LumiraDx Limited (NASDAQ:LMDX) Q3 2022 Results Conference Call November 9, 2022 8:00 AM ET
Company Participants
Colleen McMillen – Vice President, Communications
Ron Zwanziger – Chairman and CEO
Dorian LeBlanc – Chief Financial Officer
Conference Call Participants
Jeffrey Cohen – Ladenburg Tallman
Andrew Cooper – Raymond James
Operator
Good day and thank you for standing by. Thank you for joining LumiraDx Third 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] Please be advised that today’s conference is being recorded.
I would now like to turn the call over to Colleen McMillen. Please go ahead.
Colleen McMillen
Hello, everyone. We’d like to welcome you to today’s call to discuss LumiraDx third quarter 2022 financial results issued earlier today. With us are Lunar Dax’s Chairman and CEO, Ron Zwanziger’ and Chief Financial Officer, Dorian LeBlanc, the press release announcing our financial results is posted on the Investor Relations section of the Company’s website at lumiradx.com.
Before we begin, I would like to caution listeners that any statements we make today other than historical facts, are forward-looking statements made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. The — please be aware that all such forward-looking statements involve risks and uncertainties such as those detailed in our annual report on Form 20-F for the year ended December 31, 2021, which is filed with the SEC on April 13, 2022, and our reports on Form 6-K that was filed with the SEC on August 16, 2022, and in other filings that we make with the SEC. Any forward-looking statements that we make must be considered in light of these factors. Actual results may vary materially.
Also, during the course of today’s call, we may refer to certain non-IFRS financial measures. Non-IFRS financial measures should not be considered in isolation from or as a substitute for financial information presented in compliance with IFRS — there is a reconciliation schedule showing that IFRS versus non-IFRS results currently available in our press release issued earlier today, which can be found on our website at lumeradx.com. I will now turn the call over to Ron Zwanziger for opening remarks. We will then provide financial and business updates before answering questions. Ron?
Ron Zwanziger
Thanks, Colleen. Good morning, everyone, and thank you for joining our third quarter ’22 results call. As announced this morning, we continue to make progress commercializing new products to rise. At the same time, we’ve achieved substantial cost savings from restructuring with further scope to exceed our original target. These efforts advance our strategy to transform point of care diagnostics while strengthening our financial position.
As the overall market for COVID testing has dropped after the surge at the beginning of the year, we realigned our operations to address customer needs efficiently. We also strengthened our market position through expansion and diversification of our customer base, thanks to widely recognized performance and cost advantage of the competitors. As we begin manufacturing multiple non-covered test strips using common materials, we are realizing the benefit of our single highly automated manufacturing process across our menu of assays.
Third quarter revenues were about $42 million, mainly with covered sales. This performance was supported by expansion of our installed base and use cases in key markets, including the era. New product launches will contribute significantly to complementing covered revenues in the next few quarters, which I’ll cover shortly. We shipped 900 platform instruments in Q3, primarily to the U.S., Germany and Japan.
Instrument shipments to Germany and Japan represent opportunities in border respiratory and cardio metabolic testing. I want to highlight approximately 5% of test trip volume shipments in the third quarter were for non-contests such as INR, CRPDdiamond flu combo. These volumes are enabling customers to evaluate and pilot new use cases for point-of-care diagnostics.
Now sharing our progress and the four key priorities we’ve ended for advancing our strategy to drive financial performance to shape our organization and cost basis to support strong innovation and commercial success to commercialize our newly authorized CE marked product portfolio in Europe and other international markets to progress our revenue pipeline and 50k plan. and to accelerate the development of our highly sensitive troponin in molecular assays on the platform.
First, we take very seriously the path of strengthening the Company’s overall financial position, and this is awareness has resulted in the advancements towards that goal in Q3. Cost reduction has been a significant focus, and we have strong results to show from those efforts. We accomplished our initial plans targeting operating expense savings of $16 million per quarter, already implemented further cost reductions to bring this expected savings to approximately $18 million per quarter. We can further reduce our cost base is necessary to ensure sufficient cash resources throughout 2023.
As previously discussed, we’ve reshaped the organization and the cost base to focus resources on the skate strategic priorities I’ve highlighted, we are exploring strategic partnerships as we mentioned on the call, to provide additional avenues for redeveloping and commercializing our platform and look forward to updating you on these opportunities. We continue to deliver on our priority of commercializing new products in Europe and other international markets. We commenced commercial shipments of hemoglobin A1c and new finger stick assay for screening and monitoring diabetes that delivers results in under seven minutes. The rollout started with Europe and which is a key market for achieving our platform-cloconsolidation strategy at Primary Care.
Our initial test menu is designed to enable customers to consolidate three different instruments that are currently using into a single LumiraDx platform and workflow right now and the opportunity to standout to six instruments in the next 18 to 24 months. We are scaling manufacturing of hemoglobin A1c implant to launch additional countries in the next few weeks. Early customers include hospitals, pharmacies and enterprises that are looking to repurpose the LumiraDx platform for its broader testing capabilities.
We’re also on track to launch the NT-proBNP by the end of this year, positive initial feedback from key finally despite the value of diagnosing congestive heart failure in patients at community care settings using NT-proBNP finishing sample that delivers accurate results in proven. We commenced commercial shipments of our new five-minute cobot Ultra test, COVID Ultra pool and the CovidaFlu combination test, offering a comprehensive respiratory menu on a single platform delivers a critical advantage during this stage of the pandemic, given the need for customers to quickly and easily differentiate COVID from other widely circulating traditional respiratory viruses that are prevalent in the patient population this season.
We see significant demand from existing customers in Italy, U.K., Germany and Japan to convert some COVID testing to these new products. In addition, we’re seeing growth opportunities from new customers for COVID and food test, especially in Japan, in Japan, with early orders fulfilled for the current respiratory season. We believe this demonstrates the value of innovation in our respiratory portfolio and will aid in retaining and gaining market share and customer adoption. Shifting to the United States, we are addressing the opportunity to progress our U.S. revenue pipeline. In 2022, we more than doubled our testing site and now diversified our customer base for COVID testing across health systems, primary care, pharmacy and enterprise settings.
As previously shared, we are actively working on 510k submissions for both COVID Ultra and COVID-plus-flu combination test. We plan to initiate clinical studies during the current respiratory season. We plan to focus the rest of the year of next year, that is on accelerating and completing these programs and then initiating HbA1Cmolecular clinical studies and registration plans in the first half of next year. Next, our commitment is to accelerate the development of high-value assays and the capability to promote tests on our platform.
Our first molecular product in development is a true point-of-care TB test, which delivers results in 20 minutes from an easy-to-get ton swamp sample. We’re close to finalizing the strip design, having sized manufacturing test trips and are just initiating a premenclinical study in the field. In summary, we continue to progress on our strategic milestones, enabling us to deliver our mission for improved health outcomes at lower costs through fast, accurate and comprehensive diagnostic information at the point of need.
I’ll now hand things over to Dorian to go deeper into our financial performance. Dorian?
Dorian LeBlanc
Good morning. As Ron said, we have made significant progress this quarter to position our company for growth while strengthening our financial position. We believe that our focus on the four priorities Ron discussed, are experienced scaling production quickly during the pandemic and our manufacturing advantages position us to successfully grow new product volumes in 2023. Total revenues for the quarter were $42.2 million. This represents a $2.5 million decline from our prior quarter, which was primarily due to the impact of the strong U.S. dollar versus the British pound and the euro. Excluding the impact of foreign exchange, revenues in Q3 2022 declined 2% from Q2 2022.
Our point-of-care platform test strip revenues were $26.9 million and the total volume of test trips shipped within the quarter was equal to the total test trips shipped within Q2 2022. I Sales of instruments, accessories and other items related to our point-of-care platform were $1.7 million. Our fast Labs revenues were $9 million in Q3. Substantially all of the revenues for test trips and fast labs were derived from our COVID-19 products. Finally, our third-party distribution revenues were $4.6 million for the quarter. Our gross margins for the quarter were 20% compared to 11% in Q2 2022.
While core test strip margins remain strong, we recorded an additional inventory reserve of $9 million related to excess COVID-related inventory in the quarter, and we’ll continue to review the carrying value of our inventory for COVID-related items as we understand testing demand better while progressing through this respiratory season. Depreciation expense included in cost of sales for the period was $3.6 million. Excluding noncash items in the period, such as depreciation, amortization, stock-based compensation and the inventory reserves, total adjusted gross margins were 52%. We Again, our core test strip margins continue to exceed our target of over 80%.
The adjusted gross margins are reduced by the impact of instrument placements and revenue from instrument sales, fast lab reagent sales and our third-party distribution sales, all of which have lower gross margin profiles than our point-of-care test crops. We have a strong inventory position for instruments, reagents and test rip raw materials, which are common across our point-of-care testing products. As we manage down our inventories and operate with a reduced manufacturing expense base after our global restructuring, we anticipate revenues in the coming quarters to carry a high cash contribution.
Our non-IFRS R&D expenses for Q3 were $29.2 million, a decrease of 35% from the second quarter of this year. As previously discussed, we incurred higher R&D expenses in Q2 2022, achieving European CE marking of the new products that we are now launching. In addition, the global restructuring plan implemented during the third quarter reduced expenses. Our non-IFRS SG&A expenses for Q3 were $27.9 million or a decrease of 10% from the second quarter. The reduction was partially from our global restructuring program but was also impacted by the strong U.S. dollar as our European expense base for both R&D and SG&A translated into $2.5 million lower expenses in U.S. dollars for the quarter versus Q2 exchange rates. While we maintain a portion of our cash balances in pounds and euros, the net impact of a continued strong U.S. dollar is a benefit to the Company as our foreign currency expense base exceeds our foreign currency revenues.
While we cautiously guided there would be minimal impact in Q3 from our restructuring program, we were able to accelerate our plans in several areas and fully implement the program to realize our committed $16 million per quarter of savings from our first half 2022 expense base. As Ron noted, we have recently implemented additional cost reductions that will bring the overall quarterly savings to approximately $18 million.
As we progress through 2022 and move into 2023, we will continue to take measures to manage our cost base while focusing on our near-term commercialization activities and assay launches and on our U.S. 510(k) submissions. The non-IFRS operating loss for Q3 2022 was $47.9 million, representing a $22.6 million reduction in the operating loss from Q2 2022. We anticipate the impact of our global restructuring program to continue this improving trend. At the end of Q3 2022, we had cash and cash equivalents of $135.3 million, and we have the ability to ensure our existing cash position can fund the Company throughout 2023.
Thank you, and we’re now ready to take your questions.
Question-and-Answer Session
Operator
[Operator Instructions] The first question that I have is coming from Vijay Kumar of Evercore.
Unidentified Analyst
This is [Alexandra] on for Vijay. I have a couple of questions here. Maybe we can just start at the top with the HbA1C launch. And if you could talk about the reception and feedback you’ve seen there and when we see revenues ramp for that BNP?
Ron Zwanziger
Well, the response we have had even before we started shipping was excellent. Customers everywhere we have the platform in Europe and elsewhere, including where we don’t have registrations have been asking for the product. So the product performance is, as we’ve always said, that we provide land performance in the point-of-care setting.
We had some early studies with the testing agencies that look at the product from a performance, not from a regulatory standpoint and showed that we had exceptional performance. And so customers are picking it up. And we expect to see significant growth throughout next year and well beyond. We think it’s going to be one of the important — most important products in our portfolio.
Unidentified Analyst
Great. And then if I could just have a couple of follow-ups on the troponin test. When are we — or when can we expect to see data being published? And then also, what is the time line on the EU filing? And then I have a couple on the financials for Dorian as well.
Ron Zwanziger
Well, Japan is taking a little while. It’s been partly affected by the cost cutting that we’ve implemented. So I can’t be extremely definitive about exact timing. I will comment that the performance we’re seeing on the product is outstanding with where they are come. So I’m afraid I can’t be more definitive than that because of the cost basis, but we’re continuing to move the product forward.
Unidentified Analyst
Okay. And then just on the financials, I guess, two things. For the gross margins coming in slightly above 20% in the quarter. Were there any onetime impacts. And then from the restructuring that jump from $16 million to $18 million, does this change your path to profitability at all? The implied 4Q OpEx is around $60 million? Is that going to be a run rate that we can apply to $23 million.
Dorian LeBlanc
So on the gross margin, the largest issue that we’ve dealt with is the inventory reserves. So a $9 million inventory reserve. I think that the strength of the respiratory season will determine whether we have additional inventory at risk, and we’ll continue to assess that. But that was the largest onetime item in the gross margin. On the reductions, the $18 million quarterly reduction is off of the expense base from the first half of the year.
So we should see that continue to get the full impact here in the fourth quarter and substantially all of those measures have been taken and completed. And then going into next year, the path to profitability is a question both on the expense base and on the revenue ramp and the impact of COVID, but we do anticipate at these revenue levels that we’d be approaching breakeven as we exit 2023.
Operator
The next question that we have will be coming from Jeffrey Cohen of Ladenburg Tallman.
Jeffrey Cohen
Ron, you had talked about the metabolic platforms. And I think you called out 1/3 of shipping into U.S., Germany and Japan were on that front you tell us more specifically what types of tests were going in? And was that Q3 shipments and specific to those three countries?
Ron Zwanziger
Dorian, you probably have more in the detail, but the shipments into Germany and Japan were primarily driven by non-COVID, they were driven by flu and A1C or preparations for A1c and other tests. Dorian, do you have a better answer?
Dorian LeBlanc
Yes. The Japan were driven largely by the flu test. And then for Germany in that area of Europe, it really is our strategy of selling the multi-analyte solution by combining the respiratory with INR D-dimer CRP, A1c stuntPro, we can displace three of the leading competitive instruments in a single customer location with a single solution.
So that value proposition of being able to displace multiple instruments with higher performing and cost competitive content is really beginning to take hold here and really just starting to take hold at the very end of Q3, and that’s what has us excited about the momentum in Q4 and heading into 2023 able to adopt that commercial strategy that we’ve been waiting to adopt with the launch of A1C in particular.
Jeffrey Cohen
Okay. Got it. And then Dorian, any further color on forward-looking on the OpEx expenditure? Was your $18 million reduction call out off of Q3’s $57 million on an OpEx front?
Dorian LeBlanc
The $18 million is off of the expense base from the first half of the year. So we did realize a portion of that within Q3, and we did have the benefit of the foreign exchange. So if that — if the dollar stays where it is, obviously, that will endure. But you should think of it as an $18 million reduction off of the expense base in the first half of the year.
Jeffrey Cohen
Got it. And then any further color on the finance expense taken for the third quarter? I know that a fair amount of it was labor related and staffing.
Dorian LeBlanc
The finance expense below operating income, is that Yes. So none of that was related to the restructuring. We included those costs within the core operating expenses, and we may break those out in Q4 in Q3, they weren’t substantial. The largest expense in finance expenses is just the internal revaluation of intercompany balances between the group that are long-term balances. So we have a lot of pound functional currency entities. And we — and they have intercompany balances with our U.S. dollar entities. And as the currencies move, that’s just a noncash revaluation internally will never lead to any cash impact for the Company. We call that out IFRS adjustments.
Jeffrey Cohen
Got it. And then finally for us, can you talk about the Ultra platform a little bit as far as number of tests now on it currently? And any other of the test out there, whether they be respiratory or metabolic that you plan to get faster with the Ultra platform.
Ron Zwanziger
Well, the Ultra platform, which because even increased performance, even though our first test already achieved Labco performance and reduces the time of the test considerably is gradually going to become the standard for our product over time. And so we currently have the cover on it, but the flu and flu beyond Europe is going to be on it. And — but over time, all our tests will be on it.
Jeffrey Cohen
Okay. So we’ll hear more about that happening test by test going forward, I suppose?
Ron Zwanziger
Yes. We’ll give you a constant update. Sure.
Jeffrey Cohen
Okay. That’s perfect. And then one more question on the fast labs were primarily COVID-related, the fast lab revenue for the quarter. And any outlook there on how that might look through the balance of this year and next year on faslo? Or should that largely kind of follow the path with regard to general colocation.
Ron Zwanziger
Well, it’s a complicated question because we are starting to put additional tests onto the platform. So that brings an assessment of regulatory issues into play by countries. But we are in the process of turning what originally was supposed to be a product was to help in the pandemic, but it’s taken such a hold in the labs that we are turning it into a fully placed product line, and there’ll be a bunch of other tests on it going through the usual procedures.
Operator
I have next question is coming from Mark Massaro of BTIG.
Unidentified Analyst
This is Vivian on for Mark. First, wondering if we could revisit the long-term revenue target of exiting 2025 at a run rate of $1 billion in revenue. Is that still your thinking? And any thoughts you could share on your updated view for endemic COLET or flu contributing to the 15% to 20%-ish range of revenue?
Ron Zwanziger
Well, taking the last question — your second part of your question first. we have taken the view pretty early in the pandemic that we thought that the most likely outcome would be an endemic phase, which would essentially move the respiratory part of our business from about 10% long term to maybe more in the range of 15% to 20%. And I don’t think there’s anything we’ve seen recently that changes that view. I’m talking about 15%, 20% has changed our view on that. So that’s pretty much the same.
So we haven’t changed. On your first part of your question about our target revenues, because of the — because our focus at the moment is very much on the short term and many of us are — the current test that we have in Europe a launch, making sure that those will get launched in the U.S. next year. Our focus is very much on those and part of the impact of cost-cutting inevitably hits some of the R&D programs longer term. So although we haven’t sort of looked at what the specific question you asked, given sort of the nature of being much more careful about investing in R&D as a result of us being very focused on cash and utilizing cash more effectively in — particularly in the short term. I we haven’t thought that through specifically in detail. But I have to say, I think it will be impacted because of our focus on cash.
Unidentified Analyst
Okay. Understood. So could you just remind us, just following the restructuring, what the highest priority near-term R&D pipeline assays are the stage of development they’re in? And any updated outlook on when you might resume development of Amira?
Ron Zwanziger
Well, on Amira, we’re not running in rushing into that. So I don’t think — we certainly don’t have a date on that. That’s more pandemic related and let’s hope the pandemic doesn’t recur vigorously because that would certainly cause us to go back to it. But in terms of — in the short term, the fastest way to get revenues up, of course, is to bring — to not only focus very hard on the test that we have now in Europe because we’ve now — as we launch the NT-proBNP in Europe, which is imminent, we will have the base business for community-based testing. And so we have a wonderful set of tests that they replace three instruments at the moment.
So that’s our focus, and that’s why we’re very focused next year on working the regulatory aspect to bring those into the U.S. But in terms of some of the items that are in the pipeline that we’re focused on, molecular Strep, which I think we mentioned those that we are focused on near term as well. Strat in general is one of the missing items in our portfolio. So we’re pretty focused on that. So that’s one example of something that we’re focused on in the short term, but it’s not already in the immediate launch.
Operator
And we have our final question will be coming from Andrew Cooper of Raymond James.
Andrew Cooper
Thanks for the questions here. Maybe just kind of circling back on the pipeline and on the trajectory there. When you first talked about these cost cuts, the language was doing so in a way that didn’t necessarily slow down some of the higher priority launches. So we’re sitting here today thinking about Troponin coming a little bit later and potentially because of that. I think you had said Group A Strep, you were going to run these trials as respiratory season. So I guess, is that still the case? And then just how do we think about combining there or rectifying the difference between — there shouldn’t be major impacts on some of the more exciting near-term potential versus kind of what we’re hearing today on some slip outs of at least a couple of different items.
Ron Zwanziger
So the way to think about it is what’s relevant in community-based settings so that we have real solutions in those settings, whether it’s in doctors’ offices or the pharmacy. And so our willingness to let troponin slip because it doesn’t — it’s a separate target. Obviously, you don’t need to point testing in the community. It’s ER-based test. And although we have quite a number of ERs, the vast majority of our installed base and where we’re heading remains in the community. So as we’re being careful, we can let that slip. And — but in the case of groups of the tree, group-based strategy, you called it test, that’s a community base. So we’re working on that. And we’re working on other tests as well, which are community-based in the short term for the short term.
Andrew Cooper
Okay. That’s helpful. And then maybe one more. Last call, I think you had talked about ongoing discussions for potential strategic partnerships. Ideally, I think you had said you’d like to have something by the end of the year. So just can you give us an update on how those conversations have gone, where you’re sort of focused in those conversations, whether geographical or in different parts of the market and what we should be expecting from a communication standpoint around that initiative.
Ron Zwanziger
Well, I won’t go into for obvious reasons, actually exactly where the nature of them all. But we’ve got to the stage now where we’re talking particular details with several of the strategic one or two have got to be complicated because they’re more interested in a full acquisition. We — but we remain focused on working a strategic relationship. We hope to narrow the field down by the end of the year to two and at the most three and then finalize something soon thereafter.
Operator
I would now like to go ahead and turn the call back over to CEO, Ron Zwanziger for closing remarks.
Ron Zwanziger
Okay. Thanks, Lisa. Let me just conclude by saying we took timely action to right size our business as the cover demand shifted to an endemic stage as we near the end of this year and looking ahead to the coming year, we’re in a position of strength in which to address customer and market opportunities efficiently. Indeed, while focusing our financial operations and strengthening the Company’s financial position, we’ve reinforced our market position with customers and advanced our product and pipeline strategy for transforming the $50 billion point of care market. We look forward to updating you on our progress and appreciate your continued support. Thanks very much.
Operator
Thank you for you all for participating in today’s conference call. You may all disconnect. Everyone, have a great day.
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