OraSure Technologies Inc (OSUR) 2006 Q1 法說會逐字稿

Good day everyone and welcome to OraSure Technologies' 2006 first quarter financial results conference call and simultaneous webcast. As a reminder, today's conference is being recorded.

[OPERATOR INSTRUCTIONS]

For opening remarks and introductions I will now turn this call over to Kathy Owens at OraSure Technologies, please go ahead.

Good afternoon everyone and thank you for joining us today.

I would like to begin by telling you that OraSure Technologies issued a press release at approximately 4:00 p.m. Eastern time today regarding our 2006 first quarter financial results and certain other matters.

The press release is available to you on our website at www.orasure.com or by calling (610) 882-1820. This call is also available realtime on our website and will be archived there for 7 days.

Alternatively, you can listen to an archive of this call until midnight, May 5, 2006 by calling (800) 642-1687 for domestic or (706) 645-9291 for international. The access code is 8345640.

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-GAP financial measures. Additional information regarding the most comparable financial measures prepared in accordance with GAAP and a reconciliation between the non-GAP and GAAP financial measures is contained in the press release issued today.

The press release is available to you on our website at www.orasure.com or by calling (610) 882-1820. If you go to our website, 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 10K for the year ended December 31, 2005, its quarterly reports on Form 10Q, 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'd like to turn the call over to Doug Michels.

Thanks, Kathy.

Good afternoon everyone and welcome to our first quarter earnings conference call for 2006. We're very happy that you've joined us. For this afternoon's call I will first provide a brief review of our financial performance for the quarter and some of the more noteworthy developments involving our major product lines.

Ron Spair, our Chief Financial Officer will then provide a more detailed review of our financial results for the first quarter and our expectations for both the second quarter and full year 2006. I will conclude with a brief overview of the progress were making against our strategic initiatives and then I'll open the floor up for questions.

First quarter revenues came in slightly lower than our expectations at $15.2 million. This compares to revenues of $15.8 million in the first quarter of 2005. Increased revenues from the infectious disease and substance abuse testing markets were offset by lower revenues in Cryosurgery and insurance risk assessment testing.

The increase in infectious disease revenues was accomplished without the benefit of a new significant bulk procurement (inaudible) from the federal government. Ron will provide more detail on the potential impact of the bulk orders when he updates our second quarter and full year 2006 guidance later in the call.

Consistent with our expectations, net income for the first quarter was $900,000, which represents $0.02 per share on a fully diluted basis. This compares to net income of $1.6 million or $0.03 per share during the first quarter of 2005.

As Ron will further explain, this is not an apples-to-apples comparison since the current quarter includes the impact of stock option expensing and is fully taxed, while the results for the first quarter 2005 do not reflect these items. In fact when comparing results on an apples-to-apples basis, you will see the excellent results delivered on the bottom line.

Our cash and liquidity position remains strong at the end of the quarter. We had $79 million in cash and short-term investments and about $93 million in working capital at the end of Q1.

Now let me turn to some highlights for each of our product lines starting first with our infectious disease business. During the first quarter our infectious disease testing business experienced a 20% revenue increase over the same period in 2005.

Continued strong demand for OraQuick Advance more than offset slightly lower sales of our OraSure oral fluid collection device. A top priority during the quarter and indeed since last year has been to secure one or more new large bulk orders for OraQuick Advance from the CDC and other government agencies. However, obtaining actual orders from these agencies is taking longer than expected as can be the case when working with the government.

During the first quarter the substance abuse and mental health services administration or SAMHSA did place another order for about $500,000 to support the continuation of its testing initiative. As you may recall, SAMHSA previously purchased $4 million of our OraQuick Advance tests and controls.

Although this latest order is relatively small, we see the purchase of additional test devices as a positive sign from SAMHSA supporting our view that additional orders should be forthcoming in the future.

Based on our ongoing conversations with public health customers, we believe that demand for additional bulk orders is strong. Our customers have told us they have an immediate need for more tests. And our conversations confirm our belief that the OraQuick test, because it is clear waved can be conveniently used with oral fluid tests for both HIV-1 and HIV-2 as the most versatile and well-suited test for public health and other customers.

We have discussed the need for additional testing with the CDC and we continue to have discussions at the highest levels within the CDC and elsewhere at the federal level about continued bulk procurement. It is clear that without additional bulk purchases and continued deployment of rapid HIV tests by the CDC and others that the progress that has been made to date with HIV testing will not be sustained.

Based on these observations and our discussions with the CDC, we believe there is strong support for additional orders yet this year. Our optimism about receiving additional federal bulk orders this year is also supported by two other important facts.

First, the Senate conference report which accompanied the fiscal year 2006 labor Health and Human Services and Education appropriations bill contains language that encourages the CDC to move forward as quickly as possible with the purchase of additional oral fluid rapid HIV tests to help sustain and expand its HIV-AIDS programs. The report also encourages SAMHSA to expand its rapid HIV testing program and urges the Secretary of HHS to significantly increase the use of bulk purchasing and wide scale deployment of FDA approved oral fluid HIV-1, 2 rapid tests for both domestic and international programs.

Since OraSure has the only FDA approved rapid oral fluid test, we think this bodes well for us. We also believe these statements were intended to encourage additional bulk purchases as an effective tool in the fight against HIV-AIDS.

Second, as we have previously discussed, President Bush in his State of the Union address earlier this year called for a nationwide effort to deliver rapid HIV tests to millions of people in order to help stem the tide of HIV-AIDS. He has proposed to direct more than $90 million for the purchase and distribution of rapid HIV test kits in order to facilitate testing of more than 3 million people.

This is part of the 2007 budget process for the fiscal year beginning October 1, 2006, which is now working its way through Congress and we believe further confirms the federal government's commitment to purchasing a test like OraQuick as part of its HIV-AIDS strategy.

Our efforts to obtain large orders through bulk procurement have not been limited to the federal government. We are also in close discussions with several major cities who intend to substantially increase their HIV testing efforts.

While I cannot identify specifically with whom we are speaking, at least one major city has indicated a desire to make a substantial purchase this year in order to test all city residents. During the past few months, we have been working with city officials on the design and logistics of this initiative. We are very excited about this new program, and we hope to be able to share more details in the near future.

Of course, OraQuick Advance will be at the heart of this initiative, primarily due to its versatility and the benefits provided by oral fluid testing. Once finalized we also believe this city's testing initiative is something that can and will be duplicated by other cities around the country.

In view of the strong support for the bulk deployment of rapid HIV tests, largely as a result of the successful programs that CDC and SAMHSA have implemented, I am confident that OraQuick will continue to be a significant growth driver for our company. For these reasons, we remain optimistic and continue to believe it is just a matter of time before additional orders are received.

Obviously, the fact that we have not yet received a new bulk order is having an impact on our financial performance for 2006. Importantly though, we believe the absence of a new order up to this point in no way indicates a reduction in demand for rapid HIV testing or more specifically a reduction in demand for OraQuick.

Turning now to some recent highlights in the infectious disease market. Sales of OraQuick Advance to Abbott for hospital distribution was a clear highlight in the first quarter increasing 117% over the first quarter of 2005. This increase is the result of the continued strong cooperation between our companies, and in particular the great work of our hospital sales team who support Abbott hospital sales representatives.

Abbott management continues to show a strong emphasis on marketing OraQuick as part of its product offerings. We expect continued strong growth of OraQuick Advance sales to hospitals for a number of reasons.

As previously announced, Abbott recently signed a three year single source agreement to supply OraQuick Advance to the Novation system of health care facilities. Novation membership includes thousands of hospitals and this agreement will provide the opportunity to sell OraQuick Advance into many more hospitals throughout the country.

We have been tracking the CDC's efforts to develop revised guidelines for routine HIV testing in health care settings and specifically in emergency departments and labor and delivery units in hospitals as well as various other points of care like physicians office's, clinics and the like. The development of these recommendations is very far along and we expect them to be issued sometime this summer.

We believe these guidelines will provide yet another reason for hospitals and other health-care facilities to either launch new rapid HIV testing programs or to increase their use of rapid tests. Finally, as previously announced, Johns Hopkins Hospital is now offering oral fluid testing with OraQuick Advance to any patient entering the hospital's emergency room for evaluation or treatment.

The program reports that offering OraQuick has increased the rate of previously unrecognized HIV cases that are now recognized from 2.3% to 4.3%, resulting in more people knowing their HIV status. And we believe this is just the beginning.

For example, several other hospitals including Highland Hospital in Alameda County, California and John Peter Smith Hospital in Fort Worth, Texas have either commenced offering routine testing with OraQuick Advance or have initiated studies regarding the use of OraQuick Advance in the emergency department. Together with Abbott, we're working to encourage other hospitals to adopt this important practice.

During the first quarter, our direct sales of OraQuick in the public health market grew 83% over 2005. This increase was due to the expansion of public health testing programs, the conversion of new customers attracted by the convenience and other benefits of oral fluid testing, and finally by an increase in direct purchases of OraQuick Advance by agencies that may have otherwise been the beneficiaries of a federal bulk purchase.

Although the public health sector and hospitals currently represent the largest markets for OraQuick, we are successfully expanding use of this product in other markets as well. As HIV testing becomes more mainstream and routine, several new markets are now being successfully penetrated including corrections facilities, student health centers, and family planning clinics. We believe these markets and possibly others will contribute to the future growth of our infectious disease testing business.

On the international front there have been many new developments. International sales of OraQuick during the first quarter were 64% over 2005, which included a 45% increase in sales to Africa. We continue to make progress in our efforts to obtain a CE mark for OraQuick Advance which is required to sell this product in the European union.

The notifying body has reviewed our data submission and has asked a few follow up questions. We expect to respond with some additional data in the next month and to continue working closely with the notifying body to obtain final approval as soon as possible. We continue to meet with potential marketing and distribution partners for OraQuick in the EU and we have narrowed our list of potential candidates.

We also continue to move forward in identifying and signing new distributors for our products in foreign territories. We are close to signing a distribution agreement for OraQuick in the Middle East and are actively pursuing new distributors for Histofreezer in Mexico, for OraQuick in Brazil, Central America and Thailand and for Intercept in Europe and other countries. Discussions also continued--also continue for both OraQuick and Histofreezer in Japan and for OraQuck in China.

Our efforts to sell OraQuick in PEPFAR countries is also continuing. Discussions with officials of several specific African governments indicate there is growing interest in expanding testing within their countries.

During the first quarter, we made significant progress in our efforts to create an over-the-counter diagnostics business with the immediate focus being on FDA approval of an OraQuick Advance HIV over-the-counter test. As we indicated it would happen during our last call, the FDA and its Blood Product Advisory Committee or BPAC met on March 10 to further discuss the clinical trial requirements for approving an over-the-counter test.

At the meeting, the committee approved the proposal by the FDA setting forth specific clinical trial requirements. On May 9th, we are scheduled to have a follow-up meeting with the FDA to review our clinical development plan.

We expect to obtain input from the FDA and obtain the FDAs concurrent on our approach after which will prepare the study protocols and begin the trials. Some of the studies are expected to begin as early as June, while others will require IDE approval by the FDA and are not expected to commence until later in the year.

Now moving onto our second main growth driver, substance abuse and specifically Intercept. Our Intercept lab based oral fluid drug test performed very well in the first quarter.

Total Intercept revenues in the first quarter were up 27.3% over 2005 as a result of a 17% increase in workplace testing revenues, a 38% increase in criminal justice and 44% increase in international. The continued growth of Intercept is attributable to the rollout and implementation of new customer accounts closed in late 2005. 35 new accounts were signed in the first quarter including FTD Florists and AIG Insurance.

Finally, in past calls we've talked about the all fluid testing guidelines under consideration by SAMHSA. The draft guidelines have been issued and are under what we believe to be final review by government agencies. On March 7th, SAMHSA's drug testing advisory board or DTAB met and discussed the status of the guidelines.

DTAB Chairman Robert Stevenson stated that the HHS mandatory guidelines which address oral fluid testing are now with the Office of Management and Budget, which is processing the feedback from the various federal agencies that reviewed the guidelines.

Chairman Stevenson qualified this step as "a good sign pushing us toward an end game process". We see this as a positive step forward in finalizing these guidelines and we will share additional information with you as it becomes available.

During the first quarter, our cryosurgical systems business decreased 20% from 2005. The primary reason for this decrease was lower sales of our OTC cryosurgical products, primarily to Prestige for distribution in the United States.

In Europe, SSL is now focused on its launch plans for the Scholl Freeze product. The rollout in France started last October and is going well with a TV ad campaign completed in January and February. SSL launched Germany in January and its TV ad campaign started in April.

More recently, SSL launched the Scholl product in the UK in March and also started TV campaign in April. We expect SSL to meet its minimum purchase obligations under our agreement with the timing of additional significant purchases within the year being driven by the result of their marketing efforts. Worldwide sales of Histofreezer, our professional cryosurgical product decreased approximately $100,000 in Q1 compared to 2005.

And finally there have been no new developments in our patent infringement litigation against Schering-Plough. As you may recall the parties filed motions for summary judgment in November and we are currently waiting for the court to rule on these motions with a trial date expected to be scheduled shortly thereafter.

And lastly, sales in the first quarter to the insurance risk assessment market have continued to decline with revenues declining 49% from 2005. This decline is attributable to an overall decrease in the number of applications for life insurance and an increase in the average policy amount.

This latter fact is significant because insurance companies are more likely to use a blood test to test for multiple risk factors rather than oral fluid for higher face valued policies. In an effort to stabilize sales we continue to focus our marketing efforts on increasing the number and types of life insurance policies where oral fluid testing is used by life insurance companies.

In the area of manufacturing and operations as previously discussed, we've installed an automated assembly system in Bethlehem for our OraQuick product line. Regulatory and operations teams have been working through the many studies and validation requirements for submission to the FDA.

We expect the submission to be completed and filed this summer, which will be followed by an FDA inspection and hopefully a final approval toward the end of the year. In order to plan for our future, we also recently decided to purchase our two facilities located on the south side of Bethlehem, Pennsylvania which are currently being leased. As you may know, one of these facilities is our Corporate Headquarters and manufacturing facility for several of our products.

The other houses our R&D and sales and marketing departments. A primary benefit of this purchase will be an estimated reduction in operating expenses of approximately $450,000 on an annualized basis. And owning these facilities will also give us greater flexibility to expand as needed in the future.

During our last conference call, we also discussed the efforts of a cross functional team to identify an enterprise resource software system for the Company. We've selected SAP as our software vendor and have purchased software licenses from them. We will begin the implementation of this project shortly.

As I have previously indicated, this represents a major commitment and investment to build a solid foundation for future growth. We expect to implement during the last half of 2006 with a switch over to the SAP system on January 1, 2007.

So with that, I'll turn the call over to Ron Spair.

Okay, thanks, Doug and good afternoon, everyone.

Starting with the income statement revenues for Q1 were $15.2 million which is a 4% decrease from the same period in 2005. Revenue increases from sales of the Company's OraQuick Advance test and Intercept oral fluid drug test were offset by declines in sales of our cryosurgical wart removal products and our insurance risk assessment testing products.

In the infectious disease market sales increased 20% as a result of the continued strength of our OraQuick Advance test despite the absence of a new bulk government order. During the first quarter, we sold 5.2 million of OraQuick which included 2.9 million in direct sales to the public health marketplace, 1.5 million in sales to Abbott, 256,000 in sales to SAMHSA, and 561,000 into the international marketplace.

Sales of the OraSure device in the infectious disease market decreased to $946,000 in the quarter as compared to $1.2 million in the first quarter of 2005. This reduction is reflective of continued customer transition from oral fluid lab based testing to our Rapid Testing platform. We expect our infectious disease revenues in the second quarter of 2006 to approximate $6.5 million.

In the substance abuse testing market, sales were $3.4 million, up 18% over the first quarter of 2005. Total Intercept sales were up 27% over the first quarter of 2005 reflecting increases in work place testing criminal-justice and international.

Sales of Intercept devices which are predictive of future demand totalled 1.4 million, up 25% in the first quarter versus 2005, with workplace up 5% criminal-justice up 55% international up 71%, and direct sales through our website up 37%. Sales of Intercept oral fluid drug assays are indicative of the number of oral fluid specimens being processed.

Assay sales in the first quarter grew by 30% over last year to 1.1 million with workplace up 37% criminal-justice up 25%, and international up 20%. We expect our substance abuse revenues to increase in the second quarter and throughout the remainder of 2006 as additional new Intercept accounts begin implementation.

Sales to the cryosurgical systems market in the first quarter were down 20% compared to last year. U.S. OTC sales were down 54% from the first quarter of last year to 1.8 million as our distributor Prestige worked through some inventory levels built up last year.

Last year's Q1 purchases by Prestige included products for our promotional programs at one of the largest customers which did not meet expectations. This in turn led the inventory issues experienced by Prestige.

Sales of our international OTC cryosurgical products totaled 1.2 million during the first quarter. Sales of Histofreezer into the professional market decreased $100,000 as compared to 2005. We expect total cryosurgical revenues to exceed $4 million in the second quarter of 2006.

Insurance risk assessment sales of $1.1 million in the quarter were 49% lower than the comparable quarter in 2005. This decrease reflects a continued reduction in domestic life insurance application activity and a recent increase in the average policy amount. We expected second quarter revenues will approximate $1 million.

Gross margin for the first quarter of 2006 was 63% which is an improvement over the 60% gross margin for the same period in 2005. Gross margin was positively affected by a more favorable sales mix and lower scrap expense.

Our operating expenses for the first quarter increased to $8.7 million from $8.2 million last year. This increase was primarily attributable to charges for stock-based compensation including stock option expensing and charges associated with restricted shares, partially offset by lower legal fees.

Our operating margin for the first quarter was 6%. Our net income for the first quarter was $900,000 or $0.02 per share on a fully diluted basis. This compares to net income of $1.6 million or $0.03 per share on a fully diluted basis for the first quarter of 2005.

The first quarter of 2006 includes a charge of $820,000 related to stock option expensing and a $780,000 provision for income taxes. If these items were excluded, our net income for the first quarter would have been $2.5 million or $0.05 per share on a fully diluted basis.

Our effective tax rate for financial statement purposes was 46% and was heavily influenced by the inclusion of stock option expense in the calculations. Turning our attention briefly to our balance sheet and cash flow, we continue to maintain a very strong liquidity position.

Company's cash and short-term investments were $79 million and working capital was $93.1 million at March 31, 2006. Cash flow from operations was positive at $2.6 million for the first quarter an improvement of $2.1 million over the comparable period in 2005. Capital expenditures in the first quarter amounted to $665,000. We also received $174,000 from the exercise of stock options.

Depreciation and amortization amounted to $447,000 for the quarter. Our accounts receivable day sales outstanding decreased slightly from 59 days at December 31, 2005 to 58 days at March 31, 2006.

Before I comment on our expectations for the second quarter and for the full year 2006, I think is appropriate to first review the assumptions that were used to develop our previously announced guidance.

As we previously explained, one of the main drivers of 2006 revenue growth was and is expected to be, new bulk purchases by the government, particularly the CDC. As Doug has already explained, except for small additional order received from SAMHSA, we have not yet received a new large bulk government order and we cannot predict precisely when that may occur in the future.

Nevertheless, we remain optimistic that we will receive one or more bulk purchase orders yet this year. At the top of the list is an expected new order from the CDC. We have also been engaged in intensive discussions with a major U.S. city that intends to launch this year a very large HIV testing campaign with our product.

However, because we're already starting the fifth month of 2006 without such an order in hand, even if one or more were to be received shortly, it is uncertain at this point whether the orders will require us to fully deploy all purchase product during 2006. Obviously, our 2006 revenues in net income will be significantly affected by whether we receive one or more bulk purchase orders as originally expected and importantly, the timing of deployment over the balance of the year.

So in the interest of being as transparent as possible, we want to provide you some indication of the financial impact if orders do not materialize or are not of sufficient volume or if we can not deploy a significant portion of the bulk orders we receive during 2006. We believe our base business, excluding any new bulk orders will generate approximately $78 million in revenues and net income ranging from $0.09 to $0.11 per share for the year 2006.

The degree to which we exceed these figures and move towards our previously announced targets of 25% revenue growth and net income of $0.13 to $0.15 per share for 2006 will depend on the timing, size, and degree of deployment of any new bulk government orders for OraQuick.

Additionally, unless a bulk order were to occur very soon, it is likely that our second quarter revenues will be in the range of $16 million and net income for that period will be approximately $0.02 per share. All EPS projections are fully taxed and incorporate the effects of stock option expenses.

Obtaining as many additional bulk orders as we possibly can certainly remains and will continue to remain a top priority with the Company. Once a bulk order is received, we will announce it publicly and will provide guidance as to the expected timing of deployment of those orders are provided the specific incremental revenue and EPS impact we would expect for 2006. Our expectation is that we will have something positive in this area to announce in the relatively near-term.

I'd like to now turn it back over to Doug.

Okay, thanks Ron.

I've already addressed progress against many of our strategic objectives in my earlier comment. However, I wanted to conclude with an update on our efforts to expand our infectious disease point of care testing business. We continue to make good progress in the development of a prototype rapid test for hepatitis C on our OraQuick platform.

We presented preliminary performance data on this prototype test at the National Viral Hepatitis Prevention Conference in Washington D.C. at the end of last year and we will also be presenting additional performance data at the meeting of the American Association of Clinical Chemistry in Chicago in July.

Overall, we're very pleased with the progress we're making and our development efforts continue as expected. And 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.

So in conclusion, I remain extremely optimistic and enthusiastic about our growth opportunities across our different product lines in all geographies as well as our ability to improve efficiencies, reduce our costs, and increase our margins. We remain committed to and we look forward to delivering a very successful 2006 for our stockholders and with that, I would like to open up the floor for questions.

[OPERATOR INSTRUCTIONS]

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

Good afternoon.

Hey David.

Ron, I know I actually appreciate the guidance on the core business. Maybe you can maybe talk about not specific customers but if you were to look at the pipeline of these contracts whether it's city government, SAMHSA, CDC, can you give us any color in terms of a range of pipeline revenue we can expect based on these contracts, whether or not they fall in '06 or '07 just a broad range across three or four different customers?

Hard to do that, David. Obviously, we're talking with all of those groups of customers that you described. And, we're talking about a fairly broad range of possibilities. And I think to speculate probably wouldn't be wise.

Okay. Ron, in terms of the insurance risk business it sounds like it's stabilized, but obviously no evidence of a rebound. Quest and other lab parties are talking about a rebound in the back half of the year. What expectations do you have factored into guidance as it relates to a potential rebound in the insurance business?

I would save modest, David, at this point. We look forward to continuing the dialogue that we're having with the labs to better understand how that rebound would play out.

Okay, and Doug, just tied to this order from the CDC, is it your sense that it's in any way linked to updated CDC guidelines as it relates to ER admission screening or the two are kind of unrelated?

No, I think that they're unrelated. I think that in our discussions with the CDC as an example, we've been talking about the need and the demand for more testing.

And it's very clear based on the data that's out there, based on the feedback we've received from public health customers that there is an immediate need for more rapid testing. And clearly in that commentary I gave earlier, I think the guidance is there from the Senate Conference Report to not only CDC but also to HHS to continue to use bulk purchasing and specifically bulk purchasing of oral fluid HIV1-2 tests as a vehicle to sustain the program.

And if you look forward to 2007, and the initiative that the President is proposing in his initiative and budget, it's essential for public health that we continue these programs, we can't lose momentum, and I think there is acknowledgement of that--that's the nature of the discussions were having.

Now the revised guidelines, we believe, are just another event that's going to encourage more testing and as you point out, I think the focus of that is in routine health care settings, hospitals, emergency rooms, physicians' office, clinics and the like, so I see them somewhat separate.

Okay. Just two more quick questions here. First of all, just on cryosurgical volumes, Ron, into the second quarter, can you give us an updated sense of where you think Prestige is as it relates to the inventory burn? And whether we believe this is simply still the inventory burn or changes in the competitive landscape?

Difficult to tell. Our belief is that the business, which is start of DTC Advertising will pick up here as we move into the summer work season, if you will. And we look forward to continuing revenue growth from them as we move forward in the year.

Okay, and then Doug, just an update on hepatitis C timing? That's one element I think I missed on the call or potentially you did not give it.

I didn't give it. We should be in clinicals before the end of the year.

Okay, thank you very much.

Your next question comes from the line of Wade King of Montgomery & Co.

Hey, guys can you hear me?

Hey, Wade.

Thanks for the detail. First off, Doug, I think you--between you and Ron, you gave an actual expectation or figure for the second quarter by product line. The only one I didn't get was substance abuse, I'm not sure you actually gave the number for the second quarter expectation.

I said it would be in and around approximately the $4 million mark.

Approximately $4 million for substance abuse, same figure for cryo, is that right?

In and around there, that's correct.

Okay, very good. Also I believe, Ron, you said that you sold in the quarter to SAMHSA 256,000 of OraQuick devices and then you said you had $500,000 order from SAMHSA in the first quarter. So is it fair to say you deployed about half of the SAMHSA order that you got in the first quarter, is that correct?

No, actually the $256,000 worth of revenues that we recorded in the first quarter represented the completion of the previously awarded $4 million contract. The $500,000 contract was awarded on the last day or two of the quarter and represents revenues that will accrue to us in the second quarter and beyond.

Okay, so the $256,000 was a completion of the prior order and the $500,000 is incremental to that, is that right?

That's correct.

Okay, could one of you possibly give further insight as to profit? You site several new customers or talk about dialogue associated with some potential new customers in the drugs of abuse area. If you could provide any commentary for potential Intercept contracts with new customers?

As we mentioned, a couple of the significant new customers closed during the first quarter, FTD Florists and AIG Insurance. We closed typically a large number of customers on a regular basis, they are included in that 35 number that I referenced or typically some smaller accounts.

I think importantly once customers convert to oral fluid, they don't go back. So that's why we've seen some very nice sustained revenue growth in this business.

Okay, those are new contract ink for Intercept in the first quarter?

That's right.

Okay, thank you. And last question, could you comment a little bit given the uptick year-over-year in Abbott sales and the Novation contract, etc. Or could you talk about what Abbott is doing on a marketing basis to promote their hospital sales of OraQuick? What specific efforts are they pursuing? Can you give us any update on number of sales reps that have OraQuick as a high priority item in their bag of tricks, etc.?

I mentioned in comments about Abbott Management and how supportive they've been to the promotion of OraQuick. We attended their national sales training meeting earlier this year.

We had a main stage presence as well as our individual breakout. OraQuick is an emphasis product for their sales organization, it receives special incentive. Clearly, the Novation contract is a key focus are right now, for both the Abbott, OraSure team. We believe nice upside opportunity within the Novation collection of hospitals so we're certainly focused there.

We got a training session scheduled next week on OraQuick with Novation and their 170 reps that were going to be utilizing the Abbott organization but also the Novation sales force to go out and promote the benefits of OraQuick. So a lot is happening with Abbott and it's certainly showing up in the numbers.

And then we're also still looking forward to the new revised guidelines which we believe will be another shot in the arm and we've got some plans scheduled, we're not going to really disclose those right now but we intend to go out with a pretty aggressive plans to promote and encourage adoption of the guidelines within hospitals and clinics.

Okay, guys. Thanks for the detail.

You bet.

Your next question comes from the line of Aaron Lindberg with William Smith & Co.

Hi, there.

Hi Aaron.

Just a couple quick questions. Can you update us on the progress with shelf life for Advance?

Shelf life continues at six months. We are really through any issues that we had in terms of managing customer expectations on that. Customers don't hold much more than a couple of months worth of product anyway. Product's getting used as rapidly as they acquire it.

So not really an issue in the field where we continue to work on numerous possibilities to extend shelf life as we look to the future and watching the product over-the-counter and those efforts continue pretty positively.

Can you provide any more detail as it relates to that R&D effort to extend it for future applications particularly over-the-counter?

We're just looking at some additional packaging configurations, primarily nothing substantive relative to product modifications.

Okay. But with packaging modifications you think you may be able to get there?

I think with a combination of packaging modifications and perhaps a process change here and there we can do it.

Okay. And then can you update us on the Johns Hopkins initiatives? Have there been additional sites added that are similar to that? Anything new as far as the CDC's initiatives here?

I referenced a few of the sites, certainly that are offering routine testing in emergency departments. There's been a number of sites around the country that are studying this or that are actually running pilot programs and for competitive reasons I prefer not to disclose the names of those.

Can you give us a sense of how many of them are currently studying it?

Off the top of my head, I hate to venture a guess. It's tens and I don't want to say that it's 20 or 50 but it's quite a large number that are studying the possibility right now, and obviously the key focus as we go forward. So I believe that's going to be a very nice contributor to our future growth.

Okay, and last question is can you update us on the physician office market? Are you pursuing a distribution arrangement here and any progress along those lines?

The physician office market has been somewhat of a struggle for us. We have been trying to penetrate the physician office through our relationship with Abbott and PSS. We have met with PSS very recently. We're developing some implementation protocols that we believe can enhance our marketing and selling efforts. And that's in the very early stages. I don't have anything to report relative to progress on that, but we're trying to see if we can't get a little better traction in the physician office market.

Okay, and the PSS relationship that was non-exclusive to that market, is that correct?

That's correct.

I appreciate it. Thank you.

Your next question comes from the line of Ed Shenkan, Needham & Co.

Hi Doug and Ron.

Hey, Ed.

As far as the OTC clinical studies that you're doing, I think you mentioned that in June you'll start some tests and then other tests are slated for later in the year. Could you tell us what type of tests you will do in June, what type of tests you wait later in the year from? Are you waiting because you have to get results from the first set of tests and what is some of the timeline associated with these tests?

Well, some of the earlier studies that we're going to be completing are going to deal with interfering substance studies, those will be some of the first studies that we complete. Obviously studies that require IDE approval or where we have to go to ERB is going to--will take a little bit longer.

As you recall from the advisory committee recommendations, the focus of those recommendations was to ensure that studies were designed to validate that consumers could perform the tests accurately, that they could interpret the results correctly, that they could interpret your instructions for use and be able to get connected link to care.

That they knew how to respond when they had an initially positive test and how they could access confirmatory testing services. Where they could get connected to a physician, if that was the appropriate next step.

So that's what all those studies are going to be designed to validate and of course it will be the consumer packaging and with the consumer instructions for use. So that's really the broadest aspect of this study that are being designed that will be executed.

So, Doug, the validation studies for consumers, those would be in the back half of the year and you'll do some interfering substance early on. Why do you have to do the interfering substance? I'm surprised they're making you do that now.

We've clearly got a very large number of interfering substances as part of our original approval and those are listed in our package insert. There are a few others that we're going to do just to supplement the original data. That is not a gating factor, by any stretch of the imagination.

And at what point do you expect sign off so that you can begin the validation studies?

Like I said, we have a meeting a week from today, on May 9th. And were going to go down with our study plan and it's very detailed. We've been working on this sense, well even before the BPAC, but clearly after the last March 10th BPAC meeting, we got much clearer guidance.

So we're going down with what we believe is a robust plan that's going to satisfy not only the FDA, but the advisory committee recommendations. Looking forward to great dialogue with them, but our hope is that we will leave that meeting with consensus and we're going to initiate the design, the detailed design of the trials and then whatever approvals are required to get those going and launch as fast as possible. This is a top, top priority.

What is the announceable event associated with all this that you will give us? I'm not expecting that May 9th you'll necessarily communicate to the investment community, at what point would you tell us something when should we expect it, what would it be?

We'll announce the start of our trials.

When they actually begin then?

That's correct.

Okay good, and then Ron, as far as gross margin, nice improvement here. 62.9% on the quarter. Should we expect--what should we expect for second quarter and the rest of the year?

We're certainly working hard, Ed, at staying at that level and if not improve it. And of course with volume comes better efficiencies and barring some unforeseen outcome, we expect to stay at that 63% or better level.

Great. And as far as the tax rate, Ron, what should we model going forward and we know you don't pay--your paying almost nothing cash taxes, is that right?

That's correct and although the effective tax rate in the quarter was 46%. And I would suggest that you can probably look at something along those lines, mid-40s for model purposes.

And could you tell us why it fluctuates as far as the tax rate even though it's not a cash number?

One of the big issues for GAAP purposes is expensing of stock options and the reality of the fact that the stock option expense itself is not--ISOs are not deductible for tax purposes. So the real taxable income from a GAAP perspective for purposes of calculation is higher as you have to exclude the stock option expense, which drives a higher effective tax rate.

That's helpful. Thanks, gentlemen.

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

Hi, Bill.

Hey, guys Dave Cuerr (ph.) here for Bill. Just a quick question on stock-based comp, came in a little bit lower than what we're expecting. Is that kind of the same level we should be expecting going forward?

It will be in and around that level if not slightly higher, Dave, as the way the stock option expense works, you'll get some of it caught up in inventory as you actually record stock option expense--stock based comp as part of your overhead that is absorbed into your finished work in process.

Consequently as that starts to come out of inventory, the cost of goods sold in the second quarter, you will see the number go up slightly and then also to the extent we make additional grants of stock option expenses or restricted stock to new employees coming on board and begin amortizing them, we will see that number go up, offset by any folks who might leave us that have stock based comps that we're expensing.

Okay, great thanks that's very helpful. And just trying to split that 820 into selling and marketing and general administrative, I'm just trying to get a sense of an apples-to-apples comparison there. I hate to split hairs but any color would be helpful.

That's fine in R&D it was approximately 100,000, sales and marketing was approximately 200,000, and the balance was in G&A.

Okay, thanks guys.

You're welcome.

Your next question comes in the line of Ryan Rauch with Jeffries and Company.

Good evening, guys.

Hey, Ryan.

Can you walk us through, Ron, if you did 15.2 in the first quarter and 16 million is your guidance in the second and your annual guidance, excluding any bulk orders is 78. That seems like quite a hike in the back half of the year. I mean almost 11 million in revenue to get to kind of your 11% guidance now.

Where is that increase going to come from? Can you give us a little bit more granularity per line item? Is that a cryosurgical increase or how are you going to get to the 78 million in the back half of the year?

I think, Ryan, that's a great question. Most of the--all of the areas are reflecting growth as we move out through the balance of 2006. With obviously increased revenues coming from the cryosurgery area, as the (inaudible) initiatives take off in the marketplace as well as Prestige purchases get back to a higher level but clearly growth across the board, and again just to point out this is a number that is exclusive of the bulk purchases that we anticipate receiving.

So we look forward to coming out with an announcement and we'll do that immediately upon receipt of the bulk order to indicate how that's going to affect our revenues and our EPS estimates. You're right. Those numbers are for the core business.

And it's just growth across all your business lines?

Correct.

Okay, and insurance risk, do we still assume that's a flattish business going forward or do we see assume some growth there as well?

Modest, Brian.

Okay, perfect. And then when do you expect the CE mark? I know, Doug, you said you were going to resubmit some questions and it might be in another month. We've all speculated for quite some time. Is that probably a third quarter event hopefully, or maybe second quarter?

Honestly, Ryan, we would have expected it by now so we got a few more questions were going to have to respond to. And then it's back in the hands, of the notifying body. So one thing I've been burned on too many times here is predicting regulatory approvals and lawsuit outcomes. And timing. Some I'm going to tell you when we expect to respond which like I said is within the next 30 days, and then it's going to be in the hands of notifying body.

Okay, and then finally, Doug, what should we look at, or Ron, for gross margins in the back half of the year? If cryosurgical is really picking up in the back half, do we assume sort of this flattish gross margin or some sort of decline in the third and fourth quarters? What's implied in your nine to eleven EPS guidance and thanks allot.

No problem. As I mentioned to Ed's earlier question we're certainly looking to maintain that 63% margin or be better as we move out--throughout the year as revenues increases and we're able to take advantage of the efficiencies that would accrue to us in the manufactured products here in the United States. But clearly we are not planning on a decline in gross margin as we move out towards the end of the year.

Thanks a lot. Have a wonderful evening.

Thanks, Bye.

Your next question comes from the line of Caroline Korner (ph.) with Montgomery and Company.

Hi, guys. Thanks for taking my call.

Hi, Caroline.

I had some questions to follow about substance abuse. The sales force that sells to the lab that's about 10 people in total?

That's right.

So the 35 new accounts, those were all corporate accounts, is that right?

I'm not sure I understand the question.

The 35 new accounts that you mentioned that were opened in the first quarter, those are all corporate accounts or companies that are ordering Intercepts as opposed to criminal-justice?

Yeah, that would be a combination between the criminal-justice market and the work place testing.

Okay, very good. So can you talk a little bit about some of your efforts with Intercept in the criminal-justice arena, I think it was mentioned before that some of the probation officers as potential set customer services. Can you comment a little bit about what your efforts entail going forward with regard to criminal-justice?

We've had some recent success with the New Jersey Department of Prisons and Parole. We've got other state initiatives that are--that we're working on right now, very aggressively. Obviously, we're working on the drug treatment center side as well so that's primarily where our focus has been in the criminal-justice market.

Okay, very good. And then as I understood it, there were some product enhancements going on for the Intercept. I think to help with the potential DTAB guidelines and changes there. guidelines? Can you tell us a little bit about how those are going?

We're working on a couple of new assays for the Intercept product line and that's really in the antibody development stage right now. Do you have anything to add their Ron? That's primarily where our efforts are right now.

Okay, good, thanks for taking my call.

You bet.

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

I just want to thank everybody for being on the call with us this afternoon, for your continued support and we look forward to reporting on our second quarter results in a few months. Have a great afternoon and evening.

Thanks, everybody. To this concludes today's OraSure Technologies 2006 first quarter financial results conference call. You may now disconnect.