Chembio Diagnostics Inc (CEMI) 2011 Q1 法說會逐字稿

Greetings, and welcome to the Chembio Diagnostics first-quarter 2011 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. 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 are Larry Siebert, Chief Executive Officer; and Richard Larkin, Chief Financial Officer.

This morning, Chembio Diagnostics announced financial results for the first quarter 2011 and filed its 10-Q quarterly report. These documents, as well as an updated investor presentation and fact sheet, may now 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 email 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, May 5, 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, Bobbie, and good morning, everyone. Thanks for joining us, and thanks for your interest in Chembio's first-quarter 2011 results.

Supported by a 77% increase in our gross margin as compared to Q1 2010 and record cash inflows, we were able to substantially accelerate our clinical and development investments during the first quarter, retire $875,000 of debt, and still increase our cash balance to its highest level in over 3 years.

The 7-fold increase in clinical trial expenses to over $450,000 in the first quarter as compared to $55,000 in Q1 of last year is what created a small loss in Q1 that was about equal to our net non-cash expenses.

Obviously, we believe making this investment is critical. Nevertheless, I believe we will still produce good profitability in 2011 even as we continue this increased level of investment in our future.

During the year to date, we've already achieved several important objectives including 2 more product approvals in Brazil, the filing of our first PMA module for DPP oral fluid HIV tests, and our being awarded another $3 million, 3-year Phase II NIH grant. This one being for rapid point-of-care test for active pulmonary tuberculosis utilizing our patented DPP technology.

I have a few more specific comments on these and other activities, recent developments, and our outlook shortly. But first, I'd like to turn the call over to our CFO, Rich Larkin, to go through the first-quarter financial results in some detail. Rich?

Thanks, Larry, and welcome, everyone. Our total revenues were $3.64 million for the 3 months ended March 31, 2011, which compares to total revenues of $2.78 million for the 3 months ended March 31, 2010, a 30.6% increase.

Product sales for the quarter ended March 31, 2011, increased by 36.1% to $3.02 million from $2.21 million in the same period of 2010.

Net product sales to Alere for the first quarter increased by more than $0.89 million to $2.06 million, or approximately 77% as compared to $1.16 million in the same quarter of 2010.

R&D, milestone, and grant revenues increased by $45,000 and this includes the milestone revenue of $305,000 from FIOCRUZ for the approval of one of the products. In addition, we had royalty revenues of $29,000 from our 2004 technology transfer agreement with Bio-Manguinhos.

Our gross profit margin for the first quarter of 2011 was $1.93 million, an increase of 47.5% from $1.31 million in the same period of 2010.

As a percentage of total revenues, gross profit margin in the 2011 period was 53% as compared to 46.9% in the same period of 2010. The increased sales to Alere along with the recognition of milestone revenue combined to produce this gross margin improvement.

Product gross margin increased by $0.57 million or 77%, and that's $1.3 million versus $0.74 million over the comparable period in 2010.

Our R&D expenses increased significantly by $489,000 in the first quarter of 2011 as compared to the same quarter in 2010.

Our investment at the clinical trials was primarily responsible for this increase, which increased by over $395,000 over the 2010 period. Increases in wages and materials required to service development contracts and grants and internal development programs also contributed to this increase.

Our selling, general, and administrative expenses increased by about $114,000 or 17% in the first quarter of 2011, as compared to the first quarter of 2010. This was primarily due to commissions and taxes on the Brazilian milestone event. The details of this category are reported in our 10-Q.

Our operating loss was approximately $139,000 in the first quarter of 2011, compared to an operating loss in the first quarter of 2010 of $156,000, an improvement of $17,000. However, the investment in clinical trials of $452,000 in support of our FDA PMA for our DPP HIV 1/2 test was primarily responsible for the loss experienced in 2011. And we feel that this investment will provide future benefits to Chembio as have the clinical trials we expended on our 2 currently FDA-approved tests.

In addition, the net loss of approximately $142,000 in the first quarter of 2011 as compared to a net loss in the first quarter of 2010 of $156,000. Again, another improvement of $14,000.

On March 31, 2011, our cash balance was $2.8 million, or $0.66 million more than as of December 31, 2010. This was primarily due to $2.23 million in cash provided from the collection of accounts receivable, and partially offsetting this cash inflow was the license payment of $0.88 million.

The only material indebtedness that is now on our balance sheet is a 5-year term debt facility we entered into with HSBC last year, which has a total balance of approximately $225,000 as of March 31, 2011.

I also want to make mention that we reported in our filings this morning that last week about 500,000 warrants were exercised at $0.40 per share for cash, resulting in approximately $200,000 additional cash to the Company, thereby further strengthening our balance sheet.

Currently, approximately 1.8 million warrants remain at an average exercised price of $0.50. Almost all of these will expire this October.

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

Thanks, Rich. I'd just like to make a couple additional comments about some of our recent developments and the outlook for the year, and we'll then summarize the status of our clinical development programs.

We're now manufacturing for confirmed orders for all 4 of the products now approved in Brazil, 2 that were approved last year and now 2 already this year. And we look forward to providing an update of our anticipated 2011 shipments to FIOCRUZ in Brazil.

I can say that we're very pleased with the amounts of these orders. They're consistent with our expectations and the contracted for amounts. I expect to provide an update once we have more certainty as of the timing of our anticipated shipments of these orders and what we can expect throughout the balance of the year. I can say our manufacturing team is very busy. They have what I could only call a good [progress].

Overall, based on the purchase orders and forecasts we have from FIOCRUZ, from Alere, and other key current and potential new customers, and also based upon our existing contract development and grant revenues, I believe we are poised to achieve significant total revenue growth this year, as well as gross margin improvement.

We believe our anticipated growth in product revenues in 2011 is very likely to more than offset an anticipated reduction in our 2011 non-product revenues, although there can be no assurance of this.

We also believe that the gross margin increases, if realized, together with our cash on hand, will be more than sufficient for us to fully fund all of our budgeted clinical development programs for our Chembio-branded DPP products.

The extent of our revenue and gross margin growth and the cost and timing of our R&D regulatory and clinical programs will be the primary determinants of whether or to what extent we will generate profits after these expenses. We do believe these expenses will be significantly increased as compared with the comparable period in 2010, as what's evidenced in our first-quarter 2011 results.

I would want to remind you also that in addition to the reduced non-product revenue that we anticipate in 2011, we also anticipate the non-recurrence of the QTDP grants, which, notwithstanding the use of the word grant by this program, is recognized or was recognized under GAAP principles in our 2010 audited financial statements as a $1.467 million reduction in our 2010 R&D expenses, all in the fourth quarter.

Accordingly, our comparisons of our 2011 results for the results of 2010 will be after adjusting for this $1.467 million of QTDP, quote-unquote grants, which were expense reductions in our financial statements recognized in 2010.

Now a brief summary of our clinical developments and regulatory activities. First, as we recently reported, our DPP canine leishmania rapid tests was approved by Brazil's Ministry of Agriculture, Livestock and Food Supply, known as MAPA.

As we just reported this week, FIOCRUZ also received approval from ANVISA for 1 of the 2 DPP syphilis tests we have under contract with FIOCRUZ. And we've already received the purchase order for this product.

We have now collected, in terms of our DPP HIV clinical in the US, over two-thirds of the clinical data that is required for submission of this product to the FDA. And we already began submitting the FDA PMA application by using the modular PMA approach, and we announced that a few weeks ago.

Finally, we're also awarded a 3-year $2.9 million Small Business Innovative Research or SBIR Phase II grant from the United States National Institute of Health to continue development of a simple, rapid, accurate, and cost-effective serological tests for active tuberculosis that could be utilized in resource-limited settings.

Also, our initial clinical site for our DPP Syphilis Screen & Confirm Assay for US approval via 510(k) clearance will be underway soon during this quarter. And we also anticipate receiving data from the evaluation that's been ongoing in China very soon. In fact, we just got word last night that the evaluation is proceeding very smoothly. And we've made very good progress in other development projects, primarily our FLU A/B Antigen Detection Test and our Hepatitis C or HCV test.

Finally, we're beginning to recruit personnel in order to establish our commercial organization, initially expanding our licensing contract development of our patented DPP technology and also expanding our international distributions. And ultimately, to establish our US-based direct-selling organizations as our new products are approved or cleared for marketing.

So with that, thank you for listening, and we're happy to take some questions.

(Operator Instructions). Brian Marckx, Zacks Investment Research.

Hi, Larry. Can you talk a little bit about the Alere sales in the quarter? They're up very strong. I know there were some inventory destocking in late 2010. Can you just give us a little bit insight of how much the strength was based on destocking? And then was there increased demand outside of that?

Well the demand from Alere has clearly increased. They, as I've said, repeatedly, not withstanding the gyrations, which have been modest, but there are swings from quarter to quarter. They've racked up sales increases every quarter to their customers since we started with them.

So they've continued to penetrate the market. That's what's happening. They're making inroads in additional states. There was more funding as we talked about when we reported our third quarter -- I'm sorry -- our fourth quarter a couple of months ago with our 10-K. The sales, if I recall, in the fourth quarter, were about the same level as this Q1 amount, with about $2 million. So it's really significant - it's really on par with the rate that we've been at for the last several months. But clearly, it is a significant increase versus Q1 of last year.

And I would remind you also that in Q1 of last year, we had shipped some product in late December of '09, which makes this comparison now more favorable. Everything comes back one way or the other eventually.

Yes, okay. And just one quick one on DPP sales to FIOCRUZ. How much more can you comment on how you see the rollout going throughout 2011 for the various products that have been approved?

So the last 2 years, we've had $600,000 of DPP sales. All of those were to Brazil. The first in 2009, it was all product that was being used for evaluations and submissions. And then in Q4 of last year, it was almost all the HIV oral fluid test, the DPP HIV test, which we shipped in December.

We have now 4 products approved. We have at our presentation, which we've updated but these numbers haven't changed, the minimum procurements that they need to make of each one of these products in order to fulfill the requirements of the technology transfer.

And so they are well on their way toward meeting those commitments over the period. I'll give an update on the exact numbers, once we have a better feel as to when we're going to be shipping, but the outlook is very positive.

And most importantly, the demand for these products is there, not from FIOCRUZ, but from their one and only customer effectively, which is the Ministry of Health in Brazil, which is -- they're affiliated with. They're part of Ministry of Health.

So we're very encouraged, the collaboration has grown tremendously now after a somewhat of a lull in the last couple of years after our initial collaboration which was extremely successful. But then we signed 4 contracts in 2008, and then this syphilis one just in December of last year, and we've been waiting for this to happen for some time, and it is happening. So we're looking forward to reporting those numbers but I don't want to get into any specifics at this time.

Okay. All right. Thanks a lot, Larry.

(Operator Instructions). [George Marshall], Private Investor.

Could you give a ballpark time frame approval of syphilis FDA and HIV FDA? And then also an update on Battelle, what's going on there?

Sure. We anticipate -- on the syphilis, we haven't started the clinical trials yet, but we plan on starting them soon in the first site, we're finalizing the contract for, so that we can start.

And so if we are able to complete the clinical trials over the next several months, then we should be in position to submit to the FDA sometime probably during the fourth quarter that would get us through the FDA, assuming it goes relatively smoothly, by early to middle of next year.

Same for HIV, although it's a different kind of approval. It's a PMA, which means that the FDA has 180 days to respond once the package is complete. Although the expectation is on a modular PMA, that turnaround is substantially reduced, since they will have had the period leading up to the final submission of the clinical data to review the first 2 modules.

So we've submitted the first module, we'll be submitting the second module sometime over these next couple of months, I believe. And then the clinical data is well on its way towards being completed, so that by around late summer, August, September, I believe, we'll be able to submit that.

So I think the best realistic case is late first quarter of next year, and realistically, probably more towards second quarter. But we know how these things can change, but that's what we're operating under. Does that answer that question for you?

Perfect. Thank you. How about Battelle?

And then on Battelle, we have now completed the main development work. They just actually ordered some additional evaluation materials from us, some prototypes, which they're paying for additionally. And so that's as much as I can tell you under that, the program is -- the evaluation is ongoing. But I don't have any more insight in terms of timing, demand, approval. I have no insight on that at this point.

That's perfect. One follow-up, if it's okay?

Okay, go ahead.

OTC for HIV, any progress there?

Well, for the DPP oral/fluid HIV test, we can't even start, for all intents and purposes, if there's something we can do until we have the professional market PMA. So for that product, we're well away from even beginning that process. Well, it's I mean, not that far. We're a lot closer than we have ever been, but we're still approximately a year away, assuming we meet the timetable I just outlined to you.

Perfect.

Yes. So that's that. Okay?

Thank you.

You're welcome.

[Glenn Mathis], Private Investor.

Hello to you on the team. Congratulations on all of these approvals coming through.

Thanks, Glenn.

Sure. I've got a quick question, Larry. So as I was quite surprised as to how quickly the syphilis test got approved with FIOCRUZ. And I just wanted to see if you can shed some light in terms of if it was a different process that it went through? And how would FIOCRUZ be using the syphilis, the one that got approved, how would they use it any differently from the Screen & Confirm test, which is still awaiting approval? So my question is really in terms of the level of interest in each of these different tests.

Okay, understood. So the reason why -- I mean, first of all, the tests performed very well so I will say that some of the reasons that we had delays with FIOCRUZ before were not their delays, they were some resubmissions that we had to do, whether it was documentation, or additional evaluation materials, but that's one reason. So it's not so much that that was quicker as that we were slower in some of the others, A.

B, there was a significant emphasis put on syphilis eradication by global public health organizations such as the WHO, not only for Brazil, but also in China, which is how we ended up having our product evaluated there.

So there's a significant increase and there's really a need to implement a screening program there. So the demand was there from the Ministry of Health. It was determined to be a priority program. So we worked very hard -- our entire team here worked very hard hand-in-hand with the folks at FIOCRUZ in order to provide them with all the documentation and evaluation materials very quickly, even before we announced the signing of the contract last year. So there was some time and work involved before we actually officially had a contract to announce. I should add that.

All right. That's great. Thank you.

Yes, and one other question. Sorry about the --

Yes, on the Screen & Confirm test.

The advantage of the Screen & Confirm is that it will differentiate active infections from those that are past infections that have been previously treated which the treponemal-only tests, ours, and the many others that are provided by the host of other suppliers, only detects the treponemal antibodies which is just the syphilis-specific antibody. So it doesn't mean that you have an active infection, but the emphasis was so strong to start the screening program that they wanted to start with this test first because it was what we had available for them at that time --at this time.

Got it. Thanks.

Yes.

(Operator Instructions). There are no further questions at this time. I would like to turn the floor back over to Management for closing comments.

Okay. Thanks, Stacey. And thank you all for participating in the call. And we very much look forward to our Q2 results, which will be at around early to mid-August. Thanks so much.

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