By Brian Marckx, CFA
Chembio (CEMI) reported Q4 2017 financial results and provided a business update. Despite declining on a sequential basis, both product sales and total revenue remained fundamentally very strong. The ~$1.2M qoq dip in product sales relates entirely (and more) to the timing in recognition of the May 2017 $5.8M DPP HIV 1/2 Brazilian contract. Product sales were about 10% and total revenue about 7% better than our respective estimates. More importantly, recent contract wins and near-term new product launches mean product sales growth in 2018 could actually eclipse the 41% posted in 2017. We are now modeling 2018 product sales of $27.9M, which would be an all-time record for CEMI.
Product Sales Up 51% in Q4, 41% FY 2017
Q4 and full-year 2017 product sales were $4.9M and $19.3M, up 51% and 41%, respectively. While revenue per product technology (i.e. DPP vs lateral flow) was not disclosed, CEMI did note that the remaining $1.4M of the $5.8M (all of which was recognized during 2017) Bio-Manguinhos contract shipped in Q4 (compared to ~$3.2M in Q3 2017).
While we had modeled that final payment, the beat to our number on product sales appears to be related to Africa – revenue from which was $1.8M in Q4 (37% of total product sales vs. $678k or 21% in Q4 2016) – or almost exactly the same $ amount that that territory contributed over the entire first nine months of 2017. Africa, has been a strong territory for CEMI as of late and, as we noted in our Q3 2017 update, was also the source of the beat to our product sales estimate in that quarter. A significant portion of that strength appears to be coming from OTC HIV products – a segment that showed initial success in Europe but which looks to have also gained traction in parts of Africa and could represent significant growth potential in other territories. CEMI’s OTC HIV revenue grew 91% in 2017.
Africa was responsible for $3.6M (18%) of product sales in all of 2017, including $2.7M (25%) in 1H, and accounted for 21% of the years’ total product sales growth. Africa’s contribution will increase, however, as CEMI expects to book more than $4M in 2018 (commencing in Q2) from a new 3-year $15.8M Ethiopian government tender. The remainder will be recognized during 2019 and 2020.
That contract (from the Ethiopian Pharmaceuticals Fund and Supply Agency) is just the latest addition to a long and growing list of (publicly disclosed) contract wins over the last several quarters that represent at least $35M worth of revenue recognizable over just four years. These wins (detailed below) are testament to success of the company’s recently implemented strategy aimed at gaining more control over their destiny.
Total Sales Up 41% in Q4, 34% FY 2017
Total sales, which includes license and grant revenue, were $6.0M and $24.0M in Q4 and 2017, up 41% and 34% yoy. Approximately $3.2M remains under the BARDA Zika grant. With EUA authorization completed, CEMI is turning their attention to CLIA waiver and 510(k) clearance. Farther down the road is a possible $7.3M follow-on funding from BARDA for a DPP Zika/Chikun/Dengue combination assay. In the meantime and in addition to the remainder of the current BARDA contract, initial revenue will be booked from a new $2.9M product development agreement with AstraZeneca PLC (AZN).
That deal, announced in December, relates to the development of a quantitative DPP assay for the detection of a (not disclosed) biomarker. The funding is expected over a term of 18 months. CEMI noted on the Q4 call (which we missed due to a timing conflict) that the timeline includes an expected mid-2019 510(k) clearance filing. CEMI might also play a role in commercialization, if and when launched. While neither the assay or target application were disclosed, given a mutual relationship with Genisphere’s technology, we think it may relate to oncological companion diagnostics. We should learn some more details with future company updates.
Product, Gross Margin
Product margin was 29.5% and 33.1% in Q4 and the full-year. Gross margin was 42.7% and 46.2% over the same periods. For context, product and gross margins over the three prior years were 35.1%/39.1% (2014), 37.1%/43.2% (2015) and 31.2%/47.3% (2016). While we expect revenue mix (including product vs grant revenue and international, particularly EM tenders, vs U.S. sales) will continue to move margin around, two of the more significant influences may be the $15.8M Ethiopian HIV STAT-PAK tender (i.e. big, relatively low-margin) and Malaysia-based manufacturing (i.e. significant and relatively low-cost throughput). The former is expected to commence in Q2 and run through 2020 while ribbon-cutting on the latter will likely be a 2019 event (possibly early 2019, depending on timing of WHO certification). We also think increasing U.S. sales should benefit margin – and believe DPP HIV/Syphilis, PMA application for which was filed in Q1, could prove to be one of the company’s most successful products.
Bolstered by $3.7M collection of A/R, CEMI had a $2.1M inflow and $5.0M outflow of cash from operations in the three and twelve months ending December 31, 2017, respectively. Excluding changes in working capital, cash used in operations was $1.8M and $4.9M over the same periods, compared to $2.2M and $6.1M used in the comparable prior year periods. CEMI exited 2017 with $1.9M in cash and equivalents and subsequent to year-end, raised ~$11.0M, net, ($12.0M gross) via the public sale of 1.784M common shares @ $6.75/share.
The $8.5M Bio-Manguinhos order for DPP HIV and Leishmania product and $15.8M Ethiopian STAT-PAK contract were two of several recent highlights on the operational front that will make either an initial contribution or larger contribution to revenue in 2018 and beyond. In terms of regulatory-related activities, FDA decision on the DPP HIV/Syphilis PMA filing is one of the most anticipated, as is OUS approval of the DPP Malaria and Dengue assays. And as it relates to business development and other related activities focused on further diversifying the revenue base and increasing shots on goal, the recent deal with AstraZeneca may represent the first of future similar development/commercialization collaborations. Among the recent highlights are;
• $15.8M Ethiopian tender for HIV STAT-PAK over 2018 – 2020
• UNICEF conditional award for DPP Zika worth $1.5M - $4.9M over 2018 – 2020
• AstraZeneca collaboration for development, regulatory submission of quantitative assay
• $8.5M commitment from Bio-Manguinhos to purchase DPP HIV and DPP Leishmania intermediate product and test components during 2018
• DPP Zika granted Emergency Use Authorization (EUA) by FDA in Sept 2017 – 1st and only rapid test to receive EUA. Launched in U.S. and Caribbean via public health channels
• DPP Syph/HIV U.S. clinical trial completed. FDA PMA filing made in Q1 2018. Expected to be 1st rapid HIV/Syph test on market
• DPP Syph/HIV OUS: already had significant success in Mexico. Initiated clinical study in 10 countries via WHO
• DPP Syph Screen/Confirm: CE Marked. Completed pilot studies in Africa – sales initiated
• DPP Malaria, DPP Dengue – development progress on both including Malaysia approval of DPP Dengue. Add’l approvals expected and commercialization in initial markets in 2018. These represent huge markets
• DPP Dengue/Zika/Chikungunya pilot program w/ CDC initiated in India, Peru, Haiti, Guatemala
• DPP Zika final approvals received in Brazil
• DPP Fever panels development progress on both
• Progress on DPP Cancer and Bovine TB, completion of both expected in 2018. DPP Concussion could follow
We cover CEMI with a $12.50/share price target. See below for free access to our updated report.
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By Brian Marckx, CFA