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Edited Transcript of CEMI earnings conference call or presentation 7-Mar-19 9:30pm GMT

Q4 2018 Chembio Diagnostics Inc Earnings Call

MEDFORD Apr 8, 2019 (Thomson StreetEvents) -- Edited Transcript of Chembio Diagnostics Inc earnings conference call or presentation Thursday, March 7, 2019 at 9:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* John J. Sperzel

Chembio Diagnostics, Inc. - President, CEO & Director

* Neil A. Goldman

Chembio Diagnostics, Inc. - Executive VP & CFO

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Conference Call Participants

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* Bruce David Jackson

The Benchmark Company, LLC, Research Division - Senior Healthcare Research Analyst

* Kyle Royal Bauser

Dougherty & Company LLC, Research Division - Senior Research Analyst

* Per Erik Ostlund

Craig-Hallum Capital Group LLC, Research Division - Senior Research Analyst

* Philip Taylor

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Presentation

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Operator [1]

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Good day, ladies and gentlemen, and welcome to your Chembio Diagnostics' Fourth Quarter and Full Year 2018 Earnings Conference Call and Webcast. (Operator Instructions)

At this time, it is my pleasure to turn the floor over to Mr. Philip Taylor. The floor is yours.

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Philip Taylor, [2]

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Thank you. Before we begin today, let me remind you that the company's remarks made during this conference call today, March 7, 2019, include forward-looking statements within the meaning of the Securities Act of 1933 concerning the current beliefs of the company. Forward-looking statements are 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 and elsewhere in Chembio's annual report on Form 10-K for 2017 and its 3 subsequent quarterly reports on Form 10-Q. Chembio's results may differ materially from those projected. Chembio undertakes no obligation to publicly revise or update any forward-looking statements made today. I encourage you to review all the company's SEC filings concerning these and other matters.

With that, I'd like to turn the call over to John Sperzel, President and Chief Executive Officer. John?

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John J. Sperzel, Chembio Diagnostics, Inc. - President, CEO & Director [3]

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Thanks, Philip. Thank you for joining us today.

Chembio had a milestone year in 2018, and we are increasingly confident about the company's long-term potential. Our team delivered 2018 revenue of $33.4 million, representing 39% growth compared to the prior year. And we produced nearly 20 million infectious disease tests. We acquired opTricon, which strengthened our portfolio through the addition of handheld optical analyzers. And we obtained the first regulatory approval for the test we developed for AstraZeneca. The momentum and strategic advantages we achieved in 2018 give confidence to provide initial full year 2019 revenue guidance of $36 million to $40 million as we progress towards our previously announced 5-year targets of $100 million in revenue by 2023 and 50% gross margins by year-end 2023.

Today, we'll start by reviewing our financial performance against 2018 priorities. Then, we will review our 2018 financial performance and conclude with our 2019 priorities.

The Chembio team set 4 priorities in 2018, the building blocks to drive growth and operating efficiency, and we achieved each of our priorities.

Our first priority was to expand our core infectious disease business. During 2018, we increased infectious disease product sales by 38%. Revenue growth was driven by Africa, Latin America and Europe, where we increased sales 142%, 48% and 28%, respectively. Leading growth drivers in these regions included winning a 3-year tender in Ethiopia totaling $15.8 million, of which $4.3 million was recognized during 2018; increasing sales to the government in Brazil, where we recognized $11.2 million during 2018; and continuing to grow our business in Europe as more countries adopt HIV self-testing models.

Our second priority was to leverage our patented DPP technology and scientific expertise. During 2018, we made significant progress on multiple pipeline opportunities. The PMA for our HIV-Syphilis test was submitted to the United States Food and Drug Administration in 2018. The clinical data for both HIV and syphilis seems agreeable to the agent, and we are progressing toward approval. In February, the FDA provided us with an option to include additional data to support a claim for testing pregnant women, which we believe is essential given the importance of eliminating mother to child transmission of both HIV and syphilis. We plan to collect this additional data, which we estimate will take 8 weeks.

Our dengue test and our multiplex Zika/Chikungunya/Dengue test were submitted for review by ANVISA, Brazil's health regulatory agency. We believe these tests will be approved following suit of our previously approved Zika test, chikungunya test and Micro Reader, and we are hopeful to begin selling these products in Brazil during 2019. Our Ebola test was granted emergency use authorization by Food and Drug Administration during the fourth quarter of 2018, and we have now shifted our focus towards commercialization of that novel test.

Our Zika test, which is funded by the U.S. government or BARDA, is the only FDA emergency use authorized rapid Zika test in the world. While we currently sell our Zika test under EUA status, we are nearing completion of the clinical studies to support an FDA 510(k) submission, which is planned for the end of the second quarter of 2019 and also funded by BARDA.

Our HIV self-test was submitted for CE Mark in the fourth quarter of 2018 and for WHO prequalification during the first quarter of 2019.

We anticipate feedback on these filings during the second quarter of 2019. It's important to note that the same product already received WHO prequalification and CE Mark for professional use.

Our eosinophilic respiratory disease test developed in collaboration with AstraZeneca obtained its first regulatory approval, a CE Mark. We're working to develop a regulatory pathway for this test in the U.S. market through the FDA pre-submission process, including agreement on the pivotal study to support a de novo pathway. We will update on the timing of the clinical trial and the 510(k) filing once we have agreement with the FDA.

Our third priority was to broaden our sales and marketing channels worldwide. During 2018, we added 40-plus product registrations and numerous distributors throughout Latin America and Southeast Asia, which paves the way for commercial expansion and additional product sales. Historically, the company's products were never registered in most countries in these 2 important regions, which limited commercial opportunities.

Our fourth priority was to automate our U.S. manufacturing operations, which we view as an essential step in scaling our business and enhancing gross margins. During 2018, as mentioned, we produced nearly 20 million infectious disease tests as we responded to increased global demand for our products. To improve efficiency and expand capacity, we ordered and took delivery of our first fully automated manufacturing line, which will begin production by the end of the first quarter of 2019.

Finally, the acquisition of opTricon was a milestone for our company. Control of this optical technology was imperative as we continue to integrate its capabilities in both our commercial and business development activities. The ability of our DPP test to provide quantitative results, enabled by the optical analyzer, is a significant market advantage. Operationally, we're happy to report the business integration is complete and the Berlin facility is operating as our center of excellence for optical technology as well as our European commercial hub.

We're proud of what the Chembio team accomplished in 2018. Our CFO, Neil Goldman, will now review our fourth quarter and full year financial results. Neil?

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Neil A. Goldman, Chembio Diagnostics, Inc. - Executive VP & CFO [4]

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Thanks, John. In the fourth quarter of 2018, total revenue was $7.6 million, an increase of 27% compared to the fourth quarter of 2017. Net product sales for the fourth quarter of 2018 was $5.6 million, an increase of 16% compared to the fourth quarter of 2017. License and royalty and R&D, milestone and grant revenues combined in the fourth quarter of 2018 were $2 million, an increase of 76% compared to the fourth quarter of 2017. In November 2018, we completed the acquisition of opTricon, and our consolidated statement of operations includes opTricon's results beginning November 6, 2018.

Gross product margin dollars decreased by 28% compared to the fourth quarter of 2017. Gross product margin percent for the fourth quarter of 2018 was 18.3% compared to 29.5% for the fourth quarter of 2017. The lower gross margin percent resulted primarily from sales mix from markets with lower average selling prices as well as costs associated with scaling labor and production of the current manual assembly process.

Other expenses, which includes research and development and selling, general and administrative expenses, were $5.9 million for the fourth quarter of 2018 compared to the $4.6 million in the fourth quarter of 2017, each excluding acquisition-related costs. Net loss in the fourth quarter of 2018 was $3.2 million or $0.20 per diluted share compared with a net loss of $2 million or $0.16 per diluted share in the prior year period.

Now turning to full year 2018 financial results. Total revenues for 2018 were $33.4 million, an increase of 39% compared to 2017. Net product sales for 2018 were $26.7 million, an increase of 38% compared to 2017. License and royalty and R&D, milestone and grant revenues in 2018 totaled $6.7 million, an increase of 42% compared to 2017.

Net product sales in 2018 benefited from strong gains in Africa, Latin America and Europe. R&D, milestone and grant revenues benefited from a broadening array of collaborators, including AstraZeneca, LumiraDx and BARDA.

Gross product margin percentage for 2018 was 19.9% compared to 33.1% for 2017. The lower gross product margin percent resulted primarily from sales mix from markets with lower average selling prices as well as costs associated with scaling labor and production of the current manual assembly process.

As we advance towards an automated manufacturing environment, we have looked at the impact automation may have on our gross product margins. Had we been fully automated, during 2018, on a proforma basis, our gross product margins would've been approximately 40% for the year.

Other expenses in 2018, which includes research and development and selling, general and administrative expenses, were $17.6 million compared to $16 million in 2017, each excluding acquisition-related costs.

The $1.6 million increase relates primarily to increased commissions related to sales growth and increased R&D costs correlated with R&D, milestone and grant revenues. Net loss for 2018 was $7.9 million or $0.55 per diluted share compared with a net loss of $6.4 million or $0.52 per diluted share in 2017.

On the balance sheet, cash and cash equivalents as of December 31, 2018, totaled $12.5 million. During November 2018, we completed an underwritten public offering that generated net proceeds of $16.5 million, which provides the capital necessary to support our 2019 plans. We subsequently completed the $5.5 million purchase of opTricon GmbH, made initial deposits on our second and third automated manufacturing lines and subsequent to the end of 2018, sign a long-term lease on a 70,000 square-foot facility to consolidate, expand and improve our operations.

Finally, I'll touch on our guidance. As John mentioned, we expect full year 2019 revenue between $36 million and $40 million. Based on current expectations, we believe 2019 revenue will be split approximately 45% in the first half of the year and approximately 55% in the second half of the year.

As my final matter, we'll be filing our 10-K with the SEC next week.

Now I will turn the call back to John to discuss our 2019 priorities

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John J. Sperzel, Chembio Diagnostics, Inc. - President, CEO & Director [5]

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Thanks, Neil. As we look to 2019, the Chembio team is focused on 3 priorities: one, expand our commercialization; two, advance our R&D pipeline; and three, prepare for growth. Starting with the first priority, expanding our commercialization.

Over the last 2 years, we increased revenue by 34% and 39%, respectively. In 2019, we believe growth will be primarily driven by our core HIV products, including HIV self-testing, plus new products such as HIV-Syphilis, dengue, Zika and chikungunya.

We plan to expand product registrations, distribution channels and our commercial team.

In fact, during the first quarter of 2019, we hired an experienced executive from Abbott to lead our European commercial efforts.

As we enter 2019, our sales funnel is strong, including previously announced orders of $10.5 million in Brazil and $4.5 million in Ethiopia, plus a new $1.5 million order from a U.S. customer. And today, we announced a conditional UNICEF award for our dengue/chikungunya/Zika test totaling up to $3.5 million.

Moving to our second priority, advancing our R&D pipeline. We've made outstanding progress proving our science and technology, advancing internally funded programs and attracting external funding from world-leading organizations. The combination of our DPP technology and newly acquired optical technology offers a powerful combination capable of providing enhanced sensitivity, multiplexing and quantitative results. During 2019, we look to advance our current pipeline and announce new externally funded product development initiatives all aimed at providing additional growth opportunities.

Following the opTricon acquisition, we have already developed a working prototype of the next-generation analyzer based on the same patented optical technology as the DPP Micro Reader. Our team in Berlin plans to complete this development during 2019.

Moving to the third priority, preparing for growth.

As mentioned earlier, we took the liberty of our first fully automated U.S. manufacturing line during 2018, which will be operational by the end of the first quarter. To prepare for future growth, we ordered 2 additional fully automated manufacturing lines, which are planned to be operational by the end of 2019. These 3 manufacturing lines will increase our annual production capacity in the United States to approximately 30 million tests based on a 2-shift operation.

In addition, our annual capacity in Malaysia is approximately 10 million tests based on a 2-shift operation. As previously discussed, we're pursuing WHO prequalification to add our Malaysia facility for production of STAT-PAK HIV products, which will allow us to manufacture these products in Malaysia and distribute into Africa.

To consolidate, expand and improve our U.S. facilities, we signed a lease on a 70,000 square-foot facility in Hauppauge, New York. We anticipate the move occurring in multiple phases, beginning with administrative and warehouse functions in the second quarter of 2019, the R&D teams during the third quarter of 2019 and manufacturing during the first half of 2020.

In summary, Chembio delivered significant growth in 2018, leveraged our technology and made key investments to build a foundation for future growth.

Focus on expanding our commercialization and advancing our R&D pipeline gives us confidence we can reach $100 million in revenues by 2023. Investing in U.S. manufacturing automation, improved and consolidated U.S. facilities, WHO prequalification of our Malaysia facility and development and commercialization of products with higher margins will be catalysts to allow expansion of our gross margin to 50% by year-end 2023. We have a proven technology platform, a significant market opportunity, an experienced team and the capital to execute on our 2019 plans.

With that, we'll now open it up for questions. Operator?

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Questions and Answers

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Operator [1]

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(Operator Instructions) And we'll take our first question from Per Ostlund with Craig-Hallum Capital.

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Per Erik Ostlund, Craig-Hallum Capital Group LLC, Research Division - Senior Research Analyst [2]

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I guess, my first question, maybe the obvious question, is the introduction of 2019 guidance. You've put out the longer-term targets at your Analyst Day here, about a month ago, to take the step to go specifically to 2019 itself. You guys don't strike me as the type that get too far out in front of your skis on these type of things. So is it safe to say that when you evaluated where you were going to come out with that number, that you took a pretty measured approach to the inputs and what's your self-sufficient room for upside to the extent that some of the other opportunities might emerge later in the year?

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John J. Sperzel, Chembio Diagnostics, Inc. - President, CEO & Director [3]

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It's fair to characterize it as a measured approach, Per. And thank you for acknowledging the long-term targets that we put out at our analyst meeting. This is the next step in the process. We have confidence in our business, increasing confidence I might add. And with a pretty strong pipeline going into the first half of the year and a strong funnel, we feel confident in putting that guidance out between $36 million and $40 million in revenue for 2019.

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Per Erik Ostlund, Craig-Hallum Capital Group LLC, Research Division - Senior Research Analyst [4]

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Excellent. Okay, very good. So then, maybe turning to today's news. Congratulations on the UNICEF award. Do you have any expectations as far as the time line for meeting the conditions of that purchase agreement? And then maybe related, since it is the same test, you alluded to ideally having commercial sales of the combination assay in Brazil during 2019 as well. Have the awards been made at all still in Brazil? Or is that still pending? And is there anything, I guess maybe besides it being a triple combination assay, that is making your review any more protracted than you would've expected from ANVISA?

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John J. Sperzel, Chembio Diagnostics, Inc. - President, CEO & Director [5]

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Okay. First, let me make one comment that was brought to my attention. Apparently, the press release that we would typically issue to start this call was hung up for some technical reasons. So I just want to let people know that, that is on the way. So to get to your questions about today's press release from UNICEF, obviously, we're pretty pleased about that. We have a rapid diagnostic test that provides results in 15 minutes, both for IgM and IgG antibodies. So it is a multiplex test that actually provides 6 results with a single drop of blood in 15 minutes. So there's nothing else like that in the world, and it's clear that UNICEF recognizes that and they give us an award. The -- there's a requirement for us to meet the CE Mark by end of July or August. So that is a clear target that we have to achieve in terms of timing. One other thing that I might add that was not in the press release is that the price that we're going to sell that product to UNICEF is somewhere between 2 and 3x the average selling price of a typical HIV test on an average basis, globally. So that particular order is uplifting in terms of our overall gross margins. And when we talk about developing and commercializing tests that have a higher average selling price, that's a perfect example of what we're talking about.

As far as Brazil is concerned, just to continue on your question, we believe that the combination, multiplex test is literally at the goal line with both ANVISA and INCQS at Brazil. It's a 2-step process in terms of getting approval. It's going to follow the same step that we saw with our Zika test or chikungunya test and our Micro Reader. So we're pretty confident about that. We're confident about the results of the test. We have visibility on that. So -- and the award has not been issued from the Ministry of Health in Brazil for those tests for 2019. So we're still hopeful to get it.

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Per Erik Ostlund, Craig-Hallum Capital Group LLC, Research Division - Senior Research Analyst [6]

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Okay. Excellent. Last one for me, and then I'll let someone else jump in. Coming back to opTricon. Obviously, it's very, very early here, but can you talk to some of the initiatives -- the early initiatives and the groundwork that you are laying over there? And kind of, what are the initial message for your new regional head that you brought in from Abbott?

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John J. Sperzel, Chembio Diagnostics, Inc. - President, CEO & Director [7]

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Okay. So I'll take that in 2 parts. First, the acquisition of opTricon. I think we've talked about -- this in the past and how it had become an integral part of everything that we were doing, both commercially as well as operationally. And operationally, I'm talking about product development. So almost every single test that we have in our pipeline, whether it's an infectious disease or with a collaborator, requires that optical reader. It was part of numerous regulatory submissions, ongoing, approved and on the drawing card, if you will. So strategically, it just became incredibly important to the company. Getting our hands on it, directly owning it gave us global rights to the product in all territories for all applications. That was really important both from a commercial standpoint, a product development standpoint and a business development standpoint. Oftentimes, we talked in the past, we were meeting with potential collaborators, whether it was a pharma company, diagnostic company, government organization, and the first question that came up was, "Do you have rights to that product for this application?" And oftentimes, the answer was no or not yet. And so we've completely taken that off the table. The other thing that owning it allows us to do is sit down with the team in Berlin and have the #1 priority, not 1 of 20 OEM partners that they had, and that allowed us to quickly put together specifications or tighter product profile, if you will, for the next-generation analyzer. We showed a first prototype of that at our Analyst Day in New York City but we now have an enhanced working prototype that we already are taking out to show to customers, specifically on the business development side and potential collaborators, and the response has been outstanding. And we wouldn't have been able to do that at that level of speed without it being part of our family.

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Operator [8]

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Our next question comes from Kyle Bauser with Dougherty & Company.

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Kyle Royal Bauser, Dougherty & Company LLC, Research Division - Senior Research Analyst [9]

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So appreciate the update on your project with AstraZeneca during the Analyst Day. You mentioned the Chembio diagnostic would be for eosinophilic respiratory disease. It's pretty -- it's a pretty general disease. There's a lot of different applications. Can we assume this will be used in conjunction with AstraZeneca's Fasenra, which is approved in the U.S., Europe and Japan? And can you speak to any degree about the extent to which this opportunity will contribute to the 2019 guidance since you have your clearance now?

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John J. Sperzel, Chembio Diagnostics, Inc. - President, CEO & Director [10]

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Yes, Kyle. Thank you. We are embargoed on that first question, not allowed to say specifically what the application is. We mentioned in -- I don't know if it was completely picked up during Analyst Day, that AstraZeneca believes that it has potential across a number of different compounds or agents or drugs, if you will. But we can't say, at this time specifically, what it was initially developed for. What we do believe, in terms of the second part of your question, is that we'll start that process in Europe of identifying key opinion leaders, getting the product in their hands and starting testing. And that will start to generate some revenue. Can't say at this point how material that revenue would be but we do anticipate starting in 2019.

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Kyle Royal Bauser, Dougherty & Company LLC, Research Division - Senior Research Analyst [11]

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Okay. And then -- so the guide of 50% gross margin over 5 years and you said that had you had full automation, 2018 would hit about 40%. So it seems like much of the gross margin expansion would come from the automation in New York pretty quickly by 2020, at the end of it at least. First of all, is that fair? And then can you talk about what the main other factors will be to get that subsequent 10% after that?

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Neil A. Goldman, Chembio Diagnostics, Inc. - Executive VP & CFO [12]

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Yes, it's Neil. So your assessment of that is correct. That's why we went back and did that analysis and felt it important to share with people so they could appreciate what is certainly an important part of the business strategy that we have been talking about and executing, on together with our colleagues. So yes, that gets us a nice direction towards the 50%. The second piece and as John alluded to it as an example, the UNICEF program and the margin associated with its higher average selling price profile is a common theme across many of the tests in our portfolio, both ones that are in infectious disease portfolio as well as products being developed through collaborators. And that's the second part to getting to that target. Just saying we're obviously very focused on advancing those through the pipeline as we are -- want to update everyone on those as they proceed.

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Operator [13]

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We'll take our next question from Bruce Jackson with The Benchmark Company.

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Bruce David Jackson, The Benchmark Company, LLC, Research Division - Senior Healthcare Research Analyst [14]

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Congratulations on the UNICEF contract. First question is, is that revenue incorporated into your guidance? And then given that CE Mark is expected in the July, August time frame, these revenues can be kind of back-end loaded? And is it all going to be in the fourth quarter or will it be spread over the third quarter and the fourth quarter?

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John J. Sperzel, Chembio Diagnostics, Inc. - President, CEO & Director [15]

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So the UNICEF award was not in our plan or in our guidance. We literally got that award yesterday morning. Again, it's conditional. It's depending on getting CE Mark. We have not filed for CE Mark yet. So to the extent we're able to gain sales from that award, it would be in the latter part of 2019.

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Bruce David Jackson, The Benchmark Company, LLC, Research Division - Senior Healthcare Research Analyst [16]

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Okay. Got it. And then with the HIV-Syphilis combination test, you discussed that you're going to be collecting some new data to help expand the labeling. It's going to take about 8 weeks. What happens after that? Is there like a data analysis piece of it plus you got to like resubmit the package and everything? So what's the anticipated timing after you get the new data?

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John J. Sperzel, Chembio Diagnostics, Inc. - President, CEO & Director [17]

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Great question. So the clock has officially stopped while we collect the data. There are 140 days on that clock. So when we collect the data and we resubmit it, that clock will continue. And that's the time period that the agency has to review the data. Doesn't mean that they will take all that time. That is the -- that's the legal amount of time that they have.

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Bruce David Jackson, The Benchmark Company, LLC, Research Division - Senior Healthcare Research Analyst [18]

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Okay. And then last question on the guidance. Is most of the incremental revenue over 2018 coming from the product revenue? Or will the mix be similar to 2018?

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John J. Sperzel, Chembio Diagnostics, Inc. - President, CEO & Director [19]

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I think most of it comes from product revenue.

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Operator [20]

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There appear to be no further questions at this time. I will now turn the conference over to John Sperzel for any additional or closing remarks.

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John J. Sperzel, Chembio Diagnostics, Inc. - President, CEO & Director [21]

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2018 was a great year for Chembio. We have clear priorities established for 2019, and we look forward to updating you on our progress in the next quarter. Thank you very much. And have a great evening.

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Operator [22]

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Thank you. This does conclude today's conference. You may now disconnect. And have a great day.