CEMI: Soft US HIV, DPP Strong, Pipeline Progress
NASDAQ:CEMI Q2 2015: Softness in U.S. HIV, DPP Holding Up Well, Pipeline Moving Closer to Commercial Products.. Chembio (CEMI) reported financial results for the second quarter ending June 30th. The top and bottom lines missed our numbers by about 3% and $325k, respectively. Revenue shrank more than we were expecting as a result in softening of the overall HIV POC testing market and lower than modeled international lateral flow sales (which are near impossible to model given reliance on tenders), which was partially offset by better than anticipated DPP sales. This was true even despite DPP sales falling in Mexico, an area that has been a recent boon for CEMI with their DPP HIV-Syphilis test. This miss to net loss was a combination of lower revenue and higher R&D, the latter mostly attributed to R&D contracts. But while revenue and expenses weren’t a particular highlight, product margin, at 41.5%, was the widest since Q2 2012, benefitting in part from manufacturing efficiency initiatives implemented in 2H 2014. The softness in U.S. lateral flow sales, which were down $219k (18%) qoq and 30% yoy (yoy is not particularly relevant given a $1.1M payment in Q2 2014 from termination of Alere/STAT-PAK dist agreement), may reflect, at least to some degree, systemic weakness of the overall U.S. HIV POC market as some testing shifts to 4th-gen laboratory testing. OSUR noted as much on their Q2 call explaining this contributed to the 15% yoy drop in U.S. sales of their HIV POC business. But relative to CEMI’s U.S. HIV sales, some of it may also be from CEMI’s sales force still climbing the productivity curve. While we had been modeling roughly mid-single digit growth coming from CEMI’s total HIV franchise (i.e. lateral flow and DPP) in the U.S., we have since updated this to more flattish qoq growth. Relative to DPP - sales continue to mostly come from Brazil which was a major driver of the top-line in 2014 and helped push 1H 2015 DPP sales up by just better than $100k. We continue to expect DPP Brazil sales to remain significant throughout the remainder of 2015. We also think DPP HIV/Syphilis, which while slipping in Mexico in Q2, has been very successful in that country since the launch in late-2013, to be a big winner in Brazil as well. The test was approved by Brazilian regulators in February of this year. So while we continue to see headwinds during the current year and now model a 4% topline contraction (revised lower from a 2% decrease) compared to 2014, we continue to see several near-term catalysts that can turn revenue back to positive growth. Despite some US POC HIV testing moving to the lab, we believe the recently launched DPP HIV assay can be a formidable and significant revenue generator for CEMI – on the Q2 call management characterized the progress of introduction as “slow and steady.” DPP HIV/Syph - we think this is a needle-mover in Brazil and has the potential to very big in the U.S. as well – it is expected to enter clinical trials in the U.S. in 2H 2015 – this is the pipeline candidate that CEMI is most focused on. So with the pipeline getting deeper and deeper, we think there could be a fairly steady stream of new products reaching the market and if that happens, these could provide additional tailwinds to revenue for some time to come. CEMI also announced that they are breaking down their business activities into three areas; sexually transmitted diseases, fever and tropical diseases, and licensing and partnerships. The fever and tropical diseases has been a relatively new area for CEMI but they appear fully dedicated to exploiting this. Malaria and Ebola as well as Dengue Fever are initial priorities. The company also hopes to have a fever multiplex panel developed – which would presumably cover these three as well as up to four other fevers. Management noted that progress continues on these various programs, although chose not to provide specific development timelines. On the partnership side they continue to work on development of an assay for CTE and sports concussions as well as a cancer diagnostic and flu-immune status test. Q2 Financials Q2 revenue of $6.7 million was down 10%, up 8% sequentially and about 3% lower than our $7.0 million estimate. Revenue in the year-earlier period includes about $1.1 million related to the termination of the Alere/STAT-PAK distribution agreement. The increase from Q1 2015 came from a $1.5 million jump in DPP sales – not much in the way of disclosure about the big increase, although DPP sales have been all over the place so this could be timing in Brazil. As noted CEMI mentioned some relative weakness in DPP Mexico sales in Q2 although they hope for this to show regained strength. Probably, and unfortunately, more fundamental might be the 18% drop in U.S. lateral flow sales – some of which most likely relates to the move from POC to the lab (next-gen test) for HIV. But we think DPP HIV has potential to stem the tide, at least to some degree, given the potential accuracy advantages over OSUR’s saliva/blood OraQuick (POC) HIV assay. CEMI’s test was CE Marked in June and the company expects to launch in Europe in Q4 this year. While a potential contributor, we don’t model much from the EU given relatively lower rates of HIV and more reliance on lab testing. Over the near term we have Brazil related sales continuing to contribute the major portion of DPP revenue. This includes the DPP HIV/Syph test which was launched in February in Brazil. Modeling international lateral flow has been and will likely continue to be a cat-herding exercise as no one seems to have much in the way of insight into when aid tenders might come. Our Q2 number, $1.6 million turned out to be way too high with this coming in at $1.2 million. By comparison this was $1.6 million in Q1. Our model assumes about $2.1 million total in 2H – this is probably the line-item that has the most potential to beat on the upside. Gross and product margins at 45.0% and 41.5%, respectively, were the widest since Q1 2012 and bolstered by a combination of benefits from recent manufacturing cost initiatives as well as a healthy amount of contract revenue in the quarter. We continue to expect to see improvement in both product and gross margin in 2015 as compared to 2014. 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 2019 or 2020) their entire deferred tax asset which stood at $4.5 million at the end of Q2. Q2 adjusted net income and EPS of approximately ($874)k and ($0.09) compares to our ($549)k and ($0.06) estimates. Most of the difference relates to a combination of the miss on revenue and higher than modeled R&D expense. Cash Excluding changes in working capital, cash used in operations was $491k in Q2. CEMI exited Q2 with $1.6M in cash and equivalents, compared to $2.8M at the end of Q1. CEMI currently has an A/R balance of about $8.9 million – about $7.4 million of which relates to one customer. Management noted on the call that they believe this is collectible and expects to bring the balance down. Cash from A/R collections and a $2 million bank line (if needed) should provide sufficient near-term liquidity. We are maintaining our Buy recommendation. See below for our updated report on CEMI. READ THE LATEST FULL RESEARCH REPORT HERE SUBSCRIBE TO ZACKS SMALL CAP RESEARCH to receive our articles and reports emailed directly to you each morning. Please visit our website for additional information on Zacks SCR and to view our disclaimer.
