OraSure Technologies Inc (OSUR) 2007 Q2 法說會逐字稿

Good day, everyone, and welcome to the OraSure Technologies second quarter financial results conference call and simultaneous webcast. As a reminder today's conference is being recorded. (OPERATOR INSTRUCTIONS) For opening remarks and introductions, I will now turn the call over to Eileen Tavarez at OraSure Technologies. Please go ahead.

Good afternoon, everyone, and thank you for joining us today. I would like to begin by telling you that OraSure Technologies issued a press release at approximately 4:00 p.m. Eastern time today, regarding our second quarter financial results and certain other matters. The press release is available to you on our website at www.orasure.com or by calling (610)882 1820. If you go to our website, the press release can be accessed by opening the Investor Relations page and clicking on the link for news releases. This call is also available real time on our website and will be archived there for 7 days. Alternatively, you can listen to our archive for this call until midnight August 7, 2007, by calling (800)642 1687 for domestic or (706)645 9291 for international. The access code is 6857742.

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, 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 form 10K for the year ended December 31st 2006, its quarterly reports on Form 10Q and its other SEC filings. Although forward looking statements help to provide complete information about future prospects, listeners should keep in mind that forward looking statements may not be reliable. The Company undertakes no obligation to update any forward looking statements to reflect events or circumstances after this call. With that, I would like to turn the call over to Doug Michels.

Thanks, Eileen, and good afternoon, everyone, and welcome to our second quarter 2007 earnings conference call. As you can see from the earnings release issued at 4:00 today, our second quarter financial results were strong. And coupled with our solid first quarter performance, the 6 months ended June 30th 2007 were outstanding. We also continue to make significant progress against our strategic initiatives.

In the first part of today's call, Ron Spair will review our financial performance for the second quarter of 2007, and we will then open the floor for your questions on our second quarter results and the earnings press release we issued earlier today. The next part of the call will focus on the strategic initiatives we are pursuing. We will also provide some brief additional business updates and discuss our financial guidance for both the third quarter and the full year 2007. We will conclude by again opening the floor for your questions. So let's get started with Ron's financial overview.

Thanks, Doug, and good afternoon, everyone. The second quarter was another excellent one for OraSure as we exceeded consensus estimates on both the top and bottom lines. As Doug mentioned, when combined with our first quarter results, we are very pleased with the Company's financial performance during the first half of the year.

Our total revenues for Q2 reached another record at $21.4 million, a 22 % increase over revenues reported for the same period in 2006. Increased sales of the Company's OraQuick ADVANCE tests, intercept oral fluid drug tests, and international over-the-counter cryosurgical wart removal products, as well as higher R & D funding for our rapid HEP C tests, were the primary revenue drivers for the quarter.

In the infectious disease market, we booked sales of $9.2 million, a record level that is 21 % higher than the second quarter of 2006. The primary reason for continued strong growth in the infectious disease testing business were a 35 % increase in direct sales of OraQuick to the public health market, and higher sales to the Centers for Disease Control and Prevention, and to the various city HIV testing initiatives we support around the country. Abbott's out sales to its hospital customers continue to grow nicely and were up 20 % in the second quarter of 2007 versus the year-ago quarter, and are up over 22 % for the first 6 months of this year. In the second quarter, our sales to Abbott were somewhat lower than Q2 of '06. This is largely resulted from a buildup of device inventory by Abbott in the second quarter of '06, in advance of the revised CDC guidelines announced shortly thereafter.

In the substance abuse testing area, sales were at $4.4 million, up 9 % over the second quarter of 2006. Included are $3.5 million in sales of our intercept drug testing system, which represents a 16 % increase over 2006. Our workplace testing and criminal justice businesses were up 12 % and 11 % over 2006, respectively, and our international sales grew 35 % for the quarter. Our direct sales were also up 22 %. Cryosurgical systems sales were $5.8 million, a 26 % increase over 2006. Substantially higher sales of our international OTC cryosurgical products in both Europe and Mexico were the main reasons for this increase. These increases more than offset lower sales to Prestige brands for distribution in a domestic OTC market, which we, of course, expected.

The launch of our OTC cryosurgical products in Mexico has exceeded our expectations. We expect continued expansion of our OTC cryosurgery business into Central and South America and throughout the world. During the first quarter, we reported $649,000 of funded R & D work pursuant to our agreement with Schering Plough for the development of a rapid HCV test on our OraQuick platform. And finally, insurance risk assessment sales of $1.4 million in the quarter were up 3 % when compared to the comparable period of 2006.

Turning to gross margin, our margin for Q2 of 2007 was 63 %, equal to 2006's second quarter gross margin. With respect to our operating expenses, research and development expenses for Q2 were up approximately $1.6 million over 2006. That's primarily as a result of costs associated with the clinical development work for our OraQuick ADVANCE HIV 1 2 OTC test and product development costs for our OraQuick HCV test. A charge of $600,000 for acquired in process technology was recorded in the second quarter of 2006, related to the exercise of an option to expand the scope of our HIV2 patent license to cover products other than our OraQuick ADVANCE test. No such charge occurred in 2007.

Sales and marketing expenses increased approximately $1 million, primarily due to increased advertising reimbursement expense for our international OTC cryosurgical product and increased staffing related charges. As we had discussed previously, we have added to our field sales force and have agreed to reimburse a portion of the advertising expenditures incurred by SSL, our European OTC cryosurgical distributor. General and administrative expenses increased approximately $1.2 million because of increased staffing related charges, higher legal fees and higher consulting fees related to our successful enterprise resource planning system implementation. Our net income for the second quarter was $955,000, or $0.02 per share on a fully diluted basis compared to $1,208,000, or $0.03 per share for the same period in 2006. This decrease was due primarily to the increased operating expenses. Our cash balance remains very strong, with $89.1 million at quarter end. In the quarter, we generated $3.7 million in cash flow from operations. Our accounts receivable increased partially as a result of our higher revenues. Day sales outstanding rose from 52 to 63 days, primarily as the result of inter quarter revenue distribution.

With that, we would now like to open the floor for questions regarding our second quarter financial results.

(OPERATOR INSTRUCTIONS) Your first question comes from the line of John Putnam with Dawson James Securities.

Hi, Ron and Doug. Thanks. It's been a long day. I was just wondering what your expectations on gross margin are going forward? Can you give us a little bit of that?

I think we should be in and around where we are at the moment, John, at the quarter with 62%. Of course it's always dependent upon the mix of revenues in the quarters, which is not always precisely determinable at this point in the quarter, and, but generally looking out we are looking to increase our gross margins as we ramp revenues throughout 2008 and beyond, to bring our gross margins into the upper 60's.

Great. Thanks.

Your next question comes from the line of Caroline Corner with Montgomery & Company.

Hi. Congratulations on the quarter. First of all, a question about Mexico's cryo sales. Do you think there is stocking going on there, or should we expect, like we usually do, for this to continue to grow into the summer?

There is some element of stocking, obviously, because they launched during the first half of the year; but they're really promoting the product very effectively and we expect that we're going to see continued growth in Mexico through the year. And, obviously, we've got a keen interest in expanding the cryo business over the counter throughout the Central and South American region as well as throughout the world.

Okay, very good. And then a question about the G&A line. That has picked up a little bit. Can you just elaborate a little bit on your comments there regarding staffing and what's going on with that line item, please?

We have brought on some additional folks in the G&A area over the course of this past year, and we are seeing some of those expenses be reflected there as well as there are other areas of expenses such as the ERP implementation on the consulting expenses that we have in the first half of the year. We also have some additional legal expenses that we didn't have in the year-ago period related to the Prestige arbitration, so there are some unusual expenses, I would say, that would be included in our G&A line, that may not be reflected there in periods to come, Caroline.

Okay. Great. Thank you.

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

Thanks, Ron and Doug.

Hey, Ed.

Hi. On the could you tell us about SSL in Europe? As far as revenues for the quarter, are they are they kind of branching out of the U.K. What are you seeing?

Sure. I'd be happy to. In the quarter with SSL, we did see continued expansion of product into the continent and they are working to branch out, which they had started last year, to more fully penetrate some of the other countries besides the U.K. So we see them in France and in Germany, in Austria and Italy; and, of course, they also have a significant presence in the U.K. as well as in Australia and in New Zealand.

And, as far as Abbott, you mentioned a little bit is a little bit of what we saw in the quarter was that the inventories were pretty high at Abbott. What level of inventory do you think they have now, and where do you expect the business to go on a go-forward basis with Abbott?

Well, as the business has grown through the first half of the year, and as Abbott's out sales continue to increase they had record out sales in May and June, so we expect that business to continue growing through the rest of the year. We believe that their inventories right now are normalized. Obviously, given our 6 month shelf life and their commitment to provide at least 3 months dating dated product to their customers, we manage the inventory fairly closely, and that business continues to perform very well.

We should be at a low point as far as the revenues -- for Abbott going forward should just increase from here?

We expect the business to continue growing in the hospital segment and obviously Abbott's doing a good job there.

And stock comps for the quarter, Ron?

Well, I think the stock comp for the first quarter has pretty much been consistent with what we had seen previously. You are looking at something let me just

While you're looking for that .

About $1.5 million all in.

Okay. And the insurance risk. Has that business kind of stabilized here? What are you seeing from your customers?

It seems to be stabilized at this point in time, Ed. So we are cautiously optimistic that this level of revenues is repeatable for the balance of the year.

And then, lastly, you did give some color there on Mexico. What are they doing that is so good in Mexico that is exceeding the expectations? Maybe you could just tell us what they've done in the rollout that has been so phenomenal for you?

One thing that we've always known, Ed, is that the cryosurgical wart removing wart products have been very promotion sensitive. And Genomma, our distributor in Mexico, has invested very heavily, primarily in TV advertising, and that has really been driving the pull or the consumer demand for the product. They have also gotten the product out into virtually all of the retail outlets, both pharmacy and mass retailers, and it's just been a very very effective launch; and we expect demand to continue to grow.

Okay. I will jump back in queue for the second part.

Thanks.

Thanks, Ed.

Your next question comes from the line of Dave Turkaly with the FIG.

Thanks. On the OTC, considering it was about $3 million in the quarter, could you give us any qualitative comments about how big this is on the cryo side how big either Mexican or how big that business is in Europe, specifically?

Sure, Dave. The business in Latin America was $1.2 million. Our sales to [Shoal] was $1.7 million, and the balance approximately $1 million was to MedTech.

And that Latin American number was last year was a zero?

It was. We initially started shipment of product to our distributor there in the first quarter of 2007, and you may recall that we recorded approximately $500,000 in revenues in that first quarter of '07. So this is up more than double in Q2. Of course, as was asked previously, about the issue of how much of this is pipeline still, there is an element of that; but there is an expectation that this is a very good market and, as Doug pointed out, fueled with the proper advertising and promotions, the results are quite impressive.

And now, your distributor there are you already signed up for all of South America and the countries down there, or do you need still approvals or anything there or to sign them for additional areas? Or what exactly what territories are they covering today, versus where could they go in the future?

Right now Genomma has rights to the product in Mexico. We are in active discussions for the possible expansion of their rights into other Central and South American countries. Obviously, before we sell, we would need approval, depending on the country.

Great. And then there's the guidance coming off the strong quarter. It mentions that due to the OTC cryosurgery products I assume again that the $83 million for the year includes nothing from what could come from incrementally from the CDC on the OraQuick side?

That is correct.

Excellent. Thanks a lot.

Okay, Dave, thanks.

Thank you.

Your next question comes from Jeffrey Frelick with Lazard Capital.

Good morning, guys, or good afternoon, actually.

Hey, Jeff.

What was the POL market growth in the quarter? I know you guys added I think [Henry Schien] in the last quarter?

In our are you talking about the actual Histofreezer business or the the actual Histo business domestically here in the U.S. was at $1.4 million in the quarter, up from $1.1 million in Q1 of '07.

Okay. All right. And then on the infectious disease with respect to Abbott. How many new hospitals were added in the quarter?

I think we were approximately at 20 new hospitals for the second quarter.

Okay. And then, any color on the workplace testing volume in the quarter? For substance abuse?

I think we can get into that in the second part of the call, Jeff.

Yes, I will be giving some detail on that a little bit later in the call, Jeff.

Okay. Great. Thanks, guys.

Your next question comes from Wade King with Sirius Advisors.

Hey, guys.

Hello there, Doctor.

Hey, Wade.

Two questions, please. First, and if you want to defer this to the second part, go ahead. How much of your guidance on the bottom line takes into account the previously expressed timeline on new products, specifically, the over the counter rapid HIV test and secondly, obviously, the rapid HCV test?

Our guidance reflects the investments we're making in those programs, and we do plan to talk about that during the back half of the call.

Okay. I presume the guidance reflects no change in timeline associated with those initiatives. Is that right?

Again, we will talk about that, but the programs are on time as previously communicated.

Okay, thank you. And, secondly, Mr. Ron, could you just elaborate a little bit more on the receivables increase? I know that obviously as your international business goes up, your receivables generally are prolonged somewhat. But could you give us a little more detail on that regard, please?

Sure, sure. Actually, the receivables are up from December 31st, but, actually the day sales outstanding are down sequentially from where we were as of March 31st of 2007. So, we actually have reflected an improvement and, actually, Wade, subsequent to June 30th we have collected on a number of some of the larger outstanding balances that we had with some of the government entities that we do business with. And so we expect that that metric will improve over the balance of the year. But, of course, with increased revenues, we're going to be carrying higher AR balances which is just a normal phenomenon; but what we are keenly focused on is driving the day sales outstanding down, which is reflective of our the quality of the receivables that we have and our collection efforts. And that's something that we are keenly interested in managing and it's a focus of the finance group.

Ron, is the goal something around 60 days overall?

I would say generally that we would prefer to be south of 60 days. But, obviously when we're expanding internationally, some of the terms that we face with international distribution can be challenging on occasion. So, depending upon the mix of revenues and the source of those revenues, I know generally, not likely get down to the level that we had back in 2006 and '05 when our revenues were more U.S. centric.

So, Doug, can I ask just one additional follow up in that regard? Does the fact that your OTC international cryo was up so much, yet your DSO's were actually down sequentially indicate that, in fact, in that segment of your business, OTC International, the collection timeline is more favorable than in some of the other aspects of the business, whether they be Intercept or for that matter OraQuick? In the old days, obviously, you always actually the collection associated with some of your infectious disease accounts internationally seem to be a lot longer. Sounds like the overall picture is improving.

I would agree with your latter statement and, yes, I would say that some of the arrangements that we have are more favorable in the in that OTC space.

Okay, gentlemen. Thank you.

Thank you.

Your next question comes from Aaron Lindberg with William Smith and Company.

Thanks, just two quick ones. In the OraQuick results that you reported, the $5.5 million in public health, does that include sales in individual cities and, if so, how much went there?

Yes, it does, Aaron. And it was roughly in the neighborhood of a half a million, better than half a million.

Okay.

We have time for one more question, and then we're going to start with the second part.

It's the exact same question as it relates to Abbott. Is SSL, Henry Schien and Novation all in there?

The let me just check that.

I think I can answer it, Ron. Correct me if I'm wrong. But sales to Abbott would reflect certainly their sales to PSS, Novation. Henry Schein, is direct to Henry Schein.

Okay, and so Henry Schien is getting stuck into under public health, or? Where are they showing up?

In this particular presentation, they'd be in the public health number.

They would, okay.

All right.

All right, got it.

All right, thanks.

Gentlemen, you may proceed with your presentation.

So, thanks for the questions and now we are going to discuss our most important strategic initiatives and other business development. During the second quarter, we continued our progress towards building the next generation of revenue drivers for OraSure. And given the very substantial business opportunities that these programs represent, our enthusiasm for and our commitment to these projects is very high. We also remain confident in our ability to deliver against these initiatives.

I will begin with our efforts to obtain FDA approval to sell our OraQuick ADVANCE HIV test in the retail or over the counter market. As previously reported, we've been conducting several extensive operational or flex studies in a non laboratory or clinical setting designed to determine the impact of environmental and common household factors on the performance of the OraQuick test. These studies are now almost complete, and they have gone very well.

Since the last earnings call, we completed additional preliminary label comprehension studies to finalize our labeling before moving to more robust label comprehension studies. We are very pleased with the results obtained from these studies as well. The information generated has allowed us to finalize the user instructions for the test. And this is an important accomplishment, which sets the stage for the more robust comprehension studies which we expect to start within the next few weeks.

Our regulatory group recently submitted investigational device exemption amendments for both the robust label comprehension studies and our Phase II interpretive studies. The Phase II studies will evaluate an individual's ability to properly interpret test results without having to actually perform the test, and they are also scheduled to begin shortly.

We've also made good progress in planning and preparing IBE amendments for the Phase II B and Phase III user studies. Phase II B will assess an individual's ability to use the test properly in an observed setting, and Phase III will do the same in an unobserved at home study. These studies are scheduled for next year. The results of the robust label comprehension study and the Phase II, II B, and III studies will all be included in our FDA submissions for over the counter approval.

Works also continued on the development of a 24 hour per day, 7 day a week customer resource and medical referral system. As we previously reported, the Costella Group, a leading global provider of professional health services and a long term HIV AIDS related services provider for the CDC is helping us with the design and implementation of this system. Preparation of draft call center scripts is well under way, and we expect the prototype system will be fully developed and operational in time for the Phase II B user study.

Overall, the schedule I announced during the last earnings call remains intact. We will continue to perform the required clinical work for an FDA submission throughout 2007 and into 2008. We then plan to submit a PMA application with the FDA for over the counter approval upon completion of our studies as soon as possible in 2008. In anticipation of receiving FDA approval, in commercializing this product we've been searching for an executive with strong consumer marketing experience to add to our management team.

As recently announced, we've hired Mr. Ken Adach as our new Vice President of Consumer Marketing. Ken brings a wealth of experience to this position, most recently as the head of marketing for Bausch & Lomb's highly successful line of the over the counter pharmaceutical products. Ken will lead the commercialization of our OraQuick HIV over the counter test. I am confident he will make significant contributions to our business, and we're very eager for him to join the Company.

Turning to the development of our rapid Hepatitis C or HCV test on the OraQuick platform, I am to pleased report that this project also continues to progress on schedule. The product design is complete and fully optimized. Thanks go to our R & D operations and regulatory teams for their great work building what we believe will prove to be a world class assay. We are now working to transfer this product from R & D to manufacturing, and we're making great progress.

During our last call, I mentioned that preclinical studies in human subjects were being conducted for the 5 specimen types for which we intend to seek FDA approval. These include oral fluid, finger stick whole blood, venous whole blood, plasma and serum. The results of those studies were announced a few weeks ago at the annual meeting of the American Association of Clinical Chemistry in San Diego.

In summary, those studies indicated that the performance of our prototype HCV test for all specimen types was equivalent to, or better than, results obtained from currently available state of the art laboratory based enzyme immuno assay tests using serum and plasma specimens. And, in particular, a few points. In perspective testing of 419 low risk human subjects, specificity was shown to be 99.8 % in all specimen types, and 3 individuals in this group were newly identified as having been infected with HCV. Number two, testing of venous whole blood and oral fluid samples from 92 individuals known to be infected with HCV indicated sensitivity of 100 %. And the same sensitivity was shown from testing 639 archived HCV positive plasma samples. And finally, the prototype HCV test was shown to detect HCV antibody, on average, 3 days earlier than a laboratory based assay during a period of cyroconversion. And in no case did the OraQuick HCV test detect HCV antibody later than the laboratory assay. So these results are phenomenal, and we are delighted with our development efforts for this test.

Our collaboration with Schering Plough on the project also remains strong, and it continues to bear fruit. Schering's clinical and R&D groups have continued to provide valuable input as we plan the execution of clinical trials in support of FDA approval. On the regulatory front we've completed our trial design in collaboration with the FDA, and our protocols for the clinical trials are close to being finalized. A contract research organization, CRO, to support these studies has been selected, and we've been screening and visiting potential clinical trials sites. We expect the studies will begin soon and will last through the end of this year, and our FDA submission is expected to be filed early next year.

Another important program is the development of homogeneous fully automated drugs and abuse assays for use with our Intercept oral fluid collection device. As you know, this is a major development project with Roche Diagnostics. We believe development of these assays will bring significant benefits to our laboratory customers and will allow our Intercept drug test to more effectively compete against the urine products that currently dominate the drug testing market. The development work with Roche continues to go extremely well. A detailed development plan has been agreed to and is being followed by the parties. Initial feasibility has been shown and prototypes have been developed for most of the (9 to 5) assays we intend to initially commercialize.

Preliminary performance obtained with some of these prototype assays will be presented at the Society of Forensic Toxicologists meeting in October of this year. We are in the process of further assessing the clinical performance of these assays. And once these tests are optimized, we will initiate the clinical studies to be used as a basis for a 510K submission to the FDA. We expect these studies to occur during the first half of next year.

And one final area I would like to address is operations. During the quarter, we continued to make progress towards our goal of validating our automated manufacturing equipment in advance of filing with the FDA. A pre-qualification run was successfully completed. The team will now move forward with the generation of final data for an FDA filing.

And in addition, equipment installation is near completion in a recently constructed additional semi automated manufacturing space for OraQuick devices. Final data and documentation for an FDA submission will be completed shortly. Once FDA approval is obtained for both the new semi automated assembly space and our automated assembly system, we will have completed a major expansion in our manufacturing capacity for OraQuick HIV and OraQuick HCV. These additions to capacity, the implementation of our five year facility in manufacturing capacity plan, and the continued expansion of our enterprise resource planning system are laying the foundation to support a much larger business in the years to come.

So, in summary, significant progress was made on all of our major development initiatives during the second quarter; and we will continue to provide updates as additional progress is made and milestones are achieved.

Now I would like to share some more details regarding the commercial activities of each of our businesses. The infectious disease testing business, as Ron indicated, continues to perform very well. Direct sales to the public health market grew 35 % in the second quarter, and we believe this trend should continue throughout the year. Additional purchases were made by both Washington, D.C. and Philadelphia during the quarter, in connection with their HIV testing initiatives. And, in addition, two other cities, Los Angeles and Oakland, California, have committed to use OraQuick ADVANCE in their citywide HIV testing initiatives; and we expect to start selling them product in the third and fourth quarters.

In June, the CDC announced that it has identified $35 million in additional funding to expand HIV testing and prevention programs, which is expected to be allocated to targeted state and local jurisdictions by September 30th of this year for use over the next twelve months. This program has a goal of testing an additional 1.5 million persons in the United States for HIV, and identifying 20,000 HIV infected persons who are currently unaware of their status. We believe this program will result in increased sales of OraQuick ADVANCE. In observance of National HIV testing day in late June, we launched the Third Annual Mayor's Campaign Against HIV, in collaboration with the National Association of People with AIDS. This national campaign encourages testing for HIV and promotes the benefits of knowing one's HIV status. Thirty five mayors, along with health departments in major metropolitan cities, participated in this year's program.

As Ron mentioned earlier, Abbott's out sales continue to grow nicely and we expect that to continue. With the addition of new customers during the second quarter, we've now signed up 90 new hospitals and 14 new emergency departments as OraQuick users during the first half of 2007. In the physician office market, we continue to work closely with our newest distributor, Henry Schein; and we are also close to signing another group of physician office distributors and will look to add even more distribution capacity as the year continues.

We're also making good progress on the international front. In June we received official notice of European approval for our OraQuick ADVANCE HIV test. The OraQuick ADVANCE test is the first and only rapid HIV test bearing a CE mark that can be used with oral fluid as well as blood. We previously signed a distributor in the U.K., and we are aggressively pursuing several additional European distributors and product registrations focusing on Spain, Italy, France and Ireland.

As previously disclosed, there are several sites in Europe currently conducting investigational studies with our OraQuick ADVANCE test. These studies continue to progress and some are expected to be completed this year. We believe studies like this will help facilitate the European launch of OraQuick, now that the CE mark has been obtained.

We recently announced the execution of an agreement to supply our OraQuick test to the supply chain management system or SCMS. This arrangement will help make OraQuick more widely available to developing countries, supported by the President's Emergency Plan for AIDS Relief, or PEPFAR. Sales to the government of Madagascar remain strong, as that country's testing program continues to expand. And elsewhere internationally we continue to build relationships in several African countries, and position OraQuick for inclusion in country testing algorithms. We are also pursuing the validation of OraQuick in several additional countries.

In the substance abuse business, revenues grew 9 % in the second quarter. During the quarter, Intercept sales grew 16 % over 2006. We also closed 35 new Intercept accounts including a large manufacturer, a food company, call center firm, hotel chain and state probation department. The number of specimens processed in the workplace testing market continued its record pace, hitting an all time high for the quarter of more than 325,000 specimens. Oral fluid specimens processed in the criminal justice market during the quarter also grew nicely, increasing more than 10 %, compared to a year ago. And we believe this is indicative of the continued penetration of our Intercept test in the drug testing market. We will continue to focus on closing new accounts, and implementing recently signed accounts as rapidly as possible.

In the cryosurgical systems market, the most significant developments are in the international arena. Our over the counter cryo business in Europe continued the strong performance started in the first quarter. Sales to SSL, our European distributor, increased almost 200 %, compared to the comparable quarter in 2006. This is the result, as discussed earlier, of continued strong sales in the U.K. as well as continuing efforts to launch the product in other countries.

The launch of our over-the-counter cryosurgical product in Mexico through Genomma continues to exceed our internal expectations. We reported sales of $1.2 million during the second quarter and we expect continued growth in Mexico driven by strong promotional spend. And, as I mentioned, we are pursuing further expansion in a number of additional Latin American countries.

On the litigation front, in our patent infringement lawsuit against Schering Plough, we've now received the long awaited decision from the court on the motions for summary judgment filed by the parties. And, not unexpectedly, the court denied all motions for summary judgment, which clears the path for us to proceed to trial on the merit. In reaching this decision, the court eliminated several legal defenses raised by Schering Plough in this case. A status conference has been scheduled for early September, and we expect the court to issue a trial schedule after the hearing. We are eager to finally progress this litigation. And, in our pending dispute with Prestige Brands, we are now focused on the upcoming arbitration proceeding on the merits of this dispute, which is scheduled for late August. We remain very confident in our position on this matter, given the clear breach of the contract by Prestige's acquisition of the Wartner product, and we eagerly anticipate the upcoming arbitration.

Let me now turn this back over to Ron, who will update our financial guidance.

Thanks, Doug. Starting first with our third quarter guidance, we are now expecting revenues to range from $21 to $21.5 million, and earnings per share to range from break even to a $0.01 per share. We do expect expenses to increase, as we progress our clinical development activities. For the full year 2007, we are increasing our revenue forecast to $83 million, which represents a 22 % increase over 2006. As explained during our last call, our previous full-year guidance did not include any additional bulk orders for OraQuick ADVANCE or orders from Prestige Brands for our domestic over the counter cryosurgical product, beyond those received at the time, we initially announced our guidance. So, based on the Company's performance in the first half of the year, and the receipt of additional orders from both Prestige and now Genomma, we are taking up our revenue guidance.

As we close out the year, we intend to aggressively advance our clinical development plans for OraQuick HIV OTC, our rapid HCV test on the OraQuick platform, the automated assay development program with Roche, and a line extension for our OTC cryosurgery product. We are at a critical juncture where there will be substantial clinical development activities running concurrently. We believe that the successful completion of these projects, and final approval of our next generation of products, will drive future revenues considerably. As a management team, we are focused towards executing on each required step as rapidly as possible. We are committing the necessary financial and corporate resources to see that any new products reach their markets in a timely fashion. Obviously, product development and innovation have financial implications. The impact to EPS this year is expected to be considerable and is, perhaps, underappreciated. Costs related to increased R & D spend, including clinical trials and consulting services, are expected to have a bottom line impact of approximately $0.10 per share in 2007. Forecasting the exact timing of clinical trial expenses can be difficult, especially on a quarterly basis. So, it is within this context that we feel comfortable with leaving full-year earnings per share guidance at $0.05 per share. We will continue to monitor developments in our business so that we can provide an update on guidance as necessary after each quarter. In closing, we continue to believe that 2007 will be an exciting year and will position us for future growth. Now, I'll turn it back over to Doug.

Thanks, Ron. And why don't we open the floor up to questions again now regarding the strategic initiatives and our business update.

(OPERATOR INSTRUCTIONS) Your first question comes from the line of Sara Michelmore with Cowen & Company.

Hey, good afternoon.

Hi, Sara.

Just I guess a few questions. If you could just talk about, in terms of the CDC money, the $35 million that's going to be I guess it's distributed on September 30. Is that correct? It will actually get to the parties that put the grants in on September 30th?

It is our understanding that the grantees will be notified of their award at the end of August, August 31st.

Okay. So, but they may not necessarily have the money in hand.

Right, and then once the grants are awarded they will have until the end of September 2008 to spend the money.

Okay. So, in that there's a portion of that that's likely earmarked for testing the what is it -- 1.5 million patients that you mentioned? You would expect the bulk of that spending to be done in the first three quarters of 2008?

We would expect the bulk of that money to be expended during 2008, yes.

Okay. So it there's nothing in your guidance, per say, for 4Q for that type of spending, is that right?

Not at this time.

No, No. We'll have a better idea of how that product will deploy; and, when appropriate, we will talk about how it might affect our revenues.

Okay. And in terms of the international opportunities for OraQuick, it sounds like you are in a little bit of a holding pattern here near term in mainland Europe, pending some of these distribution agreements and other things like that. Should we think of that as really scaling up next year, or is that something where you think you could see some notable up tick in terms of momentum before year end?

I think we will certainly make good progress in terms of establishing distribution and getting the required regulatory approvals in country required to sell the product, but I think from a revenue perspective we will see the impact ramp up through 2008.

Okay. And in terms of the HCV OraQuick results that you showed at AACC, did you get any initial read from either the lab community or the public health community to that data set?

General feedback from all parties that have been involved in the studies or that are familiar with HCV testing in hospitals or public health market are very excited about the results that we've obtained. What's so exciting, Sara, is that we've demonstrated sensitivity and specificity equal to or better than state of the art third generation HCV tests on the OraQuick platform which, across all 5 specimen types which produces a result within 20 minutes. And these laboratory tests take 2 to 2 1/2 hours to reach final result. Really a testament to the integrity of our platform and to the platform capabilities, and certainly to the great development work that our team put together. This all needs to obviously prove out in our clinical studies but we have such a strong data set, we're very confident that we're going to execute world class clinical.

That's great. And then I guess in terms of the Q4 the, I should say the inferred Q4 guidance based on what you were talking about for Q3 in the full year, it does sound like the really I guess the R & D expenses are really going to peak in Q4. Is that really the high that you think that those expenses are going to kind of top out at for the next 3 to 4 quarters, or are we going to remain at kind of a higher level of spending starting in Q4 and then subsequent quarters based on what you need to spend?

I think that's an excellent observation, and certainly we do expect the clinicals to ramp. And with any clinical development program, especially when you have a number of them running concurrently, it's difficult to predict exactly what that number will be. But directionally you are absolutely correct that that number will increase from Q3 to Q4. What Q1 will do has yet to be determined. We have our own internal forecast, but I don't see it being considerably off of where we would be in Q4 because we will still be in a position where we will be filing. Our expectation is filing the HCV PMA in Q1. We will also be deep in the heart of working on the OraQuick OTC clinical trials so, and we also have other clinical work going on, so we do expect, Sara, that there will be significant expenditures in the first half of 2008 related to the specific programs that we discussed on this call.

Okay. That's very helpful. Thank you.

Your next question comes from the line of Dave Turkaly with FIG.

Thanks. On the HEP C, the PMA, could you give us a remind us of the data I think you said that you had some approvals in hand or at least you had the protocol kind of checked off. How many patients and what do you exactly need to show or what you think at this point you need to show to get that submission in the first quarter of '08?

We expect the total data sets going to be somewhere in the neighborhood of 3,000 subjects and that will be all 5 specimen types across those 3,000. The majority of those will be normal healthy donors. That will be to demonstrate specificity, and the rest will be appropriate sensitivity studies.

And in terms of total sites, how quickly do you think you can test that many 3,000 subjects?

Well, we would expect to have all of it completed to put us in a position where we would where we would be filing that PMA in Q1. So, as Doug indicated, the test has been finalized as far as the assay development work. Now it's just a matter of transitioning it over to manufacturing, making the clinical supplies necessary to get out in the field with our CRO. We will be opening up sites and conducting the trials, compiling the data and making the submission.

And the actual one, the protocol, the device you showed the data on in San Diego is the one that's moving forward into these trials?

Yes. That is the final design.

Excellent. Thanks a lot.

Your next question comes from the line of Caroline Corner with Montgomery & Company.

Thanks for taking my call again. First of all, your distribution agreement with Abbott. Can you tell us when that is up for renewal?

We originally signed a distribution agreement with Abbott and it is up for renewal at the end of this year. And we're engaged in discussions with Abbott for that renewal.

Okay. Very good. And then, just a quick question about the substance abuse and criminal justice line item. Is there any update with regards to (SAMPSHA)? Are they making any inroads as far as developing new guidelines for oral fluid testing?

Not that we have any real visibility to, Caroline, that would impact our expectations for the balance of '07.

Right. Thanks very much.

Your next question comes from Ed Shenkan with Needham & Company.

Ron, could you break out what you expect from Prestige in the third quarter? They usually order in advance, and also what were Schering Plough's revenues in the quarter?

Yes. That is a little difficult given where we are in the arbitration. I'd rather not comment on that at the moment. But, you are asking for Schering Plough. I would suspect it the balance of our development agreement revenues would be recorded in the third quarter of 2007, which was approximately $700,000 for Q3.

And what was it in the second quarter?

$650,000, approximately?

And, Oakland and L.A. Great announcements. I didn't realize they were coming on board. How big of orders might they be placing?

Well, L.A. is developing their program as we speak. They've announced that they're going to conduct a citywide initiative that will last several years. We would expect that as those plans get further developed and they officially launch the campaign, which we expect will be later this year, I believe targeting World AIDS Day, early December. We will certainly be able to provide greater visibility to the test and revenue expectations for the Company. Oakland announced their program on National HIV Testing Day, and they have not yet set specific testing targets. Once again, once they are established we will communicate that. But clearly both jurisdictions have selected OraQuick ADVANCE as their front line test of choice; and, given the great success we've had in Philadelphia, Washington D.C., we expect these are going to be real nice additions to the business going forward.

Thanks, Ron and Doug. Keep up the good work.

Thanks, ED.

Your next question comes from the line of Aaron Lindberg with William Smith and Company.

Okay. Similar question as it relates to OTC. How many patients do you anticipate enrolling in your Phase III trial?

On the Phase III over-the-counter trial?

Yes.

That is going to obviously depend on what results we obtain during our initial phases of the trial. So the way that the trial is designed is we have the opportunity to take a preliminary look after we've tested a certain number of specimens; I believe that number is 500 or 1,000. Beyond that, if we need to move to the next set of data, we will be obviously collecting specimens for more subjects. We will be able to provide more visibility to that as we get closer to the Phase II B and Phase III studies which will be conducted during the first half of '08.

Do you have a sense of what you're targeting for the Phase II B at this point?

It will be comparable to the Phase III, and again we will know better once we're in the midst of the studies.

And, it sounds like you've got it really well nailed down on the HCV. Is it that you guys are not quite sure what you're going to do or what's going to be necessary on that one yet ?

Well it's just a little bit further out. I mentioned that we filed our IDE amendments to the FDA. One of the nice things about how we've designed these trials is we've agreed to file IDE amendments. We'll get feedback from the FDA within 30 days of filing those so that then we will know that the trials we are about to execute will meet the requirements of the FDA, and we have not gotten that feedback quite yet. So I really don't want to comment on those specifics until we have it in hand.

Okay. Can you just comment broadly on the trend in your blended ASP for ADVANCE, just companywide over the last year?

Actually, ASP's on OraQuick ADVANCE have been pretty stable over the last year. And as I think you're aware, we've enjoyed a price premium to our competitors largely because of the benefits of our technology, its flexibility, accuracy and sensitivity and specificity.

Do you anticipate that the ASB again companywide will be stable again over the next 12 months, or will we start to see a little bit of reduction there as international builds?

I think, certainly, as we build our business internationally, we are going to see some pressure on ASP's. As we mentioned previously, we are selling into the developing world somewhere between $3 and $4 per test. So as that business becomes a larger proportion of total, obviously the total average selling price is going to decrease at some point.

Okay. And can you give us an update as to where you are specifically as it relates to a new indication in cryosurgical?

We haven't we haven't disclosed that yet, and obviously don't want to just quite yet for competitive reasons.

Okay. Can you give a little bit of background as it relates to the HCV test and the data that you guys have presented, specifically related to cyro conversion and how quickly you're picking up infection?

The cyro conversion data that I described earlier indicated that, across all the panels that were tested, we detected cyro conversion at least as soon as the third generation test and in 3 panels we were able to detect cyro conversion earlier. Excuse me, in 10 panels, earlier.

Okay in 10 panels you were able to detect it earlier. Can you give us any sense of what that is, days, weeks, months?

The average time to detection by OraQuick, and this is across all panels, was 47.5 days, where the average time to detection by EIA was 50.7 days. So on average we detected the differential sensitivity was 3.2 days on average.

Okay that helps a lot that. Thank you.

And that information, by the way, we posted Dr. Lee's poster on our website, so you can get access to the specific data that was presented there.

Great.

At this time there are no further questions. Gentlemen, you may proceed with your closing remarks.

That's great. Well, I just want to thank everyone for participating in this call, and I trust you'll agree that we have delivered a great first half of 2007. We are eagerly looking forward to finishing strong and turning in a record year. I look forward to updating you again on our progress during the next conference call and so I wish everybody a good afternoon and evening. Thanks, everyone.

This concludes today's teleconference. You may now disconnect.