May 8, 2013
Executives
Douglas A. Michels – President and Chief Executive Officer Ronald H.
Spair – Chief Operating Officer and Chief Financial Officer Kathleen Weber – Senior Vice President and General Manager of Consumer Products
Analysts
Peter Lawson – Mizuho Securities Inc. Amit Bhalla – Citigroup Global Markets Inc.
Jeffrey Frelick – Canaccord Genuity, Inc. S.
Brandon Couillard – Jefferies LLC Shaun K. Rodriguez – Cowen & Co.
LLC Nicholas M. Jansen – Raymond James & Associates, Inc.
Spencer Nam – Janney Montgomery Scott LLC
Operator
Good afternoon everyone and welcome to OraSure Technologies 2013 First 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. After the speaker’s remarks, there will be a question-and-answer period.
(Operator Instructions) OraSure Technologies issued a press release at approximately 4:00 PM Eastern Time today regarding our 2013 first quarter results and certain other matters. The press release is available to you on our website at www.orasure.com or by calling 610-882-1820.
If you go to our website, the press release can be found by opening the Investor Relations page and clicking on the link for press 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 May 15, 2013 by calling 855-859-2056 for domestic or 404-537-3406 for international. The access code is 42321505.
With us today are Doug Michels, President and Chief Executive Officer; Ron Spair, Chief Operating Officer and Chief Financial Officer and Kathy Weber, Senior Vice President and General Manager Consumer Products. Doug and Ron will begin with opening statements, which will be followed with question-and-answer session.
Before I turn the call over to Doug, you should know that this call may contain certain forward-looking statements, including statements with respect to revenues, expenses, profitability, earnings or loss per share, and other financial performance, product development, performance, shipments and markets, and regulatory filings and approvals. Actual results could be significantly different.
Factors that could affect the results are discussed more fully in the company’s SEC filings including its registration statements, its annual report on Form 10-K for the year ended December 31, 2012, its quarterly reports on Form 10-Q, and its other SEC filings. Although forward-looking statements help to provide complete information about future prospects, listeners should keep in mind that forward-looking statements may not be reliable.
The company undertakes no obligation to update any forward-looking statements to reflect events or circumstances after this call. With that, I would like to turn the call over to Doug Michels.
Douglas A. Michels
Well, thanks Judy and good afternoon everyone and welcome to our call. I am pleased to report that 2013 is off to a good start.
I will touch on some highlights from the quarter and then Ron will take you through the numbers. Our infectious disease business was up as the OraQuick In-Home HIV Test generated additional revenues.
We are encouraged by the growth in HIV OTC sales and continue to discover new ways to increase consumer awareness and use of this exciting new testing option. We are seeing strong year-over-year growth from molecular collection systems business DNA Genotek.
And we were also pleased with the better than expected performance of our cryosurgical business, which was helped by international over-the-counter sales. We are encouraged by our Q1 results and we look forward to build on this momentum.
The commercial launch of our OraQuick In-Home HIV test is in full swing and it is gratifying to know that we have helped more than 100,000 individuals learn their HIV status since launch. Our corporate goal is simple, help as many people as possible, answer questions about their health status especially as it relates to serious illnesses such as HIV and HCV.
We are fortunate to work in a field where we can combine what is good both for business and for public health. So with that as the brief introduction, let me now turn the call over to Ron Spair for a review of our first quarter financial results.
Ronald H. Spair
Okay, thanks, Doug and good afternoon everyone. Our first quarter 2013 consolidated net revenues were $21.2 million compared to $20.9 million reported in 2012.
Our consolidated net product revenues increased 6% as a result of higher sales of our molecular collection systems, infectious disease testing and substance abuse testing products. These increases were partially offset by lower sales of our cryosurgery systems and insurance risk assessment products.
Our infectious disease testing revenues were $10.7 million in the first quarter of 2013 compared to $9.8 million in the first quarter of 2012. The overall 9% increase was primarily as a result of $1.4 million in net sales of our OraQuick in-home HIV test which we began selling in the fourth quarter of 2012.
During the first quarter gross sales of our OraQuick in-home HIV test were $1.5 million which were offset by $109,000 in customer allowances including co-operative advertising, cash discounts and other allowances. Gross sales of this product increased sequentially from the 902,000 recorded in the fourth quarter of 2012.
Although sales of the In-Home test increased, we believe the rate of sales growth during Q1 was negatively impacted by certain retail execution issues which Doug will discuss later in the call. The increase in net revenues of our OraQuick In-Home HIV Test was partially offset by decline in sales of our OraQuick HCV and HIV professional products.
First quarter domestic HIV professional revenues were down 476,000 or 6%, roughly one half of this reduction is due to a one time purchase in the hospital market during the year ago period with the reminder primarily caused by the timing of public health customer purchases. First quarter HCV revenues decreased 18% largely as a result of the variability in the ordering patterns of our customers.
Our molecular collection systems revenues primarily representing sales of the Oragene product line increased to $3.9 million in the first quarter of 2013 compared to $3.3 million in 2012. Revenues for the current years quarter included a first time order placed by a new pain management customer, as well as new orders received from an existing customer we do not purchase product in the same period of 2012.
Sales of this existing customer are expected to continue through 2013. These increases were partially offset by a decline in sales in the academic research market due to continued constrained research funding primarily in North America.
In substance abuse testing revenues increased to $2.2 million in the first quarter of 2013 from $2.1 million in the first quarter of 2012 primarily as a result of higher Intercept sales. The increase in Intercept sales was the result of higher purchases by our UK laboratory distributor.
First quarter 2013, cryosurgical revenues decreased 11% to $3.1 million from $3.5 million in the first quarter of 2012 primarily as a result of lower professional sales in the domestic marketplace. This reduction largely resulted from higher distributor purchases made in the fourth quarter of 2012 in anticipation of price increases implemented in early January 2013.
Despite the lower revenues our cryosurgery business performed better than expected primarily because of higher international over-the-counter sales. Licensing and product development revenues were $202,000 in the first quarter of 2013 compared to $1.2 million in the first quarter of 2012.
During the first quarter of 2012, we received a $1 million milestone payment under our Hepatitis C collaboration agreement with Merck. No similar payment was received in the 2013 quarter.
Turning to gross margin, our overall margin for Q1 of 2013 was 57% compared to 66% reported for the first quarter of 2012. The lower 2013 margin was a result of a number of items which negatively impacted our OraSure segment including a change in product mix, the absence in the current quarter of the $1 million milestone payment received in the first quarter of 2012, higher royalties paid on sales of our OraQuick products and an increase in scrap, spoilage, and unabsorbed overhead costs as a result of production issues that were identified and corrected in the current quarter.
We expect our consolidated margin to remain in the high 50% range throughout the remainder of this year. Turning to operating expenses, our consolidated operating expenses for the first quarter of 2013 increased $5.2 million or 30% compared to the first quarter of 2012.
This increase is largely due to higher spending associated with advertising and promotional activities for our OraQuick In-Home HIV Test. Advertising and promotional cost for this product were $6.9 million in the first quarter of 2013 compared to $1 million spent on launch preparation costs in the first quarter of 2012.
R&D expense for the first quarter remained flat at $3.4 million and G&A expense declined to $5.4 million from $6.1 million in the first quarter of 2012 due to lower legal and consulting expenses From a bottom line perspective, we reported a net loss of $10.2 million or $0.18 per share for the first quarter of 2013 compared to a net loss of $3.3 million or $0.07 per share for the same period of 2012. Turning briefly to our balance sheet and cash flow.
Our cash balance at March 31st 2013 was $79.3 million compared to $87.9 million at December 31, 2012. Cash used in operating activities in the first quarter of 2013 was $7.7 million which included the advertising and promotion spend on the OraQuick In-Home Test.
This compares to $1.4 million used in the first quarter of 2012. Moving to guidance for the second quarter of 2013, we are projecting consolidated net revenues of approximately $23.5 million to $24 million and a consolidated net loss per share of approximately $0.15 to $0.16 for the quarter.
Included in our Q2 guidance is approximately a $0.001 per share in severance cost related to certain operational efficiency improvements in Q2 which are expected to save up to $2.8 million on an annualized basis. With that, I’ll now turn the call back over to Doug.
Douglas A. Michels
Thanks a lot Ron. A top priority for the company continues to be the commercialization of our OraQuick In-Home HIV Test.
During the first few months of this year, we’ve seen continued sales growth. Average weekly sales have increased from approximately 3000 units in January to almost 5000 units by late April.
We believe this continued growth is positive and shows that consumers are responding to our awareness building and consumer activation efforts. Our experience to date also indicates that it takes time to drive broad awareness about a new product and motivate consumers to purchase the product.
Essentially we are asking consumers to do something they’ve never done before. Test themselves for HIV in the privacy of their own homes.
Our sales growth is largely been driven by three things, continued national advertising, continued national public relations and the recent addition of regional and local marketing activities targeting communities at highest risk for HIV. Specifically, we continued our print, digital and television advertising throughout the first quarter shifting from our 45 second launch TV spot to more efficient 30 and 15 second spots.
This allowed us to generate a greater number of impressions against our target audiences. We’ve also continued our national public relations efforts around key dates, such as National Black HIV/AIDS Awareness Day in February and Women and Girls HIV Awareness Day in March.
We are continuing our relationship with Earvin "Magic" Johnson who has assisted us in generating over $200 million media impressions for our brand since the start of the launch. In late March, we moved into a new phase of our marketing activities layering in regional and local radio, outdoor advertising and event marketing, reaching customers and bars, night clubs and community events.
The local radio activity featured prominent celebrity DJ such as Tom Joyner, and Elvis Duran. The goal of these activities was to provide more information about HIV and the impact that it is having on various communities.
We are also reinforcing the ideas that it has never been easier to learn your HIV status with the OraQuick In-Home HIV Test. The intent of these activities is to stimulate conversation about HIV and create buzz and support allowing the need for testing.
Bundled together we call this our Make Knowing Your Thing Today, campaign. We are carefully measuring and tracking the impact of all of our marketing activities to optimize our marketing plans for the back half of 2013.
We’ve recently deployed our first post launch awareness and tracking survey which will tell us where our messages are taking route and where more work is needed. We are also analyzing store level point of sale data to understand by geography and in some cases down to the zipcode level where our sales are strongest.
And in addition, we are monitoring the social media space to understand the conversation about our product. We look at click through rates and dot-com conversion.
All of this learning is helping us focus our efforts and drive greater efficiency in our marketing spend. One area that we are monitoring quite closely is the retail environment.
During the first quarter we completed several retail audits to help assess our sales execution. These audits involve a sampling of individual retail stores around the country to check on product availability and placement.
As is typical with any OTC launch, we found areas in need of improvement. For example, we discovered that some retail stores in higher volume areas were not carrying enough shelf inventory to meet demand resulting in out of stocks.
In addition, given the high retail value of our product, some retailers concerned about potential theft elected to place the test either in a locked cabinet or behind the pharmacy counter for security purposes. We made the results of our audits available to our key retail partners and are working with them to ensure adequate product supply is on shelf.
In addition, because confidentiality is important to consumers, we are encouraging retailers not to place product behind the counter or otherwise make a consumer request assistance from store personnel in order to complete a purchase. The retail community has been and remains highly supportive of the launch and it has been responsive to the new learnings that we have shared.
As we continued to optimize our marketing and selling activities, the product is steadily increased and standing within the retailer product categories and now holds top ten positions among branded products in the sets of our leading retailers. Given our performance and learning we are now actively seeking expanded distribution in both the e-commerce and brick and mortar space.
In the weeks to come, we expect you’ll see the product become available on walgreens.com, riteaid.com and drugstore.com. While sales performance and the other items I’ve mentioned are important to consider in measuring how we are doing, they do not reflect the full impact of our product.
As you know our primary contact with end users is through our consumer support center. Since launching the product, we’ve received over 10,000 calls to our support center.
Calls have been received from all 50 states in the District of Columbia and the support center continues to exceed the performance goals we established prior to the commercial launch. Significantly, data from the support center indicate that we’ve received calls from nearly 100 individuals, who said they had obtained a positive result after using our OraQuick In-Home HIV Test.
In all cases these individuals were either directly referred into care by our support center representatives or they told us they would seek out a healthcare professional directly for follow-up. While this does not represent a comprehensive view as to all positive test results obtained by consumers, we believe it is an important early example of the potential public health impact that our test can provide.
In fact our market research indicates that as few as 5% individuals testing positive may contact the support center. And assuming this survey as at least directionally accurate, the potential number of positive results identified with our test is likely much higher suggesting that the product is delivering the intended positive benefit in the fight against the HIV and AIDS.
Turning briefly to our OraQuick HCV Test, as Ron indicated HCV sales were down for the quarter compared to Q1 in 2012. However, this decline does not tell the whole story as we in fact experience growth in both the number of new customers purchasing our test and the average size of purchase orders received during the quarter.
The lower Q1 revenues were largely due to the timing of orders by a few large customers each of whom we expect to reorder later this year. While sales of our OraQuick HIV Test continues to be impacted by economic and funding challenges, we remain confident and optimistic about the long-term prospects for this product and its potential public health benefit.
As you may know, May is Hepatitis awareness month and the second annual national hepatitis testing day is coming up on May 19. In recognition of this month and date, we are collaborating with numerous national and local, public and private organizations across the country to raise awareness of Hepatitis C as a public health issue and to educate the public about the importance of HCV testing.
In particular, OraSure’s, OraQuick HCV rapid test will be deployed at public testing events in Washington DC, LA, New York, Chicago, Pittsburgh and over 35 other locations around the country. And a final area I want to address is our molecular collection system business.
DNA Genotek had a strong first quarter with sales increasing almost 20% compared to the year ago period. The primary growth driver was higher sales to commercial customers.
The increase in commercial business was a blend of new customers ordering for the first time and existing customers growing their business. Highlights includes once new significant customer engaged in pharmacogenomic testing related to drug metabolization and a significant new order by one of DNA Genotek’s existing commercial customers.
As further perspective approximately 45% of DNA Genotek’s revenues during the first quarter came from commercial customers while the remaining approximately 55% came from academic and research institutions. You’ll recall that this represents a bit of change in product sales mix as DNA Genotek’s revenues have historically been derived mostly from the academic research market.
And this is not to say that academic research customers will not remain an important customer base. Despite ongoing funding challenges and in particular uncertainty related to the ultimate impact of federal sequestration, DNA Genotek continues to bring in new customers and increase its business with existing customer in this market.
DNA Genotek is also expanding its international network of distributors. DNA Genotek is off to a great start and we expect to see this performance continue throughout the remainder of 2013.
So in summary, we are up to a solid start in 2013. We’re excited to see increase in sales of our OraQuick In-Home HIV Test and we continue to gain insight and experience on how best to market this product.
We expect the application of that knowledge to be reflected in our future results. And with that, I’ll now open the floor to your questions.
Operator, if you would please proceed.
Operator
(Operator Instructions) And we’ll take our first question from Peter Lawson from Mizuho. Peter, please go ahead.
Peter Lawson – Mizuho Securities Inc.
Ron, just looking at the gross margins, what was the biggest driver of that weakness in the quarter? And what was the impact of medical device?
Thank you.
Ronald H. Spair
In the gross margins, we listed a number of different impacts that we felt in that quarter end. The largest one was more to do with the product mix.
We had a substantial amount of OTC products in the cryo area that were sold both to (inaudible) and then we also has a bit of an impact from $1 million missing that was pure gross margin in the 2012 quarter that was out of this quarter that was the milestone and then we had the royalty kicked in to a leer, which we spoke about that we did not have in Q4 of 2012 and now we have that apply to our HIV and HCV products and then lastly we had a production issue that cost us some margin impact that we don't expect to have an affect in the second quarter here. So it was that in that order, Peter, how the impacts were felt.
Peter Lawson – Mizuho Securities Inc.
Got you. And then the operational improvements, what was that and which business did that affect?
Douglas A. Michels
It was an across the board review of all of our operations to determine how we could streamline and perform more effectively and efficiently with the people we have on board based on the business outlooks that we have in the various business segments and so all the areas were impacted.
Peter Lawson – Mizuho Securities Inc.
Great. Thank you so much.
Douglas A. Michels
Yeah.
Operator
Thank you. And we will take our next question from Amit Bhalla from Citi.
One moment, Amit, go ahead.
Amit Bhalla – Citigroup Global Markets Inc.
Thanks. Hey Doug, can you talk about what you asses the dollar impact of the stock-outs to be and talk to us about how you are ensuring it won’t happen again for the remainder of the year?
And then secondly, we agree with you on the April trends being positive, but May looks like it has started to slow again. So can you talk to us about what you are assuming for 2Q performance overall?
Douglas A. Michels
Yeah, I will talk a little bit about the stock-outs and less than a one pick piece per shelf as best I can, very difficult to estimate. And obviously when we saw that trend in some of the higher prevalence markets, where we expect to see the disproportionally higher proportionate sales, something we obviously acted upon immediately and the good news is as the retailers have been very responsive.
So within a couple of weeks of us getting that data out to the retailers they responded by pushing product out of their central distribution locations and to the stores and talking with the store manager to get it on shelf. Very hard to estimate what the impact of that was, but we’re pretty confident it had an impact and you saw that somewhat of a slowdown in growth rates in the February and March area and we think that the improvement in April was partly due to better availability at Shelf as well as some of the impact from these local market activation activities.
We’re into the first week of May and obviously there is fluctuation that we see week-on-week. Kathy is here on the call to take any additional OTC questions.
You can ask her, she has any comments relative to that. We expect just so that you are aware to see continuing month-on-month growth throughout 2013 and beyond
Kathleen Weber
Yeah, I think that’s the key point is that we have seen month-on-month growth and on any OTC launch, you are going to see fluctuations week-by-week and they could be driven by pay cycles of consumers, the timing of events and activities in the marketplace, the level of retail inventory. To Doug’s point, the retailers have been very responsive and they’ve worked with us to push more product out to the appropriate store, but that process is an optimization process also as we learn more and more about where the product is selling, how much inventory they need to carry, where the best location is in store.
We’ll continue to see some of those fluctuations, but I think the important thing to remember is that consistently from launch, month-over-month we’ve seen increases.
Amit Bhalla – Citigroup Global Markets Inc.
And just had a follow-up on HCV; I hear what you were saying about just timing of orders, but do you feel like you are loosing any share to automated molecular HCV testing at all on your HCV business?
Douglas A. Michels
No, I don’t think that there is any indication that we are loosing to molecular testing whatsoever. We are continuing to see new opportunities open-up in HCV.
We are encouraged by the fact that the different governmental agencies in this case, SAMHSA, Substance Abuse and Mental Health Services Agency, led a $1 million RFA specifically for rapid testing. The responses to that are RFA closed out on April 5 and we expect to see a benefit from that in the back half of the year.
We were pleased to see the CDC issue, two MMWR, actually I think they are published or they are dated May 7. So they made available in the last several days, one of which was the update of guidance for clinicians and laboratorians for HCV testing and this is a long awaited new guideline, which in essence streamlines the whole process for testing patients for HCV antibody and moving immediately to viral load testing, which is very logical and the recommendation specifically highlights the availability of the OraQuick rapid hepatitis C test.
So we are encouraged by what’s going on by the dialog in the marketplace around HCV. Everybody is excited about the new therapies that are in development and we expect that we are going to be in a wonderful position to capitalize on the growth in testing with our technology.
Amit Bhalla – Citigroup Global Markets Inc.
Thanks, Doug.
Operator
Thank you and our next question is from Jeff Frelick from Canaccord. Please go ahead.
Jeffrey Frelick – Canaccord Genuity, Inc.
Yes thanks. Doug, just to kind of follow-up on the mix with respect to HCV, you’d mentioned that you added some new customers, I think you were probing around couple of hundred public health customers previously using HCV.
What is your customer base shakeout now exiting the quarter?
Douglas A. Michels
We had well over 100 customers ordering in the quarter when we talked about 200 customers, over 200 customers that was the last call that was total for 2012. So you can see that that we're seeing some momentum.
We had about 42 new customers order in the first quarter and so we expect that that's going to continue.
Jeffrey Frelick – Canaccord Genuity, Inc.
And then with respect to getting some traction on the physician office side, I think in the last quarter you said you're kind of going through the physician office distributors and there is some training at the national meetings, has all the training been completed, where are you with that initiative?
Douglas A. Michels
That has been completed and am happy to say that for the major physician office distributors, the hepatitis C test remains an emphasis product for them in the first quarter as well as in Q2 of this year.
Jeffrey Frelick – Canaccord Genuity, Inc.
Okay and then with respect to funding at the state level, are you guys noticing any pickup their as budgets are bit more, I would say controlled, but what you're seeing at the state level both funding for HCV and HIV?
Douglas A. Michels
Obviously it’s highly depended on the state, given their economic situation, I think we are starting to see some stability. Obviously, where those dollars get spend is critically important.
The USPSTF recommendation for HIV, the fact now that that’s comes out with a A grade rating is very encouraging. The public health jurisdictions as I think Jeff, there is an incentive for them to maintain the level or increase the level of their testing programs, because their futures grants from the CDC are generally funded based on not only the number of HIV tests that are performed, but the yield that they get from those test that are deployed and generally the CDC likes to see a yield of at least 1% positivity rate of new infections diagnosed, because that’s really how we can drive down incidents.
If jurisdictions are faced with budget challenges or budget cuts, one of the last things they want to do is reduce their testing volume if at all possible. We are starting to see some stability.
Obviously, there continues to challenges, we believe that 2013 is going to be certainly a much better year than 2012 as it relates to that.
Jeffrey Frelick – Canaccord Genuity, Inc.
Thanks for color on that. Then my last question for Kathy; can you maybe share just kind of the impact of the shorter more frequent ad spots, how that resulted in getting more hits on your website customer visits versus the prior quarter?
Kathleen Weber
Yeah, we definitely saw – our sales have continued to grow month-over-month and so through the beginning of April, the growth was largely driven by TV, so the shift in the 30s and 50s increased the impressions and was really the only driver of the increase of sales up through that first quarter. What’s driven the next sort of level of growth that we have seen have been by the end of the local and regional activity and that activity has increased web traffic both at local level, at national level.
We have made some other shifts in our media, not just the shift of 30s and 50s, but our digital strategy has evolved with learning where we moved away from some banner ads that were less effective and moved more into page search and we have seen dramatic increases in our digital conversion rates, just literally in the past month from making that change. So I think the point is as we shift, we try to become more efficient.
We are measuring in anyway that we can whether its sales, website traffic, conversion rates, we have some surveys, awareness and tracking surveys, zipcode analysis to measure where we are having impact and what we can do differently and more smartly.
Douglas A. Michels
Jeff, we are also going to be rolling out a new mobile app to make ordering easier for consumers interesting as we look at visits to our website, we see that 62% of visits have been from mobile devices, yet only 33% of online orders come from mobile devices and then conversely 38% of visits from consumers come from a desktop, but 67% of transactions are coming from the desktop. So whey they disconnect, why are consumers ordering from their mobile phone or tablet and that’s because we think that there is an app we can deploy that’s going to make it easier for consumers to place the order directly from their mobile device.
So really a lot of learning as we generate this data now and as Kathy said, we have got half a dozen or more different studies going on where we are looking at demographic analysis of our buyers at retail demographic of our purchasers on e-commerce. We are doing a website survey to look at consumers online experience.
We're surveying consumers who participated in some of these regional events to understand what their impressions are, whether they purchased a product, post participation. So lot’s going on, lot of learning and obviously we're going to translate all that learning into our future programs in the back half of the year and beyond.
Jeffrey Frelick – Canaccord Genuity, Inc.
You just kind of spurred a question, so I am more of a BlackBerry guy having fighting the iPhone. So will customers to be able to order on their iPhone at a local pharmacy and kind of walk by there by there in a short timeframe and pick it up at the counter and have the product waiting for them as opposed to cruising the isles and looking for the product?
Kathleen Weber
Yeah, that's an interesting idea. It's not something that – to be honest, we had considered, but I think that that's an interesting idea, because anything that we can do and this is another area we're spending out of time.
Anything we can do to make it easier for people and to have the fewest interactions with another person in terms of getting the product, so it's not currently in plan, but I think it's a great idea.
Douglas A. Michels
And Jeff will give you the specific number that you can do, so you can order as many as kits as you possibly can.
Jeffrey Frelick – Canaccord Genuity, Inc.
Thanks.
Operator
Okay. So we'll take our next question from Brandon Couillard from Jefferies.
Brandon, please go ahead.
S. Brandon Couillard – Jefferies LLC
Hey, thanks good afternoon. Ron, could you give us a sense of the anticipated marketing spend for the HIV OTC product in the second quarter and in the second half of the year, is your full year outlook of, I believe $16 million to $17 million still in the ballpark?
Ronald H. Spair
So we actually were representing that our expectations for the full year are in the high teens of millions of spend on the HIV OTC product for 2013 and if you look at our anticipated spend as we sit here today for Q2, we are looking more at a low $6 million number for spending in the second quarter here, Brandon.
S. Brandon Couillard – Jefferies LLC
Thanks. Any chance you could give us the mix between Internet and retail in the first quarter?
Kathleen Weber
The sales?
S. Brandon Couillard – Jefferies LLC
Yeah, for the OTC product.
Ronald H. Spair
Let me look into what I have on…
Kathleen Weber
Yeah, our Internet sales are just roughly under 10%, just under 10% of total retail sales.
S. Brandon Couillard – Jefferies LLC
Got you. And then one more for Ron; when should we expect the savings from the after view to begin kicking in?
Ronald H. Spair
I would suggest that, after we get through the charge here in the second quarter that we will begin to see that in the third quarter here, free and clear of any severance related charges, but the action was implemented recently and so we will have some contribution to offset the severance charge in the second quarter, but the full benefit will accrue to us beginning in Q3.
S. Brandon Couillard – Jefferies LLC
That’s helpful. One last one for Doug.
Could you give us just an update I guess qualitatively on your thoughts around new HCV partnership, I mean would you characterize that as a near-term priority or second half goal? What’s your view on that dynamic?
Douglas A. Michels
Well, obviously there is a lot of dynamic in the therapeutics space. We benefitted I think greatly from our relationship with Merck over the last several years, not just in the development of the HCV test, but also as they contributed milestone payments.
Obviously, we don’t know how the race between Merck and Vertex turned out and as part of that Merck agreement, there were restrictions in our ability to work with other players in the pharmaceutical space. We don’t want to get into a restrictive agreement like that again.
And at the same time, we realize the importance of working collaboratively with the different pharma companies and we have ongoing dialog with them. You should know that.
As I mentioned that in our last call and since that last call, we continue to meet with and actually talk about how we can work together. I think it’s clear that the therapy providers know the importance of diagnosing more chronically infected individuals and doing that in relatively short order.
With the new therapies there is going to be shorter treatment regimen, fewer side effects; it’s going to encourage more treaters to get in to the game and hopefully we will begin to work through that backlog of warehoused chronically infected patients sooner which then again highlights the need to diagnose more of the individuals who are chronically infected. So discussions continue and as I mentioned before, we have something substantive to say about that well, obviously, but you know what is going on
S. Brandon Couillard – Jefferies LLC
Super, thank you.
Operator
Thank you and our next question is from Shaun Rodriguez from Cowen. Shaun, please go ahead.
Shaun K. Rodriguez – Cowen & Co. LLC
Hi guys, good afternoon. Thanks for taking the question.
So on the HIV professional business, can you just talk about your confidence in your guidance for this to be about flat for the year. I think you’ve called out comps and timing as drivers for the decline in the quarter.
So I am just trying to understand if we should expect the significant bounce back here.
Douglas A. Michels
Well, we’re relatively confident in that. Obviously, we are predicting the future, but we see slight softness continuing in the funding area, but we also see hopefully a positive lift from the new cash flows recommendations and increased HIV testing.
And so those two things together continuing with our strong market position, we expect to have a pretty solid year.
Shaun K. Rodriguez – Cowen & Co. LLC
Okay. Great, thanks.
And then a couple on OTC, so first I am just curious about the data that you have on whose buying the test? And I am really trying to understand how whose is buying the test is matching up with who you’re targeting in your marketing and just really curious about sorts of data that you are privy to?
Kathleen Weber
Yeah, Shaun, it’s Kathleen. I will answer it two different ways.
Really answer on whose is buying that, answer will come from some of these analysis that Doug talked about. So we have the tracking study in market.
We’ll understand by target and by the MSM community, the Latino community, African-American community, what the awareness levels are and who has been buying the products, detailed information on that and then will do the – will get a good sense from the demographic analysis, where we actually go in and look at store level sales. So this is getting down to the store and matching that up with the data about demographic so we will know the types of neighborhoods and you can, there are – your company has been working with Spectrum, it’s one of them where you can really get a good sense of profile of your consumer by looking at that demographic analysis and we’ll have that in a few weeks.
What we know so far is that, we believe that not surprisingly the MSM community is showing the highest interest in our product and when we book it, the data we have dot-com conversion rates, the appeal of our banner ads and how that’s linking back to sale online it’s highest with that community and that’s not surprising. We knew that their purchase interest was higher, the purchase cycle is shorter, so we suspect that we’re getting some volume from the MSM community.
Douglas A. Michels
MSM is men that have sex with men.
Kathleen Weber
Yeah, thank you and then some of the other communities. We expect will take a little bit more time to get the purchase.
That’s very consistent with the pre-launch market research learning, but the real answer to your question will come in few weeks as we look at these various studies
Shaun K. Rodriguez – Cowen & Co. LLC
That’s helpful, thank you. And then just a last quick one, your net to gross revenues for the OTC product were – I think in the mid-90s, is this ratio expected to remain around these levels for the balance of the year.
Ronald H. Spair
I would say that that is what our expectations are probably more in the low 90s though Shaun to be honest.
Shaun K. Rodriguez – Cowen & Co. LLC
Thanks, Ron.
Ronald H. Spair
Yeah.
Operator
Thank you and our next question comes from Nicholas Jansen from Raymond James. Please go ahead.
Nicholas M. Jansen – Raymond James & Associates, Inc.
Hi guys, just trying to think about the components of growth for your 2Q guidance anything you want to specifically call out in terms of product areas that you expect to have difficult comps year-over-year or things that we should think about in terms of modeling the appropriate businesses correctly?
Ronald H. Spair
All right. So our expectations are that the HIV OTC product will experience sequential growth in Q2 over what we have recorded in Q1 here.
Obviously we are also expecting that our Q2 Cryosurgery business will be up substantially as a result of moving down more into seasonally impacted summer season where cryo has always historically done its best along with continued purchasing in the in the HIV OTC area so that will be another growth area. And of course DNA Genotek will again post growth sequentially and certainly from a comparability standpoint versus the year-ago quarter.
Nicholas M. Jansen – Raymond James & Associates, Inc.
That’s unhelpful color. And then may be just kind of thinking about DNA Genotek, you obviously are having some good success with the new customers.
May be you can talk about 23 in May and some of your larger customers how are their purchasing orders trended over the last couple of quarters and which the anticipated for the back half of the other.
Ronald H. Spair
We haven’t even that level of granularity by customer, but suffice it to say we expect to see continued purchases from 23 May in 2013. And some of the new customers that were referenced in our prepared remarks are exciting and we believe are going to put continued orders, continued demand on the company.
So really DNA Genotek’s business is clicking on a number of different cylinders. It’s one of the key reasons why we brought the company 18 months ago and we look forward to a good year from a molecular collections business.
Nicholas M. Jansen – Raymond James & Associates, Inc.
And then lastly, looking at the balance sheet you have about $80 million of cash on the balance sheet, you are in good position there. What should we think about in terms of M&A, any thoughts on perhaps a buyback given where the stock is today, just your thoughts on capital deployment thanks?
Ronald H. Spair
So you are right we do have a substantial amount of cash on board and we do have as we have talked about previously, an active business development program so we’re always are looking for opportunities, whether they will be products, technologies, built-on and so. We do focus a lot of our efforts in that area and we will continue to do that.
So I’m not yet – there is only thing that we were prepared to talk about, but certainly it’s an active area of activity for us.
Nicholas M. Jansen – Raymond James & Associates, Inc.
Thanks guys.
Operator
Thank you. And the next question comes from Spencer Nam from Janney Capital.
Spencer Nam – Janney Montgomery Scott LLC
I have just a couple of quick questions. So this stock out issue with the over-the-counter HIV, the –I'm imagining that when you guys analyze the situation there is somewhat of a gap between the moment that you recognize that a particular store is out of the stock and then you try to replenish it and then it takes time for that to happen and so forth.
And that I would assume that that event gets repeated across several stores across the country. I don't know whether you – today versus say a month ago, whether you've been able to shrink that gap of time between stock being out of a particular store versus you guys are replenishing the stock from those places.
Has that – is still addressed to the point where the gap is closing?
Kathleen Weber
Yes Spencer, I will answer that, I guess in two ways. In general when a retailer sells a product, they replenish their store level and inventory weekly.
So if a retailer is out of inventory and that’s a generalization, but most of them will get shipments in once a week at the store level. So if you are out, you can potentially be out for a week.
So what we have tried to do with the retailer and that is very difficult to implement, that cycle is the retailers infrastructure and their systems and that’s difficult to implement. Well, we’ve being trying to influence the amount of pieces of product that the retailers will carry on their shelf to reduce the chance that there will be an out of stock that there will be a situation whether that one or less than one, zero pieces of product on the shelf and that we have been able to influence.
Spencer Nam – Janney Montgomery Scott LLC
Okay.
Kathleen Weber
CVS and Walgreens have both agreed, particularly in the stores that are demonstrating that their higher volume stores they have increased the level of inventory on Shelf, so the chance is that a store will have no inventory is smaller.
Spencer Nam – Janney Montgomery Scott LLC
Okay that’s helpful. And then in terms of the capacity – I don't know whether you covered this.
I may have missed this during your prepared remarks. But in terms of your capacity, inventory at your level, how much of a cushion do you have here?
Let's say there was a huge surge, have you guys done the stress test, if you will, that you could – you would nobble them out of your inventory in case there is a ridiculous demand in the next, say, six months or something like that?
Ronald H. Spair
We are prepared for that. We have inventory staged and ready to go and also if we can – as you know we manufacture the product right here and we maintain a sufficient stock of professional products, since that we can switch right over to making more of our over the care of products, so no issues on the inventory whatsoever, don’t worry about that.
Spencer Nam – Janney Montgomery Scott LLC
Okay that’s helpful. And then on the DNA Genotek, clearly a pleasant surprise this quarter with additional customers, increasing demand.
When we look forward, I think you alluded to the fact the second quarter also seems to be more positive in terms of the growth, that how much reliability we can put on some of these new customers that are coming in or the existing big customers increasing their order sizes? Is this something that we could look beyond, say, this year for example and say these guys are going to continue to build this demand in the – across several quarters or across two or three years ago?
Douglas A. Michels
Yes, so Spencer, you have to think about the business now in two components right, the academic research and the commercial segment.
Spencer Nam – Janney Montgomery Scott LLC
Yeah.
Douglas A. Michels
So from academic research, generally these are contracts that have to be renewed each year or you got to go replenish your academic research studies on an annual basis, so to the extend that we see a revenue shift to more of a commercial mix, that’s good from a predictability perspective and obviously that’s what we are seeing right now. We measure backlog of orders as we enter into the subsequent quarter and I can tell you that the backlog for DNA Genotek’s business continues to grow, which is a good thing.
What it means is that we’re entering the second quarter with a higher level of sales already booked that have yet to ship in the quarter. Obviously we have to continue to generate new business in the second quarter to achieve our objectives, but we are going into the second quarter with a higher percentage of revenues already booked and we expect that that’s going to continue through out the rest of this year at least.
So some positive trends going on in that business and those are some of the metrics that we use to measure performance.
Spencer Nam – Janney Montgomery Scott LLC
Great. That’s helpful.
Final question; HCV rapid test, you indicated that discussions are ongoing right now between OraSure and drug companies. And you may not able to answer this with any specificity, but I'm just curious kind of if you look at the balance of interest, if you will, which side is more interested in this discussion?
Is it drug companies or you guys? How should we think about that balance?
Douglas A. Michels
I think you can think about the balance as we are all interested. We all understand that there is a tremendous need for more diagnosis.
We all understand that new therapies are going to soon be available that are going to promise nearly 100% cure rate. The Federal government has already going on record saying that that they are keenly interested in reducing the morbidity and mortality associated with chronic HCV infection within the birth cohort of Americans born between 1945 and 1965, there is 80 million Americans, believed to be 3.25% prevalence rate of chronic Hepatitis C infection.
Most of those are undiagnosed. So everybody knows that we do diagnose more patients.
If we do that, we're going to get those patients into care, we're going to treat them and going to cure them. And that's going to be great for public health and it's going to be great for the economy as well.
So we're all aligned on that. I think there is a uniform interest in seeing how we can deploy our respective assets most efficiently and effectively.
Spencer Nam – Janney Montgomery Scott LLC
That's helpful. So then would you characterize the situation as progressing in terms of your discussions or is it too early to tell?
Douglas A. Michels
More on that to come.
Spencer Nam – Janney Montgomery Scott LLC
Okay, thank you.
Douglas A. Michels
You're welcome.
Operator
Okay. Thank you.
(Operator Instructions) We will take another question from Amit Bhalla from Citi. Please go ahead.
Amit Bhalla – Citigroup Global Markets Inc.
Hi, thanks. Just a couple of clean ups for Ron.
Ron, I think the device tax, can you tell us what that was in the quarter? And second on gross margin, as you look at gross margin for 2Q compared to 1Q, are you looking at flat up or down?
Ronald H. Spair
We’re expecting the Q2 gross margin to trend up based on the product mix that we’re looking at for Q2, with a higher proportion of professional product sales, than we had in the mix for Q1 which is our highest margin product. And then as far as the medical device exercise tax, we haven’t given visibility to that number for our Q1 performance and it’s not significant, Amit.
Amit Bhalla – Citigroup Global Markets Inc.
Okay, I’m just confused why you are not giving that number for device tax.
Ronald H. Spair
Just because we haven’t given that level of granularity into that part of the business.
Amit Bhalla – Citigroup Global Markets Inc.
Okay, we can talk about it offline. Thanks
Operator
Okay, thank you. That brings us to the end of the Q&A session of today’s call.
I will now turn the over to Doug Michels for closing remarks.
Douglas A. Michels
Okay, I just want to thank everybody for being on the call this afternoon and evening. And we look forward to updating you in a few months on our 2Q results.
Thanks again. Bye-bye.
Operator
Okay, ladies and gentlemen, this does conclude your conference. You may now disconnect and have a great day.