Chembio Diagnostics, Inc.
Q2 2016 Earnings Call Transcript

Published: 11 Aug 2016

[Operator:]

Greetings, and welcome to Chembio Diagnostics Second Quarter 2016 Financial Results Conference Call. At this time, all participants are in a listen-only mode, and a brief 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 John Sperzel, CEO of Chembio. Thank you. Please go ahead.

[John Sperzel:]

Hello, and thank you for participating in today's call. Joining me is Rich Larkin, our Chief Financial Officer. Before we begin, I'd like to caution that comments made during this conference call today, August 11, 2016, will contain forward-looking statements within the meaning of the Securities Act of 1933 concerning the current beliefs of the company, which involve a number of assumptions, risks and uncertainties. Actual results could differ from these statements and the company undertakes no obligation to revise or update any statements made today. I encourage you to review all of the company's filings with the Securities and Exchange Commission concerning these and other matters. Prior to my opening remarks on Chembio's second quarter strategic initiatives, I want to acknowledge a press release issued by the company on July 25, 2016 announcing our preliminary financial results for the second quarter of 2016, which included a decrease in product sales as compared to the second quarter of 2015. I’ll provide specific comments on our 2016 second quarter sales performance following a review of the financial results. Regarding our strategic initiatives during the second quarter of 2016, Chembio continued to leverage its patented DPP technology further strengthening its three areas of business focus; sexually transmitted disease, fever disease and technology collaborations. In the sexually transmitted disease business, the company advanced its ongoing clinical trial for the DPP HIV Syphilis assay for the U.S. market, expanded its branded product offering by launching a Chembio SURE CHECK HIV assay through the U.S. sales team and distribution channels it created during 2014 and 2015 and established a new HIV pricing program in the United States effective June 1, 2016 to make the company’s three point-of-care HIV assays more affordable to the government funded U.S. public health market. In the fever disease business, the company accelerated development of the DPP Zika assay, which received initial funding from the Paul G. Allen Family Foundation, advanced the development of DPP Dengue, DPP Chikungunya, and DPP Zika-Chikungunya-Dengue combination assays, added a new oral fluid DPP malaria initiative, which is funded by the Bill & Melinda Gates Foundation, and made important advances with its partner with Brazil, Bio-Manguinhos/Fiocruz. In the technology collaboration area, the company advanced its DPP cancer, DPP traumatic brain injury initiative, both based on patented DPP technology and obtained the first regulatory approval for the DPP Micro Reader, which is expected to be introduced during the second half of 2016. Lastly, in August 2016, Chembio sold 2.3 million share of common stock in a private financing raising $13.8 million before expenses, which funds are not reflected in our June 30 cash balance. Proceeds from this financing will allow the company to further advance its business, including investments in fever disease product development, commercial infrastructure to increase global sales and new and existing products, operational improvements and working capital. Again, I’ll provide more a detailed overview of the current and anticipated milestones following a review of the second quarter financial results by Rich. Rich?

[Richard Larkin:]

Thanks, John. In conjunction with my comments, I’d like to recommend that participants review Chembio’s 10-Q filing for additional details. Before I begin, I’d like to note that the company elected, based on accounting guidance, to record a full valuation allowance on its deferred tax asset in the second quarter of 2016. Chembio’s deferred tax asset was primarily based on the company’s net operating loss carryforwards. Based primarily on the fact that the company believes given information available to it at this time, it is more likely than not that the deferred tax asset will not be realized in the foreseeable future. The company concludes that it was appropriate to record a full valuation allowance against its deferred tax asset. This resulted in a tax provision in the second quarter of 2016 of 5.96 million and for the six months ended June 30, 2016 of 5.8 million, which impacted our net loss for both periods. This is strictly an accounting treatment and the valuation allowance does not affect the company’s ability to use its net operating losses in the future. Now, I’ll go over our results for the second quarter of 2016. Our total revenues in the second quarter of 2016 of 3.27 million decreased 51.4% compared with total revenues of 6.72 million in the prior year period. Product sales in the 2016 second quarter of 2.03 million decreased 67.8% compared with product sales of 6.32 million in the prior year period. Research and development, milestone, grant and royalty revenues in 2016 were 1,232,000, an increase of 212% compared with 395,000 in the prior year period. Our gross margin dollars in the 2016 second quarter of 1.58 million decreased 47.7% compared with 3.02 million in the prior year period, due primarily to the decreased product revenues. The amount of product gross margin dollars in the 2016 second quarter of 0.35 million decreased 86.7% compared with 2.62 million in the prior year period, which also is primarily due to the decreased product revenues. Our research and development expenses in the 2016 second quarter of 2.37 million increased 34.7% compared with 1.76 million in the prior year period. This increase is due primarily to the increased R&D activities for projects and brands. Selling, general and administrative expenses in the 2016 second quarter of 1.6 million decreased 26% compared with 2.16 million in the prior year period, largely due to decreased commissions which are due to the decreased sales in Brazil as well as decreases in wages and related costs, stock-based compensation, travel, entertainment, and trade shows, consulting and professional fees, which were partially offset by increases in marketing materials and investor relations expenses. Our operating loss in the 2016 second quarter was 2,386,000 compared with an operating loss of 898,000 in the prior year period. Net loss in the 2016 second quarter was 8,347,000 or $0.86 per diluted share compared with net loss of 664,000 or $0.07 per diluted share in the prior year period. As discussed earlier, the net loss for the 2016 period includes a tax provision for the recording of a valuation allowance on the company's deferred tax asset of 5,963,000. I’ll now go over our results for the first six months of 2016. Our total revenues in the 2016 first six months of 9.87 million decreased 23.8% compared with 12.95 million in the prior year period. Product sales in the 2016 first six months of 7.95 million decreased 33.4% compared with 11.94 million in the prior year period. Research and development, milestone, grant, and royalty revenues in the 2016 first six months of 1,916,000 increased 89.6% compared with 1,011,000 in the prior year period. Our gross margin dollars in the 2016 first six months of 4.75 million decreased 16.8% compared with 5.71 million in the prior year period, due primarily to a decrease in product sales. The amount of product gross margin dollars in the 2016 first six months of 2.83 million decreased 39.7% compared with 4.69 million in the prior year period. Our research and development expenses in the 2016 first six months of 4 million increased 19.8% compared with 3.34 million in the prior year period. This increase was due primarily to increased R&D activities for projects and grants. Selling, general and administrative expenses in the 2016 first six months of 3.6 million decreased 13% compared with 4.14 million in the prior year period, largely due to decreased commissions on sales in Brazil, decreased wages and related costs, stock-based compensation, travel, entertainment and trade shows, which were partially offset by increases in consulting, marketing materials, investor relations expenses and professional fees. The operating loss in the 2016 first six months was 2,854,000 compared with an operating loss of 1,773,000 in the prior year period. The net loss in the 2016 first six months was 8,651,000 or $0.90 per diluted share compared with a net loss of 1,311,000 or $0.14 per diluted share in the prior year period. As again discussed earlier, the net loss in the 2016 period includes a tax provision for the recording of a valuation allowance on the company’s deferred tax asset of 5,801,000. The company had cash and cash equivalents of 1.44 million as of June 30, 2016 compared with 5.38 million as of December 31, 2015. The decrease was primarily due to cash used in operating activities of 3.86 million. Our working capital decreased by 2,646,000 from 9.48 million as of December 31, 2015 to 6.83 million. As John mentioned, subsequent to June 30, 2016 and early August of 2016, the company sold 2,300,000 common shares for a total of 13.8 million, which after expenses resulted in approximately 12.5 million in net funds to the company. That concludes the financial review and I’ll turn the call back over to John. John?

[John Sperzel:]

Thanks, Rich. I’d now like to give an overview of the progress made in each of our business areas during the second quarter. First, I’ll speak about our sexually transmitted disease business. Sales of the company in sexually transmitted disease products decreased during the second quarter of 2016, primarily due to the discontinuation of sales to our former U.S. distributor following expiration of a distribution agreement of our SURE CHECK HIV assay, which ended May 31, 2016. In addition, the company recorded decreased sales of its HIV products in Africa and its DPP HIV and DPP Syphilis products in Brazil during the quarter. The decrease in product sales in Brazil was primarily due to the company’s loss of ongoing business as a result of a previously disclosed tender offer in Brazil having been awarded to a competitor at an extremely low price point. Despite the loss of this tender, Chembio continues to supply other DPP products to Bio-Manguinhos/Fiocruz and the Ministry of Health in Brazil, including the DPP HIV confirmatory assay and the DPP [indiscernible] assay, as well as other organizations in Latin America, and we believe this region will continue to be a strong market for Chembio. In particular, we believe the anticipated launch of the DPP Zika IgM/IgG assay and DPP Micro Reader, as well as related DPP fever assays currently in development, will be important new products in this region. During the second quarter of 2016, the company took steps to gain further control of existing HIV products in the U.S. market and advanced its new product initiatives, which management believes will ultimately strengthen the company’s position in the sexually transmitted disease market. In June 2016, the company launched U.S. sales of its Chembio branded SURE CHECK HIV assay. The SURE CHECK HIV assay had previously been sold in the United States by a distributor under the name Clearview Complete HIV assay. In conjunction with this launch, the company implemented a new pricing program for its point-of-care products for the government funded U.S. public health market with the goal of providing affordable access through its point-of-care HIV assays, and launching a platform to increase point-of-care HIV testing and reduced HIV infection rates in the United States, which according to CDC have averaged approximately 50,000 new infections annually. During this new program, the company is selling its HIV test in the United States public health market at an end user price of $5 per test, which represents a significant discount from prior pricing through its former distributor as well as competitive pricing in this segment. Products offered under this new pricing initiative include Chembio’s FDA approved and CLIA Waived, DPP, STAT-PAK and SURE CHECK HIV assays, which provide customers with multiple point-of-care HIV testing options as well as the ability to use either fingerstick or venous whole blood or oral fluid samples. Also during the second quarter, the company continued to advance the clinical trial for its DPP HIV-Syphilis combination assay for the U.S. market, which we believe will be completed by the end of the first quarter of 2017. As we’ve stated previously, it’s an important corporate priority to be first-to-market in the U.S. with an HIV-Syphilis combination assay. The company was first-to-market an HIV-Syphilis combo assay in Latin America and we’re hopeful to be first-to-market such a test in the United States as we believe it has the potential to positively impact the company’s HIV market share. In addition, we’re in the process of submitting the technical dossier for CE mark, which will allow the company to market and sell the DPP HIV-Syphilis combination assay in Europe and the Caribbean region. Moving on to our fever disease business. During the second quarter of 2016, Chembio made significant advances in its fever disease business, which the company believes holds significant growth potential fueled by established and emerging global health threats, such as malaria, Dengue, Zika and others. The company made important advances towards the development of the DPP Zika IgM/IgG assay under initial funding from the Paul G. Allen Family Foundation, which the company received in February of 2016. To-date, the company has tested approximately 1,500 clinical specimens with its Zika IgM/IgG assay including samples from 600 pregnant women in the United States and Mexico. In the first half of 2016, the company made multiple regulatory filings for its Zika IgM/IgG assay and DPP Micro Reader, including the U.S. Food and Drug Administration under Emergency Use Authorization, ANVISA which is Brazil’s regulatory agency, the World Health Organization also under Emergency Use Authorization and COFEPRIS, which is Mexico’s regulatory agency. Supplementing these filings, the company is actively engaged with these agencies in an effort to facilitate the earliest possible approvals. In July of 2016, a CE mark was obtained that will allow the company to begin commercializing the DPP Zika IgM/IgG system which includes an assay utilizing the patented DPP technology as well as a digital reader, the DPP Micro Reader in 17 European countries, including the United Kingdom, Germany and France, as well as the majority of the Caribbean nations, excluding Puerto Rico which is under the Food and Drug Administration. Chembio expects initial sales of this system in these countries in the second half of 2016. In March 2016, the company announced the collaboration with Bio-Manguinhos/Fiocruz to develop the DPP Zika IgM/IgG assay for Brazil and in May of 2016, the Bio-Manguinhos/Fiocruz collaboration was expanded to include DPP Dengue IgM/IgG assay, DPP Chikungunya IgM/IgG assay, DPP Zika-Dengue-Chikungunya IgM/IgG combination assay and the DPP Micro Reader. The company is actively engaged in discussions to obtain U.S. government funding for its DPP Zika and Zika-related development initiatives. While we’re optimistic no guarantees can be made that such funding will be received. Also in the second quarter, the company received funding from the Bill & Melinda Gates Foundation to expedite the feasibility testing and development of the world’s first oral fluid/saliva point-of-care diagnostic test to simply and accurately identify individuals affected with all species of malaria. Point-of-care diagnostic test to detect malaria, orders of which had grown from 46 million in 2008 to 314 million in 2015, are an increasingly important tool in the diagnosis and treatment of malaria. Given our success with our initial malaria assay, which demonstrated significant improvement in sensitivity as compared to the world’s leading point-of-care malaria test, which I’ll remind you was also funded by the Bill & Melinda Gates Foundation as well as the fact that we’ve already developed and received FDA approval and CLIA waiver for oral fluid HIV assay, gives us optimism that we’ll be successful with this program which can enable the company to enter the point-of-care malaria market with a highly differentiated product at a premium price as compared to the existing point-of-care malaria test currently marketed at an estimated average price of $0.50 per test. Lastly, I’d like to address our technology collaborations. Chembio currently has multiple ongoing technology collaborations based on our DPP technology, including DPP cancer for a specific form of cancer, DPP traumatic brain injury of concussion assay, the DPP flu immunostatus assay and the DPP Micro Reader. We're pleased to report that we made progress with each of these collaborations during the second quarter of 2016. The DPP cancer assay which is funded by an undisclosed entity targets a specific form of cancer. During 2015, we successfully completed the feasibility phase of the program with highly encouraging results, demonstrating the ability to detect a specific form of cancer on our DPP technology platform with a 10 microliter fingerstick blood sample in 20 minutes. And using the DPP Micro Reader we are able to provide a quantitative result which is critical for diagnosis and monitoring. Based on the feasibility results, we moved into the product development stage which is also funded by the same undisclosed entity. With success, we’re hopeful to commercialize the first DPP cancer assay and find additional applications for our DPP technology in the broader oncology market. The DPP traumatic brain injury assay or concussion assay is a rapid point-of-care test for the detection of mild TBI in sports-related concussion. This project, which is funded by Perseus Science Group, is in the feasibility and preclinical phase. We recently finalized IRB agreements with several hospitals and began conducting initial studies of the DPP traumatic brain injury assay using patient samples. The DPP flu immunostatus assay is a rapid point-of-care multiplex influenza immunity test. Supported by several U.S. government grants, the company completed the development of the multiplex DPP flu immunostatus assay including a digital reader. We applied for additional funding in response to a new request for proposal or RFP from the U.S. government which we expect a response in the third quarter of 2016. Finally, our DPP Micro Reader is the result of the collaboration with opTricon, a leading developer of mobile analysis devices for rapid diagnostic tests. Through our exclusive agreement, Chembio will introduce the DPP Micro Reader to complement a number of our proprietary DPP assays for sexually transmitted diseases, certain fever diseases and a specific form of cancer. As I stated earlier, the company has recently obtained a CE mark that will allow it to commercialize its DPP Zika IgM/IgG system which includes an assay utilizing our patented DPP technology as well as the DPP Micro Reader in 17 European countries and a majority of the Caribbean nations, excluding Puerto Rico. Commercialization of this system, which is expected to begin in the second half of 2016, will mark the first launch of the Chembio DPP Micro Reader. As a reminder, the DPP Micro Reader uses the state-of-the-art camera system that is designed to provide definitive diagnostic results for low analyte concentrations which may otherwise result in faint or ambiguous test results. In addition, the DPP Micro Reader will provide customers with various options to capture, record, transmit and store test results. Because the DPP Micro Reader is simple, fast, palm size, battery operated and cost effective compared to traditional point-of-care assay readers, it is unique in its attractiveness and utility and we believe it will be well received by the market. In summary, revenues during the second quarter of 2016 reflect the company’s deliberate strategic decision to control global sales, marketing and distribution of its point-of-care HIV products by ending its agreement with its former U.S. distributor. While this resulted in a decline in sales during the second quarter of 2016, we believe the company will be better positioned to compete in the U.S. market in the future. The company also took steps to diversify its business in Brazil moving away from heavy reliance on standalone test for HIV and Syphilis, which are subject to significant price competition toward DPP fever assays, which have greater potential for growth and sustainable differentiation vis-à-vis our competitors. On the development side, the company believes its patented DPP technology is unique due to its inherent characteristics such as enhanced sensitivity, the ability to detect multiple diseases with a single patient sample, the ability to use multiple specimen types such as oral fluid or blood, and the ability to deliver quantitative results when combined with the DPP Micro Reader. Considering the progress made in each of Chembio’s three businesses during the quarter, the versatility and utility of this technology has never been more evident. In the sexually transmitted disease business, the clinical trial for our DPP HIV Syphilis assays in the U.S. market is advancing well and we anticipate completion by the end of the first quarter of 2017. And following the June 1, 2016 announcement regarding the company’s SURE CHECK HIV assay, we have now executed our plan to gain full control of our point-of-care assays on a global basis. Advances in our fever disease business in the second quarter includes significant progress towards the development of the DPP Zika IgM/IgG assay under initial funding from the Paul G. Allen Family Foundation, we are hopeful that our DPP Zika assay combined with our DPP Micro Reader will receive approval following submissions to numerous regulatory agencies. Just two weeks ago, a CE mark was obtained which allows for the commercialization of the Zika IgM/IgG system in 17 European countries as well as the Caribbean region. As previously stated, we expect significant revenue from our DPP Zika IgM/IgG assay in 2016 and we also anticipate the introduction of our DPP Dengue assay during the second half of 2016. The company also initiated the development of the world’s first oral fluid/saliva point-of-care diagnostic test to detect all species of malaria, which is being funded by the Bill & Melinda Gates Foundation. And earlier this month, Chembio successfully raised the funds to support this expanding work and to build the global infrastructure to drive sales of new and existing products. In view of these achievements, we’re proud of our continued progress in the second quarter of 2016 towards expanding our product portfolio and our continued work to make much needed point-of-care diagnostics available to battle the spread of HIV, Syphilis, Zika, Dengue, malaria and other life-threatening diseases. This concludes our prepared remarks for today. I’d now like to open the call for questions.

[Operator:]

Thank you. [Operator Instructions]. Our first question comes from the line of Raymond Myers with Benchmark. Please go ahead with your question.

[Raymond Myers:]

Thank you and good morning.

[John Sperzel:]

Good morning, Ray.

[Raymond Myers:]

Good morning. There’s a lot of progress here, it’s a lot to cover, so let me start with the general question. Now that Chembio is in a much stronger liquidity position, how does that influence your strategic priorities going forward? And can you touch on the potential or new product developments or potentially funding stronger direct sales efforts in the U.S.?

[John Sperzel:]

So in terms of product development priorities, Ray, the balance sheet improvements do not affect our strategic initiatives. In terms of commercialization, the balance sheet is going to allow us to invest in sales and marketing initiatives, particularly outside the U.S., that we believe are needed to drive global sales of the products, both our existing products as well as the new fever disease products which have global appeal.

[Raymond Myers:]

Great. And you’ve mentioned something in your remarks just now that I thought was intriguing. You expect to commercialize a HIV Syphilis test under CE mark. Can you give us a sense of timing when to expect to receive a CE mark, and when to expect to commercialize that?

[John Sperzel:]

Well, it’s hard to know exactly when we’ll receive the CE mark, Ray, but the fact that we’re mentioning it gives us optimism that we believe that we’ll have it hopefully out in 2016. And on the commercial side, as I mentioned before, the funds that we’ve recently raised are going to allow us to invest in commercialization efforts, and those include regions that are covered under CE mark. So when we receive the CE mark, assuming we do for DPP HIV Syphilis assay, we believe that we’ll be prepared to initiate commercialization immediately.

[Raymond Myers:]

Great, thanks. I’ll get back in queue.

[John Sperzel:]

Thank you, Ray.

[Operator:]

Thank you. Our next question comes from the line of Brian Marckx with Zacks Investment Research. Please go ahead with your questions.

[Brian Marckx:]

Good morning, John and Rich, and congratulations on the progress.

[John Sperzel:]

Thanks, Brian.

[Brian Marckx:]

John, I’m wondering if you can talk about the U.S. market for HIV testing and sort of a broad sense in terms of fourth-generation rapid test and is growth in – is the industry sort of the shifting towards the fourth-generation technology or is there enough demand still for the antibody-only test that that’s still a potential growth area.

[John Sperzel:]

Well, there’s certainly one competitor who wants everyone to believe that the entire market is shifting towards fourth-generation tests, but when we speak to customers that’s not the case. We believe that there continues to be and will continue to be strong demand for antibody-based tests. The fact of the matter is that from a scientific perspective and a clinical perspective many customers are finding that with the antigen-based detection point-of-care, they’re simply not identifying acute infections. So we’ve already seen many customers that had switched to a so-called fourth-generation point-of-care HIV assay that have moved back to one of our products. So we’re pleased with that. And we further believe that combining an antibody-based HIV assay point-of-care with a syphilis assay given co-infection rates being on the rise in many subgroups, it’s going to be an important differentiator for our products going forward. And we believe that the strength of the combined HIV Syphilis assay will have great appeal, particularly the United States market. That’s why it’s such a high priority for us.

[Brian Marckx:]

All right, thanks. That’s good insight. In terms of your current DPP Zika test, is it – you said that you tested it on pregnant women and then I assume non-pregnant women. And if I understand it correctly there could be a different response if you’re pregnant versus if you’re not pregnant. So if you can talk about how your test performed on both groups? And then is it appropriate for pregnant and non-pregnant women?

[John Sperzel:]

So I think Brian we have to wait until the regulatory agencies weigh in, in terms of the product performance claims that we’re going to want to make in the market. And so just out of respect, it wouldn’t be appropriate for me to start commenting on the performance of that assay in the market. But I think that we’ve talked about this in prior calls. The organizations involved in Zika test approval have set expectations around sensitivity and specificity. We understand what they are. The fact that we have submitted to so many regulatory agencies should be a signal of our confidence about the performance of the assay that we’ve developed. In terms of testing women that are pregnant or folks that are not, we really don’t see a difference in the performance characteristics of the assay.

[Brian Marckx:]

Okay, great. Thanks.

[John Sperzel:]

You’re welcome, Brian.

[Operator:]

Thank you. [Operator Instructions]. Our next question is coming from the line of Robert Grant [ph] who’s a private investor. Please go ahead with your questions. Robert Grant, your line is live, please go ahead with your questions.

[Unidentified Analyst:]

Hi, John.

[John Sperzel:]

Good morning, Robert.

[Unidentified Analyst:]

Good morning. I was curious as to the patent’s clock ticking off on DPP. When will that be?

[John Sperzel:]

I’m sorry, I didn’t understand the question.

[Unidentified Analyst:]

When will DPP patents run to the point where competitors can copy the technology?

[John Sperzel:]

Well, I think generally the patents run for about 20 years but we continue to build fences around the core IP that we’ve established or the DPP technology platform. And I think as you’re also aware, core IP is one part of differentiating the product in the market. The second part is building barriers around that business from a proprietary production standpoint which we also continue to do.

[Unidentified Analyst:]

Okay.

[Richard Larkin:]

This is Richard. The original patent was issued in March of 2006. As John said, we’ve certainly applied and got granted additional follow-on patents.

[Unidentified Analyst:]

Okay. Thank you. Is it possible to reverse the emphasis on things such as Zika in respect to blood supply? Everyone seems focused on the sensitivity and specificity as being able to diagnose if someone is positive for disease. It seems that when it comes to blood supplies that possibly a Zika-Dengue combination that were to show up negative might be sufficient to say the blood is free of those diseases rather than have a risk of saying that positive but we have specificity problems that we’ll have to send that to a lab? Is it possible that the combination of those two in a test, if they both show negative, could be 100% accurate with a person who’s not affected with Zika?

[John Sperzel:]

It’s hard for me to comment on that. I think that the government has made some decision in terms of funding, development of technologies to address the blood bank industry. That’s not a market segment that we’re focused on. I think as you know we’re focused on antibody detection or antigen detection. Both of those are going to show up after RNA detection. So in the blood banking business there’s a different appeal and there’s a different approach and that’s not one that we’re focused on.

[Unidentified Analyst:]

Okay. Thank you.

[John Sperzel:]

You’re welcome. Thanks, Robert.

[Operator:]

Our next question is coming from the line of Per Ostlund with Craig-Hallum. Please go ahead with your questions.

[Per Ostlund:]

Thanks. Good morning, John and Rich.

[John Sperzel:]

Hi, Per.

[Per Ostlund:]

Bill was trying to get in here as well, but it looks like we might be having some technical issues on that side. So I want to come to Zika. You mentioned in your prepared remarks, John, that you were in the process of trying to secure some additional funding on the Zika side. I’m curious sort of what specifically that funding would be for, if it’s development, if it’s commercialization, if it’s what have you? Maybe we’ll start there.

[John Sperzel:]

So we’re talking to multiple potential sources in terms of Zika funding and I would say Zika and related fever disease funding, just to be a little bit more broad about it. And they would potentially encompass all of the things that you just mentioned; product developments, regulatory approvals, clinical trials and potentially early commercialization. And it’s not just one organization that we’re speaking with, it’s multiple.

[Per Ostlund:]

Okay. Thank you for that. Staying on the Zika thread, in light of the CE mark that you just got here a couple of weeks ago, you had indicated that you would see some sales in CE jurisdictions during the second half, you’ve said that you would see significant Zika sales this year. Would CE alone be able to generate significant revenues for you or do you think you would need Brazil or somewhere else in Latin America to get to that more significant level?

[John Sperzel:]

So I think the first thing to say is in the Caribbean, again, excluding Puerto Rico because in the U.S. Virgin Islands because that falls under the FDA jurisdiction there are nearly or more than 20 countries and the majority of them are affected by the Zika virus with local transmission. So certainly we could see significant Zika sales in the Caribbean region. But when I made the comment that we would expect significant Zika sales in 2016, that was not considering the Caribbean region. So we also expect significant sales outside of the Caribbean.

[Per Ostlund:]

Okay, excellent. And then I guess I’ll just ask one last one here that’s again related on the Zika side. Do you have updated thoughts, I know it can be a little bit hard to predict, but any thoughts around potential timing for additional approvals beyond the CE mark and some of the funding initiatives you’ve talked about?

[John Sperzel:]

Very hard to make predictions about that, Per. As I said in the prepared remarks, we have made multiple submissions. We are actively engaged with every single one of those organizations that we have made a DPP Zika and DPP Micro Reader submission, because remember it is a system that we’re submitting. So we are actively engaged and as soon as we get an approval, we assure that we will announce it and we’ll be ready to commercialize thereafter. Same thing I can say about the funding. It’s really difficult to predict the timing. We’re actively engaged. We had hoped that we would see funding by one or more organizations by now. That simply hasn’t happened. It doesn’t curtail or deter our optimism about it. But it just hasn’t happened yet.

[Per Ostlund:]

Okay, very good. Thank you.

[John Sperzel:]

Thank you, Per.

[Operator:]

Our next question is coming from the line of Raymond Myers with Benchmark. Please go ahead with your questions.

[Raymond Myers:]

Thank you very much. John, can you touch on the oral fluid malaria test again? When do you expect to see development of that from the Gates Foundation?

[John Sperzel:]

So what we received is a feasibility grant. We have received a number of feasibility grants from various organizations and the way to think about those, Ray, is they’re generally kind of six to nine-month feasibility grants. Assuming that we’re able to demonstrate acceptable performance with that particular initiative, then the hope is that we would get further funding to complete full development and move toward commercialization. So with respect specifically to the oral fluid malaria initiative, first thing we’re very happy that the Gates Foundation came back to Chembio a second time. As you recall, in 2015 we completed what we would refer to as the ultra-sensitive malaria initiative where we demonstrated a 10x improvement in sensitivity compared to the world’s leading point-of-care malaria test. And so we haven’t launched that product. And the reason we didn’t launch it is because the average selling price for a point-of-care malaria test around the world is in the $0.50 per test range. That’s not something that we’re interested in entering. And as I’ve said before, when we enter the point-of-care malaria market we want to do so with a differentiated test that can command a premium price above that $0.50 mark where Chembio can make money and we can make a difference in the market, and it will be sustainable. So we are very interested in partnering with Gates Foundation on the oral fluid initiative, because the concept is very simple. We combine the performance that we experienced on our DPP platform that is the 10x sensitivity improvement with the oral fluid capabilities. And as you know, we have an oral fluid FDA approved CLIA waved HIV assay. So conceptually we should be able to detect malaria at a very low level of detection using oral fluid. It’s not simple because oral fluid can be a more complicated specimen, but we’re moving through the feasibility and we’re optimistic that if we can show the performance that we showed with blood using oral fluid, we could really have a novel test and we could be the first company to introduce a rapid oral fluid test for malaria. Why is that important? Because Gates Foundation is very interested in investing in technologies that can help to eradicate malaria. And to go into a village in Africa and ask for an oral fluid specimen when folks are not showing signs of sickness, they’re asymptomatic, that’s the time to eradicate. That’s why it has real appeal in the market. That’s why Gates Foundation has invested in Chembio again to pursue this initiative. And as soon as we can update on the results of that feasibility, which we expect to be completed in the first quarter of 2017, we will do that.

[Raymond Myers:]

Great. Thank you. And I wondered if you might touch on the traction that your direct sales efforts are now having in the public health market for HIV in the United States?

[John Sperzel:]

Yes, a great question. So let’s just take a moment and just kind of recall where we came from. I mentioned in the prepared remarks that we have been on a mission, if you will, to execute a strategy to gain control of our HIV products. And that included the following over the last two years, which may seem like a long time but we really had to sort of systematically walk down this road. We terminated the STAT-PAK U.S. distribution agreement and we launched our own STAT-PAK product in the U.S. We hired a U.S. sales and marketing team. We established agreements with U.S. distribution partners, like McKesson/PSS, Henry Schein, Fisher, Medline. We have taken CLIA waver and we launched the DPP HIV assay. We acquired the rights to SURE CHECK from SDS. And we’ve just recently ended the SURE CHECK distribution agreement and launched our own SURE CHECK assay in the U.S. market. So having that kind of control allows the company to decide how our HIV products are positioned, promoted, priced and distributed. And we believe that control is in the long-term interest of both our customers and our shareholders.

[Raymond Myers:]

Okay. Thank you.

[John Sperzel:]

Today, we continue to gain new customers with our STAT-PAK assay each quarter including customers, as I said before, that had switched to a so-called fourth-generation assay and have come back to Chembio. That’s the value of having our own sales team, speaking to customers ourselves, positioning and pricing the products the way we feel is in the best interest of the customer. So we’re now going through that transition again with SURE CHECK. The difference this time around is we have a U.S. sales team, which we didn’t have when we transitioned STAT-PAK. We now have control of all three of our HIV assays, so we’re not in a situation where if we took competitive action, one of our products which was in the hands of our competitor could retaliate with our own product. That’s off the table now. We’ve streamlined our distribution channels and we’ve given some of that savings back to a customer segment that is government funded and under tremendous price pressure. We think that’s responsible and the customers have responded very positively to it. And I think the last thing to say is we’ve already played the game once. And so playing the game a second time around gives us the advantage of knowing the tendencies of our former partner. So it’s still early to give specific details about the transition with SURE CHECK and it will take time, but we’re very pleased with the early progress since we made the announcement on June 1. We already have a very large customer with annual sales of over $100,000 that has come to Chembio and we have a number of customers in the annual sales range of $20,000 to $50,000. So we’re making really good progress. We still have to work through some of the inventory that our former partner has and some of the inventory that they put in customers’ hands, but we are systematically working through that at the moment.

[Raymond Myers:]

Great. Thank you, John. That’s great color. And I just wanted to conclude with a broad question to see if you could provide any insights into the thought process of the various regulatory agencies about the global Zika crisis you are involved with interfacing with multiple agencies globally? Is there any commonality or any description that you can provide of what their thought process is today?

[John Sperzel:]

It’s hard for me to say too much about their thought process but I can comment on what we’ve seen so far. What we’ve seen so far is a number of what we would call molecular PCR tests that through RNA detection can directly detect the virus that has been approved in the United States under Emergency Use Authorization. And we’ve seen one serological assay, which is the CDC MAC-ELISA test which is run in Fort Collins, Colorado that has also been approved by the FDA under Emergency Use Authorization. So to-date, no point-of-care rapid antibody-based test has been approved under the EUA by the U.S. Food and Drug Administration. We received the first rapid point-of-care approval under CE mark, which we recently obtained and mentioned before. In Brazil, three rapid point-of-care tests have received ANVISA approval. One is a small Canadian company and two are local Brazilian organizations which are also small. To our knowledge none of those have sold any product to the Ministry of Health in Brazil. So in summary in terms of approvals, I think that the major regulatory agencies have prioritized identifying acute infection via RNA detection and I believe will move on to the antibody-based detection assays. And we’re hopeful that we’re among the first in the various regions where we submitted our product.

[Raymond Myers:]

That’s great. Thank you very much, John.

[John Sperzel:]

You’re welcome, Ray. Thank you.

[Operator:]

Thank you. Our next question is coming from the line of Bill Bonello with Craig-Hallum. Please go ahead with your questions.

[Bill Bonello:]

Hi. Thanks a lot guys. Per was able to ask some of my questions, I’m not sure what was going on there, but I do have a couple of follow-ups if I could. Just on the technology collaborations that you’ve been talking about, you talk about the moved into the product development stage, hopeful to commercialize the first assay on the cancer side. Can you just give us a little bit more color on what that means? What product development is versus the feasibility and what has to be completed before – sort of what happens next into the regulatory phase? Just kind of path and any milestones that we might be made aware of along the way.

[John Sperzel:]

We follow a stage-gate product development process. When we talk about an internal Chembio project, it’s very structured and very regimented. When we’re working in a sort of grant-based situation with someone like the Bill & Melinda Gates Foundation or the Paul G. Allen Family Foundation, we follow a process that’s similar but it’s not exact. In the case of the cancer assay that you asked about, Bill, we were following Chembio’s internal development program. So while it’s funded by an external partner in this case, we follow our R&D program and our R&D structure. So what we first did was we had to demonstrate to that partner that we can actually perform the test for that specific type of cancer on our DPP technology platform with a fingerstick drop of blood. So our platform in this case uses a 10 microliter fingerstick drop of blood and we had to demonstrate that we could identify that particular type of cancer on the platform in 20 minutes with a quantitative result that performs similar to the laboratory assay that they have for that particular type of cancer, and we did that. So once we proved that we can actually do that test and identify that particular type of cancer quickly with a small drop of blood from the fingertip that partner decided to fund the development. So development includes further development, optimization and that is normally optimization of sensitivity and specificity, reproducibility. And then we have to do a preclinical trial, a clinical trial and regulatory submissions. So we still have a lot of work to do on this particular cancer assay but we’re very optimistic because we’re doing something that appears to be quite novel certainly with respect to this particular type of cancer and identifying it with a fingerstick drop of blood in 20 minutes, which could be performed and then authorized. That’s about as much color as I can give on it at the moment, Bill.

[Bill Bonello:]

Okay, that’s pretty helpful. Can you give any timeline at all about how we might think about sort of when you move out of the product development and into a clinical trial?

[John Sperzel:]

Well, what we’ve said publicly is that in terms of product development initiatives, we’ve given some color to the DPP HIV Syphilis clinical trial. We’ve said that that is expected to be completed by the end of the first quarter. In terms of the fever disease – first quarter of 2017 and then obviously we will submit to the FDA and we will follow that with a CLIA waver submission. I can’t give timing on those at the moment but obviously we’ll submit to the FDA as quickly as we can, following the completion of the clinical trial. The fever assays, particularly Zika, we’ve given quite a bit of color on that. And in Dengue we’ve also mentioned that we expect to begin selling our DPP Dengue assay in 2016. The other fever disease assays will rollout thereafter and I’ll give color to those when we can. In terms of the other collaborations and now we’ll talk specifically about the DPP cancer and the DPP brain injury assay, I think the way to think about those for the moment is we’re probably looking at a two to three-year timeline before we’re even close to getting those products to market. So they’re not something that we’re going to see in '17 or '18, and that’s about as much color as I can give on them. We still have a lot of work to do there.

[Bill Bonello:]

Okay. That’s very helpful. And then just on malaria you mentioned that you produced the high sensitivity test. You had decided at this point not yet to commercialize it. Is the oral fluid malaria also that same level of commercialization and what would allow you to sort of charge a premium for that oral fluid malaria versus just the standalone higher sensitivity malaria?

[John Sperzel:]

Because of oral fluid, in terms of trying to eradicate malaria and testing for patients that are asymptomatic, using an oral fluid specimen is according to the Gates Foundation who are experts in the malaria world is a much preferred sample type. And so we believe combining the oral fluid capabilities and the ultra-sensitive capabilities will put in a position to command a premium price, and Gates Foundation agrees with that.

[Bill Bonello:]

Okay. So it’s sort of that simple of having the one-two punch?

[John Sperzel:]

Absolutely.

[Bill Bonello:]

Okay, that makes sense. I think we can hold off on everything else but thank you so much.

[John Sperzel:]

You’re welcome, Bill. Thank you.

[Operator:]

Thank you. This does conclude today’s question-and-answer session. I would like to turn the floor back over to management for closing remarks.

[John Sperzel:]

Well, I just want to say thank you again for your participation and continued support of Chembio Diagnostics. We look forward to updating you again next quarter. Have a great day.

[Operator:]

Thank you. This concludes today’s teleconference. You may disconnect your lines at this time and thank you for your participation.