U.S. Markets open in 7 hrs 15 mins

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

Q3 2019 Chembio Diagnostics Inc Earnings Call

MEDFORD Nov 26, 2019 (Thomson StreetEvents) -- Edited Transcript of Chembio Diagnostics Inc earnings conference call or presentation Thursday, November 7, 2019 at 9:30:00pm GMT

TEXT version of Transcript

================================================================================

Corporate Participants

================================================================================

* John J. Sperzel

Chembio Diagnostics, Inc. - President, CEO & Director

* Neil A. Goldman

Chembio Diagnostics, Inc. - Executive VP & CFO

================================================================================

Conference Call Participants

================================================================================

* Bruce David Jackson

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

* Kyle Royal Bauser

Dougherty & Company LLC, Research Division - Senior Research Analyst

* Max Masucci

Canaccord Genuity Corp., Research Division - Associate

* Per Erik Ostlund

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

* Philip Taylor

Gilmartin Group LLC - Associate

================================================================================

Presentation

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

Good day, ladies and gentlemen, and welcome to the Chembio Third Quarter 2019 Earnings Conference Call and Webcast. (Operator Instructions)

At this time, it is my pleasure to turn the floor over to your host for today, Mr. Philip Taylor. Sir, the floor is yours.

--------------------------------------------------------------------------------

Philip Taylor, Gilmartin Group LLC - Associate [2]

--------------------------------------------------------------------------------

Thank you. Before we begin today, let me remind you that the company's remarks made during this conference call today, November 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 2018.

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 of the company's filings with the SEC concerning these or other matters.

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

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Thank you for joining us today. The Chembio team continued to execute on our 3 corporate priorities during the third quarter of 2019. Our team has generated total revenue of $9.7 million, including product sales of $8.5 million. Total revenue during the third quarter was impacted by lower sales in Africa and lower R&D revenue compared to the prior year period. However, we are pleased with the significant increases in product sales in the United States, Latin America and Asia Pacific.

I'd like to highlight a few recent developments that we believe will have considerable positive impacts on our business moving forward. In September, we strengthened our balance sheet by closing a $20 million term loan with Perceptive Advisors, one of the world's leading health care-focused investment firms. This capital provides flexibility to grow our business while limiting any dilution to our shareholders.

Earlier today, we announced that the company has signed a definitive agreement to acquire Orangelife, a privately held Brazilian manufacturer and distributor of point-of-care diagnostic tests for infectious diseases. The acquisition will enable Chembio's commercial expansion into the state, private and pharmacy markets in Brazil.

Under terms of the agreement, Chembio will make an upfront cash payment of $150,000 and approximately 150,000 shares of common stock. Separately, Chembio will enter into certain consulting agreements that could include payment of up to 500,000 additional shares of common stock based on the achievement of certain sales and regulatory milestones between 2020 and 2022. Subject to customary closing conditions, the transaction is expected to close during the fourth quarter of 2019. And following the acquisition, Orangelife will be renamed as Chembio Diagnostics Brazil and operate as a wholly owned subsidiary of Chembio.

We received 2 important approvals by the World Health Organization, WHO. First, we received WHO prequalification approval of our Malaysia manufacturing facility, which allows the company to cost-effectively manufacture our STAT-PAK HIV tests in Malaysia and supply to international markets. Second, we received WHO prequalification approval for our SURE CHECK HIV self-test, which allows the company to expand commercialization of what we believe is the easiest to use HIV self-test available.

Finally, we entered into a collaboration with Takeda Pharmaceutical to develop a quantitative point-of-care test to detect an undisclosed biomarker. This represents our second collaboration with a major global pharmaceutical company and reinforces our belief that we can utilize our platform to build a portfolio of companion or compatible diagnostic tests.

On today's call, we'll start by discussing progress on our 3 corporate priorities: one, expanding our commercialization; two, advancing our R&D pipeline; and three, preparing for additional growth. Then Neil will review third 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. During the third quarter of 2019, a number of regions had significant increases in product sales compared to the prior year period, including an 88% increase in the United States, a 26% increase in Latin America and a 133% increase in Asia.

Product sales increased by [31%] in Europe and Middle East, which benefited from the 2018 acquisition of opTricon. These increases were offset by a 61% decrease in product sales in Africa, which we attribute largely to the timing of tenders and ordering patterns in the region.

We are particularly pleased with our sales performance in the United States, which increased 88% during the third quarter of 2019 and 133% during the first 9 months of 2019 as compared to the respective prior year periods. On July 31, one of our main competitors notified its U.S. customers and distributors that it was unable to supply its rapid HIV test and did not have an estimate as to when it would resolve its technical and supply chain issue.

On October 23, the Director of HIV/AIDS Prevention Division of the U.S. Centers for Disease Control and Prevention, CDC, informed customers, "That 2 HIV test manufacturers have sent memos to their customers indicating that they've experienced delays in delivery for orders of their HIV rapid tests." And further stated, "That both companies are working diligently to resolve their production issues."

CDC reminded customers of the other rapid HIV tests available in the U.S. market, including Chembio's 3 FDA-approved, CLIA-Waived HIV tests. This situation presents a great opportunity for Chembio to further increase sales of HIV products in the U.S. market. And our sales team is targeting effective competitive accounts to convert them to Chembio products.

We remain confident in our ability to grow our global infectious disease sales through multiple drugs, including expanding our commercial presence, registering products in new geographies and entering new markets.

Today's announcement of the definitive agreement to acquire Orangelife, a privately held diagnostic company, is an important step for expanding our business in Brazil, a country with the world's ninth largest economy by GDP and sixth largest by population.

Brazil has the largest government-run and publicly administered health care system in the world, known as the United Health System or SUS. We have a long history of selling our point-of-care infectious disease products to Brazil's federal government. Since 2004, Chembio products have been sold to the Ministry of Health in collaboration with Bio-Manguinhos, a subsidiary of the Oswaldo Cruz Foundation, Fiocruz, which is responsible for the development and production of vaccines, diagnostics and biopharmaceuticals primarily to meet the demands of Brazil's national public health system. Over the last 15 years, we have supplied millions of infectious disease tests to Brazil's Ministry of Health through our partner, Bio-Manguinhos/Fiocruz.

So why make an investment in Brazil? We consider Brazil to be the largest and most attractive market for infectious disease testing. We plan to expand our business in Brazil by building on the success that we have had with the federal government. There are large markets outside of the federal government that Chembio was previously unable to reach through its federal government channel. Those markets include the states which are responsible for 5,500 hospitals in Brazil, the private market that includes 13,000 small labs in Brazil and the retail market that includes 18,000 pharmacies in Brazil.

We believe the most effective way to access markets outside the federal government in Brazil is to have a physical presence in the country. With the acquisition of Orangelife, we will have a facility that is ISO certified, approved by ANVISA according to Brazil GMP to produce Class II, III and IV medical devices in Brazil, including the production of Brazil's first ANVISA-approved HIV self-test.

We also believe that having our own salespeople in Brazil is a key success factor. With the acquisition, we'll have our own salespeople in Brazil and a distribution network to access the state, private and pharmacy markets. On recent calls, we identified our new multiplex test for dengue, Zika and chikungunya as a future growth driver. In Brazil, we believe there is a significant need for these products due to the presence of all 3 viruses, which complicates disease identification and treatment. We believe our multiplex and stand-alone tests for these viruses will be valuable tools for health care professionals to determine treatment paths and identify outbreaks across the country.

We believe the opportunity for these products in Brazil is approximately $10 million annually, and we continue to work with our partner, Bio-Manguinhos, to secure orders from the Ministry of Health. We further believe that the acquisition of Orangelife will increase our likelihood of success.

As mentioned on the last call, our team has been working to meet the conditions of 2 contracts awarded by UNICEF, one contract for our Zika test ranging from $1.5 million to $4.9 million and one contract for our Zika, dengue, chikungunya multiplex test ranging from $1.5 million to $3.5 million. I'm pleased to report that UNICEF confirmed that we've met all conditions related to the Zika contract, which included a clinical evaluation, and also confirmed that we will receive an initial $1.5 million purchase order for our Zika test. We're in discussions with UNICEF related to the delivery schedule for those tests, and we also continue to work toward meeting the conditions of the multiplex test award and remain confident about meeting the contract conditions and receiving a subsequent purchase order for that test.

Finally, we view the WHO prequalification approval of our SURE CHECK HIV self-test as a significant regulatory approval as we consider international HIV self-testing a growth driver for the company. The WHO PQ approval signifies that the product meets global standards of quality, safety and performance and is used by United Nations and other procurement agencies such as PEPFAR, Unitaid and The Global Fund to make purchasing decisions.

The SURE CHECK HIV self-test provides unparalleled ease of use using the world's smallest blood sample required by any rapid HIV test and provides results in only 15 minutes. The unique design of SURE CHECK HIV self-test integrates the capillary device and buffer solution, eliminating the need for separate collection devices and buffer solution bottles required by other HIV self-tests. The SURE CHECK HIV self-test, which detects antibodies to HIV 1 and HIV 2, demonstrated sensitivity of 99.4% and specificity of 100% when comparing untrained HIV self-test users to trained professionals.

The essential element of Chembio's newly WHO prequalified HIV self-test is the company's SURE CHECK HIV 1/2 Assay that is FDA approved, CLIA-Waived, CE Marked, WHO prequalified and trusted by health care professionals around the globe. In addition, Chembio's SURE CHECK HIV 1/2 Assay was launched in Europe in 2015 as part of 2 private label versions of Chembio's HIV self-test.

Chembio's SURE CHECK HIV self-test was evaluated by the HIV Self-Testing Africa Initiative, STAR, that is funded by Unitaid, with the goal of accelerating self-test adoption by addressing market, regulatory and policy barriers. The SURE CHECK HIV self-test was found to have superior acceptability and performance, facilitating widespread adoption.

We think that's important because it's estimated that 21% of the world's population living with HIV are unaware of their positive status, and the WHO strongly recommends HIV self-testing as the vehicle to expand access to HIV treatment.

The scientific data is clear that blood is a better clinical specimen for detecting HIV than oral fluid, even according to the clinical performance referenced in our main HIV self-test competitors' product insert. And we believe that our finger-stick blood-based HIV test is the easiest test to perform in the world.

Turning to our second corporate priority, advancing our R&D pipeline. During the third quarter, we made numerous advancements in R&D and regulatory affairs, leveraging our point-of-care platform across multiple biomarkers. As noted earlier, we received WHO prequalification for the SURE CHECK HIV self-test, and we anticipate obtaining the CE Mark for this test in the fourth quarter of 2019. We anticipate 2 U.S. Food and Drug Administration approvals before year-end, including the PMA approval for our HIV syphilis multiplex test and the 510(k) approval for our BARDA-funded Zika test.

One year ago, we completed the acquisition of opTricon, a developer and manufacturer of handheld analyzers for rapid diagnostic tests. We believe that future success in rapid testing requires innovation that extends beyond the diagnostic test to include data capture, transmission and storage, all of which are provided by an analyzer. Further, our R&D team is focused on the development of diagnostic tests that provide increased sensitivity, advanced multiplexing and quantitative results, all of which require an analyzer.

I'm pleased to inform you that our team has completed the development of a next-generation analyzer, which improved both the form factor and the ease-of-use, and we have obtained the first regulatory approval, a CE Mark. This is an important advancement as we aim to create a razor/razor-blade model through the commercialization of an analyzer and a portfolio of rapid diagnostic tests.

In addition to our internally funded product development initiatives, we're collaborating to develop products that are fully funded by our partners. Today, I'll provide updates in 2 areas: companion diagnostics and concussion.

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 third quarter, we signed an agreement with Takeda Pharmaceuticals to develop a quantitative point-of-care diagnostic test for an undisclosed biomarker. Under the terms of the agreement, funding will be provided by Takeda subject to satisfying certain milestones. We expect to complete feasibility to detect 2 blood disease specific biomarkers in finger-stick whole blood using Chembio's proprietary technology platform by the end of December 2019.

In collaboration with AstraZeneca, we successfully developed a quantitative point-of-care diagnostic test to identify eosinophilic respiratory disease and obtain the first regulatory approval, a CE Mark. The preclinical studies have also been completed, and we view the completion of both product development and preclinicals as important milestones. We continue to work toward finalizing the design of clinical and regulatory trials, and we are optimistic about achieving additional regulatory approvals for this product, including FDA 510(k).

Finally, the acquisition of the opTricon analyzer technology allows us to consider adding biomarkers to our platform that were previously challenging. With the advances in our opTricon technology, including the introduction of fluorescence-sensing technology, we're increasingly confident in our ability to develop a point-of-care test for mild traumatic brain injury or concussion.

Our team continues to evaluate numerous concussion biomarkers, including those in collaboration with Perseus Science. Due to the capabilities of our platform, including advanced multiplexing capabilities and level of detection enhancement provided by the opTricon analyzer, we believe we are well positioned to develop a point-of-care concussion test.

Turning to our third corporate priority, preparing for additional growth. To achieve our financial targets, we're pursuing several important operational objectives: automating our U.S. manufacturing, expanding and improving our U.S. facilities and obtaining WHO prequalification for our Malaysia facilities.

Our U.S. manufacturing automation strategy is designed to increase gross margins as well as increase production capacity, efficiency and flexibility. We expect to achieve our objective to have 3 automated manufacturing lines in our New York facility by year-end. We commenced production of DPP tests on line #1 earlier this year. Line #2 is being delivered this week and is expected to be operational in the first quarter of 2020. Line #3 is expected to be delivered by year-end and be operational in the second quarter of 2020. So by the middle of 2020, we expect all 3 U.S. manufacturing lines to be operational and to have additional capacity for growth.

We've commenced the plan to expand and improve our U.S. facilities, which includes moving from multiple locations to a single 70,000 square foot facility. This facility will serve as our corporate headquarters and house all components of our U.S. businesses. The first of 3 planned phases is complete, with administrative, warehouse and shipping functions all operating in the new facility today. We're finalizing the plans for Phase 2, which includes research and development, and Phase 3, which includes manufacturing and quality functions, both of which are planned for completion in 2020 subject to certain regulatory requirements.

We reached a significant milestone in October when our manufacturing facility in Malaysia was approved by the World Health Organization prequalification program to produce STAT-PAK HIV tests. This approval allows the company to manufacture our STAT-PAK HIV test in Malaysia and supply it to international markets, which we are commencing during the fourth quarter of 2019. Through production in this facility, we expect cost of goods sold to be reduced and our global production capacity to increase. This will provide opportunities to pursue new business and paves the way for future qualification to produce other tests in this facility.

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

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Good afternoon, everyone. Before we begin, I will mention one housekeeping item regarding immaterial revisions to revenue. At the start of 2018, we established an accounting policy to recognize freight and distribution expenses within cost of sales that was not properly implemented as corrected these adjustments have simply increased net product sales and cost of product sales by an equal amount within each period.

Moving into the results. In the third quarter of 2019, total revenue was $9.7 million, a decrease of 1% compared to the prior year period. Net product sales for the third quarter of 2019 was $8.5 million, an increase of 2% compared to the prior year period. License and royalty and R&D and grant revenues combined in the third quarter of 2019 were $1.2 million, a decrease of 20% compared to the prior year period. R&D revenues 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.

As John described earlier, compared to the prior year period, net product sales experienced gains in nearly every region led by Latin America, the U.S., Europe and Asia. Latin America benefited from the initial sales of our tests for Zika, dengue and chikungunya to Brazil, and the U.S. benefited from a large public health customer and initial increased demand related to competitor shipment delays. Third quarter net product sales were impacted by lower sales in Africa, which we attribute largely to the timing of tenders in the region.

Gross product margin improved by $0.8 million compared to the prior year period. This increase was from a combination of favorable product revenue and an 890 basis point improvement in product margin percent. The gross product margin percent for the third quarter of 2019 was 21.9% compared to 13% for the prior year period. The gross product margin improvement was from reduced contract labor costs and an increase in average selling prices. Gross product margin also improved on a sequential basis by 150 basis points. We did not see a higher improvement sequentially because the lower labor costs and higher average selling prices during the quarter were offset by lower unit volumes related to Africa.

Other expenses, which includes research and development and selling, general and administrative expenses, were $6.7 million for the third quarter of 2019 compared to $4.9 million in the prior year period. R&D costs increased by $0.3 million related to the acquisition of Chembio Diagnostics Germany GmbH, formerly opTricon that closed during the fourth quarter of 2018. SG&A increased by $1.4 million, resulting primarily from the acquisition of Chembio Diagnostics Germany, higher noncash equity compensation costs and rent and other costs related to leasing our new facility in Hauppauge, New York.

Net loss in the third quarter of 2019 was $3.8 million or $0.22 per diluted share compared with a net loss of $2.3 million or $0.16 per diluted share in the prior year period.

On the balance sheet, cash and cash equivalents as of September 30, 2019, totaled $21.9 million. Net working capital as of September 30, 2019, was $30 million. In the third quarter, we were pleased to have produced positive operating cash flow of $0.7 million.

Now looking to our outlook for 2019. We are reiterating our revenue guidance to be in the range of $36 million to $40 million. Based on where we are today, we expect our revenues to come in towards the lower end of that range.

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

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

During the third quarter, we strengthened our balance sheet, which provides the flexibility to continue growing the business. The Chembio team made significant progress on our 3 corporate priorities during the quarter. We increased product sales versus the prior year period, achieved several important regulatory approvals, advanced our R&D pipeline internally and by collaborating with world-leading organizations, and we are building a solid foundation for additional growth through manufacturing automation and facility improvement. Finally, we believe the acquisition of Orangelife will create another growth driver for the company.

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

================================================================================

Questions and Answers

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

(Operator Instructions) We'll go first to Kyle Bauser at Dougherty.

--------------------------------------------------------------------------------

Kyle Royal Bauser, Dougherty & Company LLC, Research Division - Senior Research Analyst [2]

--------------------------------------------------------------------------------

So maybe I'll just start in Brazil. So on the Orangelife acquisition, just that I understand correctly, you'll still rely on Bio-Manguinhos to supply the Ministry of Health of Brazil. And then through Orangelife, you'll be able to expand your commercial presence to the state, private and pharmacy channels. Is that correct?

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Absolutely right.

--------------------------------------------------------------------------------

Kyle Royal Bauser, Dougherty & Company LLC, Research Division - Senior Research Analyst [4]

--------------------------------------------------------------------------------

And does Bio-Manguinhos not supply into these other channels? Or -- and maybe a second part to that, does Orangelife distribute into the Ministry of Health?

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Bio-Manguinhos does not supply to the state, the private market or the retail pharmacy. And Orangelife has been primarily focused on those 3 markets that Bio-Manguinhos is not. However, Orangelife did have a very successful pilot program with HIV self-test to the federal government. So the federal government in Brazil has the option to buy from one of several of the major scientific institutions in Brazil, and Fiocruz/Bio-Manguinhos is the largest, but also to buy from local Brazilian organizations as they had in the past on some fever and tropical disease tests.

So we think the acquisition of Orangelife positions us very well depending on which way the federal government decides to buy in the country or also to expand our presence in these other markets that we are simply not able to play in today.

--------------------------------------------------------------------------------

Kyle Royal Bauser, Dougherty & Company LLC, Research Division - Senior Research Analyst [6]

--------------------------------------------------------------------------------

Okay. Got it. That's helpful. And you talked high level in the past and today, the Brazilian opportunity could be $10 million on an annual basis, and that was kind of before today's announcement with Orangelife. Can you sort of quantify this new opportunity through these other 3 channels? Or if you can't, maybe just -- is it a multiple of the $10 million that you've already talked about that you've already had access to?

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

So I'll try to give some color to it. Obviously, we signed a definitive agreement today, so we still have to close that. We're highly confident that, that's going to happen. But I don't want to get ahead of ourselves in terms of quantifying the Orangelife opportunity until that's within our hands. But let me give some color.

I think the first thing to say is we're disappointed to be sitting here the first week of November without an order for our tropical and fever disease test in Brazil. And we still believe that, that's an annualized $10 million opportunity to the federal government.

And what's happening, while the federal government has not purchased those tests, and they have not as of today, is the states, because they still have dengue, they still see chikungunya, they still see Zika in the country, the states are procuring the tests locally from companies like Orangelife. No one has the kind of the multiplex test that Chembio has and a multiplex for Zika, dengue and chikungunya. So we feel very confident that we'll get that order when it happens. And having a physical presence in Brazil will allow us to give better support to Bio-Manguinhos, to help win that business but also to be able to supply these kinds of tests to the states if the model ends up moving in that direction.

So we think we're really well positioned with Orangelife as a subsidiary of Chembio regardless of which way the federal government or the states decide to buy. I hope that helps a little bit, Kyle.

--------------------------------------------------------------------------------

Kyle Royal Bauser, Dougherty & Company LLC, Research Division - Senior Research Analyst [8]

--------------------------------------------------------------------------------

Yes. No, that does. And if I may just ask one more. I'll stick with Brazil here. So has the previous supplier that was halted by ANVISA tried to resurface or reestablish their license? And with Chembio as the sole supplier into that, I guess I'm just wondering what would delay that. Is it just simply that the order that they gave Chembio in Q1 of close to $800,000 may be just sufficient for a while? Any sort of color there would be great.

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

So first thing I would say is that small order was absolutely not sufficient. We're aware of states ordering hundreds of thousands of rapid diagnostic tests for things like dengue. So -- and we've been aware of that, and so that's something that we're obviously very focused on. And having Orangelife as part of our portfolio will position us to win that business. And Orangelife has been a participant of that in the past and present. So that's the first thing that I would say about that, Kyle.

In terms of just the general tenor of Brazil, the company that was the previous supplier tried to fight the removal that they had from ANVISA unsuccessfully. So they are still not in the market. And I suspect it will be very difficult for them to reenter because the product performance was terrible.

--------------------------------------------------------------------------------

Operator [10]

--------------------------------------------------------------------------------

We'll go next to Mark Massaro at Canaccord Genuity.

--------------------------------------------------------------------------------

Max Masucci, Canaccord Genuity Corp., Research Division - Associate [11]

--------------------------------------------------------------------------------

This is Max Masucci on for Mark. So you had great growth in the U.S. You called out a bit lower-than-expected sales in Africa. I guess just at a broad level, number one, how would you characterize the appetite for disease eradication initiatives or similar programs in Africa? And then number two, how has the recent prequalification wins -- how does that strengthen your position when you're competing for these tenders?

--------------------------------------------------------------------------------

John J. Sperzel, Chembio Diagnostics, Inc. - President, CEO & Director [12]

--------------------------------------------------------------------------------

So I'd say in terms of HIV self-test in Africa, I think that there has been one company that's been -- largely had the market to themselves. And if you look at the growth of HIV self-testing in Africa, it's significant on a quarter-to-quarter and a year-to-year basis. So we expect to win a fair share of that market. We -- as I said in the prepared remarks, we know and it's clear and the evidence is there that blood is better specimen for detecting HIV.

When it comes to ease-of-use, we think we have a product that has unparalleled ease-of-use. So when you combine the performance of our test and the ease-of-use of our test, we think we're going to be well positioned to capture a fair share of the HIV self-test opportunity in Africa.

Now I will say that the WHO prequalification we're very pleased with, and that will help and it will pave the way for commercialization in Africa. But many countries require local registration, and there are varying time lines on how long that will take. In some cases, it's 1 month. In some cases, it can be 6 months. So that's a process that we still have to go through in many countries. But we have obviously been having those discussions, and so our team has been ready to pull the trigger, which they already have following the announcement.

--------------------------------------------------------------------------------

Max Masucci, Canaccord Genuity Corp., Research Division - Associate [13]

--------------------------------------------------------------------------------

Great. And so I guess on the Malaysia facilities, are you guys hitting the ground running there? I guess how long will it take you to get fully up and running? I'm just trying to understand how this might affect the gross margin line in 2020 just from a sort of directional or quantitative standpoint. Any other puts and takes on gross margins in the quarter would be great.

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Yes. We're excited to have the WHO PQ for the Malaysia facility. Admittedly, it took a little bit longer than we had hoped. I have said and I will own this that we would have achieved the WHO PQ for HIV self-test and for the Malaysia facility by the end of Q3. And those slipped a little bit into Q4, so I own that. But we're pleased to have them both.

And as far as WHO PQ in Malaysia, we are starting the production in the fourth quarter. We don't think that we'll see any impact on gross margin improvement until the first part of 2020, and I think you can characterize that as a slow ramp in gross margin improvement out of that facility. But the cost of goods improvement is material when you take a rapid HIV test from New York where we have a pretty high labor and overhead rate and move it to Malaysia where we have a very low labor and overhead rate.

--------------------------------------------------------------------------------

Neil A. Goldman, Chembio Diagnostics, Inc. - Executive VP & CFO [15]

--------------------------------------------------------------------------------

Yes, Max, the other thing -- Max, it's Neil. The other thing, from a color standpoint, I shared a bit about the sequential improvement in the prepared remarks with margins going up by 150 basis points from 20.4% to 21.9% with that being driven by lower labor costs and higher average selling prices being offset by the lower unit volumes related to Africa that we've been talking about.

In addition, as you know, we're currently running 2 manufacturing and distribution facilities in the U.S., our original one in Medford and the new one in Hauppauge. And John talked about where we are on that and the time line which we're very optimistic about related to getting everything into the new facility in the first half of next year.

--------------------------------------------------------------------------------

Max Masucci, Canaccord Genuity Corp., Research Division - Associate [16]

--------------------------------------------------------------------------------

Great. That's helpful. And Neil, while I have you, so you have a bit more flexibility in the balance sheet now. OpEx came in a bit above us for the quarter. I guess in general, what should we expect in terms of just the pacing of OpEx and your appetite to maybe spend a little bit more now that you have that flexibility?

--------------------------------------------------------------------------------

Neil A. Goldman, Chembio Diagnostics, Inc. - Executive VP & CFO [17]

--------------------------------------------------------------------------------

Yes. So we haven't put numbers out there in terms of what the pacing or timing will be. We've certainly talked as we announced the credit facility with Perceptive that it gives us, to use your word, flexibility to operate and drive towards achieving the long-term growth objectives that we've set for the company of $100 million of revenue and gross margins of 50% by 2023.

That said, I think you can see that if you just look at the last quarter, our cash usage was favorable indeed of that -- as I said, we generated cash from operations in the quarter, and that included a $2.4 million from improved receivables and $0.7 million from lower inventory. And even though we've got a -- the strong balance sheet with the cash in the bank, that doesn't change our focus on being effective in the use of that, and we'll continue as we always have.

--------------------------------------------------------------------------------

John J. Sperzel, Chembio Diagnostics, Inc. - President, CEO & Director [18]

--------------------------------------------------------------------------------

So Max, this is John. I'll just put a point on that. Cash preservation and having strong balance sheet are very important, and that's a focus going forward.

--------------------------------------------------------------------------------

Operator [19]

--------------------------------------------------------------------------------

We'll going next to Bruce Jackson at Benchmark.

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

With regard to the new UNICEF purchase order, how do you anticipate that flowing into revenue over the next couple of quarters?

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

So we are excited that UNICEF confirmed the performance of our rapid Zika test and also confirmed that we're going to get the first order of $1.5 million, that purchase order. We're working with them right now on the scheduled delivery. We anticipate it being throughout 2020. Don't know yet if it's going to start first quarter, second quarter, but we anticipate most of that being delivered in 2020.

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

And then I was wondering if you'd be willing to give us a quick update on the status of the AstraZeneca companion diagnostics test and the syphilis combination test with the FDA.

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

So I'm obviously a little bit restricted in what I can say about AstraZeneca. So what I said in the prepared remarks is about what I can say about it. In terms of HIV syphilis, we continue to be optimistic about getting that before the end of the year. We're excited for that to happen. Our sales team is trained and ready to hit the ground running once we get the green light from the FDA. Data that we have looks excellent, but I don't want to dig too much into that while the review process is ongoing. I don't think that, that's fair to the agency.

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

And then last for me about the Orangelife acquisition in Brazil. I'm just curious to know about the timing and why you thought that now is the right time to do an acquisition with these guys.

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

I've had my eye on that company since I joined Chembio in 2014. So blame me for taking so long, but having a physical presence and our hands on the commercial steering wheel in our #1 country will put that in the no-brainer category.

--------------------------------------------------------------------------------

Operator [26]

--------------------------------------------------------------------------------

We'll move next to Per Ostlund at Craig-Hallum Capital.

--------------------------------------------------------------------------------

Per Erik Ostlund, Craig-Hallum Capital Group LLC, Research Division - Senior Research Analyst [27]

--------------------------------------------------------------------------------

A bunch of my questions got sniped from me here just now. But one of my favorite ones that I want to ask, I wanted to catch up on the HIV situation here domestically. We were obviously aware of the Abbott situation, and that seems -- seemed no closer to remedy. But then now you introduced the prospect of a second supplier actually having issues as well. So I'm wondering, I guess, one, can you identify who that party is? And then the second thing would be what are creating the issues that are -- what -- are the issues unique to these other parties and you're not going to be subject to them at all?

And then I guess the last part of that question, so apologies for the three-parter here, is given that you've serviced a lot of the former Abbott customers in the past, rather than seeing sort of a onetime bolus if you're able to take advantage of these supply outages, how durably do you think you can win back some of these customers? And what's going to differentiate you?

--------------------------------------------------------------------------------

John J. Sperzel, Chembio Diagnostics, Inc. - President, CEO & Director [28]

--------------------------------------------------------------------------------

Great questions, Per. So in terms of customer transition in the U.S. market, customers can be a little bit sticky in HIV testing because in many environments, they need to do evaluations of the tests. Given a supply shortage like this, that changes matters because customers are literally out of stock and the distribution channel, folks like McKesson, Cardinal, Fisher, Henry Schein, they start to have no product in their pipeline or inventory as well. So the whole distribution channels are almost bled dry in some of these cases. And so that customer conversion can happen much faster.

And that same stickiness that is generally there, will be there if and when those customer -- or those other manufacturers come back. I'm not working in those companies, so I don't have any insight into the challenges, but I've written many letters over 30 years to customers about product supply shortages, fortunately none here at Chembio. And when a letter states that there's a technical and supply chain issue, normally, that means there's a technical issue that's affecting the supply chain. And that's the letter that Abbott or formerly Alere wrote. And they have not been able to resolve that as of today.

I obviously didn't disclose the name of the second company, but the Centers for Disease Control eventually did, and that is Trinity Biotech. And they have indicated that their customers -- that they are not shipping the Uni-Gold HIV test.

So that void creates a tremendous opportunity for the other competitors. And the fact that we have our own sales team in the United States that our shareholders helped us invest some years ago puts us in a really good position to take advantage of that. If you look at our HIV domestic sales in the U.S. on a quarter-to-date and year-to-date basis, we have substantial improvement. And these shortages from our competitors really happened during the third quarter and the very end of the second quarter. So we think this is just starting. And to the extent that void continues, we're going to try to do really well to convert these customers.

--------------------------------------------------------------------------------

Per Erik Ostlund, Craig-Hallum Capital Group LLC, Research Division - Senior Research Analyst [29]

--------------------------------------------------------------------------------

Perfect. Yes, it seems like a tremendous opportunity. I guess then the last one for me. Just as it pertains to guidance, you talked about steering to the lower end of guidance, the $36 million to the $40 million. Just want to be clear, that's basic, that is totally apples-to-apples with the $36 million to $40 million before because UNICEF -- the $1.5 million from -- order from UNICEF was never in the guide nor was anything from kind of the upside from Brazilian fever. So this is completely apples-to-apples.

--------------------------------------------------------------------------------

John J. Sperzel, Chembio Diagnostics, Inc. - President, CEO & Director [30]

--------------------------------------------------------------------------------

That's correct, Per. And we still hope for those upsides, but given the fact that we're sitting here on November 7, our level of optimism has waned a little bit. And that's just because if we get the order, we still have to procure the materials, produce the product and get it shipped out before year-end. So we're not giving up. We're going to continue to fight for those orders like we always do.

--------------------------------------------------------------------------------

Operator [31]

--------------------------------------------------------------------------------

And that's all the time we have for questions today. We'll turn the conference back to Mr. Sperzel for any additional or closing comments.

--------------------------------------------------------------------------------

John J. Sperzel, Chembio Diagnostics, Inc. - President, CEO & Director [32]

--------------------------------------------------------------------------------

Thank you all for joining us. Thank you for your support, and we look forward to updating you on our next call. Have a great night.

--------------------------------------------------------------------------------

Operator [33]

--------------------------------------------------------------------------------

Ladies and gentlemen, that will conclude today's teleconference. We thank you for your participation. You may disconnect at this time, and have a great day.