Feb 13, 2008
Executives
Doug Michels - President and Chief Executive Officer Ron Spair - Chief Operating Officer and Chief Financial Officer Judy Clarke - Investor Relations
Analysts
Ed Shenkan - Needham & Company Dave Turkaly - SIG Aaron Lindberg - William Smith & Company Caroline Corner - Pacific Growth Equities John Putnam - Dawson James Securities Jeffrey Frelick - Lazard Capital Sara Michelmore - Cowen & Company
Operator
Good day, everyone and welcome to OraSure Technologies 2007 fourth quarter and full year financial results conference call and simultaneous webcast. As a reminder, today’s conference is being recorded.
All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question and answer period.
(Operator instructions). For opening marks and introductions, I will now turn this call over to Judy Clarke at OraSure Technologies.
Judy Clarke – Investor Relations
Good afternoon, everybody and thank you for joining us today. I would like to begin by telling you that OraSure Technologies issued a press release at approximately 4 p.m.
Eastern Time regarding our 2007 fourth quarter and full year financial results and certain other matters. The press release is available to you on our website at www.orasure.com or by calling 610-818-1820.
If you go to our website, the press release can be accessed 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, February 19, 2008 by calling 800-642-1687 for domestic, or 706-645-1291 for international. The access code is 328-48-688.
With us today are Doug Michels, President and Chief Executive Officer, and Ron Spair, Chief Operating Officer and Chief Financial Officer. Doug and Ron will begin with opening statements, which will be followed with a question and answer session.
Before I turn the call over to Doug, I must remind you that this call may contain certain forward-looking statements, including statements with respect to revenues, expenses, profitability, earnings per share, and other financial performance, product development performance, shippings and markets, and regulatory filings and approvals. Actual results could be significantly different.
Factors that could affect results are discussed mostly in the SEC files of OraSure Technologies, including its registration statements, its online report or form 10-K for the year ended December 31, 2006, its quarterly reports on fort 10-Q and its other SEC filings. Although forward-looking statements have to provide complete information about future prospects, we must also keep in mind that forward-looking statements may not be reliable.
The company undertakes no obligation to update any forward-looking statements to reflect the events or circumstances after this call. With that, I would like to turn the call over to Doug Michels.
Doug Michels – President and Chief Executive Officer
Thank you, Judy and good afternoon, everyone and welcome to our fourth quarter and full year 2007 earnings conference call. For today’s call, Ron Spair will begin with a review of the fourth quarter and full year 2007 financial performance.
As you can see from our earnings release, our full year financial results were in line with expectations. Following Ron’s remarks, we will open the floor for your questions on these items.
After that, we will discuss our principle strategic initiatives and provide some brief additional business updates. We will also provide our financial guidance for both the first quarter and full year 2008.
We will conclude by again opening the floor for your questions. Now let’s turn to Ron’s financial overview.
Ron Spair - Chief Operating Officer and Chief Financial Officer
Thank you, Doug and good afternoon everyone. First, I will start with a brief review of the full year results.
2007 revenues increased 21% as a result of continued, robust growth in our infectious disease business, along with exceptional growth in our non-U.S., over-the-counter cryosurgical business. Our infectious disease revenues increased 23%, while our worldwide cryosurgical sales grew 36%.
The growth in our infectious disease revenues continued as a result of strong sales of our OraQuick, rapid HIV test. Sales to public health count increased 30% over 2006 and our sales to (inaudible) were up 17%.
International sales of OraQuick nearly doubled, or were up 94% compared to 2006. Our OTC cryosurgical revenues grew 21% domestically and 115% internationally.
Our 2007 launch of an OTC cryoproduct in Mexico exceeded our expectations, and our European distribution agreement with SSL has proven to be quite successful. Such strong growth in Europe and Mexico is encouraging and we hope to announce efforts to expand our presence throughout Central and South America later this quarter.
Our substance abuse business remained flat during 2007, while our insurance risk assessment sales decreased slightly. On the bottom line for 2007, we delivered $0.05 per share on a fully diluted basis, compared to 2006 where we ended at $0.11 per share.
Our EPS was impacted by our R&D efforts. R&D expenses for 2007 increased $5.4 million.
That in turn decreased our EPS by approximately $0.07 as we continue our efforts to obtain FDA approval to sell our OraQuick HIV test OTC to develop our rapid hepatitis C test, and to develop homogenous, fully automated drugs and abuse assays for use with our oral strip, oral fluid collection device in collaboration with Roche Diagnostics. The status of these projects will be discussed by Doug in greater detail later in the call.
Now I will turn to our quarterly results. Our fourth quarter performance on both the top and bottom lines was consistent with our guidance and we are pleased with the businesses’ financial performance.
Total revenues for Q4 were $19.8 million, a 12% increase over the same period in 2006, representing all organic growth or quick advance tests, that our OTC cryoproducts were the primary revenue drivers for the quarter. In the infectious disease market, we booked sales of $9.4 million, a 19% increase over the fourth quarter of 2006.
Primary reasons for continued growth in the infectious disease testing business, or a 21% increase in sales to Abbott for distribution in the US hospital market, a 22% increase in direct sales of OraQuick to the public health market, and a doubling of our international OraQuick sales, primarily to Africa. Importantly, we are starting to benefit from the CDC’s additional funding to increase HIV testing opportunities, and we are beginning to see traction of our sales initiatives in the international market.
In substance abuse testing, sales were $3.4 million, a 16% decrease compared to last year, including worth $2.6 million in sales of our intercept drug testing system, which represents a 21% decrease from 2006. Our total warp-based testing business was down 31%, and our international sales were down 32% from 2006.
Our direct sales grew 32% for the quarter and our criminal justice sales grew 4%. The company’s (inaudible) testing business has been directly impacted by a decline in employment rates in some of the markets which by our Intercept products.
The international market has experienced a decrease in public sector funding, which has slowed the implementation of criminal justice testing. Cryosystems sales were $5.3 million for the quarter, an increase of 25% compared to the same period in 2006.
Higher sales of our international OTC cryosurgical products were the main reason for this increase, partially offset by lower sales of our domestic OTC cryoproducts. Sales of histofreezer to the US physicians offices increased 50%, reflecting the efforts of our sales strategies in this marketplace.
During the fourth quarter, we had approximately $650,000 in sales of our US OTC product, the Prestige brands, compared to $1.2 million in the fourth quarter of 2006. The decrease in our domestic OTC cryoproduct is a result of the dispute we had with Prestige and the termination of our agreement at the end of 2007.
Finally, insurance risk assessment sales in the fourth quarter were $1.6 million, up 12% compared to $1.4 million in the comparable period of 2006. Turning to gross margin, our margin for Q4 of 2007 was 58%, a decrease from the 65% from the fourth quarter of 2006.
This decline was due to several factors, including an unfavorable product mix versus the year ago period at a higher yield cost associated with the introduction of a new cryosurgical device in the European OTC market. In addition, prior year gross margins were higher than normal due to a favorable royalty expense adjustment made in the fourth quarter of 2006.
Turning to operating expenses, R&D expenses for Q4 were up 46%, or approximately $1.3 million over 2006 largely as a result of costs associated with the ongoing clinical development work for our OraQuick HIV OTC test, product and clinical development cost for our OraQuick HCV test, and clinical study to gain FDA approval for our product line extension in our OTC cryobusiness. Sales and marketing expenses increased 28%, or approximately $1.1 million, mostly due to increased staffing and related charges, increased market research and consulting costs related to the market assessment of our OraQuick HIV OTC and HCV test opportunities as well as increased advertising reimbursements costs related to our international OTC cryoproduct.
D&A expenses decreased approximately $200,000 largely as a result of a decrease in legal fees as a result of the completion of the Prestige arbitration offset by increased staffing-related charges. From a net income perspective, we reported a net of $27,000 with breakeven EPS.
This compares to $1 million or $0.02 per share for the same period of 2006. For the fourth quarter 2007, we recorded an income tax benefit largely due to the inclusion of an R&D credit in our year-end tax provision.
So turning briefly to our balance sheet and cash flow, our cash balance remains strong with cash and short-term investments of $95.6 million at December 31, 2007 and working capital totalled $105.6 million. In 2007, we generated $11.5 million in cash flow from operations, we days sales outstanding improving to 50 days from 55 days a year ago.
During the fourth quarter, we generated $3.5 million in cash flow from operations. And so with that, we would now like to open the floor for questions regarding our financial results.
Operator
(Operator instructions). The first question comes from Ed Shenken of Needham & Company.
Ed Shenken
Question on the one-time payments from Prestige. Did you get any in the quarter and what’s upcoming?
Doug Michels
We did, Ed. We had one payment related to the arbitration regarding the legal fees, and that was included as an offset to legal expenses and G&A; it approximated $400,000.
Ed Shenken
Okay. And, the Abbott contract.
Remind us if you’ve renewed it once again and what are the pricing terms there? Are they up or down?
Doug Michels
The Abbott contract has a renewal clause. We renewed for 2008, and as we’ve discussed previously, we transferred the product to Abbott in the high single digits.
Ed Shenken
Is it much of a change in the price in 2008 versus of 2007, or can you comment on that?
Doug Michels
We normally don’t comment on that and just stick with the comment a made previously.
Ed Shenken
I’ll jump back in cue, thanks.
Operator
Your next question comes from Dave Turkaly of SIG.
Dave Turkaly
Over on to the cryo side quickly, you had made some comments about the international side. How many countries are they in now?
Where else can they go? I know you mentioned Mexico as a strong point, what other countries can you bring that product to with the distributor there?
Ron Spair
SSL has rights to all of the EU along with Australia and New Zealand. Genomma has rights in Mexico, and we’re exploring the possibility of expanding their rights to other territories at this time.
SSL has launched in most of the Western European countries; they’re looking to expand into some of the other Eastern European countries. They’re still opportunities to broaden their distribution in France and Germany, and obviously we are looking for increased penetration throughout Eastern Europe.
Dave Turkaly
Great. If we just look at the guidance for a second, obviously the quarter gross margin you mentioned in the release, if you can point into a direction for 2008, maybe a little beyond, does that bounce right back quickly into this mid to low 60’s or what should we be looking for?
Ron Spair
Sure. I think that there are a couple of issues in the fourth quarter, Dave, that were specific to what we were experiencing at the time.
One of which takes us back all the way back to the fourth quarter of 2006 where we had a royalty adjustment that was favorable and cost a good soul which put up against a tough cost going for the fourth quarter of 2007. We also had an arrangement where we shipped product to our European distributor for cryosurgery without the benefit of taking a price increase for the product that we supplied them.
That will be corrected and effected for 2008. However, there are some continuing issues that we have related to some of the manufacturing process that we have that we talked about on the last call which will provide some valued pressure on margins in the early part of 2008, but I can tell you that as the volume of product sales increases and we move through the year, our expectations are that that will improve as well.
Dave Turkaly
Let me ask something on the infectious disease. Obviously, 19% growth is fairly strong.
When you look at the CDC contract and you look at the competitive landscape, it appears that you’re still growing at a healthy clip. Are you seeing anything out there?
Are you seeing some of that money flow through, and anything on the competitive front or do you still think you’ve maintained kind of a large leadership position there?
Ron Spair
Dave, we are starting to see some of the flow through and, as we have mentioned in previous calls, we think that the bulk of that allocation is going to be spent during the second and third quarters of 2008 although hopefully we’ll see some nice update during the first quarter. I’m going to talk about this a little bit later in the call, but the CDC just recently, just a couple weeks ago, had all of the 23 jurisdictions together in Atlanta.
We were fortunate enough to be invited to participate in that. Out of the 23 jurisdictions, 21 of the 23 intend to use rapid testing to fulfill their obligations as part of that commitment.
All of those customers have been OraQuick, OraSure users, loyal customers and the largest majority, virtually all of them have indicated that they are going to continue to use OraQuick as their primary test for the CBC initiative. So, as these funds begin to be deployed, we expect to realize a substantial benefit from that; I am very confident.
Dave Turkaly
Thanks a lot.
Ron Spair
You bet.
Operator
Your next question comes from Aaron Lindberg - William Smith & Company.
Aaron Lindberg
Hello, guys. One quick followup here, just on that last comment regarding the CDC and the customers.
The comment was that they’ve all been OraSure customers. Are those 21 all current OraSure customers?
Ron Spair
Within the past year, they’ve all used OraQuick and OraSure, absolutely.
Aaron Lindberg
And, Ron, can you just give us some more detail on the scrap problems of the second quarter in a row that we have seen. You made the comment that it’s going to continue into 2008.
Can you just help us understand what’s going on there?
Ron Spair
We are working to basically modify a process for securing some raw materials for our OraQuick product and we have testing algorithm that we have in place that is qualifying our raw materials for inclusion into our OraQuick device and we have some scrap that we have been experiencing that’s higher than normal, Aaron.
Aaron Lindberg
Just the raw materials and is that just for OraQuick or is that for other products, too?
Ron Spair
No, that’s OraQuick.
Aaron Lindberg
Okay. And is that due to the raw materials that you have coming in so that you are just looking at an alternative sourcing, or is it something in the process?
Ron Spair
No, the material as it’s coming in and we’re working with our supplier and it’s well on its way to resolution.
Aaron Lindberg
You have used this same supplier for some time without issue in the past, correct?
Ron Spair
Absolutely.
Aaron Lindberg
Okay. And then can you just take us through the increase in inventory in Q4?
Is that related to any specific products?
Ron Spair
Well, we have a different methodology for our partnering arrangements in the cryo as opposed to what we had with Prestige where we were primarily shipping products on a just-in-time inventory relationship for Prestige. Right now, we are stocking inventory for both SSL and Genomma and are responsive to their needs, and given the number of countries that SSL has now introduced product into, we have more issues in inventory than we had a year ago at this time and also we are carrying a little bit more OraQuick inventory to be responsive to our customer needs as well, both domestically and internationally.
Aaron Lindberg
And then, can you just talk about the OraQuick sales in Q4? Can you break out how much dollars do you have?
Ron Spair
I don’t have that number right in front of me now, but it is not a significant amount.
Aaron Lindberg
Okay. Maybe the easier question would be how much Africa?
I know you said that was the lion’s share.
Ron Spair
Yeah, I would look at most of it as in the developing countries although it was not all Africa. We are also selling in Asia in the fourth quarter of 2007.
Africa was probably in the neighborhood of three-quarters of a million or so.
Aaron Lindberg
Okay. But you are currently launched in three countries in Europe right now?
Ron Spair
That is correct.
Aaron Lindberg
And so we just expect to see of that start to pull through here early in 2008?
Ron Spair
I think that’s a fair expectation although as we have mentioned before, there is additional work that needs to be done on a country-by-country basis to secure registration. We also are actively in discussions with a number of distributors in additional countries in Europe and the way we go to market is through distribution as opposed to direct sales into public health.
And so the transfer price is lower than we would secure if we were going direct, and the ramp is going to be slower.
Aaron Lindberg
Is the transfer process similar to Abbott?
Ron Spair
I would say that it’s in that general ballpark.
Aaron Lindberg
Ok. Without getting into too much detail here as far as, I understand that you’ve got a bunch of work ahead of you as far as adding additional countries, but the three countries that you’re set in right now, is there additional work that has to happen in those three before you can sell product?
Ron Spair
No, no, no. We are selling product and there is obviously a lot of work to do to continue to build the business in those countries, whether there are opinion leaders on board or if some of those countries adopt sweeping regulations and policies like we have here in the United States, and that’s going to be all over Europe.
Europe has not adopted rapid testing like it’s been adopted here in the United States, so it’s going to be more missionary work over the next several years. Obviously, we are on the early phase of that journey.
Aaron Lindberg
Are the distributors that you’re using for those three countries, are those stocking distributors, or are you holding inventory for them as well?
Ron Spair
They’re stocking distributors, but obviously as purpose grows, we’ll hold inventory because it’s got to be labeled for the…
Aaron Lindberg
Okay, perfect. Thanks.
I’ll jump out.
Operator
Your next question comes from Caroline Corner of Pacific Growth Equities.
Caroline Corner
Hi, thanks for taking my call. Just a quick questions, Doug.
Professional or domestic cryosurgery product looks particularly strong in this quarter. I just want to know, do you have any change there with pricing or anything or does it look like that could be the high gross margin it usually is?
Doug Michels
No, I think, Caroline, that the margins have remained the same. Where we had actually expected to see more of a spike in that particular product line in Q3 which had been historically when we saw peak sales in the professional cryoproduct in the US.
It could actually occur in Q4 this year. But the Q1 results to date in forecast look strong, and are representative of regular patterns in that business.
Caroline Corner
Okay, thanks.
Operator
Your next question comes from John Putnam of Dawson James Securities.
John Putnam
Yes, I’m wondering if there’s any improvement in the substance abuse business. Is it really just an economic phenomenon?
Doug Michels
Well, we have seen in the workplace area, John, in effect as it relates to certain of our customers, some of whom are in home improvement, retail, etc. and the effects of testing volumes with those particular customers.
Our direct sales which seem to pick up, we see pretty much the status quo in criminal just here domestically, but in the international marketplace where we are primarily concentrated in the UK, there has been a reduction of public funding for substance abuse testing and we feel the effects of that as does our distributor in country there. And so as we meet through the year, economic conditions get better, we also are extremely active in going after and closing new business here in the US.
And so, I think we will begin to enjoy the benefits of that as we move through the year.
John Putnam
Thank a lot.
Operator
Your next question comes from Jeffrey Frelick - Lazard Capital.
Jeffrey Frelick
Hey, Doug. Can you comment on invisibility, on what percent of the 21 jurisdictions you had mentioned earlier have begun to (inaudible) cruise testing initiatives?
Doug Michels
Yeah. All of them are implementing right now.
The question is, have they gotten to the point where they are actually ordering product? For many of these, I’d say all of these jurisdictions; this funding represents new capacity and new testing.
So, in most cases, they have had to hire staff and build the infrastructure so that they could take on the incremental tests. That’s been going on across the board, and like I said earlier, now we are starting to see lawyers come through.
I’d say about half of the jurisdictions have actually placed orders, maybe a little bit less. And we will expect that that will now obviously ramp up through the first quarter and significantly in the second and third quarters.
Jeffrey Frelick
Well then, will CDC put in place some sort of check to make sure the funding is put to use appropriately?
Doug Michels
Absolutely. Now the primary reason for this meeting that was held two weeks ago brought all of the grantees together, talked about the reporting and monitoring process, and I think it’s very important obviously what this has done.
You may be aware that in the President’s proposed budget for 2009, this funding is re-upped; actually, there is a little bit more funding in next year’s plan for this same initiative. And so, obviously it needs to be very effective to maintain that kind of support.
Jeffrey Frelick
Okay. And then would you care to make any observations regarding your rapid test penetration in the hospital market?
Doug Michels
I’ll talk about that perhaps a little bit in the back half of the call, if that’s okay Jeff. And we’ll follow that on with another question but thanks, going well.
Jeffrey Frelick
Okay. Thanks, guys.
Operator
At this time, there are no further questions. Mr.
Michels, please resume.
Doug Michels
Okay. Thanks for those questions, and now let’s discuss the progress of our development programs and other initiatives to expand the business.
So let me start with our OraQuick HCV test development program. As planned, clinical lots have been produced and our clinical trials have been initiated.
We expect that these trials will continue through the first quarter and into Q2. As soon as they’re finished, we will analyze the results and will prepare a submission.
We are still targeting the filing of a PMA application sometime this summer, and we intend to submit for the CE mark or European approval shortly thereafter. As recently announced, yesterday we have entered into an agreement with Schering-Plough to collaborate on the development and promotion of this test on a worldwide basis.
This new agreement expands our existing collaboration with Schering-Plough which was originally limited to the United States physician office market. Under the terms of the new agreement, all sales of the HCV test will be made by OraSure and we will retain the rights to market and sell the test throughout the world.
Schering-Plough will reimburse us for certain development and regulatory costs based on the achievement of milestones. Schering-Plough will also provide promotional support for the product in international markets.
And according to the World Health Organization, and estimated 180 million people or approximately 3% of the world’s population are infected with hepatitis C, and it’s believed that 130 million are chronic HCV carriers at risk of developing liver cirrhosis and/or liver cancer. It’s also estimated that 3-4 million persons are newly infected with HCV each year and that 70% of the group will develop chronic hepatitis.
HCV is responsible for 50% to 75% of all liver cancer cases, and two-thirds of all liver transplants in the developed word. So in light of these statistics, we believe that the worldwide market for a rapid HCV test is significant.
And we believe our expanded relationship with Schering-Plough will put us in a strong position to capitalize on this opportunity. Regarding OraQuick stability, as you know a critical project has been to extend the shelf-life of our OraQuick HIV test beyond six months.
Real time stability studies continue to progress and have gone well. We usually completed testing at 9 months, and believe that our data supports extending or dating beyond the current 6 months.
Over the next several months, we will continue with these studies as well as develop the necessary documentation required to allow implementation of a shelf-life extension. Extension of shelf life in the US or Europe will require regulatory submissions.
We recognize how important this is for our infectious disease and our customers, and we will continue to prioritize these efforts. Turning to HIV NTC, clearly another major initiative is the ongoing clinical work to obtain FDA to sell our OraTech rapid HIV test over-the-counter.
There have been several developments in this area and the protocol adjustment which we will expand upon in a couple of minutes. And as planned during the fourth quarter, we completed our device interpretation study.
As you may remember, the purpose of this study was to evaluate an individual’s ability to properly interpret test results without having to actually perform the test. The data was collected and analyzed and as I will describe further in a minute shared with the FDA.
The study met our expectations and demonstrated that individuals in our target population could indeed interpret devices as prescribed in our proposed packaging and labeling. The device interpretation study was required prior to starting the final two clinical studies in this program, observed and unobserved user studies.
In our next study which is the observed user study, we will assess an individual’s ability to interact with our packaging and comprehend the instructions for use, take the test, and interpret their own results while a trained professional observes those activities. In the final study, the unobserved user study, subjects will take and interpret the test at home without any observation and report back to the clinical site.
As indicated during our last earnings call, upon completion of our device interpretation study we requested a meeting with the FDA to review our clinical progress to date and our plans for completing both of the final two clinical studies. In December we also filed an IDE amendment to permit commencement of the observed user study and we plan to discuss that submission with the FDA as well.
The FDA granted our request and a meeting was held in mid-January. On balance, we had a good meeting with the FDA.
The FDA was collaborative in its approach and provided important feedback on our clinical results to date. The FDA also further clarified their expectations for the observed and unobserved user studies.
During that meeting, we specifically discussed the detailed results of our device interpretation study and how that data supported moving to the observed user study and was predictive of a successful outcome. With respect to the observed user study IDE amendment, the FDA provided constructive comments which resulted in some minor changes to our protocol.
In the end, the FDA indicated we could proceed with finalizing the IDE amendment for the observed user study. Clearly, this was a good response.
So at the end of January, we submitted a revised IDE amendment to the FDA and we expect an expeditious review of this submission. We will begin the observed user study as soon as possible after we hear back from the FDA on this amendment.
We also discussed with the FDA our plans to move forward with the final unobserved user study. One change in our plans that did result from the FDA meeting is the timing of this study.
Our initial plan had been to obtain approval of an IDE amendment and begin that study while the observed user study was in progress. However, during our meeting the FDA made it clear that we will need to complete the observed user study first and allow the FDA to review the results before submission and approval of our IDE amendment for the unobserved study.
We intend to submit a draft IDE amendment for the unobserved study when we give the FDA our data from the completed observed user study. The FDA’s reason for the timing change comes from the fact that the observed user study will be the first time that potential consumers will be able to take and interpret the test and react to their own test results in real time.
The FDA indicated that they want to see how individuals respond to the test results in the observed study so that any necessary adjustments can be made to our protocol before the users are permitted to take the test in an unobserved setting. These concerns are understandable and we have taken significant steps to insure that our test labeling is robust and very understandable and that a 24-hour, 7 day a week medical resource and referral system will be available to support the users of our test.
The net effect of the FDA’s input is that the observed user study is likely to extend a bit further into 2008 based on the expected timing for approval of our modified IDE amendment. Subject to the results of that study, we hope to begin the unobserved study during the back half of 2008.
We will continue to prioritize these clinical studies with the goal of completing them and submitting our PMA application to the FDA as soon as possible and of course, we will provide updates on our progress in the months to come. Turning to drugs of abuse, another important program is the development of homogeneous fully automated drugs of abuse assays Roche diagnostics for use with our Intercept OraFluid collection device.
The development of these products continues to grow extremely well. Based on the progress to date, we continue to believe that we should be able to develop state-of-the art drugs of abuse assays using OraFluid on a variety of automated systems.
Prototype assays for most of the initial launch menu which is a NIDA-5 test panel are now operational on automated instrumentation. We expect to conduct consumer site testing with these automated assays during the first half of this year.
And when the tests have been fully developed, optimized, and transferred to manufacturing, Roche will initiate the clinical studies with our assistance and the data generated will be used as a basis for a 510K submission to the FDA. Now, I would like to provide some additional details regarding the strategy for growing each of our businesses.
Let me start with infectious disease. Our infectious disease testing business grew nicely in 2007 increasing 23% over 2006.
The primary growth area in 2007 was public health hospitals and our international business. We believe these trends are likely to continue in 2008.
In public health, sales will continue as we talked earlier to be driven by the increase adoption and support for the CDC revised recommendations for routine HIV screening in health care settings and the use of this $35 million in additional funding announced by the CDC last year to increase testing opportunities among populations disproportionately affected by HIV primarily, African-Americans. As I mentioned the CDC held a two day grantee workshop at the end of January for the 23 jurisdictions who receive funding under the program and we believe that the workshop will help to accelerate implementation of this specific testing program.
As I mentioned thus far, the 23 jurisdictions we have shipped product in nine in support of their CDC-funded testing campaign. Our public health business should also continue to grow as a result of HIV testing initiatives implemented in various cities around the country.
During 2007, the revenue from these initiatives more than doubled from 2006, increasing to over $1.7 million. Contributing to this growth were the initiatives in Washington, DC and Philadelphia.
And this past December at the opening of the NASDAQ stock market on World’s Aids Day, the mayor of Los Angeles, Antonio Villaraigosa kicked off a city-wide drive to implore its 1 million Angelinos to get tested for HIV/AIDS by 2011 and these initiatives will contribute to continued growth. Sales to Abbott laboratories for distribution in the US hospital market increased 17% during 2007 and out sales grew 37%.
Our agreement with Abbott which expired at the end of 2007 was renewed for 2008. As a result of the strong collaboration between our hospital sales team and Abbott sales force, we estimate that our order for tests now has an approximate 64% share of the US hospital rapid HIV testing market.
In addition, there has been significant expansion of HIV testing within hospitals specifically through the deployment of testing in the Emergency Departments, primarily driven by the CDC recommendations for routine HIV screening in health care settings. One recent development in New York City is worth noting and that happened today as part of her state of the city address which was given by New York City Council speaker Christine Quinn, she announced the new public-private collaboration between the City Council, the Health and Hospitals Corporation and OraSure to significantly increase testing for thousands of New Yorkers.
Over the course of the next few weeks, we will be working on the details of this very exciting initiative. And on the international front, we are particularly pleased with the growth of our OraQuick business particularly in Africa which saw a 76% growth over 2006 to almost $2.5 million.
Our African business in 2007 reflects our support of large testing initiatives primarily in Madagascar and Ghana and continued private sector businesses in South Africa. We expect these areas to continue to grow and that sales to other countries will increase as additional product validations, registrations are completed and OraQuick is adopted for testing initiatives.
As we mentioned with the receipt of this mark the OraQuick advance test during 2007, we successfully established distribution channels in several European countries and we are presently pursuing other distributors elsewhere in the European Union. Ron mentioned that in late ’07, we shipped our first product to Indonesia and we will be looking to open new markets in other Asian countries and we are also actively pursuing registrations of OraQuick ADVANCE for Latin American.
We are pleased to announce that we have recently received approval in Brazil and Peru for our OraQuick ADVANCE product and expect to begin shipping product later this year and registration efforts are continuing in this region and we hope to have an approval for Argentina in the very near term. Turning to substance abuse.
Our substance abuse revenues for 2007 were flat compared to 2006. As what Ron have explained this is due to primarily to economic conditions here in the United States and reduced funding internationally.
To combat the decreased employment rate, the sales focus has shifted to working with markets that have experienced employment growth or that are less likely to be substantially impacted by the decline in employment. Examples of these markets include retail grocers, hospitality, restaurants, manufacturing, and personal and business services.
To increase growth domestically, we will focus on implementing co-marketing initiatives with third party administrators or TPAs who are currently a critical channel to our customers. We are also working on securing new high profile TPAs and additional customers for Intercept.
We also have been working with potential new laboratories to adopt OraFluid screening for both the criminal justice and workplace testing markets. And in forensic toxicology we have been in discussions with a third party supplier to expand our menu of assays for forensic testing.
Negotiations are progressing and we hope to sign an agreement in early 2008. While forensics is a relatively small piece of total revenues, we believe this product’s expansion is important.
And finally, on the cryosurgical system side, our business grew at 36% over 2006 primarily as a result of our over-the-counter business. We experienced continued strong growth in international OTC markets.
Sales of our over-the-counter cryosurgical product to Mexico through Gennoma Labs resulted in almost $4.4 million in new revenues during 2007. Gennoma has done a terrific job distributing this product and promoting it in Mexico and we expect that continue.
Sales to Europe increased 16% and we expect continued growth in this part of the world as our distributor SSL expands distribution in additional European countries such as Spain and Germany. And with the termination of our agreement with Prestige Brands to the US over-the-counter market we are focused on replacing these revenues.
Our discussions with potential distributors continue and we also hope to commercialize an OTC cryosurgical product for a new indication sometime in 2008 and we recently filed an application for 510-K approval of this product application with the FDA. Sales of our Histofreezer product in the professional market were flat in 2007 compared to 2006.
However, growth in sales to distributors like Henry Schein, Owens and Minor, and independent dealers led to the company’s strong performance in Q4. We hope to continue that through 2008.
During 2007 we completed the two litigation matters in which we were involved and we are certainly happy to have those behind us. We reached agreement to settle the Schering-Plough patent infringement litigation that was started back in 2004 and although I cannot disclose the specifics under the terms of our settlement, we have licensed certain patents to Schering-Plough in the US OTC cryo market and will receive a lump sum payment and future ongoing royalties.
We also completed the Prestige arbitration and recovered a portion of our legal fees prior to the end of 2007 as Ron mentioned earlier. And finally, on the organizational front as previously announced we are delighted that Debra Fraser-Howze has joined our senior management team to head Government and External Affairs.
As you probably saw in our press release, Deborah was the founder, president and CEO of the National Black Leadership Commission on AIDS or NBLCA. Her extensive experience including over two decades serving community with color regarding teenage pregnancy, social welfare and HIV/AIDS, she has also served as an advisor to two US Presidents as a member of the President’s Advisory Council on HIV/AIDS and I am thrilled to have her on board and I am confident that Debra will make a strong contribution to the future success of our company.
So, with that let me turn this back to Ron who will update our financial guidance then we will open the floor again for questions.
Ron Spair
Thanks Doug. 2008 should mark another year of significant topline organic revenue growth for OraSure as we continue expanding our activities across all business, that is, domestically and internationally.
We expect this despite elimination of revenues from two significant sources contributing to our growth in 2007 namely the US OTC cryo business which accounted for approximately $6.2 million revenues and $2 million of funded research and development revenues recorded under our HCV collaboration agreement with Schering-Plough in the US. We are targeting total revenues for 2008 in the range of approximately $90 to $92 million.
Given the revenues, we will have to replace from 2007, this target represents a significant step forward. Importantly, this revenue projection does not include amounts payable for past sales under the Schering settlement which are expected to be recorded as other income and excludes any potential contribution in 2008 that might accrue to us from the re-introduction of our cryosurgical wart treatment product in the US OTC market or the launch of the OTC cryosurgical product line extension that Doug mentioned earlier.
From an operating expense perspective, we project a significant increase in R&D spending for the clinical development of OraQuick HCV, OraQuick HIV OTC and a qualification of a new HIV microplate assay for use with our OraSure OraFluid Collection Device. We now expect R&D expenses to total approximately $21 million in 2008, an increase of $7 million over the 2007 level or approximately $0.08 per share after tax.
Our bottom line will benefit this year from the Schering settlement and we are currently projecting fully diluted earnings per share of approximately $0.05 to $0.07. For the first quarter, we are currently projecting revenues of approximately $18 to $18.5 million with sequential growth in infectious disease and substance abuse revenues offset by a drop in cryosurgery revenues as a result of seasonality and the absence of the US OTC cryo revenues.
From a bottom line perspective, we are currently projecting fully diluted earnings per share of approximately $0.03 to $0.04. Now, we will again the open the floor to questions regarding our business update.
Operator
(Operator instructions). Your first question comes from Dave Turkaly of SIG.
Dave Turkaly
Thanks for all the details. On the HepC front, do you have a target for when do you submit and when that might actually be approved?
Ron Spair
We are just saying some time summertime, Dave. Generally, it is a six to nine month approval process for a PMA like this.
Obviously, it all depends on the quality of the data. You know what the data look like in the pre-clinical work that we did this past summer which was outstanding and assuming we replicate that in the clinical studies, which is our plan, hopefully, we will get a pretty quick review.
Dave Turkaly
And then maybe, so that seems like that is still pretty much in line with where we were prior today. Is there any update on the assay at all in terms of a timing, when that might actually be achieved with Roche?
Doug Michels
I am sorry (inaudible), we are working through the final stages of the development agreement and I believe that we have all five of the NIDA-5 panel assays at a fairly advanced stage of development. And we would look to take that into data testing after we get those all working together and balance sheet, we will give more guidance on that within the next several months but we are making great progress on the R&D side.
Dave Turkaly
Great. Thanks.
Operator
Your next question comes from Aaron Lindberg of William Smith & Company.
Aaron Lindberg
Just a quick follow up. Specifically, how is the THC assay coming along?
Doug Michels
Actually, we have made nice progress with the THC assay. It is one of the more difficult assays to develop as you probably know but we have made some nice progress with the antibodies we have identified.
Aaron Lindberg
In terms of the NIDA-5, is that the one that is …
Doug Michels
It is the most challenging in terms of sensitivity and antibody recovery.
Aaron Lindberg
But the other four, you would say are pretty well ready to go?
Doug Michels
We presented data on all four of those at the soft meeting last October, I think it was, and earnings went along very well.
Aaron Lindberg
So, the only way you would want is the THC?
Doug Michels
And we are making good progress on that.
Aaron Lindberg
Fantastic. From the financial guidance here for 2008, it sounds like that the Schering settlement is not included in the $90 to $92 million but it sound like it may be included in the $0.05 to $0.07, do I have that right?
Doug Michels
Absolutely.
Ron Spair
That’s right.
Aaron Lindberg
Why the disconnect?
Doug Michels
Well, it will not be reflected as a revenue for us, Aaron and it will be brought in as other income.
Aaron Lindberg
(inaudible) on the P&L.
Ron Spair
That’s correct. It’s a ….
Aaron Lindberg
Excellent. When did the HCV studies begin?
Doug Michels
They started over the last 30 days.
Aaron Lindberg
How many people do you expect to enroll in that?
Doug Michels
I think it is 3,000 approximately.
Aaron Lindberg
Okay. Excellent.
Doug Michels
Back in the study at eight different sites.
Aaron Lindberg
At eight sites?
Doug Michels
Uhum.
Aaron Lindberg
I will jump back in the queue. Thanks.
Doug Michels
You bet.
Operator
Your next question comes from Sara Michelmore of Cowen & Company.
Sara Michelmore
I am wondering if you can just talk us to the pacing of the quarterly earnings. It looks like relative to the guidance that you have communicated on the press release and on the call today that the earnings are relatively front-end loaded to the beginning of the year.
I am wondering if you could talk us through what is going on and I assume it has to do with the pacing of R&D in particular, but if you could just run us through the expense plans that will be helpful.
Ron Spair
Sure, I would be happy to. I think the major impact that you have seen in the first quarter, Sara, has to do with the Schering-Plough settlement and that has a pretty significant impact on the bottom line EPS.
Then, I would expect given the R&D spend which is going to be heavy in Q1 and currently looks to be probably and even more significant in second quarter of 2008 that that is what would likely drive us into a position where we would be below break-even, in fact. And then, we would hover around the break-even point in Q3 and then back up again in Q4 but the expanded shares on the clinical development were for HIV OTC, HCV and the high throughput substance abuse assays as well as the qualification of a new microplate assay for our OraSure device are going to be fairly front end loaded and we are going to go after them aggressively and we are going to spend the money to get them done as quickly as possible and onto the market.
That’s why we have this skewing towards the front end of the year.
Sara Michelmore
Okay. And then so in Q1, if I am correct to think that the Schering-Plough is going to be in other line that is going to offset some of that stuff within the first quarter?
Ron Spair
Yes, that’s correct.
Sara Michelmore
Is there any difference, in terms of, I know you guys had the burden of a lot of incremental legal expenses last year. Is this something we should think about being down this year or is it too tough to tell us at this point in the year.
Doug Michels
I certainly hope that it is going to be down.
Ron Spair
We all do. We have approximately just under $2 million worth of legal expenses last year, combination of Prestige and Schering-Plough and as Doug indicated earlier in the call, both of them are resolved and hopefully non-recurring in nature but we are sitting in out in February, so, right now we are not aware of anything that would drive that.
Sara Michelmore
Okay. But that should be an incremental positive for you on the P&L this year.
Ron Spair
Yes.
Sara Michelmore
And it sounds like I am correct to assume in terms of OraQuick in the impact of the CDC money that we should expect higher sales of OraQuick in Q2 and Q3 and lower sales in maybe Q1 and Q4, am I right?
Doug Michels
I don’t know that … Certainly higher in Q2 and Q3. We expect the money to be funded again in 2009 and the assumption is that the jurisdictions would receive that money like they did this year end of September for the ’09 fiscal year so our hope is that that OraQuick number just continues to ramp as we continue to build adoption and update.
Sara Michelmore
I know you mentioned, I am sorry, Doug, I was kind of hopping between calls here. When do you expect the CE mark or when are you filing the CE mark for the HCV point-of-care products and how much time do you think you need to get Schering-Plough up and ready to do an EU launch?
Thanks.
Doug Michels
The CE mark will be filed shortly after we make our FDA submission. We are already in discussions with Schering, talking to their international marketing directors about bringing key-opinion leaders to the table and beginning to prepare the markets both here in the United States as well as globally for the introduction of this rapid hepatitis C test.
Funding is very important and so from a government affairs perspective, it is very important that we begin to lobby and try to make those that are in-charge of appropriations aware of the importance of making funds available for the introduction of rapid hepatitis C testing. I am very excited about this opportunity both here in the United States as well as throughout the world.
And obviously Schering’s strength in the therapeutic areas and their relationship with the key-opinion leaders, thought leaders around the world is going to, we believe, help us a great deal.
Sara Michelmore
Wonderful. Thank you.
Operator
Your next question comes from John Putnam of Dawson James Securities.
John Putnam
Thanks. Ron I wondered if you might just clarify this contribution from Schering-Plough on the HCV test, are you going to get certain development costs and milestones as well?
Ron Spair
This is the agreement that we had in GS today, John.
John Putnam
Right.
Ron Spair
That we announced yesterday. There are some portions of the agreement that addresses funded research and development related to a particular geographic region outside the US and then there are other regulatory approval milestones and commercialization milestones that are at QS that would generate payments to us.
John Putnam
And when might you expect those to begin?
Ron Spair
Not in the near term, John. There are likely to be events that would occur subsequent to the US FDA approval.
John Putnam
Okay. So, we will not probably see any unit note in ’08 is that right?
Ron Spair
It would be an upside if we did.
John Putnam
Okay. Alright.
Thanks.
Operator
Your next question comes from Ed Shenkan of Needham & Company.
Ed Shenkan
On the OTC HIV program, when you begin the observed study, how long do you think it will take to do that portion?
Doug Michels
That all depends on how successful we are at the different interim looks. Okay, so we have the opportunity as we have described earlier to look at the data after the first thousand, first two thousand and then ultimately the largest body of subjects in the trials.
So, depending on what the results look like after the first interim look, whether we can stop or whether we have got to continue somewhat that will obviously determine the timing on the study.
Ed Shenkan
In other words, after the first thousand, if things look really good, you could move right on the unobserved? Is that right?
Doug Michels
As I mentioned it in the call, after the observed studies are complete, the FDA has asked us to compile our data to submit that to them and they will review that before they give us the go ahead to move to the unobserved studies.
Ed Shenkan
So, you are not sure whether you have to do a thousand after your first look or if you have to do more before you can move on to the unobserved. Is that right?
Doug Michels
Yes, that’s correct.
Ed Shenkan
The unobserved portion, could you give us some idea on how long that might take to do that part of the study too?
Doug Michels
Based on the information we know today we would expect it to take a similar amount of time as the observed studies. Now, the FDA has reserved the right obviously, by asking us to come back after the observed studies to give us future guidance on that.
But the way that the initial guidance came out of the advisory committee over a year ago, those studies were designed to be largely the same, one was going to be an observed environment and one was going to be unobserved.
Ed Shenkan
At this time, what would you think is your best case for getting the PMA in as far as when? Do you think that there is still a thought that you might get it by December of this year?
Doug Michels
I think that our best estimate right now is to talk about the observed studies and as I mentioned we resubmitted the revised IDE that went in quickly after our meeting because the revisions they were asking for were very minor. They have 30 days to review that so we would expect that we are going to get that back within the next several weeks and upon receipt of that we are going to execute on the observed studies.
Those should take several months to complete through the first interim look. We will get through that, we will see what the results look like and depending on whether we have to continue on those studies or whether we can stop and make our submission, we will go from there.
Then we have to submit that data to the FDA and my expectation is we will have another meeting. I think that is what we stay focused on right now.
I think where we are at is in a very good position. We have gone through all the steps of the studies that the FDA has asked us and we have passed through each one relatively quickly.
I wish it was faster. But successfully we are moving on to the last two phases of this study.
The FDA is very encouraging in our discussions and my hope is that we will get through the observed studies over the next several months and get through that successfully and we will see where we go from there.
Ed Shenkan
And Ron, an HCV question. From the contract you now assess here with Schering, the previous contract for HCV was about $2 million if I recall was the offset of R&D that Schering paid you.
Can you tell us how much is this one might be? Was I correct in hearing that you would not start getting offsets you thought until ’09?
Maybe just clarify that.
Ron Spair
The latter point you made is correct and unfortunately we are not able to disclose financial terms of the agreement, Ed.
Ed Shenkan
Okay. Thanks guys.
Ron Spair
You bet.
Operator
Your next question comes from Aaron Lindberg from William Smith and Company.
Aaron Lindberg
A quick follow up on the cryosurgical product, one of the comments that you made is that it looks like you will commercialize in 2008 for an indication and I guess I am not sure 1). If that is just for the new indication that you have been seeking approval for under the 510-K or if that would be multiple indications including the ones you already have approval for and just then including the new indication as well?
Doug Michels
What we are focused on right now is we are focused on re-entering the branded over-the-counter cryo market for warts and common warts and as we have mentioned earlier, we are in on going discussions with potential partners to do and we are also looking at options to do it ourselves. And separate from that as we mentioned, we filed a 510-K application for another cryosurgical indication which will be a separate product and separate indication.
That application went in within the last 30 days and it is a 510-K so we would hope to have approval some time in 90 to 120 days and we would obviously like to get the product launched some time before the end of the year, if at all possible.
Aaron Lindberg
What was the 510-K filing date?
Doug Michels
It has been within the last 30 days.
Aaron Lindberg
So, it is actually going to be a separate product, not just an additional indication for the current products, that there would actually be two products in the US OTC market?
Doug Michels
That’s correct.
Aaron Lindberg
And for your comment now. Your focus is on re-entering the US market with a branded product that would be ideal?
Is that true?
Doug Michels
Yes.
Aaron Lindberg
And since the 510-K approval process is relatively quick and you plan on having a commercial product in the US market in 2008 why aren’t there any US OTC cryo revenues in the guidance for 2008?
Doug Michels
Because we chose not to include them in the guidance.
Aaron Lindberg
Okay. Thanks guys.
Operator
Your next question comes from Jeffrey Frelick of Lazard Capital.
Jeffrey Frelick
So, regarding the HIV OTC meeting with the FDA, is it safe to assume that the user instructions remain finalized with product?
Doug Michels
Yes, barring any issues that we might encounter in the observed studies or unobserved studies, yes. That was part of the robust label comprehension study that we did previously.
Their interpretation component of that was further validated and tested during the device interpretation studies that were conducted and all of those tests went very well.
Jeffrey Frelick
Okay. And then as you go along the clinical trial path and the FDA continues to provide feedback throughout, is it safe to assume that the PMA filing may be a little bit more expeditious given the FDA involvement along the way?
Doug Michels
When we embarked on this effort, we made a decision and agreed with the FDA that we would file IDE amendments for every phase of these trials and we did that because we thought that by agreeing to the protocol upfront with the FDA, we would have less of a risk that they would come back after the fact and ask us to do more or to do the studies differently. And so far, that approach seems to be working very well for us.
I think that the FDA in the last meeting, their request is a reasonable one, to get the data from the observed studies and analyze that, make sure that they are comfortable with that before they move to the final phase of unobserved studies. They did not initially set out the rules or the protocol quite that way but that is their prerogative and it makes sense to us.
I wish we could do it more in parallel but that is not how they want to do it and so we are going to comply and I think it is rational. We will support it.
Jeffrey Frelick
And then to what Ron brought out, for guidance in 2008, shouldn’t that include the additional CDC funding?
Ron Spair
Yes it does.
Jeffrey Frelick
Could you give us a range of what is in that outlook, just on the CDC side? Any kind of range there?
Ron Spair
Jeff, it is really difficult to kind of parse that out given the fact that the money has been transferred down to the individual public health jurisdictions around the country. And as Doug indicated previously, we are active with each and everyone of those jurisdictions and have a significant relationship and expectation on additional testing and the CDC back when they announced the initiative indicated that with the grants that they have received in that they expected to test more than a million or so additional individuals with this initiative.
So, we have expectations of significant penetration there. How it plays out in relation to funding in the public health marketplace is difficult to give real granularity to at this point.
Jeffrey Frelick
Okay. Thanks guys.
Doug Michels
You’re welcome. I think we have time for one more question, then we will have to wrap it.
Operator
At this time, there are no further questions. I will now turn the call over to Doug Michels for closing remarks.
Doug Michels
Let me just thank you all for participating in our call this afternoon and evening. We are obviously very pleased with our performance in 2007 and we anticipate delivering a very successful 2008 and I look forward to updating you again on our progress during our next conference call.
So, thanks again everyone. Have a good afternoon and evening.
Good night.
Operator
This does conclude today’s conference call. You may now disconnect.