Chembio Diagnostics, Inc.
Q2 2018 Earnings Call Transcript

Published: 13 Aug 2018

[Operator:]

Greetings, and welcome to the Chembio Diagnostics, Second Quarter 2018 Earnings Call. At this time all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to your host [Philip Taylor], Investor Relations.

[Unidentified Company Representative:]

Thank you. Before we begin today, let me remind you that the company’s remarks made during this conference call today, August 8, 2018, 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. Chembio’s results may differ materially from those projected. Chembio undertakes no obligation to publicly revise or update any forward-looking statements 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 John Sperzel, President and Chief Executive Officer. John.

[John Sperzel:]

Thanks Philip. Good afternoon everyone and thank you for joining us. Joining me today is Neil Goldman, our Chief Financial Officer. Our results during the second quarter of 2018 reflect strong execution, commercially and operationally. We achieved total revenue of $8.7 million during the quarter, an increase of 112% compared to the prior year period. Our patented DPP technology is central to our business strategy and we believe its potential is only beginning to be realized in the market. While DPP based test can deliver results in 10 to 20 minutes from a tiny finger stick drop of blood, their uniqueness lies in providing enhanced sensitivity and specificity, advanced multiplexing and quantitative results when combined with our DPP micro reader. We focus on our DPP technology. We achieved a number of recent milestones, including the following highlights. Signed a long term agreement with Bio-Manguinhos to commercialize DPP tests that detect dengue, Zika and chikungunya in Brazil. Initiated shipments of HIV test to Ethiopia as part of the largest tender award in company history totaling $15.8 million over three years. Commence the LumiraDx funded collaboration to develop a portfolio of new point of care tests that detect infectious diseases. Advanced to Phase 2 is the AstraZeneca funded collaboration to develop the DPP test that detects an undisclosed biomarker. Submitted the dossier into the World Health Organization for the pre-qualification of our Malaysia facility. And entered into collaboration with FIND, to expedite the feasibility of the DPP test that detects Hepatitis-C virus. Today I will share additional details on these highlights while reviewing advancements in our three areas of strategic focus as well as recent commercial and operational achievements. Neil will follow our details and second quarter financial results. I’ll make a few closing comments and then we’ll open the call for questions. Starting with our first area of strategic focus, to expand our core sexually transmitted disease business. We continue to make excellent progress commercializing our STD products and believe they’re significant opportunity to expand globally. Net product sales during the second quarter of 2018 were $6.9 million, an increase of 137% compared to the prior. Net product sales in Latin America and Africa increased 216 % and 351% respectively compared to the prior year period fueled by earlier investments in global sales and marketing. During the second quarter we had DPP HIV sales of $3.2 million to Bio-Manguinhos, a government agency and supplier of diagnostic products to Brazil’s Ministry of Health. We’re on track to supply the remaining $2.9 million of the $8.5 million annual commitment from Bio-Manguinhos during the second half of the year. Our longstanding collaboration with Bio-Manguinhos continues to serve as a strong channel to deliver our products to Brazil’s public health system. During the second quarter we had HIVs tactic sales of $1.5 miller under a tender from the Ethiopian Pharmaceuticals Fund and Supply Agency and we’re on track to supply an additional $2.8 million during the second half of 2018. We plan to supply the remaining $11.5 million of this $15.8 million tender over the course of 2019 and 2020 as specified in the tender. We continue to advance toward commercialization of our multiplex DPP HIV-Syphilis test in the United States, which is one of our corporate priorities. We filed a premarket approval application to the U.S. food and drug administration as planned during the first quarter of 2018 and we’re in dialogue with the agency as our submission is under review. We believe a significant market opportunity exists for each of these Syphilis tests due to the growing concerns related to co-infection and a global effort to eliminate mother-to-child transmission of HIV and syphilis. Finally we’re making excellent progress on our international HIV self-testing strategy. While we are commercializing our HIV self-test in Europe via partners, we’re preparing the dossier for WHO prequalification and directly engaged with the expert review panel for diagnostics that oversees the suitability of diagnostics for procurement by the global fund, including PEPFAR, UNAIDS and other NGOs receiving global funding. Since receiving level 3 procurement through the ERPD process, we progressed with several African Ministry of Health authorities in their country evaluations which proceeds authorization for HIV sell-testing. Turning to our second area of strategic focus

[Neil Goldman:]

Thanks John. In the second quarter of 2018 total revenue was $8.7 an increase of 112% compared to the second quarter of 2017. The net product sales for the second quarter of 2018 was $6.9 million, an increase of 137% compared to the second quarter of 2017. License and loyalty and R&D milestone and grant revenues combined in the second quarter of 2018 were $1.9 million, an increase of 52 % compared to the second quarter of 2017. Net product sales growth was driven by strong gains in Africa and Latin America and partially offset by Asia. Gross product margin dollars increased by 34% compared to the second quarter of 2017. Gross product margin percent for the second quarter of 2018 was 14% compared to 24% for the second quarter of 2017. The lower gross product margin percent for the second quarter of 2018 resulted primarily from sales growth in markets with lower average selling prices as well as cost to ramp up production volumes to new corporate level. Other expenses which include research and development and selling, general and administrative expenses were $4.5 million for the second quarter of 2018 compared to $4.1 million in the second quarter of 2017. R&D costs were relatively flat representing a combination of higher R&D spending corresponding with the growth in R&D milestone and grant revenue, offset by lower spending on clinical trials during 2018 as the company completed its DPP HIV-Syphilis system in the U. S. clinical trial. SG&A increased by $0.4 million associated with higher compensation expense and sales commissions related to the growth in both our commercial infrastructure and net t product sales growth. Net loss in the second quarter of 2018 with $1.7 million or $0.12 per diluted share compared with a loss of $2.2 million or $0.18 per diluted share in the prior year period cash and cash equivalents as of June 30, 2018 total of $9.5 million. Now I will turn the call back to John for closing comments.

[John Sperzel:]

Thank you, Neil. The Chembio team delivered a strong second quarter and closed the first half of 2018 with outstanding revenue growth and performance across the board. We advanced a number of strategic initiatives during the quarter, which we believe paved the way for continued success. Our core sexually transmitted disease business delivered significant growth fueled by earlier commercial investments which we plan to supplement as we expand our global footprint. A number of the tropical and fever disease products in our pipeline developed on our DPP platform are approaching commercialization and we believe the market potential for these products is significant. Finally we continue to attract world leading organizations, which further leverage our DPP platform in our scientific expertise which we believe have the potential to further transform the company. With that, we’ll now open it up to questions. Operator.

[Operator:]

Thank you [Operator Instructions]. Our first question is from Per Ostlund with Craig-Hallum Capital Group. Please proceed.

[Per Ostlund:]

Thanks. Good afternoon John and Neil. Congratulations on just a tremendous amount of positive developments here. I wanted to start out with actually the hiring of Dr. Rousseau if I could. Sort of looking for a little bit of background on the courtship process I guess if you will. Since this was a newly created position, I’m curious as to whether you perceived an inflection in any specific aspect of your business, whether it be HIV self-testing or fever diseases or something else that really catalyzed this decision and then I guess maybe attending to that how just how critical was her background with Gates in attracting Chembio to her and the reverse.

[John Sperzel:]

Thanks Per, I appreciate your first comments and we are really excited to have Christine Rousseau as part of our executive leadership team. She has tremendous experience from the Bill & Melinda Gates Foundation, right in the wheelhouse and in the markets that we are pursuing and a lot of this is really about turning a corner and starting to play offence. We believe there are a lot of opportunities in our core STD business, certainly in international HIV self-test. We are really interested in her contributions in those areas given her background and her global network and we obviously knew her from the work that we had done with the Gates Foundation so we knew that there would be a great fit from a chemistry standpoint.

[Per Ostlund:]

Okay, very good. Getting into a couple of the relationships that you either struck or expanded on here recently, so maybe start with the Bio-Manguinhos commercialization effort that you’ve got ongoing in Brazil and I appreciate the commentary about the chikungunya approval by ANVISA and the other submissions. When you are looking at the commercialization obviously you’ve got Zika approved there, now you’ve got the chicken going test approved there. Do the dengue and the combo assay need to come in tandem before that really lifts so that you’ve got the full complement of the products there or could you start to see some commercialization in Brazil of the individual assays as approved?

[John Sperzel:]

They don’t all necessarily need to be approved. There are steps in terms of commercialization in Brazil. Obviously the first one which we have talked about on prior calls is that we have to develop the test and we did that in collaboration with Bio-Manguinhos under an agreement that we signed around the middle of 2016. Then subsequently we signed the commercial agreement, that commercial agreement is essentially a triggering event for us to submit the dossiers to ANVISA for these products. We have certainly done that in 2017 for our Zika test and receive the ANVISA approval and subsequent to signing this commercial agreement we submitted the dossiers for dengue, for chickengunia and for the combination assay for Zika, dengue and chickengunia. And so we now have Zika approved, we now have chickengunia approved. The dengue and the combination tests are pending approval and that will allow Bio-Manguinhos along with us to start negotiating with the Ministry of Health for the business. So those are the steps that are involved and we’ve taken in a pretty careful calculated process and I think we’re demonstrating really good speed, not just in terms of development but in terms of regulatory submissions and approvals. The track record is really good. We have 15 year history with Bio-Manguinhos, so there is nothing new there.

[Per Ostlund:]

Sure, maybe just to quickly follow up on that. With the chickengunia approval having come yesterday, can you give us a sense as to how protracted an approval process that was, when did that submission actually take place and is there any – is there any way we can think of that as a proxy for the other submissions.

[Neil Goldman:]

It would be – I wouldn’t suggest using that as a proxy, each submission has to stand on its own. They are completely data driven. This is a very stringent regulatory agency and Visa I’m referring to, so each one of these has to stand on its own. We obviously wouldn’t submit the dossiers for ANVISA approval if we weren’t confident in the data, but you know each one stands on its own.

[Per Ostlund:]

Okay, that’s fair. On the HCV the core antigen test that you are working with FIND on -- I realize we are dealing with some hypotheticals here still at this point getting through the development process. But is there any way at this stage of the game that you can size that potential opportunity and then I guess related to that, how much does your preexisting relationship with FIND whether it’s been on the Asian fever panel or anything else, how much does your past relationship with FIND help you as you go through the process on the funding, in the initial funding with HCV?

[John Sperzel:]

So it’s probably a little bit early for us to be talking the market. I mean I obviously shared some information about the incidents of hepatitis C globally but I wouldn’t want to start speculating about how big we think that market is for us. With respect to the relationship with FIND, I think that that’s important and it’s important because not necessarily the personalities, but because of our DPP platform. We are obviously collaborating with FIND on a fever panel for Asia, following the people panel development that we did with Paul Allen we’ve developed after Africa we’re developing a peeper panel with funding from FIND for Asia. And so they’re very familiar with the capabilities of the DPP platform they’re very familiar with the scientific expertise and the ability to work together with a diverse set of collaborators. So I think all of that was attractive to the FIND organization as they thought about who to collaborate with to make a rapid, a high quality rapid and agent based Hep-C test. This is not new for us to be working on Hep-C. We’ve been working on Help-C antibody based assay for quite a while and we’ve essentially been waiting for the right time to enter the market. This maybe that time because of the funding and support that we may get with FIND

[Per Ostlund:]

Excellent! One last question for me if I can, you mentioned John that that you got the DPP HIV-Syphilis Assay submitted to the FDA on plan in Q1. I’m just wondering if there’s anything you can say to characterize that early dialogue with the FDA that you’re having at this point. Thanks.

[John Sperzel:]

I wouldn’t want to do that.

[Per Ostlund:]

Sure, that’s fair. Thank you. Congratulations!

[John Sperzel:]

That’s ongoing. Yeah, thank you.

[Operator:]

[Operator Instructions]. Our next question is from Ross Taylor with ARS Investment Partners, please proceed.

[Ross Taylor:]

Yeah John, congratulations on the continued significant improvement and advances in the business, the management, the board and the like. There’s two areas I wanted to ask about. One is, you talked about bringing on your new automated line. Can you give us more background on the capabilities of those lines, the cost, the ability to add more and the likeness of the ability to respond quickly to potential large new opportunities as some of your irons in the fire get pulled out?

[John Sperzel:]

Sure, first we’re really excited to have the first automated manufacturing line in the facility here in New York. We saw it yesterday along with our board. I mean, if I could try to describe it here on the telephone – you know you understand what a cassette looks like. It has a base and a lid and some number of strips inside of it. Essentially we deliver the components to the front end of the equipment in a hopper or in a magazine and everything is robotic after that from the placement of the base, to the placement of the strips, to the placement of the lid, to the closing of the cassette, to the packaging of the cassette. So essentially in one end we enter or deliver the components and on the other end is a foil-pouched cassette. So we’re really excited about the labor advantages and the ability to scale the business while maintaining our quality and how that automated system will impact it. In terms of scaling the organization and the company on the production side, you know each of those lines has a capital cost of somewhere around $750,000 and in our most complex test configuration running two ships delivers about $5 million test capacity.

[Ross Taylor:]

And that’s your most complex. So in a more standard straight up, you know you’re testing for one thing such as you know a biomarker or something of that nature. I would assume that’s a less sophisticated task, because it’s going to have fewer things you’re looking for. How many could you produce?

[John Sperzel:]

Can be as high as 10 million.

[Ross Taylor:]

As high as 10 million, so basically each of these for 750k, you have the ability to produce 5 million to 10 million.

[John Sperzel:]

That’s correct, yeah. This is new, it’s a function of cycle time as you can imagine, going a little slower.

[Ross Taylor:]

Okay and then, the second question is can I count you guys as having eight or 10, perhaps more significant initiatives that you’re working with everything from the AstraZeneca, the Bio-Manguinhos, the Lumira which didn’t get mentioned on this call, you know cancer, Hep C, the fever panels, the single standing malaria and chikungunya and Dengue and the like. All those seem to be potentially very substantial markets, particularly for a company which last you did only about you know $25 million in revenues. How many of those – if we look out two to three years, how many of those eight to 10 initiatives are out front right now? Should we expect to be doing $25 million or more on their own?

[John Sperzel:]

Yeah, so I wouldn’t comment on the value associated with each of those, but I would absolutely concur with you that we have a number of you know – I think it’s been characterized maybe by you Ross as a short term goal and I always like to put a little bit of a point on that and say that, I think what we has are not your shots on goal, but quality shots on goal. And I mentioned in last quarter’s call, bubble where we think can be really transformative for the company are the collaboration that we have with AstraZeneca, which is on track to be completed by the middle of next year, essentially less than 12 months from now and the collaboration, albeit early with LumiraDx, we think both of those can be significant contributors to the company. Now we’re doing some novel things as well, to test for any type of cancer -- drop of blood in less than 15 minutes and provide a quantitative result of a multiplex bottle marker, it’s pretty novel. We’re doing that with our DPP technology platform and so we think that that in itself can open up the door for a lot of other opportunities in the broader oncology market. So you know without going into each one of the ones that you mentioned, we have some things on the table that are progressing very nicely, which we think have you know the potential by themselves or certainly in aggregate to really transform this business and this company.

[Ross Taylor:]

Yeah, it’s safe to assume that these are markets that are substantially bigger than what you’re doing in revenues right now. So given your uniqueness and obviously the fact that you guys are considered a thought leader or technology leader in this space for everyone you’ve brought onboard and the like and all the new deals you’ve gotten, it’s safe to assume that we should expect that this company should be ramping in the next couple of years substantially on the top one.

[John Sperzel:]

Well, today our core STD business generates almost all of our revenue, and we hope that in the not too distant future people will look at the company and see the HIV as a simple contributor to the revenue. You know that’s essentially as far as we can go without getting into more details on you know a piece by piece basis.

[Ross Taylor:]

Okay, great and I would not accompany with the shots on goal, from Seattle. I guess we do play soccer, but we don’t do hockey.

[John Sperzel:]

Sorry about that one.

[Ross Taylor:]

Take care.

[John Sperzel:]

Alright, thanks Ross.

[Operator:]

Our next question is from Bruce Jackson with The Benchmark Company; please proceed.

[Bruce Jackson:]

Hi, thanks for taking my question. So if we could like kind of dive into the Hepatitis C opportunity a little bit here, when do you think you might have a viable product for the market?

[John Sperzel:]

Well, the initiative that we announced with FIND includes a four month feasibility period for an antigen based rapid test. So we’re kicking that project off now. Sometime before you know the middle of December we’re going to deliver that to FIND. FIND is going to do their assessment. Obviously there were three companies. If you go to the FIND website you would see that they announced three companies that will go into feasibility for rapid test. The other two are DC Diagnostics and Mologic. So we’ll go through that process. As I said before, this is not our first initiative in Hep-C. We have an androgen based assay; there’s plenty of documentation literature out there about its performance, its excellent. We’ve sat on the sidelines waiting for the right time to enter the Hep-C space and we think this may be it, because we have a really great collaborator with FIND. They’ve been granted an awful lot of money to drive performance and improvements in the rapid global Hep-C space. By the end of December FIND will have made a decision about who they are going to focus on and we hope to be that one.

[Bruce Jackson:]

Okay, and then hypothetically speaking let’s say that you get the green light in December, what would be development time line look like in order to get the test completed?

[John Sperzel:]

Yes, it’s too early to say. But if you look at some of the other test developments that we have under way in the fever in tropical disease area, I mean they’ve gone pretty quickly. I could say almost all of them have been development times of less than 18 months and many of them you know many much shorter than 12. So you know hopefully that brackets it for you a little bit Bruce.

[Bruce Jackson:]

Okay, that’s helpful. The on looking at the LumiraDx, so you know Ron’s old company had showed some hepatitis testing in their portfolio. Lumira is supposed to be theoretically looking at the infectious disease area. Is this something that they might be looking at and are there any restrictions between taking what you learn on the FIND projects and applying it to a project for the LumiraDx people?

[John Sperzel:]

Yeah, we haven’t disclosed the details of the of the LumiraDx collaboration, so I can’t get specific on you know which test it is or which analyetic we can work back and forth with. So sorry, I can’t answer that right now Bruce.

[Bruce Jackson:]

Alright, that is fair enough; that’s fine. Anyway, that’s it for me. Thank you.

[John Sperzel:]

Thank you, Bruce.

[Operator:]

Our next question is from Larry Haimovitch with HMTC. Please proceed.

[Larry Haimovitch:]

Hey John, congrats on the progress.

[John Sperzel:]

Thank you, Larry.

[Larry Haimovitch:]

So two questions, number there were a lot of positive developments in Q2. What would you say was the development that you were most intrigued or excited about?

[John Sperzel:]

Well, I think the first one is the ramp in sales. Obviously we’re very focused on driving growth and transforming the company, so we’re really pleased with that. The second is, I’m sorry I can’t say one or two, but the second is that the advancements that we’ve made on the product development in particular, a couple of collaborations; the cancer test and the biomarker that we’re developing for AstraZeneca. We are really pleased those are big milestone for us and then lastly just continuing to build a really strong leadership team and a strong board of directors. So I’d say those are the three that were happy about that occurred in the second quarter.

[Larry Haimovitch:]

Okay, and then my follow-up question John is, you have a new sales force here in the process of training for the HIV market in the U.S. Can you talk a little bit more about that and give us some more color about that?

[John Sperzel:]

Larry, I’m sorry their call is a little hard to hear your question.

[Larry Haimovitch:]

My question was. You are training a sales force in the U.S., an outside sales force. Can you talk a little bit more about that particular agreement and the significance to Chembio?

[John Sperzel:]

Sure. So are referring to our collaboration with MTMC. So we entered that – we entered that agreement with them effectively April 1 and so during the second quarter we went around to all their regional meetings and train their folks on all of our commercially available products in the United States. So they have been sufficiently trained, people have targets and they are out there selling all of our HIV products right now. Obviously this is going to set the stage for the launch of our HIV-Syphilis assay, which we think is going to be an important growth driver for the company and one where we think we can capture meaningful market share in the U.S. We’re also planning internally for that launch doing what you would typically do from a premarket standpoint; setting up a good valuation sites, building the right papers and clinical data, establishing key opinion leaders, putting a strategy together around pricing, promotion, etcetera.

[Larry Haimovitch:]

Okay perfect. I will see you tomorrow at the Canaccord meeting.

[John Sperzel:]

Thank you very much. Look forward to it Larry.

[Larry Haimovitch:]

Okay, bye.

[Operator:]

[Operator Instructions]. Okay, there are no more questions at this time. I would like to turn the call back over to John Sperzel for closing comments.

[John Sperzel:]

Thank you for joining us today as we reviewed our second quarter financial results and discuss progress toward our 2018 priorities. We are increasingly confident in our ability to leverage our DPP platform and scientific expertise. We have the right technology, the right team and we’re pursuing significant market opportunities. We look forward to providing you with updates as we continue to execute our plans. Thanks and have a great day!