Chembio Diagnostics, Inc.
Q2 2020 Earnings Call Transcript

Published: 9 Aug 2020

[Operator:]

Good day, ladies and gentlemen, and welcome to your Chembio's Second Quarter 2020 Earnings Conference Call and Webcast. All lines have been placed on a listen-only mode, and the floor will be open for your questions and comments following the presentation. [Operator Instructions] At this time, it is my pleasure to turn the floor over to your host, Philip Taylor. Sir, the floor is yours.

[Philip Taylor:]

Thank you, operator. Thank you for joining, and welcome to Chembio's second quarter 2020 earnings conference call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session, and instructions will follow at that time. As a reminder, we're recording today's conference call. If you have any objections, you may disconnect at this time. Before we begin today, let me remind you that the company's remarks made during this conference call today, August 6, 2020, include forward-looking statements within the meaning of the Securities Act of 1933 concerning the current beliefs and expectations of the company. Forward-looking statements are subject to numerous assumptions, risks and uncertainties, many of which are beyond Chembio's control, including risks and uncertainties described from time to time in Chembio's SEC filings, including those under Risk Factors and elsewhere in Chembio's filings with the SEC, including its annual report on Form 10-K for 2019 and its quarterly report on Form 10-Q for the first quarter of 2020. Chembio's results may differ materially from those projected. Chembio undertakes no obligation to publicly revise or update any forward-looking statement made today. I encourage you to review all of the company's filings with the SEC concerning these and other matters. With that, I'd like to turn the call over to Rick Eberly, President and Chief Executive Officer.

[Rick Eberly:]

Thank you all for joining us this afternoon. Before we begin, I must recognize that we continue to work amid challenging times as the COVID-19 pandemic persists in our communities. Thank you to the frontline health care workers who remain steadfast in their service and sacrifice, cared for those directly affected by this virus. Our thoughts are with all of you. Thank you also to our employees. I applaud your resilience and dedication in driving our products aimed at being a partner solution to the public health crisis we face. Today, I will provide updates on the initiatives we have undertaken to drive a new strategic direction for our business by bringing new products to new customers initially through the development of our COVID-19 testing products. Next, I will review our legacy Infectious Disease business and R&D services vertical before turning the call over to Neil for detailed financial results. After that, I will provide concluding remarks and open the call for questions and answers. I'd like to start by briefly reviewing key quarterly financial results. In the second quarter, as we previously described in our preliminary results release, we executed the initial steps to implement this new business model and focus our resources on the development and commercialization of COVID-19 testing products. At the same time, the customers of our legacy infectious disease tests also focused much of their resources on COVID-19 management. In the second quarter of 2020, our total revenues were $5.1 million. This includes product revenue of $3.8 million in license, royalty and R&D and grant revenue of $1.3 million. The FDA's revocation of the emergency use authorization, or EUA, for our DPP COVID-19 IgM/IgG system, had a significant negative impact on our product revenues and gross product margins in the second quarter. The revocation triggered a recall of unused tests from customers in the United States. And we are aware that it was noted by international regulatory thoughts. Based on that, we determined that it was not appropriate to recognize revenue in the second quarter for certain shipments of the COVID-19 system outside the United States. The cost of the chip product is included in cost of sales, and together with the impact of the foregone revenue resulting from the U.S. recall, resulted in our reporting negative gross profit margins for the second quarter of 2020. Neil will provide further comments on this accounting treatment. As I said during the July 7 conference call, we stand behind the real-world clinical data and performance of our original COVID-19 system. I can assure you that we are working closely and collaboratively with our customers with the intent to bring closure to these shipments outside the United States, including ultimately recognizing the revenue associated with that. From the offset of the pandemic, we recognize our proprietary DPP technology could provide value across several COVID-19 related testing applications. The DPP technology in combination with our micro readers provides specific benefits that we believe make it well suited to point-of-care testing. The system is portable, provides accurate results in 15 minutes from finger stick blood or other samples and is designed to detect multiple biomarkers simultaneously and discreetly. At the same time, the easy to use testing workflow is scalable. Clinicians can run multiple tests at the same time because test cartridges are only required to be inserted in the micro reader for 15 seconds to obtain results following the 15-minute test incubation period. How technology facilitates the decentralization of tests away from core labs. The diagnostic [ph] results closer to patients and providers allows treatment and patient management decisions to be made more rapidly while also freeing up hospital and central laboratory resources. Additionally, operating cuts at doctors' offices and urgent care centers that require only simple sample collection makes higher frequency testing more feasible and efficient. With a deeper understanding of this virus, many public health officials have determined that to better manage the health of the general population, the question is no longer whether we should be testing or what types of tests should be used but rather how often we should be testing. The recent increases in case volumes has highlighted the need for both more tests and test that can provide results much sooner after the onset of symptoms than the long waiting periods being experienced in parts of the country right now. We believe our point-of-care system addresses these market needs. The demand for COVID-19 testing products in the United States extends beyond our current customer base that utilizes our Rapid HIV tests. We believe this provides us the opportunity to build a broader base of customers as we sell microreader analyzers to clinicians at hospitals physician offices, urgent care centers and other locations that provide health care. As we diversify our customer base, we intend to serve these new customers over the long-term, by expanding our menu of DPP tests to meet initial needs in the market for the detection of biomarkers to help identify respiratory, gastroenterology and neurological conditions. We feel there are many tests we can develop over time to competitively address high-value and high demand areas. This strategy represents a significant shift in our focus in business model. In the United States, we will be focused on driving recurring revenue. We will drive more frequent and regular GPP assay orders from many customers with micro readers as opposed to the large, discrete and in many cases, tender-driven orders placed by governments and NGOs that we experienced in our legacy Infectious Disease Business outside the United States. We feel this model represents an opportunity to grow revenues over time in a stable and predictable manner. Now, I would like to discuss our plans to leverage Chembio's technology to develop a portfolio of COVID-19 tests. We are encouraged by the exponential market growth observed as a result of the immense demand for various types of COVID-19 tests across a wide variety of settings and providers. This interest includes demand from areas outside of traditional health care verticals, such as companies seeking to establish back to work programs. We feel the advantages and versatility provided by our DPP assays and micro readers, creates an opportunity for us to take share and build a meaningful position in this market. Our success here is dependent on 3 factors

[Neil Goldman:]

Thanks. I'm going to start with an overview of the results for the second quarter of 2020. And as Rick indicated, I will provide some comments on how the EUA revocation impacted our financial results. For the three months ended June 30, 2020, total revenue was $5.1 million, a decrease of 48.3% compared to the prior year quarter. Net product sales for the second quarter of 2020 were $3.8 million, an increase - excuse me, a decrease of 56.8% compared to the prior year quarter. License and royalty and R&D and grant revenues combined for the 3 months ended June 30, 2020, were $1.3 million, an increase of 19.7% compared to the prior year period. R&D revenue is related to the timing and cadence of program performance obligations, which do not always occur in a certain period, but we continue to incur certain of the expenses. Compared to the 3 months ended June 30, 2019, net product sales experienced gains of 134.7% in the United States related to DPP COVID-19 IgM/IgG systems that were sold and utilized by customers. Net product sales were relatively flat in Europe, the Middle East and Asia, and were down 76.4% and 84.1% in Africa and Latin America, respectively, related to the shift in our focus from HIV to COVID-19 tests. Gross product margins during the 3 months ended June 30, 2020, declined by $3.7 million compared to the prior year period. The reduction in gross product margins and indeed, the negative gross margin figure in the quarter overall resulted from 2 things

[Rick Eberly:]

Thank you, Neil. To wrap up, in summary, we are driving towards creating a high-value point-of-care diagnostics company by expanding the menu of DPP assays that utilize our micro readers. As we have proven our leadership internationally with infectious disease testing, we are excited to pursue a number of opportunities described today to do the same in the United States. Starting with our COVID-19 tests, we plan to gain regulatory approval from the FDA and then expand the pace of customers using micro reader across new health care markets that can benefit from point of care testing over the long-term. We look forward to growing these relationships with subsequent additional high-value tests in areas like gastroenterology and neurology. We are progressing along a defined strategic path and are confident that with our technology and team, we can execute on our priorities to diversify and expand upon our legacy business to drive sustained long-term growth, increase profitability and create value. Again, I would like to thank our employees for their hard work and dedication, and thank you all for joining us today. We look forward to updating you on our next call. With that, operator, please open up the call to questions.

[Operator:]

[Operator Instructions] And first, we go to Catherine Schulte with Baird.

[Catherine Schulte:]

I guess, first, just two antigen tests that have the EUAs were approved for wage settings in their original EUAs. Is it your intent to have the data packages available for both your antigen and antibody tests to enable your EUAs to cover testing and wave settings from the get-go? Or do you plan to submit for high and moderate complexity first and then pursue that at a later date?

[Rick Eberly:]

Catherine, thanks for the question. We are pursuing the antigen and antibody tests in terms of an EUA submission for a point-of-care application. Both of the tests will be run on the same micro reader, both micro reader 1 and micro reader 2. What we're planning is the serology test will have the identical features and benefits of our original product, which will include data to support a finger stick claim as well as a point-of-care application. So that is what we are pursuing, and that will be the revised serology test. In terms of the antigen test, we are also pursuing a point-of-care claim for that assay. So for a customer who acquires either the micro reader 1 or the micro reader 2 will have the option to run either the antibody test or the antigen test, depending on the clinical need and what the clinician is ordering. It will provide that flexibility for the user. And that way, we'll have a portfolio of products to offer to the customer. And hopefully, that answers your question.

[Catherine Schulte:]

Okay, great. I guess you've talked in the past about the potential for a flu versus COVID multiplex test. Are you still planning to pursue that application? And what's the development and submission time line there?

[Rick Eberly:]

Yes. We are currently under discussions internally. We're doing market research on that. We're also looking at timing relative to the flu season. So we are in the early stages of planning, but we have not committed resources to execute upon that product development. So we continue to look at the market and look at our options. Certainly, we think that there's a competitive position for a multiplex product like that. We certainly think the DPP technology since we've demonstrated we can multiplex up to 8 different targets on a single device, we've got the technology and the ability to do it. But at the current stage, we're still evaluating the market. And we will announce that at some point in the future once we make a final decision.

[Catherine Schulte:]

Okay. Maybe one for Neil. Just given the types of investments you've talked about ramping up in your commercial organization, how should we think about the magnitude of an OpEx step-up in the back half?

[Neil Goldman:]

Yes. So thanks for the question. We're not giving guidance at this time in terms of the forward-looking, in terms of the numbers. So I'm not in a position to characterize that for you. But what I would like to refer you back to is the comments that Rick shared as it relates to the fact that we are indeed investing in our sales and marketing infrastructure in a rightsized way to reflect the demand and opportunities we see in the marketplace. Also, as Rick stated in the prepared remarks, we believe that based on the positioning that we've achieved through the first pass of the product launch, we're in a much better position to step off of when it's time to commercialize the test in due course.

[Operator:]

Next, we go to Kyle Bauser with Colliers Securities.

[Kyle Bauser:]

Maybe I'll start with the COVID antibody test. I know the NIH and NCI is pretty focused on spike being the target rather than nucleocapsid is what you targeted in the original test. But there were a couple of other companies that targeted the nucleocapsid and were able to achieve 95% plus accuracies from the independent group. So can you talk about how their tests differed from your initial test? And will you be targeting the nucleocapsid and the spike protein in the new version?

[Rick Eberly:]

Kyle, this is Rick. Thanks for the question. In terms of the NCI study, as we've talked about in our opening remarks, the samples that were preselected by the methodology that the NCI study group is using, does focus on spike protein. And when we developed the original product, back in, I would say, the first quarter of this year with limited reagents, we did choose the NP protein. And that's what we pursued in terms of the original EUA submission. Relative to the NCI study, what we have done is we have revised the system that targets the protein, the spike protein in the serology assay. And we did that to ensure that when our product is evaluated by the NCI, that we will have correlation to the methodology used by the NCI study evaluation group; so that's the only change to the system. All the other components are the same in terms of the cartridge. The components that go into the kit. So, the revised system largely is aimed at protecting human antibodies, the spike protein, which is how the samples are preselected by the NCI study group.

[Kyle Bauser:]

Okay. So I guess, just for clarity, so the competitors that also targeted nucleocapsid initially that did achieve favorable results. Was that a function of them just doing internal validation with a larger sample size? I guess I'm just a little confused about how those companies were able to use that target and still kick out acceptable accuracies.

[Rick Eberly:]

So Kyle, we do stand by our original clinical data that we submitted to the EUA or to the FDA for EUA. So I can't speak for other competitors in terms of what they did and how they designed their assays. But I think the point is that we decided we're going to revise the system and to ensure that when we are evaluated by the NCI, that we have great assurance that we're going to pass the NCI study evaluation.

[Kyle Bauser:]

Got it. Okay. And maybe just switching a little bit, but on the same application, how have you been addressing the cross reactivity issue of that test as well? I mean, if we move on from the spike protein. It looked like the cross reactivity with HIV was quite high, which was surprising since HIV assays are Chembio's bread and butter. So kind of what happened there? And are you confident that 40% reactivity number will come down?

[Rick Eberly:]

Yes, Kyle. I can't speak to the cross reactivity from the original assay at this point. But in terms of the revised assay that we have - that we're in the process of completing development, we have done extensive cross reactivity studies, not only for HIV, but for also all the other required targets for a EUA submission.

[Kyle Bauser:]

Okay, got it. And then just lastly, if I may. What's the process for resubmitting your - do you do the - do you send it on for independent validation with NIH before submitting the application packet to the FDA? Or is that done after you've submitted that? And then what is timing for the antigen approval? I know it's down the road, but what are your internal estimates for that?

[Rick Eberly:]

Yes, Kyle. The first question relative to the submission of the serology product, it's no different than our original EUA submission in that we have the notification process followed by EUA submission followed by the NCI study evaluation. So that sequencing, we're not expecting to be any different than what it was with our original submission. Relative to the antigen test, Kyle, we're still in the development phase of the antigen test. As I said in the opening remarks, we're encouraged by the initial positive results in our partnership with BARDA. I can tell you that BARDA has been a great partner for us, and their scientists are working with us literally on a day in and day out basis to accelerate the development of the antigen test. They see a great need in the market as we do and as you see with the other antigen companies on the market. So, we're optimistic that with BARDA's assistance and their funding that we will accelerate that product development through an EUA submission as quickly as possible.

[Operator:]

Our next question comes from Per Ostlund with Craig-Hallum Capital.

[Per Ostlund:]

Neil, I'm going to start with you to the dovetail into probably a Rick here. I assume when we look at the balance sheet, we see the spike in deferred revenue up towards $4 million, that is what that spike represents is the revenue sitting there for those OUS [ph] shipments that you haven't recognized the revenue for. Is that correct?

[Neil Goldman:]

That's part of it. Some part of it [indiscernible] the majority of it here - sorry, just to be clear, the majority of it relates to a different program that - where the customer is prepaid for that program, we will be shipping over a period of time, and there's more details for that in the Q that you'll see when it's filed.

[Per Ostlund:]

Okay. Fantastic. Nevertheless, I guess, relating to those OUS [ph] sales that could turn around and come back into revenue in the second half of the year. What are the gating factors, I guess, to having that convert into revenue? Is there a formal acceptance process for OUS jurisdictions where they just kind of have to say, hey, we're not going to return this to you? Or what's going to go into that decision-making process where the couple of million dollars of those OUS shipments can find their way back into revenue in the second half? And then broadly speaking, is there any OUS activity ongoing today? Or is everything outside the U.S., essentially in the holding pattern as you work through this resubmission process?

[Rick Eberly:]

Yes, Per, this is Rick. Thanks for the question. I'll turn it over to Neil to handle the accounting measures in terms of how we're dealing with those shipments. At a high level, our shipments outside the United States, we did for COVID-19, we made the decision not to recognize that revenue, largely due to what we saw as a heightened awareness among the regulatory bodies around the world relative to the FDA's decision on our original serology system. And so that heightened awareness we were aware of, and so what we decided to do was to continue to work with our customers who we have shipped product to, to work with them very, very closely to collaborate on answering any ongoing questions and/or issues around the FDA's decision to revoke the serology product in the United States. So we continue to work through those questions. And I think given the factors that we're monitoring, we're going to have to make that decision based on a number of criteria which Neil can go into a little more in detail.

[Neil Goldman:]

Yes. So - and respectively, Per, that we can only go to a certain level of detail, as you can imagine. So getting into the specifics of particular transactions or otherwise, just isn't appropriate to get into. But consistent with what Rick was saying, it's around monitoring what's going on in the environment and in the underlying transactions and what's going on in the relationships with the customers. As I described, there's a variety of factors that go into that. I talked about things that are outside our influence, but we can certainly pay close attention to third parties and other evidence and the like. So as you can imagine, as we are certainly doing and as I described, we're very focused on getting these over the goal line. But as I said, there can be no assurance that we will, which is why we treated it the way we have. But you know us and we work hard, and we try to make things happen. So we're obviously well focused on it.

[Rick Eberly:]

So Per, the thing I would add to what Neil said is that we had a number of international customers at different stages of evaluating the product and buying the product up into and shortly after the revocation. So we are working with those customers. Some are continuing to look at the current product. Others have decided to entertain the revised product. And as we publicly announced the antigen test on the same platform, we're beginning to have dialogues with them, too, as to their interest in distributing that product once it is passed through the FDA EUA and/or any other international regulatory approvals. So we're sort of in that phase where we're taking early customers through the process, and they're evaluating what's best for their particular needs in their countries.

[Per Ostlund:]

Okay. That all sounds very reasonable. Turning outside of COVID and realizing that the pivot here is largely to COVID, but acknowledging that there are some other high-value diagnostics in the queue here for you. Can you give us an update on the HIV syphilis submission? I know the reproducibility study that you had to resubmit that felt to us, I think, like a bit of a perfunctory step, but I don't know how much the FDA is just simply waylaid and overwhelmed with other things right now. But if you have any updates there, it's appreciated.

[Rick Eberly:]

Sure, Per. Happy to do so. We continue to be in an active dialogue with the FDA. The review of the PMA, as you may know, is being reviewed by both CBER and CDRH, 2 branches of the FDA. So we continue to be in dialogue with both branches of the FDA for the PMA submission. And we continue to answer their questions relative to the reproducibility study. And so it's an active dialogue back in quarter relative to their continued questions. And we think we're making progress in those discussions. And what we can't estimate at this time is the review process timing and ultimately, what the FDA is going to view relative to - they believe the final questions being answered. And so we'll continue to answer their questions and hopefully move it closer to PMA approval.

[Per Ostlund:]

Okay, that's fair as well. One last question for me. I suspect there's not going to be a lot you can say to elaborate on the second Takeda program, but clearly, that's interesting to see that another one has gotten its way into the hopper. I guess the question is, can you say anything about it, whether it's a program type duration size, that sort of thing? And then maybe secondarily, just how much of that was catalyzed by the successful initial development of the first.

[Rick Eberly:]

Yes, Per. I think one of the things we're proud of is that certainly, the second program is building off the success of the first program in the collaboration we had with the Takeda team. So we're delighted to announce the second program due to the nature of the program and the confidentiality of it, we're limited in terms of what we can say about the scope of the program, the biomarker and any funding levels. But we're certainly excited to take on the second program with Takeda, and I think it really demonstrates the capability, the DPP technology and the platform and the ability to drive enhanced sensitivity and specificity in a point-of-care asset.

[Operator:]

We take our final question or comment from the line of Bruce Jackson with The Benchmark Company.

[Bruce Jackson:]

In terms of the new test that we - so in terms of the other new tests you've been watching out for the eosinophilic test for the asthma that you've been working with AstraZeneca. What's the status of that program?

[Rick Eberly:]

Yes, Bruce, if you go and take a look in our first quarter 10-Q, and you'll see this again in the table in the second quarter Q, in the MD&A section. We have tables where we talk about the various products in development. And you'll see there's some documentation there that, as you said, the test has gotten through the process went from 0 to CE Mark inside of 12 months. And is now available for research use only. And that's similar to - described around Takeda. That's all that - what else we can say about it at this time.

[Bruce Jackson:]

Okay. And then, just a quick question on LumiraDx. Can you comment at all on how that program is moving along? And if you can provide any other details on the types of things that you're working on, that would be great.

[Rick Eberly:]

Yes, Bruce, as we announced, the Lumira agreement was a strategic relationship. So given the fact that Lumira is a private company, and we can't speak to their development program. We're very limited in terms of what we can say. But generally, Bruce, we've had a very, very positive, strong collaboration with LumiraDx. And so we continue to move forward in that strategic relationship. And we're hopeful that we'll continue to be in that relationship.

[Operator:]

Okay. It does conclude our question period, Mr. Eberly, please go ahead.

[Rick Eberly:]

So, thank you for your time today. We appreciate all of your questions and your interest, and have a good day. Thank you.

[Operator:]

Thank you. This does conclude today's teleconference. We thank you for your participation. You may disconnect your lines at this time. Have a great day.