Q3 2022 Cue Health Inc Earnings Call

November 9, 2022

Good day and thank you for standing by welcome to the Q Health third 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 the session you will need to press star one.

One on your telephone you will then hear an automated message and advising you hit it right.

Please be advised that today's conference is being recorded.

Like to hand, the conference over to normal Williams.

Best Relations. Please go ahead.

Good afternoon, and welcome to Q third quarter 2022 earnings Conference call.

Joining me today are you.

<unk>, Chairman and Chief Executive Officer, and John Gallagher, Chief Financial Officer, a few health.

Before we get started let me begin by reminding you that we are making forward looking statements, including statements related to the expected performance of our business future financial results and guidance strategy long term growth and overall future prospects as well as the impact of the COVID-19 pandemic.

These statements are subject to risks.

Certainties assumptions and other factors that could cause actual results to differ materially from those described.

These risks and uncertainties include but are not limited to those outlined in today's call as well as other risks identified from time to time in our public statements and reports filed with the SEC.

Forward looking statements that we make on this call are based on assumptions and beliefs as of the date. They are made and the company disclaims any obligations to update these statements except as required by law.

Addition, on today's call non-GAAP financial measures will be used reconciliations between GAAP and non-GAAP financial measures are included in our earnings release.

Finally, I would like to mention that the press release and a recording of this call will be available on the Investor Relations page of our website.

With that I would like to turn the call over to au.

Thank you Laura and thank you everyone for joining us today.

I'd like to start by welcoming Dr. Sachin Jain to our board of directors, such as the President and CEO of scan group and health plan and an adjunct professor of medicine at Stanford.

Earlier in his career, such and was Chief Medical information and innovation officer at Merck and attending physician at Boston VA Medical Center.

Brett Harvard Medical and business schools.

We are excited to have such a vast knowledge of health plans in Paris, as well as perspective as a medical doctor to Q as we continued to pursue our vision of making the health care system more convenient accessible and timely placing diagnostic information at the center of care.

In the third quarter, we continued to make great strides towards our vision by combining our accurate at home and point of care diagnostics with our integrated virtual care platform.

Financially the third quarter reflects continued solid execution with total revenue of $70 million, driven primarily by stronger than anticipated demand from our existing customers.

We continue to make good progress on each of our growth drivers.

Let me start with broadening our customer base in the third quarter, we shipped over 9000 kilometers, bringing our installed base to approximately 250000 kilometers.

To help with future growth, we recently added a new chief commercial officer, Suzanne stone to our team Suzanne comes to us from desktop where she most recently served as head of revenue for North America.

His extensive experience navigating the triangle of payers providers and consumers.

As menu expansion continues she will lead our global commercialization effort across customer categories, including the point of care segment, we are well defined reimbursement pathways are already in place.

We are excited to have Suzanne joined the management team.

Shifting to our test menu expansion growth driver, we have made significant progress on several initiatives in our respiratory and sexual health offerings.

To provide some context hospitalizations of children RSP are at record levels hospitalizations are a decade high influenza for this time of year. It makes a code variances on the rise.

PDC is warning of a severe burden on the health system due to a triple debit. These.

These facts underscore the need for accurate and convenient diagnostic results to address these persistent threats at the home and point of care. In fact, historically RSP is the number one cause of hospitalization for intensive with influenza Paul inputs behind.

Providing convenient and quick access to diagnostic data and making it immediately actionable with therapy specific to the identified virus.

We'll make a dramatic difference in the way of these issues are handled.

I'm happy to report that for respiratory health, we've made very substantial progress on our pipeline above what we have communicated to date.

We have submitted the flu a b standalone de Novo application. We have also submitted the flu a b plus covered multiplex test for emergency use the application to the FDA in the third quarter with these submission we are one step closer to enabling people at home and health care providers to accurately diagnose flu, a and B and code early and conveniently at the home and point.

Of care in 30 minutes or less.

For RSV, we began clinical studies in the third quarter as planned and have been enrolling patients at multiple clinical sites.

Hope to complete enrollment and some of the de Novo application to the FDA in the first half of next year.

Most parents can relate to the common concern of strep throat among their children being able to identify strep early at home and at the point of care with an accurate molecular tests would allow for targeted antibiotic use and decrease the risk of complications such as rheumatic fever.

So we haven't previously indicated a timeline for scrap that I'm happy to report that we expect to be in clinical studies in this respiratory season.

We continue to anticipate that we will have a comprehensive test menu for the respiratory category next year, which will greatly accelerate our efforts to establish ourselves broadly at the point of care, where there is already robust reimbursement infrastructure for these tests.

Combined with the sexual health menu, our market research to build a strong existing market of around 50 million tests performed annually and in the home, we hope to secure payer coverage support for our respiratory offerings, starting with the most vulnerable among us immunocompromised I'll dig it out.

Really in young children.

Moving to the sexual health category, Chlamydia and gonorrhea infections have each reached a new high in each of the past six years. According to the CDC well.

Routine testing is recommended for all sexually active adult.

That is clearly not sufficient to handle the problem, we expect to start our chlamydia and gonorrhea clinical studies here in the fourth quarter, our solution will allow health care professionals and individuals individuals at home to screen more easily and if positive allow for quick delivery the proper antibiotic.

In addition to support our goal of having a robust test menu that broadens the appeal of the <unk> platform. We are pleased to report that we have developed a high sensitivity molecular monkey pox test, we expect to be able to execute analytical and clinical testing supporting use of EUA submission in Q1.

Overall, we achieved the three previously outlined near term menu expansion milestones in the third quarter with two FDA submissions and the startup of our RSV clinical study.

<unk> on track to deliver the remaining milestone to begin chlamydia and gonorrhea clinical studies before at the end of the year.

The team completed development of Strep throat, and Monkey pox test pushing progress more quickly than we originally planned.

We believe the strong progress on menu development will make the <unk> platform. The market's most compelling value proposition for home and point of care diagnostic needs for both respiratory and sexual health, which represent a present day 3 billion.

The market opportunity according to our market research.

I'm extremely proud of the team's ability to deliver on the product pipeline and I look forward to providing additional details on our test menu milestones for 2023 during our next call.

Moving to the digital capability growth driver I'd like to remind everyone that the durable key reader, which runs all the plant test and our pipeline is Bluetooth connected to the mobile device, providing digital results to the user. This connectivity immediately opens up substantial action ability on test results for both home users and at the point of care.

Where we are making progress on plug and play integration with all of the most common EMR systems building on the work we've already done integrating with both epic and Cerner at multiple hospital systems.

Acute care our program connecting diagnostic results for home users to health care providers for a quick consultation in medication delivery was launched in Q3 and is now available nationwide.

With our flu and flu plus COVID-19 submission into the FDA. We are preparing to expand acute care to include immediate consultation for influenza positive users with on demand delivery of one or multiple available FDA cleared prescription therapies.

These medications need to be taken in the first 48 hours after symptom start highlighting the need for early diagnosis and treatment, especially for the vulnerable among debt, including immuno compromised elderly and young children.

<unk> as a foundational capability for many new test the <unk> pathway is coming through the <unk> platform to address a wide variety of common health conditions and wellness concerns, particularly for test diagnosing condition for which there are specific treatments available for example for chlamydia and gonorrhea antibiotics are the standard treatment.

RSV has multiple antivirals coming and stripped out has oral antibiotics. All of these have a similar diagnosis to treatment workflow, which for home users allows for seamless connectivity of their test results to a medical professional and medication delivery services.

We believe this test to treat model will lead to better health outcomes.

In addition to our progress on growth drivers I'd like to highlight a recent third party study that found that our point of care molecular COVID-19 test is as accurate as Centralised lab based PCR test.

This study presents findings from a head to head comparison of the Q Covenant test against lab based RT PCR on paired samples from over 3000 individuals.

This study is special because of the size of the study and because the 63000 individuals we're testing prior to travel and therefore, almost all were asymptomatic.

The findings revealed a 99, 4% match between results from the <unk> test and the referenced PCR test, including 100% clinical sensitivity to detect positive cases building no false negatives.

This study by Fhl's add to the body of clinical evidence already available, including a previously reported Mayo clinic study validating that with Q U can achieve fast convenient diagnostic testing that is as accurate as lab based Pcr.

We believe these characteristics of accuracy speed and convenience will apply to all the tests in our pipeline.

This leads me to another executive update we recently appointed Dr. David <unk> as our Chief Medical Officer, Dr side with Board certified cardiologist and MD Phd trained at Columbia.

He has been working at the intersection of Health care and most recently at Apple Health, where he led a clinical team developing new health products, including FDA cleared products and cardiovascular health.

As our vision to make health care more convenient proactive and personalized extends beyond infectious diseases. We're actively pursuing a product roadmap centered on diagnostic capabilities to enable chronic disease management, especially for the world's number one cause of death and disability and the number one cost in the health care system cardio metabolic disorders, David as a board certified cardiologist.

Working at the intersection of Medicine technology bulk defined future diagnostic.

Diagnostic products and services, including our cardio metabolic care offerings.

In summary, I'm extremely proud of the strides we've made this quarter with a strong progress on the pipeline. The nationwide launch of acute care are foundational diagnostic to cheek capability and our recruitment a great. New addition to the board and management team.

Our recent investments in R&D are critical to enable.

<unk> pipeline execution, we've reported so far this year. These investments have laid the foundation and allowed us to home key organizational competencies, including test development software development regulatory expertise and manufacturing efficiency.

Looking ahead, we will build from our strong platform with increasing focus on our commercial and financial management success factors in support of our mission to enable personalized proactive and inform healthcare that empower people to live their healthiest lives.

With that I'll turn the call over to John .

Thank you <unk> and good afternoon, I will walk through our financial results before sharing our Q4 guidance.

<unk> third quarter total revenue of $69 $6 million was better than expected as COVID-19 testing demand was higher than anticipated and we saw strong <unk>.

Listing customers.

Revenue exceeded expectations for the quarter with our private sector, contributing 95% or $65 9 million of sales public sector revenues were $3 7 million for the third quarter and just total disposable test cartridge sales were $61 $4 million.

Moving down the P&L adjusted product gross profit margin was 28%, reflecting stronger demand for Covid test cartridges.

Our supply chain costs and lower overall production volume in the quarter.

Adjusted product gross profit margin excludes the one time inventory charge of $2 $6 million relating to inventory obsolescence.

Moving to operating expenses for the third quarter of 2022 total adjusted operating expenses were $86 $3 million sequentially Q3, operating expenses were comparable to Q2 spend of $86 4 million.

Sales and marketing expense was $18 1 million in the third quarter up from $17 million in the second quarter of teams continue to support our product offering through marketing and brand expansion efforts.

R&D expense was $42 5 million for Q3 slightly below the prior quarter's spend of $44 million.

<unk> is aligned with our menu expansion and software development priorities.

G&A expense was $25 6 million during Q3 of this year in line with our Q2 spend of $25 4 million.

As a result, the adjusted net loss for Q3, 2022 was $63.6 million or <unk> 43 per share.

And then adjusted EBITDA for the quarter was a loss of $37 $2 million. We believe the earnings before interest taxes, depreciation and amortization or EBITDA is a good proxy for cash from our operations.

Moving to the balance sheet, we ended the third quarter with cash of $304 7 million.

Italy, we have a $100 million secured revolving credit facility, which remains undrawn as a reminder, Q operates with no debt obligations.

Now I'd like to move to our guidance.

For the fourth quarter, we expect revenues of $45 million to $50 million, excluding recognition of any deferred revenue.

I'll remind you that we currently have a balance of $92 $4 million of deferred revenue on the balance sheet associated with our agreement with the U S Department of defense.

As you know forecasting COVID-19 testing demand beyond the near term is challenging therefore, we will limit our forecast a quarterly expectations.

In summary, the company continues to report better than expected revenue performance and execute on our growth drivers.

With our submissions for flu, a b plus COVID-19 multiplex and flu AB molecular tests, along with the recent progress in RSV Strep and sexual health test Q is making significant progress with our menu expansion.

While we expect our COVID-19 test to continue to generate the vast majority of our revenue. This year, we do anticipate new products will contribute more meaningfully in 2023 in line with our portfolio diversification efforts.

Zooming out given the current macroeconomic climate, we believe the strong cash position on our balance sheet and the ability to control our costs going forward is important to avoid having to tap the capital markets in the near term.

With Capex spend for manufacturing complete.

R&D sprint to the initial phase of menu expansion largely complete.

We have the ability to control spend while preserving our growth opportunity.

With that I'd like to thank you for your attention and I'll now turn the call over to the operator for questions.

Thank you.

As a reminder, you would like to ask a question. Please press star one one.

Your telephone one moment, while we compile the Q&A roster.

At this time I have a question it will be coming from Ta.

Savant.

Of Morgan Stanley Your line is open.

Okay.

Hi, this is neil on for pages.

Wanted to start with acute care can you talk about the engagement levels youre seeing for the offering and how many users have received positive results you see utilizing the service today.

Hi, Neil.

Acute care is off to a really promising start we're pleased with the feedback that we're hearing on it.

And although it's early.

We have some really good anecdotes around people being able to test at home be able to speak with a health care professional and then get their treatment prescribed and delivered to their doorstep and hours. So this is an important milestone for <unk> for Q, because we've been talking for some time now about closing the loop and home health care.

Sure.

And with Q care available now nationwide for both Q test users and other test users to be able to come in to our platform.

Speak with a health care professional and get treatment delivered is a key milestone in the reason why that is is we call that foundational to the platform. Because obviously it's helpful. As we look at Covid, which we have on the market today, but as we expand the test menu offerings. If you think about those other offerings that you heard in the prepared remarks.

Flu RSV strep sexual health each of those have a treatment option and so we would expect to see volumes increase so that's something over time, we will be able to break out for you.

As volumes increase but menu expansion is key to this foundational aspect of acute care offering.

Yes.

Got it thank you.

Building on what you were saying around the cost control manufacturing and R&D, but.

But considering the commercial ramp next year with manufacturing can you give us a directional sense of how youre thinking about opex trending in 2023 should we expect to see a step up next year.

Yes, so the comment the way to think about this is.

Ramped manufacturing and we did that during 2021 through 2022.

That investment is done it's complete and behind us and so the capex and the cash associated with it is complete as well when you think about the initial menu expansion effort. So the test that we just described on the call here than the R&D investment associated with those.

Basically done two are nearly complete and so the investment there is also pretty much behind us.

I noted on the call that <unk>.

Preservation of cash is important we have over $300 million of balance sheet cash we have $100 million untapped revolver that cash and liquidity is very important to us because we don't want to tap the capital markets in the near term and so the.

The point of the discussion there is not so much around.

It's not so much around trying to guide you on expenses for 'twenty, three but what it is.

As indicated to do is to say as we exit this year, we have a large amount of investment that's already been done that and we have the ability to control our spend while still preserving the growth opportunity I E expanding the menu and go in and go into market. So.

We can we can talk more as we get into 2023, so we're not guiding today, but it wouldn't be fair to think that expenses ramp in fact, what we're saying is we can control cost and preserve our cash.

Okay.

Got it and then one last from me.

That would be supply chain and input cost pressures evolved over the past few months and looking forward. How are you thinking about these pressures in 'twenty three.

Has that driven any new considerations around your go to market strategy as you look to continue expanding your installed base.

Yes, I mean look we've said over recent quarters that we do face some supply chain cost constraints and you see some of that come out in our gross margin, but overall, we've been quite successful at navigating what has been a very difficult supply chain environment and being able to supply our pre.

To our customers uninterrupted and so we expect to continue to be able to do that in fact.

As we look forward, we're very hopeful that supply chain cost constraints will alleviate we don't know that but we hope that over time and.

And we've been able to supply.

Throughout some of the some of the supply chain issues, because think about our readers have electrical components in them.

Our test cartridges also have circuit boards in them so.

But we've been able to supply and meet the demands of our customers throughout so it's not something we're overly concerned about.

Okay great.

Great. That's very helpful. Thank you for the time.

Thanks Neil.

Thank you one moment, while we prepare for the next question.

And I have the next question.

We will be coming from Mac Sykes of <unk>. Your line is open.

Hey, guys. This is David on for Matt Congrats on the strong quarter can you remind us how you think about the opportunity for reimbursement.

The ability to sell readers to customers.

And out of pocket costs.

Allow them to have covered by insurance.

Hey, David So the way we think about it is that there is.

Big opportunity already existing where the reimbursement is.

To the point of care, so as you heard in our.

Prepared remarks.

Our central focus for us because of the opportunity. There there is a lot of testing that's happening there.

That aligns with our menu and the reimbursement is already well structured in that.

In that venue.

In the home setting, there's a lot of opportunity there as well because fundamentally there is there is a good alignment between what the payers want.

And what.

What's good for the patient.

And what we.

We would like to be able to deliver so meaning that if you.

Immunocompromised people for elderly for young children.

They are vulnerable to the respiratory threats and to be able to have this products have <unk> in the home be able to early detect and early treat.

That's going to have a significant savings for them over time, and so it's really about.

Aligning with the payers on this value proposition.

And getting that.

The mechanism to get into the home and a reimbursable way.

So on the point of care side, you have good reimbursement structures, there that align well with our menu and then in the home setting you have a really good we have a really good opportunity with.

In particular, the durable opportunity around immunocompromised elderly and young children and protecting them and aligning all the stakeholders.

Got it thanks.

And with your pipeline of tests are those going to be de novo submissions or are you able to use a 500 10-K pathway for <unk>.

Oh.

The de Novo effectively as a five 10-K it was just the first one.

Where you see de Novo that just means.

It's the first submission there, but I would point out though that as we look at menu expansion, we have submitted de novo for flu for Covid.

Also submitted EUA for the flu plus Covid combo.

That's important because obviously that pathway sometimes can be.

Can be quicker, we certainly see a lot of headlines about RSV about flu and even COVID-19. This triple demick kind of.

Sentiment. So I just wanted to point out that it's not just de Novo slashed five 10-K, I think about those as sort of.

Together, it's also EUA pathways that could be somewhat speedier.

Got it thank you.

Thanks, Dave.

Thank you Juan <unk> for the next question.

Questions.

The next question, we have is from Mark Massaro of D. P. IV. Your line is open.

Hey, guys. Thanks for the questions and congrats on the progress.

I just appreciate all the.

Updates.

Related to your submission to the FDA, but that's all that's all going well I guess can you just comment.

If you've received any material comments I know you submitted the de Novo.

Blue <unk> on September one so you have had some.

Agencies had some time to look at it.

Any thoughts on any comments, you're receiving back and forth and then can you just confirm that you.

Our thinking that Youll likely have one of these tests, whether it's EUA or for 500 10-K out likely approved.

Sometime during this current respiratory season.

Hey, Mark yes, absolutely so.

The conversations with the FDA have been very constructive where an interactive discussions with them as it relates to the submissions that we've done thus far. So we're pleased we've had historically we've had a solid relationship with the FDA and that continues today.

And then as it relates to this respiratory season I think it's reasonable.

Two to assume some small level of of Q1 non COVID-19 revenue.

But of course, it's going to be dependent on the FDA approvals and what that pathway is going to look like you heard me mention the EUA for the flu plus Covid combo.

Obviously, depending on how this respiratory season goes it's possible that that could get accelerated we're in clinical studies on an RSV, which we entered during Q3 as committed.

And.

And those are going well, so I think.

It's going to be dependent on approvals, but I don't think its outside of reason to assume some small level of non COVID-19 revenue inside of Q1.

Okay, Great and then.

Can you maybe.

Help us think about the size of your <unk> clinical study.

Is that like materially larger than your flu RSV studies, I guess, what I'm trying to get at is.

Maybe just speak to the enrollment and whether or not you think potentially.

Potentially having any revenue in 2023 is feasible or if it's more likely into 2024.

Yes, Mark I mean, it's what I'd say is those studies as we said are beginning here in this fourth quarter that we're in now.

We wouldn't say, it's a larger study than others, but I do think it's fair to assume that we're going to get revenue from the sexual health category, specifically chlamydia gonorrhea inside of 2023, we do think that would be the case.

Okay great.

I was wondering if you could just maybe expand on any success stories or use cases coming out of acute care and then you guys did have a super Bowl commercial last year and you are a consumer facing company do you have any expectations on.

Black Friday, cyber Monday, or any type of holiday type promotional activity.

Yes, yes mark.

Yes times have changed since last year, I think it's fair to say.

On a macro economic environment and.

Obviously, we've got a strong push into each of our customer categories.

And consumer continues to be one of them in fact last quarter for the first time, we broke out the amount of our installed base was comprised of consumer but looking ahead one of the key things that we emphasized is the point of care opportunity.

Large market reimbursement is already in place there we have a lab quality test that's fast it doesn't require trained technicians.

It's small so doesn't make a lot of space in a doctor's office and and so we're really excited about the point of care opportunity in that and then it also connects to the electronic medical record so.

Yes, youre going to obviously see us continue to advertise and push into our other customer categories I'd say that given the statements that we made around preservation of cash that I think we'd be a little.

We'd be very prudent about where we're placing those AD dollars and recognizing that we are very focused on the point of care opportunity as I just described.

Okay, Great and then last one for you John on the P&L.

Sales and marketing came in $7 million below us in Q3 than.

R&D came in about $6 million.

Below us.

In Q3, and so do you think that the opex levels and Q3 are decent proxies for.

<unk>.

The coming quarters, and maybe just talk about some of the clinical trial work and some of the spend that might come out of R&D going forward.

Yes, Mark so.

We are very cost conscious youre seeing that in the results I am glad that you noted at the end.

And we are looking to control our spend as we said with a focus on cash.

So.

I don't think we will.

Sort of model it out in the 'twenty three but I don't think I think the levels that youre seeing in Q3, our representative for the remainder of 2022.

And then as I mentioned, we're very focused on preserving cash and controlling our spend so we'll talk more about 23, when we get there.

Alright, thats it for me thanks.

Thanks for your questions Mark.

Thank you as a reminder, if you like to ask a question. Please press star one on your telephone.

The next question will be coming from Steve Bryan of Cowen. Please go ahead. Your line is open.

Hi, This is Steve Brown on for Charles.

Congrats on the good quarter I guess, let's just start maybe on the <unk>.

Quarter revenue guide.

Could you just walk us through some of the key assumptions that I guess, the gold, resulting in like the sequential step down in revenues.

Hi, Steve Yeah sure so.

On the fourth quarter, we guided $45 million to $50 million of total revenue there.

As we put together that forecast and think about the guide then we're taking into account how much revenue is contracted what kind of run rates do we see in the business what do we think about Covid prevalence.

And then we and then we guide that Accordingly, I guess, what I would tell you is that.

Yes, it is down.

Sequentially, but I think as you look across.

Other players in this market than it is quite consistent actually when you look at sequential performance of of Covid on our <unk>.

Sort of a proportionate or percentage basis.

Q4 is a step down from Q3, so I don't think we are an outlier in that space, but.

To reiterate the guidance is $45 million to $50 million in Q4.

Okay, Great and then I guess.

As a as youre moving closer to filling out.

The product menu expansion here I guess have you started to notice any uptick in potential partnership opportunities.

So as it relates to the menu, we're very focused on.

Expanding the menu with the tests and the respiratory category in the sexual health category as we described.

And in connection with Q care, because that what that provides to US is we've got a best in class molecular diagnostic platform.

Coupled with <unk>.

Technology that enables users to either at the point of care or at the home take a test talk to a doctor and receive a treatment and so.

Executing on that is where our focus is.

To add something.

Italy, we see a significant amount of demand from our customers with regards to the future menu.

So when youre talking about partnerships, there's a lot of opportunity.

For more places for the product to go.

For more partnerships around the treatment loop.

And partnerships with.

Sure.

Other entities with regards to other parts of the platform acute care.

So there's just a lot of opportunity when we look forward to.

The menu when you look at all the different interested parties and the demand for what's coming.

Okay, great. Thank you.

Thanks for your questions.

Yes.

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

[music].

Good day, and thank you for standing by.

Welcome to the Q Health third quarter earnings Conference call. At this time, all participants are in a listen only.

After the speaker's presentation, there will be a question and answer session to ask a question. During the session you will need to press star one on your telephone you will then hear an automated message and advising you Haven is right.

Please be advised that today's conference is being recorded.

To hand, the conference over to normal Williams.

Best Relations. Please go ahead.

Good afternoon, and welcome to Q third quarter 2022 earnings Conference call.

Joining me today are you could talk chairman and Chief Executive Officer, and John Gallagher, Chief Financial Officer of Q Health.

These statements are subject to risks uncertainties assumptions and other factors that could cause actual results to differ materially from those described.

Looking statements that we make on this call are based on assumptions and beliefs as of the date. They are made and the company disclaims any obligations to update these statements except as required by law.

In addition on today's call non-GAAP financial measures will be used reconciliations between GAAP and non-GAAP financial measures are included in our earnings release.

Finally, I would like to mention that the press release and a recording of this call will be available on the Investor Relations page of our website with that I would like to turn the call over to au.

Thank you Laura and thank you everyone for joining us today.

I'd like to start by welcoming Dr. Sachin Jain to our board of directors, such as the President and CEO of scan group and health plan and an adjunct professor of medicine at Stanford.

During his career, such and was chief medical information and innovation officer at Merck and attending physician at Boston VA Medical Center.

Brett Harvard Medical and business schools we.

In the third quarter, we continued to make great strides towards our vision by combining our accurate at home and point of care diagnostics with our integrated virtual care platform.

Financially the third quarter reflects continued solid execution with total revenue of $70 million, driven primarily by stronger than anticipated demand from our existing customers.

We continue to make good progress on each of our growth drivers.

Let me start with broadening our customer base in the third quarter, we shipped over 9000 kilometers, bringing our installed base to approximately 250000 kilometers.

To help with future growth, we recently added a new chief commercial officer, Suzanne to Archie Suzanne comes to us from desktop where she most recently served as head of revenue for North America.

His extensive experience navigating the triangle of payers providers and consumers.

As menu expansion continues she will lead our global commercialization efforts across customer categories, including the point of care segment for well defined reimbursement pathways are already in place.

We are excited to have Suzanne joined the management team.

Shifting to our test menu expansion growth driver, we have made significant progress on several initiatives in our respiratory and sexual health offerings.

To provide some context hospitalizations of children RSP are at record levels hospitalizations are a decade high influenza for this time of year.

A mix of code variances on the rise Tvs.

PDC is warning of a severe burden on the health system due to a triple demick. These facts underscore the need for accurate and convenient diagnostic results to address these persistent threats at the home and point of care. In fact, historically RSP is the number one cause of hospitalization for intensive with influenza following close behind.

Providing convenient and quick access to diagnostic data and making immediately actionable with therapy specific to the identified virus will make a dramatic difference in the way of these issues are handled.

I'm happy to report that for respiratory health, we have made very substantial progress in our pipeline above what we have communicated to date.

We have submitted the flu <unk> Standalone de Novo application. We have also submitted the flu a b plus COVID-19 multiplex test for emergency use the application to the FDA in the third quarter.

With these division we are one step closer to enabling people at home and health care providers to accurately diagnose and B and Covid early and conveniently at the home and point of care in 30 minutes or less.

For RSV, we began clinical studies in the third quarter as planned and have been enrolling patients at multiple clinical sites, we hope to complete enrollment and submit a de novo application to the FDA in the first half next year.

Most parents can relate to the common concern of strep throat among their children.

Being able to identify strep early at home and at the point of care with an accurate molecular tests would allow for targeted antibiotic use and decrease the risk of complications such as rheumatic fever.

So we haven't previously indicated a timeline for step that I am happy to report that we expect to be in clinical studies in this respiratory season.

Combined with the sexual health menu, our market research will build a strong existing market of around 50 million tests performed annually and in the home, we hope to secure payer coverage support for our respiratory offerings, starting with the most vulnerable among us immunocompromised.

Really in young children.

Moving to the sexual health category, Chlamydia and gonorrhea infections have each reached a new high in each of the past six years. According to the CDC well.

Routine testing is recommended for all sexually active adult.

In addition to support our goal of having a robust test menu that broadens. The appeal of acute platform. We are pleased to report that we have developed a high sensitivity molecular monkey pox test.

We expect to be able to execute analytical and clinical testing supporting use EUA submission in Q1.

Overall, we achieved the three previously outlined near term menu expansion milestones in the third quarter with two FDA submissions and the startup of our RSV clinical study.

We remain on track to deliver the remaining milestone to begin chlamydia and gonorrhea clinical studies before at the end of the year.

In addition, the team completed development of Strep throat, and monkey pox debt pushing progress more quickly than we originally planned.

We believe the strong progress on menu development will make the Q platform that markets, most compelling value proposition for home and point of care diagnostic needs for both respiratory and sexual health, which represent a present day $3 billion market.

<unk> market opportunity according to our market research.

I'm extremely proud of the team's ability to deliver on the product pipeline and I look forward to providing additional details on our test menu milestone for 2023 during our next call.

Moving to the digital capability growth driver I'd like to remind everyone that the durable Q reader, which runs all the planned tests in our pipeline as Bluetooth connected to the mobile device, providing digital results to the user. This connectivity immediately opens up substantial action ability on test results for both home users and at the point of care.

While we are making progress on plug and play integration with all of the most common EMR systems building on the work we've already done integrating that both epic and Cerner at multiple hospital systems.

Acute care our program connecting diagnostic results for home users to health care providers.

Consultation in medication delivery was launched in Q3 and is now available nationwide.

<unk> as a foundational capability for many new test the <unk> pathway is coming to the <unk> health platform to address a wide variety of common health conditions and wellness concerns, particularly for test diagnosing condition for which there are specific treatments available for example for chlamydia and gonorrhea antibiotics are the standard treatment.

We believe this test to treat model will lead to better health outcomes.

This study presents findings from a head to head comparison of the Q Covenant test against lab based RT PCR on paired samples from over 3000 individuals.

This study is special because of the size of the study and because the <unk> 3000 individuals we're testing prior to travel and therefore, almost all were asymptomatic.

The findings revealed a 99, 4% match between results from Q test and the referenced PCR tests, including 100% clinical sensitivity detect positive cases building no false negatives.

We believe these characteristics of accuracy speed and convenience will apply to all the tests in our pipeline.

This leads me to another executive team update we recently appointed Dr. David <unk> as our Chief Medical Officer, Dr. Tsai, The board certified cardiologist and MD Phd trained at Columbia.

Working at the intersection of Medicine technology, both to find future.

Future diagnostic products and services, including our cardio metabolic care offerings.

In summary, I'm extremely proud of the strides we made this quarter with our strong progress in the pipeline. The nationwide launch of acute care are foundational diagnostic to cheat capability and our recruitment a great. New addition, the board and management team.

Our recent investments in R&D are critical to enable <unk>.

<unk> pipeline execution reported so far this year. These investments have laid the foundation and allowed us to home key organizational competencies, including test development software development regulatory expertise and manufacturing efficiency.

Looking ahead, we will build from the strong platform with increasing focus on our commercial and financial management success factors in support of our mission to enable personalized proactive and inform healthcare that empowers people to live their healthiest lives.

With that I'll turn the call over to John .

Thank you <unk> and good afternoon, I will walk through our financial results before sharing our Q4 guidance.

<unk> third quarter total revenue of $69 $6 million was better than expected as COVID-19 testing demand was higher than anticipated and we saw strong growth from existing customers.

Revenue exceeded expectations for the quarter with our private sector, contributing 95% or $65 $9 million of sales public sector revenues were $3 7 million for the third quarter and the total disposable test cartridge sales were $61 $4 million.

Moving down the P&L adjusted product gross profit margin was 28%, reflecting stronger demand for Covid test cartridges higher supply chain costs and lower overall production volume in the quarter.

Adjusted product gross profit margin excludes the one time inventory charge of $2 $6 million relating to inventory obsolescence.

Moving to operating expenses for the third quarter of 2022 total adjusted operating expenses were $86 $3 million sequentially Q3, operating expenses were comparable to Q2 spend of $86 $4 million.

Sales and marketing expense was $18 1 million in the third quarter up from $17 million in the second quarter as teams continue to support our product offering through marketing and brand expansion efforts.

R&D expense was $42 5 million for Q3 slightly below the prior quarter's spend of $44 million.

And is aligned with our menu expansion and software development priorities.

G&A expense was $25 6 million during Q3 of this year in line with our Q2 spend of $25 4 million.

As a result, the adjusted net loss for Q3, 2022 was $63 6 million or <unk> 43 per share.

Moving to the balance sheet, we ended the third quarter with cash of $304 $7 million. Additionally, we have a $100 million secured revolving credit facility, which remains undrawn as a reminder, Q operates with no debt obligations.

Now I'd like to move to our guidance.

For the fourth quarter, we expect revenues of $45 million to $50 million, excluding recognition of any deferred revenue.

I'll remind you that we currently have a balance of $92 $4 million of deferred revenue on the balance sheet associated with our agreement with the U S Department of defense.

As you know forecasting COVID-19 testing demand beyond the near term is challenging therefore, we will limit our forecast a quarterly expectation.

In summary, the company continues to report better than expected revenue performance and execute on our growth drivers.

Zooming out given the current macroeconomic climate, we believe the strong cash position on our balance sheet and the ability to control our costs going forward. It is important to avoid having to tap the capital markets in the near term.

With Capex spend for manufacturing complete.

And the R&D sprint to the initial phase of menu expansion largely complete.

We have the ability to control spend while preserving our growth opportunity.

With that I'd like to thank you for your attention and I'll now turn the call over to the operator for questions.

Thank you.

As a reminder.

He would like to ask a question. Please press star one on your telephone one moment, while we compile the Q&A roster.

At this time I have a question it will be coming from Ta.

Savant.

Of Morgan Stanley Your line is open.

Okay.

Hi, this is neil on for pages.

So wanted to start with acute care can you talk about the engagement levels youre seeing for the offering and how many users that received positive COVID-19 results TCE utilizing the service today.

Yes.

Hi, Neil.

Acute care is off to a really promising start we're pleased with the feedback that we're hearing on it and.

And although it is early.

We have some really good anecdotes around people being able to test at home be able to speak with a health care professional and then get their treatment prescribed and delivered to their doorstep and hours. So this is an important milestone for for Q, because we've been talking for some time now about closing the loop and home health.

There and with Q care available now nationwide for both Q test users and other tests users to be able to come in to our platform.

Flu RSV strep sexual health each of those have a treatment option and so we would expect to see volumes increase so that's something over time, we'll be able to break out for you.

As volumes increase but menu expansion is key to this foundational aspect of acute care offering.

Sure.

Got it thank you and so building on what you were saying around the cost of manufacturing and R&D, but.

But considering the commercial ramp next year with menu expansion can you give us a directional sense of how youre thinking about opex trending in 2023 should we expect to see a step up next year.

Yes.

The comment the way to think about this is.

Ramped manufacturing and we did that during 2021 through 2022.

Sure.

<unk> has done is complete and behind us and so the capex and the cash associated with it is complete as well when you think about the initial menu expansion effort. So the test that we just described on the call here than the R&D investment associated with those is basically done.

We are nearly complete and so the investment there is also pretty much behind us.

I noted on the call that <unk>.

<unk> of cash is important we have over $300 million of balance sheet cash we have $100 million untapped revolver that cash and liquidity is very important to us because we don't want to tap the capital markets in the near term and so the.

The point of the discussion there is not so much around.

It's not so much around trying to guide you on expenses for 'twenty three but it is indicated to do is to say as we exit this year.

We have a large amount of investment that's already been done that and we have the ability to control our spend while still preserving the growth opportunity I E expanding the menu and go and go into market. So.

We can we can talk more as we get into 2023, so we're not guiding today, but it wouldn't be fair to think that expenses ramp in fact, what we're saying is we can control cost and preserve our cash.

Okay.

Got it and then one last from me.

How will it be supply chain and input cost pressures evolved over the past few months and looking forward. How are you thinking about these pressures in 'twenty three.

Driven any new considerations around your go to market strategy as you look to continue expanding your installed base.

Yes, I mean look we've said over recent quarters that we do face some supply chain costs constraints and you see some of that come out in our gross margin, but overall, we've been quite successful at navigating what has been a very difficult supply chain environment and being able to supply our.

To our customers uninterrupted and so we expect to continue to be able to do that in fact.

As we look forward, we're very hopeful that supply chain cost constraints will alleviate we don't know that but we hope that over time.

And we've been able to supply.

Throughout some of the some of the supply chain issues, because think about our readers have electrical components in them.

Our test cartridges also have.

Circuit boards in them so.

But we've been able to supply and meet the demand of our customers throughout so not something we're overly concerned about.

Okay.

Great. That's very helpful. Thank you for the time.

Thanks Nils.

Thank you one moment, while we prepare for the next question.

And I have the next question.

We will be coming from Mac Sykes of <unk>. Your line is open.

Hey, guys. This is David on for Matt Congrats on the strong quarter.

You remind us how you think about the opportunity for reimbursement and the ability to sell readers to customers.

And out of pocket costs.

Allow them to have that covered by insurance.

Hey, David So the way we think about it is that there is.

Big opportunity already existing where the reimbursement is.

<unk> to the point of care so as you.

Hurting our.

Prepared remarks.

Our central focus for us because of the opportunity. There there is a lot of testing that's happening there.

That aligns with our menu and the reimbursement is already well structured in that.

In that venue.

In the home setting there is a lot of opportunity there as well as a fundamentally there is there is a good alignment between what the payers want.

And what.

What's good for the patient.

And what.

We would like to be able to deliver so meaning that if you.

Frank Immunocompromised people for elderly for young children.

They are vulnerable to the respiratory threat and to be able to have this products have <unk> in the home be able to early detect and early treat.

That's going to have a significant savings for them over time, and so it's really about.

Aligning with payers on this value proposition.

And getting that as the mechanism to get into the home and a reimbursable way.

So on the point of care side, you have good reimbursement structures, there that align well with our menu and then in the home setting you have a really good but we havent really good opportunity with <unk>.

In particular, the durable opportunity around immuno compromised elderly and young children and protecting them and aligning all the stakeholders.

Got it thanks.

With your pipeline of tests are those going to be de novo submissions or are you able to use a 500 10-K pathway for <unk>.

The de Novo effectively as a five 10-K it was just the first one.

So where are you.

<unk> de Novo that just means.

It's the first submission there, but I would point out though that as we look at menu expansion, we have submitted de novo for flu for Covid.

Also submitted EUA for the flu plus Covid combo.

It's important because obviously that pathway sometimes can be.

Can be quicker, we certainly see a lot of headlines about RSV about flu and even COVID-19. This triple demick kind of.

Sentiment so.

Just wanted to point out that it's not just de Novo slashed five 10-K think about those as sort of <unk>.

Together, it's also EUA pathways that could be somewhat speedier.

Got it thank you.

Thanks, Dave.

Thank you one moment, while paying for the next question.

The next question, we have is from Mark Massaro of D. P. IV. Your line is open.

Hey, guys. Thanks for the questions and congrats on the progress.

I just appreciate all the <unk>.

<unk> really.

Related to your submission to the FDA, but that's all that's all going well I guess can you just comment.

If you've received any material comments I know you submitted the de Novo.

So <unk> be on September one so you've had some at the agencies had some time to look at it.

Any thoughts on any comments youre, receiving back and forth and then can you just confirm that you.

Our thinking that Youll likely have one of these tests, whether it's EUA for a full 500 10-K out likely approved.

Sometime during this current respiratory season.

Hey, Mark yes, absolutely so.

The conversations with the FDA have been very constructive we are an interactive discussions with them as it relates to the submissions that we've done thus far. So we're pleased we've had historically we've had a solid relationship with the FDA and that continues today.

And then as it relates to this respiratory season I think it's reasonable.

To assume some small level of of Q1 non COVID-19 revenue.

Of course, it's going to be dependent on the FDA approvals and what that pathway is going to look like you heard me mention the EUA for the flu plus Covid combo, obviously, depending on how this respiratory season goes it's possible that that could get accelerated we're in clinical studies on.

On RSV, which we entered during Q3 as committed and and those are going well so I think.

It is going to be dependent on approvals, but I don't think its outside of reason to assume some small level of non COVID-19 revenue inside of Q1.

Okay, Great and then.

Can you maybe help us think about the size of your <unk> clinical study.

Is that like materially larger than your flu RSV studies, I guess, what im trying to get at is.

Maybe just speak to the enrollment and whether or not you think.

Potentially having any revenue in 2023 is feasible or if it's more likely into 2024.

Yes, Mark I mean, it's what I'd say is those studies as we said are beginning here in this fourth quarter that we're in now.

Okay great.

<unk> activity.

Yes, Mark.

Yes times have changed since last year, I think it's fair to say.

On a macro economic environment and.

Obviously, we've got a strong push into each of our customer categories.

A large market reimbursement is already in place there we have a lab quality test that's fast it doesn't require trained technicians.

It's small so doesn't make up a lot of space in a doctor's office and and so we're really excited about the point of care opportunity in that and then it also connects to the electronic medical record so.

Yes, youre going to obviously see us continue to advertise and push into our other customer categories I would say that given the statements that we made around preservation of cash that I think we'd be a little.

We'd be very prudent about where we're placing those AD dollars and recognizing that we are very focused on the point of care opportunity as I just described.

Okay, Great and then last one for you John on the P&L.

Our sales and marketing came in $7 million below us in Q3 than you.

R&D came in about $6 million.

Below us and in Q3 and so.

Do you think that the opex levels and Q3 are decent proxies for.

The coming quarters, and maybe just talk about some of the clinical trial work and some of the spend that might come out of R&D going forward.

Yes, Mark so yes.

We are very cost conscious youre seeing that in the results I am glad that you noted at the.

And we are looking to control our spend as we said with a focus on cash.

So.

I don't think we will.

Sort of model it out into 'twenty, three but I don't think I think the levels that youre seeing in Q3, our representative for the remainder of 2022.

And then as I mentioned, we're very focused on preserving cash and controlling our spend so we'll talk more about 23, when we get there.

Yes.

Alright, thats it for me thanks.

Thanks for your questions Mark.

Thank you as a reminder, if you'd like to ask a question. Please press star.

One one on your telephone.

The next question will be coming from Steve Bryan of Cowen. Please go ahead. Your line is open.

Hi, This is Steve Brown on for Charles <unk>, Congrats on the good quarter I guess I should start maybe on the <unk>.

Fourth quarter revenue guide.

Can you just walk us through some of the key assumptions that I guess I'll go resulting in like the sequential step down in revenues.

Hi, Steve Yeah sure so.

On the fourth quarter, we guided $45 million to $50 million of total revenue there.

And then we and then we guide that Accordingly, I guess, what I would tell you is that.

Yes, it is down.

Sequentially, but I think as you look across.

Other players in this market then it's quite consistent actually when you look at sequential performance of of Covid.

Sort of a proportionate or percentage basis.

Q4 is the step down from Q3 so.

I don't think we are an outlier in that space, but just to reiterate the guidance is $45 million to $50 million in Q4.

Okay, Great and then I guess.

As you are moving closer to filling out.

The product menu expansion here I guess have you started to notice any uptick in potential partnership opportunities.

So as it relates to the menu, we're very focused on.

Expanding the menu with the tests and the respiratory category in the sexual health category as we described in.

And in connection with Q care, because that what that provides to US is we've got a best in class molecular diagnostic platform.

Coupled with.

<unk> technology that enables users to either at the point of care or at the home take a test talk to a doctor and receive a treatment.

So.

Executing on that is where our focus is.

Rob do you want to add something.

Definitely we see.

Significant amount of demand from our customers.

With regards to the future menu.

You are talking about partnerships there is a lot of opportunity.

For more places for the product to go through.

More partnerships around the treatment Luke.

And partnerships with.

Other entities with regards to other parts of the platform acute care.

So there's just a lot of opportunity when we look forward. If you look at the menu. When you look at all the different interested parties and the demand for what's coming.

Okay, great. Thank you.

Thanks for your questions.

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

Q3 2022 Cue Health Inc Earnings Call

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