OraSure Technologies Inc (OSUR) 2009 Q4 法說會逐字稿

Good day, everyone, and welcome to the OraSure Technologies 2009 fourth quarter and full-year financial results conference call and simultaneous webcast.

(Operator Instructions).

For opening remarks and introductions, I will now turn the call over to Jack Jerrett. Please go ahead.

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

I would like to begin by telling you that OraSure Technologies issued a press release at approximately 4 p.m. Eastern Time today regarding our 2009 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 610-882-1230. If you go to our website, please press the Investor Relations page and click on the link for News Releases. This call is also available realtime on our website and will be archived there for seven days. Alternatively, you can listen to an archive of this call until midnight February 17, 2010 by calling 888-203-1112 for domestic or 719-457-0820 for international. The access code is 5213543

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 the call over to Doug, I must remind you that this call may contain certain forward-looking statements, including statements with respect to revenues, expenses, profitability, earnings per share or loss 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 statement, it's annual report on form 10-K for the year ended December 31, 2008, it's quarterly reports on form 10-Q., and it's 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.

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 corresponding GAAP results, and a reconciliation to GAAP. We encourage listeners to review these items.

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

Okay. Thanks a lot Jack, and good afternoon, everyone and welcome to our call.

Before I get into the formal remarks this afternoon, I just want to let you all know that we are sitting here in Bethlehem, Pennsylvania. We have just had a heck of a snowstorm. We have more than a foot of snow on the ground and we are approaching 18-24 inches. I'm not here to be a weatherman, but I want you to know that we have had some sporadic power outages here at the Company today. And we have a back-up plan should we have a power outage during the call this afternoon. If by chance we get cut off, I encourage you to say on the line. We have a backup line that is active that's hooked up by cell phone, and it will be just a minute or so delay, but we will be back on the call should we experienced a power outage. I don't expect it will happen, but we wanted to make sure you knew that we had a contingency.

So let me get into the meat of this afternoon's call. To start out, I am pleased to report that our financial performance during the fourth quarter of 2009 was very strong.

We exceeded our guidance on both the top and bottom lines and ended the year with positive momentum. For the full year, when compared to 2008, our revenues grew, we improved our gross margin and we reduced our use of cash flow from operations. We also continued to make progress on our major clinical programs. And we accomplished all of this despite a very difficult economic environment and the unexpected challenge we experienced in manufacturing our OraQuick HIV test in mid- year.

Later in the call, I will highlight some of the more important accomplishments during 2009 and provide some expectations for 2010. However, before I do that, Ron is going to discuss our 2009 financial performance and he will provide financial guidance for the first quarter of 2010. We will conclude the call by opening the floor for any questions you may have.

So with that, I will turn things over to Ron.

Okay. Thanks, Doug, and good afternoon, everyone.

I will start with a brief review of our full-year 2009 financial results, and will follow that with more detail on the fourth quarter.

2009 revenues were $77 million, representing an 8.3% increase from the $71.1 million reported in 2008. Increased sales in the Infectious Disease, Cryosurgical Systems and Insurance Risk Assessment markets were partially offset by declines in sales of our substance abuse testing products and a reduction in license and product development revenues.

The overall 21% growth in our Infectious Disease revenues in 2009 was primarily a result of the higher average selling price for our OraQuick ADVANCE HIV test realized under the direct sales model into the US hospital market, which we implemented last year, along with continued volume growth in Public Health.

Our Cryosurgical revenues increased 2% in 2009, compared to 2008. The increase is a result of higher sales into the international over-the-counter market, primarily to Genomma, our Latin American OTC distributor. Genomma successfully worked through its excess inventory levels from 2008, resumed purchasing from us for the Mexican market during the second quarter of 200, and prepared for the Brazilian launch in December of 2009. This increase was offset by lower sales into the International Professional market of 24%, as we ceased doing business with several international distributors that we believe were diverting products to the US market.

Our Substance Abuse business decreased 14% in 2009, primarily as a result of lower sales of our Intercept devices and assays. Intercept continued to be negatively impacted in 2009 by the current recession and high unemployment levels in the domestic economy. However, we have seen this business stabilized during Q3 and Q4, and our primary drug testing lab partners have also indicated that they have seen stabilization in the downward trend of workplace testing.

Licensing and Product Development revenues decreased to $1.9 million in 2009 from $2.3 million in 2008 as a result of lower royalty-bearing sales by our licensee.

Turning to gross margins, our margins for the full year 2009 was 61%, and increase from 50% in 2008. Gross margin was favorably impacted, primarily by our switch to the direct sales model for hospitals in 2009 and it's related higher average selling price. Also benefiting margin during the year was an improvement in manufacturing efficiencies.

Our operating expenses for the year were $55.9 million, compared to $52.6 million in 2008. 2008 operating expenses included a $4.9 million pretax gain related to a lump sum payment received under a favorable litigation settlement entered into during that year. 2009 operating expenses included a $3 million pretax impairment charge recorded in the second quarter related to the netbook value of previously capitalized payments under a APV license agreement and a $1.5 million pretax litigation settlement related to our patent infringement litigation with Inverness, which was settled in the fourth quarter of 2009.

Increased spending in sales and marketing and general and administrative expenses up $307,000 and $561,000 respectively, also contributed to the overall increase in operating expenses during 2009. Partially offsetting these increases was a decline in R&D costs of $6.9 million as a result of reduced clinical trials spending on our OraQuick HIV OTC and OraQuick HCV tests.

So excluding the impairment charge in 2009 and the litigation settlements in 2009 and 2008, our adjusted pretax loss was $4 million in 2009, compared to an adjusted pretax loss of $13.6 million in 2008.

With that, would now like to turn to our quarterly results.

Our fourth-quarter performance exceeded our prior guidance on both the top and bottom lines. Our total revenues for Q4 were $20.9 million, a 21% increase over the same period in 2008. Overall Infectious Disease revenues increased 44% in the fourth quarter of 2009. Public Health sales were up 19% over the comparable period of 2008. Hospital sales increased over 100%, compared to the fourth quarter of 2008 due to the higher average selling price realized under the direct sales model implemented at the beginning of 2009, together with higher volumes.

We are observing that an increasing number of our Public Health customers are also supplying hospitals with OraQuick HIV tests purchased from us. This is a positive development, as it indicates increased support of hospital testing initiatives by public health agencies. However, this overlap is making it more difficult to separately track OraQuick sales to these markets. Since this trend is likely to continue, we intend to begin reporting Public Health and Hospital sales as a combined market, beginning in 2010.

International OraQuick revenues were $2.1 million, compared to $930,000 as a result of 90% increase in sales to Africa. This increase was due to entry year customer ordering patterns. Higher sales in Asia and Europe also contributed to the increase.

Fourth quarter 2009 Cryo revenues increased 8% compared to the fourth quarter of 2008 with revenue increases in the OTC market offset by decreases in the professional market. International OTC Cryo sales were $1.8 million in the fourth quarter as a result of increased purchases by our Latin American OTC distributor Genomma. As previously explained, Genomma resumed purchasing product from us in the second quarter after working through its excess inventory levels from 2008. In addition, Genomma launched our OTC Cryo Wart Removal product in Brazil during the fourth quarter.

Sales to our European OTC distributor, SSL, declined $539,000 in the fourth quarter, as compared to the fourth quarter of 2008. This decline was the result of an inventory build in the fourth quarter of 2008, which was not repeated in the fourth quarter of 2009, and a decrease in SSL's transfer price in 2009.

Turning to gross margin, our margin for Q4 of 2009 was 59%, an increase of 56% from Q4 of 2008. The increase was largely due to the higher average sales price up from our direct sales model, as will as improvement in manufacturing efficiencies and a decrease in scrap and spoilage expense. R&D expenses for Q4 were down 14%, or approximately $731,000, from 2008, primarily due to a $1 million patent license milestone payment made in the fourth quarter of 2008, which was required as a result of the filing of our OraQuick HCV pre-market approval application with the FDA.. This $1 million favorable variance was offset by an increase in clinical trial costs associated with our OraQuick H CV tests during the current quarter.

Sales and marketing expenses increased 5%, or approximately 273,000, mostly due to an increase in market research costs as we prepare to launch our OraQuick HCV test in the European market 2010. G%A expenses decreased approximately $1 million, primarily due to higher costs accrued in 2008 in connection with the ending of our OraQuick distribution agreement with Abbott Laboratories, as well as a decrease in legal fees in 2009 resulting from the settlement of the patent infringement lawsuit filed against us by Inverness Medical and Church & Dwight.

During the quarter, we entered into several agreements with Inverness to settle the lawsuit. Pursuant to the terms of these agreements, we paid Inverness $3 million, and Inverness granted us non- exclusive worldwide licenses to certain lateral flow patents. We expensed $1.5 million of our payment directly to our statement of operations, with the remaining balance recorded as a prepaid expense.

So from a net loss perspective, and excluding the settlement expense from the Inverness litigation, our adjusted pretax loss would have been $2 million, or $0.04 per share. This compares to a pretax loss of $5.7 million, or $0.12 per share, 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 $79.7 million and working capital of $89.4 million as of December 31, 2009. During 2009, we used to $293,000 in cash flow from operations, compared to $2.5 million used during 2008. Our day sales outstanding increased to 65 days from 60 days in 2008. This was caused by an increase in our hospital receivables, as well as an increase in hospital shipments on the fourth quarter of 2009 when compared to the fourth quarter of 2008.

Turning to our guidance. For the first quarter of 2010, we are projecting revenues of approximately $19 million to $19.5 million, and a net loss per share of approximately $0.06 to $0.07.

And with that, I will turn things back over to Doug.

Thanks, Ron.

We made progress in all our major clinical programs during 2009. And this progress will certainly help fuel our growth in 2010 and beyond.

A major milestone last year was the receipt of the CE mark approval for our OraQuick HCV test. As you know, a CE mark approval is required to sell the product in the 27 member countries of the European Union. Although some European countries have individual registration requirements, many simply require notification that the CE mark approval has been obtained. We have notified now virtually all member countries of the EU, and we are pursuing several countries' specific registrations where they are needed.

Our launch plans for OraQuick HCV in Europe are under development. We are identifying and signing distributors and we are discussing the promotional support to be provided under our collaboration with Schering/Merck. We intend to announce the commercial launch of our tests at a meeting of the Association for the Study of the Liver or, EASL, meeting, which is scheduled for April of this year. While we believe there is a public health need for rapid HCV testing in Europe, the actual commercialization and uptake of the test will likely be a gradual process as we attempt to create awareness along with product acceptance.

On the domestic front, we continued to advance our clinical development program. As previously announced, we recently filed a pre-market approval PMA application amendment, which contains the additional clinical data requested by the FDA for the use of the OraQuick HCV test for on venous whole blood samples. This additional data was very strong, and is under active review by the agency.

Last year, we initiated an additional study requested by the FDA for finger stick whole blood and oral fluid claims. This study remains on schedule and is likely to take the rest of the first quarter to complete. We intend to file our results with the FDA as soon as possible after completing the study. At the same time, we are finalizing preparations for a preapproval facility inspection by the FDA, and we are waiting to hear from the agency as to the specific timing.

We have also been developing a proposed protocol for our CLIA waiver study. Discussions with the FDA have occurred, and we expect these will continue through the end of this quarter. The actual study should start toward the middle of 2010. We intend to submit the results of our CLIA study as soon as possible after we receive FDA approval for our finger stick whole blood oral fluid claims.

With respect to shelf life, our OraQuick HCV testing in Europe is being launched with product dating of 18 months. This was based on realtime stability studies in which this product acceptance criteria for storage of 20 months at 30 degrees c. Data from these ongoing stability studies will also be used to support approval of product dating for the product here in the United States.

We continue to believe there is a need in the United States and around the world to increase hepatitis testing and that a rapid hepatitis C testing can be an important tool for healthcare providers. You may have seen a report recently issued by the Institute of Medicine, which is a branch of the US National Academy of Sciences. This report confirms the need to increased health services related to both hepatitis C and hepatitis B, including testing, and urges federal and state agencies to increase funding for these important programs.

Now, turning to our clinical program for an OraQuick HIV over-the-counter test, as previously discussed, we participated in a meeting with the FDA's Blood Product Advisory Committee, or BPAC, in mid-November. This meeting was very productive. For those of you that attended or read the transcript from the meeting, you know that there was a tremendous showing of support at the meeting by representatives of the public health and HIV/AIDS communities. During a portion of the session closed to the public, we reviewed with the committee the results of our clinical studies, and our review of the additional clinical work needed for approval. The BPAC indicated that we could move forward with our clinical program and provided important guidance with what will be required for final FDA approval of this product.

Now since the BPAC meeting, we have engaged in the regular dialogue with the FDA about the next phase of clinical testing. Recently, we prepared and are filing in the next several days an amended to our Investigational Device Exemption, or IDE, which contains an proposed protocol for the final phase of clinical studies for review and comment by the FDA. Upon receiving feedback and comments from the agency, we will make whatever revisions are warranted to the protocol and resubmit for official approval. We would expect the review and IDE approval process to occur over the next several months.

And upon FDA approval, we are permitted to finalize setting up the clinical sites and begin actual subject enrollment for the final round of clinical testing. So assuming a timely IDE approval, we would expect clinical testing to extend into 2011. Once the study is completed, we will submit our data, and expect that another BPAC meeting will be needed before and approval can be issued by the FDA.

The productive and positive meeting with the BPAC and the significant progress made in our subsequent discussions with the FDA reflect the great work of our Regulatory, Clinical, and R& D groups. Getting to this stage of development for what would be the first-ever FDA approved rapid HIV over-the-counter test is a huge accomplishment. We've gained greater clarity on the path forward and we remain confident that approval is within our reach, and we are very pleased with our progress and we are really excited about the opportunity that this product represents.

In the Substance Abuse Testing area, our collaboration with Roche Diagnostics for fully automated homogeneous drugs of abuse assays continues to go well. As discussed in prior calls, this collaboration initially focused on a development of a NIDA-5 panel assays for marijuana, cocaine, opiates, PCP, amphetamines and methamphetamine. Submissions for FDA 510(k) clearance were filed at the end of 2009 for four of these assays, and we expect the other two, cocaine and marijuana, to be filed this year. Our hope is that the 510(k) clearance will be received for all but the marijuana assay later in this year, at which time we expect to launch with Roche a partial NIDA-5 panel for use with our Intercept collector in the workplace testing and other markets.

Shortly after the new year started, we announced the signing of a worldwide commercialization agreement with Roche for these newly developed assays an our Intercept device. The agreement is structured to take advantage of each party's strengths. Our contribution is an established market presence with oral fluid drug testing primarily here in the United States. And, of course, Roche has an established base of automated analyzers and extensive marketing capabilities, particularly in international markets. We will exclusively serve the United States and Canadian criminal justice markets and have exclusive marketing rights to the United Kingdom. We will jointly serve the US workplace market and Roche will exclusively serve other international markets. We believe the new automated drug testing system we'll be enthusiastically received by our lab customers.

During 2009, we also made some important announcements to our OraQuick HIV test. As previously discussed, several enhancements were implemented during the first half of the year, which enabled us to extend the FDA approved shelf life to 12 months. This increase in shelf life is improved our ability to manage inventory and has strengthened the competitive position of our OraQuick HIV product. This is particularly true in international markets, where there is a greater need for a longer shelf life due to the more complicated distribution logistics. We have continued our realtime stability studies for this product, and we now have data that is passing for 17 months. We expect this to continue, and later this year, we expect to request FDA approval for a product dating extension to 18 months. And we will continue our ongoing stability studies to support additional dating extensions for this product.

During 2009, as a result of these enhancements, we also enjoyed outstanding field performance by our OraQuick HIV test. We've continued collecting data from our sentinel sites, and this data reflects over 185,000 test results, and it indicates that our oral fluid tests performed at a 99.94% specificity last year, which is at the very top of the range, reflected in our FDA approved claims. We expect that these field performance results well also soon be published.

In 2009, we continued to strengthen our organizational capabilities. As you know, we added a new Vice President of Marketing and Sales and a new Vice President of Regulatory Affairs and Quality Assurance during the year. We also filled the vacancy at Vice President of US Sales with an internal promotion, and these individuals, each of them, have outstanding qualifications and are already making significant contributions in there respective positions.

More recently, Nancy McLane joined our Company as the new Vice President of Operations. She will be taking over the manufacturing, facilities management and quality control functions previously handled by Mike Formica. As you may recall, last year we asked Mike to manage our worldwide professional and over the counter cryosurgical products, and he is now devoting 100% of his time to this important part of our business.

Nancy brings with her over 20 years of experience in medical device manufacturing at several leading healthcare companies. Most result, she served as they were Senior Vice President at LifeSync Corporation, where she was responsible for operations, QA, regulatory affairs, global supply chain and customer service, and prior to that, she held senior operations positions at Cordis Corporation and CR Bard. We are very happy that Nancy has joined our Management team.

And now I like to provide some additional perspective on various aspects of our business. As Ron indicated, revenue growth in 2009 was primarily the result of higher sales of our OraQuick HIV test. A number of factors contributed to this growth and will help set the stage for continued growth in 2010.

A major achievement during 2009 was the deployment of a new direct sales force for the US hospital market and the successful transitioning of business from our prior distributor Abbott Laboratories. As part of the Abbott transition, we renewed or secured new purchase agreements with all major hospital group purchasing organizations in the United States, including most recently, Premier and the HealthTrust Purchasing Group. We have also began to secure new business with VA hospitals, after the Department of Veterans' Affairs announced the policy change eliminating the need for written consent and mandated pre- and post-test counseling.

In Public Health, we successfully renewed contracts with a number of key customers, including New York, Florida, Chicago, and the District of Columbia. And on the international front, we gained additional traction during 2009 with growth of almost 40%, primarily due to higher sales in Asia, Latin America, and Europe.

And finally, we settled the patent infringement lawsuits filed by Inverness and Church & Dwight that targeted our OraQuick ADVANCE test. The settlement terms are very favorable, and will provide us with opportunities to grow our business with new product offerings.

Our OraQuick HIV test is the most versatile on the market and we believe it continues to be very will positioned competitively. Our sales and marketing efforts continue to focus on maximizing new opportunities, especially in the US hospital marketplace. And in Public Health, we expect to support the expansion of several major city testing initiatives in 2010, and we expect to continue to grow this important segment.

Lastly, we believe that 2010 will be a strong year on the international front, with sales growth comparable to 2009.

Turning to Cryosurgery, although revenues from this business were only up slightly last year, there have been a number of developments which we believe will position this business for future growth. We are now seeing evidence that our efforts to reduce diversion by foreign distributors into the US market are working. This should help return our Histofreezer sales in the domestic professional market to a more normal pattern. Earlier this year, we signed agreements with two manufacturer's sales representative organizations. Under these arrangements, over 40 additional sales reps will be working with our physician office distributors throughout the United States, and should contribute to domestic Histofreezer sales growth. At the end of 2009, our Latin American over-the-counter distributor, Genomma, announced of the launched our over-the-counter product in Brazil. We believe Brazil, the largest country in South America, represents a substantial opportunity. Based on initial product orders, this product seems to be going very well.

As we move into 2010, we have a number of priorities for our Cryosurgical products. We are considering a change to the distribution model currently in place for our European over-the-counter product, in order to better serve some of the European countries outside of the UK. We are also focused on improving our distribution network for Histofreezer in international markets. And finally, we are working to expand the number of retail outlets here in the United States that carry our national over the counter brand, Freeze n' Clear Skin Clinic.

In the Substance Abuse testing area, the continued economic challenges, high unemployment and reduced funding negatively impacted our business during 2009. However, our revenues were a bit more consistent in the second half of 2009, and we believe this business is now stabilizing and the biggest negative impact from the economy is behind us. We expect the launch of high throughput assays with Roche beginning later this year to be an important factor in helping to get this business growing again.

Finally, I want to highlight to items in operations. During 2009, our Operations group paid a critical role in successfully resolving the manufacturing issues which was impacting our OraQuick HIV test. This group was integral to resolving the issue and resumed full-scale production almost immediately after the issue was identified and resolved. By replenishing our critical inventory levels, we were able to eliminate a large second-quarter backlog with minimal negative customer impact. The hard work of our Operations group, along with our R&D personnel, was invaluable in overcoming a difficult challenge.

More recently, we submitted our OraQuick automated manufacturing line for validation by the FDA. This is an important filing as we believe the use of full automation will improve efficiency in our manufacturing and help us be prepared to meet the future demand for our OraQuick HIV test.

And with that, I will now open the floor to questions.

Thank you.

(Operator Instructions).

We will go first to Sameer Harish with Needham & Company.

Hi, guys. Thanks for taking my question.

Hey, Sameer how are you?

Good.

I want to ask you quickly on the Inverness, can you talk about the market opportunities to market additional products there? In terms of what types of products you could be targeting, and possible contribution?

Sure.

Under the agreement were set of agreements that we entered into with them, we were granted access to certain products in the drugs of abuse area, and certain respiratory products, including an OEM glue test, a strep test, and also a pregnancy test. It's not an obligation that we take any or all of those products, but an opportunity to evaluate the attractiveness of each of them on their own merits, and should we desire to have them OEM manufactured for us, that's available to us.

Great.

And just looking up a little bit, can you talk a little bit about the opportunities to grow the public health OraQuick business? It sure seems like it's plateaued around 500,000, 600,000 tests a quarter. What's going to drive that higher? Do you expect additional funding or additional mandates? What are the drivers moving that forward?

Clearly, one of the key drivers is funding, and I'm happy to report that funding, at least in the proposed president's budget, is going to remain at level funding or increase.

One of the other key drivers is for the public health jurisdictions, now that they have the infrastructure built to handle additional testing, is to now begin to deploy those funds toward the purchase of tests. And we have seen data from the CDC, they present it publicly, they presented it actually to Congress, which indicated that in the back half -- in the most recent six months, they have seen increased utilization of those funds for the purchase of HIV tests.

So we believe that those factors are going to continue to drive our Public Health business, along with a focus on those jurisdictions that are getting more funding. As part of our prepared remarks, we said that we expect to have a greater emphasis on some key city testing initiatives, and we have seen some great success in those cities where we have had that specific focus, mainly New York, Philadelphia, Houston, Los Angeles, and we expect that will continue in 2010.

Thanks guys, I'll get back in queue.

Thanks, Sameer.

We will go next to Shawn Bevac with Susquehanna

Hello?

Hey Shawn, how are you?

How are you doing, guys? A few questions here.

What kind of ramp do you guys see in -- probably towards the back half the year for the HCV test in EU?

Right now we are working on having a very successful launch, which I mentioned that is going to come up in April. Obviously, we just got word recently that the product was CE mark, so we have been working real hard to finalize the labeling, get the package inserts, get the packaging done. We are working with our European registration agent to ensure registrations are in place in all of our European countries. Right now we are making good progress on all of those. Poland and Germany, Spain are a little bit lagging. We have to make sure that all of our distributors are on board. Obviously, in most cases we are going to provide an opportunity for our existing HIV distributors to market the hepatitis C test. In some cases we are going to look for new distribution. We have got to train and prepare them for launch.

And at the same time that all this is going on, we're also in discussions with Merck, because as you know they have an accountability. That accountability doesn't actually kick in until sometime in June, where they've got to be prepared and ready to launch their position detailing effort. So there's a lot of stuff going on right now around HCV, and it's a lot of good work.

I want to make sure that we have realistic expectations about what to expect in the EU with HCV. We are building a market here. The infrastructure in the EU is very different than it is here in the United States, relative to rapid testing. Most of the healthcare is government run, and it's more centralized. We do see some nice -- what we believe are going to be nice opportunities in the UK, in Eastern Europe, possibly in France and some other geographies.

So we're going to get this thing launched. I think will be able to give you better perspective on what the back-end revenue expectations look like. I would say right now we are taking a relatively cautious -- and I would take a modest approach to revenues in 2010 out of the EU.

Okay.

Looking at the OraQuick in the Hospital market, how many reps do you guys have there, and do you think your coverage is enough? Would you guys be hiring any more direct reps there?

The total field force serving the hospital market in the United States is about 25. That includes management and some direct telemarketing resources. I think we've got very good coverage there. Together with the relationships that we have with our GPO partners, our direct coverage in the 300-plus bed hospital segment is excellent. And, if we are short a little coverage, it would be in the smaller-bed hospitals.

But for right now, as we continue to watch this business grow, I think we've got real solid coverage. As we get these hep C approvals, and begin to load hep C into the US hospital reps ' bag, so to speak, I think that obviously gives us another opportunity to reevaluate that.

Okay.

And then how should we look at or think about R&D and the gross margins in 2010? Will gross margins continue to pick up and will R&D be significantly more than it was in 2009, given the clinical studies that you guys are doing?

I think that's a reasonable assumption. We are looking at a base of approximately 60% for our gross margins and hopefully exceeding that, which will be dependent on mix, Sean, as we move out through the year. R&D expenses are anticipated to increase as we complete the trial work for our OraQuick HCV, oral fluid finger stick submission, as well as the CLIA waiver studies that will be necessary to be completed, and, of course, embark on the HIV OTC clinical activity in 2010, opposed to protocol approval and IDE approval from the FDA.

So yes, we do expect R&D to be up over levels experienced in 2009.

Okay, and just one last quick one.

What was the stocking order from Genomma in Brazil?

It was -- we had a couple of shipments that we put out to Genomma, the first of which was approximately $250,000, and we had one other of approximately $250,000 in the latter part of the fourth quarter.

Logistically, it's a challenge to get our product into the market. And it takes from shipping out of our facilities in the US about two months door-to-door. So there is a bit of a lead time that we need to take into consideration as we want to make sure our customers are not ever in a position where they are out of product, especially at this critical time of their launch in the heavy advertising and promotional support that they invest in that product.

So the total $500,000 came in the fourth quarter though?

Yes.

Okay. Thanks, guys.

We will go next to Jeff Frelick with Think Equity.

Good evening, folks.

Hey, Jeff.

Two follow-ups, I guess.

First on the HCV in EU and second on the gross margins.

With respect to HCV rollout in the EU, can you comment on the timing, when basically the Merck sales force in Europe will be training and kind of fully armed with HCV tests, understanding the test and promoting and marketing that for you?

Yes. By contract, they had a time period from when we notified them we were going to begin marketing in certain geographies, and that date is June 28. Okay? So they have to be prepared to begin detailing post-June 28. So just use of July 1 as when we would expect them to begin detailing the physician office market segment in the EU.

Okay. Will they have that in their detail, where they physically have the product and demo it in physician offices, or will they kind of talk about it from a marketing or ad slick?

Obviously, that's what were working with them on right now. So what materials do they want, we have dummy devices that they can show. We mentioned in our prepared remarks that we have done some market research during the fourth quarter, and that's targeted to making sure that we've got our messaging downright, particularly particularly with the physician office community, which might be a little different, as you would know, from public health, or from the laboratory market segment. So that's all ongoing.

Okay.

And second question for Ron, would the manufacturing efficiency improvement, you talked about it from automation, for HIV testing, will that have a meaningful impact in 2010 on gross margins?

Jeff, is going to be dependent upon when we received the approval for the automated manufacturing. So that could be anywhere from a quarter review to two to three quarters of review by the FDA. So it will be dependent upon when we bring it online. But the impact we expect to be meaningful.

Okay. Thanks, guys.

(Operator Instructions). We will go next to Carolyn Corner with William Smith & Company.

Hi, guys. Thanks for taking my call.

Hi, Carolyn.

I just wanted to -- I have another question, we were talking about gross margins. With the strides in the automation on the OraQuick HIV test, when the hep C product in the OTC products are being launched for approval, are those products us are going to be on an audited platform? Are you moving those towards -- in that direction, or how long would it be just additive to add those products on existing approvals?

That's a great question. And the OraQuick HIV test that will be incorporated into the over-the-counter packaging is the same product that we are manufacturing for the professional marketplace. Just in different packaging. So that would be a product that I would believe would be eligible for automated manufacturing.

The HCV test will be a semi- automated manufacturing and with an idea end-goal of ultimately moving that to automated.

Okay.

And one more question about the OraQuick OTC, just to get this straight. Your filing an IDE there in the next few days. After that approval you can do the clinical studies, and I'm guessing those are the user studies where the patient takes a test home. You said 2011 for clinical testing. So are we looking at the BPAC meeting in 2011 as when you're going to be presenting that data to the FDA?

Okay. So let me just clarify back to what we're going to be doing in the next few days. We will be submitting a proposal protocol as part of the IDE submission. That's the result of the discussions we've had. We're going to get some comments back from them, and then we will incorporate whatever comments they have and submit that as our final submission for approval, which obviously after we have incorporated their comments, we would expect we get their approval. That will then kick off our signing up the clinical sites, training the clinical sites, and beginning human subject enrollment. We expect that will happen sometime mid-year this year. Just with the back-and-forth.

Than we expect that human subject testing will take us through 2010 and into 2011. Now, depending on how -- the timing, how that goes, and how long into 2011 that testing goes will obviously determine when will be able to wrap up all that data and get a submission in.

So I don't want to speculate on that right now. All I want to say is the clinical plan that we are proposing will have us enrolling and testing subjects through 2010 and through some part of 2011. And as we get confirmation on that from the FDA, we will try to give you more clarity on when we might think that would end in 2011.

Okay, great. Thanks for taking my questions.

And that concludes our question-and-answer session. I would like to turn the conference back over to Doug Michels for closing remarks.

Okay.

I just want to thank everyone for participating on today's call. I hope you heard in our prepared remarks and in our answers to questions, we believe the Company is extremely will positioned for continued growth. And Ron and I look forward to updating you on our progress.

I want to thank you for your continued interest in OraSure and I hope you all have a good afternoon and evening.

Thank you, everyone. This concludes today's conference. Thank you for your participation.