Chembio Diagnostics, Inc. (NASDAQ:CEMI) Q2 2022 Earnings Conference Call August 4, 2022 4:30 PM ET
Philip Taylor – Investor Relations
Rick Eberly – President and CEO
Larry Steenvoorden – Chief Financial Officer
Conference Call Participants
Per Ostlund – Craig-Hallum
Good afternoon, ladies and gentlemen. And welcome to the Chembio Second Quarter 2022 Earnings Conference Call. 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 turn — my pleasure to turn the floor over to your host, Philip Taylor. Sir, the floor is yours.
Thank you, Operator. Before we begin, let me remind you that the company’s remarks made during this conference call today, August 4, 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, its quarterly report on Form 10-Q for the first quarter of 2022 and in subsequent 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.
Good afternoon and thank you all for joining us. On today’s call, we will review our commercial performance and provide updates on our product pipeline. Larry will cover the second quarter financial results and provide detail on our global competitiveness program. Then I will — then conclude and open up the call for questions.
To begin, I would like to highlight our second quarter performance. In the second quarter, we generated total revenue of $9.2 million, including product revenue of $8.9 million, representing growth of 42% and 125%, respectively, compared to the prior year period.
Along with our strong revenue growth, we improved our cash burn rate in the quarter, reducing cash utilization in the second quarter to $1.6 million as a result of accounts receivable collections and tighter cost controls under the Global Competitiveness Program, which we will touch on later on the call.
Strategically, across every function in our organization, we have prioritized profitable growth, and are pleased to begin to see the impact of these actions and how they are having an effect on our financial results.
To remind you, we are focusing our commercial efforts on our core products, like SURE CHECK HIV Self-Test, specifically directing our efforts and resources towards higher value opportunities and higher growth markets.
By focusing on our product sales mix and on the channels that support higher average selling prices, we can increase product gross margin contribution. At the same time, we intend to continue to be opportunistic, with respect to other non-core products, specifically our COVID portfolio.
To further increase margins and profitability, we are currently finalizing our two main initiatives to increase efficiency. First, we are continuing our automation expansion, which should reduce labor requirements and result in lower manufacturing costs.
Second, we have signed an agreement with Reszon Diagnostics International for contract assembly manufacturing of our HIV STAT-PAK assay at our Chembio Diagnostics Malaysia facility.
Finally, tight cost controls and ongoing evaluation of operating expenses will be critical in the back half of the year.
Revenue in the second quarter was led by product sales in Africa, where we recognized $3.1 million of product revenue. Sales were driven by shipments of the HIV1/2 STAT-PAK assay to Ethiopia, completing most of the previous purchase order supported by the global fund.
United States product sales in the second quarter totaled $3.4 million, growing 208% compared to the prior year period. In the U.S., we are offering a diverse portfolio of core Chembio products and distributing third-party COVID tests.
Sales in the quarter were driven by distribution of the InBios SCoV-2 antigen detect rapid test. As we announced in June, the self-test version of Detect has received an EOA and we are initiating a direct-to-consumer launch.
COVID testing demand has migrated toward at-home self-testing solutions, and we are pleased to expand access for consumers through an e-commerce platform available on Chembio’s website.
Given the unpredictable spikes in infection rates, test demand is fluctuating rapidly. Among our core products, the DPP HIV-Syphilis system supplemented sales in the United States. We continue to believe this differentiated test can represent a meaningful growth driver upon receipt of a CLIA waiver.
On to Europe, where we are focused on distribution of the SURE CHECK HIV Self-Test. We are experiencing early success with efforts to penetrate pharmacies in France, through our established distributor. We will continue to pursue additional opportunities to expand HIV self-testing in additional markets in Europe.
As part of our efforts in the U.K., we launched additional direct-to-consumer channels. We are now operating SURE CHECK HIV Self-Tests through Amazon, on the shelves in a major pharmacy chain and through their website in the U.K.
Product sales in Latin America region were $835,000, with the completion of the purchase order from Bio Manguinhos for DPP SARS CoV2 tests in the first quarter. We are now focused on accelerating the adoption of our core products in the region. Like Europe, we see SURE CHECK and HIV self-testing as the most attractive opportunity for our Brazilian subsidiary.
The healthcare system in Brazil is currently promoting self-testing through the Ministry of Health and several awareness campaigns. Retail pharmacies are beginning to carry test inventory.
We are pleased to now have product on the shelf in three of the five largest pharmacy chains in Brazil. We are approaching the market through other channels as well through e-commerce platforms and our distribution partners, who are pursuing traditional hospital and clinic customers.
Should Brazil experience a respiratory infection season, we have laid the groundwork for distribution of our approved DPP respiratory panel test in the traditional healthcare market and pharmacy testing clinics. We will also submit the tests for at-home approval in Brazil.
Now transitioning to discuss our regulatory and product development pipeline. On the regulatory front, we are actively working with the FDA to secure approvals for two tests. We are pursuing a CLIA waiver for the DPP HIV-Syphilis test.
At this point, we are working to collect additional data requested by the FDA. The EUA submission for the DPP SARS CoV-2 antigen test remains under active review by the FDA and we are encouraged by the progress that has been seen over the past months.
Given the innovative features of the DPP platform, like multiplexing and numerical results, we are selectively investing in product R&D, where we can leverage these unique capabilities to address high-value unmet clinical needs.
We have identified two potential products that are now the top development priorities for Chembio. Both are in relatively similar stages, collecting preclinical data to use in pre-submission meetings with the FDA.
Our intention for these meetings is to discuss guidance on the structure and requirements for potential pivotal clinical trials. Today, we are happy to introduce the DPP Syphilis, Screen and Confirm Assay and the DPP Lyme assay.
DPP Syphilis Screen & Confirm would be complementary to our core sexually transmitted disease portfolio and serve as a reflex test to the DPP HIV-Syphilis combination test. For example, when patients test positive for syphilis with the HIV Syphilis combination test, they could confirm that result and determine whether the syphilis infection is an active infection or a prior infection with a syphilis Screen & Confirm test.
DPP Lyme would also be a screen and confirm six-plex test for the detection of both IgG and IgM antibodies for the three most common antibodies developed by the body when infected with Lyme disease. As development is in early stages, we do not have timelines for commercialization of these tests, but as we make material advances, we will share additional details.
I will now hand the call over to Larry to detail the second quarter financials and provide more details on our operational improvements under the Global Competitiveness Program.
Thank you, Rick. For the three months ended June 30, 2022, total revenue was $9.2 million, representing growth of 42% compared to the prior year period. Product revenue for the second quarter of 2022 was $8.9 million, an increase of 125% compared to the prior year period.
Government grant income, license and royalty revenues and R&D revenues combined for the three months ended June 30, 2022, were $0.3 million, a decrease of 88% compared to the prior year period, due to the expiration of previous partner development agreements. Our revenues were in compliance with the quarterly 12-month rolling minimum total revenue covenants in our credit agreement
Gross product margins during the three months ended June 30, 2022, increased to $0.8 million, compared to negative $0.1 million in the prior year period. Gross product margin percent was 9% in the second quarter of 2022, compared to negative 3% in the second quarter of 2021.
R&D costs decreased by $0.8 million compared to the prior year period to $2 million in the second quarter of 2022, primarily associated with completion of development work from prior partnership development agreements.
Selling, general and administrative expenses decreased by $0.8 million compared to the prior year period to $5.2 million in the second quarter of 2022, primarily attributable to lower legal costs.
Net loss in the three months ended June 30, 2022, was $6.9 million or a loss of $0.23 per diluted share, compared to a net loss of $9.1 million or a loss of $0.45 per diluted share in the prior year period. There were no impairments, restructuring, severance or related costs for the second quarter of 2022, compared to $2 million or $0.10 per share in the prior year period.
On the balance sheet, cash and cash equivalents as of June 30, 2022, totaled $22.8 million. We were able to reduce cash usage in the quarter to $1.6 million through tight cost controls on spend and working capital management. The company did not sell any shares of common stock, as part of the ATM offering in the second quarter of 2022. Net working capital as of June 30, 2022, was $27.1 million.
Looking forward, given the substantial nature of the COVID revenues over the past two quarters, we expect revenue for the year will be first half weighted and we will face challenging sales growth comparisons in the third and fourth quarters of 2022. Line of sight on orders is a major priority for the second half 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. First, we are laser focused on higher margin business in growth markets. This includes our core products and being opportunistic with non-core products, when these opportunities fit our profitability criteria. Notably, as Rick discussed, we see a significant global opportunity for our SURE CHECK HIV Self-Test and have aligned resources to support adoption of this product across markets.
Second, we are taking action to lower manufacturing costs. Automation and labor management are essential to increasing product gross margin and for scaling unit volumes to support new opportunities.
Our third automated manufacturing line is now up and running, line four has been installed and we have initiated production on a new semi-automated line. Furthermore, our contract manufacturing agreement with Reszon should also provide a pathway to drive down manufacturing costs.
We currently are facing a major margin headwind, as high inflation is causing material supplies and logistics price increases. As a result, we have incorporated the assumption of longer lead times for materials into our manufacturing algorithm. We are evaluating appropriate price increases and delivery schedules for our products to offset these industry-wide impacts.
Third, we are working to reduce infrastructure costs. This includes an in-depth analysis of all our support functions and external spend to reduce costs. Mainly through attrition our organizational headcount is down to 290 employees from 337 at the end of 2021. We plan on further headcount reductions in the second half of the year to adjust with automation efficiencies and lower volumes.
Fourth, we have completed the majority of work related to the strategic review of non-core businesses and assets. Our focus has been on our subsidiaries in Brazil and Germany with the intent to develop independent path profitability for each business. We have completed the restructuring of our German subsidiary, including employee reductions at the local business.
We believe that these pillars, when taken together, provide a clear roadmap for a trajectory towards comfortability. Successful execution of these pillars is dependent upon a number of critical factors, such as, delivering on the topline, key relationships with customers and distributors, expansion in large markets such as the U.S. and regulatory approvals. We are committed to adhering to these pillars and look forward to providing updates as we continue to execute.
I will now turn the call back to Rick for concluding remarks.
Thank you, Larry. We are pleased with our results from the first half of 2022 and are excited to build upon this positive momentum. We have experienced strong year-over-year revenue growth, improved our gross margins and are beginning to see the positive impacts of our global competitors program.
We have increased our commercial efforts on the distribution of our higher value core products, which we offer in high growth markets such as the U.S., France, the U.K. and Brazil. Progress on the regulatory and product development front, will increase our opportunities to drive more profitable growth in the years to come.
With that, Operator, please open up the call to questions.
[Operator Instructions] Thank you. Your first question is coming from Per Ostlund with Craig-Hallum. Sir, please pose your question.
Thank you. Good afternoon, guys. I will start with — it might be a bit of a dumb question to start with, but I think it might be a little bit foundational nevertheless. So as we have talked in recent quarters about COVID weaning, you have talked increasingly about refocusing around the core portfolio. And I guess maybe my first question is, internally, how do you define and how do you think about your core portfolio and the reason I ask the question is, because there are always these other things that come up, whether it’s been a Zika outbreak or obviously COVID and now Monkeypox is the virus Zure [ph] that can be opportunities for you as well, whether or not they actually qualify as core is certainly an open question. But I look at DPP as a relatively product development friendly platform and it’s easy to use. So when these things come up, whether they are not, whether they are core or potentially core or not, how do you evaluate, what kind of opportunities you want to pursue, as you are refocusing around the core, I know it’s kind of a circuitous way to get to that, but let’s start there, if we can?
Sure. Per, thank you. This is Rick. Certainly, we are defining our core products as the products that we have had on the market, pre-pandemic, during the pandemic and post-pandemic, that have the greatest potential to drive revenue at higher average selling prices and higher margins.
So if you look at the U.S., we have three primary HIV products on the market under three different platforms. Our SURE CHECK is a self-test platform for HIV, our STAT-PAK is a traditional lateral flow platform for HIV and then our DPP HIV-Syphilis combination test. So that is our core product. Certainly, we have a Zika — DPP Zika IgM product on the U.S. market as well.
So when we look at core products and evaluate new opportunities, our fundamental principal underlying analysis is the market opportunity, right? Where do we see growth coming from? So the products that we announced today, Per, as an example, DPP Syphilis Screen & Confirm, is a multiplex product, that has high clinical value in the United States in confirming Syphilis infections.
The other example we talked about today was our DPP Lyme multiplex product, where Lyme is a growing clinical concern in the United States. So you can see from our product development pipeline, we are very focused on innovative products that utilize DPPs multiplexing capability to deliver high value clinical need.
So I think that’s an example. Relative to other opportunistic disease states, certainly, everyone is aware that today the U.S. Government declared a public health emergency for Monkeypox, the WHO also declared a public health emergency on July 23rd, the States of California and New York and Illinois have followed suit, in terms of declaring a public health emergency.
So we are monitoring that. Certainly, if you look at our history, back in 2017, we rapidly developed a Zika — Rapid Zika product for the U.S. market, when the Zika outbreak was impacting the United States. We went on to get an EUA for that product and then followed on and got a 510(k) approval for DPP Zika.
So there was certainly a clinical need for Zika. The following year, there was an Ebola outbreak. So we developed a DPP Ebola test to help with the outbreak with Ebola, which that product as of today still emergency use authorization in the United States.
And then in 2020, obviously, when the pandemic hit with COVID, we developed — rapidly developed COVID tests. We got funding from the U.S. Government of around $13 million to develop a portfolio of COVID tests.
So we are monitoring the Monkeypox situation very, very closely. We know that globally there’s now 26,000 cases in over 80 countries. In the United States, there’s now 6,600 reported cases. So this is a growing problem. We see that as an area where we can provide value, because we have done it for other outbreaks.
The interesting thing with Monkeypox is that the symptoms are very similar to other essentially transmitted diseases like herpes and syphilis, as well as other healthcare issues like scabies and eczema. So it’s beginning to show like it’s a very difficult disease to diagnose, because of a similar symptomology with other viruses. So we are going to monitor this closely.
We have a great network of individuals at the NIH, the CDC, as well as BARDA, who funded our COVID test development. So we are in conversations and in consultation with our colleagues at the NIH, the CDC and BARDA, to see what is the need the current tests that are available today for Monkeypox are PCR, which you have to take a sample from the open skin lesions, which is very painful, very difficult to obtain very, very good samples for PCR.
So we are monitoring this closely, all options are open for us and if we see there’s a growing consistent clinical need and the ability to utilize our product technologies as we did with Ebola, Zika and COVID, we will make a decision and move forward or not.
So, but I want to come back to the fundamental premise of our analyses for making a decision on a core product, it’s really, do we have a high clinical need, is there a growing need for that product and is there commercial opportunity for the company along our Global Competitiveness Guidelines, which is focusing on higher margin growth in higher markets.
So you are talking a lot about our HIV SURE CHECK Self-Test, because that is a perfect example of we are realizing much higher margins on that product in the countries where we have got direct-to-consumer, OTC pharmacy initiatives in place and we are really driving that for our future growth. I hope that’s a long answer there, but I hope it clears up how we are evaluating this Monkeypox opportunity.
No. Absolutely. It’s very comprehensive. It feels for you to have long answer. That’s very helpful. Since you kind of ended there talking about margin, so the gross product margin in the second quarter here was about 9%, first quarter was 18% and I think in the fourth quarter was negative single digits and somewhere. So there was a stark improvement and a little bit of a comeback here in the second quarter. How much of that is just the logic of having that Bio Manguinhos order being fulfilled in Q1 and not having that big chunk of revenue to absorb some overhead and that sort of thing or were there mix factors that contributed to going from 18% to 9%, just trying to think of the considerations there?
Yeah. Per, I will take a quick shot at that and then turn it over to Larry to provide any additional detail. Certainly, its product mix and volume related. If you look at our revenue in the first quarter and the gross margins, it was largely due to high volume and product mix compared to the second quarter, where more of our product mix was the HIV product for Ethiopia. So when you combine those two factors, as well as some of the other inflationary measures that Larry was talking in his opening remarks, drove that gross margin in the second quarter.
Yeah. Per, just to add to that. So the large African revenue, $3.1 million was certainly a lower margin. We did have solid revenues in the U.S. that was offsetting. So I think that’s in play. Certainly, inflationary raw materials was a factor.
But we have made progress in automation. So now as you can see from where our headcount is going down with our attrition and the automation now is getting up and running. So that will just — that will continue.
So this is really another transformation quarter of a move from the labor manual production to automate it. So that has been our trajectory and now as we get to Q3, all the product platforms will be on an automated line, right? So the journey for Chembio to automation, we are coming to the end to really drive with the higher volume to get even more drop through from the margin.
I lost it there for a second here. Are you still answering the question?
We are here. Yeah. We are here. Can you hear us, Per?
Yeah. I can hear you fine now. Sorry about that. Just disappeared for a second.
Okay. So that was helpful. And candidly that’s kind of what I thought, since you mentioned inflation, just one last quick one for me, you have referenced the possibility of price increases in the past to tackle that and I tend to think that the ticket price on a lot of your tests are low, which would make me think that a little bit of an increase wouldn’t be so onerous. Now you do have some end markets and end customers that are going to be more sensitive to that. So I guess I am wondering, do you see price increases or potential price increases residing kind of across the portfolio or [Technical Difficulty] it’s more in some of these higher margin markets like the U.S., like France and the rest of Europe or your…
… penetrating markets with SURE CHECK that you have a unique product that you just — you really feel like there’s absolutely margin to be gained there with price?
Yeah. I would say, Per, our approach to pricing increases has been pretty much uniformly across our products and across the regions. Obviously, some regions where we compete in, like Africa and Asia, and even to some measures South America. We have a lot of competition from Asian countries. So we are going after every price increase we can possibly get and yet be in a position to maintain our current customers.
So, certainly, in the U.S., we have seen better options for price increases across our product lines, because we don’t have the same competition in the United States as we do from Asian suppliers and markets like Africa.
So it was a part of our strategic plan, the Global Competitiveness Program for the commercial organization across the globe to try and maximize any opportunity for a price increase, yet while balancing being competitive.
Sure. That makes a lot of sense. All right. I lied. I will ask — I guess it’s a question — it’s comment as much as a question, too. I think that the cash usage here in the quarter was very negligible and very impressive considering where it was not really that long ago, just over $1 million. You did mention cost control, and I think, that that would be one thing that you would clearly endeavor to continue to implement over time and have that be a contributing factor to lowering usage. The AR collection side of it, I suspect when you have AR and then you collect it, then it’s no longer a factor to help you mitigate cash usage. So when you look and not necessarily trying to ask you to guide this by inserting your imagination, but when you look at the next quarter or two quarters, is the $1 million in change that you used in second quarter reflective of where you think you can be or want to be in the next couple of quarters? Do you think it’s more — was this a little bit of an outlier and maybe it’s something between this and the, call it, 4.5, I think, $1 million it was in the first quarter? Does it sort of reside in there, I guess, I am just kind of trying to get a handle around it, because it was obviously a — to me it was a fairly eye-popping number, considering where it’s been, a very encouraging number, just kind of want to get at sustainability of it?
Yeah. Per, it’s Larry. So from the quarter, certainly, the tailwinds from the large orders and the collection of those receivables was a primary factor. So the tight controls were in place, will continue to be in place. As we look to the second half of the year, don’t expect to have it at that same level. We will have costs associated with trials and product innovation. So there will be a higher burn.
But that being said, we are looking at where we are with our labor force and the volume associated from the second half, so we are absolutely focused on what the cash burn would be expected to be higher than this quarter, we are monitoring that as closely as a priority as we can. So we would like this to continue on that — right discipline of cost and again we are going to be spending our product innovation for the long-term here as well.
Okay. Excellent. I appreciate all the answers and I apologies for keeping on firing away at you. thank you.
Thank you. Thank you, Per.
Sirs, there appear to be no further questions in queue. So I will hand it back to management for any closing comments.
Thank you, Operator. I want to thank everyone for taking time out of your day today for our second quarter earnings call and have a wonderful evening. Thank you.
Thank you, ladies and gentlemen. This does conclude today’s conference call. You may disconnect your lines at this time and have a wonderful day. Thank you for your participation.