Chembio Diagnostics, Inc. (CEMI) on Q1 2021 Results - Earnings Call Transcript
Operator: Good afternoon, ladies and gentlemen, and welcome to the Chembio Diagnostics First Quarter 2021 Earnings Conference Call and Webcast. It is now my pleasure to turn the floor over to your host, Brian Johnston. Sir, the floor is yours. Brian Johnston. Sir the floor is yours.
Brian Johnston: Thank you, operator. Before we begin today, let me remind you that the company's remarks made during this conference call today, May 6, 2021, may include predictions, estimates or other information that might be considered forward-looking. These forward-looking statements represent Chembio's current judgment for the future. They are, however, subject to numerous assumptions, risks and uncertainties, many of which are beyond Chembio's control. Including risks and uncertainties described from time to time in Chembio's SEC filings, including those under Risk factors and elsewhere in Chembio's filings with the SEC. Including its annual report on Form 10-K for 2020. Chembio's results may differ materially from those projected. Chembio undertakes no obligation to publicly revise or update any forward-looking statement made today. I encourage you to review all of the company's filings with the SEC concerning these and other matters.
Rick Eberle: Thank you. Good afternoon everyone. And thank you all for joining us this afternoon. Today, I look forward to reviewing our first quarter performance and discussing progress made with our strategic repositioning. Neil will detail the financial results and then I will conclude and open the call for a question-and-answer session. In the first quarter, we generated total revenue of $8.7 million, including product revenue of $4.0 million, representing growth of 27% and a decline of 30%, respectively, compared to the prior year period. With strong total revenue growth resulted from achieving a milestone as part of the $12.7 million award from the Biomedical Advanced Research and Development Authority, BARDA, which is part of the Department of Health and Human Services, for the development and issuance of Emergency Use Authorization applications for the DPP Respiratory Panel and the development and receipt of 510(k) clearance for the rapid point-of-care DPP SARS-CoV-2 Antigen test system. We will touch on these in more detail later in the call. The strategic repositioning that we launched when I joined Chembio last year is built upon leveraging our DPP technology and other test platforms to target diagnostic disease states that meet three criteria: first, rapid diagnosis impacts patient treatment and outcomes; secondly, existing current diagnostic products underserve the clinical need due to performance or availability; and number three, new product opportunities are available regionally, demographically or clinically. Combined, these criteria are focused on products and markets that have the potential to deliver higher average selling prices and provide a path to profitability. We are focused on current and new test solutions on our technology platforms. Our product portfolio is marketed globally to acute care hospitals, reference labs, outpatient clinics, including urgent care centers and physician offices, NGOs and ministries of health. Our branded products such as SURE CHECK, STAT-PAK and DPP have secured meaningful market share globally. Going forward, we will focus on internally developed products and pursue external opportunities to license novel technologies and products with the intent of leveraging our growing commercial infrastructure. We are currently operating or targeting the development of rapid diagnostic test solutions for infectious diseases, respiratory diseases, sexually transmitted diseases, gastroenterology and insect vector diseases. The market for rapid diagnostic infectious disease tests is being driven by the high prevalence of infectious diseases globally, an increase in geriatric population, growing demand for rapid test results and advancements in multiplexing. Through a combination of understanding the broader market growth drivers, the evolving market needs and market research, we are identifying and evaluating opportunities for the application of the unique features and benefits of our technology. We expect that this disciplined product development strategy will continue to create growth opportunities for Chembio through a broader, high-value product menu that expands our current and future customer base.
Neil Goldman: Thanks, Rick. For the three months ended March 31, 2021 total revenue was $8.7 million, representing growth of 27% compared to the prior year period. Product revenue for the first quarter of 2021 was $4.0 million a decrease of 30% compared to the prior year period. Government grant income, license and royalty revenues and R&D revenues combined for the three months ended March 31, 2021 were $4.7 million, an increase of 311% compared to the prior year period. Of this $4.7 million, $3.4 million was earned by achieving milestones under our $12.7 million program with BARDA, bringing our cumulative government grant income under this program to the first quarter of 2021 to $5 million. Both government grant income and R&D revenue are related to the timing and cadence of program performance obligations, which do not always occur in a certain period but we continue to incur certain of the expenses. Gross product margins during the three months ended March 31, 2021 declined by approximately $0.9 million compared to the prior year period. Prior to the first quarter – excuse me, during the first quarter of 2021, we continued to invest in developing and offering products to address the COVID-19 pandemic. We also continued to implement manufacturing automation in order to reduce our reliance on manual labor and improve our product margins. The $0.9 million decrease in gross product margin was comprised of an unfavorable product margin percentage due to the impact of geographic product mix and fixed manufacturing overhead and unfavorable product sales volume. Over the past year, we have been taking steps to automate our test manufacturing process, the entirety of which is now based in the U.S. Our goal for doing so is that we believe it will add capacity, improve product margins and reduce variable costs, including head count, which was lower as of March 31, 2021 than it was on December 31, 2020. R&D costs increased by $0.9 million primarily related to pursuing the EUA and 510(k) for the DPP SARS-CoV-2 Antigen test system and in EUA for the DPP Respiratory Antigen Panel, each pursuant to awards from BARDA that Rick described. Selling, general and administrative expenses increased by $1.9 million, which principally reflected increased cost in two areas: first, increased fees for legal services relating to shareholder litigation and for internal audit services; and second, compensation costs related to our expanded U.S. commercial team. Net loss in the three months ended March 31, 2021 was $4.5 million or $0.22 per diluted share, compared to a net loss of $5.0 million or $0.29 per diluted share in the prior year period. On the balance sheet, cash and cash equivalents as of March 31, 2021 totaled $14.4 million. Net working capital as of March 31, 2021 was $22.8 million. During the three months ended March 31, 2021, we executed changes representing approximately $2 million of cost savings on an annualized basis. Our operations used $7.2 million of cash during the three months ended March 31, 2021 primarily due to the net loss adjusted for noncash items of $3.2 million; a $2.2 million increase in inventory related to supply chain time lines, including materials for COVID-19 systems that were ordered but could not be canceled following the previously disclosed revocation of an EUA from the FDA and in anticipation of regulatory approvals; a $1.6 million decrease in accounts payable and other accrued liabilities; and a $1.2 million decrease in deferred revenue. Those uses of cash were offset in part by a $1 million combined decrease in accounts receivable, deposits and other assets. I will now turn the call back to Rick for concluding remarks.
Rick Eberle: Thank you, Neil. To wrap up, we believe that Chembio is positioned to take share in the point-of-care diagnostic testing market based on the strategic repositioning that we launched last year. We will continue leveraging our DPP technology and other test platforms with the benefit of applying an additional product menu in markets that have the potential to deliver higher average selling prices and provide a path to profitability. In the first quarter of 2021, we made progress on commercial, product development and operational initiatives that will position the company for future success. We are highly confident in our DPP testing platform and our ability to expand its testing menu, which we believe will lead to growing adoption across decentralized health care markets. Looking forward, we remain committed to delivering profitable growth by leveraging our growing customer base and expanded commercial team while also focusing on gross margin expansion through manufacturing automation and operational excellence. Finally, as I shared during the previous quarterly call, given the uncertainty of the continuously changing regulatory process and priorities, we will not be providing any commentary or guidance on any submissions, time lines or achievement of resubmissions. We will look forward to providing updates when we have more visibility into this matter. With that, operator, please open up the call to questions. Thank you.
Operator: Thank you. And the first question today is coming from Per Ostlund from Craig-Hallum. Per, your line is live. You may ask your question.
Per Ostlund: Great. Thank you. Good afternoon, Rick and Neil. I want to start out with a question on product revenue specifically. So I'll stipulate upfront. I know that my forecast was probably a little higher than others. But given that the pandemic seems to be still kind of running unabated in Brazil, I guess I was kind of figuring that first quarter product revenue could look a little bit more like third and fourth quarter product revenue, especially in light of the ANVISA approval of the antigen testing system late last year. So just curious if you might be able to kind of circle back and talk about what market dynamics might be at play there that have resulted in the lower demand out of Latin America here this quarter.
Rick Eberle: Yes, Per. Thank you. Thank you for the question. Obviously, we are following the market dynamics in Brazil very, very closely. We actually have a number of strategic initiatives going on. I think the biggest opportunity for us to continue to work closely with our long-standing partner, Bio-Manguinhos. Our history with them dates back 15 years and we have a very good relationship with them. Certainly, one of the things we had to work through with Bio-Manguinhos, which basically supplies the federal health care system in Brazil with vaccines and diagnostics, was to get the product approved through their organization with the ANVISA regulatory body in Brazil. So we have been working and supporting them in that effort for some time. So as you know, we just released that today as a recent approval so we're working very, very closely with ANVISA to monitor what are their test needs for the balance of this year. We've been in dialogue with them for a number of months leading up to the ANVISA approval of the Bio-Manguinhos' DPP product. So at the federal level, we are very closely engaged with Bio-Manguinhos. At the state and local hospital and clinical markets, we're approaching them through our distribution partner that we have in Brazil that services that market as well as the retail over-the-counter pharmacy. So we have launched the DPP antigen test for the over-the-counter pharmacy market in Brazil, and we're beginning to see some traction and movement through that particular strategy. And then finally, we are expanding our commercial infrastructure in Brazil to be able to support a broader distribution strategy in Brazil. As you know, Brazil's a huge country with many, many states. And so we're in dialogue with some potential distribution partners that have access to upwards of 26 to 28 sub-distributors in the country to get our product out into the various states and local health care providers. So we're a little early in the strategy in Brazil. Certainly, they have a massive problem with cases with COVID and the number of tests are very, very high. We have seen a little bit of what I would characterize as a little bit of a chaotic response to the pandemic in Brazil. So what we're doing is staying very, very close to Bio-Manguinhos, so when they're ready to move, we're there to support.
Per Ostlund: Okay. Thank you, Rick. That’s helpful. I'll pivot for my follow-up question to the margin side of the equation. Obviously, I assume that, that is a relatively high priority that single-digit and low-teens product margin situation isn't sustainable forever. And I know that there's been a fair amount of puts and takes in recent quarters, given the revocation last year and returns coming in and out of the P&L and some inefficiencies like that. But how far can you go, I guess, on the business today? Where do you think you could go versus the 12% product margin today? And how much of it simply just has to be getting a more substantial U.S. business and a more substantial pool of multi-analyte tests that are out there commanding higher ASPs?
Rick Eberle: So Per, I'll take a shot at that and then I'll let Neil provide his additional input. You can probably tell from my prepared remarks how focused I am and the senior leadership team is here in terms of getting revenue growth in markets and with products that have higher margins. The 12% gross margin in Q1 just is not acceptable. And so the team is very focused on driving HIV-Syphilis. We've talked a lot about the much higher average selling price in the United States for that product as you get two CPT codes in terms of reimbursement. So I mean, the U.S. commercial team, HIV-Syphilis right now is their number one priority because it's going to deliver much, much higher product margins. Outside the United States, we talked a little bit about, today, SURE CHECK HIV self-testing. And although this is probably a two- to three-year initiative that's been underway by our international sales team, but by increasing our average selling prices for the self-test in countries like Malaysia and Kenya and even South America, to a certain extent, drives our gross margins higher. And so this is about changing our product mix. This is about changing our geographic mix and getting away from what you saw play out in Q1. And so obviously, we talked a lot today about getting our COVID Antigen and Respiratory Panel into the U.S. market because of the higher average selling prices. I think everyone is talking about the price pressures they're seeing ex U.S. for the flood of COVID products coming in from foreign manufacturers, Indian manufacturers. And so – and you see the prices that governments are paying for, very high volume of COVID tests within the $3 to $5 range. So that doesn't solve the gross margin problem. So we're very focused on, to answer your question, Per, the U.S. market and selling what we have in the U.S. market and selling what we have outside the United States with higher average selling price opportunities. And we're going to change that product mix and the geographic mix over time. It's not going to happen overnight but you've got the commitment of me and Neil and the senior leadership team at Chembio to change that. Neil, anything to add?
Neil Goldman: Yes, I think that's a really good summary, Rick. The only other dimension that I would reference, though, number one. Number two and number three are average selling prices. The other piece to the puzzle is certainly the impact of driving volume. And of course, price times volume gives you revenue, is driving volume through a facility and the benefits of our automated operations to be able to allocate the overhead in a manner that is favorable. And we're – similarly to the average selling price, we're focused on driving the volumes that can achieve that can achieve that as well. As you heard me mention, we've already made changes and are seeing the benefits. You don't see it totally in the numbers, as you described this is good where they are, but it is nevertheless sequential progress, by no means the destination, but sequential progress in that regard. And we're very, very focused on that and is the entire team.
Per Ostlund: Very good. Thanks for the color both of you. Thanks.
Rick Eberle: Thank you, Per.
Operator: Thank you. The next question is coming from Bruce Jackson from Benchmark Company. Bruce, your line is live. You may ask your question.
Bruce Jackson: Good afternoon. Thank you for taking my questions. With the HIV-Syphilis combo tests and the CLIA Waiver, maybe you could just remind us the major steps you'd have to go through to get that CLIA Waiver and where you are in that process.
Rick Eberle: Yes, Bruce. Thank you for the question. The CLIA Waiver, I think we disclosed in the Q4 year-end earnings call that – we submitted that shortly after the PMA approval. So the CLIA Waiver is a statutory process, so the FDA does publish their statutory time lines in terms of how quickly they review the application, how quickly to get back with questions and so forth that they might need to clarify the application. So we are not estimating a time frame because the – even though there's a statutory process for CLIA Waiver approval, the timing on that can stretch out, given the FDA's process. So at this point, we are not providing any guidance or timing, other than to say, we submitted the application and we will be in that statutory review cycle.
Bruce Jackson: Okay. So to paraphrase then, you've done everything that you were supposed to do on your end and now we're into the iterative discussion part of the process. Is that a fair characterization?
Rick Eberle: Yes, Bruce, that's fair because during that statutory review process, it is iterative. If they have questions, they ask us questions and we have to answer them. And it goes back and forth until they get all their questions answered. So that's a fair description of the process.
Neil Goldman: This is Neil. Adding to what Rick said as I'll refer you back to some of the things he said in the prepared remarks is that while that's going on, our commercial team, their number one priority is the HIV-Syphilis product. There are about 15,000 moderately complex labs in the United States that they are targeting, both directly as well as with our distribution partners. As Rick said, we've – and as we mentioned in the release today, we've launched marketing programs with them around that. And I know that they, as well as a lot of registered participants, are looking forward to the webinar that we are co-sponsoring with the National Association of STD Directors later this month because as you well know, the clinical need is very serious, and we believe we have a differentiated product that can meet that need.
Bruce Jackson: Okay. Then one other question and I'll hop back in queue. So you provided the information on the cumulative spending from the BARDA contract. With the other major agreements that you've got out there with UNICEF, can you just remind us how much those might be valued at and how much might be potentially gained from those two contracts?
Rick Eberle: Yes, Bruce, thanks. This is Rick. With the BARDA contract, it is milestone-driven. And as Neil mentioned in the Q4 year-end call, we started grouping that out as government funding in the revenue description. So it gives you some visibility into what our government income is relative to the BARDA contract. In terms of UNICEF, that's a customer and a revenue-generating customer so we don't break that out by a per customer basis. So Neil, anything to add to that?
Neil Goldman: Yes. So that's right. So while we don't break it on a per customer basis, you may remember that we negotiated an upfront payment from UNICEF for that program last spring, just about a year ago. So that cash is sitting on the balance sheet and the other side of it is sitting in deferred revenue, most of deferred revenue, not necessarily all of it but most of deferred revenue. And as we recognize through shipments of the product, we recognize that revenue out of deferred revenue. So that can give you a sense of what's left under that program. And as we've said, when we launched that – those shipments were scheduled to run through Q2 of this year.
Bruce Jackson: Okay. And then UNICEF has the ability to extend that relationship if they wish?
Neil Goldman: Yes they do.
Bruce Jackson: Okay. Thank you very much.
Neil Goldman: Thank you, Bruce. The only other thing to keep in mind as it relates to that program, Bruce, in addition to UNICEF extending it is, let's talk briefly about the reason UNICEF funded that program, which for everyone's benefit is for two multiplex products. The first is the DPP Zika/IgM/IgG product, and the second is a multiplex DPP Zika/Dengue/Chikungunya IgM/IgG product that delivers six results from a single blood sample. And the reason UNICEF and their donor agencies funded this program was to see the use cases and the development of these markets where they are needed around the world. And the hope, in addition to the opportunities you mentioned for UNICEF to extend that, is that they would create other funding opportunities in these markets based on how those address the clinical need because those three diseases are all spread by the same mosquito and, not unlike flu and COVID, they present with the same symptoms but the treatments are very, very different and have life-threatening differences. And that's why they're important and compelling products. And by the way, are also at favorable average selling prices, to Rick’s comments earlier.
Operator: Thank you. Your next question is coming from Kyle Bauser from Colliers Securities. Kyle your line is live, you may ask your questions.
Kyle Bauser: Great, thank you Rick and Neil for all the updates here. Can you hear me okay?
Rick Eberle: Yes, we can hear you fine Kyle. Thanks.
Kyle Bauser: Perfect. Great. So it looks like you've made some investments in additional automated manufacturing lines, I think, in the K. I saw something there. How should we envision the manufacturing operations to look in, say, the next 12 to 24 months? I mean will it always be a hybrid of manual and automated lines? Or said another way, do you have any kind of goals for what percent of product output might come from each type?
Rick Eberle: Yes, Kyle great question and I'll tackle the sort of the higher level of that and have Neil address the spending side of that or the capital investments. We have made tremendous progress, Kyle, over the last, I'd say, two, three months with the automation investments the company made over the last year or two. So the automated production lines are fully operational. That was step one. So that's been completed. The second step in that was to validate certain products on those automated lines, and that's been largely accomplished for our high-volume anticipated products. And then the third part of that is to get the regulatory approvals that are necessary, depending on the product and depending on the regulatory body in the world, whether it's WHO or ANVISA or FDA that requires a change in production approval. So we're well down that path. We are actually – we have established a goal for greater than 85% of our COVID products to be manufactured fully automated lines, line 1 and line 2 for this year. And the operational team has set that goal for the organization as well as the operation and manufacturing team. So we're very focused on that. We're driving the organization by achieving those high levels of automation. Of course, there's a few products that we'll have to continue to manufacture manually because the regulatory bodies require a fairly extensive conversion and validation plan to move them from manual to automated lines. We're also taking into consideration volume, some of the lower-volume products that don't really justify going through the fully automation process and the cost involved in that. We'll assess to keep those under a manual production process. So, to answer your question, it's going to be a mix of fully automated production in some small volume of manual production as we move forward and hopefully, over time, go to complete full automation. So, Neil, do you want to add anything to that?
Neil Goldman: I think that's a great overview. The only other thing I would share to sort of the back half part of your question, Kyle, is the ongoing investments are tied to our supplier of the customized automated equipment hitting their milestones as it relates to the performance of the equipment. So that's how the costs and the cash flow, flow accordingly. And as always, we're focused on managing and measuring those investments along the way.
Kyle Bauser: Got it. I appreciate it. That’s helpful. And then I’m just kind of curious, can you talk about how the head count has changed over the past 12 months? Kind of where are you now compared to a year ago? I know you built out the commercial operations, Rick. But maybe you can talk about how it's trended and how you imagine that to trend in the coming quarters as well.
Rick Eberle: Yes. Sure, Kyle. Neil can provide the – any additional information on that, but we will continue to evaluate our head count based on a couple of factors. One is certainly the more we automate and the less we need manual production, that will dictate where our head count is in manufacturing and operations. And so certainly, we're trending down in terms of head count. And I think Neil gave that number of $2 million in Q1. The annualized impact of the head count reductions we made in Q1 is $2 million. We'll continue to evaluate that as we move throughout the year based on the volume of sales and units that we manufacture. But I think it's fair to say that we will continue to look at that closely and make the necessary decisions to keep that trend going down.
Kyle Bauser: Okay, great. Thanks for all the updates and for taking my questions.
Rick Eberle: Thank you, Kyle
Operator: And there are no further questions in queue at this time.
Rick Eberle: Okay. Operator, thank you for the time today, and I wish everyone a very good evening. And again, thank you for your time.
Operator: Thank you, ladies and gentlemen. This does conclude today’s conference call. You may disconnect your phone lines at this time, and have a wonderful day. Thank you for your participation.
