Chembio Diagnostics Inc (CEMI) 2011 Q4 法說會逐字稿

Greetings, and welcome to the Chembio Diagnostics fourth 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, Susan Norcott of Chembio Diagnostics.

Good morning. This is Susan Norcott 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 2011 and filed its annual report on Form 10-K with the SEC. 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 me, Susan Norcott, or e-mail me 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 day of this live broadcast, March 8, 2012. 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, Susan, and good morning, everyone. Thanks for joining us.

2011 was a great year for Chembio, one in which we made significant progress in a number of areas key toward building sustainable growth Company. In addition to posting record product sales, we expanded our gross margins, strengthened our balance sheet, invested in and made important advances to our product line, all while maintaining profitability.

We're pleased to report that 2011 total revenues increased 16.1% to $19.39 million, and this is up from $16.7 million in 2010. We also reported net income for the year of $6.21 million, or $0.09 per diluted share; and this is up from net income of $2.51 million, or $0.04 per diluted share in 2010. These net income figures include the reversal of $5.16 million in deferred tax asset valuation allowance in 2011, and the effect of $1.47 million in qualified therapeutic discovery project grants in 2010. Since we became profitable in 2009, we have increased product revenues by more than 40%, to $17.4 million in 2011, and we have increased gross profit by 60% to $9.4 million in 2011.

Moving forward, we are confident that we will post another strong year with substantially higher revenues for the first half of 2012 compared with the first half of 2011. We have great optimism for the financial outlook for all of this year, which we believe will conclude solid gains in revenue and operating income while as compared with 2011.

I will have a few more specific comments on our 2011 activities and recent developments, but before I do that I will now turn the call over to our Chief Financial Officer, Rich Larkin, to go through the 20711 financial results in some greater detail. Rich?

Thanks, Larry; and welcome, everyone.

As Larry mentioned, total revenues were $19.4 million for the year ended December 31, 2011, a record for the Company; which compares to total revenues of $16.7 million for the year ended December 31, 2010, a 16.1% increase. The Company had a 28.9% increase in net product sales during the year compared with the comparable period in 2010. This resulted from $1.9 million, or 36.5% increase in sales to Alere, our FDA-approved HIV test for marketing in the US, to $7.2 million; and a $3.6 million increase in sales of our DPP products, all to Fiocruz in Brazil, to $4.7 million. The approximate $3.9 million increase in net product sales for the year was partially offset by a decrease of $931,000 in our R&D milestone and grant revenues, and a decrease of $292,000 in our license and royalty income; again, as compared to 2010.

The increased sales to Alere and Fiocruz, along with higher sales to Mexico and Asia, substantially outpaced the decrease in sales to Africa, and combined to produce a 51.1% increase in product gross profit. It was $2.5 million as compared to the year of 2010. The product gross margin increased by almost six percentage points, from 36.3% in 2010 to 42.6% in 2011. Overall gross margin was 48.4% for 2011, compared with an overall gross margin of 48.5% for 2010. Our research and development expenses increased to $4.88 million from $2.6 million in the 2010 period. This includes an increase of $590,000 in clinical trial expenses; and I would also like to note that the 2010 number includes a reduction or credit for the $1.47 million in QTDP grants we received in that year.

Selling, general, and administrative expenses increased in 2011 by $484,000 over 2010. An increase in commissions due to higher DPP product sales to Brazil, as well as increases in wages, share-based compensation, and other expenses, partially offset by decreased professional fees, was responsible for this increase. Our operating income was approximately $1.09 million in 2011 as compared with $2.57 million in 2010. Again, included in the 2010 results is $1.47 million of QTDP grants that were recorded as a reduction of R&D expense. The Company recorded net income $6.21 million, or $0.09 per diluted share, for 2011; and this compares with net income of $2.51 million, or $0.04 per diluted share for 2010. Net income for 2011 included the reversal of $5.16 million in deferred tax asset valuation allowance, and the 2010 results included the effect of the QTDP grants.

At the end of the year, the Company had cash and cash equivalents of $3.01 million, as compared with $2.14 million as of December 31, 2010. The increase includes cash received from change in receivables of $953,000, and a $734,000 increase in accounts payable and accrued liabilities; which were partially offset by increases in inventory of $951,000 and a payment to Bio-Rad of $875,000 for a license fee which was paid in January of 2011. In addition, the Company received $288,000 from the exercise of options and warrants throughout the year. The increased cash from operations in 2011 was also attributable to non-cash expenses totaling $622,000, which primarily came from depreciation and amortization expense.

For additional information, please refer to our Form 10-K filed with the Securities and Exchange Commission this morning. Now I would like to turn the call back over to Larry. Larry?

Thanks, Rich.

As I mentioned earlier, in addition to the solid financial performance we posted for 2011, throughout the year, we also made important advances in product developments. We've enrolled 98% of the subjects in our 3,000-patient clinical trial for US Food and Drug Administration approval of our DPP HIV 1/2 assay, and expect to complete enrollment as soon as possible. We began submitting the pre-market approval application to the FDA using the modular PMA option. We submitted module 1, containing the manufacturing information, and module 2, containing non-clinical data, last year.

We remain satisfied with the results to date, and believe they will support product performance that meets or exceeds requirements for PMA approval on oral fluid, finger stick, whole blood, venous whole blood, serum, and plasma samples. Moving forward, our plan is to submit module 3 to the FDA as soon as possible. We expect a PMA decision by year end. With a positive decision, we would immediately thereafter apply for CLIA waiver, which is expected to take approximately three months to be granted after application.

Also, during 2011, we made significant progress in our collaboration with Fiocruz. Notably, we received notification from Fiocruz, which is the Oswaldo Cruz Foundation in Brazil, that our DPP Syphilis Treponemal screening test, as well as our DPP Leptospirosis test, each was approved by Brazil's National Health Surveillance Agency, or Anvisa. In addition, our DPP visceral canine Leishmaniasis rapid test was approved by Brazil's Ministry of Agriculture, Livestock, and Food Supply, or MAPA. This is the first diagnostic product that Fiocruz has successfully submitted for approval to MAPA in Brazil. We look forward to successful launches by Fiocruz of these products, which is already well underway. We expect this collaboration to continue to drive revenue growth throughout this year.

Also, as a result of our receipt of a CE Mark for the syphilis test in the third quarter of last year, and our business development efforts in the fourth quarter, we've now established some European distributors for this product. In the US, we're still working through these issues related to an acceptable agreement of our test results to the legacy RPR test results, which is the reference currently for the non-treponemal marker on our dual-marker test. As mentioned, we're already manufacturing large volumes of a visually-read treponemal-only test for Brazil, which has outstanding performance.

Also, we've made progress toward completing the requirements for submitting an investigational device exemption application to the FDA with regard to our Sure Check OTC HIV rapid test; that is for consumer self-testing. In addition to the making the progress towards regulatory path for commercialization, we are actively working with public health agencies to begin studies in 2012 to support this product. We're one of only two companies that has a practical opportunity to participate in this emerging market, which market should see some significant activity this year if our competitor, OraSure Technologies, receives, as expected, over the counter approval for their oral fluid-only OTC test. We believe there may well be significant benefits in our being second to this brand-new market, both with respect to product features and packaging, as well as performance specifications and marketing strategy.

We're also very excited about some of the new products and potential collaborations we are working on that are enabled by our patented DPP and related technologies. It is clear that the funded agreements we've had or have with Bio-Rad Laboratories, Fiocruz in Brazil, the CDC and Battelle, and the ongoing Phase II NIH grants, that are all based on our DPP technology, along with our nearly completed clinical trials for our oral fluid HIV test, as I just mentioned -- all continue to validate our innovative technology, and they are now opening up new opportunities for the development of novel products of our own, as well as product in collaboration with others.

We believe we're well positioned to successfully translate at least some of these opportunities into new revenue streams for the Company and our shareholder in the years to come. For example, during the first quarter, we held meetings with a global pharmaceutical company regarding a potential collaboration for developing assays using our DPP technology for the detection of hepatitis C, or HCV. Based on our demonstration of the work we had done with some of these aforementioned organizations, we were just informed that we are proceeding toward an initial feasibility study as an initial step toward a development program. Based on expectations of new CDC testing recommendations for HCV, which is somewhat analogous to the recommendations that the CDC issued for HIV in 2006, in terms of a potential impact on the market for testing, we believe this is an excellent opportunity for us, though it is admittedly still in the early stages of discussion. We do look forward to reporting our progress on this and any other collaborations we may have.

To conclude, 2011 was an excellent year for Chembio, and we're entering 2012 on a strong note, and we expect to continue to drive revenue growth and profitability. We have a robust pipeline of new products in development which are opening the doors to a number of new collaborative opportunities. We expect these to combine to drive shareholder value.

Finally, I want to thank our valued employees. -- our R&D, regulatory, quality, manufacturing, marketing, and administrative teams that have continued to meet the challenges of growth and continue to improve and strengthen our capabilities. We have very high expectations for 2012, and I'm very confident that we have the team to meet them and, hopefully, exceed them.

And with that, Operator, we are ready to take questions.

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

Congratulations on the quarter. On the Alere sales, which were very strong in 2011, can you talk about what the catalyst to the growth was and do you think that can continue into 2012 at least?

We're seeing continued strength in that part of our business from Alere as we enter 2012. They've continued to make progress in a number of markets, both on the public health side as well as the hospital side. On the public health side, it's obviously a state-by-state market penetration, and I think the performance of our product has been outstanding. The ease of use, the performance, the consistency, the robustness, I think that's all contributed, as well as the outstanding efforts that they've made.

They will be exhibiting at a STD, sexually transmitted disease, conference, happens to be in Minneapolis, I believe next week, and they're doing a great job. It's really been a terrific collaboration, and they've made great progress, and I think it's both due to their efforts as well as our terrific products.

On the Fiocruz syphilis screening confirm test, will that incorporate the reader like you're working on with the US test?

Just to clarify, in Brazil, the product that they have launched and that we are producing large volumes for them this year is the treponemal only test. That is the product that is so far approved in Brazil and is being used in a very large screening program, called Stork, for screening pregnant women. I don't know what the Portuguese word is for that off-hand, but it's the Portuguese word for stork.

Our agreement with them contemplates that they would ultimately move towards the combo test which, in fact, we have personnel from Fiocruz here this week and last week related to the tech transfer for that. The product that will be shipping throughout this year at least is the single marker treponemal test, which is really the test that is more appropriate for the program that they're running in Brazil. There will be no reader. It's a visually read test. It's a single marker treponemal-only test.

Can you talk more about the status of the dual marker test, the Fiocruz dual marker test?

We're in the process of putting the dossier, as it were, together so that they could submit that to Anvisa. I think the goal is to submit it sometime during the third quarter, during the summer. Is that what your question is?

Yes, that covers it. For the syphilis test in the US, you mentioned in the 10-K, anyway, that you are looking to incorporate a reader into the test, Can you talk about what the process is with that and how long it might be to determine whether that is feasible?

I can tell you where we are thus far, and that is that we need to, in order to get a 510-K, the test needs to be substantially equivalent to a predicate device. In the case of the dual marker syphilis test, we're effectively using two different lab tests as the predicate devices, or predicate test. On the non-treponemal, the predicate test is this RPR technology which is very non-specific, particularly at low levels. We're in the challenging position of trying to be just like a reference test that is wrong a fair amount of the time.

We need to figure out how we're going do that in collaboration with the CDC and the FDA, because there are many low level RPR positive results, for example, that do not result in somebody having an active infection, even though that is what the RPR marker is supposed to indicate. That is what we're working through. I don't know what the timing of that is going to be.

We just had people visiting one of the sites where we have the reader in place now, trying to work through discrepant samples and to see whether there is a way to bring this product to market. It's a very challenging opportunity, and also a very good opportunity. Those often go together. We're working through it, and we will see. I don't have a sense as to timing.

We do know that we did pre-clinical studies, and there are acceptable results from those pre-clinical studies, but we just to have work through some of these issues. Understand the full information concerning some of the patients whose samples were anomalous in terms of the results that we expected. We just need to follow that.

Also, there's sometimes been anomalies with the methods used by the labs, which had to be also pointed out and corrected.

On the 2008 technology transfer agreement with Fiocruz, I think the purchase quota is, correct me if I'm wrong, $21 million or $23 million in aggregate for all the products. Based on that, you guys are probably bumping up against that -- their quota is probably close to complete, say sometime in 2013. What is your feelings about when Fiocruz may be ready to start manufacturing?

There's nothing new in terms of my feelings on that. Our experience is that they've well exceeded their minimum quotas for having the right to technology transfer in the past. They also need to have a facility in order to absorb the technology, which I was just there in December, and it's a long way from being ready. They said mid-2013. It's very large, I don't remember how many square feet, but many storied facility.

We're doing everything we can to keep up with the demand that we have this year. We now are up to almost 160 employees, which in large measure is due to the demand that they have, so I don't know what 2013 is going to bring. We have many other things that we think will fill in if they only meet their minimum, but I don't know what 2013 is going to bring as it relates to that particular -- I don't have any better visibility on that now than I did several months ago.

What I do have visibility on, as I indicated, as we indicated in the filings, is that we expect to do at least $9 million within this year. That's the visibility that I have. That's what we're focused on right now. We're also focused on developing new opportunities for these products and other products with Fiocruz and potentially other parties in Brazil.

Raymond Myers, Benchmark.

You mentioned in your prepared remarks that the hepatitis -- you had a hepatitis C partnership with a global pharma partner, and you would be doing some work soon related to that. That sounds very interesting. Could you elaborate?

Unfortunately, no. We have -- and we don't have a partnership, didn't use that word, we have a feasibility study that will be in the offing in the weeks to come, and it is proceeding past the discussion stage towards doing a feasibility study, but that's as much as I can say about it. We have an NDA in place.

I don't want to put words in your mouth. I want to understand it as much as possible. You're progressing towards a feasibility study with a global pharmaceutical company related to the hepatitis C market in the US. Is that correct?

That's correct.

I want to ask you about the dual path platform's advantages over the current standard lateral flow rapid test. Specifically, can you summarize what the advantages you expect would be for a US HIV rapid test in the clinical market once you get the oral fluid claim? Second, what the potential advantages would be in the larger over-the-counter HIV market once you address that market. What are the advantages of the DPP over the current standard lateral flow test?

The DPP technology, Ray, effectively allows an incubation of the sample for a period of time that you don't have in lateral flow. That has resulted in our experience and in studies that we've done with improved sensitivity and improved specificity, which are the two measures of a diagnostic test.

It also allows for a sharper visual interpretation of the lines on any test because of that incubation which, generally speaking, is one of the disadvantages of the lateral flow technology. You see or don't see background or see or don't see a line. When you're talking about HIV or any other serious infectious disease, for that matter, the less doubt there is the better, of course.

Also, one of the advantages of DPP and the way that we are configuring it for the HIV test is that we have a separate sample collection system, either for oral fluid or for the blood sample, so that you can run the test right away, or you can run it at some later point in time, or potentially run an additional test on the sample that has already been collected for the first test that you ran.

There are other potential claims that we might be able to pursue with that system, and we also think that for oral fluid it allows for a better sensitivity by extracting that oral fluid through this buffer system before running it onto the DPP test in our case.

Then beyond the HIV DPP test that you are asking about, as long as you're asking me about DPP, is the general advantage of multiplexing. Because of the design of DPP, it allows us to develop other tests using multiple markers in a way that is much less possible on lateral flow. Those are some of the advantages.

If we understand it correctly, you are positioned to be the second to the market to the oral fluid clinical market and second to the market in the US over-the-counter HIV market. However, you would be entering the market with tests that are more accurate and more clear to read, which could be, we'd hope, a substantial competitive advantage. Is that the right way to think about it?

We have studies that certainly indicate improved performance over the competitive products, and we will need to see how we perform in the marketplace, but certainly that is the expectation that we have.

When will we learn more about this feasibility study for hepatitis C with this large partner?

As soon as we do it and we're able to talk more about it. We will learn about it. I can't give you a specific date. It is something that just materialized this week, literally.

I would be correct in assuming that this would be a 2012 event.

I can't even give you the timing of it, Ray. It's really too preliminary, except that we believe that there's a significant market opportunity, and as we've mentioned in the past, this is a market opportunity that we think is worth pursuing, and it has taken us awhile to find a partner, and we've gotten some, just some, traction in this area now. We're cautiously optimistic about moving from the discussion to a feasibility study, and I thought it was appropriate to mention that as early as it is in that process.

(Operator Instructions). Tony Fernandes, Fernandes Financial.

I just wanted to congratulate you guys, not on just a great quarter, but six years of consistent growth through a horrific economic market. It's been a pleasure following your company, and it's going to be an immense pleasure continuously seeing your company grow. I have no questions. As you guys know, I've been following you guys for a long time, and I just think it's quite remarkable that you're one of very, very few companies that were consistently able to grow through a very turbulent economic market worldwide. My hat's off to your entire team.

Randy Shaffer, a private investor.

I just wanted to know if you could clue us all in, it's been kind of quiet. You spoke about China awhile back, and checking out the syphilis test. Is there anything you can tell us as far as any plans to move forward in that arena? Is it just too difficult? Can you give us any color on that at all?

The answer is, yes and yes that we have plans of trying move forward in that market, but it is -- I won't say too difficult, because if it was too difficult, then we wouldn't do it. It is challenging to find the right partner. We have a couple of discussions ongoing with potential distributors, potential partners.

We are looking at potential collaborations around the world where, and China certainly would be included in this, but other growing markets such as Brazil, Russia, India, the BRIC group, where the market growth, the population growth, the standard of living growth is all tremendous, and you want to find a way to participate in that.

We think that for our products, our industry, our experience, there may be other markets, for example, Brazil, where we might be able to develop a local manufacturing collaboration that, in addition to what we are doing, obviously with Fiocruz, where we could be more successful given all the considerations. Not only pricing, but anywhere from IP, regulatory barriers, which are important other considerations for dealing in the market.

Yes, it's a great market; it's a huge market, but we need to find the right partner. Our patent is issued in China, and so we want to exploit that. We just need to find the right partner.

(Operator Instructions). It appears there are no further questions. I would like to turn the floor back over to management for further or closing comments.

Thank you, operator, and thank you, everyone, for joining the call. We look forward to keeping you appraised of our progress during the year with the expectation of having our next call in the beginning of May to report our first quarter results. Thank you so much for joining us. Have a great day.

Thank you. This does conclude today's teleconference. You may disconnect your lines at this time, and have a wonderful day. We thank you for your participation today.