market, which obviously wouldn't hurt your growth rate.

No doubt. Absolutely. And I think we were fortunate enough to receive that order in the fourth quarter here, would really feel the effect of that in 2005.

Great. So I just want to make that perfectly clear. In terms of -- Doug, can you give us a sense of timing or discussions on going in terms of in licensing Hepatitis-C?

Discussions are ongoing; another discussion was recently as this week. How soon we might be able to consummate something -- it's not completely in my control. So we continue to pursue that as aggressively as we can.

Okay. Doug, I think in your prior job, you had some experience with the Hepatitis-C product or portfolio. Would you say, just off the cuff, that Hepatitis-C represents a market size as equivalent to HIV or potentially larger than HIV?

While HCV globally -- I believe represents a market opportunity that may eclipse HIV, simply because of its prevalence.

Okay. And one last thing, just on the CE marking, is there a more specific time frame you can give us on when you would expect -- from when you initiate the process how long you expect the CE-marking process to take you?

We're hopeful we could accomplish it within 9 to 12 months.

With that, we'll now turn the call back over to Doug Michaels for closing remarks.

I just want to thank everybody for being on the call again tonight, and we appreciate your confidence. I'm delighted with the performance, as I talked about, and look forward to delivering the full year. Have a great night.

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