Earnings Call: Q2 2023

Aug 9, 2023

Good day and thank you for standing by. Welcome to the Q Health Second Quarter 2023 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. Please be advised that today's conference is being recorded. I would now like to turn the call over to your speaker For today, Laura Williams, please go ahead. Good afternoon, and welcome to Q's Q2 2023 earnings conference call. Joining me today are Ayub Ptak, Chairman and Chief Executive Officer of Q Health 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-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 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 statement. Finally, I would like to mention that the press release and recording of this call are 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. Q delivered total revenue of $10,000,000 in the 2nd quarter at the top end of our guidance. We expect next Quarter to have revenue in the $11,000,000 to $13,000,000 range. Additionally, we have reached greater than $150,000,000 in annualized cost savings ahead of schedule. Despite aggressive cost cutting, we've been able to maintain a strong pace of milestone achievements for test menu expansion And new products and services on the Q platform, which I believe will help Q return to revenue growth. To start, I'd like to summarize our progress on our number one strategic priority, test menu expansion for the Q Health monitoring system. We remain on track to have a robust respiratory care offering for this 2023, 2024 respiratory season. In June, we achieved a landmark industry milestone when we became the 1st company to receive a de novo authorization for a COVID home use test. Q System was thoroughly reviewed as part of FDA's process for safety and efficacy. In our view, this is a very positive signal for our molecular test submissions already under FDA review and the others we have forthcoming. With this regulatory breakthrough, we set a new standard As the first de novo granted for any home use respiratory test. Historically, COVID testing was offered under an emergency use authorization. Our full approval enables Q to continue to offer our simple to use accurate molecular tests even if the emergency use We are currently in productive conversations on our flu plus COVID multiplex and standalone RSV de novo We remain optimistic that our flu plus COVID multiplex test will be authorized in time for the respiratory season later this fall. In May, we submitted a de novo application for the Q RSV molecular test for authorization at home and point of care and have already had productive interactions with the FDA around this very important test. Rounding out our respiratory pipeline, our strep throat Program continues and we now expect to complete our FDA submission early in 2024. We are often asked whether regulatory authorization of a test can turn into commercial revenue quickly or if there's a long ramp time. We already have our automated production lines built and they are ready to produce any tests in our menu at scale as they all share the same cartridge backbone and manufacturing process. What I want to emphasize is that we are ready to scale manufacturing and that it does not require additional CapEx investment as we already have roughly $200,000,000 invested into our highly advanced manufacturing facilities. Furthermore, on the commercial side, We have more than 300 directly contracted enterprise and provider customers, public sector customers, and we have distribution relationships with major healthcare distributors. We have an installed base of more than a quarter 1000000 Q readers and the number one request from our customers is additional menu. To be clear, we have manufacturing capabilities and existing customer relationships firmly in place. We think our launch of new tests will be as timely as possible. Going further on menu expansion, last week Q was awarded a BARDA contract to accelerate the development of a new comprehensive respiratory cartridge to detect flu, COVID and RSV simultaneously. This is intended to be an over the counter and point of care test that will run on the same Q reader that is already has a large installed base. Q has been working with BARDA for over 5 years as they previously supported the development of our standalone flu and COVID molecular test. Under this new contract, BARDA will provide funding of approximately $28,000,000 to accelerate the development, validation and regulatory authorization of an RSV, flu and COVID combination test. Our initial objective is to have this multiplex available for the 2024 respiratory season. Moving to Q's menu expansion efforts in the sexual health category, the Q AMPOXX molecular test is already authorized for the point of care. We believe this authorization is noteworthy as it is the 1st non COVID test approved on the Q platform and utilizes a sample collection method that is different from our COVID test. Our chlamydia gonorrhea test continues to progress with the goal of FDA submission in the Q4 of this year as planned. Our sexual health menu will be a very important complement to our respiratory menu. Now I will shift from the expansion of the Q Health monitoring system The Q Integrated Care platform, where we've introduced a number of new products and services like Q Care, our telemed solution Q Lab, our at home diagnostic test kits And Q Pharmacy, a suite of prescription and over the counter treatments for common health and wellness concerns. Q Lab is our line of at home test kits. Customers can order a variety of diagnostic panels and standalone tests that are delivered to their homes and returned to lab for processing. Q App includes tests for key heart health markers, sexual health panels and hormone panels of various types. Results are available in the Q Health app, where customers can seamlessly access virtual care And received prescription medication in consultation with a clinician. Q Lab complements our test cartridge capability and enables us to provide more value to our customers and access more of the available market for diagnostic data. During the Q2, We introduced Q Pharmacy to provide customers with convenient access to lifestyle treatments and common prescription medications. Our platform now treats respiratory infections like COVID and flu to UTIs to sexually transmitted infections like herpes and provides for birth control and treatments for common health conditions such as erectile dysfunction. Customers consult with a clinician through the Q Health app for advice about their condition and if medically indicated receive a prescription medication delivered to them or picked up from their local pharmacy. Now that we have fully launched the building blocks of the integrated care platform, Adding new tests and treatments or combined tests and treatment programs is a very small incremental effort. While Asim will review our financial performance in detail, I am proud of how we have been executing with financial discipline. We ended the quarter with what we view as a strong balance sheet, including $129,000,000 of cash on hand and continue to operate with no debt. We also delivered on our annualized run rate cost savings goal of $150,000,000 ahead of original expectations. We plan to continue to manage our cash prudently as we progress through the regulatory process and gain commercial traction on our new set of diagnostic tests. I believe that the continued progress on our menu expansion and the launch of new products within our integrated care platform well positions us for growth in the coming quarters. I'm proud of the team's hard work, which has enabled customer centric end to end solutions that empower people to live their healthiest lives. With that, I'll turn the call over to Assam. Thank you, Ayub, and good afternoon. Earlier this year, we announced our intention to reduce our cost by $150,000,000 on an annualized basis. And as of Q2, just 2 quarters into the year, we have now achieved that savings target. We are comfortable that this lower rate of spend is sufficient for us to execute our highest priorities, including regulatory approval and commercialization of our new molecular tests, key development programs and market traction with Q Pharmacy and Q Lab. As a result of these cost reduction efforts, strong execution of our development milestones and the expected contribution from new products and services, I believe that we have more than 12 months of cash on hand to run our operations. Now let's walk through our financial results and Q3 guidance. Q2 total revenue of $9,900,000 was at the high end of our guidance range of $8,000,000 to $10,000,000 In the quarter, our private sector contributed 76 percent or $7,600,000 of sales. Public sector revenues were $2,300,000 for the 2nd quarter and total desk cartridge sales were $7,300,000 Q2 product gross profit was a loss of $21,800,000 impacted by lower manufacturing volumes and an $11,700,000 write down of excess inventory. Q2 total adjusted operating expenses were $59,300,000 excluding the previously announced $6,600,000 restructuring charge relating to our cost reduction plan. Sequentially, operating expenses decreased by 19% from the 1st quarter operating expenses of $72,900,000 and Q2 adjusted OpEx was down almost 40% from Q4 2022 driven by our cost reduction efforts. Sales and marketing expenses were $8,100,000 in the 2nd quarter, a decrease of 53% from Q2 2022, driven by a decrease in digital and marketing costs. R and D expenses were $36,500,000 for Q2, a decrease of 17% from $44,000,000 of spend in Q2 2022 as we focus on studies related to our respiratory and sexual health product offering. G and A expenses were $14,700,000 during Q2 of this year, a decline of 42% from Q2 2022 spend of $25,400,000 As a result, Adjusted net income was a loss of $77,200,000 or $0.51 per diluted share and adjusted EBITDA for the Q2 was a loss of $53,100,000 Moving to the balance sheet, Looking ahead, we expect our cash burn to decline in each of the next two quarters. Now I'd like to move on to our guidance. While many of our industry peers expect COVID testing volumes to be down quarter over quarter, We expect revenues of $11,000,000 to $13,000,000 for the Q3, growing double digits from Q2. As you may know, the vast majority of our revenue is driven by COVID testing demand. Forecasting this demand beyond the near term is challenging. Therefore, we will continue to limit our forecast to quarterly expectations. As a reminder, today, Q operates with no debt and we have a healthy balance sheet with $129,000,000 of cash on hand. Even with lower top line revenue in the second quarter, our quarterly cash utilization decreased by over 20 And we achieved our saving goal of $150,000,000 of annualized cost reductions, substantially reducing our breakeven point. Additionally, we expect our near term catalysts such as regulatory submissions and new product offerings through QLab and QPharmacy to contribute to the growth of our top line in the near term. Finally, we are always evaluating financing opportunities and options to bolster our cash position and further fuel our growth. In summary, I am pleased with the progress being made against our 2023 priorities of test menu expansion, new product launches on our integrated care platform and strong financial discipline. Looking ahead, we expect to have Several molecular tests on the market in 2024, strengthening our expectations of 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. Thank you. To R11 again. The first question today is coming from Tejas Savant of Morgan Stanley. Your line is open. Hi, thank you. This is Madison Pasterchick on for Tejas. Congrats on the quarter. Just had a few questions regarding the BARDA contract. I was wondering If you could share some of the economics associated with the contract and does like how long the contract stands for, if it's multiple years And how you anticipate it flowing through the P and L? Yes. Thanks for the question. We're Very excited about being awarded this new $28,000,000 contract from BARDA. We do think that the market is heading towards a Multiplex test type of market and we think that a flu COVID RSV combination test will be A very strong entrant into the market. Our goal is to have this test available in the 2024 respiratory season. And this builds on the submissions that we've already put in place with the FDA. So we've already submitted for flu plus COVID And for RSV, and then this brings everything together. Another really important fact of this is that it will run on the same cartridge backbone And the same reader system, so we get to have the advantage of plugging into our existing installed base. And to jump in there on the P and L impact, the spend will show up on the R and D line item, but Remember our R and D line item where we have it at Q2 after the reductions we've taken, we expect that line item Stay relatively steady or constant over the next subsequent quarters. And then the reimbursement For the spend would show up in revenue. Got it. Okay. That's super helpful. And then on among the non COVID tests that you've been approved for or expected to be approved over The next 12 months, what do you think is the greatest opportunity to begin to drive non COVID testing volumes in your mind, Not just considering the size of the opportunity, but from the perspective of where you may get a rapid adoption given your current installed base? We think flu COVID is a very big opportunity for us. And then we think RSV Amplifies that and so it makes it a completely comprehensive offering. We also think that With chlamydia, gonorrhea on the horizon, that's a very important complement to the respiratory menu. I think sexual health and respiratory Really complement each other. One is a little bit more seasonal than the other. And so they're and they expand the settings That the Q platform can be adopted in both in the home and in the point of care setting. So we really think the complements of those two things, so Chlamydia gonorrhea, flu COVID RSV would be really important test. And then to add to that, the test You've just mentioned, they have attractive reimbursement rates, especially when you compare it to COVID. And remember these tests are made by Q on the same manufacturing line. So we expect these to be From a unit margin perspective, attractive and that should help improve our gross margin profile as well. Okay, perfect. And then if I could just squeeze in one more. Following the receivables purchase agreement with East West Bank of up to $20,000,000 can you Maybe talk about any other financing options you are considering to continue to strengthen up the balance sheet? And if you could help us think a bit about how we should be thinking about current cash runway? So we ended the quarter with about $130,000,000 of cash With no debt, we've achieved our $150,000,000 of annualized savings ahead of plan. And as we think about cash utilization, we noted that our cash utilization came down in Q2 versus Q1 And we expect that trend to continue in the upcoming quarters as well. Not only that, we have Revenue catalyst with the test menu expansion that we've been talking about as well as the expectation Of Q Lab and Q Pharmacy really contributing to that top line. So a combination of those factors, We expect to have us set more than 12 months of cash. And secondly, we do our confidence continues to Build and strengthen on our EBITDA profitability for Q1 2025. And as we think about financing, look, as you would expect, it's something we always do evaluate And we will continue to do so. Perfect. Thanks so much for the time. Thank you for your question. One moment while we get ready for the next question. And our next question will be coming from Dave Bellahunt of Goldman Sachs. Your line is open. Hey guys. So it sounds like you expect the flu and COVID combination test to be ready for Upcoming virus season, could you tell us about what you expect the mix of single versus combination test to be? Yes. I mean, we obviously have contracts in place already for COVID, The single plex test and we do have a healthy installed base that's receptive to that test. But we do think that In general, the market is going to move towards multiplex tests. And so we are excited that we have a path there with the Flu COVID in the near term and then flu COVID RSV in the long term as a single test. We think that's going to be A very important test for us as well. So both in the near term and the longer term, we're trending towards where we think the market Really wants to go, which is towards more information and to disambiguate when you have symptoms in the cold Cold and flu season, you really just want to know what it is and then get the right treatment for that. So, we do think that that's the trend and that's where we're heading. Yes. And as we think about the second half of the year, we've been saying for a while now that we expect to return to growth in the second half of the year And that's exactly what our guide would suggest. And we think about the mix of non COVID versus COVID. We haven't Really spit that out in the past, but we have been saying and we continue to believe that non COVID Revenue would start small in Q3 and then grow into Q4 and that would really be a combination of Flu COVID and then increased traction and momentum on QLab and Q Pharmacy. Got it. Thanks. And could you help us think about the incremental value of adding RSV to the flu COVID multiplex, is there much of a price difference there? We think that the utility of a full COVID RSV or an RSV standalone is very high. A lot of People became very acutely aware of RSV last year, as it was quite a significant public health burden. It is the number one cause of hospitalizations in young children and it is a significant cause of hospitalizations in adults over 65. So So it's a really big public health problem in addition to flu and COVID. And right now there's a rising tide of awareness around RSV As there have been some activity around treatments and vaccines that have recently been approved by the FDA. So in recognition of like the public health importance, it's Top of mind right now for both consumers and pediatricians and folks that treat elderly adults. So We think it's a very important addition to the menu. Got it. Thanks. Keep up the good work. Thank you. One moment for our next question. Our next question will be coming from Charles Rhyee of TD Cowen. Your line is open. Yes. Thanks for taking the questions. Maybe just to follow-up, in the quarter, do you have a breakdown between How many tests were done at a point of care like in like in a clinic or a physician's office versus Done at home by consumers? Hi, Joss. When we think about the quarter, we don't typically break out the Yes, between our different customer segments, I think broadly, our customer segments, the public sector, private sector and then within private, we have Enterprise, direct to consumer and provider, on the direct to consumer, we've historically spoken about them having about 12% of our installed base, which is a good proxy for how you think about direct to consumer revenue in totality. But the other sectors, we haven't broken out at this point. Okay. I asked that because right, because You're having a test approved for over the counter and if you think about the opportunity there, I was just thinking about like What are kind of some of the strategies that you're thinking about? Because I know right at the start, it was really sort of an employer driven model to give the readers to their employees and then obviously they take in order The tests themselves and when the expansion would come, it would open up a new test menu. But if we think about Particularly respiratory tests, I feel like I'm sick, I go to the pharmacy, I want to get a test. Is there a strategy to think about how to make leaders available more direct to consumers versus going online to the site to order and Subscribed to a package, but I could go to like a Walgreens or something and just buy a reader. Just can you talk us through like how you're thinking about that? Because At 12%, that's great. And clearly that's grown in this last year. But particularly as we're coming up to this respiratory season and if you can get these other tests out, is there any thought to Trying to accelerate the user base because that would be I think at this point seems like A bigger opportunity or to really accelerate sort of adoption of these tests? So I think one of the things that's really important about our system is that It's a molecular test, it's ion engine test and yet it utilizes Yes, it's very easy to use. It's actually easier to use than an antigen test, but it gives you the accuracy of molecular test. And the reader itself compared to other offerings and then point of care, other readers, this is a much less Expensive option. So, we agree that lowering the barrier to adoption For the reader is a really important piece because we've seen a lot of good reordering from customers To adopt the reader and start to use the platform. So it's a very important point that you're making, which is you can expand Distribution by lowering barrier to entry on the reader, and we'd certainly look at retail opportunities and have been. The enterprise option or the ability to enter into the home through the enterprise, the B2B2C Has been a very important part of our business and will continue to be we expect. So If you look at the proportion of tests that are running the home versus point of care, I mean it's going to get skewed as a result of the fact that Not only do you have B2C, but you have B2B2C that's fueling use in the home. And on the provider side, there's just a good opportunity there as well Because like I said, compared to the other offerings, this reader or the barrier to entry is very low And yet you get a much easier test to use. So the fact that we originally designed this test, this platform For consumers, it gives a lot of advantages in both the home setting, of course, but also in the point of care, Because ultimately in the point of care, they want clinicians and nurses, they want to be able to run Test very simply, very easily and build deliver that result to the patient, and also to be reimbursed for it. And so we think that From the perspective of 1 Care and Consumer, we're benefiting from the core design of the product, which is to make it Sort of consumer grade, which is really the highest standard from an FDA or from a regulatory perspective, because it means anybody can use it. And so, we feel really good about the opportunity before us on the consumer side and the point of care, and we will Continue to look at options to expand the retail distribution. I will note that we are in retail pharmacies now, and we are Also in hospitals and also in homes, I think it's a really unique sort of aspect to Q versus other platforms. Okay. I appreciate that. Maybe this is talking about sort of the enterprise employer market. Can you talk about sort of the where we are in sort of the selling season For next year, and I don't know that you've touched on it in recent quarters, but Any kind of notable new signings of employers signing up for this? The $10,000,000 obviously, it's just I think the percent how people are perceiving COVID right now, but obviously with the flu and RSV coming back expect to come back in the fall, Just curious on sort of what the interest level from new employers to sign up, because when we look at the Over a quarter 1000000 leaders, that number has been growing very quickly for a while. It's kind of slowed a little bit. Just curious on what the Number of new accounts that you've been adding recently and any kind of color around that would be great. Thanks. As we look at the COVID market in general, I mean, it's been it's a very dynamic time, the public health and emergency Ended earlier this year and people are just really digging out from the whole pandemic altogether. And so it is a Sort of a transition moment for the market. Having said, we do think that there is a large Market still for respiratory testing generally, not just for COVID. And we think that we're on trend with that by introducing multiplex Option for flu COVID and then also with RSV added on to that. So we do think that this is where the market is heading. We think we have the most compelling offering. But of course, signing new contracts and etcetera, that's going to be a function of regulatory approvals for these compelling new products. So that's why we really do expect more revenue and growth from These new products because that's what the customers are asking for. And we think that's going to be a really significant factor in being able to expand Our installed base and a number of accounts. Is that the message that you're hearing? You have Customers that are interested in signing up for their employees, but they're waiting till the test menu does expand. And I guess the question is, Is just having the flu COVID plus standalone RSV, is that the critical mass at least to get The ball rolling again or do you think we'll need to wait maybe until early next year where we get more of the sexual health test as well to really accelerate sort of new logos. We do think that, yes, flu COVID and RSV are the Really important set for more market penetration in the near term. Sexual Health is a little bit of a different Customer type, it's more point of care, more sexual health clinic and urgent care. So just open it up, but if you're talking about enterprise Specifically, that's more of interest in flu COVID RSV set. And also D2C It's really aligned with DTC and public sector, are very aligned with respiratory and sexual health. So Second Health plays a very important role, but in terms of when we're talking about B2B2C, I think we're really talking more about respiratory, Because this is something that employers end up paying for anyways in some way or another because people, their employees, they end up Taking time off for work, they end up going to urgent care, they end up getting a test anyways and that usually for self insured employers, they end up paying for that test, that lab test At a higher rate, it's more expensive, it's less effective because it's lower, and you can't treat off it as easily. So We think that the opportunity on the opportunity long term is really there with enterprise as well. And then now what we've introduced is the Q App, we can complement the available test today With 14 additional panels that give you all sorts of other information that's really important. Yes. No, that makes sense. Sorry, if I could just ask one last question here. You talked about productive conversations with FDA. Are you in the commentary where have they already given you like questions? Have you responded to them? Maybe just give us an update where we are in the comment period with FDA, like where we are in terms of the clock on their response time? Yes. So the COVID de novo was a really significant moment for us and that's because it gave us The validation from the regulatory agency on the safety, efficacy of the platform from a reader and cartridge backbone perspective, meaning That what we're going for in each new indication, we don't have to revalidate the reader and the cartridge backbone. It's really about the incremental chemistry changes And the clinical data that we are able to generate for those new applications. So that makes a really big difference, first of all. And with regards to the dialogue state, we're definitely in dialogue on flu COVID and RSV and that's where We get that's where we get the confidence that we have in terms of feeling like we'll have Blue Coat for this respiratory season with RSV following on to that. And I think it's also a strong indication with our BARDA contract and where that's going After we got our COVID de novo, to really bring all these things together into one single test, flu COVID and RSV. So, we're really making good progress across the board on these. And specifically, we know how important The regulatory pieces, we feel really strong that the COVID was a strong signal and we're going to Be able to bring this new test to market in part because of that. Great. Appreciate all the comments. Thanks. Thank you. This does conclude the conference call for today. Thank you all for joining. You may now disconnect and everyone have a great