Chembio Diagnostics Inc (CEMI) 2010 Q4 法說會逐字稿

Greetings and welcome to the Chembio Diagnostics fourth-quarter 2010 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, Ms. [Bobbie Coco]. Thank you, Ms. Coco, 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 is Larry Siebert, Chief Executive Officer.

This morning, Chembio Diagnostics announced financial results for the year of 2010 and filed its 10-K annual report. These documents, as well as an updated investor presentation and fact sheet, may now all be viewed and downloaded by going to www.Chembio.com and selecting Investor Center.

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; 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 this live broadcast, March 3, 2011. 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, Bobby, and good morning, everyone. We are very satisfied, obviously, with our record 2010 audited financial results. They were record-breaking in every respect.

The Company recorded a nearly 21% increase in total revenues in 2010 versus 2009. Fourth-quarter 2010 total revenues of $5.67 million represented a 65% increase compared with the same period in 2009. These strong top-line results of course also produced record gross profits of over $8 million, and we recorded net income after taxes of over $2.5 million.

As pleased as we are with these results, I am most excited about our prospects for 2011 and beyond, as we really expect to see the benefits from our investment these last few years in R&D. But before I discuss some of the highlights of 2010 and my outlook for 2011, I would like to run through the full-year and fourth-quarter results and summary and, in doing that, pinch-hitting for my CFO, Rich Larkin, who unfortunately has been battling a brutal case of bronchitis during the last week.

So, product sales for the year ended December 31, 2010, increased 9% to a record $13.52 million from $12.37 million in 2009, which was the Company's previous record for revenues. Net product sales to Inverness, or Alere, for the year remained steady as compared with the year of 2009.

Also included in our 2010 product sales was $628,000 of DPP product sales, an increase of just 1% or $8,500 as compared to 2009. These sales were for two of the four products that we contracted for in 2008 with our Brazilian customer, FIOCRUZ.

Approximately $84,000 of these sales reflect products provided to FIOCRUZ to submit product for evaluation, laboratory and field studies, and regulatory approvals. The balance of that DPP sale to FIOCRUZ was of our HIV 1/2 Screening Test which was approved last year. Delays had occurred with FIOCRUZ pending certain of the regulatory approvals, though we believe these regulatory approvals will be achieved during the first and/or second quarters of this year.

The increased product revenues, combined with our R&D milestone and grant revenues, produced gross margin dollars that were $2.26 million or 39% greater than the gross margin dollars in 2009. R&D expenses, excluding the effect of the QTDP grant, which is a qualified year to discovery prior to Qualified Therapeutic Discovery Project grants under the new healthcare law that we participated in.

R&D expenses excluding that increased by $1.17 million or 41% to $4.05 million compared to $2.88 million for the 2009 period. The QTDP grant reduced research and development expenses in 2010 to $2.59 million net. The Company has nevertheless over this period increased its R&D expenses, as more products based on our DPP technology were validated for manufacture and enter the clinical evaluation and regulatory approval process.

The operating results also include $650,000 of clinical trial expenses that have been -- the trial has been ongoing in support of our FDA PMA submission to the FDA for our HIV 1/2 Screening Test for use with oral fluid or blood samples.

Selling, general and administrative expenses increased by $281,000 or 10.6% in the year of 2010 as compared to 2009. This was primarily due to the recording of $94,000 in Brazilian tax withholdings on the milestone payments and an increase in investor relations expense.

Operating income was $2.57 million in 2010 as compared to $0.32 million in 2009, an increase of $2.25 million. In addition, net income was approximately $2.51 million in 2010 as compared to $309,000 in 2009, an increase of $2.2 million.

The December 31, 2010, cash balance was $2.14 million, or $1.07 million more than the balance at December 31, 2009. This was primarily due to a slightly over $1 million in cash provided from operations. Also contributing to the cash increase was a $250,000 term loan from our bank HSBC. Partially offsetting these cash inflows was our investment in fixed assets.

The increase in accounts receivable at year-end was due to the Company making a large number of sales during the last month of the year. Since then we have collected over two-thirds of that balance as of this current date, March 3. In addition, on January 3, 2011, we made the final payment to Bio-Rad Laboratories under our HIV 2 license agreement in the amount of $875,000.

So that is the financial commentary. Going to some highlights that I would point out, one is the large product sales during the fourth quarter which represented over 65% increase over the same period in 2009. R&D revenues for the fourth quarter increased $70,000 to $456,000 from $386,000 in the same period in 2009.

The increased product and R&D revenues in the fourth quarter, together with the effect of the QTDP grant, combined to produce very high gross margin dollars that were almost $0.9 million or 54% greater than the gross margin dollars in the comparable period in 2009. I am now talking -- I am sorry -- about the quarterly results that are still in the financial highlights.

SG&A expenses increased by $140,000 in the fourth quarter or 21% as compared to the fourth quarter of 2009. This was primarily due to an increase in commissions for the increased sales made to Brazil.

Operating profit in the fourth quarter was $1.93 million as compared to operating income in the fourth quarter of 2009 of $218,000, an increase of $1.71 million. In addition, net income was approximately $1.88 million in the fourth quarter of 2010 as compared to net income in the fourth quarter of 2009 of $217,000, an increase of $1.67 million.

The QTDP grant had a significant impact on both operating profit and net income for the fourth quarter of 2010. For a more complete analysis of our 2010 full-year and quarterly results, please see the 10-K we filed this morning.

So those are the full financial results remarks -- I apologize for that -- that Rich would have delivered. And now I will just some additional remarks on the financial results; then touch on our development, regulatory, and OEM program; and then conclude with some remarks concerning the stock and the strategic transactions we have been considering.

As mentioned, our net income includes a large, unusual income item of nearly $1.5 million of QTDP grant, which offset our fourth-quarter and full-year 2010 R&D expense by that amount. However, as also mentioned, our net income also increased significantly over 2009 even after $650,000 of clinical trial expenses and the $275,000 of M&A-related expenses for the strategic opportunities, or a total of $925,000 between those two items, which are both expenses we did not have in 2009 when we had $300,000 in net income for the year.

So, with or without these unusual items, basically no matter how you slice it and dice it we had a very positive year from a financial results standpoint.

Our operating results in 2011 are likely to benefit from continued growth in sales to those customers and markets that we had during 2000 -- and participated in during 2010. Based upon the two product approvals we received last year in Brazil, as well as three additional product approvals that are still pending, we anticipate a significant ramp in the sales to that customer during the course of this year, building quarter by quarter. We have additional opportunities in other markets for our products that we are developing which, if realized, could provide additional revenues for our products.

Just to mention our cash position, working capital and shareholder equity is stronger than ever. And as a result of our payment of the balance due to Bio-Rad in January, our loans or debt outstanding only consist of some equipment leases and a small term loan. Our balance sheet is in great shape.

Turning to R&D and clinical programs first, last year we conducted and concluded two major funded research projects along with Bio-Rad Laboratories, and the other with Battelle Memorial Institute on behalf of the CDC. These projects were for the most advanced Multiplex products we have developed, based upon our DPP technology. This activity really enabled us to develop significant capabilities which will bode well for us for our future development efforts.

We delivered the completed product to Bio-Rad last fall in accordance with specifications, and we expect they will begin to commercialize the product first with a CE Mark by the beginning of 2012 under the exclusive license we granted to them for this field of use.

The Battelle Influenza Immune Status project called for delivery of initial prototype to them by the end of last year, which we did. We are waiting for the results of their evaluation of those prototypes and possible next steps for further funded development activity.

Next, we commenced clinical trials in the US nearly a year ago in support of our planned Pre-Marketing Approval, or PMA, application to the FDA for our HIV Screening Assay on our DPP platform for use with oral fluid or blood sample. We are now over halfway through with those clinical trials.

We just this week received the FDA's approval to file a modular PMA to them, which submission allows us to submit our preclinical and manufacturing information for their review while we finish collecting, compiling, and analyzing the clinical data. So the first, second, and third modules are being planned for submission to the FDA in the first, second, and third quarters of this year, respectively.

Third, we are working very hard to finally complete the internal processes necessary to commence clinical studies for our unique Screen & Confirm test for syphilis. Clinical studies are being scheduled for the second quarter of this year to support the FDA premarket clearance or 510(k), and I am very confident that we will stick to this schedule.

Turning to the FIOCRUZ programs, we have five active projects with FIOCRUZ, four relating to agreements signed in 2008 and one signed just in December, a couple of months ago, for syphilis, as we announced at that time. During 2010 ANVISA, their regulatory body, granted FIOCRUZ approval to market our DPP HIV 1/2 Screening Test as well as approval for our Confirmatory Test that we developed for that. We believe the Ministry of Health of Brazil is now seeking to have these products used in a new testing algorithm that is to be deployed nationally, and that this new algorithm will be implemented during the course of this year.

The other three products we believe are well on their way -- that are not yet approved, but we believe are well on their way toward approval, though it is difficult to predict the timing. Nevertheless, based upon our discussions with FIOCRUZ we believe there remains strong support for all of these products, and we are confident these approvals will be forthcoming.

As we announced just last week, we received a $2.9 million Phase II NIH grant for a tuberculosis test that we had developed in a Phase I prototype phase that was completed last year. The grant is effective March 1 and, along with other ongoing and potential new R&D grants and contracts, this will contribute significantly to covering our operating expenses while also obviously advancing the specific research and development aims and our other exciting grant and contract R&D opportunities.

Turning to finally the stock and potential strategic transactions. As some of you may have noticed, on February 24 and since that date, our stock has not been quoted on the OTC Bulletin Board. It is now being quoted on the OTC QB, which is the second of three tiers of the OTC Market Groups.

The change has nothing to do with Chembio or the quality of our Company. It is solely related to the desire of the market makers to save costs related to providing quotes on the OTC Bulletin Board, which they are no longer doing. For price and volume information regarding Chembio on the OTC QB marketplace, please visit otcmarkets.com and punch in the CEMI symbol.

We will make a determination as to what market we believe is best for our stock considering the relative cost, liquidity, and market strategy, and so forth. But for the time being we are on the OTC Markets QB tier.

Regarding the strategic transaction, in the third-quarter 2010 filings we informed you of certain expenses, about $190,000, that we determined were material to the third-quarter results relating to certain strategic opportunities that we had been considering at that time, one of which we continued to consider through the fourth quarter and into 2011. However, despite a significant investment of time and effort by our management, the Board of Directors, legal counsel, and other professionals, this investment of time and effort did not result in any agreement being concluded.

Obviously we invested this time and effort because we believe the strategic opportunities, if realized, could have had the result of significantly increasing shareholder value. So, given our investment of time and expense I was, of course, disappointed that neither one of those transactions could be finalized, given the amount of time and effort and expense incurred.

They are called strategic opportunities because they address strategic objectives of one or both of the parties in the discussions and because if completed would have or could have resulted in our investors realizing the value being created in Chembio more quickly, if not as fully as we might have believed that could have been created with more time. Of course, we believe that even more strongly now.

We never at any time since last July, when the first of these opportunities first materialized, engaged an investment banker for the purpose of leading a Company-initiated process for the sale of the Company. This was a process initiated by one company, and it was a process which we were not seeking to be engaged in. But what I can tell you unequivocally is that a few things have come out of this that are of immense comfort and value to me, not only as CEO but as a substantial investor in this Company who also happens to be involved in the management and Board of the Company.

First, we have an outstanding organization, and by that I mean the people in our Company. My confidence and pride in and my optimism for our organization is quite frankly at an all-time high. I have never been more excited about the opportunity we have to grow and bring this Company to the next level. And I am not just saying that for any other reason except that I really believe it.

Second, we learned a lot through this process and are unquestionably a better Company than we started because of this process.

Third, I believe ever more strongly, and notwithstanding the already very strong results of 2010, that the Company is approaching a significant inflection point that should and likely will result in significant value creation for our shareholders. In that regard I suggest you see our new PowerPoint presentation that we filed on our website today.

Therefore, if we believe more strongly that we are approaching a point of significant value creation, rather than continuing the process we were engaged in, we believe our shareholders are now best served by our focusing on bringing the products that are in our regulatory and R&D pipeline through to commercialization, to ensure we arrive at this inflection point and that we arrive there expeditiously.

Nevertheless, while we are not soliciting or engaging anyone to solicit a strategic transaction on our behalf, we are and we will continue to consider specific strategic opportunities where we believe that such an opportunity would increase or could increase shareholder value. Beyond this, the details of the process, the parties, the terms, and the laundry list of explanations and speculations as to why an agreement was not consummated cannot and will not be discussed any further, as we don't believe it would be productive or helpful -- and certainly not without disclosing confidential information, which I obviously cannot do. So I'm afraid I cannot provide any further information other than what I have already provided on this subject.

With that I want to say again that I have never been more bullish for the prospects of our Company than I am now, and to thank you for your support, and now open it up for your calls and questions.

(Operator Instructions) David Woodyatt, Keeley Asset.

Yes, the reference to the inventory drawdown at Alere, do you have good reason to believe that that drawdown is now complete?

Oh, yes. When you say inventory drawdown, really -- I don't recall exactly what I said or is that something that you saw in the 10-K?

No, in the press release it says inventory level changes. Sale of your products were up 25% but --

Oh, right, right, right. Yes, sorry. So at the end of 2009, we shipped product that really they had not expected for delivery until the first quarter of 2010. So to some extent that distorted what their actual sales were as compared with ours.

Yes.

So yes, we've -- I think we are likely to see --

Okay, so that phenomenon really completed early in the year?

Yes, absolutely.

Okay, and their inventory levels now are normal?

Yes, absolutely. Maybe a little bit below normal.

Right. So am I right in assuming that you expect at least a reasonably good gain in sales through them in 2011?

Yes, they have continued to register increased sales at their level or quarter after quarter from the beginning, just about.

Yes. Okay, thank you.

Brian Marckx, Zacks Investment Research.

Hi, Larry. Congratulations on the quarter.

Thank you, Brian.

One follow-up to the Alere question. Can you give us a little bit of insight into what is the demand? What is behind the demand for the lateral flow products in the US?

Well, there seems to be increasing implementation of HIV testing guidelines that were issued by the CDC. I talk about that just about every quarter because it continues to have an impact.

Remembering that CDC recommendations that were issued way back in 2006 -- coincidentally like the same week that we announced our agreement with Alere -- were only recommendations. And we all know how long legislative processes in states can take.

These recommendations had to -- have been implemented slowly but surely across the country. So as those recommendations are implemented, that ramps up the demand for HIV testing and for more testing being done at the point-of-care, where there is so much value from a public health standpoint of getting a rapid result and being able to refer patients to treatment or counseling or whatever the case may be.

So, we are seeing continued demand and I think also very good success that Alere is having with our product in particular. So notwithstanding a lot of challenges from a budgetary standpoint, both in individual states as well as federally, there is a continued funding for these testing programs. In fact, I believe the CDC grants are being renewed for this current fiscal year. So we anticipate continued gains in this line of business that we have.

The international sales for the lateral flow products were really strong this quarter as well. Is there -- is that more PEPFAR activity, or is it more than that?

It's a combination of PEPFAR, primarily a combination of PEPFAR and the Global Fund, which is the UN counterpart that actually 20% of the PEPFAR funds go through. But the Global Fund to stop HIV, TB, and malaria is UN member countries, and it has its own fund in addition to the 20% that the US provides, which is the most of any country.

But both those, and it's in specific countries where our product has been selected as one of the tests being used in the national testing protocol. So in case of the international markets last year, there was a significant increase in the funding in the countries where our product has been selected.

We think that we can sustain that level of overall revenues this year, although the distribution of it may be different. I am not providing a forecast here; but we think that maybe some markets we won't have as much as we had last year, but other markets that we are -- including some that are not PEPFAR funded or Global Fund funded -- will help to offset some of that maybe fallback to more normal levels.

For 2010 it was pretty choppy. The first half of the year was significantly less than it was in the second half of the year. Do you expect that choppiness in 2011? Or can we expect maybe the level that you got in the second half of 2010 to flow through the full year of 2011?

Well, again, we don't provide forecasts. I can tell you that we believe our product sales during the first half of this year will easily exceed those of the first half of last year.

Having said that, our experience -- the product sales during the first half of last year were relatively weak. But having said that, our experience has been now for a few years that the national lateral flow product sales tend to be -- flow more toward the latter part of the year.

Yes, okay.

But it's more even with our US business. And now that the inventory -- as the other gentleman was pointing out -- situation with Alere has been resolved, I do expect that we will have relatively better sales to Alere during the first half of this year as compared with last year.

Yeah, that's good. Can you just give us a little bit more background on the DPP HIV US trial and how the module filing works? So if you get a third module filed in Q3 2011, I believe the press release said, what is the best-case scenario, do you think, for approval and launch timeline?

The best case is early 2012. I mean there is a theoretical possibility of before the end of 2012, but in all likelihood the realistic best case is early 2012, let's say by the end of the first quarter. That would be a very good case, but possible.

Therefore, assuming immune CLIA waiver is right in line after that, that we could see a launch toward the middle of 2012.

Okay. So the module filing process is FDA gets started as soon as you file -- make the first module filing. Is that right?

We sent an application a few weeks ago to the FDA requesting the modular submission approach. We just heard I think Monday that they have approved that approach. That gives them more time to review those modules that we submit.

I don't believe that by doing that they guarantee you that they are going to turn it around faster. But it is the experience of companies that do it that way that they do that. Because they appreciate, for lack of a better word, the fact that you are providing them more time to review certain components of your submission.

Yes, yes. Okay. This is my last one. The regulatory process in China, it looks like the syphilis test is the first one that is potentially going to be there. Can you talk a little bit about what the regulatory process is expected to be in China?

It is not a regulatory submission, although the data could well be used for regulatory submission. It is an evaluation that is a very important evaluation that we were invited to participate in by the WHO, in conjunction with the collaboration that they have with the CDC, who we have collaborated with in turn on the development of this product.

So the idea is -- and we also mentioned, I don't know if you saw it, that our patent was recently issued in China. Our DPP patent. So the idea is to first get the evaluation completed and then we will start to look at the submission and the regulatory process. But I can't really talk intelligently about that right now.

Yes, okay. Okay. Thanks, Larry. I appreciate it.

(Operator Instructions) [Joseph Leblanc], Gilford Securities.

Hi, congratulations on a great quarter, guys.

Thank you.

I'm pretty excited about the future of the Company, especially this year and moving into next year. I was kind of curious, though, with the stock price where it is at around $0.50, do you envision any sort of reverse stock split or anything like that in the future?

Well, we wouldn't take anything like that off the table, but I am not telling you that we have current plans to do that. I think these kinds of discussions need to take place in connection with our considering what markets we want to trade our stock in and other considerations.

But as we continue to have a very optimistic outlook for our short, medium, and long term, we clearly want to consider getting into a different exchange. I don't know that we would do it, although anything is possible. I don't think we would do it just to do it without also getting onto NASDAQ or AMEX or something.

Okay. Then just maybe a follow-on or a side note to that. I am a huge believer in investor relations and on non-deal roadshow for companies this size in getting the word out. Do you folks have any immediate plans to hire a good IR firm and get the word out on the Street on the story?

Because it is a good story. When I look at the trading volume it is kind of light, and I think a good IR company can take care of that.

Well, we will continue to focus on developing the story and getting the word out. We do work with an investor relations firm called The Investor Relations Group in New York.

Oh, okay, that's probably -- I apologize then; that is how I probably came -- oh, that is correct. That is how I came across you guys.

One other point then I would like to make. Because I remember meeting you folks inside Gilford and the story seemed great. And then today on the conference you mentioned that $192,000 I guess expenditure on some lost deals and so on and so forth.

But why the emphasis on explaining all of that? It seems de minimis in nature. I'm just curious. Did I miss something somewhere along the line in this story?

Yes, I appreciate your point. I think that what happened was that when we -- that $190,000 was incurred during the third quarter of last year. And our third-quarter results net of that amount was a profit, if I recall, during the third quarter of about $170,000.

So it wasn't de minimis relative to our results at that time. So we needed to disclose it for that purpose, because it was material to our overall results during that quarter.

Okay, all right. I got it. Thanks a lot. Congratulations again.

Thanks again.

There are no further questions in queue at this time. I would like to turn the call back over to management for closing comments.

Thank you very much, operator. We appreciate your interest and support in Chembio Diagnostics and look forward to providing you with further updates as we go through the year. Thanks very much.

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