Chembio Diagnostics, Inc.
Q1 2015 Earnings Call Transcript

Published: 11 May 2015

[Operator:]

Greetings, and welcome to the Chembio Diagnostics First Quarter 2015 Financial Results Conference 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 John Sperzel, CEO. Thank you. You may begin.

[John J. Sperzel:]

Good morning. Thank you all for participating in today’s call. Joining me today is Rich Larkin, our Chief Financial Officer. Before we begin, I’d like to caution that comments made during this conference call today, May 7, 2015, will contain forward-looking statements within the meaning of the Securities Act of 1933, concerning the current belief of the company, which involves 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 statement made today. I encourage you to review all of the company’s filings with the Securities and Exchange Commission concerning these and other matters. As we reported in March, 2014 was a transformative year for the company, we implemented a new which included a focus on commercialization and commitment to leveraging the patented DPP platform technology. We're pleased to announce that the results of this effort were apparent in Q1 2015. During the first quarter our total revenues increased 7.2% as compared to Q1 2014 and product revenue increased 14.5% as compared to Q1 2014. One of the important measures for the company is revenue from our DPP products which increased 110.7% compared to Q1 2014. We're also pleased to report an increase in product gross margin which increased to 36.9% for the first quarter up from 27.8% in the first quarter of 2014. The gross margin improvement is a result of activities undertaken in the second half of 2014 to streamline our manufacturing operations including the reduction of indirect headcount as well costs associated with materials and labour through the implementation of lean and operations excellence initiatives. And although our net loss of 647,000 represents an increase $422,000 in Q1 2015 over Q1 2014 a large portion of this increase is attributable to increased research and development and sales and marketing activities investments that we believe will be to Chembio’s benefit in the future. I'll provide a more detailed overview of our recent and anticipated milestones including updates on several of our key research and development projects following a review of the first quarter financial results by Rich.

[Richard J. Larkin:]

Thanks John. Before I begin, I would like to recommend that participants review Chembio’s 10-Q filings for additional details. Our total revenues for the first quarter of 2015 of $6.23 mil were down 7.2%, compared to total revenues of $5.81 million in the prior year period. And product sales in the 2015 first quarter of $5.61 million were up 14.5%, compared with product sales of $4.90 million in the prior year period. Our Research and development milestone and grant and royalty revenues for the three months ended March 31, 2015 decreased to $616,000 from $909,000 in the prior year period. Our gross margin for the 2015 first quarter increased a 18% to $2.69 million compared with $2.27 million in the prior year period due primarily to the increase in products sales. The amount of product gross margin for the first quarter of 2015 increased 51.8% to $2.07 million from $1.36 million in the prior year period. Our research and development expenses in the first quarter of 2015 were $1.58 million compared with $1.20 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 first quarter of 2015 increased to $1.98 million from $1.48 million in the prior year period, largely due to increased commission on DPP sales also wages and related costs and increased travel expenses. Operating loss for the first quarter of 2015 was $875,000 compared with an operating loss of $383,000 in the prior year period. Net income for the first quarter of 2015 was $647,000, or $0.07 per diluted share, compared with a net loss of $225,000, or $0.02 per diluted share for the prior year period. The company had cash and cash equivalents of $2.82 million as of March 31, 2015, compared with $4.61 million as of December 31, 2014. The increase was primarily due to the net cash used in operating activities of $0.94 million as well as investing activities to fund the purchase of the license and deposits on and purchase of fixed assets of $0.86 million. Our working capital decreased by $1.05 million during the three months from $12.37 million to $11.32 million. That concludes the financial review. I will now turn the call back over to John.

[John J. Sperzel:]

Thanks, Rich. As I stated at the beginning of this call, the company achieved a number of important growth milestones during the first quarter and this growth can attributed to expanding sales of our proprietary DPP products. While most of this growth has occurred internationally, subsequent to the end of Q1 2015 we secured a single DPP order for $85 with a U.S. community based HIV organization, to support our U.S. commercial initiative and expand our market reach, we established agreements with a number of premier distributors in the second half of 2014 and Q1 2015, including McKesson/PSS, Fisher Healthcare, Henry Schein and Medline for distribution of both DPP HIV and HIV STAT-PAK Assays in the U.S. We expect to accelerate our commercialization efforts in 2015 in order to strengthen our position in the U.S. market. Interrupting large sales growth is the fact that Chembio’s product portfolio is the strongest it’s ever been. Today we have complete control of our propriety DPP products and our STAT-PAK products on a worldwide basis. As reported last year, we terminated our prior STAT-PAK U.S. distribution agreement and developed the commercial infrastructure required to support our U.S. strategy. And as announced in January of 2015, we finalized an agreement to regain full rights related to the SURE CHECK HIV Assay including worldwide sales, marketing, distribution, manufacturing and trademark rights which will become effective June 1, 2016. The DPP, STAT-PAK and SURE CHECK HIV Assays are approved by the U.S. Food and Drug Administration and (ph) [clear wave] for the detection of antibodies to HIV-1 and HIV-2. Most important our assays are recognized as high quality products and some of most important tools in the fight against HIV and other infectious diseases. As evidence of this reputation the AIDS Institute, New York State Department of Health recently added the DPP HIV-1/2 assay to the list of clear wave HIV rapid tests that are approved for funding and it’s worth noting that our DPP assay is the only oral fluid HIV test on the list. We're proud to have the respect of the healthcare community and it’s our goal to preserve and strengthen this reputation in the United States and around the world. While all Chembio products are important contributors today, we believe the patented DPP platform represents the future of Chembio. As reported during 2014, we set specific internal product development priorities and we also signed multiple research collaborations to leverage the DPP technology across a number of new indications. As you may recall our internal product development priorities include four key projects. Today, I would like to update you on our two highest product development projects the DPP HIV-Syphilis Assay for the U.S. market and the DPP HIV antibody antigen assay. First the DPP HIV-Syphilis multiplex assay designed for the U.S. market is intended to addresses the growing concern among public health officials regarding co-infection rates of HIV and Syphilis... The project has progressed to the preclinical evaluation phase and the results are very encouraging. We’re broadly in discussion with the Food and Drug Administration to finalize the clinical study design which we anticipate initiating in 2015. Second project I want to update you on is the DPP HIV antibody antigen asset; it is also progressing according to plan. We’ve completed the development prototype and we recently entered a supply agreement to secure critical P24 antibodies and I look forward to updating you more on this in future calls. Shifting gears a bit to our research collaborations, they include number of developments DPP assays for Febrile illnesses including Malaria, Dengue Fever and Ebola, Traumatic brain injury including sports related concussion, flu immuno-status and a specific form of cancer. Chembio stepped out in these programs in particular are advancing at a rapid pace. As previously announced we are developing a DPP Malaria assay under a grant from the Gates Foundation. We’re developing a Dengue Fever Multiplex Assay to detect Dengue 1, 2, 3 and 4 in a partnership with an undisclosed partner and we’re developing a DPP Malaria Ebola Multiplex Assay under a research collaboration agreement with CDC. As you may know the CDC continues have an active Ebola program and plans to initiate field testing of our DPP Malaria Ebola Multiplex Assay in West Africa during Q2 2015. I previously reported that such field testing would begin in 2015 and I want to acknowledge that fact. While adding that the extra time allowed us to optimize the assay performance based on testing with wild Ebola virus in the high containment BSL4 labs both at the CDC and in Canada. Chembio’s DPP Flu immuno-status assay developed under series of grants from the CDC successfully completed the third phase in April of 2015. We’re developing a DPP Multiplex Assay with up to nine tests plus controlled to identify both seasonal and pandemic flu which the government requested for surveillance end modelling. We anticipate another request for proposal in 2015 when we intend to participate in that process. In the regulatory front, Chembio received several critical approvals in 2014 and we‘re on track to secure additional approvals in 2015. In February 2015, the DPP HIV Syphilis Assay was granted approval from the Brazilian Agency called ANVISA making it the only the point-of-care test cleared for commercialization in Brazil for rapid point-of-care detection of both HIV 1/2 and Syphilis. Subsequent to the end of Q1 2015 the company received a European CE Mark for HIV self-testing via its partners allowing us to become the first company to market a private label version of SURE CHECK HIV Assay for self-testing in several European countries. In 2015, we expect to receive European CE Mark for the DPP HIV 1/2 assay and for our new trade name STAT-VIEW HIV 1/2 formally SURE CHECK. In closing I would like to say that decisions made in 2014 and the execution that followed paved the way to new collaborations, new product opportunities and new markets. During the first quarter of 2015, we observed growth in total revenue, growth in product revenue, growth in DPP revenue and improvements in product gross margins. Our key internal development programs and our research collaborations are advancing. The first quarter of 2015 provided a strong signal validating both our strategy and our ability to execute. This concludes the prepared remarks for today; I would now like to open the call for any questions.

[Operator:]

Thank you. At this time, we will be conducting a question-and-answer session. [Operator Instructions] Our first question is from Bill Bonello from Craig-Hallum.

[Unidentified Analyst:]

Thanks. This is (ph) [Paras] in for Bill this morning. Good morning and congratulations on a great start to the year.

[John J. Sperzel:]

Thank you, Paras.

[Unidentified Analyst:]

Couple of questions for you and I know you make the point we agreed wholeheartedly that DPP is going to be the source of the big growth going forward but my first question I’m going to ask is actually going to be on lateral flow here, it seems to me I think the number there in the first quarter was well above what we had and I think that that revenue stream looks like it’s been a lot more resilient than maybe we expected it to be in the wake of the distribution change. So I’m just wondering if you could maybe talk through sort of the market to market dynamics, the puts and takes there and then I guess related to that I know you don’t guide but is the revenue kind of level from Q1 from lateral flow is that the kind of revenue stream you could see being relatively durable here over the immediate term?

[John J. Sperzel:]

Sure Paras, thanks for the question and the comment regarding lateral flow testing and certainly those of our legacy products I think that you know both the STAT-PAK and the SURE CHECK products have outstanding performance when it comes to sensitivity and specificity both well over 99% and they’re both very well accepted in the market. It’s fair to say that until we just received the CE Mark for version of SURE CHECK for the self-test segment that the majority of the SURE CHECK business was in the United States, the STAT-PAK product has more of a global presence. Quite frankly we think it’s the significant competitive advantage to have three products, three HIV 1/2 assays that are FDA approved all have gone through the PMA process and all are also clear way. They are CE Mark with respect to SURE CHECK and STAT-PAK and as I mentioned we expect to get the CE Mark for the DPP Assay. So while we have tremendous growth related to our DPP Assay we fully intend to continue to market itself the SURE CHECK and the STAT-PAK assays.

[Unidentified Analyst:]

Okay. Thanks.

[John J. Sperzel:]

With respect to guidance about the performance of the lateral flow business that is something that we wouldn’t intend to discuss on the call Paras other than to say we do intend to continue to focus on those products as we focus on DPP.

[Unidentified Analyst:]

Okay. Fair point, then turning to DPP, on the last call you mentioned that in February you have gotten the approval from ANVISA down in Brazil for the DPP HIV Syphilis Assay, just wondering if that had a chance to contribute to Q1 or if that still largely kind of ahead of you and I guess if it did contribute at all in Q1 did it - do you see any displacement of a single analyte product that you’re offering them prior?

[John J. Sperzel:]

The DPP HIV Syphilis Assay did not contribute in Brazil in the first quarter, I have personally been to Brazil twice in the first quarter of 2015, we are working with our partners in Brazil to prioritize the DPP HIV assay, it’s worth noting that today we sell a DPP HIV Assay and we sell a DPP Syphilis assay and so it is going to take some careful positioning in the market to make sure that we are successful with all three products and we’re working on that.

[Unidentified Analyst:]

Sure. That makes sense. Okay last question and then I’ll let somebody take the floor. With respect to some of the new distribution partners you mentioned them here in your prepared remarks but I thought I would see what kind of the early returns are from those folks as you kind of revamp the go to market effort here?

[John J. Sperzel:]

Sure. It’s early to assess how well we’re doing with those particular distributors, I think you probably know them well, when you talk about names like McKesson/PSS, Fisher, Henry Schein these are very large organizations, they are public companies, they distribute to thousands and thousands of customers, we are new to this part of the commercial effort and so it will take time in the field to develop relations between our sales reps of those organizations, that the process that we are undergoing which involves that many people in Chembio including myself or involved in and we’re confident that those partnerships are going to help expand our reach beyond the public health, which tends to be a direct business into the hospital and integrated delivery network which tends to be supported by these types of distributors.

[Unidentified Analyst:]

Okay, very good congratulations again. Thank you.

[John J. Sperze:]

Thank you, Paras.

[Operator:]

Our next question is from Larry Haimovitch from HMTC.

[Larry Haimovitch:]

Good morning John.

[John J. Sperze:]

Hi, Larry good morning.

[Larry Haimovitch:]

Congrats on the progress. John I have two questions. One is the combination HIV and Syphilis for the U.S. which you beginning the process of moving through the FDA. I’m very experienced enough to know that FDA is not something one predicts easily but could you give us some sort of parameters is this the 2016 possibility or 2017 possibility, what is the normal time frame we should think of this product moving through the FDA and receiving both PMA and CLIA-waiver.

[John J. Sperze:]

Larry, the best way that I can characterize that is to say that we are in discussions with the FDA about what kind of clinical trial we will have to have, in order to meet the FDA’s requirements and so until we have the answers to that it would be premature to quick estimates around the amount of time. But once we have a line of side, we have the direct dialogue, we have confirmation in terms of what the FDA wants, we can start put arms around that timeline and at the appropriate time we can show that.

[Larry Haimovitch:]

Okay, fair enough. And then, second…

[John J. Sperze:]

I’m just Larry, I’m sorry – I would just reinforce, this continues to be our number one internal product development priority. So you can imagine with that its getting a lot of focus in...

[Larry Haimovitch:]

Great. And the second there was an article in, I guess as the BBC recently about the, it sounds like an epidemic in Brazil with Dengue fever and I’m wanted to discuss, wanted to discuss with us what you’re doing in Brazil with Dengue fever because I imagine this is the important opportunity for you.

[John J. Sperze:]

So, the Dengue epidemic that you referenced in Brazil is also, up similar levels in many parts of Asia, so this epidemic is a global concern and but we were doing about it. I think you probably know we publicly announced that we are developing a Dengue assay and in fact its multiple assays, we’re developing a Dengue test which you could, I would just say plainly call a yes, no there is Dengue present or there isn’t Dengue which would most likely to be part of the febrile illness multiplex assay and then we are developing a multiplex assay for Dengue itself to identify the four different types of Dengue. Dengue 1, Dengue 2, Dengue 3, Dengue 4, so we have a significant effort around Dengue fever and we believe that there was significant market both in Latin America and in Asia for about type of tests. We are also seeing evidence of Dengue in Africa as well and that was noted that a recent Ebola/ febrile illness symposium that was sponsored by the [indiscernible] foundation in the last two weeks on the West Coast.

[Larry Haimovitch:]

Okay and one more question John and I’ll jump back in queue. And that is in the last call we talked about the ending of the Alere relationship and where we were in terms of all the inventory that was in the pipeline being utilized and allowing you to begin to make some progress of with your own product. And are you pretty confident now the inventory that was remaining after that deal was broken are has pretty much been consumed and the channels now more receptive to your own product John.

[John J. Sperze:]

The last report that we’ve received from Alere which is in the last couple of weeks indicated that they have a little bit of STAT-PAK inventory remaining and we have already received orders from our distributors and end user so were confident going through 2015 that they’re a other handle – with respect to Alere inventory on STAT-PAK as, we are continues to be our exclusive distributor in the U.S market for SURE CHECK which they market as their view complete and the volume at the end-user level for SURE CHECK continues to increase.

[Larry Haimovitch:]

Okay great. Thank you John.

[John J. Sperze:]

You are welcome Larry, thank you.

[Operator:]

Our next question if from Brian Marckx from Zacks Investment Research.

[Brian Marckx:]

Good morning John and Rich and congratulations on the quarter and congratulations on all the [indescribable] progress and particularly with DPPP and HIV in U.S. John it’s been tough to model DPP fee accrues sales that fluctuate quite a bit from quarter-to-quarter, do you have any kind of I guess insight from fee accrues in terms of ordering patterns and what to kind of expect through 2015.

[John J. Sperze:]

New.

[Brian Marckx:]

Is it something that you can share?

[John J. Sperze:]

It’s not something that I would want to share, I can tell you that as you know we had a very strong year in Brazil in 2014 and we are working very hard to make sure that we have a strong year in 2015, as I mentioned earlier I have been to Brazil twice, we had other folks in Brazil and we are in very close communication around the market, around payments which we continue to receive from our partner in brazil and around building the business, not just the business that we have but adding tests like HIV-Syphilis combination assay addressing the earlier question around dengue fever and other diseases that are affecting the market in Latin America and specifically in Brazil

[Brian Marckx:]

Okay.

[John J. Sperze:]

2014 and continues to have a good start in 2015.

[Brian Marckx:]

Okay. Okay great. In terms of U.S. DPP HIV-Syphilis in the preclinical is the data from a preclinical something that you expect to share publically?

[Richard J. Larkin:]

Probably not Brian.

[Brian Marckx:]

Okay.

[Richard J. Larkin:]

And what I can say is it’s very encouraging.

[Brian Marckx:]

Okay. Okay great. Last one on RVR anything that you can talk about relative to that partnership and where they are in terms of launching products in their territories?

[Richard J. Larkin:]

Would be happy to, so as I probably have characterized in prior calls we are very pleased that our partnership with RVR is progressing according to plan, as you might recall the agreement was signed a year ago February and in that period of time RVR secured a facility, they completed tenant improvements, they ordered setup and validated equipments, we’ve completed the [indescribable] production lounges, they are now ISO 1345 certified and they intend to manufacture commercial product in 2015. I can also add that RVR is already very involved in potential tenders in Malaysia and we are supporting those efforts.

[Brian Marckx:]

Okay. Should we expect that there would be a product launch from RVR in 2015?

[Richard J. Larkin:]

The market is a bit tender driven, so that will depend on the one, opportunities and two, their ability to successfully win the tenders.

[Brian Marckx:]

Okay. All right. Thanks a lot.

[Richard J. Larkin:]

They will be ready, yes. Thank you Brian.

[Operator:]

Our next question is from Paul Nouri from Nobel Equity Funds.

[Paul Nouri:]

Hey good morning.

[John J. Sperze:]

Good morning Paul.

[Paul Nouri:]

It looks like the revenue in Africa was the highest it’s been and at least the year, was there any significant contributing factor to that?

[John J. Sperze:]

You are correct, we had a good start to the year in Africa, I think as was mentioned before we are making a concerted effort to expand our commercial footprint. Whether it is in the U.S. with a direct commercial effort, whether it’s in Latin America through our partners in Brazil and Mexico and others whether its entering the self testing market in Europe or in the case Africa, putting a concerted effort on trying to win successfully tenders. So those are the fruits of that labour in Q1.

[Paul Nouri:]

Okay and did the first quarter include any notable sales of the HIV oral product?

[John J. Sperze:]

We wouldn’t break out the – are you talking about sales in the U.S. or sales in general?

[Paul Nouri:]

Right in the U.S.

[John J. Sperze:]

We wouldn’t break out what is used for oral fluid or for blood testing with respect to DPP, it’s actually quite difficult to do that, customers use the product for both oral fluid and blood samples.

[Paul Nouri:]

Okay thanks.

[John J. Sperze:]

You are welcome. End of Q&A

[Operator:]

Ladies and gentlemen we have reached the end of the question-and-answer session.

[John J. Sperzel:]

Thank you all for your participation and continued support at Chembio Diagnostics. We look forward to updating you again next quarter. Have a great day.