Chembio Diagnostics, Inc.

Good afternoon, ladies and gentlemen, and welcome to the ChemBio fourth quarter 2020 earnings conference call and webcast. At this time, all participants are placed on a listen-only mode, and we will open the floor for your questions and comments after the presentation. It is now my pleasure to turn the floor over to your host, Philip Taylor. Sir, the floor is yours.

Thank you, operator. Before we begin, let me remind you that the company's remarks made during this conference call today, March 11, 2021, may include predictions, estimates, or other information that might be considered forward looking. These forward looking statements represent ChemBio's current judgment for the future. They are, however, 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 filings with the SEC. including its annual report on Form 10-K for 2019 and its quarterly report on Form 10-Q for the third quarter of 2020 and subsequent Form 10-Qs. ChemBio's results may differ materially from those projected. ChemBio undertakes no obligation to publicly revise or update any forward-looking statement made today. I encourage you to review all of the company's filings with the SEC concerning these and other matters. With that, I'd like to turn the call over to Rick Eberle, President and Chief Executive Officer.

Thank you, Philip. Thank you for all of you joining us today. Today, I'm delighted to discuss our strong fourth quarter performance, provide an update on the strategic repositioning I initiated upon joining ChemBio in March 2020, and review the status of our product portfolio expansion. Neil will cover the detailed financial results, And I will conclude and open up the call for questions. Given this was a challenging year, we were pleased that because the team remained resilient, we were able to finish the year with a strong fourth quarter revenue performance. Before talking about these numbers and our business strategy, I would be remiss if I did not acknowledge the range of challenges we encountered throughout the year. Never less, our team, which I am very proud to be a part of, remained focused upon executing even what it meant overcoming those challenges along the way. ChemBio's core values spell the acronym RAPID, as we are in the rapid testing business. The R stands for relentless, and our team's achievements during 2020 are a testament to our relentless perseverance through many challenging times as a result of the global pandemic. We achieved top line product revenue growth, we executed on product development and regulatory submission timelines, expanded our relationship with the Biomedical Advanced Research and Development Authority, or BARDA, which is part of the Department of Health and Human Services, and advanced our commercial and operational capabilities. Total revenue for the fourth quarter was $10.2 million including product revenue of $6.9 million representing growth of 62% and 39% respectively compared to the prior year period. Now I would like to take a step back and talk about what attracted me to join KenBio approximately one year ago. I will articulate the opportunities I still see for the company and how we have repositioned the business to execute on them throughout an incredibly dynamic and challenging year. I am now even more convinced that there is significant value to be realized with the DPP platform. Why? Well, as a reminder and for some of our newer shareholders on the call today, ChemBio's proprietary DPP technology platform provides high-quality rapid diagnostic results in 15 to 20 minutes using a small drop of fingertip blood or alternative easy-to-collect samples such as nasal swabs. Through advanced multiplexing, the DPP platform can detect up to eight distinct test results from a single patient sample, delivering greater clinical value than other rapid tests. For most applications, ChemBio's easy-to-use portable DPP microreader optical analyzer then reports accurate results in approximately 15 seconds. The system is well-suited for decentralized testing, where rapid results enable patients to be evaluated while they are on site. Objective results produced by the DPP microreader reduce the possibility of the types of human error that can be experienced in the visual interpretations required by many rapid tests. With these differentiating features, DPP test systems are ideally suited for testing more patients in more locations more often. We have all seen the value of this decentralized testing model. When I joined ChemBio, it was focused on international, tender-driven programs funded by national health systems and or NGOs. Many of these arrangements were in regions that could not afford premium technology. This situation created lower ESPs that pressured margins and the inherent nature of these tenders reduced business performance visibility. To expand its product portfolio beyond each ID and leverage DPP's capabilities, the company focused on disease states and underdeveloped markets. This work resulted in powerful validations of the technology but with commercialization potential constrained by the same inherent market dynamics. Other than the GPP HIV syphilis test, internally identifying and pursuing organic product development opportunities for the U.S. market was not a priority. The U.S. market offers premium prices for advanced technology and well-defined disease states and sales channels. There are many potential customers across decentralized healthcare settings where multiplex tests improve clinical decision making at the point of care. In addition, with a balanced approach of direct sales and leveraging leading healthcare distributors, U.S. sales team can efficiently access these customers at scale. Our strategy is focused on building a U.S. customer base with recurring revenue from high-value diagnostic tests. Our objective is to win customers by selling PPP microreaders used to analyze the results for a broad menu of current and future tests. Establishing these accounts offers the potential to realize recurring revenue that facilitates increased visibility on future business performance. This is where we see the greatest opportunity for the company. In 2020, we took steps to optimize our resources to support this business model. Commercially, we have built a comprehensive U.S.-based team of professionals with diagnostic experience, We are active in both the direct and distribution channels to access all the decentralized testing markets where we see potential demand for our products. To serve the U.S. market more comprehensively, we've added new commercial leadership, distribution management, sales, marketing, and customer service professionals. Building deeper and new relationships with large national distributors like Fisher Healthcare, McKesson, and Henry Schein is a priority and that will help broaden the reach of our expanded sales force. We've built our organization to suit the needs of different customers across various decentralized markets. Internationally, distribution is a core component of our commercial strategy. We are working on building a new and improved distributor network to better leverage our Anvisa approvals with our subsidiary in Brazil, our CE Mark approvals in Europe, and country-specific opportunities elsewhere. As an example, Lewis Diagnostics, led by industry veteran CEO Brendan Farrell, is now our exclusive distributor in the UK and Ireland. Commercially and operationally, our resources are aligned to be more effective with current and future product portfolios. Of course, as we move forward, we are hyper-focused on driving the development and regulatory approval of a diverse portfolio of tests that will bring value to the U.S. market. I'll start with the FDA's PMA award of our DPP HIV Syphilis test, which illustrates all the differentiated features provided by ChemBio's DPP platform. From a single finger stick blood sample, both HIV and syphilis are discreetly detected at a high sensitivity and specificity in only 15 minutes. It is the very first rapid test approved in the U.S. to aid in the diagnosis of both infections. Access to syphilis testing is vital because congenital syphilis infections increased by 185% from 2014 to 2018. An untreated syphilis in pregnant women may result in stillbirth or infant death in up to 40% of cases. Additionally, patients with active syphilis infections are two to five times more likely to contract HIV if exposed. Our initial target customers are 15,000 moderately complex physician offices, hospitals, and clinical labs across the country. We are pursuing a clear waiver for the test, which if awarded, would expand the market meaningfully into traditional HIV testing locations and provide the opportunity to take meaningful share in the U.S. HIV testing market. The DPP and HIV simplest test provides both clinically differentiated value and dual reimbursement under well-defined CPT codes with a single test and a single finger prick of blood. Now, I will provide an update on our portfolio of COVID-19 test systems, which comprise a COVID-19 antigen test, a COVID-19 antibody test, and a multiplex respiratory panel, which is currently under development, that simultaneously and discreetly detects antigens for SARS-CoV-2, flu A, and flu B. All three systems deliver the differentiated features of the DPP platform. 20 care diagnostic tests for COVID-19 have proven to be extremely effective in understanding and controlling the spread of the virus. The information that these tests provide to clinicians enables quick decisions to be made with the patient still present. By contrast, lab-based PCR tests are run at central labs and they take days to produce results and have at times been bogged down to the volume of testing and the complex sample preparations required. This delay between testing and diagnosis can put patients and those around them at risk. BARDA recognizes the importance of point-of-care testing and ChemBio's DPP platform. We were awarded two grants from BARDA for the development and regulatory submissions for both the DPP SARS-CoV-2 antigen test system, which we will refer to as our COVID-19 antigen test, and the DPP respiratory panel. The first BARDA grant totaled approximately $630,000 and is for the development and issuance of an EUA of the COVID-19 antigen test. The second award totaled approximately $12.7 million and is for the development and issuance of an emergency use authorization application for the rapid DPP respiratory panel and the preparation and receipt of a 510 clearance for the rapid COVID-19 antigen test. Receiving the 510 would also provide traditional permanent FDA regulatory clearance. We appreciate the collaborative relationship we have built with BARDA Their support and guidance have been very valuable in helping us quickly develop high-performing tests. To date, our COVID-19 antigen test has received Anvisa approval for distribution in Brazil by Oleon subsidiary. And in January 2021, obtained CE mark for distribution in the EU. In January 2021, we also obtained CE Mark for the SARS-CoV-2 IgM IgG antibody test system, which we will refer to as our COVID-19 antibody test. As I mentioned previously, to take advantage of these approvals, we are working on building new distributor relationships in Europe, Brazil, and elsewhere to help commercialize these products. Now I'd like to provide an update on our regulatory filings in the U.S. In the US, we submitted EUA applications for our COVID-19 antibody test in September 2020 and our COVID-19 antigen test in October 2020. We completed the development of these tests and submitted their respective EUAs ahead of the timelines we had communicated. In December 2020, the FDA notified us that it was declining to review the COVID-19 antibody test based on the FDA's then effective prioritization guidance. Under this guidance, Review of the system was not a priority for the FDA because, for example, the FDA determined that authorization of the test would have relatively limited impact on testing accessibility or testing capacity. The FDA has supplementally advised us of the type and nature of information it would need to receive in a subsequent EUA application in order for the COVID-19 antibody test to be prioritized for review. To be clear, our COVID-19 antibody test was not reviewed by the FDA. We believe the application that we submitted included data that met the performance requirements laid out by the agency. We are confident in the quality of our test and view the Anvisa approval and the CE mark as validations of its performance. We are continuing to evaluate whether to commit further resources to the testing and development that would be required in order to seek to submit a new FDA EUA application for COVID-19 antibody test systems. Turning back to our COVID-19 antigen test, in January 2021, the FDA notified us that it was declining to review the COVID-19 antigen test based on its updated prioritization guidance, under which reviewing the system was not a priority. The FDA has supplementally advised us of the type and nature of information it would need to receive in a subsequent EUA application in order for our COVID-19 antigen test to be prioritized for review. And we are engaged in testing and development in order to submit a new EUA application. We appreciate the FDA's guidance and BARDA's continued support, and we are completely committed to gathering the specific information required. We are confident we have a plan, the resources, and technical capability required to resubmit the EUA. We will not be providing guidance regarding either the timeline or achievement of the resubmission based on the uncertainty of the changing regulatory process and priorities. We look forward to sharing news about any FDA or regulatory awards in due course. Now I will talk about the DPP respiratory panel. Development is progressing well. Again, this is a great example of the versatility of our DPP platform and its ability to multiplex. Differentiating COVID-19 flu A and flu B can assist healthcare providers in patient management and improve resource utilization. We believe the clinical utility of this test will extend well beyond the pandemic phase of COVID-19 and into future respiratory virus seasons. To capitalize on the current demand for a respiratory panel product and leverage our expanded U.S. commercial organization, while our CPP systems are under development, we recently signed an in-licensing agreement to distribute a respiratory panel test. This test is a point-of-care, EUA-approved respiratory panel for the detection of SARS-CoV-2 antigens, flu A and flu B. We believe it will complement our COVID-19 portfolio because it will be sold across the same overlapping decentralized markets as our currently available point of care HIV tests and other COVID-19 products in development. We are launching this respiratory panel this month. Our commitment to the decentralized COVID-19 testing market is strong, and we are excited to be able to offer customers this high-performing test as the first component of our planned future portfolio. Our COVID-19 tests combined with the TPP HIV system and our well-regarded point-of-care PMA-approved and CleoWave HIV tests represent a comprehensive product portfolio that can provide value to a wide range of decentralized testing locations across the U.S. and globally. The pandemic has proven the value of point-of-care diagnostics. Our DPP test systems are easy to use and do not require infrastructure such as central reference laboratories. They are duly suited for testing patients across a wide variety of decentralized locations such as doctors' offices, minute clinics, urgent care centers, hospitals, nursing homes, and skilled nursing facilities. We believe that the global visibility that the pandemic has provided to point-of-care diagnostic testing bodes well for its future adoption throughout the healthcare system. As I mentioned previously, in Brazil, we received the Anvisa approval during the fourth quarter to market our COVID-19 antigen test through our wholly owned subsidiary, and we are commercializing the product through state, local, and pharmacy markets. We are also working with BM&Dinos, our long-time partner that supports the federal market, to cross-register their approval of the product with Anvisa. Over the course of 2020, we have made significant changes to our organization that repositioned it to focus on U.S.-based test demand. This is reflected in our product development, our BARDA-funded regulatory priorities, and our expanded commercial organization. Our plans for 2021 are built upon this groundwork. Our objectives are clear. Number one, launch the point-of-care EUA-approved in-license respiratory panel product in the United States. Number two, get our COVID-19 products approved and on the market in the United States. Number three, obtain CLIA waiver to accelerate the initial uptake of our DPP HIV syphilis sales. Number four, begin development of our expanded portfolio of DPP tests covering respiratory viruses, sexually transmitted disease, gastroenterology, and insect vector diseases. And five, build upon our automation transition initiatives, and achieve operational excellence throughout the organization. At the beginning of my remarks, I shared a number of thoughts about how I approached joining ChemBio nearly a year ago. And through all of the underlying issues of the pandemic itself, together with the successes and challenges ChemBio faced throughout the year, my overriding thesis for creating value at ChemBio has not changed. Much has been written in the past few weeks about what the future of COVID-19 testing looks like, given the vaccine programs, current downward trend of cases, and overall testing demand in the U.S. So let me be clear. ChemBio is committed to the broader point-of-care testing business for the long haul. Our product portfolio strategy is to launch the in-license respiratory panel this month pursue CLIA waiver for the PMA-approved DPP HIV syphilis test, and complete our ongoing dedicated work with BARDA on the respiratory paddle and COVID-19 antigen test. As discussed, the COVID-19 antigen test is funded by BARDA to complete clinical trials and achieve a 510 regulatory approval providing a permanent clearance beyond when COVID-19 is an emergency and becomes a standard test used in seasonal upper respiratory diagnostics. That transition from emergency use to routine patient care illustrates why we are focused on our market and channel positioning strategy in the U.S. While others are pursuing local markets, including over-the-counter and at-home testing, ChemBio is staying focused on the healthcare channels where we can maximize our expanded U.S. commercial organization and the proven differentiated capabilities of our TPP platform. The basis for this strategy is compelling and clear. We believe this is where the long-term, sustained market will exist for each of the disease states I listed, including our current products, those presently under development and in clinical trials, and future products that we will develop in these areas. We believe that while tangential markets may develop, all these disease states will continue to be diagnosed and treated in traditional, decentralized point-of-care clinical markets. From our current market position, we can drive the company towards profitability and sustained growth with incremental market share gains in these high average selling price, well-established diagnostic channels. I will now turn the call over to Neil for details on the 2020 financials. Thanks, Rick. First, I would like to begin with a logistical item. As a matter of corporate housekeeping, we anticipate filing an S3 shelf registration within the next few business days. Moving on to the financial results, for the three months ended December 31, 2020, total revenue was $10.2 million, representing growth of 62% compared to the prior year period. Net product sales for the fourth quarter of 2020 were $6.9 million, an increase of 39% compared to the prior year period. Government grant, license and royalty, and R&D revenues combined for the three months ended December 31, 2020 were $3.4 million, an increase of 143% compared to the prior year period. Consistent with past earnings calls, I'm sharing these non-product sales figures on a combined basis. In addition, effective with this period, we are separately presenting government grant income and R&D revenue within total revenues on our income statement. Both government grant income and R&D revenue are related to the timing and cadence of program performance obligations, which do not always occur in a certain period, but we continue to incur certain of the expenses. Gross product margins during the three months ended December 31, 2020 declined by approximately $0.7 million compared to the prior year period. The decrease reflected continued impacts from unfavorable geographic sales mix, operational inefficiencies related to manufacturing production schedule changes, and the qualification during the quarter of certain of our automated equipment. Our margins were also impacted by the write-off of expired and therefore obsolete HIV product. During 2020, we continue to invest in transitioning toward the automation of our manufacturing processes, all of which are now based in the United States. Our transition from manual to automated assembly is intended to add capacity, reduce variable costs, and improve product margins. Particular focus on the validation and implementation of the automated lines occurred during the three months ended December 31, 2020. I will talk more about this in a few minutes. R&D costs increased by $1.3 million, primarily due to the clinical trial costs related to the development of our COVID-19 tests. Selling, general, and administrative costs increased by $3.6 million, primarily due to legal costs, costs from expanding our U.S. commercial organization, and facility costs related to the COVID-19 pandemic. net loss in the three months ended December 31, 2020 was $7.1 million or $0.35 per diluted share compared to a net loss of $3.9 million or $0.23 per diluted share in the prior year period. Now turning to full year 2020 financial results. The extensive economic disruption caused by the COVID-19 pandemic exacerbated by the market and regulatory complications we faced in seeking to develop and commercialize a portfolio of COVID-19 test systems was reflected in our operating results for 2020, as total revenues were $32.5 million, a decrease of 6% from 2019, and net product sales were $24.8 million, a decrease of 14% from 2019. Government grant, license and royalty, and R&D revenues combined for the year ended December 31, 2020 were $7.7 million, an increase of 37% compared to the prior year period. Gross product margins during the 12 months ended December 31, 2020 declined by approximately $5.6 million compared to the prior year period. In 2020, we invested in developing and offering products to address the COVID-19 pandemic. which have average selling prices greater than those of our legacy products. As previously discussed, we also continue to invest in transitioning toward the automation of our manufacturing processes to reduce our reliance on manual labor and improve our product margins. The decrease in gross product margin was comprised of $0.9 million from unfavorable product sales volume and $4.7 million from unfavorable product margins. The portion related to unfavorable product margins had three primary drivers. First, we incurred the cost of product sales for COVID-19 antibody tests that were returned by customers in the U.S. following the FDA's revocation of the EUA for that product. Second, the revocation precluded planned sales of COVID-19 antibody tests to customers in the U.S. for the remainder of 2020 and resulted in the deferral of certain customer opportunities for the sales of these systems outside the U.S. This negatively impacted our sales mix as we experienced significantly lower sales in the U.S. where we have our highest average selling prices relative to regions outside the U.S. where we experienced a higher mix of sales in geographic regions with lower average selling prices. And third, we experienced operational inefficiencies, including those triggered by the revocation, activities related to qualifying automated lines for production of certain products, and the write-off of expired and therefore obsolete HIV product, which together resulted in increased cost of product sales as we shifted much of our production from COVID-19 products back to legacy products. R&D costs increased by $1 million, primarily due to clinical trial costs related to the development of our portfolio of COVID-19 tests, including those funded by Pharma, as Rick described earlier. Selling general and administrative costs increased by $4.9 million, primarily due to legal costs arising subsequent to the revocation, costs from expanding our U.S. commercial organization, and facility costs related to the COVID-19 pandemic, offset in part by cost savings from retrenching our Malaysia facility. During 2020, we incurred severance and related costs totaling $1.1 million. Net loss for the year ended December 31, 2020 was $25.5 million or $1.34 per diluted share compared to a net loss of $13.7 million or $0.81 per diluted share in the prior year period. Adjusted for non-cash items, our net loss for the year ended December 31, 2020 was $18.2 million. As Rick and I have discussed on prior calls, our team continues to execute a program to reduce expenses and better align our costs with revenues, including by eliminating positions that are no longer required by our strategy. Associated with that, during the first half of 2021, we are reducing the number of employees dedicated to manually assembling our products and expect to take a restructuring charge during that period, ranging from $0.1 to $0.2 million. To date, in 2021, we have executed changes representing approximately $2 million of cost savings on an annualized basis. On the balance sheet, cash and cash equivalents as of December 31, 2020 total $23.1 million. Networking capital as of December 31, 2020 was $27.4 million. During the year ended December 31, 2020, Cash used in operations totaled $18.9 million, primarily due to the net loss adjusted for non-cash items and a $6.5 million increase in inventory associated with a combination of non-cancellable purchase orders subsequent to the revocation of the antibody test and building raw material inventory for the COVID-19 antigen test. Finally, while we do not intend to provide quarterly guidance going forward, Given the current state of operations amid the pandemic and where we are in the quarter, we want to provide an update on our expectations for the first quarter. We expect first quarter 2021 product revenue to decrease sequentially compared to the fourth quarter of 2020, but to be roughly offset by a sequential increase in non-product revenue. I'll now turn the call back to Rick for concluding remarks. Thank you, Neil. Our VPP platform technology offers clinicians in every setting across the healthcare system the ability to decentralize and improve access to diagnostic testing. Both patients and clinicians are fully realizing the clinical utility of point-of-care testing. We continue to believe the outlook for our technology has never been more promising. There have been challenges on the regulatory paths of our respective COVID-19 tests, but our commitment to this market is unwavering. We understand the FDA's priorities can change as we learn more about the virus and the testing landscape evolves. Our team has the resources and technical capability to demonstrate why the DPP platform is highly differentiated. There is a large need and market for decentralized testing. We are confident our DPP tests will provide value for our customers. Ultering this confidence is the fact that we have achieved several more regulatory approvals for tests using the DPP platform. We received CE Mark and Inviso approval for our COVID-19 antigen and antibody tests. Additionally, the DPP HIV syphilis test received FDA PMA approval. We also won two awards totaling $13.3 million from GARDA that represent another strong validation of the DPP technology. Over the course of this year, we plan to build on that success. Our goal on the regulatory front is to achieve EUA approval and 510 clearance for our COVID-19 antigen test, EUA approval for our DPP respiratory panel, and a CLIA waiver for the DPP HIV syphilis test. These approvals can enable a shift in the geographic and product mix that would lead to improved margins. I would like to take this opportunity to welcome our newest members to the ChemBio Board of Directors. First, Dr. David Acheson joined the Board of Directors in December 2020. Dr. Acheson brings applicable expertise in public health and infectious disease management to our leadership team. We are confident that his perspective and insights will contribute meaningfully to our long-term value creation strategy as we enter the next phase of growth for ChemBio. Secondly, David Vespalco joined the Board of Directors in March 2021. Given Mr. Vespalco's extensive network and commercial experience in the industry, David will add meaningful insight to help maximize the value of our TPP and other technology platforms in the market. We look forward to the collaboration and contributions from both Dr. Ashton and Mr. Vespalco. ChemBio is a performance-driven organization that strives to attract and retain top customers and talent every day. Operational excellence is our expectation internally, and from this foundation we are confident we can deliver customer satisfaction, profitable growth, and shareholder value. Finally, I would once again like to thank our employees for their steadfast commitment to our organization. We look forward to providing updates in the future as we continue to execute our strategy. Thank you all for joining us today. Again, I wanted to reiterate that we appreciate the FDA's guidance and BARDA's continued support of our COVID tests, and we are committed to gathering the specific information required. We are confident we have a plan, the resources, and technical capability required to submit the respective EUAs. At this time, we will not be providing commentary or guidance regarding the submissions, timelines, or achievement of the resubmission based on the uncertainty of the changing regulatory process and priorities. We look forward to sharing news about any FDA or regulatory awards in due course. With that, operator, please open up the call to questions.