Earnings Transcript for HLTH - Q3 Fiscal Year 2022

Operator: Good day, and thank you for standing by. Welcome to the Cue Health Third Quarter Earnings Conference Call. [Operator Instructions]. I would like to hand the conference over to Lorna Williams, Investor Relations. Please go ahead.

Lorna Williams: Good afternoon, and welcome to Cue's Third Quarter 2022 Earnings Conference Call. Joining me today are Ayub Khattak, Chairman and Chief Executive Officer; and John Gallagher, Chief Financial Officer of Cue Health. Before we get started, let me begin by reminding you that we are 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 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 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 would like to turn the call over to Ayub.

Ayub Khattak: Thank you, Lorna, and thank you, everyone, for joining us today. I'd like to start by welcoming Dr. Sachin Jain to our Board of Directors. Sachin is the President and CEO of SCAN Group and Health Plan and an adjunct professor of medicine at Stanford. Earlier in his career, Sachin was the Chief Medical Information and Innovation Officer at Merck, an attending physician at Boston VA Medical Center and [indiscernible] Harvard's Medical and Business Schools. We are excited to have such a vast knowledge of health plans and payers as well as prospective as a medical doctor to Cue, as we continue to pursue our vision of making the health care system more convenient, accessible and timely by placing diagnostic information at the center of care. In the third quarter, we continue to make great strides towards our vision by combining our accurate at-home and point-of-care diagnostics with our integrated virtual care platform. Financially, the third quarter reflects continued solid execution with total revenue of $70 million, driven primarily by stronger-than-anticipated demand from our existing customers. We continue to make good progress on each of our growth drivers. Let me start with broadening our customer base. In the third quarter, we shipped over 9,000 Cue Readers, bringing our installed base to approximately 250,000 Cue Readers. To help with future growth, we recently added a new Chief Commercial Officer, Suzanne Stone to our team. Suzanne comes to us from Dexcom, where she most recently served as Head of Revenue for North America. She has extensive experience navigating the triangle of payers, providers and consumers. As menu expansion continues, she will lead our global commercialization efforts across customer categories, including the point-of-care segment where well-defined reimbursement pathways are already in place. We are excited to have Suzanne join the management team. Shifting to our test menu expansion growth driver. We have made significant progress on several initiatives in our respiratory and sexual health offerings. To provide some context, hospitalizations of children with RSV are at record levels. Hospitalizations are at a decade high for influenza for this time of the year. A mix of COVID variance is on the rise. CDC is warning of a severe burden on the health system due to a tripledemic. These facts underscore the need for accurate and convenient diagnostic results to address these persistent threats at-the-home and point-of-care. In fact, historically, RSV is the #1 cause of hospitalization for infants with influenza following post behind. Providing convenient and quick access to diagnostic data and making it immediately actionable with therapy specific to the identified virus will make a dramatic difference in the way these issues are handled. I'm happy to report that for respiratory health, we have made very substantial progress in our pipeline above what we have communicated to date. We have submitted the Flu A/B standalone de novo application. We have also submitted the Flu A/B plus COVID multiplex test for emergency use application to the FDA in the third quarter. With these submissions, we are one step closer to enabling people at-home and health care providers to accurately diagnose Flu A/B and code early and conveniently at-the-home and point-of-care in 30 minutes or less. For RSV, we began clinical studies in the third quarter as planned and have been enrolling patients at multiple clinical sites. We hope to complete enrollment and submit a de novo application to the FDA in the first half of next year. Most parents can relate to the common concern of strep throat among their children. Being able to identify strep at early at-home and at the point-of-care with an accurate molecular test would allow for targeted antibiotic use and decrease the risk of complications such as rheumatic fever. So we haven't previously indicated a timeline for strep throat. I'm happy to report that we expect to be in clinical studies in this respiratory season. We continue to anticipate that we will have a comprehensive test menu for the respiratory category next year, which will greatly accelerate our efforts to [indiscernible] broadly at the point-of-care, where there's already robust reimbursement infrastructure for these tests. Combined with the sexual health menu, our market research revealed a strong existing market of around 50 million tests performed annually. And in the home, we hope to secure payer coverage support for our respiratory offerings, starting with the most vulnerable among us, the immunocompromised elderly and young children. Moving to the sexual health category. Chlamydia and Gonorrhea infections have each reached a new high in each of the past 6 years according to the CDC. While routine testing is recommended for all sexually active adults, the status quo is clearly not sufficient to handle the problem. We expect to start our Chlamydia and Gonorrhea clinical studies here in the fourth quarter. Our solution will allow health care professionals and individuals at-home to screen more easily and if positive, allow for quick delivery of the proper antibiotics. In addition, to support our goal of having a robust test menu that broadens the [indiscernible] Cue platform, we are pleased to report that we have developed a high-sensitivity molecular Monkeypox test. We expect to be able to execute analytical and clinical testing to support EUA submission in Q1. Overall, we achieved the 3 previously outlined near-term menu expansion milestones in the third quarter with 2 FDA submissions and the startup of our RSV clinical study. We remain on track to deliver the remaining milestone to begin Chlamydia and Gonorrhea clinical studies before the end of the year. In addition, the team completed development of strep throat and Monkeypox test pushing progress more quickly than we originally planned. We believe the strong progress on menu development will make the Cue platform the market's most compelling value proposition for home and point-of-care diagnostic needs for both respiratory and sexual health, which represent a present a $3 billion market opportunity according to our market research. I'm extremely proud of the team's ability to deliver on the product pipeline, and I look forward to providing additional details on our test menu milestones for 2023 during our next call. Moving to the digital capability growth driver. I'd like to remind everyone that the durable Cue Reader, which runs all the planned tests in our pipeline is Bluetooth connected to the mobile device, providing digital results to the user. This connectivity immediately opens up substantial actionability on test results for both home users and at the point-of-care, where we are making progress on plug-and-play integration with all those common EMR systems, building on the work we've already done integrating with both Epic and Cerner at multiple hospital systems. Cue Care, our program connecting diagnostic results for home users to health care providers for a quick consultation and medication delivery was launched in Q3 and is now available nationwide. With our flu and flu plus COVID submission into the FDA, we are preparing to expand Cue Care to include immediate consultation for influenza positive users with on-demand delivery of one of multiple available FDA-cleared prescription therapies. These medications need to be taken in the first 48 hours after symptom start highlighting the need for early diagnosis and treatment, especially for the vulnerable among us, including immunocompromised, elderly and young children. Acute Care is a foundational capability for many new [indiscernible] pathways coming to the Cue Health's platform to address a wide variety of common health conditions and wellness concerns, particularly for test diagnosing conditions for which there are specific treatments available. For example, for Chlamydia and Gonorrhea, antibiotics are the standard treatment. RSV has multiple antivirals coming, and strep throat has oral antibiotics. All these have a similar diagnosis to treatment workflow, which for home users allows for seamless connectivity of their test results through a medical professional and medication delivery services. We believe this test-to-treat model will lead to better health outcomes. In addition to our progress on growth drivers, I'd like to highlight a recent third-party study that found that our point-of-care molecular COVID-19 test is as accurate as centralized lab-based PCR test. The study presents findings from a head-to-head comparison of the Cue COVID-19 test against lab-based RT-PCR on paired samples from over 3,000 individuals. This study is special because of the size of the study and because these 3,000 individuals were testing prior to travel, and therefore, almost all were asymptomatic. The findings revealed a 99.4% match between results from Cue test and the reference PCR test, including 100% clinical sensitivity detect positive cases, yielding no false negatives. This study by FH Health adds to the body of clinical evidence already available, including a previously reported Mayo Clinic Study, validating that with Cue, you can achieve fast, convenient diagnostic testing that is as accurate as lab-based PCR. We believe these characteristics with accuracy, speed and convenience will apply to all the tests in our pipeline. This leaves me to another executive team update. We recently appointed Dr. David Tsay as our Chief Medical Officer. Dr. Tsay is a board-certified cardiologist, and MD, PhD, trained at Columbia. He has been working at the intersection of health care and [indiscernible], most recently at Apple Health, where he led a clinical team developing new health products, including FDA created products and cardiovascular health. As our vision to make health care more convenient, proactive and personalized extends beyond infectious diseases, we are actively pursuing a product road map centered on diagnostic capabilities to enable chronic disease management, especially for the world's #1 cause of death and disability and the #1 cause in our health care system, cardiometabolic disorders. David, as a board-certified cardiologist working at the intersection of medicine and technology helped define future diagnostic products and services, including our cardiometabolic care offerings. In summary, I'm extremely proud of the strides we've made this quarter with our strong progress in the pipeline, the nationwide launch of Cue Care, our foundational diagnostic to treat capability and our recruitment of great new additions to the Board and management team. Our recent investments in R&D were critical to enable a rapid pipeline execution we've reported so far this year. These investments have laid the foundation and allowed us to hone key organizational competencies, including test development, software development, regulatory expertise and manufacturing efficiency. Looking ahead, we will build from the strong platform with increasing focus on our commercial and financial management success factors in support of our mission to enable personalized proactive and informed health care that empowers people to their healthiest lives. With that, I'll turn the call over to John.

John Gallagher: Thank you, Ayub, and good afternoon. I will walk through our financial results before sharing our Q4 guidance. Cue's third quarter total revenue of $69.6 million was better than expected as COVID testing demand was higher than anticipated, and we saw a strong (technical difficulty) from existing customers. Revenue exceeded expectations for the quarter with our private sector contributing 95% or $65.9 million of sales. Public sector revenues were $3.7 million for the third quarter, and the total disposable test cartridge sales were $61.4 million. Moving down the P&L. Adjusted product gross profit margin was 28%, reflecting stronger demand for COVID test cartridges, higher supply chain costs and lower overall production volume in the quarter. Adjusted product gross profit margin excludes a onetime inventory charge of $2.6 million relating to inventory obsolescence. Moving to operating expenses. For the third quarter of 2022, total adjusted operating expenses were $86.3 million. Sequentially, Q3 operating expenses were comparable to Q2 spend of $86.4 million. Sales and marketing expense was $18.1 million in the third quarter, up from $17 million in the second quarter as teams continue to support our product offering through marketing and brand expansion efforts. R&D expense was $42.5 million for Q3, slightly below the prior quarter spend of $44 million. Spend is aligned with our menu expansion and software development priorities. G&A expense was $25.6 million during Q3 of this year, in line with our Q2 spend of $25.4 million. As a result, the adjusted net loss for Q3 2022 was $63.6 million or $0.43 per share, and an adjusted EBITDA for the quarter was a loss of $37.2 million. We believe that earnings before interest, taxes, depreciation and amortization or EBITDA is a good proxy for cash from our operations. Moving to the balance sheet. We ended the third quarter with cash of $304.7 million. Additionally, we have a $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. For the fourth quarter, we expect revenues of $45 million to $50 million, excluding recognition of any deferred revenue. I'll remind you that we currently have a balance of $92.4 million of deferred revenue on the balance sheet associated with our agreement with the U.S. Department of Defense. As you know, forecasting COVID testing demand beyond the near term is challenging. Therefore, we will limit our forecast to quarterly expectations. In summary, the company continues to report better-than-expected revenue performance and execute on our growth drivers, with our submissions for Flu A/B plus COVID multiplex and Flu A/B molecular tests, along with the recent progress in RSV, strep and sexual health tests, Cue is making significant progress with our menu expansion. While we expect our COVID-19 test to continue to generate the vast majority of our revenue this year, we do anticipate new products will contribute more meaningfully in 2023, in line with our portfolio diversification efforts. Zooming out, given the current macroeconomic climate, we believe the strong cash position on our balance sheet and the ability to control our costs going forward is important to avoid having to tap the capital markets in the near term, with CapEx spend for manufacturing complete and the R&D sprint to the initial phase of menu expansion largely complete, we have the ability to control spend while preserving our growth opportunity. With that, I'd like to thank you for your attention, and I'll now turn the call over to the operator for questions.

Operator: [Operator Instructions]. At this time, I have a question that will be coming from Tejas Savant of Morgan Stanley.

Neel Ram: This is Neel on for Tejas. So I wanted to start with Cue Care. Can you talk about the engagement levels you're seeing for the offering? And how many Cue users have received positive COVID results do you see utilizing the service today?

John Gallagher: Neel, yes, Cue Care is off to a really promising start. We're pleased with the feedback that we're hearing on it. And although it's early, we have some really good anecdotes around people being able to test at-home, be able to speak with a health care professional and then get their treatment prescribed and delivered to their doorstep and hours. So this is an important milestone for Cue because we've been talking for some time now about closing the loop in home health care and with Cue Care available now nationwide for both Cue test users and other test users to be able to come in to our platform, speak with a health care professional and get treatment delivered is a key milestone. And the reason why that is, is we call that foundational to the platform because obviously, it's helpful as we look at COVID, which we have on the market today. But as we expand the test menu offerings, if you think about those other offerings that you heard in the prepared remarks, flu, RSV, strep, sexual health, each of those have a treatment option. And so we would expect to see volumes increase. So that's something over time we'll be able to break out for you as volumes increase, but menu expansion is key to this foundational aspect of the Cue Care offering.

Neel Ram: Got it. And so building on what you were saying around the cost control around the manufacturing and R&D, but considering the commercial ramp next year with menu expansion. Can you give us a directional sense of how you're thinking about OpEx trending in 2023? Should we expect to see a step up next year?

John Gallagher: Yes. So the comment -- the way to think about this is we've ramped manufacturing, and we did that during 2021 and through 2022. We're -- that investment is done. It's complete and behind us. And so the CapEx and the cash associated with it is complete as well. When you think about the initial menu expansion efforts, so the test that we just described on the call here, then the R&D investment associated with those is basically done too or nearly complete. And so the investment there is also pretty much behind us. I noted on the call that preservation of cash is important. We have over $300 million of balance sheet cash. We have $100 million untapped revolver. That cash and liquidity is very important to us because we don't want to tap the capital markets in the near term. And so -- the point of the discussion there is not so much around -- it's not so much around trying to guide you on expenses for '23. But what it is indicated to do is to say, as we exit this year, we have a large amount of investment that's already been done that -- and we have the ability to control our spend while still preserving the growth opportunity, i.e., expanding the menu and going to market. So we can talk more as we get into 2023. So we're not guiding today, but it wouldn't be fair to think that expenses ramp. In fact, what we're saying is we can control costs and preserve our cash.

Neel Ram: Got it. And then one last for me. How would the supply chain and input cost pressures evolved over the past few months? And looking forward, how are you thinking about these pressures in '23. Has that driven any new considerations around your go-to-market strategy, if you look to continue expanding your installed base?

John Gallagher: Yes. I mean, look, we've said over recent quarters that we do face some supply chain cost constraints, and you see some of that come out in our gross margin. But overall, we've been quite successful at navigating what has been a very difficult supply chain environment in being able to supply our product to our customers uninterrupted. And so we expect to continue to be able to do that. In fact, as we look forward, we're very hopeful that supply chain cost constraints will alleviate. We don't know that, but we hope that over time. And we've been able to supply throughout some of the supply chain issues. I could think about our readers have electrical components in them. Our test cartridges also have circuit boards in them. So -- but we've been able to supply and meet the demand of our customers throughout. So not something we're overly concerned about.

Operator: [Operator Instructions]. And I have the next question will be coming from Matt Sykes of GS.

David Delahunt: This is Dave on for Matt. Congrats on the strong quarter. Can you remind us how you think about the opportunity for reimbursement and the ability to sell readers to customers as an out-of-pocket cost and allow them to have tests covered by insurance?

Ayub Khattak: David, so the way we think about it is that there's a really big opportunity already existing where the reimbursement is plumbed to the point-of-care. So as you've heard in our prepared remarks, that's a central focus for us because of the opportunity there. There's a lot of testing that's happening there that aligns with our menu. And the reimbursement is already well structured in that venue. In the home setting, there's a lot of opportunity there as well because fundamentally, there is a good alignment between what the payers want and what's good for the patient and what we would like to be able to deliver. So meaning that if you -- for immunocompromised people for elderly, for young children, they're vulnerable to respiratory threats and to be able to have this product, have Cue in the home, be able to early detect and early treat, that's going to have a significant savings for them over time. And so it's really about aligning with the payers on this value proposition and getting that at the mechanism to get into the home in a reimbursable way. So on the point-of-care side, you have good reimbursement structures there that align well with our menu. And then in the home setting, you we have a really good opportunity with, in particular, the durable opportunity around immunocompromised elderly and young children protecting them and aligning all the stakeholders.

David Delahunt: Got it. And with your pipeline of tests, are those going to be de novo submissions? Or are you able to use the 510(k) pathway for any of the...

John Gallagher: The de novo effectively is the 510(k), which is the first one. So where you see de novo that just means it's the first submission there. But I'd point out though that as we look at menu expansion, we have submitted de novo for flu, for COVID. We've also submitted EUA for the flu plus COVID combo. That's important because obviously, that pathway sometimes can be quicker. We certainly see a lot of headlines about RSV, about flu and even COVID, this tripledemic kind of a sentiment. So I just wanted to point out that it's not just de novo/510(k). Think about those as sort of together. It's also EUA pathways that could be somewhat speedier.

Operator: [Operator Instructions]. The next question we have is from Mark Massaro of BTIG.

Mark Massaro: Congrats on the progress. I just appreciate all the updates related to your submissions to the FDA. So that's all going well. I guess can you just comment if you've received any material comments, I know you submitted the de novo Flu A/B on September 1. So you've had some -- the agencies had some time to look at it. Any thoughts on -- any comments you're receiving back and forth? And then can you just confirm that you are thinking that you'll likely have one of these tests, whether it's EUA or full 510(k) likely approved sometime during this current respiratory season.

John Gallagher: Mark, yes, absolutely. So the conversations with the FDA have been very constructive. We're in interactive discussions with them as it relates to the submissions that we've done thus far. So we're pleased we've had -- historically, we've had a solid relationship with the FDA, and that continues today. And then as it relates to this respiratory season, I think it's reasonable to assume some small level of Q1 non-COVID revenue. It's -- but of course, it's going to be dependent on the FDA approvals and what that pathway is going to look like. You heard me mention the EUA for the flu plus COVID combo. Obviously, depending on how this respiratory season goes, it's possible that, that could get accelerated. We're in clinical studies on RSV, which we entered during Q3 as committed. And those are going well. So I think it's going to be dependent on approvals, but I don't think it's outside of reason to assume some small level of non-COVID revenue inside of Q1.

Mark Massaro: Okay. Great. And then can you maybe help us think about the size of your CT/NG clinical study. Is that like materially larger than your flu or RSV studies? I guess what I'm trying to get at is -- maybe just speak to the enrollment and whether or not you think potentially having any revenue in 2023 is feasible or if it's more likely into 2024?

John Gallagher: Yes, Mark, I mean, it's -- what I'd say is those studies, as we said are beginning here in this fourth quarter that we're in now. We wouldn't say it's a larger study than others, but I do think it's fair to assume that we're going to get revenue from the sexual health category, specifically Chlamydia and Gonorrhea inside of 2023. We do think that would be the case.

Mark Massaro: Okay. Great. I was wondering if you could just maybe expand on any success stories or use cases coming out of Cue Care. And then you guys did have a Super Bowl commercial last year and you are a consumer-facing company. Do you have any expectations on Black Friday, Cyber Monday or any type of holiday type promotional activity?

John Gallagher: Yes, Mark, we -- times have changed since last year. I think it's fair to say on a macroeconomic environment. And we're -- obviously, we've got a strong push into each of our customer categories, and consumer continues to be one of them. In fact, last quarter, for the first time, we broke out the amount of our installed base that was comprised of consumer. But looking ahead, one of the key things that we emphasized is the point-of-care opportunity. That's a large market. Reimbursement is already in place there. We have a lab quality test that's fast. It doesn't require trained technicians. It's small, so it doesn't take a lot of space in the doctor's office. And so we're really excited about the point-of-care opportunity. And then it also connects to the electronic medical record. So while yes, you're going to obviously see us continue to advertise and push into our other customer categories, I'd say that given the statements that we made around preservation of cash that I think would be a little -- we'd be very prudent about where we're placing those ad dollars and recognizing that we are very focused on the point-of-care opportunity, as I just described.

Mark Massaro: Okay. Great. And then last one for you, John, on the P&L. Your sales and marketing came in $7 million below us in Q3, and your R&D came in about $6 million below us in Q3. And so do you think that the OpEx levels in Q3 are decent proxies for the coming quarters? And maybe just talk about some of the clinical trial work and some of the spend that might come out of R&D going forward.

John Gallagher: Yes. Yes, Mark. So we are very cost conscious. You're seeing that in the results. I'm glad that you noted it the -- and we are looking to control our spend, as we said, with a focus on cash. So I don't think we'll sort of model it out into '23, but I don't think -- I think the levels that you're seeing in Q3 are representative for the remainder of 2022. And then as I mentioned, we're very focused on preserving the cash and controlling our spend. So we'll talk more about '23 when we get there.

Operator: [Operator Instructions]. The next question will be coming from Steve Braun of Cowen.

Steven Braun: This is Steve Braun on for Charles Rhyee. Congrats on the good quarter. I guess I'd like to start maybe on the fourth quarter revenue guide, could you just walk us through some of the key assumptions that I guess, that resulting in like the sequential step down in revenues?

John Gallagher: Steve, yes, sure. So on the fourth quarter, we guided $45 million to $50 million of total revenue there. As we put together that forecast and think about the guide, then we're taking into account how much revenue which is contracted, what kind of run rates do we see in the business? What do we think about COVID prevalence and then we guide that accordingly. I guess what I'd tell you is that, yes, it is down sequentially. But I think as you look across other players in this market, then it's quite consistent actually when you look at sequential performance of COVID on a sort of a proportionate or a percentage basis, that Q4 is a step down from Q3. So I don't think we're an outlier in that space. But just to reiterate, the guidance is $45 million to $50 million on Q4.

Steven Braun: Okay. Great. And then I guess, like as you're moving closer to filling out the product menu expansion here, I guess, have you started to notice any uptick in potential like partnership opportunities?

John Gallagher: We're -- so as it relates to the menu, we're very focused on expanding the menu with the tests in the respiratory category, and the sexual health category as we described, and in connection with Cue Care because what that provides to us is we've got a best-in-class molecular diagnostic platform, coupled with technology that enables users to either at the point-of-care or at-the-home, take a test talk to a doctor and receive a treatment. And so executing on that is where our focus is. Ayub, do you want to add something?

Ayub Khattak: Yes. I mean, definitely, we see a significant amount of demand from our customers with regards to the future menu. So when you're talking about partnerships, there's a lot of opportunity for more places for the product to go for more partnerships around the treatment loop and partnerships with other entities with regards to other parts of the platform, like Cue Care. So there's just a lot of opportunity when we look forward, when you look at the menu, when you look at all the different interested parties and the demand for what's coming.

Operator: Thank you for your questions today. This concludes today's conference call. You may all disconnect, and everyone, have a great rest of your day.