Chembio Diagnostics, Inc. (NASDAQ:CEMI) Q3 2022 Earnings Conference Call November 3, 2022 4:30 PM ET
Company Participants
Philip Taylor – Investor Relations
Rick Eberly – President & Chief Executive Officer
Larry Steenvoorden – Executive Vice President & Chief Financial Officer
Conference Call Participants
Per Ostlund – Craig-Hallum
Operator
Good afternoon, ladies and gentlemen, and welcome to the Chembio Diagnostics Third Quarter 2022 Earnings Conference Call and Webcast. At this time, all participants have been placed in a listen-only mode and the floor will be open for questions after the presentation.
It is now my pleasure to turn the floor over to your host, Philip Taylor. Sir, the floor is yours.
Philip Taylor
Thank you, operator. Before we begin, let me remind you that the company’s remarks made during this conference call today, November 3, 2022 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 in its annual report on Form 10-K for the full year 2021, in its quarterly report on Form 10-Q for the first quarter and second quarter of 2022 and in subsequent SEC filings.
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 the company’s filings with the SEC concerning these and other matters.
With that, I would like to turn the call over to Rick Eberly, President and Chief Executive Officer.
Rick Eberly
Good afternoon, and thank you all for joining us. On today’s call we will review our strategy and our progress, scale and growth, improving operational efficiency and further developing our test portfolio. Larry will then cover the third quarter financial results and provide a detailed update on our Global Competitiveness Program. I will then conclude and open the call for questions.
First, I want to provide a brief description on the current priorities that have guided Chembio’s strategic pivot over the year. Across the business, profitable growth remains the top objective. In prior quarters, we’ve announced several initiatives to pursue higher margin business and reduce operating expenses. Not all of these changes are reflected immediately in our financial results but we expect their impact to be significant in the coming quarters and for the company long-term.
This year we’ve renewed our focus on commercial efforts with our core business in higher value markets. We are now more focused on markets like the US and Europe with higher average selling prices for advanced technologies. These markets also represent healthcare systems that support recurring opportunities versus large one-time government tenders.
Additionally, we have expanded our attention to our OTC markets, which provide similar structural benefits. We believe winning business with a regular cadence of frequent smaller orders, should allow us to be more efficient with resource planning, supply chain management and product manufacturing.
To further improve our operating efficiency, we have advanced our manufacturing capabilities by leveraging both expanded automation and contract manufacturing in Malaysia. Both solutions combined with tighter cost controls are expected to improve our cost of product revenue. Over the medium term we plan to develop products to broaden our portfolio with differentiated tests that command premium value.
Now I will outline our third quarter performance and growth drivers. In the third quarter, we generated total revenue of $11.2 million including product revenue of $10.8 million. Product revenue grew 16%, compared to the prior year period. Product revenue in the third quarter was primarily driven by $4.8 million of sales in the United States.
Growth here of 361%, compared to the prior year period, resulted mainly from increased COVID antigen detect rapid tests. The self-test version of this test was received an EUA and we have initiated a direct-to-consumer launch to service the OTC market through an e-commerce platform.
One of our featured core products, the DPP HIV-Syphilis system also contributed to sales in the United States. We continue to believe this differentiated test will be a meaningful growth driver upon receipt of a CLIA waiver.
Third quarter Latin America sales were $2.3 million. Sales in the region transitioned back to core product sales from COVID sales as in the prior year period sales in the region were predominantly for DPP SARS-CoV-2 tests under the large Bio-Manguinhos order. Approximately $2 million of DPP HIV tests were shipped to Bio-Manguinhos in the quarter.
In Brazil, we are now focused on marketing our SURE CHECK and HIV self-testing. We continue to believe that is the most promising commercial opportunity supported by our current product portfolio in the region. The healthcare system in Brazil is currently promoting self-testing through the Ministry of Health and awareness campaigns.
As a reminder, our product resides on the shelf in three out of the five largest pharmacy chains in Brazil and we have just launched our e-commerce sales channel. In EMEA and Asia, product revenues in the third quarter grew 43%, compared to the prior year to $3.8 million. In Europe like Brazil, we’ve heightened distribution efforts of the SURE CHECK HIV self-test. We continue to expand shipments to pharmacies across Europe and are now on the shelf in approximately 35,000 pharmacies through the excellent work of our distribution partner in France.
Within the UK, we have launched our direct-to-consumer channel through Amazon and are also in pharmacies in the region. We continue to seek opportunities for expansion of our HIV self-test across applicable markets in Europe.
Turning to Africa. This quarter Chembio completed its tender with Ethiopia for shipments of the HIV 1/2 STAT-PAK asset. This tender had generated margins below our expectations and now we are actively pursuing opportunities in markets seeking higher margin premium solutions.
Shifting now to our product and regulatory development pipeline. On the DPP HIV-Syphilis test, we continue our work to address the FDA’s request for additional data to achieve a CLIA waiver. Our EUA submission for the DPP SARS-CoV-2 antigen test continues to be under active review by the FDA and we are encouraged by the progress made over the past quarters.
Late in the third quarter, we announced the company was awarded a $3.2 million contract from the Centers for Disease Control for the development and clinical validation of a rapid point-of-care diagnostic test for syphilis. We are actively developing a syphilis treponemal, nontreponemal that we’re branding TNT, leveraging our Dual Path Platform or DPP technology and proprietary DPP Micro Reader II.
We expect that the assay will be able to simultaneously and separately detect treponemal and nontreponemal IgM and IgG antibodies. We anticipate that grant revenue will begin in the fourth quarter and will be milestone-based through the regulatory submission. We are excited to expand our portfolio as we endeavor to develop a highly sensitive and specific test, where we can anticipate a large need for physicians to quickly and accurately confirm active or prior syphilis infections.
We also announced in the third quarter development of a rapid point-of-care diagnostic test for Lyme disease. Lyme disease caused by the bacterium Borrelia burgdorferi is transmitted to humans via infected tick bites. Recently, the CDC has updated its guidelines for Lyme disease diagnosis with a new algorithm termed MTTT for modified two-tier testing. These two steps are methods that are labor-intensive, take a long time to run and require trained professional laboratory personnel.
The DPP Lyme IgM/IgG test is designed to be a rapid multiplex point-of-care test and combine the two-tier testing algorithm into one DPP test cassette, utilizing our DPP Micro Reader II for objective test results. We are currently collecting preclinical data for our DPP Lyme test in development. We are hopeful this data will underpin a productive pre-submission meeting with the FDA. Our intention is to complete the pre-submission meetings for both the DPP TNT and the Lyme test to discuss guidance on the structure and requirements for potential pivotal clinical trials.
I will now hand the call over to Larry to detail the third quarter financials and provide more details on our operational improvements under the Global Competitiveness Program.
Larry Steenvoorden
Thank you, Rick. For the three months ended September 30, 2022, total revenue was $11.2 million, representing a decline of 7% compared to the prior year period. Product revenue for the third quarter of 2022 was $10.8 million, an increase of 16% compared to the prior year period. Government grant income, license and royalty revenues and R&D revenues combined for the three months ended September 30, 2022 were $0.4 million, compared to $2.7 million the prior year period. The decrease was due to the expiration of previous partner development agreements.
Our revenues were in compliance with the quarterly 12-month rolling minimum total revenue covenant in our credit agreement. Gross product margins during the three months ended September 30, 2022, decreased to $1.2 million, compared to $1.5 million in the prior year period. Gross product margin percent was 11% in the quarter, compared to 16% in the third quarter of 2021, impacted by inventory reserves taken in the third quarter of this year.
R&D costs decreased by $1.6 million, compared to the prior year period to $1.9 million in the third quarter of 2022, primarily associated with completion of development work from prior partnership development agreements. Selling, general and administrative expenses decreased by $0.4 million, compared to the prior year period to $5.6 million in the third quarter of 2022. Net loss in the three months ended September 30, 2022 was $6.7 million or a loss of $0.21 per diluted share, compared to a net loss of $6.4 million or a loss of $0.24 per diluted share in the prior year period.
On the balance sheet, cash and cash equivalents as of September 30, 2022, totaled $21.1 million. In the third quarter of 2022, the company received net proceeds of approximately $4 million from sales of its common stock, as part of its ongoing ATM offering. Net working capital as of September 30, 2022 was $8.7 million.
Looking forward, given the substantial nature of the COVID revenues over the past three quarters, as expected revenue for the year will be first half weighted and we anticipate challenging sales growth comparisons in the fourth quarter of 2022. Line of sight on orders is a major priority for the final quarter of the year, especially with regards to our large customers and markets.
I will now provide an overview of the progress we are making on our Global Competitiveness Program, which we launched in the first quarter of 2022. We continue to prioritize higher margin options within key markets that the organization has identified as prime growth opportunities. We are focusing on both our core products and non-core products that have potential to be profitable. We’ve identified a global opportunity for SURE CHECK HIV self-test and have allocated resources to support its adoption and distribution.
Additionally, we’re actively lowering our manufacturing cost through increased adoption of automated manufacturing. We believe automation and labor reductions are required to improve product gross margins and scale unit volumes to support new initiatives. We have executed on a previously communicated strategy to have all our product platforms on an on-demand line by end of Q3.
Bolstering these efforts, is our contract with Reszon Diagnostics International to oversee the manufacturing efforts of our HIV 1/2 STAT-PAK assay in our Chembio Diagnostics Malaysia facility. They are now up and running and we have initiated production in the facility.
In an effort to reduce infrastructure expenses, we conducted an internal audit of our business and external spending to reduce costs. We reduced our organizational head count from 290 to 211 employees as of September 30. We expect to continue to increase our automation capabilities and further reduce our head count and dependency on manual labor.
Our path to profitability is clear. As we realign our organization to reduce costs and prioritize efficiency, we believe the company is well positioned for long-term growth. Keeping our customers at the forefront of our vision, we believe our organization can deliver the initiatives necessary to achieve expansion, both domestically and internationally. We look forward to providing more updates and are excited for the future of Chembio.
I’ll now turn the call back to Rick for concluding remarks.
Rick Eberly
Thank you, Larry. We are pleased with our results from the third quarter of 2022. Over the course of this year, we have improved efficiency, identified and initiated commercialization of promising market opportunities, and reduced our operating infrastructure. We improved visibility on our top line, and sales efforts have been refocused on our core products in key growth markets. With advancements in our pipeline supported by a new contract, with the CDC, we are excited by the opportunities that lie ahead to propel Chembio to long-term profitable growth.
With that, operator, please open up the call for questions.
Question-and-Answer Session
Operator
Thank you. Ladies and gentlemen, the floor is now open for questions. [Operator Instructions] We have a question from Per Ostlund with Craig-Hallum. Please go ahead.
Per Ostlund
Thank you. Good afternoon, guys.
Rick Eberly
Hey, Per.
Per Ostlund
I’m going to start out with the Q3 revenue number. Candidly, I was pleasantly surprised here. I had been sort of – while not officially having an estimate, we have talked and you’ve talked about the second half being lighter than the first half. And I kind of assume that with a couple of contracts being fulfilled earlier in the year that, we would see a sequential step down. So I was happy to see that number be so strong here in the quarter. Was there anything unusual as far as a bolus of order stocking order somewhere that wouldn’t otherwise recur, or was this simply a function of the growing depth of product and geography that you are – you have at your disposal?
Rick Eberly
Yeah, Per. Thank you for that question, and I’m glad you were happily surprised. As we’ve talked over the last several quarters, our strategy has really been to diversify the business by region and by product, it become less dependent on large government tenders, or large government orders, whether they come from Brazil, as we’ve experienced over the last year or Global Fund countries in Africa. So this quarter, I think was a good indication that we’re getting good balanced revenue from tremendous growth in the United States from our sales team and the investment we’ve made in the US.
South America same thing. Our balanced attack in Brazil now is beyond COVID. We’re focused on our core products in Brazil. And our strategy in Brazil is multifaceted. Not dependent upon the government or Ministry of Health or Bio-Manguinhos. We now have a retail strategy, where our pharmacy partners are now selling our SURE CHECK HIV self-test online on their websites, as well as an e-commerce platform we’ve set up. So that’s a retail strategy. Our other strategy in Brazil is now going out to the states and local, areas like Rio and Sao Paulo, to work with the state and city governments, where they’re putting together programs, as well for rapid testing.
And then we’re going into the traditional markets in Brazil as well through our distribution partner in Brazil, who calls on hospitals and clinics and so forth throughout the country. So I would say, it’s a balanced approach strategically. We continue to maintain excellent relationships, with the Ministry of Health, as well as Bio-Manguinhos in Brazil. So we’re working with them on a well-detailed forecast for 2023.
And then over to Europe. I think we’re beginning to see, the fruits of a strong investment in our distribution partner in France, who now is in almost every Western European country in 35,000 pharmacies with our HIV SURE CHECK products. They’re launching into new Eastern European countries. We’re talking about a Middle East strategy, as well for that product. So we’re getting good contribution from Europe.
And then in the UK, we’ve invested time and energy with our distribution partner in the UK, to get Amazon up and running as well as the Boots Pharmacy. It’s now on the shelf in the UK through our pharmacy partner in the UK. So I think it’s a long-winded answer Per, but I think we’re beginning to see a really good distribution of product revenue in our core products, as well as by regions around the world where in the history of Chembio, they were largely focused on Africa and Southeast Asia, where there’s tremendous pricing pressure, tremendous competition from the South Asian manufacturers of rapid tests. So that’s where we’re at.
Per Ostlund
I can perfectly accept a long-winded answer, when some of these other regions are starting to contribute. So thank you for going into that detail. As we look at one of those higher value markets that I think are – is foundational to what you’re trying to accomplish going forward in the US that was a nice number here in the quarter. Rick, I think you called out the Detect COVID test as well as HIV-Syphilis as being the key drivers there. So, two questions related to the US. One, I would hazard, it’s safe to say, but I’ll let you say it. Is it safe to say that even with the HIV-Syphilis contribution that you’ve seen already you are barely scratching the surface of the opportunity given that the CLIA waiver is still in front of you?
And then number two on that, as you talk about some of the OTC/DTC type opportunities globally it stands to reason that there’s a logic for you to have a retail opportunity here domestically as well, whether it’s the Walgreens or Minute Clinics and that sort of thing here. Is that something that you’re pursuing? And what are the gating factors to penetrating that opportunity?
Rick Eberly
Yeah. So Per, we do have a strategy for the US. Our HIV-Syphilis test we’ve talked a lot about. We’re at the end stages with the FDA, in terms of getting the CLIA waiver. We’re hopeful that is in Q4, or early Q1. We’ve talked about the market in the US. Most of the HIV-syphilis combination testing in the US is point of care. It’s in a physician office. It’s in an OB/GYN office, where they want to get a quick result for both HIV and syphilis, so treatment can be immediately implemented upon testing.
So the CLIA labs in the United States, we just did some analysis on how many CLIA labs now exist in the United States post-COVID. And it’s 250,000 CLIA-waived labs, which are mostly urgent care centers, physician offices and so forth. So we are really optimistic that once we get CLIA waiver that we’ll see tremendous growth in the United States.
And the other thing I would say about HIV-syphilis is in the sexually transmitted disease community, one of the reasons the CDC is concerned is they’re seeing a growth in co-infections. So if you’re infected with syphilis, the risk of your partner being infected with HIV, if that patient’s HIV-positive is five times to six times the risk. So the CDC is pushing for additional syphilis testing. Syphilis is growing exponentially in the United States and the CDC is tracking that.
So the CDC, part of the $3.2 million grant to Chembio was because they saw the value of our multiplex DPP product, allowing a physician to diagnose and treat immediately in one visit before the patient leaves the office and maybe is not back for a second or third visit. Especially, during pregnancy that’s very, very important. So we’re very, very delighted that the CDC has committed to us that kind of funding to take this product the syphilis screen and confirm the TNT product through full development and clinical trials which will be happening in 2023.
Regarding OTC in the United States for our HIV home test or self-test. We’re seeing again tremendous interest in the CDC. They just announced I want to say three weeks ago a $42 million program to make tests available for people to test at home discreetly. And that’s what we’re seeing the CDC’s interested that a lot of times people are reluctant to get tested in a physician’s office or urgent care center because it’s not discreet. But the home test, the self-test will allow discreet testing for an individual in the privacy of their home. So the CDC is also very interested in supporting us because we have a very, very proven SURE CHECK product because it’s been on the market since 2018 in Europe. And it’s WHO certified or approved, CE Marked and Visa approved in Brazil.
So we got a really good performance track record. And that’s what they’re seeing with our SURE CHECK product is that they’re seeing the performance is extremely good compared to the competition. It’s extremely easy to use. It has the world’s smallest whole blood fingerstick sample, which is basically 2.5 microliters which is a drop of blood. And so we are in the early stages of discussions with the FDA and the CDC on how we can accelerate an abbreviated clinical trial in 2023 to get that OTC product for HIV onto the market in the US.
So we are going after the higher value markets. The other thing I would add Per, that we haven’t really talked a lot about is that we are now selling a flu product and a respiratory antigen product in the United States. We brand it by the name of Status. So if we do have a flu season and we’re beginning to see an uptick in flu incidence in the United States coming up in the south and moving north. So if we do have a pretty typical flu season, we’re in a position — a great position with a flu product, standalone flu product as well as a respiratory antigen product that detects COVID flu A and flu B. So that’s where we’re moving. Higher value markets, higher average selling prices. And hopefully, that’s another long answer to your question, but it’s imperative to our strategy as we move into 2023.
Per Ostlund
That makes sense. I ask long questions so long answers are perfectly logical. This is going to sound odd going back away from higher margin and higher value testing. But as you roll out — or as you have the Malaysia agreement in place, you have automation more or less fully in place on Long Island the company is — I think you’ve characterized it as in the past kind of chasing revenue for revenue’s sake. Are you in a position — do you have any desire to chase any of that business, now that you actually could probably make a little more money on it than the company historically has?
Rick Eberly
Yeah, Per. We are not focused on the high-volume low-margin business meaning — I mean, we’re already in certain algorithms in seven countries in Africa. There’s always changes to algorithms. It changes from year-to-year. For example, the Ethiopia algorithm that was a three-year contract that started in end of 2018.
And so again it was gross margins below our expectations. We’ve said — Larry and I both said, we want to get into the 40% to 60% range for gross margins. And although that high volume business can have a contribution margin to product margins, it takes resources to go after that business. We are in a position now though with Malaysia and our Malaysian partner that if there’s opportunities that come around for STAT-PAK in Southeast Asia like Indonesia, Malaysia, Thailand, Vietnam, our cost of production is in a position where we can compete. But it’s not our focus.
The commercial organization as I said is extremely focused on higher margin products. We’re viewing that business as opportunistic. If we can win some business and some of the algorithms in Africa, we’ll pursue it. But we’re not going to compete on price with manufacturers from Korea and China where we’re seeing price erosion be incredible.
So again STAT-PAK has a great track record, a great performance among the WHO and Global Funded countries. It’s been out there for many, many years proven. And we also raised our price recently. So again it’s an opportunistic view on that business at this point.
Per Ostlund
Okay, good. I like that answer. And it dovetails into the last — my last one. I promise I won’t hog the call further. The elephant I guess in the room is the debt and the revenue covenants. And as Larry noted you’re in full compliance with the trailing 12 months. And I think back of the envelope would lead me to believe, it won’t take you a Herculean effort to get there here in Q4. But when Q1 of 2022 rolls off that’s a fairly big number that goes away. And I think while we all appreciate not chasing revenue for revenue’s sake, the covenant I suspect ends up — could end up being an issue maybe in Q1 or Q2 of 2023. Is that short of paying off some or all of that debt is there — are there discussions in place to try to reconfigure that situation, or relationship so that maybe you’re not feeling like you’re forced to go and chase bad business just to make a number?
Larry Steenvoorden
Yeah. Per it’s Larry. I’ll answer that. So, yeah, we are proactively searching all options. We do have an S-1 filing out there, so that is certainly an option. And we want to address this year in the next quarter as we look out. We want to be able to start to minimize our cash burn and then address our capital structure. We feel that is a major overhang to our company and valuation. So as we will get through the next months, we would look to update everyone on where we are either with the capital raise or other options and certainly speaking to our lender. So more to come and absolutely a major priority for us as a company to get through that debt agreement.
Per Ostlund
Fantastic. Thanks for the color, all of it. Thank you.
Larry Steenvoorden
Yeah.
Rick Eberly
Thank you, Per.
Operator
Gentlemen as there appear to be no further questions in the queue, I will hand it back to Rick for any closing comments he has to finish with.
Rick Eberly
I want to thank you for your time today. I really appreciate the questions from Per. So again thanks for your time and have a good evening.
Operator
Thank you ladies and gentlemen, and this does conclude today’s conference call. You may disconnect your lines at this time and have a wonderful day. We thank you for your participation.
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