OraSure Technologies Inc (OSUR) 2005 Q1 法說會逐字稿

Good day everyone and welcome to the OraSure Technologies 2005 first quarter financial results conference call and simultaneous webcast.

[Operator Instructions].

For opening remarks and introductions, I will now turn this call over to Shannon Morin, 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 PM Eastern time today regarding our 2005 first quarter financial results and certain other matters. The press release is available to you on our web site at www.OraSure.com or by calling 610-882-1820. This call is also available real-time on our web site and will be archived there for seven days.

Alternatively, you can listen to an archive of this call until midnight May 6 2005 by calling 800-642-1687 for domestic, or 706-645-9291 for international. The access code is 5552177. With us today are Doug Michels, President and Chief Executive Officer, and Ron Spair, Chief Financial Officer. Doug and Ron will begin with opening statements and then follow with a question-and-answer session.

Before I turn the call over to Doug, I must remind you that this call may contain certain forward-looking statements including statements with respect to revenues, profitability, another financial performance, product development, performance, shipments and markets, and regulatory filings and approvals. Actual results could be significantly different. Factors that could affect results are discussed more fully and this year's 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 2004, its quarterly reports on form 10-Q, and its other SEC filings.

Although forward-looking statements help to provide complete information about future prospects, listeners should keep in mind that forward-looking statements may not be reliable. The company undertakes no 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 first quarter earnings conference call for 2005. We're very pleased and excited that you're able to join us, and we look forward to updating you on our company's first quarter results and the progress we are making against our plans for 2005.

For this afternoon's call I will first provide a brief review of the quarter, focusing on our strong financial performance, and some of the more noteworthy developments involving our major product lines. I will also discuss the update to our financial guidance for the full year 2005. Ron Spair, our Chief financial Officer, will then provide a more detailed review of our financial results for Q1, and our expectations for the second quarter. I will conclude with a brief overview of the progress we are making on our long-term strategy. We will then open the floor for questions.

OraSure's first quarter of 2005 was excellent. The Company recorded record revenues of $15.8 million, a 28 percent increase over the comparable period in 2004, and as expected, this increase was driven by significant growth across the business. While revenue growth was strong our bottom line was even stronger.

Net income for the quarter was a record $1.6 million, a substantial improvement over the net loss of 162,000 we experienced in Q1 of 2004. Record revenues together with improved gross margins, and cost containment initiatives drove this significant improvement. Finally, we maintained our strong cash and liquidity position. We had more than $66 million in cash and short-term investments and working capital of $71 million as of the end of the first quarter.

Given our strong first quarter performance, we are updating our earnings guidance for 2005. We now expect full year net income in the range of $0.10 to $0.12 per share, compared to our original projection of $0.06 to $0.08 per share. At this time, we will maintain our projection of a 25 percent increase in revenues in 2005, to approximately $67.5 million. Ron will provide more detail on this guidance change later in the call.

Our strong financial performance was the result of continued progress in the execution of our business plan. Let me begin our discussion with the infectious disease business.

Revenue from the infectious disease testing market for the first quarter was up 54 percent versus 2004, mainly driven by OraQuick, and specifically the growth of OraQuick Advance.

We continue to build our base in public health, penetrate hospitals, and expand into new market segments. It is clear that the Ora fluid and HIV-2 claims are important to our customers. It's also clear that the scientific community realizes the value of broader HIV screening, as evidenced by the two articles that were published in the New England Journal of Medicine in February. These articles analyze the costs and benefits of routine HIV screening at populations with different prevalence rates. Both concluded that routine HIV screening is cost-effective and should be expanded. We were not surprised by these findings, and we believe this type of data will continue to drive demand for OraQuick, the most versatile and flexible HIV screening product available today.

Our direct sales of OraQuick in the public health market grew 225 percent over Q1 of 2004. This can be attributed to the continued utilization and expansion of public health testing programs and the launch of our oral fluid test. New York, California, and Florida alone experienced more than a fivefold increase in testing in Q1 2005 as compared to the previous year, and several currently growing state programs, like those in Indiana, Arizona, and Missouri, have expanded significantly.

The latest bulk order from the CDC, which we received last December, for 230,000 units is about 63 percent deployed, and we would expect this to be fully deployed by September, if not sooner. This deployment was originally supposed to extend through year-end 2005 and is progressing much quicker than originally expected because of the high demand for OraQuick.

Last year, you'll recall we received a $4 million bulk purchase order from the Substance Abuse and Mental Health Services Administration, or SAMSHA, for the delivery of OraQuick Advance to substance abuse treatment and prevention sites throughout the United States.

Great progress was made during the first quarter preparing sites for roll out. SAMSHA as recently informed us that they plan to deployed 100,000 tests in May and we expect the deployment of the rest of this bulk purchase order to accelerate for the balance of the year. We are also continuing discussions with the CDC about a new bulk purchase for 2005, and I hope to have something to report on that in the near future.

Our hospital sales are accelerating, and the new agreement with Abbott for OraQuick Advance is off to a great start. OraSure direct hospital accounts have been transitioned over to Abbott and Abbott public health accounts have been transitioned over to OraSure.

The selling model of our hospital direct sales force working collaboratively with Abbott's sales force is also off to a very strong start. Initial training of the Abbott sales reps have been completed and OraQuick Advance has been launched by Abbott to its customers.

Each of our hospital sales reps are now teamed with approximately 10 to 15 Abbott reps, and together we are working territory plans and targeting key accounts for conversion to OraQuick Advance. Significant progress is being made to not only get OraQuick Advance established in hospitals, but to expand use of the test in labor and delivery, emergency rooms, occupational health, and clinics.

Although we are only weeks into our new agreement with Abbott, the feedback from both organizations and from our customers is very positive, with a lot of successes in the field, and I am optimistic that together we will maximize the penetration of OraQuick Advance in the U.S. hospital market.

We are making excellent progress with the penetration of OraQuick in the public health and hospital markets. Virtually all new customers are ordering Advance and we are using Advance to fill the bulk orders placed by the CDC and SAMSHA. There are now 43 states that have adopted the use of OraQuick Advance in whole or in part. Because of our current demand for an HIV-1 2 product with an oral fluid claim, we expect to completely phase out our HIV-1 product in favor of OraQuick Advance by the end of August.

We are beginning to see significant uptake in new segments, such as family planning clinics, and colleges around the country. During the latter part of the quarter we sponsored a fairly unique HIV AIDS awareness campaign for college students, called the 2005 Road to Hope tour. That tour was organized by two groups; Hope's Voice, a national HIV AIDS organization committed to promoting the education and prevention of HIV AIDS too young adults, and the Student Global AIDS Campaign, a national advocacy movement, with more than 75 chapters in high schools, colleges, and universities across the United States.

The tour is in the midst of visiting 22 colleges across the U.S. Each stop will also feature on site or local HIV testing using our OraQuick Advance tests. We are excited to the sponsoring this tour, and we intend to remain active in this, and future HIV AIDS awareness programs.

International sales of OraQuick for the first quarter were $343,000, a 55 percent increase over the first quarter of 2004. We are continuing discussions with leaders of both the President's Emergency Plan for AIDS Relief, or PEPFAR, the Global Fund, and Global Business Coalition members, to access available funding for the purchase of our OraQuick test for use in developing countries.

Because of the importance of these international opportunities for OraQuick, we recently made an important addition to our management team. On April 18th, Mr. Scott Everetts joined OraSure as Vice President International Affairs. We recruited Scott because of his understanding of critical public health issues, and his lifelong commitment to the global fight against the spread of HIV AIDS.

As some of you may know, Scott's most recent job was with the United States Department of Health and Human Services, where he was appointed by President Bush to serve as Special Assistant to the Secretary of Health and Human Services, Tommy Thompson for Global AIDS initiatives. In this roll, Scott served as Secretary Thompson's key policy adviser on international HIV AIDS programs. Prior to that appointment, Scott served as the director of the White House office of National AIDS Policy, and led the AIDS office that was responsible for both domestic and international HIV AIDS policy. We are convinced that Scott's wealth of knowledge and experience will enable him to contribute significantly to the growth of our international business. We will also be counting on Scott for strong support and leadership in our domestic efforts. I am delighted to have him as part of our management team.

Switching to substance abuse testing, our Intercept lab-based oral fluid drug test continued the growth trend from 2004 with another outstanding quarter in Q1. Total Intercept revenues were up 45 percent over 2004, reflecting a 90 percent increase in workplace testing revenues, and a 28 percent increase in criminal justice revenues.

A total of 360,000 oral fluid specimens were processed during Q1, up 68 percent in the workplace testing market, 61 percent in criminal justice, and 19 percent in international compared to Q1 of 2004. The number of specimens processed in a single month for all markets was about a 134,000 in March, which represents a 25 percent increase over January 2005, and a 50 percent increase from March 2004.

Sales of Intercept devices which are predictive of future demand totaled $1.1 million, up 54 percent in Q1 versus 2004, with workplace up 83 percent, criminal justice up 25 percent, and international up 16 percent. Device demand was driven in part by 31 new accounts that were closed in Q1.

As you know, last year SAMSHA published proposed drug testing guidelines, which 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 and we will update you on any developments and the potential impact on our business once the final guidelines are issued.

Our crime surgical systems business also delivered solid first quarter results as revenues increased 25 percent over 2004. In the over-the-counter market, sales of the Freeze Off product were in line with expectations, with $4 million in revenues, up 30 percent from a year ago. Based on the initial orders and forecasts from our distributor Medtech for this product, we believe sales of this product in the second quarter will exceed $3 million.

Our agreement with Medtech is for North America, and we've been working with Medtech to prepare for the launch of Freeze Off in Canada. Some final regulatory hurdles need to be cleared and we expect to launch Freeze Off in Canada later this year.

Sales of our Histofreezer product in United States professional market were flat versus 2004, but we expect them to increase over the year, primarily due to enhanced sales and marketing efforts. Importantly, two of our largest U.S. distributors continue to grow this business, as they reported an increase in sales of about 45 percent versus a year ago, while an independent distributor grew 21 percent.

On the European front, sales were up 32 percent versus a year ago.

Finally, our litigation for patent infringement against Schering-Plough continues. As you know, we're still waiting to receive a decision from the Markman hearing held last November. Once that occurs, we expect a new trial schedule to be issued.

Sales for the insurance risk assessment market have stabilized, as we predicted last year, at about $2 million per quarter. Sales were a bit lower than Q1 of 2004, but an increase over Q4 of 2004, which supports this view.

In the area of manufacturing and operations we're moving forward with the automation of our OraQuick manufacturing process. We have had the necessary equipment on order for some time, and this past month it was delivered and installed here in Bethlehem. Additional modifications are still needed and the equipment will then need to be validated, and data supplied to the FDA before we can use it to make OraQuick Advance. We expect to complete these activities by the first quarter of 2006. Once this equipment is in use, we expect to lower our costs for this product substantially while significantly increasing our manufacturing capacity.

During the first quarter we continued the ramp up of OraQuick manufacturing. To date, OraQuick manufacturing processes have proven very stable. Since receiving FDA approval we have manufactured over 2.6 million devices with a yield of 99.7 percent.

Continued growth in all product lines has driven operations to add capacity throughout 2004, resulting in higher utilization of facilities and equipment. This has continued into 2005 with the hiring of new employees, and the move to add second shift capacity in several manufacturing processes. Automation for the Intercept and OraSure Technologies was implemented during the transfer of these products from Oregon in 2003 and the ramp up in Bethlehem during 2004. These assets are the first to extend to second shift operations.

With that, I'll turn the call over to Ron ... who will provide a more detailed review of our first quarter 2005 financial results.

Thanks Doug. Starting with the income statement.

Total revenues for the first quarter were $15.8 million, or 28 percent higher than the same period in 2004. Product revenues were $15.7 million for the quarter, also a 28 percent increase over the first quarter of 2004. Both revenue amounts are records for the company and in fact this is the ninth consecutive quarter of record revenues, and the twelfth consecutive quarter of increasing revenues.

The revenue increase was well balance across the company's infectious disease testing, substance abuse testing, and cryosurgical product line. We sold $4.0 million of OraQuick and $4.0 million of Freeze Off during the quarter.

Including the OraQuick numbers were $840,000 in sales to the CDC; 1.6 million in direct sales to the public health market place; $682,000 to Abbott; $343,000 into the international marketplace and $531,000 of direct sales into the hospital marketplace.

OraQuick direct sales to the public health marketplace are up 225 percent over the comparable 2004 quarter, as Doug mentioned earlier.

Sales of the OraSure device in the infectious disease market totaled $1.2 million in the quarter. Sales of Intercept were up 90 percent in the workplace market, and 28 percent in criminal justice.

Freeze Off sales were up 30 percent over last year and based on purchase orders received to date we expect revenues to be in excess of $3.0 million for the second quarter.

Insurance risk assessment sales at $2.1 million in the quarter were 7.0 percent lower than the comparable quarter in 2004, but are in line with our project dates run rate of approximately $2.0 million per quarter for this business, on a going forward basis.

As we look forward to 2005, we expect total revenues in the second to be in the $16.5 to $16.75 million range. The primary drivers of Q2 revenue growth are expected to be increase in sales in the infectious disease, and substance abuse markets. We are maintaining our expectations of a full year revenue increase of 25 percent over 2004 levels.

Focusing on the gross margin. The gross margin for Q1 of 2005 was 60 percent compared to 58 percent for Q1 of last year. Gross margin for the quarter was positively affected by more efficient utilization of the company's manufacturing capacity, and a reduction in the production costs for our Freeze Off products, partially offset by less favorable product sales mix and higher scrap and spoilers.

Our operating expenses for Q1 increased by 9.0 percent, or approximately $700,000 to $8.2 million compared to last year. This increase in primarily attributable to higher legal fees resulting from the Schering Plough patent litigation, increased amortization of restricted stock grants to management and increased staffing costs in both sales and marketing and general and administrative.

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

Our bottom line for the first quarter was much better than expected as we reported net income of $1.6 million or $0.03 per share. This compares to a net loss of $162,000 or $0.00 per share reported for the same quarter last year.

Because of increasing revenues we expect profitability to continue in the second quarter. Net income is expected to come in at about $0.02 per share or a bit less than Q1 primarily because of the higher legal fees expected from the Schering Plough litigation increased staffing costs and higher sales and marketing expenses.

As a result of our strong performance to date together with the recent postponement of stock option expenses for 2006, we now project full year profitability of between $0.10 and $0.12 per share.

Turning our attention briefly to our balance sheet and cash flow we continue to maintain a strong liquidity position. Company's short and short term investments were $66.8 million. Working capital was $71.2 million at March 31, 2005.

Cash flow from operations was positive at $521,000 for the first quarter which represents the twelfth consecutive quarter of positive cash flow from operations and an improvement of approximately $400,000 over the first quarter of last year.

Capital expenditures in the first quarter amounted to $152,000. Depreciation and amortization totaled $630,000 for the quarter. Our accounts receivable days sales outstanding increased from 46 days at December 31, 2004 to 50 days at March 31, 2005 as a result of higher sales to MedTek who has 60 day payment terms.

I'd not like to turn it back to Doug.

Thanks Ron. The final area I will address is an update on the progress made during our first quarter against our strategic objectives. As previously indicated, late last year we completed a thorough review of our business and market opportunities.

We define four main areas of focus in an effort to refine our business strategy going forward. So let me expand on those.

The first area of focus is to maximize the potential from our existing product lines and technologies including the expansion of our base business and where possible the menu of oral fluid offerings.

During the first quarter we continued to make great progress on our global expansion initiatives. As you know, only about 11 percent of our current revenues are derived from international sales and ideally we would like to see this percentage increase to 30-40 percent.

Our market research indicates there's a substantial opportunity for an over-the-counter cryosurgical wart removal product in the European Union. After looking at several potential commercial partners, we have narrowed our focus and are in final negotiations over a distribution agreement. We hope to have an announcement very soon.

Our objective is to launch our OPC cryosurgical product in Europe in 2005. We continue to make excellent progress in our efforts to obtain the required regulatory approvals to begin selling OraQuick ADVANCE in the EU. We submitted our technical file for a CE mark on February 15th and certifying authorities have completed an audit of our facility and processes here in Bethlehem.

Our expectation is to have OraQuick ADVANCE CE mark sometime this summer. We will then be free to obtain the necessary country specific registrations and launch OraQuick ADVANCE in Europe in 2005.

We have also begun the process of identifying and selecting a marketing and distribution partner for this opportunity. We also continue to make progress in identifying new distributors for our products in other foreign territory. Negotiations regarding the distribution agreement for Histofreezer in Mexico are progressing and we are supporting the launch of Histofreezer by our new distributor in China.

We are also supporting the commercialization efforts of our OraQuick distributor in Mexico. More recently, we initiated discussions with the Japanese government regarding both OraQuick and Histofreezer and we are continuing to evaluate these opportunities in Japan.

During the first quarter we also worked hard to further expand our reach within the markets that we currently serve. Our internal sales force continued to open up new sales opportunities in the public health market. Examples of new customers include family planning clinics, university clinics and drug treatment centers.

We continue to aggressively seek to convert customers to oil fluid testing. Because of these efforts our Intercept business continued its trend of strong growth largely due to the conversion of customers from traditional urine and blood base testing to oral fluid. In fact, the major U.S. based retailer recently converted to Intercept and is in the process of completing the rollout of its new oral fluid drug testing program. I expect to announce details of this significant new account shortly.

Finally, we continue development work on several new assays for use with our Intercept Oral Fluid Drug Test System. By expanding the menu of 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 second area of strategic focus is to expand our infectious disease point of care testing business by developing or acquiring additional point of care tests. One are where we've made great progress is in the development of a rapid test for hepatitis C. According to the World Health Organization an estimated 170 million persons globally are or three percent of the world's population are chronically infected with HCV and three to four million individuals become newly infected each year. Approximately 10 million people worldwide are co-infected with both HCV and HIV. We therefore believe a rapid HCV test would have a strong appeal to physicians and other healthcare providers throughout the world.

Our discussions with ortho-clinical diagnostics and CYRON to obtain a license to their HCV patent are nearing finalization and we expect to have an agreement soon.

During the first quarter we continued our search for opportunities under Ron Spair's direction through our own internal efforts as well as meetings with various investment banks. We will continue this effort in order to identify potential opportunities that are consistent with our infectious disease strategy.

The third focus of our strategy is to identify and/or develop products that can be sold in the over-the-counter or retail marketplace. As we have communicated in prior calls the most immediate of these opportunities is determine the pathway to selling our OraQuick ADVANCE HIV test over-the-counter.

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. It's easy to use and it's clear way so the test can be administered by people with minimal training. We recently conducted several consumer focus groups to understand their view of OraQuick ADVANCE.

The information obtained from this work is very encouraging and further supports the preliminary study that we conducted in the fall. One point was very clear. An over-the-counter OraQuick test would significantly increase the amount of testing conducted in the United States each year and more testing there's more HIV infected individuals will enter treatment sooner and add years to their lives. Cross-functional teams have been assigned to begin working on this project. One of the most important components of this effort is to begin an open dialogue with all constituencies regarding an over-the-counter HIV test.

In addition, we are actively preparing for meetings with the FDA to ensure regulatory support for an eventual launch. Although much work needs to be done we're making progress and I'll keep you posted as to material developments.

From that piece of strategic focus is to achieve operational improvements. As previously stated, the first quarter saw a lot of progress towards automating the manufacturer of our numerous products. We've also made progress in expanding our global sourcing of components and assemblies that has already yielded opportunities for significant margin improvement in the cryosurgical product line.

One example is that we were successful in getting our contract manufacturer for the Freeze Off product to lower our costs for this product. We are starting to manufacturer or planned European over-the-counter cryosurgical product in the United States and we expect to move all over-the-counter cryosurgery products manufacturing to the United States starting in 2007.

OraQuick, OraSure collection devices and Intercept have very high yields. Cost reductions for these product lines will focus on automation of manual or semi-manual processes presently being used as well as increasing gap sizes.

Finally, a cross-functional team has been formed to examine the feasibility and costs of implementing an enterprise resource software system for the company. We expect a decision on this investment to take place this summer. This would represent a major step in preparing our company for future growth.

So in conclusion, the first quarter was excellent and it establishes a very strong foundation on which to build for the rest of 2005. I'm extremely optimistic and enthusiastic about the growth opportunities across our different product lines in all geographies, and I'm also very confident in our ability to deliver against our stated objectives.

We remain committed to delivering a very successful 2005 for our stockholders and with that let me open the floor to questions.

At this time, I'd like to remind everyone if you'd like to ask a question press star then the number one on your telephone keypad. We'll pause for just a moment to compile the Q&A roster.

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

Good afternoon guys.

Hey David.

Just a quick one and then I'll jump back in queue. First off Ron, this public thing we're seeing with OraQuick ramping and OraSure not degrading, can you give your thoughts why you think that's happening and how long you think that's sustainable?

It's difficult to say. We're very pleased that the OraSure device continues to enjoy the market acceptance that it has no visibility to lend that cannibalization will occur if it does occur.

Would you say Ron that the reason it's happening is largely because they're just finding different applications for a variety of tests to it's possible that we don't even see this degradation or you think that's unlikely?

David this Doug. I think that's one explanation. Certainly we're seeing an explosion of applications for OraQuick ADVANCE out into different public heath settings were they want a rapid test. Certainly in some situations the immediate result isn't required and in some cases they might not have counseling available so it makes more sense to use OraSure.

Okay that's clear. Moving onto drugs of use. Doug you mentioned this large customer. Is this large customer factored into DOA guidance for the year currently?

The DOA guidance - we haven't specifically identified any particular customers David that are or not factored into our estimates and so we're sticking at the moment with the 67.5 million top line.

Okay but to Doug's point he's going to give us more clarity in coming weeks regarding his customer. Hey I'm just confused. You're just not going to say if that's within guidance or not?

Well we have a very aggressive growth objective for the substance abuse business in 2005 and so obviously as we prepare forecasts on a forward-looking basis that includes new business acquisitions. So I think the next few months firm up we'll have a better indication of that specific guidance for the year.

Okay and then one last one and I'll jump back in queue. Doug, you've been here obviously now for quite some time. You have a variety of opportunities you've laid out and kind of refocused the company. Can you give us a sense of how you thought about or if you have it all refocused the sales organization to align itself more specifically with these different opportunities?

We've spent a line of time getting everybody aligned to the strategic direction of the company. I've got to say that Joe Zack has done a fantastic job across all the different sales organizations. The Public Health Organization has been highly focused on driving demand at the local level helping to pull through the orders from the CDC as well as generating primary demand at the state level.

Certainly the shift now with the new Abbott agreement for our hospital reps is very exciting development. We've had these ten or so people out calling directly on hospitals and trying to build demand outside of the laboratory. Now working hand in hand with Abbott you know they're tough. They're able to strategize with Abbott. Use Abbott's presence and leverage with the hospital and in essence we're deploying double the resource now into hospitals generating demand and labor and delivery, emergency rooms and some of the clinic settings. Then very good focus there.

The substance abuse business as it relates to that. We're starting to close larger accounts and I wish I could disclose the name of this large retailer. We don't have that permission yet, but they're almost fully deployed in terms of their conversion of the oral fluid products and these are accounts that we've been working on for some time so our focus is to drive the business - our base business. Clearly I've talked about the expansion internationally and we've got I think a real thoughtful plan on what products we're going to take to what markets. When and that's all driven by product registration and making sure we have the right channels set up. So I think the organization is pretty well aligned to our strategic direction. I think it's starting to show up in the numbers.

Okay actually I lied. I have a couple more, but those are some pretty positive comments about Abbott from the J&J guy, Doug.

I was an Abbott guy for seven years first.

I know. On terms of the size of the customer - I know you don't want to disclose who the customer is can you relate to us on a percentage basis how large this customer is relative to Kroger, lets say?

We're not really going to disclose that yet until we have the customers permission.

Okay and then lastly maybe a question for Ron. Just looking at the cryosurgical business still strong performance year-over-year and sequentially it's still a little below our number by a couple of hundred grams for the quarter. Are you seeing kind of softness in the marketplace? Was this inventory timing wrong? Was it competition? Obviously from Dr. Scholls - or simply you know you're not really seeing any competitive threat to just - it came in where it came in?

I think it came in where it came in David and we're obviously responding to the demand placed on us by our partner Prestige Brands, MedTek with the compound W product and I don't think I'd ready too much into it at the moment.

And now in the April/May timeframe we're still seeing the traditional seasonal ramp into the summer period?

Well, we've indicated on the call that we expect to supply product that we have visibility into right now in the range of $3 million of OTC product sales for the second quarter of '05 here. That will be 7 million or so for the first half of the year.

OK. Thank you very much.

Your next question comes from Ryan Rauch with Jefferies & Co.

Just maybe to extend on David's question, as far as guidance goes, you grew 28% in the quarter. Is it fair to say that if you're successful getting another CDC order securing the cryo distribution deal, getting CE Mark for OraQuick ADVANCE, and securing the distribution deal, those three things are not in the 25% growth guidance. Is that fair?

That's correct.

Okay. And then as far as the second quarter, you indicated your earnings guidance of $0.02. Should we expect gross margins to sequentially increase in the second quarter, Ron?

I would look to the gross margins to remain pretty much in the same ballpark as they are in the first quarter of 2005.

Okay. And then just two other quick things. What did you spend on legal expenses in the quarter?

We were hitting around $0.75 million mark in the second quarter -- or in the first quarter, excuse me, for legal expenses.

And Doug, do you expect a decision this quarter relating to the Markman hearing?

We were expecting a decision on the Markman hearing before the end of 2004. So I'm going to refrain from predicting, but we sure as heck hope for a decision and quite honestly expected one before now.

And then maybe finally, Doug, or maybe two more quick ones. Can you speak to your current relationship with Draeger or the uplink product? What are your thoughts there? Do you have plans to continue that effort and if not, what would the savings be to you on the bottom line?

We are continuing the relationship with Draeger. They continue to promote the product in Europe for roadside drug testing and continue to have good success with the product. The product is performing well. I think we mentioned during our last call that we're also considering the possibility of transferring development and manufacture of the product to Draeger. Those discussions are ongoing and I don't have anything more to report on that right now.

But to that point, what would the cost savings be if you did transfer the development and manufacturing to Draeger, roughly.

I don't think we're prepared to disclose that right now as obviously the transfer and the future relationship could have different machinations to it. And so I'll decline comment on that right now.

Okay. And then finally, Ron, is it correct that when you renegotiated your OEM manufacturing agreement the gross margin on that cryo line is now sort of high 50s versus low 50s or how should we look at that renegotiating pricing -- renegotiation of pricing as it relates to your gross margin on that product line?

Well again, this product, as you may recall, is denominated in euros so we still continue to have a euro effect. So to actually have any kind of pinpoint accuracy with respect to where that margin's going to come in from one quarter to the next is very, very difficult, in fact impossible, to predict. But let's just leave it at that we improved our margins on that product by virtue of lowering the purchase price as denominated in euros and for competitive purposes we don't want to disclose exactly what that pricing is. But it certainly has moved closer to our corporate average.

OK. Thanks a lot. Have a great afternoon.

Your next question comes from Aaron Lindberg, Wm Smith & Co.

A couple of quick questions. First is have you seen any sales of OraQuick in Mexico to date?

Yes, we have.

And is the hospital sales force seeing Trinity in the marketplace and can you give us some color around what's going on there?

We obviously see Trinity in the marketplace but the feedback from the customers is very enthusiastic about the HIV-1/2 capability of OraQuick ADVANCE and then certainly the flexibility of the oral fluid application. So we're doing much better than holding our own, I'll tell you that. And the customers continue to be impressed with the overall quality and performance of OraQuick versus our competitors.

As it relates to kind of the product characteristics, would you say the thing that you were most surprised by was the meaningfulness of that HIV-2 claim?

I think it's the whole package, but when customers understand that they can have in essence similar technology and get the total benefit of the flexibility of oral fluid and HIV-2, once they convert they're not going back. They're not going back to lesser capability for an HIV-1 product.

Any sense of why the HIV-2 claim is having an impact, higher reimbursement, the marketing effect of saying, "Hey, even though it's not super-prevalent, we're testing for both strains"?

I think you answered it; it is reimbursed at a higher rate than an HIV-1 only product. I think somewhere in the neighborhood of from 12 to somewhere around $19 for an HIV-1/2, so that's a nice benefit for the customer. And certainly if you have a product that covers a broader spectrum, why not use it? It's a more effective product.

And then, do you still plan to have approval -- or the CE Mark in 30 to 60 days on OraQuick?

No, I don't think we ever...

You were talking about on the last call 90 to 120 day review time after the submission in February, which is kind of putting you down to that timeframe.

Okay, sorry. That is what the certifying bodies told us at the time. We're still roughly in that ballpark. We went through the inspection here very positively and so we're still expecting to have CE Mark sometime this summer.

Great. Can you give us some broad understanding as it relates to operating expenses as we look throughout 2005, maybe just kind of a net broad brush after you try to think through transferring manufacturing from Beaverton to Pennsylvania, kind of rebuilding the R&D pipeline, litigation, what have you?

I think you've actually stumbled upon the wild card there in the mix, Aaron, and that's the litigation expense and when that would drop off or reduce. So it's difficult to give you a firm estimate as to the impact of that and how that's going to affect our operating expenses on the going forward basis. But we certainly believe that we will see some additional pickup in research and development expenditures as we move through the year, as well as additional expense in the sales and marketing area. But to pin down on the G&A is a little bit difficult. As you know, we had actually forecasted stock option expensing in the tail end of the year; that's off the table until 2006 for the company. And so what we had anticipated would have been a pickup in operating expenses in the tail end of the year has now been deferred until the first part of '06. Hopefully that addresses your...

I guess maybe, then, just to focus specifically on R&D and maybe you can give us a little bit of an update as to what progress has been made there around staffing in that area, R&D business development?

Yes, I think I mentioned during our last call that we were going to go out with a retained search for a Chief Science Officer, which we've done. We had a number of candidates in here for interviews. We've had a few different candidates in here for multiple interviews and I believe we're getting pretty close. So my expectation is that we'll be able to extend an offer within the next couple of few months, and hopefully have somebody onboard within the next three months, I would say.

Are you still looking for a similar type of level position for business development?

Yes, we're still -- have an active search for a Vice President of Business Development, and again have identified some candidates, and working along the same timeline.

Okay. Last question is just to clarify your comments earlier as it relates to SAMSHA. The OraQuick, so far there have been no OraQuick shipments on that order yet?

No, there have been but we've been working with Samsha to ensure that each one of their testing locations are ready to receive product and that they've got all their processes in place. We haven't received substantial orders and so the one that we just received, actually it was last week, indicating that they were planning to deploy 100,000 units in May, in the month of May alone, signals the start of substantial ramp-up in the deployment of that order.

Okay. Oh, I guess one last question. I apologize. Uplink sales in the quarter were?

250,000 approximately.

The next question comes from Spencer Nam, SG Cowen.

Just a couple of quick questions I have. Did I hear in your comment, Doug, that acquisition is a potential option for growing the substance abuse business?

Well, we said that -- I think my comments were related specifically to infectious disease and what we said is we -- and what we've been deployed against is trying to identify technologies, products or perhaps even companies that might be of interest as we try to build out our rapid point-of-care infectious disease business. And I mentioned that Ron's leading that effort. While we're looking at those possibilities, we're certainly not going to run away from attractive opportunities in the substance abuse area because obviously it's a key growth driver for the company and we're very committed to that space. But where our focus is right now is in infectious diseases.

Great, that's really helpful. Just a quick question on the cryosurgical business. In terms of looking ahead of the -- you mentioned that the professional product side is going to grow from what you did in Q1 and I was just wondering if that growth -- if you can quantify that growth somewhat? Any sense of sort of percentage or sort of how the volume will grow over the course of the year?

Yes, we certainly expect it to be up over last year, but I don't think I've got a lot more commentary beyond that. Obviously we market into the professional segment through distributors and so we're counting on those sales to grow the business and we're working real hard right now with those distributors to increase the pressure on the product line.

And then related to cryosurgical, are you planning to launch the product in Europe this summer as well in conjunction with OraQuick or is that going to be -- do you have a timeframe that you have in mind?

We want to launch it as rapidly as possible. Obviously we first need to sign a deal. We hope to do that shortly. And then I would expect sometime this summer we would hopefully be able to begin selling cryosurgery product OTC. The OraQuick CE Marking is another story and that's dependent on A -- getting a CE Mark when we expect it, B -- getting product registrations -- or country-specific registrations for the product, and C -- getting the distribution capability in place, all of which is actively in progress. Its hard for me to predict right now when that's going to happen and what kind of impact we're going to see from that in 2005, although our objective is to launch, if at all possible, in 2005.

Great. And finally, quick question on the legal situation with Schering-Plough. Have you been putting up about $750,000 a quarter for the legal situation? Is that sort of the rough number that's being added up to the bottom line?

Over the last two quarters, yes.

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

Two quick ones here. First of all, Doug, it may be helpful given your existing OTC ADVANCE product is already approved, so to speak, what type of approval assurance process are you looking to come out of your meetings here with the FDA? I'm more interested in the specific regulatory process than I am the stakeholder process.

Honestly, David, that's still a little bit unknown until we go down and meet with them. We've said all along that it was very important that the FDA was 100% supportive of our plans and it's more than just the product approval plans; we want to make sure that they're supportive of our plans to provide counseling and supportive services once we launch this product OTC. So we're going to go down and lay out our plans and intention and we want to have them right there with us. You should know that all of the preliminary discussions we've had with the FDA and the CDC, people are supportive in our efforts and they want to work with us. They've expressed that sincere interest.

Okay. And then secondarily, just looking at Calypte's restructuring, you believe that that restructuring may result in any sort of different business tactics they may employ in the international market and any impact that could have for the impending launch of OraQuick in Europe?

What I've been able to ascertain from the public information I've read about Calypte is that they continue to stay focused on some of the developing world markets and so I don't see any significant near term impact from what they've described.

The next question comes from Ed Shenkan, Wells Fargo Securities.

As far as the CDC goes, could you give us any clarity about the discussions you're in right now? Is it about pricing that you're negotiating or is it where you're going to deploy geographically or where they're going to use it, in the ER, maternity or clinics, and where would you expect any cannibalization of the clinic business with states with the CDC order?

We haven't had any of those kinds of specific discussions about price and those kinds of things. Where the discussion has focused is more around the enormous need that is being expressed by the states and by other healthcare providers for rapid testing. And I mentioned the statistics about the recent order, the bulk order that we're currently fulfilling. We're about two-thirds through that fulfillment after four months here, okay, and they expected that bulk purchase to be deployed throughout 2005. And that rate of deployment is consistent with all of the other bulk purchases that we've received from the CDC over the last couple of years. They give us a bulk purchase, they expect it to run out for six to nine to 12 months and they run through it in half the time that they expected. And so those are the discussions that we're having.

There's an enormous need here and we believe that with the new information that's coming out, the scientific support, the cost effectiveness of broad routine HIV screening in public health settings, that the CDC can continue to play a leadership role in helping get people tested, getting them into treatment and helping to stop the spread of this disease. And we're awfully happy to be part of that.

What are the issues for the CDC as far as coming up with the dough? Clearly it sounds like there is demand, and how long might it take them to get sign-offs for an order like this?

I don't know all the intricacies of their funding process, but they're part of HHS, so they've got to go through their channels, perhaps even up to the Secretary, I don't know, to obtain those kind of funding levels. But we're hopeful that they'll be able to free up a fair amount of more money to support further expansion of the program.

And then shifting gears towards the CE Mark for your HIV product, are you submitting only for the oral fluid? I'm guessing. And then tell me about the timeline for rollout by country, how might that work and where is some of the best pricing for the product currently?

We would obtain a CE Mark for the product with all of its applications, venous, whole blood, finger stick, plasma and oral fluid. And relative to specific countries, we're going to focus on the entire EU. And certainly with the common currency now and the IBDD Directive (ph), pricing has normalized somewhat across the different countries and, as I mentioned, we're working through that assessment right now as well as our different distribution options.

Your next question comes from David Clare (ph), RBC Capital Markets.

Hey, guys, Dave Clare here for Bill Quirk. I guess my first question is we're expecting to hear final guidance on oral fluid drugs of abuse testing from SAMSHA. Could you give us an update on kind of what you're hearing on your end?

We haven't heard a lot new. We were expecting revised guidelines to be published sometime towards the end of last year; that didn't happen. Our best information says they'll come out sometime this year. Once they're issued, it's uncertain whether there's going to be additional comment period or what the timing's going to be for implementation. We don't have a lot of intelligence there.

Okay. And I guess another question would kind of go back to the overall strategy that you've been discussing. Can you give us an update on the cost cutting piece of this? Are there any timelines or targets that we should be thinking of there?

Well, we're trying to move to automation as rapidly as possible and one of the biggest projects we have is automating OraQuick. We're delighted to have the new equipment installed here. Got a lot of work to do before that goes online with validation, verification and then ultimately FDA approval of the system. But our target is to have that online in the first quarter of 2006, so that should provide a nice improvement. Certainly volume is our friend right now and so to the extent that we're able to continue to see the nice kind of volume growth here in the factory, we're benefiting from reduced overhead on a per unit basis and we're trying to leverage that growth by controlling headcount and our resources. We think we're pretty well staffed. We're adding some people on the international front as we look to expand into these different geographies and obviously we have to add some manufacturing folks and the related quality folks to support that growth. But I think our operating expenses -- Ron, correct me if I'm wrong -- were about 9% in the first quarter on 28% sales growth, so you can see we're seeing some nice leverage there.

At this time you have no further questions.

Okay, so we'll sign off. Thanks, everybody, for being on the call and look forward to talking to you next quarter.

This concludes today's OraSure Technology's 2005 first quarter financial results conference call. You may now disconnect.