Cue Health Inc. (NASDAQ:HLTH) Q1 2023 Earnings Call Transcript

Cue Health Inc. (NASDAQ:HLTH) Q1 2023 Earnings Call Transcript May 10, 2023

Cue Health Inc. misses on earnings expectations. Reported EPS is $-0.62 EPS, expectations were $-0.61.

Operator: Good day and thank you for standing by and welcome to the Cue Health First Quarter 2023 Earnings Call. At this time, all participants are in a listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised that today’s conference call is being recorded. I would like to turn the conference over to your speaker for today, Lorna Williams, VP of Investor Relations. You may begin.

Lorna Williams: Good afternoon and welcome to Cue’s first quarter 2023 earnings conference call. Joining me today are Ayub Khattak, Chairman and Chief Executive Officer of Cue Health; and Aasim Javed, Incoming Chief Financial Officer. Before we get started, let me begin by reminding you that we may be forward-looking statements, including statements related to the expected performance of our business, future financial results and guidance, strategy, long-term growth, and overall future prospects, as well as the impact of the COVID-19 pandemic. These statements are subject to risks, uncertainties, assumptions, and other factors that could cause actual results to differ materially from those described. These risks and uncertainties include, but are not limited to, those outlined in today’s call as well as other risks identified from time-to-time in our public statements and reports filed with the SEC.

Forward-looking statements that we have made on this call are based on assumptions and beliefs as of the date they are made, and the company disclaims any obligation to update these statements, except as required by law. In addition, on today’s call, non-GAAP financial measures will be used. Reconciliations between GAAP and non-GAAP financial measures are included in our earnings release. Finally, I would like to mention that the press release and a recording of this call will be available on the Investor Relations page of our website. With that, I’d like to turn the call over to Ayub.

Ayub Khattak: Thank you, Lorna and thank you everyone for joining us today. Cue’s financial performance for the first quarter delivered $25 million of total revenue, which is at the top end of our guidance range and we ended the quarter with $178 million of cash on hand. While these results are predominantly from our COVID-19 product, we’re making significant progress in our strategic plan to improve the way healthcare is delivered with diagnostic-enabled care at the heart of everything we do. I believe we are well-positioned for future growth, but realistic that today, Cue’s in a between period. We are in between the success we saw from deploying our initial COVID product and success that we believe will come from our expanded product offering and the execution of our unique flywheel opportunity, which we believe will return us to growth in the second half of the year.

We have largely completed the significant investment that will power our future growth and innovation in at-home and point of care diagnostics. Namely, our $250 million capital expenditures to build up our automated manufacturing infrastructure and the $200 million we spent on R&D over the last two years to deliver major progress on a pipeline and menu expansion for our core Cue Health Monitoring System and to build our digital capability. Additionally, our investments in expanding the Cue Integrated Care platform have resulted in new product lines to enable telemedicine, lab-based testing, and most recently, an expanding universe of treatment capabilities for the launch of Cue Pharmacy. Now, as we work towards regulatory approvals on the tests we have already submitted and finished clinical studies on the final few new tests of its first major R&D push, A key focus is on cash preservation given the macro environment.

To that end, we announced last quarter we made roughly $100 million in annualized cuts to our spend. In the last week, we announced an additional $50 million in expected annualized cost savings. This combined $150 million in annualized cost savings will allow Cue to weather the macro climate to reap the benefits of our investments as our plan tests come out of the pipeline and we gain commercial traction on the Cue Integrated Care platform products of Cue Care, Cue Lab, and Cue Pharmacy. For menu expansion on the Cue Health Monitoring System, we continue to make significant progress on a comprehensive respiratory care offering. We’re happy to share that we submitted our Cue RSV molecular test for a full de novo submission for at-home and point of care use.

We remain in productive conversations with the FDA for flu plus COVID multiplex test, our flu de novo and COVID de novo submissions. We do expect a decision on our COVID de novo soon. We’ve had continuing engagement with the FDA for our flu plus COVID multiplex and are hopeful that we’ll have this test authorized before the beginning of the respiratory season. Rounding out the pipeline on the respiratory side, we’ve made good progress on our Strep Throat molecular test and clinical studies and do continue to expect we’ll submit this test to the FDA second half of the year. In the sexual health category, we announced last quarter we received FDA authorization for Mpox molecular test, which we expect to be in commercializing in the next quarter.

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Our chlamydia and gonorrhea test is making good progress in its clinical studies and we continue to expect a submission to the FDA in second half of this year. Looking back and reviewing our opportunity for molecular test portfolio like the one we have developed, the point of care represents the largest near-term opportunity because of the reimbursement structure that aligns well to the cost structure of molecular test. We believe that Cue has an industry best workflow for running tests and data flow, both of which allow for the system to flex into a wide band of settings including retail pharmacies, doctors’ offices, urgent cares, and emergency departments. Our first major phase of menu expansion is completed to both the respiratory and sexual health categories, we expect to have an industry leading menu for molecular point of care testing.

The point of care market for diagnostic testing is large and underserved and we believe our largest near-term opportunity. Cold and flu-like symptoms are the number one reason for a doctor visit in the US, with sexual health, especially chlamydia and gonorrhea being another top reason for a visit to the doctor. Moving on to the Cue Integrated Care platform where we’ve introduced several important products and services including Cue Care, our telemed solution, at-home diagnostic test kits, and just this week, a new suite of treatment capabilities in Cue Pharmacy. Our test to treatment platform closed the virtual care loop enabling individuals to take a test from the comfort of home, consult with a clinician to discuss treatment options, and if appropriate, have medication delivered in a matter of hours.

While we envision the diagnostic portion of the virtual care loop for many common conditions, flu, COVID, RSV, STIs, et cetera, taking place on our core Cue Health Monitoring System, to complement our test cartridge capabilities and enter the broader diagnostic market, including lab-based testing, we recently launched a collection of at-home test kits for customers to access a wide variety of diagnostic panels and standalone tests that are delivered to their home and return to a lab for processing. Customers receive test results in the Cue Health app where they are presented with treatment options and have access to virtual care. We continue to build on our treatment capabilities, where we’ve already enabled treatments for COVID, flu, UTIs, and sexual health conditions to a growing number of other common health and wellness needs.

Cue now offers convenient access to prescription medication options related to sexual health, including birth control and treatments for erectile dysfunction and herpes, as well as hair loss with more on the way. On the web or using the Cue Health app, customers can consult with a clinician to get advice about their condition and if medically indicated, receive a prescription medication delivered to them as a subscription service. This is an exciting opportunity as we believe the adoption of telehealth and medication subscription for common health concerns is a secular trend that was accelerated by the pandemic, but is now here to stay. While these new offerings are in the beginning stages of launch, we are receiving positive feedback from customers.

I’m proud of our efforts to evolve the Cue Integrated Care platform, enabling customer-centric and tend solutions that empower people to live a healthiest lives. With continued progress on our menu expansion pipeline and the launch of major new product lines within our Integrated Care platform, we’re executing on our strategy and I believe we’re well-positioned for future growth. In the meantime, we will continue to manage our cash prudently as we progress our menu expansion to the regulatory process and gain early traction on our new set of products. With that, I’ll turn the call over to Aasim.

Aasim Javed: Thank you, Ayub, and good afternoon. Since the beginning of the year, Cue has announced two cost reduction programs to align the company to the current macroeconomic environment and COVID testing volumes. We expect these actions to result in a total of $150 million in annualized run rate cost savings. In Q1, we already achieved approximately $100 million of annualized savings. We are comfortable that this lower rate of spend is sufficient for us to continue to execute on our highest priorities, including regulatory approvals and commercialization of our new molecular tests, key development programs, and gaining early traction of Cue Pharmacy and Cue Lab. Now, let’s walk through our financial results and Q2 guidance.

Cue’s first quarter total revenue of $24.8 million was at the high end of our guidance range. In the quarter, our private sector contributed 98% or $24.2 million of sales. Public sector revenues were $0.6 million for the first quarter, and total test cartridge sales were $22.4 million. Q1 adjusted product gross profit margin was a loss of 14%, which excludes $12 million related to a disputed charge from a manufacturing vendor. Q1 total adjusted operating expenses were $72.9 million excluding previously announced $7.9 million restructuring charge relating to the cost reduction plan. Sequentially, we are down 23% from Q4 operating expenses of $94.6 million, reflecting our recently announced efforts to reduce costs. Sales and marketing expense was $11.2 million in the first quarter, a decrease from Q4 spend of $19.3 million, driven by a decrease in digital and marketing costs.

R&D expense was $44.7 million for Q1, a decrease from Q4 spend of $56.1 million as we focus on clinical studies related to our respiratory and sexual health product offering. G&A expense was $16.9 million during Q1 of this year, a decline from Q4 spend of $19.2 million. As a result, adjusted net income was a loss of $74.3 million or $0.48 per diluted share. Adjusted EBITDA for the first quarter was a loss of $47.6 million. Moving to the balance sheet, we ended the first quarter with cash of $178.2 million, which was a slight improvement over the previously shared estimate, reflecting progress on our cash preservation priority. Additionally, we have $100 million secured revolving credit facility, which remains undrawn. As a reminder, Cue operates with no debt obligations.

Now, I’d like to move to our guidance. We believe that the market for COVID testing is settling into a seasonal respiratory pattern. We are seeing this reflected from industry peers forecasting lower COVID test pull through. For Cue, several of our existing contracts have shifted delivery timelines to align with the respiratory season. As a result, we expect revenues of $8 million to $10 million for the second quarter. As you know, forecasting COVID testing demand beyond the near-term is challenging. Therefore, we will continue to limit our forecast to quarterly expectations. In summary, the company continues to deliver on a strategic plan with our Cue Health Monitoring System and the Integrated Care platform fully launched in the market. We believe we are on track to deliver a more comprehensive respiratory offering with COVID, flu, flu plus COVID multiplex, and RSV tests currently with the FDA for review.

We also launched Cue Care, Cue Lab, and Cue Pharmacy services in the last few months, which should begin to contribute to the topline in the second half of the year. In addition, we have a strong balance sheet with more than 12 months of cash on hand. While we are not giving guidance beyond Q2 revenue, I would like to provide further commentary for Cue’s longer term outlook given the state of the pandemic, our past investments in manufacturing and R&D, and our expanding product offering. For revenue, Cue expects to continue to sell our COVID-19 molecular test volumes indicative of this stage of the pandemic. We also anticipate the revenue from our molecular tests available for the 2023 respiratory season will begin to contribute in the second half of the year.

In addition, we expect at-home test kits, Cue Pharmacy, Cue Care, and sexual health test cartridges to help create a more durable topline over the mid-term. We believe that with significant foundational investments behind us, namely manufacturing badges, R&D, and digital capability, along with the recent announced cost reduction actions and the team laser-focused on execution of near-term revenue generating programs, we are well-positioned to return to growth and expect to return to a positive adjusted EBITDA by early 2025. With that, I would like to thank you for your attention, and I’ll now turn the call over to the operator for questions.

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Q&A Session

Operator: And thank you. [Operator Instructions] And our first question comes from Tejas Savant from Morgan Stanley. Your line is now open.

Operator: And thank you. And our next question comes from Dave Delahunt from Goldman Sachs. Your line is now open.

Operator: And thank you. [Operator Instructions] And our next question comes from Charles Rhyee from TD Cowen. Your line is now open.

Operator: Thank you. And I’m showing no further question. This concludes today’s conference call. Thank you for participating. You may now disconnect.