Chembio Diagnostics, Inc.
Q4 2020 Earnings Call Transcript

Published: 11 Mar 2021

[Operator:]

Good afternoon, ladies and gentlemen, and welcome to the Chembio Fourth Quarter 2020 Earnings Conference Call and Webcast. It is now my pleasure to turn the floor over to your host, Philip Taylor. Sir, the floor is yours.

[Philip Taylor:]

Thank you, operator. Before we begin, let me remind you that the company’s remarks made during this conference call today, March 11, 2021, may include predictions, estimates or other information that might be considered forward-looking. These forward-looking statements represent Chembio’s current judgment for the future. They are, however, 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 third quarter of 2020 and subsequent Form 10-Q’s. 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.

[Rick Eberly:]

Thank you, Philip. Thank you for all of you joining us today. Today, I’m delighted to discuss our strong fourth quarter performance, providing an update on the strategic repositioning, I initiated upon joining Chembio in March, 2020 and review the status of our product portfolio expansion. Neil will cover the detailed financial results and I will conclude and open up the call for questions. Given this was a challenging year, we were pleased that because the team remained resilient, we were able to finish the year with a strong fourth quarter revenue performance. Before talking about these numbers and our business strategy, I would be remiss if I did not acknowledge the range of challenges we encountered throughout the year. Nevertheless, our team, which I am very proud to be a part of remain focused on executing, even when it meant overcoming those challenges along the way. Chembio’s core values spell the acronym rapid, as we were in the rapid testing business. The R stands for relentless and our team’s achievements during 2020 are a testament to our relentless perseverance for many challenging times, as a result of the global pandemic. We achieved top line product revenue growth, we executed on product development and regulatory submission times, expanded our relationship with the Biomedical Advanced Research and Development Authority or BARDA, which is part of the Department of Health and Human Services and advanced our commercial and operational capabilities. Total revenue for the fourth quarter was $10.2 million, including product revenue of $6.9 million representing growth of 62% and 39% respectively, compared to the prior year period. Now I would like to take a step back and talk about what attracted me to join Chembio approximately one year ago. I will articulate the opportunities, I still see for the company and how we have repositioned the business to execute on that throughout an incredibly dynamic and challenging year. I’m now even more convinced that there is significant value to be realized with the DPP platform. Why? Well, as a reminder, and for some of our newer shareholders on their call today, Chembio’s proprietary DPP technology platform provides high-quality, rapid diagnostic results in 15 to 20 minutes using a small drop of fingertip blood or alternative, easy to collect samples, such as nasal swabs. Through advanced multiplexing, the DPP platform can detect up to eight distinct test results from a single patient sample, delivering greater clinical value than other rapid tests. For most applications, Chembio’s easy-to-use, portable DPP Micro Reader optical analyzer then reports accurate results in approximately 15 seconds, the system is well-suited for decentralized testing where rapid results enable patients to be evaluated while they are on-site. Objective results produced by the DPP Micro Reader reduce the possibility of the types of human error that can be experienced in the visual interpretations required by many rapid tests. With these differentiating features, DPP test systems are ideally suited for testing more patients in more locations more often. We have all seen the value of this decentralized testing model.

[Neil Goldman:]

Thanks, Rick. First, I would like to begin with a logistical item. As a matter of corporate housekeeping, we anticipate filing an S-3 shelf registration within the next few business days. Moving on the financial results, for the three months ended December 31, 2020, total revenue was $10.2 million representing growth of 62% compared to the prior year period. Net product sales for the fourth quarter of 2020 were $6.9 million, an increase of 39% compared to the prior year period. Government grant, license and royalty, and R&D revenues combined for the three months ended December 31, 2020 were $3.4 million, an increase of 143% compared to the prior year period. Consistent with past earnings calls I’m sharing these non-product sales figures on a combined basis. In addition, effective with this period, we are separately presenting government grant income and R&D revenue within total revenues on our income statement. Both government grant income and R&D revenue are 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. Gross product margins during the three months ended December 31, 2020, declined by approximately $0.7 million compared to the prior year period. The decrease reflected continued impacts from unfavorable geographic sales mix, operational inefficiencies related to manufacturing production schedule changes and the qualification during the quarter of certain of our automated equipment. Our margins were also impacted by the write-off of expired and therefore obsolete HIV product. During 2020, we continue to invest in transitioning toward the automation of our manufacturing processes, all of which are now based in the United States. Our transition from manual to automated assembly is intended to add capacity, reduce variable costs and improved product margins. Particularly focus on the validation and implementation of the automated lines occurred during the three months ended December 31, 2020. I will talk more about this in a few minutes. R&D costs increased by $1.3 million, primarily due to the clinical trial costs related to the development of our COVID-19 tests. Selling, general and administrative costs increased by $3.6 million, primarily due to legal costs, costs from expanding our U.S. commercial organization and facility costs related to the COVID-19 pandemic. Net loss from the three months ended December 31, 2020 was $7.1 million or $0.35 per diluted share compared to a net loss of $3.9 million or $0.23 per diluted share in the prior year period. Now turning to full year 2020 financial results. The extensive economic disruption caused by the COVID-19 pandemic, exacerbated by the market and regulatory complications we faced in seeking to develop and commercialize a portfolio of COVID-19 test systems, was reflected in our operating results for 2020, as total revenues were $32.5 million, a decrease of 6% from 2019, and net product sales were $24.8 million, a decrease of 14.1% from 2019. Government grant, license and royalty, and R&D revenues combined for the year ended December 31, 2020 were $7.7 million, an increase of 37% compared to the prior year period. Gross product margins during the 12 months ended December 31, 2020 declined by approximately $5.6 million, compared to the prior year period. In 2020, we invested in developing and offering products to address the COVID-19 pandemic, which had average selling price is greater than those of our legacy products. As previously discussed, we also continue to invest in transitioning towards the automation of our manufacturing processes to reduce our reliance on manual labor and improve our product margins. The decrease in gross product margin was comprised of $0.9 million from unfavorable product sales volume and $4.7 million from unfavorable product margins. The portion related unfavorable product margins had three primary drivers. First, we incurred the cost of product sales for COVID-19 antibody tests that were returned by customers in the U.S., following the FDA’s revocation of the EUA for that product. Second, the revocation precluded plan sales of COVID-19 antibody test to customers in the U.S. for the remainder of 2020, and resulted in the deferral of certain customer opportunities for the sales of these systems outside the U.S. This negatively impacted our sales mix. As we experienced significantly lower sales in the U.S., where we have our highest average selling prices relative to regions outside the U.S., where we experienced a higher mix of sales in geographic regions with lower average selling prices. And third, we experienced operational inefficiencies, including those triggered by the revocation, activities related to qualifying automated lines for production of certain products and the write-off of expired and therefore obsolete HIV product, which together resulted in increased cost of product sales, as we shifted much of our production from COVID-19 products back to legacy product. R&D costs increased by $1 million, primarily due to clinical trial costs related to the development of our portfolio of COVID-19 tests, including those funded by BARDA, as Rick described earlier. Selling, general and administrative costs increased by $4.9 million, primarily due to legal costs arising subsequent to the revocation caused from expanding our U.S. commercial organization and facility costs related to the COVID-19 pandemic offset in part by cost savings from retrenching our Malaysia facility. During 2020, we incurred severance and related costs totaling $1.1 million. Net loss for the year ended December 31, 2020 was $25.5 million or $1.34 per diluted share compared to a net loss of $13.7 million or $0.81 per diluted share in the prior year period. Adjusted for non-cash items, our net loss for the year ended December 31, 2020 was $18.2 million. As Rick and I have discussed on prior calls. Our team continues to execute a program to reduce expenses and better align our costs with revenues, including by eliminating positions that are no longer required by our strategy. Associated with that, during the first half of 2021, we are reducing the number of employees dedicated to manually assembling our products and expect to take a restructuring charge during that period ranging from $0.1 million to $0.2 million. To-date, in 2021, we have executed changes representing approximately $2 million of cost savings on an annualized basis. On the balance sheet, cash and cash equivalents as of December 31, 2020 totaled $23.1 million. Net working capital as of December 31, 2020 was $27.4 million. During the year ended December 31, 2020, cash used in operations totaled $18.9 million, primarily due to the net loss adjusted for non-cash items and a $6.5 million increase in inventory, associated with a combination of non-cancelable purchase orders, subsequent to the revocation of the antibody test and building raw material inventory for the COVID-19 antigen test. Finally, while we do not intend to provide quarterly guidance going forward, given the current state of operations amid the pandemic and where we are on the quarter, we want to provide an update on our expectations for the first quarter. We expect first quarter of 2021 product revenue to decrease sequentially compared to the fourth quarter of 2020, but to be roughly offset by a sequential increase in non-product revenue. I’ll now turn the call back to Rick for concluding remarks.

[Rick Eberly:]

Thank you, Neil. Our DPP platform technology offers clinicians in every setting across the health care system, the ability to decentralize and improve access to diagnostic testing. Both patients and clinicians are fully realizing the clinical utility of point-of-care testing. We continue to believe the outlook for our technology has never been more promising. There’ve been challenges on the regulatory paths of our respective COVID-19 tests. But our commitment to this market is unwavering. We understand the FDA’s priorities can change. As we learn more about the virus and the testing landscape evolves. Our team has the resources and technical capability to demonstrate why the DPP platform is highly differentiated. There’s a large need and market for decentralized testing. We are confident, our DPP tests will provide value for our customers. Bolstering this confidence is the fact that we have achieved several more regulatory approvals for tests using the DPP platform. We received CE mark and ANVISA approval for our COVID-19 antigen and antibody test. Additionally, the DPP HIV-Syphilis tests received FDA PMA approval. We also own two awards totaling $13.3 million from BARDA that represent another strong validation of the DPP technology. Over the course of this year, we plan to build on that success. Our goal in the regulatory front is to achieve EUA approval and clear 510(k) clearance for COVID-19 antigen test, EUA approval for a DPP respiratory panel and CLIA waiver for the DPP HIV-Syphilis test. These approvals can enable us to shift in the geographic and product mix that would lead to improve margins. I would like to take this opportunity to welcome our newest members to the Chembio’s Board of Directors. First, Dr. David Acheson joined the Board of Directors in December 2020. Dr. Acheson brings applicable expertise in public health and infectious disease management to our leadership team. We were confident that his perspective and insights will contribute meaningfully to our long-term value creation strategy. As we enter the next phase of growth for Chembio. Secondly, David Bespalko joined the Board of Directors in March 2021. Given Mr. Bespalko’s extensive network and commercial experience in the industry, David will add meaningful insight to help maximize the value of our DPP and other technology platforms in the market. We look forward to the collaboration and contributions from both Dr. Acheson and Mr. Bespalko. Chembio is a performance driven organization that strives to attract and retain top customers and talent every day. Operational excellence is our expectation internally. And from this foundation, we are confidence. We can deliver customer satisfaction, profitable growth, and shareholder value. Finally, I would once again, like to thank our employees for their steadfast commitment to our organization. We look forward to providing updates in the future as we continue to execute our strategy. Thank you all for joining us today. Again, I wanted to reiterate that we appreciate the FDA’s guidance and BARDA’s continued support of our COVID tests. And we are committed to gathering the specific information required. We were competent. We have a plan, the resources, the technical capability, requirements submitted respective EUAs. At this time, we will not be providing commentary or guidance regarding the submissions, timelines, or achievement of the resubmission based on the uncertainty of the changing regulatory process and priorities. We look forward to sharing news about any FDA or regulatory awards in due course. With that Operator, please open up the call to questions.

[Operator:]

Your first question is coming from Kyle Bauser . Your line is live.

[Kyle Bauser:]

Great, good evening and thanks for all the updates here. I’m sorry if I missed this, but what percentage of product sales came from international markets? And can you talk a little bit about our commercialization efforts and then going in O-U.S. markets, for example, are you selling more antigen tests and antibody tests? Any color here would be great.

[Rick Eberly:]

Yes, Kyle, thank you for the question. In terms of product revenue, we haven’t broken that out between the U.S. and international for Q4. Neil, can provide some additional color on that. What I would like to say, Kyle, is that in terms of our international commercialization efforts we’re very focused in the EU and neighboring markets like the UK and Ireland and South Africa. In terms of pursuing those markets, we talked a little bit about Brazil in our prepared remarks. But we’re very, very active in marketing the product in Brazil to the state and local and pharmacy markets given the severity of the pandemic as everybody is reading about in Brazil. We’ve got a great distributor partner in Brazil who is helping us market the product into the pharmacy markets as well. And we’re also expanding our commercial organization in Brazil in order to build the infrastructure there long-term to not only have distribution in Brazil, but into the neighboring region. And then finally, Kyle, we’re working very, very closely with Bio-Manguinhos. As you know they’ve been a long-term partner of Chembio over the last 15 years. So we’re working very, very closely with them to get the cross-registration of the product approved by ANVISA. So Bio-Manguinhos can begin to also provide the antigen test in Brazil. And turning to United States, we talked a lot about our commercial organization. We’ve been very, very focused on obtaining customers and obtaining new customer opportunities for HIV-Syphilis tests. And now as we announced today, we have an in-license product for the respiratory panel, which will be launching very, very shortly and were very excited about adding that to our HIV product portfolio in the United States. So Neil, do you want to provide any additional color on the revenue distribution?

[Neil Goldman:]

Yes, sure. Thanks and hi, Kyle. In the geographic breakdown in our 10-K, which will be filed a little later this afternoon, fourth quarter revenues in the United States were just under $860,000, which represents 13% of our product revenues in the fourth quarter. And by contrast just as a couple of data points in the first and second quarter of this year, U.S. sales were 21% and 42% of our net product sales. So you can see how that connects in with some of the comments that I made as well as it relates to the unfavorable geographic mix.

[Kyle Bauser:]

Got it. No, that’s helpful. Appreciate it, Neil. And Rick can – so what are the next steps for required for obtaining CLIA waiver for the HIV-Syphilis test? Sounds like, you’ve got some nice traction there? Your partner up and running, but – and I know you won’t talk about timelines, but I’m just kind of wondering, what’s next there that you have to do?

[Rick Eberly:]

Yes, Kyle. We’re very excited about the customer uptake in the moderately complex market as we talked about. We’re seeing, customers and the public health sector certainly the OB/GYN market is really giving us some positive signs that the product has a great clinical utility and fit in that market. And so we have filed for a CLIA waiver to the FDA, as we said, we would do after receiving PMA approval by the FDA. So we’re now under the timing of the FDA and we will work with them to answer any questions along the timeline as they review our CLIA waiver submission.

[Kyle Bauser:]

Okay. Oh, great. So that’s already filed. Great. And then can you provide an update on the latest situation with manufacturing? You provide some nice color. I’m just kind of wondering about capacity, how many automated lines are up and running to the extent you can share? And maybe what percent of your output is still from manual? Just kind of any color on that would be great.

[Rick Eberly:]

Yes, Kyle. As Neil talked about in his prepared remarks, we made tremendous progress in the fourth quarter in getting our automated lines not only validated but operational. So, as we head into 2021 and we’re well into 2021, we will continue to utilize our validated and operational automated lines. We also are looking at possible expansion of our automated lines as well as we go out throughout the year. But one of the things we will do is continue to balance our fully automated lines, as well as our manual production lines as it dictates by product mix, geographic product sales and the various regulatory approvals we need to get for certain automated products. So Neil, is there anything to add?

[Neil Goldman:]

Yes, just a couple of things. One is, I’ll reiterate the comment that I shared during the prepared remarks about the actions that we’ve taken thus far in 2021 related to our – I guess, reflecting our confidence in the capability automated lines. And that is that we’ve executed changes in our head count that generates annualized savings of approximately $2 million. Secondly, as is described in the 10-K file, is we have issued purchase orders for additional automated production lines. And that’s just part of the transition that we’re moving towards. Something to keep in mind is the qualification of those lines for different products, for different geographies under different regulatory authorities vary from place to place, product to product, et cetera. So those are just the multiple dimensions that we manage as we decide where and how we build any particular product in order as we move along day in, day out.

[Kyle Bauser:]

Okay. That’s helpful. Thank you for all the updates, both of you.

[Rick Eberly:]

Thank you, Kyle.

[Operator:]

Thank you. Your next question is coming from Bruce Jackson . Your line is live.

[Bruce Jackson:]

Thank you for taking my question. If we could go back to the automated manufacturing lines and the gross margins, how do you see the gross margin profile unfolding over the course of the year? And will there be a increased automation have any impact on the gross margins?

[Neil Goldman:]

So Bruce thanks for the question. We’re not providing any forward-looking guidance as it relates to specific numbers. We have in the past described the benefit on the margin standpoint that automated lines provide relative to manual production. Of course, mix overall volume and average selling prices have a significant contribution to where the margins shake out as well. And those are the factors that will impact where we ultimately end up.

[Bruce Jackson:]

Okay, great. And then getting back to the CLIA Waiver for the HIV-Syphilis test. Can you give us maybe a rough idea of how long that process might take? I know that we’re dealing with the FDA and that it’s somewhat unpredictable, but are we talking like nine months, a year, a year and a half before getting the CLIA Waiver? Can you just help us maybe put some time around that estimate?

[Rick Eberly:]

Yes, Bruce. The CLIA Waiver does have a statutory time to it in terms of the review process. But that does not include, any additional time where there’s a request for specific questions to be answered and/or the response to our CLIA Waiver submission. So that’s why the timing is a little uncertain and why we’re not providing any guidance on timing. Because we can’t predict, what the FDA response process is going to look like at this point. But we are in that statutory time for review under CLIA Waiver submissions. And like I said before, at some point when we receive CLIA Waiver, we’ll provide that information.

[Bruce Jackson:]

Okay. Fair enough. And then last question, you’ve got several programs ongoing in the companion diagnostics area. Anything news report on any of those programs?

[Rick Eberly:]

Yes. We don’t have any news to report on that at this point. We do have some ongoing work in that area. Neil, do you want to talk more about any break out of that revenue?

[Neil Goldman:]

Yes, sure. So you can actually – as I shared see the breakout between the revenue from those programs versus the government programs on the base of the income statements. So you can see where that’s coming. In addition as Rick described and as we talk about in the MD&A that you’ll be able to read that later this evening. We have our – as part of the focus, which I think is maybe the theme here is the focus that Rick talked about on developing and launching our products and our portfolio. We are shifting very much towards doing exactly that and away from – I’ll call it outsourced R&D development. The work that we did in those areas have unquestionably provided substantial validation over the capabilities of the platform as they were all inbound interest and in many respects were very successful. And at the same time, we see that the highest and best use for our people is to develop product where we’re controlling the products, we’re controlling the timeline and we’re controlling the commercialization associated with them.

[Bruce Jackson:]

All right. Thank you very much.

[Rick Eberly:]

Thank you, Bruce.

[Operator:]

Thank you. There are no further questions in the queue at this time.

[Rick Eberly:]

Okay. Let me wrap up and say thank you for everyone’s time and attention today. We look forward to future updates. Have a good evening.

[Operator:]

Thank you, ladies and gentlemen, this does conclude today’s conference call. You may disconnect your line at this time and have a wonderful day. Thank you for your participation.