Good day, ladies and gentlemen, and welcome to the Chembio Third Quarter 2020 Earnings Conference Call and webcast. All lines have been placed on a listen only mode until the end, when the floor will be open for your questions and comments following the presentation.
At this time, it is my pleasure to turn the floor over to your host, Mr. Philip Taylor. Sir, the floor is yours.
Thank you, operator. Before we begin, let me remind you that Chembio’s remarks made during this conference call today, November 5, 2020, may include predictions, estimates or other information that may 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 second quarter of 2020.
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 Eberly, President and Chief Executive Officer.
Thank you all for joining Chembio’s third quarter 2020 earnings conference call. Before we begin, it is important that we recognize that together, we are facing a global pandemic with far–reaching consequences. Thank you to our team for their dedication to our top priority of developing and providing tests that can help manage this pandemic. From everyone at Chembio, we would like to say thank you to the health care workers, who are caring for patients across the world.
Today, I will discuss our third quarter performance including completing several development and regulatory milestones and the progress we have made implementing a new business model centered around the launch of a portfolio of DPP COVID-19 tests. Then Neil will discuss the detailed financial results, and I will conclude and open up the call for questions.
To start, in the third quarter, total revenue was $10.3 million, including product revenue of $8.4 million, representing growth of 6% and a decline of 1%, respectively, compared to the prior period. Our third quarter results demonstrate improvement in our total revenues, which include revenue from DPP COVID-19 IgM/IgG systems shipped outside the United States in the second quarter.
We also made significant progress on the product development and regulatory fronts. As previously communicated, we set goals to submit applications to the U.S. FDA for Emergency Use Authorization or EUA, for a new COVID-19 antibody and antigen tests by the end of the third and fourth quarters, respectively. We’ve accomplished both milestones ahead of schedule, with submissions in early September and early October, respectively. We also received FDA premarket approval or PMA for our DPP HIV-Syphilis system last month.
Looking forward, these tests will mark the beginning of our diversification into higher–value point-of-care diagnostic testing systems targeted for use by U.S. customers. We intend to build upon our foundation of legacy infectious disease products, consisting primarily of sexually transmitted disease and fever and tropical disease tests that are both sold in the United States and internationally.
The COVID-19 pandemic has reshaped how society functions. Impacts of the pandemic have the potential to permanently change population behavior and health care protocols. Diagnostic testing has proven to be among the most effective tools for managing infection transmission. We are experiencing unprecedented proliferation in the types of available tests and most importantly, to Chembio, the locations where testing is performed. Specifically, point–of–care diagnostic tests for COVID-19 have proven to be critical for controlling the spread of the virus because clinicians received test results that can make medical and quarantine decisions immediately, while patients are still on site.
Central and reference laboratories continue to be overwhelmed with testing volumes. Extreme volumes and the complex sample preparation required for testing with some high throughput instruments is causing many tests to be delivered days later. This delay in the time to result can increase risk factors for both patient care and virus transmission. We’ve also seen its impact on the challenges to contact tracing.
Rapid point-of-care tests like our DPP systems are easy to use and do not require the infrastructure found in a large laboratory, making it convenient to test patients across a wide variety of decentralized locations like doctor’s offices, mini clinics, urgent care centers and retail pharmacies. This versatility helps alleviate bottlenecks and increases patient access to this critical health information. The pandemic has led to increased point-of-care testing adoption across a wider variety of health care providers and use cases.
Chembio’s proprietary DPP technology platform provides high–quality, rapid diagnostic results in 15 to 20 minutes, using a small drop of blood from the fingertip or alternative samples. For advanced multiplexing, the DPP platform can detect up to 8 distinct test results from a single patient sample, delivering greater clinical value than other rapid tests. For certain applications, Chembio’s easy to use, highly portable, battery–operated DPP Micro Reader optical analyzer that reports actual results in approximately 15 seconds. Making it well suited for decentralized testing, where real-time results enable patients to be clinically assessed, while they are still on site. Objective results produced by the DPP Micro Reader reduce the possibility of the types of human error that can be experienced in the visual interpretations required by many rapid tests. These features have been designed to make DPP test systems ideally suited for testing more patients, in more locations, more often.
The opportunity to provide testing solutions for COVID-19 was realized early in the pandemic. Because of the flexibility of our platform, we are well on our way developing a portfolio of testing solutions. We have set out to offer antibody tests and an antigen test. These will provide clinicians, in any health care setting or beyond, the ability to evaluate a variety of different patient scenarios, using the same affordable and portable Micro Reader optical analyzer. In the second quarter of 2020, we experienced both great success and a setback. We achieved one of the first EUAs in the United States for an antibody test that was well received by customers and generated significant sales. However, in June, 2 months following the EUA, the FDA implemented a new methodology to evaluate antibody tests. And the results of that change triggered the revocation of the EUA for our antibody test. While disappointing, we took immediate action, designing a new antibody test. With the FDA’s evaluation methodology as a guide and a growing body of knowledge of how the virus interacts with our technology, we were able to quickly develop a new antibody test.
In the beginning of September, we submitted an EUA application for a new antibody test to the FDA, named the DPP SARS-CoV-2 IgM/IgG test system. It is designed to detect antibodies [indiscernible] receptor binding domain in the blood that the body produces in response to a COVID-19 infection. It is a multiplex test that, combined with the Micro Reader provides 2 objective numerical results, detecting both IgM and IgG antibodies independently from a fingerstick blood sample in just 15 minutes.
We believe that antibody tests will play an increasing role with the eventual introduction of vaccines. They will assist in evaluating individuals’ immune responses to vaccines determining overall population exposure and following additional research could ultimately help determine immunity status.
We intend to complement antibody testing in our portfolio with a rapid antigen test. Rapid antigen testing has become the method of choice for evaluating patients in the U.S., as illustrated by the U.S. government’s purchase of 150 million tests from a single manufacturer. Antigen tests provide the ability to detect active virus infections to inform diagnosis decisions. The point-of-care DPP SARS-CoV-2 antigen test system consists of the DPP SARS-COV-2 antigen assay and a DPP Micro Reader optical analyzer. It uses a minimally invasive nasal swab to detect SARS-CoV-2 viral antigens in only 20 minutes. The most likely use cases for this test include patient diagnosis, screening of high risk populations such as the elderly in nursing homes and confirming cases in patients who had contact with other COVID-19 patients.
To codify a grant from BARDA, the development of the DPP SARS-CoV-2 antigen test system, an EUA application submission was completed in just 3 months. We are thankful for their assistance. And their guidance was crucial in our ability to produce and submit the EUA application for a high–performing test in just a few months.
We’ve also been submitting data to support point-of-care claim, the designation traditionally known as a CLIA waiver, which would allow testing to be conducted in a greater variety of less complex settings. The application is under review by the FDA. We look forward to achieving EUA for both tests as soon as possible.
Transitioning now to the commercial launch strategy for our COVID tests. Previously in the United States, we were focused on providing family health clinics our basic HIV test. Internationally, we focused on providing infectious disease tests to governments and NGO customers. As discussed on prior calls, we are using the COVID test launch opportunity to pivot our business model and focus on a more diverse set of U.S. customers.
The low–cost accurate results provided by our easy–to–use DPP test systems allow health care workers, in any setting, to deliver important health information to patients. There’s no substantial investment in infrastructure or training required to conduct our tests, just the purchase of a Micro Reader for under $1,500.
Customers across the health care landscape and beyond traditional health care settings are interested in providing testing services. Potential markets for our tests include city and state health departments, emergency rooms, hospital labs, medical clinics, physician offices, urgent care centers, patient draw centers, nursing homes and skilled nursing facilities. The most effective and efficient strategy for driving growth is ensuring we can address each of these markets. We will combine our direct sales force with distributors who have established channels across the industry.
Given our prior experience, the build–out of this commercial infrastructure has been underway since the spring. Key representatives in managerial positions across sales, marketing and customer service have been built. For example, to deepen our relationships with large national distributors, we acquired an experienced director of distribution. The distribution team at Fisher Healthcare is now trained on the DPP platform. We are excited to partner with leading organizations to expand our commercial footprint. The team and strategy are in place, and ready to ramp up quickly following product authorizations.
Internationally, we have strong relationships across Brazil, Africa and Europe, that we will continue to service. Third quarter product revenues include sales of the antibody tests shipped outside the United States. Moving forward, we have maintained a dialogue with our customers, and they remain interested in all of our test systems.
Testing systems include Micro Readers and once customers have a Micro Reader, they can run any COVID-19 test in our portfolio. This provides a competitive advantage against many competitors who are only offering one type of test. For clinicians, the adoption of multiplex tests like our COVID antibody and HIV-Syphilis are attractive because billing is performed on a per result basis under established CPT codes.
Each of these tests provide 2 distinct results. In the future, we envision an installed base of accounts that have Micro Reader analyzers that can select from a portfolio of DPP assays that could include detection of biomarkers, including other respiratory, gastroenterology and neurological conditions. That is the classic razor blade model.
Along with the new COVID test, we are launching our DPP HIV-Syphilis system. We are pleased to have received PMA approval from the FDA, which includes approval from this rigorous process for the Micro Reader. This is the very first rapid test to detect both HIV and syphilis from a single patient sample.
The multiplex DPP HIV-Syphilis system represents a significant step forward in rapid testing for sexually transmitted diseases. The test is now available to moderately complex sites, and we are working with our distributors to approve the approximately 15,000 physician office labs, hospital labs and clinical labs with a moderately complex certificate. To expand the locations that can conduct this test, we are pursuing a CLIA waiver. The waiver would enable public health and family planning clinics to use this test. As such, we are moving forward with the studies required to generate the data for a CLIA waiver submission.
Co-infection rates of HIV and syphilis are on the rise. And according to the U.S. Centers for Disease Control and Prevention, individuals with an active syphilis infection, have an estimated 2 to 5 fold increased risk of contracting HIV if exposed to that virus. The CDC has also reported that untreated syphilis in pregnant women who acquired the disease during the four years before delivery can lead to infection of the fetus in up to 80% of cases and may result in still birth or infant death in up to 40% of cases. Congenital syphilis has increased by 185.3% from 2014 to 2018, consistent with the 165.4% increase in active syphilis infections among reproductive age women during the same period. As you may know, congenital syphilis is a preventable disease that could be significantly reduced through effective prenatal testing and treatment of infected pregnant women. Chembio’s DPP HIV-Syphilis system assist clinicians in diagnosing HIV or syphilis, while patients are still at the point-of-care setting. By getting effected patients onto treatment, we hope our test can reduce both co-infection and mother–to–child transmission of these diseases.
According to the U.S. Department of Health and Human Services, 1 in 8 people living with HIV in the United States are unaware of their infection. And improving access to HIV testing can help more people learn their status so they can be connected to care and treatment. The CDC recommends that individuals at higher risk of HIV infection be tested at least annually.
As discussed on our last conference call, disruptions caused by the pandemic has continued to divert resources away from HIV and tropical disease testing. The Bill & Melinda Foundation’s 2020 Goalkeepers Report states that HIV prevention is suffering as a result of these disruptions. We remain in close contact with our international customers and global funders and look forward to supporting a re-expansion of global HIV testing as funding returns and the essential facilities and logistics are in place to support it. In anticipation of the launch of our COVID test we have focused on coordinating our manufacturing processes to add the additional test to our production schedules. Ensuring we deliver on commitments made for our legacy products, while ramping up production on the new test is a top priority. The plan to scale production are well formulated, and our supply chain is currently well positioned to support the manufacture of our full suite of products. We will scale production according to demand.
The DPP portfolio of tests use the same technology set in a common form factor, which provides production advantages for both manual and automated assembly. To further capitalize on this commonality, over the past 2 years, we have made significant investments and automated manufacturing lines that will provide and improve our production efficiency, flexibility and scalability, while maintaining our consistency and quality standards.
Now, I will turn the call over to Neil for details on the third quarter financials.
Thanks, Rick. For the 3 months ended September 30, 2020, total revenue was $10.3 million, representing growth of 6% compared to the prior year quarter. Net product sales for the third quarter of 2020 were $8.4 million, a decrease of 1% compared to the prior year quarter.
License and royalty and R&D and grant revenues combined for the 3 months ended September 30, 2020, were $1.9 million, an increase of 54% compared to the prior year period. R&D revenues related to the timing and cadence of program performance obligations, which do not always occur at a certain period, but we continue to incur certain of the expenses.
As Rick described, during the third quarter, we continued implementing our new business model and focusing our resources on the development and commercialization of COVID-19 testing products. At the same time, customers of our legacy infectious disease tests continue to devote much of their resources toward COVID-19. Our revenues during the 3 months ended September 30, 2020, included revenues for shipments of the DPP COVID-19 IgM/IgG system outside the U.S. that were previously not recognized during the second quarter of 2020; for reasons, as I described at that time; as we have now met the requirements of generally accepted accounting principles to recognize that revenue.
The FDA’s revocation of the EUA for our antibody system continued to have a significant negative impact on our product revenues during the third quarter of 2020. The resulting recall of unused DPP COVID-19 IgM/IgG systems from customers in the U.S. during the second quarter of 2020 precluded the sale of the systems within the U.S. during the third quarter of 2020. It also delayed some customer opportunities for the antibody system internationally.
Gross product margins during the 3 months ended September 30, 2020, declined by $0.9 million compared to the prior year period. The decrease reflected 3 principal developments. First, we experienced unfavorable geographic product sales mix with much higher concentration of product sales in countries with lower average selling prices. To illustrate, product sales in the U.S., where we have our highest average selling prices were only 3.5% of net product sales during the third quarter of 2020 compared to 16.8% in the prior year period. Additionally, sales to Africa, where we have our lowest average selling prices represented 22.3% of net product sales during the third quarter of 2020 compared to 14.7% in the prior year period. The reduction in U.S. sales, both in absolute terms and as a percent of total product sales resulted from a combination of the FDA’s revocation in June 2022 sic 2020 have precluded sales of COVID-19 IgM/IgG systems in the U.S. during the third quarter and the impact of the pandemic on demand for HIV tests, as Rick described earlier.
Second, we experienced operational inefficiencies, including those triggered by the recall of products starting at the end of the second quarter of 2020, such as shifts in product manufacturing schedules together with activities related to qualifying automated manufacturing lines. Offsetting these items was a recognition of net revenue from shipments outside the U.S. that were deferred into the third quarter of 2020, as I previously described.
Other expenses, which includes research and development and selling, general and administrative expenses combined were $7.7 million for the 3 months ended September 30, 2020, compared to $6.7 million in the prior year period. R&D costs increased modestly by $0.1 million. Selling, general and administrative expenses increased by $0.9 million or 20% for the 3 months ended September 30, 2020, compared to the prior year period.
Net loss in the quarter ended September 30, 2020 was $5.5 million or $0.28 per diluted share, compared to a net loss of $3.8 million or $0.22 per diluted share in the prior year period.
On the balance sheet, cash and cash equivalents, as of September 30, 2020, totaled $28.7 million. Net working capital, as of September 30, 2020, was $33.4 million.
I’ll now turn the call back to Rick for concluding remarks.
Thank you, Neal. Over the past few months, we have executed our product development and regulatory strategy as stated, to address the growing needs of the COVID-19 pandemic. 2 EUA applications have been submitted to the FDA; an approved antibody and antigen portfolio would make Chembio a leader in point-of-care testing for COVID-19.
As the pandemic surges to record case numbers in some states across the United States, we are looking forward to the opportunity to offer our COVID-19 solutions in the near future. Our DPP platform technology offers clinicians in every setting across the health care 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.
The market has shown that demand continues to far outpace supply. That message has been consistent across the health care system. The outlook for our technology has never been more promising. That is why I’m so proud of our team’s accelerated rapid expedited development of COVID-19 solutions. And with our expanding U.S. commercial organization, positions Chembio for sustained long–term growth and success.
We are humbled to be able to drive adoption of our PPP point-of-care testing systems in this kind of need. Again, I would like to thank our employees for their hard work and dedication in these trying times. We look forward to updating you as we continue to execute on our new business model.
Thank you for joining us today. And with that, operator, please open up the call for questions.
[Operator instructions] We’ll go first to Kyle Bauser at Collier Securities.
So, I just want to make sure I caught this. You talked about, Rick, submitting data for a CLIA waiver. Was that for the COVID antigen test? And was this data requested by the FDA after you submitted your application?
Yes. Well, I was referring to the CLIA waiver data. We are submitting that to the FDA as a part of the EUA submission. And so, our plan for the DPP SARS-CoV-2 antigen test is to have a CLIA waiver.
And so that could come at the same time as a potential approval, it sounds like, or shortly thereafter.
Yes, that’s correct, Kyle.
And how is the Q4, the COVID antigen and antibody test, do you know how many tests are currently being evaluated by the FDA for each? Obviously, it’s a lot less for the antigen side. I’m just trying to get a sense of timing for a decision.
Yes, Kyle, we don’t have great visibility into the exact numbers of submissions for both the antibody and the antigen test. I know the FDA, in their weekly town hall meeting does talk about their backlog and what they’re doing to try to speed up the review process. So we are obviously staying very, very close to what the FDA is communicating, relative to their review process. And any changes to it. And so, we will continue to monitor that. Our hope is that the review process will speed up. And we’ll be able to get our applications reviewed and approved in the very near future.
And then just lastly, if I may, I’ll just ask these both at the same time. Neil, are there any more gen 1 antibody COVID tests that might hit the revenue line in Q4? And then regarding the DPP for HIV-Syphilis system, really nice to see that get approved. Can you give us an update on the market dynamics here? There were some competitors that stumbled in the marketplace so the value proposition for this multiplex is pretty compelling right now compared to an HIV–only test. So any kind of update on the market dynamics there? And if this will have premium pricing.
Yes. I think, Karl, I’ll take the first part of that, and Rick will take the second part. So we’re not going to get into which of our tests are being sold or taken up on the international side. But I can tell you that our revenues in Q3 included sales beyond the initial order that was announced earlier this year for $4.1 million to Bio-Manguinhos. And there is some amount of that, that will continue to ship in Q4.
So Kyle, this is Rick. In terms of the market dynamics for the DPP HIV-Syphilis test, yes, we’re extremely excited about that approval by the FDA. Our commercial team, along with our distribution partners are in a full launch mode. We are providing information to our distributors, who are now actively selling the product. The market dynamics are such that the combination of HIV and Syphilis testing has been talked about for a long time. Our PMA approval process was around 2 years, in order to get that product approved. And so, we were delighted to finally get that approval. So we are actively marketing and promoting the test. For the clinical use cases that we’ve talked about, in terms of co-infections for HIV patients, and also the mother–to–child transmission issue that we talked about in some of the public health numbers. That we talked about in the prepared remarks. So the commercial organization is fully engaged. We are actively selling the product, and we’re hoping to have some Q4 revenue for that product.
Okay, great. I’ll jump back in queue. Thanks so much for all the updates here.
Once again, ladies and gentlemen, it is star one if you have a question or comment at this time. And that will conclude today’s Q&A. I’ll now turn the conference back to management for any additional or closing comments.
Thank you, Jess. We really thank you for your time today, and we look forward to further communication in the future. So have a good day, everyone. Thank you.
Ladies and gentlemen, that will conclude today’s call. We thank you for your participation, and ask that you — can disconnect at this time, and have a great day.