Chembio Diagnostics Inc (CEMI) 2008 Q4 法說會逐字稿

Greetings and welcome to the Chembio Diagnostics 2008 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, [Bobbi Coco]. Thank you, Ms. Coco. You may now begin.

Good afternoon. This is Bobbi Coco with Chembio Diagnostics, Inc. Thank you all for participating in today's call. Joining me from Chembio Diagnostics are Larry Siebert, Chief Executive Officer, and Richard Larkin, Chief Financial Officer.

This morning, Chembio Diagnostics announced financial results for 2008 and filed its 10-K annual report. If you have not received this news release or if you would like to be added to the company's distribution list, please call Chembio Diagnostics at 631-924-1135 and ask for Susan Norcott.

Before we begin, I would like to caution that comments made during this conference call by management will contain forward-looking statements that involve risk and uncertainty regarding the operations and future results of Chembio Diagnostics. I encourage you to review the Company's past and future filings with the Securities and Exchange Commission including, without limitation, the Company's Form 10-K and 10-Q, which identify specific factors that may cause actual results or events to differ materially from those described in the forward-looking statements.

Furthermore, the content of this conference call contains time-sensitive information that is accurate only as of the date of this live broadcast, March 19, 2009. Chembio Diagnostics undertakes no obligation to revise or update any statements to reflect events or circumstances after the date of this conference call.

With that said, I would like to turn the call over to Larry Siebert. Larry?

Thanks, Bobbi, and good afternoon, everyone. Our revenues in 2008 were the highest in the Company's history. Our operating loss, which was the lowest since our merger with Chembio Diagnostic Systems, Inc., decreased 28% from 2007. And the net loss, which last year included dividends on convertible preferred stock -- last year meaning 2007 -- preferred stock which was converted into common stock, decreased 76% from 2007.

While we are pleased with our results, we are very optimistic about our prospects for 2009, as we believe we have laid out a plan to improve on these results which if achieved should result in our being profitable for the 2009 year.

Excluding approximately $400,000 in Q4 charges that are related to prior quarters, we were nearly breakeven in the fourth quarter of 2008, with revenues of $2.5 million, or $10 million annualized -- roughly $2.5 million. A delay in receipt of an import license from one of our DPP products until January prevented our Q4 2008 revenues from being about $380,000 greater.

We ended the year with a cash balance of $1.2 million, an increase of approximately $200,000 from our September 30, 2008, cash balance. We believe our cash resources are sufficient to fund our needs throughout 2009.

I will highlight other items of note on our 2008 results and also discuss the current outlook for 2009 after our Chief Financial Officer, Rich Larkin, first goes through our full-year results in greater detail. Rich?

Thanks, Larry, and welcome, everyone. Total revenues for the year 2008 were $11.05 million, a 19.7% increase compared with 2007 total revenues of $9.23 million.

Year 2008 revenue growth came from $1.5 million(Sic-see press release) of increased product revenues and $0.23 million of increased research and grant revenues. The increased product revenues for the year 2008 included an increase in rapid HIV tests and related revenue of $1.26 million to $9.19 million, or an increase of 16% from $7.93 million in the same period of 2007. We also made our first shipment of tests that utilize our DPP technology.

Gross profit margin for 2008 was $3.85 million, an increase of 38% from $2.8 million in 2007. As a percentage of total revenues, gross profit margin in 2008 was 34.9% as compared to 30.3% in 2007. The increase in gross profit margin as well as gross profit margin as a percentage of sales for the year of 2008 primarily reflects an increase in total revenues and improved revenue mix and volume-related manufacturing efficiencies.

Research and development expenses, which include clinical and regulatory affairs, increased $0.7 million to $2.6 million for the year of 2008 as compared to $1.9 million for 2007. The primary reason for the increases was additional R&D personnel related to work on the Company's DPP technology. R&D expenses are funded in part by grant and development income, which increased $0.23 million or 49% to $0.69 million for the year of 2008, as compared to $0.47 million in 2007. The details of these increased costs are reported on our 10-K.

Selling, general, and administrative expenses for the year of 2008 was $3.32 million as compared to $3.77 million for 2007. Increases in commissions based on increased product sales in Brazil were partially offset by reduction in wages and related expenses; consulting; marketing materials; investor relations; legal and accounting; and travel and entertainment cost as well as other expenses. The details of this category are also reported in our 10-K.

The operating loss for 2008 decreased 28% to $2.07 million from an operating loss of $2.88 million in the previous year. Reduced operating loss reflects increased revenues, improved gross profit margins, and lower SG&A expenses, which were more than offset by the increase in research and development expenses associated with our new product development.

The net loss in 2008 also includes a $500,000 charge, all expensed in the fourth quarter of 2008, relating to a license agreement for HIV-2 entered into by our US marketing partner, of which we were notified in the fourth quarter of 2008. More details of this are reported in our 10-K.

The net loss attributable to common stockholders decreased 76% to $1.95 million or $0.03 per share for the year of 2008, compared to a net loss attributable to common stockholders of $8.27 million or $0.05(Sic-see press release) per share for 2007. The net loss attributable to common stockholders in the year 2007 includes $4.2 million of nonrecurring deemed dividends and $1.3 million in non-cash dividends to preferred stockholders.

As previously reported, all of the Company's convertible preferred Stock was converted to common stock in December 2007, which resulted in no preferred stock dividend in 2008. Again, please see our 10-K for information on our full year-end results.

The Company had a decrease in cash for the year ended December 31, 2008, as compared to a lesser decrease in cash for the same period in 2007. This decrease during the 2008-2007 periods are primarily attributable to cash used in operations.

The Company had a working capital surplus of approximately $1.66 million at December 31, 2008, and a working capital surplus of approximately $3.23 million at December 31, 2007. The Company estimates that its resources are sufficient to fund its needs through the end of 2009.

I would like now to turn the call back over to Larry. Larry?

Thanks, Rich. I just want to clarify one thing. We said the reduced operating loss, which reflects increased revenues, improved gross profits, and lower SG&A expenses, which more than offset the increased research and development expenses associated with new product development, not the reverse. The improved results more than offset the increased R&D expense. But thank you very much, Rich.

Just to further elaborate on a couple of areas concerning our 2008 results that Rich has covered so well, first, excluding approximately $400,000 in Q4 charges that were related to prior quarters, we were nearly breakeven in the fourth quarter of 2008, during which we had less than $2.5 million in revenues or $10 million annualized. A delay in receiving an import license from Brazil for about $380,000 of our DPP Leishmania test until this quarter was also a factor.

During 2008, we decreased total SG&A by approximately 12% from $3.8 million to $3.3 million, or about $450,000. This decrease was achieved primarily through a $380,000 decrease in fixed salaries and related costs as well as reductions in other cost areas, even while sales commissions increased by approximately $330,000 as compared with 2007.

Third, during the first quarter of 2009, we have made additional cost reductions in all areas, including elimination of a number of salaried positions. We also implemented a companywide pay reduction program that we believe will result in further reductions to our total SG&A cost in 2009.

Our net increase in 2008 research and development expenses included our cost of completing the lowering of the age limit of our FDA-approved rapid HIV test, which was -- we received the approval for last September; as well as the cost of our establishment of a technical department within R&D that can alternatively support operations, transfer new products to operations, research process improvements, and support traditional R&D activities. This was actually a very key accomplishment for the Company in 2008 to create this group.

Now to the outlook for 2009. Based upon the growing base of business we have in the United States for our two FDA-approved CLIA-waived rapid HIV tests, resulting both from the expansion of the market and from market share gains by our marketing partner Inverness Medical; the continued growth opportunities we see for our rapid HIV test products globally; and third, our expectation that 2009 will bring significant revenues from our DPP technology, primarily as a result of the contracts we signed with the Oswaldo Cruz Foundation last year, we believe we are positioned for continued increases in our revenues and further improvement in our overall operating results in 2009.

Our plan for 2009 assumes the following. One, growth in our sales to Inverness as it makes gains in hospital and public health markets and because their inventory levels that they brought into 2008 have been much reduced and normalized.

Second, conservative assumptions with regard to our international HIV rapid test business, primarily including a significant reduction from Nigeria, which will be partially offset by expected growth from other markets through new distribution opportunities we have in Asia, Africa, South America, and also in Europe upon receipt of our CE Mark, which we expect by midyear.

Next, successful execution of our DPP product collaborations pursuant to the contracts we signed with the Bio/Cruz last year, including successful product evaluations, regulatory approvals, and availability of funding by our customer.

Last, if we are able to achieve these three main elements of the plan, we anticipate having sufficient resources to support our operations so that we can have very strong results for the year.

Also, based upon current and pending research and development income from grants, development contracts, and feasibility studies and associated staffing requirements for such commitments, our net R&D cost in 2009 -- which is our R&D income less total R&D expenses -- should decrease substantially in 2009 versus 2008. Should current contracts not continue or pending contracts not materialize, we will make commensurate adjustments to our R&D expense.

In addition to the DPP products we anticipate launching in Brazil through Bio/Cruz this year, our contract development work for Bio-Rad Laboratories and several other R&D programs, our main DPP products that we are focusing our R&D activities on are our DPP HIV 1/2 screening test for use with oral fluid and our DPP Syphilis Screen and Confirm test.

We are in discussions with a large in vitro diagnostics marketing organization that, if an actual agreement is completed, would fund all the external regulatory costs, co-brand this product with our DPP trademark, and commence minimum sales of the product in exchange for our granting them exclusive US marketing rights to this product.

We are also actively pursuing opportunities for our oral fluid HIV test in the international market that we already participate in, as well as others. And we are very encouraged by the interest we've received in this product offering.

Finally, all the while we intend to continue improving our manufacturing efficiencies, controlling our SG&A and overhead expenses, all of which will lead to anticipated improvements in our bottom-line results. So with that, I am happy to take any questions you may have.

(Operator Instructions) [Glenn Mathias], a private investor.

Yes, Mr. Siebert, this is Glenn. I've got a question with regards to the oral HIV test. What would be a reasonable time frame for seeing the first sales of an oral HIV test globally? Because I am assuming globally would be easier to -- the sales would occur globally prior to the US domestic market, right?

Right. We submitted the test to the US AID, which is the arm of the US PEPFAR program that evaluates tests for inclusion in programs funded by PEPFAR in those countries.

We have also -- we are in the queue for a new evaluation by WHO, which is the qualification organization for UN AIDS-funded procurements, which has a number of other agencies underneath it like UNICEF and so forth. So those submissions have already -- are ongoing.

We also are pursuing local registrations in certain countries where we think we have some opportunities.

This doesn't give you a specific answer, but I would hope to start to realize some sales from the international markets for DPP this year. That is, however, in addition to the expectation we have in Brazil for this product. Because we also have an OEM agreement with Oswaldo Cruz Foundation that we signed last year related to this same product for that market specifically. So we fully anticipate to have sales of that product in Brazil this year even if there are no others.

We do also anticipate other sales, but I can't give you a specific timetable until I knew better about the results of the US AID and WHO evaluations and the timing for the registration in some of the countries that we are pursuing.

As a follow-up question to the oral HIV test, could you shed some light in terms of what the -- how Chembio's oral HIV test compares to OraSure's oral test?

Yes, OraSure. We have not published any data on that. We are compiling a number of evaluations. We have some that we are pursuing on our own; others that we have been invited to participate in by international agencies.

But as we go forward, we will be publishing information. There is some information on our website on the product. And we anticipate once the product becomes eligible for these international markets, that information that we have thus far on the product, including its features and benefits, will be on our website.

So generally speaking, I can tell you that the DPP format is attractive for any number of applications because of the ability to independently migrate the sample independent of the conjugate. Which is a feature that -- the combination of the sample and the conjugate is what you see in all lateral flow tests.

We think that particularly because of the challenging nature of oral fluid, that this system is particularly advantageous for an oral fluid application because we are able to separately control the migration of the oral fluid sample independent of the conjugate. And that provides for, we think, a better reaction and better sensitivity and specificity, and sharper indications of the results whether they be negative or positive.

So, just comparing the performance of the DPP platform for the HIV test, the oral HIV versus the single barrel or the earlier platforms you've had, how would you compare the sensitivity and the specificity on it?

Well, the internal data that we have generated so far is excellent. It is somewhat better than our existing test, which is well above FDA's standards obviously already.

But it would be premature for me to be more specific than that, because we haven't generated the amount of data that we have generated on our lateral flow test. So we are very confident and comfortable that the test will meet or exceed all required performance levels, but the ultimate test is going to be the field, and we are just starting.

We have done some field studies. As we reported, I think last year around this time, we completed a limited study on oral fluid samples here in the United States. But we want to do more studies in field conditions, both here in the United States as well as in other parts of the world, to really fully and firmly establish the performance capabilities of this product.

Okay. From a pricing standpoint, have any pricing points been determined yet in terms of how the oral HIV will be priced globally?

Not that we have published at this point in time. But our goal is to be very price competitive for this product in all markets.

All right, thank you.

(Operator Instructions) Glenn Mathias, private investor.

Thanks. Mr. Siebert, could you shed some light with regards to pay reduction? As to -- was that across the board? Did it apply to executives as well as non-executive positions?

Yes, it applied to everybody in the Company, with my taking the largest percentage pay cut of anybody.

Other than people who were on, let's say, the manufacturing floor. We did not --

Salaried.

(multiple speakers) impact them.

Salaried people, yes. Not hourly people.

All right. One follow-up question with regards to the HIV growth rates in the US. So, I know in your 10-K you -- we talked. I did see some initial numbers in there.

But what is the growth rate that we are experiencing in the US for the existing HIV test, with Inverness as being the only distributor to the product?

What is the growth rate for our unit sales?

That's correct.

Or for the overall market?

For just Chembio's.

Well, I think you need to just understand that our sales -- and this is one of the things that we tried to communicate in our filings. Our sales to Inverness are not necessarily indicative of what the growth in their sales are. Specifically, in 2007, when they launched the product, they purchased more product than they ended up being able to sell into the market in 2007, because of delays and a number of things.

One, we didn't get CLIA waiver for one of the two products until the end of 2007, and they launched in the beginning of 2007. Two, we didn't have the lower age limit claim that we finally were able to achieve FDA approval of the latter part of 2008. Three, we had a component recall, which did cause somewhat of a setback for their sales during the early part of last year.

So they came into 2008 with more inventory. So our sales to them last year, I believe actually our gross dollars to Inverness last year decreased slightly compared to 2007.

However, their sales to the market increased. I am not able to give out that number specifically; but their sales increases have been quite good and they are quite optimistic about that trend continuing this year.

And with their inventory levels now being down to what they consider to be normalized levels, that we should see a commensurate increase in our sales to them if they in fact do achieve those improved results, which as I say they are very optimistic about achieving.

Okay, that's great. Getting back to the Brazilian oral HIV test format, currently I am assuming that we have had no sales to Brazil yet; and it's pending the FDA equivalent in Brazil's approval of the oral HIV test. Is that right?

That's correct.

Okay. Is there an expected time frame as to when we can expect some kind of a decision on the test? The approval of the test in Brazil.

Well, obviously, we expect that to occur this year, because as I said we anticipate selling product there this year. So I don't want to give a specific date. That process is ongoing, and it is active, and we are making progress. But I wouldn't be able to give you a specific timetable on that.

But we are -- there is a fair amount of activity going on concerning the submission of the product, the evaluation of the product, and hopefully eventually the approval of the product within -- it's within months. Might be seven months, five months, three months, somewhere in there.

All right. Is there time frame as to when we intend to submit some kind of an application on the FDA side for this product?

As we mentioned, I believe I mentioned in my remarks and also in our filing, we are in discussions with a large IVD company, in vitro diagnostic company, about being our marketing partner for that product.

We are finalizing a terms sheet, and assuming that converts into a definitive agreement, the plan is to start the clinical trials well before the end of this year and thereby be in a position to get FDA approval by the end of next year, plus or minus, depending upon timing.

Okay. Is this the same company that we would also be working with with regards to the syphilis test? Or is that a different -- that was not part of this term agreement? Or we don't anticipate it being part of this term agreement?

I didn't quite understand. The syphilis (technical difficulty) We don't have any negotiations ongoing for the syphilis product with any marketing partner, but it's possible that it could be with that same company, but there is no discussion of that at the moment.

Okay. Could you shed some light with regards to the scheduling for the time frame on the syphilis test? It looks like we have fallen a little bit behind what was anticipated.

Yes. The timing of the syphilis test is a little bit delayed compared to where we thought we would be by the end of last year. But we have made some very good progress. As you probably know, the timing of these things is difficult to predict to the week or to the month. But we have made some very good progress.

We have been working very closely with the CDC on finalizing the specifications for the product and readying the product for a number of evaluations that are yet to take place.

All right. That's all the questions I have. Thank you.

[Stephen Farber] of [AS Advisers].

Larry, thank you for taking the call. Can you comment on the scalability of your manufacturing processes and any CapEx that might be required to meet the anticipated new sales?

Sure. We have budgeted this year. We have actually have already begun about six weeks ago or so a project to build some automated equipment that will from the assembly side substantially increase our capacity to assemble and package our products, both our traditional lateral flow product as well as our new DPP products.

That equipment is anticipated to be in our facility sometime around the middle of this year and validated for use sometime by the end of the year. So that is on the packaging and assembly side, which is pretty standard.

Also, on the production side the equipment that is used to impregnate the membranes with the various reagents we use as well as to laminate the card that the reagents are impregnated onto, that equipment -- which we call reel to reel equipment -- both for printing as well as lamination are -- by adding those machines we are able to substantially increase our production capacity.

There is about a three-month lead time from the time that we decide to buy another one of those units to actually having it in place and validated. Three to six months.

What is the capacity of each one of those reel to reel machines? It's 12-hundred-thousand additional tests per month it would enable us to produce.

Is that -- Steve?

Yes. Oh, thank you.

Just to clarify, we have already made a purchase actually back at the end of 2007 for a reel to reel machine that is being used right now in the R&D development of the DPP. But it is being validated to be put into service into our production facility. So that will increase our capacity.

Okay, great. Thank you very much.

Ladies and gentlemen, there are no further questions at this time. I would like to turn the floor back over to management for any closing comments.

Okay. Thanks very much, operator. We appreciate your listening to the call and we are really quite optimistic about what this year brings, despite the challenging times that we are in. So we look forward to speaking to you again in a couple months when we report our first-quarter 2009 results. Thanks very much.

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