OraSure Technologies Inc (OSUR) 2006 Q4 法說會逐字稿

Good day, everyone, and welcome to the OraSure Technologies fourth quarter and full year 2006 financial results conference call and simultaneous webcast. As a reminder, today's conference is being recorded. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer period. (OPERATOR INSTRUCTIONS).

We will allow time for as many questions as possible. Questioners are asked to limit themselves to only a single question with no more than two follow-up questions related to the same topic. Once the follow-up is completed, a questioner can rejoin the queue for further questions.

For opening remarks and introductions, I will now turn this call over to Eileen Tavares 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 four p.m. Eastern time today regarding our fourth quarter and full year 2006 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. If you go to our website, the press release can accessed by operating the Investor Relations page and clicking on the link for the News Releases.

This call is also available real-time on our website and will be archived there for seven days. Alternatively, you can listen to an archive of this call until midnight February 20, 2007 by calling 800-642-1687 for domestic or 706-645-9291 for international. The access code is 655-4283.

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 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-GAAP and GAAP financial measures is contained in the press release issued today.

I must also remind you that this call may contain certain forward-looking statements including statements with respect to revenues, expenses, 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 the 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.

Thanks, Eileen, and good afternoon, everyone, and welcome to our fourth quarter and full year 2006 earnings conference call. We are very glad you've joined us.

Before we get to the substance of our remarks I would like to share some changes we have incorporated into the format of this call. As you may have noticed from the press release issued within the past hour, we have included more detailed financial information which was previously discussed during the conference call. We thought that including this in our press release would make it easier for all investors to review this information in advance of the call and allow us more time to focus on the future outlook for OraSure.

We are also going to change the structure of our conference call by dividing this afternoon's call into two sections. The first section of our call will deal with 2006 and our historical performance. Ron Spair, our Chief Operating Officer and CFO, will briefly review the fourth quarter and full year financial performance for 2006. We will then open the floor for a short Q&A session to answer any questions you may have on the press release and our 2006 performance.

The second half of the call will be future-oriented. We will discuss the Company's outlook as we see it including in particular, some of the significant initiatives that we're pursuing during 2007 and our financial guidance for both the first quarter and full year 2007. We will conclude by again opening the floor for questions on the forward-looking information that we provide during the second half of the call.

We hope that this change in format will make the call more informative, a bit easier to follow, and more focused on the exciting future we are creating here at OraSure. So let's get started with the first part of the call and a financial overview from Ron.

Thanks, Doug, and good afternoon, everyone. First I'll start with a brief review of the full year results. 2006 was a year where we witnessed continued growth of our infectious disease and substance abuse testing businesses and experienced disappointment in our cryosurgery sales.

As you know, the primary areas of focus for OraSure have been in the infectious disease and the substance abuse segments, and I am pleased to report revenue growth for 2006 of 12% and 17%, respectively compared to 2005. Particularly encouraging was the strong growth in our direct OraQuick sales to public health which increased by 84% over 2005 and in the hospital channel, where our OraQuick sales to Abbott were up 40% over last year.

In substance abuse, we saw revenue increase in every market segment. Our cryosurgery business was down 24% for the year as a result of lower revenues in the U.S. over the counter market.

From a the bottom line perspective, we actually exceeded our strong performance for 2005 when you adjust for stock option expense and taxes. After making these adjustments, our fully diluted earnings per share before charges for 2006 grew 24% from $0.21 to $0.26 as we managed costs while making necessary investments for the future.

During 2006, we entered into a number of strategic relationships that will help drive our business over the coming years. We have partnered with Washington, D.C. and Philadelphia to promote rapid HIV testing throughout these cities. This has led to additional opportunities with cities around the country looking to emulate the model.

We entered into an agreement with Schering-Plough to collaborate on the development of a rapid HCV test on the OraQuick platform, and promotion of that test in the U.S. physicians office market. We believe that the market potential for such a test is significant, as Doug will explain later in the call.

We are also partnering with Roche for the development of oral fluid homogeneous assays for our intercept product line, which will help our lab partners improve their efficiency and reduce costs.

Internationally, we entered into new product distribution agreements for OraQuick and our cryosurgery products in a number of countries. This begins to expand the infrastructure necessary to execute our revenue growth strategy upon receipt of regulatory approvals around the world.

Now I would like to turn to our fourth quarter results. We are very pleased with the strong financial results reported for the fourth quarter of 2006. We exceeded expectations on the top line and our business performed well, especially in the infectious disease and substance abuse testing markets.

Total revenues for Q4 were $17.7 million, which is slightly less than revenues reported for the same period in 2005. The prior period included a $2.7 million stocking order from SSL for their European launch. Increased sales of the Company's OraQuick ADVANCE test and Intercept oral fluid drug test during Q4 nearly offset completely the lower sales of our cryosurgical systems products.

In the infectious disease market, we booked record sales of $7.9 million, 26% higher than 2005. Record revenues of $4.5 million in our direct sales to the public health market and higher than expected sales to Abbott drove this segment of the business.

In the substance abuse testing market, sales were $4.1 million, up 17% over the fourth quarter of 2005. It is worth noting the strong performance of our workplace testing business here, which was up 37% over 2005, and up 10% over the third quarter of 2006.

Sales to the cryosurgical systems market in Q4 were down 37% compared to 2005. Primary reason behind the lower Q4 revenues was the unfavorable comparison versus the prior year's quarter which included the $2.7 million stocking order from SSL.

Insurance risk assessment of 1.4 million in the quarter were essentially flat when compared to the comparable quarter in 2005. Our gross margin for the fourth quarter of 2006 was 65%, significantly above 2005's fourth quarter gross margin of 60%, resulting primarily from increased efficiencies in manufacturing operations.

Turning to operating expenses -- research and development expenses were up approximately $1.4 million primarily as a result of an increase of approximately $650,000 in product development costs. A charge for in-process research and development and increased staffing related charges including stock option expenses accounted for the balance of the increase.

Sales and marketing expenses increased approximately $200,000, primarily as a result of increased staffing-related charges including stock option expenses, partially offset by decreased advertising reimbursement payable under our agreement with Prestige brands.

G&A expenses increased approximately $500,000, primarily as a result of increased staffing-related charges including stock option expenses offset by substantially lower legal expenses.

Our net income from Q4 was $1 million or $0.02 per share on a fully diluted basis compared to $20.6 million or $0.44 per share for the same period in 2005. Taxes were a huge part of the positive performance in 2005, accounting for $0.38 of earnings per share. You may recall that we recognized the benefit of recording our deferred tax asset in the fourth quarter of 2005, which accounted for $18.2 million of income.

Given the significant impact of taxes in 2005, it's useful to look at pretax income when measuring our fourth quarter performance this year versus 2005. This year we recorded pretax income of $1.8 million for the quarter compared to pretax income of $2.9 million in the fourth quarter of 2005. Nearly the entire difference can be attributed to the expensing of stock options this year and therefore reflects comparable bottom-line performance.

Turning briefly to our balance sheet and cash flow, our performance in the quarter was again outstanding. The Company's cash and short-term investments were $91 million and working capital totaled $96.2 million at December 31. Cash flow from operations was positive at $2.9 million for Q4, bringing our full year cash flow from operations to a record of $17 million.

With that, we'd now like to open the floor for questions regarding our 2006 financial results.

So we are going to take a brief Q&A period right now. So we will open the floor to questions.

(OPERATOR INSTRUCTIONS). Wade King, Montgomery & Co.

Thanks for the detail and congratulations. One quick question -- you had a very strong figure in your direct to U.S. to public health initiatives. Could you tell us were there any specific things driving that in the quarter? Do you expect that wind in your sails to continue?

We have seen continued growth in our direct sales to public health. It was a strength through the full year 2006. And certainly with all of the initiatives, the CDC has gone out with since the new guidelines have been announced, and we continue to see increased adoption and expansion of programs, we expect our business to continue to grow in '07.

Very good and then one housekeeping question for Mr. Ron. Obviously you did a good job on managing receivables in the quarter and the like. The inventories popped up a bit sequentially; is there anything specific going on there? Do you expect that to moderate in terms of the increase obviously to the first quarter?

That is a great point. Inventories were up a bit and it reflects a different model that we use for our sales of cryosurgery products into the European market where we actually do inventory products for sale there as opposed to our business in the U.S., which was really a contracted business. It would dropship product and we would not hold any inventory or if we did, it would be minimal.

So I would suspect as that business grows we may see a little pickup in inventory levels. And then obviously as our business grows in general over the course of the next several years, we will move our inventories up to support that growth.

Aaron Lindberg, William Smith & Co..

A quick question on that direct to public health as well. Does that include the sales to the individual cities?

Yes, it does.

Sara Michelmore, Cowen and Company.

This is actually Doug with Sara's group. One question I had was, you talked about gross margin improvements driven by manufacturing efficiencies and, at least relative to our model, you certainly came in a lot stronger than we expected. Would you expect that these efficiencies -- is there something in the efficiencies that you've built that we should be factoring in moving forward? Or is some of this attributed to product mix? And maybe we should see a pull back to a certain extent moving forward?

Well, as we've discussed multiple times, it is our aspiration to continue to improve efficiency and to continue to improve gross margin. I think 2005 was a nice quarter to go up against versus our performance in the fourth quarter of 2006. We do expect our gross margins to be approximately in this range, and hopefully we can improve that as we move forward.

One housekeeping question, I guess to an extent. If you look at what we saw in insurance testing in Q3, looks like we went back to a normalized level. Looking back at Q3, is there something that you now can point to as why we saw what looks like a temporary spike?

I think it is really pretty much distributor -- our lab partner's ordering pattern. We don't sell directly to the insurance companies per se but through our lab partners who service that industry. And from time to time we see aberrations in their ordering patterns.

(OPERATOR INSTRUCTIONS). Ed Shenkan, Needham & Co..

A question on the city orders -- could you walk us through how much will be stocking versus sellthrough? Are different cities stocking more than others? Just so that we'll understand going forward how to interpret this quarter.

I don't think that across any of our infectious disease businesses that you see any effect of stocking. We've got, as you know, a six month shelf life on our product. And whether it's Abbott or our direct customers, they are going to order a month to two months supply, maybe three months supply max.

On the CDC guidelines change, can you quantify the impact there? Where would we have seen that?

You would see that in direct to public health as well as in our direct sales to hospitals. That's where you're going to see the primary uptake. And that is why we're pretty bullish on the outlook for both of those segments in 2007, which we'll talk about here shortly.

Thanks. We'll let you get on with the rest of the call.

We'll take one more question, please, if there is one?

Or we'll move on.

At this time there are no further questions.

Okay. Well, then let's move on to the next part of the call. I want to thank you for your questions. And the second half of our call will include a discussion of our outlook for 2007 and beyond. And again, we will follow this discussion with a Q&A session as well.

Now to say that we are excited about the many significant initiatives and plans for 2007 and beyond would be an understatement. Not only do we plan to accelerate our business growth in 2007, we also have several large initiatives that will carry our Company into the future. While these longer-term initiatives will require a fairly high level of investment now, we believe the future revenue opportunities they represent more than justify our planned level of resource commitment. Our financial guidance for the first quarter of 2007 and for the full year reflects these plans and initiatives and will be discussed at the end of our call.

One of the biggest opportunities that we are pursuing and the one requiring our largest investment is the effort to gain FDA approval to sell our OraQuick ADVANCE HIV 1/2 test in the retail or over the counter market.

The U.S. has a total population of approximately 300 million people with approximately 190 million individuals between the ages of 18 and 64. Our research indicates that within that general population there is significant demand for a home use rapid HIV test, especially one that can be used with oral fluids. This demand is primarily given by consumers who, one, want to take an HIV test in the privacy of their own home; two, are concerned with issues of confidentiality; and three, three, who when given a choice would prefer to test themselves with oral fluids.

Our research indicates that the potential market for an over the counter OraQuick HIV test in the United States alone could be in excess of $500 million. Our ability to capture a significant portion of this opportunity will depend on a number of critical factors including securing FDA approval, gaining access to critical distribution channels, continuing to secure a professional endorsement of our product, and ultimately getting our product to market quickly.

In addition, the degree to which we create awareness of a rapid oral fluid HIV test available over the counter will have a significant impact on the size of this opportunity and how quickly home testing is adopted. Based on our research, we believe the opportunity for an HIV test outside the United States is also very substantial and pursuing it has become a top priority for 2007 as well as for the next several years.

We believe OraSure is well positioned to capitalize on this opportunity. First, we have the only rapid HIV 1/2 test approved by the FDA for oral fluids. Our research indicates that having an oral fluid claim will maximize the chances for success in the over the counter market.

Second, it appears that there is a high likelihood that we will be first to market with a rapid HIV test. This should give us a significant head start on developing brand loyalty in a market that is eventually expected to be more competitive.

As previously explained, during 2006 we completed several laboratory based operational studies as an initial step toward obtaining FDA approval of an over the counter OraQuick HIV test. These studies are part of a group of research and development protocols known as stress or flex studies that are designed to demonstrate the robustness of our OraQuick test for home use.

These initial studies were conducted in a controlled laboratory setting and were designed to determine the impact of environmental and common household factors on the performance of the OraQuick test. These initial studies were successfully completed last year and have been written up for the FDA.

During 2007, we intend to complete several other groups of studies required for FDA approval. First, there is an additional group of more extensive flex studies that are being conducted in a non-laboratory or clinical setting. These studies have already begun and we are incorporating some FDA comments in the protocols we are using. We expect these studies to be completed during the next couple of months.

We have started a second set of studies referred to as label comprehension studies which relate to a user's ability to understand our product labeling and instructions, collect a sample, run the test, and interpret the results of testing using the OraQuick device, all in a correct manner. Our initial label comprehension studies will be performed in an observed setting. Once these initial studies are completed, the results will be incorporated into final clinical trials for untrained users in an unobserved setting. These trials are scheduled to run throughout 2007.

A key component of our clinical studies will be the incorporation of a counseling and referral system. We have spent a significant amount of time and resource developing the key features of a counseling and referral system. We have engaged a third party to help us develop a system that will be robust and fully portable so that we will be able to replicate it with any third party provider we choose. The system is designed to be used on a global basis and will be fully compliant with applicable regulatory requirements.

The counseling system, as you might expect, will provide 24/7 phone and website access and will be fully validated to ensure it meets the highest quality standards required by the FDA and other global regulatory authorities.

Another key component of our HIV OTC test is the packaging configuration and content of the labeling and instructions. With the assistance of an outside firm, we have developed a prototype configuration and an initial draft of the labeling and instruction content. During 2007, we will continue to evaluate the prototype and make refinements as needed based on what we are seeing in our label comprehension studies. We've also filed a provisional patent application here in the U.S. to protect some of the intellectual property we are developing around this product.

As you can imagine, the effort required to develop the counseling and referral system and complete all of the clinical work required for an HIV OTC test is substantial and will involve thousands of subjects and numerous clinical evaluation sites. Our goal is to complete these activities at the earliest possible date while structuring them to be as complete and thorough as possible to maximize our chance of obtaining FDA approval, a CE mark and other necessary approvals. We expect to spend a substantial portion of our 2007 R&D budget on these activities.

Our current schedule is to complete much of the clinical work during 2007, although we expect that some of the studies will require time for completion in 2008. Based on that schedule, our plan is to submit a PMA application for over the counter approval with the FDA as early in 2008 as possible. This is an aggressive schedule, which reflects the importance of this product and its urgency to our entire organization. Our ability to meet this timing will depend on how the trials progress and whether any issues are encountered, any comments or input we receive from the FDA and other factors. We intend to provide updates on our progress as we achieve milestones along the way.

A second exciting and very valuable initiative we are pursuing is to complete development and clinical trials for a rapid hepatitis C or HCV test using our OraQuick platform and file a PMA submission for FDA approval by the end of 2007 or early in 2008. We believe an OraQuick HCV test approved for professional use represents a second, very significant business opportunity for the Company, and consequently warrants a high priority and the commitment of significant resources in 2007.

On a worldwide basis, there are an estimated 170 million people who are chronically infected with HCV, with an estimated 3 million to 4 million individuals newly infected each year. The prevalence of hepatitis C infection is estimated to be four times that of HIV.

Here in the United States, there are an estimated 4 million Americans or approximately 1.3% of the entire population that are or have been infected with HCV. It is believed that as many of 50% of persons infected with HCV are undiagnosed, and up to 80% who have HCV show no signs or symptoms. New infections in the United States are estimated at 30,000 to 50,000 per year.

Hepatitis C is a major cause of acute hepatitis and chronic liver disease, and if left undiagnosed, can lead to psoriasis of the liver, liver cancer, liver failure and death. It is estimated that 85% of those infected develop chronic liver disease and about 10% to 20% eventually develop psoriasis of the liver. HCV is a significant health issue.

Fortunately, HCV is a curable disease. With current treatment therapies the rates of sustained viral clearance are as high as 50% in cases of infection by genotype I, the most common form of HCV, and as high as 80% with the less commonly occurring genotypes II and III of the virus. New therapies are under development which hopefully will improve these treatment rates. Like HIV, we believe the key to improving public health is early diagnosis through widespread testing.

We believe the HCV testing market is at a stage where the HIV market was prior to the availability of an FDA-approved rapid point of care test. As you may know, before rapid HIV testing, there were no large-scale HIV testing initiatives and there were no guidelines from the CDC or other agencies recommending broad-based routine screening as there are today.

We think the HCV market may follow a path similar to HIV after rapid HCV testing is available, especially as new HCV therapeutic treatments become available that are more effective and have fewer side effects. The foundation for this is already in place as there has been heightened interest in HCV by public health officials as evidenced by a recent increase in surveillance activity.

Given the much higher prevalence of HCV, both here in the U.S. and globally, we currently see the HCV market as potentially larger than HIV. This is why we made the decision some time ago to obtain a sub-license to the HCV patents held by Ortho Diagnostics and Tyron Corporation.

Our research indicates a potential opportunity for rapid HCV testing in the professional market here in the U.S. of approximately $200 million to $250 million with a potential worldwide market of even greater magnitude.

Our ability to penetrate this market will be affected by some of the same factors I mentioned for the HIV over the counter opportunity. Significantly, I believe we have a good opportunity to be the first to market with a rapid HCV test for professional use. That has been a substantial advantage for our oral fluid OraQuick HIV test.

Additionally, our market launch and penetration should be significantly enhanced by the collaboration agreement we recently signed with Schering-Plough. Having our test promoted by a physicians office sales force from a company like Schering-Plough, which is a leader in HCV therapeutics, should give us a strong start once the product is launched.

In prior calls, we've updated you on our development work for an OraQuick HCV test and those efforts continue to go well, in large part due to the leadership of Steve Lee, our CSO and his team. We have developed a prototype test that in initial studies has shown excellent sensitivity and specificity using plasma samples. These studies have also shown that our prototype OraQuick HCV test is able to detect antibodies produced following infection at about the same time as lab based immunoassays currently on the market. In other words, the rate of seroconversion sensitivity of our prototype test initially looks to be comparable to the most sensitive lab test on the market today.

We are now conducting studies in human subjects with samples of blood and oral fluid using this prototype test. Our plan is to optimize the test with the results of these latest studies so that the final device design can be transferred to manufacturing and included in our clinical trials. Based on our current plans, we would expect to conduct the clinical trials in the second half of the year in support of our FDA submission, a CE mark and other regulatory approvals.

And a final initiative I would like to mention is the development of homogeneous fully automated oral fluid drugs of abuse assays for use with our Intercept collection device. Late last year we signed a letter of intent with Roche Diagnostics to jointly develop and commercialize these assays. Initial feasibility work has been completed and we expect to advance the development effort during 2007 as we finalize our agreement with Roche. These assays will be an important addition to our substance abuse testing business which is expected to continue to become more competitive. Our laboratory partners are constantly looking to reduce costs and these new assays should allow them to improve their efficiency and reduce turnaround times.

More importantly, we believe these assays will allow us to compete more effectively with the urine drug testing products that currently dominate the overall drug testing market. Homogeneous fully automated assays are used for most urine drug testing. In the United States, we estimate the total drug testing market to be approximately $400 million in revenues per year and about 95% of that is the urine business for which we will be able to compete. Development of these automated assays represents another significant opportunity for both maintaining and growing our substance abuse testing business.

In addition to our two major OraQuick initiatives and our work in substance abuse, we also have initiatives planned in 2007 in the cryosurgical systems area. As you know, we currently sell our Histofreezer cryosurgical product to the physicians office or professional market, and this product has been approved by the FDA for the treatment of a total of nine types of benign skin legions. Our OTC product is approved for two of these, common and plantar warts.

Our research indicates that one or more of the seven other Histofreezer indications may be attractive to the over the counter market. In 2007 we intend to pursue FDA approval for at least one of these indications.

A second initiative is to seek FDA approval for an extension of our existing over the counter wart product. We intend to sell a product that combines both our original cryosurgical treatment with salicylic acid. While I cannot give more details about these new products for competitive reasons, they both will necessitate additional clinical studies, which we expect to complete this year.

We also expect to obtain FDA clearance this year as well and hope to launch both products shortly thereafter. Our research indicates that the potential market for these new products could reach $60 million to $75 million.

As a result of the initiatives I have described, we expect to incur an additional $8 million in R&D costs during 2007, the vast majority of which will be related to the clinical work for the OraQuick HIV over the counter test and the OraQuick HCV test. We believe the revenue opportunities represented by these programs support the significant investment and resource commitment we intend to make in 2007. We are extremely excited by the potential return from these efforts.

And now that I've outlined some of our most exciting opportunities and major initiatives for 2007 along with the related investments, I would now like to briefly describe some additional steps we are taking to accelerate the growth of our various business lines in the short-term during 2007.

Let me start with infectious disease. We believe our infectious disease testing business will grow substantially in 2007. We are taking a number of steps to maximize revenues from this important market. We believe our direct sales to the public health market will continue to fuel growth in 2007.

Last year sales of OraQuick to public health grew 84% compared to 2005. To continue this growth we are working to launch several new city-wide testing initiatives for HIV similar to the one we helped launch in Washington, D.C. Discussions with several major metropolitan areas are progressing and we plan to bring them to close this year. Our efforts to secure additional purchases from the CDC, SAMSA, and other government agencies will continue. We believe new orders are clearly supported by the demand for testing in the communities served by these agencies.

Additionally, we plan to expand sales of OraQuick outside of the traditional public health market, including to family health clinics such as Planned Parenthood, corrections facilities, student health centers and faith-based organizations. We expect to see substantial growth in sales to these customer groups. We have added several new reps to our public health sales force which will help provide increased coverage and penetration for this diverse and evolving market.

The second important channel for OraQuick sales growth is in the hospital market. Hospital sales of OraQuick grew nicely in 2006, increasing 40% compared to 2005. We will work with Abbott Labs to substantially increase OraQuick sales in the U.S. hospital market. We have added additional hospital sales representatives that will provide better coverage and greater support for Abbott. We intend to utilize the CDC's recently revised HIV testing guidelines to create additional demand for OraQuick in hospitals.

We are working with the CDC and others to promote widespread adoption of these guidelines through a number of regional workshops. The first of these workshops is scheduled for this week in Los Angeles with the rest already scheduled throughout the country later this year.

As you know, Abbott recently announced that it will be selling most of its diagnostic business to General Electric. We intend to meet with G.E.'s senior management shortly in order to discuss their plans for Abbott's diagnostics business generally and rapid HIV testing in particular.

We also intend to secure additional distributors for OraQuick into the U.S. physicians office market. We are close to signing one significant new distributor and hope to add as many as two more later in the year.

On the international front, we have some positive developments to share with you regarding our CE mark approval for the OraQuick ADVANCE test. We recently received notification from our notifying body that our OraQuick ADVANCE test will be recommended to receive a CE mark. Approval is contingent on the successful completion of facilities inspections, which have been scheduled for March and April.

We plan to sign up new distributors in several European countries and complete the required country-specific registrations that may be required for our OraQuick ADVANCE test. We already have an agreement for the U.K. and are close to finalizing agreements for France and Spain. In addition, multiple sites in Europe are currently conducting investigational studies with our OraQuick ADVANCE test.

We expect to complete OraQuick registrations in Brazil, Mexico, and Peru and sign up new distributors in several additional Latin American countries. We also plan to expand our OraQuick registration in Singapore, obtain new registrations in South Korea and Vietnam, and secure new distributors and begin registration in several additional Asian countries. We are progressing the registration process for OraQuick with distributors in the Middle East and Russia and hope to begin sales in that part of the world and possibly at several new distributors.

In the substance abuse testing market, revenues grew 17% in 2006 compared to 2005. To continue growing this business our priorities will include targeting a number of new large and medium-size workplace accounts for closure in 2007; increasing the speed with which we implement new accounts after they are closed and improving our ability to track specimen processing data through our laboratory partners. We intend to add new laboratory partners to distribute and use our Intercept product and continue the expansion of distribution of our QED rapid alcohol test in response to recent regulatory changes.

In the cryosurgical systems market, our focus in 2007 will be to reinvigorate growth by doing a number of things. We will continue to work with SSL, our over the counter distributor in Europe, Australia and New Zealand to increase sales and expand the number of countries in which the Scholl freeze product is offered.

We are working through a comprehensive marketing plan with SSL and plan to finalize launch plans for several new countries in the next month or so. With one full year under our belt, we are expecting great things from SSL in 2007.

As previously mentioned, we will also be developing plans for the distribution and commercial launch of a product line extension and new indication planned for our over the counter cryosurgical product. We will work closely with our Mexican distributor to ramp up sales of our OTC cryo product in that country, and we intend to sign up additional over the counter distributors in Latin America and elsewhere.

Over the next several months, we expect resolution of our pending dispute with Prestige brands concerning our domestic over the counter cryosurgical product offering. And finally, we hope to resolve the Schering-Plough patent infringement litigation as soon as possible.

With that as an overview, I will turn it back over to Ron to discuss our 2007 financial guidance.

Thanks, Doug. Turning to our financial guidance for 2007, I am pleased to report that we expect reinvigorated top line growth of 17% with expected total revenues of approximately $80 million for 2007. Growth in revenues is expected to be primarily concentrated in the infectious disease and substance abuse market.

In the infectious disease area, growth is predicted in virtually all channels including our direct sales to public health, sales to hospitals through Abbott, and sales to international markets throughout the world.

In substance abuse, we expect to grow in workplace criminal justice, international, and in our direct business.

I want to point out two significant exclusions from our $80 million revenue target for 2007. As previously announced, we are maintaining our policy of not including additional governmental bulk purchase orders for OraQuick ADVANCE beyond those currently in hand. This policy was adopted because of the unpredictable nature of the size and timing of these orders. This will allow us to revise guidance upward, should we be fortunate enough to obtain such orders and when we are in a better position to predict the deployment of the underlying OraQuick devices.

Additionally, our North American over the counter cryosurgery business full year guidance includes only purchase orders in hand today. This again allows us to revise guidance upward should we receive additional orders from Prestige beyond what is expected to ship in the first quarter or if we implement one of the alternative options we are evaluating for distribution of our product in this important channel. We are firmly committed to success in this channel and look forward to providing you with further updates on our progress.

As Doug mentioned earlier in the call, the opportunities that we are pursuing are significant and will continue to build OraSure Technologies into a world-class diagnostic company with OraQuick product offerings in both the professional and over the counter markets for HIV and in the professional market for HCV.

These are indeed exciting times as we expect these programs to be brought to fruition through hard work and well planned and executed clinical trials occurring over the next several quarters. The potential payoff is substantial, and our investment is fully justified as we race to be the first to market with both a rapid HIV test in the OTC marketplace and in the professional market with a rapid HCV test.

The R&D investment for 2007 will have a significant impact on our projected results for the year as we position ourselves to capture as much of these opportunities as possible. Our current projections indicate that R&D investment will increase from $8.6 million in 2006 to over $16 million in 2007 as we complete the clinical development of our OraQuick HCV test, advance the OTC project through a substantial portion of its clinical development, pursue FDA approval of our new cryosurgical offerings, continue development of the high throughput fully automated drug assays, and pursue registration of products in numerous foreign countries.

Our current expectations are that the spend level in R&D will ramp up over the course of the year with a significant spend in the second half for clinical trials.

Being first to market for the OraQuick HIV OTC test and the OraQuick HCV test is critically important and requires agility and focused R&D investment to concurrently advance both of these projects.

Sales and marketing expenses will increase as we add headcount in the infectious disease market segment to drive revenues in public health, hospitals and the international markets. We will also be supporting our partner SSL in the European cryosurgery market through the introduction of an add credit, modeled after the one established in the U.S. market.

G&A costs are also expected to increase over last year as a result of increased legal expense related to both the Prestige dispute and the expected proceedings on the Schering-Plough cryosurgery patent infringement matter and increased costs related to higher staffing levels.

From a bottom-line perspective, our current expectations for 2007 earnings per share are in the range of $0.03 to $0.05 per share. As we gain additional visibility to the upside revenue opportunities discussed previously, we will reassess our expectations for bottom line performance and we'll update our projections accordingly.

Additionally, predicting the timing of clinical development is an imprecise science and will depend on how quickly we realize success with the trials and on the input from the FDA. We will be reassessing spend levels and timing after each quarter in 2007 to be more transparent with you, our shareholders.

To finish off the guidance section of the call, I would like to focus briefly on the first quarter. For that period, we are expecting revenues to fall within a band of $18.5 million to $19 million and earnings per share to approximate $0.01 to $0.02 per share.

In closing, 2007 will be an exciting and busy year as we continue building OraSure into a world-class diagnostic company. I am looking forward to keeping you informed of our progress throughout the year. Now I'll turn it back over to Doug.

Thanks, Ron. As you have heard, we've provided more detail in this call than any previous, and we have done so because of the importance and the excitement we have around the opportunities we are actively pursuing. We're making some very significant investments in 2007 from which we can expect substantial returns.

And so we're very pleased now again to open the floor to questions regarding the future outlook for the business and for the Company.

(OPERATOR INSTRUCTIONS). Sara Michelmore, Cowen and Company.

It is Doug again. It looks like there is about $1 million left on the $2.3 million CDC bulk order placed last May. If that is the case, is it fair to assume that most of that will be fulfilled the first quarter? And any signs that we are close to a re-up on that, either at a similar size or a larger level?

I think I would look at that as being realized over the first half of the year as well as the remaining revenue that we have under our Substance Abuse and Mental Health Services Administration contract. And beyond that we are obviously in dialogue with the CDC and other governmental entities, and hopeful that there will be additional bulk purchases.

The way you guys have positioned guidance, you talk about potential upside linked to a bulk order from either of the agencies. How should we think about the trade off between some of the continued momentum that you've talked about in the public health market and the upside that would be linked with one of these bulk orders?

What we have tried to communicate in the past is that whenever we haven't had a bulk order we have seen some improvement in our direct sales to public health or hospitals. So when we are fortune enough to get a bulk order, not all of that is recognized as true upside. But what we will do, if we are fortunate enough to get additional orders from the government agencies, is we will try to give you our best thinking at that time. Right now, relative to our direct sales to public health and hospitals we just expect continued improvement in that business.

And then in the absence of an order, as you have guided us, how should we think about the pacing of some of these sales to the states and the cities? Is it fair to assume that because you're dealing with different organizations that there probably will be some lumpiness to those numbers throughout the year?

I think that generally speaking when we're entering into agreements with these large city initiatives, in most cases this is business above and beyond contracted business that they're already doing with us. So for example, in Washington, D.C. we were already providing the Public Health Department with OraQuick. This initiative just significantly expanded that program.

We've got product agreements with virtually every major city in the country and every state health laboratory in the country. So these initiatives significantly expand those programs.

And one last question and then I will jump back in the queue. Would you be willing to share the dollar value of Prestige purchase orders that you have in-hand right now?

Sure. That's not a problem. We would expect to ship approximately $2.1 million worth of product to Prestige in the first quarter.

Wade King, Montgomery and Company.

Just to understand the spending guidance for the coming year or the year 2007, the overall spending, you have alluded to a significant uptick on the R&D side. I understand the clinical programs going on there. The sales and marketing spend increase associated with the various parts of your distribution platform is a little bit more of a moving target. So in terms of your overall expense increase to 2007, you indicated it would be about $8 million on the R&D side. Can you give a rough estimate as to -- maybe we could back into it clearly, given the bottom line guidance, but can you give us a rough idea of what you think your increase will be on the overall SG&A side for the year 2007?

Sure, we can give a range. I think that you're right, you could back in to it if you were to keep the margin number in the basic area of where we are from a gross margin standpoint. We would see increases in sales and marketing due to increased personnel being brought onboard. And again, we also predict increased legal expenses that I spoke about in G&A. If you were to look at that total area and that total spend, it could be in the high single millions that we would be looking at for spending increases in SG&A for 2007.

High single millions. So once again, you would not anticipate that the increase in R&D based on all the programs would at all be offset by more moderate increases in SG&A than some of us may have previously modeled?

I think that is correct.

And the tax rate for the year '07, Ron, you ran a tax rate overall that is higher than 40% and so -- at least on the annualized basis. Is there any improvement in the tax rate potentially looking ahead to '07?

There may be a slight improvement. And you are right, our tax rate for 2006 is [42%]. A lot of that had to do with the effect of incentive stock options on our tax calculation. We have moved towards a policy of issuing non-qualified stock options in an effort to cut down the effective tax rate from a GAAP standpoint. And I think we will see the benefit of that beginning to accrue to us in 2007. So you may see that drop by a point or so.

John Putnam, Dawson James Securities.

Congratulations on the quarter. I was wondering if you might comment on the impact on the gross margin that the bulk orders have? And how about running through the rest of the P&L?

John, when we see those bulk purchase orders, we would book them as we ship them. And we have indicated that the pricing that we have on those give us a margin that is in and around that experience for the general corporate average gross margin.

And how does it filter through the rest of the P&L, I guess the question is, does it have the same sales and marketing expenses?

On those bulk purchases that we were speaking of earlier, we would simply direct ship that product to the public health entity or recipient of those purchases, whether they be state and local community health, or public health entities. And so beyond the sales and marketing force that we have out there, we would really not be looking at any significant incremental spend in that area to support the deployment of those devices.

Aaron Lindberg, William Smith & Co.

When do you guys expect resolution with the Prestige brands arbitration?

We would hope that that will be resolved in the next few months.

Do you have a date set for the hearing now?

No, we do not.

How are the contingency plans developing if you don't achieve your desired outcome?

Well, we've got several options, obviously.

What do you see those as?

Well, our first and best option is to resolve something with Prestige. We got into the arrangement with Prestige because of our -- how much we value the Compound W brand. And we hope that we will be able to work something out. So obviously that is our primary objective. And prefer quite honestly, not to get into other options. They could range from everything of introducing a new brand to do something ourselves with a private label strategy or something like that. But right now our focus is completely on Prestige and resolving this with the Compound W product.

Are you more confident today that you'll be able to extend the shelf life of ADVANCE without additional regulatory filings than you were the last time we spoke, last quarter?

I can't say that I am more confident today. But we are equally confident. We've been working on our plans for this to understand what we can do to extend the dating of our product. We think we've got a real good handle on that. We intend to implement whatever process changes or improvements that we believe are required to make that happen in the very near-term. And then obviously, it's a real-time stability requirement that we are faced with. And so we'll get that on stability as rapidly as possible. But we're very confident through some great science that we understand how we can extend the shelf life of our product and we intend to do so.

And have you already begun some of that real-time stability testing?

We have done some significant testing. The actual real-time testing will start within the next few months.

Can you help us understand what steps you are taking with European regulatory bodies to ensure efficient approval of future products specifically as you're talking about over the counter HIV testing?

Specific to over the counter HIV testing, our primary objective -- or our primary focus has been here in the United States, given the significant amount of work involved here. One thing that we realized in the U.S. as a model is that having professional endorsement of the product makes it somewhat easier to making the transition to an over the counter product. So obviously in Europe, as an example, our primary focus has been to get that darn CE mark that we have been focused on for so long. And that is why we are so delighted with the news we were able to share with you earlier in the call.

We'll get the product CE mark, we'll get it launched into the professional market. Hopefully we will build rapid adoption and endorsement for the product, and then we will begin to pursue next steps towards over the counter approval. But the first thing, our first priority is going to be to get the product well deployed into the professional market in the EU and other parts of the world.

But as far as whether it's over the counter HIV or HCV or whatever the case may be, as you look forward, is this something where you are just looking for different partners than you have used in the past to get through that process? We've learned a lot that these three things definitely don't work because obviously the CE mark took a lot longer than you had hoped for. Can you provide us any more clarity around that?

Well, we have a lot of options in terms of our go-to-market strategies. And in most cases the partners that we are talking to about taking our product over the counter are different than those who would be good partners in the professional market. So those are two different work tracks.

I guess I was thinking beyond distribution partners -- as far as other companies that you are using on the regulatory front.

We have been doing most of the regulatory work here ourselves. For the over the counter effort we've contracted with CRO's to help us manage the clinical trials themselves. And as I mentioned, we're working with an outside firm to develop our counseling and referral system.

I thought you'd used an outside firm for the CE mark, too, but.

No, we conducted those studies ourselves. We have to use a notifying body in the EU who actually certifies us and inspects us as part of the IVDD process.

(OPERATOR INSTRUCTIONS). Ed Shenkan, Needham & Co.

Doug, the first time that we have heard you size the OTC HIV market. Be interested to hear what any assumptions you have that go into the $500 million plus as far as pricing and how fast do you think the market grows to $500 million -- what might it be, first, second or third year? Or is it 10 years later that it gets to be $500 million?

We are not really prepared, Ed, I'm sorry to give you that information, because we are not really eager to disclose our pricing strategies. But you're right, we thought it was important for you guys to understand the size of the market as we see it, the tremendous market opportunity that we see just here in the United States. And obviously our ability to capture a significant portion of that depends on all those factors that I talked to you about. It's speed to market. It's making sure that we've got the right distribution channels in place. It's building consumer awareness of the need to know their HIV status as well as the fact that an HIV test is available over the counter. So that's really where our efforts are over the next year or so as we work through the clinical process and hopefully gain approval to launch this thing over the counter.

We thank you for the additional detail. A follow-up question would be -- what updates could we expect in the investment community as your trials progress on the OTC status? What will you be sharing with us as time goes forward?

We will certainly share with you when we move from one stage of the clinical study process to another. As you know, there's three or four different stages which we have described previously, and will describe as we are exiting one stage and entering another. And we'll provide regular updates on either our quarterly conference calls or any conferences that we might be participating in or through the press release process with significant updates to our progress.

And any changes that you would expect as Abbott has sold their diagnostics business to G.E.? Might that improve things, make it even better for you as they've been with Abbott?

Well, you know, we're pretty happy with the way things are going with Abbott right now, so if we can improve that, I'm all for it. Obviously we've got to talk with G.E. and understand what their intentions are. G.E. is a world-class medical supply partner as well as obviously a diversified supplier of other products and services. They don't get into businesses unless they intend to be number one. And so hopefully they will take that same approach with our product and we will continue that relationship. But we need to engage them first to fully understand the intention.

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 you all for joining us on the call this afternoon. We tried a different format. I hope you found it useful and look forward to talking to you during our next call. Thanks, everybody.