LumiraDx Limited (NASDAQ:LMDX) Q2 2023 Earnings Call Transcript

LumiraDx Limited (NASDAQ:LMDX) Q2 2023 Earnings Call Transcript August 24, 2023

LumiraDx Limited beats earnings expectations. Reported EPS is $0.16, expectations were $-0.15.

Operator: Good day and thank you for standing by. Welcome to the LumiraDx 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 is being recorded. I would now like to hand the conference over to your speaker today Melissa Garcia, Vice President, Corporate Counsel. Please begin.

Melissa Garcia: Hello everyone and welcome to today’s call to discuss LumiraDx’s second quarter 2023 financial results issued earlier today. Joining us are LumiraDx’s Chairman and CEO, Ron Zwanziger; and Chief Financial Officer, Dorian LeBlanc. The press release announcing our financial results is posted on the Investor Relations section of the company’s website at lumiradx.com. Before we begin, I would like to caution listeners that any statements we make today, other than historical facts, are forward-looking statements made pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. Please be aware that all such forward-looking statements involve risks and uncertainties such as those detailed in our annual report on Form 20-F for the year ended December 31, 2022, which was filed with the SEC on May 1, 2023 and in other filings that we make with the SEC.

Any forward-looking statements that we make must be considered in light of these factors. Actual results may vary materially. Also, during today’s call, we may refer to certain non-IFRS financial measures. Non-IFRS financial measures should not be considered in isolation from or as a substitute for financial information presented in compliance with IFRS. There is a schedule showing the reconciliation of these non-IFRS financial measures in our press release issued earlier today which can be found on our website at lumiradx.com. I will now turn the call over to Ron Zwanziger for opening remarks and general business update. We will then provide financial updates before answering questions. Ron?

Ron Zwanziger: Thanks, Melissa. Good morning everyone and thank you for joining our second quarter results call. In the United States during Q2, we strategically positioned our North American business to take advantage of the upcoming respiratory season in the short-term, while also focusing on expanding our testing menu for both short-term and long-term growth. We have three key updates. First, we extended our testing program with CVS to encompass numerous pharmacies across the U.S., complementing our existing partnership with the CVS MinuteClinic, which has been in place since 2020. The expansion leverages our current installed instrument base, allowing for a strong operating margin on testing volumes within these new pharmacy sites during the upcoming respiratory season.

Second, our COVID flu combo test has been submitted to the FDA emergency use authorization, the UA, as part of the NIH’s independent test assessment program, ITAP having already launched successfully in over 25 countries. Globally, obtaining the UA for our tests should be valuable, should be a valuable addition to our U.S. testing portfolio, we’re actively engaged in discussions regarding the current status of our application. Third, as reported in our recent press release, we’re excited to report our submission of our five 10-K application to the FDA for the clearance of our five-minute COVID Ultra product. The innovative ultra-test strip design enables higher sample volumes enhancing detection levels and reaction times for more precise results.

This marks a significant milestone for LumiraDx as we work to expand the markets for our SARS-CoV-2 Ultra test. The receipt of five-day care approval from the FDA could also pave the way for expanding our testing menu in the U.S. on our unified platform. In Europe, our focus remains on the acceptance and expansion of our non-COVID portfolio. Non-COVID platform test volumes excluding seasonal respiratory products increase 50% sequentially. 26% of our customers purchased more than three assays during the second quarter in ’23 versus 17% in the first quarter of ’23. Highlighting the positive impact of our menu expansion. A specific example of our unique NT-proBNP test following the January ’23 launch of our NT-proBNP test was dedicated to showcasing its lab-comparable performance and user-friendliness to clinicians and key opinion leaders.

By offering the only fingertip NT-proBNP test at the point of care, we’re able to gain access to key accounts for evaluation. Our efforts have been supported by peer-reviewed studies, including those from the University of Salah [ph] and the European Journal of Heart Failure, emphasizing the clinical and economic benefits of widespread NT-proBNP testing in primary care settings. The studies confirmed the excellent performance of our test, the benefits of room tempera storage, the utility of the same test strip and method for samples of whole venous blood, capillary blood, and plasma, and the short turnaround time of the test 12 minutes. These published studies are a welcome addition to the body of evidence showcasing our laboratory comparable performance of our tests at the point of care setting.

We remain committed to transforming healthcare by enabling early heart failure diagnosis in the community and plan to expand our approach globally. Further, with regards to NT-proBNP, our collaborative work with Medtronic continues to develop positively. A follow-up event was run in Manchester in July, which continues to show excellent results and a direct impact for individuals being immediately referred for further testing due to elevated results. As a result of our second successful events, we plan to support further events with Medtronic in ’23 and have spun this concept down into other mobile settings, one of which is a workplace benefit program being run in Ireland in the fall of ’23 with expanded scope. It will not only be hard health checks with our NT-proBNP test but would also support diabetes screening with our HbA1c test, which highlights our multi-menu approach.

We plan to further expand on this model globally in an overall effort to broaden general access to such needed health checks in an overall effort to transform how healthcare is delivered within the community. Our CRP test has made significant strides, particularly in community-based settings like virtual wards in the UK. Partnerships like NHS from e-Health have demonstrated the test value in real-time decision-making for antibiotic treatment, resulting in improved patient safety experiences and cost savings. The aim was to support real-time decision-making on the need for antibiotic treatment in frail, acutely unwell patients in an effort to avoid hospital admission if achievable and desirable rather than waiting several hours for lab results.

This customer described our platform as small, portable, battery-operated, robust, and simple to use with room temperature, reagent storage, ideal for community and mobile testing. The clinical and operational benefits were studied across various patients, and the results were very positive. In 50% of patients tested, the LumiraDx CRP test improved the safety of care and help to avoid the need for escalation to hospital care at a cost saving of up to 3,914 pounds per patient. If adopted more broadly, these benefits could lead to substantial savings for healthcare systems. We continue to deliver on our multiple assay menu platform offering. As an example, we recently started working with a leading operator of care homes in Austria. They were looking for a more efficient way to test their patients at the bedside.

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Instead of sending them to the hospital immediately saving money and reducing patient stress. We’re initially starting to work with them in the Vienna region with 16 instruments, they’re currently focused on CRP, D-dimer, and our broader respiratory portfolio, and have indicated that in the future expand, they may expand to our entire assay portfolio and may also expand geographically into additional regions throughout Austria, where they have other customer locations. This is an excellent example of how easy it can be to transform community-based healthcare with the LumiraDx platform when one single portal of instrument can have a major positive clinic or impact in nearly any setting. Coming into this year’s respiratory season, we believe we’re well placed strategically to continue to grow the CRP business as a broader part of our respiratory portfolio.

As the only platform available today at the peer point of care setting with CRP as well as flu and COVID tests, we provided turnkey solution for important clinical pathways that are aimed at curbing antimicrobial resistance by differentiating between viral and bacterial infections. For example, the UK Primary Care Respiratory Society recommends algorithms they have developed to rule out COVID-19 and flu taking other symptoms into account and using the point of care CRP test, if the prescriber feels antibiotics are necessary. LumiraDx has the only platform at the point-of-care setting that can fulfill the entire algorithm with just our one instrument, making both the patient and clinician experience more efficient and desirable to the alternatives, which would not require the multiple PSC instruments or having to wait hours for laboratory results.

On the commercial side, we have expanded our reach into increased sales impact by entering into distribution agreement with Axonlab, a major player in the industry for Germany and Switzerland. This distributor has already placed an initial order of instruments, assay and tests and aims to start to roll out in these countries shortly. We also plan to appoint additional distributors in other regions to increase sales reach and local customer support. The benefits of our broader menu are also felt in Africa and Africa, we’ve been working with key stakeholders to drive uptake of non-COVID testing, non, on our 5,000 plus instruments installed with the Gates Foundation during the pandemic. We’ve now started shipping our HbA1c test to various African countries, as well as D-dimer test to Zimbabwe.

D-dimer has historically been underutilized as a marker of blood clotting in Africa, but the new features LumiraDx platform enable access to this important test. These tests also show utility in high-risk TB and HIV population. This reflects the overall benefit of the platform for tests being deployed in African countries where they have traditionally not been tested in the community. We note that globally traditional healthcare models are being impacted in hospital setting due to funding and staffing restrictions, and as a result, innovations like our portable point-of-care instruments are needed to allow testing in the community. As we continue to innovate and expand our portfolio, LumiraDx remains dedicated to transforming healthcare delivery worldwide and contribute to such impactful change.

Now, Dorian will further discuss our financial performance in the first quarter. Dorian?

Dorian LeBlanc: Thanks, Ron. Quarterly revenues for Q2 were $21 million, $9.2 million or 44% of total revenues were from non-COVID specific solutions, marking our highest quarter for our non-COVID revenues. These revenues included $4.4 million from our LumiraDx technologies and $4.8 million from our distribution business. Total adjusted gross margins for the quarter were a loss of $6.6 million. Adjusted gross margins exclude net depreciation, amortization, stock-based compensation, and restructuring charges. The decline in gross margin from Q1 was largely due to the new placement of more than 1,500 instruments in the U.S. primarily with our retail partner to build testing capacity for the upcoming respiratory season. The full cost of these instrument placements were taken as a charge within Q2.

Similar to Q1, the fixed cost base of our prior manufacturing investments pressure our overall margins at our current revenues. We do anticipate our significant capacity and low variable costs will enable seasonal revenues from the upcoming respiratory season to have a strong contribution margin to our gross margin and to our operating cash flows. As we approach the upcoming respiratory season, we have seen customer preference shift to our multiplex solutions for flu and COVID over COVID-only testing. We have seen the majority of our fast labs revenues migrate to our flu COVID offering. As a result, we did take further inventory reserves on raw materials related to COVID specific tests in the period. Total inventory reserves for test strips, instrument returns, instrument components, and fast labs raw materials in the quarter were $3.8 million with fast labs COVID inventory reserves contributing $2.4 million.

Excluding instrument placements in these inventory reserves, adjusted gross margins would’ve been approximately 10%. Our restructuring programs have reduced our operating expenses sequentially over the last five consecutive quarters since we exited the omni front wave and transitioned to endemic COVID. Since Q3 2022 when we initiated our cost reduction programs, we have decreased our annualized cost base by more than $100 million in line with our prior guidance. Our second quarter adjusted to R&D expenses were $14.3 million compared to $14.8 million in Q1 of this year, and compared to $42.8 million in Q2 2022. Our second quarter adjusted SG&A expenses were $17.6 million compared to $19 million in Q1 and $30.2 million in Q2 of 2022. The adjusted operating expense reductions from Q1 ’23 to Q2 ’23 are primarily related to decreased wages and other employee expenses.

Adjusted operating expenses exclude depreciation, amortization, stock-based compensation, and restructuring charges. We incurred $2.9 million of restructuring costs in the quarter as we finalize most of our latest cost reduction program in June, and anticipate additional cost savings in Q3 with the full benefit of these changes. At June 30, 2023, our cash balance is $25.3 million. On a cash base, our quarterly cash interest paid reflects the payment of both the Q1 and Q2 cash interest on our senior debt within the second quarter. On July 20, 2023, we executed a ninth amendment to the loan agreement with our senior lender, which included an agreement to increase the loan facility with two new tranches of senior debt. On July 21st, we drew down the tranche B funding from the amendment for $15 million.

We anticipate drawing down tranche C funding of $16 million before the end of August as we continue to manage our liquidity position. We will now pause for the operator gather any questions. Operator?

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Q&A Session

Operator: [Operator Instructions]. First question comes from the line of Matt Sykes with Goldman Sachs. Your line is now open.

Matt Sykes: Hi, good morning. Thanks for taking my question. Maybe the first one, the ITAP submission for the flu COVID combo in the U.S. market. Could you just give us a sense for timing? Do you think that would be ready for the respiratory season in the U.S.? And you had mentioned some conversations you were having with them. Just how are those going and any kind of color on timing would be helpful.

Ron Zwanziger: Well, that’s always a tricky question. That’s certainly the intent of the folks we are dealing at the ITAP. And so that is the expectation, but of course, there can never be an assurance of that. But that is the expectation that we will have it in time for the quarter and certainly, we’ve got customers lined up on that basis.

Matt Sykes: Got it. And then maybe just two quick follow-ups. One, you had mentioned the press release, the divestiture of the INRstar business. And was there any kind of cash realized from that you guys have disclosed?

Ron Zwanziger: Dorian?

Dorian LeBlanc: No, no cash that we’ve disclosed that we realized for that transition. That’s a business that is monitoring patients on warfarin and the software helps to provide the algorithm for the dosing. What we’ve seen with the warfarin patient population declining that business was in decline and it did require some significant investment to maintain the software. So, it was more of an avoidance of future investment than to realize proceeds.

Matt Sykes: Got it. And just my last question, the relationship with CVS, which sounds like it’s going well with some of the additional placements. Could you just maybe talk about sort of your expectations for timing of rollout? I assume a lot of that’s to capture the respiratory season in Q4, but maybe just talk about the expansion of that relationship and what it could mean from a non-COVID standpoint as we kind of go into the end of this year, into early ’24?

Ron Zwanziger: Well, probably it’s best to remind you that we had a relationship with CVS that preceded the pandemic where we had a plan with them, and many of the product selection of the order in which we’re launching the non-COVID test was agreed with them well before the pandemic. Then of course there was this long hiatus, and now we’re coming back to it. So, we’re really sort of simply evolving back to what was originally intended pre-pandemic. And of course, in the short-term, that means the respiratory, the first question you asked, and then of course there’s other tests, that will be coming through both respiratory and non-respiratory. So, there’s a whole program of tests that we expect to go into that relationship. Now, I don’t know if you’ve sort of picked it up, but the significance of what’s been going on in the second quarter and the expansion of relationship is that we’ve taken it beyond the MinuteClinic, where traditionally the tests are not done in the regular pharmacies, which do not have a MinuteClinic and so we’ve had a large number of instruments now go into the regular pharmacy.

So, it’s quite a change in behavior and we think that bods really well for the future. There’s quite a lot of tests which can be, are needed in the community where you don’t want to force people to go to just the MinuteClinics which are crudely speaking every 10th CVS where you want them to be able to, to have more reach and to go into more stores. So, it’s quite, it’s a substantially quite significant change that we’ve had a positive change.

Operator: Our next question comes from the line of Jeffrey Cohen with Ladenburg. Your line is now open.

Jeffrey Cohen: Good morning, Ron, and Dorian. Couple of questions from our end. I guess firstly, Ron, could you expand upon your commentary on Medtronic and talk about health checks with us a little deeper as far as what specific tests and what channels as far as coagulation and diabetes cardiovascular?