OraSure Technologies Inc (OSUR) 2005 Q3 法說會逐字稿

Good day everyone and welcome to the OraSure Technologies 2005 third quarter financial results conference call and simultaneous webcast. As a reminder, today’s conference is being recorded.

For opening remarks and introduction, I will now turn this call over to Shannon Morin.

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 p.m. Eastern Time today regarding our 2005 third quarter financial results and certain other matters. This call is available real-time on our web site and will be archived there for 7 days. Alternatively, you can listen to an archive of this call until midnight November 14, 2005, by calling 800-642-1687 for domestics, or 706-645-9291 for international. The access code is 1701906.

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, you should know that today’s conference call will include a discussion of certain non-GAAP financial measures. Additional information regarding the [inaudible] financial measures prepared in accordance with GAAP and reconciliation between the non-GAAP and financial measures is contained in the press release issued today. The press release is available to you on our web site at www.orasure.com or by calling 610-882-1820. If you go to our web site, the press release can be accessed by opening the investor relations page and clicking on the link for news releases. I must also remind you that this call may contain certain forward-looking statements, including statements with respect to revenues, profitability, earnings per share, and other financial performance, product development performance, shipments and markets and regulatory filings and approvals. Actual results could be significantly different. Factors that could affect results are discussed more fully in the SEC filings of OraSure Technologies including its registration statements, its annual report on Form 10-K for the year-ended December 31, 2004; its quarterly reports on Form 10-Q, and its other SEC filings. Although forward-looking statements helps provide complete information about future prospects, listeners should keep in mind that forward-looking statements may not be reliable. The Company undertakes no obligation to update any forward-looking statements to reflect events or circumstances after this call.

With that, I would like to turn the call over to Doug Michels.

Thanks, Shannon, and good afternoon everyone and welcome to our third quarter earnings conference call for 2005. We’re very happy that you’ve joined us and we look forward to updating you on our results from another great quarter. We’ve also made good progress against our strategic objectives for 2005 which I will discuss, including an update from our recent presentation to the FDA’s Blood Product Advisory Committee, or BPAC, regarding a potential OTC rapid HIV test. Specifically 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 line. Ron Spair, our chief financial officer will then provide a more detailed review of our financial results for the third quarter, our expectations for the rest of 2005 and our initial forecast for 2006. I will conclude with a brief overview of some of the progress we are making on our long-term strategies, including the results of the BPAC meeting, and we will then open the floor for questions.

Third quarter results for 2005 were truly excellent. The Company realized record revenues of $18.1 million, a 28% increase over the comparable period in 2004. Significant growth in our infectious disease and substance abuse testing businesses were our main growth drivers in the quarter. We also delivered another highly profitable quarter. Net income for the third quarter was $3.8 million, a substantial improvement over the net loss of $294,000 experienced in the third quarter of 2004. These results add another $0.08 per share to our bottom line, which is outstanding. In fact, with the third quarter behind us, we have already achieved the earnings level that we have projected for the full year. As a result, we will be updating our earnings guidance later in the call.

Finally, we enhanced our already strong cash and liquidity position. We had more than $75 million in cash and short-term investments and about $80 million in working capital at the end of the third quarter. Later in the call Ron will review our financial results in greater detail and discuss our updated earnings per share guidance for the full year 2005. He will also provide an initial look at 2006.

Our strong financial performance was once again the result of continued progress in the execution of our business objectives. Let me provide you with some highlights from each of our product lines starting with the infectious disease business. Revenue from infectious disease testing for the third quarter was up 90% versus 2004, mainly driven by strong growth in sales of OraQuick ADVANCE. Rapid HIV testing continues to gain wider acceptance resulting in increased utilization of OraQuick and public health hospitals and new market segments. There are several examples of events that are helping and should continue to help to promote rapid HIV testing and drive demand and sales of OraQuick. In September, the governor of Illinois announced an expanded social marketing effort intended to reach the African-American community in his state. That program called Brothers and Sisters united against HIV AIDS will provide increased education prevention and testing for HIV in the African-American community. As part of this program, Illinois plans to partner with predominantly African-American colleges and universities to provide increased on-campus rapid HIV testing and to establish student peer networks to encourage testing. Illinois also will be working with African-American churches to promote similar messaging and to encourage further HIV testing. However, perhaps the most important action taken will be the adoption of an emergency rule authorizing the use of rapid HIV tests throughout Illinois. The effect of this rule was to overturn the prevailing HIV testing laws in Illinois which effectively prevented rapid testing by requiring a confirmatory test before results could be delivered to a client. Removal of this barrier will permit the sale and use of rapid HIV test such as OraQuick on a wide scale basis throughout Illinois. Our OraQuick test also continues to receive national recognition. For example, in October, the Tech Museum of Innovation based in San Jose, CA, announced that we had received a foundation health award for our OraQuick test which is given to companies for leveraging technology to improve the safety and efficiency of healthcare in marginalized communities and the rest of the world. In addition, the company has been nominated for a red ribbon leadership award presented by the National HIV AIDS Partnership, a powerful coalition of business and civic organizations dedicated to stopping the HIV AIDS epidemic here in the United States.

As previously announced, we are also looking forward to next week, November 17, when the CDC will present a satellite broadcast and webcast entitled “Revised Recommendations for HIV screening of Adults, Adolescents, and Pregnant Women in Healthcare Settings.” This broadcast is expected to cover the rationale for expanded routine HIV screening and healthcare settings among other things. We expect the CDC to issue its revised recommendations some time in 2006. These events and others confirm the need for a versatile, rapid HIV test such as OraQuick ADVANCE, and we believe will continue to drive increased demand for this product.

Turning to some specifics for the third quarter, we continue to see excellent sales growth of OraQuick ADVANCE to hospitals. Sales to Abbott in the third quarter increased over 450% compared to 2004. This increase reflects the continued strong cooperation between our companies and the hard work of our hospital sales team and their support of the Abbott Diagnostics hospital sales representatives in targeting key accounts for conversion to OraQuick ADVANCE. This 450% increase reflects many successes in the field, particularly in key states such as New York, Texas, Illinois, and Florida. Our OraQuick test is now being used in over 1300 hospitals across the United States, and according to the CDC’s 2005 Rapid Testing Model Performance Evaluation Program, or MPAP, OraQuick is now the most used rapid HIV test in hospitals. In short, our relationship with Abbott is strong and we continue to make progress in penetrating the U.S. hospital market. Our direct sales of OraQuick ADVANCE in the public health market grew 133% over the third quarter of 2004. This increase reflects a further expansion of public health testing programs. We now estimate that more than half of OraQuick customers in the public health market are using the test with oral fluid, and that percentage continues to grow.

The latest bulk order from the CDC received last December for 210,000 units is now fully deployed. Devices were distributed to 27 states and Puerto Rico under this program. With the continued growth and demand for rapid testing in the public health market, we believe a new order is more than warranted. However, in the absence of a new CDC order, we would expect to see any increase in our direct sales to the public health sector.

As you know, in 2004, we also received a $4 million bulk purchase order from the Substance Abuse and Mental Health Services Administration, or SAMHSA, for the delivery of OraQuick ADVANCE to substance abuse treatment and prevention sites throughout the United States. Deployment of this order is now over 70% complete. Under this program, devices have been sent to 28 states, with Maryland, Florida, Indiana, and Michigan accounting for the bulk of shipment in the third quarter. Several training seminars have also been conducted for SAMSHA and we expect training of additional sites to continue over the next few months.

There are now 48 states that have adopted the use of OraQuick ADVANCE in whole or in part. Only North Dakota and West Virginia have yet to roll out Rapid Testing. Because of the high demand for this new product with oral fluid claim, we completed the phase out of our HIV-1 test during the third quarter and the HIV-1 product is no longer being sold.

International sales of OraQuick for the third quarter were $377,000, which is a decrease from the third quarter from 2004. The international market remains in priority and we have continued discussions with leaders of both President’s Emergency Plan for AIDS Relief, or PEPFAR, and the global fund and global business coalition members to the access available funding for the purchase of our OraQuick test for use in developing countries.

We recently completed a very positive meeting with officials in Rwanda, Zambia, Kenya, Ethiopia, and Nigeria and we are now discussing how OraQuick can be specifically used in these countries and others through PEPFAR funding. While these efforts are complex and time consuming, we remain optimistic we will be successful in building a successful presence in these developing countries.

Moving on to our second main growth driver for the quarter, substance abuse and specifically Intercept. Our Intercept lab-based oral fluid drug testing system had another fantastic quarter in the third quarter. Total Intercept revenues were up 54% over 2004, reflecting a 66% increase in workplace testing revenues, a 74% increase in criminal justice and a 29% increase in international.

I am also happy to report that we signed 40 new Intercept customers in the third quarter including 3 new very large accounts. One of these accounts is a large restaurant management company and the second is Seneca Foods, a large food products company. The many benefits of oral fluid based drug testing led them to adopt the Intercept product. Each account is expected to test more than 20,000 specimens per year with a full roll out of Intercept planned for 2006. Also we are very proud to announce that working with Bendiner & Schlesinger Laboratories in New York, we have added the State of New Jersey to our criminal justice client based for testing a host of individuals on probation in drug courts and more. This is expected eventually to result in 150 to 180,000 oral fluid specimens per year. Adding large accounts like these to the growing list of Intercept customers illustrates the successful execution of our strategy. We continue to make great progress converting the market from traditional urine drug testing to oral fluids.

Another important development was the acceptance in 3 cases by a court of the results of oral fluid drug testing using our Intercept device. The legal defensibility of our test is very important to our customers and these cases represent yet additional confirmation of the reliability and accuracy of our Intercept test. Finally, in past calls, we have talked about the oral fluid testing guidelines under consideration by SAMHSA. In September, SAMHSA’s drug testing advisory board met and indicated that revised draft guidelines have been published and are under review by other government agencies; however, the board suggested that the review may be delayed somewhat due to the need for resources to be directed to recent hurricane activity. We will update you as we receive more information on this issue.

Our cryosurgical systems business generated revenues of $6.1 million during the quarter, an increase of 5% over 2004, a very solid quarter and in line with our expectations. In the over-the-counter market, sales of the Freeze Off product accounted for $3 million in revenues in the third quarter. Included in this number are devices purchased by MedTech for the launch in Canada which occurred during the quarter. As Ron will explain in greater detail, we are not expecting any additional significant orders of Freeze Off for U.S. distribution until the first quarter of 2006. During the quarter, we also sold almost $500,000 of our over-the-counter products for distribution in Europe.

Sales of our professional product, Histofreezer, were excellent in the quarter. U.S. professional sales were up 40% over 2004, reflecting our enhanced sales and marketing efforts. In particular, we have been working closely with existing distributors to increase sales and we are in the process of adding to our stable of distributors. On the international front, professional sales were up about 35% compared to a year ago, primarily as a result of increased purchases by our distributor in the U.K.

Finally, our patent infringement litigation against Schering-Plough continues. On November 2, we had a pretrial conference in this matter during which the court heard oral arguments on the motions for summary judgment filed by both parties. Although no decisions were rendered, the hearing went very well from our perspective, and we look forward to receiving the Court’s ruling on the motions. The Court also did not indicate exactly when the trial will be scheduled, but we hope that will occur soon. We remain confident in our position and we look forward to a successful completion of this litigation in the coming months.

Lastly, sales for the insurance risk assessment market for the third quarter were 1.3 million, which is 29% lower than last year and below the $2 million per quarter run rate projected for this line of our business. The primary reason for this, we believe, was a decline in the number of applications for life insurance during the quarter and for the year as a whole. In an effort to boost sales in this market, we have implemented a program to refocus our marketing efforts on increasing the number and types of life insurance policies where oral fluid testing is used by insurance companies. Although we expect our revenues in this market to approximate $2 million for the fourth quarter of this year, we also expect this business line to be flat to down in the near term.

In the area of manufacturing and operations, we continue to make good progress. Installation of automation equipment for OraQuick is proceeding as planned. We expect to complete the installation of this equipment in the next couple of weeks and in the coming months we will validate this equipment and prepare our submission for FDA approval. With the growth in all of our product lines, we are enjoying increased efficiencies. For example, OraQuick costs were reduced 13% over the quarter as a result of the continued higher utilization of our fixed assets. We have now produced over $4 million OraQuick devices since receiving FDA approval. Intercept device production has increased 13% and production of OraSure devices has increased 8.8% compared to the second quarter of this year. With this increase production, we have been able to build safety stocks for OraQuick, OraSure, Intercept, and [QED] ranging from 4 to 6 weeks’ worth of supply.

Before turning things over to Ron, I would note that we had 2 critical additions to our management team during the third quarter. First, in September, Dr. Stephen Lee joined our company as our new executive vice president and chief science officer. Dr. Lee has more than 20 years of experience in the immunodiagnostic industry, primarily with Johnson & Johnson, where he had direct responsibility for or involvement in the development of over 40 major diagnostic assays in areas such as infectious disease, cardiology, oncology, and other conditions. Steve’s strong technical and leadership skills have enabled him to begin contributing immediately to our success. We are fortunate to have someone with Steve’s experience and knowledge leading our scientific efforts.

Also in this quarter we hired Sue Sutton-Jones as senior vice president regulatory affairs and quality assurance. Sue joins OraSure with 25 years of wide ranging regulatory experience with companies such as Serologicals Corporation and Johnson & Johnson. Sue is already making a difference, as she is playing a lead role in our efforts to pursue FDA approval of an over-the-counter claim for our OraQuick ADVANCE test.

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

Thanks, Doug.

Turning to the income statement, total revenues for Q3 were 18.1 million or 28% higher than the same period in 2004. This is the 11th consecutive quarter of record revenues and the 14th consecutive quarter of increasing revenues. As Doug mentioned, the revenue increase came primarily from the Company’s infectious disease and substance abuse testing product lines. In the infectious disease market, sales increased 90%, primarily as a result of the increased strength of our OraQuick ADVANCE rapid HIV-1/2 antibody test. During the third quarter, we sold $5.9 million of OraQuick, which included 2.1 million in direct sales to the public health marketplace, 2 million in sales to Abbott, 867,000 in sales to the substance abuse and mental health services administration, 606,000 in sales to the Centers for Disease Control, and 322,000 into the international marketplace. OraQuick ADVANCE direct sales to the public health marketplace are up 133% over the comparable 2004 quarter. Sales of our OraSure device in the infectious disease market totalled 1.1 million in the quarter, which was in line with our third quarter of 2004.

In the substance abuse testing market, sales were 3.6 million, up 31% over the third quarter of 2004. Total Intercept sales were up 54% over ’04, primarily driven by increases in the workplace testing and criminal justice market. The total number of oral fluid specimens processed in the workplace market are up 64% over third quarter 2004 and the specimen process year to date are up 65% compared to 2004. Sales of our Intercept devices, which are predictive of future demand, totalled 1.7 million, up 55% in Q3 versus 2004, with workplace up 42%, criminal justice up 125%, and international up 73%. Sales of our Intercept oral fluid drug assays are indicative of the number of oral fluid specimens being processed. Assay sales grew by 53% over last year with workplace up 116%, criminal justice up 18% and international up 5%.

Overall sales for the cryosurgical systems market in Q3 were up about 5% compared to last year. While U.S. OTC sales were down 34% from Q3 of last year to 2.6 million, we saw new sources of revenue contribution from the initial distribution of our OTC cryosurgical product into Canada and Europe during the third quarter. Sales of Histofreezer into the U.S. professional market also increased 40% as compared to 2004. Additionally, and as Doug indicated, our revenues in the international professional market were up 35% over 2004.

For the fourth quarter, we expect total cryosurgical system sales to approximate $5.3 million with 3.3 million in international over-the-counter sales. We currently do not expect any domestic OTC sales in the fourth quarter. Insurance risk assessment sales of 1.3 million in the quarter were 21% lower than the comparable quarter of 2004. This decreased reflects and overall reductions in domestic life insurance application activity during 2005. We expect that our full year 2005 revenue in this market will now approximate $7.3 million. As we look forward to the fourth quarter 2005, we expect our total revenues to be in the range of 17 and 3/4 million to $18 million. We are also projecting total revenues for 2006 to increase by 25% over 2005 levels. The primary drivers of 2006 revenue growth are expected to be increasing sales to the infectious disease, cryosurgical systems and substance abuse testing markets.

Turning to gross margin. Our gross margin for the third quarter of 2005 was 64% compared to 60% for the third quarter of last year. This improvement reflects a more efficient utilization of our manufacturing facilities as well as lower inventory scrap expense. Our operating expenses for the third quarter decreased by 6% or approximately 504,000 to 8.4 million compared to last year. This decrease is primarily attributable to a reduction of research and development expenses and a reduction of consulting expenses, partially offset by increased charges for stock-based compensation. Our operating margin for the third quarter was 18%. Our operating expenses are expected to increase in the fourth quarter as research and development and legal expenses ramp up.

Our bottom line for Q3 was our strongest to date, as we reported net income of 3.8 million or $0.08 per share on a basic and fully diluted basis. This compares to a net loss of $294,000 or a negative penny per share reported for the same quarter last year. We expect net income to come in at about $0.05 a share in the fourth quarter. Earnings in the fourth quarter are expected to be negatively impacted by legal expenses associated with the ongoing Schering-Plough litigation, a less favorable sales mix, increased R&D expenses, and lower gross margin. As a result of the earnings growth experience, we are now increasing our full-year, untaxed earnings per share guidance to $0.20 per share on a basic and fully diluted basis. This earnings per share guidance for the full year 2005 excludes any impact that may result in Q4 from the completion of our review of the realizability of our deferred tax asset. In that regard, we plan to complete this analysis in Q4 to determine whether our ability to use net operating loss carry-forwards to offset current and future federal income tax obligations is limited by changes in the ownership of our stock. This analysis is being performed under Section 382 of the Internal Revenue Code. Provided that we can demonstrate actual and forecasted sustained profitability, we expect to release a portion of our deferred tax valuation allowance during the fourth quarter to reflect the realizability of this asset. At this time, however, the precise impact cannot be determined, but any release of this allowance would have a positive effect on earnings and could be material. Looking forward to 2006, we expect to achieve fully taxed, full-year net income in the range of $0.18 to $0.20 per share, without giving effect to the impact of stock option expenses. On a pre-tax basis, this is more than a 60% improvement when compared to 2005 projected untaxed earnings per share. Due to a change in accounting rules that becomes effective in January 2006, the Company will begin expensing stock options which will reduce its net income and earnings per share. The magnitude of the charge for stock option expenses will not be known or disclosed until our fiscal year 2005 earnings call held in February 2006.

Turning to our liquidity situation, our balance sheet and cash flow we continue to maintain a very strong liquidity position. The Company’s cash and short-term investments were 75.3 million and working capital was 80 million at September 30, 2005. Cash flow from operations was positive at 3.6 million for the third quarter, an improvement of approximately 3.3 million over the third quarter of last year, which brings our cash flow from operations to 8.5 million for the 9 months.

Capital expenditures in the third quarter amounted to 873,000 and license payments were 1.5 million. We also received 2.9 million from the exercise of stock options. Depreciation and amortization amounted to $580,000 for the quarter. Our accounts receivable days sales outstanding increased from 46 days at June 30, 2005, to 51 days at September 30, 2005, primarily due to a higher level of sales in the month of September to Medtech, which has 60-day payment terms.

I will now turn it back over to Doug.

Thanks, Ron.

The final area I’d like to address is an update on the progress made during the third quarter against our strategic objectives, focused on the extension of our base business, further growth in the area of infectious disease point-of-care testing, and the development of new over-the-counter opportunities. In our effort to extend our base business, we’ve made significant progress. Earlier this year, as you know, we signed a distribution agreement with SSL International to distribute an over-the-counter cryosurgical wart removal product in the European Union, Australia, and New Zealand. The OTC market in Europe, historically, has been dominated by salicylic acid treatments with faster, most effective treatments like cryosurgery procedures available primarily in clinics and doctors’ offices. Our product, which is being sold by SSL, under the Scholl brand name, was launched in Germany and France during the third quarter and is doing quite nicely. We expect SSL to launch the product in Spain and Italy in early 2006 with the U.K. and other European countries to follow thereafter. Our agreement and relationship with SSL has been progressing very well and we are excited by the launch of this product in Europe.

We continue to make progress in our efforts to obtain a CE mark, the required regulatory approval to sell OraQuick ADVANCE in the EU. We were recently advised that 2 small additional non-clinical studies are needed and we expect to complete these studies and submit the data in the next few weeks. Although we would like to get the CE mark this year, it is more likely to occur early next year. Once the CE mark is obtained, we will then need to obtain necessary country specific registration and we expect to launch OraQuick ADVANCE in Europe thereafter. We have completed our review of the market and narrowed the list of potential marketing and distribution partners for this opportunity. We will continue to evaluate these partners with a view of entering into negotiations later this year or early next.

We also continue to make progress in identifying new distributors for our products in other foreign territory. We are actively pursuing a new distributor for Histofreezer in Mexico and we are close to signing deals with distributors for OraQuick in the Middle East and [inaudible] countries. Discussions are continuing for both OraQuick and Histofreezer in Japan and we have started initial discussions with a potential distributor for OraQuick ADVANCE in China.

Turning to the expansion of our infectious disease point-of-care testing business, we are continuing with the development of a rapid test for hepatitis C. Much work remains to optimize this test, but this project is progressing as expected. As you know, there are an estimated 170 million people in the world who are chronically infected with HCV and 3 to 4 million people are newly infected each year, according to the World’s Health Organization. We also continue to evaluate a number of other opportunities to acquire or otherwise gain access to tests in the infectious disease point-of-care market.

Another area where progress has been made is in our efforts to build an over-the-counter diagnostics business. As we have communicated in prior calls, the most immediate of these opportunities is to determine the pathway to selling the OraQuick ADVANCE HIV test over the counter. Perhaps the most significant development in this area was the discussion of over-the-counter testing at the Blood Product Advisory Committee Meeting on November 3. One purpose of the meeting was to discuss criteria the FDA should consider when evaluating an over-the-counter rapid HIV test. OraSure was given the opportunity to present on a proposed OTC test and describe the types of studies we would conduct in support of an over-the-counter claim. The advisory committee also heard presentations on related issues including the role of HIV test counseling, psychological and social issues relating to HIV testing. In summary, it was a very positive meeting that helps clarify a path towards an FDA submission. We believe the FDA and the advisory committee are eager to work with us to make this a reality. This is one of the outcomes we certainly wanted and hope for from the meeting. During the meeting, the advisory committee answered the questions outlined by the FDA regarding requirements for an application submission, general direction on the types of clinical studies required, and the contents of labeling and packaging were provided. Prior to meeting, the FDA was not able to provide us with these types of recommendations or even if we should submit for approval. So we see the constructive dialogue at the BPAC meeting as a huge step forward. Our next steps will be a meeting with the FDA to gain agreement on the specifics a regulatory submission. We hope to schedule this meeting shortly.

One final piece to update is the area of operational improvement. As previously stated, the third quarter saw significant progress towards automating and increasing production of our numerous products. We have finalized the remaining contracts needed to manufacture our European over-the-counter cryosurgical products here in the United States and the first units of this product were produced and shipped to our distributor SSL. We expect to increase production of this product throughout 2006 to meet demand as this product is launched in other European countries.

Finally, as mentioned on our last earnings call, a cross-functional team has been working to identify and begin implementing an enterprise resource software system for the company. We made good progress during the third quarter in identifying acceptable software vendors and implementation consulting organizations. We expect the team to make a final recommendation on the enterprise system for approval during the fourth quarter. This will be a major project for us in 2006.

So, in conclusion, the third quarter was outstanding and I remain extremely optimistic and enthusiastic about our growth opportunities across our different product lines in all geographies. Our strategy is in place, our team is developing nicely, and we are executing as we promised. We remain committed to delivering a very successful 2005 for our stockholders, and we look forward to an even better 2006.

So, with that, let’s open the call up to questions.

[OPERATOR INSTRUCTIONS]

Wade King, Montgomery & Co.

Congratulations on all the progress. First, a couple of housekeeping questions, balance sheet questions. The ARB in the quarter, Ron, went up as referenced to a large degree because of September shipments to European distributors, is that right?

Actually our shipments to Medtech.

Okay. To Medtech.

The OTC cryo product here in the States and they were concentrated pretty much in the month of September and they have 60-day payment terms. So tend to inflate the AR balances a bit.

Okay and the Q and your comments suggested 3.3 million OTC cryo to EU, and are you assuming a good part of that stocking, how much sell-through is assumed in that kind of figure?

That’s a great question. Just to clarify, the 3.3 million includes both our expected revenues in the European Union as well as in Canada, and this would be the second shipment of products into the Canada and it is the beginning of our shipment into the EU marketplace and France and Germany as we understand it will be the 2 countries that will have products shipped to in the OTC space in 2005 and then additional products will be going into the other European countries in early ’06.

Okay. Very good. And just last on the balance sheet, the other non-current assets were up a million bucks. Is there any visibility you can give us on what’s involved there?

That’s principally related to our insurance renewals that take place in the third quarter and the amounts that we pay and then amortize over the insurance period which runs September to September.

Okay. Great. Onto the real meat of the issue, the comments, Doug, you made about OraQuick steps for [inaudible] in the EU. Given the [inaudible] that the FDA had as it relates to OraQuick, I am actually a little surprised that they’re actually demanding some additional, from your description, non-clinical studies. Are these specific performance related issues? I assume there are no safety concerns that they have. Could you give us anymore insight there?

Yes, Wade, that was small studies to compare to EU product that is already currently CE marked.

Okay. Blood-based products, is that right?

Yes.

Okay. And then secondly, you mentioned you hope to schedule a follow-up meeting with the FDA following the BPAC meeting. So that meeting is not scheduled yet. I presume you’re actively preparing an agenda for that meeting already? Is that right?

That’s absolutely right, and we want to get that meeting scheduled as rapidly as possible as a follow-on to the very productive and constructive discussion that took place at BPAC.

And I assume that your hope would be to have that by the end of the year?

That’s certainly our hope.

Okay. And then last question and I’ll get back in line. The gross margin was phenomenal in the quarter yet it sounded like you were restraining expectations for the fourth quarter as it relates to margin. Can you tell us why? What’s going on? Is there anything specific about the fourth quarter aside from your expected product mix that would restrain your margin?

I think that’s primarily it, Wade. More product mix. Not as much revenue in the U.S. professional Histofreezer market.

Okay. So are you talking about gross margin more in line with the performance in the front half of the year in the 59.5 to 60% realm or are you talking about something in the low 60s? Can you give us a little bit more color there, please?

You know, that’s a little bit more specific than we want to go through it at this point.

Okay. Let’s put it this way, would you expect a – is there any reason that your gross margin would decline from levels that you have achieved so far this year in the front half of the year?

Well, the first half was negatively affected by the significant write-off in the second quarter of our reserve of a million five against the Uplink products. So, no, I don’t think we’re going to be touching those levels, not at all.

Your objective would be to – I presume would be 60% or higher, is that correct?

That’s correct.

Okay. Thank you very much.

[Eugenia Shin], Thomas Weisel Partners

With your strong gross margins and operating margins in the third quarter, the 2006 EPS guidance appears a little conservative to us and that’s just by the increased R&D spending which we agree is necessary given the large market opportunities for the HCV and OTC products. Could you provide any additional details surrounding the spending assessments or development plans for these products?

No. I mean, other than clearly we’ve articulated our desire to fully fund the HCV development as well as the HIV product in the over-the-counter marketplace and other R&D projects that we have not publicly talked about that we are working on as well. That’s clearly an expense that we anticipate. We do anticipate additional expenses in the sales and marketing area in 2006 as we build out a little bit more of our personnel infrastructure.

All right. And then is the recent announcement by the HHS included in the 2006 numbers?

What – what announcement would that be?

The proposal to purchase 1 million OraQuick tests.

I believe that the “proposal” that you’re discussing is reference to bills that passed both the senate and house, is that correct?

Right. I think there was one more approval [inaudible] but is that included in your guidance for ’06?

Well, we clearly believe that the marketplace in public health, whether it’d be served by devices sold to the CDC, SAMHSA, HHS, or directly to public health, is a significant one, and so if there is money available from a government funding entity, then that will certainly assist us in selling product into the market. If it’s not available, we’re confident that we will continue to sell products directly into public health with our sales force.

Okay. Great. Thanks.

Aaron Lindberg, William Smith & Co

Do you guys feel that the SAMHSA order was a one-time event?

Actually, no. When the SAMHSA order was originally placed and awarded it was communicated as the first of a 3-year program. We expect that to continue.

Do you expect the subsequent 2 years to be similar to the first, or does it make sense [inaudible] –

I think that remains to be determined.

And how’s progress going with distributors for ADVANCE in China, Mexico, Japan, and some other countries that you’ve talked about previously?

Well, very well. We’ve launched or begun to ship product in Mexico. We got our registration during the third quarter so we’re going to start seeing registration there – or I mean revenues there, excuse me. China, as I mentioned, we’re in discussions with potential distributor and we continue active discussions in other parts of the world.

Okay. Anything in particular on Japan or the distributor you added in the Caribbean. Anything else internationally that we [inaudible]?

A lot of activity in Japan. I think I was there a couple times perhaps during the quarter. I know for sure one. And that’s going to be one of the longer-term development areas because it’s going to require separate approval. We believe probably the best approach is to have a Japanese partner to assist us with the registration efforts. We’ve identified a number of potential partners that are highly interested, and we’re just in the process of continuing to engage them in discussions so we can move forward. But, you know, that’s not going to be a near-term event, but we believe can be an attractive opportunity for us.

Okay and then how many ships are you currently running for OraQuick ADVANCE and Intercept?

We’re running a little over – up to one and a half [inaudible] one and third maybe.

On both?

Yes.

And then what do you guys believe the domestic opportunity is for rapid HIV test over-the-counter?

You know, we haven’t gone public with our preliminary assessment of that – probably too premature.

Could you explain a little bit of your approach and the research that you conducted there?

Well, we’ve done purchase intent studies with consumers and it’s been pretty broad-based research. It’s been primary research. And we’ve been working on it for the last 9 to 12 months, so we think we’ve got a pretty good handle on what potential intent might be, but it’s going to depend on what the ultimate product looks like and what pricing levels turn out to be and a lot of those things have yet to be determined based on our discussions with the FDA and other interested parties.

Do you guys want to provide any thoughts as it relates to pricing as far as what might be likely? Maybe something like your pricing to Abbott and [inaudible] but not Abbott necessarily the distributor there but some distributor they’ve got to have some markup, a retail is obviously going to have some markup.

You know, Aaron, it’s just too premature to talk about that. We don’t know what the requirements are going to be for the product. We don’t know what services are going to have to be provided along with the product. We know we’re going to have set up the ability for people to get connected to care – what that network looks like, what it’s going to cost to deploy and maintain that, what packaging is going to cost and look like. All those things are to be determined and we’re going to be working aggressively to get our arms around that with the FDA in the next – in the weeks and months to come – but until we’ve got a better handle on that, we’re not going to go out and speculate on either price or what the market opportunity is.

Last question for you. Just the status of the HCV research and what do you see as sort of a likely [inaudible] timeline on that?

Yes, it’s coming along real consistent with our expectations. We’ve developed prototype devices. We’re generating data that is encouraging but obviously there’s a lot of optimization that has to go into a development project like that. It’s still in the neighborhood of a 2 to 3 year project and we’ve been at it for about 4 months now or so and – so we still have the bulk of the work yet to be accomplished.

And are you working on optimization for both blood-based and oral assays?

We are.

Okay. Thank you.

Ed [inaudible].

Congratulations on a great quarter, Doug and Ron.

Thanks, Ed. Welcome back.

As far as the CDC order, you mentioned now completed, so you’re expecting the public health departments to order more in the upcoming quarter because the CDC is not going to give it to them. I wanted to understand better how that will affect your ASPs for the quarter? In other words, what kind of pricing does the CDC get? What kind of pricing on average do your public health customers get? How’s that going to affect the upcoming quarter?

Well CDC pricing [inaudible] purchasing off the GSA schedule, which has been $11 per test. You know, average pricing into the public health market is in the $12 to $15 range, depending on volume and what kind of commitments are obtained there. So that’s what we would expect to see. That’s the beauty of our strategy and how we deploy the products so that we haven’t been dependent on the government bulk purchase program, the state and local health departments have been purchasing all along, so if we don’t get it on the bulk side our intention is to make sure we maintain these important programs through direct purchase at the state level. So if we don’t get it on the bulk side our intention is to make sure that we maintain these important programs through direct purchase at the state level.

You know, I’ve done some primary research of my own with the public health department and they seem to realize that the value that your product has, certainly compared to competitor products. Is there any – are you contemplating a price increase in the upcoming years. It would appear that you could actually get it.

We haven’t disclosed any plans there, and that’s something that I don’t think we would disclose.

Okay. And in the upcoming quarter, can you tell us about expectations for litigation expense related to the Schering-Plough litigation and then could you look forward into the first half of ’06?

Sure. In the third quarter, we spend approximately 650,000 on litigation expense on the Schering-Plough matter and we expect that to increase in Q4. Of course, the ultimate timing of the trial, which Doug talked about earlier, is yet to be determined and that’s going to affect the significance of the expenditure and if it slips into Q1 then, of course, we’ll take some of that expense into Q106 with us.

Okay. And the $1 million unit proposal that you mentioned earlier for OraQuick that has gone through the House and the Senate, could you tell us about what the next steps are there and what’s the expected timeline that the government sets?

Yes. Our expectation is that the House and Senate versions of the spending bill will be reconciled by a House/Senate Conference Committee and then that will be sent back to each chamber for a final vote and then a reconcile bill would be put before the President for signature. Timing on that I’m not going to speculate – [inaudible] process.

Does this bill kind of stand-alone, or is it part of something – you know, a bigger bill? How does it stand as far as approval? Is it just this one item that the President would sign off on or how is it right now?

It’s part of the Department of Labor, Health, and Human Services and Education Related Agency Appropriations Act of 2006.

Okay. Thanks for clarifying that. The last one would be on the gross margin, you’ve talked about it a little bit and you’re expecting some automation. Could you explain how that will affect gross margin going forward and then also the move of manufacturing for the wart removal product? Some of it’s in the United States. Just explain how much is going to actually going to come to the U.S. and how that would impact the gross margin?

Sure. Okay. With respect to automation for the OraQuick product line, we expect to actually have that up and running next year, Ed, as we need to complete the final installation of the bits here, the final pieces and then we would need to have the product or the machinery actually validated by the FDA. So we’re probably talking about midyear of ’06 or so before we’ll be able to actually see product coming off of that automated manufacturing equipment and reducing our cost of goods sold for manufactured products of OraQuick. With respect to your second question, you are correct that the OTC product that we are selling to Europe is manufactured here in the U.S. and we expect that to be at a higher gross margin than our OTC product offering here in the States.

Is there a change that’s upcoming there with that product?

I don’t quite understand what you mean.

You’ve already made your changes to manufacturing there –

That’s correct. The changes that were made were the re-negotiation of the [inaudible] relationship on the OTC product per the U.S. earlier in ’05 and [inaudible] and his group have implemented the manufacturing operations for our European cryo products in the latter part of the year here for supply.

All right. Well keep up the good work, guys. Thanks. Great quarter.

Ryan Rauch, Jefferies & Co.

Just a couple quick questions. By your fourth quarter revenue guidance, and maybe I’m doing the math wrong, is it fair to assume that your guiding to flat to down in infectious disease sales or am I doing the math wrong from the 17.5 to 18 million guidance?

I think where we’re seeing a little bit of a downturn would be in the overall cryo business, Ryan, as we don’t expect any OTC cryo sales in the U.S. market and they accounted for approximately $2.5 million worth of revenues for us in the third quarter. So you can see that even in the guidance of 17 3/4 to 18, if we had been fortunate enough to have some additional revenues coming from the prestige brand in the fourth quarter, we’d probably be up in the mid to high 19.

Oh, no. I understand that but unless I’m missing something – I thought you said [inaudible] was 1.9, cryosurgical five three, assuming substance abuse is up sequentially, it leaves you with 7 million for infectious disease which is flat. So I understand the cryosurgical. I’m just trying to understand – I mean, the infectious disease line or if I’m doing something wrong?

I think you’re in the ballpark.

Okay. And then will you give more granularity in ’06 as far as the gross margin assumption in the $0.18 to $0.20 cents, what litigation expenses are imbedded in that EPS guidance and the tax rate we should use? Anything like that would you give a little bit more detail?

Well, I think what we’ll need to do is actually defer a little bit more of that until February, as we think it would probably be more productive to address it within the context of our revised guidance that would incorporate our stock option expense charges and stock comp charges that would affect all of the various components of our income statement including gross margin as it affects cost of goods sold operating margin as the expenses are into our various departmental categories. So I’d like to defer that until February.

Okay. Perfect. Have a good evening.

The allotted time for the call is up. We apologize for those who are still holding to ask a question. I will now turn the call over to Doug Michels for closing remarks.

Obviously, we had a great third quarter. We’re looking forward to closing out the year in fine fashion and a strong 2006. I just want to thank all of you for being with us this afternoon on the call and look forward to talking with you soon. Take care. Bye bye.

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