Earnings Call: Q3 2022

Nov 9, 2022

Welcome to the Q Health Third Quarter Earnings Conference Call. At this time, all participants are in a listen only mode. After the speakers' presentation, there will be a question and answer session. You will then hear an automated message advising your hand is raised. Please be advised that today's conference is being recorded. I would like to hand the conference over to Norma Williams, Investor Relations. Please go ahead. Good afternoon, and welcome to Q3's Q3 2022 Earnings Conference Call. Joining me today are Ayush Katak, Chairman and Chief Executive Officer and John Gallagher, Chief Financial Officer of Q 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-nineteen 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 in 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. 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 A. Yu. Thank you, Lorna, and thank you everyone for joining us today. I'd like to start by welcoming Doctor. Sachin Jain to our Board of Directors. Sachin is the President and CEO of SCAN Group and Health Plan and an adjunct professor of medicine at Stanford. Earlier in his career, Sachin was Chief Medical Information and Innovation Officer at Merck and attending position at Boston VA Medical Center And a great team at Harvard's Medical and Business Schools. We are excited to have such a vast knowledge of health plans and payers as well as perspective as a medical doctor as we continue to pursue our vision of making the healthcare system more convenient, accessible and timely by placing diagnostic information at the center of care. In the Q3, 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 Q3 reflects continued solid execution with Total revenue of $70,000,000 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 Q3, we shipped over 9,000 Q readers, bringing our installed base to approximately 260,000 key readers. To help with future growth, we recently added a new Chief Commercial Officer, Suzanne Stone to our team. Suzanne comes to us from DexCom, where she most recently served as Head of Revenue for North America. She has 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 where well defined reimbursement pathways are already in place. We're excited to have Suzanne join 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 with RSV are at record levels. Hospitalizations are at a decade high for influenza for this time of year. A mix of code variance is on the rise. CDC is warning of a severe burden on the health system due to a triplendemic. These facts underscore the need for accurate and convenient diagnostic results to address these persistent threats at the home endpoint of care. In fact, historically, RSV is the number one cause of hospitalization for infants with influenza falling close behind. Providing convenient and quick access to diagnostic data and making it immediately actionable with therapies specific to the identified virus will make a dramatic difference in the way 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 AB standalone de novo application. We have also submitted the Flu AB plus With these submissions, we are one step closer to enabling people at home and healthcare provider For RSV, we began clinical studies in the Q3 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 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 test would allow for targeted antibiotic use and decrease the risk of complications such as rheumatic fever. Though we haven't previously indicated a timeline for strep throat, 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 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 reveals a strong existing market of around 50,000,000 tests performed annually. And in the home, we hope to secure payer coverage Support for respiratory offerings, starting with the most vulnerable among us, the immunocompromised elderly and young children. Moving to the sexual health category, chlamydia and gonorrhea infections have each reached a new high in each of the past 6 years according to the CDC. While routine testing is recommended for all sexually active adults, the status quo is clearly not sufficient to handle the problem. We expect to start our chlamydia and gonorrhea clinical studies here in the Q4. Our solution will allow healthcare professionals and individuals at home to screen more easily and if positive allow for quick delivery of the proper antibiotic. In addition, To support our goal of having a robust test menu that broadens the appeal of the Q platform, we are pleased to report that we have developed a high sensitivity molecular monkeypox test. We expect to be able to execute analytical and clinical testing support in EUA submission in Q1. Overall, we achieved the 3 previously outlined near term menu expansion milestones in the Q4 with 2 FDA submissions and the start of our RSV clinical study. We remain on track to deliver the remaining milestone to begin chlamydia and gonorrhea clinical studies before the end of the year. In addition, the team completed development of strep throat and monkeypox tests, pushing progress more quickly than we originally planned. We believe the strong progress on menu development will make the Q platform the market's most compelling value proposition for home endpoint of care diagnostic needs for both respiratory and sexual health, which represent a present day $3,000,000,000 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 DurableQ reader, which runs all the planned tests in our pipeline is Bluetooth connected to the mobile device, providing digital results to the user. This connectivity Immediately opens up substantial actionability 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 the Common EMR systems, building on the work we've already done integrating with both Epic and Cerner at multiple hospital systems. Q Care, our program connecting diagnostic results for home users to healthcare providers for quick consultation and medication delivery was launched in Q3 and is now available nationwide. With our flu and flu plus COVID submission into the FDA, we are preparing to expand acute care to include immediate consultation for influenza positive users with on demand delivery of 1 of multiple available FDA cleared prescription therapies. These medications need to be taken in the 1st 48 hours after highlighting the need for early diagnosis and treatment, especially for the vulnerable among us, including immunocompromised, elderly and young children. Q Care is a foundational capability for many new test of free pathways coming to the Q Health platform to address a wide variety of common health conditions and wellness concerns, particularly for test diagnosing conditions for which there are specific treatments available. For example, for chlamydian gonorrhea, Antibiotics are the standard treatment. RSV has multiple antivirals coming and strep throat has oral antibiotics. All 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-nineteen test is as accurate as centralized lab based PCR test. The study presents findings from a head to head comparison of the Q COVID-nineteen test against lab based RT PCR on paired samples from over 3,000 individuals. This study is special because of the size of the study and because these 3,000 individuals were testing prior to travel and therefore almost all were asymptomatic. The findings revealed a 99.4% match between results from Q's test and the reference PCR test, including 100% clinical sensitivity to detect Positive cases, yielding no false negatives. This study by FH Health adds to the body of clinical evidence already available, including a previously reported Mayo Clinic study, validating that with CUE, you 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 team update. We recently appointed Doctor. David Tsai as our Chief Medical Officer. Doctor. Tsai is a Board certified cardiologist An MD PhD trained at Columbia. He has been working at the intersection of healthcare and security, 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 healthcare more convenient, proactive and personalized extends beyond infectious diseases, We're actively pursuing a product road map centered on diagnostic capabilities to enable chronic disease management, especially for the world's number one cause of death and disability David, as a Board certified cardiologist working at the intersection of medicine and technology, Well, to find Q's future diagnostic products and services, including our cardiometabolic care offerings. In summary, I'm extremely proud of the strides we've made this quarter with our strong progress in the pipeline, the nationwide launch of Q Care, Our foundational diagnostic to treat capability and our recruitment of great new additions to the Board and management team. Our recent investments in R and D were critical to enable the rapid pipeline execution we've reported so far this year. These investments have laid the foundation and allowed us to hone 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 informed healthcare that empowers people to live their healthiest lives. With that, I'll turn the call over to John. Thank you, Ayub, and good afternoon. I will walk through our financial results before sharing our Q4 guidance. Q3's Q3 total revenue of $69,600,000 was better than expected as COVID testing demand was higher than anticipated And we saw strong work from existing customers. Revenue exceeded expectations for the quarter with our Private sector contributing 95 percent or $65,900,000 of sales. Public Revenues were $3,700,000 for the Q3 and total disposable test cartridge sales were $61,400,000 Moving down the P and 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 a one time inventory charge of $2,600,000 relating to inventory obsolescence. Moving to operating expenses. For the Q3 of 2022, total adjusted operating expenses were $86,300,000 Sequentially, Q3 operating expenses were comparable to Q2 spend of $86,400,000 Sales and marketing expense was $18,100,000 in the 3rd quarter, up from $17,000,000 in the 2nd quarter as teams continue to support our Product offering through marketing and brand expansion efforts. R and D expense was $42,500,000 for Q3, Slightly below the prior quarter spend of $44,000,000 Spend is aligned with our menu expansion and software development priorities. G and A expense was $25,600,000 during Q3 of this year, in line with our Q2 spend of $25,400,000 As a result, the adjusted net loss for Q3 2022 was $63,600,000 or $0.43 per share And an adjusted EBITDA for the quarter was a loss of $37,200,000 We believe that 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 Q3 with cash of $304,700,000 Additionally, we have a $100,000,000 secured revolving credit facility, which remains undrawn. As a reminder, Queue operates with no debt obligations. Now I'd like to move to our guidance. For the Q4, we expect revenues of $45,000,000 excluding recognition of any deferred revenue. I'll remind you that we currently have a balance of $92,400,000 of deferred revenue on the balance sheet associated with our agreement with the U. S. Department of Defense. As you know, forecasting COVID testing demand beyond the near Term is challenging. Therefore, we will limit our forecast to quarterly expectations. In summary, the company continues to report better than revenue performance and execute on our growth drivers. With our submissions for flu AB plus COVID multiplex And Flu AB molecular tests, along with the recent progress in RSV, strep and sexual health tests, Q is making significant progress with our menu expansion. While we expect our COVID-nineteen 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 It's important to avoid having to tap the capital markets in the near term. With CapEx spend for manufacturing complete And the R and 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. At this time, I have a question that will be coming from T. A. S. Svante of Morgan Stanley. Your line is open. Hi, this is Neil on for Thegis. So I wanted to start with Q Care. Can you talk about the engagement levels you're seeing for the offering? And How many Q users have received positive COVID results do you see utilizing the service today? Hi, Neil. Yes, we're QCARE 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 healthcare professional and then get their treatment prescribed and delivered to their doorstep in hours. So This is an important milestone for CU because we've been talking for some time now about closing the loop in home healthcare. 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 healthcare professional and get treatment delivered is a key milestone. And 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'll be able to break out for you, as volumes increase. But menu expansion is key To this foundational aspect of the acute care offering. Got it. Thank you. And so building on what you were saying around Cost control around the manufacturing and R and D, but considering the commercial ramp next year with menu expansion, can you give us a directional sense of How you're 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, we've ramped manufacturing and we did that during 2021 and through 2022, we're that investment is done. It's complete and behind us. And so the CapEx and the cash associated with it It's complete as well. When you think about the initial menu expansion efforts, so the test that we just described On the call here, then the R and D investment associated with those is basically done too. We're nearly complete. And so the investment there It's also pretty much behind us. I noted on the call that preservation of cash is important. We have over $300,000,000 of balance Cheap cash, we have $100,000,000 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 point of the discussion there is not so much around it's not so much around Trying to guide you on expenses for 2023, but what it is indicated to do is to say as we exit this year, we have a large amount of investment It'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 going to market. So we can talk more as we get into 2023. So we're not guiding But it wouldn't be fair to think that expenses ramp. In fact, what we're saying is we can control costs and preserve our cash. Got it. And then one last for me. So How have the supply chain and input cost pressures evolved over the past few months? And looking forward, how are you thinking about these pressures in 2023? 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 Well, it has been a very difficult supply chain environment and being able to supply our product 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 supply chain issues. Because think about our readers have electrical components And our test cartridges also have circuit boards in them. So but we've been able to Meet the demand of our customers throughout. So not something we're overly concerned about. Great. That's very helpful. Thanks for the time. Thanks, Neils. Thank you. One moment while we prepare for the next question. And I have the next question will be coming from Matt Sykes of GS. Your line is open. Hey, guys. This is Dave on for Matt. Congrats on the strong quarter. Can you remind us how you think about the opportunity for Reimbursement and the ability to sell readers to customers as an out of pocket cost and Allow them to have tests covered by insurance. Hey, David. The way we think about it is that there's a really big opportunity already existing where the reimbursement is plums to the Point of care, so as you've heard in our prepared remarks, that's a central focus for us Because of the opportunity there, there's a lot of testing that's happening there that aligns with our menu And the reimbursement is already well structured in that venue. And in the home setting, There's a lot of opportunity there as well because fundamentally there is a good alignment between what the payers want And what's good for the patient, and what we would like to be able to deliver. So meaning that if you For immunocompromised people, for elderly, for young children, they're vulnerable to respiratory threats. And to be able to have this product, have Q 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 at the mechanism to get into the home in 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, We have a really good opportunity with, in particular, the durable opportunity around immunocompromised elderly and young children and protecting them And aligning all stakeholders. Got it. Thanks. And with your pipeline of tests, Are those going to be de novo submissions? Or are you able to use the 510 pathway for any of them? The de novo effectively is the 510, it's just the first one. So where you see de novo, that just means it's the first submission there. But I'd point out though that as we look at menu expansion, we have submitted de novo for flu, for COVID. We've also submitted EUA for the flu plus COVID combo. That's important because obviously that pathway sometimes can be quicker. We certainly see a lot of headlines about RSV about flu and even COVID this triplendemic kind of sentiment. I just wanted to point out that it's not just de novo510 ks, think about those as sort of together. It's also EUA pathways that could be somewhat Speed here. Got it. Thank you. Thanks, Dave. Thank you. One moment while we prepare for the next question. The next question we have is from Mark Massaro of BTIG. Your line is open. Hey, guys. Thanks for the questions and congrats on the progress. I just appreciate all the Updates related to your submissions to the FDA. So 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 Flu AB on September 1, so you've had some the 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 Are thinking that you'll likely have one of these tests, whether it's EUA or full 510 likely approved Sometime during this current respiratory season. Hey, Mark. Yes, absolutely. So, the conversations with the FDA have been very constructive. We're in 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 Q1 non COVID revenue, it's 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 RSV, which we entered during Q3 as committed and those are going well. So I think It's going to be dependent on approvals, but I don't think it's outside of reason to assume some small level of non COVID revenue Inside of Q1. Okay, great. And then, can you maybe Help us think about the size of your CTNG clinical study. Is that like materially larger than your flu or RSV studies? I guess What I'm trying to get at is, maybe to speak to the enrollments 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 Q4 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 Q 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 Black Friday, Cyber Monday or any type of holiday type promotional activity? Yes. Yes, Mark. We Yes. Times have changed since last year, I think it's fair to say, on a macroeconomic environment. And We're obviously, we've got a strong push into each of our customer categories. And consumer continues to be one of them. In fact, Quarter for the first time, we broke out the amount of our installed base that was comprised of consumer. But looking ahead, one of the key things that we emphasized is The point of care opportunity, that's 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 it doesn't take up a lot of space in a doctor's office. And so we're really excited about the point of care opportunity and that and then it also connects to the electronic medical record. While, yes, you're going to obviously see us continue to advertise and push into our other customer categories. I'd say 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're 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 and L. Your sales and marketing came in $7,000,000 below us in Q3 and your R and D came in about $6,000,000 below us And in Q3, and so do you think that the OpEx levels in 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 and D going forward? Yes, yes, Mark. So, yes, we are very cost conscious. You're seeing that in the results. I'm glad that you noted it. And we are looking to control our spend as we said with a focus on cash. So I don't think We'll sort of model it out into 2023, but I don't think I think the levels that you're seeing in Q3 are Representative for the remainder of 2022. And then as I mentioned, we're very focused on preserving the cash and controlling our So we'll talk more about 23 when we get there. All right. That's it for me. Thanks. Thanks for your questions, Mark. Thank you. The next question will be coming from Steve Braun of Cowen. Please go ahead. Your line is open. Hi. This is Steve Braun on for Charles Rhyee. Congrats on the good quarter. I guess I'd like to start maybe on the 4th quarter revenue guide, Could you just walk us through some of the key assumptions that, I guess that are resulting in like the sequential step down in revenues? Hi, Steve. Yes, sure. So on the Q4, we guided $45,000,000 to $50,000,000 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 guide that Accordingly. I guess what I'd 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 COVID on a sort of a proportionate or percentage basis that Q4 is a step down from Q3. So I don't think we're an outlier in that space. But just to reiterate, the guide is $45,000,000 to $50,000,000 on Q4. Okay, great. And then I guess like as you're moving closer to filling out The product menu expansion here, I guess, have you started to notice any uptick in potential like partnership opportunities? We're so as it relates to the menu, we're very focused on expanding the menu with the tests In the respiratory category, in the sexual health category, as we described, and in connection with Q Care, Because what that provides to us is, we've got a best in class molecular diagnostic platform Coupled with technology that enables users to either at the point of care or at the home take a test, talk to a doctor and receive Treatment. And so executing on that is where our focus is. Ayub, you want to add something? Yes. I mean, definitely we see a Significant amount of demand from our customers with regards to the future menu. So when you're talking about partnerships, there's just a lot of opportunity For more places for the product to go, for more partnerships around the treatment loop And partnerships with other entities with regards to other parts of the platform like Q Care. So there's just a lot of opportunity when we look forward. You look at the menu and 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