OraSure Technologies Inc (OSUR) 2006 Q2 法說會逐字稿

Good day, everyone, and welcome to the OraSure Technologies' 2006 second 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 would now like to turn the call over to Shannon Morin at OraSure Technologies. Please go ahead, ma'am.

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 second 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 real-time on our website and will be archived there for 7 days. Alternatively, you can listen to an archive of this call until midnight, August 11, 2006 by calling 800-642-1687 for domestic, or 706-645-9291 for international. The access code is 3140107.

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 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 would like to turn the call over to Doug Michels.

Thanks, Shannon.

Good afternoon, everyone, and welcome to our second quarter 2006 earnings conference call. We're very glad that you've joined us.

For this afternoon's call, I will first review our financial performance for the quarter and various developments involving our product lines. Our Chief Financial Officer, Ron Spair, will then provide a more detailed review of our financial results for the second quarter and our expectations for the rest of the year.

Throughout my prepared remarks, I will, where appropriate, also provide an update on the progress we are making against our strategic initiatives. We will conclude by opening the floor for questions.

Second quarter revenues were higher than we last expected, coming at $17.6 million. This compares to revenues of $17.4 million in the second quarter of 2005. Increased revenues from the substance abuse testing and cryosurgical systems markets were partially offset by lower revenues in insurance risk assessment testing. We also received a strong contribution from our infectious disease business.

Net income for the second quarter was also somewhat higher than expected at $1.2 million, which represents $0.03 per share on a fully diluted basis. This compares to net income of $1.4 million or $0.03 per share during the second quarter of 2005.

The current quarter includes the impact of stock option expensing and is fully taxed, while the results for the second quarter of 2005 do not reflect these items. As Ron will explain, eliminating these items illustrates the substantially improved bottom line results we've delivered for the current quarter.

Our cash and liquidity position remains strong at the end of the quarter. We had $84.6 million in cash and short-term investments, and about $96.8 million in working capital at the end of the second quarter.

Now, let me turn to some highlights for each of our product lines, starting first with our infectious disease business.

Although revenues for infectious disease testing during the second quarter were flat compared to the same period in 2005, we are very pleased with the sales performance of our OraQuick Advance test. We saw continued strong demand, as illustrated by an 82% increase in sales of OraQuick to the public health market, and a 123% increase in the hospital market. These increases completely offset the substantial lower sales of OraQuick under bulk government orders, and some reduction in sales of our OraSure Oral Fluid Collection Device.

As I've previously explained, one of our top priorities has been to secure additional large bulk orders for OraQuick Advance from the CDC and other government agencies. In the second quarter we were successful in obtaining another such order from the CDC, which has committed to purchase an additional $2.3 million of our OraQuick tests. We expect this order to be entirely deployed this year.

Earlier in the year we also received an additional $500,000 order from the Substance Abuse and Mental Health Services Administration, or SAMHSA, in connection with SAMHSA's continuing testing initiative.

While we are certainly pleased with these additional orders, we have not yet shipped product under the SAMHSA order because of delays in completing contract negotiations with a third-party logistics firm used by SAMHSA. We also shipped less than 15% of the CDC order during the second quarter. As a result, we expect to realize the benefit of these orders during the second half of this year.

We continue to believe that demand for additional bulk orders remains strong. Our customers have confirmed that the demand for our OraQuick test exceeds the orders we've received to date. Consequently, discussions with the CDC and other agencies regarding additional bulk orders are continuing.

Support for additional orders and a significant expansion in Rapid HIV testing is also seen in statements from President Bush and developments in the budget process for 2007. In several recent speeches, the President has reiterated his support for expanded use of Rapid HIV testing.

More importantly, we believe there is a strong likelihood in light of the $90 million proposed by President Bush for the purchase and distribution of Rapid HIV test kits that a significant amount of funding for Rapid testing will eventually be approved by Congress. We are watching the budget process carefully and will continue efforts to access new funding for Rapid HIV testing that is ultimately approved.

Apart from the federal government, we have also had some recent significant success working with several major cities who intend to substantially increase their HIV testing efforts. On June 27th, which was National HIV Testing Day, the District of Columbia announced a major new initiative to offer increased HIV testing services with OraQuick Advance.

The program, which we created, is called Coming Together to Stop HIV in DC, and has established the goal of insuring that all the approximately 500,000 district residents know their HIV status by 2007. The program was driven by the fact that DC has the highest rate of new HIV infections among major U.S. cities, with approximately 1 in 50 DC residents now living with HIV/AIDS. It is estimated that 25% of those infected do not know their status, and they account for about 55% of new infections.

The District has given us an initial purchase order for 75,000 units, and we expect an additional order later this year. We are excited to be working with the District and are committed to the success of this important initiative. We're now using the DC initiative as a model program in discussion with other cities around the country.

In late June we were also please to announce the signing of a new $6 million multi-year purchase contract with the city of New York to expand its use of our OraQuick Advance test. This contract, which commenced on July 1st, 2006, will extend the city's aggressive program of HIV prevention, including widespread access to OraQuick testing and prevention services throughout the city.

Availability of oral fluid testing has had a significant and beneficial effect in New York, particularly at the city's STD clinics, where blood has been the traditional testing matrix of choice. By switching to Rapid Oral Fluid Testing with OraQuick, it appears testing has increased by more than 30% at these clinics.

Turning now to other highlights in our infectious disease business, a major bright spot continues to be sales of OraQuick Advance to Abbott for hospital distribution, which increased 123% over the second quarter of 2005. The strong cooperation between our companies, and focus on our hospital customers continues to pay dividends.

During the second quarter, 50 new hospital customers were added, and there was significant exposure outside the hospital laboratory in our existing customer base as we added 60 new labor and delivery departments, 18 new emergency department, and 10 new infectious disease clinics as customers.

Thirty-four of the 50 new hospital customers added in the second quarter were part of the Novation system of healthcare facilities. The three-year single source agreement Abbott signed with Novation became active on April 1st. We believe this important contract will provide an opportunity to sell OraQuick Advance into many more hospitals throughout the country.

We continue to track the revised guidelines under development by the CDC 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. These guidelines are expected to issue in the next couple of months.

The CDC has shared with us their intent to broadly promote the guidelines after their issuance. We understand their promotional programs will target hospitals, OB-GYNs and general practitioners. We believe this type of promotion will help support and encourage wide-spread adoption of the guidelines.

During the second quarter, our direct sales of OraQuick in the public health market grew 82% over 2005. This increase was due to the expansion of public health testing programs, including an initial shipment of tests ordered under the District of Columbia initiative. Of particular importance is that this increase was achieved despite the absence of significant deployment of tests under bulk orders from both the CDC and SAMHSA during the quarter.

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 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.

For example, last year we signed an agreement with Planned Parenthood. Of the approximately -- of 120 Planned Parenthood affiliates that conduct HIV testing around the country, 35% are now using OraQuick Advance. And each affiliate represents 7 to 10 additional testing sites.

In observance of National HIV Testing Day, we once again partnered with the National Association of People With AIDS, or NAPWA, to sponsor the Second Annual Mayors' Campaign Against HIV. This is a national campaign designed to encourage testing for HIV and promote the benefits of individuals knowing their status.

Under this campaign, we worked with public health departments and community-based organizations around the country to solicit mayoral support to urge HIV testing and prevention among their constituencies. This was a great success as we had 18 mayors' offices in major metropolitan cities participating, including San Francisco, Chicago, Los Angeles, Houston, New Orleans, Seattle and Phoenix.

On the international front, there have also been several developments of note. We continue to obtain registration and regulatory approval for OraQuick Advance in Africa and several other foreign countries and territories. A top priority has been to obtain a CE mark for OraQuick Advance, which is required to sell this product in the EU. We continue to work closely with the notifying to obtain final approval as soon as possible. We've also continued to meet with potential marketing and distribution partners.

We've also prioritized identifying and signing new distributors for our products in foreign territories. We have signed new distribution agreement for OraQuick in the Middle East and Central America, and are close to signing an agreement for Brazil. We are also in discussions for agreements in Russia, China and Thailand.

With respect to other products, we have made progress on distribution agreement for Histofreezer in Mexico and Japan, and for Intercept in Europe and other countries. We are also working through the registration process in Israel, Korea and Mexico.

Finally, during the second quarter we made significant progress in our efforts to ultimately obtain FDA approval of an OraQuick Advance HIV over-the-counter test. On May 9th, we met with the FDA to review our clinical development plan and obtained input and concurrence from the FDA on our approach. Some of the studies are expected to begin as early as September, while others will require IDE approval by the FDA and are not expected to commence until later in the year, or in 2007.

We are developing the trial protocol for two types of studies. The first type, which we refer to as FLEX Studies, will test for the impact of conditions that might affect test performance and use by consumers. The second type of studies will test label comprehension and will validate that consumers can properly use and interpret the test.

Late last week, we completed and filed our initial IDE submission with the FDA. We expect to hear back from the agency within 30 working days, and hope to launch our initial studies shortly thereafter.

Now, moving on to substance abuse. Our Intercept lab-based oral fluid drug test continued its upward trend in the second quarter. Total Intercept revenues in Q2 were up 8% over 2005 as a result of increases in workplace testing, criminal justice and international. This growth rate is a bit more than we have been reporting for the past few quarter, primarily because the second quarter of 2005 was a bit higher than normal. Sales last year were positively impacted by the initial stocking and rollout of testing at Lowe's which, as you know, is a very large account. During the quarter, we signed 38 new Intercept accounts, 18 in workplace and 20 in criminal justice.

Workplace specimens processed exceeded 100,000 per month in April, May and June, up 46% from the first half of 2005. Criminal Justice specimens processed exceeded 60,000 per month throughout the quarter, up 64% from the first half of 2005. The Intercept business hit a record high of over 200,000 specimens per month in the second quarter.

In the second quarter the Governor of Oklahoma signed a bill approving the use of oral fluids for workplace testing, which will go into effect November 1st. This will allow several of our current customers to rollout Intercept testing to their locations in this state. We are now poised to capitalize on other companies located in Oklahoma which have been awaiting this approval.

In addition to working closely with our laboratory partners in the workplace market, OraSure has established relationship with key third-party administrators who play an important role as HR service and product providers. OraSure believes these relationship will play a significant role in growing our workplace business.

Finally, in past calls we've talked about the draft oral fluid testing guidelines under consideration by SAMHSA. In a surprising turn of events, these draft guidelines were recently withdrawn for further consideration by the Office of Management and Budget. At this moment, there is no visibility as to why the regulations were withdrawn or what SAMHSA's next steps might be. We will provide an update as soon as an official explanation for the withdrawal becomes available. In the meantime, we are continuing to sell to the non-federal markets.

During the second quarter, our Cryosurgical Systems business increased 7% over 2005. The primary reason for this increase was higher sales of our Histofreezer Professional product. For the remainder of 2006, we are foreseeing a decline in our over-the counter cryosurgical revenues.

Prestige brands recently advised us that they are substantially reducing their forecasted purchases for the year. The primary reasons for this are increased competition from the other OTC cryosurgical products sold in the U.S. by Wartner and Schering-Plough, ongoing efforts to reduce inventory levels beyond what we had expected, and Prestige's decision to substantially reduce advertising expenditures.

The decision by Prestige to reduce advertising substantially below historical levels is very disappointing, especially since these reductions occurred during the peak wart season. Unfortunately, we do not have absolute control over a distributor like Prestige. And a significant reduction in advertising, especially for an OTC product, will have a significant negative impact on consumer purchases.

The latest forecast from Prestige, which we only recently received, shows a $5.5 million shortfall in sales for the year. Later, Ron will explain the impact of this development on our full-year guidance.

SSL, our OTC distributor in Europe, Australia and New Zealand has also delivered some disappointing news. Earlier this year we received assurances that SSL would meet its minimum purchase commitments, and we fully expected them to do so as indicated in our public guidance. We were comfortable with this because SSL had been extremely successful in the UK and seemed to be moving forward with commercial launches in France, Germany and other countries. However, we recently learned that orders for the second half of the year may be lower than expected, primarily due to the delayed or slower launch of the product in countries outside the UK. We have also reflected this development in our updated guidance.

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 those motions, with a trial date expected to be scheduled shortly thereafter. We are hoping to hear something from the court later this summer or in the early fall timeframe.

Lastly, sales in the second quarter to the Insurance Risk Assessment market declined by $700,000 from 2005. We believe this is attributable to an overall decrease in the number of applications for life insurance, and an increase in the average policy amount. 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. These efforts are starting to bear fruit as we recently signed three new large accounts from which we expect 50,000 or more specimens processed per year. While this will not turn this part of the business around, it is clearly movement in the right direction.

As discussed previously, 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, and we expect the submission to be completed and filed this fall.

As previously announced, earlier this year we decided to purchase our two lead facilities located on the south side of Bethlehem, Pennsylvania. 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. These purchases closed on June 30th. The primary benefit of owning rather than leasing these buildings will be an estimated reduction in operating expenses of approximately $400,000 to $500,000 on an annualized basis. Owning these facilities will also give us greater flexibility to expand as needed in the future.

Finally, the work of a cross-functional team to implement an enterprise resource software system for the Company is continuing and is making good progress. We've still expect to implement this system during the last half of 2006, with a go-live date scheduled for January 1, 2007.

Before turning the call over to Ron Spair, I would also like to mention two recent additions to our management team. First, we hired Mr. Mark Kirtland as Senior Vice President, Business Development. Mark has more than 14 years of experience in the healthcare and medical diagnostic field and will lead our efforts to evaluate, license and acquire new technologies and products. Mark most recently worked for Valeo Medical and, prior to that, for Cytyc Corporation, Wyeth and McKinsey & Company. I believe he will be a strong contributor to our management team.

Secondly, we also hired Mr. Tony Hill to head up our international sales efforts. Tony comes to OraSure from Sigma-Aldrich, with more than 15 years experience in international sales, primarily in Europe. He will be based in the UK and will help drive the growth of our business in Europe, the Middle East, Africa and Asia.

And with that, I will turn the call over to Ron Spair.

Thanks, Doug, and good afternoon, everyone.

Total revenues for Q2 were $17.6 million, which is slightly more than revenues for the same period in 2005. Increased sales of the Company's Intercept Oral Fluid Drug Test and Cryosurgical Systems were offset by a decline in Insurance Risk Assessment Testing revenues.

In the infectious disease market, sales of $7.6 million were essentially flat when compared to 2005. Strong growth in hospital sales and our direct sales to the public health market were offset by the absence during the quarter of any significant deployment under bulk government purchase order.

During Q2 we sold 6.6 million of OraQuick, which included 4.1 million in direct sales to the public health marketplace, 2.1 million in sales to Abbott for distribution to hospital, 261,000 in sales to the CDC, and 230,000 into the international marketplace. During the second quarter of 2005, we had more than 2.6 million in sales to the CDC and SAMHSA.

Sales of the OraSure device in the infectious disease market decreased to $919,000 in the quarter as compared to $1.2 million in the second 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 third quarter of 2006 to increase slightly from Q2, reflecting continued growth in the public health and hospital markets, and deployment under the latest bulk purchase orders from both the CDC and SAMHSA.

In the Substance Abuse Testing market, sales were $4 million, up 14% over the second quarter of 2005.

Total Intercept sales were up 8% over the second quarter of 2005, reflecting increases in workplace testing, criminal justice and international. Sales of Intercept devices, which are predictive of future demand, totaled $1.7 million, up 1% in Q2 versus 2005, with workplace down 9% criminal-justice up 34%, international down 15%, and direct sales through our website up 56%.

Sales of Intercept Oral Fluid Drug Assays are indicative of the number of oral fluid specimens being processed. Assay sales in the second quarter grew by 13% over last year to $1.5 million, with workplace up 27%, criminal justice down 6%, and international up 2%. We expect our Substance Abuse revenues to increase in the Q3 and throughout the remainder of 2006 as additional new Intercept accounts begin implementation.

Sales to the Cryosurgical Systems market in Q2 were up 7% compared to last year. Sales of Histofreezer into the U.S. professional market increased 19% to $1.3 million, and Histofreezer sales to the international professional market increased 82% to $550,000 as compared to 2005 due to abnormally low revenues in the year ago period.

Domestic OTC sales were down 25% from Q2 of last year to $2.1 million. Sales of our international OTC Cryosurgical products totaled $580,000 during the second quarter of 2006. We expect total Cryosurgical revenues to approximate $4 million in the third quarter of 2006.

Insurance risk assessment sales of $1.3 million in the quarter were 34% 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 expect that third quarter revenues will approximate $1.6 million in this market.

Turning to gross margin. Our gross margin for the second quarter of 2006 was 63%, which is an improvement over the 54% gross margin for the same period in 2005. Gross margin for the second quarter of 2005 reflected a $1.5 million charge associated with the up-link assets, which accounts for the bulk of the variance.

Our operating expenses for the second quarter increased to $9.7 million from $8.5 million last year. This increase was primarily attributable to charges for stock option expensing and a $600,000 charge for in-process research and development.

Our operating margin for the second quarter was 8%, up 38% over the comparable period last year.

Net income for the second quarter was $1.2 million or $0.03 per share on a fully diluted basis. This compares to net income of $1.4 million or $0.03 per share on a fully diluted basis for the second quarter of 2005.

The second quarter of 2006 includes a charge of $953,000 related to stock option expensing, and a $991,000 provision for income taxes. If these items were excluded, our net income for the second quarter would have been $3.2 million or $0.07 per share on a fully diluted basis.

Our effective tax rate for financial statement purposes was 45%, and was heavily influenced by the inclusion of stock option expense in this calculations.

Turning to cash flow from operations and liquidity. Our balance sheet and cash flow specifically, we continue to maintain a very strong liquidity position. The Company's cash and short-term investments were $84.6 million, working capital was $96.8 million at June 30th, 2006. Cash flow from operations was positive at $5.6 million for the second quarter, an improvement of $1.3 million over the comparable period in 2005. Capital expenditures in the second quarter amounted to $10.2 million. We also received $136,000 from the exercise of stock options.

Depreciation and amortization amounted to $449,000 for the quarter. Our accounts receivable days sales outstanding decreased slightly from 58 days at March 31st, 2006 to 52 days at June 30th, 2006.

Turning to our guidance for the third quarter and the full-year 2006. I believe we should first look at what the prior projections were.

During our call last quarter, we indicated that we would be splitting our guidance between the basic business and updating that with government orders when received. The base business had been projected to account for $78 million in FY 2006 revenues, and $0.09 to $0.11 in earnings per share. We increased this when we received the CDC order to target $80 million in revenues and $0.10 to $0.12 in earnings per share.

As you know, our practice is to review tends and update our guidance in connection with each quarterly earnings call. We were recently informed by our OTC Cryosurgery distributors that their business will be materially lower than expected, and that they are lowering their forecast for the year. This is particularly troublesome as their success in the second and third quarters generally sets the tone for the year as we are currently in the height of the wart season in the northern hemisphere. This season typically runs from May to September.

Prestige brands, who markets our OTC Cryosurgery product, known as the Freeze-Off Compound-W brand name, has recently informed us that they will not be purchasing any product during the third quarter. And for the year, their purchases are now expected to be less than 50% of their purchases from last year. We believe the increased strength of competing OTC Cryosurgical products, Prestige's ongoing efforts to reduce inventory levels, as well as their surprising decision to cut back on advertising during the peak wart season are the main reasons for this change in their forecast.

SSL has also had mixed success with their campaign in Europe. They have established the Dr. Scholl's brand as the number one brand in the UK, but have been slower in rolling out their product offering to all countries of Europe. We are monitoring this situation very closely since it may result in their not achieving their contractual minimums for 2006 unless their purchase a large amount of product in the fourth quarter.

At this point, based on recent statements by SSL, achieving their contractual minimums looks unlikely. Moreover, we are concerned that a large buy-in like that at the end of the year could negatively affect purchases and, thus, expected revenues in early 2007. We have been in frequent dialogue with SSL over the last several weeks after being made aware of this situation, and are exploring our options in these markets should they not perform as originally expected.

In light of these events, we are currently forecasting revenues of $17 to $17.5 million for the third quarter, and revenues ranging from $70 to $73 million for FY '06, respectively.

Our earnings per share are expected to amount to break even to $0.01 per share in the third quarter, and from $0.04 to $0.07 for the full year.

Additionally, it is worth noting that subsequent to our discussions with the FDA related to the clinical trials for our OTC OraQuick project, we had determined that the cost associated with the clinical trials will be substantial and could exceed $10 million. Although we expect to begin this project shortly, this should not affect 2006 as most of these costs will be incurred in 2007.

I will now turn it back over to Doug.

Thanks, Ron.

One final strategic area I would like to address is our efforts to expand OraSure's 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. Most recently, we presented performance data on this prototype test at the American Association of Clinical Chemistry meeting in Chicago in July. We are pleased with the progress to date and our development efforts continue as expected.

We also continue to evaluate another of other opportunities to acquire or otherwise gain access to tests in the infectious disease point of care market.

Before taking your questions, I would like to add a little context to what is happening in our business. Although we're disappointed by the performance of our over-the-counter Cryosurgical business in the short run, we continue to believe that sales of the OTC product will continue to grow, especially in the international arena. We are working with both Prestige and SSL in order to help improve things in the U.S. and Canada, and to accelerate the launches throughout Europe.

However, the challenges we face in our OTC Cryosurgical business should not overshadow the continued strength we are experiencing in other core areas. For example, infectious disease and substance abuse testing business continue to do quite well, and we expect that to continue.

Demand for OraQuick remains strong, and sales during the second quarter were sufficient to overcome the lack of shipments under government bulk purchase orders. With the signing of several new distributors, we continue to develop a strong foundation for future international sales of OraQuick.

One of the biggest opportunities facing our company is the over-the-counter distribution of OraQuick. And during the quarter, we made significant progress towards obtaining FDA approval of this product and that work continues.

On the new product development side, we're making great strides in developing a robust and state of the art Rapid Hepatitis C test, which we expect to contribute significantly to our future growth. Similarly, our Substance Abuse Testing business continues to grow nicely, as evidenced by the record number of oral fluid specimens processed during the quarter.

So, for these reasons, we remain extremely optimistic about OraSure and its future prospects. And with that, I'd like to open the floor for questions.

[OPERATOR INSTRUCTIONS.] Ed Shenkan from Needham & Co.

Hi, Doug and Ron. A couple of questions, if I could, about your clinical trials for the OraQuick product. Could you tell us that, as you've done initial research on the package label and the instructions for use, what's been the feedback from the patients who are trying it? And before you go into now the clinical study, how do you expect those labels to be received?

Well, Ed, when we did the original market research and the product concept testing, we tested a number of different package configurations and product labels. We haven't done that work yet as part of the official clinical trial yet. But certainly, in the original work we did, I think more than a year ago, obviously that confirmed the attractiveness of the opportunity. That's how we were able to quantify what we believe is a very attractive market opportunity.

Have you recently tried the label with some perspective consumers, ahead of what you've done with the FDA?

No, that's part of the second phase of the clinical trial. That will be a little bit later.

And what's going to be the most expensive part, as you said it's going to cost about $10 million next year? Can you walk us through where the spending will occur, or what parts of the development are you going to spend it on?

Certainly, there's multiple phases to the trial that's prescribed by the FDA. And there's going to be a fair amount of consumer acceptance testing and proficiency testing. And depending on the number of consumers that need to be exposed to the product in different phases of the trial, that will certainly be one of the major cost drivers.

As a last follow-up, you submitted what the IDE in the last 30 days. When do you expect to hear and then when would you really begin this clinical study?

We submitted an IDE just last week. And the FDA has committed to us that they would review and comment back on the IDEs within 30 working days. So, that would be our expectation.

And then would you begin immediately after you hear form them if it was positive?

Assuming they accepted our application, then we would begin on those initial studies. Now, there will be subsequent IDE applications that will go in for different phases of the clinical studies.

And is there any comment on what the initial IDE is that you're starting on?

As I mentioned, it relates to the first phase of studies, which are the flex studies.

Perfect. I'll get back in queue.

David Lewis from Thomas Weisel Partners.

Good afternoon. Just real quickly, Doug, in terms of two businesses that seemed to rebound in the quarter, I want to make sure those trends are sort of consistent. So, in Insurance Risk Assessment, do you now think, just looking at actually claims being processed that we've definitely troughed out in that business?

You know, David, I wouldn't say definitely troughed out, but we believe that things have stabilized somewhat. And obviously, we're watching that pretty carefully. We had some success in securing some new accounts this last quarter, which I think will help. We're going to continue to watch it pretty carefully.

And Doug, in terms of overseas, obviously you were counting on those revenues for the back half of the year. Maybe you mentioned some other options that are available to the company. What would some of those options be if that primary provider in Europe does not meet expectations?

Well, we really aren't prepared to disclose that right now. By contract we want to explore what our options are there. They have minimum purchase requirements for 2005. They have been given exclusive rights to the Europe, Australia and New Zealand. And we're going to continue to work with SSL to see if we can't accelerate the launches in those countries and minimize the opportunity yet this year.

Okay. And this $10 million number for clinical trials that you're referring to, give us a sense of what you were thinking clinical trials could have cost three or six months ago.

You know, David, until we met with the FDA on -- well, certainly the blood product advisory committee meeting in March and then the subsequent meeting we had with the FDA early in May, that's why we're been very hesitant to put out what we thought were going to be the costs or the timeline. And so, now that we've got better clarity on the path forward, I think we're starting to be able to frame in some estimates on what these expenses might be.

But based on your discussions with the FDA, do you feel that the extent of the trials is more significant? Because on last quarter's conference call we talked about the outcome of recent meetings with [BPAC] being somewhat similar to your expectations. I'm just trying to understand the disconnect.

Well, I think if we said that the outcome from the BPAC meeting was similar to our expectations, I think that related to our expectations that we would need to do some level of consumer proficiency testing, that we have to do label comprehension studies and the like, that the scope and extend of those, obviously, have now been better clarified. And it's going to be a significant undertaking. We think we'll be successful in executing those studies and we still believe we're in a great position from a competitive perspective. So, we're excited about that. But, we're just now able to start framing in what the extend of these studies might be.

Okay. And one last question. Ron, just in terms of the third quarter number. You said it would be up slightly for infectious disease. Can you give us a sense of the magnitude of that slight increase?

Less than $8 million, David.

Less than $8 million in total number?

Right.

Great. All right. Thank you very much.

Wade King from Montgomery & Co.

Hey, guys. Can you hear me?

Hey, Wade.

Hey, Wade.

Can I ask -- you made some comments on the guidelines and you were referencing, if I heard you correctly, the SAMHSA guidelines. Could you distinguish that between CDC related guidelines that we thought might come in September?

Yes. The CDC guidelines refer to the recommendation to make HIV testing more routine in healthcare settings.

Oh, I'm sorry. I didn't mean -- I understand what the guidelines represent. Could you just -- could you clarify what your expectations for those guidelines are and that timeframe work, Doug or Ron, versus the comments made regarding SAMHSA related guidelines.

Our expectation for the CDC guidelines is that they'll be issued within the next couple of months. The SAMHSA guidelines that we referenced refer to the allowance of oral fluid testing in substance abuse for federal workers.

Right. Okay. So, you still -- there's no change to your expectation on the CDC front? You still expect that within the next couple of months [inaudible].

That's correct.

Okay. Could you give us an idea, please, as to how much -- you'd commented previously on your expectations for the DC order. How far along are you in terms of fulfilling that?

Well, as I mentioned, we received an order for 75,000 units from the District of Columbia.

For this year.

That's right. The campaign launched on June 26th or 27th, I can't remember the exact date. So, we're about a month into the campaign. And the initial shipment to them went out and those tests are being deployed. We expect additional shipments to go out to DC this month and next month.

We also then expect an additional order later on in the year, the size of which is to be determined.

When you say additional order, Doug, are you talking about from DC or are you talking about in terms of replicating this type of program in other major cities?

I'm talking about from DC. So, I said we received the 75,000 unit order at the beginning of the quarter and now we -- what I'm saying is we would expect some additional order later on in the year after this order is fulfilled.

Relative to other types of programs like the DC initiative, we are actively -- we're in active discussions with other communities, other cities, about possibly replicating this program. We started talking to DC about doing this back in the latter part of 2005 and, as you know, we launched it at the end of June.

So, there's a lot of planning that has to take place, a lot of different people that need to participate and be part of this whole process. And so, as we go to other cities, we're talking to a lot of stakeholders. But, there's a very high level of interest, both at the federal, state and city level as to what's going on in DC and possibly doing this in other communities.

Of course. And [inaudible] suggested, it sounded like you were close as it relates to possibly some kind of agreement as it relates to New York City, which would be another landmark city as part of this program. Could you make any comment on that or any other major areas, L.A., etc., where that would have a significant impact on the business?

Well, we received a significant contract from the city of New York for -- it's a multi-year contract for approximately $6 million in OraQuick product. And New York is one of the communities that we're speaking with, amongst others.

Okay. Very good. And lastly, any comments on potential prospects for a new partner replacing SSL? And would you expect SSL to at least meet their contractual minimums until a new partnership is established?

At this point in time, SSL has exclusive rights to the product. And so, we haven't changed that and--.

Okay, very good. All right, gentlemen, thank you very much.

Bill Quirk from RBC Capital Markets.

Mr. Quirk has withdrawn his question. Your next question comes from Aaron Lindberg from William Smith Co.

Hello. Let's try a little bit different tact on the OTC study. Can you give us an idea as to how many you'd expect to enroll in the initial studies?

Yes. We haven't confirmed that as of yet. Obviously, that will be part of each one of the different phases and will be ultimately decided through the IDE submission process.

Can you kind of put us in the ballpark for the initial one here, whether we're looking at 200 or 2,000?

Yes, we really haven't disclosed that and, at this point in time, I think it's premature.

Okay. How about any updates to your strategy as it relates to the [inaudible] given the reduced guidance, both in the U.S. and abroad?

This relates to the Plough surgery lawsuit?

Yes.

As you know, we've gone through the discovery process and both parties filed motions for summary judgment back in November. We're waiting on the judge to rule on those motions and would expect -- or are hopeful that will happen soon. And then as soon as she rules, we would expect a trial date to be set. We're still confident in our position based on everything that's been discovered and discussed to date and eager to go to trial.

Okay. So, now change based on kind of cost benefit analysis with reduced guidance and forecasts here, at least in the near term?

We still think we have a very strong case. We've made the bulk of our investment in this already and we've filed for injunctive relief, for damages, which continue to mount, and we're looking forward to getting the trial behind us.

Okay. Last question. Can you give us an update on the progress with improving the shelf life for OraQuick Advance?

We continue to make progress on that. Obviously, it's one of the top priorities for the company and we're pursuing multiple avenues to make that happen. And we believe that we'll be successful there.

And without substantial additional regulatory work?

Well, that's clearly the objective.

Okay. But no new clarification as it relates to your ability to do it?

Just that we're very confident based on the work that's been completed to date.

Okay. Excellent. Thank you.

Ladies and gentlemen, that does conclude the amount of time for questions.

Mr. Michels, do you have any closing remarks?

No, I just want to thank everybody for being on the call tonight and appreciate your continued support of the company. Have a great evening.

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