OraSure Technologies' CEO Discusses Q2 2013 Results - Earnings Call Transcript

Aug. 7.13 | About: OraSure Technologies, (OSUR)

OraSure Technologies, Inc. (NASDAQ:OSUR)

Q2 2013 Earnings Conference Call

August 07, 2013 05:00 PM ET

Executives

Douglas A. Michels – President & CEO

Ronald H. Spair – COO & CFO

Kathleen Weber – SVP and General Manager of Consumer Products

Analysts

Peter Lawson – Mizuho Securities Inc.

Spencer Nam – Janney Montgomery Scott LLC

Jose Haresco – JMP Securities

Mark Massaro – Canaccord Genuity

Shaun Rodriguez – Cowen and Company

Nicholas Jansen – Raymond James and Associates

Operator

Good afternoon everyone and welcome to OraSure Technologies 2013 Second Quarter 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 speaker’s remarks, there will be a question-and-answer period. (Operator Instructions)

OraSure Technologies issued a press release at approximately 4:00 PM Eastern Time today regarding its 2013 second quarter results and certain other matters. The press release is available to you on our website atwww.orasure.com or by calling 610-882-1820. If you go to our website, the press release can be found by opening the Investor Relations page and clicking on the link for press 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 August 14, by calling 855-859-2056 for domestic or 404-537-3406 for international. The access code is 19672741.

With us today are Doug Michels, President and Chief Executive Officer; Ron Spair, Chief Operating Officer and Chief Financial Officer and Kathy Weber, Senior Vice President and General Manager Consumer Products. Doug and Ron will begin with opening statements, which will be followed with a question-and-answer session.

Before I turn the call over to Doug, you should know that this call may contain certain forward-looking statements, including statements with respect to revenues, expenses, profitability, earnings 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 company’s SEC filings including its registration statements, its annual report on Form 10-K for the year ended December 31, 2012, its quarterly reports on Form 10-Q, and its other SEC filings.

Although forward-looking statements help to provide complete information about future prospects, listeners should keep in mind that forward-looking statements may not be reliable. The company undertakes no obligation to update any forward-looking statements to reflect the events or circumstances after this call.

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

Douglas A. Michels

Well, thanks Judy and good afternoon everyone and welcome to our call. The company delivered solid results for the second quarter. Both our top and bottom line results were better than expected and exceeded our guidance for the period. Consolidated net revenues were up 8% compared to 2012 and one reason for this growth was a 15% increase in our infectious disease sales primarily due to the contribution from our OraQuick In-Home HIV Test.

Our focus continues to be on implementing the most effective and efficient strategies for building awareness and demand for this new product.

In addition, our molecular collection systems business delivered a very strong quarter with almost 40% growth compared to the year-ago period. This part of the business is now up about 30% for the first six months of this year.

We are especially pleased with the performance of our molecular collection systems subsidiary DNA Genotek which reported record revenues. DNA Genotek delivered not only year-over-year growth for Q2 but also sequential growth from the first quarter. We expect continued strong growth from DNA Genotek for the rest of this year.

Ron will now provide a more detailed overview of our second quarter financial performance along with guidance for Q3. I will then give a business update and we will open the floor for your questions.

So, with that let me now turn the call over to Ron.

Ronald H. Spair

Thanks, Doug and good afternoon everyone. Our second quarter 2013 consolidated revenues were $24.3 million compared to $22.6 million reported in 2012. Our consolidated product revenues increased 8% as a result of the record sales from our molecular collection systems segment and higher sales of our infectious disease testing products. These increases were partially offset by lower sales of our substance abuse testing, cryosurgical systems and insurance risk assessment products.

Our infectious disease testing revenues were $12 million in the second quarter of 2013 compared to $10.4 million in the second quarter of 2012. The overall 15% increase was primarily the result of $2 million in net sales of our OraQuick In-Home HIV test which we began selling in the fourth quarter of 2012.

During the current quarter gross sales of our OraQuick In-Home HIV test were $2.1 million which were offset by $133,000 in customer allowances including co-operative advertising, cash discounts and other allowances. Net sales of this product included approximately 255,000 of direct sales to public health customers.

We anticipate that some public health entities may chose to use a portion of their funding to purchase our over-the-counter product in lieu of our Ora competitors professional product.

The increase in net revenues from our OraQuick In-Home HIV Test was partially offset by a decline in sales of our OraQuick HIV and HCV professional products.

Second quarter domestic HIV revenues were down $344,000 or 4% due to a timing of customer purchases and reductions in government funding.

Second quarter HCV revenues decreased 2% largely as a result of the variability in the ordering patterns of our customers. Our molecular collection systems revenues primarily representing sales of the Oragene product line increased to $4.7 million in the second quarter of 2013 compared to $3.3 million in 2012, this 39% increase was the result of higher sales in the commercial market primarily due to new orders received from the existing customer who did not purchase product in the same period of 2012. This increase was partially offset by a decline in the academic research market which continues to be negatively impacted by constraint research funding primarily in North America.

Our second quarter 2013, cryosurgical revenues decreased 7% to $4.2 million from $4.5million in the second quarter of 2012 primarily as a result of lower professional sales in the domestic marketplace. This reduction largely resulted from higher distributor purchases made in the fourth quarter of 2012 in anticipation of price increases implemented in early January 2013 as well as the decline in sales to the military as a result of the U.S. withdrawal of troops overseas.

Substance abuse testing revenues decreased to $2.1 million in the second quarter of 2013 from $2.9 million in the second quarter of 2012 primarily as a result of lower Intercept sales. This decrease resulted from reductions in purchases by a former domestic lab distributor and our UK distributor both of which have begun selling their own competing oral specimen collection devices.

Turning to gross margin, our overall margin for Q2 of 2013 was 60% compared to 65% reported for the second quarter of 2012. The lower 2013 margin was primarily a result of higher royalties paid on sales of our OraQuick products and a change in product mix.

Our consolidated operating expenses for the second quarter of 2013 increased $1.8 million or 10% compared to the second quarter of 2012. This increase is largely due to higher spending associated with advertising and promotional activities for our OraQuick In-Home HIV Test. Advertising and promotional cost for this product were $5.4 million in the second quarter of 2013 compared to $1.6 million spent in the second quarter of 2012.

R&D expense for the second quarter declined to $2.7 million from $3.1 million due to lower staffing costs, supplies and prototype expenses. G&A expense declined to $5 million from $6.1 million in the second quarter of 2012 due to lower legal and consulting expenses.

From a bottom line perspective, we reported a net loss of $5.3 million or $0.10 per share for the second quarter of 2013 compared to a net loss of $3.6 million or $0.07 per share for the same period of 2012.

Turning briefly to our balance sheet and cash flow, our cash balance at June 30, 2013 was $77 million, compared to $87.9 million at December 31, 2012. Cash used in operating activities in the second quarter of 2013 was $1.6 million compared to $940,000 used in the second quarter of 2012.

So, as we look forward to the third quarter of 2013, we are projecting consolidated net revenues of approximately $24 million to $24.5 million and a consolidated net loss per share of approximately $0.09 to $0.10.

With that, I’ll now turn the call back over to Doug.

Douglas A. Michels

Okay, thanks Ron. As stated earlier, sales of our OraQuick In-Home HIV Test were $2 million for the second quarter. It was an increase of 38% over the first quarter. Our advertising and promotional spend for this product during the second quarter of $5.4 million represents a one-and-a-half million dollar reduction from Q1 and reflects the impact of more efficient marketing strategies and some shifting of promotional spend to the back half of 2013.

Sales growth during the second quarter came from several sources. First, the national retail chains carrying our product increased sales and we are now beginning to recognize revenues from small independent drug stores. As you may know, retail outlets with less than one million dollars in total sales are not included in publicly available data such as the information reported by Neilsen, which many investors use to track retail sales of the In-Home HIV Test.

Because of the difficulty in tracking sales through these small outlets, we had not previously been able to recognize sales to this segment of the market. However, we have recently developed an approach to recognize at least a portion of the sales to these small outlets consistent with revenue recognized from the larger retail chains reported by Neilsen.

The second growth area has come from the dot com or e-commerce portion of our business as several new internet sales sites were added during the quarter. E-commerce sales by retailers increased 16% during the second quarter compared to the first, and total online sales, including sales through our own OraQuick.com site now represent about nine percent of our HIV over-the-counter business.

The third area of growth has come from third-party agencies and customers in the public health market. These organizations continue to purchase our professional OraQuick product, but now some of these are looking to incorporate our OraQuick In-Home HIV Test as a way of expanding their testing programs. Sales to these customers were $255,000 for the second quarter.

We are encouraged by the growth in the over-the-counter business and by the fact that our growth has been driven by interest across multiple channels. However, Q2 sales were below our expectations and consequently we have executed several critical studies to understand opportunities for improvement.

A key goal of our marketing program is to drive product awareness within our target populations. We recently completed an awareness tracking study to measure our achievement against goal. This study revealed that while our awareness is building, our unaided or top-of-mind awareness levels with key targets are below expectations at this point in our launch.

Unaided awareness levels range from 6% to 12%, depending on the consumer target measured. To understand the slower than expected awareness build, we thoroughly reviewed both our messaging strategy and execution and our media buying approach. We are making modifications to both, which I will discuss in a minute.

The same study also revealed that interest in our product remains very high within all of our key target groups. These include MSM or Men who have Sex with Men, African-Americans, Hispanic Americans and sexually active adults 18 to 34-years-old. Interest among members of the MSM and African-American communities remains the highest, and all of this is consistent with our prior research and continues to be very encouraging.

We also continue to analyze the demographics of our top selling stores and markets for both retail purchases and e-commerce sales. This review shows that our sales are skewed toward several of our primary target populations, including the MSM and African-American populations. So, while our overall awareness is lower than we hoped, we are connecting well with our intended consumers. Not surprisingly, our sales are more concentrated in higher HIV prevalence markets, with the top 15 of these markets representing approximately 50% of sales.

As you know, we have also been working with our retailers to improve retail conditions and we have seen chain-wide increases in store level inventory and a reduction in out-of-stock situations. We continue to work with retailers to optimize the level of inventory in the stores based on product movement. Some retailers continue to place the product behind-the-counter or have security devices as a theft-deterrent. Our research has shown that this remains a significant barrier to higher consumer purchases and we are continuing to work with these retailers to identify and test creative solutions to these challenges.

A final area of focus has been understanding the effectiveness of our promotional activities. Our promotional efforts have included TV, radio, digital and print advertising, local events such as promotions in bars, gay pride festivals in churches and retail store-level promotion.

Although all of these programs have contributed to product sales, they’ve done so in varying degrees and we’ve been evaluating which specific programs provide the greatest return on our investment. We have already made adjustments based on this analysis. For example, we have launched the revised 15-second commercial which connects better with our target audiences at a lower cost, and we have shifted our media strategy to incorporate more predictable and measurable media weight.

We are also further refining our messaging by target audience and we are planning to shift more promotional support to key markets. Going forward, we believe the most effective use of our promotional dollars continues to be a combination of local level promotions, national TV advertising and strong digital and online presence.

Turning briefly to our consumer support center, this part of the business continues to perform exceptionally well and is meeting or exceeding all of our service-level goals. In addition, the product seems to continue to perform well on the field as our consumer complaint rate is very low and below industry standards.

So, as we look forward to the rest of the year and beyond, our focus remains on building awareness among our target consumers through more focused messaging and a more effective and efficient media strategy. We will also continue addressing the barriers to purchase at retail. We will be implementing refinements to our strategy throughout the third quarter and we expect to somewhat moderate the level of our promotional spending during this period. This will likely result in a sequential decline in retail sales in that quarter compared to Q2, but we would expect sales growth to resume in the fourth quarter as the full implementation of our revised approach starts to be realized.

Finally, discussions are under way with potential collaborators to expand our OraQuick In-Home HIV Test sales in international markets. Interest is high and we’re looking at multiple foreign jurisdictions. We hope to have something more to announce on this in the relatively near future.

Turning next to our OraQuick HCV Test, as Ron indicated, total HCV sales were down slightly for the current quarter compared to last year. However, second quarter sales of our OraQuick HCV Test were up sequentially over the first quarter and we continue to add new customers.

Importantly, we expect the sequential growth will continue at least for the rest of 2013 and a major contributor to this growth will be a significant international NGO which has already placed a large order for the third quarter and may place similar orders in future periods.

There have also been significant positive developments on the hepatitis front since our last call. In June, the United States Preventive Services Task Force issued final recommendations giving HCV screening for both at-risk individuals and baby boomers, a B grade.

As you may know, under the Affordable Care Act, preventive services that receive an A or B grade from the Task Force are expected to be covered by insurance without cost sharing, and the B grade for screening baby boomers represents an improvement from the Task Force’s initial draft recommendation issued late last year, which had proposed a C grade for screening of this type.

Although the Task Force’s final recommendations do not take effect until next year, we believe they will help drive expanded HCV testing including with our OraQuick HCV product. In addition, the New York State Legislature recently passed a law that would require that doctors offer hepatitis-C testing as a routine part of healthcare provider to baby boomers. This law is consistent with the CBC’s recommendation on HCV testing and is now on the Governor’s desk for signature.

Assuming the Governor signs this into law, the statute would also take effect in 2014 and represent another positive development supporting expanded HCV testing. So, we remain very optimistic about the long-term prospects for our rapid hepatitis-C product.

And the final area I want to address is on molecular collection system business. Most of DNA Genotek’s record setting revenues this quarter reflects significant growth in commercial customers use of the FDA-cleared Oragene Saliva Collection product line for DNA testing. In particular, we continue to see healthy activity in purchasing by commercial customers using these products for clinical and pharmacogenomic testing, consumer testing and commercial research.

Gains in the commercial market more than offset a decline in DNA Genotek’s academic research revenue which recently has been trending below quarterly levels seen in prior years. We expect DNA Genotek’s commercial revenue to continue to grow for the remainder of 2013 and to offset weakness in the academic market due to constraint research funding, primarily in North America.

So in summary, I am pleased with our performance for the second quarter. The contributions from our OraQuick In-Home HIV Test and the record revenues at DNA Genotek are welcome additions to the company. We are excited about future opportunities for growth and I look forward to reporting our progress in future calls.

So with that, I’ll now open the floor to your questions. Operator?

Question-and-Answer Session

Operator

(Operator Instructions) Our first question comes from Amit Bhalla from Citi. Your line is open.

Unidentified Analyst

Hi. Good afternoon. This is [Nick Nollen] [ph] in for Amit. First, I want to talk a little bit about HIV and the spending there. One of the things you guys talked about this refinement strategy and how you expect to moderate spending, what kind of moderation could we expect in spending in Q3 and what kind of impact should we expect that to have on sales in the quarter?

Ronald H. Spair

Hi Nick. It’s Ron here. We had talked about the spending in Q2 being about $5.4 million for our advertising and promotional spend. Our current estimates are that the Q3 spend should be in the neighborhood of about three-and-half to $3.6 million for advertising and promotional spend activities in the third quarter, and as Doug pointed out, within the composition of our revenues generated in Q2, we did have included in there approximately $255,000 worth of sales into public health. So, you really have to look at the true retail consumption, net of that public health revenue, and we are estimating that as we work through this refinement phase of our strategy and are reducing our expenditures during that time, that we will see a slight drop in revenues at the retail consumption.

Unidentified Analyst

And what would you expect the full-year spending to be for the product?

Ronald H. Spair

We are anticipating that the previously discussed targeted spend levels in advertising and promotion in the high teens of millions will still be met and so as we get through this phase and then initiate the spending associated with the new roll out of the different components, we should be back up in the high teens of millions so nineteen to twenty million dollars worth of spending.

Unidentified Analyst

Okay, and then one follow up with, so maybe you’re studying to see which of your advertising is the most effective, have you done any study to see on the price-sensitivity of customers to see if there’s any impact of potentially a lower price and how the market would respond to that?

Kathleen Weber

This is Kathy. We have included price in pretty much every piece of research we do, we ask consumers for their perceptions around price, so including the awareness tracking study that Doug referenced, we asked the questions about price and price does not seem to be a major barrier, very consistent with the earlier research, our price is appealing to a large segment of the population. So we are not seeing anything that’s inconsistent on the price from prior research and don’t believe that it’s a barrier.

Unidentified Analyst

Okay, thanks. I’ll get back in the queue.

Ronald H. Spair

Okay, thanks Nick.

Operator

Thank you. Our next question comes from Peter Lawson from Mizuho Securities. Your line is open.

Peter Lawson – Mizuho Securities Inc.

Ron I may have missed this but what drove the strength in the DNA collection business, which customer group?

Ronald H. Spair

Hi. It’s primarily in the commercial area Peter and we haven’t identified specifically what customer/customers represented that but generally overall, just the uptake in volumes in the commercial side of the business as opposed to the academic side.

Douglas A. Michels

Yeah, I think Peter just to expand on that a little bit, I mean obviously we continue with [inaudible], with Ancestry, which we have talked about, two of our larger commercial customers but we are seeing additional customers and growth and repeat purchases across all of our commercial customers really and that includes customers that are operating in the pharmacogenomics space where the products used in evaluating pain or psychiatry, neurology, ophthalmology, we’re seeing continued purchases in reproduction on the commercial front, where a product is used in pregnancy genetics and so overall, the commercial business has performed very well and obviously are participating in multiple segments there, which diversifies our business in that segment and gives us a lot of confidence and optimism for the future.

Peter Lawson – Mizuho Securities Inc.

And were there any kind of stock in orders in the quarter for that business?

Douglas A. Michels

I would say none of any significance that would skew our Q2 results. We expect sequential growth in Q3 and strong growth through the remainder of the year.

Peter Lawson – Mizuho Securities Inc.

And then the pullback in the R&D spend, should we think about that, kind of trend happening or that $2.7 million number for 3Q and 4Q or is that one time blip?

Ronald H. Spair

No, I think that level of expenditure will be in and around that range for the balance of the year.

Peter Lawson – Mizuho Securities Inc.

Thank you. I’ll get back into the queue.

Ronald H. Spair

Okay, thanks Peter.

Operator

Thank you. Our next question comes from Spencer Nam from Janney Capital. Your line is open.

Spencer Nam – Janney Montgomery Scott LLC

Thanks for taking my questions. Maybe I’ll start off with the comment that was made, I believe it was Doug, you made this comment on the third quarter over-the-counter HIV test revenue maybe slightly below that level we saw in second quarter, is that, did I hear that correctly? And I know you guys are trying to calibrate the marketing strategy and so forth. But, you know, I’m just curious if, you know, the volume really is tied to the marketing strategy or the different types of marketing efforts and you know, does that mean that going forward whether that we should expect, you know, some sort of a function of how much marking dollars you guys put into this effort versus how much you’re going to get out of the revenue lines, how should I think about all those issues given the comment that you gave?

Douglas A. Michels

Well, I’ll let Kathy speak to some of the specifics that we believe are going to increase our effectiveness of our marketing spend. Obviously, it is a function of spending, but we have a wonderful opportunity based on the research to, you know, spend more efficiently and consequently more effectively as well and we believe that that’s what these refinements to our activities are actually going to represent. I’ll let Kathy talk about some of the specifics.

Kathleen Weber

Yeah, I can. So, Spencer what we’ve been doing is you know we put a lot of different tools out in the marketplace, we have TV advertising, local radio, national radio, event marketing, PR, many different marketing elements out there. And, what we’ve been doing now that we’ve completed this six market tour and have six months of, you know, the year under our belt, we’ve been evaluating every program related to sale to understand which programs deliver the highest lift and a highest ROI. And, you know, the short story there is that our local program seem to be delivering very effectively for us, they have some of the highest ROI.

Our national advertising has improved with the changes we’ve made to our copy and to our media buying approach. And then, we’ve also learned some things about the target consumers where we’re building the most traction as Doug said, we appeared to be building traction with [inaudible] an African-American, but we also because we are below expectations from an awareness standpoint, we need to refine our messaging, we need to just get a little bit tighter into some of those target communities and have more insight based messaging.

So, what we are doing right now is, spending a little bit less just during the short, the very, very short-term, spending in the areas where we see good ROI and developing optimized messaging, renegotiating some of our media, so that we can come out of the third quarter and then into the fourth quarter in a stronger place with better messaging, better media strategy, focusing really in on those things that have popped us the highest ROI investment.

So, to Doug’s point, the whole purpose is to continue doing what drives the business, and you know, holdback where we weren’t seeing the kind of return we wanted to.

Spencer Nam – Janney Montgomery Scott LLC

So, if you know, so I guess, I think I get that clearly. So, if you think about third quarter and just thinking about what kind of revenue trajectory we could expect out of over-the-counter HIV, is it going to be a lot less than what we saw on second quarter or is it going to be, you know, slightly down, I mean, you know, even qualitatively how should we think about that?

Douglas A. Michels

You know Spencer, I would say at this point we would think it would be slightly down.

Spencer Nam – Janney Montgomery Scott LLC

Got you.

Douglas A. Michels

And, as I mentioned earlier in my remarks to more or less the same question included in the revenues for the second quarter were approximately $255,000 of revenues from public health placements of the OTC, HIV kit. So, you know, you have to take that into consideration when you’re looking at what the Q3 number could be. So, we are basically communicating that $2 million is not likely to be achieved in the third quarter here that will be down slightly.

Spencer Nam – Janney Montgomery Scott LLC

Got it. And then, so on the second quarter number, the HIV number, Doug I think you also mentioned in your prepared remark that it was below your expectation, what were you guys expecting, can you guys tell us that?

Douglas A. Michels

We haven’t given that level of granularity, but obviously we anticipated a stronger awareness level amongst our targeted consumers and awareness is going to drive individuals to retailer or online to purchase the product. Now Kathy wants to add anything additional to that.

Kathleen Weber

Yeah, I think just in terms of how we diagnosed the, you know, source of the lower revenue, awareness was a big piece of it and that’s driven we believe by the messaging and the media strategy. So, we have good pictures in place for that. And, the second piece we haven’t really talked about too much is the retail environment. So, as we spoken on some of the calls as you – many of you have raised to us, we have some club optimal resell conditions out there in terms of inventory levels out at store level, and also the test devices to BTC and a spider wires that will put on the product.

The good news is, we made good progress on the inventory front and if you think about where we were, you know, in the second quarter we had, in the beginning of the second quarter we had some chain wide out of stock levels at the 8% to 10% range and those are down now to 2% to 3% range for chain level.

What we are doing, we’ve been spending a fair amount of time looking at all the retail POS data and looking at store level data to understand, you know, may look 2% chain wide, but how does it look when you look at your high volume stores, your medium volume stores; your low volume stores. And, we’re seeing opportunities to continue to improve the inventory load, and you know, in the stores depending on their volume. And, there’s some very good insight that we’ve discovered, we are bringing it back to the retailers, the retailers remained very strong partners with us and we are working with them on that. So, the comment on the lower than expected revenues, we believe we know why and we are making good progress and putting those pictures in place.

Spencer Nam – Janney Montgomery Scott LLC

Thank you.

Operator

Thank you. Our next question comes from Jose Haresco from JMP Securities. Your line is open.

Jose Haresco – JMP Securities

Hi folks, good afternoon.

Douglas A. Michels

Hey, Jose.

Ronald H. Spair

Hi, Jose.

Jose Haresco – JMP Securities

I want to ask a quick – to switch gears to HCV for a second, from what I’m hearing there is a backlog of HCV patients for a lack of better term being warehouse this they’re all waiting for approve of Gilead new drug later this year. Have you given any thought to and perhaps how should we think about or what happened to your quick HCV business eve that drug is approved because it seems to me that it would be Gilead best interest to find as many of undiagnosed HCV patients out there beyond those are in warehouse right now?

Douglas A. Michels

Well, I think that’s absolutely the case. And, you know, the exciting thing about some of these new therapies is that the treatment duration is going to be much, much shorter. And so, it’s likely that they’ll work through that warehouse patient population quickly, and in order to really capitalize on the opportunity of therapy as we are going to have diagnose a whole lot more patients very quickly. And, obviously with the new taskforce recommendation, the CDC recommendation to test all baby boomers where there is the highest percentage of chronically infected hepatitis C patients, one time – one time test for hepatitis C set itself up ideally for the use of a rapid test.

Clearly, once these new therapies are available and promoted and physicians understand that they can cure these patients, there is going to be more hepatitis C testing broadly, so it’s going to benefit everybody in the diagnostic space. But, we think we are very well position to capitalize on the opportunity.

Jose Haresco – JMP Securities

Are you hearing the specific feedback, you know, four months away from that approval, but are you hearing specific feedback from your customers or doctors getting to know how the test will integrate into that treating paradigm?

Douglas A. Michels

Well, absolutely and you know, all these developments in the marketplace are, you know, creating a lot of buzz and excitement about hepatitis C diagnostics, you know, we are seeing, it increased numbers of customers coming into the queue with first time orders and repeat orders and we plan to, you know, capitalize on this both in the position office market as well as in the public health market.

Jose Haresco – JMP Securities

Okay. Thank you very much.

Douglas A. Michels

Thanks, Jose.

Operator

Thank you. (Operator Instructions) Our next question comes from Mark Massaro from Canaccord. Your line is open.

Mark Massaro – CanaccordGenuity

Hey, Doug and Ron. This is Mark in for Jeff. Thanks for taking the question.

Douglas A. Michels

Hey, Mark.

Ronald H. Spair

Hi, Mark.

Mark Massaro – CanaccordGenuity

So, I’m, entreat with the New York State legislature and the law requiring doctors to offer an HCV test. Can you maybe provide timing with that going to affect potentially January 1st? And secondly, are you in other discussions with other state legislatures?

Douglas A. Michels

I believe that should the government sign it would be effective in the first quarter of 2014 and we know that there are other legislators that are in other states that are evaluating that same opportunity to put the law in place encouraging or mandating routine testing for hepatitis C among the baby boomer population.

Mark Massaro – CanaccordGenuity

Great, and maybe as a follow up with respect to the international NGO, can you give us maybe a little flavor of what type of entity this is and similarly are you in other discussions with NGOs?

Douglas A. Michels

We are, not just on the international front, but here in the United States. And, given the new recommendations there’s a number of public health jurisdictions or other agencies that are looking at adopting routine hepatitis C testing alongside the work that they’re doing with rapid HIV testing and we’re having discussions on multiple fronts, and I believe that they’re going to barefoot in the quarters to come.

Relative to this international NGO, it’s an organization that operates really globally in multiple countries both in Europe, Eastern Europe as well as in Asia and they provide medical services to generally the underserved, well funded, they’ve been providing not only HCV testing, but also HIV and other diagnostic services to a significant population for sometimes. This is a well established program and actually they’re going to be again using our HCV test based on its superior performance has demonstrated in clinical studies both here in the United States as well as around the world. So, it’s really wonderful win for the company and we believe it’s going to b a nice contributor in the third quarter and beyond.

Mark Massaro – CanaccordGenuity

Great, and maybe just one last follow up, you know, the DNA Genotek business is performing well, can you maybe provide a little more color with respect to the pipeline of commercial customers or conversations, I know you’ve called out pharmacogenomics pregnancy genetics in the like, but it seems to me that the business has an opportunity to raise as a result of the overall uplift in molecular diagnostic as a whole, but maybe could you just shed some light discussions you’re having with potential customers?

Douglas A. Michels

Well, we completely agree [audio gap] primarily here in the United States and that’s impacted our revenue somewhat, the number of orders received from the academic research customers continues to grow, we were up 30% sequentially in terms of orders in the academic research area, which says interest continues to be very high amongst that community in our product offering. One of the things that this funding issue is causing us a challenge with this, we are seeing fewer large orders coming from the academic research base, we define large orders in the academic research spaces, book orders and excess of $10,000 and actually the number of orders in excess of $10,000 that we received during the quarter was down about 20%.

And so, it’s not that customers aren’t ordering; they just don’t have the funds to fund these large studies as they had previously. So, how we are going to respond to that as we are going to, you know, continue to depress in the academic research market. Obviously, there is interest in the product and so we are going to continue to look to expand not just in Europe or the United States, but in rest of world where we are making some good progress.

And, we continue to seek regulatory approvals in some very key markets, Russia is a good example. And then, in the second quarter we also received approval to begin selling in China. So, a lot of excitement both in the academic space as well as on the commercial front, great results from DNA Genoteck in the quarter and we are looking forward to real great year from them.

Mark Massaro – CanaccordGenuity

Great, thank you.

Douglas A. Michels

You’re welcome.

Operator

Thank you. Our next question comes from Shaun Rodriguez from Cowen. Your line is open.

Shaun Rodriguez – Cowen and Company

Hi guys, good afternoon.

Douglas A. Michels

Hey, Shaun.

Shaun Rodriguez – Cowen and Company

Can you talk about the impact on the competitive landscape of the earlier announcement, I guess, that was late last week that they’re developing their own the HIV professional test and maybe more specifically to the extent, you’ve viewed some incremental, competitive challenge is coming from the DTP product does it ever gets clear waiver on the oral indication, does it reach the potential uncertainty in terms of will be marketing that maybe push out any potential impact that you see or is this kind of a non event in your eyes?

Douglas A. Michels

You know Shaun it’s very difficult to comment on the specifics of that announcement; I don’t know what earlier obligations were to Chembio what the timing arrangements were in terms of their obligation and the like, I think those questions would be better directed to earlier and Chembio. We’ve been dealing with, you know, the competitors in the rapid HIV space for years, the better part of five to seven years I think, there is multiple FDA approved rapid HIV test in the marketplace. We continue to differentiate our product offering and continue to compete very effectively, we’ll see, you know, how their relationship develops whether it on wines or what happens and once we’ve got better clarity on that, we’ll give you our perspective on it.

Shaun Rodriguez – Cowen and Company

Fair enough. Thank you. On HIV OTC, on the 250,000 or so in public health revenues for that product, I understand and appreciate why you called it out something we should think about and understand in Q2, but also Q3. But I’m actually just curious where those kits went, you know, why the OTC kits were sold into that versus the professional really just trying to understand whether that sort of a thing is really a one timer sort of thing or something that could popup from here from time-to-time?

Ronald H. Spair

Well, so that $255,000 in revenue actually went to quite a number of public health jurisdictions, there were a few large purchases at the either the city or state level and these jurisdictions plan to integrate the at home HIV test into their testing programs.

I think at this point in time it’s a little early to make predictions as to how effective those strategies are going to be and whether they’re sustained in future periods. But I can tell you that we are also in active discussions with other jurisdictions today that are considering similar kind of purchases, what the timing of those might be, and what the magnitude of those might be is a TBD and we’ll try to give you visibility both to the effectiveness of the programs that have already purchased and are using the product as well as, you know, as we identify and secure additional purchases from other jurisdictions what those might be and how the product might be used, it’s exciting, again you know, I think that we got extraordinary support from the HIV AIDs community from our professional customers, from medical providers that use our rapid HIV test on the professional front and HCV utility for the over-the-counter test.

And as Kathy said, the product, the over-the-counter product continues to perform very well in the hands of consumers and we know that consumers are testing positive, they call our call center looking for referral and like, we’ve had meetings with CDC and with the FDA to talk about our positive experience with the product and I think there is growing appreciation that this is a valuable contributor in the fight against HIV and AIDs.

Shaun Rodriguez – Cowen and Company

It’s interesting. Thank you. And, lastly and I apologize if you covered this on the call, but on HCV, I think you’ve said in the past in 2012 about 200 customers have ordered, I think you said over 40 new customers last quarter, I think you mentioned that you continue to add customers in the quarter, can you be more specific on this any notable reorder trends or anything that popped up in the quarter, just I’m thinking about how many of these new customers actually turn into more consisting customers?

Ronald H. Spair

You know, we track that as best we can both on physician office front as well as in public health. And, you know, for the quarter just an example, for the quarter on the physician office side of the orders received about two thirds of the orders were first time customers. So, new customers deciding to test, a third of them were from repeat orders and 50% of those repeat orders were orders that had ordered within the previous three months.

So, you know, they ran through the test and they’re reordering. So, we’re capturing that kind of information about two thirds of our business in the public health, on the public health line on HCV were from repeat customers, about a third were new customers. So, this is something we are tracking and we’ll try to give you as good a color as we have wanted in future calls.

Shaun Rodriguez – Cowen and Company

That’s helpful. Thank you, guys.

Douglas A. Michels

Okay, Shaun.

Operator

Thank you. Our next question comes from Nicholas Jansen from Raymond James. Your line is open.

Nicholas Jansen – Raymond James and Associates

Hey guys, maybe following up on one of the Shaun’s questions in terms of the, you know, selling the OTC, are you effectively just losing the business in one area and picking up in the other area and just maybe just kind of walk me through kind of how that revenue dynamic played out just trying to get a sense of, if that strategy picks up theme, how should we think about domestic core professional business being down 4% in the quarter, now how should we think about that modeling going forward particularly in light of kind of government reimbursement challenges? Thanks.

Douglas A. Michels

Yeah, you know, I think from, I think it’s too early to tell to be quite honest, I mean, you know, the sales for the OTC kit, you know, quite small relative to our HIV professional business. You’re accurate in saying that HIV professional was down approximately 4%, you subtract out the HIV OTC from our total infectious disease, it was just like you said about 3.7%, you look at that on the total revenues of HIV professional, it’s a few hundred thousand dollars. So, it’s, you know, that can be one order from a public health customer in a quarter and you know, those can shift from quarter-to-quarter.

So, I think it further supports what we’ve said previously that we believe our HIV professional business is stabilized. I don’t think that we are going to see the over-the-counter product really cannibalize our HIV professional business to any great extent. I don’t see public health programs adopting over-the-counter testing broadly at the expense of their HIV professional, you know, their routine, testing that they’re doing out in the community or in clinics. I think it’s a supplemental strategy, they use it for partner testing, you know, when somebody test positive in the clinic and one of their key strategies is to reach out to that individual social network because obviously if they can connect with those individuals and get them tested that they generally find a high yield of positive test results from testing that social network.

A lot of times people within that social network are reluctant to come forward and confidential home HIV test can be valuable tool in helping those individuals learn their HIV status, that’s just one example of how the product could be used.

Nicholas Jansen – Raymond James and Associates

That’s helpful. And, maybe just one on kind of DNA Genotech, I was thinking about, you know, I think 23 May actually it came out the press release maybe yesterday or this week regarding kind of going after a national TV advertising campaign and just wanted to get your sense of, if that kind of ramps up quite nicely for them, how do you think about in contacts of your manufacturing capacity to meet the demand and that perhaps could be your, if that’s a home run advertising strategy? Thanks

Douglas A. Michels

I sent Ian Curry, our President a note that he better get his capacity up, you know, it remains to be seen what the impact of that advertising is going to have, but it’s certainly isn’t going to be a negative, it will be a positive. And, I looked at the campaign, I think it’s clever and to the extent it’s effective, it will have a very positive impact on our business we would expect.

Nicholas Jansen – Raymond James and Associates

Thanks, guys.

Operator

Thank you. Our next question is a follow up from Amit Bhalla from Citi. Your line is open.

Nick Nollen – Citigroup Global Markets Inc.

Hey, this is Nick again. Follow up on HCV, have you guys have any updates there on partnership opportunities there and also is there any opportunity from a co-marketing perspective on the HIV front to accelerate OCT sales? Thanks.

Douglas A. Michels

Yeah. No problem, Nick. You know, relative to pharma discussions, you should know we are engaged on multiple fronts and in discussions with certainly more than one of the relevant pharmaceutical organizations. We are discussing collaboration that are pretty broad, you know, ranging from possible collaboration on discreet programs and events to broader longer term types of initiatives and these discussion stand both domestic as well as international opportunities, I think that it’s not appropriate right now to get into more detail than that, but you should know that we are having multiple discussions ongoing.

And, I think it highlights what we’ve been saying and what some of you guys said on tonight’s call that it’s an exciting time, there is clearly a lot of excitement about the new therapies and there is a broad recognition that diagnostics are going to be key to realizing the full potential of these new drugs as they become available.

Nick Nollen – Citigroup Global Markets Inc.

Bye. Thanks, Doug.

Operator

Thank you for your questions. I will now turn the conference over to Doug Michels for closing remarks.

Douglas A. Michels

Okay, well, I just want to thank you all again for joining us on the call this afternoon and this evening. We look forward to speaking with you again after the third quarter. And, I appreciate all your support. Have a good night, everyone.

Operator

Ladies and gentlemen, thank you for your participation in today’s conference. This does conclude the program and you may all disconnect at this time.

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