Profile Report - Dec. 13, 2005

Issued by:
Shailesh Dhuri, CFA
Senior Financial Analyst

I. Executive Summary

Chembio Diagnostics, Inc. (OTCBB: CEMI); www.chembio.com, hereinafter “Chembio” or the “Company”) develops, manufactures and markets rapid tests for the detection of HIV and certain other infectious diseases. The Company is located in Medford, NY where all operations are conducted within a 14,000 square foot leased facility. Sales offices have been established during 2005 in Tanzania and Nigeria. Current employment is approximately 60, with 35 in Operations and the remainder in Research & Development, Sales & Marketing, Regulatory Affairs, Finance and Administration.

The Global Market and Chembio’s Opportunity

The Company is currently marketing its three rapid HIV tests internationally and expects to receive United States Food & Drug Administration (hereinafter “FDA”) approval for two of these HIV rapid tests in early 2006. Chembio believes that the prevention and treatment goals that have been established by large programs financed to thwart the spread of HIV will drive the growth and demand for rapid HIV tests geometrically in the coming years. Chembio is one of only two US-based manufacturers of rapid HIV tests and the only one with products that it believes can meet the various demands of the global market. It believes that serving these markets represents an excellent opportunity for investors.

Based upon an analysis done by the Global Business Coalition of HIV/AIDS, approximately 500 million people will need to be tested with at least one rapid test (also a confirmatory rapid test will be needed in the case of a positive result) over the next three years in order to insure that treatment targets are achieved (1). This is not just because of the continuing growth in the epidemic, but more importantly, because anti-retroviral treatments are available, affordable and are being funded, so that people actually have a reason to be tested.

Because HIV medicines have become much less expensive and more widely available, unprecedented multi-billion dollar financial commitments are being allocated in each of the next few years. Some of these commitments are being made by the UNAIDS “3 by 5” initiative (2), The Global Fund (3), and the U.S. Presidential Emergency Plan for AIDS Relief (4), which will provide treatment to five million people, and in order to identify these five million people, rapid testing is being implemented on a very large scale. The United States is the largest donor, by far, to these programs. Each of these programs recognizes that a massive scale-up in the use of rapid HIV tests is the only way their treatment goals can hope to be achieved.

Chembio further believes that the global demand for rapid HIV testing will increase at very high rates well beyond the next few years and for the foreseeable future. As of the end of 2004, there were an estimated 40 million people infected with HIV/AIDS worldwide, of which 6 million were in need of antiretroviral therapy. The number of people in need of treatment will continue to grow as infection rates increase significantly worldwide, and there is little expectation for an effective vaccine anytime soon. As such, even with relatively low prevalence rates in Asia, UNAIDS estimates that 12 million new infections could occur in that region alone between 2005 and 2010.

Near Term US Market Opportunity

FDA approval for two of Chembio’s rapid HIV tests is anticipated in early 2006, and this will enable Chembio to participate in this market as well, which is estimated to become a $50 million market during the next few years (6). The U.S. market opportunity has been developing first in the public health and hospital emergency room segments, and as a result of increased advocacy for routine testing, will likely increase and expand use of this technology into the physician’s office, prisons, and other venues. The company is in preliminary discussions with a US marketing partner to serve these markets.

Finally, based upon recent pronouncements, the company believes that the over the counter market is also likely to open up in the U.S., which would expand the U.S. market very significantly.

Pipeline of Other Rapid Test Products

In addition, the Company has significant additional opportunities in world markets for rapid testing for Tuberculosis (human and veterinary), Chagas Disease, and certain other areas where the Company has proprietary rapid tests and related technologies in development.

II. PRODUCTS

Chembio began development of its HIV rapid tests in 2001 and it presently has three products to serve this market: SURE CHECK ® HIV, HIV 1/2 STAT-PAK™ and HIV 1/2 Stat Pak Dipstick. These tests are simple, safe, cost effective, non-invasive, highly specific and sensitive and provide results in approximately 15 minutes. In addition to other important competitive advantages, the products have a very long shelf life (approximately 24 months at room temperature), which makes them ideal for developing countries with slow distribution capability and/or with minimal or no access to refrigeration, as well as for the developed world consumer over-the-counter markets, which appear increasingly likely to develop. Chembio’s tests can be used with whole blood samples from a finger prick as well as with venous whole blood, serum and plasma samples. Each format is designed for different user preferences, which gives the company a unique flexibility with customers. Chembio’s tests are based on Chembio’s proprietary lateral flow technology. The SURE CHECK HIV and HIV 1/2 STAT-PAK products are in the final stages of review by the US Food and Drug Administration.

Chembio is developing rapid tests for other infectious diseases including Chagas and Tuberculosis. Chagas Disease, increasingly recognized as a neglected disease, is a malaria-like parasitic disease endemic in much of Latin America that affects over 20 million people and kills 50,000 annually. Chembio has the only rapid test for Chagas disease that has been evaluated in multi-center studies in Latin America. These studies have produced outstanding results which is creating significant opportunities for Chembio.

Tuberculosis is the leading killer of people who have AIDS. Chembio’s TB products will leverage several years of basic NIH-funded research by Chembio’s scientists in TB and will result in products applicable to both human and veterinary TB, while also leveraging a marketing and distribution capability which the Company has been developing for its HIV products.

Tuberculosis is also a problem in a number of animal species either because of potential transmission to humans, costs to agricultural production or because of the impact on the cost of the animals themselves. For example, nonhuman primates used in research or in zoos are quite costly, and whole colonies can be lost if transmission is not effectively controlled through routine and accurate diagnosis. Bovine (Cattle) TB can be transmitted from livestock or deer to humans and to other animals. Under rules established by APHIS, a state can lose the right to move cattle across state lines if TB is detected in two or more herds as has recently happened in Texas and Michigan. TB control of meat at slaughterhouses is dependent upon visual inspection. The USDA believes that a rapid test could complement or supplant these visual inspections.

Chembio has already completed development of a rapid lateral-flow test for the detection of TB in Non-Human Primates, and has a similar test near completion for multiple host species, including cattle, deer and other animals. The tests can use serum, plasma, whole blood or “meat juice” samples and provide results within 20 minutes.

III. MARKETING

Approval from the FDA of Chembio’s HIV rapid tests will not only permit sales in the U.S. but will also enhance marketing capability in the international markets. HIV 1/2 STAT-PAK™ and HIV 1/2 STAT-PAK™ Dipstick were recently made part of the World Health Organization 2005 Bulk Procurement Scheme and, together with SURE CHECK® HIV, the USAID blanket waiver list. These are both critically important for international sales. The WHO’s endorsement is required for virtually all international procurements by governmental and non-governmental organizations. The USAID waiver allows Chembio’s products to be procured with USAID and CDC (i.e., PEPFAR) funding even without FDA approval which, as mentioned above, is pending.

Chembio’s marketing strategy is to:

• Expand its international sales effort and strategic partnerships in the developing world for its global health rapid test products, particularly its HIV and Chagas Disease tests. The company is actively engaged in expanding HIV test sales and marketing through its recently established East and West African offices. These offices are headed by seasoned professionals that have extensive marketing/public health experience in Africa and who have been establishing distributor relationships throughout the continent.
• Launch the Company's rapid HIV tests in the US and Europe. The company anticipates late QI’06/early QII’06 FDA approval in the US. These products will be marketed initially in the public health and hospital markets, through Chembio’s own direct sales people and/or with marketing and distribution partners with whom it is currently in discussion. Once Chembio obtains approval it will move aggressively on approval in Europe.
• Pursue potential OTC marketing in the U.S. and internationally. There is a lot of discussion now to allow over-the-counter sale of HIV rapid tests in the U.S. as well as in other markets.
• Launch in 2006 Chembio’s initial veterinary TB product, Prima TB Stat Pak™, within its growing line of veterinary TB tests. The Company anticipates USDA approval of its initial product, a nonhuman primate TB test, in mid-2006. During 2007 it expects to obtain revenues from certain other veterinary TB products, at very favorable margins.

Launch in 2006 Chembio’s initial veterinary TB product, Prima TB Stat Pak™, within its growing line of veterinary TB tests. The Company anticipates USDA approval of its initial product, a nonhuman primate TB test, in mid-2006. During 2007 it expects to obtain revenues from certain other veterinary TB products, at very favorable margins.

IV. STRATEGIC ALLIANCES

Strategic alliances are a key element in Chembio’s business strategy. The Company is committed to securing alliances and technology-transfer agreements with government agencies and commercial entities. For example, Chembio signed, in early 2004, a thirteen year technology transfer, supply and license agreement with Bio-Manguinhos, an affiliate of the Brazilian Ministry of Health (MOH) and the predominant supplier for meeting public health needs in Brazil. Over a three-year period, Chembio will transfer its proprietary technology related to HIV 1/2 STAT-PAK™ to Bio-Manguinhos in exchange for commitments to purchase at least one million rapid tests. Thereafter Bio-Manguinhos will produce its own rapid tests using this unique technology and Chembio will receive royalties for ten years. Chembio is applying its Brazilian success to other areas of the world. It will partner with qualified entities that will assemble and package semi-finished tests produced by Chembio under Chembio’s quality control in the U.S. These unique arrangements will create an effective public-private partnership with local governments and ensure the availability of rapid HIV tests. This will foster self-reliance in these countries, create local jobs and contribute to their economic and technologic growth.

V. REGULATORY

A. FDA Approval Of Rapid HIV Tests – A Pre-Marketing Approval (PMA) application is pending before the United States Food & Drug Administration for two of the Company’s rapid HIV tests: SURE CHECK® HIV and HIV 1/2 STAT-PAK™. Clinical trials were completed during the second half of 2004 at six sites across the US on approximately 2700 patients. Both tests were run in parallel on each patient from finger-stick whole blood as well as venous whole blood, serum and plasma samples. Results were well above required levels for approval with sensitivity and specificity of approximately 99.8%. There were no discrepancies between the two tests or across the various sample types. The fully completed PMA application was submitted in February 2005. Approval is anticipated in early 2006.

B. USDA Approval of Veterinary TB Tests

1. Non-Human Primate TB Test

The initial USDA submission for this product was made in March of 2005 and an amended outline of Chembio’s production protocols, as requested, was submitted in early September to the USDA. These production protocols were reviewed and Chembio was given the approval to proceed with preparing to submit to the USDA its clinical study protocol. Three sites need to be selected and confirmed, the clinical study protocol approved by the USDA and three serial lots of product produced to be used in the clinical trials; all must be completed prior to commencing the clinical trial data collection phase of the project. A USDA facility inspection needs to be scheduled in parallel with the agency’s review of the final clinical study data results before full commercialization of the product can commence. Chembio anticipates conditional approval by Q3’06 and full commercial market clearance in Q1’07.

2. Multi-Species TB Test - VET TB STAT-PAK™ has been recently validated at Chembio. Three lots of 3,000 to 10,000 units have been produced and passed the established QC performance specifications using a panel of TB positive and negative sera from badgers, cattle and white-tailed deer. The use of whole blood samples from cattle and deer is being currently evaluated in comparison with serum and plasma samples in collaboration with USDA. The use of Vet TB STAT-Pak™ for other host species, such as elephants, reindeer, and elk, is in progress and shows very promising results.

VI. RECENT NEWS

Dec 1st 2005:

With today marking the 18th annual World AIDS Day, Chembio Diagnostics, Inc. (OTCBB: CEMI) is updating its investors on its role in the growing global demand for affordable rapid HIV tests.

A member of the Global Business Coalition (“GBC”) on HIV/AIDS (www.businessfightaids.gov), Chembio supports the position taken by GBC’s Chairman, Richard Holbrooke, in yesterday’s Washington Post regarding the need for a more aggressive scale-up in rapid testing for HIV/AIDS.

Chembio will participate in today’s World AIDS Day 2005 Commemoration, hosted by UNAIDS, in partnership with the African Services Committee and the New York City Department of Health.

Furthering its efforts to engage local stakeholders in the geographic locations where these tests are most urgently needed, Chembio will likewise participate in the 14th International Conference on AIDS and sexually transmitted diseases (ICASA) in Africa scheduled for next week in Abuja, Nigeria.

US APPROVAL

Clinical data for two of Chembio’s three rapid HIV tests, HIV 1/2 STAT-PAK™ and SURE CHECK® HIV 1/2 are in final review by the United States Food and Drug Administration (“FDA”). The FDA has already completed the inspection of Chembio’s facility. Chembio is in discussions with potential US marketing partners.

INTERNATIONAL APPROVALS

Chembio’s rapid HIV tests, qualified by the World Health Organization (“WHO”), are already approved for purchase internationally. These tests have also been approved for international procurement by the United States Agency for International Development (USAID) and the United States Centers for Disease Control. These are the agencies responsible for implementing President Bush’s five-year, $15 Billion Emergency Plan for AIDS Relief (PEPFAR) program.

Chembio is the only rapid HIV test manufacturer approved by these government agencies that offers three rapid HIV test formats, and the only US-based company with products priced to meet the massive need for these tests worldwide.

Chembio also has new patent-pending rapid HIV test technologies in development.

LATIN AMERICA

As previously reported, Chembio expects that 2005 orders will total 700,000 units, an increase from 450,000 units in 2004, from its Brazilian customer, The Oswaldo Cruz Institute, affiliated with the Brazilian Ministry of Health.

Chembio’s SURE CHECK® HIV 1/2 is also approved for sale in Mexico. The Company is actively pursuing sales opportunities in Mexico as well as in several other markets in South America.

AFRICA

Over the last six months, Chembio has established regional offices in East and West Africa. The Company is now finalizing agreements with distributors in Uganda, Kenya, Mozambique, Ethiopia, Tanzania and Zambia. In Uganda, a world-wide leader in prevention and treatment efforts, Chembio’s HIV 1/2 STAT-PAK™ test is in the national testing protocol. One or more of Chembio’s three rapid HIV tests are also under evaluation for inclusion in the national protocols of other African nations. Local assembly is being considered.

OTHER MARKETS

Chembio is seeking to extend its global reach in other markets through local, governmental and non-governmental partnerships that recognize the urgent need for rapid HIV testing.

Dec 8th 2005:

Against a backdrop of mounting concern about the steady increase in animal to human transmission of tuberculosis (TB) and other communicable diseases, Chembio Diagnostics, Inc.’s (OTCC BB: CEMI) rapid test for the detection of TB in multiple animal species has been recommended to the USDA for conditional approval and use for a period of two years by the United States Animal Health Association (USAHA). The announcement was made near the conclusion of the USAHA’s annual meeting held recently in Hershey, PA.

The rapid test developed by Chembio, VetTB STAT-PAK™, will be submitted to the USDA for use as an ancillary diagnostic, along with the standard skin test, in order to more quickly and accurately detect TB in cattle, white-tail deer, elk, red deer, and reindeer.

Chembio filed a patent application on its unique technology earlier this year. This antibody detection assay employs a cocktail of carefully selected recombinant antigens. The test can utilize serum, plasma, whole blood, or other body fluids, and provides results within 20 minutes.

Zoonotic (naturally communicable to humans from animals) TB occurs in almost all developed and developing nations of the world. The incidence of disease in both animals and humans is increasing worldwide, producing a significant negative economic impact on global agribusiness. In addition to lost productivity the impact includes the increased risk of transmission from species to species, including to humans. One chronic contagious respiratory disease that affects many animal species and is of particular concern to man is bovine or cattle associated TB. Veterinary TB can spread within and across species through aerosols and through the ingestion of contaminated meat.

In its recommendation the TB SAS also advocated use of the Chembio VetTB STAT-PAK™ rapid serological test in cattle in conjunction with current testing strategies in program herds and also strongly encouraged producers in the cervid (deer, reindeer, elk, etc.) industry to support the evaluation of Chembio’s VetTB STAT-PAK™ by providing samples for analysis from all species of Cervidae.

Conclusion

The need for rapid, accurate testing for infectious deceases cannot be underestimated. The unfortunate global spread of HIV infection and the resulting increase in TB and such other infectious incidence is a major cause of worry. However, this trend provides a growth opportunity for companies who are able to produce rapid test kits addressing this market.

Acronym Glossary

1. www.businessfightsaids.org/site/pp.asp?c=gwKXJfNVJtF&b=1008825 – Policy Documents/Facilitating Access to Testing
2. www.unaids.org/en/treat3millionby2005initiative.asp
3. www.theglobalfund.org/en
4. www.usaid.gov/our_work/global_health/aids/pepfar.html
5. www.unaids.org/html/pub/global-reports/bangkok/unaidsglobalreport2004_en_html.htm
6. Market research prepared for Chembio