Written by Brian Marckx, CFA
Chembio Diagnostics, Inc ( CEMI ) reported financial results for the third quarter on November 4, 2010. Revenue of $4.51 million was about 4% better than our $4.34 million estimate. The $170k difference was mostly a result of recognizing a $225k milestone from FIOCRUZ related to the approval of for the DPP HIV confirmatory test in Brazil one quarter earlier than we had anticipated, partially offset by a $75k milestone from Bio-Rad that we modeled but has been pushed back (we now model this in Q4). Revenue from product sales was $3.79 million which was just about dead-on with our $3.83 million estimate.
EPS was $0.00, in-line with our estimate. Net income came in at $168k versus our $52k figure. R&D was up considerably as a result of ramping the U.S. DPP HIV trials. This however, was largely offset from an impressively strong product gross margin as a result of economies of scale from higher production volumes coupled with the fruits of recent manufacturing efficiency initiatives. While R&D expense will remain elevated through the duration of the U.S. DPP clinical trials, we also expect Chembio to continue to benefit from wider gross margins.
Management’s business update was highlighted by the disclosure that they have had discussions with two potential acquirers of the company. Further disclosure in the 10-Q and on the call was very limited other than noting that Chembio expensed $190k in consulting fees during the quarter related to a potential sale and that discussions have continued into the fourth quarter. While we have no specific insight, in our opinion the most likely potential suitors are ALR, BIO, OSUR and TRIB, all of which would have reason to be interested in CEMI and the resources to acquire the company. Our take is that management is likely to be unwilling to sell anywhere near the current valuation. The recent influx of cash makes CEMI much more self-sufficient and, in our opinion, gives CEMI management significantly more negotiating leverage than prior to being awarded the QTDP federal grant.
The update to development timelines remained mostly unchanged from our prior expectations. Noteworthy was that DPP HIV clinical trials are approximately 25% complete (compared to 10% complete at end of Q2) and should conclude in Q1 2011 – also at which time a PMA regulatory filing is expected to be made. At Q2 Chembio was still hoping to get the trials through and file prior to year-end 2010, although it was clear (as we noted in our last update) due to financial constraints that a delay was not unlikely. With roughly $2.8 million in cash on hand (pro forma for receipt of the $1.47 million grant), the company should now have ample funds to hit this new target-date and is no longer considering any additional financing. Assuming no further delays we think the product could launch during the first quarter 2012.
The company also provided product sales and total revenue guidance for the fourth quarter and full-year. Product sales are expected to increase by at least 50% from the same period in 2009 with full-year total revenue expected to be up by at least 15% from 2009. The company also noted that they expect U.S. HIV sales to Alere to increase by at least 15% in 2011 due to high customer satisfaction with Chembio’s lateral flow products as well as increased compliance with CDC testing recommendations.
We look for full-year revenue and EPS of $15.97 million and $0.01. We are maintaining our Outperform rating on Chembio and $0.92 price target.
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