Q2 2021 Lucira Health Inc Earnings Call

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Good day, and thank you for standing by and welcome to the Sierra House Second quarter earnings Conference call. At this time, all participants are in a listen only mode. After the speaker's presentation. There will be a question and answer session to ask a question during this session.

We'll need to press star one on your telephone and if you require any further assistance. Please press star Zero I would now like to hand, the conference over to your first speaker today Hana Jeffrey from Gilmartin Group. Please go ahead.

Thank you Laurie and good afternoon, everyone earlier today.

<unk> financial results for the second quarter ended June 30th 2021 a copy of the press release is available on the company's website.

Joining me today on todays call are Eric Angleton, President and Chief Executive Officer, and Dan George Chief Financial Officer.

Before we begin I'd like to remind you that during this conference call. The company will make forward looking statements regarding future events.

We encourage you to review the company's past and future filings with the SEC, including without limitation the risk factors section in the company's annual report on Form 10-K, and quarterly reports on Form 10-Q, which identify the specific factors that may cause actual results or events to differ materially from those described.

These forward looking statements.

These factors include without limitation statements regarding product development product potential regulatory environment sales and marketing strategies capital resources or operating performance.

With that I'll now turn the call over to Eric.

Thank you Hannah good afternoon, everyone and thank you for joining us and welcome to the second quarter 2021 earnings Conference call I would like to start by saying that we are excited about the substantial progress we have made during the second quarter of 2021.

Sarah has capitalized on the solid foundation built since our inception, and we look forward to continued success. During today's call. We will recap the progress and accomplishments of the second quarter 2021 and discuss our ongoing strategy and talk about the future Dan.

We will then transition into a more detailed walk through of our second quarter financial results.

<unk> was founded on the mission of revolutionizing at home testing for infectious disease by putting lab quality molecular testing in a small easy to use form factor for us anytime anywhere that would produce PCR like quality result on the spot.

Our strategy has always been motivated by our belief that earlier treatment or quarantine with greatly aid in the fight against any infectious outbreak.

Shifting the current climate of testing begins with creating an accurate.

<unk> use and readily available tests.

We believe our platform checks all of the necessary boxes and will become a testing platform of choice for many different infectious diseases.

During the past year and a half we have seen a real time shift in the testing market and an increased need for decentralized testing the.

The unfortunate arrival of Covid helped to abbreviate. The typical time required to launch a decentralized testing platform.

Our COVID-19, all in one test kit was developed to help alleviate many of the burdens and logistical issues associated with centralized testing and to provide patients with an accurate and convenient testing alternative.

With Covid acting as the catalyst we are excited to continue to advance the Lucia decentralized testing platform.

I would like to provide a financial summary, before turning to a more detailed review of the second quarter.

Following the first quarter's commercial debut with Sarah produced record results in the second quarter of 2021.

During the second quarter, we recorded revenue of $12.4 million, representing a 175% sequential growth from the previous quarter of 2021 in.

In addition, our gross margin is continuing to improve sequentially as volume increases.

Although we anticipate that <unk> could be at a gross margin positive run rate by year end 2021, our focus is less on gross margin in the near term in favor of continued investment and production capability optimization during the second half of 2021.

Our quarterly revenue was a direct culmination of contributions from several key initiatives that we have been focused on throughout the first half of 2021.

These initiatives are rooted in the following areas one opportunities generated by the OTC indication.

<unk> opportunities from international demand and three worldwide reopening versus control of Covid in new areas.

During the second quarter, a leading driver of revenue for <unk> Sara resulted from the FDA issuing an EUA authorizing our OTC use of the Lucerne checkout test kit.

Blue Sarah Checkout, which allows users to detect a positive result in as few as 11 minutes.

Or to confirm a negative result within 30 minutes is available to individuals without requiring a physician prescription or health care professional oversight in.

In addition, the OTC EUA authorization has opened up many distribution channels and partnerships for loose era.

Regarding commercialization, we are focused on targeting large businesses and have initiated several partnerships during the quarter.

These partnerships reflect large orders of our test kits and.

And for their duration can provide steady recurring revenue as discussed as discussed last quarter. An example is our partnership with the Chase center in supporting their reopening.

We were the sole supplier of tests as the Chase center reopened to fans additional examples of commercial partnerships include maintenance, which customized a workflow for the Lucerne all in one test kit and was utilized by athletes and visuals traveling to Japan in the summer of 2021.

And more recently, <unk>, which negotiated authorization to sell though this year checkup test kit with <unk> as video observation services for travel to Hawaii, we are continuing to partner with businesses and distributors believe Lou Sarah can become.

A leader in decentralized testing.

Another key area of demand for us this quarter was from international customers and distributors with the rise of new Covid variance and much of the world is still experiencing low vaccination rates with Sarah is working to support partnerships and corporate customers, both domestic and international.

We had an international interest in the latter half of Q2, and we predict that this trend will continue and expect to see increased international sales in the second half of 2021, we plan to provide a regional breakdown <unk> established ordering cadence is achieved.

Also in the quarter the share of checkout test kit was available for online purchase through Amazon Dot com, creating a nationwide distribution channel for loose era late in the second quarter. We made the decision to temporarily halt sales through Amazon and our website as we prioritize distribution to our partnership.

We intend to reactivate online ordering again in the second half of 2021.

As the world begins to balance reopening with the emergence of new variants with Sarah aims to remain at the forefront of decentralized testing.

We are noticing that the market is evolving quality and reliability are more of a focus until the share of checkout is designed to optimize these factors in a convenient form factor that provides results on the spot.

Given the current environment it will be essential to continue forging relationships and partnerships domestic and international we believe COVID-19 will be endemic and will require testing for years to come and in the immediate future testing will be heavily relied upon as the world begins to return.

Roughly to normal.

Regarding new Covid variance, we perform routine surveillance of emerging variance, including the Delta variant and others by regularly evaluating reactivity against published sequence databases based upon these evaluations current variance that have been highlighted by the CDC and the <unk>.

<unk> are detected by our test. In addition, our technology enables test reactivity to new variance without sacrificing accuracy.

In addition to the accuracy of the Sarah test the companion Lucy pass text based reporting system AIDS reopening efforts. The Lucy pass provides users an easy way to receive a digitally verified test result, and to access this resolved for up to seven days on a smartphone.

As events and venues workplaces and travel continue to require proof of a negative test Lucy pass provides users with flexibility and convenience in fact it could be.

More time efficient and safer to test and results in the comfort of one's home hotel room or car and then to show a Lucy pass as evidence of a negative molecular test result, then to mingle among others of indeterminate COVID-19 status during group testing.

To support the sales ramp we have focused efforts on expanding manufacturing capabilities. During the second quarter of 2021, we announced at the opening of a new manufacturing center in the Dominican Republic with our manufacturing partner Jabil.

This new manufacturing facility has the potential to manufacture about 1 million units per month at full capacity loose air products is currently being produced at this facility. We are excited about the progress that has been made after only two quarters of commercialization and anticipate that this facility will be operating at full capacity.

In the first half of 2022 <unk>.

Investment in supply chain has been made to mitigate potential disruptions, resulting in more than approximately $36 million of inventory on our balance sheet.

In addition, although confidence in our ability to procure materials used in the manufacturing processes. We are aware of industry wide shortages that could result in certain materials being thinly supplied and as a result, we are keeping a close eye on this we of course have work to do but are gratified to see customers.

<unk> and businesses recognize our products unique attributes.

We will continue to optimize the supply chain and manufacturing in order to meet global demand.

In support of the manufacturing expansion and topline growth, we continue to add to our executive team and are pleased by the level of talent that we have been able to attract both to this team as well as throughout the company in May of 2021, we hired a chief revenue Officer, Kevin Collins, who brings experience as a.

Global commercial business leader, Kevin and churn hired a handful of seasoned healthcare professionals with commercial experience and their efforts immediately yielded additional partnerships in health care professional distribution and government channels. The investments in our sales organization is paying off.

And the demand from the business and global government community is building.

We continue to add experienced talent to the management team and throughout the organization commensurate with growth.

Looking to the future our focus is to build upon the momentum established in the first half of 2020. One we believe there is a significant growth opportunity with our COVID-19 test kit based on recent changes that many member states of the European Commission made in their policies, we made the strategic decision to forego apply.

<unk> for temporary allowance of our this year, a ticket test kit and countries that fall under the EC instead, we plan to submit our application through the standard CE certification process in the first half of 2022 for loose era check a test kit.

In June 2021, we decided to withdraw our last pending EUA application that was intended to expand the current prescription EUA to also include suspected asymptomatic individuals we decided it was more valuable to focus our efforts on a five 10-K, which we plan to some.

<unk> the FDA in the second half of 2021, we do not expect this withdrawal of this last pending EUA to have a revenue impact. In addition, we are increasing investment in assays and products for the detection of sexually transmitted infections and other respiratory infections and we have.

Fully resource the development of the multiplex COVID-19 flu product the.

The market demand for the COVID-19 test kit is underscored to us the utility of the <unk> technology, and we intend to capitalize upon the potential of this technology across many products.

While additional product launches will take time, we are redoubling investments just speed parallel development processes. We are excited about our future and look forward to the upcoming quarters I will now turn the call over to Dan George Our CFO for a detailed discussion of our financials.

Thanks, Eric and Hello, everyone.

Please refer to our press release issued earlier today for a summary of our financial results for the second quarter of 2021.

Overall from a commercial perspective, we had no activity in Q2.2020 in Q2.2021 represented our second full quarter of such activity.

Net revenue for the second quarter of 2021 was $12.4 million or net revenue was primarily driven by access to the OTC channel through our EUA authorization.

Resulting in direct sales to consumers contracted businesses and distributors in international sales.

Gross loss was approximately $70000 for the second quarter of 2021, and gross margin was negative 1%.

The decrease in gross loss and negative margin from the first quarter of 2021 was primarily the result of increased manufacturing production.

Selling general selling general and administration expenses were $6.1 million in the second quarter of 2021 compared to approximately 900000 in the same period in 2020.

The increase was primarily related to increasing head count and third party services to facilitate commercial launch in public company compliance.

R&D expenses were $10.1 million in the second quarter of 2021 compared to $4.6 million in the same period in 2020.

The increase was primarily related to activities to support new product validation new products.

And validation and manufacturing activities.

Loss from operations was $16.3 million in the second quarter of 2021 compared to $5.5 million in the same period in 2020.

The increase in operating loss resulted from our gross loss and increases in operating expenses as previously described.

Net loss was $16.2 million in the second quarter of 2021 compared to $6.6 million in the same period in 2020 the.

The increase is primarily related to the operating loss previously described.

We ended the second quarter of 2021 with $161.7 million in cash compared to cash of $58.2 million at year end 2020 the.

The increase in cash is primarily related to net proceeds received from our initial public offering.

Based on our current plans, we believe our existing cash resources will be sufficient to meet our capital requirements and fund our operations through 2022.

While we are not offering while we're not officially offering annual guidance for 2021, we do expect continued quarterly sequential revenue growth.

With the emergence of the more contagious Delta variant and low vaccination rates and most of the world combined with the ease of use and flexibility of our COVID-19 test kit, we believe demand will remain robust for the foreseeable future.

I'll now turn the call back back over to the operator for Q&A.

Okay.

Sorry to ask a question you will need to press star one on your telephone.

Draw your question Brad.

Again ill ask a question please press.

Scott wine.

First question is from Brian Weinstein of William Blair. Please ask your question.

Hey, guys. Good afternoon. This is Christian on for Brian Thanks for taking my questions here.

Just first on the <unk> partnerships can you give us a sense of the size of those going to be in dollar terms or volumes.

Are there any committed volumes moving forward and then just more broadly on partnerships like this in.

And I'll call it the institutional settings employers schools entertainment et cetera.

What kind of duration.

Are you talking with clients in these opportunities.

Now I would say script and that we won't get into necessarily specifics around those those partnerships, but I think that they are fairly representative of a lot of the deals that we're seeing today.

Kevin and his team has done a great job of bringing in a lot of contracts that have durability.

Forecasted volumes I would say greater than the majority.

What we're seeing now our contracts and purchase orders that that have forecasted amounts that range anywhere between.

Three to 12 months.

Got it.

That's helpful. Thank you.

And then just.

On the manufacturing ramp I heard the comment reaching full capacity in the first half of <unk>. Two can you just give us a sense of your current capacity in relation that $1 million per month.

Yes so.

Griffin, we're in the single digits.

We are in hundreds of thousands of units.

At this point.

And we're.

We're looking at a fairly linear trajectory.

To the $1 billion.

Yes, I might just want to throw a little bit of color there that that.

We kicked off the Dominican Republic facility here in the Q2 timeframe.

Just producing commercial units.

That Dr facility now.

So as we gain experience with with the Dr. Our capacity will grow and I would expect it to see call. It over time, 80% to 90% of our unit production will be derived from that facility.

Okay.

And then.

The decision to pull the online.

The distribution channel.

First is it fair to say that current demand is exceeding supply and then if you could quantify that in any sense based on inbound orders in the sales funnel any sense of just how much demand is outstripping current supply.

Well I would say that demand is robust right now.

We made the decision that we didn't want to partially fulfil that channel and we had larger larger commercial orders that we decided to prioritize.

So we felt that that was a prudent move to make especially considering that those distributors have a better opportunity to meet the demands of the public then we would just through our website or through Amazon.

Got it appreciate the time guys. Thank you.

Thanks, Kevin.

And our next question is from Derik de Bruin.

Bank of America. Please ask your question.

Hi, This is John on for Derek.

That's a very interesting agreement you guys Chuck I wanted to ask about.

How much volume you guys are getting the Olympics deal and more generally could you break out the OTT and the new channels.

The at home volume Thank you.

Yes.

We won't necessarily speak about the specifics around our deal with me today, it's more to be illustrative of the type of arrangements that were deals that were striking today.

Most definitely getting the OTC indication had a had a fairly dramatic impact on our demand as you can imagine as once you once we receive the OTC indication.

The rate limiters around receiving the script or going into a physician to actually get the product will remove so so those what those inhibitors being removed.

We were able to.

Expand our reach.

And I would say from an OTC perspective, we're looking at 70, 70% plus.

Percent of our total revenue is derived from.

That OTC channel versus the existing Rx at home channel.

Gotcha Gotcha Thats helpful.

And then.

In terms of the competitive landscape could you could you provide an update at <unk>.

<unk> and other is pushed into the at home market.

Yeah.

Yes so.

It's a very.

<unk> to them.

On the very nice product. This is a very different product that we have and that theres no instrument additional instrument required. The instrument is effectively built into our test at very low cost and that what that does it make solutia tests extremely easy to use.

We're as proud of the.

Consumer usability.

As we are the clinical results. So we are seeing.

At least for this era that we're growing off such a small base initially forwardly Sarah into such a large ocean of opportunity.

That we're not at this time, feeling the feeling impacts of competitive threats.

Okay. Thank you.

And our last question is from Brett Horn Watkins of lifestyle capital. Please ask your question.

Hey, guys. Thanks for taking my questions can you hear me okay.

We can go ahead.

Just a quick one from me in terms of how you guys are bringing back the online sales at Amazon and through your own website, maybe I know you touched on this a little bit maybe help us understand what the demand I guess exactly looked like in the past and then how do you kind of expect that to be a contributor looking ahead to the rest of this year and coming into next year.

Maybe I'll just comment qualitatively and then turn it over to Dan but.

We intend to bring back online ordering in the second half of the year, whether thats on Amazon or on our website or both.

To be determined, but Dan I don't know if you want to yes.

We see the businesses primarily be to be.

Going forward of course, we are going to offer the product.

At a consumer level as well, but I think.

Our sales team has done a great job of qualifying customers and we've had inbound interest from very sophisticated customers who.

Who really understand the importance of molecular testing.

Understand.

The requirements and needs for testing proactively so we.

We see that being.

Predominantly making up the lion's share of our demand for the foreseeable future.

Got it okay. I appreciate that and then I guess, maybe just one more in terms of manufacturing and maybe you could just provide a little bit more color on what's happening and what needs to happen between now and then to get to that optimal point.

Our manufacturing capacity.

Absolutely no we're delighted by the way with the partnership with Jabil that was the right partnership for <unk> Sara and.

A working relationship collaboratively, particularly well both in Michigan, where we started.

Impressive startup work and then later in the Dominican Republic.

With a great team and the Dr. So very happy with that.

It's just your standard.

Ramp up of a new manufacturing process.

<unk> extremely well, we're very pleased with it.

If we could wave a magic wand and make it go faster we would.

But these things go at a certain rate.

And the good news is we're applying the right teams to this.

We're very happy with the way it's going.

Got it okay I appreciate that.

Congratulations on a great quarter, thanks for taking the questions.

Thank you.

And we have a question from Derik de Bruin of Bank of America. Please ask your question.

Hey, Thanks for getting me back in I know you guys mentioned.

The sequential growth in revenues for the rest of the year, but.

Wondering what the outlet critical testing looks like.

From what you see for 2022.

I mean, we.

We're not necessarily going to talking about 2022, right now, but we see robust demand and.

And we see.

The majority of the world not being inoculated.

Being impacted by variance in.

And testing, becoming more and more important every day, so we're although COVID-19 horrible.

We're we're optimistic.

And we see that that we don't see any signs of slowing down.

<unk> for our product anytime in the near future.

Well.

We've been saying since the time of the IPO that Covid will remain endemic and and we're seeing a reinforcement of that for better for worse for society.

And.

That testing will continue to play a very important role.

Going forward you can imagine that.

It's going to take somehow controlling this over the entire planet.

To be able to significantly bring it under control and as the virus replicates in places where there is not vaccination not mask wearing for example.

And then the virus throws off.

Throws off variance in those variance can challenge existing control measures.

So.

For all of the above testing remains important.

And it's particularly important to be able to.

Identify asymptomatic positives for that.

At least from what we can see today, the only way to effectively do that.

As with a test like <unk>, that's that's molecular.

Very accurate.

Gotcha. Thank you.

Thank you Josh.

There are no further questions at this time I will now turn the call over back to Eric Engel.

Oh for his closing remarks.

Thank you Laurie.

I want to thank everyone again for your time this afternoon and for your interest in <unk> Health. We are very excited about the future at <unk> and we look forward to speaking to you soon.

Thank you.

And this concludes today's guidance.

Thank you for participating you may now disconnect.

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