Cue Health Inc. (NASDAQ:HLTH) Q2 2023 Earnings Call Transcript

Cue Health Inc. (NASDAQ:HLTH) Q2 2023 Earnings Call Transcript August 9, 2023

Cue Health Inc. beats earnings expectations. Reported EPS is $-0.51, expectations were $-0.53.

Operator: Good day and thank you for standing by. Welcome to the Cue Health Second Quarter 2023 Earnings Conference 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. Please go ahead.

Lorna Williams: Good afternoon and welcome to Cue’s second quarter 2023 earnings conference call. Joining me today are Ayub Khattak, Chairman and Chief Executive Officer of Cue Health; and Aasim Javed, Chief Financial Officer. Before we get started, let me begin by reminding you that we may be making 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 statements. Finally, I would like to mention that the press release and a recording of this call are 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 delivered total revenue of $10 million in the second quarter at the top end of our guidance. We expect next quarter to have revenue in the $11 million to $13 million range. Additionally, we have reached greater than $150 million in annualized cost savings ahead of schedule. Despite aggressive cost cutting, we’ve been able to maintain a strong pace of milestone achievements for test menu expansion and new products and services on the Cue platform, which I believe will help Cue return to revenue growth. To start, I’d like to summarize our progress on our number one strategic priority, test menu expansion for the Cue Health Monitoring System. We remain on track to have a robust respiratory care offering for the 2023-2024 respiratory season.

In June, we achieved a landmark industry milestone when we became the first company to receive a de novo authorization for a COVID home use test. Cue system was thoroughly reviewed as part of FDA’s process for safety and efficacy. In our view, this is a very positive signal for our molecular test submissions already under FDA review and the others we have forthcoming. With this regulatory breakthrough, we set a new standard as the first de novo granted for any home use respiratory test. Historically, COVID testing was offered under an emergency use authorization. Our full approval enables Cue to continue to offer our simple to use accurate molecular tests, even if the emergency use authorization pathway ends. We are currently in productive conversations on our flu plus COVID multiplex and standalone RSV de novo submissions.

We remain optimistic that our flu plus COVID multiplex test will be authorized in time for the respiratory season later this fall. In May, we submitted a de novo application for the Cue RSV molecular test for authorization at home and point of care and have already had productive interactions with the FDA around this very important test. Rounding out our respiratory pipeline, our step-through program continues and we now expect to complete our FDA submission early in 2024. We are often asked whether regulatory authorization of a test can turn into commercial revenue quickly or if there is a long ramp time. We already have our automated production lines built and they are ready to produce any tests in our menu at scale as they all share the same cartridge backbone and manufacturing process.

What I want to emphasize is that we are ready to scale manufacturing and that it does not require additional CapEx investment as we already have roughly $200 million invested into our highly advanced manufacturing facilities. Furthermore, on the commercial side, we have more than 300 directly contracted enterprise and provider customers, public sector customers, and we have distribution relationships with major healthcare distributors. We have an installed base of more than a quarter million Cue readers and the number one request from our customers is additional menu. To be clear, with our manufacturing capabilities and existing customer relationships firmly in place, we think our launch of new tests will be as timely as possible. Going further on menu expansion, last week, Cue has awarded a BARDA contract to accelerate the development of a new comprehensive respiratory cartridge to detect flu, COVID, and RSV simultaneously.

This is intended to be an over-the-counter and point-of-care test that will run on the same Cue reader that has already has a large install base. Cue has been working with BARDA for over five years as they previously supported the development of our standalone flu and COVID molecular test. Under this new contract, BARDA will provide funding of approximately $28 million to accelerate the development, validation, and regulatory authorization of an RSV flu and COVID combination test. Our initial objective is to have this multiplex available for the 2024 respiratory season. Moving to Cue’s menu expansion efforts in the sexual health category, the Cue-mpox molecular test is already authorized for the point of care. We believe this authorization is noteworthy as it is the first non-COVID test approved on the Cue platform and utilizes a sample collection method that is different from our COVID test.

Our Chlamydia gonorrhea test continues to progress with the goal of FDA submission in the fourth quarter of this year, as planned. Our sexual health menu will be a very important complement to our respiratory menu. Now I will shift from the expansion of the Cue’s monitoring system to the Cue integrated care platform, where we have introduced a number of new products and services like Cue care, our telemed solution, Cue lab, our at home diagnostic test kits, and Cue pharmacy, a suite of prescription and over the counter treatments for common health and wellness concerns. Cue lab is our line of at home test kits. Customers can order a variety of diagnostic panels and standalone tests that are delivered to their homes and returned to lab for processing.

Cue app includes tests for key heart health markers, sexual health panels, and hormone panels of various types. Results are available in the Cue health app, where customers can seamlessly access virtual care and receive prescription medication in consultation with a clinician. Cue app complements our test cartridge capability and enables us to provide more value to our customers and access more of the available market for diagnostic data. During the second quarter, we introduced Cue pharmacy to provide customers with convenient access to lifestyle treatments and common prescription medications. Our platform now treats respiratory infections like COVID and flu to UTIs to sexually transmitted infections like herpes and provides for birth control and treatments for common health conditions such as erectile dysfunction.

Customers consult with a clinician through the Cue Health app for advice about their condition and if medically indicated, receive a prescription medication delivered to them or picked up from their local pharmacy. Now that we have fully launched the building blocks of the Integrated Care Platform, adding new test and treatments or combined test and treatment programs is a very small incremental effort. Well, Aasim will review our financial performance in detail, I am proud of how we have been executing with financial discipline. We ended the quarter with what we view as a strong balance sheet, including $129 million of cash on hand and continued to operate with no debt. We also delivered on our annualized run rate cost saving goal of $150 million ahead of original expectations.

We plan to continue to manage our cash prudently as we progress through the regulatory process and gain commercial traction on our new set of diagnostic tests. I believe that the continued progress on our menu expansion and the launch of new products within our Integrated Care Platform well positions us for growth in the coming quarters. I am proud of the team’s hard work which has enabled customer centric end-to-end solutions that empower people to live their healthiest lives. With that, I’ll turn the call over to Aasim.

Aasim Javed: Thank you, Ayub and good afternoon. Earlier this year, we announced our intention to reduce our cost by $150 million on an annualized basis and as of Q2, just two quarters into the year, we have now achieved that savings target. We are comfortable that this low rate of spend is sufficient for us to execute our highest priorities including regulatory approval and commercialization of our new molecular tests, key development programs and market traction with Cue Pharmacy and Cue Lab. As a result of these cost reduction efforts, strong execution of our development milestones and the expected contribution from new products and services, I believe that we have more than 12 months of cash on hand to run our operations.

Now let’s walk through our financial results and Q3 guidance. Cue’s second quarter total revenue of $9.9 million was at the high end of our guidance range of $8 million to $10 million. In the quarter, our private sector contributed 76% or $7.6 million of sales. Public sector revenues were $2.3 million for the second quarter and total desiccated sales were $7.3 million. Q2 product gross profit was a loss of $21.8 million impacted by lower manufacturing volumes and an $11.7 million write down of excess inventory. Q2 total adjusted operating expenses were $59.3 million excluding the previously announced $6.6 million restructuring charge relating to our cost reduction plan. Sequentially, operating expenses decreased by 19% from the first quarter operating expenses of $72.9 million and Q2 adjusted OpEx was down almost 40% from Q4 2022 driven by our cost reduction efforts.

Sales and marketing expenses were $8.1 million in the second quarter, a decrease of 53% from Q2 2022 driven by a decrease in digital and marketing costs. R&D expenses were $36.5 million for Q2, a decrease of 17% from $44 million of spend in Q2 2022 as we focus on clinical studies related to our respiratory and sexual health product offering. G&A expenses were $14.7 million during Q2 of this year, a decline of 42% from Q2 2022 spend of $25.4 million. As a result, adjusted net income was a loss of $77.2 million or $0.51 per diluted share and adjusted EBITDA for the second quarter was a loss of $53.1 million. Moving to the balance sheet, we ended the second quarter with cash of $128.6 million and no outstanding debt, reflecting a slower cash utilization rate in the second quarter versus Q1.

Looking ahead, we expect our cash burden to decline in each of the next two quarters. Now, I’d like to move on to our guidance. While many of our industry peers expect COVID testing volumes to be down quarter-over-quarter, we expect revenues of $11 million to $13 million for the third quarter, growing double digits from Q2. As you may know, the vast majority of our revenue is driven by COVID testing demand. Forecasting this demand beyond the near term is challenging, therefore, we will continue to limit our forecast to quarterly expectations. As a reminder, Cue operates with no debt and we have a healthy balance sheet with $129 million of cash on hand. Even with lower top-line revenue in the second quarter, our quarterly cash utilization decreased by over 20% and we achieved our saving goal of $150 million of annualized cost reductions, substantially reducing our break-even point.

Additionally, we expect our near-term catalysts, such as regulatory submissions and new product offerings through Cue Lab and Cue Pharmacy, to contribute to the growth of our top line in the near term. Finally, we are always evaluating financing opportunities and options to bolster our cash position and further fuel our growth. In summary, I am pleased with the progress being made against our 2023 priorities of test menu expansion, new product launches on our integrated care platform, and strong financial discipline. Looking ahead, we expect to have several molecular tests on the market in 2024, strengthening our expectations of 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.

Q&A Session

Operator: Thank you. [Operator Instructions] The first question today is coming from Tejas Savant of Morgan Stanley. Your line is open.

Unidentified Analyst: Hi. Thank you. This is [indiscernible] on for Tejas. Congrats on the quarter. I just had a few questions regarding the BARDA contract. I was wondering if you could share some of the economics associated with the contract and how long the contract spans for, if it’s multiple years, and how you anticipate it flowing through the P&L?

Aasim Javed: Thanks for the question. We’re very excited about being awarded this new $28 million contract with BARDA. We do think that the market is heading towards a multiplex test type of market and we think that a flu, COVID, RSV combination test will be a very strong entrance into the market. Our goal is to have this test available in the 24 respiratory season and this builds on the submissions that we’ve already put in place for the FDA, so we’ve already submitted it for flu plus COVID and for RSV and then this brings everything together. Another really important fact of this is that it will run on the same cartridge backbone and the same reader system, so it’ll get to have the advantage of plugging into our existing installed base.

To jump in there on the P&L impact, the spend will show up on the R&D line item, but remember our R&D line item, where we have it at Q2 after the reductions we’ve taken, we expect that line item to stay relatively steady or constant over the next subsequent quarters and then the reimbursement for the spend would show up in revenue.

Unidentified Analyst: Got it. Okay, that’s super helpful. And then among the non-COVID tests that you’ve been approved for or expected to be approved over the next 12 months, what do you think is the greatest opportunity to begin to drive non-COVID testing volumes in your mind, not just considering the size of the opportunity, but from the perspective of where you may get a rapid adoption given your current installed base?

Ayub Khattak: We think flu COVID is a very big opportunity for us and then we think RSV amplifies that and so it makes it a completely comprehensive offering. We also think that with Chlamydia gonorrhea on the horizon, that’s a very important compliment to the respiratory menu. I think sexual health and respiratory really complement each other. One’s a little bit more seasonal than the other and so they expand the settings that the Cue platform can be adopted in. Both in the home and in the point of care setting. So we really think the compliments of those two things, so Chlamydia gonorrhea, flu COVID, RSV would be really important tests.

Aasim Javed: And then to add to that, the tests that Ayub just mentioned, they have attractive reimbursement rates especially when you compare it to COVID and remember these tests are made by Cue on the same manufacturing line. So we expect these to be from a unit margin perspective, attractive, and that should help improve our gross margin profile as well.

Unidentified Analyst: Okay, perfect. And then if I could just squeeze in one more, following the receivables purchase agreement with East West Bank of up to $20 million, can you maybe talk about any other financing options you are considering to continue to strengthen up the balance sheet and if you could help us think a bit about how we should be thinking about current cash runway?

Aasim Javed: So we ended the quarter with about $130 million of cash with no debt. We’ve achieved our $150 million of annualized savings ahead of plan. And as we think about cash utilization, we noted that our cash utilization came down in Q2 versus Q1 and we expect that trend to continue in the upcoming quarters as well. Not only that, we have revenue catalysts with the test menu expansion that we’ve been talking about as well as the expectation of Cue Lab and Cue Pharmacy really contributing to that top line. The combination of those factors, we expect to have a set more than 12 months of cash. And secondly, we do — our confidence continues to build and strengthen on our EBITDA profitability for Q1 2025. And as we think about financing, look as you would expect, it’s something we always do evaluate and we will continue to do so.

Unidentified Analyst: Perfect. Thanks so much for the time.

Operator: Thank you for your question. One moment while we get ready for the next question. And our next question will be coming from David Delahunt of Goldman Sachs.

David Delahunt: Hey, guys. So it sounds like you expect the flu and COVID combination test to be ready for its upcoming virus season. Could you tell us about what you expect the mix of single versus combination tests to be?

Ayub Khattak: Yes. I mean, we obviously have contracts in place already for COVID, the single flex test, and we do have a healthy installed base that’s receptive to that test. But we do think that in general, the market is going to move towards multiplex tests. And so we are excited that we have the path there with the flu COVID in the near term and then flu COVID RSV in the long term as a single test. We think that’s going to be a very important test for us as well. So both in the near term and the longer term, we’re trending towards where we think the market really wants to go, which is towards more information and to disambiguate when you have symptoms and the cold flu season, you really just want to know what it is and then get the right treatment for that. So we do think that that’s the trend and that’s where we’re heading.

Aasim Javed: And as you think about the second half of the year, we’ve been saying for a while now that we expect to return to growth in the second half of the year and that’s exactly what our guide would suggest. And we think about the mix of non-COVID versus COVID. We haven’t really spit that out in the past, but we have been saying and we continue to believe that non-COVID revenue would start small in Q3 and then grow into Q4 and that would really be a combination of flu COVID and then increased traction and momentum on Cue Lab and Cue Pharmacy.

David Delahunt: Got it, thanks. And could you help us think about the incremental value of adding RSV to the flu COVID multiplex? Is there much of a price difference there?

Ayub Khattak: We think that the utility of a flu COVID RSV or an RSV standalone is very high. A lot of people became very acutely aware of RSV last year as it was quite a significant public health burden. It is the number one cause of hospitalizations in young children and it is a significant cause of hospitalizations in adults over 65. So it’s a really big public health problem in addition to flu and COVID. And right now there’s a rising tide of awareness around RSV as there have been some activity around treatments and vaccines that have recently been approved by the FDA. So in recognition of the public health importance, it’s top of mind right now for both consumers and pediatricians and folks that treat elderly adults. So I think it’s a very important addition to the menu.

David Delahunt: Got it, thanks. Keep up the good work.

Ayub Khattak: Thank you.

Operator: One moment for our next question. [Operator Instructions] Our next question will be coming from Charles Rhyee of TD Cowen. Your line is open.

Charles Rhyee: Yes, thanks for taking the questions. Maybe just to follow up, in the quarter, do you have a breakdown between how many tests were done at a point of care like in a clinic or a physician’s office versus done at home by consumers?

Ayub Khattak: Hi, Charles, when we think about the quarter, we don’t we don’t typically break out the test between our different customer segments. I think broadly our customer segments, the public sector, private sector, and then within private, we have enterprise, direct to consumer and provider, on the direct to consumer, we’ve historically spoken about them having about 12% of our installed base, which is a good proxy for how you think about direct to consumer revenue in totality. But the other sectors, we haven’t broken out at this point.

Charles Rhyee: Okay, I asked that because, right, because, you have, you’re having a test approved for over the counter. And if you think about the opportunity there, I was just thinking about like, what are kind of some of the strategies that you’re thinking about? Because I know, right, at the start, it was really sort of an employer driven model to give the readers to their employees. And then obviously, they think in order to the test themselves and when the expansion would come, it would open a whole new test menu. But if we think about, particularly respiratory tests, I feel like I’m sick, I go to the pharmacy, I want to get a test. Is there a strategy to think about how to make leaders available more direct to consumers versus going online to the site to order and subscribe to a package.

But I could go to like a Walgreens and just buy a reader. Just can you talk us through like how you’re thinking about that? Because at 12% that’s great. And clearly that’s grown in this last year. But particularly as we come into this respiratory season, and if you can get these other tests out, is there any thought to trying to accelerate, the user base because, that would be, I think at this point seems like a bigger opportunity or to really accelerate sort of adoption of the sort of adoption of the of these tests.

Ayub Khattak: So I think one of the things that’s really important about our system is that it’s a molecular test, a cyanogen test, and yet it utilizes it’s very easy to use. It’s actually easier to use than an antigen test but it gives you the accuracy of a molecular test and the reader itself compared to other offerings and the point of care other readers and this is a much less expensive option. So we agree that lowering the barrier to adoption for the reader is a really important piece because they’ve seen a lot of good reordering from every from customers who adopt the reader and start to use the platform. So it’s a very important point that you’re making which is we can expand distribution by lowering barrier to entry on the reader and we certainly look at retail opportunities and have been, the enterprise option or that the ability to enter into the home through the enterprise of B2B B2C has been a very important part of our business and will continue to be we expect.

So if you look at the proportion of tests that are run in the home versus point of care. I mean it’s going to get skewed as a result of the fact that not only do you have B2C but you have B2B2C that’s fueling use in the home and on the provider side there’s just a good opportunity there as well because like I said compared to the other offerings this reader or the barrier to entry is very low and yet you get a much easier test to use. So the fact that we originally designed this test this platform for consumers gives a lot of advantages in both the home setting of course but also in the point of care because ultimately in the point of care they want clinicians and nurses they want to be able to run tests very simply, very easily and build deliver that result to the patient and also to be reimbursed for it.

And so we think that from the perspective of one care and consumer benefiting from the core design of the product which is to make it sort of consumer grade which is really the highest standard in — from an FDA or from a regulatory perspective because it means anybody can use it. And so it’s really good about the opportunity before us and the consumer side and the point of care and we will continue to look at options to expand the retail distribution. I will note that we are in retail pharmacies now and we are also in hospitals and we are also in home. I think it’s a really unique sort of aspect to Cue versus other platforms.

Charles Rhyee: Okay, appreciate that. Maybe just talking about sort of the enterprise employer market. Can you talk about sort of the — where we are and sort of the selling season for next year? And I don’t know that you’ve touched on it in recent quarters but any kind of notable new signings of employers signing up for this the 10 million obviously it’s just I think how people are perceiving COVID right now but obviously with the flu and RSV coming back and expect to come back in the fall. Just curious on sort of what the interest level from new employers to sign up because when we look at the over a quarter million leaders that number have been growing very quickly for a while. It’s kind of slowed a little bit just curious on what the number of new accounts that you’ve been adding recently and then you kind of holler around that would be great. Thanks.

Ayub Khattak: As we look at the COVID market in general and it’s been it’s a very dynamic time the public health emergency ended earlier this year and people are just really digging out from the whole pandemic all together. And so it is a sort of a transition moment for the market that being said we do think that there is a large market still for respiratory testing generally not just for COVID and we think that we’re on trend with that by introducing a multiplex option for flu COVID and then also with RSV added on to that. So we do think that this is where the market’s heading. We think we have the most compelling offering but of course signing new contracts and etc. that’s going to be a function of regulatory approvals for these compelling new products.

So that’s why we really do expect more revenue and growth from these new products because that’s what the customers are asking for. And we think that’s going to be a really significant factor in being able to expand our installed base and a number of accounts.

Charles Rhyee: Is that the message that you’re hearing you have core customers that are interested in signing up for their employees but they’re waiting till the t test menu does expand and I guess the question is just having the flu COVID plus standalone RSV is that the critical mass at least to get the ball rolling again? Or do you think we’ll need to wait maybe until early next year we’ll get more of the sexual health test as well to really accelerate sort of a new logos?

Ayub Khattak: We do think that yes flu COVID and RSV are the really important set for more market penetration in the near term. Sexual health is a little bit of a different customer type. It’s more point of care, more sexual health planning and urgent care. It does open it up but if you’re talking about enterprise and specifically that’s more of a interest in flu COVID RSV set and also D2C is really aligned with, D2C and public sector are very aligned with respiratory and sexual health. So sexual health plays a very important role but in terms of when we’re talking about B2B B2C, I think we’re really talking more about respiratory because this is something that employers end up paying for anyways in some way or another because people, their employees they end up taking time off work they end up going to urgent care they end up getting a test anyways and that usually for self-insured employers they end up paying for that test, that lab test at a higher rate it’s more expensive.

It’s less effective because it’s slower and you can’t treat off it as easily. So we think that the opportunity on the long term is really there with enterprise as well and then now what we’ve introduced is the Cue Lab we can complement the available test today with 14 additional panels that give you all sorts of other information that’s really important.

Charles Rhyee: Yes. No that makes sense sorry if I could just ask one last question here. You talked about productive conversations with FDA. Are you in the commentary where have they have they already given you like questions have you responded to them? Maybe just give an update where we are in the commentary with FDA like where we are in terms of the clock on their response time?

Ayub Khattak: Yes. So the COVID de novo was a really significant moment for us and that’s because it gave us the validation from the regulatory agency on the safety of the platform from a reader and cartridge backbone perspective meaning that what we’re going for in each new indication we don’t have to revalidate the reader and the cartridge backbone it’s really about the incremental chemistry changes and the clinical data that we were able to generate for those new applications. So that makes a really big difference first of all. And with regards to the dialogue state we’re definitely in dialogue on flu COVID and RSV and that’s where we get the confidence that we have in terms of feeling like we’ll have blue code for this respiratory season with RSV following on to that and I think it’s also a strong indication with our bar to contract and where that’s going after we got our COVID de novo to really bring all these things together into one single test of blue code and RSV.

So we’re really making good progress across the board on these and specifically we know how important the regulatory piece is and we feel really strong that the COVID was a strong signal and we’re going to be able to bring this new test to market in part because of that

Charles Rhyee: Great. Appreciate all the comments. Thanks.

Operator: Thank you. This does conclude the conference call for today. Thank you all for joining. You may now disconnect and everyone have a great evening.