OraSure Technologies, Inc. (OSUR) Q3 2007 Earnings Report, Transcript and Summary

Good day, everyone, and welcome to OraSure Technologies'Third Quarter Financial Results Conference Call and simultaneous webcast. As areminder, today's conference is being recorded. All lines have been placed onmute to prevent any background noise. After the speaker’s remarks, there will bea question-and-answer period (Operator Instructions). To allow time for as many questions is not possible,questioners are ask to limit themselves to only a single question with no morethen two follow up questions related to the same topic. Once the follow up iscompleted a questioner can rejoin the queue for future question For opening remarks and introductions, I will now turn thecall over to Eileen Tavarez at OraSure Technologies. Please go ahead.

Good afternoon, everyone, and thank you for joining ustoday. I would like to begin by telling you that OraSure Technologies issued apress release at approximately 4:00 p.m. Eastern time today regarding our thirdquarter financial results and certain other matters. The press release is available to you on our website atwww.orasure.com, or by calling 610-882-1820. If you go to our website, thepress release can be accessed by opening the Investor Relations page andclicking on the link for News Releases. This call is also available real-time on our website andwill be archived there for seven days. Alternatively, you can listen to anarchive of this call until midnight, November 5, 2007, by calling 800-642-1687for domestic, or 706-645-9291 for international. The access code is 21207217. With us today are Doug Michels, President and ChiefExecutive Officer, and Ron Spair, Chief Operating Officer and Chief FinancialOfficer. Doug and Ron will begin with opening statements and then follow with aquestion-and-answer session. Before I turn the call over to Doug, I must also remind youthat this call may contain certain forward-looking statements, includingstatements with respect to revenues, expenses, profitability, earnings pershare, and other financial performance, product development, performance,shipments and markets, and regulatory filings and approvals. Actual resultscould be significantly different. Factors that could affect results are discussed more fullyin the SEC filings of OraSure Technologies, including its registrationstatements, its annual report on Form 10K for the year ended December 31, 2006,its quarterly reports on Form 10Q, and its SEC filings. Although forward-looking statements help to provide completeinformation about future prospects, listeners should keep in mind thatforward-looking statements may not be reliable. The Company undertakes no obligation to update anyforward-looking statements to reflect events or circumstances after this call. With that, I'd like to turn the call over to Doug Michels.

Thanks, Eileen, and good afternoon, everyone, and welcome toour third quarter 2007 earnings conference call. For today's call, Ron Spair will begin with a review of ourfinancial performance for the third quarter of 2007. As you can see from ourearnings release, our third quarter financial results were inline withexpectations. And the nine months ended September 30, 2007, were strong. Following Ron's remarks, we will open the floor for yourquestions on these items. And then, during the remainder of the call, we willupdate our progress against our principle strategic initiatives and providesome brief additional business updates. We will also discuss our financial guidance for the rest of2007. We will conclude by, again, opening the floor for your questions. So, now, let's turn to Ron's financial overview. Ron?

Thanks, Doug, and good afternoon, everyone. Our thirdquarter results on both the top and bottom lines were consistent with our mostrecent guidance. When combined with our results for the first half of the year,we are pleased with the Company's financial performance. Total revenues for Q3 were $21.4 million, a 21% increaseover the same period in 2006, and a record for OraSure. Increased sale of theCompany's OraQuick Advance Test and its international and domesticover-the-counter Cryosurgical Wart Removal products were the primary revenuedrivers for the quarter. In the infectious disease market, we booked sales of $8.2million, a 9% increase over the third quarter of 2006. Primary reasons forcontinued growth in the infectious disease testing business were a 31% increasein sales to Abbott Labs for distribution in the U.S. hospital market, a 17%increase in direct sales of OraQuick to the public health market, and higherinternational OraQuick sales, primarily to Africa. In substance abuse testing, sales were $4.1 million, whichis slightly lower than Q3 of '06. Included are $3.2 million in sales of ourIntercept drug testing system, which represents a 3% increase over '06. Our workplace testing business was up 7% over 2006, whichwas partially offset by decreases in our criminal justice business andinternational sales, which were down 4% and 20% from '06 respectively. Our direct sales grew 56% for the quarter. Cryosurgicalsystem sales were $6.7 million, an increase of 67% compared to the same periodin 2006. Higher sales of our U.S. and Mexican OTC Cryosurgical products werethe main reason for this increase, partially offset by lower sales of Histofreezerto physicians' offices and lower sales of our European OTC product. During the third quarter, we had approximately $2.5 millionin sales of our U.S. OTC product to Prestige Brands. However, Prestigepurchased no product in Q3 of '06, which included the period just prior totheir acquisition of the competing Wartner brand in September of that year. As a result of the arbitration decision and the terminationof our agreement with Prestige at the end of this year, we do not expectfurther revenues from Prestige in 2008. Sales of our OTC Cryosurgical product to SSL, our Europeandistributor, were primarily because SSL is working off its existing inventoryin anticipation of launching a product with an enhanced configuration andlabeling early next year. Finally, the launch of our OTC Cryosurgical productin Mexico continues to exceed our expectations. During the third quarter, we recorded $720,000 of fundedR&D work pursuant to our agreement with Schering-Plough for the developmentof a rapid Hepatitis C test on the OraQuick platform. Finally, insurance risk assessment sales in the thirdquarter were $1.6 million, compared to $1.7 million in the comparable period of2006. Turning to gross margin, our margin for Q3 of 2007 was 60%,a decrease from 64% for Q3 of 2006. This decline was primarily due to increasedscrap and spoilage, higher product support costs, and an unfavorable productmix versus the year-ago period. Research and development expenses for Q3 were upapproximately $1.9 million over 2006, primarily as a result of costs associatedwith the clinical development work for our OraQuick Advanced HIV-1/2 OTC testand product development costs for our OraQuick HCV test. Sales and marketing expenses increased approximately $1.4million. That's primarily due to increased staffing and related charges, suchas travel, recruiting and relocation expenses. G&A expenses increased to approximately $1.7 millionbecause of higher legal fees related to the Prestige arbitration and increasedstaffing related charges. Pursuant to the arbitration decision, we expect torecover our legal fees and certain costs incurred in the Prestige matter in anamount to be determined by the arbitrators. From a net income perspective, we were at breakeven on thebottom line for Q3 and within the guidance announced during the last quarterlyinvestor conference call. This compares to net income of $2.1 million, or $0.05a share for the same period of 2006. Our cash balances remained strong with $92.3 million at theend of Q3. During the first nine months of the year, we generated $7.8 millionin cash flow from operations. Accounts receivable increased partially as aresult of higher revenues. Day’s sales outstanding held steady at 52 days compared to53 days in the prior year. However, importantly, this represents a reduction of11 days from the June 30, 2007, day’s sales outstanding metric. And with that, we would now like to open the floor forquestions regarding our third quarter financial results…

(Operator Instructions) Your first question comes form theline of David or Dave Turkaly, SIG.

Great, thanks. I guess, quickly on the infectious diseasefront, is there any, and looking back at last year, and it does appear thatthere was some seasonality to sort of the direct to U.S. public health. And I know that we've seen the CDC allocate some new money,so I guess, do you think there's any impact of people waiting for some of thesemonies to be allocated? Maybe any update you can give us on that front.

I think we probably saw, this is Doug, Dave. I think weprobably saw a little bit of that in the third quarter. Certainly, the secondquarter is historically our strongest quarter. That's when national HIV testingday occurs, and there's a lot of activity. But, I think we turned in a solid quarter in the thirdquarter in infectious diseases, fourth quarter should be strong, as well.That's when I think we're going to start to see some of the CDC money start tobe spent, although jurisdictions are telling us that they are also going to beinvesting in infrastructure during the fourth quarter. And so, the bulk of thatCDC money will come, we believe, in 2008.

Okay, just to be fair, I'll leave it to one for now.

Thank you. Your next question comes form the line of AaronLindberg with William Smith & Company. Aaron Lindberg - William Smith &Company: A quick question on public health, as well. How much of thepublic health sales went direct to cities or city-wide initiatives, likePhilly, L.A., Oakland, some of the ones you've talked about in the past?

Just a little less than $400,000, Aaron. Aaron Lindberg - William Smith &Company: Great, thank you.

Yes.

Your next question comes from the line of Jeff Frelick withLazard Capital.

Hi, guys. Given that Abbott had a pretty decent number, canyou tell me how many hospitals were Abbott in the quarter?

Well, we're up to approximately 2,000 or so now, Jeff. Andso, I would imagine that we're probably looking at something of approximately acouple of hundred or so that were added during the last quarter.

Okay. Thanks, Ron.

Yes.

Your next question comes from the line of John Putnam withDawson James Securities.

Yes, thanks. Hi, guys. I was wondering if you might justgive us a little color on what's going on in the substance abuse testingmarket. Some areas were up, some areas were down. Can you just give us a littlecolor on that, as well?

Sure, I'd be happy to. The workplace testing businesscontinues moving on. The criminal justice was a little softer than we had hopedin the third quarter compared to the prior year's comps. That business ishighly competitive and always funding-challenged. And I think that we felt a little bit of that in theinternational business, as well, where we saw that down 20% versus a year agoperiod. And that is from our distributor over in the U.K., John. And they sellinto the criminal justice marketplace, and public funding in that marketplacewas down, as well as the effect of competition over there in the U.K.

Thanks a lot.

Okay.

We have a follow-up question from the line of AaronLindberg. Aaron Lindberg - William Smith &Company: Which products drove the higher scrap and spoil cost in theQ?

There were a number of products where we had scrap andspoilage, including OraQuick, Aaron. Aaron Lindberg - William Smith &Company: Okay. No one that drove it particularly higher than another?

I'd have to look back at the numbers but, certainly,OraQuick was involved with that, yes. Aaron Lindberg - William Smith & Company: If you look, what the easiest way to look at the data foryou is, just off the top of your head, but can you give us just a sense of whatthe impact was there, either sequentially or year-over-year?

I would say you're probably looking about half of thatreduction was based on scrap and spoilage, from a margin perspective. Aaron Lindberg - William Smith &Company: Perfect, thank you.

And then, you had the…

Your next question comes from the line of Ed Shenkan ofNeedham & Company. Ed Shenkan - Needham & Company: Thanks, Doug and Ron. Can you hear me?

Yes.

Hey, Ed. Ed Shenkan - Needham & Company: Good. But, I was just wondering if you could give anyfurther breakdown on the infectious disease. You gave some percentages. I'm notsure, just to make it easy, if you could give what some of the revenues were inthe breakout?

Sure. In the press release that we put out there, the totalrevenues for OraQuick in the quarter were $7.5 million, $4.5 of which wentdirect to public health, and $2.2 to Abbott. And then, really, the bulk of theremainder was in the international market segment of about $850,000 or so. Ed Shenkan - Needham & Company: So, that's a nice trend on the international side. Do youexpect it to continue? And is it mostly Madagascar, are you finding it aroundAfrica? Any additional color you could provide.

We'll comment on that a little later in the call. But,certainly, Africa continues to grow pretty nicely. Madagascar has been strong.We're working on several other initiatives on the continents that we're excitedabout. I don't have anything formal to announce on that as of yet.But, we believe that's going to provide some nice growth in the future. We'lltalk a little bit later about our efforts to prepare for the European launchbefore the end of the year. That's moving along pretty nicely. So, we're expecting good things on the international front,certainly through the rest of this year and through '08 and '09.

And Ed, just to round it out, OraSure accounted forapproximately $700,000 of rev in the infectious disease segment in the quarter. Ed Shenkan - Needham & Company: Thank you. And for the Cryosurgical business, could you dothe same thing as far as maybe breaking out the business, as far as revenuesgo, the OTC, U.S., rest of world, and professional U.S., rest of world?

Sure, no problem. In the professional marketplace,domestically, we recorded approximately $1 million in revenues. Theinternational marketplace, approximately $600,000 in the professional space.OTC in the U.S. was $2.5 million, and OTC international was $2.7 million. Ed Shenkan - Needham & Company: And in the other areas of business, insurance risk wasparticular strong in the quarter. Anything you can attribute it to? And mightthis be a trend, or how do you think about that business going forward?

Ed, it actually turned in a performance of approximately$1.6 million, and that was pretty much blot. And I think that that's what ourexpectation is going forward, until we bring on additional companies in theinsurance field that we use oral fluid testing. Ed Shenkan - Needham & Company: And I'm not sure if now is the time, but Genoma, it soundslike, might have been real strong. Can you give more details there, if they'reexpanding throughout South America or wherever at?

All the revenues that were recorded from Genoma in the thirdquarter were related to their activities in the Mexican market only. Ed Shenkan - Needham & Company: Okay, thanks.

All right.

Your next question comes from the line of John Putnam ofDawson James Securities.

Yes, just going back to the gross margin situation, have youbeen able to improve the yields on products that were giving you trouble, or isthere anything specific you can do about that?

That's a certainly of paramount interest to us, John, and ithas our…

Sorry about that

That has our laser focus on improving that situation andturning around our margins in that area. Yes, absolutely.

Okay. So, have you been able to make any progress in doingthat?

We believe that we have.

Yes.

Okay, great. Thanks.

At this time, there are no further questions.

Okay. Well, thanks for the questions. And now, we'll discussthe progress that we're making against our strategic initiatives and certainother business developments. So, first, let me start with our ongoing efforts to obtainFDA approval to sell the OraQuick Advanced HIV test over-the-counter. Duringthe last earnings call, I indicated that we would be starting a more robustlabel comprehension study. This study has now been completed. During thequarter, we also initiated our Phase II interpretive studies, which evaluate anindividual's ability to properly interpret test results without having toactually perform the test. And these studies are ongoing, and we expect them toconclude during the fourth quarter. We expect to submit the IDE amendments forthe Phase IIb and Phase III user studies in the next few weeks. As previouslydiscussed, Phase IIb will access an individual's ability to use the testproperly in an observed setting, and Phase III will do the same in anunobserved, at-home settings. These studies are scheduled to begin next year. The resultsof the robust label comprehension study and the Phase II, IIb, and III studieswill all be included in our FDA submission for over-the-counter approval. Workalso continues on the development of a 24-hour per day, 7-day a week customerresource and medical referral system. As previously reported, The Constella Group, a leadingglobal provider of professional health services and a long-term HIVAIDS-related services provider for the CDC, is helping us with the design andimplementation of this system. Draft call center scripts have been completed,and a prototype system is nearing completion. Training on the system is planned for December, and a fullydeveloped system will be operational in time for the Phase IIb user studiesnext year. So, in summary, the schedule I announced during the last earningscall remains intact. There is still a great deal of clinical work to beaccomplished that we expect will take us to mid-2008. We have requested a meeting with the FDA to review clinicalprogress to date and our plans for completion of the clinical study effort in2008. We hope that meeting will occur before year-end. We still plan to submita PMA application with the FDA for OTC approval upon completion of our studiesas soon as possible in 2008. Turning to the development of our rapid HepatitisC test on the OraQuick platform, this project also continues to progressnicely. Previously, we reported the completion of our product designand the generation of clinical performance data equivalent to existinglaboratory-based HCV tests. We have since made good progress in establishingand verifying the manufacturing specifications for production of the OraQuickHepatitis C device. As a result, this product has now been transferred fromR&D to manufacturing, and is now being produced in our production facility.Following successful production of three clinical trial lots, we will begin theclinical studies to support product approval. These studies should begin beforethe end of the year and are expected to continue through the early part of nextyear. As you know, a critical project has been to extend the shelflife of our OraQuick HIV test beyond six months. Real-time stability studiesare progressing and have gone well. We recognize this an important issue forour infectious disease business and we are working to extend the shelf life ofthis product as quickly as possible. Another key program is the development of homogeneous, fullyautomated drugs of abuse assays with Roche Diagnostics for use with ourIntercept oral fluid collection device. The development work continues to goextremely well. In fact, three posters with preliminary performance data forprototype assays for cocaine, opiates, amphetamines and methamphetamines werepresented at the Society of Forensic Toxicologists, or SOFT, meeting on October18th of this year. These prototypes showed excellent correlation with currentconfirmatory methods for drugs of abuse. The performance of these prototypeassays was very encouraging and indicated that we should we able to developstate-of-the-art drugs of abuse assays using oral fluid on automated systems. Interest in the assays at the SOFT conference wastremendous, with customers specifically visiting the OraSure and Roche boothsto inquire when they can anticipate using these assays in their labs.Development of the assays for PCP and THC, or marijuana, also continues toprogress. Once all these tests have been developed and optimized,Roche will initiate the clinical studies with our assistants, and the datagenerated will be used as a basis for our 510(k) submission to the FDA. A final area I would like to address is operations. Duringthe quarter, we completed the qualification of our new fully automatedmanufacturing equipment for OraQuick. The team is in the process of completingvalidation activities and compiling the final data set for an FDA submission,since our last investor call, an additional assembly station was added to theline to increase capability of the system. In addition, equipment installation and validation was completedin a recently constructed semi-automated manufacturing space for OraQuickdevices. Data and documentation for an FDA submission have been compiled, andthe submission should be filed in the fourth quarter. Once FDA approval is obtained for both the newsemi-automated assembly space and our fully automated system, we will havecompleted a major expansion in our manufacturing capacity for OraQuick HIV andHCV. These additions to capacity are important steps in the execution of ourfive-year facility and manufacturing plant, designed to ensure that ourinfrastructure can support the future growth of the company. Now, I would like to provide some additional detailsregarding each of our businesses. In our infectious disease testing business,the primary driver will continue to be, in our view, the increased support forand adoption of the CDC's revised recommendations for routine HIV screening inhealthcare settings. To help implement these recommendations, the CDCpreviously announced that it had identified $35 million in additional fundingto increase HIV testing opportunities among populations disproportionatelyaffected by HIV, primarily African-Americans. In September, the CDC awarded this funding to 23 states inmajor metropolitan areas. We've been working closely with many of the granteesand, because many are already OraQuick customers, we believe that we are in astrong position to capture a significant portion of these incremental funds. Inaddition to financial support, the CDC is providing implementation andcommunication support for the funded jurisdictions. For example, the CDC has completed strategic planningworkshops to help grantees implement their recommendations in Los Angeles,Chicago, Boston and Miami, and additional workshops are currently scheduled forWashington, D.C., New York and San Antonio. Eight additional workshops are planned for other fundedjurisdictions. The CDC recommendations have received broad support from theAmerican College of Emergency Physicians, the AMA, the NMA and others, and anumber of states have adopted legislative changes since last year, designed toincrease HIV testing, including eliminating the requirements for writteninformed consent and requiring opt-out prenatal testing. These are all very positive developments, and we expect moreto come. At a recent meeting of the President's Advisory Commission on HIVAIDS, or PACHA, data was provided for the CDC's hospital emergency departmentdemonstration projects and several public health testing programs. This data shows that adoption of the CDC's revisedguidelines is resulting in increased HIV screening and identification of newHIV infections. And earlier this month, we participated in a two-day meetingconvened by the National Black Leadership Commission on AIDS, or NBLCA, whichbrought together many of the nation's most prominent African-American clergy,representatives of the National Medical Association, the Congressional BlackCaucus, and other organizations to discuss a plan to fight HIV AIDS within theAfrican-American community. At this meeting, there was overwhelming support forincreased testing, education and treatment, and to prioritize these efforts. Inpartnership with the Latino Commission on AIDS also participate in a rapid HIVtesting initiative on National Latino Awareness Day, 2007. We donated OraQuick HIV test and educational materials tothe Commission, which, in turn, distributed the test kits to more than 100community testing sites and events nationwide. And during the quarter, we continuedour efforts to expand HIV testing initiatives in cities that have launchedmajor campaigns. Washington, D.C.'s program continues to expand. The districtwas one of the 23 jurisdictions awarded CDC funding for expansion of itsprogram. And likewise, Philadelphia also continues to grow itsprogram, expanding into traditional public health and corrections settings, andpartnering with hospitals to deliver rapid HIV testing. Finally, our workcontinues with the city of Los Angeles on the development of their testinginitiative, and we anticipate a more formal announcement about this initiativewill be issued in the near future. Sales to Abbott increased 31% during the quarter, andAbbott's out-sales increased 30% compared to 2006. OraQuick is now being usedin almost 2,000 hospitals and is now on contract with seven major hospitalgroup purchasing organizations. As you may know, the initial term of ouragreement with Abbott ends at the end of this year, and there are provisionsconcerning the renewal of this agreement. We are currently in renewal discussions with Abbott andexpect the Abbott agreement will continue for 2008. We're also making goodprogress on the international front. Since our OraQuick Advanced HIV test is CEmarked, we've been aggressively pursuing distribution in the European Union.We've signed distributors in the U.K. and Ireland, and are close to signing adistributor in Spain. We're also making good progress in Italy and France. Several sites in Europe are currently conducting investigationalstudies with the OraQuick Advanced test. We believe studies like this will helpfacilitate our European launch. And as mentioned earlier, OraQuick sales to Africa duringthe third quarter more than doubled, compared to 2006. Sales to the Governmentof Madagascar remain strong, as that country's testing program continues toexpand. And we're also making significant progress, as I mentioned earlier, inother African countries, which we believe will help fuel future growth. In the substance abuse area, there were several importantdevelopments during the third quarter. Intercept sales in the workplace testingmarket grew 9% and 41 new accounts were closed in the quarter across bothworkplace and criminal justice. Two of those closes were large criminal justiceaccounts. And we also recently reached agreement to extend ourIntercept contract with Quest Diagnostics. In the Cryosurgical systems market,apart from the Prestige arbitration, the most important developments were inthe international arena. Significantly, we are close to signing agreements todistribute our over-the-counter Cryosurgical product in a number of additionalLatin American countries. Regarding litigation, last week we received the decision inour pending arbitration with Prestige Brands, the distributor of our U.S.over-the-counter Cryosurgical product. The arbitrators found that Prestige hadbreached the nine compete provision of our distribution agreement when itacquired the competing Wartner product. The arbitrators also concluded that we were entitled to anaward of our legal fees and a share of the arbitrators' costs. To receivepayment, we have to submit proof of our legal fees for approval by thearbitrators. The panel also concluded that the agreement with Prestige willterminate on December 31, 2007. And as a result, we've been evaluating alternative productand distribution strategies for the domestic over-the-counter Cryo market. Thedomestic over-the-counter Cryosurgical market is important, and we intend toparticipate in the future. With respect to the Schering-Plough litigation, this matterremains pending, and we look forward to bringing this litigation to aconclusion, as well. I'll now turn it back over to Ron, who will update ourfinancial guidance.

Thanks, Doug. Starting first with our fourth quarterguidance, we are now expecting revenues to range from $19.5 million to $20million, and earnings per share to approximate break-even. We do expect R&Dexpenses to increase as we progress our clinical development activities. To theextent we can accelerate spending to achieve our desired outcome sooner, wewill do so with a corresponding impact on EPS. With respect to guidance for the full-year 2007, we arereiterating our revenue forecast of approximately $83 million, representing a22% increase over 2006. As we close out the year, we intend to aggressively advanceour clinical development plans on OraQuick, HIV OTC, our rapid HCV test on theOraQuick platform, a product line extension for our Cryosurgery product line,and the automated assays under development with Roche, all of which are runningconcurrently. We believe that there is nothing more important to securingour future than the successful completion of this work and obtaining finalapproval of our next generation of products. And as management team, we arefocused on executing each required step as rapidly as possible. As we have discussed previously, forecasting the exacttiming of clinical trial expenses is a difficult task. And the actual timing ofthese costs will have a significant impact on our EPS. In addition, in Q4, we have our Schering-Plough litigationand the pending resolution and quantification of our legal fee recovery in thePrestige dispute. It is against this background, a difficult to predictvariable, some of which are outside of our control, that we feel comfortablewith leading full-year earnings guidance at $0.05 per share. With respect to 2008 guidance, we will be providingestimates on our fourth quarter earnings call in early February 2008. So, inclosing, I continue to believe that our activities in 2007 will position us forfuture growth in the years to come. And with that, we'll now open again the floor to questionsregarding our business update.

(Operator Instructions) Your first question comes from theline of Ed Shenkan, Needham & Company. Ed Shenkan - Needham & Company: Thanks, Doug and Ron. I just wanted to follow-up on the CDCdisbursements to the cities, which we recently had. Are you finding that thecities are purchasing more product than they previously did because of thisfunding from the CDC, or is the funding in a displacing what you have expectedthose cities to order?

Ed, this is Doug. We expect that this funding is going to beincremental to what they've been granted and spent in the past. However, as Imentioned earlier, we expect most of this new funding to actually be spent in2008. Ed Shenkan - Needham & Company: Okay.

If you recall, the jurisdictions had to submit their grantproposals to the CDC. And they were just notified within the last 30 or 45 daysor so that they received those grant awards. They then, now, have to take thatmoney and begin to implement. And in virtually all cases, these dollars represent newprograms. So, the different jurisdictions are building infrastructure to beable to execute and deploy these new funds. So, that's why we're going to seesome funding, some of this new money in the fourth quarter. But, we believethat most of it will be in 2008. Ed Shenkan - Needham & Company: And the way those programs were designed, the grants thatthey had to write, it had to explicitly show that it was additive, these werenew programs. Is that right?

That's exactly right. And there will be an accountabilityand a reporting mechanism set up by the CDC with the grantee, so that we shouldhave some indication as we progress through 2008 as to just what theincremental funding impact was. Ed Shenkan - Needham & Company: And Ron, two clarifications in the guidance for the fourthquarter, does it include any U.S. OTC? What revenues from Prestige? And also,did you include in your guidance expectation of litigation reimbursement from,I guess, Prestige also?

Sure. With respect to your first question, Ed, there is anamount of product that we shipped in early October to Prestige of approximately$700,000 in the fourth quarter. And yes, we do have an estimate in there forlegal expense recovery. Ed Shenkan - Needham & Company: So, other than the $700,000, that's all you'd expect forPrestige?

Yes, that's it. Ed Shenkan - Needham & Company: Great. I'll get back in queue.

Your next comes form the line of Dave Turkaly of SIG.

Thanks. And on the clinical front, can you just review withus the ultimate timing? I think you spoke about when you submit HIVover-the-counter. Could you refresh our memory on Hep C and when an ultimateapproval could actually come from the FDA?

Okay. So, on the HIV OTC, we still have to complete thePhase 2 studies, which we expect will be completed yet this year, and then weexpect to complete the Phase 2b and Phase 3 studies during the first half of2008. Assuming those studies are completed on time, the actual HIV OTCsubmission will be somewhere mid-year or into the back half of 2008. On the HCV front, we're going to initiate our clinicalstudies before the end of this year. They will certainly last through the firstquarter or so. And then, we will compile that data and make our submission assoon thereafter.

And just quickly, my recollection is that it's PMA, but itmay not need a panel. Is that still the way you guys are thinking today?

We would expect that the HIV OTC submission will be reviewedby the blood product advisory committee. The HCV submission, we expect, will bemore straightforward PMA approval.

And just one last one to that front. I know you're notspeaking too much about the exact design of the trial that you have to do but,I mean, is it similar to what we saw data on in July, or is it a completelydifferent kind of analysis you'll need to do for the FDA?

No, I think that the data that was shared at the AACC on theHCV prototype is represented of the types of specimens and the types of studiesthat are part of our HCV clinical trial protocol. It will just be a bit larger.

Thanks a lot.

Your next question comes from the line of John Putnam ofDawson James Securities.

Yes, I was just wondering on the Prestige, or the OTCmarket, could you possibly speculate on some of your options? What are youkinds of looking at trying to do?

I prefer not to speculate although, obviously, we've enjoyeda good position with the Compound W brand. Our technology has well received inthe marketplace, so we'd like to make sure that that technology still has aplace in the market. We could introduce an additional branded product. We could,obviously, also do something with potentially a private label product. Wehaven't rule any of those things out at this point. But, I wouldn't speculate on which of those, or both ofthose, we'd pursue. I think as we progress discussions with potential partnersor make decisions on our own to launch one or more of those products, we'llshare that information as soon as possible.

Yes. Thanks, Doug.

Your next question comes from the line of Aaron Lindberg,William Smith & Company. Aaron Lindberg - William Smith &Company: Just a clarification on an earlier question, in your Q4estimates, you are included that recoup of the PVH arbitration costs?

Yes. Aaron Lindberg - William Smith &Company: Okay. So, that's already in there, and we're netting out atbreak-even.

Yes. Aaron Lindberg - William Smith &Company: Okay. When would you expect to once again have a U.S. overthe counter Cryo product?

We're not prepared, at this time, to give an estimate onthat, Aaron. Aaron Lindberg - William Smith &Company: Okay. Do you have in your financial plans, do you have anypurchases from the CDC or SAMSA directly, whether that's 2007, '08, beyond?

We'll give guidance on 2008, as Ron mentioned, in ourFebruary call. Aaron Lindberg - William Smith &Company: But, broadly speaking, are you planning on any directpurchases from either one of those agencies for OraQuick Advance?

You want to comment on any fourth quarter?

Well, no. I mean, in the fourth quarter, which is really theone that we have been discussing and giving guidance on, Aaron, again, I thinkit'll be the CDC's money that has been directed down to the various publichealth entities around the country, will be utilized and, as Doug indicated,that the majority of that is likely to be an '08 event. But, we will likely seesome dollar purchases using CDC money in the fourth quarter here, but notdirect purchases from the CDC, indirect purchases. Aaron Lindberg - William Smith &Company: Okay. That was just my and that's all that I'm looking foris clarification because my sense is that the likelihood of direct purchasesfrom those organizations going forward is low. You said it’d be throughprograms like the rapid HIV initiative that's underway now, that we just sawthe allocation for, rather than a direct purchase.

Okay. Aaron Lindberg - William Smith &Company: And that's what I'm looking for clarification on. As it relates to your final Phase III OTC trial for HIV, doyou know how many patients you anticipate enrolling in that now?

We have not reviewed that study protocol yet with the FDA.So, no, I can't comment on that right now. Aaron Lindberg - William Smith &Company: Okay. And then, last question, it'll be just a follow-up onan earlier one, as well. Can you just walk us through, from your vantage point,what you see as the pros and cons of a new branded product versus a privatelabel OTC Cryo product in the U.S.?

Well, I think, on the branded side, we have a leadingtechnology, so that technology put into under any brand obviously, it dependson the strength of the brand, could be an attractive offering. There is not a private label offering in the marketplacetoday, and that could be interesting, as well. None of these options are off thetable right now. As I mentioned, as we have something more to report, we'llshare it with you. Aaron Lindberg - William Smith &Company: Okay. Thanks.

Your next question comes from the line of Jeff Frelick ofLazard.

Yes. Doug, could you comment maybe on the timing of platformenhancements for OraQuick?

I'm not sure; I understand the question, Jeff.

Increasing the sensitivity or specificity of the product?

The sensitivity and specificity of the product is extremely,extremely high right now. Sensitivity of OraQuick HIV and blood is 99.6%, 99.3%oral fluid. Specificity is 99.9% and blood 99.8% in oral fluid. So, the product's absolutely robust and performing very wellin the field. We have learned some things, quite frankly, through thedevelopment of our Hepatitis C assay that we think might make those numberseven better. We haven't made any firm decisions yet to develop animproved or reengineered HIV test but, certainly, something that we mightconsider as we look down the road.

Okay. And with respect to shelf-life extension, maybe helpus understand a little bit what's kind of needed to -- kind of the to-do list,next step, other than just waiting for time to elapse?

I think, as we've mentioned previously, we've identifiedsome process improvements that we've implemented in the OraQuick manufacturingprocess. We've developed some enhanced lots that we believe will enable us toextend our shelf-life and those new lots are currently on stability. We indicated previously, I think, that we put those lots onstability in April. And in order to extend the shelf-life of the product, wehave to have real-time stability. Our current shelf-life is six months. Obviously, as we pass the six-month timeframe and continueto demonstrate extended stability, we will make the appropriate adjustments toour shelf-life.

Okay. Thank you.

Thank you. At this time, there are no further questions. Mr.Michels, I'll return the call to you.

Okay. Well, I want to thank everyone for participating inthis afternoon and this evening's call. We're certainly looking forward tofinishing a very successful 2007, and I look forward to updating you again onour progress during our next conference call in February. Have a good afternoon and evening, everyone. Thanks again.Bye-bye.

Thank you. This concludes today's conference call. You maynow disconnect.