Nov 24, 2008
Executives
Kathy Owens – IR Doug Michels – President and CEO Ron Spair – COO and CFO
Analysts
Dave Turkaly – SIG Ed Shenkan – Needham & Company John Putnam – Dawson James Securities Jeffrey Frelick – Lazard Capital Wade King – Healthcare Investments
Operator
Good day, everyone, and welcome to the OraSure Technologies 2008 third quarter financial results conference call and simultaneous webcast. As a reminder, today’s conference is being recorded.
All lines have been placed on mute to prevent any background noise. (Operator instructions) For opening remarks and introductions, I would now like to turn the call over to Kathy Owens at OraSure Technologies.
Please go ahead.
Kathy Owens
Good afternoon, everyone, and thank you for joining us today. I would like to begin by telling you that OraSure Technologies issued a press release at approximately 4 o’clock PM Eastern Time today regarding our 2008 third quarter financial results and certain other matters.
The press release is available to you on our website at www.orasure.com or by calling 610-882-1820. If you go to our website, the press release can be 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, November 11, 2008 by calling 800-642-1687 for domestic or 706-645-9291 for international.
The access code is 69750537. With us today are Doug Michels, President and Chief Executive Officer; and Ron Spair, Chief Operating Officer and Chief Financial Officer.
Doug and Ron will begin with opening statements, which will be followed with question-and-answer session. Before I turn the call over to Doug, I must also remind you that this call may contain certain forward-looking statements, including statements with respect to revenues, expenses, profitability, earnings or loss per share and other financial performance, product development performance, shipments and markets, and regulatory filings and approvals.
Actual results could be significantly different. Factors that could affect results are discussed more fully in the SEC filings of OraSure Technologies, including its annual report on Form 10-K for the year ended December 31, 2007, its quarterly report on Form 10-Q, and its other SEC filings.
Although forward-looking statements help to provide complete information about future prospects, listeners should keep in mind that forward-looking statements may not be reliable. The company undertakes no obligation to update any forward-looking statements to reflect the events or circumstances after this call.
With that, I would like to turn the call over to Doug Michels.
Doug Michels
Thanks, Kathy. And good afternoon, everyone, and welcome to our third quarter 2008 earnings conference call.
In a press release issued earlier today, we announced our third quarter results and provided financial guidance for the fourth quarter. Our third quarter revenues and bottom line results exceeded the guidance that was provided for the quarter.
Ron Spair will provide a further overview in just a few minutes. Following Ron’s remarks, I will discuss additional business developments, including the progress that we are making in our major clinical and development projects.
We will then conclude the call by opening the floor for your questions. But before Ron provides his financial update, I would like to briefly discuss two very exciting and recent developments.
The filing of our FDA pre-market approval application for a rapid Hepatitis C test and the transition of our hospital distribution arrangement with Abbott to a direct sales model, which we announced through a press release within the past hour. As you know, we’ve been conducting clinical trials for use of an OraQuick HCV rapid antibody test on five specimen types; oral fluid, finger stick whole blood, venous whole blood, plasma and serum.
Our clinical studies included data from over 3,000 participants and generated results consisted with the encouraging preclinical data that we previously announced publicly. We continue to believe that there is a substantial opportunity for a rapid HCV test.
On a worldwide basis, there are an estimated 180 million people who are chronically infected with HCV with an estimated 3 million to 4 million individuals newly infected each year. The prevalence of Hepatitis C infection is estimated to be four times that of HIV around the world.
According to the World Health Organization, as many as 50% of persons infected with HCV are undiagnosed and up to 80% who have HCV show no signs or symptoms. In the United States, there are an estimated 4 million Americans or 1.2% of the entire population that are or have been infected with Hepatitis C.
Hep C is a curable disease. The existing treatment therapies can resolve in viral clearance ranging from as high as 50% to up to 80%, and new therapies are under development, which may improve these treatment rates.
We believe that the key to improving public health with respect to HCV is early diagnosis through expanded testing and screening initiatives. While we cannot predict if or when we will receive FDA approval, generally PMA submissions take 10 to 12 months before they are approved.
The ultimate timing will depend on the extent of any FDA questions or requests for additional information and the result of an FDA inspection of our facilities, which is part of the process for PMA submissions in this complexity. Additionally, we intend to file for CLIA waiver as soon as our PMA submission is approved.
CLIA waive tests are simple laboratory tests and procedures that are cleared by the FDA for use outside of a laboratory. These tests are so simple and accurate as to render the likelihood of erroneous results negligible and pose no reasonable risk upon to the patient if the test is performed incorrectly.
Gaining a CLIA waiver for the HCV rapid test, as we have done for the HIV rapid antibody test, would thus substantially expand the available market for the product into include outreach settings, physicians’ offices, and other non-laboratory organizations. We are now in the process of wrapping up some additional studies required to obtain a CLIA waiver.
As I mentioned, we will file an application for a CLIA waiver as soon as we receive FDA approval for the HCV test. We are also finishing up some additional clinical work needed to complete our submission for a CE Mark.
This is required to sell the test in Europe, and we expect to make that filing in the next several months. The completion of the HCV clinical trials and the submission of our FDA application is a very significant milestone for the company.
And I want to take this opportunity to thank and congratulate our R&D regulatory and operations groups who did an excellent job on this very important project. The second announcement, which we issued in a press release about an hour ago, is the termination of our distribution agreement with Abbott Laboratories and the expansion of our direct OraQuick HIV business.
For the past several years, Abbott has distributed our OraQuick ADVANCE HIV test on an exclusive basis to US hospitals and reference laboratories, and on a non-exclusive basis, to the US physician office market. We’ve recently entered into an agreement with Abbott, pursuant to which our distribution arrangement will terminate at the end of this year, and we will begin to distribute our OraQuick HIV test directly to both US hospitals and reference laboratories beginning in 2009.
Physicians’ offices will continue to be served through distributors. Per the agreement with Abbott, we will pay a one-time lump sum termination fee and Abbott will assist in the transitioning of its OraQuick customers to us.
Once the termination fee is paid, which will be early next year, we will have no further financial obligations to Abbott as a result of the termination of the distribution arrangement. This transition is an important and necessary step for our company for many reasons.
We believe taking this business direct will help us maximize sales by taking greater control of an important market, US hospitals. It will also lay a foundation to sell future products into the same channel and, in particular, our OraQuick rapid HCV test once FDA approval is obtained.
We’ve been calling on hospital accounts with our Abbott counterparts for the past five years. And in so doing, we’ve developed close ties with these customers.
Noting now for a couple of months that this transition was a possibility, we have already begun the expansion of our hospital sales team and related support services. And we are confident that the transition will be a smooth one.
We are very pleased with the interview flow, and we are hiring experienced and high achieving sales managers and sales representatives that understand the hospital market. With these additions, we are expanding a very strong sales force to server our hospital customers.
As you know, we also announced some organizational changes during our last earnings call, several of which were in the sales and marketing department. The expansion of our sales force as a result of the Abbott transition is now part of this re-organization as was the addition of Brian Reid, our new Vice President of International Sales, which we announced several weeks ago.
As you may recall, Brian joined OraSure with more than 30 years of experience, the majority of which was in international markets working for companies such as Axis-Shield Diagnostics and Ortho-Clinical Diagnostics. We expect all of these changes, including my continued involvement in leading the sales and marketing activities, to begin to have a more significant impact on our business in the months to come.
And with that, let’s move on to Ron’s financial overview.
Ron Spair
Thanks, Doug, and good afternoon, everyone. I'll start with a brief review of the third quarter results.
Total revenues for Q3 were $16.9 million compared to $21.4 million in the prior year. Increased sales of our OraQuick ADVANCE tests were offset primarily by an expected decrease in revenues from our cryosurgical systems category.
An 18% growth in our infectious disease revenues was the result of continued strong performance by our OraQuick ADVANCE HIV test. Sales to public health during the quarter increased 37% over 2007 as a result of continued growth in our base business and incremental sales driven by the CDC’s efforts to increase HIV testing.
International sales of OraQuick increased 13% compared to the same period in 2007, largely as a result of an increase in revenues from Latin America. Our sales to Abbott decreased 17% as a result of their ordering patterns for the US hospital market, driven in part by the decision to go direct next year.
We expect this trend in Abbott sales to continue in Q4, as they effectively their inventory position to zero in anticipation of the transition. Our cryosurgical revenues during Q3 experienced an overall decrease of 75% compared to 2007.
This was expected because of the absence of the US and Mexican OTC sales in the current quarter, together with reduced OTC sales in Europe. As we explained earlier in the year, our Latin American distributor, Genomma, reduced its purchasing level this year in response to an increase in return product from retailers due to overstocking during the winter months.
The decrease in US OTC sales is the result of the termination of our domestic distribution relationship with Prestige Brands at the end of 2007, while Europe OTC sales declined due to lower revenues experienced by SSL in key markets outside the United Kingdom. Third quarter cryo sales to the international and domestic professional markets experienced decreases of $125,000 and $173,000 respectively.
This business continues to be affected by the diversion of some lower-priced Histofreezer product from several international distributors into the US professional market. We are addressing this diversion by increasing our international pricing, changing product labeling and packaging, and enforcing contractual rights against certain international distributors.
In substance abuse testing, sales were $3.6 million for the third quarter, a 12% decrease compared to 2007. Sales of our Intercept drug testing system totaled $2.6 million, a 20% decrease from ‘07.
Our total workplace testing business was down 35%. Our international sales were down 8%.
And our criminal justice sales declined 1%. Our direct sales grew 11% for the quarter.
The company's workplace testing business continues to be directly impacted by adverse economic conditions resulting in a decline in employment rates in some of the markets that buy our Intercept product. Finally, insurance risk assessment sales in the third quarter were $1.2 million, down 28% compared to $1.6 million in the comparable period of ‘07.
This decrease is largely a result of the ordering patterns of two of our largest laboratory distributors, coupled with an overall decrease in life insurance policies as a result of current economic pressures. Third quarter 2008 licensing and product development revenue included $702,000 in royalties from Schering-Plough related to sales of their OTC cryo product in the US market.
Third quarter 2007 revenues included $754,000 of funded research and development under our domestic HCV collaboration agreement with Schering-Plough. Turning to gross margin, our margin for Q3 of ‘08 was 58%, a decrease from 60% for Q3 of ‘07.
The margin decline for the current quarter was primarily due to an unfavorable change in product mix versus the year-ago period, partially offset by a decline in certain overhead costs, decreased production scrap and spoilage expense, and lower product support costs. Turning to operating expenses.
Research and development expenses for Q3 were up 13% or approximately $495,000 over ‘07, largely as a result of costs associated with our ongoing OraQuick HIV OTC and HCV clinical development programs. Sales and marketing expenses increased 7% or approximately $348,000, mostly due to increased staffing and related charges, as well as increased marketing expenses.
General and administrative expenses decreased approximately $1.5 million, largely as a result of a decrease in legal costs compared to the third quarter of 2007. From a bottom line perspective, we reported a net loss of $1.8 million or $0.04 a share, which is better than our guidance, as some of our research and development expenses associated with our OraQuick HIV OTC and HCV clinical development shifted to the quarter.
This compares to $4,000 in net income or breakeven earnings per share for the third quarter of 2007. Turning briefly to our balance sheet and cash flow, our cash balance remained strong, with cash and short-term investments of $85.4 million and working capital of $99.5 million at September 30, 2008.
During the first nine months of 2008, we used $3.7 million in cash flow from operations compared to $7.8 million provided from operations during the first nine months of 2007. The use of cash in 2008 was largely due to decreased net income and payments of royalty obligations and legal expenses that were accrued at the end of 2007, as well as an increase in our inventory and accounts receivable balances and a decrease in AP.
Days sales outstanding was at 63 days compared to 52 a year ago. In addition, under the terms of our previously announced share repurchase program, we purchased 626,385 shares of common stock at an average price of $4.87 per share.
Now turning to our financial guidance update. With respect to the fourth quarter, we project that revenues will be in the range of $16 million to $16.5 million, and our loss per share will approximate $0.10.
Included in our fourth quarter loss per share are charges associated with the transition of our distribution agreement with Abbott and a $1 million charge associated with a milestone payment required as a result of the filing of our OraQuick HCV pre-market approval application with the FDA. And with that, I'll turn things back over to Doug.
Doug Michels
Okay. Thanks, Ron.
And will now provide an update on our product pipeline and other strategic matters. We continue to make progress in our clinical activities to obtain FDA approval for an OraQuick rapid HIV test for sale over the counter.
As previously announced, we completed testing for the first 1,000 subjects in our observed user clinical study. This is a study where we assess an individual’s ability to interact with our packaging and comprehend the instructions for use to take the test, interpret the results, all while a trained professional observes those activities.
We stopped at 1,000 subjects because our clinical study met the stopping criteria under our protocol. By meeting the stopping criteria, we are permitted to examine the data to see if we have met the 95% confidence intervals for both specificity and sensitivity initially established by the FDA for this phase of the trials.
We believe the data shows this and we have now submitted this data to the FDA for their review. We have also been granted a meeting with the FDA in December to review this data and to discuss our draft protocol for the third and final clinical study for our submission.
As previously discussed, this final study is designed to test the device with consumers in an unobserved setting. In anticipation of moving to the next phase of our clinical trials, we have identifying additional clinical sites to utilize in this final study.
We are very encouraged by the results of our observed user trial, and we look forward to meeting with the FDA to discuss the continuation of this important project. We are doing everything within our control to advance this program as rapidly as possible.
And as additional progress is achieved, we will provide update to all of you as appropriate. Our efforts to extend the shelf life of our OraQuick HIV test have also progressed.
As previously announced, we submitted stability testing data to the FDA to support an extension of shelf life to 12 months. This improvement in stability is based on process changes in the manufacturing and packaging of the OraQuick device that were previously submitted to the FDA.
During the next several weeks, we will be completing a small additional study that’s been requested by the FDA in support of these process changes, after which we will submit the data with the hope of getting final FDA approval to move to 12 months as quickly thereafter as possible. In order to extend the shelf life in Europe, we recently submitted stability data to our notified body with a requested extension to 12 months.
Our notified body is scheduled to visit our Bethlehem facility in early December as part of this normal annual inspection, and we would expect to discuss this request for shelf life extension with them at that time. Our work with Roche Diagnostics to develop fully-automated homogenous drugs of abuse assays for use with our Intercept oral fluid collection device also continues to grow extremely well.
At a recent meeting of the Society of Forensic Toxicologists or SOFT in late October, OraSure and Roche Diagnostics presented posters on automated homogenous oral fluid assays for cannabinoids, or THC, and phencyclidine or PCP. The data presented in these posters indicated that these assays demonstrate state-of-the-art sensitivity for both THC and PCP in oral fluid.
What is significant about this is that feasibility and performance have now been demonstrated with oral fluid on automate equipment for all drugs in the initial NIDA-5 panel expected to be launched under our collaboration with Roche Diagnostics. In addition, at the SOFT meeting, findings were presented from a recent large scale study sponsored by the Substance Abuse and Mental Health Services Administration of oral fluid drug testing results over a five-year period in a non-federally regulated workplace market.
This large analysis demonstrated that oral fluid drug testing produces comparable outcomes to urine drug testing. Analysis of 650,000 oral fluid drug testing results, of which 98% were conducted with our Intercept oral fluid drug testing system, also indicated that verified positive rates by medical review officers were higher with oral fluid specimens than with what it typically observed with urine drug tests.
The results of this analysis clearly reinforce the credibility and the strong performance of oral fluid drug testing and, in particular, our Intercept Drug Test. We are very encouraged by these findings.
As discussed in prior calls, we are planning to launch our own branded cryosurgical wart removal product in the United States OTC market beginning in the first quarter of 2009. Instead of using a distributor that already has a brand name, we will be launching a new national brand that we developed after conducting significant consumer testing.
We will also sell our product directly to the retail market with assistance from a broker that specializes in consumer brands. Our plan is to start with a targeted launch focusing on one or two major retailers.
Once the product has entered the market, we will look to expand distribution to other major retailers in the OTC channel. We are excited about introducing a new brand and re-entering the domestic OTC cryosurgical market.
And in the long term, we look forward to expanding the number of branded cryosurgery product available to our consumers. A final development project that we have mentioned in prior calls is to obtain FDA approval of a new HIV lab-based enzyme immunoassay or EIA for use in testing oral fluid specimens collected with our OraSure collection device.
The OraSure device is used primarily in the insurance risk assessment testing and public health markets. As you may recall, last year BioMerieux indicated that it would cease manufacturing the only HIV immunoassay approved for use with our OraSure collection device.
We have identified another blood-based HIV immunoassay, which with some optimization we believe can be used with oral specimens collected with an OraSure device to screen HIV-1. The optimization is close to being finalized and we are preparing to launch trials to obtain FDA approval of this assay for use with the OraSure device.
These trials will also incorporate the use of our oral fluid Western Blot as the confirmatory test for oral specimens that initially screen positive with the new asset. We expect these clinical trials to start in the first quarter of 2009 and our submission to the FDA will be made as soon as possible after they are concluded.
Finally, the lawsuit filed against OraSure by Inverness and Church & Dwight for patent infringement continues to move forward. Pursuant to a schedule adopted by the court earlier this year, Inverness filed a motion for summary judgment on the issue of infringement last month.
And we plan to file our response to that motion at the end of this week on November 7. Inverness will have another seven days to reply under the current schedule, after which the court will consider the motion with a decision expected either later this year or early next.
In the meantime, the discovery process is continuing and will continue through much of next year. We remain confident in our position that our OraQuick ADVANCE HIV test does not infringe the patent asserted in this lawsuit, that the Inverness and Church & Dwight patent is invalid and unenforceable, and that we will successfully resolve this litigation.
Additional updates on material developments will be disclosed as they occur. And with that, let’s open up the floor to your questions.
Operator
(Operator instructions) Your first question comes from the line of Dave Turkaly from SIG.
Dave Turkaly – SIG
Thanks. Looking at your decisions to go direct, can you remind us how many people you have total kind of doing your public health direct sales?
And then how many do you think you will need kind of to take over for the Abbott effort?
Doug Michels
Yes. Dave, we’ve been direct in public health, as you know, I think from the beginning.
So our sales force calls directly. And as a separate group, they call directly to the state, local and city health departments and the like.
This is a direct impact on the hospital market where we’ve also had reps in the field that have been supporting the Abbott effort. We have about a dozen or so reps there.
We are going to be expanding that group pretty substantially in addition to adding inside sales folks. We are obviously adding additional support people.
We’re adding warehousing people, building the infrastructure so that we can take on this business seamlessly. We believe that the resources that we’re adding will actually enhance our presence in the hospital market.
Don’t forget that Abbott represents the OraQuick product in addition to all of their central lab-based systems. They really spend limited time outside of the central laboratory, and by having a significant force out there calling on the points of care where OraQuick is used, we think we’re going to actually significantly expand our presence in the hospital market.
And we’re going to have great synergy with that expanded force with our public health effort as well.
Dave Turkaly – SIG
And just total numbers ballpark, how many people do you have direct public health and how many do you think you will add?
Doug Michels
On a combined basis, we’re going to have in excess of 30 folks calling directly on the combined market.
Dave Turkaly – SIG
And with that kind of effort, do you think in terms of the imprint you can get to the hospitals, where Abbott was, I mean, can these guys come to speed pretty quick? Do you think that means next year?
It looked like Abbott was running $7 million to $8 million, or is that a realistic goal or should we expect it kind of to trail down a bit and then pick up maybe later in the year 2010?
Doug Michels
Dave, we expect these folks to hit the ground running. As I mentioned in my comments previously, we are hiring experienced managers and representatives who are familiar with the hospital environment, who are familiar with rapid point-of-care testing.
Our applicant flow has been excellent. And as I mentioned also, we’ve been interviewing and actually hiring for the last couple of months anticipating this possibility.
This is an absolute critical move for us, something that we’ve been looking forward to actually, not only to accelerate the option of rapid HIV testing in the hospital market, but to set the stage for the ultimate launch of HCV in the future.
Dave Turkaly – SIG
Thanks.
Operator
Your next question comes from the line of Ed Shenkan with Needham & Company.
Ed Shenkan – Needham & Company
Doug, I was just wondering what prompted the change with Abbott. Have you been displeased?
Doug Michels
When we signed the amended agreement with Abbott four years ago, the initial term was a three-year term, and we had annual renewal options. We exercised the first annual renewal at the end of ’07 for this 2008 calendar year.
And the opportunity to renew or to take the business direct presented itself, given the fact now that we submitted our HCV PMA application. This seemed like an opportune time to exercise that option.
We’ve got a very strong position in the hospital market. We’ve got a strong sales organization that obviously we’re going to continue to build.
It’s important to understand that we know the largest hospital customers that are purchasing our products. We’ve been servicing them.
We’ve been supporting the Abbott effort. So this transition of those customers should be very effective, seamless, very smooth transition.
What we’re trying to do is we’re trying to accelerate the growth in the hospital market by deploying more direct, fully committed, fully focused resources against this significant opportunity.
Ed Shenkan – Needham & Company
Doug, you’ve always been direct with public health. How many people do you have, or how many sales reps in public health now?
And how many is that going to grow to when you get your 30 total combined force?
Doug Michels
We’ve got about a dozen completely focused on public health. That number is not expected to change materially at this time.
But obviously, the synergy between the public health sector and the hospital segment is significant. We expect that will continue to build.
Ed Shenkan – Needham & Company
Did I hear it right, you got about 12 public health now, about 12 in the hospital now and you’re going to get to about 30 combined. So you go from 24 now to 30?
Doug Michels
It will be somewhere in that range, probably a few more than that.
Ed Shenkan – Needham & Company
Okay. And the termination payment to Abbott, how big is it and what’s contingent on that payment?
Is there a case that you may not have to pay it?
Doug Michels
No, it’s a contractual agreement and we have not disclosed the magnitude of that.
Ed Shenkan – Needham & Company
Is it all going to be in the first quarter or will it be for several quarters?
Ron Spair
No, it will all be taken in the fourth quarter, Ed.
Ed Shenkan – Needham & Company
Okay. So we’ll finish this.
It will all be done in 2008 then, nothing lingers into ’09?
Ron Spair
That’s right.
Ed Shenkan – Needham & Company
Good. And for Hepatitis C, congratulations first on submitting.
Doug Michels
Thank you.
Ed Shenkan – Needham & Company
That’s an accomplishment, as you said. What’s the specificity and sensitivity in that data?
What is the data?
Doug Michels
Yes. The results from the clinical studies were broadly consistent with the preclinical studies that we share the information on were presented at the AACC in 2007 and the ASM this past year.
So, excellent sensitivity and specificity. We’re not going to release the specific numbers at this time until we finally get the approval from the FDA, but you should know that the results were broadly consistent with those previously announced studies and we’re very pleased with the results.
Ed Shenkan – Needham & Company
As we get closer to approval and then launch, what should the launch plan – what should we expect? Will you focus more on public health, more on doctor office?
What would be the revenue breakout as far as public health versus doc office, just to better understand the marketing plan?
Doug Michels
I think we’ll share that information once the product is approved. But I think you’ve hit the nail on the head.
The opportunities are clearly going to be in the physician office market. We’re eagerly looking forward to putting the product in the hands of Schering-Plough’s organization so they can go out and detail it into the physician office market.
We see significant opportunities in the public health sector in the substance abuse and mental heath services community and also in the hospital market. So, very eager to work with the FDA to get this product approved, and we’ll share more specifics about the launch of these sales, Ed.
Ed Shenkan – Needham & Company
Can you remind us who the doctor, physician office distributors are that you use now, maybe how big those sales forces are? I assume that they are going to get Hepatitis C product as well.
Doug Michels
Well, today with the HIV product, obviously we use PSS, we use Henry Schein. We use all the traditional physician office distributor groups that you’re familiar with.
Ed Shenkan – Needham & Company
Okay. And for R&D projects coming up going forward, what – where is the majority of the spend going to be?
Just sort of wondering if we’re sort of now on R&D spend and expect it to start to drop considerably going forward.
Doug Michels
Well, we still have a major study that’s going to be conducted for the final phase of the HIV OTC trial in 2009. As I mentioned, we’ve got a meeting set up with the FDA in December to discuss the final protocol for that.
We’re really encouraged that that meeting now has a schedule, which would have been scheduled in the last few months. But we can only meet with them when they grant us a date.
But that meeting is now scheduled. We’re going to be conducting the study on that HIV EIA that’s going to be used to replace the BioMerieux assay.
That’s going to be another significant expense. And there is going to be some expenses associated with the HCV CLIA waiver studies and the CE Mark.
I think that pretty much – well, and then there will also be some additional expenses related to the high throughput homogenous SAP assays. So we’re still going to be investing in R&D.
That’s for sure.
Ed Shenkan – Needham & Company
Is it fair to say that total spend probably doesn’t decrease in ’09 with everything you got going on?
Ron Spair
I don’t think I’d draw that conclusion as we did incur significant spend level for HCV for the PMA. And so most of that is behind us.
So, as Doug mentioned, we’ll have yet the CLIA and some CE expenses that will go over into 2009, but I believe in the aggregate, the ’09 spend level in R&D will be less than ’08.
Ed Shenkan – Needham & Company
Roughly how much was the HCV, then PMA? Because maybe I can just sort of back that out, that will give me a better idea of what to expect.
Ron Spair
Several million dollars.
Ed Shenkan – Needham & Company
So they took out several million. That brings me in a ballpark of what – I’m just trying to figure out how much to bring R&D down in ’09, any help you can give.
Ron Spair
Yes. I really don’t want to give guidance for 2009 here on that expenses, Ed.
Sorry.
Ed Shenkan – Needham & Company
Okay. Last question, I’ll get back in queue.
The cryo OTC, you said – did you say one or two retailers that you’re going to work with? Can you tell us who they are?
Have you decided them yet? And then, for the first year of that launch, would it be similar to the first year when you launched the old brand a couple of years ago, as far as the splash you make in the market, or would it be significantly more or less?
Ron Spair
We have not identified the individual retailers for competitive reasons. We do not expect the magnitude of the splash, as you say.
It would be anywhere near the magnitude of the launch for Prestige back in 2003. So just to manage those expectations in your mind, this is where we are out in a focused way, managing or experiencing the OTC channel here, and looking to learn from that.
And this is a targeted launch, and we’ll manage expenses as well as learn from it and look to add to when we have other indications to bring to the market under the brand name.
Ed Shenkan – Needham & Company
Two or three years out, should the brand be as big as Prestige was, or –?
Doug Michels
We have high hopes for the brand. And we believe that it can be expanded.
So that’s going to be our objective.
Ed Shenkan – Needham & Company
Good. Jump back in queue, thanks.
Doug Michels
Thank you.
Ron Spair
Thanks, Ed.
Operator
Your next question comes from the line of John Putnam with Dawson James Securities.
John Putnam – Dawson James Securities
Yes, thanks a lot. I was wondering on the HIV, on the unobserved portion, do you think it will be as large in terms of subjects as the observed was?
And will the end points be the same do you think, or will the FDA requires something else?
Doug Michels
Thanks for the question, John. Difficult to say whether it’s going to be as large.
If you recall, we had two arms of the observed study. One, where we tested approximately 500 known HIV positives.
There was another arm where we tested 500 healthy normals or presumed negatives. I don’t know that the FDA is going to require us to once again test a large number of HIV positives.
Based on what we shared, you know, that arm – both arms were highly successful. So I’m not sure what’s that going to prove.
So we may require 500 more healthy normals. They may up that number.
I think that’s where a lot of the discussion is going to take place when we meet with the FDA. So it’s really a TBD.
When we originally talked about a phase – the final phase study, discussions were more along the lines that we would just repeat what was done in the observed setting. And the expectation was that the same stopping criteria would be used.
If that’s the case, I guess my viewpoint on that is that would be great. We believe we met the stopping criteria at 1,000 subjects.
So, we’ll see. All I can say is we were delighted with the results of the observed trial.
We’re going down and having this discussion with the FDA, and we look forward to finally getting their guidance on the unobserved study. And we’re going to be ready to execute quickly in 2009.
John Putnam – Dawson James Securities
Okay. And then just a follow-up question on the transition from Abbott, did you say that there is a royalty payment of $1 million?
Ron Spair
No. No, John, we have a payment of $1 million that is due as a milestone payment to the Ortho-Chiron group as a result of filing the PMA.
And that will be expensed as in-process R&D during the fourth quarter. Separately, we spoke about a one-time payment to Abbott related to the transition of the agreement here in the fourth quarter.
That payment, we indicated, would likely be made in the first quarter, although the expense will be taken here in the fourth quarter and there will be nothing that follows us into 2009.
John Putnam – Dawson James Securities
Okay. Thanks for the clarification.
Doug Michels
So our financial obligations to Abbott will be done.
Operator
Your next question comes from the line of Jeffrey Frelick with Lazard Capital.
Jeffrey Frelick – Lazard Capital
Hi, good evening, folks.
Doug Michels
Hi, Jeff.
Ron Spair
Hey, Jeff.
Jeffrey Frelick – Lazard Capital
Ron, regarding the 4Q ’08 outlook, what is the estimate for earnings per share if you exclude the charges relate to Abbott in the quarter and the one-time payment?
Ron Spair
For reasons of confidentiality, we were not permitted to disclose the amount of the payment related to the termination inside. I really would want to be in a position to have that calculated.
So I – we’ve identified $1 million on the IT R&D. Beyond that, I just don’t want to go in further – can’t go in further, Jeff.
Sorry.
Jeffrey Frelick – Lazard Capital
Okay. How much inventory is remaining at Abbott?
Ron Spair
We are expecting them to pretty much be out of inventory by the end of December. And we’re working closely with them to achieve that goal.
Jeffrey Frelick – Lazard Capital
Okay. And then after that, going forward, what will that do to gross margins?
Ron Spair
That will be a net pickup to gross margins, as we will be billing the hospital customers directly. And obviously we’ll have a royalty obligation on those incremental revenue dollars, but other than that, that would be a net positive to gross margins.
Jeffrey Frelick – Lazard Capital
Okay. Thanks, guys.
Ron Spair
Yes.
Operator
Your next question comes from the line of Wade King with Healthcare Investments.
Doug Michels
Hi, Wade.
Ron Spair
Wade?
Operator
Mr. King, your line is open.
Doug Michels
Okay, let’s move on.
Wade King – Healthcare Investments
Hello?
Doug Michels
Hello.
Wade King – Healthcare Investments
Yes. Can you hear me?
Ron Spair
Hey, Wade.
Doug Michels
Hi, Wade.
Wade King – Healthcare Investments
Hi. Couple questions, please.
First off, given there is no approved rapid test for HCV in the market, do you think the PMA application would be afforded in an expedited timeline?
Doug Michels
It is a PMA application. It’s being reviewed by CDRH versus CBER.
We don’t have any indication that there will be an expedited review. As I mentioned, we expect normal review, which is generally in the 10 to 12-month timeframe.
Wade King – Healthcare Investments
Okay, very good. Thank you.
Secondly, can you talk a little bit more specifically about the synergies associated with the sales force you described you are building out for selling your ADVANCE HIV test alongside ultimately the HCV test?
Doug Michels
Absolutely. Many of the initiatives in public health to expand routine HIV testing have been targeted to expansion of routine screening in acute care settings like hospitals and in emergency departments.
And we’ve mentioned previously on calls that in many cases public health jurisdictions who received grant funding for testing expansion have actually purchased tests or funded expanded screening initiatives in hospitals. And what we – our working model over the last year to two years has been very close collaboration between the public health, our public health representatives and our hospitals.
So we expect that to just kind of continue and accelerate. And as we have more feet on the street calling on hospitals and working with them to develop emergency room screening initiatives, we believe that that’s just going to further expand testing opportunities.
Wade King – Healthcare Investments
Okay, very good. Can you also comment on what is the next identified infectious disease test that you think is a natural for you to add on to your rapid testing platform?
Doug Michels
Obviously, it’s an area that we’ve done a fair amount of research in. We’ve looked very carefully at other sexually transmitted diseases as key target opportunities.
We haven’t disclosed which ones we’ve done feasibility work on or which ones we’re targeting for potential new product development, but clearly that’s an area that we have a high level of interest in. And the team is working on to some degree.
Wade King – Healthcare Investments
Do you have any clinical – preliminary clinical study efforts going as it relates to other testing areas, Doug, for the rapid platform?
Doug Michels
We don’t have any formal clinical studies ongoing, although we’ve got development activities, feasibility work that’s being done in several of those areas.
Wade King – Healthcare Investments
Okay, good. And last question, please.
Ron, your comment on the gross margin, once Abbott goes away, you just meant to say, I presume, that you will pay an ongoing royalty as it relates to patents and licenses and this type of thing. But obviously the tick-up in gross margin, given you’re not going to be obviously selling to Abbott the single-digit price, will be all coming to the company?
Ron Spair
That’s correct.
Wade King – Healthcare Investments
Very good, gentlemen. Thank you very much.
Doug Michels
Okay. Thank you, Wade.
Operator
Ladies and gentlemen, we have reached the allowed time for questions. I would now like to turn the call over to Doug Michels for closing remarks.
Doug Michels
Okay. Well, thank you very much everybody for coming on the call tonight.
It’s a very exciting time for the company. Our decision to take the business direct and transition is going to be very exciting.
We’ve got a tremendous number of opportunities obviously in the hospital space for development programs and the progress we’re making with HCV to take advantage of that, the progress with HIV OTC and our high throughput substance abuse assays represent tremendous opportunities for the company. We continue to stay very focused on these and expect bright future for the company.
I want to thank everybody again for coming on the call to talk about our results in the third quarter. I look forward to talking to you again after the New Year.
Take care, everybody.
Operator
This does conclude today’s conference call. You may now disconnect.