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CEMI > SEC Filings for CEMI > Form 10-Q on 8-Aug-2013All Recent SEC Filings

Show all filings for CHEMBIO DIAGNOSTICS, INC.

Form 10-Q for CHEMBIO DIAGNOSTICS, INC.


8-Aug-2013

Quarterly Report


ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The terms "Chembio", "Company,", "we", "us", and "our" refer to Chembio Diagnostics, Inc. and its subsidiary as a consolidated entity, unless the context suggests otherwise.

Overview

This discussion and analysis should be read in conjunction with the accompanying Condensed Consolidated Financial Statements and related notes. The discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with generally accepted accounting principles in the United States ("U.S. GAAP"). The preparation of financial statements in conformity with U.S. GAAP requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of any contingent liabilities at the financial statement date and reported amounts of revenue and expenses during the reporting period. On an ongoing basis we review our estimates and assumptions. Our estimates are based on our historical experience and other assumptions that we believe to be reasonable under the circumstances. Actual results are likely to differ from those estimates under different assumptions or conditions, but we do not believe such differences will materially affect our financial position or results of operations. Our critical accounting policies, the policies we believe are most important to the presentation of our financial statements and require the most difficult, subjective and complex judgments, are outlined below in ''Critical Accounting Policies,'' and have not changed significantly from December 31, 2012.

In addition, certain statements made in this report may constitute "forward-looking statements". These forward-looking statements involve known or unknown risks, uncertainties and other factors that may cause the actual results, performance or achievements of the Company to be materially different from any future results, performance or achievements expressed or implied by the forward-looking statements. Specifically, 1) our ability to obtain necessary regulatory approvals for our products; and 2) our ability to increase revenues and operating income are dependent upon our ability to develop and sell our products, general economic conditions, and other factors. You can identify forward-looking statements by terminology such as "may," "could", "will," "should," "expects," "intends," "plans," "anticipates," "believes," "estimates," "predicts," "potential," "continues" or the negative of these terms or other comparable terminology. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements.

Except as may be required by applicable law, we do not undertake or intend to update or revise our forward-looking statements, and we assume no obligation to update any forward-looking statements contained in this report as a result of new information or future events or developments. Thus, you should not assume that our silence over time means that actual events are bearing out as expressed or implied in such forward-looking statements. You should carefully review and consider the various disclosures we make in this report and our other reports filed with the Securities and Exchange Commission that attempt to advise interested parties of the risks, uncertainties and other factors that may affect our business.

All of the Company's future products that are currently being developed are based on its patented Dual Path Platform (DPP®), which is a unique diagnostic point-of-care platform that has certain advantages over lateral flow technology.
The Company has completed development of several products that employ the DPP® technology, three of which will be marketed under Chembio's label (DPP® HIV 1/2 Screening Assay, DPP® Syphilis Screen & Confirm, and DPP® HIV 1/2 -Syphilis Assay) and several others that have been developed specifically related to private label agreements with The Oswaldo Cruz Foundation ("FIOCRUZ") for the Brazilian public health market, as explained below.


All of the Company's products other than its lateral flow tests are based on the Company's patented Dual Path Platform (DPP®) technology. The Company has had very active research and development programs and has significantly increased its spending on research and development during the last three years. Third-party funding from research and development contracts and grants have offset a significant portion of these increased research and development expenses. The Company has a number of products under development that employ the DPP® technology. The principal product development activities are described below.

DPP® Hepatitis-C (HCV) Antibody Detection and HCV Antigen-Antibody Multiplex Test - Development work on our DPP® HCV point-of-care rapid test continues. Our development activity has been focused on creating a differentiated product that is at least capable of identifying antibody response in a more comprehensive manner than the currently available point-of-care test is able to do, and to also, in parallel, engage in efforts to differentiate those patients that are antibody positive from those that have an active infection, as up to 30% of patients that are HCV antibody-positive don't have an active infection.

In July 2012, the U.S. Centers for Disease Control finalized the recommendations for testing all individuals in the United States born between the years of 1945 and 1965 for HCV, which age cohort represents a substantial portion of the estimated over three million individuals in the United States that are infected with HCV infection but unaware of their status. With a number of new anti-retroviral therapies approved, and even more pending approval in the years ahead by the FDA, we believe that over time these new recommendations will be implemented. In fact, in May the United States Preventive Services Task Force revised its
November 2012 recommendations to more fully endorse the CDC recommendations by giving both hepatitis-C (HCV) screening for at-risk individuals and age-cohort screening a 'B' grade; under the Affordable Care Act, preventive services that have received an 'A' or 'B' grade from the USPSTF must be covered by insurance policies without cost-sharing and be part of the essential health benefits for those individuals eligible for Medicare.

We plan to complete development in mid-2014, and to begin commercialization activities in the US. by the end of 2015 or early 2016.

DPP® HIV Multiplex Antigen-Antibody Test - Development work continues on a DPP® HIV multiplex test that is being designed to detect acute (early stage) HIV infection by means of detecting P24 antigen, as well as antibodies, to HIV1/2, in whole blood samples. There are no FDA-approved point-of-care tests that detect acute HIV infection, although there are two FDA- approved laboratory tests with such claims, and Alere anticipates near-term approval of its Determine HIV Ag/AB test that we expect will claim earlier detection due to the ability to detect unbound P-24 antigen. We believe that development of such a test in our patented DPP® point-of-care platform may help identify HIV infections that cannot currently be identified by any of the currently FDA-approved rapid HIV tests or the new Alere Determine test, and thus serve an unmet market need and may help to maintain and potentially grow the already strong position our products have in the U.S. rapid HIV test market.

Our revised plan for the new HCV and HIV products is to complete development of these products by mid-2014, conduct clinical trials in 2014-2015, and to receive FDA approval by the end of 2015 or early 2016.

International Distribution & Assembly Agreement with Labtest - During the second quarter the Company entered into an international assembly and distribution agreement with Labtest Diagnostica SA (Labtest), a leading diagnostics manufacturer and marketing organization based in Brazil, for products based upon Chembio's patented Dual Path Platform (DPP®) in Brazil and potentially other markets outside the U.S. Pursuant to the agreement, Chembio will manufacture and sell certain specialized test components to Labtest and also will receive a royalty based on sales by Labtest of DPP® products. Labtest will produce certain reagents and perform assembly and packaging operations in a dedicated space at Labtest's manufacturing facilities near Belo Horizonte, Brazil. Chembio will provide Labtest with the training necessary to perform the operations specific to the DPP® products. Labtest will also have responsibility for marketing, promotion and distribution of the products in Brazil.

All products will be marketed under brand names that will include Chembio's DPP® trademark together with trade names selected by Labtest, and each test kit will state that Chembio Diagnostic Systems, Inc. is the licensor of the DPP® trademark and technology. The products selected for inclusion in this agreement will address both private as well as public health markets, and will enable Chembio to participate in significant market opportunities in Brazil. This agreement addresses market opportunities that are independent of those addressed by Chembio's ongoing collaboration with the Oswaldo Cruz Foundation.

Chembio and Labtest will immediately begin product registration activities for an initial group of infectious disease products with sales expected to commence by early 2014. The agreement contemplates additional products and territories to be added by mutual agreement. In addition, the agreement offers the possibility for Labtest to assemble products for other global Chembio customers as a contract manufacturer.


Sponsored Research & Development

Multiplex Influenza Immunity Test - In July 2012 we entered into a follow-on, milestone-based development agreement of up to $480,000 based on our previous successful initial development of a multiplex rapid point-of-care ("POC") influenza immunity test utilizing our patented Dual Path Platform (DPP®) technology. The agreement contemplated a period of approximately six months in which the follow-on development activity was to be completed. In the first quarter of 2013 we completed the requirements of this agreement.

During the second quarter we reported that the Company had entered into a follow-on, milestone-based development agreement with the private contracting organization that is engaged to enter into, implement and provide technical oversight of agreements relating to pandemic influenza preparedness on behalf of its client, the United States Centers for Disease Control and Prevention (CDC), for a multiplex, rapid, POC influenza immunity test utilizing Chembio's patented Dual Path Platform (DPP®) technology. The follow-on agreement is for up to approximately $472,000 and contemplates a period of approximately six months, or May through October of 2013, in which the follow-on development activity is to be completed.

The early prototype development work for this product was successfully completed by Chembio in 2010 through 2013 pursuant to previous contracts with the same organization totaling approximately $1.4 million. The objective of this follow-on project is to further develop a rapid influenza immunity test that can determine a person's influenza immunity status in the field or in an outpatient setting, while incorporating certain additional subunits of influenza virus proteins.

As a result of pandemic planning activities, the United States Department of Health and Human Services and the CDC have identified POC and high-throughput testing as a gap in influenza diagnostics. Rapid responses in the field - such as the vaccination, prophylactic treatment or isolation of patients - require POC diagnostic tests for influenza infection and immunity. Ideally, these tests should be fast, portable, self-contained and non-technical. Development of this test is especially critical for the military, as evidenced by previous influenza outbreaks that spread rapidly through densely populated barracks and killed thousands of soldiers.

DPP® Febrile Illness Multiplex test - During the second quarter we entered into a cooperative research project agreement with a U.S. government agency for up to $750,000 for an eight-month development project. The project is to develop a rapid POC diagnostic test for five infectious diseases associated with febrile illness and to multiplex them into one assay. The project also contemplates that the test would be optimized for use with a mobile reader that incorporates cell phone technology to enable the results to be recorded, transmitted and monitored remotely via a cloud system, in real-time. This research project supports our efforts in developing multiplex products using our proprietary DPP® technology. Our DPP® technology, when combined with the mobile reader being used in the project, will enable real time data collection and monitoring capabilities. As these infectious diseases can all exhibit similar clinical symptoms, a rapid multiplex test that could distinguish them would be very useful, particularly in field conditions, so that correct diagnosis and treatment could be provided on a timely basis.

DPP® Tuberculosis - In February 2011, we were awarded a three-year $2.9 million, Small Business Innovative Research (SBIR) Phase II grant from the United States National Institutes of Health (NIH) to continue our successful Phase I grant work to develop a simple, rapid, accurate, and cost-effective serological test for active tuberculosis that can be utilized in resource-limited settings.
During 2012, several additional antigens were identified to enhance antibody detection by the DPP® test prototype designed in our Phase I studies. Antigen reagents have been finalized and test prototype evaluation using well-characterized clinical specimens is in progress. Funding for the third and final year of this Phase II grant was confirmed with a reduction of approximately 1%.

Chembio's work to finalize DPP assay design using various fusion proteins has been completed and production of an evaluation lot is in progress; these tests will be used for verification studies, internal and external evaluations at the selected collaborative sites (see below), QC protocol validation, and accelerated stability study. The target sensitivity is 80% and specificity is 95%. Study sites for external evaluations of DPP assay include Bangladesh, Brazil, China, Haiti, Peru, Venezuela, and South Africa.

In addition to the above-mentioned research and development work sponsored by governmental agencies and/or their contractors for the influenza, febrile illnesses, and tuberculosis projects, we are discussing additional opportunities for sponsored research and development activity. We endeavor to select sponsored research projects where we believe there is an identifiable commercial opportunity and/or where other benefits to the Company are anticipated in connection with these projects.


In general, we are considering certain new DPP® product opportunities, either as OEM development projects and/or as Chembio-branded products. These products are being identified based upon our assessment of opportunities in the market and upon whether they can be addressed with our proprietary technology, along with our development and manufacturing capabilities and experience. We are also identifying and assessing additional technologies that we believe could provide us with additional products and capabilities, and thereby provide additional revenue streams, although there is no assurance that we will be able to obtain or utilize any of them profitably.

Regulatory Activities

CE Mark for FDA-approved HIV tests - The Company's SURE CHECK® HIV 1/2 Assay has received CE Mark approval from European regulators and is therefore now cleared for commercialization within the European Union (EU) for rapid, point-of-care detection of HIV. Chembio is currently working with commercialization partners in Europe. We anticipate that our HIV 1/2 STAT PAK® lateral flow HIV test and our DPP® HIV 1/2 test will receive CE Mark approval in the fall.

FDA Approval for DPP® HIV 1/2 Screening Assay for Use with oral fluid or blood samples - We received FDA approval of our Pre-Marketing Application (PMA) for this product on December 19, 2012 as we previously announced. We are now working towards a CLIA waiver, however we now expect that it will not be granted before the end of 2013. As we had reported, we initiated the CLIA study in April, and our plan was to have the submission into the FDA by July, and to receive a CLIA waiver during the fourth quarter. However, start up of certain sites was delayed, so that completion of the trial is also delayed. As of July 31, 2013, approximately 50% of the enrollment criteria had been completed, and the results are in accordance with expected requirements. At this rate, enrollment will be completed by September 2013, as compared with the original expectation of July. Therefore the CLIA waiver is not likely to be submitted until during the fourth quarter and therefore the CLIA waiver grant is now expected to be received in the first quarter of 2014.

DPP® HIV-Syphilis - We have developed this product for international and US marketing; Although initial international registrations and approvals are anticipated before the end of 2013, we expect the US FDA approval process to be lengthier (see below). Globally, far more pregnant women are estimated to have syphilis than HIV, and untreated maternal syphilis always results in an adverse pregnancy outcome such as fetal death, stillbirth, premature birth, low birth weight or congenital syphilis infection. As syphilis commonly co-exists in patients with HIV (prevalence is 14-36%), a dual rapid test for HIV and syphilis could greatly strengthen pregnant mother-to-child testing, or PMTCT, of syphilis. This is particularly true, because there are already well financed programs for the PMTCT of HIV.
For the international market we have submitted this product both for evaluation by the CDC, acting on behalf of the United States Agency of International Development, and the WHO, which has accepted this product to be evaluated for pre-qualification in its global procurement scheme. Other international registrations are pending. During the second quarter we announced receipt of an evaluation report from Mexico's Institute of Epidemiological Diagnosis and Reference (InDRE) regarding the Company's DPP® HIV-Syphilis multiplex test, which showed the Company's assay performed with 100% agreement for both markers on all 941 samples tested. In evaluating the sensitivity and specificity of the Chembio DPP® HIV-Syphilis product, 527 biological samples were tested on the HIV line, of which 158 were true negative and 369 were true positive, and 414 were tested on the Syphilis line, of which 108 were true negative and 306 were true positive. The Chembio DPP® HIV-Syphilis test performed with 100% sensitivity and 100% specificity on all samples.

The FDA review timeline for this product, which we originally anticipated would be in mid-2014, has now been shifted to late 2014, with CLIA waiver now anticipated in early 2015. This development is due to this product being characterized by FDA as a PMA, not a 510(K), as the syphilis component performance will be compared to actual patient infection status, as compared to a predicate device allowed in 510(K). This change will be more time consuming due to the increased statutory review time, and potentially more costly.

DPP® Syphilis Screen & Confirm - In late February we received a response from the FDA that will enable us to pursue the regulatory pathway that we outlined in our submission. While we confirmed our intended study approach with the FDA, we have encountered problems with the supply of one of the key raw materials used in this test. Until we are able to resolve those problems, this project is on hold.


SURE CHECK® HIV OTC Study - We completed the self-testing study required for submitting an IDE ("Investigational Device Exemption") application in order to commence clinical trials for this product. However due to the results reported to date by Orasure, which show significant marketing expenditures without meaningful revenues, let alone the costs of the clinical trials and other costs associated with FDA approval, we will keep this project on hold though we will continue to monitor this market opportunity closely.
There can be no assurance that any of the aforementioned Research & Development and/or Regulatory products or activities will result in any product approvals or commercialization, nor that any of the existing research and development activities, or any new potential development programs or collaborations will materialize or that they will meet regulatory or any other technical requirements and specifications, and/or that if continued, will result in completed products, or that such products, if they are successfully completed, can or will be successfully commercialized.

Critical Accounting Policies and Estimates

We believe that there are several accounting policies that are critical to understanding our historical and future performance, as these policies affect the reported amounts of revenue and the more significant areas involving management's judgments and estimates. These significant accounting policies relate to revenue recognition, research and development costs, valuation of inventory, valuation of long-lived assets and income taxes. For a summary of our significant accounting policies, which have not changed from December 31, 2012, see our Annual Report on Form 10-K for the twelve months ended December 31, 2012, which was filed with the SEC on March 7, 2013.


RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED JUNE 30, 2013 AS COMPARED WITH THE THREE MONTHS ENDED JUNE 30, 2012

Income:

For the three months ended June 30, 2013 loss before income taxes was ($371,000) compared to income before taxes of $512,000 for the three months ended June 30, 2012. Net income for the 2012 period was $309,000 as compared to a net loss of ($241,000) for 2013. The decrease in net income is primarily attributable to a combination of increased operating expenses, especially increased clinical trial expenses attributable to our ongoing CLIA waiver studies, and to decreased product sales. In the three months ended 2013, as a result of a 12.9% decrease in Net Product Sales and a 21.7% increase in non-product revenues along with a 11.4% decrease in cost of products sold, the Company had a $289,000, or 11.3%, decrease in its gross margin, to $2,281,000. This decreased gross margin also included increased operating expenses, the most significant of which was an increase in clinical trial expenses of $350,000, partially offset by a decrease in commissions of $184,000, due to the decreased sales in Brazil account for most of the change from a net income to a net loss.

Revenues:

Selected   Product  Categories:       For the three months ended
                                  June 30, 2013        June 30, 2012        $ Change           % Change

Lateral Flow HIV Tests and
Components                        $    4,158,354      $     3,159,657     $     998,697              31.61 %
DPP  Tests and Components                694,816            2,226,200        (1,531,384 )           -68.79 %
Other                                    208,521              425,333          (216,812 )           -50.97 %
Net Product Sales                      5,061,691            5,811,190          (749,499 )           -12.90 %
License and royalty revenue                    -                    -                 -             100.00 %
R&D, milestone and grant
revenue                                  331,831              272,701            59,130              21.68 %
Total Revenues                    $    5,393,522      $     6,083,891     $    (690,369 )           -11.35 %

Revenues for our lateral flow HIV tests and related components during the three months ended June 30, 2013 increased by approximately $999,000 from the same period in 2012. This was attributable to increased sales to South America, excluding Brazil, of approximately $654,000, increased sales to Africa of $567,000, and increased sales to Alere from $2,144,000 during the three months ended June 30, 2012 to $2,306,000 during the three months ended June 30, 2013. These increases were partially offset by decreased sales to Brazil of $201,000 and decreased sales to Asia of $223,000. Revenues for our DPP® products during the three months ended June 30, 2013 decreased by approximately $1,531,000 over the same period in 2012, a decrease of 69%, which decrease is attributable to a reduction in sales to the Oswaldo Cruz Foundation. The increase in R&D, milestone and grant revenue was due to revenue from certain development projects granted in the fourth quarter of 2012. R&D revenues include funds, recognized on an "as expenses are incurred" basis, from a Phase II NIH grant for Leptospirosis, which was effective as of June 1, 2009, and from a Phase II grant for Tuberculosis which was effective March 1, 2011 as well as a development contract with Battelle entered into in the fourth quarter of 2012. Gross Margin:

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