Chembio Diagnostics, Inc.
Q1 2019 Earnings Call Transcript

Published: 4 May 2019

[Operator:]

Greetings, and welcome to the Chembio First Quarter 2019 Earnings Conference Call and Webcast. [Operator Instructions]. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Mr. Philip Taylor, Investor Relations. Thank you. Mr. Taylor, you may begin.

[Philip Taylor:]

Thank you. Before we begin today, let me remind you that the company's remarks made during this conference call today, May 1, 2019, include forward-looking statements within the meaning of the Securities Act of 1933 concerning the current beliefs 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 annual report on Form 10-K for 2018. 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 would like to turn the call over to John Sperzel, President and Chief Executive Officer.

[John Sperzel:]

Thank you for joining us today. Chembio's off to a strong start in 2019 as we continue to execute across the business. Our team delivered revenue of $8.3 million in the first quarter of 2019, representing 8% growth compared to the prior year period, and our product gross margins increased significantly compared to recent quarters. We received approval for our multiplex test for Zika, dengue and chikungunya from ANVISA, Brazil's health regulatory agency, and recently received an initial order for this new test from Brazil. We signed an agreement with Perseus Science, which provides additional funding and support to advance the development of a point-of-care test for concussion. We completed the validation of our first fully automated manufacturing line, which is now producing DPP test, and we initiated our U.S. facility and expansion improvement plan. Finally, we are reiterating our full year 2019 revenue guidance of $36 million to $40 million. Today, we'll start by discussing the progress on our three priorities in 2019

[Neil Goldman:]

Good afternoon. In the first quarter of 2019, total revenue was $8.3 million, an increase of 8% compared to the first quarter of 2018. Net product sales for the first quarter of 2019 were $6.4 million, which is comparable to the first quarter of 2018. License and royalty and R&D and grant revenues combined in the first quarter of 2019 were $1.9 million, an increase of 45% compared to the first quarter of 2018. As John mentioned, compared to the first quarter of 2018, net product sales increased in Africa, the U.S. and Europe, offset by lower sales in Latin America and Asia. Africa continued to benefit from both the Ethiopia program and ongoing commercial successes in that region. The U.S. benefited from winning back a large state program. The decline in Latin America was due to a raw material issue affecting shipment to Brazil that has since been resolved. And the decline in Asia was due to a government's delay of a dengue tender. Gross product margin dollars decreased by 29% compared to the first quarter of 2018 primarily due to sales growth in markets with lower average selling prices as well as increased direct labor costs associated with the manual assembly of our tests. Gross product margin percent for the first quarter of 2019 was 25.3% compared to 35.6% for the first quarter of 2018. We are directionally pleased with the 700 basis point sequential improvement in product margins when comparing the first quarter of 2019 to the fourth quarter of 2018. Other expenses, which includes research and development and selling, general and administrative expenses, were $6.2 million for the first quarter of 2019 compared to $4.3 million in the first quarter of 2018. R&D cost increased by 20% associated with higher R&D spending, which is offset by higher R&D and grant revenue. SG&A increased by $1.6 million through a combination of the acquisition of Chembio Diagnostics Germany, legal rent and other costs related to leasing our new facility and higher noncash equity compensation costs. During the first quarter, we incurred $0.4 million of auditing and compliance costs related to the Chembio Diagnostics Germany acquisition. Net loss in the first quarter of 2019, including the $0.4 million of acquisition costs, was $2.8 million or $0.16 per diluted share compared with a net loss of $0.7 million or $0.05 per diluted share in the prior year period. On the balance sheet, cash and cash equivalents as of March 31, 2019 totaled $7.4 million. Net working capital as of March 31, 2019 was $19.9 million, a decrease of $2 million compared to December 31, 2018. As John mentioned, we are reiterating our full year 2019 revenue guidance of $36 million to $40 million. We continue to be confident that we have an adequate capital structure in place to support our current forecast. And now I will turn the call back to John to make some closing remarks.

[John Sperzel:]

We're very encouraged by the growing demand for our high-quality point-of-care test and pleased with our progress in the first quarter of 2019. We're confident in our platform, business and prospects. With continued execution across our key priorities, we're confident in our ability to create sustainable growth. We plan to drive additional revenue growth through increased market penetration and market share gains combined with broadening our geographic presence. Bolstering our growth is a full and advancing pipeline that leverages our patented DPP platform and handheld optical analyzer internally and through collaborations. Finally, building on two consecutive years of high growth, we are preparing for future growth by investing in fully automated manufacturing, expanding our facilities and increasing manufacturing capacity. With that, I'll now open it up to questions. Operator?

[Operator:]

[Operator Instructions]. First question is from Kyle Bauser, Dougherty & Company.

[Kyle Bauser:]

Just following up on the agreement with Perseus to leverage their patented biomarker to develop a concussion test. I mean, clearly a very significant market here. First, are you aware of any other organizations that have a patented biomarker for concussion and are trying to develop a point-of-care test?

[John Sperzel:]

Sure, Kyle. We're aware that Banyan Biomarkers actually has the only FDA-approved biomarker. One is proprietary, one is commercially available. They have a patent on the use of their proprietary biomarker. And they also have a patent on the combination of their biomarker along with the commercially available biomarker. They've licensed that to Abbott to put on their i-STAT system, to bioMérieux to put on their VIDAS system and to one other company for research use only.

[Kyle Bauser:]

Okay. And can you talk about the dollar size of this agreement or what the milestones consist of in this partnership?

[John Sperzel:]

Sure. Perseus is actually funding the development of the test. We haven't communicated any commercial arrangements with Perseus at this time. This is a channel that we intend to build ourselves.

[Kyle Bauser:]

Okay. And thanks for the comments on the PMA for the HIV-syphilis test and your efforts to collect additional data for testing pregnant women. It's, of course, favorable that FDA has reached out to help expand this indication. Can you kind of talk about the type of data you're collecting, efforts required to generate this for the FDA? Basically, just an update of the overall activities on this over the past several weeks.

[John Sperzel:]

Sure. It's a super high priority for us. We've described HIV-syphilis in the U.S. as a needle mover in terms of our ability to capture a meaningful market share. We are working very hard to satisfy the FDA. I can say that I spoke with our Head of Regulatory Affairs earlier today, and we're having regular dialogue with the agency on this matter. So it appears that there's a strong interest on the agency's side to get to the goal line, and there certainly is on our side. We're working as fast as we can to collect the data on pregnant women, submit that data back to the agency so that we can get to a decision. As I said before in the opening remarks, we anticipate that happening in the second half of the year.

[Operator:]

Next question is from Per Ostlund, Craig-Hallum Capital Group.

[Per Ostlund:]

I wanted to start on product gross margin. So as you noted, it was down year-over-year very much as expected, but you also noted it was up very nicely on a sequential basis. So I was curious if we could start there, what drove that sequential increase, because I was absolutely not modeling that more or less with the assumption that the automated line for DPP was not probably in a position to really contribute to Q1. So just curious what drove that.

[Neil Goldman:]

Yes. Per, you're right because we started automated assembly of our DPP test at the end of Q1. So we didn't see any benefit of the automation from that during the quarter. What drove the increase was that we've been able to minimize overtime and reduce weekend work as well as reduce our reliance on contract workers that come at a meaningful cost premium for all of these manually assembled products during the first quarter.

[Per Ostlund:]

Okay. Very good. So in realizing that mix effects can have quite a lot of impact to you both geographic- and product-wise, is a 25-plus-type gross margin appropriate to think about over the next couple of quarters before you layer on that next wave of automation?

[Neil Goldman:]

Well, a couple of things. As you pointed out, geographic mix definitely does impact our business, and that does continue to have a diversity over the course of the year. During the first quarter, we also benefited, as I think we talked about not only on the Q4 call but also as John spoke about today, having won back a significant state program here in the U.S. So that certainly helped us from an average selling price standpoint, and that naturally contributes to margin growth as well. As we look going forward, the business today will still continue to experience a diversity of mix from a timing standpoint. We've talked about how Ethiopia in particular is planned to shift substantially all during the first half of the year. And then there's other dimensions balanced out as John talked about, Brazil and others being weighted more towards the back half of the year.

[Per Ostlund:]

Okay. Let's stick with the concept of margin and looking specifically at the automation. So you've got the one line operational running DPP. You've got the other two on order. And John, I appreciate all the commentary about the phasing of the facility move and improvement. I guess my question is, is what kind of have you learned about validating and establishing the automated line now that you've gone through the first one, which I think you'd probably admit took a little longer than you expected. But what have you learned from that one that's going to help your other two? And how do you layer or how do you plan to layer those two in -- I guess without being disruptive to anything? Will they just go directly then to your -- to the new consolidated facility, they won't even touch where you're at today?

[John Sperzel:]

Okay. So let me take those in reverse order, Per. We're still working out the detailed plan on whether we take possession of line number two and line number three in our current facility or whether we take possession of them in our new facility. That's somewhat dependent on the demand that we have for those products, whether we want to produce them manually or on the automated line, and when we wouldn't need and when we would get certain regulatory blessings for lines number two and line number three. Line number one by contrast is producing DPP tests, which today are largely sold in Brazil. And we already have both ANVISA and Bio-Manguinhos' blessing to produce those products on the automated line. So as we get into subsequent quarters, we'll be able to give a lot more color on line number two and line number three and exactly where those will be received, how it will be validated and when they will be operational. For now, we've said those lines and our entire business is going to be automated by the end of the year. So that gives you an idea of how we're thinking about that. In all likelihood, we start in the existing building. But again, that's got to play out a little bit over the next few months. To the first part of the question about what did we learn from the first line and what -- how might we benefit when we talk about validation and verification of line number two and line number three. The first thing I would say is line number two is for STAT-PAK, which is a standard lateral-flow test with one strip inside of the cassette. Contrast that with DPP, which was our first line, has anywhere from 2 to 4 strips inside. So the software required to optimize the efficiency, the output of the line, is much more complicated in the line that we just installed. So line number two will go much easier based on what we've learned and through the validation and verification of line number one. Okay? So that takes care of the first two. Line number three is for SURE CHECK. Now the form factor of SURE CHECK looks more like a pen with a strip inside of it that's clear. And so placing a strip is inside of a tube versus placing it down on a flat cassette is a little bit different. And I would suggest -- and what we've heard from the people that are developing that line and all three lines is that the verification and validation should be pretty straightforward. The complexity is really on their end of the engineering and the mechanics to actually place the strip in a more horizontal fashion than in a vertical fashion. So all of that said, we're pretty confident that we can get those three lines in place, get them verified and validated and get them operational by the end of the year.

[Per Ostlund:]

Excellent. Since we mentioned Brazil, it's certainly encouraging to see that initial order come in on the fever test. And I just want to make sure of one thing, and then I have a question, a separate question. So was dengue -- did dengue gets its own order even though it didn't have ANVISA yet? That's part one. And then part two, you talked in the past about the Ministry of Health not having made the awards for 2019 within some of the fever programs. In light of your comments about what they've done to halt production or commercialization by the current party, the current manufacturer, how much do you think that the lack of award being made was simply because they didn't want to actually have to award it to that party?

[John Sperzel:]

Okay. I'll take those in pieces. So first of all, the order that we received, which I would describe as an initial order, included our dengue tests, plural. That is we have an antibody test as well as an antigen test for dengue. So the order included the two dengue tests, which neither are approved yet. They included our Zika test, our chikungunya test and our multiplex test as well as Micro Readers. So that's one of the reasons that we're very optimistic about the possibility or probability of getting our dengue tests approved. Okay? Second is regarding the company that previously supplied these types of products to the Ministry of Health, I think the first thing to recognize is that they were standard lateral-flow tests. So in order for that company to present something that is a combination or a multiplex test, they actually took 3 or 4 standard lateral-flow tests and put them together in a holder, which meant that you had 3 or 4 samples, 3 or 4 activation solutions. I mean, a very complex solution for the customer. But in fairness, it's all that they had, it's all that was approved at the time. Given the fact that they've had quality problems and the quality problems are really performance -- analytical performance problems, which we have been aware of and the government is well aware of now, ANVISA has stepped in and stopped both the production and the commercialization of those tests. While we always believe that we had an opportunity in Brazil, we now believe that, that opportunity is much stronger because the -- where there was a window open before, now we look at it as a door is open. As far as the timing is concerned, typically the award for these tests happens in August. Keep in mind, summer in Brazil in many parts of Brazil is year-round. But their real summer starts in October, November and runs essentially through now, and that is really the peak mosquito season for them. So we still anticipate a larger order in 2019, which will be delivered toward the back half of the year, but we still have to go win it. Chances just got a lot better, though.

[Per Ostlund:]

That's excellent. Okay. Great. One last maybe quick question for me. Is there any update on the HCV program with FIND? I think it was in the fall or maybe -- it wasn't maybe fall. But last summer, when the three parties including Chembio were awarded an initial grant for development, has there been any distillation of those three parties into sort of a bake-off winner, if you will?

[John Sperzel:]

Yes. So the companies all work to develop an antigen-based hep C test. There is none in the world today. All hep C rapid testing is done on an antibody test. And so FIND was tasked with money that they have received from Unitaid, I believe, around $30 million to go out and see if a company could develop an antigen-based hep C test with high sensitivity and specificity. So we were one of the companies, as you mentioned. We supplied our test. It was evaluated. FIND has now evaluated all of the supplier's tests, and we're in discussions with them about a path forward. As soon as I have more to report, I will do so.

[Operator:]

We have a question from Mr. Mark Massaro of Canaccord Genuity.

[Unidentified Analyst:]

This is Max on for Mark. So you stuck with your full year revenue guide of $36 million to $40 million. So just at a high level, can you give us some idea about the level of conviction you need -- the level of conviction you need to have for a particular revenue source to include it in your guidance?

[John Sperzel:]

It's a fair question. I'd say first, we start with getting a regulatory approval that increases our level of confidence and then being very close to an order. So I think we outlined in the last call one of the product areas where we felt could be a contributor in 2019 was some combination of stand-alone or multiplex test for Zika, dengue and chikungunya. The fact that we have a number of products approved in Brazil -- and I'd say we've telegraphed how we feel about the chances for our dengue test and we've indicated that the probability of success there just got a lot better, coupled with the fact that we now have an award from UNICEF for Zika, dengue and chikungunya between $1.5 million and $3.5 million and we're highly confident that we can get the CE mark, hopefully by the next quarter we can get those things under our belt and I think we can address the underlying question that you have, Max.

[Unidentified Analyst:]

Great. That is very helpful. So just regarding the back half weighting of Brazil revenues. So we were previously looking for roughly 45%-55% split between first half and second half, and I think that was prior to the incrementally back-end-loaded expectations for Brazil. So I just want to make sure that we're calibrated. So do you -- so how does that 45-55 split look? Or do you think it's going to be even more back-end loaded than that?

[John Sperzel:]

I think that's pretty close, Max. It could be another percent or two in the second half of the year.

[Unidentified Analyst:]

Great. And then one more if I can. So you've indicated that your test with AstraZeneca isn't pegged to any of their particular compounds or drugs, but rather that it has broad application to the respiratory market. So AstraZeneca has indicated that their respiratory medicines were used by -- I think it was over 18 million patients in 2018. Just in broad terms, how should we think about your addressable portion I guess of the respiratory market? And should we expect the revenues to come solely from cash used in the clinical setting or also from tests that could be used in the research setting?

[John Sperzel:]

So I think the second part of your question is that the test would be used in the clinical setting. That's the way both Chembio and AstraZeneca envision our entire collaboration. You're absolutely right that AstraZeneca believes that the tests we're developing has application for a number of different compounds. And then finally, it's really interesting because we talk all the time with different folks about opportunities for rapid diagnostic tests. And a lot of times, people get hyper-focused on the number of incidents of a particular disease. What we have to remember is most times when we run a diagnostic test, we get a negative. We've run an awful lot of diagnostic tests to find the handful of positives for a particular disease. So I would just suggest not to limit the thinking about a particular incidence of disease and really think about the number of people that you have to test to find that lever.

[Operator:]

We have a question from Bruce Jackson, The Benchmark Company.

[Bruce Jackson:]

Can you give us an update on the unidentified cancer test with the unidentified company?

[John Sperzel:]

Yes. I think the first thing to say, Bruce, is I hate unidentified as much as everybody else probably listening to the call. Unfortunately, we're embargoed on that as we are on a couple of other collaborations, which we prefer not to be but we are. So what I can say is that, that product, we've completed the development of that test. It is multiplex in two different cancer biomarkers. It is a quantitative test. It requires the analyzer. And one of the things that we are so excited about is that our partner is a diagnostic company and they have large, sophisticated laboratory analyzers for which they run this particular test on. And the target that we had to achieve was the same result that they got on their analyzer. Now oftentimes, point-of-care tests try to get close to a lab result, and oftentimes there's a difference. In our case, the product profile requirement was exactly the same number. That would be impossible with any kind of visually interpreted tests. Even a test as good as DPP with the level of detection that we can achieve, sensitivity, specificity, et cetera, it would be impossible by the eye. And so introducing the analyzer was really critical. The fact that we've now introduced fluorescence capabilities into that analyzer gives us even more confidence that we can advance tests like our cancer test and others that require these extremely low levels of detection, opens up an entire possibility for us to look at biomarkers we've never been able to commercialize otherwise. So that particular test has moved into verification, validation phase, and that can be a relatively short phase. But once we get through that, we'll be able to update more on the regulatory pathway for that test.

[Bruce Jackson:]

Okay. And then after verification and validation, how soon would it be before you could go to the FDA?

[John Sperzel:]

Well, we're going through a clinical trial, and then we would go to the appropriate regulatory agencies.

[Bruce Jackson:]

Okay. And then I apologize if I missed this earlier if you talked about it. But with regard to the tropical fever testing contract in Brazil, can you give us an update on where they stand in the process and when we might hear something from them?

[John Sperzel:]

Sure. We did cover that, but I'm happy to just highlight it. The award typically comes out in August. Brazil, the main summer for the country generally starts around October and runs into April and May. So we're sort of at the tail end of their summer. But as I mentioned in the opening remarks, the company that was supplying those products, a local Brazilian company, has been stopped by ANVISA both for production and commercialization. So we have what we believe is a pretty significant opportunity to go in and sell product ahead of that tender.

[Operator:]

There are no further questions at this time. I'd like to turn the floor back over to John Sperzel, President and Chief Executive Officer, for comments. Please go ahead.

[John Sperzel:]

Thank you for joining us today to review our first quarter results and the progress we made toward our 2019 priorities. We are relentlessly focused on expanding our commercialization, advancing our R&D pipeline and preparing for additional growth. We look forward to updating you on our next call. Thanks and have a great day.