Cue Health Inc.

Q1 2023 Earnings Conference Call


spk07: Good day, and thank you for standing by, and welcome to QHealth's first quarter 2023 earnings call. At this time, our 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'll need to press star 1-1 on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star 1-1 again. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Lorna Williams, VP of Investor Relations. You may begin.
spk02: Good afternoon, and welcome to Q's first quarter 2023 earnings conference call. Joining me today are Ayub Katak, Chairman and Chief Executive Officer of QHealth, and Asim Javed, Chief Financial Officer. Before we get started, let me begin by reminding you that we may be making forward-looking statements, including statements related to the expected performance of our business, future financial results and guidance, strategy, long-term growth, and overall future prospects, as well as the impact of the COVID-19 pandemic. These statements are subject to risks, uncertainties, assumptions, and other factors that could cause actual results to differ materially from those described. These risks and uncertainties include, but are not limited to, those outlined in today's call, as well as other risks identified from time to time in our public statements and reports filed with the SEC. Forward-looking statements that we make on this call are based on the assumptions and beliefs as of the date they are made, and the company disclaims any obligations to update these statements except by 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'd like to turn the call over to AU.
spk00: Thank you, Lorna, and thank you everyone for joining us today. Q's financial performance for the first quarter delivered $25 million of total revenue, which is at the top end of our guidance range. and we ended the quarter with $178 million of cash on hand. While these results are predominantly from our COVID-19 product, we are making significant progress in our strategic plan to improve the way healthcare is delivered with diagnostic-enabled care at the heart of everything we do. I believe we are well-positioned for future growth, but realistic that today queues an in-between period. We are in between the success we saw from deploying our initial COVID product and success that we believe will come from our expanded product offering and the execution of our unique flywheel opportunity, which we believe will return us to growth in the second half of the year. We have largely completed the significant investment that will power our future growth and innovation in at-home and point-of-care diagnostics, namely our $250 million in capital expenditures to build up our automated manufacturing infrastructure and the $200 million we spent on R&D over the last two years to deliver major progress on a pipeline and menu expansion for our core QHealth monitoring system and to build our digital capability. Additionally, our investments in expanding the Q integrated care platform have resulted in new product lines to enable telemedicine, lab-based testing, and most recently, an expanding universe of treatment capabilities for the launch of Q Pharmacy. Now, as we work towards regulatory approvals on the tests we have already submitted and finished clinical studies on the final few new tests of this first major R&D push. A key focus is on cash preservation, given the macro environment. To that end, we announced last quarter we made roughly $100 million in annualized cuts to our spend. In the last week, we announced an additional $50 million in expected annualized cost savings. This combined $150 million in annualized cost savings will allow Q to weather the macro climate to reap the benefits of our investments. as our planned tests come out of the pipeline and we gain commercial traction on the Q integrated care platform products of QCare, QLab, and QPharmacy. For menu expansion on the QHealth monitoring system, we continue to make significant progress on a comprehensive respiratory care offering. We're happy to share that we submitted our QRC molecular test for a full de novo submission for at-home and point-of-care use. We remain in productive conversations with the FDA for our flu plus COVID multiplex test are fluid de novo and COVID de novo submissions. We do expect a decision on our COVID de novo soon. We've had continuing engagement with the FDA for our fluid plus COVID multiplex and are hopeful that we'll have this test authorized before the beginning of the respiratory season. Rounding out the pipeline on the respiratory side, we've made good progress on our strep throat molecular test and clinical studies and do continue to expect we'll submit this test to the FDA in the second half of the year. In the sexual health category, we announced last quarter we received FDA authorization for our mpox molecular test, which we expect to begin commercializing in the next quarter. Our chlamydia and gonorrhea test is making good progress in its clinical studies, and we continue to expect a submission to the FDA in the second half of this year. Stepping back and reviewing our opportunity, for a molecular test portfolio like the one we have developed, the point of care represents the largest near-term opportunity because of the reimbursement structure. that aligns well to the cost structure of a molecular test. We believe that Q has an industry-best workflow for running tests and data flow, both of which allow for the system to flex into a wide band of settings, including retail pharmacies, doctors' offices, urgent cares, and emergency departments. When our first major phase of menu expansion is complete into both the respiratory and sexual health categories, we expect to have an industry-leading menu for molecular point-of-care testing. The point of care market for diagnostic testing is large and underserved, and we believe our largest near-term opportunity. Cold and flu-like symptoms are the number one reason for doctor visits in the U.S. with sexual health, especially chlamydia and gonorrhea being another top reason for a visit to the doctor. Moving on to the Q integrated care platform, where we've introduced several important products and services, including Q Care, our telemed solution, at-home diagnostic test kits, and just this week, a new suite of treatment capabilities in Q Pharmacy. Our test-to-treatment platform closes the virtual care loop, enabling individuals to take a test from the comfort of home, consult with a clinician to discuss treatment options, and if appropriate, have medication delivered in a matter of hours. While we envision the diagnostic portion of the virtual care loop for many common conditions, flu, COVID, RSV, STIs, et cetera, taking place on our core QF monitoring system, to complement our test cartridge capabilities and enter the broader diagnostic market, including lab-based testing, We recently launched a collection of at-home test kits for customers to access a wide variety of diagnostic panels and standalone tests that are delivered to their home and returned to a lab for processing. Customers receive test results in the QHealth app where they are presented with treatment options and have access to virtual care. We continue to build on our treatment capabilities where we've already enabled treatments for COVID, flu, UTIs, and sexual health conditions to a growing number of other common health and wellness needs. QNOW offers convenient access to prescription medication options related to sexual health, including birth control and treatments for erectile dysfunction and herpes, as well as hair loss, with more on the way. On the web or using the QLF app, customers can consult with a clinician to get advice about their condition and, if medically indicated, receive a prescription medication delivered to them as a subscription service. This is an exciting opportunity, as we believe the adoption of telehealth and medication subscriptions for common health concerns is a secular trend that was accelerated by the pandemic, but is now here to stay. While these new offerings are in the beginning stages of launch, we are receiving positive feedback from customers. I'm proud of our efforts to evolve the Q-integrated care platform, enabling customer-centric end-to-end solutions that empower people to live their healthiest lives. With continued progress on our menu expansion pipeline and the launch of major new product lines within our integrated care platform, We're executing on our strategy, and I believe we are well positioned for future growth. In the meantime, we will continue to manage our cash prudently as we progress our menu expansion through the regulatory process and gain early traction on our new set of products. With that, I'll turn the call over to Asim.
spk04: Thank you, Ayub, and good afternoon. Since the beginning of the year, Q has announced two cost reduction programs to align the company to the current macroeconomic environment and COVID testing volumes. We expect these actions to result in a total of $150 million in annualized run rate cost savings. In Q1, we already achieved approximately $100 million of annualized savings. We are comfortable that this lower rate of spend is sufficient for us to continue to execute on our highest priorities, including regulatory approvals and commercialization of our new molecular tests, key development programs, and gaining early traction of Q Pharmacy and Q Lab. Now let's walk through our financial results and Q2 guidance. Q's first quarter total revenue of $24.8 million was at the high end of our guidance range. In the quarter, our private sector contributed 98% or $24.2 million of sales. Public sector revenues were $0.6 million for the first quarter, and total desk cartridge sales were $22.4 million. Q1 adjusted product gross profit margin was a loss of 14%, which excludes $12 million related to a disputed charge from a manufacturing vendor. Q1 total adjusted operating expenses were $72.9 million, excluding previously announced $7.9 million restructuring charge relating to the cost reduction plan. Sequentially, we are down 23% from Q4 operating expenses of $94.6 million, reflecting our recently announced efforts to reduce costs. Sales and marketing expense was $11.2 million in the first quarter, a decrease from Q4 spend of $19.3 million, driven by a decrease in digital and marketing costs. R&D expense was $44.7 million for Q1, a decrease from Q4 spend of $56.1 million, as we focus on clinical studies related to our respiratory and sexual health product offering. CNA expense was $16.9 million during Q1 of this year, a decline from Q4 spend of $19.2 million. As a result, adjusted net income was a loss of $74.3 million, or 48 cents per diluted share. tested EBITDA for the first quarter was a loss of $47.6 million. Moving to the balance sheet, we ended the first quarter with cash of $178.2 million, which was a slight improvement over the previously shared estimates, reflecting progress on our cash preservation priority. Additionally, we have $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. We believe that the market for COVID testing is settling into a seasonal respiratory pattern. We are seeing this reflected from industry peers forecasting lower COVID test pull through. For Q, several of our existing contracts have shifted delivery timelines to align with the respiratory season. As a result, we expect revenues of $8 to $10 million for the second quarter. As you know, forecasting COVID testing demand beyond the near term is challenging. Therefore, we will continue to limit our forecast to quarterly expectations. In summary, the company continues to deliver on its strategic plan with our QHealth monitoring system and the integrated care platform fully launched in the market. We believe we are on track to deliver a more comprehensive respiratory offering with COVID, flu, flu plus COVID multiplex, and RSV tests currently with the FDA for review. We also launched QCare, QLab, and QPharmacy services in the last few months, which should begin to contribute to the top line in the second half of the year. In addition, we have a strong balance sheet with more than 12 months of cash on hand. While we are not giving guidance beyond Q2 revenue, I would like to provide further commentary for Q's longer-term outlook given the state of the pandemic, our past investments in manufacturing and R&D, and our expanding product offerings. For revenue, Q expects to continue to sell our COVID-19 molecular tests at volumes indicative of this stage of the pandemic. We also anticipate the revenue from our molecular tests available for the 2023 respiratory season will begin to contribute in the second half of the year. In addition, we expect at-home test kits, Q Pharmacy, Q Care, and sexual health test cartridges to help create a more durable top line over the midterm. We believe that with significant foundational investments behind us, namely manufacturing bills, R&D, and digital capability, along with the recent announced cost reduction actions and the team laser focus on execution of near-term revenue generating programs, we are well positioned to return to growth and expect to return to a positive adjusted EBITDA by early 2025. With that, I would like to thank you for your attention And I'll now turn the call over to the operator for questions.
spk07: And thank you. One moment. As a reminder, to ask a question, please press star 1-1 on your telephone and wait for your name to be announced. To withdraw your question, please press star 1-1 again. Please stand by while we compile the Q&A roster. And we ask that you limit yourself to one question and one follow-up. Again, that's one question and one follow-up.
spk06: And one moment for our first question. And our first question comes from Tia Savant from Morgan Stanley.
spk07: Your line is now open.
spk05: Hi, this is Gabby on for Tejas. Thanks for taking my question. So just to start, you recently launched the new pharmacy offering on the QHealth app. So should we be thinking about this pharmacy offering positioned within your overall business as another way to expand utilization of the virtual care platform? And then how do you choose what treatments are offered via the platform? Thanks.
spk00: Yeah, thanks for the question. So we're really excited to announce earlier this week that we launched Q Pharmacy. It's a really natural growth from what we were already doing with treatments. So we have COVID treatment, flu treatment, and UTI treatment as part of Q Care. And it's always been our strategic vision to be able to provide convenient access to healthcare and to make it very accessible and digitally oriented. So Q Pharmacy combined with Q Lab, which we launched earlier this year, and Q Care really complement the core Q health monitoring system offering. So when you look across our customer categories, we have you know, point of care, we have enterprise, we have public sector and D2C. The blend of these products is really helpful to provide a more comprehensive offering for really all these categories.
spk05: Okay, great. Thanks. And then just given the recently announced RIF, for modeling purposes, how should we be thinking about the distribution of the additional $50 million of incremental savings to the cost savings reductions plan that was announced in January, just between sales and marketing, R&D, and G&A. And when should we anticipate the associated charges of $5 million and $7 million to be recognized?
spk04: Yeah, on the recently announced cost reduction, you know, we have a goal of $150 million on an annualized basis, of which we achieved 100 in Q1. The way to think about it is we'd expect the spend to decrease as we move through the year and fully achieve our cost reduction goal by year end. What I would add is we're comfortable with where our cost structure is to play out our strategic plan. To your question on when the charge will hit, it's $5 to $7 million. That's the range. We expect that range to hit in Q2.
spk05: Okay, great. Thank you.
spk06: And thank you. And one moment for our next question. And our next question comes from Dave Delahunt from Goldman Sachs.
spk07: Your line is now open.
spk03: Hey, guys. Could you please give us a little more color on the mix of point of care versus DSE enterprise government that you're seeing?
spk00: So one way of thinking about it is really for the near term, the QLF monitoring system, so that's our Q-Reader and the suite of molecular tests that we have, which are in regulatory sort of review. That suite of tests, that's really oriented really nicely for the point of care. And the reason for that is the reimbursement structure that's there. So when you look at, you know, structurally how it's set up, the reimbursement allows for the right pricing model for, you know, that kind of aligns with the cost structure of molecular tests. So we think the point of care is really a good opportunity. We have a lot of infrastructure there, great lighthouse customers like Mayo Clinic and Memorial Hermann, as well as having already set up commercial distribution with most of the major healthcare distributors. So we feel like we're in really good shape there and really what's missing for the long term is the menu expansion and that we feel like is tracking well. So on the D to C side, I think one number that I think is illustrative is last year we did around $40 million in revenue for D2C. So that's a new number that we're providing. And that's just to benchmark what it has been. Obviously, we're moving into a different phase where that was COVID-dominated. And now we have, at the turn of the year, we probably had two or three SKUs. Now we have 50-plus. So the mix that's oriented for the different products, different customer categories is going to evolve, but we're really in the early stages of all these new products and product lines that we've rolled out.
spk03: Okay, thanks. And in point of care, any additional color on the types of settings where you're seeing the most demand for your product, maybe say smaller clinics where it wouldn't make sense to have a higher throughput instrument?
spk00: Yeah, I mean, we're in retail pharmacy, we're in urgent care, we're in emergency departments, we're in just regular outpatient clinic settings. So we have already a footprint in various types of settings. And we think that long term, the advantage is that we have, you know, we think industry best workflow from actually operating a test. And we have really good data flow. So we integrate with all the major EMR systems. So we think that once the menu is there, which is on the horizon, they will have a really competitive offering for the point of care to expand further and really grow.
spk06: Thanks.
spk07: And thank you. And if you have a question, that is star 1-1. Again, if you would like to ask a question, that is star 1-1.
spk06: And one moment for our last question. And our next question comes from Charles Rye from TD Cowan.
spk07: Your line is now open.
spk01: Hi. Thanks for – this is Lucas on for Charles. Thanks for taking the question. I want to kind of ask about the – how you guys see the acute care integrated platform evolving over time. You guys announced your at-home diagnostic test offering last quarter and now the pharmacy offering next. Are there any other areas that you guys may look to expand into going forward or do you feel like you have all the pieces in place? And then I guess the second question would be more on the pharmacy offering. Can you walk us through the economics of that offering and just how you guys earn revenue? Thanks.
spk00: I think the way you frame the question is right. Structurally, we have built the major pieces for the Q integrated care platform. So that's the Q care piece, which is telemed. That's the Q lab piece, which is the at-home test kits and those panels. And now that's Q pharmacy, which is a big expansion of our offering. So in terms of, you know, structurally, we think all the pieces are there. But what we would expect to see in terms of development is for there to be more products, more selection in each of these categories. It's also true, of course, of the QL monitoring system where we are working very actively on menu expansion. So I think the way to think about it is most of the major pieces for the integrated care platform are there now, but the selection and the commercialization motions, those are going to really evolve over time.
spk04: And I'll just jump in there on the revenue piece. Look, we just launched QLab, QPharmacy. We're really excited about it. We've already gotten really good customer feedback. We do think this will be a very important piece for us over time. And we believe... it'll contribute more meaningfully in the second half of the year.
spk01: Okay, thank you. And then I guess, you know, given the restructuring Do you guys have a sense of what you will exit the year in terms of the OpEx run rate? I think the last quarter you mentioned somewhere around 60 million exiting a year. If you can kind of give us an update on how that we've had this newer structuring. And then also, could you walk us through some of the assumptions you guys are thinking about in terms of reaching that 2025 adjusted EBITDA positive target?
spk04: Yeah, in terms of the OpEx, as I just mentioned, if you think about the $150 million of savings, we expect that to come across all P&L line items as well as CapEx. And really, the spend, we expect it to keep decreasing, and we achieve the full $150 million by year-end. And, you know, as I mentioned before, out of the 150, about 100 we've already achieved in Q1. So that's kind of how I would think about the cadence of the cost savings over the year. In terms of our EBITDA, look, as we mentioned, you know, a lot of the costs are behind us. We have initiated this cost reduction plan We have a lot of revenue catalysts upcoming. We have a lot of things in front of the FDA. We expect to have strep and chlamydia gonorrhea in front of the FDA. So you add that all up, including QLab, Upharmacy that we just launched. So the collection of all of that, along with us being really, really focused on our cost and cash spent, That combination is what we expect to get us to EBITDA profitability in early 2025. The last thing I would say is the way to think about OPEX and the baseline. You know, we're really baselining our spend reduction versus Q4 2022. So that should kind of help from a modeling perspective.
spk06: All right. Great. Thank you. Thank you. And I'm showing no further questions. This concludes today's conference call. Thank you for participating. You may now disconnect.

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