OraSure Technologies Inc (OSUR) 2009 Q3 法說會逐字稿

Thanks so much for holding everyone. Welcome to OraSure Technologies third quarter financial results conference call and simultaneous webcast.

Just a quick reminder, today's call is being recorded. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer period. (Operator Instructions).

We'll have time for as many questions as possible. Questioners are limited to -- asked to limit themselves to only a single question with no more than one follow-up question related to the same topic.

Once the follow-up question is completed, the questioner can join the queue for further questions. Now at this time, I'll turn things over to our host, Judy Clark, at OraSure. Please go ahead, Judy.

Thank you, Bo. 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 PM Eastern time today regarding our 2009 third-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 seven days.

Alternatively, you can listen to an archive of this call until midnight November 11, 2009 by calling 888-203-1112 for domestic or 719-457-0820 for international. The access code is 676-2345.

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 with be followed with the 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, clinical studies 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 statement, its annual report on Form 10-K for the year ended December 31, 2008, its quarterly reports on Form 10-Q and its other SEC filings. Although forward-looking statements help to provide complete information about future prospects, listeners should keep in mind that forward-looking statements may not be reliable.

The Company undertakes no obligation to update any forward-looking statement to reflect events or circumstances after this call. Also, please note that today's results will include a discussion of certain non-GAAP financial measures.

Non-GAAP reporting is provided to help you better understand our business and certain items which impacted our results. However, non-GAAP financial results are not meant to be considered as a stand-alone measurement of performance or as a substitute for or as superior to GAAP results.

You should be aware that non-GAAP measures have inherent limitations and should be used only in conjunction with OraSure's consolidated financial statements prepared in accordance with GAAP. Our press release includes a table detailing the non-GAAP measures together with the corresponding GAAP results and a reconciliation to GAAP. We encourage listeners to review these items. With that, I would like to turn the call over to Doug Michels.

Thank you, Judy; and good afternoon, everyone, and welcome to the call. I am pleased to report that we had a strong third quarter, exceeding our guidance on both the top and bottom line; Largely as a result of record revenues and lower R&D expenses. The higher revenues were driven primarily by the continued strong performance of our infectious disease testing business along with a rebound in sales in our international cryosurgical over-the-counter products.

Importantly during the quarter, we eliminated a $2.2 million backlog in orders for our OraQuick advance rapid HIV test. As you will recall, we experienced manufacturing issues during the second quarter and we were unable to meet demand for our OraQuick HIV test.

These issues were resolved during the third quarter when we resumed full-scale production and restored our inventory levels for this product. It's worth noting that if this backlog were excluded from our results, our infectious disease testing business would still have increased by a double-digit rate over the prior year quarter. So we are very pleased with these results.

The reduced R&D spending in the quarter was the result of lower clinical trials costs associated with our OraQuick Hepatitis C test and our OraQuick HIV over-the-counter product. Ron is going to provide a more complete description of our financial performance for the quarter and will follow that with an update on financial guidance for Q4.

Following Ron's remarks, I will review the progress on our major clinical development program and provide some more general business updates. We will conclude by opening the floor for your questions. So with that, I will turn things over to Ron for his financial review.

Thanks, Doug; and good afternoon, everyone. Starting with the top line, third quarter 2009 revenues were $21.6 million, representing a 28% increase from the $16.9 million reported in 2008. Overall infectious disease revenues increased 39% in the third quarter of 2009.

Excluding $1.8 million in backlog dollars for public health customers, our public health sales would have increased 11% as a number of our customers have expanded their HIV testing programs. Hospital sales increased 75% in the third quarter of 2009. This increase is the result of the elimination of $400,000 in backlog orders from June 30 and the higher average selling price realized under the direct sales model which began at the beginning of 2009.

Lastly, sales of OraQuick to our international customers increased 48% primarily as a result of a 28% increase in sales to Africa as well as increased sales activity in various countries in Europe and Latin America. Third quarter 2009 cryosurgical revenues increased 61% compared to third quarter of 2008 with revenue increases realized in the international OTC market as well as the US professional market.

International OTC sales were $1.2 million in the third quarter of 2009 compared to $367,000 in the third quarter of 2008 as a result of increased sales to our Latin American OTC distributor, Genomma; and higher European OTC sales to our distributor, SSL. Genomma has successfully worked through their excess inventory levels from 2008 and has resumed purchasing product from us. We shipped $564,000 of product to Genomma during the third quarter of 2009.

In addition, Genomma recently received approval to sell our OTC cryo product in Brazil. We made our first shipment to Brazil in Q3 in preparation for a product launch this quarter. During the first half of 2009, we experienced a decline in purchasing volume from SSL as a result of slower than expected out sales in the European market, combined with excess inventory levels built at the end of 2008.

However, sales to SSL rose to $683,000 in the third quarter of 2009 compared to $367,000 in 2008. We believe this increase was largely the result of SSL having worked through its excess inventory. As previously discussed, during the first quarter of 2009, we launched our own nationally branded cryosurgical wart removal product in the US OTC market which generated gross revenues of $467,000 in the third quarter.

We also participated in several promotional and advertising programs in order to create initial awareness and implement the launch of our product within the OTC market. As a result and in accordance with US GAAP, we netted the cost of these promotion and advertising programs which approximated $589,000 against our revenues.

On the professional side, our combined cryo sales increased by 19% compared to the third quarter of 2008. Sales of our Histofreezer product to the US physicians office increased 35% in the third quarter of 2009 largely due to fluctuations in distributor ordering patterns, price increases enacted and certain distributor contract renewals and a decrease in product diversion from international sources.

We believe we have identified all the sources of the diversion and cut off the sales of Histofreezer to all involved parties in an effort to finally remedy the situation. The 16% decrease in international sales reflects the [discontinuance] of sales to one of these foreign distributors.

Moving to substance abuse testing, revenues decreased 9% in the third quarter of 2009 compared to the third quarter of 2008 as a result of lower sales in the forensic toxicology market and reduced sales of our Intercept drug testing system for workplace testing caused by much lower preemployment testing due to the continuing adverse economic conditions.

These decreases were partially offset by higher sales in the US criminal justice and international markets. Finally, our insurance risk assessment sales for $1.4 million for the third quarter increased 22% from $1.2 million in 2008 due primarily to variable laboratory ordering patterns while licensing revenues for the quarter remained flat at $702,000.

Turning to gross margin, our overall margin for Q3 of 2009 was 64% compared to 58% for Q3 of 2008. Gross margin was favorably impacted by increased absorption of our fixed costs as a result of te return to full-scale production of our OraQuick ADVANCE Rapid HIV-1/2 antibody test and replenishment of finished good inventories. Gross margin also benefited in the current quarter by our switch in January 2009 to a direct sales model in the US hospital market.

Turning to operating expenses, our total operating expenses for the third quarter were down $928,000 or 7% compared to 2008. R&D expenses for Q3 were down 30% or approximately $1.2 million primarily due to a decrease in clinical trials pending associated with our OraQuick HCV and OraQuick HIV OTC programs and a decrease in staffing costs.

The additional clinical testing and studies required by the FDA in order to obtain approved claims for use of our OraQuick HCV test with venous whole blood, oral fluid and finger stick whole blood specimen types did not start to ramp up until September of this year. Sales and marketing expenses decreased slightly from $5.3 million in the third quarter of '08 to $5.2 million in third quarter of '09. This decrease was the result of lower staffing related costs for the quarter.

G&A expenses for the quarter increased approximately 12% or by $413,000 primarily due to higher staffing related costs. From a bottom-line perspective, we reported pretax income of $1.8 million or $0.04 per share. This compares to a net loss of $1.8 million or $0.04 per share reported for the same period in 2008.

Turning briefly to our balance sheet and cash flow, our cash balance remains strong with cash and short-term investments of $83 million at the end of the third quarter. Our working capital was $92.1 million at September 30, 2009 which is an increase from the balance at December 31, 2008 of $90.9 million.

And our current ratio improved from 6.95 at December 31, 2008 to 7.6 at September 30, 2009. Durin the third quarter of 2009, we generated positive cash flow from operations of $4.3 million, resulting in a year-to-date cash provided by operations of $2.7 million compared to $3.7 million used during the first nine months of 2008. This represents an improvement of $6.4 million for the current nine-month period.

Accounts receivable collections also improved as we collected a large outstanding balance due from one of our international customers. Day sales outstanding improved from 63 days at December 30, 2008 to 60 days at September 30, 2009.

So turning to our guidance, for the fourth quarter of 2009, we are projecting revenues of approximately 19 to $19.5 million and a loss per share of approximately $0.08 to $0.09. We expect substantially higher clinical trial costs during the fourth quarter as spending increases for the additional OraQuick HCV studies.

Sales and marketing expenses are also expected to increase due to costs associated with preparation for the launch of our OraQuick HCV test in Europe and additional market research studies to be completed in the fourth quarter. And with that, I'll turn things back over to Doug for an update of our major clinical programs.

Thank you, Ron. There's been good progress with our efforts to obtain regulatory approval on OraQuick HCV tests. First on the international front, we recently received feedback from our notifying body who is actively reviewing our application for CE Mark approval which is required to sell the OraQuick HCV test in Europe.

We are responding to requests for additional information which we do not believe are significant. And inspection by our notifying body is scheduled for early December, at which time we hope to close out any open issues on our submission. It is therefore possible that approval could be obtained by the end of the year.

This would be an important development and would enable us to begin implementing our European launch of this product in the near future. As previously discussed here in the United States, we are conducting supplemental clinical testing to obtain approval for a venous whole blood claim and an additional clinical study to obtain approval of claims for both oral fluid and finger stick whole blood.

Enrollment for the venous whole blood testing was completed in October and we are on schedule to complete testing and data analysis by the end of the year. The additional study for oral fluid and finger stick whole blood is also well underway and we expect to add a few additional clinical sites this month in order to advance this study as quickly as possible.

All testing and data analysis should be completed and our submission filed with the FDA during the first half of next year. We are also preparing for a preapproval facility inspection by the FDA. We hope to schedule that inspection in the next several months so that there is no holdup in obtaining one or more approvals once the additional clinical work is completed and submitted to the agency.

To maximize the rapid HCV opportunity here in the United States, we've been working closely with our legislators to increase the funding that will be available for HCV testing and treatment. A bill called the Viral Hepatitis and Liver Cancer Control and Prevention Act of 2009 which is supported on a bipartisan basis is currently pending in Congress.

This bill highlights the need for increased testing and treatment for both Hepatitis C and Hepatitis B and in its current version would provide up to $90 million in funding for testing and treatment programs. While this bill has not yet been finalized or enacted, we believe it is an indication that both Congress and the administration support increased funding for HCV prevention.

When the OraQuick HCV test is finally approved, we expect it will be launched with excellent shelf life and product dating. Our real-time stability studies for this product continued to progress with the most recent data indicating that the product has met the acceptance criteria for storage for 18 months at 30 degrees Celsius. We will continue these studies in the hope of expanding our product dating even further and we will use the results to support a final shelf life approval by the FDA.

Turning to our efforts to gain FDA approval to sell OraQuick HIV over the counter, as previously discussed, the FDA plans to seek additional guidance from its blood product advisory committee or BPAC at a meeting scheduled now for November 17. We've been working closely with the agency to plan for this meeting. We expect this meeting will be productive and informative as to what will be required in order to obtain final approval.

After the meeting, we hope to be in a position to publicly disclose additional information on the next steps for this clinical program. The nature of our future disclosures will depend on the specific actions taken by the advisory committee and whether we need to engage in further discussions with the FDA. We'll certainly keep you advised as soon as we are able on this very important project.

Our collaboration with Roche Diagnostics to develop and commercialize fully automated homogeneous drugs of abuse assays were for use with our Intercept oral collection device continues to progress quite nicely. As discussed in the past, we initially developed a [night of five] panel of assays for marijuana, cocaine, opiates, PCP, amphetamines, and methamphetamines.

The clinical studies remain largely on schedule with the assays for opiates, PCP, amphetamines and methamphetamines expected to be submitted to the FDA for 510-K clearance by the end of this year. The submission for our cocaine assay is likely to slip into early 2010 and as previously communicated, the submission for THC or marijuana will not occur until later next year.

Another program that we've mentioned in prior calls was our effort to obtain FDA approval of a new HIV-1 lab-based enzyme immunoassay or EIA for use in testing oral fluid specimens that are collected with our OraSure collection device. Because the bioMerieux has stopped manufacturing an HIV-1 immunoassay which was approved for use with our OraSure device, we were planning to conduct our own clinical trials for approval of a third party's EIA.

Recently and before the clinical trials had started, we learned that another third party had already obtained FDA approval of an EIA for use with our OraSure device. This EIA was licensed by BMX to this other third party. And as a result, it's no longer necessary that we conduct separate clinical trials which is great news and also contributed to our lower clinical expenses during the quarter.

Turning to litigation, the conference with the court at which the Markman hearing will be scheduled has been delayed again until December 17 to accommodate the party's schedules. We will provide further updates as this matter progresses,

On the organizational front, we've continued to strengthen our management team with the appointment of Doctor Robert Gregg as our new Vice President of Regulatory Affairs and Quality Assurance. Bob will have responsibility for the Company's regulatory, quality assurance and clinical affairs functions.

He joins OraSure with over 25 years of relevant regulatory experience in the medical device and diagnostic industries with organizations such as the FDA, with Roche Diagnostics and with Johnson & Johnson. And we are very pleased that Bob has joined OraSure. He is already making a substantial contribution to our Company in the important clinical projects that are currently underway.

Finally, I would like to provide some perspective on various aspects of our business. As Ron explained, our infectious disease testing business and principally sales of our OraQuick HIV test remain strong.

Sales to the public health market were the highest level reported in any quarter since we launched the product in late 2002. Despite the manufacturing challenges experienced earlier in the year, we were successful in not only retaining virtually all of our customers, but we continued to deliver a high level of customer service and strengthened our customer relationships on several fronts. This is reinforced by the increase in sales during the third quarter.

During the third quarter, we also achieved substantial improvement in manufacturing. At June 30, 2009 we had a backlog for about $2.2 million in orders for our OraQuick test. However, by the end of the third quarter, that backlog was completely eliminated and we have built a finished goods inventory of about 500,000 units. All told, we produced about 1.7 million OraQuick tests during the quarter to meet both domestic and foreign demand and this is a record level of production for this product for the Company.

On the legislative front, we're pleased to see the recent renewal of the Ryan White Care Act, pursuant to which the federal government funds HIV/AIDS prevention treatment and care programs. Under this latest renewal, the US Department of Health and Human Services has been directed to establish a national HIV/AIDS testing goal of 5 million tests annually. We believe this will have a positive impact on sales of our OraQuick test, especially into the public health market beginning in 2010.

In the hospital market, the strong third-quarter performance is attributable to the continued successful transition to a direct sales approach in this market as well as the elimination of the second-quarter backlog. One of our strategic focal points for the hospital market has been to expand the number of contracts with large group purchasing organizations.

In September we were pleased to announce the execution of a 36-month agreement with Premier Purchasing Partners, the group purchasing unit of Premier for our OraQuick test. The new agreement became effective on November 1 and provides Premier's more than 2200 member hospitals with negotiated pricing and terms for the purchase of our OraQuick test.

Although some of Premier's customers were already OraQuick customers, it's important to note that the OraQuick test is the only rapid HIV test currently offered through Premier's ASCEND program which stands for accelerated supply chain endeavor. The program is designed to allow participating hospitals to achieve and sustain rapid improvements in supply chain performance.

More than 90 participants representing approximately $2.7 billion in supply-chain purchasing volume and close to 24,000 hospital beds currently participate in the ASCEND program. Several of Premier's hospital members purchase exclusively through their group purchasing organization. We believe that our agreement represents the potential for significant new hospital business for our OraQuick product line.

We also just recently signed a multi-year contract renewal with HealthTrust Purchasing Group, HPG. HPG is one of the largest group purchasing organizations in the country and its membership includes nearly 1400 not-for-profit and for-profit acute care facilities as well as ambulatory surgery centers, physician practices and alternative care sites. Our OraQuick test is one of only two rapid HIV tests that are currently available under the HPG contract.

And finally as discussed during our last call, a regulatory change was announced in July by the United States Department of Veterans Affairs, the VA, which eliminated the need for both written consent and mandated scripted pre and post test counseling for HIV testing. As a result, VA clinical product providers can eliminate these cumbersome steps and simply obtain oral consent in order to implement HIV testing for patients. This change brings the VA policy in line with the CDC prevention recommendations and enables VA providers to better implement routine HIV screening so that patients can be diagnosed earlier and receive treatment sooner.

In August, the VA followed this change in law with the issuance of a directive to all VA hospitals and associated clinics that HIV testing be made a part of routine medical care and that providers should routinely offer HIV testing to all veterans. We believe this change represents a very attractive opportunity for our OraQuick test and we have been aggressively pursuing new business within the VA.

Moving to cryosurgical systems, revenue from this business were up compared to the year ago quarter primarily due to our international over-the-counter business. Our Latin American over-the-counter distributor, Genomma; and our European distributor, SSL, each ordered product in the third quarter of this year. And in addition, sales of our professional Histofreezer product in the United States increased over the prior quarter. We believe this is an indication that our efforts to eliminate the diversion by foreign distributors back into the United States market are working.

And finally in the substance-abuse area, the economic downturn, rising unemployment and reduced funding continue unfortunately to negatively impact sales of our Intercept product line. Our Intercept business is not likely to improve until we see significant changes in these conditions.

So in conclusion, our financial results were very strong for the third quarter. We substantially improved our gross margin and posted record revenues including strong growth in our core infectious disease testing business. Our public health sales force is doing a terrific job supporting our customers and winning new business and we are expanding our relationship and business with large hospitals and group purchasing organizations. We resolved our OraQuick manufacturing issues, we returned to full-scale production and we completely eliminated the backlog in just one quarter.

And lastly, we continued to advance our major clinical development programs. We are really looking forward to our upcoming meetings with the blood product advisory committee and the FDA in the next few weeks and we will report back to you on the next steps for these important projects as soon as we can. And with that, I will now open the floor to questions.

(Operator Instructions) Aaron Lindberg, William Smith & Co.

In respect to the BPAC meeting on the 17th, what would represent success to you?

Success is going to be represented by a clear path forward. To the extent that we can come out of that meeting, have clear guidance, recommendations out of the BPAC that translate very importantly into clear guidance from the FDA on the path forward, that would be a big success for us.

Anything in terms of what you would anticipate for trial design and things like that? The BPAC's composition is different than the last time you were there but the prior BPAC meeting was quite favorable.

Well the prior BPAC was quite favorable. They prescribed the studies we had to execute in order to get to this point. As you know, we've executed not only the label comprehension, the device interpretation, the observed use trial very successfully. And the FDA wanted to go back to the BPAC before we began our unobserved trial to review the protocol to make sure we were all in sync before those began.

So that's the step that we are at right now. Obviously it is a new BPAC. So we're going to spend some time reviewing the progress to date. But as you know, it's been a very successful program so far. There continues to be a high level of interest across all market segments. I believe we have a lot of support for this and we are just eager to engage with the advisory committee and the FDA and get some clarity on the path forward and get moving.

Thanks. You know how many companies are presenting at the BPAC regarding rapid HIV testing?

No, I do not.

Can you give us a sense of what the year-over-year unit growth was far ADVANCED to hospitals?

The unit growth was up when you look at the elimination of the backlog coming -- that was outstanding in the second quarter. If you pro forma the results for that, I would say it was just slightly down from where we were in the year ago quarter.

Okay, thanks for the update on the shelf life for HCV. A similar timing for the HIV product?

Excellent work continues on extending the shelf life for our HIV product. As you know, we put another set of product on stability. That product has passed I believe the 13 month time frame right now.

The stability continues to look excellent and projects to at least as good a stability profile as the Hepatitis C test or better. So we are going to continue to monitor this. At an appropriate time, we will make the appropriate submissions to the FDA for extension of our HIV product shelf life but the data is outstanding.

And then what's the most logical reason for the continued delay of the Markman hearing?

All I have from our legal team is scheduling conflicts and it's delayed apparently another five weeks or so from the November 2 date. We'll give you an update as that progresses.

Sameer Harish, Needham & Co.

I guess thanks for taking the question. I guess just to start, maybe you can highlight Dr. Gregg's addition to the Company, maybe talk about how his experiences are benefiting the Company and have there been any major strategic changes that he's brought to the Company since he's joined.

He's only been here about five or six weeks, so I want to cut him a break in terms of jumping in and making too many changes too quick. His background and experience is so relevant to what we are doing, obviously Bob spent time with (inaudible) at the FDA.

We are in the midst of a lot of dialogue with the FDA whether it is around our HCV studies or very importantly now with the HIV OTC. Bob was able to jump in right away, understand our technologies, he's got a PhD, so he understands the science here; strong depth in diagnostics.

He's contributed a great deal already. Obviously, we have been working on these different programs for quite some time. We have got a very capable staff. So Bob has come in, has come up to speed very quickly and is actually contributing in the process now. He has added a lot to our discussions with the FDA on our BPAP planning and on our presentation that we intend to make to the advisory committee. So very positive all around.

I think you mentioned that you started to sell through Genomma into Brazil. Would you say that was fully stocked in the third quarter number or is there still some additional stocking you expect in the third quarter?

We may see a little bit more stocking in the fourth quarter here and we'll just have to monitor the launch and see how it goes.

Okay and in terms of stocking, I know Genomma had made some mistakes in regards to some of their initial stocking in other regions. Is this more of a controlled release and maybe you can talk a little bit about that.

I think that's a great question. I would say the portion of the revenues that we shipped to Genomma in the third quarter related to the Brazilian opportunity was approximately $265,000 of the product [sales] that we shipped them. And I believe that they're looking at something comparable in the fourth quarter which is significantly different than the product purchases they made in advance of the launch of the product in Mexico. They are very aware of our past experience and want to take every opportunity they can to avoid repeating that.

That being said, Brazil was a very attractive market. They're the largest population in South America and we think that there is a very nice opportunity there. And given the supply chain logistics, we don't want to be in a position where we have them stock out of product right in the middle of a highly supported, from an advertising perspective, launch right in the peak of the season.

In regards to OraQuick international, certainly that number came in higher than expected. Can you talk a little bit about was that inventory timing issues or were there some major new accounts that you signed during the quarter?

No, we're seeing generally pretty nice growth across each of the major international geographies, characterizing them as Africa, Latin America, the Caribbean, Asia and Europe. So generally the growth that we saw in the quarter was broad based. We did see some nice orders come out of Africa in particular, as well as Asia. But business was pretty good across the board.

Okay, great. Wanted to ask a little bit about guidance. If we did a little bit of shuffling and moved that $2.2 million of deferred revenue to the second quarter, it looks like revenues were roughly flat third quarter into what I would consider a seasonally lower quarter for the Company and sort of wondering why you're guiding toward kind of a flat to downish third quarter from that base.

I think if you look at the second-quarter numbers, go all the way back and adjust them on a pro forma basis, you are right. You are in and around the mid $19 million range. And third quarter on a pro forma basis would approximate the same.

I certainly believe that the guidance that we gave indicates that we are comfortable in that range in the 19 to $19.5 million after having evaluated the business opportunities we have in front of us in various segments of the business -- infectious disease, substance disease the cyro and the insurance. We also have passed the peak of the highest historical royalty revenue that we can generate from our Schering-Plough relationship as we moved into the winter months.

Is that to say that there won't be any royalty revenues in the fourth quarter?

No, but just kind of signaling the fact that typically if you look back over the last few years, the royalty rates peak in the third quarter and trend downward from there.

Got it. Can you talk a little bit in terms of both substance abuse and cryo? Did you see inventory pickup at the customer levels or was this timing of ordering? Or maybe talk a little bit about the ordering trends. Were they large orders placed at the end of the quarter or just generally tracking up over time?

No, I think it was just general tracking up over time. We didn't see any large stocking orders in either of those businesses and we were very pleased to actually -- that particularly the substance business leveled off at least for this year, hoping to get -- depending on the economy -- get that business back into growth mode.

Jeff Frelick, ThinkEquity.

So with respect to the public health strength in the quarter, can you talk about anything that maybe occurred there such as -- was it taking share, was it just volume increases from public health facilities or some community programs going on?

No, I think we continue to see continued growth in testing programs, particularly in the major jurisdictions where we have got strong presence in virtually all the major programs around the country, a lot of partnership between hospitals and the public health providers as they work together to try to expand routine HIV testing. And I think we have seen some movement out of the public health channel into hospitals which makes that quarter on quarter hospital comparison that runs off a little bit more challenging.

But generally speaking, continued strong demand in the public health sector. We believe and we have seen federal funding is likely to at least stay the same or probably increase. There's some funding pressures at the state and local level. But generally speaking, we think that funding for testing in particular is going to be maintained at reasonably healthy levels on a go forward basis.

Okay, thanks. And then with respect to the VA and in the testing program, what percent of the hospitals in the VA system are already using OraQuick Rapid test?

A relatively small percentage. There's about 185 hospitals or so in the VA system and I would say there were 20 to 30% that were actually OraQuick customers. Now obviously we are working with all of those hospitals as well as with the integrated service networks, the (inaudible) if you will. There's 23 of them.

And closely associated with each of those are the community-based outpatient clinics. I believe there's about 900 of them. And so we are engaged with every single one of those (inaudible) and those hospitals.

They are working through their plans to implement the directive. So together with them, we are going to try to help them make this a big success. We've been having discussions at the national level as well and trying to understand what we can do to help them implement this program most effectively.

Thanks. I'll jump back in the queue.

(Operator Instructions) A follow-up question from Aaron.

Thanks. Do you anticipate launching any other cyro products for other indications in the next year?

That's a good question, Aaron. We have expressed an interest in possibly bringing additional cryo applications to market. We are actively pursuing that right now. Whether we gain FDA approval to launch another indication in 2010 is not real certain at this time.

Do you have a sense of whether you would launch it on your own or launch it with a partner?

I would say in the United States, we would most likely launch it on our own. Internationally we probably would do it through a partner.

Okay and the additional indications, the regulatory processes has already started on that?

Yes.

And then can you give us any more detail in regards to the VA medical system, specifically on successes that you have had so far?

I would prefer not to get into the specifics of that for competitive reasons. But suffice it to say we have had success in signing numerous hospitals to blanket purchase agreements which are new agreements which provide some incentive to use our product over multiple years. And we have also had some success at the (inaudible) level signing the same type of blanket purchase agreement with the integrated service networks.

That would be a collection of anywhere between three and let's say half a dozen hospitals and community-based outpatient clinics. We will begin to see some local publicity around those agreements as the local entities publicize their programs and talk about how they're implementing routine HIV testing using OraQuick. And I think we'll use that as a vehicle to get the word out as to where we have had success.

A follow-up question from Jeff.

Doug, with respect to HCV launch in Europe, can you just kind of review the sales and marketing strategy, number of distributors you will partner with, countries you'll launch it in, stuff like that?

We intend obviously to use those distributors that we currently have in place. One of the key aspects of a European launch or any geographic launch as you know is we're going to work very closely with Schering because they are going to assist us in promoting the new test, detailing the product into the physician office market.

We have notified Schering and advised them that we intend to pursue the development of regulatory approval in 20 plus countries, most of which are in Europe or expand to the EU. And as we -- first of all, we've got to get the CE Mark through our notified body and then will go on and pursue the regulatory approvals that are required in the respective countries.

Now as you know, our experience with HIV regulatory approval is less or more difficult in certain countries; the UK, Spain, as an example; pretty straightforward. Once we get the CE Mark, we should be able to sell into those markets pretty quickly. We already have our distributor network up and running there.

The same goes for some of the Eastern European countries where we are selling. So as we -- I think first things first. Let's get our CE Mark approval and then as we begin to launch in the different countries, we will communicate that.

Can you remind me how many countries you'd seek approval through and have approval on your HIV product just in Europe?

Yes, I have got a list right here. 17 of the 22.

Okay; thanks, guys.

Gentlemen, it appears we have no further questions. Mr. Michels, I will turn it back to you for any closing comments.

Okay, I just want to thank all of you for participating in today's call and obviously for your continued interest in OraSure. Look forward to talking to you next quarter and hope you all have a great afternoon and evening. Thanks again. Bye bye.

Again, that will conclude our conference call. We thank you for joining us and again, we wish you all a great afternoon. Good bye.