CEMI: Lateral Flow Picks Up Slack of FIOCRUZ Decline

Zacks Small Cap Research

By Brian Marckx, CFA

Q3 2013

Chembio's (CEMI) Q3 2013 revenue of $9.6 million was up 92% yoy and buoyed in part by the $5.3 million order from an international procurement agency for one of the lateral flow products that Chembio had previously announced.  CEMI recognized $3.9 million of this order in Q3 (the remainder almost evenly split between Q2 and Q4) which helped push international lateral flow sales up almost 390% yoy to $4.9 million, just slightly below our $5.0 million estimate.  Meanwhile, <_st13a_country-region _w3a_st="on">U.S. lateral flow sales remained very strong as well, posting 83% yoy growth to $2.2 million and better than our $2.0 million estimate.  DPP sales to FIOCRUZ at $1.9 million also came in incrementally better than our estimate, at $1.7 million.  Importantly, management noted that their prior guidance for full-year FIOCRUZ related revenue of approximately $6 million still holds, which implies they should record $2+ million in FIOCRUZ DPP sales in Q4.

Total revenue beat our estimate of $9.2 million by about 5% and consisted of $9.0 million in product sales (vs. $8.8 million estimate) and $572k in R&D contracts and grants (vs. $350k estimate).  We look for revenue of $6.7 million in Q4, the anticipated sequential decrease due to the bulk of the large international order being booked in Q3.  Our 2013 full year estimate now stands at $28.4 million, implying yoy growth of about 11%.  Noteworthy is that we think CEMI will post double-digit revenue growth in 2013 despite an anticipated decline in FIOCRUZ related sales of $4 million or more (40%+).

Gross margin at 42.2% was also better than our estimate, of 38.9%.  Q3 operating expenses were $3.0 million, in-line with our $2.9 million estimate.  With CLIA waiver studies for the DPP HIV test now nearly completed, we expect to see a decrease in R&D expense in Q4.

EPS
We use adjusted net income and EPS for consistency purposes.  As a reminder, in Q4 2011 CEMI took a non-cash gain of $5.16 million to income from the reversal of deferred tax asset as they expected to generate positive pre-tax income from that point forward.  Their GAAP income tax rate of ~35.1% is 90% non-cash until they exhaust (which, based on our current model will occur sometime in 2015) their entire deferred tax asset which stood at $3.9 million at the end of Q3.  Q3 adjusted net income and EPS of approximately $1.0 million and $0.11 were ahead our $682k and $0.06 estimates.  We now look for adjusted EPS of $0.18 for the full year 2013.

We are maintaining our Outperform rating.  Our price target is $10/share.  See below for access to our most recent Investor Note on CEMI.

Cash
Excluding changes in working capital, cash from operations was an inflow of $1.27 million.  CEMI exited Q3 with $8.1 million in cash and equivalents and no debt.  CEMI also has a $2.0 million credit line (untapped at Q3 quarter-end). 


Business / Pipeline Update

Highlights over the last few quarters include discussions with Alere about that company potentially extending the agreement to remain CEMI's distribution partner for the company's lateral flow products.  CEMI noted that Alere has stated that they want to continue this arrangement.  A decision is expected in the near-term.  As a reminder, earlier this year Alere announced that they expect to launch a competing product (HIV 1/2 antibody / p24 antigen rapid test) which, per terms of the distribution agreement, allows CEMI to make the agreement non-exclusive or (for one of the lateral flow tests) terminate the agreement altogether. If CEMI does decide to sell these tests with their own sales force, which they will assemble in 2014 for their DPP products for the U.S. market, they will realize a significantly higher average sales price given that Alere currently clips a sizeable margin.

The other most noteworthy recent highlights are that timelines for CLIA waiver of the DPP HIV test are tracking earlier expectations and CEMI launched their HIV-Syphilis test in
<_st13a_place _w3a_st="on">Mexico, which was also accepted on the USAID list of products eligible to be used in international procurement programs.  Relative to the DPP HIV test for the <_st13a_country-region _w3a_st="on">U.S. market, CEMI is still shooting to have the CLIA waiver application submitted in Q4 (mid-November) and hopes to have the CLIA waiver in Q1 2014 with launch anticipated shortly afterwards.

A copy of the latest research report can be downloaded here >> 
 Chembio Diagnostics Report

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