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OraSure Technologies, Inc. (NASDAQ:OSUR)

USFDA approval of OraQuick In-Home HIV Test Conference Call

July 5, 2012 8:00 am ET

Executives

Judy Clarke – Investor Relations

Douglas A. Michels – President and Chief Executive Officer

Ronald H. Spair – Chief Operating Officer and Chief Financial Officer

Analysts

Scott Gleason – Stephens, Inc.

Mark Massaro – Canaccord Genuity Inc.

Spencer Nam – ThinkEquity LLC

Scott Gleason – Stephens Inc.

Charles Duncan – JMP Securities LLC

Charley Jones – Barrington Research Associates, Inc.

Operator

Good day everyone and welcome to today’s conference call and simultaneous webcast. As a reminder today’s conference is being recorded, all lines have been placed on mute to prevent any background noise. After the speakers remarks there will be a question-and-answer period. (Operator Instructions) For opening remarks and introduction, I will now turn this call over to Judy Clarke at OraSure Technologies. Please go ahead.

Judy Clarke

Thank you. Good morning everyone, and thank you for joining us today. I would like to begin by telling you that OraSure Technologies issued a press release on July 3 announcing receive of FDA approval of the company’s OraQuick In-Home HIV Test. The press release is available to you on our website at www.orasure.com or by calling 610-882-1820. If you go to our website, the press release can be found by opening the investor relations page and clicking on the link for news releases. This day, this call is also available real-time on our website and will be achieved there for 7 days. Alternatively you can listen to an archive of this call until midnight July 12 by calling 855-859-2056 for domestic or 404-537-3406 for international. The access code is 98134091.

With us today are Doug Michels, President and Chief Executive Officer and Ron Spair, Chief Operating Officer and Chief Financial Officer. Doug will begin with an opening statement 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 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 it’s registration statements, it’s annual report on Form 10-K for the year-ended December 31, 2011, it’s quarterly reports on Form 10-Q and it’s other SEC filings.

Although forward-looking statements have 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.

Douglas A. Michels

Well, thank you, Judy, and good afternoon everyone. I hope you all had a nice July 4 holiday and I want to thank you for joining us on this morning’s call. The purpose of today’s call is to provide additional information regarding the FDA’s recent approval of our OraQuick In-Home HIV test, which we announced earlier.

OraSure is now permitted to sell the first and only over-the-counter rapid test that can detect the antibodies to both HIV 1 and HIV 2 with an oral swab. This is a significant achievement for our company and is the result of great work by many of our employees. We are very excited about this opportunity and we believe that this product represents an important and critical tool in the fight against HIV and AIDS.

As you know, about a month and a half ago, we submitted our clinical data for this product to the blood products advisory committee or BPAC, which is an advisory committee to the FDA. Based on its review of our submission and input from the FDA and CDC, the BPAC voted unanimously 17-0 in support of the OraQuick In-Home HIV test. We appreciate the thorough and carefully review by BPAC and the broad support that was shown for our product particularly by the numerous members of the HIV/AIDS community who participated in the public comment portion of the BPAC meeting.

As you might expect since the BPAC meeting, we’ve been engaged in extensive discussions with the FDA regarding our product. Much of those discussions revolved around finalizing the product labeling and packaging. The FDA also completed a pre-approval inspection of our Bethlehem manufacturing facilities and is finishing up the bioresearch monitoring or BIMO audits it had been conducting on the 20 clinical sites we used to generate our clinical data. Based on its consideration of the BPAC recommendation, the results of its inspections and audits and it's on thorough review of our clinical data, the FDA issued the approval this past Tuesday, July 3.

As I've indicated on prior earnings calls, this project with a monumental effort by virtually all functional areas with in our company. The receipt of FDA approval of our OraQuick In-Home HIV test as the first and only rapid HIV over-the-counter test is clearly the most significant achievement in our company's history.

I would like to take this opportunity to thank all of our employees and the members of our senior management team and in particular, the regulatory, R&D, and operations departments for their hard work, dedication and perseverance in making the approval of this product to reality.

For sometime now, we've been planning for this approval and the subsequent steps we must take to commercialize this exciting new product. As an initial matter, we must may able to produce sufficient quantities of product to meet demand. They say, you can’t sell from an empty wagon. And since we did not begin production of a significant part of our product packaging until approval of final labeling by FDA, we followed a two-pronged approach to production planning.

First, we've already been producing, if you will at risk those portions of our packaging, which we believe would not be affected by the FDA's label review process. Secondly, we've developed a plan to complete the remaining packaging and produce test devices to enable a commercial launch as quickly as possible, now that the approval has been received.

At this point, all product components for the launch have been purchased and are scheduled for our manufacturing process. We expect to begin shipping completed product to all major retailers by mid-September with a goal of having product on retail shelves by the beginning of October this year.

Let me speak more to the specifics. As you know, we’ve been developing a distribution and sales strategy, which is designed to ensure that product will be available in the right stores and in the right markets to maximize this opportunity. We expect to have product in more than 30,000 retail outlets at launch. These retail outlets represent approximately 85% of all commodity volume for this initial placement. The term all commodity volume or ACV represents the dollar value share we expect to achieve in the stores projected to constitute the market for our product.

In short, we anticipate having broad distribution of our OraQuick In-Home HIV test in the highest value retail outlets representing our primary market for this test. The product will also be available for purchase online through retailers’ websites and our own website www.oraquick.com.

In order to meet these distribution goals, we’ve established vendor relationships with key retailers such as Walmart, Walgreens, CVS, Rite Aid, and Kroger. We will also be distributing product through several large drug wholesalers and additional food retailers and regional pharmacies. We’ve developed plans for pharmacist education, trade ads, shelf signage and the use of pharmacy counter displays.

Our company website will also provide links to the various retailers in order to further drive retail sales. We expect most retailers to place the product in the family planning and sexual health sections of their stores with a small number of retailers considering placement with other diagnostic products.

In addition to driving awareness and recognition at the retail outlet level we intend to launch a robust targeted consumer education and advertising program. Although designed to reach all consumers, this program will have a particular focus on certain at risk populations, who we believe based on our market research are most likely to buy our product. These include African-Americans, men who have sex with men, Hispanics and adults 18 and over, who engage in high risk sexual activities. Two primary ad campaigns had been developed in our currently and quantitative testing with consumers. Our messaging will be reviewed with the FDA and will be delivered to a variety of media, including TV, print, digital and social.

As I previously mentioned, we also plan to sell the OraQuick at-home HIV Test through a company managed website. We currently have a pre-launch website in place, which is a temporary site intended to serve consumers until a more complete website has been finalized and approved by the FDA. This temporary site is basic and will contain core product information, information as to when product will be available in retail outlets or over the website, call center information and the timing for activation of our four websites.

The final comprehensive website is expected to contain more complete product information including a video demonstrating how to operate the test, a link to the CDC’s medical provider and counseling referral data base, general HIV and AIDS education materials and resources, links to various relevant PR and community events, and of course access to an e-commerce site through, which consumers can purchase the product. We’ve already submitted initial information about this website to the FDA and we would expect it to go live in October when product is expected to be on retailers’ shelves.

Another piece of our communications program will focus on pharmacist, doctors and other healthcare professionals. During the course of our research, we learned that healthcare professionals are generally not as focused on the need for HIV testing as you may expect, given the CDC’s existing recommendations for broad based HIV screening. Consequently, we will be rolling out an initiative to help change this through increased awareness and focus on HIV testing by professionals. Under this initiative, we will inform the professional market about the launch of our at-home tests, provide additional information about HIV and AIDS and encourage healthcare professionals to promote increased HIV testing among their patients.

In conjunction with our advertising, we will implement media outreach and support of our product. The purpose of this PR program also will be to help drive awareness and brand recognition through the media in support of our advertising initiatives. As you may have noticed our OraQuick In-Home HIV Test has generated quite a bit of news coverage lately. For example, the results of the Advisory Committee meeting resulted in more than 121 million media impressions. We hope to continue to drive a high level of coverage and interest through both national and regional media outreach programs. And in addition, we’re planning a number of launch events during the next few months, which we expect to be covered by many traditional as well as social media outlets.

And finally, we’ll support individuals who purchase and use our tests through a live toll free customer support center to be operated on a 24x7 365 day per year basis. Through the center customers, consumers will have access to highly trained, bilingual representatives to obtain answers to questions about HIV AIDS taking the test and interpreting the test results.

In addition, our support center representatives will be able to refer consumers to appropriate resources for follow-up confirmatory testing, counseling, and medical treatment. The support center will also be equipped to properly capture and report any consumer or product complaints and accept and process online product purchase orders from consumers. As you can see, a lot has gone into the development of our support center and our intent is to provide exceptional service to all of our retail customers who need it.

One final topic I’d like to briefly address is the financial impact of this product. Our revenue recognition practices will initially be different than those customarily used in the consumer packaged goods industry. Seasoned companies that operate in this space have experience with returned goods rates and are generally able to predict with a high level of precision the final amount of revenue generated by a product that is sold into the retail distribution channel.

Because we’re a new participant in this space and have a new product for which we do not have a track record of returns, we will only recognize revenue upon the confirmation of the sale to the retail customer either in a store or over the internet. We are working with our retail distribution partners to gain access to this out sales data, which would provide our team and investors transparency into the effectiveness of our launch and the actual uptake of our product in the hands of the consumer.

We have also been receiving a number of questions surrounding our anticipated launch cost. Currently, our plans are to leverage our public relations and digital media efforts to build broad awareness across all of our targeted customer base. This will run from today forward through the launch and continuing thereafter. As you may know, this is a lower cost strategy than a full advertising campaign. We will look to test market, our advertising content during the latter part of the year before investing in a targeted direct-to-consumer advertising campaign.

From a spending perspective and for the balance of the year, we anticipate spending at or above our projected quarterly rate of approximately 1.7 million that we announced for the second quarter. When we have completed the test marketing of our focused advertising campaigns, we will have a better understanding of the spend levels required to expand awareness and purchase demand among the consumer groups.

So in summary, we are extremely pleased as you can imagine to have obtained FDA approval of our OraQuick In-Home HIV Test. Our focus now is on executing our plans to bring this product to market. There are still much to be done, but I believe we have a great plan and the right team in place. And over the next several months, we will be producing product and building inventory, raising awareness and driving brand recognition through coordinated sales, marketing and PR initiatives and closely monitoring consumer reaction in the operations of our call center to ensure that these activities are completed in a successful and compliant manner. This is an extremely exciting time for OraSure Technologies and we look forward to updating you on the launch of this new product offering during future calls.

So thank you again for joining us. And with that, I’ll now open the floor to your questions. Operator?

Question-and-Answer Session

Operator

(Operator Instructions) Our first question comes from Scott Gleason of Stephens. Please go ahead.

Scott Gleason – Stephens, Inc.

Ron, thanks for taking my question. I guess just to start off, you guys, [there are going to be] 30,000 retail outlets probably at launch, that’s a large number of stores. Do you guys have any kind of sense for what type of inventory level a store or retail site will have, I’m sure it varies, but just on an average basis how many tests might be kind of in the initial stocking order on a per store basis?

Douglas A. Michels

Obviously the number of pieces per store is going to vary, based on where the store is located and foot traffic that they anticipate. On an average that will be somewhere between four and six pieces per store and obviously half of that will be on-shelf and half will be in-store inventory and then obviously we’re going to have more product in both our warehouse as well as the distributor’s warehouse or the retailer’s warehouse and we will have plenty of backup supply. Our primary objective is to make sure without question that we will be able to handle any demand in excess over our projections. We have built increased supply of our professional product right now, so that if at launch we need to switch over, all of our production to the over-the-counter product, we can do that, we can do that for the months. So we feel like, we’ve got a real solid production plan and we’re ready to execute.

Scott Gleason – Stephens, Inc.

Doug, when we look at that number of tests on a per store basis, may be four to six tests, and mainly most of these retailers are doing this kind of a just in time inventory management were they receive daily shipments, so some able to come in and buy four or six tests, but basically that would be reset the next day, is that the right way to think about it?

Douglas A. Michels

Yeah, the retailers do manage our inventory very efficiently and there is a few levels of inventory, so you will have inventory at the store, you will have inventory at the retailers – generally they have regional distribution centers and then most regional distribution centers get supply through our central warehouse, so there is inventory throughout the channel.

Scott Gleason – Stephens, Inc.

All right, and then just last question Doug, and the CDC has put out some press releases here recently about a program that they have in a slight number of retail pharmacy sites where they’re actually doing free testing, I believe using your tests. When you look at that program, can you talk about that and how that might eventually kind of compliment what you guys are doing in the retail pharmacy side or and I think they’ve been seeing volumes about five to 10 test per day?

Douglas A. Michels

Right. So this was an announcement by the [CVC] of a pilot program that is to run for two years, it’s being conducted in 24 stores. And I believe that 22 out of those 24 stores are actually using the OraQuick product. So this is really a test to see if pharmacists can administer the product. We will have data from this for several years in terms of if this as a viable strategy. We think this is very complementary to our efforts. One of our key objectives as I mentioned in the prepared remarks this morning, was to execute our pharmacists education to the extent that pharmacists are aware of our product and its capabilities, they can direct consumers to use the product at home. We think this is a – yeah, just another opportunity to get people test and that’s our primary objective.

Scott Gleason – Stephens, Inc.

Doug, I guess just along the lines, sorry one more question. When we look at retail pharmacy sites, lot of them are looking for additional content, would you envision that those sites may be performing an OTC HIV test as a service offering not just as an over-the-counter product offering as well?

Douglas A. Michels

We haven't had any discussions along those lines. I don't anticipate that’s going to be the primary driver here, and certainly all of our promotional activities are going to be directed to encourage consumers to buy the product either at retailer or online, take it home. That's all our messaging that, now you have a self-test, you can take in the comfort and privacy of your home, 100% confidential that you can be very confident in the results.

Scott Gleason – Stephens, Inc.

Great, thanks for taking my questions guys.

Douglas A. Michels

Yeah. thanks, Scott.

Operator

Our next question comes from Jeffrey Frelick of Canaccord Genuity. Please go ahead.

Mark Massaro – Canaccord Genuity Inc.

Good morning. This is Mark Massaro in for Jeff.

Douglas A. Michels

Hi, Mark.

Ronald H. Spair

Hey, Mark.

Mark Massaro – Canaccord Genuity Inc.

Well, congratulations guys. The first question we have, can you specify or quantify how many different retail companies will carry the OraQuick Test. Obviously you called out Wal-Mart, Walgreens, CVS, Rite-Aid and Kroger. You didn’t mention target, could you just add a little more color to that?

Douglas A. Michels

Yeah. So all total, there is going to be in the – at least at launch, I would say somewhere between 20 and 25 total retailers. We call out the ones that we did, because they represent the bulk of that All Commodity Volume. If you take those five retailers in this space, you’re well over 75% of ACV, the additional retailers, the regional pharmacies, other mass retailers and the like, that gets us up to the 85% to 90%.

In total, if you look at all retailers, who sell in the healthcare consumer package goods space, there’s about 50,000 retail outlets. And so you can imagine, we said we’re going to be in a 30,000 to 35,000 of those at launch that represents in excess of 85% of ACV. So that remaining 30,000 that we’re not going to be in, 25,000 to 30,000 that we’re going to be in at launch represents just 15% or less of ACV. So this is really about efficient and effective retail distribution and we’re just so pleased that that all of these retailers have enthusiastically agreed to not only take the product at launch, but take it off cycle. Remember retailers generally reset their stores twice a year, they usually do it sometime mid-year and sometime after the first of the year. So for them to take in a new product off-cycle and cut it in and do it across so many stores, really speaks to how excited the retailers are and what they believe is an exciting retailer opportunity.

Mark Massaro – Canaccord Genuity Inc.

Okay, great. And could you give us just a ball park, how are you thinking about revenue contribution in the first twelve months for the HIV OTC product?

Douglas A. Michels

I’ll let Ron handle that one.

Ronald H. Spair

Yeah, so Mark the revenue contribution as Doug mentioned on the call earlier has all to do with the quantification of the product sold at the retail point of sale as well as at and over-the-internet. And we have not projected what that level of revenues are expected to be. We do anticipate that it will ramp overtime and as we move through the balance of the year, Doug indicated that this is going to be available on October, so we’ll see some contribution from out sales being made in the last quarter of 2012. And then we’ll be testing our advertising content during that period of time and then driving increased revenues in 2013 as we roll out the more targeted advertising campaigns that Doug spoke off. But from a total overall quantification standpoint, we don’t have the number to offer up today.

Mark Massaro – Canaccord Genuity Inc.

Okay. Thanks very much.

Operator

Our next question comes from Charles Duncan of JMP Securities. Please go ahead.

Charles Duncan – JMP Securities LLC

Good morning guys. Thank you for taking my questions and congratulations on this news.

Ronald H. Spair

Good morning, Charles.

Douglas A. Michels

Thanks, Charles.

Charles Duncan – JMP Securities LLC

My first question was along the lines of the language around false negative, I believe that was a point of discussion at the Adcom and I think it was discussed around 93% at that point, but in the FDA PR it was cited to be 92%. Can you help us understand the difference there and what their requirements were in terms of specific language around false negatives?

Douglas A. Michels

Yeah, obviously, the labeling will reflect the actual performance of the product. Regarding the specific numbers that will be on the package versus anything that was discussed at BPAC, the numbers are virtually the same and reflect the product performance in the clinical studies. So the FDA wanted us to make sure that we were clear with the consumer and that there was no confusion as to what the product can and cannot do. Obviously, the results from the advisory or from the clinical studies reviewed with the advisory committee were overwhelming in support of approval, and so that’s what we are going with. So we know the products performs exceptionally well both in the hands of professionals as well as consumers, our data reflects that and we are eager to get that out to the consuming public.

Charles Duncan – JMP Securities LLC

I’m united to – I was just curious as to the differences. And then finally, I’m wondering if I missed it. Did you speak about pricing and then how this approval impacts your international claims?

Douglas A. Michels

We haven’t disclosed the suggested retail price yet, we’re going to do that, provide more detail closer to launch. We have, as you know, as the advisory committee indicated that it’s going to sell substantially lower than $60, we’ve said publicly as well, but it’s going to sell more than the $17.50 suggested price for our professional products. So it’s going to be bracketed somewhere between there and we’ll share more as we get closer to launch.

Regarding international opportunity, we believe it’s substantial, I’ve mentioned before we’ve done preliminary market research on the international opportunity, we evaluated obviously HIV prevalence rates by country, we’ve looked at the top 50 countries in terms of HIV prevalence. We’ve looked at GDP per capita spending as a proxy for consumer spending power. We’ve done a complete regulatory legal environmental risk assessment to determine what countries there might be restricted policies or laws in place that would prohibit sale of a consumer test. And we compiled all that information and cross referenced that to basically come up with what our priority countries might be that we would pursue at the next level.

We haven’t yet done the quantitative market research, the basic studies to determine unit demand and potential pricing, which would give us an idea of the market opportunity. And then obviously, once all that’s completed, we’d have to look at the channel strategy to determine where would a product like this be sold. So that’s the next step, we’re going to begin the pursuit of those questions in the back half of this year and as we complete that next level of due diligence as to where we might go next with a product like this, we’ll share that with you most likely as part of our regular conference calls.

Charles Duncan – JMP Securities LLC

Thank you. Again congratulations. I’ll hop back in the queue.

Ronald H. Spair

Thank you.

Operator

(Operator Instructions) Our next question comes from Spencer Nam of ThinkEquity. Please go ahead.

Spencer Nam – ThinkEquity LLC

Thanks for taking my questions. Congratulations to you guys. Good, great achievement here.

Ronald H. Spair

Thanks.

Douglas A. Michels

Thanks, Spencer.

Spencer Nam – ThinkEquity LLC

Just couple of quick questions. What's the current shelf life on these test kit?

Douglas A. Michels

Its 30 months.

Spencer Nam – ThinkEquity LLC

Thanks. And then, in terms of the cost of the launching this, are you just focusing – just to understand the pieces of the cost structure, what would you be, you the OraSure be responsible. What part of the sales and marketing would you guys be responsible and versus what would be your partner be responsible in terms of promoting the product?

Douglas A. Michels

That's a good question. So obviously, we're going to be responsible for all the public relations activities, which Ron mentioned, and I commented in the prepared remarks that we’re going to rely on very heavily. We've already had a whole lot of public relations and media coverage of the Advisory Committee, obviously this approval now, and you probably saw the front page of the New York Times yesterday, we are going to be doing a lot of media interviews, the rest at today and the weeks to come.

We also have a public relations campaign that will roll out immediately and through product availability. at launch, there will be a lot of promotions surrounding that. Ron mentioned that we’re going to also do some targeted advertising and this is very important, the target market for this product is pretty well defined, I’ve talked to you.

there’s going to be a general population component to that, but there is also clearly defined populations, who will use this product, they heterosexual individuals 18 years of age and older, African-Americans, Hispanic, men who have sex with men and we can reach those target populations very efficiently, not necessarily through network advertising in the like, but through things like targeted cable advertising through specific [press] media and the like and then of course, utilizing digital and social media. So we’re going to go out with that at launch and through the end of this year taking somewhat of a test and learn approach. This will all be on our nickel.

now that test and learn approach will inform our broader media intentions in 2013. and as you can imagine, we’re right now preparing our commercials and our advertising campaigns, those are going to production. the real cause of all that is when you’re buying media, and when you get out international kinds of campaigns and you’re buying media in markets across the country, broad scale national network kinds of things, the numbers can add up pretty quickly. So we want to make sure that we’ve got the right messaging targeted to the right markets to the right consumers, before we go out with that kind of spending.

You also mentioned, what are we doing and what are our partners doing. and our partners are really behind this. and they plan significant promotion of the product at launch. One of their most effective tools are the circulars that they print on a weekly basis that they distribute Walgreens, CVS, Rite-Aid, all intend to include the product in their circulars at launch and multiple times, multiple phasings over the first few months of launch and when we are talking about that, we are talking about numbers like 55 million exposures for example with Walgreens circular impressions and similar number maybe a little bit less, but in the tens of millions for Rite-Aid and CVS. So these promotional circulars reach a very large percentage of our target audience.

Now they are also going to be doing in-store promotion as well, I mentioned some of the retailers are going to carry the product in the family planning sexual health area, some are going to have it in the diagnostic area, but in all cases they have indicated they intend to cross promote the product, have signage in both places directing the consumers to where the product is located in store.

One of the retailers is also going to actually launch the product with a promotion on shop at pharmacy and that's one of the most valuable retail areas in a store, is on the pharmacy counter, and we look forward to being able to measure the effectiveness of all of these different strategies.

Spencer Nam – ThinkEquity LLC

Ron, Doug, it's really helpful on the – just quick follow-up on that, is the – how these guys pay your sales and marketing partner, is that pay staff of the – some sort of a small fixed payment plus the proportional to how many kits are sold or would you guys be paying some static amount of cash on a periodic basis for them to work on the customer inside of the things?

Douglas A. Michels

Generally, that’s part of the agreement that we’ve signed with each one of the retailers and that is not generally disclosed. But on a broad basis, I would say that we’re going to transfer – there will be a transfer price for the product to the retailer and there will be some form of a promotional credit.

Spencer Nam – ThinkEquity LLC

Okay. And then a quick question at the end. You guys are giving yourselves approximately three months, a three month cushion on this prior to the launch. In the past, you had talked about possible approval towards the end of the summer, early fall, let’s say, as the approval come August, end of August of this year, would you have given yourselves stimulus of a three-month lag for the actual launch of the product in the U.S. market?

Douglas A. Michels

Actually, like I mentioned in the prepared remarks, our plan right now is to ship product to retail early to mid-September. Once the product gets shipped to retail, they need time to take it into their warehouses, get it redistributed out to their stores, get it on shelf, make sure all those shelves sited into the accurate [less than] additional two or three weeks.

So, we are moving as quickly as we can. We’ve had contingency plans in place for virtually any eventuality going out to as long as you are suggesting here. The reality is right now, got the approval in hand, got a plan in place, the retailers are aware, the retailers are ready to receive products in early to mid-September and given the timing that they need to get the product on shelf and available to consumers, we are pretty confident right now that product would be up that retail on the 1 of October.

Spencer Nam – ThinkEquity LLC

So basically you’re saying that some sort of a cushion would have been required due to the just the hard work you will, moving around through different channels and distribution networks.

Ronald H. Spair

Yes, and actually Spencer there is work to be done on printing the final materials included in the kit itself.

Spencer Nam – ThinkEquity LLC

Sure.

Ronald H. Spair

And that’s a longer lead item so that would have to have been done whether we received the approval in early July or at the end of August.

Spencer Nam – ThinkEquity LLC

Sounds great. Thank you.

Ronald H. Spair

Yeah.

Operator

Our next question is a follow-up from Scott Gleason of Stephens. Please go ahead.

Scott Gleason – Stephens Inc.

Hey guys, just some more questions, it more pertains to 2013, so Ron, you’ve given pretty detailed expense guidance for 2012. I guess for our modeling purposes, can you give us any kind of sense for what kind of correlated expense run rate, do you guys not expect to see in 2013, as the DTC campaign ramps up, I know it’s kind of finalized now, but I just – I guess just kind of rough projections.

Ronald H. Spair

Scott, I’ve really – I’m not in a position to be able to help you on that today and I think a lot of that will be informed by the testing that we do in the fourth quarter, with respect to the advertising content that’s being developed right now, and that would be test marketed in Q4. That will inform the level of spend that we believe will be necessary to maximize revenue generation in 2013. But I think you can conclude that it’s going to be at a rate higher than what we are experiencing, as we move forward through the balance of 2012, simply because advertising is a high priced expense.

Scott Gleason – Stephens Inc.

Okay, great. And then Ron, can you give us a sense for what you guys expect the COGS to be in a per test basis with volume, and then what's the gross margin would probably on that COGS?

Ronald H. Spair

So as far as the gross margin, we are expecting the gross margin when we're up at scale to be around about the corporate average of in and around 60 – below 60% range to OraSure. And as far as the point estimate on the COGS, we've not given that as of today and obviously you will be able to calculate that once we talk about the suggested retail price and work through the math on the retail markup.

Scott Gleason – Stephens Inc.

Okay, great. And then I guess one last question for Doug, you guys have always had a lot of success getting those tests through the FDA. I guess, I think out is there other tests such as an OTC HCV test that you guys are going to start evaluating. And I guess when we look at the clinical trials with the FDA there would you have to go through I guess the whole process again or is there potentially that you could see some type of reduced process for future products?

Douglas A. Michels

That's a great question Scott. And obviously this product represents a landmark in terms of being the first self test for infectious disease that the FDA has ever approved. So we've really ploughed new territory here, and have set up a roadmap for future opportunities. Obviously, we're looking at those opportunities right now, the Hepatitis C product, which we’ve just recently launched there for the U.S. professional market, we’re very excited about. We see the potential for an over-the-counter opportunity with that product. We have not done the quantitative market research to determine if that’s really a viable opportunity.

So until that’s done that would just be speculation. obviously, there’s other potential products that could go over-the-counter in the infectious disease space, and as part of our due diligence, we’re looking at those opportunities. We have a roadmap now, whether that’s the same plan that the FDA would take with other products, that would have to be determined and have to be agreed to in conjunction with the FDA, but we can do it. And we’re so proud of that achievement. I told the team here, they’ve done something that nobody else has ever done, ever. And that’s a great accomplishment. And we’re going to get this thing launched, we’re going to do it responsibly, professionally, and in an excellent form and hopefully, that will translate into some great revenue and profitability for the company.

Scott Gleason – Stephens Inc.

Okay, great. Thanks for taking my questions guys.

Douglas A. Michels

Thanks, Scott.

Operator

Our next question is a follow-up from Charles Duncan of JMP Securities. Please go ahead.

Charles Duncan – JMP Securities LLC

Hi guys, thanks for taking the follow-up. I was wondering if you could provide a little bit more color on the definition of the right stores or regions with in your ACV program. How you define those and what was the basis of those and your plans to follow-up and make sure that you’re giving decent flow through, through those different stores?

Douglas A. Michels

Well, so certainly the right stores mean those that have the highest volume of consumer foot traffic, the highest number of eyeballs that are going into the family planning, sexual health or diagnostic areas. And the retailers are able to help us with that. So I mentioned there’s – let’s say, there is 50,000 stores in total, if 30,000 to 35,000 represent 85% plus of the expected volume for a product like this, then it says, hey look, get into those 30,000 to 35,000 as quickly as you possibly can and the remainder, if it makes sense you go there but likely it’s going to be a lot of energy and cost for very little return that’s the basic strategy here.

At the same time, I mentioned that some of the retailers’ promotional programs, let me give you some examples. Walgreens has a number of their stores, 1500 plus of them that are designated as HIV centers of excellence and that’s where they serve populations who are disproportionately avail themselves of their HIV prescriptions or other products that they might buy. So Walgreens is going to more heavily promote the product in those stores. Another one of the retailers is going to heavy up their promotion in communities of color, specifically those stores that are serving predominantly African-American or Hispanic populations, where as I mentioned, a larger percentage of our target audience reside. So, different retailers have different strategies and that highlights the right store, right approach process.

Charles Duncan – JMP Securities LLC

It’s helpful. My follow-up question, I know its kind off path, but I’m wondering if we could ask a question about the HCV screening guidelines. I believe the public comment period ended last month, I’m wondering if you have heard anything or have any thoughts on the process now post that public comment period.

Douglas A. Michels

We have not and we expect that the revised guidelines will be out in the next month or two and we have an opportunity to comment more on that at our upcoming earnings call. But thanks for the question.

Charles Duncan – JMP Securities LLC

It sounds good Doug and Ron. Thank you.

Douglas A. Michels

Okay. thanks, Charles.

Operator

Our next question comes from Charley Jones of Barrington Research. Please go ahead.

Charley Jones – Barrington Research Associates, Inc.

Hi, good morning. I have a little trouble with my phone, can you hear me okay?

Douglas A. Michels

Yeah, got you, Charlie.

Charley Jones – Barrington Research Associates, Inc.

Okay. I just have a couple quick questions on your retailers. So Walgreens is administering this test, you see there a little red sign in their pharmacy, are they using your test or somebody else’s? And do you think that there is an opportunity for, I think on previous question, for some of these pharmacies that might not be clear with their facility to administer an OTC test or are they going to use one of the more Clearwave tests and are they using yours?

Douglas A. Michels

The answer is that they are using ours. And as I mentioned, this is a pilot in 24 stores across the country.

Charley Jones – Barrington Research Associates, Inc.

I was referring to 1,300 you’re referring to (inaudible) some number facilities that are just doing HIV testing I thought not related to OTC related to a number of different infectious diseases?

Douglas A. Michels

I’m sorry if I wasn’t clear. What I was talking about are the different retailer strategies to promote the over-the-counter test. and I mentioned just as an example that in addition to the 5,000 plus Walgreens stores that the product is going to be placed in, they’re going to heavy-up promotion in about 1,700 of those or more where in those stores that they consider HIV centers of excellence. that was all. I was just trying to differentiate the different retailer promotional strategies. I think is all good.

Charley Jones – Barrington Research Associates, Inc.

And what I was trying to get at was, there’s a portion of these stores, these 1,700 stores that are centers of excellence. and I think that they already in a lot of cases are administering HIV tests in some of their stores, I know they do in Chicago. So I guess my question is, are they using your nuclear-based laboratory test in that situation, and are there opportunities in other stores that you – [what you see] in the same way. And I guess my final question related to this is, can you talk a little bit about maybe some of your partners and some of the clinics and how they feel out there with those co-promotion or decreased purchasing going on by them.

Douglas A. Michels

That's a great question. Thanks Charles. So in-stores today that are offering any kind of HIV testing whether that's in a MinuteClinic or Take Care clinic. And really they are using our products obviously because it's the market-leading product and it's all capability. They are using the professional product. Oftentimes they are performing that testing in conjunction with community-based organizations at the local level. It's not widespread and we do not anticipate that those programs would switch over to using the in-home test.

We also do not anticipate that the in-home test is going to cannibalize our professional business primarily because this isn't being promoted as a replacement for the testing that goes on to day. Most of our business today is in public health clinics where the testing is offered free of charge to consumers. And we don't anticipate too many of those individuals who are currently being tested at no charge are going to switch tomorrow and begin paying for the product at retail. Some will, who have the means to do it, but generally speaking, people who are accessing the public health market generally don't have that kind of flexibility.

The other part of our business in the professional market is in hospitals were the product is used primarily in occupational health and labor and delivery. We expect that testing will continue with our professional product and then of course there is the physician office market. So we don’t anticipate cannibalization. We expect this product will be consumed by either consumers who don’t test today for various reasons, or for people who do test today in a professional setting, who perhaps want to test more frequently.

Charley Jones – Barrington Research Associates, Inc.

Right.

Douglas A. Michels

And that’s our primary messaging.

Charley Jones – Barrington Research Associates, Inc.

Got it. All right, thanks guys, congratulations, really good job.

Douglas A. Michels

Thank you.

Ronald H. Spair

Okay. Thanks Charley.

Operator

That brings to an end to Q&A session of today’s call. I will now the turn the call over to Dough Michels for any closing remarks.

Douglas A. Michels

Okay. I just want to thank you all again for joining us after the holiday. Obviously, we’ll continue to update you on the progress of our launch preparation and our launch activities and we appreciate your continued interest and support in the company. Thanks everyone, have a great day.

Operator

Ladies and gentlemen, this does conclude today’s conference. You may all disconnect and have a wonderful day.

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