Chembio Diagnostics Inc (CEMI) 2009 Q4 法說會逐字稿

Greetings, and welcome to the Chembio Diagnostics fourth-quarter 2009 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, Bobbie Coco from Chembio Diagnostics. Thank you, you may begin.

Good morning. This is Bobbie 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 the year of 2009 and filed its 10-K annual report. These documents, as well as an updated investor presentation and fact sheet, may now all been viewed and downloaded by going to www.Chembio.com and selecting Investor Center. If you would like to the added to the Company's distribution list, please call Chembio Diagnostics at 631-924-1135 and ask for Susan Norcott, or e-mail Susan at snorcott@chembio.com.

Before we begin I would like to caution that comments made during this conference call by management will contain forward-looking statements that involve risks and uncertainties 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 forms 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 the slide broadcast, March 5, 2010. 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, Bobbie. And good morning, everyone; thanks for joining us and for your interest in Chembio's 2009 results. We're very pleased with our 2009 results as we experienced a 25% increase in revenues, a huge improvement in our gross margins, we were profitable and we made significant progress in our new product development and commercialization initiatives.

As Rich will detail in a moment, during the year we benefited from very strong growth in our rapid HIV test business in the US through our use distributor, Inverness. We increased revenues from R&D and license agreements, improved our manufacturing margins and lowered our SG&A costs.

We've done this while continuing to support a robust pipeline of new products that are all based on our patented DPP point-of-care technology which we made some great progress with during the last few months, and which I will briefly update you on after Rich first goes through the numbers of 2009. So now, Rich, can you please go through the numbers?

Thanks, Larry, and welcome, everyone. Our total revenues for the year were $13.83 million, a 25% increase compared with the 2008 revenues of $11.05 million. This revenue growth is attributable to a $2.02 million increase in product revenues and a $646,000 increase in our research and development grant revenues.

In addition, we received royalty payments of $122,000 from our 2004 technology transfer agreement with Bio-Manguinhos. The increase in product revenues for 2009 was due to increased sales of our HIV tests and increased sales of our DPP test, in particular sales to our US distributor was up significantly.

Gross profit margin for 2009 was $5.86 million, an increase of 52% from $3.85 million in the same period of 2008. As a percentage of total revenues, gross profit margin in 2009 was 42% as compared to 34.8% in the same period of 2008. The shift in our product mix toward a greater portion of HIV tests sold into the US market was with higher average selling prices and increased manufacturing efficiencies and an increase in our non-product revenues combined to produce this gross margin improvement.

Our R&D expenses including costs related to clinical and regulatory affairs which resulted in an increase of $278,000 to $2,884,000 for 2009 as compared with $2,605,000 for the same period in 2008. The primary reason for the increase was technical support personnel and material used to support our manufacturing improvements and costs related to the work on our DPP technology. The details of these increased costs are reported in our 10-K.

Our selling, general and administrative expense for 2009 was $2.66 million as compared to $3.32 million in 2008, that's a 20% decrease. This was a result of decreases in almost all categories of this expense. The reduction in costs, other than commissions, reflect the cost-cutting efforts made by management during 2008 and in 2009. The details of this category are also reported in our 10-K.

We continued the quarterly profitable trend from the second quarter through the fourth quarter of 2009. The operating profit for the fourth quarter of 2009 was $218,000, an improvement of $876,000 over the operating loss of $658,000 in the year ago period. The full-year 2009 operating profit was $317,000, an improvement of $2,388,000 over the operating loss of $2.071 million in the year-ago period. The net profit of $309,000 or less than a penny a share for the 2009 compared to the loss of $1,949,000 or $0.03 per share for 2008.

The December 31, 2009 cash balance was $144,000 less than at December 31, 2008. This was primarily due to $792,000 that was paid to Inverness pursuant to our agreement of the 2008 -- December 2008 in which we agreed to amortize $1.01 million of liability to Inverness based on a percentage of their sales of our products beginning in 2009.

Based on Inverness' anticipated sales of our product in 2010, we anticipate that that liability mentioned will be fully amortized in the first part of 2010 thereby freeing up this cash flow used to extinguish the obligation to Inverness for other corporate purposes.

Also contributing to the cash decrease was a $675,000 Accounts Receivable balance that was outstanding at the end of the year. This amount has been paid in January 2010. And $400,000 that we invested in 2009 in new equipment and facilities primarily for our new assembly system that we took delivery of in February of 2010. Partially offsetting these cash outflows were our net income and non-cash expenses and receipt of a $340,000 license fee deposit from Bio-Rad laboratories, Inc. And now I'd like to turn the call back over to Larry. Larry?

Thanks, Rich. In 2009 Chembio achieved record revenues, record gross margin, operating income and cash flow including our first ever quarterly and full-year profit since we became a public company in 2004. This was obviously an important milestone in 2009, even though our revenues have increased every year since 2004, increasing at a compounded annual growth rate exceeding 30% over that period.

The results in 2009 are attributable to a few key factors. First, the $3.13 million or 148% increase in our rapid HIV test sales to our US marketing partner Inverness was a very was a very big factor. And this increase more than offset a $1.53 million or 21.6% decrease in our international HIV rapid test sales. The higher average selling prices in the US market for rapid HIV tests helped to produce a 39.3% or $1.24 million increase in our gross margin on product sales from $3.2 million in 2008 to $4.4 million in 2009.

These increased US market revenues reflect the continued expansion of the US rapid HIV test market into more hospitals and public health testing venues, a very good job done by our marketing partner Inverness and, of course, the excellent performance record that has now been firmly established by our two FDA approved PMA approved products since they've been introduced into the US market by Inverness in 2007.

The second big factor is the 93% or $646,000 increase in R&D contracts and grants to $1.34 million in 2009 from $694,000 in 2008 which increase more than offset the $278,000 increase in our R&D expenses as more commercial, governmental and non-governmental organizations entered into license and/or development programs with us related to our DPP technology as we reported during the course of last year.

The third factor is that we experienced a 392% or $494,000 increase in our DPP product sales which is attributable to our OEM agreements with FIOCRUZ in Brazil. These products were sold last year for use in evaluations and in connection with regulatory submissions made and to be made in Brazil for these products. Although there have been some delays in FIOCRUZ receiving the required approvals, which I'll describe further in a moment, we're still very optimistic about this and additional opportunities that we have with this organization.

The fourth factor is we received a 20% -- we achieved a 20% reduction, as Rich mentioned, in our SG&A expenses from $3.32 million in 2008 to $2.66 million in 2009. That decrease followed an 11.9% SG&A reduction in 2008 over 2007 and a 21.3% SG&A reduction in 2007 over 2006. As a comparison of our results in 2009 versus 2008 clearly indicates, we are much less reliant on the developing and emerging markets from which, until just the last couple of years, we derived the bulk of our revenues.

Given our US-based manufacturing and our decision to invest in creating and maintaining our FDA approved manufacturing facility we're having to be more selective in those emerging and developing world markets. We do have several opportunities in these markets. In addition to our contracts with Brazil and grants from the NIH, we have projects funded by and more pending with the Gates Foundation and other NGOs.

As we announced in December this year, we have the addition of the Battelle CDC pandemic influenza multiplex test development contract that we signed for $900,000 in December. In addition, I believe we have a very good global opportunity developing with our oral fluid HIV test.

As far as 2010 is concerned revenue growth could be realized from the following opportunities. First, increased sales of our rapid HIV tests in the US market as the total market and our product's market share increases. We do not expect another 148% increase from Inverness, but we'd happily take it.

Second, we may see this year the continued recovery of our business in Nigeria that began in the fourth quarter of 2009 due to the reinstatement of the testing algorithm that had been modified at the end of 2008 as we had announced at that time. And as I said, I believe we may even see initial sales of our DPP oral fluid HIV test in Africa toward the latter part of this year.

We believe that there could well be significant opportunities for this product in segments of the international market as we are the only competitively price oral fluid rapid HIV test that will be approved for procurement by the US government's [PEP-R] program and as compared with about three dozen now that only work on blood samples and that have saturated that segment of the market.

The third area of potential revenue growth in 2010 is the anticipated DPP product sales and license fees from our contracts with FIOCRUZ in Brazil. We've received purchase orders from FIOCRUZ for the three products pending regulatory approval for an aggregate of over $2 million. And we still have an aggregate of approximately $1 million in license fees that will be payable to Chembio if and when the products are approved.

However, these fees will not be paid and these orders cannot be produced and shipped unless and until the relevant regulatory approval is obtained in Brazil. And while these have been delayed, we believe that three of these approvals can occur still during the first half of this year, although there can been no assurance of this. The delays are bureaucratic in one case and possibly a technical issue on one of the products in another case.

Being one step removed from the regulatory process is a bit frustrating and we need to be patient as FIOCRUZ is seeking these approvals from their applicable regulatory agencies. FIOCRUZ, as you may know, itself is affiliated with the Brazilian government, which one would normally assume is an advantage, but lately that hasn't been the case.

Anyway, we would be more concerned if we did not have a long-standing relationship with this customer and a history of nearly $8 million of revenues from them over the last several years on our initial product technology transfer we did in 2004 through 2009. And they're also keeping us regularly informed.

The fourth area of revenue growth this year would be from the completion of the product development phase in our program with Bio-Rad Laboratories which would result in our recognizing the $340,000 license fee we received in 2009. That program is proceeding very well.

Fifth, a substantial increase in our R&D contract and grants primarily based on the $900,000 development program we entered, as I mentioned, with CDC and the Battelle Memorial Institute, as well as our having our first full year of the $2.9 million three-year NIH grant for leptospirosis we received in June of last year as we announced then.

Sixth, although not a revenue driver, we continue to be focused on further reducing our manufacturing cost and improving our productivity as our volume increases. Accordingly, the delivery last month of our automated assembly system, which Rich just mentioned, and which we invested over $300,000 in last year for automating our lateral flow and DPP product assembly should help us drive down our cost and thereby improve our gross margins further.

As we'll lower royalty and material costs for the peptides used in our HIV test as a result of our having bought out a license agreement last year, as we disclosed in our one as our quarterly filings last year. As will other ongoing initiatives we have in place to lower our material usage of scrap and improve our margins thereby.

Therefore I believe we can achieve strong revenue growth based upon the aforementioned assumptions and if achieved we believe that these would also result in our achieving higher gross margins, particularly if we further improve our product mix as we did in 2009.

We also expect to incur substantially higher regulatory costs this year in connection with the costs associated with the preparation of the regulatory submission for our new DPP HIV, syphilis and flu A/B antigen test products. With this pipeline of new DPP products this is a very exciting time for Chembio. I'm very optimistic about what we should be able to achieve in the US market beginning next year when we hope to launch all three of these products under Chembio's DPP brand.

Just this week we completed training at our first site where we will next week commence clinical trials related to our FDA PMA application for our DPP oral fluid HIV test. We've also made substantial progress in moving the syphilis test into the US FDA regulatory trial phase, having identified sites for the trial to begin during the second quarter of 2010. And we have made significant progress in completing development of our first DPP antigen detection test which is our flu A/B test.

There is a very large well-established market for these products in the US and globally, much larger than the rapid HIV test market in the US. So we think that this will be a very good first antigen detection DPP product for us to bring into the market.

So in closing, we anticipate that these unique point-of-care products will be markets that will be marketed directly by Chembio under Chembio's DPP brands will provide us with good sustainable long-term growth and that is the best way to build long-term value for our shareholders. And with that, thanks a lot for listening. I'd be happy to answer now a few questions. Operator?

(Operator Instructions). [Steve Rud], USIP.

A quick question for you. It somehow blew past me, when you were talking about Nigeria and Africa, the test we have, you said we're the only approved one. Can you tell us -- just flesh it out a little more?

Yes there are roughly three dozen rapid HIV tests that are approved on a procurement list for the PEP-R program. And all of them except for one are blood tests. The one that is -- an oral fluid test that is on the list now is the only oral fluid test in the US which is OraSure's product. We expect to be on that list very soon and OraQuick's product is priced much higher than the price that we intend to go in with in order to participate in this PEP-R program.

So, once we're approved on this PDP-R list, which we anticipate will be very soon, we expect that we have a real opportunity to participate in this market. Because we're seeing, through some studies that are being done, that there is really a significant opportunity for oral fluid testing, not only in the US but in the PEP-R program countries.

Got you, okay. And we're talking about these three new products on -- the HIV oral test, the syphilis test and the DPP antigen detection test which is for flu, right, (inaudible)?

That's correct.

Okay. And you were saying we're going to be marketing those under our brand. Are we thinking that -- maybe we're getting ahead of ourselves, but are we thinking that we'll be trying to sell that ourselves or are we going to be looking to Inverness or what's our -- I know you worked 25 hours a day, but I'm wondering how we get those out the door?

We have a plan that we'll be rolling out regarding what our marketing plan is on that. But we are planning on marketing it through Chembio DPP brand, yes.

Okay, so we'll brand it as our brand and maybe we've got somebody else who will help us distribute it and you'll figure it out and let us know?

Absolutely.

Am I right?

We have plenty of time, but we have a game plan.

Okay, terrific. Thanks again.

(Operator Instructions). [Scott Clark], private investor.

Congratulations, management as well as employees, on an awesome year. My question is -- it actually has two parts. Regarding Chembio in Brazil with FIOCRUZ, it was stated that there may be a technical problem regarding getting approval. Can you go into detail? Is that a technical on our end, is it on their end?

It's a -- it's a problem that I really can't go into the details of because we don't really have all the details at this point. So it would been really not something I would be able to discuss in any full way, so I'd rather not get into any of the details.

Okay.

Waiting to get some more information. But we have a very good working relationship with them. We've had technical problems in the past, it's part of being in this business, whether in the regulatory phase or in the market. And that's the kind of stuff that we live with all the time. In this case it's in the regulatory phase and we need to find out all the details and see whether it can be resolved. We can't tell you one way or the other at this point because we don't have a lot of -- we don't have as much information as we're going to need in order to make that determination.

Okay. My second question is regarding CE Mark in Europe. I was reading in your 10-K that you file that it seems like (inaudible) you will no longer be seeking the CE Mark. Which I feel is very wise considering that Inverness has already had the product out there. So since that is the case, what exactly do you -- what plans do you have regarding Europe?

Well, what happened over there -- it's a good question and we're still trying to make an assessment of that. The regulatory requirements in the EU have been transitioning over the last few years and our application and the data that we generated with our tests have kind of overlapped that transition. And so they kind of kept on moving the bar.

And so the reality is while there are pockets of opportunity in Europe, it's not a huge market for rapid HIV tests, nothing like what we have in the US and in some of these developing world markets. There are exceptions to that. But for example, you're right; Inverness does have a product I think it sells mostly in France. And there may be some other sales, I'm not that intimately familiar with that.

But, it's my understanding that OraSure has had their product approved in the EU and several countries within the EU for some years now. And I don't think that they've had much success in selling in Europe, as far as I know based upon the information that they report publicly.

So, it's not the end of the world for us in terms of what the lost sales opportunities are. And we're thinking maybe we wait until we have DPP ready to submit to EU where we can bring something more novel. So it's something that we're trying to assess and see exactly how much work is going to be required in order to meet the additional requests that have been made by the notified body that we work through.

Okay. Thank you so much.

(Operator Instructions). [John Ford], private investor.

Hi, guys. Three quick questions. The first one is, on the syphilis screening you have limited results. Can you give us any kind of a sense of -- we're just trying to figure out if this works or not. Do you know yet?

Well, what we know is that based upon the analytical studies that we've done it works. We have done a lot of analytical work and we've done that not just here at Chembio, but in collaboration with the CDC who we're fortunate to be working with because of the broad range of samples that they have available related to this disease, the different stages and so forth, active and inactive disease.

But we need to -- and there has been a limited study that we expected to have results from international and also that international actually includes one site here in the US. And in fact two of my colleagues from Chembio were at that site in Alabama this week. And we couldn't get access to the data, but we're optimistic that the product is working well.

But we really -- to be fair, we need to generate more data, we need to generate some significant data in the field before I can tell you that -- if clinical levels of the product is meeting the needs -- the specifications that we hope to make for the product.

Okay. Thank you. And then the other question is for the CE Mark HIV, you were asked for additional data. Can you give us any color on that?

I don't have the stuff in front of me, and it's --.

Actually, let me make it simple. What I'm just wondering is do you see problems there or is it simply a bureaucratic issue?

You know, to the extent -- one of the changes in the EU has been raising the bar for diagnostic tests that they have, basically characteristics equivalent to what is known in the industry as fourth-generation assays, which describes an [assay] that detects both antigens and antibodies.

And while OraSure's test, for example were talking about OraSure -- their test is only, like ours, an antibody detection test. They were approved, but I guess maybe they got grandfathered. But now the standard has -- it seems to have shifted to -- you don't have to have a fourth-generation test, but you have to have detection equivalent to that.

So, if in fact that is -- and there may be some samples that we're not going to pick up on our antibody detection test, in which case we may have a problem.

Okay. Thanks. And my last question, what's keeping you from being more aggressive with your over-the-counter products?

Well, there are two products that we have FDA approved today that because they are FDA approved for the professional market we could start the over-the-counter approval process or the additional phases of regulatory submissions that's required. However, while there's some possibility that we would move forward with those, we're more inclined to go forward with the oral fluid test in the over-the-counter market. And the requirement of FDA, as I just suggested with these two tests that are approved, is that you first need to be approved in the professional market.

So, the oral fluid test that we have is not yet approved in the professional market, that's what we hope to achieve by the middle of next year. At that time we have every intention of moving forward to the next phase for that product for this over-the-counter approval. But we can't start that until we get the professional market approval which we hope to have by the middle of next year.

Okay, great. That answers all of my questions. Thank you very much.

(Operator Instructions). [Steve Rud], USIP.

Larry, on the testing that we have to do to validate the three products, do we have the -- it's a little bit crystal ball, but I think your crystal ball is pretty good -- do we have the anticipated cash flow to manage that? I mean, what are we thinking is the cost here?

Well, it depends on how fast we go and how -- on how the revenue from Brazil and the other programs we have come in. So, we're going to manage that as we go and we'll see. We certainly have sufficient resources to get started on all of these. And but clearly we need to watch that and if we decide that we want to accelerate then we may need to look at additional resources, whether that be partnering or otherwise.

So, but right now that's not our intention. Our intention is to finance it all ourselves. And to hopefully match it with the operating cash flow that we generate. But we're keeping all options open.

Okay. All right, I guess a follow-up on that will come after Q1 when we see where we are in terms of cash flow for that. Okay, thanks very much.

You're welcome.

Thank you. Gentlemen, we have no further questions in queue at this time. I'd like to turn the floor back over to management for closing comments.

Okay, thank you very much, Operator. And thank you all for joining us and for your interest in our results and continuing your interest in our company. We look forward to if not before then having our conference call when we purport our first-quarter 2010 results. Thanks again and have a great day.

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