Second Quarter Financial Results…
Chembio Diognostics, Inc. (CEMI) reported financial results for the second quarter on July 29, 2010. Revenue and EPS both came in better than our estimates.
Revenue of $3.75 million topped our estimate by $203k (5.7%), while the $0.01 EPS was ahead of our $0.00 forecast. Net income came in at $622k, versus our ($16k) estimate.
The better-than-anticipated revenue figure was partially a result of $650k in milestones recorded one quarter earlier than we had anticipated — mostly as a result of FIOCRUZ gaining regulatory approval of the DPP HIV 1/2 slightly ahead of our expectations. This was partially offset by lower than expected ($848k actual versus $1,250k estimate) international sales of the lateral flow HIV products. EPS benefited from the higher-than-anticipated revenue figure as well as lower-than-forecasted R&D expenses.
Updates
Management also provided a business update. Most of the product development status remains in-line with our prior expectations. There were a few noteworthy items, however. Among this was that Chembio has received some potentially encouraging preliminary data on their DPP HCV and HCV/HIV combo test products.
The data should be made public within the next 60 – 90 days and will be the first glimpse of the performance of the tests. Hopefully this will provide further insight relative to timelines for clinical trials and eventual commercialization.
Management also noted that there have been some delays in validating lots of the DPP syphilis test for use in clinical trials. Our interpretation is that this is a relatively minor setback with the expectation that the issue will be resolved in relatively short-order and clinical trials will begin by the fourth quarter (i.e. – potentially a 2 – 3 month delay from our prior expectations).
Relative to the DPP HIV product, management noted that the U.S. clinical trials were proceeding slowly (roughly 10% complete), and the ability to maintain their anticipated timelines (complete trials and submit PMA by current year-end) is highly dependent on the availability of financial resources. Management has been very upfront about seeking additional financing in order to help finance U.S. clinical trials, so this so this does not come as a surprise.
We believe there is a chance that the anticipated timelines could be pushed back without additional financing, although we do not view this as an overly significant issue. We believe the product will be immensely successful once commercialized — so a slight delay in getting the HIV DPP test to market is relatively insignificant. Management is clearly wholly interested in doing what is best for shareholders and is hesitant to issue additional stock at prices which they (as do we) believe significantly undervalues the company and are therefore seeking different alternatives including partnerships and grants.
The fundamentals of the company remain unchanged, and we remain highly positive on Chembio. They have recently delivered on a number of significant milestones and are expected to gain approval of several other tests in Brazil before the end of the year. U.S. sales of the lateral flow HIV products remain robust (up 11% in Q2) and while international sales fell short of our expectations, new orders should help reverse this in the second half of the year. Excluding adjustments to working capital, Chembio generated $726k in operating cash flow through the first six months of 2010.
Longer-term, we continue to expect revenue, cash flow and earnings to accelerate following the U.S. launch of the DPP products. We are maintaining our Outperform rating on Chembio with a $0.92 price target.
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