Chembio Diagnostics, Inc.
Q3 2018 Earnings Call Transcript

Published: 11 Nov 2018

[Operator:]

Greetings, and welcome to the Chembio Diagnostics Third Quarter 2018 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to the host, Mr. Philip Taylor. 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 may include predictions, estimates or other information that might be considered forward-looking. While these forward-looking statements represent Chembio's current judgment as to what the future holds, they are subject to risks and uncertainties that could cause actual results to differ materially. You are cautioned not to place undue reliance on these forward-looking statements, which reflect Chembio's opinion only as of the day of this call. Please keep in mind that Chembio is not obligating itself to revise or publicly release the results of any revisions to these forward-looking statements in light of new information or future events. Throughout today's discussion, Chembio will present some important factors relating to its business that may affect its predictions. You should review Chembio's 2017 Form 10-K and 2018 Form 10-Qs for a more complete discussion of these factors and other risks, particularly under the heading Risk Factors. With that, I would 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. Our results during the third quarter of 2018 reflect strong execution, commercially and operationally. We achieved total revenue of $9.4 million during the third quarter of 2018 and $25.8 million during the first 9 months of 2018. Increases of 24% and 43%, respectively, compared to the prior-year periods. We focus on our DPP technology platform. We advanced multiple product development, regulatory and operational initiatives, which we believe provide significant growth opportunities. Highlights of some of our recent milestones includes the following

[Neil Goldman:]

Thanks, John. In the third quarter of 2018, total revenue was $9.4 million, an increase of 24% compared to the third quarter of 2017. Net product sales for the third quarter of 2018 was $7.9 million, an increase of 28% compared to the third quarter of 2017. License and royalty and R&D milestone and grant revenues combined in the third quarter of 2018 were $1.5 million, an increase of 5% compared to the third quarter of 2017. Net product sales growth was driven by strong gains in Africa and to a lesser extent in Europe. Gross product margin dollars decreased by 48% compared to the third quarter of 2017. Gross product margin percent for the third quarter of 2018 was 14% compared to 34% for the third quarter of 2017. The lower gross product margin percent for the third quarter of 2018 resulted primarily from sales growth in markets with lower average selling prices as well as costs associated with scaling, labor and production of the manual product assembly process to ramp up volumes to new corporate levels. Other expenses, which includes research and development, and selling, general and administrative expenses were $4.9 million for the third quarter of 2018 compared to $4.1 million in the third quarter of 2017. R&D costs increased modestly, 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 U.S. clinical trial. SG&A increased by $0.7 million, primarily associated with merger and acquisition expenses and increased headcount in related costs. Net loss in the third quarter of 2018 was $2.3 million or $0.16 per diluted share compared with a net loss of $0.6 million or $0.05 per diluted share in the prior-year period. Cash and cash equivalents as of September 30, 2018, totaled $6.8 million. After the quarter end, we strengthened the balance sheet by raising an estimated $16.6 million in net proceeds through a public offering of common stock. Now I will turn the call back to John for closing comments.

[John Sperzel:]

Thank you, Neil. The Chembio team delivered strong performance in the third quarter of 2018, highlighted by double-digit revenue growth in our core business. We advanced a number of development, regulatory and operational initiatives, which we believe will provide significant growth opportunities. We continue to attract world leading organizations, which further leverage our DPP platform and scientific expertise. We are especially pleased to have completed the first regulatory submission of our DPP test, developed through the collaboration with AstraZeneca. With that, I'll now open it up for questions. Operator?

[Operator:]

Thank you. [Operator Instructions] Our first question comes from the line of Per Ostlund of Craig-Hallum Capital. Please proceed with your question.

[Per Ostlund:]

Good afternoon guys. Let's start with opTricon if we would because I know that was kind of maybe #1 with a bullet in terms of priorities with you're capital raise and obviously, you've closed that transaction already. You alluded to a little bit of it in your prepared remarks, John, but I just wonder if I might be able to get maybe a little further delineation from your guys' perspective in terms of the strategic importance of opTricon, whether it's the geographic footprint, whether it is commercial control over the reader? And the opportunities there? And then a little bit more on the financial profile of the opTricon business, if we can?

[John Sperzel:]

Sure, Per. So the strategy was to really strengthen our overall point-of-care offering by adding an optical reader. I talked in my prepared remarks data capture, data storage, data transmission. But the main importance of opTricon to us is that the combination of our patented DPP test technology when combined with optical reader allows us to take an otherwise qualitative platform and provide our customers with quantitative results. And that is a critical element of a number of our product development initiatives as well as our technology collaborations. So, for example, the test that we're developing for AstraZeneca incorporates the reader. Our HIV-Syphilis test, which is in front of the FDA, incorporates the reader. The Ebola test that I referenced incorporates the reader. All of the fever and tropical tests incorporates the reader. The cancer test incorporates the reader. So you can see where it is strategically important for us. We had a long-term distribution agreement with opTricon so people might say why didn't you just live with distribution agreement? And I would say, there are probably 2 answers related to that. The first is, that distribution agreement gave us non-exclusive rights in many territories. We certainly didn't want to give a competitor the opportunity to compete with us with the same product. And it also didn't give us rights for all applications in all markets. And when we think about technology collaborations that we have or ones that we're discussing as potential collaboration, having a complete playing field became more and more strategically important. And then of course, on the financial side, we were dealing with a partner who is trying to make a profit selling readers, and when we own the Company, we obviously don't have to deal with that; it allows us to have a much lower COGS and we can be much more aggressive in the market. And then the last thing I would say about this is it's very common, as you know Per, for diagnostic companies whether they are in cardiac markers, infectious disease, cholesterol testing or diabetes testing to follow a razor-razor blade model to have a reader and to have a test, which is a consumable. And for some reason, the infectious disease space has been slow to adopt readers. We feel like we found great technology that we produce at an excellent COGS and go out and be very competitive in the market. And actually be differentiated. Hopefully, that helps.

[Per Ostlund:]

That does help. Very good. Thank you. You touched on AstraZeneca and congratulations on the CE Mark application. Couple of questions related to that, I guess, first and foremost, is it fair to characterize that as maybe even being a quarter earlier than you expected? I think that, that was something that we're maybe looking for in the first quarter of next year? So actually that would be certainly a positive inflection, but on that point, I guess, was it a quarter early? Is it fair to think of it as a quarter early? What does that mean for potential timing of an FDA submission? And then maybe taking those 2 pieces together, obviously, this is a partner that doesn't necessarily want you to get out in front of your skis talking about it. But is there an opportunity in the relatively near future, where the veil might get lifted on what this biomarker actually is?

[John Sperzel:]

Yes, you can characterize it as quarter early. The program is well resourced within Chembio and also within AstraZeneca. We're working shoulder to shoulder and we've made excellent progress. So we're very pleased to be able to submit the CE Mark application actually ahead of our schedule. In terms of when it would be disclosed, what type of test it is, the CE Mark process, the submission or the granting of CE Mark is not a process that automatically would disclose that test. But as you can imagine, the reason to file for CE Mark is so that we can go out and begin commercialization in Europe. That process ends up putting the test in customers' hands, and we are in active discussions with AstraZeneca about when we would decide to disclose that, but, quite frankly, it is entirely in their hands as to when that date is.

[Per Ostlund:]

Okay, that's fair. And maybe that actually segues into my next question. Because in addition to AstraZeneca, obviously, you guys have I would say, a lot of shots on goal, arrows in the quiver, whatever metaphor we want to use, and you are embargoed to a degree in terms of what you can say on some of these. Is -- we get asked a lot when some of these programs might be unearthed a little bit more and AstraZeneca obviously, is one of those, LumiraDx is another one of those. The cancer test is one of those. Are there any rough milestones or timelines that we might be able to start thinking about when some of these things might become a little bit more visible, the tranches of the LumiraDx tests or those sorts of things. When might we get a little bit more specificity around the programs?

[John Sperzel:]

I think if you want to sequence them, it's likely that the first test that we'll get visibility on is the test that we're developing in collaboration with AstraZeneca. And we have an original schedule that includes FDA submission, obviously CE Mark was part of it, FDA 510(k) submission was a second part of it. And so I think it's highly likely that would be disclosed in the first half of 2019. LumiraDx is a private company and they are essentially in stealth mode at this point. I believe that they are going to show at least one of their product at the Medica conference in Germany next week. So some of that will start to get disclosed in terms of what they're working on. I suspect it will just be a piece of it. And so I think that we can't really put a date yet on when we disclose the test we're developing for LumiraDx, nor can be disclose at this point the type of cancer that we're developing a test for with our cancer diagnostics partner. So unfortunately, we are still embargoed on those other 2.

[Per Ostlund:]

Sure. That's totally fair. Last question for me, since again, I think in terms of your recent capital raise, one of the, I don't know if you call it imperative or not but perhaps an imperative, would be the automation, and you talked a lot about the automation in your prepared remarks. In terms of adding a couple of lines to Long Island and being able to be fully automated for production by the end of '19, how much flexibility do you have to add additional automated lines into Long Island to meet demand that goes beyond that?

[John Sperzel:]

The great thing about the automation that we chose is that it is modular by design. And so it allows us a lot of flexibility in terms of how we lay those out in our facility. That doesn't require a very significant footprint. Now think the size of a large dining room table something that can produce on the order of 10 million to on STAT-PAK 15 million tests a year running 2 shifts. So we certainly have the ability to add additional lines as our business continues to grow. And in fact, that's exactly the way we've thought about it and that's why we chose the type of line that we chose. So going back to your original point, one of the specific use of proceeds, obviously, was to close on the acquisition of opTricon. The second specific use of proceeds was to add line number 2 for STAT-PAK and line number 3 for SureCheck. And we feel now is the right time because we have demonstrated a consistent ability to drive revenue and so we have sufficient volume to warrant automation of all 3 of those product lines. In the past, we didn't necessarily have that and certainly, we do now. And we believe that having gone through the verification validation process of the DPP line, which is about to go live this quarter, we have in essence derisked this transition from manual, think by hand, assembly to fully automated vision guided robotic system.

[Per Ostlund:]

Excellent, thank you guys, appreciated.

[Operator:]

Our next question comes from the line of Ross Taylor of ARS Investment Partners.

[Ross Taylor:]

John, I've heard you talk about what you're using this capital you raised in the secondary for, but I only come up with $7.1 million, 2 lines at $800,000 a piece, actually I think they have been little less than that. And the $5.5 million for opTricon. Can you give us much more detail, I mean, to be blunt, you imposed on your shareholders a 27% dilution in stock price to get about 19% dilution in ownership interest. And bluntly, to my organization, we don't know enough to know whether or not this is a good deal. And you and I have had this conversation before and it's clear the fact that the stock has performed so poorly after the deal is closed that the message hasn't gotten to your investors as to why we should be happy that you did this deal instead of frustrated. So I like to give you a chance to kind of lay out more why you needed to raise that extra $9 million or so in the secondary, and what it's going to be used for, and how fast we think it can develop into generating economic returns, because right now, the concern I hear from people who own your stock is that your business model has become dream and delude. And for us to move forward, I think, we need to know that you actually have a business plan that's going to bring stuff to the bottom line.

[John Sperzel:]

Thanks, for the question, Ross. I acknowledge your disappointment. The specific use of proceeds came down to 4. As I mentioned, funding the acquisition of opTricon as I'm sure you're aware the purchase price is one part of the use of proceeds. There obviously are also legal expenses that go along with that. The second piece is funding the additional 2 lines and while you're correct in using an approximate $800,000 for the DPP line that we have now, the purchase price of STAT-PAK and the SureCheck line are slightly higher than that; you can estimate about a million dollars a piece. Part of the use of proceeds is also to extend and improve our U.S. facilities to increase capacity and efficiency. And then finally, we want to put some holes in our global sales team, starting initially in Europe where we have 0 coverage and we now have a facility which we believe is going to be a hub. And finally, we have to continue to fund the high-growth in terms of inventory AR so that's working capital. So that's the summary of working capital.

[Ross Taylor:]

Okay, when are you going to get to the position where you can assure your holders that we're not going to be facing these types of dilutive almost ambushed type secondaries?

[John Sperzel:]

I'm not sure what you're asking.

[Ross Taylor:]

When is your business going to be self financing? And I think as I say I think what's really going on here it's very clear there is a disconnect between how you guys and the board see this company and how your investors see this company. The second secondary in 12 months or actually in 8 months clearly caught the market by surprise. And I don't think it was well sold to your investors. You've not talked about the need to sell secondaries, not just to the guys who are buying it, but to those of us who are not allowed to participate in the deal. And therefore, so that we can get a chance to actually believe that there's something here that we should be happy about. And so I think the #1 issue I hear when I talk to your holders is people want to know that this business doesn't have to constantly go back to the well to dilute them. The last few years there has been 72%, about 70% dilution to economic interest. And price dilution to stock was 8.5 before you did your deal in July of '16. So I think you can see that, I'm not just frustrated, your entire holder base is frustrated. The stock in spite of all the things you've done that are great, the stock is meaningfully lower than it was when you did your first secondary going back by 28 months or something of that nature. So I want to give you a chance to kind of lay out and assure us that we are not going to be looking at yet another deal that you guys are going to actually start to make money instead of just make bankers happy.

[John Sperzel:]

So Ross, again, I appreciate your concern. I respect it. I'm not sure that you do speak for every single shareholder so it's probably not fair to characterize your comments that way. As I said, we have very specific use of proceeds. We have not given guidance in terms of when the Company will transition to profitability and that's not something we plan to do on this call.

[Ross Taylor:]

John, I would say it's not me making the judgment it's the market making the judgment. And you and I have had that conversation. The fact is the market is the one that's saying that this deal wasn't well sold and it wasn't well-received.

[John Sperzel:]

Appreciate your comments, Ross.

[Ross Taylor:]

I think you need, insiders need to start buying stock. We need to actually feel that you guys are in bed with us instead of simply working at a different level than us.

[John Sperzel:]

I don't think that's an appropriate comment to make on a call, Ross, but thank you again for your comment.

[Operator:]

At this time, there are no further questions over the audio portion of the conference. I would like to turn the conference back to management for closing remarks.

[John Sperzel:]

Thanks for joining us today as we reviewed our third quarter financial results and discussed 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 on our plans. Thank you, and have a great night.