OraSure Technologies Inc (OSUR) 2004 Q4 法說會逐字稿

Good day, everyone, and welcome to OraSure Technologies 2004 fourth quarter and full year results conference call and simultaneous webcast. As a reminder, today's conference is being recorded. [Operator Instructions]. For opening remarks and instructions, I would now turn the 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 at approximately 4:00 p.m. Eastern time today regarding our 2004 fourth quarter and full year 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 realtime on our website and will be archived there after seven days. Alternatively, you can listen to an archive of this call until midnight February 13, 2005, by calling 800-642-1687 for domestic, or 706-645-9291 for international. The access code is 3409876.

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 that this call may contain certain forward-looking statements, including statements with respect to revenues, profitability and other financial performance, product development, performance, shipments and markets, and regulatory filings and approvals.

Actual results could be significantly different. Factors that could effect results are discussed more fully in the Securities and Exchanges 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 reports on Form 10-Q, and 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.

Thank you, Shannon. Good afternoon, everyone, and welcome to our 2004 fourth quarter and full year earnings conference call. We're very pleased and excited that you're able to join us and we look forward to updating you on our company's 2004 results and our plans for 2005. For this afternoon's call, I will first provide a brief review of 2004, focusing on our strong financial performance for the year and some of the many noteworthy accomplishments involving our major product lines. Ron Spair, our Chief Financial Officer, will then provide a more detailed review of our financial results for the fourth quarter and full year. I will conclude with a brief overview of the results of the strategy work that we completed at the end of 2004 and describe some of the exciting plans we have in store for 2005 and beyond. We will then open the floor for questions.

Let me start. 2004 was a terrific year for OraSure. The Company recorded record revenues of a little more than $54 million, a 34 percent increase over 2003, driven by significant growth across most product lines. Contributing to this strong growth were four consecutive quarters of record revenues and positive cash flow in each of those four quarters. On the bottom line, we recorded a net loss for the year of $560,000, which reflects an improvement over the $1.1 million loss we experienced in 2003. As you know, we expected to be profitable in 2004 and built an operating plan to deliver that objective.

Several unexpected events, including my hiring and transition, along with our continued litigation with Schering-Plough were significant events that impacted our ability to achieve profitability in 2004. When we last spoke, we said we expected a net loss of about $0.03 per share. As a result of the great work by the team here, I'm delighted that we were able to significantly reduce our loss and nearly achieve our goal of profitability for the year. The continued strong revenue growth we expect in 2005, coupled with our commitment to improve margins and reduce costs, should enable us to achieve profitability in 2005.

Finally, our cash and liquidity position continues to be strong. We had more than $66 million in cash and $8 million in available credit facilities at the end of 2004. With the strong foundation laid in 2004, we recently updated our guidance to project a 25 percent increase in revenues in 2005 to approximately 67.5 million. Also, as mentioned, we expect 2005 to be profitable, with net income ranging from $0.06 to $0.08 per share.

In addition to our strong financial performance, 2004 was a year of significant change, along with the many -- with the achievement of many highly relevant business mile stones. Perhaps the most visible change occurred at the top of the organization when I became this company's new CEO in June. With slightly more than six months now under my belt, I want you to know that I continue to be very impressed with our Company's leadership team, our directors and managers, and with the focus and dedication of each of our employees. The management team has certainly pulled together to make the leadership transition a smooth one and has delivered against our expectations for 2004. We are poised for a very successful 2005.

One of the priorities I announced after assuming my role of CEO was to refine the Company's strategic business plan. We hired Mackenzie and Company, a well-known management and strategy consulting firm, and worked with them to complete an intensive review by the end of 2004. Our management team is very pleased with this review and believes it helps clarify the strategies we will need to follow in order to exceed our stated revenue growth objectives of at least 25 percent each year, and to maximize value for stockholders. I will provide additional detail on the strategy we intend to follow a bit later in the call.

Turning now to specific accomplishments in our various business lines, the most significant area of achievement was with OraQuick. Early in the year, our new OraQuick Rapid HIV-1 and HIV-2 tests was approved for use one fingerstick and venipuncture whole blood samples, and shortly thereafter this new test received approval for use in both oral fluid and plasma samples. And then a couple of months later, we received a CLEA waiver for the OraQuick HIV-1/2 test for all specimen types except plasma. Thus, within a few months, we had the only rapid test approved for detecting both HIV-1 and HIV-2 on a broad array of sample types, including oral fluids, and which is also CLEA waived.

During the middle of the year, we sign add sublicense for several HIV-2 patents, held by BioRed laboratories, thereby opening up the commercial opportunities for our new OraQuick HIV-1/2 test. We then named our new HIV-1/2 test OraQuick ADVANCE and launched this product in October at the US Conference on AIDS in Philadelphia, Pennsylvania. Since that time, demand for OraQuick ADVANCE has been outstanding in both hospitals and the public health market, demonstrating the value of an HIV-2 indication and oral fluid claim. In fact, about 70 percent of our monthly OraQuick sales now consists of OraQuick ADVANCE. Virtually all new customers are ordering ADVANCE, and we are using ADVANCE to fill the bulk orders from the CDC and the substance abuse/mental health services agency.

In addition, 37 states have already adopted the use of OraQuick ADVANCE in whole or in part, and we expect to eventually phase out our HIV-1 product as demand for ADVANCE continues to grow. This could occur by as early as mid year. We also established a hospital sales force in early 2004 and they did an excellent job penetrating the hospital market. This high quality sales team continues to work with our hospital customers to deploy OraQuick in hospitals where applications in labor and delivery, occupational health, and in the emergency rooms are having a big impact on improving healthcare delivery.

In public health, we completed fulfillment of all CDC bulk purchase orders previously received. We also received an additional bulk order from the CDC in December and have already allocated nearly one third of that purchased in just the first two months. We continue discussions with the CDC about possible new bulk orders for 2005. In the middle of 2004, we received a $4 million bulk purchase order from the substance abuse and mental health services administration, or SAMHSA. We've been working closely with SAMHSA on the rollout of product to substance abuse treatment and prevention sites throughout the United States and expect this to be completed in 2005.

On the international front, we continue to see growth in the developing world. International sales of OraQuick for the year were 1.2 million, a 73 percent increase over 2003. We are in regular and ongoing discussions with leaders of both the president's emergency plan for AIDS relief, or PEPFAR, and the global business coalition to access available funding for the purchase of our OraQuick test for deployment in countries where rapid HIV testing is most needed.

As a general matter, rapid HIV testing continued to gain wider acceptance throughout 2004, and our OraQuick tests were at the forefront of much of this acceptance. In addition, this product continued to receive broad, national media coverage and received a number of prestigious awards, including the 2003 Photonics Circle of Excellence award, a 2004 Best of What's New by Popular Science magazine, one of Time magazine's 2005 Amazing Inventions award, and the Best New Approved Product award at the 17th annual Biotech meeting hosted by Beryl and Company.

During 2004, our Intercept lab-based oral fluid drug test produced outstanding results as well. Total Intercept revenues were up 53 percent over 2003, reflecting a 70 percent increase in workplace testing revenues, a 58 percent increase in criminal justice revenues, and a 35 percent increase in international revenues. The number of oral fluid specimens processed during 2004 is up 60 percent in the workplace testing market, 66 percent in criminal justice, and 27 percent in international. In fact, we achieved a record number of specimens processed with more than 110,000 specimens processed in three out of the last four months of the year for a total of over 1.1 million specimens processed for the full year.

Intercept device shipments and indication of future growth were up 68 percent in 2004 versus 2003. Device demand is driven by large account implementations and increased testing demand. Specimen volumes follow closely behind. Device shipments in Q4 of 2004 were 46 percent higher than the fourth quarter in 2003, giving every indication that 2005 is off to an even faster start than last year. During 2004 we converted hundreds of workplace and criminal justice accounts from urine to oral fluid drug testing. This is continuing evidence of the growing acceptance of oral fluid drug testing. We continue to work on a number of very large potential customers and hope to have good news to share with you as the year progresses.

During 2004, SAMHSA published it's long awaited drug testing guidelines, which for the first time would allow oral fluid drug testing for federal workers. We submitted detailed comments to the proposed guidelines in July as did many of our lab partners and customers. We believe final guidelines will be issued this year with an additional 12-month period before they are implemented. The regulated workplace covered by these guidelines will add an estimated 11 million drug tests to the market potential for Intercept.

We also had an extremely successful year in our cryosurgical systems business. In the over-the-counter market, sales of the Freeze Off products substantially exceeded all expectations with over $13.3 million in revenues. Initial orders and forecasts from our distributor, MedTech for this product for 2005 have also been strong and indicate that sales of this product in the United States should continue at least this same level. Our refocused sales and marketing efforts for our Histofreezer product in the U.S. professional market also produced strong results, with revenues up 21 percent versus 2003. During 2004, two of our largest distributors of this product here in the United States increased their sales by close to 50 percent compared to 2003.

Finally, our litigation for patent infringement against Schering-Plough continues. We have largely completed discovery in the case and we remain confident in our position. The schedule originally had the trial occurring in February; however, procedural delays typical in litigation of this type have caused this schedule to slip a bit. We now expect the trial to occur in March or April. We will continue to keep you updated as any material developments occur.

The insurance risk assessment business continues to be an important part of our company and I am pleased to say that the business appears to have stabilized as we predicted in the second half of 2004. We believe 2005 will be an improvement over 2004. In April 2004, we launched our UPlink rapid drug detection system with our partner Drager in the European roadside testing market. We have worked with Drager to complete field trials in Europe and the product is performing well. Drager continues to be optimistic about its prospects in the roadside testing market. For example, Drager recently won a tender to supply product in Bulgaria, and we plan to ship 50 UPlink analyzers and approximately 10,000 test cassettes to Drager in Q1 of this year.

As part of our strategic analysis, the roadside market for drugs of abuse testing was examined. Based on the outcome of our strategic analysis, we believe the opportunity for this market is perhaps not a as attractive as a number of other opportunities. In light of this analysis, we have reevaluated the UPlink opportunity with Drager, which is primarily focused on roadside testing. Although no final decisions have been made, we have had initial discussions with respect to Drager possibly taking over the further development and manufacture of the product line. At this point, the exact terms have not been determined and could very well include OraSure continuing to manufacture some key components of UPlink for Drager. Such a change would likely result in a royalty stream to OraSure. OraSure would retain rights to the workplace and possibly other markets. I will update you as these discussions progress.

One final area I want to cover is the area of manufacturing and operations where we also had a very good year. During 2004 we completed the transfer of our OraSure, Intercept, and Western Blot products from Oregon to Bethlehem. This has resulted in improved yields, lower costs, and better utilization of our facilities. For example, [inaudible] shields for oral Western Blots increased approximately 20 percent. We manufactured over 2 million OraQuick devices since launch with a 99.7 percent yield. Costs for our Intercept collection devices during the 2004 ramp-up were reduced 36 percent.

2004 was also the last full year that we will be leasing our facility in Beaverton, Oregon as the lease for that facility expired as of the end of January. The closing of this facility alone will result in annual cost savings of about $600,000. We have greatly increased the utilization of our manufacturing facilities with the transfer and ramp-up of products from Oregon, and the increased volume associated with our growth. That said, we are still operating most areas in a one-shift environment allowing continued growth within our present facilities.

We certainly accomplished quite a bit in 2004, and we will continue to focus on delivering against our objectives in 2005. With that, let me turn the call over to Ron Spair, who will provide a more detailed review of our 2004 financial results.

Okay. Thanks, Don. I'll start with the fourth quarter income statement. Total revenues for Q4 were 14.2 million, or 20 percent higher than the same period in 2003. Product revenues were 14.1 million for the quarter, which was also a 20 percent increase over the fourth quarter of 2003. Both revenue amounts are records for the Company and, in fact, this is the eighth consecutive quarter of record revenues. It's also the eleventh consecutive quarter of increasing revenues. The revenue increase is well balanced across the Company's Freeze Off cryosurgical product, the OraQuick Rapid HIV antibody test and the Intercept oral fluid drug test product line.

Sales of Intercept were up 40 percent in the workplace market and 50 percent in criminal justice. We sold over 3.1 million of OraQuick and over 3 million of Freeze Off during the fourth quarter. Included in the OraQuick numbers were 70,000 in sales to the CDC, 2 million in direct sales to the public health marketplace, 475,000 of sales to Abbott, 235,000 into the international marketplace, and 350,000 of direct sales to the hospital market. OraQuick direct sales are up 330 percent over the comparable 2003 quarter and are more than double our Q3 direct revenues. Sales of our OraSure device in the infectious disease market totalled 1.4 million in the quarter. The insurance risk assessment sales of 1.8 million in the quarter compared favorably to the comparable quarter in 2003, and are slightly lower than what we foresee as a base run rate of approximately 2 million per quarter for this business on a going-forward basis.

As we look forward to 2005, we expect total revenues in the first quarter to be in the range of 15 to 15.25 million. The primary drivers of Q1 revenue growth are expected to be increasing sales into the cryosurgical systems and substance abuse testing market, along with increases in the infectious disease market and an increasing insurance risk assessment area. We are maintaining our expectations of a full year revenue increase of 25 percent over 2004 levels. We had previously projected that our first quarter 2005 revenues in the OTC cryosurgical market would be in the range of 2.5 million. We now expect revenues in the first quarter to be in the $4 million range.

Turning our focus to gross margins for a moment. The gross margin for the quarter -- fourth quarter 2004 was 60 percent, compared to 61 percent for the fourth quarter of last year. Gross margin for the quarter was positively effected by the more efficient utilization of our manufacturing facilities, offset by an unfavorable change in product mix and higher production costs associated with our UPlink drug detection system. The Company's gross margin was 59 percent for the full year; that's down from the 60 percent gross margin recorded in 2003. Gross margin for the full year was positively effected, again, by more efficient utilization of the Company's manufacturing capacity, offset by higher production costs associated with the Company's UPlink oral fluid drug detection system, a less favorable product sales mix, and higher scrap.

Operating expenses for Q4 increased by 32 percent, or approximately 2.2 million to $9 million, compared to last year. This increase is primarily attributable to significantly higher legal fees resulting from 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 sales and marketing expenses, including our continuing reimbursement of a portion of MedTech's advertising expenses related to the Freeze Off product. Also costs associated with our hospital sales force and higher staffing and travel expenses. We have also incurred higher professional fees related to compliance with the Sarbanes-Oxley Act of 2002.

These increases were partially offset by lower R&D expenses resulting primarily from lower staffing expenditures and lower costs associated with the transfer of manufacturing operations from Oregon to Pennsylvania. Operating expenses for the full year were up 29 percent, or approximately 7.5 million compared to last year. The reasons for the increase are consistent with the explanations offered for the increase in the quarter, and we are making every effort to reign in operating expense growth as we move into 2005 and see the litigation expense as the one variable that is difficult to predict.

Our net loss for Q4 was $245,000, or a penny per share. This compares to a profit of 435,000, or a penny per share reported for the same quarter last year. For the full year 2004, we report a net loss of $560,000, or a penny per share, compared to a net loss of 1.1 million, or 3 cents per share in 2003. Primarily because of the higher legal fees expected from the Schering-Plough litigation, we expect to break even for the first quarter of 2005. Due to a delay in the actual trial date as we discussed earlier, trial preparation costs associated with the Schering-Plough litigation will likely continue into Q2 of '05.

Turning our attention briefly to our balance sheet and cash flow, we continue to maintain a strong liquidity position. The Company's cash and short-term investments were 66.7 million and working capital was 68.9 million at December 31, 2004. Cash flow from operations was positive at 1.3 million for Q4 and a positive 3.5 million for the year ended December 31, 2004. This represents the eleventh consecutive quarter of positive cash flow from ops; an improvement of approximately $900,000 over last year.

Capital expenditures in the fourth quarter amounted to $136,000. Capital expenditures and license fees for the full year amounted to 921,000 and 600,000, respectively. Depreciation and amortization amounted to 662,000 for the quarter and 2.5 million for the full year. Our accounts receivable day sales outstanding remained at 46 days at year end.

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 retesting 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 am pleased to report that we have made significant progress in this regard, and as of today we are not aware of any material weaknesses in our internal controls at OraSure. That being said, the process will not be completed until mid March when we file our annual report on Form 10-K and after KPMG completes their evaluation of our controls. All of our Sarbanes-Oxley compliance work will be completed at the time of our 10-K filing so that KPMG will be in a position to render an integrated opinion on both our financial statements our internal controls. I'd like to now turn it back over to Doug.

Thanks, Ron. The final area I will address is an update on our long-term growth strategy. As indicated, this strategy was developed as a result of a detailed review of our business and market opportunities by our leadership team with support from [Mackenzie]. We believe the strategy, which has three main areas of focus, will enable us to participate in larger and higher growth markets, while leveraging our company's inherent strengths.

The first area of focus is to maximize the potential from our existing product lines and technologies, including expansion of our base business, and where possible, the menu of oral fluid offerings. This part of the strategy will likely touch every one of our product lines and includes a number of initiatives, some of which are already underway. A major growth opportunity for all of our product lines is to expand globally. Currently, only about 14 percent of our revenues are derived from international sales, and ideally, we would like to see this percentage increase to 30 to 40 percent over the near-term horizon.

In order to give you an idea of where we are headed, I will describe several initiatives that are already underway. We've complete add review of the market for an over-the-counter cryosurgical wart removal product in the EU and believe that a number of countries present a good opportunity for us. With this market knowledge, we have been in discussions with a number of potential commercial partners since October, and have narrowed the list to a short few. We are engaged in negotiations and would expect to launch -- to announce a commercial partner for the EU very soon. Our objective is to launch in Europe in 2005.

We are making excellent progress in our efforts to obtain the required regulatory approvals to sell OraQuick ADVANCE in the EU. We received great news after meeting with three certifying bodies, and believe we should be able to obtain a CE mark within 90 to 120 days after we complete and submit our technical file on the product. This technical submission is expected to be complete by the end of February. Our objective is to have OraQuick ADVANCE CE marked by the end of summer, obtain necessary country-specific registrations, and launch OraQuick in Europe in 2005.

We've also made progress identifying new distributors for our products in other foreign territories. We recently signed an agreement with a new distributor for OraQuick in Mexico and expect to begin selling product as soon as all regulatory hurdles have been cleared. We're also close to finalizing distribution agreements for Histofreezer in China, Mexico, and perhaps more broadly, in South America. Japan represents a huge market opportunity and we will be working diligently to create our strategy for accessing this important market.

The other way we intend to grow our base business is to further expand our reach within the markets that we currently serve. This will occur in several ways. Our internal sales force, which already has a strong presence in public health, will continue to open up new sales opportunities in that market. For example, we recently signed a supply agreement with the California Family Health Council Family Planning Cooperative purchasing program, which purchases products for more than 2500 family planning clinics. This is an entirely new customer and illustrates how we are expanding our public health customer base.

We will continue to aggressively seek to convert customers to oral fluid testing. The continued growth of our Intercept business is a clear and continuing indication that we are making substantial inroads into converting customers from traditional urine and blood-based testing to oral fluid. Our oral fluid claim for OraQuick ADVANCE is providing similar conversion opportunities for HIV testing. We are also planning to develop several new assays for use without Intercept oral fluid drug test system. By expanding the menu assays, we expect to expand our markets and sell to customers that previously would not have used Intercept without the additional oral fluid assays.

The secondary of strategic focus is to expand our infections disease point-of-care testing business by developing or acquiring additional point-of-care tests. We've completed an exhaustive assessment of both established and what we would call speculative infectious disease opportunities and have prioritized a number of new products which we believe may offer substantial opportunities in the point-of-care testing market. One example that we've mentioned generally in prior calls is hepatitis C. We believe a rapid HCV test would have a strong appeal to physicians and other healthcare providers throughout the world. We have for some time been in discussions with ortho clinical diagnostics and Chiron to obtain a license to their HCV patent.

Our next step is to finalize a license agreement, which has been drafted and is currently under review. We would expect to finalize this shortly. We intend to pursue our infectious disease point-of-care strategy, not only through internal development, but also through the potential acquisition of new technologies and products that may already be developed or commercialized. Our strategic assessment has identified potential products and technologies and Ron Spair will lead an effort to further evaluate these options and scan the market further to identify specific opportunities we wish to pursue.

The third area of strategic focus is to identify and/or develop products that can be sold in the over-the-counter or retail marketplace. As we've communicated in prior calls, the most immediate of these opportunities is to determine the pathway to selling our OraQuick ADVANCE HIV test over the counter. HIV testing started in the lab, and in recent years rapid testing has become the accepted standard at the point-of-care. Today, more people are learning their HIV status and receiving prompt treatment as a result of rapid testing.

In the February 10th issue of the New England Journal of Medicine there are three articles that speak to the need for routine screening of HIV infection, specifically as a means to identify positive patients earlier so that they can receive more timely antiretroviral therapy. Our OraQuick rapid test is the ideal means for screening in physician's offices, hospitals and public health settings around the world. Many have suggested that the next logical step would be to make a rapid test available over the counter, and thereby further expand the availability of testing so that even more people can get tested and treated.

An OTC application of OraQuick seems to be a possibility, primarily because our test is already the most versatile, is well accepted for its accuracy, is the easiest to use test, and is clear waved so the test can be administered by people with minimal training. However, we recognize that taking a product like OraQuick over the counter is not a simple task, and I do not want to give the impression that this opportunity is likely to materialize quickly. Much work needs to be done, but we have made this a part of our strategy and it is something against which we are mobilizing.

Lastly, although not a formal part of the strategic analysis, we've add add fourth element to our long-term strategy under the heading of operational improvements. This is something that will be a continuous process here at OraSure and will include items such as expanding the use of automation to prepare for growth in OraQuick, OraSure Collection Device and Intercept product lines. Expanding global sourcing of components and assemblies that has already yielded opportunities for significant margin improvement in the cryosurgical product line.

Infrastructure investments, such as in IT made in 2004, which are already delivering value, as we provide information and data to our sales and organization for greater efficiency. Expanding the use of statistical process control through all key manufacturing processes and scaling batch sizes to reduce costs as volumes increase. Maybe most importantly is moving the organization toward a culture of continuous process improvement to insure world-class performance. In conclusion, 2004 was certainly a great year and we have laid a very strong foundation for 2005 and beyond.

I am extremely optimistic and I am passionate about the growth opportunities across our product lines across in all geographies, as well as our ability to improve efficiencies, reduce our costs, and increase our margin. Much time and effort has been spent over the last weeks and months aligning the leadership and all of our employees with the strategic growth opportunities we have in front of us, and we are very committed to delivering an extremely successful 2005 for our stockholders. And with that, I would like to open the floor for questions.

[Operator Instructions]. Your first question comes from David Lewis with Thomas Weisel Partners.

Good afternoon, guys.

Good afternoon, David.

It sounds like someone's been busy over there in Bethlehem. Let me just start here with a couple of questions on the quarter and a couple questions on strategic strategy here. Ron, just looking at this dynamic between OraSure and obviously the ADVANCE product, we're already starting to see some sequential degradation in OraSure. Should we expect that to continue as we head into 2005, given the OraQuick product is getting such significant traction? And is there a baseline level you're thinking about this bottoming out at?

That's a great question, David, and clearly with the approval of OraQuick ADVANCE, we do believe now that the OraSure product in the infectious disease area is more at risk for cannibalization. And we continue to monitor that, although I think it's a little bit early here to predict what that level will drop down to but, I think it is a risk there in the OraSure business; right.

And similarly, Ron, we should be assuming that there is going to be more consistent and growing business from state public health departments as opposed to the CDC, given your strength there in converting these states and getting more direct orders?

I think the good news there is that the direct business has done extraordinarily well in the fourth quarter and for the year as a whole. And now, coupled with CDC, I think we should continue to see very nice increasing revenues from the OraQuick ADVANCE product line, both through the CDC revenue as well as direct sales into our state and local public health entities.

If I could add, David, we continue to work with the CDC on the possibility of additional bulk orders. As mentioned in my comments, we're running through, now, pretty rapidly, the last order that they placed with us in December, and the market need is out there. Different states want more bulk testing by the CDC.

Okay. Last question before I jump onto the long-term guidance. Ron, you saw pretty dramatic OTC ramp [inaudible] in the first quarter that, I guess, is not seasonally what we would have predicted. Is there another country involved there or is that simply greater demand earlier than you would have thought in the first quarter?

I think it's the latter case; that's the latter point of the case where we're seeing a little bit greater demand than we had anticipated when we last gave guidance on Q1 revenue. So that's what it is. It does not reflect another country's supply in that $4 million guidance number.

Okay. And then we talked about a lot of strategic initiatives here, some of which are actually relatively near term. The existing guidance you've given around 25 percent, does that include anything from OTC cryosurgical in Europe or any increased business in the international market tied to the CE approval?

No, it does not.

Okay. So none of that's in the number. Great. And then I'll jump back in the queue here. Just one question, Doug. Looking at these acquisitions or things you thought of in terms of broadening the pipeline, have you developed a certain criteria for these acquisitions or have any idea about what markets initially that you'll focus on?

Like I mentioned, we looked at, evaluate a lot of different disease states, and we divided those into, like I said, established and speculative types of diseases. We then evaluated the market opportunity for each one of those. We evaluated the technical risks, competitive environments, and we have prioritized both in the established and speculative disease areas. Obviously, for competitive reasons, I prefer not to get into that in detail. But as we move forward on many of these initiatives and have more information to share, we'll certainly make it public.

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

Your next question comes from Wade King with Wells Fargo.

Hi, Doug and Ron. Can you hear me?

Yes. Hi, Wade.

Hi, Wade.

Thanks for the detail. Your public health direct business increased from around $900,000 to $2 million, sequentially. So given that great accomplishment, could you tell us a little bit of realtime feedback as to what's going on and where you expect it to go?

I can tell you what's going on, as the different states have taken on rapid testing, as they have rolled rapid testing out to their different community-based organizations and the response from the community has been so positive, there has just been a sequential ramp-up by states year-on-year of going from, let's say, 5 states year-on-year of going from let's say 5 CEOs doing testing and providing counseling to 10 or 15, and it's happening from state to state.

So that's the market dynamic. And I think what's most important here is that the rapid testing is bringing more people into the network of knowing their status. We're rolling testing out closer to the high risk individuals, so we're seeing positivity rates go up versus traditional laboratory-based testing. Very, very promising results and I think this is why we're seeing a lot more in the press about more interest in rolling out HIV testing and making it more accessible.

Well, you previously-- just to follow up, specifically, you previously have talked about a change in the paradigm as relates to, obviously, the CDC making these bulk purchases, supplying certain state public health facilities, training them. And then, obviously, the hopeful end result was that the public health facilities themselves would take it upon themselves to order directly. So where are you in the paradigm shift in this transition?

That's hard. That's a difficult question to answer. I-- we're certainly not at the end point, so think it's clear that the CDC -- that CDC bulk purchases will continue to encourage more states to either begin testing or expand their testing. And I think that's a very important role that the CDC has played. I am convinced, personally, that without the CDC bulk purchase program, their commitment to this and their support of the state effort, that testing wouldn't be rolled out as far as it is. States are purchasing directly from us as well, as you know. So they not only rely on the CDC bulk purchase program, but also buy direct from us to supplement that.

Okay. Second question, please. You alluded to discussions with potential partners for the OraQuick ADVANCE, the combination oral fluid product, that would address the hospital market. And can you comment on that as relates to any discussions ongoing that might supplement or ultimately eclipse your direct sales effort in the hospital arena for the ADVANCE combination project -- product?

-- making any comment to what you just referenced, Wade. Obviously, we continue to access the hospital market both directly and through our relationship with Abbott. We continue to see great results with both Abbott and with our direct efforts. Certainly, our focused effort is enabling a little better coverage, I believe, in terms of the ER occupational health and labor and delivery. And obviously, we've seen some nice growth in that area.

And one detailed question. You released a bunch of figures as relates to sales of the OraQuick product, but I didn't hear you actually give the actual number of units, which you did give in the third quarter call. Could you repeat or provide us with the actual number of OraQuick ADVANCE units sold in the quarter?

Let me just do that math a little quickly here. I would say, directionally, we're, oh, in and around the 400,000 unit mark, Wade.

400,000 unit mark. That's of ADVANCE only, so the Abbott --

No --

-- the Abbott part of that is top of that, which was HIV-1 only; is that right?

No, no, that's all the unit sales across the HIV-1 and HIV-1/2 product.

That's all OraQuick sales, approximately 400,000 units.

Right.

Okay. Very good. Thank you very much, gentlemen.

You're welcome.

Your next question comes from Sarah Michelmoore with SG Cowen.

Thanks for taking my question. Just a couple of questions. I guess just going back to this public health market issue, it seems to me that maybe the market is bigger than we had estimated originally, and I'm just wondering as you're rolling this product out, are you actually seeing the market opportunity growing beyond what you had initially thought it was?

This is Doug. Obviously, coming in mid year, it's hard for me to give a perspective on growing more than what we thought it was. We continue to see it expand, as I mentioned earlier. New entities, like the substance abuse and mental health services agency, organizations that didn't do this type of testing before certainly highlights expansion opportunities here.

Well, all right. You know, Doug, just to follow on on this strategy stuff, you listed a lot of things that you guys are working on. I'm just wondering from a near-term perspective, say the next 12 to 18 months, really, where are you going to focus your resources and the resources of the senior executive team? That wasn't clear to me based on your comments.

Well, they're going to be focused, really, in the three or four areas I talked about. Number one is we've got tremendous opportunity to expand our existing business. As I mentioned, all the different international opportunities, we still have a lot of head room in our existing markets with whether it's OraQuick or Histofreezer or the Intercept product line. Infectious disease, we said that is a clear focus for us, obviously driven off the success we've already had with infectious disease, but there's lots of opportunity to expand there. And that's more of a little, perhaps, medium to longer term, because to the extent we're going to develop new applications, either on the OraQuick platform, that's going to be a little bit of time and development effort. But on the potential licensing or acquisition front, as I mentioned, Ron's going lead that effort to see if there's other technologies or perhaps even products that might make sense in the infectious disease area.

And then last, I mentioned this consumer diagnostic opportunity. We see that as a) a real need, b) a potential significant opportunity for us. It's complex. There's a lot of work that has to be done before we're going to be prepared to launch a product over the counter. But at the same time, we've looked at our capabilities. We looked at our product. We looked at the market need and we believe that we're, in our estimation, best positioned to capitalize on that if there is anybody. And so we've got teams, right now, mobilized against evaluating that opportunity and seeing if we can make that our reality.

Okay. And a follow-up on the HCV opportunity, because I think that is a natural extension of the business.

Absolutely.

What kind of time frame or product development time would it take you, assuming that you're able to get a license to actually have a commercial product, what should we think about in terms of development timelines and clinical trial needs for that product?

You know, because there's pretty substantial clinical trials, that becomes a little bit of a wild card there, with the scope of the clinical trial and the approval process. But generally speaking, my experience on these types of products is 24 to 30 months.

Okay. That's helpful. Thanks so much.

No problem. Thanks for the questions.

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

Good afternoon.

Hi, Bill.

Hey, Bill.

Doug, thanks so much for the details on the strategic plans going forward. I had a quick question on the OTC OraQuick product. Clearly early days here, but can you talk about any discussions you may have had with FDA? Have they given you any type of indication, either positively or negatively, about taking this direction?

No, we haven't had any discussions as of yet.

So everything remains internal, effectively?

That's right.

Okay. Got it. And then, just turning to the insurance risk assessment business. I think you guys made the comment that we should look for a run rate in and around about 2 million a quarter. That would represent nice uptick from what we've been running at here for the past three quarters. Maybe you can give us a little better granularity on why we should expect the rebound here?

Well, for the year, Bill, I think we came in around about 7.8 million. And taking our 2 million per quarter guidance gets us up to about 8 million. And I think it's just a better visibility into the device procurement from our lab partners and more of a stable environment that we foresee for that piece of the business in 2005.

So we're not necessarily looking at new customer wins, but rather kind of stable business at the existing customer base, is that -- ?

I wouldn't want to say that. We actually are anticipating some new customer wins. But as you know, we sell these devices to our lab partners, who then in turn sell them out to the customers, but we clearly are working hard with our -- with the insurance companies to get them to convert over and use oral fluid.

Okay. Got it. And then just a follow-up on the insurance business. In the past you've talked about adding HSCRP, or for that matter, maybe even HCV to the list. Any update there, and again, timelines if you have them?

I think the HCV piece timeline would be consistent with the timeline I just talked to Sara about. It's not clear that the insurance risk assessment market would adopt HCV testing at this point in time. That's to be determined. HSCRP, we don't have any plans right now.

Okay. Thanks, guys. Your next question comes from Aaron Lindberg with William Smith.

Thank you. Couple questions. Can you give us some additional ideas as it relates to new assays on the Intercept platform, whether those would be additional drug assays or multiplexing unrelated -- or related but not drug tests under there, or if you're just talking about using the platform for unrelated tests?

Oh, no. There would be additional drug assays, Aaron.

Okay. And then have you made progress in your hiring in R&D and business development segments?

We've made progress in that we've had a number of prequalified candidates presented. We have both candidates in the process right now, in business development and in the CSO area, but we're not prepared to announce anything in that regard. Okay. Can you comment on sales to LabOne and what we've seen here in the last quarter and going into 2005? Are you referring to --

Substance abuse.

Oh, the substance abuse area. I don't have granularity at that level here, Aaron --

Even directional is fine.

-- or direct sales. But directionally upward.

And then the last question would be, how quickly do you expect to ship the currently allocated portion of the CDC order?

Whoa. That's a challenging one. If the first couple months here are any indication, we should run through it pretty quickly. I would say certainly before the end of the third quarter and maybe even sooner. That's really why I think the states are putting pressure on us as well as the CDC to consider additional bulk purchases.

Okay. And one more question is, where were you on UPlink sales in the quarter?

The UPlink revenues in the fourth quarter were approximately 20,000.

Okay. Great. Thank you.

You're welcome.

You're next question comes from Mark Attalienti with Alliance Capital.

Hi, Mark.

Good afternoon.

Hey, Mark.

I just wanted to get clarification on a couple things, in terms of the guidance. What was included in your guidance of 67 million for '05? Was that just the base business growing at current rates or does that include additional wins from public health and/or some of the other initiatives that Doug said that were exciting and potentially on the come?

Certainly, the initiatives that Doug referred to, such as launching the OraQuick product in Europe with CE marking, or taking the cryosurgery product over-the-counter in Europe are not included in our base revenue guidance of 25 percent, Mark.

At the same time, Mark, the SAMHSA deal, which we closed in 2004, is within the '05 guidance.

So I'm just trying to get a sense for if you get additional deals, is that above and beyond what the company expected to get, or how do we figure out what's upside and what's in the numbers?

Well, we'll have to provide that guidance as the year goes on. Obviously, in order to grow to sixty-seven five, it's a substantial increase over last year. And each one of the different marketing sales groups have forecasted new account closures. We've got those pretty well laid out by business, and so we'll provide that guidance as we realize significant wins.

And furthermore, Mark, this 67+ million does not include any M&A activity or product acquisitions. So this is just the core business as it's currently configured.

On M&A, should we expect something imminent or is the pipeline full or how much do you want to elaborate on that?

We just recently completed the plan, and our efforts are just beginning in that area.

Okay. Thank you very much.

Thanks, Mark.

You have a follow-up question from David Lewis with Thomas Weisel Partners.

Hey. Just two quick follow-ups, guys. One, Ron, as it relates to Drager, you mentioned kind of a strategic role to your relationship. Should we forecast Drager revenue being flat year-over-year, as you would likely favor profitability versus revenue? Or is possible that continues to grow until this deal gets struck?

I would say that the revenues, as we indicated earlier in the call, are going to be up in the first quarter as a result of the shipment of the Bulgarian order of readers and cassettes. And then depending upon when we conclude our negotiations and the form in which those negotiations ultimately end up with the contractual relationship, we'll have more to say at that point about what the revenue expectations should be based on sales of that product, David.

But for this time, we should essentially pop them up for Bulgaria and hold at those levels?

I -- We've only really talked about the first quarter and that's about what I'm comfortable speaking about here at this point. And we'll have more to say next time we have a call or have more visibility into the relationship going forward.

Sure. Doug, just one question on the OTC OraFluid product. Obviously, you have not talked to the FDA yet, but to be vague here, our discussions with large, government-driven public health organizations have indicated they are fairly interested in this project and are willing to try to take a lead role in some of the regulatory issues. Would that be consistent with what you think such agencies have said or not?

One part of this effort is going to do a broad, if you will, stakeholder assessment, and make sure that we're doing the right thing for public health. So I don't have a position on that right now. As I mentioned, we've got teams kicked off and mobilizing against this. I'm sure we're going to need the support of all the stakeholders, whether it's public health providers, and that's what we aim to do, is to make sure this is done right and done effectively.

Okay. Thank you very much.

You bet. Thanks a lot. I think that's it. So thanks for joining us tonight and have a great evening. This concludes today's conference call. You may now disconnect.