Chembio Diagnostics Management Discusses Q1 2013 Results - Earnings Call Transcript

May. 9.13 | About: Chembio Diagnostics, (CEMI)

Chembio Diagnostics (NASDAQ:CEMI)

Q1 2013 Earnings Call

May 09, 2013 10:00 am ET

Executives

Bobbi Coco

Lawrence A. Siebert - Executive Chairman, Chief Executive Officer, President, Chairman of Chembio Diagnostic Systems Inc, Chief Executive Officer of Chembio Diagnostics Inc and President of Chembio Diagnostic Systems Inc

Richard J. Larkin - Chief Financial Officer, Principal Accounting Officer and Chief Financial Officer of Chembio Diagnostic Systems Inc

Analysts

William B. Bonello - Craig-Hallum Capital Group LLC, Research Division

Brian Marckx - Zacks Investment Research Inc.

Raymond A. Myers - The Benchmark Company, LLC, Research Division

Paul Nouri - Noble Equity Funds

Joseph P. Munda - Sidoti & Company, LLC

Operator

Greetings, and welcome to the Chembio Diagnostics First Quarter 2013 Financial Results Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Bobbi Coco. Thank you, Ms. Coco. You may begin.

Bobbi Coco

Good morning. This is Bobbi Coco with Chembio Diagnostics, Inc. 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 first quarter 2013 and filed its Annual 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 e-mail her 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 9, 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?

Lawrence A. Siebert

Thanks, Bobbi. Good morning, everyone, and thanks for joining us. The first quarter of 2013 featured strong growth in our sales of our lateral flow HIV test to South America and to our U.S. marketing partner, Alere, offsetting decreases in our Dual Path Platform sales to FIOCRUZ in Brazil. We continued working towards commercializing our DPP oral fluid HIV 1/2 Assay in the U.S. during the first quarter, as well as on a number of new development and commercial opportunities. We're optimistic about continuing our year-over-year growth despite this start to the year as we are anticipating increased revenues from a number of current and new international distribution partners for our FDA-approved lateral flow HIV test and for our newly developed DPP HIV-Syphilis test. I'll cover these and other areas in more detail following review of the Q1 financial results by our CFO, Rich Larkin. Rich?

Richard J. Larkin

Thanks, Larry. First, I'm going to go over our first quarter results and then I'll review briefly highlights of our balance sheet. The total revenues for the first quarter of 2013 were $6.68 million, essentially flat compared to the first quarter of 2012. Our product sales of $6.31 million were also flat compared with prior year's first quarter. Research, development, milestone, grant and royalty revenues for the first quarter of 2013 increased from -- increased to $365,000 from $290,000 in the same period of 2012. Our gross profit for the first quarter 2013 decreased 19% to $2.69 million, and this was due primarily to product mix that resulted in a higher cost of goods sold. This was partially offset by higher non-product revenues. Our product gross profit for the first quarter of 2013 decreased to 23% to $2.33 million. And again, product gross margin declined due to product mix was mainly responsible for the decrease. Our R&D expenses for the first quarter of 2013 were $1.05 million, down about $330,000 from the prior year. The 2013 first quarter included $98,000 of clinical trial expenses compared with $484,000 in the 2012 period. For the 3 months ended March 31, 2013, selling, general and administrative expenses increased to $1.16 million from $1.23 million in the prior year, largely due to lower commissions on DPP product sales to Brazil and the changes in the allowance for doubtful accounts. This was partially offset by higher wages and other expenses. Our operating income for the first quarter of 2013 was $487,000 compared with operating income of $720,000 for the first quarter of 2012. Our net income for the first quarter of 2013 was $317,000 or $0.04 per diluted share, compared with net income of $433,000 or $0.05 per diluted share for the comparable period in 2012.

Turning now to our balance sheet. The company had cash and cash equivalents of $2.6 million as of March 31, 2013, and this compares with $2.95 million as of December 31, 2012. During the first quarter, accounts receivable increased by $423,000 and this does not include the change in the allowance for doubtful accounts and bringing our AR balance to $5.28 million and accounts payable and accrued expenses decreased by $114,000. Overall, our working capital increased by $390,000 during the first quarter to $8.02 million. Subsequent to the close of the quarter in April, we completed an underwritten public offering of 1.2 million shares of common stock at $5 per share and we realized net proceeds of approximately $5.5 million. Thank you for your time and now, I will turn the call back over to Larry. Larry?

Lawrence A. Siebert

That you, Rich. Based on a revised forecast that we received from FIOCRUZ earlier this month, and as we had anticipated at the time of the filing of our annual report in March, our FIOCRUZ revenues will be down this year from the $10 million that we realized in 2012. We currently believe that we will derive approximately $6 million of revenues from FIOCRUZ during the course of 2013, inclusive of the first quarter revenues of approximately $1.2 million from FIOCRUZ. This decrease is primarily attributable to its slower scale up in the Brazilian ministry of health program that our tests are being used in primarily. Since last year, we've been working on developing a number of new revenue opportunities that if realized will largely offset or even exceed the decline in 2013 FIOCRUZ revenues, which we were expected eventually in any case. As well as other opportunities specifically in Brazil that we believe will provide more sustainable revenues in this market in 2014 and beyond.

In terms of our 2013 outlook, as was indicated I think every year I have been involved with this business, participating in these large donor-funded programs like PEPFAR and other large NGO procurement often results in large variations from quarter-to-quarter and it appears that this year is shaping up to be no different. And so we are increasingly optimistic that we can largely neutralize Brazil increase with a very strong second half of 2013. As far as gross margins are concerned, although clearly not apparent from our Q1 margin due to particularly unfavorable product mix and some ongoing capacity constraints in early part of the quarter, I am confident that our scrap reduction, cost reduction and manufacturing automation programs are very much on track and assuming recent trends continue, they will enable us to improve our margins this year and over the long-term, although our product mix will likely be less favorable with the lower DPP sales mix in 2013. However, as we move forward in 2014, and as we bring more of our products like our DPP HIV oral fluid assay and our DPP HIV-Syphilis assay through the FDA, into the United States market where we can realize substantially higher average selling prices, I believe that our gross margins will improve substantially.

It's important to note that Chembio is the only company that supplies large volumes of U.S. manufactured, FDA-approved products to these international donor-funded programs, and I believe that the fact that we can serve the U.S. and the global market for these products from our New York facility is a unique competitive advantage that we are leveraging. Also, our gross margins are impacted by non-product revenues dollar for dollar. These revenues are largely comprised of research and development contracts and grants. Here, too, we are working on consummating new research and development contract agreement which, if completed, will favorably impact our gross margin. We look forward to reporting on these developments soon as well. We believe that the final recommendations from the United States Preventive Services Task Force published just on April 30, with a routine HIV testing of all adults between the ages of 15 and 55 years old, should help drive demand for HIV testing, especially as the Affordable Care Act is implemented, as the A rating that it was given, being that there will be no copay required. This should be a positive demand driver both for a lateral flow blood tests that are marketed by Alere, as well as for our DPP HIV 1/2 Assay for use with oral fluid or blood sample. We are in the process of completing the requirements for a clear waiver for the DPP HIV assay for oral fluid or blood sample in order to enable it to be sold in the point-of-care market segments where these tests are primarily due. We believe all 3 of our FDA-approved HIV test, both our lateral flow test marketed by Alere and our DPP HIV oral fluid test have competitive advantages, which I believe will continue to drive increased market share gains in the U.S. market and globally. We're also much more optimistic about our finally getting CE marks for these products in the near-term despite a long time that it has taken place.

As we have said, we plan to address the U.S. public health market for our Chembio DPP branded HIV 1/2 Assay to a small direct sales organization and to reach the U.S. hospitals and physician office market through distribution relationships. This organization will also enable us to sell other products, including, but not limited to those in our pipeline described in our recent filings. We've begun work on this commercialization strategy with good progress to date. Our product pipeline includes our multi-flex DPP HIV-Syphilis test, which we are very excited about. During the year-to-date, we submitted this product for evaluation to the CDC, for qualification with the U.S. PEPFAR program and to the WHO for a pre-qualification scheme adhered to by most of the other major global NGOs, such as the Global Fund, UNICEF, among many others. Other international registrations and evaluations are also pending and we have begun a dialogue with FDA for approval of this product. We are very encouraged by the data from this product and these evaluations. We anticipate FDA clearance and clear waiver of both of our syphilis product, both the combo HIV/syphilis test as well as the syphilis screening confirm test in 2014. Work on our Hepatitis-C project also continues, though with some delays relating to licensing the technology that we have identified for potential use in this assay, so that development will now likely not be completed until sometime in early to mid-2014.

As for the HIV OTC products, while we can if we choose to, complete the application to the FDA for an investigational device extension for our Sure Check HIV 1/2 Assay for home use, so that we could begin clinical trials to pursue FDA approval for home use, we really are not yet seeing a pathway through justifiable market size for this product, though we continue to watch it carefully. We are pleased to have learned that recently, Bio-Rad Laboratory received CE Marking for its HIV 1/2 confirmatory assay that Chembio developed for in-license to Bio-Rad pursuant to a royalty agreement that we have with Bio-Rad. The Bio-Rad product which they call Geenius, with 2 e's incorporates Chembio's patented DPP technology. As was demonstrated in the successful development -- in this successful development project, our DPP technology is strongly suited for such multiplex applications as this. And this is a great example of the kind that differentiated product opportunity that we are pursuing on our own and with potential partners.

Finally, in order to fully realize the potential of our point-of-care diagnostics business, we realized that we may want to opportunistically invest in expanding our production capacity, advancing our clinical development program, developing this small commercial team and potentially in-licensing new technologies to advance product development. Accordingly, ensuring the availability of capital for these activities was the principal reason the company's Board of Directors authorized a $6 million public offering of common stock in April. As the company's largest investor, I would obviously disappointed that we were not able to achieve a higher offering price and that the stock price has fallen below that offering price since the offering. However, on balance as the longest of long-term investors in this company and like the decision we made a year ago to uplift our stock to NASDAQ, I strongly believe that this was the right decision in order for us to achieve a number of important and value creating milestones in the short, medium and long-term and that we are in front of a number of exciting potential developments, which I believe made our stock -- current stock price extremely attractive. Thank you all for listening and now, operator, we're ready to take some questions.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from Bill Bonello from Craig-Hallum.

William B. Bonello - Craig-Hallum Capital Group LLC, Research Division

A couple of questions that I'd like to ask here. First of all, and maybe this is in the PowerPoint and I haven't had a chance to see it, but I apologize if it is. But your latest thinking on the timing of the DPP HIV CLIA waiver, are you still looking for that by the end of this year?

Lawrence A. Siebert

Yes, Bill, we are. We announced just recently that we had started and our plan is still to be able to submit the CLIA waiver application in the summer. And of course, we can't predict, I believe that there is no actual statutory turnaround time that the FDA has for CLIA waivers. So we can't be assured exactly when they will respond. But our plan -- our best [indiscernible] is by the end of the year.

William B. Bonello - Craig-Hallum Capital Group LLC, Research Division

Okay, that's great. And just in terms of sort of the hurdle there. Can you just share some thoughts on what you think, in particular, the sort of hot button issues will be and how that differs from what you had to show just to get the product FDA-approved?

Lawrence A. Siebert

Actually, what's interesting is that it's really -- as it relates to HIV test, from what I understand, it's because of the way they changed the guidance in 2008. It's effectively redoing, but on a smaller scale, the clinical trial we just completed. It's a little bit aggravating that the FDA device division deals with CLIA as compared with the division that deals with the HIV test has this requirement, but effectively, that is the new -- the newer hurdle is that you have to effectively do a new clinical trial that identifies new infections in addition to the long-standing requirement to demonstrate the simplicity of use of the product. So the new part that we didn't, for example, have to do with our lateral flow test when we did the CLIA waiver was this aspect. So it was effectively a mini clinical trial. I don't anticipate that to be a hurdle but it is, I mean, that -- in terms of not -- I expect to achieve that but that is -- those are the 2 requirements.

William B. Bonello - Craig-Hallum Capital Group LLC, Research Division

Okay. And then in terms of the -- your pipeline beyond that product, particularly with syphilis screening confirmed and the syphilis HIV product, are the anticipated timing still where it had been on those products?

Lawrence A. Siebert

Yes.

William B. Bonello - Craig-Hallum Capital Group LLC, Research Division

Okay, great. And then just -- is there any way you could give us a little more color on this -- some of the opportunities you see to offset FIOCRUZ and in particular, maybe characterize them a little bit in terms of whether these are opportunities that you would characterize as recurring revenue sources and just -- because it is an overhang on the stock right now, and I think the more that you're able to give us the better we can all feel.

Lawrence A. Siebert

Right. Sure. I would like to say that we are working very hard on a number of opportunities. I don't want to characterize anything until I know what we have, but I am increasingly optimistic that we have a very strong pipeline of opportunity and as soon as there is something more definitive, we will absolutely give plenty of color.

William B. Bonello - Craig-Hallum Capital Group LLC, Research Division

Okay. And it sounded like you said, at least from what you said at the beginning of the call, that it's not just confined to opportunities -- additional opportunities in Brazil, but perhaps other international opportunities that may be above and beyond what you had previously anticipated?

Lawrence A. Siebert

Absolutely, yes. So we are developing opportunity -- new opportunities in Brazil that we look forward to reporting on and as soon as we're able to and in addition, developing a number of opportunities in the donor-funded markets, primarily in South America and Africa, other countries in South America besides Brazil, as well as Africa which, are primarily funded by PEPFAR, which is as you know, the U.S. President's Emergency Plan for AIDS Relief, as well as the international NGOs, mostly headquartered in Geneva, such as UNICEF, the Global Fund, UNITAID, those organizations. So we've had -- pursuing those opportunities for many months now and we're hopeful that some of those will be coming to fruition soon.

Operator

Our next question is coming from Brian Marckx from Zacks Investment Research.

Brian Marckx - Zacks Investment Research Inc.

Larry, while we're on the topic of the international opportunities, how soon do you anticipate that you could see a contribution from that?

Lawrence A. Siebert

As soon as possible.

Brian Marckx - Zacks Investment Research Inc.

Okay. Q2?

Lawrence A. Siebert

Yes, I think we're talking -- what we're talking about is this year and I would say that, if we are fortunate enough to receive some of the large opportunities that we're working on, that we may see the kind of swings that we saw last year, maybe earlier this year as compared to last year. So that we may have large orders that don't get out until the third quarter, even though we would see them in the second quarter. But I can't confirm that, that is the case at this point. But I am cautiously optimistic.

Brian Marckx - Zacks Investment Research Inc.

And then the revenue would be recognized when the order is shipped, correct?

Lawrence A. Siebert

That's correct. And then, when there are certainly partial shipments that can be made in certain cases. So that possibility certainly exists to -- it depends on how we are able to negotiate delivery schedule.

Brian Marckx - Zacks Investment Research Inc.

Okay. On the topic of the sales force in the U.S., you mentioned it would be small. Can you kind of quantify what small is?

Lawrence A. Siebert

This year, I think it will be very small, certainly under 5, and probably 2 or 3. And as we get more traction and as the other products start get closer to FDA approval or clearance, it may grow. But it is going to be a -- not a significant expense until very late this year.

Brian Marckx - Zacks Investment Research Inc.

Okay. And you mentioned production capacity in the 10-K, anyway, may need to be beefed up -- can you give us sort of an idea in terms of CapEx, what would be needed for that?

Lawrence A. Siebert

Well, we -- to some extent, quite frankly, the CapEx is equipment that needs to be brought online that we have. But at the same time, there is some additional space that's required that may involve either renting additional space and therefore, needs to be improved. But I don't think it's going to be in the short term material number, but we are looking potentially to do something that would be a longer-term fix for our capacity constraint. It's -- we have a leased facility here that is about 30,000 square feet. It's not ideally configured. That would be an understatement. And so we're looking at ways to improve the configuration and that may be -- involve moving a part of the operation and that could involve some more significant expenditures, but I wouldn't anticipate that much of that would occur for some, at least a couple of quarters. So that's lined up.

Brian Marckx - Zacks Investment Research Inc.

Okay, all right. And on the multiplex P24 HIV antigen test, is that sort of still -- development of that, is that still sort of in the planning stage or is that something that you've decided you will pursue?

Lawrence A. Siebert

We are -- we have it in an early stage of development at this point and we're doing a number of checks on that, both in terms of proof-of-concept, as well as the market. We are looking at that carefully from a number of reimbursement as well. So there are a number of things that we are doing, but we are -- we do have a development program for that product at this point in time, but it's early.

Operator

Our next question is coming from Raymond Myers from Benchmark.

Raymond A. Myers - The Benchmark Company, LLC, Research Division

Larry, how you long do you think it might take Bio-Rad to get U.S. FDA approval of your HIV confirmatory test?

Lawrence A. Siebert

Actually, I received a Google alert for their product just this morning for a -- an article introducing the product in which they said that they were starting clinical trials for the product next month, for U.S. FDA approval. So that's as much as I know, which is information I just learned today, as it relates to their timetable. We're starting clinical trial and I don't know how long does clinical trials will take. I don't think it will take nearly as long as we took, since we are self funding our clinical trials in the course of 2010, '11, and '12, so I would think within 12 to 24 months, they should be through the FDA.

Raymond A. Myers - The Benchmark Company, LLC, Research Division

Great. That's helpful. And we've gone through a lot of other questions, but maybe you could discuss some of the other multiplexing testing opportunities that are possible under Chembio's DPP platform.

Lawrence A. Siebert

Sure. We've got a number of opportunity as well as products that we are working on now, whether that be for other infectious diseases. We have -- as you may recall, we had a development program with the Battelle Memorial Institute for a multiplex influenza immuno-status test and we're hopeful that we'll be able to extend the development work on that, which really demonstrates tremendous capability for that type of epidemiological tool. Also, another development contract that is in the offing with another government agency, having to do with some tropical diseases, where you can detect multiple diseases on a single point-of-care device. In addition, we've had preliminary discussion that have been advancing with the veterinary diagnostic company that may allow us to get into the companion animal field on a multiplexing basis with an outstanding partner. So those are certainly examples where we can get to veterinary, epidemiology, as well as tropical diseases. And -- there are others as well, but those are some examples.

Raymond A. Myers - The Benchmark Company, LLC, Research Division

Great, sounds like a lot. And then I wonder if we are able to get any sense of the magnitude of new sales opportunities that you're pursuing for later this year. Could you frame that for us in some comparison to last year? Is it roughly the same size of opportunities more or less?

Lawrence A. Siebert

Well, we've got a number of opportunity that if they all were to come through would probably be more we could produce, to be honest with you. So it's a process where you continue to identify, filter and move forward with -- from prospect to PO, purchase order. And clearly, our goal is to try to continue to achieve the kinds of double-digit top line growth that we have achieved for many, many years. And so given that goal and the falloff in the Brazilian revenue segment, and we certainly hope that, that will -- we will be able to replace that and then some in order to achieve that growth in addition to the growth that we certainly expect to achieve in the U.S. with Alere this year, which we're very confident that they will achieve growth for our lateral flow test this year.

Operator

[Operator Instructions] Our next question is coming from Paul Nouri from Noble Equity Funds.

Paul Nouri - Noble Equity Funds

Larry, you have a lot of new initiatives coming up, a lot of opportunities and obviously, they take spending. Is there a focus on staying profitable while making real headway in some of these opportunities?

Lawrence A. Siebert

Our focus is on growing the business for the long-term and we don't -- we are certainly focused on continuing to grow the top line and invest in new opportunities that we see fit. There can be variations from quarter-to-quarter, but clearly, all things being equal, we'd much rather be profitable.

Paul Nouri - Noble Equity Funds

And when you talk about capacity expansion, might it involve purchasing or leasing an entirely new space? And if so, do you think that will be geographically close to where you or are you thinking about going somewhere else in the country or even in another country?

Lawrence A. Siebert

Our current focus is in this area because this is where our key people are and our key talents and we think that having the intellectual property and our employees based here, and the FDA approval, so forth that we have that we think are key competitive assets of the company are important to maintain. If we move our business to the -- some developing world market, where maybe costs are lower, we risk losing some of those competitive advantages. On the other hand, I will say that one of the things that we have been looking at is emulating the -- in some ways -- in many ways, the model that we developed in collaboration with FIOCRUZ in Brazil with other partners in other countries, whether that be directly with Ministries of Health or with public private partnerships that are between the Ministry of Health and some private group in that country. So that wouldn't necessarily be a move, but it would be a way for us to generate new opportunity and have our products ultimately produce in a lower cost -- potentially a lower-cost market while, I think, having a better way to protect our intellectual property.

Paul Nouri - Noble Equity Funds

Yes, I actually think that way makes a lot of sense. You said you gained some headway into other countries in South America. Was it focused on a couple of countries or are you really gaining headways throughout the continent?

Lawrence A. Siebert

I'd rather not go into the specifics of the country, but we've had some large orders in the past from large countries and that may happen in the future, but we've got a number of initiatives in a number of countries -- a number of prospects in a number of countries so I will not go into the specifics until we have something definitive to report about it.

Paul Nouri - Noble Equity Funds

And the R&D in the quarter was fairly well controlled. Might we see that pick up throughout the rest of the year or is that a level that we can expect around $1 million?

Lawrence A. Siebert

I'd say that we'll probably going to tick up, we're definitely going to tick up in the third quarter because we're spending on CLIA waiver which is not an internal R&D cost. It's an external trial that's going on that we budgeted for $700,000. So we will see the lion's share of that expense in this current quarter.

Paul Nouri - Noble Equity Funds

And with all the business you've been doing in Brazil, is there an issue of having a lot of your cash stuck in that country or have you been repatriating it?

Lawrence A. Siebert

No and yes. No issue with getting paid and it's not -- do you have any comment on that, Rich.

Richard J. Larkin

No. We don't have an operation down there so that -- entity down there is being paid on our behalf or manufacturing on our behalf. So right now, it's an arm’s length sale from the U.S. and the payment for shipment of the goods is paid in U.S. dollars to us here in the U.S.

Paul Nouri - Noble Equity Funds

Okay. well, that's good. And the accounts receivable, I mean they're not really high, but is there any tick down we can expect there in the next quarter? Like, are there any special items that make it higher than usual?

Lawrence A. Siebert

The short answer is I hope not and I hope that we continue to grow our sales, so therefore, our receivables will take up there. Obviously, you like to collect the cash, but we don't really have any issues in that area. So again, it's a matter of as we talked about production and so forth. We had some issues in the beginning of the quarter, so most of the sales took place in the last month and therefore, results in a higher receivable.

Paul Nouri - Noble Equity Funds

And you'll be getting licensing revenue from Bio-Rad from the European sales?

Richard J. Larkin

Yes. We have a 7% royalty agreement that we expect to start trickling in after the next -- starting, I guess, 45 days after this current quarter is when the first modest check will be, I assume, flowing in, but hopefully it will start to build and that will be a nice little source of revenue -- royalty revenue.

Paul Nouri - Noble Equity Funds

And touching on the over-the-counter for a minute. I mean, it's just my opinion that I think the $40 price level is prohibiting consumers from buying it on a larger level. Is that something that you guys think that if you went that route, you could bring it down from there? I mean, I think a lot of it has to do with the way that they have to prepare the test. So that's how they kind of got the approval from the FDA, but do you think there's anything you could do to bring down the cost?

Lawrence A. Siebert

Well, I mean, these are the same products at the nub of it, the same product that's already being sold in the professional market for under $10 in the U.S. market and for a couple of dollars, plus or minus in the international market. So there's certainly plenty of room from the cost of goods. Obviously, there's a lot of packaging and just to get to that point and to get on the shelves, I think that certainly, Orasure has put together a very expensive package that's certainly -- that cost could be brought down. But I think the bigger question is, can you justify a return on investment for the -- all of the other cost? Meaning getting approval which is in the $5 million to $8 million range. Orasure has spent a lot more than that, so we could bring down that cost, but even $5 million to $8 million is still -- you need to have a return on that from your product price. And of course, all the marketing cost. So it's a longer answer maybe, than you wanted for the question, but if -- there are many aspects to it and right now, I mean Orasure is spending quarterly, and they will spend, I think, I listened to their call yesterday, I think it's $7 million in marketing expense, in addition to the cost of the product. So that's the issue. Can the -- if they bring it down by half to $20, are they going to make it into a 10 million unit market from 10,000? Of course not 10,000, but like several hundred thousand. I don't know the answer to that right now, but we're certainly watching it and we're hoping that they're -- if they continue to double their sales quarter-over-quarter, they've done that once so far, they've only had 2 quarters, they continue to do that then it becomes maybe more interesting and then -- maybe, I know they're doing -- they said, they're doing a number of surveys and they realized themselves that they need to drop the price.

Paul Nouri - Noble Equity Funds

Yes, I mean, I guess, I think that with them spending so much on marketing, you guys could actually benefit, if it did become a mass market, if you were able to see a competitive product in there and not having to spend all that money yourself, just creating the awareness that is there.

Lawrence A. Siebert

We agree. I agree with that.

Paul Nouri - Noble Equity Funds

And the last question. Are there any other companies that you know of that are in the R&D phase or at the approval phase going for an oral HIV product?

Lawrence A. Siebert

None that we're aware of, no.

Operator

Our next question is coming from Joe Munda from Sidoti & Company.

Joseph P. Munda - Sidoti & Company, LLC

Larry, real quick. On the topic of Brazil, just going back looking at your prepared remarks and the slides and what you just said. In the slide it says the opportunity there is for possibly $7 million. But in your prepared remarks, you're expecting it to come down to $6 million. I was just wondering if you could give us a little bit more color on what's going on there and about your comment about their scaling up a little bit slower than you had anticipated.

Lawrence A. Siebert

Yes, I mean, we get forecasts from them that are updated from time to time and there may have been a lag between the $7 million and the $6 million. I think, actually, the number is somewhere between...

Richard J. Larkin

It's between the 2.

Lawrence A. Siebert

$6 million and $7 million...

Richard J. Larkin

Depending on how we round it, I guess.

Lawrence A. Siebert

So there was a discrepancy there. The -- what's going on there is that they are really at the mercy of the Ministry of Health which is their customer and -- their sole customer, effectively. And if they -- if the Ministry of Health has not been able to ramp up a particular screening program as according to the schedule that was originally indicated to them, then they need to pull back on what they supply, which is of course means that they pull back on the orders from us. And they are able to do that under our agreements with them. There's no issue with that. In fact they've been quite -- it's been quite a good collaboration with them. They're recognizing that they want to complete these agreements in ways that they obtain the rights to the technology. So I think it's -- they're-- one of the things that's going on, if you will, is that there's some lag in what's happening out in the field in terms of the scale of the program. How that could get conveyed to the Ministry of Health. How that gets conveyed to FIOCRUZ and how that gets conveyed to us. And I think, you have -- things like the carnival that happens in February that pretty much shut down a lot of the country for weeks, and so there's some communication lag. So these are kinds of the things that we have to deal with. But I think long-term, the program is going to play itself out as we have always anticipated, which was -- would be a finite opportunity that has been a great opportunity for us to validate the various DPP products under those agreements and that we need to and are very focused on diversifying our business in Brazil, as well as other markets, and we're doing that. And in some ways, the signal that we got that this was going to maybe be reduced sooner rather than later has motivated us to be more aggressive to grow our business in other direction. So that's what's going on there and we still have a good relationship there and we're looking, as I mentioned, to develop other opportunities in Brazil because we think it's a great market and including other opportunities with FIOCRUZ. So it's not necessarily the end of our FIOCRUZ business, even after these agreements play themselves out, but ultimately, we want to find other ways to participate in what we think is a great market to participate in and we look forward to reporting on some of the developments related to that as soon as we can.

Joseph P. Munda - Sidoti & Company, LLC

Larry, remind me, isn't it exclusive with FIOCRUZ?

Lawrence A. Siebert

It is an exclusive under certain -- within certain definitions of the market. For example, it doesn't include the private market. It's a little bit different depending upon the product and it's only -- assuming that they achieve the minimum requirement, that trigger the technology transfer. So there are a number of permutations and conditions associated with exclusivity. Yes, there is exclusivity, but there are a number of restrictions and conditions associated with the exclusivity.

Joseph P. Munda - Sidoti & Company, LLC

You don't think competitive pressure then in Brazil?

Lawrence A. Siebert

I don't think what?

Joseph P. Munda - Sidoti & Company, LLC

That competitors or competitive pressure is there. Look for them to kind of scale back or slow down with you guys and go with somebody else?

Lawrence A. Siebert

I don't think that FIOCRUZ is working with anybody else for these products. I do think that there are other bidders to the Ministry of Health that -- or suppliers, I should say, to the Ministry of Health that -- other companies that aim to have that business. That has always been a potential competitive threat to us in Brazil or to FIOCRUZ, even though they have effectively a right of first refusal to any Ministry of Health business, is the best way that I can describe it as far as I know. But there are certainly -- the Ministry of Health is not required to buy everything that they need from FIOCRUZ and certainly, there are products that FIOCRUZ doesn't supply or cannot supply. And so, yes, it is -- that is possible. I don't know the extent of it that is occurring here if at all.

Joseph P. Munda - Sidoti & Company, LLC

Okay, and then with what's going on with FIOCRUZ, currently, how does that impact -- you spoke about a transfer and conversion to license so please...

Lawrence A. Siebert

I can't hear you, Joe.

Joseph P. Munda - Sidoti & Company, LLC

In the slide, you talked about a transfer and conversion to a license on a technology, and, let's say, it's $6 million less in that opportunity, and let's say, that gets filled here in 2013. In 2014, are we going to expect then a bump in royalty revenue? How should we look at that?

Lawrence A. Siebert

Yes. So if you look in the 10-Q, we detailed what we have remaining under those agreements and as you may recall, the total value of those contract is $23 million. However, that $23 million is not a take-or-pay, it's a $23 million that is divided up against -- amongst 5 different contracts that is only a minimum requirement if they want the technology. And in fact, they've already exceeded the purchase requirement under certain contracts and have a long ways to go on their other contract, so that I believe, in addition, to the $6 million to $7 million that we anticipate for this year, based upon what's remaining under certain contracts and what's been exceeded under other contracts that they could order as much as an additional $9 million after 2013 in order for them to achieve the minimum requirement under all of the contract. So I'm not sure if that came through clearly, but -- so there -- which means that we could receive an equal or greater amount of sales from FIOCRUZ next year. But on certain contracts, there could be royalties that convert to that. So we don't have a forecast from them for next year. We obviously just received an updated forecast for this year. I think the updated forecast from them that we received actually goes -- for some reason, goes through January or something, right? But it doesn't go any further into 2014. So I think the way we look at it is, that it is -- we expect to get some meaningful business from FIOCRUZ, next year, I don't know if it's going to be $2 million, $7 million or $9 million, but it's going to be a meaningful part of our business, but ultimately, we're looking at other opportunities in Brazil, including with FIOCRUZ and others and other ways to grow our business. The best way I could describe it, but there are some details in the 10-Q about the specifics of the contract.

Joseph P. Munda - Sidoti & Company, LLC

Okay. And then just a couple more here. The Long Island facility that you guys are currently at, you said possibly looking at other facilities. Can you currently expand on the current facility? And if you don't and you go to another facility, do you lose the FDA and USDA recognition for that facility?

Lawrence A. Siebert

Well, when you say expand, we can certainly add shifts as we have in the past.

Joseph P. Munda - Sidoti & Company, LLC

I mean the physical structure?

Lawrence A. Siebert

In terms of physical space, there is -- as far as I know, no adjacent space currently available although we do have the opportunity for some space from our current landlord nearby. And the -- it depends upon what you use that facility for as to -- and so for example, we can move offices to the other facility and expand this current facility's production capacity and we've looked at and continue to look at a number of different alternatives and that's -- we have a task force that's looking at those alternatives. But no question that we have to take the regulatory factor into consideration and if you move a PMA-approved product or USDA-approved product to another facility, you need to qualify that approval. You would -- I mean, it's done all the time and it can be done, it's just has to be done right and smartly. That's -- hopefully, what we get paid to do.

Joseph P. Munda - Sidoti & Company, LLC

Okay, and then finally, on the follow-up to the OTC question. Is there any opportunity to taking the IP that you've got coming out on that space and licensing or it OEM-ing it someone else interested or say, you guys decided, we're not going to get into it, but there's somebody else interested in competing with Orasure, can you do that?

Lawrence A. Siebert

Yes. We -- in fact, one of the potential opportunities that we've been discussing for that -- for the product is a effectively an OEM type of arrangement with a -- an organization that is -- seats in the over-the-counter market place. So that is certainly something that we would be looking at but -- and/or some combination where we would not necessarily give up as much upside as we would in such a deal. So those are all on the table.

Operator

[Operator Instructions] Our next question is coming from George Marshall [ph], a private investor.

Unknown Attendee

Tuberculosis update, please?

Lawrence A. Siebert

Sure. We are in the third year of the Phase II NIH grant. I believe we have provided an update in the 10-Q, go back to that particular section because I don't remember. Here we are. We have identified the additional antigen for the antibody detection DPP test and we are now in the process of doing some -- putting those together for some evaluation. But to go off script, if you will, I mean, the challenge in TB is that there are -- it is very difficult to detect active pulmonary TB, particularly in this developing world where you've got a lot of co-infected patients with -- that also have HIV and who are therefore, immune compromised in order -- so it's very difficult to accurately -- or to have the sensitivity on a serology only test. So there are markets where we have -- believe that the serology test that we are developing will have applicability. So that's what we're doing but in order to have a test that's going to be useful in a lot of these markets, particularly where you have some of these resistant type -- types of TB, I think we will need to do more work, but we are making progress. We plan to have a product completed by the time the Phase II research is done, which is in a year. I don't know how applicable that product will be to some of the most vexing areas -- some of the most endemic regions for TB.

Operator

Our next question is coming from Bob Graham [ph], a private investor.

Unknown Attendee

I would like an update on the non-human testing [indiscernible] animal health. Is not Bovine TB approved for deer? But -- and I'd like to know if there's any chemically paired [ph] with, I believe the federal agency requested that you submit a bid for that product and then I also like an update to see what if that is proceeding [indiscernible] to get approval for a title [ph] ?

Lawrence A. Siebert

I'm having difficulty hearing you, Bob, so why don't you call me in my office a little bit later, because you're distorted and we've kind of run up against the time, but do you have the number here of the company?

Unknown Attendee

I do.

Lawrence A. Siebert

Okay, so why don't you call in about half hour?

Sorry I just have difficulty hearing you. Okay, I think that's it. Thank you all very much for listening and for your support. We look forward to updating you, if not before, certainly in early August when we report our second quarter results. Have a good day.

Operator

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

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