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Edited Transcript of CEMI earnings conference call or presentation 6-Aug-19 8:30pm GMT

Q2 2019 Chembio Diagnostics Inc Earnings Call

MEDFORD Aug 15, 2019 (Thomson StreetEvents) -- Edited Transcript of Chembio Diagnostics Inc earnings conference call or presentation Tuesday, August 6, 2019 at 8:30:00pm 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

* Per Erik Ostlund

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

* Philip Taylor

Gilmartin Group LLC - Associate

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Presentation

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Operator [1]

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Greetings and welcome to Chembio Second Quarter 2019 Earnings Conference Call and Webcast. (Operator Instructions) As a reminder, this conference is being recorded. I would now like to turn the call over to your host, Philip Taylor, Investor Relations. Thank you. You may begin.

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Philip Taylor, Gilmartin Group LLC - Associate [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, August 6, 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 2018. 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 of the company's filings with the SEC concerning these and other matters.

 

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

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

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Thank you for joining us today. Chembio demonstrated strong commercial and operational performance during the second quarter of 2019. Our team generated total revenue of $9.6 million, including product revenue of $8.5 million, representing growth of 10% and 24%, respectively, compared to the prior year period. For the year, we are reiterating our revenue guidance of $36 million to $40 million.

 

In addition to our excellent top line performance, I want to highlight several recent accomplishments. During the second quarter, we received 2 important regulatory approvals, in line with previously communicated expectations that will create future commercial opportunities. Our dengue test was approved by ANVISA, which covers Brazil and our multiplex test for Zika, dengue and chikungunya received CE Mark, which covers Europe and the Caribbean region.

 

Last month, we entered into collaboration with Takeda, a leading global pharmaceutical company, to develop a point-of-care test for an undisclosed biomarker. This represents our second collaboration with a major pharmaceutical company, validating our technology as an ideal platform for the development and commercialization of companion or compatible diagnostic tests.

 

On today's call, we'll start by discussing progress on our 3 corporate priorities: expanding our commercialization, advancing our R&D pipeline and preparing for additional growth. Then Neil will review second quarter financial results, I'll make a few closing remarks and then we'll open the call for questions.

 

Starting with our first priority, expanding our commercialization. Strong product sales in the quarter were a result of continued market penetration on sales of our core HIV tests across numerous geographies. We're pleased with our product sales during the second quarter of 2019, which increased by 24% as compared to the prior year period. We believe there is significant growth opportunity for our HIV products through continued market penetration, geographic expansion and commercial investment.

 

Last week, one of our main competitors notified U.S. customers and distributors that it is unable to supply its HIV test and does not have an estimate as to when it will resolve the supply issue. This presents a great opportunity to increase our sales of HIV products in the U.S. market, which we are aggressively pursuing.

 

We also believe there is significant growth opportunity for several of our new infectious disease products. On recent calls, we identified our new dengue, Zika and chikungunya test as potential growth drivers for 2019, noting that we believe the opportunity for these products in Brazil is approximately $10 million annually.

 

Brazil faces a difficult epidemiological situation, characterized by the co-circulation of these 3 arboviruses, which present similar symptoms in patients. Our tests can help health care providers distinguish between the infections while detecting both active and prior exposure to help determine optimal treatment paths and providing surveillance data for population health management.

 

Our main competitor for fever and tropical disease tests in Brazil recently had its GMP approval revoked by ANVISA, Brazil's health regulatory agency, and therefore, is unable to produce, sell or distribute its test for dengue, Zika or chikungunya. Needless to say, this strengthens our position and our confidence about the potential to expand our business in Brazil.

 

We're also making progress toward meeting the conditions set in our UNICEF contracts, having received the CE Mark for our multiplex test for Zika, dengue and chikungunya. This takes us one step closer to realizing the $1.5 million award and potential total of $3.5 million under the contract, which runs through December 31, 2020.

 

Finally, as the World Health Organization has declared the Ebola outbreak in the Democratic Republic of the Congo a global public health emergency, we've recognized the growing need for our Ebola test. To address this need, we're in discussions with a number of organizations to secure funding for the procurement of our Ebola test.

 

Turning to our second priority, advancing our R&D pipeline. To expand our product portfolio, we are constantly working to advance the development of additional point-of-care diagnostic tests using our patented DPP technology platform. During the second quarter, we made significant advances in R&D and regulatory affairs, leveraging our point-of-care platform across multiple biomarkers. We continue to believe multiple infectious disease products will achieve regulatory approvals during the second half of 2019, including FDA approval of our multiplex tests for HIV and syphilis, FDA approval of our BARDA-funded Zika test and WHO prequalification and CE Mark for our HIV self-test.

 

We're also advancing our concussion test initiative through our recent agreement with Perseus Science, under which we will receive both funding and support towards the development of a point-of-care concussion test. We see a significant market opportunity for a highly sensitive concussion test, which could be used to triage patients in the emergency room, reducing the need for costly and time-consuming CT or MRI scans.

 

In May, we stated that we were in discussion with a number of potential collaborators to develop companion diagnostic and biothreat tests using our DPP platform. Further, that the inclusion of the optical analyzer, which allows us to enhance the level of detection by incorporating fluorescence sensing technology, has opened a number of opportunities to commercialize biomarkers and create growth drivers that were previously unavailable.

 

In the area of companion or compatible diagnostics, we continue to advance our strategy of collaborating with pharmaceutical companies to leverage our technology to develop point-of-care tests to identify certain biomarkers.

 

During the second quarter, we completed Phase III of our AstraZeneca-funded program in the development of a test for eosinophilic respiratory disease. While the test is currently CE marked and being used to support numerous studies, we remain focused on developing a regulatory pathway through the Food and Drug Administration pre-submission process, including finalizing agreement on the pivotal study to support a de novo pathway. We'll update on the timing of the clinical trial and the 510(k) filing once we have agreement with the FDA.

 

Additionally, we recently signed an agreement with our second pharmaceutical company, Takeda Pharmaceuticals, to develop a quantitative point-of-care diagnostic test for an undisclosed biomarker. Under the terms of the agreement with Takeda, funding will be provided subject to satisfying certain milestones. We view this as further validation of the potential for our technology to function as a platform for companion or compatible diagnostic testing.

 

Turning to our third priority, preparing for additional growth. To achieve our financial targets, we are expanding our operational infrastructure. We've commenced initiatives to automate manufacturing, expand U.S. facilities and increase production capacity to scale as efficiently as possible.

 

As previously discussed, our transition from manual to automated manufacturing is underway in the United States. Our manufacturing automation strategy is designed to increase gross margins as well as increase production capacity, efficiency and flexibility.

 

Our plan is to have 3 automated manufacturing lines by the end of 2019. We've commenced DPP test production on line #1 at the end of the first quarter of 2019, and 2 additional lines are scheduled for delivery during the third quarter of 2019. Line #2, which is designed to produce both DPP and STAT-PAK branded products, is planned to be operational by the end of 2019. And line #3, which is designed to produce our SURE CHECK branded product, is planned to be operational during the first quarter of 2020.

 

 

To update you on the expansion and improvement of our U.S. facilities, I remind you that we're consolidating from 4 buildings to a single 70,000 square foot leased facility. We're handling the transition in 3 phases and we are on schedule. We completed Phase I during the second quarter with the transfer of administrative, warehouse and shipping functions; Phase II, which includes the transfer of research and development, is planned for the completion in the second half of 2019; and Phase III, which includes the transfer of manufacturing and QA/QC operations, is planned for the completion in the first half of 2020.

 

Finally, we continue to advance towards the goal of obtaining World Health Organization prequalification for our Malaysia facility. Last week, the WHO completed the planned follow-up inspection. And based on the results of that inspection, we anticipate receiving WHO prequalification for our Malaysia facility during the third quarter of 2019.

 

Once we obtain WHO pre-Q, we will begin producing our STAT-PAK branded HIV test in Malaysia for supply to Africa. This will significantly reduce our product manufacturing cost, which will be especially important to improve product gross margins on existing business and help us win new business.

 

Now I'll turn it over to Neil to provide details on our financial results.

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

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Good afternoon, everyone. In the second quarter of 2019, total revenue was $9.6 million, an increase of 10% compared to the second quarter of 2018. Net product sales for the second quarter of 2019 was $8.5 million, an increase of 24% compared to the second quarter of 2018.

 

License and royalty and R&D and grant revenues combined in the second quarter of 2019 were $1.1 million, a decrease of 41% compared to the second quarter of 2018. R&D revenue is related to the timing and cadence of program performance obligations, which do not always occur in a certain quarter, but we continue to incur the expenses. In addition, we are wrapping up the Zika 510(k) work, which we believe will be replaced with projects such as the Takeda Pharmaceutical collaboration and others in our pipeline.

 

As John described earlier, compared to the second quarter of 2018, net product sales experienced gains in nearly every region, led by Latin America, Africa and Europe. Latin America benefited from the initial sales of our tests for Zika, dengue and chikungunya to Brazil. Africa continued its strength related to the Ethiopia program, and Europe reflects the contribution of our acquisition of opTricon, now Chembio Diagnostics GmbH, in November 2018.

 

Gross product margin improved by $0.9 million compared to the second quarter of 2018. This increase was from a combination of favorable product revenue and a 770 basis point improvement in product margin percent. The gross product margin percent for the second quarter of 2019 was 21.1% compared to 13.5% for the second quarter of 2018. The gross product margin improvement was from initial benefits from our first automated assembly line and reduced contract labor costs, offset by the impact of geographic mix on average selling prices.

 

Other expenses, which includes research and development and selling, general and administrative expenses, were $6.2 million for the second quarter of 2019 compared to $4.5 million in the second quarter of 2018. R&D costs increased by 5.5% associated with higher regulatory approval related spending. SG&A increased by $1.5 million through a combination of the operating costs for Chembio Diagnostics Germany, which we acquired late last year, legal expenses, rent and other costs related to leasing our new facility and higher noncash equity compensation costs.

 

Net loss in the second quarter of 2019 was $3.2 million or $0.19 per diluted share compared with a net loss of $1.7 million or $0.12 per diluted share in the prior year period. Per GAAP, the calculation of earnings per share excludes restricted stock that is unvested but issued and outstanding. The weighted average number of shares outstanding for both the 3 and 6 months ended June 30, 2019, is approximately 16.9 million shares.

 

On the balance sheet, cash and cash equivalents as of June 30, 2019, totaled $4.5 million. Net working capital as of June 30, 2019, was $15.4 million. As John mentioned, we are reiterating our full year 2019 revenue guidance of $36 million to $40 million. We continue to be confident that we have an adequate capital structure in place to support our 2019 plans. Given our growth plans and momentum, we are currently evaluating a credit facility or debt financing to further leverage our capital structure.

 

Now I will turn the call back to John to make some closing remarks.

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

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In summary, we've built a broad portfolio of point-of-care infectious disease tests, bolstered by a differentiated and highly analytical technology platform that's leverageable across many biomarkers. The performance, ease of use, speed and cost of our tests is attractive to customers across the globe. We are more confident than ever in our ability to expand commercialization and advance the development of new tests internally and through collaborators while efficiently scaling operations.

 

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

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from Per Ostlund with Craig-Hallum.

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

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Let's start with the Brazilian fever market. So you mentioned in your remarks, John, and reiterated that the potential competitor there had, had production halted and was essentially out of the market. You had gotten an initial order as of the last quarterly call.

 

Now that you've got all your approvals, what sort of gating factors are in place for you to more materially capture the market opportunity there? Or is it more of a 2020 item, potentially, at this point given where we are in the year?

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

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The short answer is just getting the order. And we still believe it is potentially a 2019 opportunity.

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

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Okay. No elaboration needed on that.

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

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Yes. To expand a little bit on what happened with the previous supplier, on the past call, we mentioned that they were, let's call it, under a hold by ANVISA. It's gone a step further and they've had their GMP license revoked. So that's gone from an open window to an open door.

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

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Okay. Very, very good. A couple of the time line matters I wanted to come back to. It sounds like DPP, HIV-Syphilis and self-tests are still seen as a couple of second half opportunities. Just wanted to get your sense or an update on the data collection from the HIV-Syphilis side on the -- to add the pregnant women claim to the test. Where do you stand there? And then I think, if I recall correctly on HIV self-test, you were expecting some feedback on the CE Mark filing and the WHO filing potentially in 2Q? Did those things happen? And if so, could you characterize...

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

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Yes. Okay. So there are few pieces to that question, Per, excellent question. First, let's take HIV-Syphilis in the U.S. We continue to be confident that we're going to get the FDA approval, which is a PMA in the second half of this year, and that creates a significant opportunity in the U.S. market.

 

To expand a little bit on comments that I made in the prepared remarks, there's also a significant market opportunity that's emerged in the U.S. with one of our competitors, Abbott, who is unable to supply their Determine HIV test in the U.S. market. They've communicated that to U.S. customers and distributors and have gone so far as to say that those customers should look to other suppliers to get supply of that product.

 

So beyond HIV-Syphilis and waiting for the FDA approval, we have an immediate actionable opportunity with HIV testing in the U.S. market. And it's also worth noting, those customers that currently buy from Abbott previously bought Chembio products when we distributed them through Alere who, of course, is now Abbott. So we think we have a great opportunity in the U.S. market right now with our HIV test and then going forward, once we get approval with HIV-Syphilis.

 

Internationally, we're very focused on getting both the CE Mark, which would cover, broadly, Europe and the Caribbean region and also getting WHO prequalification for our HIV self-test. Remember, that's the same test that the SURE CHECK brand that is used for public health in the United States and customers love it. And the feedback that we have through our distributor in Europe is that the HIV self-test customers love it as well, incredibly easy to use.

 

So we anticipate getting both of those approvals in the second half of this year, which creates additional opportunity for us in the self-test segment.

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Per Erik Ostlund, Craig-Hallum Capital Group LLC, Research Division - Senior Research Analyst [8]

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Excellent, excellent. Question on HCV. I'm wondering if there's any updates on the project that you had going with FIND there. I think it kind of kicked off last summer, and it looks like maybe they've narrowed their focus down to a lesser number of partners than they had originally, although I don't think they've disclosed anything, which naturally means you might not be able to disclose anything. But I did see that there was an RFP and an RFQ out in terms of development and commercialization of an HCV core antigen test. I'm just wondering if there's any update there.

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John J. Sperzel, Chembio Diagnostics, Inc. - President, CEO & Director [9]

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There is not an update on that officially. We know how our test performed. I think it's unlikely that we'll continue forward with an antigen-based hepatitis C test. There were 2 components to the work that we're doing with FIND. One was to assess whether a rapid testing platform could perform an antigen-based hepatitis C test, for which none exists in the world today. I don't know that that's going to go forward based on the data that I've seen.

 

The other part, which is much more encouraging, is the performance of our antibody-based hep C test, which we had previously developed. That data looks outstanding, and I think there's a high likelihood that internationally, we'll move forward on that front. And we'll update you once we go forward, exactly what that plan looks like, but very encouraging.

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Per Erik Ostlund, Craig-Hallum Capital Group LLC, Research Division - Senior Research Analyst [10]

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Okay, excellent. And then just last one, last one to squeeze in. With the reaffirmed guidance of $36 million to $40 million, I assume that, that still does not include the UNICEF conditional order. Is that a situation where literally you will make sure that every facet of the conditions are taken care of before it's included in the number?

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John J. Sperzel, Chembio Diagnostics, Inc. - President, CEO & Director [11]

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That's correct, yes. And it also, just as a reminder, did not include any potential upside of the fever and tropical disease tests in Brazil, which we're pretty encouraged about at this point.

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Operator [12]

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

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Unidentified Analyst, [13]

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It's actually Greg filling in for Kyle. But I just want to follow up, to start, on the previous question. You had a nice initial order from Brazil last year and we're anticipating a subsequent material order. To the extent that you can tell, when does Brazil typically give awards for topical and fever tests? And have you had any subsequent discussions with Brazil since last quarter?

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John J. Sperzel, Chembio Diagnostics, Inc. - President, CEO & Director [14]

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So I'll take those in reverse order, Greg, and thanks for the question. We are in constant discussion with Brazil about the fever and tropical disease opportunity. We have finalized pricing with our partner, Bio-Manguinhos, on the dengue test, the chikungunya test and the multiplex test. We had previously established pricing on Zika. So we're moving forward on the contractual side of things.

 

Recall that our partner Bio-Manguinhos is the one that actually supplies the product to the Ministry of Health. They are both Brazilian government organizations. The award for those tests generally happens in the third quarter of each year, of the previous few years that they've had that tender out. And so we anticipate that occurring in the third quarter.

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Unidentified Analyst, [15]

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Okay. Great. And then regarding the partnership with Takeda, can you provide any more color around timing milestones? I think you touched a little bit in your prepared remarks. And then in particular, if you look at the Astra Zika deal for $2.9 million over the -- over 18 months and the Paul Allen Foundation agreement, which I think was $2.8 million, is it fair to assume that the Takeda contract is in the same ballpark?

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John J. Sperzel, Chembio Diagnostics, Inc. - President, CEO & Director [16]

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Sure. First of all, I mean we're excited to work Takeda. It's a top 10 pharmaceutical company. I think all of you know, they recently acquired Shire for more than $60 billion. So we're really excited about that opportunity. As I mentioned in the prepared remarks, it's the second major pharmaceutical company that has chosen to work with Chembio, and that's a real stamp of approval for our platform and our scientific capabilities.

 

We haven't disclosed the funding through the Takeda collaboration. And bluntly speaking, the reason we don't disclose that for each collaboration is it can be helpful or it can also be harmful in future negotiations with other potential partners, many of which are ongoing. So that's why we haven't disclosed it.

 

You referenced a couple of collaborations that we had with Paul Allen and with AstraZeneca that provided multimillion-dollar funding. I mean it's fair to think about it that way, but it's not a number that we have put out publicly.

 

And then finally, I think, Greg, your other part of your question was where are we in the process. We have kicked off the program. We're in the feasibility phase and look forward to updating as we go forward.

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Operator [17]

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Our next question comes from Bruce Jackson with The Benchmark Company.

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

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So to continue on the Takeda Pharmaceuticals product, is this going to be a companion diagnostic? And is it going to be a single biomarker or a multi-biomarker assay?

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

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It's a companion diagnostic test, and we haven't disclosed if it's a single or a multiplex test.

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Bruce David Jackson, The Benchmark Company, LLC, Research Division - Senior Healthcare Research Analyst [20]

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Okay. And I suppose you can't discuss what therapeutic area it might be in.

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

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Correct.

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Bruce David Jackson, The Benchmark Company, LLC, Research Division - Senior Healthcare Research Analyst [22]

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Okay. And then with AstraZeneca, if you could perhaps bring us up to speed on the story. So you finished up the clinical work. What kinds of discussions have you had with the FDA? And what's the -- what seems to be the sticking point right now?

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John J. Sperzel, Chembio Diagnostics, Inc. - President, CEO & Director [23]

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So when you say we finished up the clinical work, I want to just make sure that I respond to that appropriately. We have not finished the clinical trial for the FDA submission, if that's what you were suggesting, Bruce. Just maybe clarify that for me.

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Bruce David Jackson, The Benchmark Company, LLC, Research Division - Senior Healthcare Research Analyst [24]

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Yes. The -- sorry about the verbiage there. But you've gotten the project to the stage where you're ready to approach the FDA. So just take us through what the nature of those discussions are and what the time line is looking like to the best of your knowledge right now.

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John J. Sperzel, Chembio Diagnostics, Inc. - President, CEO & Director [25]

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Yes. So I think it's important to start with -- today, there is no diagnostic test on the market for the application that we are pursuing. So there is no predicate device, if you want to talk in regulatory terms. That means, with the FDA, we need to follow a de novo pathway. And generally, through the pre-submission process, there's lots of dialogue between a diagnostic company and the agency as you prepare to start a clinical trial.

 

Because to be efficient, we want to get agreement on what that clinical trial is comprised of and what it's intended to prove in terms of your intended use of the product. And so in terms of characterizing the dialogue with the FDA, I would say it's pretty extensive. And it includes Chembio, who's leading that effort, as well as AstraZeneca. They're involved in every single discussion and every single meeting that we've had with the agency.

 

As far as the time line is concerned, it's a little premature to comment on that. As I mentioned, as soon as we have that pathway agreed to with the FDA, then we'll be able to put a time line on it and we don't have that yet.

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Operator [26]

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There are no further questions. At this time, I'd like to turn the call back over to John Sperzel for closing comments.

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John J. Sperzel, Chembio Diagnostics, Inc. - President, CEO & Director [27]

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Thank you for joining us today. Look forward to updating you on our next call. Have a great afternoon.

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Operator [28]

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This concludes today's conference. You may disconnect your lines at this time, and we thank you for your participation.