Cue Health Inc. (NASDAQ:HLTH) Q2 2022 Results Earnings Conference Call August 11, 2022 4:30 PM ET
Company Participants
Lorna Williams – Investor Relations
Ayub Khattak – Chairman and Chief Executive Officer
John Gallagher – Chief Financial Officer
Conference Call Participants
Charles Rhyee – Cowen and Company
David Delahunt – Goldman Sachs
Vidyun Bais – BTIG
Neel Ram – Morgan Stanley
Operator
Welcome to Cue Health’s Second Quarter 2022 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]. As a reminder, today’s program may be recorded.
And now. I’d like to introduce your host for today’s program, Lorna Williams, Investor Relations. Please go ahead.
Lorna Williams
Good afternoon and welcome to Cue’s Second 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 obligations to update these statements, except as required by law.
In addition, on today’s call, non-GAAP financial measures will be used. Reconciliation 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 found at investors.cuehealth.com.
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 would like to start by welcoming Dr. Josh Ghaim to our Board of Directors. Josh is a founder of Ignite Venture Studio, an innovation accelerator for companies focused on changing how health care is delivered, and also serves as President of Small World Brands, a health and beauty start-up with a mission to support girls’ education and women-owned businesses.
Earlier in his career, Josh was Chief Technology Officer of Consumer Health at Johnson & Johnson. Josh’s experience in consumer health, technology and R&D will be a valuable addition to our Board as we continue to pursue our vision of making the health care system more accessible, convenient and timely by placing diagnostic information at the center of care.
I’m pleased to present our second quarter financial results, which I believe reflect another strong quarter of execution. Total revenue of $87.7 million was better than expected due to stronger-than-anticipated COVID testing orders from existing customers. Our private sector customers accounted for 92% of our revenue in the second quarter.
Now let me walk you through the performance of our three key growth drivers: one, broadening our customer base; two, expanding our test menu; and three, further developing our digital services and capabilities.
Starting with broadening our customer base, where distribution of our Cue Readers is a key metric for tracking awareness of our platform across different customer categories, enhances pull-through of our future diagnostic tests. In the second quarter, we shipped nearly 15,000 Cue Readers, bringing total shipments to over quarter of a million, including over 30,000 readers in our direct-to-consumer customer category.
As a reminder, late last year, we made our fast and accurate COVID molecular test available to the general public. We continue to be pleased with the uptake of the B2C category.
Cue products are available for purchase on our website and the Cue Health app as well as most major health care product distributors, retail pharmacies and through enterprise accounts.
Shifting to our menu expansion growth driver. We continue to be on track to deliver all of the pipeline milestones outlined during our fourth quarter earnings call. To level set on the terminology, for FDA submissions in the diagnostic category, if a company assessed is the first in this category, a combination of the intended use setting, for example, the home and/or point of care, and the specific test target, then it is called a de novo application.
As a testament to Cue’s pioneering approach to both the point-of-care and the home settings, most of Cue submissions will be de novo application for full FDA authorization. As previously shared, we submitted the full de novo application for the Cue COVID-19 molecular test in May. In addition, we continue to execute our plans for flu standalone and flu + COVID multiplex molecular tests.
I’m pleased to share that we have completed clinical studies for the flu standalone and are preparing the de novo application for submission in the third quarter. We began our flu + COVID multiplex clinical studies during the second quarter, as planned, and expect to submit for EUA for flu + COVID in the third quarter.
For another key test in the respiratory category, respiratory syncytial virus, or RSV, we remain on track to start RSV clinical studies in the third quarter of this year 2022. Our first sexual health test, the chlamydia + gonorrhea molecular multiplex test is progressing well, and we expect to begin clinical studies in the second half of this year. I’m extremely proud of the R&D team’s ability to deliver these accomplishments and look forward to providing updates as the pipeline progresses.
Moving to our third growth driver, digital capabilities. I am thrilled to share that we began our phased launch of Cue Care, our diagnostic-to-treatment capability. Cue Care successfully closes the care loop as customers can conduct a diagnostic test, consult a medical professional and get the treatment they need delivered on the same day, all within the Cue Health platform.
Cue Care is win-win for all stakeholders because it delivers effective treatment to patients in a timely and convenient fashion. It seamlessly connects health care providers to patients, and it limits community exposure and disease transition by identifying and treating ill individuals in their own home. We have launched our pilot and expect general availability nationwide in the next few weeks.
Cue Care meets an urgent and unmet need for positively diagnosed COVID-19 customers and is a foundational capability for future diagnostic tests in our pipeline, particularly for those tests in which there are specific treatments available.
For example, for flu, there are two approved FDA antiviral medications that are most effective if taken within 48 hours with the onset symptoms. For chlamydia and gonorrhea, antibiotics are the effective treatment, and RSV has multiple antivirals coming. All of these have similar diagnosis-to-treatment workflow as the one we’re launching for COVID-19 in the third quarter.
In summary, I am proud of our progress on all of our growth drivers, with continued expansion of the customer base with over 250,000 Cue Readerships; a recent test menu expansion efforts, including the completion of the flu standalone clinical studies and planned de novo submission for flu standalone; and EUA submission for flu + COVID multiplex in the third quarter of 2022 and the phased rollout of Cue Care, our foundational diagnostic-to-treatment capabilities in the third quarter 222. Taken together with our progress on our RSV test, we believe we can have a comprehensive offering to the respiratory category next year.
Our team is making great strides towards our mission of enabling personalized, proactive and informed health care to empower people to live their healthiest lives.
With that, I’ll turn the call over to John.
John Gallagher
Thank you, Ayub. And good afternoon, everyone. I will walk through our financial results before sharing our Q3 guidance.
Cue’s second quarter total revenue of $87.7 million was better than expected as COVID testing demand was higher than anticipated, and we saw strong customer ordering from enterprise customers, direct-to-consumer and the public sector. Both the private and public sectors exceeded our expectations for the quarter, with our private sector contributing 92% or $80.5 million of sales, an increase of $48.1 million from Q2 last year. Public sector revenues were $7.2 million for the second quarter, and disposable test cartridge sales were $82.9 million.
Moving down the P&L. Adjusted product gross profit margin was 30%, driven by stronger demand for COVID test cartridges, which was offset by higher supply chain costs and a reduction in overall production volume in the quarter.
Adjusted product gross profit margin excludes the one-time inventory charge of $42.8 million relating to obsolescent inventory and warranty reserves. This charge is primarily related to an overbuild of inventory after Cue successfully scaled production late in 2021 to meet certain contract obligations as well as surging COVID testing demand at that time.
In addition, during the quarter, we made the decision to reduce our manufacturing workforce to align capacity and better position Cue with the current macroeconomic environment. As a result, we took a restructuring charge of $1.9 million.
Manufacturing remains a core competency for Cue. Our freestanding modular production pods for automated cartridge production allow us to scale quickly as new tests become available and the demand for our products changes.
Moving to operating expenses. Over the last few quarters, we’ve been building our business, which included appropriate investments in SG&A and R&D. For the second quarter of 2022, total adjusted operating expenses were $86.4 million, excluding the one-time restructuring charge I just mentioned. Sequentially, comparing the second quarter to the first quarter of 2022, adjusted operating expenses decreased by 3.9% from $89.9 million.
Sales and marketing expense was $17 million in the second quarter, down from $34.2 million in the first quarter, demonstrating our ability to flex variable expenses to meet quarterly deliverables and changing market dynamics. R&D expense was $44 million for Q2 versus $28.8 million in the prior quarter. Spend is aligned with our menu expansion and software development priorities. G&A expense was $25.4 million during Q2.
As a result, the adjusted net loss for Q2 2022 was $55.2 million or $0.37 per share, and our adjusted EBITDA for the quarter was a loss of $29.9 million. This is the first quarter we are introducing earnings before interest, taxes, depreciation and amortization, or EBITDA, as we believe it is a good proxy for cash from our operations.
Moving to the balance sheet. We ended the second quarter with cash of $363 million. We view our multiyear cash position as sufficient to allow us to continue to operate the business and invest and execute our strategy and vision, regardless of the economic climate.
In addition, on June 30, we entered into a $100 million secured revolving credit facility to increase financial flexibility. As we ended the quarter, it remains undrawn. As a reminder, Cue operates with no debt obligations.
I’d like to now move to our guidance. For the third quarter, we expect revenues of $55 million to $60 million, excluding any adjustment to deferred revenue held on the balance sheet. As you know, forecasting COVID testing demand beyond the near term is challenging. We will limit our forecast to Q3 and plan to update you on next quarter’s call.
In summary, the company performed well in the second quarter, beating top line and bottom line expectations. Our strong balance sheet allows continued execution of our plans and strategies, including progress on our flu standalone and flu + COVID multiplex clinical studies, both of which will be submitted to the FDA in Q3 in addition to our phased rollout of Cue Care.
With that, I would like to thank you for your attention, and I’ll now turn the call over to the operator for questions.
Question-and-Answer Session
Operator
[Operator Instructions]. And our first question comes from the line of Charles Rhyee from Cowen. [Operator Instructions]
Charles Rhyee
Ayub and John, maybe to start talking about the Cue Care rollout, you said it’s a phased rollout. Can you describe a little bit more, is that by geography? Or is that with certain customers? How should we think about that in terms of the progression through the rest of the year?
Ayub Khattak
We’ve started our pilot. So we’ve definitely gotten patients through at a small scale, and we expect general availability nationwide in the next few weeks. So we’ll be dialing it up in the app stores over the next – really just the next few weeks. So get to 100% distribution in a few weeks’ time nationwide.
Charles Rhyee
You talked about the progress on all the non-COVID test menu. It looks like everything was sort of is still on track with your prior comments. When we think about revenue contribution from non-COVID tests, is it right to still think that we should start to see some contribution beginning next year?
John Gallagher
It’s John. Yes, that is the right way to think about it. We’re very excited about the progress we’ve been making on the menu, including now a thing that we’ll submit, not only the flu standalone, but also the flu + COVID multiplex within this quarter. So that’s good progress in our minds, and some acceleration from the initial plan. But, of course, what we don’t know is exactly when the approvals will come in. So I think the best way to model it is to think about next year as certainly being a very reasonable period to be having non-COVID revenue. And think about that even beyond flu.
And if you think about respiratory, as we think about the full year of 2023, think about respiratory being a category as well as sexual health, where we’ll be able to introduce our first test there, where we’re doing clinical studies in the back half of the year on chlamydia and gonorrhea. So as you think about 2023, then absolutely, we should think about revenue there, and we’re very excited about the progress we’re making this quarter on the menu expansion.
Charles Rhyee
Is that something where we should see it starting in the first quarter? Or do you think that might end up being something more like a second quarter event?
John Gallagher
Well, again, it’s hard to predict the approval time lines, but I’d like to – being optimistic and looking at it optimistically, knowing that we’re going to submit in Q3, then we’re certainly hopeful that that would be a Q1 event where we’d be able to get revenue. But again, it’s predicated on the approval time line.
Operator
And our next question comes from the line of Dave Delahunt from Goldman Sachs.
David Delahunt
Congrats on the strong quarter. Could you tell us more about your revenue expectations for Cue Care? And what does the gross margin profile of that business look like?
John Gallagher
It’s John. We’re pleased with the quarter. And yes, look, we’re very excited about Cue Care, as you heard Ayub talk about. As far as revenue expectations, it’s not going to be material inside of this year, where it’s a phased rollout. We think it’s a very important proof point in closing the loop in home health care, and that’s a critical milestone.
And it’s going to help not only when you think about COVID testing, but as I was just mentioning, the menu expanded tests that we have coming out. All have treatments for them available. And so the ability to be able to go from diagnostic to treatment with our Cue Care platform is something that’s going live now.
And that’s foundational to Cue’s platform moving forward, the ability to take the diagnostics, speak with a doctor, have a prescription written and have that delivered to your door in a couple of hours or in that range is something that is very exciting. So I wouldn’t want to dimension that revenue quite yet and the gross margin as well, but you can think about it in the context of – that kind of service would be less than $100 to the consumer.
David Delahunt
Any additional thoughts on what some of the drivers were creating the higher reorders from existing customers in the quarter?
John Gallagher
I think what we saw, and I think what many others saw, in the space is that COVID testing volumes were higher than anticipated on the quarter. So prevalence as well as testing volume was higher in the quarter, and I think it’s a nice proof to the platform and the stickiness of our business that our customers are reordering. And that’s in the enterprise category. It’s in direct-to-consumer. We’re even seeing it in the public sector, too, with some of the states coming directly to us to work off the installed base that they got as a benefit of the DoD contract from last year. So that’s how we’re seeing it. And I think those rates are why we had a beat in the quarter.
Operator
[Operator Instructions]. Our next question comes from the line of Mark Massaro from BTIG.
Vidyun Bais
This is Vidyun on for Mark. So any color you can give on path to profitability? Any initiatives for gross margin improvement? You talked about a manufacturing workforce reduction. So if you could just share your updated outlook for OpEx through 2022.
John Gallagher
I’ll start with the last one there on the OpEx outlook for 2022. What we’ve been able to say is that, hey, last year, we were ramping expenses, appropriately so, especially as we are growing the organization and investing in the key areas of menu expansion, software and technology, and you’ve seen that continue. But the ramp in OpEx is complete really at this point, and we’re expecting it to be sort of in the range that we’ve seen in Q1 and now in Q2 as well. So that was OpEx.
As far as path to profitability then, one of the important things about the status of Cue right now is our balance sheet. We’ve got $363 million of cash on the balance sheet. We also just put a $100 million revolving credit facility in place, which is undrawn, not needed. But best to get capital when you don’t need it. And so we view that as a multiyear cash going forward, and that is going to allow our investment in R&D, in the menu, in software and technology to put in place that foundational platform that Ayub was describing earlier.
As it relates to profitability then, we did introduce EBITDA as a key metric here. We think that’s an important way for you to look at us and look at what our cash from operations looks like on a quarterly basis. And the path to profitability is going to be somewhat contingent on the volumes that we have there. And obviously, as our menu rolls out and we expand our product portfolio, we expect that the volumes will increase from a single COVID offering that we have on the market today.
And then the last piece I think you asked about was gross margin. With volumes lower in Q2 than we had seen in previous quarters, we still posted an adjusted 30% gross margin. So that’s a healthy gross margin. And we are still putting in place manufacturing efficiencies. You saw us take actions related to the market, where we reduced our manufacturing workforce. And that was a tough decision, but the right decision to do in this business climate. And so, those are the types of actions that you’ll see us take to be able to get that path to profitability. And EBITDA is a good measure going forward to look at what our cash from operations looks like.
Vidyun Bais
Just a quick follow-up. So, on the partnership front, a couple of months ago, you talked about your distribution agreement with BioReference Labs. You’ve also discussed administering tests in partnership with Albertsons. So just curious how those partnerships are progressing relative to your expectations.
Ayub Khattak
We’ve continued to ramp up our retail pharmacy footprint. That’s gone well. We believe that it’s an interesting model for the system as a point-of-care point to access. We’ve been looking at various distribution mechanisms. And obviously, the pull-through on the installed base has been very solid, and we’ll look to continue to expand our footprint in retail pharmacy and health care providers and in the home. So all the customer categories are very important to us. They all have strategic value, so we’ll continue to expand on those.
Operator
And our next question comes from the line of Tejas Savant from Morgan Stanley.
Neel Ram
This is Neel on for Tejas. Congrats on the strong quarter and the initial rollout here for Cue Care. Just had a couple of quick questions. So starting with OpEx this quarter, with some of the major shifts in line items, could you provide some detail there? I guess, can you break out some of the individual drivers on the sales and marketing side to get that flex quarter-to-quarter?
John Gallagher
On the OpEx, yes, on the specific lines there, so sales and marketing, you saw that down sequentially quarter-over-quarter, as I mentioned in the prepared remarks. Some of that is just natural quarter-to-quarter. Some of that is intentional as, in this climate, we pulled back a bit on some media spending and we are constraining the cost inside the organization as it relates to some of the spend there.
As we look forward, that spend will normalize. And when you look at R&D, R&D, that’s a spot, obviously, we’ve been investing quite a bit, menu expansion as well as the software and technology related to Cue Care. So that’s why that has an increase on a quarter-over-quarter basis.
But when you take OpEx all in, on a net-net basis, the range of $85 million to $90-plus million is a fair way to look at it. Because, again, we’re not anticipating continuing the kind of ramp that we had in OpEx during 2021. That’s not the plan for 2022.
Neel Ram
And a couple on Cue Care. So in its current state, could you provide who — the providers are backfilling the telehealth and prescription purchasing end of the loop? And do you see any opportunities post launch to expand on this offering with major partnerships [indiscernible]?
Ayub Khattak
What we’ve done on the Cue Care is we’ve – obviously, on the mobile side, that’s the front end of the patient or a physician would operate to run the test, and then if they get a positive test, they can get into the Cue Care flow.
And on the other side of that is a web-based application we call Cue Clinic, which the doctor network – any doctor network can operate. And so, the idea is that with web-based application that’s agnostic to doctor network, and what it does is it allows for the doctor to receive test results, to conduct video-based telemedicine visits and asynchronous messaging and to be able to prescribe with a full EMR backing it. So, it gives the full spectrum of capabilities to allow for a doctor to be on the other side of this telemed visit and prescribe and track the prescription to delivery. So really excited about it because underneath the hood of Cue Care, you have Cue Clinic for doctors, and this really makes it agnostic to doctor network, which will be a potent tool for the future as we want to expand the doctor network behind it.
Neel Ram
And are there any metrics you could provide us on utilization of virtual care in its current state? Any trends you’re seeing and how that might evolve with Cue Care? And thoughts on how you see this offering driving further adoption on the DTC side?
John Gallagher
Yes. So the way to think about the metrics and the usage there is Cue Care is completing the home health care loop by offering the ability to have a prescription written and then delivered to your door. And so, what we anticipate – although we don’t have specific metrics to put out at this point in time, what we would anticipate is that we’d see a significant uptake in the usage of the telehealth portion of our platform because there’s a treatment there, there’s a full loop to be able to take a test, talk to a doctor, which you can do on our platform today, but then have the prescription written and delivered to your door is going to create an uptick that we anticipate related to the telehealth visits.
And maybe the other piece I would add to that, too, is that as we look at our platform, the testing – because we do have access to be able to look at what testing looks like on our platform. And the testing volumes on our Cue Readers that are out in the field have been relatively high, and you saw that in our revenue results in Q2 when we post almost $88 million of revenue.
Neel Ram
Just one last for me on the partnership with Albertsons. With menu expansion progressing really well, any early discussions with your partner to expand the partnership alongside your menu into areas like flu or STD testing or eventually cardiometabolic?
Ayub Khattak
Yes, not just with Albertsons, but across the spectrum with enterprise, with B2C. We’ve been seeing a lot of demand for what’s coming next on the platform. So I think our customers understand that when they bought the Cue Reader, they were buying something that was going to be flexible across our future menu expansion. And that was why they made the investment to get the durable equipment to really have the capability into the future. So we believe our customers, as we talk to them, not just in retail pharmacy, but across the spectrum, are really excited about what they see coming down the pipe. And so, the fact that we’re delivering on that pipe at a rapid pace is really good news.
Operator
Thank you. This does conclude the question-and-answer session as well as today’s program. Thank you for your participation. You may now disconnect. Good day.
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