Cue Health Inc. (NASDAQ:HLTH) Q3 2023 Earnings Call Transcript

Cue Health Inc. (NASDAQ:HLTH) Q3 2023 Earnings Call Transcript November 8, 2023

Cue Health Inc. beats earnings expectations. Reported EPS is $-0.43, expectations were $-0.47.

Operator: Good day and thank you for standing by. Welcome to the Cue Health Third Quarter 2023 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker’s 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 turn the conference over to your first speaker today, Lorna Williams, Investor Relations. Please go ahead.

Lorna Williams: Good afternoon and welcome to Cue’s Third 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 submission of any FDA applications and expectations around receiving clearance and authorization. Expectations regarding production capacity, expectations related to availability of our programs and testing volumes, 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 make 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’d like to mention that the press release and recording of this call are available on the Investor Relations page of our website.

With that, I would like to turn the call over to Ayub.

Ayub Khattak: Thank you, Lorna, and thank you, everyone, for joining us today. Cue reported total revenue of $17.5 million in the third quarter, exceeding expectations driven by stronger-than-anticipated COVID-19 test sales. We had non-COVID contribution revenue this quarter, and we continue to expect growth in the coming quarters as new products gain momentum. Additionally, we ended the quarter with $111.5 million of cash and equivalents. We continue to execute our key strategic priorities with strong financial discipline, having brought our cost down by $165 million on an annualized basis, exceeding our $150 million target. Turning to our number one strategic priority, test menu expansion for the Cue Health Monitoring System.

Our Flu + COVID multiplex test remains an active FDA review. Through the last quarter, we added a substantial amount of additional clinical data, and we believe our application exceeds FDA’s data performance criteria and the required prospective clinical samples for lay users for all three of flu A and flu B and COVID-19 positive clinical samples. To get the additional flu B samples, we conducted a study in the Southern Hemisphere this year. This is our first multiplex and has been submitted to the FDA for over-the-counter use, which would enable use both at home and at the point of care. Our Flu + COVID multiplex test simultaneously detects and differentiates between influenza and COVID-19 in approximately 25 minutes, with the results delivered digitally to the Cue Health app.

It is integrated into Cue Care, our same-day test treatment solution, which enables telehealth and prescription delivery. With this product, we believe we’re adding a powerful tool for individuals at home, providers and enterprise seeking to make better informed health care decisions enable timely effective treatments. We also have two de novo applications currently under review with the FDA. The Cue RSV molecular test was submitted earlier this year, and we have received feedback from the FDA. We believe that we can address all the feedback within the quarter and continue to review. We anticipate an approval later in the respiratory season. The Cue flu molecular test was submitted to the FDA for a full de novo last year. Subsequently, we were asked for a greater number of flu B clinical samples, which has been very rarely circulating over the last three years, with almost no circulation in the Northern Hemisphere.

We collected the additional samples in the Southern Hemisphere as suggested by the FDA, and we believe we exceed the requirements. The flu submission is progressing well to de novo approval this respiratory season. For all of these tests, as soon as we receive authorization, we are ready to launch that, utilizing our existing sales and distribution channels. These products will be made on our automated production line without significant additional capital investment. Our automated production lines were designed to produce any test in our menu at scale. As a reminder, all of the Cue Health monitoring system tests show the same cartridge backbone and manufacturing process. Our installed base has more than 0.25 million Cue Readers, and we have more than 300 directly contracted enterprises and providers.

Together with public sector customers, our distribution partners, and our direct-to-consumer channel, we believe we have the available channels to get these products into the market. Last quarter, we announced we are developing a combined flu, RSV + COVID all-in-one multiplex test supported by BARDA on a $28 million contract. This new molecular test is being developed on the same Cue Reader in cartridge system and will also utilize the same production line. The team continues to drive solid progress in the development of this multiplex test. We plan to follow an EUA regulatory pathway with an initial objective of having this test available for the 2024, 2025 respiratory season. Rounding out our respiratory pipeline, we’ve now completed development for our strepto molecular tests.

We made the decision, though, to delay the start of the clinical study to save cost as we prioritize promising near-term revenue-generating products, including the three tests and review with the FDA. Now I’d like to highlight Cue’s menu expansion efforts in the sexual health category. Our chlamydia + gonorrhea multiplex test is in clinical studies. We now expect an FDA submission in the first half of next year. We have been developing a Cue Herpes + Mpox multiplex molecular test. This is an important next step for our sexual health testing menu for sexually active people [indiscernible] and build on our already FDA authorized Mpox molecular test. General herpes caused by HSV-1 or HSV-2 is the most common HCV in the United States with an infection in one out of every six sexually active people in the US.

A diagnostic test is needed to determine if an individual has either of these highly contagious viruses. We believe our new multiplex test can quickly and accurately detect herpes and/or Mpox to allow for timely medical intervention. Today there is another point-of-care herpes solution available on the market. We believe that our herpes + Mpox multiplex test is eligible for an EUA and we believe that we could have this herpes Mpox test on the market next year. The Cue Health Monitoring System has many new tests on the way, and we’re very excited about the progress and our key priority of menu expansion. We’re also happy to see the peer-review publication of real-world clinical experience with Cue comparing Cue to a lab-based RT-PCR test. Recently, an independent clinical study comparing our Cue molecular COVID-19 test to a lab-based PCR test was peer-reviewed and published in microbiology spectrum, a journal produced by the American Society for Microbiology.

This largest of its kind study of asymptomatic people find that Cue test is as accurate as the lab-based PCR test with 99.4% concordance with a lab-based RT-PCR test. The study’s finding differentiate Cue on the basis of both accuracy and speed superior to the poor sensitivity of antigen testing and without the delays of lab-based PCR testing. Shifting to the Cue Integrated Care platform, our solution that seamlessly extends the capability of our foundational Cue Health Monitoring System, enabling an end-to-end customer journey to receive an active diagnosis consult with a health care provider through our app and receive treatment. We have integrated many of these building blocks over the last 18 months. Last year, we launched Cue Care, allowing for video consultation with clinicians and prescription delivery.

We announced a partnership with Minnesota Department of Public Health to enable all the state citizens to access Cue Care without cost to the patient. Next, we leverage this platform to add Cue Lab, mail in at-home test kits and Cue Pharmacy for prescription subscriptions. We continue to be excited about this opportunity. We believe Cue Lab and Cue Pharmacy have the potential to be a meaningful part of the business over the next year. Now that we have fully built out the integrated care platform, we expect that adding new tests and treatment programs will be straightforward, and I’m really pleased with how the team continues to leverage the platform across new indications. While Aasim will review our financial performance in detail, I want to highlight the progress we’ve made with financial discipline.

The team continues to balance operational execution with cost management. Our goal at the beginning of the year was to reduce spend by $150 million. We have now delivered approximately $165 million of annualized run rate cost savings. At the same time, the team is also focused on near-term revenue-generating opportunities, including upcoming FDA approvals. We believe we’re getting close as we continue to have positive engagement with the FDA and have continued to add data where necessary as common in the review process. Over the last months, we’ve been actively responding to information requests and supplying additional data as necessary. We remain optimistic that we will have additional authorization shortly and at these approvals along with new product launches will be the catalyst for revenue growth and reaching EBITDA breakeven in early 2025.

With that I’ll turn the call over to Aasim.

Aasim Javed: Thank you, Ayub, and good afternoon. Now let’s walk through our third quarter financial results and fourth quarter guidance. Cue’s third quarter total revenue of $17.5 million exceeded our guidance range of $11 million to $13 million. We are pleased with the sequential increase amidst the continued industry decline in COVID revenues. In the quarter, our private sector contributed 82% or $14.4 million of sales. Public sector revenues were $3.1 million for the third quarter, and total test cartridge sales were $13.2 million. Q3 product gross profit was a loss of $7.4 million. Gross profit is impacted by lower manufacturing volumes and also includes noncash items. Excluding depreciation, amortization and stock-based compensation, our gross profit would be slightly positive.

Total operating expenses in the quarter were $60 million, excluding cost of revenue. Sequentially, operating expenses are in line with the second quarter. Q3 operating expenses were down 37% from Q4 2022 driven by cost reduction efforts. Further, if you exclude noncash items such as depreciation, amortization and stock-based comp, the reduction in operating expenses from Q4 2022 would be even higher on a percentage basis. Sales and marketing expenses were $7.1 million in the third quarter, a decrease of 63% from Q4 2022, driven by a decrease in digital and marketing costs. R&D expenses were $37.1 million for Q3, a decrease of 34% from $56.1 million of spend in Q4 2022 as we focus on development programs related to our respiratory and sexual health product offering.

G&A expenses were $15.8 million during the quarter, a decline of 17% from Q4 2022 spend of $19.2 million. In the quarter, we received an employee retention credit of $20.9 million from the IRS. As a result, GAAP net loss in the third quarter was $47 million or $0.31 per diluted share. On an adjusted basis, net loss was $63.6 million or $0.42 per diluted share. Adjusted EBITDA was a loss of $36.6 million. Moving to the balance sheet. We ended the quarter with cash of $111.5 million. Now I’d like to move to our guidance. We expect revenues of $16 million to $18 million for the fourth quarter. Cue has a healthy balance sheet with $111.5 million of cash on hand as we continue to prioritize cash preservation. As a reminder, we delivered approximately $165 million of annualized run rate cost savings versus Q4 2022.

Our operating expenses were down 37% from Q4 2022 and PPE capital expenditures in the quarter were $1.7 million, a 76% decrease from Q4 2022. Our underlying cash burn rate improved from Q2. Additionally, we continue to execute on our near-term catalysts, including preparing for the launch of our flu + COVID multiplex, flu and RSV regulatory approvals and other new product offerings. Finally, we continue to evaluate options and opportunities to bolster our cash position. In summary, I am pleased with the progress being made against our 2023 priorities of test menu expansion 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.

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Q&A Session

Operator: Thank you. [Operator Instructions] Our first question comes from the line of Tejas Savant with Morgan Stanley. Your line is now open.

Unidentified Analyst: Hi. This is Jason in for Tejas. So congratulations on the quarter guys. So my first question is just back in August, one of your shareholders, they published a public letter of voicing their views on your business strategy? And then recently, in October, a separate group of shareholders acting independently published a letter voicing similar views. So my question was just, have you had any dialogue with either of these stakeholders in the past few months? And how do you think about your company’s strategy moving forward? Is this the right one?

Ayub Khattak: Thanks for the question. So the Board and the management team, the key lens that we apply to every decision is increasing shareholder value. It’s a fundamental part of how we make decisions. And we value shareholder feedback. So we take it very seriously and we deliberate on what is the right strategy for the company all the time. It’s not only at the behest of shareholders, but also just as the fiduciaries of this company. So with regards to what we’re doing you can see that we’ve been executing with really strong fiscal discipline. Instead of a $150 million target, we actually achieved $165 million of cost lowering. So and that’s while focusing and moving forward our key strategic priority of menu expansion. So in terms of our priorities, they are to expand the menu to do so with fiscal discipline to expand in integrated care platform, which delivers the full experience that we seek to with our product and platform.

Unidentified Analyst: Got it. Thank you for the color. I may ask a follow-up question. So you ended the quarter with $111 million in cash. And then last quarter, you guided provided about 12 months of runway way. So with another 3 months past us, how do you think about cash management financing opportunities over the next year to extend your runway?

Aasim Javed: Thanks for the question. We’re always building towards — we’re building towards our post-approval profitability phase and all the opportunities that come with it. So our cash performance this year of $17 million utilization, we’re very happy with that performance. This is the best cash performance we’ve had since Q1 2022, which was the height of the Omicron. And not just this quarter, if you look at the whole year, in every quarter, our cash utilization has trended better quarter-on-quarter. So we’re continuing to focus on our cash and manage our cash and extend our runway. And as Ayub mentioned, from a savings standpoint, we had a target of $150 million. We came in at $165 million. So bigger — higher than the target.

And from a timing standpoint, ahead of our target, all our investments and most of our investments are behind us. And we’re edging closer and closer to approval. So as we sit here, we’re really excited about the not-too-distant future when we have these approvals in hand.

Unidentified Analyst: Got it. That was helpful. Thank you guys.

Operator: Thank you. One moment for our next question. This question comes to the line of Matthew Sykes with Goldman Sachs. Your line is now open.

Unidentified Analyst: Hey, guys. This is Will on for Matt. Thanks for taking the question. Just wanted to start at a high level. Do you see your multiplex tests cannibalizing the sales of stand-alone tests and on top of that, what are the use cases for the stand-alone tests once the multiplex comes out? Thank you.