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OraSure Technologies, Inc. (NASDAQ:OSUR)

Q1 2010 Earnings Call Transcript

May 5, 2010 5:00 pm ET

Executives

Judy Clarke – IR

Doug Michels – President & CEO

Ron Spair – COO & CFO

Analysts

Sameer Harish – Needham & Company

Caroline Corner – William Smith & Company

Jeff Frelick – ThinkEquity

Operator

Good day everyone, and welcome to OraSure Technologies 2010 first 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 speakers’ remarks, there will be a question-and-answer period. (Operator instructions) To allow time for as many questions as possible, questioners are 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 is completed, a questioner can rejoin the queue for further questions.

For opening remarks and introductions, I would now turn the call over to Judy Clarke at OraSure Technologies. Please go ahead.

Judy Clarke

Thank you. Good afternoon everyone and thank you for joining us today. I would like to begin by telling you that OraSure Technologies issued a press release at approximately 4:00 PM Eastern Time today regarding our 2010 first quarter financial results and certain other matters. The press release is available to you on Website at www.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 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 May 12th, 2010, by calling 800-642-1687 for domestic or 706-645-9291 for international. The access code is 69378968.

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 a question-and-answer session.

Before I turn the call over to Doug, I must also remind you that this call may contain certain forward-looking statements including statements with respect to revenues, expenses, profitability, earnings per share and other financial performance, product development performance, shipments and markets, and regulatory filings and approvals. Actual results could be significantly different. Factors that could affect results are discussed more fully in the SEC filings of OraSure Technologies including its registration statements, its annual report on Form 10-K for the year ended December 31st, 2009, 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 events or circumstances after this call.

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

Doug Michels

Thank you, Judy, and good afternoon everyone. I will start today’s call with an update on several recent developments including our first quarter performance. Ron will then follow with a more detailed overview of our first quarter results and our guidance for the second quarter. I will conclude the call with a brief discussion of our major clinical programs and certain other business developments, and we will then open the floor for your questions.

As I indicated in our press release, revenues for the first quarter were $17.9 million. This represents an increase over the comparable period of 2009, but fell below our topline guidance for the quarter. Despite the lower-than-expected revenues, we exceeded our guidance on the bottom line. The revenue shortfall was driven primarily by lower-than-expected domestic sales of our OraQuick Advance HIV tests and international sales of our over-the-counter cryosurgical wart removal product.

Continuing economic challenges have had a greater-than-expected impact on some of our OraQuick customers. Funding cuts at both the state and local levels resulted in lower sales during the quarter, primarily in the public health segment, which depends heavily on public funding. Reduced funding also impacted our OraQuick sales to hospitals but to a lesser degree.

Funding challenges are not new and we built our 2010 plan and first quarter forecast anticipating their impact. However, it is becoming more apparent that the extent and timing of the reductions and their impact on our business can be very difficult to predict with precision. For example, during the first quarter, several large customers unexpectedly reduced their purchases from committed levels previously communicated to us.

In fact, one state’s reduction did not occur until after an early March meeting of the state legislature which focused on reducing expenditures by the Department of Health. Several other jurisdictions were unable to expand their HIV testing programs in the first quarter as they had previously planned. Funding issues were more pronounced where customers had accumulated higher levels of product inventory. As you may recall, we reported strong results in the third and fourth quarters of 2009, in part because several public health customers made large purchases of OraQuick tests during those periods. This is not unusual as customers often try to spend unused funds prior to September 30th or December 31st ends of their respective fiscal years.

However because of continued funding cuts associated with testing initiatives, some of these customers were unable to deploy their purchased inventory that what would have been normal or expected rates, and this in turn adversely affected their first quarter purchases. Reduced funding has also placed increased pressure on pricing for our OraQuick HIV tests, and while we continue to maintain a premium on price compared to our competitors and our 2010 forecast did reflect a lower average selling price, the price degradation during the first quarter was somewhat greater than expected.

Now, despite the state and local funding challenges, our OraQuick HIV test continues to be the key tool in the fight against HIV AIDS. HIV testing is strongly supported at the federal level as evidenced by the CDC’s funding decisions during the past few years and we certainly expect this to continue. In fact on April 1st, the CDC announced the $31.5 million expansion of its program to fund HIV testing and healthcare settings. As a result, total funding of $142.5 million is planned for the three-year period beginning later this year October 2010.

We believe this will mitigate some of the funding issues currently being experienced by our public health and hospital customers. With respect to our cryosurgical business, we experienced lower-than-expected sales of our over-the-counter wart removal product in Latin America during the first quarter. As explained on prior calls, our distributor, Genomma launched our product in Brazil beginning late last year. The launch has gone well and the product has been well received by retailers and consumers, however late in the first quarter, Genomma decided to cancel two purchase orders, which we had included in our first quarter forecast. These orders totaled more than $500,000 and were cancelled in order to give Genomma more time to gauge the level of consumer purchases so as to avoid an inventory buildup at retail outlets.

Looking forward, we believe the economic climate and funding challenges will continue to impact our business for the rest of 2010, particularly here in the United States. And while the exact impact is difficult to predict at this time, we believe that revenues for the year may well be at or near the levels recorded in 2009. And Ron will provide more detail on our specific expectations for the second quarter later in the call.

Regarding some key accomplishments for the quarter, we recently completed a facility and quality systems audit performed by the FDA in connection with the pre-market approval application for the OraQuick HCV tests. This audit occurred during March and it went well. We submitted our formal response, which we believe satisfies all of the FDA’s observations and clears the path for approval of our OraQuick HCV tests for use with whole blood. The completion of the audit was the result of excellent work by a cross-functional group of employees from our regulatory quality operations and R&D groups and their efforts are certainly very much appreciated.

And one final comment before Ron provides his update relates to an organizational matter. Manuel Mendez who joined OraSure last year and has led our Sales and Marketing group will be leaving the company to pursue another opportunity. We appreciate Manuel’s contributions and we wish him well and his new endeavors. A search for his successor is underway and in the interim, I will directly manage the sales and marketing function as I have done from time to time in the past.

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

Ron Spair

Okay. Thanks, Doug, and good afternoon everyone. Our first quarter 2010 revenues were $17.9 million, representing a 4% increase from the $17.3 million reported in 2009. Increased licensing and product development revenues and increased sales of our cryosurgical systems products were partially offset by a decline in infectious disease testing and insurance risk assessment revenues.

Our first quarter of 2010 licensing and product development revenues include a $1 million milestone payment received from Merck as a result of our achievement of certain regulatory objectives pursuant to our collaboration agreement for the development and promotion of our OraQuick rapid HCV tests.

Infectious disease testing revenues were $9.5 million in the first quarter of 2010 compared to $10.5 million in the first quarter of 2009. As we discussed during the previous call, we have absorbed an increasing number of our public health customers, our supplying hospitals with OraQuick HIV tests purchased from us. This overlap makes it difficult to separately track OraQuick sales to these markets. Since this trend is likely to continue, we began reporting public health and hospital sales as a combined domestic market beginning with the first quarter.

The overall 9% decline in our infectious disease revenues in the first quarter of 2010 was a result of decreased OraQuick HIV sales in both the domestic and international markets. Domestic OraQuick sales were down 6% primarily due to lower average selling prices and lower volumes. International OraQuick revenues declined 27%, largely as a result of some customer losses caused by increased price competition as well as the non-recurrence of customer orders from the prior-year period.

Moving to substance abuse testing, revenues remained flat at $2.7 million in the first quarter of 2010 compared to the first quarter of 2009 as lower sales of our Intercept drug testing system were offset by increased sales of the QED rapid Saliva Alcohol Test. First quarter 2010 cryo revenues increased 40% compared to the first quarter of 2009. International over-the-counter sales increased $952,000 when compared to sales in the same period of 2009, largely as a result of $1.1 million of sales to our Latin American OTC distributor, Genomma, in support of the launch of our products in Brazil. This was partially offset by lower European OTC sales to our distributor, SSL, during the first quarter.

On the professional side, a 28% increase in sales of Histofreezer in the United States was offset by a 57% decrease of Histofreezer sales in the international market. Domestic sales were up largely due to increased purchases by our distributors in anticipation of price increases implemented in January and April of 2010. The decline in international sales is largely due to a discontinuance of sales to certain foreign distributors that had been diverting products to the US market.

We believe our efforts to stop diversion by certain foreign distributors along with the addition of two manufacturers’ sales representative organizations or MROs are having a positive impact on our domestic Histofreezer business. On the over-the-counter front, we expect additional orders from Genomma for Brazil despite the first quarter cancellations and we expect that sales this year to SSL for Europe will be higher than last. Our insurance risk assessment sales decreased from $1.6 million in 2009 to $1.4 million in 2010 due to variations in laboratory ordering patterns and a decrease in the issuance of new insurance policies.

Turning to gross margin, we are pleased that our overall margin for Q1 of 2010 remained at 64%, essentially unchanged from the first quarter of 2009. Gross margin in the current quarter benefitted from the increase in licensing and product development revenues as well as a decrease in royalty and licensing expenses. However, these benefits were offset by an increase in unabsorbed overhead costs due to lower product production in light of existing inventory levels as well as the lower selling price realized by our OraQuick product.

Our total operating expenses for the first quarter increased $747,000 or 6% compared to 2009. Lower R&D costs were offset by higher sales and marketing and G&A spending. R&D expenses for Q1 declined 7% or approximately $246,000 from the first quarter of 2009, primarily due to a decrease in clinical trial spending associated with our OraQuick HCV and OraQuick HIV OTC programs as well as a decrease in validation and vendor qualification costs for those same programs.

Our sales and marketing expenses increased 13% or approximately $672,000 as a result of additional market research activities, increased recruiting and consulting costs and commissions paid to the two new manufacturers’ sales representative organizations that we retained during the first quarter to support sales of our Histofreezer product in the US physician office market. G&A expenses also increased approximately 7% or by $322,000 primarily due to increased consulting costs partially offset by a decrease in legal expenses.

From a bottom line perspective, we reported a net loss of $2.2 million or $0.05 per share, which exceeded our guidance. This compares to a net loss of $1.6 million or $0.04 a share for the same period of 2009.

Turning briefly to our balance sheet and cash flow, our cash balance remained strong, with cash and short-term investments of $73.4 million at the end of the first quarter. Our working capital of $86.6 million at March 31st, 2010 is down somewhat compared to the working capital balance at December 31, 2009 of $89.4 million. Our current ratio improved from 6.81 at December 31, 2009 to 8.48 at March 31, 2010.

During the first quarter of 2010, we used $5 million in cash flow from ops compared to $2.7 million used during the first quarter of 2009. The increase is largely the result of our increased net loss coupled with payments of our 2009 accruals and accounts payable as well as increases in inventories and other assets. These uses of cash were partially offset by a decrease in accounts receivable of $1.6 million as a result of timely collection of amounts due and a decrease in product revenues experienced in the first quarter of 2010 compared to the fourth quarter of 2009. Our days sales outstanding were at 61 days at March 31, 2010 compared to 59 days at March 31, 2009.

Turning to our guidance for the second quarter of 2010, we are projecting revenues of approximately $17 million to $17.5 million and a loss per share of approximately $0.07 to $0.08. And with that, I will turn things back over to Doug.

Doug Michels

Thanks, Ron. We have continued to progress all of our major clinical programs. With the FDA audit behind us, we believe there is very little left to do before we receive a first US approval of our OraQuick HCV test for a whole blood claim. We are in discussions with the FDA on our labeling and we expect this approval shortly. With respect to the other applications as you know, the FDA has required an additional study to support claims for finger stick whole blood and oral fluid.

This study is now complete and within the next 30 days, we expect to submit our final data to the FDA. With respect to a clear waiver, our protocols for the required studies were submitted to the FDA in the form of a pre-investigational device exemption or IDE submission. We are waiting for feedback from the agency and once we receive this, we will finalize the protocols as quickly as possible.

As stated previously, our plan is to submit the clinical data from our clear studies and request a clear waiver as soon as possible after we receive approval of our finger stick whole blood and oral fluid claims. Finally, you will recall that we received CE Mark approval for the OraQuick HCV test in 2009, which allows us to sell the product in Europe. In April, we formally launched the OraQuick test at a meeting of the European Association for the Study of the Liver or EASL meeting. The launch went well and we are now focused on building awareness and acceptance for this product in a number of European countries.

Since the last call, we have prepared and filed with the FDA an amendment to our IDE which contains a proposed protocol for the final phase of clinical studies related to our rapid HIV over-the-counter tests. The FDA has reviewed the protocol and we are incorporating their feedback. We have also made some further revisions to our product labeling, which we believe will further improve the performance of the product in the user’s hands. And we are in the process of testing these changes in several small validation studies.

This will then be followed by a larger study demonstrating the efficacy of our final product labeling and after completion of these studies; we intend to submit the labeling validation data along with a revised clinical study protocol for final approval by the FDA. Once this approval is received, we will initiate subject enrollment for the final phase of clinical testing. And we remain on schedule for this product with clinical testing still expected to extend into 2011, and we also continue to believe that an additional blood product advisory committee will be needed before final approval would be issued by the FDA.

In the substance abuse testing area, we continue to prepare for the commercialization of fully automated homogenous drugs of abused assays, which are being developed with Roche Diagnostics. Submissions for FDA 510-K clearance were filed at the end of 2009 for opiates, PCP, amphetamines and methamphetamines assays and the submission for cocaine was filed recently in late April.

Once 510-K clearance is received for each of these assays, which is expected later this year, OraSure and Roche will launch a partial NIDA-5 panel into the workplace testing and other markets. The assay for THC is expected to be filed later this year. And we have also started development on yet a second group of assays, which will continue into 2011 and overall, I want to emphasize that we are very pleased with our collaboration with Roche on these important products.

As discussed on the last call, we believe our Intercept business is stabilizing despite the ongoing adverse employment conditions. To supplement this part of the business, we intend to launch some new drug testing products later this month. These include a group of microplate assays for the detection of various prescription medications which will expand our offerings in the forensic toxicology, criminal justice and pain management markets. We will also start offering a rapid urine drug screening test into the criminal justice drug treatment and workplace testing markets, which will allow us to more effectively compete for customers that urine as their sole or primary drug testing metrics.

And finally, before we take your questions, I want to update you on the shelf life for the current OraQuick HIV tests. Our ongoing real-time stabilities have now reached the 20-month mark, and so a submission requesting a dating extension to 18 months is being finalized and we expect that we will be filing that within the next few weeks.

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

Question-and-Answer Session

Operator

(Operator instructions) Our first question comes from Sameer Harish of Needham & Company.

Sameer Harish – Needham & Company

Hi guys, thanks for taking the question.

Doug Michels

Hi, Sameer.

Ron Spair

Hi, Sameer.

Sameer Harish – Needham & Company

Hi. Can you tell me a little bit more about the impact that pricing and volumes had on OraQuick in the quarter?

Doug Michels

Sure. If you are looking quarter-over-quarter, Sameer, I would say that you are probably looking at an impact of, in the range of about, say about $0.25 million [ph] or so for ASP in OraQuick for the first quarter of 2010 versus 2009, with the rest made up of volume.

Sameer Harish – Needham & Company

And was that across both the hospital and the public health markets?

Doug Michels

I would say, yes, that would be the case generally, yes, both in public health and in hospital.

Sameer Harish – Needham & Company

Got it. And in terms of HCV, can you give us an update as to the marketing preparations that are going on with your partner out there as you prepare to heavily market that product?

Doug Michels

Yes, absolutely. I mentioned that we had a big event at the EASL meeting. We had key opinion leaders from across Europe participating in a full-day session with us. That obviously also included our partners at Merck and other pharmaceutical representatives. We spent a day with these key opinion leaders from multiple countries identifying key segments and stakeholders in each country and listing their advocacy support and actually developing some country-specific action plans. We had a great presence at the EASL meeting itself and literally generated hundreds of leads which right now we are qualifying and developing follow-up plans with our distribution partners. You know, remember as I indicated during our last call, we are developing a market here and so there is a lot of effort being put into that. We will be having another meeting with Merck later this month as we prepare for them to begin detailing the product sometime, I would expect in July in those territories where we have approval. And so the dialog, collaboration and joint effort continues.

Sameer Harish – Needham & Company

Okay. And switching back to OraQuick, can you talk a little bit about the VA market; I know it’s pretty early with that group. Can you talk about any wins or successes that you have there or has that also kind of been slower than you are tracking?

Doug Michels

Yes, I don’t want to talk specifically about where the wins occurred, but suffice it to say that our business is up fairly substantially in the VA year-on-year. We continue to focus at both the VISM [ph] and the hospital level. We have the opportunity to sign agreements at the integrated health system level at the VISM that would be with the hospitals and the community-based outpatient clinics and the other point-of-care within the VA. Obviously, it has been easier to secure institution contracts versus the whole VISM-wide system agreement, because it requires a little bit more collaboration, but we are having success. We wish it was going faster and moving quicker, but we are having success and that business is growing.

Sameer Harish – Needham & Company

Okay. And lastly in terms of public health ordering, have you had any indication that because of the combined volume effects and pricing effects, maybe some of the health centers are moving back cheaper drug products or you know, it’s just a matter of delay that you expect to continue to keep your relationship?

Doug Michels

The challenge that we had in Q1 specifically related to a handful of some of our largest jurisdictions where we were expecting some large orders, actually the jurisdictions told us that, that should be our expectation. It was their forecast to us. And when you are talking about some of these largest jurisdictions that will order 10,000 or more units at a time at our pricing, that’s hundreds of thousands of dollars potentially in an order, so it doesn’t take too many of those if they delay or defer their orders to have an impact on near-term revenues. I want to emphasize that the reduced purchases in the first quarter were not about losing accounts or about losing business to competition, it was really about local either program delays or deferring their purchases and still they were able to deploy the test that were already in their inventory.

Some of their challenge in deploying that test as a result of staff cutbacks and staff reductions. And just recently, the National Association of State and Territorial AIDS Directors released information that they had gathered from their different jurisdictions members of NASTAD and they indicated from the survey what we are realizing in the marketplace that of the nearly 50 jurisdictions that they surveyed, almost half of them indicated that they have had some budget cuts, 55% of the jurisdiction said that they had cuts to their HIV prevention programs and the implications of those cuts are that fewer community-based organizations are going to be funded by the jurisdictions. And while state and local funding isn’t the majority of the funding that these jurisdictions receive, actually it represents only estimated about a third of their funding, two-thirds come from the feds and as we said in the script that federal funding is still very strong and is expected to actually increase and hopefully that will make up for some of these challenges at the state and local level. But all of that just says that we expect to continue to have a fight at the local level with the state and local budget, city budget challenges and we are going to do the best we can to help them work through that.

Sameer Harish – Needham & Company

And just as a follow-up, have you gotten any indication from these handful of centers that they expect orders to maybe pickup in the back half of the year, or is it kind of more of an annual budgetary thing that they are not seeing the orders coming in?

Doug Michels

They are all on different budget cycles. So, that makes it somewhat of a challenge too. Some go on July 1st to June 30th, some go on with the typical federal government schedule, some go on with the fiscal year, calendar year/fiscal year. And so it varies by jurisdiction and I will just highlight how challenging this is. We have one jurisdiction that’s a state that’s pretty public; they said they were reducing their HIV prevention dollars by 80%. And so of course, we knew about that going into 2010 and we correspondingly reduced our expectations for their purchases in 2010. That was a surprise in the opposite direction now where they place some pretty big orders on us in the first quarter, and we expect some large orders from them for the remainder of the year. So, it somewhat goes both ways. All we can do is communicate, literally we are communicating with our largest jurisdictions as you might imagine on a weekly basis, and monitoring their inventory and their purchases and trying to assist them with their programs, so that they can deploy the testing and that we can rely on consistent purchases.

Sameer Harish – Needham & Company

Thank you.

Operator

Thank you. Our next question comes from Caroline Corner of William Smith & Company.

Caroline Corner – William Smith & Company

Hi guys. Thank you for taking my call. Can you hear me?

Doug Michels

Hi Caroline, yes.

Ron Spair

Sure, we can. Hi, Caroline.

Caroline Corner – William Smith & Company

Hi. So, I was wondering with regard to the public health funding issues you have been facing, as you move forward and move towards getting hepatitis C approval, that product is also going to be entering a similar market where it’s going to be somewhat dependent as I see it on public funding. Can you talk about or a little bit about your expectations for the hep C product, when it hits the US market and are those somewhat lessened by the recent developments on the public funding side?

Doug Michels

Generally speaking, the hepatitis prevention and funding is generally separate from HIV prevention, although obviously we are going to be relying on public funding in the public health sector to support that. You may recall that we have talked about our efforts to build support for legislation that would provide more funding for HCV prevention – I should say HCV – hepatitis prevention, and there is a bill currently circulating within Congress calling for $90 million in incremental funding for next year. It’s a bill jointly sponsored by Congressman Honda and Dent. It’s my understanding they got a large number of signatures on in support of that bill at this time, and once they have an adequate number of signatures, our expectation is that will be presented and a vote taken to hopefully approve that incremental funding. And we also know that there is other budgets in different agencies that could be tapped to support increased HIV or HCV prevention and testing, including SAMSA, even HRSA, and the NIH. And so, we are working on that real hard, we are communicating broadly across the different sectors, and I can tell you from the discussions we have had so far, support for what we are doing and support for the availability of a rapid hepatitis C test is extremely high.

Caroline Corner – William Smith & Company

Okay. That’s helpful, thanks. On the research and development line, your $3.1 million recorded this quarter came in below where I expected it. Is that a good base number going forward and so you get in with respect of HIV OTC trials or are you expecting an uptick towards the end of the year? Can you elaborate a little bit on your expectations for R&D going forward?

Doug Michels

Sure, Caroline. My expectations are that the R&D line will begin escalating in the second quarter of the year as we engage further in prep for the HIV OTC trials and then begin executing them towards the serious accrual in the second half of the year. We are also involved in the clear waiver studies for hepatitis C. And so, there is a significant spend coming in the last three quarters of 2010 here related to R&D. So, this should be the low watermark for R&D spend for the year.

Caroline Corner – William Smith & Company

Okay. Thanks. And then last question, your revenue guidance of $17 million to $17.5 million, given that there was a $1 million payment, Merck payment in this current quarter, in the first quarter, it looks like your revenue estimate is an uptick quarter-over-quarter, first quarter to second quarter. Is that a reflection of your expectations of a recovery in the infectious disease segment or is it in some other revenue segments?

Doug Michels

No, it is in the infectious disease segment, Caroline, and that’s an astute observation. The $1 million will not be a recurring revenue item in the second quarter although there is an expectation that we will receive another milestone payment under the Merck collaboration agreement in the second half of 2010. And that will be related to – yes go ahead.

Caroline Corner – William Smith & Company

That’s all my questions. Thank you.

Doug Michels

Okay.

Operator

Thank you. (Operator instructions) Our next question comes from Jeff Frelick of ThinkEquity.

Jeff Frelick – ThinkEquity

Yes. Hi Doug, we saw with respect to the funding again, can you give us a little more color just how the timing works with the state and local funding? You did mention that it kind of varies by jurisdiction, but do they kind of forecast by quarter or do they give you some visibility for the year, and is it staggered from jurisdiction-to-jurisdiction?

Doug Michels

Yes. So, first of all, it is staggered jurisdiction-by-jurisdiction. It relies on how the different cities or states, what their budget cycles are. We generally have multi-year agreements with these jurisdictions and the agreement is built on some kind of an expectation for annual purchase. And from that committed volume, then we work out our pricing arrangements. As it breaks down to a quarterly or monthly forecast for product purchases, these are worked out at the local level and they are pretty real-time. They give us their best estimate generally speaking over 60 to 90 days. We monitor that here really on a monthly basis, in some cases in every two-week basis, and it’s with that kind of intelligence that we create our quarterly forecast. Obviously as the timeline moves out beyond the quarter, the numbers get a little softer because the deployment of the tests that these jurisdictions buy from us is dependent oftentimes on the community-based organizations that they are relying on to actually perform the testing. So, I will give you an example.

The New York City Department of Health, they might have as many as 400 community-based organizations that they supply product to that they buy product from us. They will also provide those community-based organizations with grant money to support the deployment of those tests in the form of councilors and testers and educators. And so, as the money gets reduced, let’s say from the city of New York to the Public Health department, they got to make decisions on where they are going to make corresponding reductions and grants to their CBOs and that’s kind of a model that happens around the country less or more. And in some cases, they rely on state funds, in some cases it’s city or in some cases it’s county funding for those different programs. And when these cities or states are in crisis and they need to make some quick or near-term decisions, some of these things can be mediocre real short-term decisions.

Jeff Frelick – ThinkEquity

What kind of inventory levels do you think the public health clinics are running at?

Doug Michels

They are generally pretty low. I would say generally within the 30-day range. It depends on the jurisdiction and sometimes when they are approaching end of their fiscal year and they might have extra moneys if they can deploy them, they will. Obviously with longer-dated product, it’s a benefit to them if they can use up some of that money and get the product into their inventory. It’s variable.

Jeff Frelick – ThinkEquity

Okay. And then switching gears to HCV in Europe, so you had the product approved in CE Mark approval like December and European launch at EASL, I know Merck (inaudible) is coming up this summer. With respect to timing, when do you expect to start receiving some HCV sales or orders in Europe?

Doug Michels

We receive some in the first quarter. They were minimal. We would expect obviously to see a ramp through the remainder of 2010.

Jeff Frelick – ThinkEquity

Okay. Great, I will jump back in queue.

Operator

Thank you. Our next question comes from Caroline Corner of William Smith & Company.

Caroline Corner – William Smith & Company

Had a launch with Roche, can you give us a little bit more detail on your expectations there regarding the Intercept product, who will be selling it, and is expected to be a launch of, as I intended, a launch of the product minus the THC capabilities, is that right?

Doug Michels

Yes, Caroline, you cut out at the beginning of your question. So, could you repeat it from the beginning please?

Caroline Corner – William Smith & Company

Yes, I would Doug. The question is regarding the Intercept product, the automated panel work that have been developed with Roche, you said that later this year you are expecting to do a partial panel launch with Roche, could you give us a little bit more detail around that, if it’s going to be a launch into all of your customers with the partial panel or just select customers?

Doug Michels

No. So, we are going to launch the product after we have five of the six initial assays approved. The THC assay will not be approved this year. As I mentioned, we expect to just file that later this year sometime I would expect in the fourth quarter. But once we receive 510-K clearance for the other assays, we intend to launch the product across all the different market segments, and Roche will be launching the assays into their customer base, we will be launching into ours. And obviously it’s all going to be dependent on when we receive 510-K clearance, get the product labeled into inventory and ready to go.

Caroline Corner – William Smith & Company

Then all of Roche’s salespeople in that sector will be selling the products, all of the diagnostics people?

Ron Spair

I think it will be those that are calling on the lapse line that are performing drugs of abuse testing and using urine-based testing as a metrics and offering the oral fluid as an alternative.

Caroline Corner – William Smith & Company

Okay. Thanks, that’s helpful. Last question, with regard to your pipeline, do you have anything that you can speak about on the R&D side beyond HIV OTC, any new additions to the platform that you are developing?

Doug Michels

I don’t want to speak about specific, analyze it at this time, but we are working on some feasibility work on the OraQuick platform with several different analytes [ph], and we are also working on some new formats and enhancements to our HIV product offering and sometime in probably not-too-distant future, we will be talking about the specifics of those programs.

Caroline Corner – William Smith & Company

Great. Look forward to it, thank you.

Operator

Thank you. The allotted time for the call is up. We apologize for those who are still holding to ask a question. I will now turn the call over to Doug Michels for closing remarks.

Doug Michels

Okay. I just want to thank everybody for being on the call with us this afternoon. I hope you all a great night and look forward to talking with you all again real soon. Take care. Bye-bye.

Operator

This does conclude the program. Thank you for your participation and have a wonderful day. You may disconnect your lines at this time.

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Source: OraSure Technologies, Inc. Q1 2010 Earnings Call Transcript

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