Chembio Diagnostics Discusses Q2 2013 Results - Earnings Call Transcript

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

Chembio Diagnostics (NASDAQ:CEMI)

Q2 2013 Earnings Conference Call

August 8, 2013 10:00 ET

Executives

Bobbi Coco

Larry Siebert - CEO

Rich Larkin - CFO

Analysts

Bill Bonello - Craig-Hallum Capital Group

Paul Nouri - Noble Equity Funds

Joe Munda - Sidoti & Company

Operator

Greetings and welcome to the Chembio Diagnostics Second Quarter 2013 Financial Results Webcast. (Operator Instructions).

It is now my pleasure to introduce your host Ms. Bobbi Coco. Thank you Ms. Coco you may now begin.

Bobbi Coco

Good morning this is Bobbi 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 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, 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?

Larry Siebert

Thanks Bobby. Good morning, everyone and thanks for joining us. We had an operating loss in the second quarter which loss was due to a combination of increased operating expenses especially in increase in clinical trial expenses related to our DPP HIV 1/2 Assay CLIA Waiver study decreased product sales as compared with Q2 of 2012 and increased manufacturing overhead cost and anticipation of stronger revenues in the second half of 2013. Still the second quarter was marked by a number or important achievements in developments for our product, technologies including the single largest purchase order in our history of $5.3 million CE Mark approval of our SURE CHECK HIV 1/2 Assay solid progress in our international and U.S. product development and commercialization efforts, new sponsor development agreements and a new distribution collaboration in Brazil. With our CLIA Waiver studies for DPP HIV1/2 oral fluid assay has more than half way completed we look forward to launching this as first in our pipeline of U.S. brand products in 2014. We also look forward to working on a mutually agreeable arrangement with Alere as it relates to our lateral flow products in the U.S.

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

Rich Larkin

Thanks Larry. First I will go over our second quarter results and then I will 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 in the prior-year period, primarily due to declines in DPP product sales in Brazil and particularly to 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, grant and royalty revenues for the three months ended June 30, 2013 increased to $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 to the lower DPP sales and a product mix and higher cost 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 with $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 Assay 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 changes 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 $0.03 per diluted share, compared with net income of $309,000, or $0.04 per diluted share, for the prior-year period.

Now turning to our balance sheet, the company had cash, the Company had 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 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. Again the April 2013 common stock funding of $5.41 million accounted for most of this increase.

Thank you for your time and now I will turn the call back over to Larry.

Larry Siebert

Thanks Rich. First as I had mentioned upfront the operating loss in the second quarter is primarily due to a combination of increased operating expenses especially in increasing clinical trial expenses attributable to our DPP HIV 1/2 Assay CLIA Waiver study 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 and anticipated orders these (inaudible) increases were necessary and we anticipate completing shipments of the $5.2 million award that we announced in June during this current third quarter.

Second as reported new sponsored research and development contracts with U.S. government agencies or the contractors as compared with the second half of 2012 will subsidize our R&D cost extend our development capabilities and know-how especially with new product opportunities and also have a positive impact on our gross margins and operating results during the second half net of the cost 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 growth margin partially offset by the cost of direct sales and sales and marketing team supporting this effort. We’re developing this team and this added cost 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 2 to 3 years.

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

As for our development programs we made good progress in our CLIA Waiver studies where our DPP HIV 1/2 Assay and in our having established a regulatory pathway to approval for our unique DPP HIV 1/2 Syphilis Assay. 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 applications until likely the fourth quarter.

This means that we would now reasonably expect to receive a CLIA Waiver decision until the first quarter of 2014. Well that’s disappointing, we believe this kind of delay is not unusual in these circumstances. On the DPP HIV 1/2 Syphilis combination product we have also made good progress with this product in terms of international evaluations and registrations, we believe this will result in revenues in the near term. However here too on the FDA side the review timelines 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 510k. The PMA is more time consuming due to the increased statutory review time and this is the main reason for the changed timelines.

Also in so far as our Hepatitis-C development program with USPSTF recently issued file a recommendations on STD testing certainly will help the demand for an STD rapid test particularly as more applications (ph) and convenient therapies are expected to come to market causing it an anticipated scale up in testing both in the lab and at point of care. However the recent results of (inaudible) share both mismarket and over the counter HIV test market would they have in both cases exclusive products continue to us reasons to proceed cautiously in this area.

Meanwhile our U.S. product revenues have remained strong during a challenging period that we’re ever more optimistic that routine HIV testing will be expanded in the U.S. as 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 recommendations. This is a very important development as we near full implementation of the Affordable Care Act. By the establishment of our own focus sales and marketing team we will be provided with the option if we choose to rebrand our FDA through lateral flow, HIV rapid test which are currently sold by Alere under it's (inaudible) 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 to competitive rapid HIV test in United States and that decision triggered provisos in our agreements with Alere which gives Chembio certain options exercisable at any time including termination of Alere’s exclusive rights to market either of both products and in the case of the Cassette Agreement (ph) to terminate the agreement entirely. The agreement in any case terminates in October, 2016.

Notwithstanding Alere’s decision to compete we believe they have every interest in continually to successfully market and promote our lateral flow products for so long that is in their best interest to do so.

We’re 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 opportunity to commercialize our U.S. manufacturing products, 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 top-line 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 and to the U.S. market with our first EPP point of care product and help to save and improve lives. Thank you for listening. Operator we’re now ready to take some questions.

Question-and-Answer Session

Operator

(Operator Instructions). Our first question comes from the line of Bill Bonello - Craig-Hallum Capital Group. Please proceed with your question. Your line is live.

Bill Bonello - Craig-Hallum Capital Group

Just a few question, the first one just can you repeat Larry you went pretty fast, the timing of the delay on the HIV-Syphilis did you see submit late ’14 and approval early ’15 is that what you’re now expecting?

Larry Siebert

Now exactly, what we said is that we would have a PMA approval by the end of 2014 so it's much earlier. In fact we expect to submit is early part of 2014 but because of the PMA we tried to take the conservative estimate and expect to get the PMA approval by the end of the year and then what I said as our early 2015 was CLIA Waiver.

Bill Bonello - Craig-Hallum Capital Group

And then that’s for the HIV-Syphilis what about the HIV-Screening confirm?

Larry Siebert

That right now we’ve to suspend any estimate of time because we had the 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 and until we resolve that we can’t make an estimate.

We’re making progress on that but I can’t, it would be imprudent to make.

Bill Bonello - Craig-Hallum Capital Group

Yeah 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 onetime need for that client?

Larry Siebert

We don’t know we certainly hope so, we think that there is opportunity to continue to do business with this customer and this region and other regions it's really as you know sometimes a country or 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 will only have funding for a particular year. So at the end of the day it's all about funding for these programs. So basically the answer is yes and yes and it could recur, it may not we’re looking at other opportunities in that region as well as many, many other region. So it is 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.

Bill Bonello - Craig-Hallum Capital Group

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 U.S., do they have inventory that they might be working down over the next couple of quarters? Should we think about you know maybe your U.S. sales being lower than what we would have otherwise expect it, not because of competition but because of the intention of competition?

Larry Siebert

I’ve no indication of that at this point and I think that they are, they manage their inventory pretty well so that they are in a fairly short you know at least if you I don’t, bad metaphor to put 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 maybe the case this year, you know I don’t know we had a very good have with them in the first half but they are meeting their expectations and our expectations that we have talked with them for the year, they are very committed to these products, they are doing a great job. I don’t have any reason to believe there won't be change at this point.

Bill Bonello - Craig-Hallum Capital Group

Okay and this quarter tracking kind of consistently with last quarter?

Larry Siebert

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. We have quarterly calls with Alere and they are continuing to do well with our products and they have every reason to keep their customers have become accustomed to our products satisfied.

Operator

Thank you. Our next question comes from the line of Paul Nouri with Noble Equity Funds. Please proceed with your question. Your line is live.

Paul Nouri - Noble Equity Funds

The government development agreements that you’ve I think there is at least two of them that are funded at the end of the year?

Larry Siebert

Correct.

Paul Nouri - Noble Equity Funds

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

Rich Larkin

Yes. We did recognize some of those grants in the second quarter and I would turn your attention to foot note number three, where we talk specifically how much at least for the six months we have received from the different grants.

Paul Nouri - Noble Equity Funds

Okay and then the $5 million you brought it up earlier in the call, you’re going to complete the rest of it in the third quarter?

Larry Siebert

That’s our current expectation, yes.

Paul Nouri - Noble Equity Funds

Okay and I notice that your Africa sales picked up pretty nicely, is that, I mean I know these are mostly tender but do you see that as something that’s sustainable?

Larry Siebert

We have more opportunities in the pipeline in these regions than we have had in the past, what I put it's very difficult to predict but we certainly have some nice opportunities that we’re working on. You’ve to be careful about comparing one quarter to the previous one because you may have had good Africa sales in Q1 of 2012 and you’re not seeing that comparison. So and that I can recall off hand but it's you tend to for any region they tend to order for an extended period on once and sometimes it's goes in different quarter so the comparison becomes difficult.

Paul Nouri - Noble Equity Funds

And similar to the agreement you struck in Brazil where I guess the manufacturing agreement, could you see doing something like that in Africa, will that make you more competitive in second or third world countries?

Larry Siebert

Absolutely. And we’re looking at not only in Africa but in Asia as well.

Paul Nouri - Noble Equity Funds

Okay and then finally on Alere what, they are going to put out a new product what is their motivation to sell yours as hard as they have been while selling their new products?

Larry Siebert

We’re going to see and it obviously 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 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 in our good strong track record in terms of manufacturing and clean record with the FDA and so forth that they want to continue to make sure those customers are serviced properly.

Paul Nouri - Noble Equity Funds

Okay and then final question turning back to the big order that should be completed in the third quarter. Your gross margin picked up a little bit this quarter versus the prior few, should I not expect that to continue because of this big order because of the large order it might be a lower margin or it might go in the wrong direction?

Larry Siebert

We don’t predict our margins but we indicated in comments or in the queue or both that we expect to have, we have been experiencing improved yields 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 than maybe a little better than what we have had in the past and certainly from a utilization standpoint we will be utilizing, we’re utilizing our facility at a higher rate so that those are all good omens for improved gross margins although I’m not predicting that the gross margin will be better.

Operator

Thank you. (Operator Instructions). Our next question comes from the line of

Joe Munda with Sidoti & Company. Please proceed with your question. Your line is live.

Joe Munda - Sidoti & Company

First off I know Alere has been 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?

Larry Siebert

I think the, anything is possible. There are no issues that are off the table and so we had a few conversations with Alere so far, we will have more in the days and weeks ahead and I think that notion applies not only to Alere but other companies. And the fact that we have those lateral flow products potentially available outside of the Alere agreements if we so choose or to modify the agreement in a way that we have more flexibility with those products that could make those quite 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 biology service unit is selling so they very much want to keep that revenue stream for as long as possible.

Joe Munda - Sidoti & Company

And then following up on a question regarding Africa, the order or the ordering 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 possible player leaving that space or are you gaining share in a competitive environment, I’m just trying to get a sense of how you know how successful you have been in Africa?

Larry Siebert

I think both of those things have occurred and may occur that we certainly have had situations where and really to the lot of these countries they have a sequence of test that are used and sometimes there is a multiple, there are alternative tests that are used and so in some cases test 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’ve to be in it to win it and we are in it more than we have been in the past. We’ve a nice pipeline of opportunities but it's the online thing you can say about that is that when you’ve more you’ve a better opportunity to getting some in and we tried to be more focused in terms of the way you approach and discount the opportunities and I think we have more than we have 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 blow-up quarter.

So 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 but it's better than the alternative which is to rely only on the U.S. market like one of our competitors where they are very small portion of the business is into national and it enables to be more cost competitive, to have higher throughput and lower cost of goods and that helps with everywhere.

Joe Munda - Sidoti & Company

Okay I got two more for you Larry, in regards to Brazil you know through the first half of the year you got about 4.1 million in sales to South America and then in the investor presentation you guys provided, you talked about potential for FIOCRUZ of 9 million. To me it looks like attracting obviously around 8 million is that a possibility for FIOCRUZ.

Larry Siebert

I think you’re mixing up, the 9 million is what we were talking for 2014 and the number that you’ve quoted for this year 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 was 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 ship in the first half and the second half.

Joe Munda - Sidoti & Company

And that 9 million number you’re quoting for 2014 is that related to the events the world-cup and the Olympics coming and you went to state the possibility that they could actually increase that number you know from 9 million to maybe 12 million depending on demand.

Larry Siebert

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

Joe Munda - Sidoti & Company

And then my final question here on the home HIV front, you guys quoted in the press packet that’s the presentation I’m sorry, looking at OraSure (ph) it's home HIV I mean they did 1.9 million in the second quarter and 3.4 for the first six months and they are 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 are not seeing some of the results that they probably would have like to see or you know are you still is it still something that is a possibility.

Larry Siebert

Well it's still something that is 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 a 100 million to 50 million and the 100 million was already an 80% discount from what OraSure (ph) (inaudible) has been saying at least in the past I’m not sure whether they have changed that at all, the word is that they have.

Joe Munda - Sidoti & Company

I heard 500 million when he was giving an interview on CNBC he actually said 500 million.

Larry Siebert

Right that’s the number I recall. So we’ve been using a 100 million in our presentation and you know discussions but now I think that number is more likely to be 50 million, these are guestimates 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 are not spending money as some would say they are not spending enough because of the cost of getting it to the retail distribution but 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 backburner.

Joe Munda - Sidoti & Company

Okay well following up with what you just said, I mean is there a threshold number as far as market opportunity where what you say is not worth our time?

Larry Siebert

Well we’re getting close because not only is it the market opportunity but it's the cost of entry and not only the regulatory approval but getting into market although there are other ways to get into the market more cost effectively than through a branded strategy that they are using. And certainly for example a store brand strategy when there is a branded alternative you know 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 even a smaller market. So hate to be so sober about it but that’s our job to be realistic about what the opportunity is.

Operator

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

Larry Siebert

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 later than our, during our third quarter report in early November. Thank you.

Operator

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

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