Earnings Call: Q1 2023

May 10, 2023

Good day, and thank you for standing by, and welcome to Q Health's First Quarter 2023 Earnings 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 now like to hand the conference over to your speaker today, Lorna Williams, VP of Investor Relations. You may begin. Good afternoon, and welcome to Q's Q1 2023 Earnings Conference Call. Joining me today are Ayub Khattak, Chairman and Chief Executive Officer of Q Health and Assam 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-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 and reports 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 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 A. Yu. Thank you, Mona, and thank you everyone for joining us today. Q's financial performance for the Q1 delivered $25,000,000 of total revenue, which is at the top end of our guidance range. And we ended the quarter with $178,000,000 of cash on hand. While these results are predominantly from our COVID-nineteen 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, Q is an in between period. We are in between the success We saw from deploying our initial COVID product and the 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 $250,000,000 in capital expenditures To build up our automated manufacturing infrastructure and the $200,000,000 we spent on R and D over the last 2 years to deliver major progress on a pipeline and menu expansion for our core Queue Health 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 approval on the tests we have already submitted and finish clinical studies on the final few new tests of this first major R and D push, A key focus is on cash preservation given the macro environment. To that end, we announced last quarter we made roughly $100,000,000 in annualized Cut to our spend. In the last week, we announced an additional $50,000,000 in expected annualized cost savings. This combined $150,000,000 in annualized cost savings will allow CU to weather the macro climate to reap the benefits of our investments as our planned tests come out of the pipeline and we gained commercial traction on the Q integrated care platform products of Q Care, Q Lab and Q Pharmacy. For menu expansion on the Q Health monitoring system, we continue to make significant progress on a comprehensive respiratory care offering. We're happy to share that we submitted our QRSV molecular test for a full de novo submission for at home endpoint of care use. We remain in productive conversations with the FDA for our flu plus COVID multiplex test, our flu de novo and COVID de novo submissions. We do expect a decision on our COVID de novo soon. We've had continued 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 AMPOXX molecular test, which we expect to be in 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 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 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. 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 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 While we envision the diagnostic portion of the virtual care loop for many common conditions, Flu, COVID, RSV, STIs, etcetera, 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 Q Health app, They are presented with treatment options and have access to virtual care. We continue to build on our treatment capabilities We've already enabled treatments for COVID, flu, UTIs and sexual health conditions to a growing number of other common health and wellness needs. Q Now offers convenient access to prescription medication options related to sexual health, including birth control and treatments for erectile dysfunction and herpes, On the web or using the QoS 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 child health and medication subscription for common health concerns is a secular trend that was accelerated by this pandemic, but is now here to stay. While these new offerings are in the beginning stages of the 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. Thank you, Ayub, and good afternoon. Since the beginning of the year, Q has announced 2 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 $150,000,000 in annualized run rate cost savings. In Q1, we already achieved approximately $100,000,000 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. Q1 total revenue of $24,800,000 Was at the high end of our guidance range. In the quarter, our private sector contributed 98% or $24,200,000 of sales. Public sector revenues were $600,000 for the Q1 and total desk cartridge sales were $22,400,000 Q1 adjusted product gross profit margin was a loss of 14%, which excludes $12,000,000 related to a disputed charge Q1 total adjusted operating expenses were $72,900,000 excluding previously announced $7,900,000 restructuring charge relating to the cost reduction plan. Sequentially, we are down 23% from Q4 operating expenses of $94,600,000 reflecting our recently announced efforts to reduce costs. Sales and marketing expense was $11,200,000 in the 1st quarter, A decrease from Q4 spend of $19,300,000 driven by a decrease in digital and marketing costs. R and D expense was $44,700,000 for Q1, a decrease from Q4 spend of $56,100,000 as we focus on clinical studies related to our respiratory and sexual health product offering. G and A expense was $16,900,000 during Q1 of this A decline from Q4 spend of $19,200,000 As a result, adjusted net income was a loss of $74,300,000 or $0.48 per diluted share. Adjusted EBITDA for the Q1 was a loss of $47,600,000 Moving to the balance sheet. We ended the Q1 with cash of $178,200,000 which was a slight improvement over the previously shared estimate, reflecting progress on our cash preservation priority. Additionally, we have $100,000,000 Secured revolving credit facility, which remains undrawn. As a reminder, CU 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 $8,000,000 to $10,000,000 for the Q2. 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 Queue Health 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 per scoping multiplex and RSV tests currently with the FDA for review. We also launched Q Care, Q Lab And few pharmacy 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 CU's longer term outlook given the state of the pandemic, our past investments in manufacturing and R and D, and are expanding product offering. For revenue, Q expects to continue to sell our COVID-nineteen molecular test at volumes indicative of this 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 desk kits, Q Pharmacy, Q Care and sexual health desk cartridges to help create a more durable top line over the midterm. We believe that with significant foundational investments behind us, namely manufacturing build, R and D and digital capability, along with the recent announced cost reduction actions And the team laser focused 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. And thank you. One moment. Please stand by. We will compile the Q and A roster. And we ask that you limit yourself to 1 question and one follow-up. Again, that's one question and one follow-up. And our first question comes from Tia Savant from Morgan Stanley. Your line is now open. Hi. This is Gabby on for Tejas. Thanks for taking my question. So just to start, you recently launched a new pharmacy offering on the Q Health 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. Yes, 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 with COVID treatment, flu treatment and UTI treatment as part And it's always been our strategic vision to be able to provide convenient access to healthcare I mean to make it very accessible and digitally oriented. So, this 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 point of care, we have enterprise, we have public sector and B2C. The blend of these products is really helpful to provide a more comprehensive offering for really all these categories. 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 $50,000,000 of incremental savings to the cost savings reductions plan that was announced in January, just between sales and marketing, R and D and G and A. And when should we anticipate the associated charges of $5,000,000 $7,000,000 to be recognized? Yes. On the recently announced cost reduction, we have a goal of $150,000,000 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 $5,000,000 to $7,000,000 That's a range. We expect that range to hit in Q2. Okay, great. Thank you. And thank you. And our next question comes from Dave Delahunt from Goldman Sachs. Your line is now open. Hey, guys. Could you Please give us a little more color on the mix of point of care versus D2C, enterprise and government that you're seeing? So one way of thinking about it is really For the near term, the QoS monitoring system, so that's our Q reader and the suite of molecular tests that we have or 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 structurally how it's set up, the reimbursement allows for the right Pricing model for that kind of aligns with the cost structure of molecular test. 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 health care 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 D2C side, I think one number that I think is illustrative is Last year, we did around $40,000,000 in revenue for DTC. 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 2 or 3 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. 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? Yes. 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 We think the industry best workflow from actually operating a test. And we have really good data flows. We integrate with all the major EMR So we think that once the menu is there, which is on the horizon, they We'll have a really competitive offering for the point of care to expand further and really grow. Okay. Thanks. And thank you. And our next question comes from Charles Rhyee from TD Cowen. Your line is now open. 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 acute care integrated platform evolving over time. You guys announced your at home diagnostic test offering last quarter and now the pharmacy offering. 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? Just how you guys revenue? Thanks. Yes. So 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 Big expansion of our offering. So in terms of 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 QF 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 For the Q integrated care platform, we're there now, but the selection and commercialization motions, those are going to Clearly evolve over time. And I'll just jump in there on the revenue piece. Look, We just launched QLab, Q Pharmacy. We're really excited about it. We've already gotten really good customer feedback. We do think this will be very important piece for us over time, and we believe it will contribute more meaningfully in the 2nd half of the year. Okay. Thank you. And then I guess, Given the restructuring, do you guys have a sense of what your guide what you will exit The year in terms of OpEx run rate, I think last quarter you mentioned somewhere around 60,000,000 Exiting the year. If you can kind of give us an update now that we've had this new restructuring? 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? Yes. In terms of the As I just mentioned, if you think about the $150,000,000 of savings, we expect that to come across All P and L line items as well as CapEx. And really, the spend we expected Keep decreasing and we achieved the full 150 by year end. And 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, a lot of the costs are behind us. We have initiated this cost reduction plan. We have a lot of kind of revenue catalysts upcoming. We have a lot of things in front of the FDA. We expect to have a strep and chlamydia gonorrhea in front of the FDA. So you add that all up, including Q Lab, Q Pharmacy that We just launched. So the collection of all of that along with our us being really, really focused Our cost and cash spend, 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, we're really baselining our spend reduction versus Q4 2022. So that should kind of help from a modeling perspective. 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.