OraSure Technologies Inc (OSUR) 2007 Q4 法說會逐字稿

Good day, everyone, and welcome to OraSure Technologies, Inc. 2007, four quarter and full year 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)

For opening remarks and introductions, I will now turn this call over to Judy Clark at OraSure Technologies. Please go ahead.

Good afternoon, everyone and thank you for joining us today.

I would like to begin by telling you to OraSure Technologies issued a press release at approximately 4 p.m. Eastern time today regarding our 2007, fourth quarter and full year 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 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 seven days. Alternatively, you can listen to an archive of this call until midnight February 19, 2008 by calling 800-642-1687 for domestic or 706-645-9291 for international. The access code is 32848688.

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 which will be followed with question and answer sessions. Before I turn call over to Doug, I must remind you that this call may contain 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, annual report on form 10-K for the year ended December 31, 2006, its quarterly reports on 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 now like to turn the call over to Doug Michels.

Thank you, Judy and good everyone, and welcome to our fourth quarter and full year 2007 earnings conference call.

For today's call Ron Spair will begin with a review of the fourth quarter and full year 2007 financial performance. As you can see from our earnings release, our full year financial results were in line with expectations. Following Ron's remarks, we will open the floor for your questions on these items. After that we will discuss our principal strategic initiatives and provide some brief additional business updates. We will also provide our financial guidance for both the first quarter and full year 2008. We will conclude by again opening the floor for your questions.

Now, let's turn to Ron's financial overview.

Thanks, Doug, and good afternoon everyone.

First I will start with a brief review of the full year results. 2007 revenues increased 21% as a result of the continued robust growth in our infectious disease business along with exceptional growth in our non U.S. over the counter, cryosurgical business. Our infectious disease revenues increased 23% while our worldwide cryosurgical sales grew 36%. The growth in our infectious disease revenues continued as a result of strong sales of our OraQuick rapid HIV test. Sales to public health increased 30% over 2006 and our sales to Abbott were up 17%. International sales of OraQuick nearly doubled and were up 94% compared to 2006. Our OTC cryosurgical revenues grew 21% domestically and 115% internationally. Our 2007 launch of an OTC cryo product in Mexico exceeded our expectations and our European distribution agreement with SSL has proven to be quite successful. Such strong growth in Europe and Mexico is encouraging. And we hope to announce efforts to expand our presence throughout Central and South America later this quarter. Our substance abuse business remained flat during 2007 while our insurance risk assessment sales decreased slightly. On the bottom line for 2007, we delivered $0.05 per share on a fully diluted basis compared to 2006 where we ended at $0.11 per share. Our EPS was impacted by our R&D efforts. R&D expenses for 2007 increased $5.4 million and in turn decreased our EPS by approximately $0.07, as we continue the our efforts to gain FDA approval to sell our OraQuick HIV test over-the-counter, to develop our rapid Hepatitis C test and homogeneous fully automated drugs of abuse assays for use with our intercept oral fluid collection device in collaboration with Roche Diagnostics. The status of these projects will be discussed by Doug in greater detail later in the call.

Now I will turn to our quarterly results. Our fourth quarter performance on both the top and bottom lines was consistent with our guidance and we are pleased with the business' financial performance. Total revenues for Q4 were $19.8 million, a 12% increase over the same period in '06, representing all organic growth. Increased sales of OraQuick ADVANCE test and OTC cryo products were the primary revenue drivers for quarter. In the infectious disease market we booked sales of $9.4 million, a 19% increase over the fourth quarter of 2006. Primary reasons for continued growth in the infectious disease testing business were a 21% increase in sales to Abbott for distribution in the U.S. hospital market, a 22% increase in direct sales of OraQuick to the public health market and doubling of our international OraQuick sales, primarily to Africa. Importantly, we are starting to benefit from the CDC's additional funding to increase HIV testing opportunities and we are beginning to see traction of our sales initiatives in the international market. In substance abuse testing, sales were $3.4 million, a 16% decrease compared to last year. Included were $2.6 million in sales of our Intercept drug testing system which represents a 21% decrease from 2006. Our total workplace testing business was down 31%, and our international sales were down 32% from 2006. Our direct sales grew 32% for the quarter and our criminal justice sales grew 4%.

The Company's workplace testing business has been impacted by the decline in employment rates in some of the markets which buy our Intercept products. The international market has experienced a decrease in public sector funding which has slowed the implementation of criminal justice testing. Cryo system sales were $5.3 million for the quarter, an increase of 25% compared to the same period in 2006. Higher sales of our international OTC cryosurgical products were the maintain reason for this increase, partially offset by lower sales of our domestic OTC cryo products. Sales of Histofreezer to the U.S physician's offices increased 50% reflecting the efforts of our sales strategies in this market place. During the fourth quarter, we had approximately $650,000 in sales of our U.S. OTC product to Prestige Brands compared to $1.2 million in the fourth quarter of 2006. The decrease in our domestic OTC cryo product is a result of the dispute we had with Prestige and the termination of our agreement at the end of 2007.

Finally, insurance risk assessment sales were $1.6 million, up 12% compared to $1.4 million in the comparable period of 2006. Turning to gross margin, our margin for Q4 of 2007 was 58%, a decrease from the 65% for the fourth quarter of 2006. This decline was due to several factors, including an unfavorable product mix versus the year ago period and a higher unit cost associated with the introduction of a new cryosurgical device in the European OTC market. In addition, prior year gross margins were higher than normal due to a favorable royalty expense adjustment made in the fourth quarter of 2006.

Turning to operating expenses, R&D expenses for Q4 were up 46% or approximately $1.3 million over 2006; largely as a result of costs associated with the ongoing clinical development work for our OraQuick HIV OTC test, product and clinical development costs for our OraQuick HCV test and a clinical study to gain FDA approval for a product line extension in our OTC cryo business. Sales and marketing expenses increased 28% or approximately $1.1 million, mostly due to increased staffing and related charges, increased market research and consulting costs related to the market assessment of our OraQuick HIV OTC and HCV test opportunities as well as increased advertising reimbursement costs related to our international OTC cryo product. G &A expenses decreased approximately $200,000, largely as a result of a decrease in legal fees as a result of the completion of the Prestige arbitration, offset by increased staffing related charges. From a net income perspective, we reported net of $27,000 with break even EPS. This compares to $1 million or $0.02 per share for the same period of 2006. For the fourth quarter 2007 we recorded an income tax benefit largely due to the inclusion of an R&D credit in our year end tax provision.

So turning briefly to our balance sheet and cash flow; our cash remains strong with cash and short term investments of $95.6 million at December 31, 2007, and working capital totaled $105.6 million. During 2007 we generated $11.5 million in cash flow from operations with days sales outstanding improving to 50 days from 55 days a year ago. During the fourth quarter we generated $3.5 million in cash flow from operations.

And so with that, we would now like to open the floor for questions regarding our financial results.

(OPERATOR INSTRUCTIONS) We'll pause for just a moment to compile the Q&A roster. Your first question comes from Ed Shenkan of Needham & Company.

Quick question on the one time payments from Prestige. Did you get in in the quarter and what's upcoming?

We did, Ed. We had one payment related to the arbitration regarding the legal fees, and that was included as an offset to our legal expenses in G& A. It approximated $400,000.

Okay. And the Abbott contract, remind us -- you've renewed it once again and what's the pricing terms there? Are they up or down in.

The Abbott has a renewal clause. We renewed for 2008 and as we discussed previously, we transfer the product to Abbott in the high single digits.

Is it much of a change in the price in '08 versus '07 or can you comment on that?

We normally don't comment on that and just stick with the comment I made previous.

I'll jump back in queue. Thanks.

Your next question comes from Dave Turkaly SIG.

Over on to the craft side quickly. You made questions about the international side. SSL in Europe, how many countries are they in now? Where else can they go? Then I know you mentioned Mexico as a strong point. What other countries can you bring that product to with your distributor there?

SSL has right to all of the EU along with Australia and New Zealand. Gennoma has rights in Mexico and we're exploring the possibility of expanding their rights to other territories at this time. SSL is launched in most of the Western European countries. They're looking to expand into some of the other Western European countries. There's still opportunities to broaden their distribution in France and Germany. And obviously we're looking for increased penetration throughout Eastern Europe.

Great. And then we just look at the guidance. Obviously, the quarter gross margin, you mention in the release some scrap and other items. If you can point us to a direction for 2008, maybe a little beyond what factors does that bounce right back quickly into the mid-low 60s. What should we be looking for from that from line item.

Sure. I think that there are a couple of issues in the fourth quarter, Dave, that were specific to what we were experiencing at the time. One of which tacks all the way back to the fourth quarter of '06 where we had a royalty adjustment that was favorable and cost of goods sold which put us up against a tough comp going for the fourth quarter of '07. We also had an arrangement where we shipped product to our European distributor for cryo surgery without the benefit of taking a price increase for the product that we supplied them. That will be corrected and affected for 2008. However, there are continuing -- some continuing issues that we have related to some of the manufacturing process that we have that we talked about on the last call which will provide some downward pressure on margins in the early part of 2008, but I can tell you that as the volume of product sales increases and we move through the year, our expectations are that that will improve as well.

And last for me on the infectious disease, 19% growth that's fairly strong. When you look at the CDC contract and the competitive landscape, it appears that you're still growing at a healthy clip. Are you seeing anything out there? Do you think that some of those monies -- are you seeing some of that flow through? And anything on the competitive front? Or do you still think you maintain a large leadership position there?

Dave, we are starting to see some of the flow through and as we had mentioned in previous calls, we think that the bulk of that allocation is going to be spent during the second and third quarters of 2008, although hopefully, we'll see some nice up tick during the first quarter. I'm going to talk about this a little bit later from the call, but the CDC, a couple weeks ago, had all of the 23 jurisdictions together in Atlanta. We were fortunate enough to be invited to participate in that. Out of the 23 jurisdictions, 21 of the 23 intend to use rapid testing to fulfill their obligations as part of that commitment. All of those customers have been OraQuick users or OraSure users, loyal customers, and the largest majority, virtually all are going to continue to use OraQuick as their primary test for the CDC initiative. So as these funds begin to be deployed we expect to realize a substantial benefit from that. Very confident.

Thanks a lot.

You bet.

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

One quick follow-up regarding here, just on that CDC and the customers. Your comment was that they've all been OraSure customers. Are those 21 all current OraSure customers.

Within the past year they've all used OraQuick and OraSure. Absolutely.

And then can your just give us more detail on the scrap problem. This is the second quarter in a row that we've seen it. You made the comment that it is going to continue into '08. Can you help us understand what's going on there?

We are working to basically modify a process for securing some raw materials for our OraQuick product. And we have a testing algorithm that we have in place that is qualifying our raw materials for inclusion In our OraQuick device and we have some scrap that we have been experiencing that's higher than normal, Aaron.

Is that due to just the raw materials? And is that for other products too?

No, it's OraQuick.

Is that due to the raw materials that you have coming in, so you are just looking at alternative sourcing or something in the process once you receive them?

No. No, it's the material as it's coming in and we're working with our supplier and it's well on its way to resolution.

And you've used the same supplier for some time without issue in the past, correct?

Absolutely.

And then can you talk us through the increase in inventory in Q4. Is that related to any specific products?

We have a different methodology for our partnering arrangements in the cryo space, Aaron, as opposed to what we had with Prestige, where we were primarily shipping product on a just in time inventory relationship for Prestige. Right now, we are stocking inventory for both SSL and Gennoma and are responsive to their needs and given the number of countries that SSL has now introduced product into, we have more skews in inventory than a year ago. And also, we are carrying a little bit more OraQuick inventory to be responsive to our customer needs as well, both domestically and internationally.

And on the OraQuick sales can you break out how much of that was to Europe?

I don't have that number. But it was not a significant amount.

Okay or maybe the easier question would be Africa.

I would look at most of it as in the developing countries although it was not all Africa. We are also selling in Asia in the fourth quarter of 2007. Africa was probably in the neighborhood of $.75 million or so.

Okay. But you're currently launched in three countries in Europe now?

That's correct.

And we just expect to see some of that start to pull through here early in '08?

I think that's a fair expectation. Although as we have mentioned before, there's additional work that needs to be done on a country by country basis to secure registration. We are actively in discussions with a number of distributors in additional countries in Europe. And the way we go to market is through distribution as opposed to direct sales into public health. And so the transfer price is lower than we would secure if we were going direct and the ramp is going to be slower.

Is the transfer price similar to Abbott?

I would say that it is in that general ballpark.

Okay. But without getting into too much detail here I understand you've got a bunch of work ahead of you as far as adding additional countries, but the three country that is you're set in right now, is there additional work that has to happen in those three before you can sell product?

No. No. No. We are selling product. There's obviously a lot of work to do to continue to build the business in those countries whether it's getting key opinion leaders on board or working with the countries to adopt sweeping regulations and policies like we have here in the United States. And that's going to be all over Europe. Europe has not adopted rapid testing like it's been adopted here in the United States. So there's going to be more missionary work over the next several years. And obviously, we're on the early phase of that journey.

Of the distributors that you're using, are those stocking distributors or are you holding inventory for them as well?

Stocking distributors. But obviously, as our business grows we'll hold inventory because it's got to be labeled for the EU.

Perfect. Thanks. I'll jump out.

Your next question comes from Caroline Corner of Pacific Growth Equities.

Hi, thanks for taking my call. Just a quick question. The professional domestic cryosurgery product was particularly strong in this quarter. I was just wondering, is there any change there with pricing or anything or still expect that to be at the high gross margin it usually is.

I think, Caroline, that the margins have remained the same. Where we had expected to see more of a spike in that particular product line in Q3 which had been historically when we saw peak sales in the professional cryo product in the U.S. It actually occurred in Q4 this year. But the Q1 results to date and forecast look strong and our representative of regular patterns in that business.

Okay. Thanks.

Your next question comes from John Putnam Dawson James Securities.

I wonder if there's any improvement in the substance abuse business. Is it really just an economic phenomenon?

Well, we have seen in the workplace area, John, in effect as it relates to certain of our customers some of whom are in home improvement, retail, etc, and the effects of testing volumes with those particular customers. In our direct sales, we've seen a pickup. We've seen pretty much the status quo in criminal justice domestically. But in the international marketplace where we are primarily concentrated in the U.K., there's been a reduction of public funding for substance abuse testing and we feel the effects of that as does our distributor in country there. And so I think as we move through the year, economic conditions get better. We also are extremely active in going after and closing new business here in the U.S. and so I think we'll begin to enjoy the benefits of that as we move through the year.

Thanks a lot.

Your next question comes from Jeffrey Frelick of Lazard Capital.

Hey, Doug, can you comment on any visibility on what percent of the 21 jurisdictions you had mentioned earlier, maybe have begun to implement some of the increased testing initiatives.

All of them are implementing right now. The question is have they gotten to the point where they're actually ordering product. For all those jurisdictions, this funding represents new capacity and new testing. So in most cases they've had to hire staff and build the infrastructure so that they could take on the incremental tests. That's been going on across the board. Now we're starting to see the orders come through. I would say about half of the jurisdictions have actually placed orders, maybe a little bit less. And we would expect that that would now obviously ramp up through the first quarter and significantly in the second and third quarters.

And then will CDC put in place some sort of checks to make sure the funding is put to use appropriately?

Absolutely. And that was the primary reason for this meeting that was held two weeks ago where they brought all the grantees together, talked about the reporting and monitoring process, and I think it's very important obviously that this is done; you may be aware in the President's proposed budget for 2009, this funding is re-upped. Actually, there's a little bit more funding in next year's plan for this same initiative. And so obviously, it needs to be very effective to maintain that kind of support.

Okay. And then would you care to make any observations regarding rapid test penetration in the hospital market?

That's going along very well. I'll talk about that perhaps in the back half of the call if that's okay, Jeff, and we'll follow that on with another question. But, things are going well.

Thanks, guys.

At this time there are no further questions. Mr. Michels, please resume. Okay, well thanks for those questions.

And now let's discuss the progress of our development programs and other initiatives to expand the business. Let me start with our OraQuick HCV test development program. As planned, clinical lots have been produced and our clinical trials have been initialed. We expect that these trials will continue through the first quarter and into Q2. As soon as they are finished we'll analyze the results and we will prepare our submission. We're still targeting the filing of a PMA application sometime this summer and we intend to submit for the CE marker, European approval shortly thereafter.

As recently announced yesterday, we have entered into an agreement with Schering-Plough to collaborate on the development and promotion of this test on a worldwide basis. This new agreement expands our existing collaboration with Schering-Plough which was originally limited to the United States physician office market. Under the terms of the new agreement, all sales of the HCV test will be made by OraSure and we will retain the rights to market and sell the test throughout the world. Schering-Plough will reimburse us for certain development and regulatory costs based on the achievement of milestones. Schering will also provide promotional support for the product in international markets. According to the World Health Organization an estimated 180 million people or approximately 3% of the world's population are infected with Hepatitis C, and it's believed that 130 million are Chronic HVC carriers at risk of developing liver cirrhosis and or liver cancer. It's also estimated that three to four million persons are newly infected with HCV each year and that 70% of this group will develop chronic hepatitis. HCV is responsible for 50% to 75% of all liver cancer cases and two thirds of all liver transplants in the developed world. So in light of these statistics, we believe that the worldwide market for a rapid HCV test is significant, and we believe our expanded relationship with Schering-Plough will put us in a strong position to capitalize on this opportunity.

Regarding OraQuick stability as you know, a critical project has been to extend the shelf life of our HIV test beyond six months. Real-time stability studies continue to progress and have gone well. We recently completed testing at nine months and believe that our data supports extending our dating beyond the current six months. Over the next several months we will continue with these studies as well as develop the necessary developmentation required to allow implementation of a shelf life extension.

Extension of shelf life in the U.S. and Europe will require regulatory submissions and we recognize how important this is for our infectious disease business and our customers and we will continue to prioritize these efforts. Turning to HIV OTC, clearly another major initiative is the ongoing clinical work to obtain FDA approval to sell our OraQuick rapid HIV test over the counter. There have been several developments in this area and a protocol adjustment which we will expand upon in a couple of minutes. As planned during the fourth quarter, we completed our device interpretation study. As you may remember, the purpose of this study was to evaluate an individual's ability to properly interpret test results. As you may remember, the purpose of this study was to evaluate an individual's ability to properly interpret test results without having to actually perform the test. The study met our expectations and demonstrated that individuals could indeed interpret devices as prescribed in our proposed packaging and labeling. The device interpretation study was required prior to starting the final two clinical studies in this program, our observed and unobserved user studies.

In our next study which is the observed user study we will assess an individual's ability to interact with our packaging and comprehend the instructions for use, take the test and interpret their own results, while a trained professional observes those activities.

In the final study, the unobserved user study, subjects will take and interpret the test at home without any observation and report back to the clinical site.

As indicated during our last earnings call, upon completion of our device interpretation study, we requested a meeting with the FDA to review our clinical progress to date and our plans for completing both of the final two clinical studies. In December, we also filed an IDE amendment to permit commencement of the observed user study and we planned to discuss that submission with the FDA as well. The FDA granted our request, and a meeting was held in mid January. On balance, we had a good meeting with the FDA. The FDA was collaborative in its approach and provided important feedback on our clinical results to date. The FDA also further clarified their expectations for the observed and unobserved user studies. During that meeting, we specifically discussed the detailed results of our device interpretation study and how that data supported moving to the observed user study and was predictive of a successful outcome. With respect to the observed user study IDE amendment, the FDA provided constructive comments which resulted in some minor changes to our protocol. In the end the FDA indicated we could proceed with finalizing the IDE amendment for the observed user study, clearly this was a good response.

So at the end of January, we submitted a revised IDE amendment to the FDA and we expect an expeditious review of this submission. We will begin the observed user study as soon as possible after we hear back from the FDA on this amendment. We also discussed with the FDA our plans to move forward with the final unobserved user study. One change in our plans that did result from the FDA meeting is the timing of this study. Our initial plan had been to obtain approval of an IDE amendment and begin that study while the observed user study was in progress. However, during our meeting, the FDA made it clear that we will need to complete the observed user study first and allow the FDA to review the results before submission and approval of our IDE amendment for the unobserved study. We intend to submit a draft IDE amendment for the unobserved study when we give the FDA our data from the completed observed study -- observed user study.

The FDA's reason for the timing change stems from the fact that the observed user study will be the first time that potential consumers will be able to take and interpret the test and react to their own test results in real-time. The FDA indicated that they want to see how individuals respond to the test results in the observed settling so that any necessary adjustments can be made to our protocol before the users are permitted to take the test in an unobserved setting. These concerns are understandable and we have taken significant steps to ensure that our test labeling is robust and very understandable and that a 24 hour, seven day a week medical resource and referral system will be available to support the users of our tests.

The net effect of the FDA's input is that the observed user study is likely to extend a bit further into 2008 based on the expected timing for approval of our modified IDE amendment. Subject to the results of that study, we hope to begin the unobserved study during the back half of 2008. We'll continue to prioritize these clinical studies with the goal of completing them and submitting our PMA application to the FDA as soon as possible and of course we will provide updates on our progress in the months to come.

Turning to drugs of abuse. Another important program is the development of homogeneous drugs of abuse assays with Roche Diagnostics for use with our Intercept oral fluid collection device. The development of these products continues to go extremely well. Based on the progress to date we continue to believe that we should be able to develop state of the art, drugs of abuse assays, using oral fluid on a variety of automated systems. Protype assays for most of the initial launch menu, which is a 905 test panel, are now operational on automated instrumentation. We expect to conduct consumer site testing with these automatic assays during the first half of this year. And when these tests have been fully developed, optimized and transferred to manufacturing, Roche will initiate the clinical studies with our assistance and the data generated will be used as the basis for a 510(k) submission to the FDA.

Now I would like to provide additional details regarding the strategy for growing each of our businesses. Let me start with infectious disease. Our infectious disease business grew nicely in 2007, increasing 23% over 2006. The primary growth areas in 2007 were public health, hospitals, and our international business. We believe these trends are likely to continue in 2008.

In public health, sales will continue as we talked earlier, to be driven by the adoption and support for the CDC revised recommendations for routine HIV screening in health care settings and the use of the $35 million in additional funding, announced by the CDC last year to increase testing opportunities among populations disproportionately affected by HIV,primarily African-Americans. As I mentioned the CDC held a two day grantee workshop at the end of January,for the 23 jurisdictions who received funding under the program. And we believe that the workshop will help to accelerate implementation of the specific testing programs. As I mentioned, thus far of the 23 jurisdictions, we've shipped product to nine in support of their CDC funded testing campaigns. Our public health business should also continue to grow as a result of HIV testing initiatives implemented in various cities around the country. During 2007 the revenue from these initiatives more than doubled from 2006, increasing to over $1.7 million. Contributing to this growth were the initiatives in Washington, D.C. and Philadelphia. And this past December at the opening of the NASDAQ stock market on World AIDS day, the Mayor of Los Angeles, Antonio Villaraigosa, kicked off a city wide drive to encourage one million Angelinos to get tested for HIV/AIDS by 2011. And these initiatives will contribute to continued growth.

Sales to Abbott Laboratories for distribution in the U.S. hospital market increased 17% during 2007 and out sales grew 37%. Our agreement with Abbott which expired at the end of '07 was renewed for 2008. And as a result of the strong collaboration between our hospital sales team and Abbott sales force, we estimate that our OraQuick test now has an approximate 64% share of the U.S. hospital rapid HIV testing market. In addition, there's been significant expansion of HIV testing within hospitals, specifically through the deployment of testing in the emergency departments, primarily driven by the CDC recommendations for routine HIV screening in health care settings.

ne recent development in New York City is worth noting, and that happened today as part of her state of the city address which was given by New York City Council Speaker, Christine Quinn. She announced a new public/private collaboration between the City Council, the Health and Hospitals Corporation and the OraSure to significantly increase testing for thousands of New Yorkers. Over the course of the next few weeks, we will be working on the details of this very exciting initiative.

And on the international front we're particularly pleased with the growth of our OraQuick business, particularly in Africa which saw a 76% growth over 2006 to almost 2.5 million. Our African business in 2007 reflects our support of large testing initiatives, primarily in Madagascar and Ghana and continued private sector business in South Africa. We expect these areas to continue to grow and that sales to other countries will increase as additional product validations, registrations are completed and OraQuick is adopted for testing initiatives.

As we mentioned with the receipt of a CE mark for our OraQuick advance test during 2007 we successfully established distribution channels in several European countries and we're aggressively pursuing other distributors elsewhere in the European Union. Ron mentioned in late '07 we shipped our first product to Indonesia and we will be looking to open new markets in other Asian countries. And we are also actively pursuing registrations of OraQuick ADVANCE for Latin America. We're pleased to announce that we have recently received approval in Brazil and Peru for OraQuick ADVANCE product and expect to begin shipping product later this year. And registration efforts are continuing and we hope to have an approval for Argentina in the very near term.

Turning to substance abuse. Our substance abuse revenues for 2007 were flat compared to 2006. As Ron explained due primarily to economic conditions here in the United States and reduced funding internationally. To combat the decreased employment rate the sales focus has shifted to working with markets that have experienced employment growth or that are less likely to be substantially impacted by the decline in employment. Examples of these markets include hospitality, restaurants, manufacturing, and personal and business services. To increase growth domestically, we will focus on implementing with co-marketing initiatives with third party administrators or TPAs who are currently a critical channel to our customers. We are also working on securing new high profile TPAs as additional customers for Intercept. We also have been working with potential new laboratories to adopt oral fluid screening for both the criminal justice and work place testing markets. And in forensic toxicology, we have been in discussions with a third party supplier to expand our menu of assays for forensic testing. Negotiations are progressing and we hope to sign an agreement in early 2008. While forensics is a relatively small piece of total revenues we believe this product expansion is important.

And finally on the cryosurgical systems side, our business grew 36% over 2006, primarily as a result of our over-the-counter business. e experienced continued strong growth in international OTC markets, sales of our over-the-counter cryosurgical product to Mexico through Gennoma labs resulted in almost $4.4 million in new revenues during 2007. Gennoma has done a terrific job distributing this product and promoting it in Mexico, and we expect that to continue. Sales to Europe increased 16% and we expect continued growth in this part of the world as our distributor, SSL, expands distribution in additional European countries such as Spain and Germany.

And with the termination of Prestige Brands to the U.S. over-the-counter market we're focused on replacing these revenues. Our discussions with potential distributors continue and we also hope to commercialize an OTC cryosurgical product for a new indication sometime in 2008, and we recently filed an application for 510(k) approval of this product application with the FDA.

Sales of Histofreezer product to the professional market were flat in '07 compared to 2006. However, growth in sales through distributors like Henry Schein, Owens and Minor, and independent dealers, led to the Company's strong performance in Q4 and we hope to continue that through 2008.

During 2007 we completed the two litigation matters in which we were involved and we're certainly happy to have those behind us. We reached agreement to settle the Schering-Plough patent infringement litigation which was started back in 2004, and although I can't disclose the specifics under the terms of our settlement, we have licensed certain patents to Schering-Plough in the U.S. OTC cryo market and will receive a lump sum payment and future ongoing royalties. We also completed the Prestige arbitration and recovered a portion of our legal fees prior to the end of 2007, as Ron mentioned earlier.

And finally, on the organizational front as previously announced, we are delighted that Debra Fraser-Howze has joined our senior management team to head up government and external affairs. As you probably saw in our press release, Debra was the Founder, President, and CEO of the National Black Leadership on AIDS, or NBLCA. Her extensive experience, including over two decades serving communities of color regarding teenage pregnancy, social welfare, and HIV/AIDS,she has also served as an advisor to U.S. Presidents as a member of the President's Advisory Council on HIV/AIDS and I'm thrilled to have her on board, and I'm confident that Debra will make a strong contribution to the future success of our company.

So with that, let me turn it back to Ron who will update our financial guidance and we'll open the floor again for questions. Thanks, Doug.

2008 should mark another year of significant top line organic revenue growth for OraSure as we continue expanding our activities across all businesses, both domestically and internationally. We expect this despite an elimination of revenues from two significant sources contributing to our growth in 2007; namely the U.S. OTC business which accounted for approximately $6.2million in revenues and and $2 million of funded research and development revenues recorded under our HCV collaboration agreement with Schering-Plough in the U.S. We are targeting total revenues for 2008 in the range of approximately $90 million to $92 million. Given the revenues we will have to replace from 2007, this target represents a significant step forward. Importantly, this revenue projection does not include amounts able for past sales under the Schering settlement which are expected to be recorded as other income and excludes any potential contribution in 2008 that might accrue to us from the reintroduction of our cryosurgical wart treatment product in the U.S. OTC market or the launch of the OTC cryosurgical product line extension that Doug mentioned earlier.

From an operating expense perspective we project an significant increase in R&D spending for the clinical development of OraQuick HCV, OraQuick HIV OTC and the qualification of a new HIV MICRO-PLATE Assay for use with our OraSure, oral fluid collection device. We now expect R&D expenses to total approximately $21 million in 2008, an increase of $7 million over the 2007 level or approximately $0.08 per share after tax. Our bottom line will benefit this year from the Schering settlement and we are currently projecting fully diluted earnings per share of approximately $0.05 to $0.07.

For the first quarter we are currently projecting revenues of approximately $18 million to $18.5 million with sequential growth in infectious disease and substance abuse revenues offset by a drop in cryosurgery revenues as a result of seasonality and the absence of U.S. OTC cryo revenues. From a bottom line perspective we are currently projecting fully diluted earnings per share of approximately $0.03 to $0.04.

Now, we will again the floor to questions regarding our business update.

(OPERATOR INSTRUCTIONS) Your first question comes from Dave Turkaly SIG.

Thanks for all the detail. On the HepC front, do you have a target for when you submit and when that might be approved?

We're just saying some time summertime, Dave. Generally it's a six to nine month approval process for a PMA like this. Obviously, it all depends on the quality of the data. You know what the data looked like in the preclinical work that we did this past summer, which was outstanding, and assuming we replicate that in the clinical studies, which is our plan, hopefully, we'll get a pretty quick review.

And then maybe on -- so that seems like that's still pretty much in line with where we were prior to today. And is there an update on the assay at all in terms of a timing? When that might be achieved with Roche?

I'm sorry.

We're working through the final stages of the development agreement and I believe that we have all the 905 panel assays at a fairly advanced stage of development, and we would look to take that into Beta testing after we get those all working together and that should occur--we'll give more guidance over the next several months. We're making great progress on the R&D side.

Great, thanks.

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

Just a quick follow-up there. Specifically how is the THC assay coming along.

Actually we've made nice progress with the THC assay. It's one of the more difficult assays to develop, as you probably know, we've made nice progress with the antibodies we have identified.

In terms of the is 905 that's --

That's always the most challenging in terms of sensitivity and antibody recovery.

But the other four are pretty well ready to go?

We presented data on all four of those at the meeting last October I think it was. And everything is moving along very well.

Okay. So the only lagging one is THC.

And we're making good progress on that.

Fantastic. From the financial guidance here for 2008, its sounds like the Schering settlement is not included in the 90 to 92 but may be included in the $0.05 to $0.07. Do I have that right?

Absolutely.

Why the disconnect?

It won't be reflected as a revenue item for us, Aaron, and it will be brought in as other income--

--it will be showing way down on the PNO.

That's correct

Excellent. And then when did the HCV study begin?

They started over the last 30 days.

How many people do you expect to enroll in that?

Oh, goodness. ,I think it's 3000 approximately.

Okay. Excellent.

Conducting the studies at eight different sites.

At eight sites.

Yes.

Excellent. I will jump back in the queue.

Your next question comes from Sara Michelmore of Cowen and Company.

Hello.

Hey, Sara.

I'm wondering if you can just talk us through the pacing of the quarterly earnings. Looks like relative to the guidance that you communicated on press release and on the call today that the earnings are relatively front end loaded to the beginning of the year. So I am wondering if you can just talk us through what is going on there. I assume it has to do with the pacing of R&D in particular. But if you can just run us through the expense lines, that would be helpful.

Sure. I would be happy to. I think that the major impact that you are seeing in the first quarter, Sara, has to do with the Schering-Plough settlement. And has the a pretty significant impact on the bottom line EPS. Then I would expect given the R&D spend which is going to be heavy in Q1 and currently looks to be very probably even more significant in the second quarter of 2008 that that is -- would likely drive us into a position where we would be below break even in fact, and then we would hover around the break even point in Q3 and back up again in Q4. But the expenditures on the clinical development work for HIV OTC, HCV and the high through put substance abuse assays as well as the qualification of a new MICRO-PLATE assay for our OraSure device, are going to be fairly front end loaded and we're going to go after this aggressively. And we're going to spend the money to get them done as quickly as possible and on to the market, and that is why we have the skewing toward the front end of the year.

Okay, so in Q1 I am correct the Schering-Plough is going to be another income line that's going to offset some of that investment in the first quarter.

Yes. That's correct.

Is there any difference I know you had the burden of a lot of incremental legal expenses last year. Is this something that we should think of being down this year, or is it too tough to tell at this point in the year?

I certainly hope it's going to be down. We all do. We had approximately just under $2 million worth of legal expenses last year, a combination of Prestige and Schering-Plough. And as Doug indicated earlier in the call, both of them are resolved. And hopefully, non-recurring in nature. But we're sitting in early February. Right now we're not aware of anything that would drive that.

But that should be an incremental positive for you.

Yes.

And it sounds like I am correct to assume in terms of OraQuick and the impact of the CDC money, that we should expect higher sales of OraQuick in Q2 and Q3 and lower sales maybe in Q1 and Q4. Is that right?

I don't know -- certainly higher in Q2 and Q3. We expect the money to be funded again for 2009, and the assumption is that the jurisdictions would receive that money like they did this year at the end of September for the '09 fiscal year. So our hope is that OraQuick number just continues to ramp as we continue to build adoption and uptake.

Okay. And I know you mentioned -- I'm sorry, Doug, I was kind of hopping between calls here -- when do you expect the CE mark for the HCV point in care product? And how much time do you think you need to kind of get Schering-Plough kind of up and ready to do an EU launch?

The CE mark will be filed shortly after we make our FDA submission. And we're already in discussions with Schering, talking to their international marketing directors about bringing key opinion leaders to the table and beginning to prepare the markets both here in the United States as well as globally for the introduction of this rapid Hepatitis C test. Funding is very important, and so from a government affairs perspective, it's very important that we begin to lobby and try to make our -- those that are in charge of appropriations aware of the importance of making funds available for the introduction of rapid Hepatitis C testing. Very excited about this opportunity both here in the United States and throughout the world. And obviously Schering's strength in the therapeutic areas and their relationship with the key opinion leaders, thought leaders around the world is going to, we believe help us a great deal.

Wonderful. Thank you.

Your next question comes from John Putnam of Dawson James Securities.

Ron, I wondered if you might just clarify this contribution from Schering-Plough on the HCV test. You're going to get certain development costs and I guess milestones as well?

This is the agreement that we entered into yesterday, John, that we announced yesterday. There's a portion of the agreement that addresses funded research and development related to a particular geographic region outside the U.S. And then there are other regulatory approval milestones and commercialization milestones that are ex U.S. that would generate payments to us.

And when might you expect those to begin?

Not in the near term, John. They're likely to be events that would occur subsequent to the U.S. FDA approval.

So we probably won't see any in '08? Is that right?

It would be an up side if we did.

All right. Thanks.

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

On the OTC HIV program, when you begin the observed studies, how long do you think it will take to do that portion?

Well, that all depends on how successful we are at the different interim looks. So we have the opportunity as we've described earlier to look at the data after the first 1,000 the first 2000, and then ultimately, the largest body of subjects in the trial. So depending on what the results look like after the first interim look, whether we can stop or whether we've got to continue somewhat, that will obviously determine the timing on the study.

In other words after the first thousand, if things looked really good, you could move right on to the unobserved? Is that right?

As I mentioned in the call, after the observed studies are complete, the FDA has asked us to compile our data, to submit that to them, and they will review that before they give us the go ahead to move to the unobserved studies.

But you -- you're not sure whether you have to do a thousand after your first look or if you'll have to do more before you can move on to the unobserved? Is that right?

Yes, that's correct.

Okay. And the unobserved portion -- should that give us some idea on how long that might take to do that part of the study too.

Based on the information we know today, we would expect it to take a similar amount of time as the observed studies. Now, the FDA has reserved the right obviously, by asking us to come back after the observed studies to give us future guidance on that. But the way that the initial guidance came out of the advisory committee over a year ago, those studies were designed to be largely the same. One was going to be in an observed environment, and one was going to be unobserved.

Okay. And what at this time would you think is your best case for getting the PMA in as far as when? Do you still think you might get it by December of this year?

You know, I think that our best estimate right now is to talk about the observed studies. And as I mentioned, we resubmitted the revised IDE, that we said in quickly after our meeting because the revisions they were asking for were very minor. They have 30 days to review that. So we would expect that we're going to get that back within the next several weeks and upon receipt of that, we're going to execute on the observed studies. Those should take several months to complete through the first interim look. We'll get through that and we'll see what the results look like and depending on whether we have to continue on those studies or whether we can stop and make our submission, we'll go from there. Then we got to submit that data to the FDA and my expectation is we'll have another meeting. I think that's what we ought to stay focused on right now. I think where we're at is in a very good position. We've gone through all the steps of the studies that the FDA has asked us and we've passed through each one relatively quickly. I wish it was faster. But successfully, and we're moving on to the last two phases of this study, the FDA is very encouraging in our discussions and my hope is that we'll get through the observed studies over the next several months and get through that successfully and we'll see where we go from there.

And Ron, an HCV question from the contract you announced yesterday with Schering. The previous contract for HCV was about $2 million if I recall was the offset of R&D that Schering paid you. Can you tell us how much this one might be and was I correct in hearing that you wouldn't start getting offsets you thought until '09, maybe just clarify that.

I think the latter point you made is correct and unfortunately, we're not able to disclose the financial terms of the agreement, Ed.

Okay. Thanks, guys.

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

Hi there. A quick follow up on the cryosurgical product. One of the comments you made is that looks like you'll commercialize in 2008 for an indication and I'm not sure, number one, if that's just for the new indication that you've been seeking approval for under the 510(k) or if that would be multiple indications and including the ones that you already have approval for, and then just including the new indication as well.

What we're focused on right now is we're focused on re-entering the branded over-the-counter cryo market market for warts and common warts and as we mentioned earlier, we're in ongoing discussions with potential partners to do and we are also looking at options to do it ourself. Separate from that as we mentioned we've filed a 510(k) application for another cryosurgical indication which will be a separate product, a separate indication. That application went in within the last 30 days and it's a 510(k). So we would hope of the approval some time 90 to 120 days and then we'd obviously like to get a product launched sometime before the end of the year if at all possible.

What was the 510(k) filing date?

It's been within the last 30 days.

Okay. Okay. And so it's actually going to be a separate product, not just an additional indication for the current products. There would be two products in the U.S. OTC market?

That's correct.

And then for your comment now. Your focus is on re-entering the U.S. market with a branded product. That will be ideal. Is that true?

Yes.

And since the 510 (k) approval process is relatively quick, and you plan on having a commercial product in the U.S. market in 2008, why aren't there any U.S. OTC revenues in the guidance for 2008?

Because we chose not to include them in the guidance.

Okay. Thanks, guys.

Your next question comes from Jeff Frelick of Lazard Capital.

So regarding the HIV OTC meeting with the FDA, is it safe to assume that the user instructions remain finalized with the product?

Yes, barring any issues that we might encounter. Yes. That was part of the robust label comprehension study that we did previously. The interpretation component of that was further validated and tested during the device interpretation studies that were conducted and all of those tests went very well.

Okay. And then as you go along the clinical trial path and the FDA continues to provide feedback throughout, is it safe to assume the PMA filing might be a little bit more expeditious given the FDA involvement along the way?

When we embarked on this effort, we made a decision and agreed with the FDA that we would file IDE amendments for every phase of these trials, and we did that because we thought that by agreeing to the protocol up front with the FDA, we would have less of a risk that they would come back after the fact and ask us to do more or to do the studies differently. And so far, that approach has -- seems to be working very well for us. I think that the FDA in the last meeting, I think their request is a reasonable one, to get the data from the observed studies and analyze that, make sure that they're comfortable with that before they move to the final phase of unobserved studies. And they didn't initially set out the rules or the protocol quite that way. But that's their prerogative, and it makes sense to us. I wish we could do a more in parallel, but that is not how they want to do it, so we're going to comply and I think it's rational and we will support it.

And then don't want to leave Ron out. Guidance for 2008, I assume that includes the additional CDC funding.

Yes, it does.

Care to give us a range of what's in that outlook just on the CDC side. Any kind of range there.

It's difficult to kind of parse that out given the fact that the money has been transferred down to the individual public health jurisdictions around the country. And as Doug indicated previously, we are active with each and every one of those jurisdictions and have a fantastic relationship and expectation on additional testing and the CDC, back when they announced initiative indicated that with the grants that they had received that they expected to test more than a million or so individuals with this initiative. So we have expectations of significant penetration there. How it plays out in relation to funding in the public health marketplace is difficult to give real granularity to at this point.

Okay. Thanks guys.

You are welcome. I think we have time for one more question and then we'll have to wrap it.

At this time there are no further questions. I will now turn the call over to Doug Michels for closing remarks.

Okay. Well just let me thank you all for participating in our call this afternoon and evening. We're obviously very pleased with our performance in 2007, and we anticipate delivering a very successful 2008. I look forward to updating you during our next conference call. Thanks again, everyone. Have a good afternoon and evening. Good night.

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