Chembio Diagnostics, Inc.
Q2 2019 Earnings Call Transcript

Published: 9 Aug 2019

[Operator:]

Greetings and welcome to Chembio Second Quarter 2019 Earnings Conference Call and Webcast. [Operator Instructions]. As a reminder, this conference is being recorded. I would now like to turn the call over to your host, Philip Taylor, Investor Relations. Thank you. 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, August 6, 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 demonstrated strong commercial and operational performance during the second quarter of 2019. Our team generated total revenue of $9.6 million, including product revenue of $8.5 million, representing growth of 10% and 24%, respectively, compared to the prior year period. For the year, we are reiterating our revenue guidance of $36 million to $40 million.In addition to our excellent top line performance, I want to highlight several recent accomplishments. During the second quarter, we received 2 important regulatory approvals, in line with previously communicated expectations that will create future commercial opportunities. Our dengue test was approved by ANVISA, which covers Brazil and our multiplex test for Zika, dengue and chikungunya received CE Mark, which covers Europe and the Caribbean region.Last month, we entered into collaboration with Takeda, a leading global pharmaceutical company, to develop a point-of-care test for an undisclosed biomarker. This represents our second collaboration with a major pharmaceutical company, validating our technology as an ideal platform for the development and commercialization of companion or compatible diagnostic tests.On today's call, we'll start by discussing progress on our 3 corporate priorities

[Neil Goldman:]

Good afternoon, everyone. In the second quarter of 2019, total revenue was $9.6 million, an increase of 10% compared to the second quarter of 2018. Net product sales for the second quarter of 2019 was $8.5 million, an increase of 24% compared to the second quarter of 2018. License and royalty and R&D and grant revenues combined in the second quarter of 2019 were $1.1 million, a decrease of 41% compared to the second quarter of 2018. R&D revenue is related to the timing and cadence of program performance obligations, which do not always occur in a certain quarter, but we continue to incur the expenses. In addition, we are wrapping up the Zika 510(k) work, which we believe will be replaced with projects such as the Takeda Pharmaceutical collaboration and others in our pipeline.As John described earlier, compared to the second quarter of 2018, net product sales experienced gains in nearly every region, led by Latin America, Africa and Europe. Latin America benefited from the initial sales of our tests for Zika, dengue and chikungunya to Brazil. Africa continued its strength related to the Ethiopia program, and Europe reflects the contribution of our acquisition of opTricon, now Chembio Diagnostics GmbH, in November 2018. Gross product margin improved by $0.9 million compared to the second quarter of 2018. This increase was from a combination of favorable product revenue and a 770 basis point improvement in product margin percent. The gross product margin percent for the second quarter of 2019 was 21.1% compared to 13.5% for the second quarter of 2018. The gross product margin improvement was from initial benefits from our first automated assembly line and reduced contract labor costs, offset by the impact of geographic mix on average selling prices.Other expenses, which includes research and development and selling, general and administrative expenses, were $6.2 million for the second quarter of 2019 compared to $4.5 million in the second quarter of 2018. R&D costs increased by 5.5% associated with higher regulatory approval related spending. SG&A increased by $1.5 million through a combination of the operating costs for Chembio Diagnostics Germany, which we acquired late last year, legal expenses, rent and other costs related to leasing our new facility and higher noncash equity compensation costs. Net loss in the second quarter of 2019 was $3.2 million or $0.19 per diluted share compared with a net loss of $1.7 million or $0.12 per diluted share in the prior year period. Per GAAP, the calculation of earnings per share excludes restricted stock that is unvested but issued and outstanding. The weighted average number of shares outstanding for both the 3 and 6 months ended June 30, 2019, is approximately 16.9 million shares.On the balance sheet, cash and cash equivalents as of June 30, 2019, totaled $4.5 million. Net working capital as of June 30, 2019, was $15.4 million. 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 2019 plans. Given our growth plans and momentum, we are currently evaluating a credit facility or debt financing to further leverage our capital structure.Now I will turn the call back to John to make some closing remarks.

[John Sperzel:]

In summary, we've built a broad portfolio of point-of-care infectious disease tests, bolstered by a differentiated and highly analytical technology platform that's leverageable across many biomarkers. The performance, ease of use, speed and cost of our tests is attractive to customers across the globe. We are more confident than ever in our ability to expand commercialization and advance the development of new tests internally and through collaborators while efficiently scaling operations.With that, we'll now open it up to questions. Operator?

[Operator:]

[Operator Instructions]. Our first question comes from Per Ostlund with Craig-Hallum.

[Per Ostlund:]

Let's start with the Brazilian fever market. So you mentioned in your remarks, John, and reiterated that the potential competitor there had, had production halted and was essentially out of the market. You had gotten an initial order as of the last quarterly call. Now that you've got all your approvals, what sort of gating factors are in place for you to more materially capture the market opportunity there? Or is it more of a 2020 item, potentially, at this point given where we are in the year?

[John Sperzel:]

The short answer is just getting the order. And we still believe it is potentially a 2019 opportunity.

[Per Ostlund:]

Okay. No elaboration needed on that.

[John Sperzel:]

Yes. To expand a little bit on what happened with the previous supplier, on the past call, we mentioned that they were, let's call it, under a hold by ANVISA. It's gone a step further and they've had their GMP license revoked. So that's gone from an open window to an open door.

[Per Ostlund:]

Okay. Very, very good. A couple of the time line matters I wanted to come back to. It sounds like DPP, HIV-Syphilis and self-tests are still seen as a couple of second half opportunities. Just wanted to get your sense or an update on the data collection from the HIV-Syphilis side on the -- to add the pregnant women claim to the test. Where do you stand there? And then I think, if I recall correctly on HIV self-test, you were expecting some feedback on the CE Mark filing and the WHO filing potentially in 2Q? Did those things happen? And if so, could you characterize...

[John Sperzel:]

Yes. Okay. So there are few pieces to that question, Per, excellent question. First, let's take HIV-Syphilis in the U.S. We continue to be confident that we're going to get the FDA approval, which is a PMA in the second half of this year, and that creates a significant opportunity in the U.S. market. To expand a little bit on comments that I made in the prepared remarks, there's also a significant market opportunity that's emerged in the U.S. with one of our competitors, Abbott, who is unable to supply their Determine HIV test in the U.S. market. They've communicated that to U.S. customers and distributors and have gone so far as to say that those customers should look to other suppliers to get supply of that product.So beyond HIV-Syphilis and waiting for the FDA approval, we have an immediate actionable opportunity with HIV testing in the U.S. market. And it's also worth noting, those customers that currently buy from Abbott previously bought Chembio products when we distributed them through Alere who, of course, is now Abbott. So we think we have a great opportunity in the U.S. market right now with our HIV test and then going forward, once we get approval with HIV-Syphilis. Internationally, we're very focused on getting both the CE Mark, which would cover, broadly, Europe and the Caribbean region and also getting WHO prequalification for our HIV self-test. Remember, that's the same test that the SURE CHECK brand that is used for public health in the United States and customers love it. And the feedback that we have through our distributor in Europe is that the HIV self-test customers love it as well, incredibly easy to use. So we anticipate getting both of those approvals in the second half of this year, which creates additional opportunity for us in the self-test segment.

[Per Ostlund:]

Excellent, excellent. Question on HCV. I'm wondering if there's any updates on the project that you had going with FIND there. I think it kind of kicked off last summer, and it looks like maybe they've narrowed their focus down to a lesser number of partners than they had originally, although I don't think they've disclosed anything, which naturally means you might not be able to disclose anything. But I did see that there was an RFP and an RFQ out in terms of development and commercialization of an HCV core antigen test. I'm just wondering if there's any update there.

[John Sperzel:]

There is not an update on that officially. We know how our test performed. I think it's unlikely that we'll continue forward with an antigen-based hepatitis C test. There were two components to the work that we're doing with FIND. One was to assess whether a rapid testing platform could perform an antigen-based hepatitis C test, for which none exists in the world today. I don't know that that's going to go forward based on the data that I've seen.The other part, which is much more encouraging, is the performance of our antibody-based hep C test, which we had previously developed. That data looks outstanding, and I think there's a high likelihood that internationally, we'll move forward on that front. And we'll update you once we go forward, exactly what that plan looks like, but very encouraging.

[Per Ostlund:]

Okay, excellent. And then just last one, last one to squeeze in. With the reaffirmed guidance of $36 million to $40 million, I assume that, that still does not include the UNICEF conditional order. Is that a situation where, literally, you will make sure that every facet of the conditions are taken care of before it's included in the number?

[John Sperzel:]

That's correct, yes. And it also, just as a reminder, did not include any potential upside of the fever and tropical disease tests in Brazil, which we're pretty encouraged about at this point.

[Operator:]

Our next question is from Kyle Bauser with Dougherty & Company.

[Unidentified Analyst:]

It's actually Greg filling in for Kyle. But I just want to follow up, to start, on the previous question. You had a nice initial order from Brazil last year and we're anticipating a subsequent material order. To the extent that you can tell, when does Brazil typically give awards for topical and fever tests? And have you had any subsequent discussions with Brazil since last quarter?

[John Sperzel:]

So I'll take those in reverse order, Greg, and thanks for the question. We are in constant discussion with Brazil about the fever and tropical disease opportunity. We have finalized pricing with our partner, Bio-Manguinhos, on the dengue test, the chikungunya test and the multiplex test. We had previously established pricing on Zika. So we're moving forward on the contractual side of things. Recall that our partner Bio-Manguinhos is the one that actually supplies the product to the Ministry of Health. They are both Brazilian government organizations. The award for those tests generally happens in the third quarter of each year, of the previous few years that they've had that tender out. And so we anticipate that occurring in the third quarter.

[Unidentified Analyst:]

Okay. Great. And then regarding the partnership with Takeda, can you provide any more color around timing milestones? I think you touched a little bit in your prepared remarks. And then in particular, if you look at the Astra Zika deal for $2.9 million over the -- over 18 months and the Paul Allen Foundation agreement, which I think was $2.8 million, is it fair to assume that the Takeda contract is in the same ballpark?

[John Sperzel:]

Sure. First of all, I mean we're excited to work Takeda. It's a top 10 pharmaceutical company. I think all of you know, they recently acquired Shire for more than $60 billion. So we're really excited about that opportunity. As I mentioned in the prepared remarks, it's the second major pharmaceutical company that has chosen to work with Chembio, and that's a real stamp of approval for our platform and our scientific capabilities.We haven't disclosed the funding through the Takeda collaboration. And bluntly speaking, the reason we don't disclose that for each collaboration is it can be helpful or it can also be harmful in future negotiations with other potential partners, many of which are ongoing. So that's why we haven't disclosed it.You referenced a couple of collaborations that we had with Paul Allen and with AstraZeneca that provided multimillion-dollar funding. I mean it's fair to think about it that way, but it's not a number that we have put out publicly. And then finally, I think, Greg, your other part of your question was where are we in the process. We have kicked off the program. We're in the feasibility phase and look forward to updating as we go forward.

[Operator:]

Our next question comes from Bruce Jackson with The Benchmark Company.

[Bruce Jackson:]

So to continue on the Takeda Pharmaceuticals product, is this going to be a companion diagnostic? And is it going to be a single biomarker or a multi-biomarker assay?

[John Sperzel:]

It's a companion diagnostic test, and we haven't disclosed if it's a single or a multiplex test.

[Bruce Jackson:]

Okay. And I suppose you can't discuss what therapeutic area it might be in.

[John Sperzel:]

Correct.

[Bruce Jackson:]

Okay. And then with AstraZeneca, if you could perhaps bring us up to speed on the story. So you finished up the clinical work. What kinds of discussions have you had with the FDA? And what's the -- what seems to be the sticking point right now?

[John Sperzel:]

So when you say we finished up the clinical work, I want to just make sure that I respond to that appropriately. We have not finished the clinical trial for the FDA submission, if that's what you were suggesting, Bruce. Just maybe clarify that for me.

[Bruce Jackson:]

Yes. Sorry about the verbiage there. But you've gotten the project to the stage where you're ready to approach the FDA. So just take us through what the nature of those discussions are and what the time line is looking like to the best of your knowledge right now.

[John Sperzel:]

Yes. So I think it's important to start with -- today, there is no diagnostic test on the market for the application that we are pursuing. So there is no predicate device, if you want to talk in regulatory terms. That means, with the FDA, we need to follow a de novo pathway. And generally, through the pre-submission process, there's lots of dialogue between a diagnostic company and the agency as you prepare to start a clinical trial. Because to be efficient, we want to get agreement on what that clinical trial is comprised of and what it's intended to prove in terms of your intended use of the product. And so in terms of characterizing the dialogue with the FDA, I would say it's pretty extensive. And it includes Chembio, who's leading that effort, as well as AstraZeneca. They're involved in every single discussion and every single meeting that we've had with the agency.As far as the time line is concerned, it's a little premature to comment on that. As I mentioned, as soon as we have that pathway agreed to with the FDA, then we'll be able to put a time line on it and we don't have that yet.

[Operator:]

There are no further questions. At this time, I'd like to turn the call back over to John Sperzel for closing comments.

[John Sperzel:]

Thank you for joining us today. Look forward to updating you on our next call. Have a great afternoon.

[Operator:]

This concludes today's conference. You may disconnect your lines at this time, and we thank you for your participation.