OraSure Technologies' CEO Discusses Q3 2012 Results - Earnings Call Transcript

| About: OraSure Technologies, (OSUR)

OraSure Technologies, Inc. (NASDAQ:OSUR)

Q3 2012 Earnings Call

November 7, 2012 5:00 pm ET


Judy Clarke – Investor Relations

Douglas Michels – President and Chief Executive Officer

Ronald Spair – Chief Operating Officer and Chief Financial Officer


Shaun Rodriguez – Cowen and Company

Jon Wood – Jefferies and Company

Jeff Frelick – Canaccord Genuity

Nicholas Jansen – Raymond James

Judy Clarke

Good afternoon everyone and welcome to OraSure Technologies 2012 Third Quarter Financial Results Conference Call and simultaneous webcast. As a reminder today’s conference call is being recorded. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks there will be a question-and-answer period. (Operator Instructions)

To allow time for as many questions as possible, questionnaires 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 questionnaire can rejoin the queue for further questions.

OraSure Technologies issued a press release at approximately 4 p.m. eastern time today regarding our 2012 third quarter financial results and certain other matters. The press release is available to you on our website at www.orasure.com or by calling 610-882-1820. If you go to our website the press release can be 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 November 14, 2012 by calling 855-859-2056 for domestic, or 404-537-3406 for international. The access code is 51186733.

With us today are Doug Michels, President and Chief Executive Officer and Ron Spair, Chief Operating Officer and Chief Financial Officer. Doug and Ron will begin with opening statements which will be followed with question-and-answer 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 statement, its annual report on Form 10-K for the year ended December 31, 2011, 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 or 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 Michels

Okay, thank you very much, Judy, and good afternoon everyone. I want to thank you for joining us on our call today. Third quarter consolidated revenues fell within the low end of our guidance range, while our net loss beat our guidance for the bottom line. Revenues were up slightly over the third quarter of 2011 primarily as a result of our molecular collection system subsidiary DNA Genotek.

The third quarter included truly historic achievements in OraSure. In July, we received FDA approval of our OraQuick In-Home HIV Test, the first and only rapid infectious disease test approved for sale in the over the counter our OTC market.

We also completed initial shipments of this product to retailers around the country at the end of the third quarter. And in October, we commenced the commercial launch of our OraQuick In-Home HIV Test with support from celebrity spokespersons and the initiation of a nationwide promotional campaign.

I will provide an update on the progress we’ve made with this exciting new product as well as certain other developments in our business. However, before I do that, let me ask Ron to review our third quarter financial results.

Ronald Spair

Okay. Thanks, Doug, and good afternoon everyone. Starting with revenues, our third quarter 2012 consolidated revenues were $22.1 million compared to $21.7 million reported in 2011. Revenues for the current quarter included $3.3 million from our molecular collection system subsidiary, DNA Genotek acquired in August 2011. DNA Genotek’s revenues for the period post acquisition date through September 30, 2011 were $2 million. Our consolidated product revenues increased 1% as a result of the higher molecular collection systems sales and higher sales of our cryosurgical systems products. These increases were partially offset by lower sales of our infectious disease, substance abuse and insurance risk assessment products.

Our infectious disease testing revenues were $10.7 million in the third quarter of 2012 compared to $11.9 million in the third quarter of 2011. The overall 10% decrease was primarily a result of lower domestic OraQuick HIV sales, partially offset by the higher OraQuick HCV sales. Third quarter domestic HIV revenues were down $1.5 million or 15% due to various factors including changes in public health testing programs and their timing of purchases, reductions in government funding, price competition and a shift to automated laboratory based blood test by some of our customers.

HCV revenues were $919,000 for the quarter, a $494, 000 increase over the third quarter of 2011. In substance abuse testing, revenues decreased to $2.3 million in the third quarter of 2012 from $2.8 million in the third quarter of 2011, primarily as a result of lower intercept sales partially offset by higher sales of our Q.E.D. point-of-care, saliva alcohol test. The higher Q.E.D. revenues resulted from the absence of production issues experienced last year which were resolved in October 2011. The decrease in intercept sales as a result of lower purchases by our largest domestic laboratory distributor who began selling it’s own competitive oral fluid drug testing system at the end of 2011, and lower international sales due to reduction in purchases by our UK laboratory distributors who is also started selling it’s own competing oral specimen collection device.

Our third quarter 2012 cryo revenues increased 24% compared to the third quarter of 2011, primarily as a result of higher OTC sales and higher professional sales in the international market place. Our professional sales in the domestic market remained flat. Our OTC cryo sales during the quarter increased $770,000 or 81% when compared to 2011, largely as a result of higher sales to both our Latin American OTC distributor Genomma, and our European distributor, Reckitt Benckiser. As discussed in our previous calls, early in 2011 the Mexican government imposed restraints on the advertising Genomma could use for our product. At the same time the Brazilian government required us to make changes to our package insert. Both of these issues negatively impacted our sales to Genomma during 2011 but were resolved by the end of that year.

The higher sales to Reckitt Benckiser were the result of increased advertising and promotional activities and expansion into additional European countries. Our international professional cryo sales in the current period increased 13% compared to the third quarter of 2011. The increase was primarily due to higher sales in Europe, Australia and Asia.

As mentioned earlier, our molecular collection systems revenues were $3.3 million for Q3 2012 compared to $2 million for the period August 17, 2011 through September 30, 2011 and primarily represent sales of the Oragene product line.

Turning to our gross margin. Our overall margin remains strong at 63% for both the third quarters of 2012 and for 2011. Turning to operating expenses, our consolidated operating expenses for the third quarter decreased $982,000 or 6% compared to the third quarter of 2011. R&D expenses decreased from $5.5 million to $3 million for the quarter due to lower clinical trial costs associated with our OraQuick In-Home HIV Test.

G&A expenses decreased by approximately $1.3 million, as a result of the absence in the current quarter of $2.1 million of DNA Genotek transaction costs incurred by us during the third quarter of 2011. This decrease was partially offset by the higher DNA Genotek expenses incurred for the full quarter in Q3 2012 compared to the partial period in 2011.

Sales and marketing expenses were $8.6 million for the third quarter or an increase of $2.9 million over 2011 due to $1.8 million of additional sales and marketing costs related to the commercialization of our OraQuick In-Home HIV Test and a full quarter of DNA Genotek expenses.

The third quarter 2012 expenses included $3.1 million from our molecular collection systems subsidiary compared to $1.5 million for the last six weeks of Q3 2011. From a bottom line perspective, we reported a net loss of $2.4 million or $0.04 per share compared to a net loss of $3.9 million or $0.08 per share for the same period of 2011.

Turning briefly to our balance sheet and cash flow, our cash balance at September 30, 2012 was $89.4 million compared to $23.9 million at December 31, 2011. We completed a secondary stock offering in Q3 2012, which increased our cash balance by approximately $70 million. Cash used in operating activities in the third quarter of 2012 was $1.7 million compared to $3.7 million used during the third quarter of 2011.

So turning to guidance for the fourth quarter of 2012, we are projecting consolidated revenues of approximately $20.5 million to $21 million and a consolidated net loss per share of approximately $0.13 to $0.15 for the quarter. During this fourth quarter, we expect to spend $4.2 million on sales and marketing efforts related to our OraQuick In-Home HIV product launch. This is above the level we have previously envisioned, largely due to the cost of celebrity spokesperson and a delay and expenditures originally projected for Q3.

Additionally, we have reduced our revenue estimates in number of our business units as a result of disruptions caused by hurricane Sandy.

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

Douglas Michels

All right, great, thanks Ron. As mentioned earlier, during the third quarter we received FDA approval of our OraQuick In-Home HIV Test and we completed the first shipments of this product to retailers. We also sold $3.6 million of this product in Q3 although most of this revenue cannot yet be recognized for financial reporting purposes. Because we do not yet have a track record for this product, we can only recognize revenue upon the consummation of sales to retail customers, either in a store or over the internet.

These initial shipments primarily represent pipeline fill for retailers and their distribution centers. From the time of new product such as our OraQuick In-Home HIV Test is purchased, it typically takes two to three weeks to start appearing on retailer shelves. As you might expect, there is variability in the timing of retailer shipments from their distribution centers to their stores and then and how quickly individual store managers placed new product on their store shelves. Our initial shipments covered the leading drug and mass merchandize chains including Wal-Mart, Walgreens, CVS, Rite Aid, Kroger and Duane Reade and we are also selling to large drug wholesalers such as AmerisourceBergen, Cardinal Health and certain regional food retailers.

We’ve seen strong initial support by our key retailers as several have run multiple circular and internet ads for our OraQuick In-Home HIV Test. Since its launch in early October, our OraQuick In-Home HIV Test has been placed on the shelf in thousands of retail outlets across the country. We have started to conduct retail audits in order to help retailers optimize their execution.

And based on initial data from these audits, we estimate that over 90% of the largest retail outlets have product on the shelf today. Most of these retailers are selling the test for $39.99 although pricing can vary a bit by location. We’ve been receiving initial data on the volume of consumer purchases at the various retailers and as you can imagine, we will tracking this very closely.

So far, initial consumer purchase levels have been modest reflecting the time required for product to move through retail distribution networks. We expect consumer purchases to ramp up as the retail network distribution process continues and our promotional activities intensify through the fourth quarter and into next year.

We’ve also begun selling the test over the internet. Our comprehensive website, www.oraquick.com has been active since September 24. As previously discussed, this site provides information about HIV in aids and our product including a high-quality instructional video on how to take the test and interpret the results. Importantly, the site provides electronic access to a comprehensive referral network for counseling and care services in any consumer’s geographic area.

And the since the full website was launched, we have seen over 165,000 visitors. The website also provides consumers with the opportunity to purchase our test online or find a retail store near them that sells the product.

Our promotional and advertising campaign has been structured in two key phases. The first phase was kicked-off on October 9th with the objective of driving awareness in product trial and letting people know that the OraQuick In-Home HIV Test is now available at retail. This phase included a strong public relations campaign and a targeted digital advertising plan.

Perhaps the most exciting element of our first phase was the engagement of former NBA start, Earvin “Magic” Johnson as a spokesperson for the test. Mr. Johnson appeared on a number of national broadcast shows as well as in print and online media generating more than 105 million media impressions. His participation at the launch, kick off in New York City also lead to an increase of nearly 350% in branded social media pose on Twitter and Facebook. Under our agreement with Mr. Johnson, he will participate in further promotional activities during 2013.

We also retained former Miss Universe Dayana Mendoza as another highly credible and influential spokesperson. Ms. Mendoza promoted our product and advocated for expanded HIV testing in connection with National Latino AIDS Awareness Day on October 15th in New York for appearances are also being used in our digital activities.

The second phase of our campaign includes more traditional advertising. During the fourth quarter, we started to implement internet banner advertisements, paid search and targeted print. Our banner advertising began appearing on hundreds of popular websites on October 15th and will run through the remainder of 2012 and into 2013.

We’re seeing strong early results with CTRs, our click-through rates, three times the industry average. Print advertisements are also appearing in publications serving our core target consumers. The second phase will continue into next year beginning in January with significantly increased advertising support and PR activities with Magic Johnson and other events.

Our ad campaign which quantitatively scored well in consumer testing will be designed to drive awareness and product trial and encourage people to get tested for HIV. The ad campaign will feature a 45-second spot and include a heavy emphasis on TV along with digital and print placements designed to reach a broad consumer audience with increased focus on those most at risk and most likely to test.

This includes men who have sex with men, African-Americans, Latino Americans and sexually active adults 18 to 49 years old. This is the same campaign that began running in banner ads during Q4.

As discussed on prior calls, pharmacists and medical professionals play a key role in educating consumers and driving the usage of medical products such as In-Home HIV Test. Thus an important part of our communication program has focused on these individuals.

During the third quarter, we finalized our educational materials and they’ve now been deployed to thousands of pharmacies through the major retail chains. And in addition, this information is being made available through our website. On positions, we will target medical dental advertising in Q4 to make physicians aware of the OraQuick In-Home HIV Test and provide them access to our educational materials.

Briefly turning to production, our manufacturing process is operating smoothly and we’re well positioned to meet future product demand.

And finally I’d like to briefly discuss our consumer support center. This center has been operating since July 6th and provides consumers with toll-free support on a 24/7/365 day per year basis. To-date, we receive thousands of calls with usage continuing to build as product awareness and purchases increase.

As previously discussed, our support center representatives are bilingual and they’re highly trained. And they’re prepared to answer questions and provide consumers with resource referrals for follow-up confirmatory testing, counseling and medical treatment.

So in summary, the initial commercialization of our OraQuick In-Home HIV Test is well underway. Although there is still a lot of work to do particularly to drive increased awareness and consumer sales velocity are making progress.

As Ron indicated in his guidance discussion, creating awareness is not without cost. We expect that our promotional expenses will be significant in the fourth quarter of this year. Looking further ahead, we believe promotional spending in 2013 is likely to exceed the annualized spend rate incurred in the fourth quarter of 2012. The precise level will be determined after creative development and testing is completed in Q4.

Our expectation for 2013 is that spending will be front-loaded early in the year to maximize product exposure and support and will decline sequentially as the year progresses. Given the potential market size and the fact that this is a first of its kind product, we believe it’s critical to support the market launch with ample resources and I look forward to providing additional updates in the future about this exciting new product.

Turning now to our OraQuick HCV Test, we continue to focus on market development in order to grow product sales. Current quarter HCV revenues were up substantially over the same quarter of last year. The primary drivers for this performance were higher sales to public health and hospital customers in the U.S. and sales to certain international customers.

A major development in Q3 was the adoption by the centers for disease control of new guidelines for hepatitis C testing. These guidelines recommend that all person born between 1945 and 1965 are approximately 81 million people according to the 2010 census receive a one-time test for hepatitis C. We believe these new birth cohort guidelines will help to substantially increase HCV testing over the long-term.

And while the issuance of the new CDC guidelines is certainly a positive development, there is still much work needed in order to make physicians and their patients aware of the need for greater HCV testing. As a result, we continue to assist our distributors and their efforts to educate medical professionals about the guidelines and the availability of our OraQuick HCV Test to meet their testing needs.

We’ve also been working closely with other parties such as Chronic Liver Disease Foundation and the National Medical Association to implement HCV education awareness and testing campaigns.

A major factor effecting sales of our OraQuick HCV Test has been the availability of government funding, which is relied upon by many of our customers especially in the public health market. Economic downturn has played significant pressure on government budgets in both the U.S. and other countries and this pressure is likely to continue for the foreseeable future.

There was some good news on funding during the third quarter. The CDC received a $10 million appropriation for hepatitis testing indicating that there is still congressional support for expanded testing despite these budgetary concerns. As a result, 26 public health jurisdictions and community-based organizations receive $5.2 million in CDC funding specifically for HCV testing and linkage to care.

These types of grants support increased awareness of the CDC guidelines and will enable the recipients to start HCV testing initiatives. Based on our discussions with the CDC, we believe that over half of the grantees we’ll use the rapid HCV testing in their programs.

With respect to DNA Genotek, this business showed progress in the third quarter. The company sold a significant amount of product to a large scale commercial customer whose test is demonstrating rapid uptick among its customer base. This is a great example of commercial customers offering alternative non-health related test using DNA. As these types of alternative tests become prevalent, we expect DNA Genotek’s business to benefit.

In addition, we saw continuing growth and sustainability from other commercial customers providing health0-related DNA test. DNA Genotek’s full range of DNA sample collection products are now being used by commercial customers either for diagnostics or commercial research. Five of the top eight sales in the third quarter were to commercial customers.

The company’s academic business also continues to perform well given the global funding challenges pacing academic researchers.

So in conclusion, we’re advancing the commercialization of our new OraQuick In-Home HIV Test, the first and only FDA approved rapid HIV test for consumers. We’re also focused on maximizing the opportunity for OraQuick Hepatitis C test.

This is an exciting time for our company and we look forward to advancing both our strategic and financial initiatives as we move into 2013. And so with that, I’ll now open the floor to your questions. Operator, please proceed.

Question-and-Answer Session


Our first question comes from Amit Bhalla of Citi. Your line is open.

Unidentified Analyst

Nikit (ph) for Amit today.

Douglas Michels


Unidentified Analyst

So I want to first focus on the over-the-counter launch for you guys. You talked about the launch has been modest so far. Can you talk a little bit more about that? I mean what are your expectations for a ramp, when would you see that ramps sometime in significant – in the fourth quarter as this is more into 2015 that you see?

Douglas Michels

Well so, this id Doug. So going back to the information that I shared with you in the script obviously, since product was shipped to retail and moved onto shelf, we’re very, very early into this launch. And the team has executed I think very well on those different logistical activities. We’ve secured distribution. We begun communicating now with the consumers and engaging them to learn more I think some of the data that is shared with you about the click-through rate, really shows that consumers are responsive to our message and they’re interested to learn more.

I shared with you the number of visits we’ve had to our website, I think that again emphasizes that we’re engaging the consumer and encouraging them to act. We’re not going to see the impact of that immediately. We’re going to see it build through the fourth quarter and obviously as we continue to increase our advertising and our advertising message, we’re going to see that build throughout 2013. So that’s all that comment was designed to communicate and obviously when we come back with our fourth quarter call in February we’re going to have a much more robust status to share with you about how the product has sold at retail, online and what that velocity actually looks like.

Unidentified Analyst

Okay that’s helpful.


Thank you. Our next question comes from Shaun Rodriguez of Cowen and Company. Your question please.

Shaun Rodriguez – Cowen and Company

Thank you. On guidance, what are the key drivers of the expectations for the 6% sequential decline and I guess here I’m trying to think through the dynamic of hurricane Sandy versus maybe some challenges in the base business specifically in the HIV professional business.

Ronald Spair

Right. So Shaun, some of the sequential decline is related to the cryo business in Q4 which has certain seasonality to it. And as we have in years past we’ve seen a bit of peaking in the summer time and then a reduction of the purchases in and over the winter time. So we do see a sequential decline in the cryo business which is a large contributor to the Q4 over Q3 2012 reduction.

Shaun Rodriguez – Cowen and Company

Okay, that’s helpful. And on the U.S. professional HIV business, you’ve talked about that franchise being pressured for a few quarters now on changes in public health testing programs reduced government funding pricing and now we transitioned to lab-based testing. Is this still your biggest business? Can you just talk about your, the outlook there? We’ve been in the sort of the $8 million of $8.5 million of quarter range. This year, it’s hard to see government funding getting better, pricing getting less competitive and it doesn’t seem like the transition to automate a testing, is it temporary dynamics. I’m just trying to think through whether there are any positive offsets that you see in the near and medium term or should we think about this as kind of the run rate that we should expect?

Douglas Michels

Yeah, we’re going to continue to manage these pressures I think for sometime certainly until the economy improves. Clearly rapid HIV testing has its benefits and we’re going to continue to sell those benefits as effectively as we possibly can. Data from the CDC indicates that greater than 98% of individuals receive their results with rapid testing, with non-rapid testing. It can be as low as 50%. And that’s not lost on public health jurisdictions or professional users who use our product.

We have seen some migration to laboratory based testing particularly where testing is being conducted in a clinical setting where they may have an automated analyzer where they can move that. We’re going to continue to work with our customers to serve their entire needs, not only with our HIV product, but with HCV as well as with a growing interest in a number of our customers to consider deploying our over-the-counter test in certain situations and we’re in a unique position where we’re able to work with our customers across those three fronts. So we’re going to continue to manage this but it just continues to be somewhat of a challenge for us.

Shaun Rodriguez – Cowen and Company

Sure. Now that’s very helpful. And last one on OTC, can you talk about your dialog with the FDA following the advisory panel and then the formal approval with regard to any post-marketing studies that might be required of you. We noticed a couple listed on the clinicaltrials.org website, so just wondering if there are more of these studies that you’re expecting to have to do. Thank you.

Douglas Michels

Thanks for that question. And over the years we’ve enjoyed an extremely positive and collaborative relationship with the FDA. We’ve committed to stay in very close touch with the FDA throughout this launch. We intend to engage them here shortly just to give them a perspective on what kind of response we received from the consuming public, how the consuming public has used our call center. What kind of frequency? What kind of questions they’re asking our call center representatives? It’s very interesting early on. Most of the questions to the call center were more around product availability and pricing and now that the product is more available at retail and online more of the questions to our call center are more about product use and interpretation of results and with some referrals.

And I think that’s the kind of information that the FDA is very interested to understand. I have to tell you, the call center response in consumer support has been excellent. We’ve also begun to interact with our professional HIV customers and working with the Public Health Community to help build out our consumer support center to make it more of a consumer support network. And I think there are some interesting strategies that we can deploy to provide even better support to the consuming public. And I think that’s a keen interest to the FDA and to the whole HIV Aids community.

So we’re going to continue with the regular dialog and obviously we’ll continue to keep you up-to-date as that progresses.

Shaun Rodriguez – Cowen and Company

Thank you.


(Operator Instructions) Our next question comes from Jon Wood of Jefferies. Your question please.

Jon Wood – Jefferies

Hey, good afternoon.

Douglas Michels

Hi, Jon.

Ronald Spair

Hey, Jon.

Jon Wood – Jefferies and Company

Hey. So Doug, just look at the ACV business into US, kind of surprise to see that down a little bit sequentially and I know you kind of – there was a transition or at the beginning of the transition away from Merck and then to the physician office distributors, can you just describe what impact that had on that business, and we’d love to hear, you talked about some of that funding beginning to I guess hit later in this year, when does that start accruing to your business, the specific CDC grant you mentioned.

Douglas Michels

Good yeah, thanks for those questions, Jon. So let me first address the Merck relationship impact and our decision to let that agreement lapse and that decision was taken really to eliminate any future restrictions on our ability to work with anybody in the therapeutic space in hepatitis C. I think we all know that it’s a very fluid space right now and likely will be for the next several years, and our relationship with Merck was a very productive one but it did have restrictions and we weren’t able to work with some of the players in the hepatitis C space under that agreement.

We have an opportunity to just let the agreement lapse and we took that opportunity, that doesn’t mean that we can’t continue to work with Merck, which we’re happy to do but it also frees us up to work with Vertex and any of the other pharmaceutical players in the space.

Relative to the CDC funding announcement and the grants that have now been communicated and money transferred and we should start seeing the benefit of that in Q4 as well as throughout 2013, that’s critical. Obviously these public health jurisdictions rely on public funding whether it’s from the feds or state, city governments and this is a great indication not only of the CDC’s commitment to support the implementation plan of these revised guidelines but also of congress’s support and we anticipate that there is going to be more of that.

So we’ll report on that is through the fourth quarter and into 2013 as we work with the jurisdictions to deploy our rapid test, I gave you some indication as to significant percentage of those grantees have already indicated but they plan to use our rapid test as the device of choice and implementing their programs.

We’re very enthusiastic about the future of our hepatitis C business, not just because of the guidelines but because of these developments in therapy and as well as the governments increase focus on prevention but funding is critical in the public health sector and on the physician office front obviously we’ve got to continue to drive awareness, this is a challenging activity because we’re trying to drive behavior change, but we continue to receive great support from our distributor partners and we’re going to continue to advance that forward.

Jon Wood – Jefferies and Company

Okay that’s good color, thanks for that. I guess an unrelated follow-up, sorry about that. So Ron, is there – is it too early or do you have a better sense kind of how the gross margin kind of booked to ship more work in the HIV OTC business, if you’ve got any incremental color on that we’d love to hear it, if not, we’ll just stay tuned.

Ronald Spair

Yeah, no I think that’s a great question, Jon. And in the early days there will be an impact because when you actually record the out sales which we’re going to be able to book as revenues, whether that occurs at the point of sale at a retail pharmacy or over the internet, the aggregation of those revenues will obviously ramp over time, but we need to deduct off of those revenues the trade spend that is put forth by our retail partners like the CVS, Walgreens, Rite Aid to the world.

And so consequently as part of our total overall, that’ll affect the gross margin because it effectively reduces revenues. And so as I’ve mentioned before, as we move to scale which is obviously further out and when we have the VTC campaign running and product to shipping more robustly then the gross margins will pick up but in the early days the gross margin will be affected by the great investment from our trade partners out there who are supporting the product for us, or with us I should say.

Jon Wood – Jefferies and Company

Okay, thanks a lot. Good quarter, thanks.

Ronald Spair



Thank you. Our next question comes from Jeff Frelick of Canaccord. Your question please.

Jeff Frelick – Canaccord Genuity

Hi Ron, can you comment, so as the guidance you have included in the guidance for fourth quarter HIV OTC revenues?

Ronald Spair

We do.

Jeff Frelick – Canaccord Genuity

Okay. And is that mostly on the retail chain pull through or is that more on the direct side over the internet?

Ronald Spair

So it’d be all inclusive.

Jeff Frelick – Canaccord Genuity

Okay. Any interest yet, and then just a quick follow-up, any interest for public health in obtaining HIV OTC product?

Douglas Michels

We’ve had a number of discussions with the different public health jurisdictions Jeff, and some varied applications of how they might use the product. Obviously, we’ve got to be careful to make sure that how we interact with the public health market does not impact our commitment to the retailers, but there are certainly some unique applications, there is a lot of interest in studying the use of the product in certain populations which I think can be very valuable down the road. And so we continue to see a high level of interest and engagement within our professional customer base.

Jeff Frelick – Canaccord Genuity

Okay, thanks Doug.


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

Nicholas Jansen – Raymond James

Some quick thoughts on the DNA business in terms of the academic funding challenges that are out there, what should we think about, can the commercial growth that you’re seeing offset those pressures or could ’13 be a little bit of a struggle to growth the top line in that business before kind of reaccelerating as commercial becomes the bigger piece of the pot?

Douglas Michels

We certainly expect to see growth on both fronts in 2013, both academic research as well as commercial. And obviously like I commented in the prepared remarks, quite pleased with the growth that we’re seeing on the commercial front and we expect that to definitely continue. The DNA Genotek team has really done a great job in responding to some of these academic research challenges.

We look at the customer, new customer acquisition on the academic research front that continues to grow year-on-year, one of their challenges is, is the accounts that are using the product in their research they’re using a little bit less of it because their projects aren’t funded to the level that they were previously, so they’re not going to have as many specimen involved in the studies and the like but there still a high level of interest among the academic research community.

And then DNA Genotek has done a good job of identifying and cultivating opportunities on the commercial front.

Nicholas Jansen – Raymond James

That’s helpful, thanks. And then just one of the – make sure I heard you correctly, in terms of the marketing spend regarding the OTC launch next year, you said it was going to be about similar to the fourth quarter number annualized, was that correct, did I hear that right?

Ronald Spair

Yeah you did, Nick, that’s likely the area that we’re operating in and as Doug mentioned, it’ll be more front end loaded coincident with the initiation of the DTC campaign in early January and so the first half of the year we’ll see a significant spend in that area.

Nicholas Jansen – Raymond James

Thank you very much.

Ronald Spair



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

Douglas Michels

Okay, I just want to thank everybody for being on the call with us this afternoon and this evening, and I hope you have a good week. Take care, bye-bye.


That does conclude the program. Ladies and gentlemen, you may disconnect your lines at this time. Have a great day.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.


If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!