Chembio Diagnostics Inc (CEMI) 2006 Q4 法說會逐字稿

Greetings, ladies and gentlemen, and welcome to the Chembio Diagnostics Incorporated 2006 financial results conference call. At this time, all participants are in a listen-only mode. A brief question and answer session will follow the formal presentation. [OPERATOR INSTRUCTIONS] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Mr. Lawrence Siebert, Chairman and President. Thank you, Mr. Siebert, you may begin.

Thank you. Good afternoon, everyone. I'm Larry Siebert, Chairman and President of Chembio Diagnostic Inc. And it's my pleasure to welcome you all to this conference call. Before we get into the substance of the call, I would like to first advise everyone that statements made during this call that are not historical facts are forward-looking statements within the meaning of the Securities Act of 1933, as amended. Those statements include statements regarding: the intent, belief, or current expectations of Chembio and its management. Such statements reflect management's current views, are based on certain assumptions and involve risks and uncertainties. Actual results, events, or performance may differ materially in such forward-looking statements due to a number of important factors and will be dependent upon a variety of factors. Chembio undertakes no obligation to publicly update these forward-looking statements to reflect events or circumstances that occur after the date hereof or to reflect any changes in Chembio's expectations with regard to these forward-looking statements or the occurrence of unanticipated events. Factors that may impact Chembio's success are more fully disclosed in Chembio's most recent public filings with the United States Securities and Exchange Commission, including, but not limited to, the annual report on Form 10K that was filed on March 29th, 2007.

So with that, welcome again, everyone, to the April 3rd, Chembio Diagnostic Inc. conference call. The purpose of this call is to discuss our 2006 full-year and fourth quarter financial results, as well as our general outlook for 2007. We will not provide any specific financial guidance at this time.

I believe that 2006 and 2007 year-to-date has been a period of significant achievements for the company. And we are very excited about how the company is now positioned. We grew our product sales in 2006 85% over 2005. We received FDA approval of our premarketing approval applications for two of our three rapid HIV tests. We signed a marketing partnership with Inverness Medical Innovations for the FDA approved tests and Inverness is now just as of about a month ago or so launched our HIV tests in the U.S. market. And as a result of an inspection report, we've received just today from the U.S.D.A., the U.S. Department of Agriculture regarding our February 27 inspection, we believe our first of hopefully several U.S.D.A. approvals is eminent. And we are very pleased that we received the United States' patent for the Dual Path Immunoassay test system, or DPP.

Before we get into the discussion of these activities and opportunities, however, I'd like to first access -- first ask our Chief Financial Officer, Richard Larkin, to summarize the financial results for both the full year and for the fourth quarter of 2006. After Richard's done, I will then summarize our business results and activities, including recent developments. We'll take about 15 minutes together for our prepared comments, which will then leave about a half hour or so to take some questions. Thanks. Rich.

Thanks, Larry, and welcome, everyone. Chembio's 2006 full-year revenues of $6.5 million are comprised of $6.3 million in net product sales and $200,000 in grants and development income, as compared with our 2005 full-year revenue of $3.9 million. That was comprised of $3.36 million in net product sales, $250,000 in license revenue, and around $331,000 in grants and development income. The increase in net product sales is attributal to increases in sales of our HIV rapid tests, which was about $2. million more than 2005, and of our Chagas rapid test, which is about $1.15 million more than 2005. These increases were partially offset of our decreased sales of our pregnancy test of around $116,000 and reduced other product sales aggregating around $130,000.

Overall, net product sales for 2006 increased 87% compared to 2005. Net product sales increased 85% in 2006, as compared to 2005. Net product sales for the three months ended December 31, 2006, increased 93% to $2.6 million compared to that same period in 2005. Our HIV product sales increased 101% to $2.464 million for the first -- for the three months ended December 31, 2006, as compared to the same period in 2005. Gross margin on net product sales for the year ended December 31, 2006, was 28.7%, as compared to 22.3% for the year ended December 31, 2005. The increase in gross margin percentage is primarily attributal to the increased sales of our HIV products, which were at a higher margin than those than -- than other product lines. The gross margin on net product sales for the three months ended December 31, 2006, declined to 32.2% from 38.1% in the comparable 2005 period. This was due in part due to inefficiencies caused by the need to rapidly produce a large 990,000 unit order for HIV barrel product for Mexico. More than 50% of which we shipped during the fourth quarter of 2006.

In addition, product mix also contributed to the decline in gross margin percentage for the fourth quarter of 2006 as compared with the fourth quarter of 2005. Our research and development expenses for the year ended December 31, 2006, were $1.2 million compared to $1.355 million for the year ended December 31, 2005. This category includes costs incurred for regulatory approval, product evaluation and registration. Selling, general, and administrative expenses increased $1.9 million to $5.2 million in the year ended December 31, 2006, compared with 2005. These costs not only include increased costs for sale and marketing personnel and promotional expenses, but also includes significant increases in license and royalty expenses, commission, investor relation expenses and legal expenses.

We did have approximately $215,000 of litigation costs that as a result of the settlement of the litigation matter we do not expect to incur again this year. As our sales of HIV test products increase in the U.S. and globally, we expect selling, general and administrative expenses to increase. And this will be in large measure due to increased costs for royalties on intellectual property licenses related to our single path lateral flow licenses from Inverness and reagents we license from others. Over the longer term, if we are successful in deploying the DPP technology, certain royalty expenses will decrease and royalty and license income will increase as we begin to deploy products on the DPP platform. Larry will discuss in some more detail in a few moments.

Our other income and expenses. Interest expense increased by $271,000 for the year ended December 31, 2006, compared with 2005. This was primarily attributal to the valuation of the bridge warrants where we borrowed $1.3 million in June of 2006, at a rate of 2% for 90 days cost warrants that were exercisable at $0.70. Some of this debt was converted to the Series C offering, which allowed for a discount of 12.5%, resulting in a loss on extinguishment of debt of $87,000. Interest income for the year ended December 31, 2006, decreased by $10,000. In addition, during 2006 we received a marketing grant from New York State of $25,000. We had a working capital surplus of $5.113 million at December 31, 2006, which included cash of $4.290 million. We believe our resources are positioned to fund our needs till the end of 2007 and into early 2008, subject to the caveat and assumptions that are set forth in the Form 10KSB filed last week.

That concludes the financial summary. Larry.

Thanks, Rich. 2006 was really a landmark year for Chembio from so many perspectives. I believe we significantly increased our possibilities for achieving long-term, sustainable revenue growth and profitability, while at the same time reducing a lot of risk that the company had for many years. In terms of risks that we reduced, here a few key ones. Whether or not we would get FDA approval and see a waiver, we did. Whether or not we would land a good marketing partner for HIV tests, and enter into a win-win deal that gives us good upside in this expanding U.S. rapid HIV testing market, I believe we did. We're able to raise a total of about $10 million in capital last year primarily through our Series C convertible preferred stock ground that closed in the same time frame as our agreement with Inverness, and that round included the participation by Inverness in the amount of $2 million. We're able to settle our -- our outstanding litigation on the technology, eliminating this particular risk and cost of this 2.5 year litigation.

We significantly reduced our exposure to third party intellectual property patents as a result of the license we obtained from Inverness to their lateral flow patent portfolio, not to mention our new patent, which I'll cover separately. And I believe that any question about whether the U.S. market for rapid HIV test had long-term growth prospects was affirmatively addressed both -- both by the new CDC recommendation for routine screening, as well as by the FDA decision that rapid HIV tests could be submitted for over-the-counter approval.

And just to review where things stand with Inverness, we signed in September of last year agreements with Inverness Medical Innovations, a $2 billion market capitalization company that has become a global leader and point of care diagnostics for both consumer and professional markets, to market our FDA approved rapid HIV test in the U.S. and one of the two products, the barrel product, globally. Inverness launched our FDA approved HIV test just over the last several weeks under their Clearview line of products. So it's way too early to discuss results or anything of the like as it relates to this program. However, I can say that I am very pleased with what I've seen so far in terms of a demonstration of their commitment to this product line in the United States market, at least. And I can also say the communication and cooperation with Inverness's product management team and distribution team has so far been outstanding. And it's evident that they have excellent distribution rates in the hospital and the physician office market, and I also believe that they have added or are adding more resources in the public health segment, as well.

As to a potential over-the-counter submission to the FDA for our HIV tests, at this particular juncture, we're waiting for Inverness to complete their announced joint venture with Proctor & Gamble in order to agree on which, if any, of our current or future HIV products may be candidates for the over-the-counter market that the FDA opened last year.

We've made good progress in the international markets, of course. Last year our sales growth was fueled entirely by these markets with our HIV tests and our Chagas test and we expect continued growth from these markets. But also for them to become increasingly competitive. Some of the other developments that have occurred this year-to-date include: based upon a favorable inspector report we received today from the U.S.D.A. for our nonhuman primate TB test and approval process which we've worked at very diligently in the background of all of our other developments this past year should be forthcoming quite soon. And we hope to have other U.S.D.A. product approvals this year, as well.

We signed a distribution agreement for that product with a specialty -- specialty distributor called [inaudible] who is very familiar with this little market and we expect to begin to see sales of this product in the U.S. market in this current quarter. Also as reported in our 10K just filed, on March 20th, we were issued a patent covering the method and use of our veternary TB product across a wide spectrum of animal species. I do believe that our having a U.S.-based facility that has approvals to produce and market products that are a class III biologics device, such as our two HIV tests that are FDA approved regulated by the biologics division of the FDA, and to also produce and market products that are regulated by the U.S.D.A. expands the scope of our future opportunities beyond just develop or licensing, but also for manufacturing, as well. I should also mention that we have scheduled our ISO 13485 inspection for later this quarter by a notified body, which will enable us to pursue a CE marking for our HIV and/or other products that we choose to market in the EU and other countries requiring such a mark. And this will aid in our business development efforts, as well. However, with all of that, alongside the agreement we concluded with Inverness and now their launch of our products in the U.S. market, the most important development for us in my own view was on March 13th, when we previously announced we were granted a United States patent for our dual path platform. I want to make sure that everyone understands that DPP is not a test per se, it's a platform technology on which we believe many tests can and will be developed as a result of collaborations that we hope and expect to enter into with others in 2007 and beyond.

Over the last several months we've done a number of mostly internally conducted studies on antibody detection using well characterized serums -- serum samples, each containing antibodies for a particular infectious of interest, including, but not limited to: HIV, syphilis, and tuberculosis. And as a result of these studies, we are very satisfied that DPP, as compared with standard single path lateral flow assays, enables the development of diagnostic test that can, one, increase sensitivity. Two, use sample types beyond just the more typical sources, such as blood serum and plasma, for example: oral fluid, sputum, urine, feces, and even animal meat juices. Three, parameters of one related condition -- I'm sorry, improved results when testing for multiple conditions and/or different parameters of one related condition. And four, reduce the amount of expensive reagents required, as well as other advantages.

As such, we are now very actively seeking collaborations for this exciting new graphic test platform and we now have preliminary discussions ongoing under NDAs with several parties. Given these developments, we've very recently actually just over this past week engaged some new external business development resources in order to advance this activity meaningfully in the short and medium term.

We're simultaneously interviewing candidates to replace our former VP of Business Development, who is now overseeing our HIV product line at Inverness, with someone we are satisfied can successfully build this new business. When we make this hire, we can scale back these consulting resources. However I did not want to lose any time or momentum given the interest we have generated in DPP already on our own during these last few months. And I can't identify any of the companies, obviously, that we're having these preliminary discussions with, although we did disclose last year well before the patent was issued that we had entered into a cooperative research and development agreement, or a CRADA with the United States Centers for Disease Control, where we're screening some syphilis tests, and we're very pleased with the early -- early results from that collaboration based upon a meeting recently held in Atlanta.

We've also filed with the SEC our agreements with Inverness, which includes a grant to Inverness of a first-ride negotiation on any new Chembio HIV product we develop. And though I can't get into any specifics here, we've been on record for some time that we were developing a new Chembio HIV product on DPP for use, not only with blood samples, but also with oral fluid.

Generally, we're pursuing commercial opportunities for DPP where either sensitivity use of different sample types and/or multiplexing using conventional single path lateral flow technology is not possible, not optimal, or at least not sufficient for the market need. And we're primarily interested in addressing market needs and opportunities in the U.S. and other developed world markets. However, where we see that there are opportunities to get funding commitments for both R&D and product procurement, we're also looking at developing world needs, as well. And we have a couple of initiatives in that regard, as well.

And finally, and importantly, we are also doing studies internally and externally, which we hope to complete this quarter that if successful -- successful will help to validate additional applications of DPP beyond antibodies detection into direct antigen detection. And to also include the integration of DPP with a hand-held reader. If successful these -- if successful, these studies could result in many additional direct antigen, bacteria, or pathogen detection market to be available for DPP collaborations. So, with those remarks, for which I appreciate your indulgence, operator, I'm happy to open up the line to about a half hour of questions.

Thank you. Ladies and gentlemen, at this time we will -- we will be conducting a question and answer session. [OPERATOR INSTRUCTIONS] One moment please while we poll for questions. Our first question is from the line of Keay Nakae of C.E. Unterberg, Towbin. Please proceed with your question.

Good afternoon.

Hi, Keay, how are you?

Good. Let's start with the -- the U.S.D.A. inspection. You talked about that going well. What -- are there any action items or areas where you need to respond to anything that they observed? Or what exactly is the process from here towards getting commercialization?

As I understand it, Keay, simply now a matter of getting approval of our labeling, which was submitted some weeks ago. And then also, there needs to be a training session at U.S.D.A. facility, where each lot is released. As you may or may not know for U.S.D.A. approved products, each lot that is produced has to be approved by the U.S.D.A. when it -- after it is produced. And so there needs to be -- effectively a training session by the applicable U.S.D.A. inspectors, so that when we start to produce, they'll know what to do to determine whether the product is performing in accordance with the specifications. Other than -- and that whole process should not take more than about 30 to 45 days from now.

So have you scheduled the training session there?

I don't believe it can be scheduled until the labeling itself is approved. And so I think the labeling should be approved well before that 30 to 45 day period, so that we can still achieve the goal of 30 to 45 days completion of those -- those task items.

And this initial vet TB test, will it be specific to a certain species?

Yes. The first test that's been submitted that was associated with the facility inspection was the nonhuman primate TB test, which is specific to nonhuman primates, specifically certain types of nonhuman primates for which we have claims. And so that will be the first product, but we hope to follow that up with additional species, exotic animals that are going to be tested at zoos, as well as some larger production animals if we're able to complete the data-gathering process that we hope to continue doing this year.

Okay. So if possible you'll be submitting these additional tests for approval in the back half of this year?

Yes.

Okay. With respect to the SURE CHECK product and the Clearview waiver, can you give us an update on where you're at with that process?

Yes. We need to do a little bit more testing with the product in order to confirm the simple nature of the test. We had some questions that were raised as a result of some of the procedures for the test. We think that those will be satisfactorily addressed over the next few months. And our -- we certainly expect to have that clear waiver this year, hopefully during the third quarter.

Okay. Moving on to the dual path platform. You mentioned your -- your work in developing a -- an oral fluid HIV test. Can you give us a sense of where you're at in the development of that product, what you have to do to -- to validate a product such as that, and how long you think it might be until you are in a position to submit for a PMA for that particular test?

Okay. Well, we certainly have some experience in getting PMAs given that we've got two of them for the two tests we have in the market. So we're familiar with the process. What we need to focus on now is really the application, or the use of oral fluids with our tests, which is a process we're doing as we speak and we hope to have -- be in a position by the end of this quarter where we've validated that particular type of sample, so that we can then go full blown into clinical trials toward the end of this year.

Okay. So -- so you'll have the test validated the middle of this year?

I think so, yes.

Okay. And then as far as the clinical data required for the PMA, give us a sense of what's required there.

Sure. Similar to what we had to do for the two products that we already went through the PMA process, you have to have a minimum of 500 known positives, and 500 -- or 1,000 patients, 500 from high-risk areas and 500 from low-risk areas. That's the minimum that you need. And you need to have sensitivity and specificity of at least 98%, I believe, with a confidence interval at 95%. So, typically, you want to have more patients than the minimum numbers to -- to ensure that you meet those criteria. As I think you know, our two tests that we got FDA approval for have sensitivity and specificity well in excess of those minimums. And we have no reason to believe that the DPP would not be at least as good, if not better.

So the process then is, how long will it take us to conduct those clinicals? I can only tell you that in our previous clinical trial, I believe we started in July, and we finished in December. And there were some inefficiencies in that process. So I think we should be able to do it better in a more planful way this time around. And then we submitted our -- so that takes -- should take four to six months. And that would bring us to some time around the end of the year or early part of next year. And then we would submit our PMA application, if we haven't done so on a modular basis ahead of time. We didn't do it that way the first time around. We did it all together last time. And that was -- we submitted in February of '05, and we also made some supplemental claims, which cost us about four months. And still the whole process only took us 14 months -- or 14 or 15 months from the time that we submitted in February of '05.

So I would think that a year from the time that we submit would be a conservative estimate this time around, given that part of that process is the facility inspection, which we're already being inspected by [inaudible] division for our current PMA products anyway. So I would think that we should be in good position as it relates to the submission once we complete the clinical trial data. I would say that if we've completed the clinical trials with satisfactory numbers that that will be a very good sign for the rest of the process.

Yes. So basically we should be expecting you to submit the PMA first quarter of '08?

Well, I think we're -- we're maybe jumping a little bit ahead because one of the things that we want to establish well ahead of that is who our partner is going to be. So we may -- we are doing validation work as we speak, but I'm not sure how far into this process we're going to do until we've identified a partner, whether that be Inverness, or somebody else.

Okay. And to that point. In the -- the filing of your agreement with Inverness, it speaks to the fact that they have a right of first negotiation for any new HIV test developed off of DPP. So at what point in the development process of such a test, such as your oral fluid test do you, I guess, go to them and -- and try to engage them on that particular clause?

Well, that process that at this point we need to keep confidential, but obviously we will be providing them or -- with the notice that the time that we have developed the product in accordance with the terms of the agreement.

Okay. So, basically, at some point in time, you will have completed enough development such that you feel you have something compelling to show them. And enter into that negotiating period, at least the way that you've responded to the prior questions, it's not unreasonable for us to expect that negotiation period would -- would occur sometime this year.

Very likely, yes.

Okay. Okay. That's all I have for now.

Okay.

Thanks.

[OPERATOR INSTRUCTIONS] There are no questions at this time.

Okay. You turning it back to me, operator?

Yes, sir. There are no questions in the queue at this time.

Okay. Thank you very much. Thank you all for attending. And I appreciate your being on the call, and look forward to keeping you apprised of our quarterly progress as we get through the year. And thanks very much.

This concludes today's conference. Thank you for your participation. You may disconnect your lines at this time.