OraSure Technologies Inc (OSUR) 2006 Q3 法說會逐字稿

Good day, everyone, and welcome to the OraSure Technologies' 2006 Q3 Financial Results Conference Call and simultaneous webcast. [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 PM Eastern Time today regarding our 2006 third quarter financial results and certain other matters. The press release is available to you on our web site at www.orasure.com or by calling 610-882-1820. If you go to our website, the press release can be accessed by opening the Investor Relations page and clicking on the link for New Releases.

This call is also available, real-time, on our web site and will be archived there for seven days. Alternatively, you can listen to an archive of this call until midnight November 8, 2006 by calling 800-642-1687 for domestic or 706-645-9291 for international. The access code is 8995949.

With us today are Doug Michels, President and Chief Executive Officer, and Ron Spair, Chief Operating Officer and Chief Financial Officer. Doug and Ron will begin with opening statements and then follow with a Q&A 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-GAAP and GAAP financial measures is contained in the press release issued today.

I must remind you that this call may contain certain forward-looking statements, including statements with respect to revenues, profitability, EPS and other financial performance, product development, performance, shipments and markets, and regulatory filings and approvals. Actual results could be significantly different. Factors that could affect results are discussed more fully in the SEC filings of OraSure Technologies, including its registration statements, its annual report on Form 10-K for the year ended December 31, 2005, its quarterly reports on Form 10-Q, and its other SEC Filings.

Although forward-looking statements help to provide complete information about future prospects, listeners should keep in mind that forward-looking statements may not be reliable. The Company undertakes no obligation to update any forward-looking statements to reflect events or circumstances after this call.

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

Great. Thank you, Kathy, and good afternoon, everyone, and welcome to our third 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 Operating Officer and CFO, Ron Spair, will then provide a more detailed review of our financial results for the third quarter and our expectations for the rest of the year.

Where relevant, I will also provide an update on the progress we are making against our strategic initiatives. We will conclude by opening the floor for questions.

We are very pleased with the strong financial results reported for the third quarter. We exceeded expectations on both the top and bottom lines and our business performed well, especially in the infectious disease and substance abuse testing market.

We generated nearly $6.0 million in cash flow from operations during the quarter and our balance sheet is very strong. We continue to build the foundation for a very bright future.

Third quarter revenues were $17.6 million, which were higher than projected during our last conference call. This compares to revenues of $18.1 million in the third quarter of 2005. Increased revenues from the substance abuse testing, infectious disease testing and insurance risk assessment market offset lower revenues from the cryosurgical systems market.

Net income for third quarter was substantially higher than expected, at $2.1 million, which represents $0.05 per share on a fully diluted basis. This compares to net income of $3.8 million or $0.08 per share during the third quarter of 2005.

The current quarter results include the impact of stock option expensing and are fully taxed. The results for 2005 do not reflect these items. As Ron will explain, if these items were eliminated, our bottom line would have increased by 14% for the current quarter.

Our cash and liquidity position remains strong at the end of the quarter. We had $89.5 million in cash and short-term investments and about $98.1 million in working capital at the end of Q3.

In summary, we have had a very good third quarter, exceeding expectations on the top line and especially on the bottom line. In addition and equally important, we continued to make significant progress against our strategic objectives, which I will discuss in more detail later in the call.

As example, we continued to grow our base business, as evidenced by the strong sales of OraQuick to the public health market, the signing of a Letter of Intent related to the development and commercialization of fully automated oral fluid assays for our Intercept drug testing system. And the signing of additional new distributors and the receipt of additional regulatory approvals in numerous foreign countries.

Second, we are making progress on expanding our infectious disease point of care testing business, as evidenced by the continued development of our OraQuick HCV test and the generation of strong performance data.

Finally, on the over-the-counter (OTC) front, we recently initiated several laboratory-based operational studies, which will be needed to support a submission for FDA approval of our OraQuick test for use in the OTC market. We have also made good progress in planning for the start of our next phase of clinical study.

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

Revenues for infectious disease testing increased during the third quarter, primarily as a result of the continued strong performance of our OraQuick Advance test. Including the recent testing initiative by the District of Columbia (DC), sales to the public health market during the quarter increased 80% over last year and are up 82% for the first three quarters of this year. In addition, sales to the CDC during the third quarter increased 23% over the comparable period of 2005.

The significant growth experienced in direct sales to the public health market is due to several factors. The bulk purchase orders received from the federal government have helped seed the public health market and create significant demand for our OraQuick test throughout the country. Additionally, we have devoted resources to expand our direct sales to public health.

Finally, OraQuick continues to be the test of choice due to its high performance, flexibility, ease of use and oral fluid capabilities. These factors, we believe, should help maintain future growth for our infectious disease business.

Our relationship with Abbott Laboratories, which distributes OraQuick primarily to hospitals, also remains very strong. Sales to Abbott for the first three quarters of 2006 are up about 46%, compared to 2005. And even more important, Abbott's out sales to its customers increased 29% for the third quarter and 74% YTD. We continue to work closely with Abbott to drive adoption of rapid testing and specifically OraQuick Advance in the hospital market.

During the quarter we delivered additional test in support of a major HIV testing initiative announced this summer by the DC. As you may recall, the District announced a program called, "Coming Together to Stop HIV in DC", with a goal of ensuring that all of the approximately 500,000 District residents know their HIV status by 2007. So far, we have sold 75,000 OraQuick Advance tests to the District and we expect additional orders to occur in 2007.

The success of the DC initiative was highlighted at a recent symposium hosted by the Kaiser Family Foundation, where the District reported an HIV prevalence rate of 3.0% out of the first 14,000 tests conducted. This is twice as high as the national average. This data further illustrates the value of OraQuick Advance as a tool to identify individuals infected with HIV and enable them to get connected to care.

Our efforts with other metropolitan areas have also continued to progress. We are in discussions with several other major metropolitan areas that intend to use OraQuick in similar programs. It is clear they are very interested in the initiative in Washington, DC and we are working with these cities to potentially launch similar major HIV testing initiatives.

And perhaps the most significant development during the third quarter came in September, when the CDC issued its long-awaited HIV testing recommendations entitled, The Revised Recommendations for HIV Testing of Adults, Adolescents and Pregnant Women in Healthcare Settings.

The objectives of these revised recommendations are to normalize HIV screening as a routine part of medical care in healthcare settings, by fostering early detection of HIV infection, identifying and counseling persons with unrecognized HIV infections and linking them to clinical and prevention services. And further reducing perinatal transmission of HIV in the United States.

The recommendations are intended for all healthcare providers in clinical settings, including those working in hospital emergency departments, urgent care clinics, inpatient services, substance abuse treatment clinics, public health clinics, community clinics, correctional healthcare facilities and primary care settings.

The recommendations call for routine HIV testing of all patients aged 13 to 64 and represent a substantial step beyond prior guidelines, which recommended routine testing only for high-risk persons or those in acute care settings where HIV prevalence exceeded 1.0%.

Although it may take several years to fully implement these recommendations, we believe the CDC's leadership in this area will continue to drive increasing demand for rapid HIV testing generally and OraQuick Advance in particular.

The CDC is actively promoting these revised recommendations and they're specifically targeting hospitals, OB/GYNs and general practitioners. In addition, the CDC recently selected the cities of Philadelphia and Cleveland to pilot an HIV awareness campaign aimed at young African American women.

This campaign, which is called "Take Charge, Take the Test" will use billboards, handouts and various other communication tools developed through focus group testing to prompt people to question their HIV status and get tested. These efforts, along with the direct communication of the recommendations to customers through our sales force and Abbott Laboratories should help encourage additional testing and use of OraQuick.

One early example of the impact of the CDC's new recommendations was just recently announced by Howard University Hospital in Washington, DC. In response to the recommendation, Howard is now offering routine HIV testing with OraQuick Advance to all patients, employees and students.

The tests are being offered free of charge and the hospital is actually going beyond the CDC's recommendation by advocating that the upper age limit for people getting tested by increased from 64 to 84 years of age. This is the type of response we were expecting and we believe it will be used as a model for other hospitals.

Sales of OraQuick Advance are also growing in markets outside of traditional public health. In particular, our efforts to sell to family planning clinics such as Planned Parenthood are increasing nicely. With specific reference to Planned Parenthood, we are now in 35% of their network affiliates. We are also gaining traction at a number of student health centers and corrections departments or facilities in several states.

As previously indicated, our hospital business is performing very well, due largely to our close work with Abbott. During the third quarter, 51 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, 23 new emergency departments and 31 new infectious disease clinics as customers.

During the quarter, we also once again joined with the Latino Commission on Aids and the Congressional Hispanic Caucus in recognizing the Annual National Latino Aids Awareness Day. This event is an annual call to action to Latinos to get educated about HIV and to get tested, so that they know their status. This was yet another example of our continuing effort to broaden the availability of rapid HIV testing among many different populations in the United States.

On the international front, there have been several developments of note. We continue our efforts to obtain registration and regulatory approval for OraQuick Advance in Africa and several other foreign countries and territories. As a result, OraQuick is now being validated for use with oral fluid in a number of African countries.

A top priority has been to obtain CE Mark for OraQuick Advance, which is required to sell this product in the EU. We continue to work closely with a notifying body to obtain final approval as soon as possible. We have also continued to meet with potential marketing and distribution partners.

We have also prioritized identifying and signing new distributors for our products in foreign territories. We have signed new distribution agreements for OraQuick in Central American, Argentina and Brazil. We are also close to finalizing an agreement for Russia and are continuing discussions for China and Thailand.

With respect to other products, we have signed a new distribution agreement for Histofreezer in Australia and New Zealand and have made progress on distribution agreements for Histofreezer in Mexico and Japan and for Intercept in Europe and other countries. We are also continuing to work through the registration process for OraQuick in Israel and Mexico and for Histofreezer in Korea.

Finally, we've made good progress in our efforts to ultimately obtain FDA approval of an OraQuick Advance HIV OTC test. Late in the third quarter, we announced the start of several laboratory-based operational studies as an initial step towards obtaining OTC approval.

These studies are part of a group of R&D protocols known as stress or flex studies that are designed to demonstrate the robustness of the OraQuick test for home use. These studies are designed to determine the impact of environmental and common household factors on the performance of OraQuick.

In conjunction with the development of clinical protocols, we have continued to develop packaging and product labeling that will be suitable for the OTC market. Significant time has also been spent on the design and development of a counseling and referral system, which will be an important element of our product offering. We continue to work diligently and make progress in this important OTC project.

Now, moving on to our cryosurgical business. Before reviewing our business results, I want to address some recent events involving our domestic OTC distributor Prestige brand.

In 2003, we signed a distribution agreement with Prestige, under which we granted Prestige exclusive distribution rights to our cryosurgical product in the OTC market in both the United States and Canada. This product is based on our patented technology and is sold under Prestige's Compound-W Freeze Off trade name.

An important provision in the agreement and one that was critical for OraSure to receive before granting exclusive distribution rights to Prestige, is a covenant not to compete. This covenant prohibits Prestige and its affiliates from either acquiring ownership of a competing cryosurgical product or manufacturing and selling a product in competition with the Freeze Off product in the OTC market.

The agreement also contains confidentiality provisions, which preclude Prestige from using any proprietary or confidential information that we provide for the benefit of anything other than the Freeze Off product.

In late September, Prestige unexpectedly announced that they had acquired a competing OTC cryosurgical wart removal product manufactured by Wartner. In the OTC cryo market, there are three brands that directly compete. The Compound-W Freeze Off product, the Wartner product, and a product made by Schering-Plough.

Prestige acquired ownership of the Wartner product and we believe they are selling the product in the U.S. OTC market in direct competition against Compound-W Freeze Off, with some transitional logistical support being provided by the prior owner of that product.

It is quite clear that Prestige's actions constitute a material breach of our distribution agreement and Prestige has not disputed the enforceability of the non-compete provision or that its newly acquired Wartner product directly competes with the Freeze Off product. Instead, they have asserted that we are somehow not being damaged by their actions and therefore, any breach is not material enough to warrant any remedies on the part of OraSure.

We strongly disagree. Our distribution agreement mandates that the parties engage in mediation and then binding arbitration in order to resolve our dispute. We have initiated this provision and we intend to pursue all available remedies.

Because we are going through the mediation and arbitration process, I'm afraid that I will not be able to comment further on any expectations regarding our future relationship with Prestige. We can, however, answer clarifying questions and answer questions, which clarify what has already occurred. Our priority is to protect this important part of our business.

Turning now to our cryosurgical systems business performance during the third quarter, total revenues were down 34% over 2005. The primary reason for this reduction was the absence of any sales of the Freeze Off product to Prestige brands during the quarter.

As discussed on our last conference call in July, Prestige unexpectedly announced a 50% reduction to its forecast for 2006. We were told by Prestige this was due to increased competition, ongoing efforts to reduce inventory levels and a planned reduction in advertising expenses for the year. Of course we have since learned they were also moving forward with the Wartner acquisition during this period.

Sales in the European OTC market to our distributor SSL increased 255% over 2005. This increase reflects the fact that the third quarter of 2005 was the period during which we signed our agreement with SSL, so it only reflects initial sales under the agreement.

On the professional side, Histofreezer revenues are down about 11%, largely because of fluctuations in distributor ordering patterns.

And finally, there are no developments to report in the Schering-Plough patent infringement litigation, as we continue to wait for the court's decision on the pending motions for summary judgment.

During the third quarter, our Intercept lab-based oral fluid drug test continued it's upward trend. Total Intercept revenues in the third quarter were up 15% over 2005, as a result of increases in workplace testing, criminal justice, and international.

During the quarter we signed 31 new Intercept accounts, - 14 in workplace and 17 in criminal justice. Six of these accounts are expected to be large Intercept users. Workplace specimens processed in July, August, and September were up 13% from 2005 and criminal justice specimens processed for the same period were up 68%.

The most significant development during the quarter in the substance abuse area was the signing of a Letter of Intent with Roche Diagnostics. The letter outlines our intention to negotiate a joint development and commercialization agreement for fully automated homogeneous drugs of abuse assays that can run on random access chemistry analyzers.

Oral fluid samples will be collected with OraSure's Intercept collector and then tested on analyzers that use Roche's kinetic interaction of microparticles in solution, or KIMS technology. The key benefit to our laboratory customers will be increased efficiencies and quicker turnaround time. We believe the development of these new fully automated assays will play a key role in the continued growth of our substance abuse testing business for many years to come.

Last quarter we reported that the Governor of Oklahoma signed a bill approving the use of oral fluids for workplace testing, which will go into effect November 1st. We expect to capitalize on this initiative in the fourth quarter, with several of our current customers, by helping to roll out Intercept testing at their locations in this state.

And in the third quarter, our criminal justice team signed up another lab partner in the State of California that will be offering Intercept to several probation offices in this state and we believe this will be an important new user of Intercept.

And finally, although not normally mentioned on our earnings calls, OraSure's Q.E.D. Rapid Saliva Alcohol test is also a part of our substance abuse testing division. This product has experienced significant growth in 2006 and in the third quarter, revenues from this business were up 50% from a year ago.

Lastly, sales in the third quarter to the insurance risk assessment market increased 36% compared to 2005. We believe this increase was due to fluctuations in laboratory ordering patterns that resulted in the unusually low revenues in the year-ago quarter.

So, turning to operations, as discussed briefly previously, we are continuing work to validate an automated assembly system installed in Bethlehem for our OraQuick product line. Work has also continued to implement an enterprise resource software system for the Company. We are still on track to meet a go-live date of January 1, 2007.

And before turning the call over to Ron, I'd also like to mention several changes to our management team.

First, at the Board level, we recently added Mike Celano as a new member of our Board of Directors and as a member of our Audit Committee. Mike currently serves as Vice President, Finance and Chief Financial Officer of BioRexis Pharmaceutical Corporation. Before that, he was a partner with KPMG, in charge of its Mid-Atlantic Lifesciences practice and prior to joining KPMG, ran the Life Science practice for Arthur Andersen. Mike brings a wealth of experience in accounting and financial matters and we expect him to be a strong contributor to our Board.

Secondly, we added two new members to our senior management team. Although not previously announced, we recently appointed Sarah Gunhouse as our new Vice President of Sales. Sarah was instrumental in the growth of the diagnostic business at BioSite to $275 million during her tenure there and has had substantial sales and marketing experience in the diagnostic field.

Additionally, we recently appointed Henry Cohen as the Company's new Senior Vice President, Human Resources. Henry joins the Company after serving in various senior human resources positions at J&J.

I am very pleased with these additions to our management team and believe that they will continue to make us a much stronger Company. With that, I'll turn the call over to Ron Spair.

Thanks, Doug, and good afternoon, everyone.

As Doug mentioned earlier, total revenues for the third quarter were $17.6 million, slightly less than revenues reported for the same period in 2005. Increased sales of the Company's OraQuick Advance test and Intercept oral fluid drug test, as well as higher revenues in the insurance risk assessment market offset lower sales of our cryosurgical systems products.

In the infectious disease market, sales of $7.5 million were 7.0% higher than 2005. Strong growth in our direct sales to the public health market more than offset somewhat lower sales to Abbott and slower than expected deployment under both government purchase orders.

During Q3 we sold $6.6 million of OraQuick product, which included $3.8 million in direct sales to the public health marketplace; $1.7 million in sales to Abbott for distribution primarily to hospitals; $748,000 in sales to the CDC; and $394,000 into the international marketplace.

The lower sales to Abbott were due to an inventory buildup in anticipation of the revised CDC HIV testing recommendations, which were originally expected in the summer. As Doug explained, these recommendations did not come out until September.

During the third quarter of 2005, we had approximately $1.5 million in sales to the CDC and Substance Abuse and Mental Health Services Administration (SAMHSA).

Sales of the OraSure device in the infectious disease market decreased to $906,000 in the quarter, as compared to $1.1 million in the third quarter of 2005. This reduction reflects continued customer transition from oral fluid lab-based testing to our rapid testing platform.

We expect our infectious disease revenues in the fourth quarter of 2006 to decrease from the third quarter, reflecting slower deployment under the latest bulk orders from federal and city-based initiatives and lower sales of OraSure devices.

In the substance abuse testing market, sales were $4.2 million, up 17% over the third quarter of 2005. Total Intercept sales were up 15% over the third quarter of 2005, reflecting increases in workplace testing, criminal justice and international.

Sales of Intercept devices, which are predictive of future demand, totaled $1.9 million, up 25% in the third quarter versus 2005, with workplace up 30%, criminal justice up 35%, international down 4.0%, and direct sales through our website up 30%.

Sales of Intercept oral fluid drug assays are indicative of the number of oral fluid specimens being processed. Assay sales in Q3 grew by 2.0% over last year to $1.2 million. We expect our substance abuse revenues to remain approximately the same in Q4.

Sales to the cryosurgical systems market in Q3 were down 34% compared to last year. The primary reason behind the lower Q3 revenues was the absence of any domestic OTC sales to our distributor, Prestige, during the quarter. During the same period of 2005, we had $2.6 million in domestic OTC revenues.

Sales of our international OTC cryosurgical products totaled $1.7 million during Q3, compared to $477,000 from Q3 '05. Sales of Histofreezer into the U.S. professional market were $1.8 million or 17% lower than a year ago, while Histofreezer sales to the international professional market increased 4.0% to $576,000, as compared to 2005. We expect total cryosurgical revenues to approximate $4.5 million in the fourth quarter of 2006.

Insurance risk assessment sales of $1.7 million in the quarter were 36% higher than the comparable quarter in 2005. This increase reflects a favorable comparison to a very low third quarter '05 revenue total impacted by unusually low laboratory ordering patterns. We expect that fourth quarter revenues will approximate $1.7 million in this market.

Our gross margin for the third quarter of 2006 was 64%, which is unchanged from the same period in 2005.

Our OpEx for Q3 increased to $8.8 million from $8.4 million last year. This increase was primarily attributable to charges for stock option expensing, higher new product development expenses and costs related to the implementation of our new enterprise resource planning system, offset by both lower legal and advertising costs. Our operating margin for the third quarter was 14%.

Our net income for the third quarter was $2.1 million, or $0.05 per share on a fully diluted basis. This compares to net income of $3.8 million or $0.08 per share on a fully diluted basis for the third quarter of 2005. Q3 2006 includes a charge of $945,000 related to stock option expensing and a $1.2 million provision for income taxes. If these items were excluded, our net income for the third quarter would have been $4.3 million, or $0.09 per share on a fully diluted basis.

Our effective tax rate for financial statement purposes in the third quarter was 37%.

Turning briefly to our balance sheet and cash flow, our performance in the quarter was outstanding. The Company's cash and short-term investments were $89.5 million and working capital totaled $98.1 million at September 30, 2006.

Cash flow from operations was positive at $5.9 million for the third quarter, an improvement of $2.3 million over the comparable period in 2005. Our CapEx in the third quarter amounted to $775,000. D&A amounted to $545,000 for the quarter. Our AR, DSO increased slightly from 52 days at June 30th to 53 days at September 30th.

Turning to our guidance for the fourth quarter and the full year 2006, due to the better than expected bottom line performance in the third quarter, we are increasing our full year EPS estimates between $0.09 an $0.10 per share [sic - see Press Release]. This is based on our prediction of attaining between $0.01 and $0.02 per share in the fourth quarter on revenues, in the $17 to $17.5 million range. Full year revenues are now expected to approximate between $67.5 million and $68 million.

These projections reflect the impact of the previously announced reduction in Freeze Off purchases by Prestige, a slower than expected ramp up of purchases of our international OTC cryosurgical product by SSL. And the delayed deployment of the latest bulk purchase orders received from both the CDC and SAMHSA, due to a more protracted coordination and data collection effort by these agencies.

I'd just like to go back and make one correction. We're actually increasing our full year EPS estimate to between $0.10 and $0.11 per share for the full year. I apologize.

Finally, because we are continuing to finalize and fine-tune our business plan for next year, we intend to defer any announcement of 2007 guidance. We hope to be in a position to address this on our full year 2006 conference call, which is expected to occur in early February 2007.

I'll now turn it back over to Doug.

Okay, thanks, Ron. One final area I'd like to touch on relates to our ongoing efforts to develop a rapid test for hepatitis C (Hep-C) on our OraQuick platform.

This is a major focus as we work to expand OraSure's infectious disease point of care testing business. In addition to the performance data using plasma specimens that we presented in July at the American Association of Clinical Chemistry (AACC) meeting, we have now generated preliminary feasibility data in whole blood and are currently working on the development of an oral fluid application.

We are also continuing to optimize a prototype HCV OraQuick test and remain confident that we should be able to achieve expectations for product performance. And while we're doing that, 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 before concluding, I'd like to step back and touch on a couple of items.

The year-on-year revenue growth in 2006 has been significantly impaired by the absence of government orders for OraQuick, as well as by the cryosurgery challenges with Prestige.

These short-term challenges should not overshadow the excellent growth of our infectious disease business in public health and hospitals, the continued growth of our substance abuse testing business in the criminal justice market and workplace, and very importantly, the strong financial performance of the Company in a year where overall revenue growth has been a challenge.

We also expect to stabilize our OTC cryosurgical business, both domestically and internationally. Our relationship with Prestige will either be fixed through a resolution of our pending dispute, or we will attempt to find an alternative arrangement for continuing the domestic business.

Similarly, we are close to finalizing a framework, which we believe should help SSL be more successful on the international front, and bring more predictability to this side of the business.

As I mentioned earlier in the call, we have also continued to make substantial progress against our strategic objectives of expanding our core business, further developing our infectious disease point of care offerings, and building an OTC diagnostic business.

We believe these actions are building a strong foundation for a very successful future. So, with that, I'd like to open the floor for questions.

[Operator Instructions] Ed Shenkan with Needham & Co.

Congratulations on the quarter, Doug and Ron.

Hey, Ed, thanks.

Thanks, Ed.

Prestige, you usually tell us what the expected orders are, the quarter ahead. I know you're in arbitration and such, but could you tell us what the purchase orders are expected to be for the fourth quarter?

It's approximately $1.25 million as it stands right now, Ed.

So $1.25 million?

In that range.

Okay and R&D was lighter than we expected in the quarter. Are you expecting to begin the OTC testing with consumers, which might increase significantly your R&D spend in the fourth quarter? Or when do you think that the R&D spend it going to rise significantly?

We did talk about the fact that we are still in the midst of the flex or stress studies. Additionally and concurrently with the execution against that, we're in the development cycle for the Hep-C test on the OraQuick platform and also expending resources in the collaboration with our prospective partner Roche. So that R&D effort will continue to ramp, but we have not given guidance as to when exactly we expect to be in the next phase of our OTC clinical work.

Okay. Is there any timing that you could give of when you would think you'd get OTC approval or are you going to wait until you begin more of the studies to talk about that?

No, we're not going to -- we're not in a position to give any timing. I mean, obviously that depends on how quickly we can move through the consumer studies that are planned. We said, I think, in the last call, that we'll be working through those during 2007. How quickly we move through those will depend on how soon we can get our application in and then, of course, it's up to the FDA to make their final decision on approval.

Can I ask one last question?

Go ahead.

The insurance risk business recovered in the quarter and I'm just wondering if we should see that as a recovery in the business going forward and expect that to continue. You certainly guided to another $1.7 million in the fourth quarter. Could you comment on what was the cause of the slowdown in the previous quarters? What did you fix? It looks like you're back on track.

Frankly, Ed, I think it's a little too early to predict any kind of upturn in that particular segment of the business and we're monitoring our usage patterns at our laboratory partners and feel comfortable with the $1.7 million that we've guided to for the fourth quarter.

I think, as we had discussed on the call, there were some abnormally low prior year comps, which some might exacerbate the performance metrics in this quarter. But I think it's a little too early to go out and look at some increased turnaround or penetration in this market segment at the moment.

Is there anything you could point to of why it had slowed down?

Well, I think that we had talked earlier or on prior calls about a general reduction in life insurance applications in the market, as well as some of the insurance companies looking to do more extensive testing for lower policy limit amounts. And I think that those two events had a negative effect on our revenues to the labs.

Thanks, gentlemen. I'll get back in queue.

Aaron Lindberg with William Smith & Co.

Hey, Aaron.

So what impacts are you guys seeing the field from the revised CDC guidelines?

Well, there's certainly a lot of activity. Shortly after the guidelines were released, the CDC announced this program, which we referenced, pilot that they're conducting in both Philadelphia and Cleveland, targeting African American women. We've had several discussions with hospitals, emergency room directors and the like. We're seeing a lot of activity in that regard.

We continue to work with several cities that are watching closely what's going on in Washington DC and we think we're making some nice progress there. So this is going to be a long-term effort. But certainly the CDC's announcement was viewed as a very important step forward in the effort to identify those individuals who are infected with HIV and don't know it and to get them connected to care.

Can you comment a little bit about what you're doing specifically to influence the adoption of the guidelines?

Absolutely. Obviously we're working very closely with Abbott to work with our hospital customers, to roll out best practice examples. We mentioned the situation at Howard, where they're adopting OraQuick Advance broadly across all aspects of the hospital.

There have been other examples of emergency departments that have adopted OraQuick Advance for routine screening. So we're putting that into implementation protocols that we're sharing with other customers.

Working with the CDC, talking with the CDC about how we can work collaboratively to help promote the programs that they're rolling out, educational programs to physicians' offices and the like. With our substance abuse customers, trying to help them, in terms of implementing rapid HIV screening. So it's a broad scale initiative across all those different market segments.

Excellent. Have you taken steps towards offering a private label OTC cryo product in the U.S.?

No we haven't.

Is that something that you'd consider?

We haven't eliminated any potential options for future sales. Obviously we entered into the existing relationship with both Prestige and SSL, because we thought they were the best partners to take our cryosurgery product OTC here in the U.S. and Canada and in the international markets and still believe that.

Obviously we have agreements in place and we expect our partners to live up to the terms of those agreements, which they signed. So that's where we're at right now and beyond that, I really can't comment on what other strategic options we're pursuing.

Can you give us a quick update on your progress in extending the shelf life for Advance?

Yes. That's a great question. Our existing shelf life right now is six months and we've identified shelf life extension as a key priority for the Company. We continue to work on that. We've identified some potential opportunities to extend shelf like and right now, we're in the process of validating some of those either process or other changes that we might be able to make.

And we feel very good about that and feel confident that we should be successful in extending our shelf life. We know that's a critical requirement before we launch a product OTC and we've made some nice progress there.

Excellent. Real quickly, can you comment on how you're working to capitalize on the appropriations bill currently related to rapid HIV testing?

Yes, another very, very good question. We had hoped that the appropriations bill would have already been approved. Unfortunately they're not and with congress out right now until after the election, it's going to be a little while longer.

The President's initiatives that he announced during the State of the Union Address, where he proposed in excess of $90 million towards rapid HIV testing initiative, is a very important initiative, we believe, if we're going to see increased HIV testing. And we think it represents a great opportunity for the Company.

Now there have been proposed appropriations that have come out of the House and the Senate. Those will go into conference and those proposals will be reconciled and then ultimately we'll get an approved spending bill. And obviously that can't happen soon enough. So hopefully that'll happen before the end of the year. It's possible it could drag on into the early part of 2007.

Until that time, the departments are operating under basically last year's funding level. But clearly, with the proposed plan, we'd see significantly increased moneys targeted towards rapid testing. And we believe, given our strong position both in public health and in hospitals, that we'd be well positioned to capitalize on that.

Can you just talk about what you're doing to make sure that you're positioned to receive those dollars now, as far as kind of --?

Well, the only thing we can do to make sure we're positioned to share in that is to make sure that our test is the test of choice in the marketplace and I think we've done that in spades.

I mean, we are clearly the product of choice in the public health market for rapid HIV testing. We are the market share leader in the hospital market. And so once those dollars get appropriated and then deployed, I feel confident we'll capture a fair share or a significant share of those dollars.

Also, don't forget that we're the only company with an oral fluid HIV-1/2, CLIA-waived product. And those are significant advantages, as the government tries to expand testing out to different testing locations.

Excellent. Thanks for so much time.

You bet.

Caroline Corner with Montgomery & Co.

Hi. Congratulations on the quarter.

Thanks, Caroline.

I've just got a follow-up question regarding the OTC efforts. Previously you've said total costs could approach about $10 million. Is that still a good ballpark estimate there?

I think that's a general ballpark estimate, yes. I think we should stay with that for now.

Okay and then with regard to cryo, I heard your commentary on Prestige. Can you comment a little bit of SSL? I know that that seemed to be going slowly at the beginning. It looks like the UK sales have picked up. Are you feeling good about that relationship going forward? Can you give us a little bit of color there?

Yes. We actually are feeling real good about that relationship. They did get off to a little bit slower start in terms of rolling the product out to other geographies throughout the EU. But certainly the UK is an example of where they did a comprehensive launch, really put a lot of promotion behind the product and achieved the number one position in the territory.

Now obviously, like here in the United States, we're a little bit off season right now and so through our discussions with SSL we're very confident that they're going to put a fair amount of effort behind the product in the rest of the EU, as we go into the 2007 wart season, if you will. And so we're feeling pretty good about that.

Okay and then with regard to the Prestige efforts, any -- I know you can't speak to it right now. But could you comment at all on expected spend, near-term, for legal fees, etc, related to mediation or arbitration?

I didn't --.

Caroline, I don't imagine that we're going to spend a significant amount of money as we take this through the process and if we end up with something down the road, it'll probably be something we would talk about on the next call.

Okay, very good. About a month ago, the press release talking about Inverness, Thatcher and Bio, agreements between those three companies. Can you talk a little bit about anything you know as it pertains to them getting together to have an HIV oral fluid test, and specifically as it relates to HIV-2, out there on the U.S. market?

I don't know anything more than what you've read. The ChemBio product, as we understand it, is a blood-only product and we're unaware of efforts or a product that's in a clinical for an oral fluid test.

As you know, today we compete against Trinity and Trinity has a blood rapid test and I think that we compete very effectively against them in all markets. And so we expect competition, don't take competition lightly, but believe that our product as well as our organization, our service to our customers is highly competitive.

Okay. Thanks for that. Finally, Ron, did you give any guidance for the infectious disease segment in particular? I heard the other ones. Did I miss that one?

No, not specific guidance, Caroline, just that it would be down a bit from the third quarter of 2006.

Okay, my last question. With regard to Roche collaborations, do you have any update there with regards to the timeline with any developments there?

No. No further updates at this time. Still working in the development phase of the exercise.

Okay, very good. Thanks for taking my call.

Ryan Rauch with Jefferies & Company.

Hi guys.

Hey, Ryan.

Just a couple quick ones. Ron or Doug, when do you expect the CDC and SAMHSA orders to hit your P&L? I mean, explain again why they were delayed from sort of the fourth quarter onward and just maybe walk us through? Do you think that'll hit in the first half of 2007, I would presume?

Well, Ron can speak to the revenues that we've had from CDC to date, but while he's pulling that information, the issue is simply an issue of a slightly slower deployment schedule than we've had in the past. It's primarily due to the way that the CDC has allocated product out to the different grantees and it's nothing more than that.

So we thought when we originally receive the order, that it would all or certainly the greatest majority of it would be deployed before the end of the year or it's going to bleed over into early 2007, purely a timing issue.

Right and in the third quarter, Ryan, we had approximately $750,000 in CDC revenues, which would have brought our total CDC revenues to approximately $1.0 million in the nine months ended September 30.

Okay, perfect, and then maybe on the guidance, do you -- I know you're not giving '07 guidance. But is it fair, Doug, to say, I mean, you look like you're going to be down in '06 from '05, that you expect to sort of reaccelerate in '07 top line growth? While not pinning you to a number, is it fair to say you do expect, with some of the initiatives you have and the CDC and SAMHSA orders hitting among other things, including new municipalities, that you do plan to grow in '07 on the top line? Or you'll do your best?

Absolutely.

Okay and then why is the fourth quarter profitability guidance -- are you just being conservative, Ron, or am I missing something of a onetime nature, from a positive benefit in Q3? Because if you do roughly the same level of revenues, why wouldn't your earnings be roughly the same? And if missed something, please pardon me.

No. It's not a problem at all. I think there are a number of different factors at play. We guided to revenues between $17 and $17.5 million, so there's a little drop off from the Q3 revenue number. We also talked about the R&D activities that we have going on with the OraQuick OTC, OraQuick HCV, as well as the homogeneous assay development with Roche. So we're expecting R&D expenses to go up.

We do expect revenues to accrue to us from our relationship with Prestige in the fourth quarter, which will also generate some advertising credits that are captured in the S&M line. So that'll be increased expenditures and as Caroline had indicated earlier, questioning about spend and we will, in G&A, have additional spend related to the mediation and arbitration that hasn't been factored in.

So that, coupled with a tax rate, which we expect to be higher in the fourth quarter than the one that we experienced in Q3, lead us to the guidance range that we put out there for that.

Okay and then finally, CE Mark approval. I mean, can we hope for fourth quarter, Doug, or is that a 2007 event?

We're still working on it, Ryan, and really out of our hands and in the hands of the regulators, so.

Okay, got you. Have a nice evening.

You bet, thanks.

Ed Shenkan with Needham & Co.

I wanted to ask about the sales cycles to the cities, Doug. Could you walk us through what the process is in getting a city to sign on? About how long is a reasonable time frame for a city to go through that process?

What we're finding is it's highly variable, depending on what kind of funding the city department of health might have available to it, what kind of funding or resources that the total city might have.

The process really involves enlisting the city leaders, both in the health department and the political leadership to call to action. That tends to be easier to do, because obviously HIV is a huge issue across all the major cities in the country. Next is to align the stakeholders, which takes a little bit of time and then to build the program and secure funding.

So it's months, not weeks, generally speaking. But don't forget now, since we announced the Washington, DC initiative back at the end of June, we've been working with several cities and we're making good progress. So I'm hopeful that, in the months to come, we'll have more positive announcements.

Would you expect the size of future cities to be larger or smaller? What size or are they similar to New York and--?

I'd say larger, smaller and similar.

Yes, all right, that's fair. And then another question would be with the hospitals that are implementing the new CDC guidelines. Can you tell us about what you're doing to affect lots of hospitals at one time to implement it, rather than going after a couple here and there?

Right. Well, certainly, through our relationship -- Abbott's our exclusive partner in selling to the hospitals and they've got excellent coverage across the different hospitals. We've got a very nice position with the different group purchasing organizations in the hospital segment. We've talked in previous calls about Novation and our relationship there. We continue to work with other hospital groups.

We're working on streamlined implementation protocols with Abbott so it's easier for hospitals to adopt and we're working with integrated health networks that will implement the guidelines across multiple hospitals that are part of their network. So all of those activities are in process right now.

Should we expect a watershed event that at a certain point something happens with Novation or somebody else, that we get a flurry of hospitals all of sudden implementing and in a certain quarter a jump in the revenues? Not predicting when it happens, but is something like that likely or is it more of a gradual approach?

I think that is less likely. I think it's going to be more of a gradual approach where either individual hospitals are going to adopt or integrated health networks, smaller groups of hospitals will adopt the guidelines.

Okay, thanks.

The allotted time for the call is up. We apologize to those who are 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 tonight. We look forward to talking to you after our fourth quarter results. Have a great afternoon and evening.

Goodnight.

This concludes today's Q3 2006 financial results conference call. You may now disconnect.