Cue Health Inc. (NASDAQ:HLTH) Q4 2022 Earnings Conference Call March 29, 2022 4:30 PM ET
Company Participants
Ayub Khattak – Chairman and Chief Executive Officer
John Gallagher – Chief Financial Officer
Caroline Corner – Investor Relations
Conference Call Participants
Mathew Sykes – Goldman Sachs
Tejas Savant – Morgan Stanley
Charles Rhyee – Cowen
Vidyun Bais – BTIG
Operator
Good day and thank you for standing by and welcome to Cue Health’s Inc, Fourth Quarter 2021 Earnings 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]. I would now like to hand the conference over to your host today. Caroline Corner, Investor Relations, you may begin.
Caroline Corner
Thank you, operator. Welcome to Cue Health’s Fourth Quarter 2021 Earnings Call. Joining me on today’s call to discuss our results are Ayub Khattak, Chairman and Chief Executive Officer, and John Gallagher, Chief Financial Officer. Our prepared remarks will be followed by a Q&A session. During this call, we’ll be making forward-looking statements, including statements related to the expected performance of our business, future financial results and guidance, strategy, long-term growth, and overall future prospects, as well as the impact of the COVID-19 pandemic.
We wish to caution you that such statements are subject to known and unknown risks and uncertainties that may cause actual results to differ materially from those we projected or implied during this call. In particular, those described in our risk factors including in our final prospectus related to our initial public offering dated September 23, 2021, and in our Form 10-K for the fiscal year of 2021 that will be filed following this call. You should not rely on our forward-looking statements as predictions of future events.
All forward-looking statements that we make on this call are based on assumptions and beliefs as of the date hereof, and cue disclaims and the obligation to update any forward-looking statements, except as required by law. Our discussion today will include non-GAAP financial measures. These non-GAAP measures should be considered in addition to, and not as a substitute for, or an isolation from our GAAP results.
Information regarding our non-GAAP financial results including a reconciliation of our historical GAAP to non-GAAP results, can be found in our earnings release, which was furnished with our 8-K — Form 8-K today with the SEC and may also be found on our Investor Relations website at investor.cuehealth.com. Finally, a recording of this call will be available on our Investor Relations website shortly after this call has ended. With that, I would like to turn the call over to Ayub for his comments on fourth quarter business highlights. Ayub
Ayub Khattak
Thank you, Caroline and thank you everyone for joining us today. We’ve made tremendous progress towards our goal of creating a new way to access the health care system. Combining accurate diagnostics, virtual care and soon antiviral delivery all in a single platform uniting health care providers, enterprises, and consumers. I’m happy to report we’ve achieved significant growth in our installed base, shipping to-date nearly a quarter million Cue Readers. This large increase of our installed base across all of our customer categories, banks, sophisticated customers, and traditional healthcare space, such as Johns Hopkins, the University of Pittsburgh Medical Center, to enterprises such as Google, Netflix and Sales Force, to government agencies and individual household is reflective of our core platform capabilities, speed, accuracy, and integration with the digital ecosystem.
We use core platform capabilities in mind, the growth in our installed base is particularly important as Cue Reader is durable and capable of running all future tests in our menu expansion pipeline. Excitingly, we launched our direct-to-consumer offering in Q4 with integrated virtual care, e-commerce capabilities, including same-day delivery and video-based supervise testing, all natively integrated into our accessibility friendly mobile apps.
Today, we have over 220 directly contracted organizations as customers, made up of healthcare provider organizations, governmental bodies, and enterprises, up 2.5 times since the end of Q3. Our $618 million in 2021 revenue during our first year as a public company, up from $23 million in 2020, demonstrated our ability to execute a coordinated strategy across our manufacturing, product, and commercial teams to bring our vision of the future of healthcare to life.
Our mission of delivering more integrated and accessible healthcare is a global one and we’re glad to update that we’ve begun commercialization internationally in Canada through distributors, enterprises, and a direct-to-consumer offering, as well as in Singapore. In addition to signing many new agreements, we also extended our existing agreements and expanded our relationships with many of our key customers including Google, the NBA, MOB and many other major sporting links.
We also announced a partnership with Albertsons, when today Albertsons customers at over 900 locations in communities across the U.S. can get a Cue test administered by their local Albertsons pharmacist. This is an important public health initiative driving increased access to the lab quality, molecular testing we provide in communities across the U.S. especially for those communities that might not otherwise have access to lab quality micro diagnostic tests.
For the quarter, we purposely and radically expanded our distribution in the healthcare provider space. I’m pleased to share that we are now distributed by Cardinal Health, McKesson, MEDLINE and Henry Schein, and we will continue to expand our reach to smaller healthcare provider clinics and other fragmented markets. To the Department of Defense, we shipped 6 million Cue COVID -19 test cartridges, and 30,000 Cue Readers over the contract life, demonstrating our ability to scale manufacturing and deliver on large contract. Through this agreement, our products reached under-served communities in 18 states, thousands of schools, nursing homes, correctional facilities, and Community Health clinics across the country and the military.
Today, we continue our DoD conversations regarding broader opportunities to utilize their installed base. For example, we were recently awarded an IDIQ electronic catalogue contract for the Defense Logistics Agency with a value of up to $50 million, which facilitates acquisition of Cue products for any federal agency. Additionally, we are seeing that our strategy of placing installed base is working for the public sector customer category. Leveraging our public fiber relationships and successful deployment, we’ve converted several end-user public sector organizations that take into direct customers, such as the State of Minnesota, Colorado, and Wyoming, among others. To help us tell Cue, unique story of creating and introducing a new product category beyond the traditional healthcare system and into the home, we have been investing in awareness.
We added a Chief Marketing Officer and intend to go to our team. He joins us from Abbott, where he led the marketing launch of the continuous glucose monitoring system. We’re excited to leverage attained skills and experience with marketing and payers, consumers and healthcare providers. Eileen Sheil joins us as Chief Communications Officer. Previously, she led Corporate Communications at Cleveland Clinic and Medtronic. We’re excited to have an attendant Eileen joined to help bring awareness to the brand, connect to our customers, and tell the story of Cue. Their join has rapidly become a world-class leadership team here at Cue.
The best known sports leagues such as MLB, NBA, NHL, and many NCAA teams utilized Cue. And in this new category of molecular testing anywhere, anytime we’re finding innovative ways with marketing and bringing to life our vision of the future. It is such a unique time where diagnostics has entered the cultural consciousness and behavior and expectations of how the health care system should work have evolved dramatically because of COVID.
We’ve partnered with some of the biggest athletes and stars helped bring our product and brand story to life in the minds of our customers. From NBA All-Star, Karl Anthony-Towns to Super Bowl champ Aaron Donald, and actress Gal Gadot, all avid Cue users. Now you may have caught a suitable app, which was seen by a 107 million viewers and drove a 10,000 times increase in our traffic to our website after Derek. Our number one goal with our Super Bowl ad was to increase awareness of our brand and establish Cue as a digitally connected Smart HLTH lab platform that will serve consumers beyond COVID.
As we have created this new category of molecular testing spinning the home and the traditional healthcare system, we’ve had to rapidly scale our manufacturing. Last year we increased our production capacity to nearly 100,000 test cartridges per day, measured over a seven-day period as part of completing our DoD agreement. This represented nearly a 50 times scale up of a novel molecular testing product in the course of one year, fully integrated, highly automated and domestic, this is a result of a decade of investment and product design, automated manufacturing, and excellent execution by our operations team.
The strength and ownership of our manufacturing capabilities provides for the core competitive advantage going forward for quality, cost, and supply capability. All of these investments we have made in scaling our manufacturing from biochemistry production to cartridge manufacturing will serve our test menu expansion with no modification required. This shortens the path from R&D to add scale commercialization for our future test menu. So let’s talk a little more about one of our key growth drivers, menu expansion. Menu expansion is critical to our future, because each test will significantly expand our addressable market. But more importantly, allow Cue to become ubiquitous as the natural choice to turn to at the first sign of respiratory symptoms or for sexual health concerns.
As consumer behavior has evolved to expect immediate answers for health issues, just as we experienced with parts of our life from food delivery to transportation, we believe this paradigm has shifted in consumers mind for testing for infectious diseases. Similar to how glucose readers and pregnancy tests have changed the paradigms for their markets. Our pipeline and development include tests and respiratory, sexual health, women’s and men’s health, cardiometabolic and well in it’s categories all of which will run on the Cue Reader.
The Cue Reader is the basis of our install base in which we have shipped nearly a quarter million units of. Our R&D team is making exciting progress, executing well against our near-term milestones for menu expansion. Starting with our goal of COVID 510(k) clearance, we completed clinical enrollment in February ahead of schedule and expect to submit our COVID product to the FDA for de novo review in Q2 per 510(k) clearance. For our flu AB tests, we began enrolling patients at our clinical study sites in December as planned.
We expect to continue enrolling patients in the study through Q2, with the expectation to submit for FDA de novo review in Q3. Flu season [Indiscernible] year so we anticipate including bank samples of part of our FDA submission. Notably funding for both the COVID and flu clinical studies is provided by BARDA, Biomedical Advanced Research and Development Authority, a division of HHS and a long term partner of Cue. For our flu AB plus COVID multiplex test, we are in late-stage technical development and can detect and differentiate between flu AB versus COVID.
We will continue to optimize this assets performance. We expect clinical studies to begin in the second half of ’22. This multiplex test does have a EUA pathway that could simplify the clinical and regulatory process versus a standard 510(k). For RSV tests, we’re progressing on late-stage technical development and expectedly in clinical studies in Q3, last year’s RSV peak was during the summer.
Within our sexual health category, our chlamydia and gonorrhea multiplex test is pressing well. The chlamydia and gonorrhea multiplex test is in late-stage technical development, and we expect to commence clinical studies for the test in the second half of ’22. We currently have a COVID-19 Omicron -specific test cartridge under review at the FDA.
At the request of BARDA, we were able to complete primer design, asset development, and updates to the Cue Health app and all required studies in a nine week period. We submitted for emergency use authorization on March 3rd, so we look forward to updating you on progress on that test in the near future. All in all, menu expansion is proceeding at a very fast clip and we have a robust set of tests showing strong progress that will increase our addressable opportunity.
Combined with significant upgrades has made and are making to our digital capabilities, which all of our diagnostics results flow seamlessly through. We think we’re in pole position to enable a new experience of the healthcare system across many of the most common reasons individuals use the healthcare system. I will expand further on our digital capabilities growth, a key growth driver, because these capabilities enhance the value and actionability of our diagnostic results. We are investing heavily in and rapidly building the technology enhancements for our Integrated Care Platform. Our software development team has recently been focused on building out they integrations with leading electronics medical record systems, expanding internationally to ex-U.S. app stores and building the next generation of digital capabilities for Cue, including streamlined test-to-treat workflows that include prescription delivery.
We believe our plan future enhancements will provide an even more comprehensive and seamless digital health experience, including efforts we’re making to enable reimbursement directly on our platform. Right now on Cue, you can take a molecular diagnostic test for COVID -19, share your results securely with the physician, and visit with them, and they can write a prescription all without leaving the app. We are getting very close to having our eureka moment of linking diagnostic results with virtual care, and the final piece, antiviral and prescription delivery.
Our solution for COVID-19 is a major proof point as this diagnosis virtual care prescription delivery format is the heart of our vision for healthcare 2.0, and we’ll apply to other respiratory products, sexual health infections, and even for managing chronic diseases. Wouldn’t it be great if when your kid has a sore throat, you could just reach for Cue, run an accurate molecular tests and detect strep, talk to a doctor and have an antibiotic delivered?
In summary, with continued expansion of our customer base, test offerings and software and services, our team is making great strides towards our mission of making health care more timely and accessible. As we continue to build out the business, we’re excited by what we have in store for the near-term future. And I look forward to updating you on our progress on future calls. With that, I’ll turn it over to John to walk through our financial results.
John Gallagher
Thank you Ayub, and good afternoon, everyone. In Q4, we had total revenues of $192.5 million, a significant increase from revenues of $13.3 million in Q4 of the prior year. This was driven by our production capacity ramp, delivery on our initial DoD contract and expansion of our customer base across all customer category. Private sector revenues for the quarter grew to 54% or a $104 million.
This is the first time private sector revenue surpassed the public sector, reflecting growth and diversification in our customer base. Public sector revenues for Q4 were $88.5 million and accounted for 46% of revenues. During the quarter we completed shipment of our initial contract with the DoD. Also in the quarter, the expansion of our installed base continued as we sold approximately 40,000 readers, bringing our total number of readers shipped to over a 160,000 units as of December 31st, 2021. And due to the strong demand in the first quarter as a you’ve highlighted earlier. We’ve now shipped more than 230,000 readers.
Please note that as we onboard new customers, and because of the linkage to COVID prevalent, we expect reader sales to fluctuate quarter-to-quarter. Disposable test cartridge sales in the quarter were $165.4 million. Moving down the P&L, product gross margin was 46.3% for the fourth quarter of 2021, compared to 7.2% in the fourth quarter of 2020. The increase in gross product margin was driven by higher volumes as we expanded our production capacity throughout 2021. And despite global supply chain constraints, we have been successful in obtaining necessary components and meeting our customer’s expectations for supply of our product.
Operating expenses were $66.3 million in the fourth quarter of 2021, compared to $19 million in the fourth quarter of 2020. Sales and marketing expense was $21.2 million in the fourth quarter. We have ramped our spend as planned with a focus on digital marketing, advertising, and growing our commercial and marketing teams, including launching direct-to-consumer during the quarter.
R&D expense was $21.7 million in the fourth quarter. Again, as planned, we have ramped our investment in R&D with a focus on menu expansion and software development. G&A expense was $23.5 million during Q4. Net income for the fourth quarter of 2021 was $34.2 million compared to a net loss of $19.5 million in the fourth quarter of 2020. This translates to deluded EPS of $0.22 in the fourth quarter versus the loss of a $1.16 in the fourth quarter 2020. Net income for the fourth quarter reflects an effective tax rate of negative 44.9%. The negative tax rate in the quarter was driven by tax benefits related to utilization of net operating loss carryforwards and some accelerated depreciation. Moving on to full-year 2021. We had revenues of $618.1 million in 2021 versus revenues of $23 million in the prior year.
Private sector revenue accounted for 37.7% or $232.8 million of total revenue, and public sector revenue accounted for 62.3% or $385.3 million during 2021. Disposable test cartridge sales for the year were $490.3 million. Product gross margin for 2021 was 55.1%. Operating expenses were $151.3 million for full-year 2021, including sales and marketing expense of $28.7 million, R&D expense of $42.8 million, and G&A expense of $79.8 million.
Net income for full-year 2021 was $86.4 million, which translates to dilute EPS of $0.59 and reflects an effective tax rate of 27.5%. Adjusted Net income for the year was $164.5 million and translates to an adjusted diluted EPS of a $1.21. The non-GAAP adjustments are related to one-time impacts pertaining to our September IPO. Moving to the balance sheet. We ended 2021 with cash of $409.9 million. This cash positions us with a strong balance sheet, and the ability to invest in the business, and execute on our vision and strategy. I’d now like to move to our guidance.
For the first quarter we expect revenues of $170 million to $180 million. Our business today is highly coupled to COVID rates and resurgences. For example, the Omicron surge meant we saw strong demand for testing throughout the first half of the first quarter. And more recently, I have seen a tempering of demand as the number of cases has declined. This makes it difficult to predict how demand will progress throughout the rest of the year, so we are not providing full-year revenue guidance, but we plan to give an update on our Q1 call.
As you’ve highlighted, we continue to make progress with the expansion of our testing menu into different categories, including and most near-term respiratory and sexual health. Test menu expansion will diversify the business and we expect more predictable revenue streams going forward. 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
Thank you. [Operator Instructions] And our first question comes from Mathew Sykes from Goldman Sachs. Your line is now open.
Mathew Sykes
Hey, good afternoon, everybody. Thanks for taking my questions. I appreciate it. Maybe just to start with you just on the direct-to-consumer strategy congrats on getting that out in the fourth quarter. I know there is some adjustment in the pricing strategy that you had initially. I’m just wondering, as you think about the course of this year and that strategy overall, how much is pricing a lever you think for that strategy to drive additional volumes in your mind or are there other levers that you’re going to be using to continue to drive that forward?
John Gallagher
Hey, Matt, thanks for the question. This is John. I thought I’d jump in with the pricing aspect that you have there. So with the move on pricing was in advance of our Super Bowl advertisement that you heard us talk about on the prepared remarks, and that was more about feedback that we’ve had related to accessibility of our products. So it’s important to us to make sure that Cue is accessible to as many people that want it as possible, and so that’s why we’re looking at moving the pricing down in advance of that. As it relates to direct-to-consumer, we’ve been very pleased actually with the uptake that we’ve seen there. It’s still early, having just launched it in the middle of the fourth quarter but we’ve been really happy with the uptake that we’ve seen. And coincidentally, we did launch it into a time where Omicron came shortly thereafter. So we’ve been pleased with the volumes, but I’d say stay tuned for more on direct-to-consumer. And as it relates to pricing, then we’re always going to seek to be competitive in the marketplace.
Mathew Sykes
Got it, thanks John for that. And then just — you’d mentioned that private sector revenue in Q4 surpassed that of public. Could you just talk about some of the drivers within that, whether it’s corporate, direct-to-consumer, health systems, is there any main driver there? And as you look forward to this year, within those sub-segments, you didn’t see any big opportunities for you that could continue to drive that private sector revenue.
John Gallagher
Yeah, so that was notable that for the first time private sector revenue was greater than public. And you’re right, it represented 54% of our revenue on the quarter. And as we look at what some of the key drivers are, a reminder, we have four customer categories. And that’s the public sector and the private sector. Within the private sector, there’s three categories, it’s enterprise, provider which gives us access to the point-of-care market, and then direct-to-consumer.
So as we look at the acceleration that we saw in the private sector, then it was across all three of the customer categories, enterprise, provider, and of course, we launched direct-to-consumer. So we’re getting revenue for the first time there as well. One thing I’d point out is what’s driving the acceleration? What are we going to see continuing into the future is hey, we’ve increased our customer base. Since since the Q3 call, we’re now up to more than 220 directly contracted organizations.
So that’s a significant increase over where we were on the Q3 call. And that’s, as you would expect, that’s in enterprise and it’s in — it’s centered in provider where you’ve seen us make recent announcements with large health care networks like Johns Hopkins, University of Pittsburgh Medical Center, and then even last week for the first time in retail pharmacies with the partnership that we have with Albertsons, which is now going to be in 900 different retail pharmacies. So that has given us a very good customer base. And that’s what’s driving the growth that you see in the private sector.
Mathew Sykes
Great. And if I could squeeze in one more. Just on the public sector, there’s obviously been some news regarding federal level funding for COVID, but it seems like you’ve been able to pivot towards state and other levels of public sector opportunities. Could you maybe talk about how your public sector strategy may pivot over the course of the year, just given the funding environment which may change or be dynamic throughout the course of the year.
John Gallagher
As you look at the public sector, you’re right, Matt, we completed the delivery on the initial contract which allowed us to deliver 6 million test cartridges and 30,000 Readers which created a large installed base for us in the public sector. And we completed the delivery on that and in Q4 and what we’ve been seeing is that we’re getting engagement directly from the states, which is, as we would expect, related to having a durable, installed base across the public sector. And so while it’s still early and it takes time to have direct engagement with these states, we’re seeing the right demand signals coming in and playing off of the installed base in the public sector.
Mathew Sykes
Great. Thanks, appreciate the time.
John Gallagher
Thanks for the questions, Matt.
Operator
And thank you. As our next question comes from Tejas Savant from Morgan Stanley. Your line is now open.
Tejas Savant
Hey guys. Good afternoon and thanks for the time. Maybe John, just to kick things off on the first-quarter guide here. Could you give us a sense for what the mix of public versus private sector assumed in the guide is? And secondly, in terms of, I think you mentioned sort of not giving the full-year guide just yet, given some of these COVID trends, I’m assuming that implied a month over month decline through — in terms of your January through March trends year, would you be able to give us an exit run rate for revenue in March even though you’re stopping shy of giving a formal of the idea?
John Gallagher
Yes, Tejas, thank you. Thanks for the questions. First on the private versus public, I think you know that we’re in an RFP process with DoD and that process is ongoing. We don’t have an update actually on that process related to this phone call today. But what I would tell you is that when you look at the mix because we’ve delivered the initial contract in Q4, that with the guide on Q1 of 170 to 180, it’s almost entirely private sector and it’s notable actually pertaining to the prior question. Private sector revenue in Q4 was $104 million.
So as we’re looking at this guide on Q1, it’s $170 million to $180 million which is almost entirely private sector. So significant growth across these key customer categories that I was just mentioning. As you think about the no guide on the year and how to think about the quarter, yes, look for now, our revenue achievement is tied to COVID prevalence as we know, and it’s getting COVID isn’t predictable.
And what you did hear me say though is the beginning of the first half of the first quarter, we had higher volumes, and as we are exiting Q1 right now, the volumes are lower, not going to be able to guide what that translates to, but we’re certainly out of time right now where COVID testing volumes are a bit lower as we exit the quarter.
Tejas Savant
Got it. That’s helpful. And then as we think about the rest of ’22, I think Ayub, you mentioned in your prepared remarks, going live in Canada and Singapore today, I believe India is also in the mix here. So how are you thinking about revenue contribution from OUS cumulatively over the course of this year?
Ayub Khattak
So when we think about international expansion is look, we have a value proposition and vision of how we want to deliver healthcare. We think that the need is consistent globally, meaning everybody wants to have accurate diagnostics that they could leverage to have a more meaningful virtual care conversation, and then ultimately get treatment. We think that the universal customer need, and it’s global. So that’s one element. The other element from a business strategic perspective is that not only with COVID but some of the respiratory elements, they are going to have an element of seasonality to it.
And as a result, you would only want to be in the northern hemisphere, you want to be in southern hemisphere, you want to be in different countries to mitigate the demand pattern. So long term we want to have good commercial operations internationally, not only because it’s basically executing on our vision which we think is global, but also because it helps mitigate some of the seasonality we see in some portions of the menu.
Tejas Savant
Got it. That’s helpful. And I’ll just squeeze in a third one here. One of the resilient features of your business model here is the onshore manufacturing and you’re pretty scaled up there. Could you walk us through two things? I mean, one, there’s this input costs sort of pressures you’re which everyone is going through?
What does that mean for you guys having your manufacturing in-house and already scaled up? And second, as we think about the supply chain environment and the ongoing risks there, can you just give us a sense for the degree to which you have all the raw materials that go into the manufacturing process? Are you building up sufficient inventory to cater to these real-time changes in demand based upon COVID in the near-term?
Ayub Khattak
Yes. One of the things that we invest heavily in over time is really automation. And automation meaning like the automated assembly of our cartridges with minimal human input. So that’s been really very important for us from a quality perspective, a predictability, a scaling up. And it makes it so that on shoring production made a lot of sense because we, while we’ve created a lot of jobs, over 1,500 here, we also want to have a good cost structure.
And so the automated manufacturing allows us to do that. With regards to the actual supply chain, the operations team has done an excellent job duplicating, creating geographical redundancy on various components. Because when we created Cue and we started Cue, we understood that part of the business was going to be related to pandemics and we would need to be — have a lot greater control over our own supply chain.
So not only have we on-shored big parts of it, the vast majority, but we’ve also created a lot of our own critical components like our enzymes and our primers. And having a capability has really served us and has allowed us to see the type of growth and scale that you saw going from $20 million in revenue to $600 million revenue in the course of one year.
Ayub Khattak
That’s all because of the investments that we made pre -pandemic and because of the excellent execution following that. So we definitely see that the global supply chains are in turmoil and we see that’s what’s — what is happening in China with COVID that there’s a lot of difficulty ahead. But for most countries, try for most companies, but we think we’re in a great situ — we think we’re in a robust situation because of the investments we’ve made on-shoring and also scoping in a lot of the work that needed to be done and just owning the vertically integrated manufacturing elements.
Tejas Savant
Got it, super helpful, thank you.
Operator
Thank you. And our next question comes from Charles Rhyee from Cowen. Your line is now open.
Charles Rhyee
Hey, thanks for taking the questions, appreciate it. Maybe I could ask a little bit about the 1Q guide a little differently, and you talk about the Albertsons partnership, assigning them plus the 220 new customers. Maybe first a point of clarification. John, you mentioned now you shipped over 230,000 Readers. I think I heard you say at the end of fourth quarter you were at a 160,000 Readers. So does that mean we shipped 70,000 here in the first quarter?
John Gallagher
Hi Charles? Yes. Yeah. Your math is correct on that. So our installed base is now more than 230,000 readers shipped throughout as of now, really through the quarter that is, that’s correct
Charles Rhyee
Okay. That’s helpful. So if we think about the first-quarter guide, is it fair to think that part of that is shipping both readers and cartridges to places like Albertsons to set up for these kind of new partnerships? Or is this — how much would you say is that growth to readers already in the market and people using and ordering new cartridges?
John Gallagher
Related to your question, Charles on reader, the way to think about it is readers represent our install base, but they don’t represent a large proportion of our overall revenue dollars. So on a –as we look at it, readers on a quarterly basis generally represent anywhere between 5% to 10% of revenue. I don’t think you should think about the key one guide as 170 to 180 with a large portion of it being readers. In fact, it’s going to continue to be predominantly cartridge revenue from new customers and we highlighted the new customers that we’ve added, as well as from existing customers on the reorder rates that we’ve had from them on the contracts that they have in place.
Charles Rhyee
Okay. That’s helpful. And with those new clients, are there any upfront cartridge purchases or I guess more importantly as we think about past Q1, are there any minimum cartridge purchase requirements built into your contracts so you have some visibility on forward revenue, particularly on the cartridge side?
John Gallagher
Charles, so we’ve got a mix. Our business is a mix of all our card business so that people are buying at will and then we’ve got a mix of people that are on contract, both short-term and longer term in nature. And so what we’ve seen is the buying patterns are adhering to the contracts that we have in place. And I mentioned earlier, we’re also seeing our revenue achievement tied to the prevalence of COVID.
So it was those volumes were higher in the first half of the quarter. And as we exit the quarter, those volumes are lower and that’s not a surprise to anybody here. I don’t think. But you should view the 170 to 180 as being a mix of both of that.
Charles Rhyee
Appreciate it. Maybe I can sneak one last you talked about an Omicron specific assay. Does that also — is that also able to detect this new BA.2 variant as well?
Ayub Khattak
Yeah, the Omicron specific test is definitely able to detect BA.2 in addition to BA.1. And where we think it could be useful is in distinguishing from Omicron versus well as in the past and also what’s in the future, because the therapies as we’ve seen, are actually variant specific in a pretty significant way. Most of the monoclonal antibodies stopped working with Omicron BA.1, and the rest started failing with Omicron BA.2 packs loaded on their hand, still working for both strains and variants, and then we’ll have to see what comes next after Omicron. And that could help guide the genotyping assays for Omicron could help guide the therapy decisions once available.
Charles Rhyee
Great. Thanks, guys. I appreciate it.
John Gallagher
Thanks, Gerald.
Operator
And thank you. And ladies and gentlemen, [Operator Instructions] and our next question comes from Mark Massaro from BTIG, your line is now open.
Vidyun Bais
Okay, this is Vidyun on for Mark, thanks for taking the questions. Heard you talking about your manufacturing lines and prophecies remaining consistent, take solid approval. Could you maybe provide some color of which as your pipeline offerings, you’re placing the highest priority on in the near-term. And maybe also remind us on the pricing of those stakes.
Ayub Khattak
The menu expansion is definitely a parallel process thing. We have team members who are dedicated to one asset versus another asset. So we’ve identified a set of them that are very important and are near-term so flushing out the respiratory category, flushing out the sexual health category. Those are really near-term priorities because it fits in this really important model of going from diagnosis to talking to doctor, to getting the treatment.
And all these have that structure available, meaning there’s treatments for almost all of them. And so we don’t think of like rank order system [Indiscernible], we think of as a category, these are the ones that we really want to pursue and let’s pursue them in parallel. As an example, the Omacron test was very short development cycle for us. And the good example of what — it’s a good demonstration of our capability.
We’ve really built a modular system that is able to be updated very quickly and so we’re feeling really [Indiscernible] and with the milestones we laid out across the different tests that we have in our development pipeline. I think that shows that we’re executing really well on the R&D side and the clinical study side as well.
John Gallagher
And as it relates to the other part of your question on price, as we rollout our menu expansion test, we’re going to seek to be competitive on what the price points are out in the marketplace on tests like those. We’ve got the P&L to be able to do that. We’ve got a strong gross margin profile, and we’ve got the ability, as you’ve seen, us do, to be able to adjust price when necessary. So when we look at menu expansion, we’re going to seek to be competitive on any in the each of the tests that we roll out.
Vidyun Bais
Great. If I could add just a follow-up. Could you briefly comment on gross margins? I know there’s been talk of inflationary and supply chain pressure, so how should we be thinking about your prior target of 50% margins by 2023?
John Gallagher
Yes. So we’re not guiding on the margin today, but I think part of your question is though we were 46% in Q4, that’s down from 60% what it was in Q3, so what’s driving that? And the answer to that question is a couple of things, it’s really two-fold. One is cost increases, so you’ve heard us talk a little bit about navigating the global supply chain constraints. And as it relates to our cartridges and our readers, we have been successful in obtaining the components that we need to fulfill all of our customers’ orders and expectations, which is great, but we have had to pay up a little bit for that and that’s reflected in the margin.
And that’s as it relates to materials, as it relates to freight, and the likes. So that’s one component of what you see with the 46% gross margin on Q4. And then the other component is customer mix shifts. So we highlighted that the private sector is now in the quarter was 54% of our total revenue achievement. And that’s great, it’s good customer diversification.
And we talked about the expansion of our customer base, but as it relates to the margin, there is, as we do that mix shift. And we shift more to private sector and away from public sector, then there’s less deferred revenue that’s recognized. And deferred revenue has a higher gross margin. So when you take those two things together, that’s what’s reflected in the 46%.
Vidyun Bais
Okay, great. Thanks for taking the questions.
Ayub Khattak
Thank you.
Operator
And thank you. And I’m showing no further questions, this concludes today’s conference call, thank you for participating, you may now disconnect.
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