At Chembio, looking beyond the numbers

By GREGORY ZELLER //

While it made “important advances … intended to prepare the company for growth,” according to its CEO, Chembio Diagnostic Systems has suffered another subpar fiscal quarter.

The news is not all bad for the Medford-based biotech, which produces point-of-care diagnostic tests for a range of medical conditions. Earlier this month, the company announced the acquisition of a private Malaysian distributor of POC diagnostic tests, while Brazil’s national health-regulatory agency has approved commercial use of Chembio’s rapid field test for the Zika virus – two promising victories.

chembio-logo-1But right now, the numbers are not there. Reporting Thursday on the third quarter of its 2016 fiscal year, Chembio noted a 45.5 percent drop in total revenues compared to 3Q FY2015 – from $6.89 million to $3.75 million – and a 59.7 percent plunge in sales, from $6.21 million to $2.5 million.

That led to a quarterly operating loss of $2.14 million, compared to a loss of $579,000 in the third quarter last year, and a net loss also weighing in at $2.14 million, or 19 cents per diluted share. In 3Q FY2015, the loss per diluted share was a nickel.

A nine-month review of Chembio’s fiscal performance reveals equal gloom: revenues down 31.3 percent (to $13.6 million) compared to the first three quarters of FY2015, sales down 42.4 percent (to $10.45 million), more than double the operating loss (to $5 million) and a net loss of $10.79 million – 516 percent worse than the $1.75 million net loss recorded over the first nine months of FY2015, with mounting losses per diluted share (from 18 cents to $1.06) to match.

The recent shortfalls follow a 2015 that itself was a downer of a fiscal year, with Chembio’s annual revenues dropping 12.3 percent and annual sales skidding 15.7 percent below their FY2014 levels, leading to chunky operating and net losses ($3.55 million and $2.4 million, respectively).

Chembio CEO John Sperzel III has repeatedly blamed the losses on declining sales in oversaturated Latin American markets of POC tests for sexually transmitted diseases. On Thursday, while acknowledging a year-over-year decrease in product sales for both the second and third quarters, the CEO accentuated the positives – including promising increases between the second and third quarters and the evolution of sales in non-Latin American regions, including the United States and “the growing Asian market.”

John Sperzel III: The pieces are in place.

John Sperzel III: The pieces are in place.

“A quarter-over-quarter analysis shows sales growth,” the CEO said, noting a 15 percent jump in revenues and a 23 percent improvement in sales.

Sperzel specifically cited better third-quarter sales of the company’s HIV 1/2 State-Pak assay, up 21 percent over the second quarter and 44 percent over 3Q FY2015 – “strong evidence” in favor of Chembio’s June 2014 reacquisition of the product’s U.S. distribution rights.

“We are effectively rebuilding the U.S. HIV Stat-Pak business,” Sperzel said. “We are also seeing encouraging U.S. sales of the HIV 1/2 Sure Check assay since we took back distribution rights to this product at the end of May 2016.”

Meanwhile, the company is yet to truly feel the bump of some its major 2016 accomplishments and personnel moves. In addition to a $550,000, Zika-focused “catalyst grant” from Microsoft cofounder (and longtime supporter) Paul G. Allen, announced in February, Chembio in August secured a $13.2 million contract with the Department of Health and Human Services to develop assays to test for the Zika, chikungunya and dengue viruses.

While earning those domestic boosts, the company shook up its international roster. In September, it named new presidents for its Americas region – including Canada, the United States and Latin America – and its EMEA and APAC markets, covering Europe, the Middle East, Africa and the Asian Pacific.

That shakeup was followed by this month’s good news out of Brazil, with Agência Nacional de Vigilância Sanitária greenlighting the DPP Zika IgM/IgG Assay (the regulatory agency must still approve use of an accompanying micro-reader).

And that was followed quickly by the equally impressive news that Chembio had entered into an agreement to acquire RVR Diagnostics Sdn Bhd, a private distributor of diagnostic tests for infectious diseases operating in Malaysia.

It amounts to a roughly $3.75 million acquisition, give or take: Based on “the achievement of certain milestones,” according to Chembio, the Medford firm will pay up to $1.5 million in cash and $2 million in Chembio stock, while also forgiving $250,000 owed by RVR Diagnostics to Chembio (the companies have licensing, manufacturing and distribution deals dating back to 2014).

Figuring due diligence and regulatory approvals, the deal expects to close in the first quarter of 2017, with RVR Diagnostics becoming a wholly owned Chembio subsidiary.

That $3.75 million price tag might seem steep for a company enduring a shaky fiscal stretch, but in announcing the acquisition Nov. 4, Sperzel noted the additional revenues, strategic physical location and cost-effective regional manufacturing gained in the deal.

“Our growth plans include expansion into the Asia Pacific region, and we believe a corporate presence in Malaysia … will be a key success factor,” the CEO said. “We believe the combination of RVR’s cost-effective manufacturing competence and Chembio’s patented DPP technology will allow Chembio to accelerate product registrations within Southeast Asia.”

That’s exciting not only because of Southeast Asia’s 600-million-strong population, Sperzel said, but for the opportunities it affords to “build a stronger presence in other regions” – a theme he echoed Thursday when discussing Chembio’s quarterly financials.

From that juicy DHHS grant and the Brazilian regulatory approvals to the new international overseers and that critical Asian-market foothold, Chembio is set up to succeed domestically and internationally, according to the CEO.

“We believe Chembio is on a path to establish a global operation with potential for growth in several important markets,” Sperzel said.


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