Chembio Diagnostics Inc (CEMI) 2013 Q2 法說會逐字稿

Greetings, and welcome to the Chembio Diagnostics second-quarter 2013 financial results webcast. 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. Cocoa. You may now begin.

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

This morning, Chembio Diagnostics announced financial results for the second-quarter 2013 and filed its Quarterly Report on Form 10-Q with the SEC. 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 Investors. If you would like to be added to the Company's distribution list, please call Chembio Diagnostics at 631-924-1135, extension 125, and ask for Susan Norcott, or email her at norcott@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, August 8, 2013. 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. Good morning, everyone, and thanks for joining us. We have an operating loss in the second quarter, which loss was due to a combination of increased operating expenses, especially an increase in clinical trial expenses related to our DPP HIV 1/2 CLIA waiver study; decreased product sales as compared with Q2 of 2012; and increased manufacturing overhead costs in anticipation of stronger revenues in the second half of 2013.

Still, the second quarter was marked by a number of important achievements and developments for our products and technologies, including the single largest purchase order in our history of $5.3 million; CE Mark approval of our SURE CHECK HIV assay; solid progress in our international and US product development and commercialization efforts; new sponsored development agreements; and a new distribution collaboration in Brazil.

With our CLIA waiver studies for our DPD HIV 1/2 oral fluid assay test more than halfway completed, we look forward to launching this as our first in our pipeline of US branded products in 2014. We also look forward to working on mutual -- mutually agreeable arrangement with Alere as it relates to our lateral flow products in the US.

I'll go over these and other items in more detail following a review of the second-quarter financial results and balance sheet by our Chief Financial Officer, Rich Larkin. Rich?

Thanks, Larry. First, I'll go over our second-quarter results, and then I'll review briefly highlights of our balance sheet. Total revenues for the second quarter of 2013 were $5.39 million and were down 11% compared with total revenues of $6.08 million in the prior-year period. Our product sales in the 2013 second quarter were $5.06 million and were down 13% compared with product sales of $5.81 million in the prior-year period. This was primarily due to declines in DPP product sales in Brazil -- in particular, the FIOCRUZ -- and it was partially offset by an increase in our HIV lateral flow sales.

Of the large order Larry mentioned, we shipped approximately 869,000 in the second quarter of 2013. Research and development milestone brands and royalty revenues for the three months ended June 30, 2013 increased $332,000 from $273,000 in the prior-year period. Our gross margin for the 2013 second-quarter decreased 11% to $2.28 million compared with $2.57 million in the prior-year period. Again, primarily due to the lower DPP sales and product mix, and higher costs of products sold. Our product gross margin for the second quarter of 2013 decreased 15% to $1.95 million from $2.3 million in the prior-year period.

Our R&D expenses in the second quarter of 2013 were $1.5 million compared to $0.98 million in the prior-year period. The 2013 second quarter included $422,000 of clinical trial expenses, as Larry mentioned earlier, related to our DPP HIV 1/2 CLIA waiver study. And that compares with only $72,000 in the prior-year period.

Our selling, general and administrative expenses in the second quarter of 2013 increased to $1.16 million from $1.08 million in the prior-year period. And largely, that change is due to changes in 2012 in our allowance for doubtful accounts. Our operating loss for the second quarter of 2013 was $380,000, and that compares with an operating income of $512,000 for the 2012 period. Net loss for the second quarter of 2013 was $241,000 or about $0.03 per diluted share, compared with net income of $309,000 or $0.04 per diluted share for the prior period.

Now turning to our balance sheet. The Company has cash and cash equivalents of $8.65 million as of June 30 compared with $2.95 million as of December 31, 2012. The primary driver for this increase was net cash received from the April 2013 common stock funding of $5.4 million. Additional cash was provided from decreased Accounts Receivable of $927,000, which also included changes in our allowance for doubtful accounts, and increased accounts payable and other accrued liabilities of $626,000. Partially offsetting these provisions was a use of cash for increased inventories of $1.36 million in preparation to meet our third-quarter sales.

Overall, our working capital increased by $5.56 million during the second quarter to $13.19 million. The April -- again, the April 13 common stock funding of $5.41 million accounted for most of this increase.

Thank you for your time. And now I'll turn the call back over to Larry.

Thanks, Rich. First, as I've mentioned upfront, the operating loss in the second quarter is primarily due to a combination of increased operating expenses, especially an increase in clinical trial expenses attributable to our DPP HIV 1/2 assay CLIA waiver studies, and decreased product sales.

Also, we made the decision to add significant manufacturing personnel in the second quarter in order to meet significantly larger unit volumes that were anticipated for the balance of this year. While this level of cost would not have been justified based on the second quarter revenues, it was critical in order to meet current demand. In fact, based on our backlog of anticipated orders, these staffing increases were necessary, and we anticipate completing shipments of the $5.3 million order that we announced in June during this current third-quarter.

Second, as reported, new sponsored research and development contracts with US government agencies or their contractors, as compared with the second half of 2012, will subsidize our R&D costs, extend our development capabilities and know-how, potentially result in new product opportunities, and also have a positive impact on our gross margins and operating results during the second half, net of the costs incurred related to these projects. Of course, over the long-term, our plans to directly market our DPP HIV 1/2 assay and future anticipated FDA-approved products under our Chembio brand, are also expected to enable us to enjoy increased gross margins, partially offset by the cost of direct sales, and sales and marketing teams supporting this effort. We are developing this team, and these added costs will be distributed over a larger volume base as we bring the additional products in our pipeline through, and potentially other products, through this organization over the next two to three years.

Third, there are a number of international procurement opportunities for HIV, syphilis and other products, and we are vigorously pursuing such opportunities. As always, it is very difficult to predict whether or when we're going to be successful in these opportunities, as they typically result in very significant variations to our quarterly results, as we see this year, as we saw last year, and we'll continue to see as long as we participate in these international procurement opportunities, which we enjoy significant sales from.

As to our development programs, we've made good progress in our CLIA waiver studies for our DPP HIV 1/2 assay, and in our having established a regulatory pathway to approval for our unique DPP HIV syphilis assay. On the DPP HIV oral fluid CLIA waiver study, we're now well on our way to completing the study. However, enrollment is slower than originally planned, which, when combined with some startup delays, will delay filing our CLIA waiver application until likely the fourth quarter. This means that we would not reasonably expect to receive a CLIA waiver decision until the first quarter of 2014. While that's disappointing, we believe this kind of delay is not unusual in these circumstances.

On the DPP HIV syphilis combination product, we've also made good progress with this product in terms of international evaluations and registrations. And we believe this will result in revenues in the near-term. However, here too on the FDA side, the review timeline for this product, which we originally anticipated would be by mid-2014, has now been shifted to late 2014, with CLIA waiver now anticipated by early 2015.

This development is due to this product being characterized by the FDA as a premarket approval, or PMA, not a 510(k). A PMA is more time-consuming, due to the increased statutory review time, and this is the main reason for the changed timeline.

Also, insofar as our hepatitis C development program, USPSTF recently issued final recommendations on HCD testing certainly will help support demand for an HCD rapid test, particularly as market cases and convenient therapies are expected to come to market, causing an anticipated scale-up in testing both in the lab and at the point of care. However, the recent results of OraSure both in this market and in the over-the-counter HIV test market -- which they have, in both cases, exclusive products for -- continue to give us reason to proceed cautiously in these areas.

Meanwhile, our US product revenues have remained strong during a challenging period, so we are ever more optimistic that routine HIV testing will be expanded in the US as a result of the recent full and final endorsement by the USPSTF -- which stands for the U.S. Preventive Services Task Force -- with an A rating of the CDC HIV -- of the 2006 CDC HIV testing recommendation. This is a very important development as we near full implementation of the Affordable Care Act.

By the establishment of our own focused sales and marketing team will be provided with the option, if we choose to, rebrand our FDA-approved lateral flow HIV rapid test, which are currently sold by Alere under its Clearview brand, and to instead sell them directly to the market or through distributors, and/or through distributors under Chembio's brand. This opportunity has come about due to Alere's decision, as was anticipated, to introduce a competitive rapid HIV test in the United States. And that decision triggered provisions in our agreements with Alere, which gives Chembio certain options exercisable at any time, including termination of Alere's exclusive rights to market either or both products, and, in the case of the cassette agreement, to terminate the agreement entirely. The agreement, in any case, terminate in October 2016.

Notwithstanding Alere's decision to compete, we believe they have every interest in continuing to successfully market and promote our lateral flow products for so long as it is in their best interest to do so. We are in discussions with Alere concerning alternatives that we believe could be mutually beneficial. And we expect that any new arrangements would be completed soon. And we will certainly keep you advised accordingly, as developments warrant.

In summary, our opportunities to commercialize our US manufacturing products under our own brand globally, and particularly in the United States, come at an opportune time. We're looking forward to completing our fifth straight year of topline growth and profitability, and with our strongest balance sheet position ever. So we look forward to an exciting period ahead for Chembio, as we continue to serve and expand our global customer base, enter the US market with our first DPP point of care product, and help to save and improve lives.

Thank you for listening. Operator, we are now ready to take some questions.

(Operator Instructions). Bill Bonello, Craig-Hallum Capital Group.

Just a few questions. The first one, just can you repeat, Larry -- it went pretty fast -- the timing of the delay on the HIV syphilis? Did you say submit late '14 and approval early '15? Is that what you're now expecting?

Not exactly. What we said is that we would have a PMA approval by the end of 2014. So what we said -- much earlier. In fact, we submitted in the early part of 2014; but because it's a PMA, we've tried to take a conservative estimate, and expect to get the PMA approval by the end of the year. And then what I said about early 2015 was a CLIA waiver.

Oh, okay. Okay. Right, okay. That's what I meant, actually. Sorry. And then, the -- that's for the HIV syphilis. What about the screening, HIV screen and confirm?

That right now, we have to suspend any estimates of timing, because we had a raw material issue that we're trying to resolve. So we didn't put any estimates on that. We don't have any estimates -- updated estimates on that. We're not going to meet the estimates that we had originally had because of that delay. Until we resolve that, we can't make an estimate.

Okay.

We're making progress on that but I can't -- I just -- it would be imprudent to make (multiple speakers) --.

Yes. No, that makes sense. And then the big HIV order that you got this quarter, does that have any potential to be recurring? Or was that sort of fulfilling some kind of a one-time need for that country client?

We don't know. We certainly hope so. We think that there is opportunity to continue to do business with this customer in this region and other regions. It's really -- as you know, sometimes a country or a region will adopt a testing program that will be a multi-year program. Other times, they will get funding. Even if they have a program, they'll only have funding for a particular year. So, at the end of the day, it's all about the funding for these programs.

So, basically, the answer is yes and yes. It could recur; it may not. We're looking at other opportunities in that region as well as many, many other regions. So, it is -- this -- these large orders that we have been successful in getting, and that we have gotten over the years, is part of the business that we're in, in the international procurement business. And if we don't get another order from this client, or for this reason, we hope to get it from some other place. So, it's very hard to predict, but we like getting the business.

Okay, great. And then just what kind of visibility do you have into Alere orders for the remainder of this year, given their plans to launch a test in the US? Did they have inventory that they might be working down over the next couple of quarters? Should we think about maybe your US sales being lighter than what we would've otherwise expected? Not because of competition but because of the intention of competition?

You know, I have no indication of that at this point. And, I think that they are -- they manage their inventory pretty well, so that they are on a fairly short leash, if you will. I don't -- it's a bad metaphor -- but they certainly have not indicated any change in their ordering patterns for the rest of the year.

Last year, the first half of the year was stronger than the second half. That may be the case this year; I don't know. We had a very good half with them in the first half. But they are meeting their expectations, and our expectations that we've talked with them for the year. They're very committed to these products. They're doing a great job. I don't have any reason to believe there will be any change at this point.

Okay. And is this quarter tracking kind of consistently with last quarter?

I can't comment on the current number because I wouldn't and I don't know what the number is off the top of my head anyway. But their -- we have quarterly calls with Alere, and they're continuing to do well with our products. And they have every reason to keep the customers, that have become accustomed to our products, satisfied.

Okay, thanks.

Sure.

Paul Nouri, Noble Equity Fund.

The government development agreements that you have, I think there's at least two of them that are funded through the end of the year.

Correct.

And was any of that recognized in the current quarter, in the second quarter?

Yes. We did recognize some of those grants in the second quarter. And I would turn your attention to footnote number 3, where we talk specifically how much, at least for the six months, we've received from the different grants.

Okay. And then the $5 million order, you brought it up earlier in the call, you are going to complete the rest of it in the third quarter?

That's our current expectation, yes.

Okay. And I noticed that your Africa sales picked up pretty nicely. Is that something that's -- I mean, I know these are most mostly tenders, but do you see that as something that's sustainable?

We have more opportunities in the pipeline in these regions than we've had in the past. What I -- but it's very difficult to predict. But we certainly have some nice opportunities that we're working on. It's -- you have to be careful about comparing one quarter to the previous one, because we may have had good Africa sales in Q1 of 2012, and you're not seeing that comparison, so -- that I can recall offhand. But it -- you tend to, for any region, they tend to order for an extended period all at once. And sometimes it goes in different quarters, so the comparisons become difficult.

And similar to the agreement you struck in Brazil, where -- I guess, the manufacturing agreement. Could you see doing something like that in Africa? Would that make you more competitive in second and third world countries?

Absolutely. And we are -- we have -- we're looking at that not only in Africa but in Asia as well.

Okay. And then, finally, on Alere, what -- they're going to put out a new product. What is their motivation to sell yours as hard as they have been, while selling their new product?

Good question. We're going to see. And obviously, it depends upon how well their product performs and is perceived and received. So, we need to be mindful of what is in their best interest. And we need to do what's in our best interest. But we're hopeful because we've enjoyed a very good long, working relationship with Alere, and because they have a lot of customers that have come to know the quality of our products. And their performance and reliability, and our good, strong track record in terms of manufacturing, and a clean record with the FDA and so forth, that they want to continue to make sure those customers are serviced properly.

Okay. And then final question, turning back to the big order that should be completed in the third quarter. Your gross margin ticked up a little bit this quarter versus the prior few. Should I not expect that to continue because this big order is -- because it's a large order, it might be a lower margin or might have gone the wrong direction with it?

You know, we don't predict our margins, but we indicated in comments or in the Q or both, that we expect to have -- we have been experiencing improved yield, as compared with some of those quarters where the margins were lower. I think that the pricing that we have with the products in our backlog is good. It's certainly no worse, and probably maybe a little better than what we've had in the past period. And certainly, from a utilization standpoint, we will be utilizing -- we are utilizing -- our facility at a higher rate. So, those are all good omens for improved gross margins, although I'm not predicting that the gross margin will be better.

Okay, thank you.

Sure.

(Operator Instructions). Joe Munda, Sidoti & Company.

Thanks for taking the questions, Larry and Richard. (multiple speakers) First off, I know Alere has been a hot topic on the call here, but I want to look at it from a different point of view. Larry, does this opportunity open up the possibility of a licensing agreement for your DPP platform with Alere, by getting out of the prior agreement?

I think that the -- I mean, anything is possible. There are no issues that are off the table. And so, we have a -- we've had a few conversations with Alere so far. We'll have more in the days and weeks ahead. And I think that that notion applies not only to Alere but to other companies. And the fact that we have those lateral flow products potentially available outside of the Alere agreement, if we so choose, or to modify the agreement in a way that we have more flexibility with those products, that could make those products interesting to other companies, whether they be new partners, distributors, what have you.

So I think that while, on the one hand, it could be seen as a threat, it's also, for us, a great opportunity. And so -- but we certainly are going to try to work out something that makes the most sense for us and for Alere. These two products right now are the only products that the -- with their clinical virology service unit, is selling. So, they very much want to keep that revenue stream -- for as long as possible.

That's helpful. And then following up on a question regarding Africa, the order or the ordering pattern, you said, could differ, could be lumpy, based on the fact they order in bulk for an extended period of time. But I'm just wondering, is it more of a function of a possible player leaving that space? Or are you gaining share in a competitive environment? I'm just trying to get a sense of how successful you've been in Africa.

I think both of those things have occurred, and/or -- and may occur; that we certainly have had situations where -- and really, just to explain to you, in a lot of these countries, they have a sequence of tests that are used. And sometimes there's a multiple; there are alternative tests that are used. And so, in some cases, tests that have been used are no longer in use because maybe pricing, maybe quality, maybe some other performance issue. And then, there may be -- so it can be any number of things. So it's hard to give you one reason.

I think another reason is that you have to be in it to win it. And we are in it more than we have been in the past. We have a nice pipeline of opportunities. But it's -- the only thing you can say about that is that when you have more, you have a better opportunity of getting some in. And we try to be more focused in terms of the way you approach and discount the opportunities. And I think that we have more than we've had.

So, it's a challenging part of the business. Because one quarter, as we are sitting here, it's weak and looks like the Company is not moving forward; and then, you can then have the following quarter, that can be a blowout quarter. So, it will be -- it's easier for -- it would be easier to have smooth progress quarter-by-quarter. But so long as we're in that international business, that's not going to be the case.

And -- but it's better than the alternative, which is to rely only on the US market, like one of our competitors, where they have a very small portion of their business is international. And it enables us to be more cost-competitive, to have a higher throughput and lower cost of goods. And that helps us everywhere.

Okay. I've got two more for you, Larry. In regards to Brazil, in the Q through the first half of the year, you got about $4.1 million in sales to South America. And then in the investment presentation you guys provided, you talked about potential for FIOCRUZ of $9 million. To me, it looks like you're tracking obviously around $8 million. Is that a possibility for FIOCRUZ? Or, I mean --?

I think you're mixing up -- the $9 million was what we were talking about for 2014. And that -- and the number that you quoted for this year is for South America, includes Brazil, but other countries in South America. Just to focus for a second on FIOCRUZ, year-to-date through the first half, we've shipped about $2 million to Brazil. And we said, in May, that we expect to do $6 million in Brazil for the year, which means that if we meet that expectation -- and we have every reason to expect that we will -- we will ship about $4 million over the second half. So, about double what we shipped in the first half in the second half -- just about.

Okay. And is that $9 million number you're quoting for 2014, is that related to the events, the World Cup and the Olympics, coming? And do you anticipate the possibility that they could actually increase that number from $9 million to maybe $12 million, depending on demand?

We don't have an actual forecast from them for next year. We think that that $9 million number is a possible number. One of my colleagues is actually with them now, today. And we are -- we believe that there are -- that's not an unrealistic number, based upon current products that we have and potentially additional products that we may be able to develop new programs with them for.

Okay. And my final question here. On the home HIV front, you guys quoted in the press packet -- investor presentation, I'm sorry -- looking at OraSure's home HIV, I mean, they did $1.9 million in the second quarter and $3.4 million for the first six months, and they're spending roughly $7 million. I mean, does that give you pause to really think hard about getting into that market, based on the fact that they're not seeing some of the results that they probably would have liked to see? Or are you still -- is it still something that is a possibility?

Well, it's still something that's a possibility, but I'm not encouraged by what their numbers are. In our current investor presentation that we just uploaded this morning, we reduced our market opportunity size for that particular product line down by 50% from $100 million to $50 million. And the $100 million was already an 80% discount from what OraSure has been saying, or at least in the past. I'm not sure whether they've changed that at all. I'm not aware that they have. (multiple speakers) So --

(multiple speakers) Well, I heard $500 million --

Right.

When he was giving an interview on CNBC, he actually said $500 million.

Right. That's the number I recall. So, we have been using $100 million in our presentations and discussions, but now I think that number is more likely to be $50 million. These are guesstimates, nobody really knows. But the only thing we know is what we know; what we're seeing from their actual results. And it's not as if they're not spending money. Some would say they're not spending enough, because of the cost of getting into the retail distribution. But if that's not enough, that's a scary thought, given the size of the market. So, I haven't eliminated it, but it's certainly on the back burner.

Okay. Following up with what you just said, I mean, is there a threshold number as far as market opportunity, where you would just say it's not worth our time?

Well, we're getting close. We're getting close. Because not only is it the market opportunity, but it's the cost of entry. And it's not only the regulatory approval, but getting into the market -- although there are other ways to get into the market more cost-effectively than through a branded strategy that they're using. And certainly, for example, a store brand strategy, when there is a branded alternative, is a tried-and-true way.

I think that you also need to consider -- or we would also need to consider that -- in that type of scenario, the ASP would have to be significantly lower. So now you might be talking about an even smaller market. So, hate to be so sober about it, but that's our job to be realistic about what the opportunity is.

We appreciate the color, Larry. Thank you.

(Operator Instructions). There are no further questions at this time. I'd like to turn the floor back over to you for any closing comments you may have.

Thank you very much, Christian. Thank you all for listening. And we look forward to updating you in the weeks and months ahead, and certainly no later than our third -- during our third-quarter report in early November. Thank you.

Ladies and gentlemen, that does conclude today's conference. You may disconnect your lines at this time. And we thank you all for your participation. Good day.