Medical diagnostics may not seem as glamorous a field like pharmaceuticals or medical devices, but it sure is a profitable one. In-vitro medical diagnostics is currently a $40 billion dollar market that provides revenue multi-billion dollar companies like BioRad (NYSE:BIO), Abbott (NYSE:ABT), Beckman Coulter (NYSE:BEC), Johnson and Johnson (NYSE:JNJ), Invitrogen (NASDAQ:LIFE), Quest Diagonostics (NYSE:DGX), Inverness (IMA), and the list goes on. So when a company with an established history of innovation and strong record of sales comes on the scene, you better pay attention, because there is a tremendous potential for them to gain a sizeable share of the profits in this multi-billion dollar market. You probably have never heard of Chembio Diagnostics (NASDAQ:CEMI), but they emerged on the field in 2001 and are starting to make a name for themselves. Although Chembio Diagnostics (and their stock) continue on relatively unnoticed, some recent developments are about to make them noticeable, and you can likely expect a renewed interest in Chembio Diagnotistics to increase the price of their stock also.
Chembio Diagnostics is a player in the currently $7 billion point-of-care test (POCT) market. The demand for POCTs is increasing dramatically, as POCTs offer significant advantages over the traditional centralized lab tests. They reduce costs by simplifying the test procedure and by offering early and prompt diagnosis on site, and they eliminate return visits and expedite necessary intervention. Chembio Diagnositics is a profitable company who already generates millions in revenue, increasing quarter over quarter, selling FDA approved test kits. Beyond this continued growth, the immediate future is bright for Chembio Diagnostics as they are seeking to gain CE Mark (European) approval, and approval in two developing countries before the end of this year. But the bright future for Chembio Diagnostics only begins there- their novel and patented DPP technology (US patent 7189522) is being used to develop several more news kinds of test kits that promise better sensitivity (10-50 times over existing lateral flow kits) and faster results (read more at www.chembio.com/newtechnologies.html). Chembio plans on gaining CE Mark and FDA approval for its HIV DPP kits in 2010 through 2011. Chembio diagnostics has also an extensive development program and collaborations with major diagnostic companies, the World Health Organization, the National Institute of Health, Brazil’s Oswaldo Cruz Foundation to accomplish it goals of gaining market share elsewhere.
Chembio Diagnostics main products are three rapid tests for the detection of HIV. Chembio's two FDA PMA-approved, CLIA-waived, rapid HIV tests are marketed in the U.S. by Inverness Medical Innovations, Inc under the Clearview name. The Clearview product made for Inverness already has FDA approval, and is seeking CE Mark approval as well. According to Chembio's last 10Q, they have nearly completed a required analysis of this test and anticipate that this will be the final item they need to complete the filing for the CE Mark for the Clearview Complete HIV 1-2 test by the end of this year or early 2010. Chembio markets its own HIV STAT-PAK line of rapid HIV tests internationally to government and donor-funded programs directly and through distributors. Chembio has developed a novel and patented point-of-care test platform technology, the Dual Path Platform (DPP) technology, which has significant advantages over existing lateral-flow test kit technologies. This technology is providing Chembio with a significant pipeline of business opportunities for the development and manufacture of new products based on DPP. Chembio is headquartered in Medford, NY, with approximately 100 employees. Chembio is licensed by the U.S. Food and Drug Administration (FDA) as well as the U. S. Department of Agriculture (USDA), and is certified for the global market under the International Standards Organization (ISO) directive 13.485. From this brief description, it should be clear that Chembio is not the 15 person developing company typical of penny stocks; they have an established business, client base, and profits, with even more room to grow.
Please view the Chembio Diagnostics investor presentation below:
Nationally, the sales of HIV test kits have been a boom for the diagnostic test kit business because of the President's Emergency Plan for AIDS Relief program, a multi-billion U.S. taxpayer funded program established in 2003. This benefits Chembio Diagnostics because under this program, non-FDA approved HIV tests used offshore are requisitioned by the US government. In addition, Congress is currently drafting a federal proposal to have Medicare cover HIV testing, which would further stimulate the sales of rapid HIV test kits (Medicare covers 45 million people). These sources of potential revenue are not trivial to CEMI, as rapid HIV tests represent much of Chembio’s product revenues in the first half of 2009. In addition to its marketed HIV tests, Chembio has developed several rapid tests for the detection of HIV and Syphilis using a variety of body fluids including saliva. These tests are from a whole family of new Chembio products based on the DPP technology. Two of these will be marketed under Chembio’s label (DPP HIV 1/2 Oral Screening Assay and DPP Syphilis Screen & Confirm) and two will be used in private label agreements with The Oswaldo Cruz Foundation (“FIOCRUZ”) for the Brazilian public health market. Completion of the FIOCRUZ agreement will trigger approximately $900,000 of technology transfer fees payable to Chembio. The DPP HIV 1/2 test also now being evaluated in Africa in two separate studies in sub-Saharan Africa, one contracted by the Chembio, and one being conducted by the CDC Global AIDS Program. They expect to complete a portion of the clinical trials in support of a Pre-Marketing Approval (NYSEARCA:PMA) application for this product during the fourth quarter 2009. This product will enable Chembio to participate in the oral fluid testing market segments in the United States and globally. According to the timelines discussed in their most recent quarterly statement, Chembio expects to submit for and gain approval for the HIV screen in the Brazil and other developing countries in the last half of 2009/ early 2010. Chembio also will continue to pursue EU CE Mark and US FDA approval with expected completion in the first half of 2011.
According to their last 10Q, Chembio is also currently performing the trials necessary and expect to gain approval to market the DPP Syphilis Screen & Confirm in the Developing World in the last half of 2009/ early 2010, with EU CE Mark approval in the first half of 2010 and US FDA approval in the first half of 2011. The first phase of a multi-center evaluation sponsored by the World Health Organization is commencing during the current quarter, and they expect to have the first phase results during the fourth quarter. They are also finalizing internal documentation in order to submit a proposed clinical plan for this test to the FDA during the third quarter of 2009.
In addition to HIV tests using the DPP platform, Chembio has a number of additional products under development that employ the DPP technology:
1. DPP Hepatitis C and DPP Hepatitis C/HIV Oral Fluid Antibody Tests
Prototypes of these products have been developed and are being evaluated in a study that has been organized by the National Center for HIV/AIDS, Viral Hepatitis, STD, and TB Prevention (NCHHSTP) at the Centers for Disease Control and Prevention (NASDAQ:CDC) of the Department Of Health and Human Services. In the recent 10Q Chembio stated that the evaluation will be completed during 2009.
2. DPP Influenza
Research & development efforts are ongoing with respect to the development of antigen (Flu A & B) detection and antibody detection (multiplexed strains to ascertain specific immune status in connection with vaccine programs) assays. Chembio is developing its own test, is working with a potential commercial partner that already has a Flu A/B test in the market. Chembio is also developing a multiplex antibody test pursuant to a funded pilot program with the Influenza division of the CDC which, if successfully developed, could be used to determine immune status in connection with vaccine administration.
Now with the recent declaration of an H1N1 emergency, the FDA is permitting Emergency Use Authorization (EUA) approval for H1N1 diagnostic kits to be used as part of the CDCs testing and vaccination program. In their most recent 10Q, CEMI stated: In addition, the United States CDC has issued a purchase order to Chembio for a multiplex test related to pandemic influenza which, if the product meets certain initial performance expectations, could result in a broader funded collaboration with CDC in this field. In the most recent 10Q, Chembio stated that they anticipate delivering this prototype during the third quarter of 2009. If CEMI was to gain EUA approval for their prototype flu diagnostic kit, this would be a major development.
3. DPP Leptospirosis
In June 2009 Chembio was awarded a three-year $3 million Small Business Innovative Research (SBIR) Phase II grant from the United States National Institutes of Health (NIH) to fully develop, validate, and commercialize a rapid diagnostic test for leptospirosis for general use worldwide. The test will be developed with DPP and will utilize proprietary reagents developed by Cornell University and the Oswaldo Cruz Foundation at the Brazilian Ministry of Health. Development of the test will be in collaboration with the Division of Infectious Diseases, Weill Medical College, Cornell University in New York and the Oswaldo Cruz Foundation, the largest biomedical research institution in Latin America. In the Phase I work completed in 2008, which occurred with this same collaborative group, novel diagnostic targets were identified and evaluated in a prototype test in Chembio’s patented DPP format. The studies demonstrated that the test prototype had an overall sensitivity of 85% and a specificity of 90% using serum samples of leptospirosis patients from Brazil and Thailand.
4. Other developments
Chembio continues to work with commercial, governmental and private organizations in order to obtain research grants and other funding for development projects. By the end of this year, these programs will have netted over $2,650,000 to subsidize the development expenses while expanding the applications DPP and creating important collaborative relationships with to develop a multiplex test with DPP. These programs include work for Bio-Rad Laboratories, Inc., which work has achieved an additional milestone and will likely result in additional funded development work during the balance of 2009. This includes a received payment of $340,000, with an anticipated $165,000 more in the third and fourth quarters of 2009. They believe that the product development phase of this project is likely to be completed during the fourth quarter, enabling us to recognize the license fee and to begin the process of transferring the product to manufacturing and to enable regulatory submissions to be made by Bio Rad for this product.
Chembio also received DPP grants from governmental agencies for $55,000 for leprosy research and $110,000 for Human TB Serology In April 2009 they entered into a Services Agreement with the Infectious Disease Research Institute to develop DPP products for Leishmaniasis and Leprosy for and have received $125,000 and which, subject to attainment of development milestones, will additionally provide us with approximately $125,000 within the next twelve months. During the first quarter we entered into a funded feasibility study agreement with the Foundation for Innovative and Novel Diagnostics (OTCPK:FIND), a non-profit organization funded by the Gates Foundation, related to development of serological tests for Tuberculosis and Malaria using DPP. Subject to achievement of additional milestones, additional funding will be provided by FIND for this project. They have received $125,000 and which, subject to attainment of development milestones, will additionally provide them with up to approximately $275,000 over the next 18 months subject to the attainment of development milestones.
Chembio anticipates that FIOCRUZ will receive required approvals from its regulatory agencies during 2009 for the DPP Leishmaniasis test, which will trigger approximately $900,000. These funds, if received, will help to underwrite the costs of the DPP® HIV and Syphilis regulatory submissions in the United States. In addition to the DPP products Chembio anticipates launching in Brazil through the agreements with the Oswaldo Cruz Foundation, they have several other contract development programs with third parties which are expanding the applications for our technology while also providing additional non-dilutive funding, including the $3 million, three year grant from the United States National Institutes of Health awarded in June 2009 to complete development of a test for Leptospirosis.
Stated timeline for expected approvals for DPP tests:
Market DPP® HIV 1/2 Screening Assay
Developing World: end 2009-start 2010
CE Mark: 1st Half 2011
US FDA: 1st Half 2011
DPP® Syphilis Screen & Confirm
DPP® Syphilis Screen & Confirm
Developing World: end 2009-start 2010
CE Mark: 1st Half 2010
US FDA: 1st Half 2011
Ongoing development summary- Chembio expects to complete by the end of 2009/early 2010:
1. CE Mark for the FDA approved STAT PAK HIV tests under the Clearview Complete name in early 2010.
2. Completion of a portion of the clinical trials in support of a Pre-Marketing Approval (PMA) application for the DPP HIV 1/2 test during the fourth quarter of 2009. They also anticipate the remainder of the testing to be completed during the first half of 2010, and a PMA approval during early 2011.
3. Regulatory Approvals in Brazil through the Oswaldo Cruz Foundation (FIOCRUZ) –for the DPP Leishmaniasis, HIV Confirmatory, and the DPP HIV screening tests. They anticipate that regulatory approval of these tests, registered under the label of their Brazilian partner, Oswaldo Cruz Foundation, will be obtained before the end of 2009.
4. The first phase of a multi-center evaluation sponsored by the World Health Organization for DPP Syphilis Screen & Confirm is commencing during the current quarter, and they expect to have the first phase results during the fourth quarter of 2009. They are also finalizing internal documentation in order to submit a proposed clinical plan to the FDA during the third quarter of 2009.
5. Approval to market the DPP Syphilis Screen & Confirm in the Developing World in the last half of 2009/ early 2010. They are also finalizing internal documentation in order to submit a proposed clinical plan for this test to the FDA during the third quarter of 2009.
6. A prototype for their DPP influenza test kit by the end of 2009. Research & development efforts are ongoing with respect to the development of antigen (Flu A & B) detection and antibody detection (multiplexed strains to ascertain specific immune status in connection with vaccine programs) assays. During the third quarter, Chembio provided a 3-band prototype multiplex antibody test (that included various Flu antigens other than H1N1) pursuant to a $50,000 funded pilot program with the Influenza division of the CDC.
7. Evaluation of the DPP Hepatitis C and DPP Hepatitis C/HIV Oral Fluid Antibody Tests by the end of the year (2009).
They believe that the product development phase of this project is likely to be completed during the fourth quarter, enabling us to recognize the license fee and to begin the process of transferring the product to manufacturing and to enable regulatory submissions to be made by Bio Rad for this product.
As you can see, the next several months are going to be exciting for CEMI and its investors.
Chembio’s most recent quarterly results released on November 4 results are something to get excited about: Chembio showed an increase in net income of 279% over their last quarter, driven by a 29% increase in revenues. Total revenues were $4.36 million for the third quarter, which is a 24% increase over the same quarter last year. In the first nine months of 2009 product sales increased 14%, from $8.11 million to $9.25 million. Their operating profit was approximately $100,000 in the first 9 months of 2009 compared to an operating loss for the first nine months of 2008 of $1,412,000, a swing of $1,512,000. At current the current income and revenue levels shown this quarter, this represents a forward looking annualized $17 million in revenue and $0.04 per share in forward net earnings. However, we expect to see continued rate of growth as they have shown the past couple years, which would bolster these numbers even further. From this, it is clear that Chembio Diagnostics has left the development stage, generating staggering increases in revenues, and is currently trading at a forward P/E of less than 8. This is a ridiculously low valuation, as the typical P/E in this industry ranges closer to 35.
The profit allowed the company increased its cash position during the first nine months of 2009 by approximately $665,000 to $1.88 million. As you can see, this is NOT a struggling biotech company waiting for FDA approval. In fact, I see Chembio Diagnostics as ripe fruit for a buyout opportunity. I am not the only ones who see this in CEMI’s future- others are paying attention as well: According to a recently filed SC 13G form, on November 2 Platinum Partners Liquid Opportunity Master Fund bought a new position of 4,096,674 shares of common stock in a pre- arranged ECN trade, representing 6.6% of all outstanding shares. This is a significant investment in dollar value and stake in the company. Why would this private investment group suddenly take such an interest in CEMI? We can only speculate, but the revenue and growth of the company are good reasons they would take such an aggressive position in this small company. One successful investing strategy is to simply "follow the money"- see where the "big boys" are putting their money and follow suit. As Platinum Partners is a private hedge fund, very little information is available about them (visit http://platinumlp.com and see for yourself). However, with over $700 million in assets, the Platinum Partners Value Arbritridge fund boasts an impressive 25% year over year gain over the last 3 years, putting them in 15th place in returns for all hedge funds (rated by the Wall Street Journal). It is now clear that successful "big boys" are putting money into CEMI. Perhaps Platinum Partners based their decision to take a major stake in CEMI due to the inherently low valuation, expecting the P/E ratio to catch up to the industry standards, which would give CEMI a share price of double to quadruple what it is currently trading at.
But there may be much more to the story than that: An investigation into who Platinum Partners is reveals that they may not be simply just making a "value play" with CEMI, they see a strong potential for much more dramatic changes coming to CEMI. Following a trail of SC13G filings, Platinum Partners Value Arbitridge Fund has taken beneficial ownership in 14 companies in 2009. Interestingly, nearly all of these were in Special Purpose Acquisition Companies (SPACs). SPACs are an investment vehicle that facilitates investments in private equity transactions, particularly leveraged buyouts. SPACs do not have any regular operations, only the intention of merging with or acquiring a company with the proceeds of the SPAC's initial public offering (NYSEARCA:IPO). Taking beneficial ownership in individual companies and/or SPACs is a way hedge funds can orchestrate and benefit from corporate buyouts.
This begs the question: Why does a hedge fund who specializes in acquisitions take a sudden interest in CEMI? The Platinum Partners Liquid Opportunity Fund, which filed the SC13G for CEMI, is a new fund started in June of this year, so even less information is available about this fund. However, since its inception this June, Platinum Partners Liquid Opportunity Fund has only stated beneficial ownership in Chembio Diagnositics. The Platinum Partners have clearly demonstrated their ability to generate consistent returns in the top 20 of all hedge funds; is their investment in CEMI a harbinger for the future? Using the "follow the money" approach, this substantial interest in Chembio Diagnostics suggests that dramatic changes for CEMI are soon to come, most likely in the form that will dramatically increase the price of their stock. So when Platinum Partners takes interest in a company with an established history of innovation and strong record of sales and revenue, you better pay attention, because there is a tremendous potential for you to gain a sizeable share of the profits along with them.
This begs another question: How much is CEMI worth? With 62 million outstanding shares, and a current price of about 30 cents per share, its current market capitalization is only $20 million. With continued profitability as expected due to milestone payments, grant income, and increased sales due to CE Mark approval for sales in EU and approval for sales in developing countries, it is reasonable to anticipate earnings of about 5-6 cents per share for 2010. Compare this to the average price to earnings ratio of around 35 for the diagnostic companies mentioned earlier, and it is easy to see a value of over $1.50 per share based solely on these fundamentals. However there is added value in CEMI beyond this- add in the anticipated market expansion for their numerous DPP platform assays and US FDA approval for several of these tests as outlined earlier, and you should expect the share price to reflect that.
Who would buy CEMI? We can only speculate. But the most obvious candidate is their major partner Inverness Medical Innovations (IMA). Chembio’s net product sales to Inverness for the first nine months of 2009 increased more than $1,880,000 from $1,570,000 to $3,450,000, or approximately 120%, as compared to the first nine months of 2008. Also, Chembio is states they will likely get CE Mark approval for the Clearview HIV test in early 2010, which would double their market potential. With a market share the size of Clearview in the US, it would also double the Chembio revenue potentially to nearly $10 million per year total. Buying CEMI for this reason alone makes sense. But given that Chembios exciting new DPP HIV tests could replace the Clearview HIV tests marketed for Inverness in 2011, this makes Chembio evem more attractive as a buyout by Inverness. Inverness has an established record of buying several companies in the $100-$150 million dollar range, and it does not seem unrealistic that they would buy CEMI for the reasons stated above.
Hopefully you can see all the potential in CEMI as a legacy stock- one that you bought at a very low price and held on to through the growth of the company, rewarding you with amazing exponential returns as the company grows. Hold CEMI for the anticipated announcements of CE Mark approval for the Clearmark HIV test and Brazilian approval for DPP Leishmaniasis, HIV Confirmatory, and the DPP HIV screening tests in late 2009/early 2010. This would dramatically improve revenue for the already profitable CEMI. After this, continue to hold CEMI for US FDA approval for these numerous tests, which will generate even more revenue and a higher price per share for CEMI. At worst, this is an opportunity to get in on the ground floor pricing for a solid company who has earned market share, developed novel technologies for the fraction of cost you would expect- the proverbial “hidden gem”. At best, you may be getting into a company who is soon to be bought out at a substantial premium. Right now you can buy CEMI for literally pennies on the dollar before investors flock to this great company or it is bought out for a premium. Although it is trading for pennies right now, it is truly not your typical penny stock: There are very few downsides and many upsides for high reward potential.
Disclosure: Long on CEMI. I do not have positions in any other of the companies mentioned.
Disclaimer: This blog is an expression of my opinion on a particlular company or matter. I am not a financial advisor or professional analyst. This is not a solicitation to trade any security. Although I rely on company approved public documents and make all reasonable efforts to confirm the accuracy of my statements, the comments made in my articles should be considered only as opinion and should not be considered as current or as absolute fact. All investors are strongly encouraged to not rely entirely on any single opinion and perform their own due dilgence when investing. Investing in equities includes considerable risk, and investors should be prepared for the risk of capital loss.