Q3: DPP Sales Up 49% Despite Revenue
Miss
By Brian Marckx, CFA
Q3 2012
:
DPP Revenue Up 49%. Lateral Flow Sales Slip Both Domestically
and Int'ly But Q4 Should Be Another Record Quarter…
Chembio (
CEMI
)
reported financial results for the third quarter ending 9/30/2012
on November 13th. While DPP sales to FIOCRUZ were up 49%
and about 10% ahead of our forecast, lateral flow sales were
significantly softer than anticipated. The net result was
revenue falling 15% yoy and coming in about 20% below our
number. Domestic sales to Alere came in about 37% lower
than our estimate while international lateral flow sales missed
our number by 31%. While reduced CDC funding of rapid HIV
testing, which CEMI along with OSUR and TRIB have pointed to as
to blame for reduced demand for their respective rapid HIV tests,
may crimp growth domestically for at least the very near-term,
the relative weakness in CEMI's total revenue is not expected to
be repeated in Q4 as management noted a large order backlog which
accumulated towards the tail end of Q3 should ship before
year-end and help push Q4 revenue to an all-time record (i.e. -
besting the $6.7MM record set in Q1 of this year).
And while we have materially trimmed our domestic revenue
estimate for Q4, we continue to model lateral flow sales to Alere
to eke out low-single digit growth (unchanged from expectations
prior to Q3 results) in 2013 and beyond for a few reasons.
CEMI noted that they continue to take market share from
competitors despite the recent drop in revenue from these
products. In addition (as we noted in our 8/21/2012
Investor Note
) the USPSTF could recommend in the near future that all
adolescents and adults be screened for HIV which would
significantly expand reimbursable patient population as well as
increase awareness of the importance of HIV screening.
Obamacare is also geared towards reigning in healthcare costs
with a focus on preventative care and early diagnostics - rapid
HIV testing seems to be a clear fit with that strategy and as a
result could potentially result in greater support and
reimbursement for these products and programs over the
longer-term.
On the operational side there were no surprises in Q3 as there
were no material changes to expected development or
commercialization timelines of CEMI's various R&D projects
and pipeline candidates.
We have made only minor changes to our financial model
following Q3 results. We are maintaining our
Outperform.
Q3 Financial Results
Revenue of $5.01 million (-15%) missed our $6.22 million
number by about 20% mostly as a result of lower than modeled
lateral flow sales both domestically (to Alere) as well as
internationally, partially offset by a beat on DPP sales (to
FIOCRUZ).
Total product sales were $4.8 million, down 14% and about 19%
lower than our $5.8 million estimate. Sales of the
company's lateral flow products to Alere fell 38% yoy and 45%
sequentially to $1.2 million compared to our $1.9 million
estimate. International lateral flow sales fell 47% yoy and
2% sequentially to $992k compared to our $1.4 million
estimate. As indicated earlier, we expect to see a major
reversal in international lateral flow sales in Q4 while domestic
sales may continue to show some weakness at least for the very
near-term. Importantly (given that DPP is the long-term
catalyst for CEMI), DPP sales were very strong in the quarter, up
49% yoy, up 14% sequentially and 10% better than our $2.3 million
estimate. We model $9.9 million in DPP revenue for the full
year which calculates to almost 40% of our estimated $25.0
million total revenue for CEMI in
2012.
Operating expenses of $2.2 million were largely in-line with
our $2.1 million estimate.
We use adjusted net income and EPS for consistency
purposes. As a reminder, in Q4 2011 CEMI took a non-cash
gain of $5.16 million to income from the reversal of deferred tax
asset as they expected to generate positive pre-tax income from
that point forward. Their GAAP income tax rate of 39.7% is
90% non-cash until they exhaust (which, based on our current
model will occur sometime in 2015) their entire deferred tax
asset which stood at $4.5 million at the end of Q3. Q3
adjusted net income and EPS of approximately ($466k) and ($0.06)
were well below our $606k and $0.07 estimates. The
difference coming from the miss on revenue and lower than modeled
(34.5% A vs. 45.3% E) gross margin.
Cash
Cash used in operations was $833k in Q3. Chembio exited
the quarter with $3.3 million in cash and equivalents, down from
$4.4 million at the end of Q2. Debt remains relatively
immaterial. As noted in our previous updates, we have
incorporated assumed/estimated/best-guesses of expenses related
to the HIV OTC program into our model - and even with these
expenses included, we think CEMI can continue to fund all
operations (including clinical trials, product development,
regulatory filings, SG&A, etc.) through cash on hand and
funds from operations.
Business / Pipeline Update (largely unchanged since our
last update)…
DPP HIV, U.S.
In mid-April Chembio announced enrollment of their pivotal
3,000-patient U.S. clinical trial for the DPP HIV 1/2 test
had completed. In early June Chembio filed the third and
final module with the FDA. As management noted in the
recent past, they expect that both the blood and oral fluid
sample data will be robust enough to meet FDA requirements.
A pre-approval inspection was completed in October - which CEMI
believes was satisfactory. Chembio continues to expect an
FDA decision by the current year-end. Assuming a positive
decision, Chembio will then apply for a CLIA waiver, which could
potentially be granted by mid-2013.
We continue to model a U.S. launch sometime in mid-to-late
2013 and a modest amount of revenue during that year.
Syphilis Screen and Confirm (treponemal / non-treponemal) test
was CE Marked in Europe in early October 2011. CEMI noted
that during Q2 they established distribution for the test in the
U.K. and have since received some small orders to date from
Europe.
While the road to the U.S. market has been drawn out longer
than anticipated, CEMI continues to make progress towards that
end. The delay, as noted in our previous updates, has to do
with determining how to meet the FDA requirements of showing
substantial equivalence on the non-treponemal marker (which
differentiates between past and active infections) compared to
the predicate device currently on the market. Chembio had been
investigating including a reader for the test but had determined
that that will not suffice and is instead now looking to conduct
a study to show that their screen and confirm test can detect
primary infections equivalent to that of the predicate
test. CEMI notes that during Q3 they made further progress
in starting clinical trials to support a
510(k). CEMI expects to soon request a meeting
with FDA to discuss data that they recently received related to
reinitiating clinical trials to support a 510(k) submittal.
CEMI is still shooting for a 510(k) application submitted by
mid-2013 (unchanged from recent expectations).
In the absence of demonstrating substantial equivalence for a
treponemal / non-treoponemal test, the company may look to just
bring the single-marker treponemal test to the U.S. market (which
is already sold to FIOCRUZ) - although appeal would likely be
significantly less than a dual-marker test.
DPP HCV
Chembio is now even more focused on development of a
competitive DPP hepatitis C test following the recently released
draft recommendation by the CDC that all Americans ages 45 - 65
be tested for the virus as well as independent data published in
the Journal of Virology which indicated relatively high accuracy
of CEMI's HCV test (see our June 19
Investor Note
).
Chembio efforts relative to DPP HCV have most recently focused
on improving upon accuracy and competitiveness compared to rapid
HCV tests already on the market. Chembio is now looking at
including antigen detection on top of antibody detection.
All the rapid HCV tests currently on the U.S. market are all
antibody tests, which can fail to detect the virus especially in
the early stages of the disease when antibody presence is
low.
In Q3 CEMI completed an initial feasibility study on
proprietary antigens and is now awaiting additional proprietary
materials to further improve the performance of their initial DPP
HCV test (the initial test was used in the study cited in The
Journal of Virology article).
Assuming the results of this study are positive (CEMI
may know within the next 6 months or so), CEMI expects to go
full-speed with development and thinks clinical trials could
commence before 2013 year end.
We had removed a DPP HCV test from our model in early 2011
when it looked like CEMI may abandon the program. While we
still do not model the test, we will revisit this depending on
how things progress over the next 6 - 12 months.
DPP Syphilis / HIV Combo
CEMI still looking at opportunities in international markets
for the test including donor-funded pre-natal testing programs in
emerging markets.
OTC HIV
CEMI had been waiting for FDA's decision on OraSure's OTC HIV
test before going full-bore on their OTC HIV program. In
early July the FDA approved OraSure's OraQuick over-the-counter
rapid HIV. The test, which uses an oral swab (saliva) as
the sample and is basically identical to the test sold to the
clinical market, is the first HIV test to be approved for home
use. OSUR recorded $3.6 million in deferred revenue in Q3
related to shipments of their OTC HIV test - revenue will be
recorded as OSUR receives consummation of a sale to the end
customer. Assuming the majority of this is eventually
recorded as revenue, the implied ~$10 million - $12 million
(assumes significant front-end stocking orders) annual revenue
run-rate means CEMI's OTC HIV test (which could more competitive
than OSUR's) could be a big winner for Chembio.
FDA's decision essentially green-lighted CEMI's move to
proceed with their home-use HIV test. Chembio will now
pursue OTC approval of its Sure Check rapid HIV test, which is
already FDA approved for the clinical market. The design,
scope, size and cost of CEMI's OTC program are yet to be nailed
down but Chembio has almost certainly reviewed the path that
OraSure already paved and can use that as (at least) a rough
guide for what to expect to gain FDA approval. They will
also have the advantage of seeing exactly how well OSUR's test
sells and the demand for OTC HIV testing.
Chembio expects to submit an IDE to the FDA and have it
granted by December 2013 or January. Assuming it's granted
(which we expect it to be), CEMI will then work towards their
clinical trials. It's difficult to gauge the scope of the
development program that CEMI will need to follow but for
reference, OraSure enrolled ~5,800 people in its final clinical
trial. We think it's probably safe to assume that this will
be a multi-year and multi-million dollar endeavor. As it is
now, we assume FDA approval will not happen prior to the out-year
(2015) of our model but our model does now include (best-guess)
development/regulatory expenses beginning in 2013 related to the
OTC HIV program. CEMI may also look to partner - we will
update our assumptions as necessary.
We think, if and when Chembio gets regulatory approval for and
launches their OTC HIV test, it can be very competitive to
OraSure's OTC test, particularly on performance. We also
note that FDA approved OSUR's OraQuick OTC test, despite
seemingly low (~92%) sensitivity when administered by consumers
(as opposed to by doctors). This low sensitivity is likely
in CEMI's sights and we think that if they can show better
performance, that would be a very compelling message when the
product rolls out. We do note that OSUR's test uses an oral
swab as the sample, whereby CEMI's current Sure Check uses
blood. Assuming equal performance, oral swab would be
considered an advantage from an ease and comfort of
administration basis - but this advantage could be potentially
largely negated with superior performance. For obvious
reasons, FDA and physicians (and consumers) have serious concerns
relative to accuracy of HIV home tests - oral swab versus blood
sampling may be a relatively benign convenience gap if CEMI's
test shows greater
accuracy.
OUR OUTLOOK
Revenue
We now look for 2012 revenue of $25.0 million, down from $25.7
million prior to Q2 results, which mostly reflects the miss in
Q3, partially offset by the aforementioned backlog of
international lateral flow orders which will be recognized in
Q4. $25.0 million implies growth of 29% from 2011. We
continue to expect the main catalyst to come from ramping sales
of DPP products to FIOCRUZ. Meanwhile we model lateral flow
products sales to contract about 22% in 2H 2012 compared to the
same period in 2011.
And as we noted in our recent previous updates, our model
assumes that FIOCRUZ meets their purchasing quota under the 2008
Technology Transfer agreement sometime during 2013 but does not
take ownership of manufacturing until early 2015. As a
reminder, FIOCRUZ is obligated to purchase at least ~$23 million
in DPP products from Chembio before the technology is transferred
and FIOCRUZ has the rights to manufacture themselves. FIOCRUZ may
purchase more than the $23 million and vastly exceeded their
required quota under a similar 2004 Technology Transfer
agreement. When the transfer is complete and FIOCRUZ manufactures
the products, Chembio will receive royalties of 4% on sales of
the DPP products by FIOCRUZ in Brazil (this agreement only
applies to Brazil). Although we feel comfortable with our
estimate that FIOCRUZ will meet their purchasing quota in 2013,
we have absolutely no insight into when to expect that FIOCRUZ
will begin to manufacture the products. As it is now, we
use the beginning of 2015 as a placeholder for this to occur. Our
model reflects this and is the reason we have 2015 revenue
falling ~6% - we also model some trimming in expenses which
somewhat mutes the impact to the bottom line.
Net Income / EPS
We model adjusted net income and EPS of $1.4 million and $0.17
in 2012.
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