Cue Health needs success in flu diagnostics to jump-start growth (NASDAQ:HLTH)

A quick take on Cue’s health

Cue Health Inc. (NASDAQ:NASDAQ:HLTH) went public in September 2021, raising approximately $200 million in gross proceeds from an IPO at a price of $16.00 per share.

The firm has developed an integrated diagnosis US health monitoring and delivery platform.

Until management can get approval for their standalone flu test and start demonstrating demand for it, I’m on cue for the short term.

Benchmark Health Overview

Cue, based in San Diego, Calif., was founded to first develop a COVID-19 test kit and an integrated information platform for treatment and patient communication.

Management is led by Co-Founder, President and CEO Ayub Khattak, who has been with the company since inception and holds a BS in Mathematics from UCLA.

The company’s key offerings in its Cue integrated care platform:

• Health monitoring system

• Reader

• Cartridge

• Magic wand

• Data

• Delivery apps

• Business Dashboard

• Ecosystem integrations

The company maintains relationships with healthcare providers through its internal direct sales team focused on healthcare providers, large enterprises and public sector customers.

Cue Health Market and Competition

According to a 2020 market research report According to Grand View Research, the global market for COVID-19 detection kits was estimated at $3.28 billion in 2020 and is expected to reach $5 billion by 2027.

This represents a projected CAGR of 5.05% from 2021 to 2027.

The main drivers of this expected growth are strong growth in demand for testing services of all types globally.

Also below is a graph showing the detection kit usage market share by end-user type:

Major competitors or other industry participants include:

• Abbott Laboratories

• Becton, Dickinson

• BioMerieux

• Bio-Rad Laboratories

• Danaher

• Ellume Limited

• Everly Health

• rock

• Fluidigm

• GenMark Diagnosis

• Others

Health Information Software Market is Expected to Grow Nearly $12 Billion from 2021 to 2026, According to a report by Technavio.

If achieved, this would translate to a CAGR of 7.9%, with North America accounting for 41% of global market growth during this period.

Cue’s Recent Financial Performance

• Total revenue by quarter has produced the following trajectory over the last 9 quarters:

• Gross margin by quarter followed a similar trajectory to total revenue:

• Selling, G&A expenses as a percentage of total revenue by quarter were highly variable, as shown in the chart below:

• The operating result per quarter became strongly negative in the second quarter of 2022, due to a significant write-down of inventories:

• Earnings per share (diluted) also turned negative in the second quarter of 2022:

(All data in the graphs above are in accordance with GAAP)

Since its IPO, HLTH’s stock price has fallen 81.4% compared to the approximately 3.1% drop in the US S&P 500 index, as shown in the chart below:

Assessment and other measures for benchmark health

Below is a table of relevant capitalization and valuation figures for the company:

Measurement (TTM)	Rising
Enterprise Value/Sales	0.36
Revenue growth rate	210.7%
Net profit margin	-6.2%
% EBITDA GAAP	7.5%
Market capitalization	$549,650,000
Enterprise value	$245,250,000
Operating cash flow	$8,050,000
Earnings per share (fully diluted)	-$0.36

Click to enlarge

(Source – Alpha Research)

Benchmark Health Commentary

In its latest earnings call (Source – Seeking Alpha), covering Q2 2022 results, management highlighted shipping 15,000 of its benchmark readers as part of its continued strategy to grow its customer base.

In addition, the company has submitted its application for its COVID-19 molecular test and continues to pursue its “multiplex flu and flu + COVID molecular test plans.”

The company has completed clinical studies for its stand-alone flu test and is preparing its FDA application for submission in the third quarter.

Further testing is expected to begin clinical studies in the remaining part of 2022.

Regarding its financial results, total revenue was “better than expected”, but still declining sequentially as the COVID-19 pandemic subsided.

Adjusted gross profit margin was 30% despite higher supply chain costs and lower production volume.

However, the company recorded an inventory write-off of $42.8 million for obsolete inventory and warranty reserves. This charge, combined with a restructuring charge of nearly $2 million to reduce its manufacturing workforce, produced a significant loss for the quarter.

On the balance sheet, the company ended the quarter with cash of $363 million and entered into a secured revolving credit facility of $100 million.

Over the past 12 months, the company has used $75 million of free cash, primarily due to capital expenditures.

Looking ahead, management limited its guidance to just the third quarter, where it expects revenue of $57.5 million in the middle of the range. That figure is down sharply from $87.7 million in the second quarter.

On the valuation side, the market values ​​HLTH at an EV/Income multiple of just 0.36x.

The main risk to the company’s outlook is the timing of approval of its next test submissions as the company continues to use cash.

A potential upside catalyst for the stock could include a return of COVID-19 to the US in the coming winter period.

Given the high vaccination rates in the United States, I do not foresee a high likelihood of significant growth in COVID-19 cases and drive demand for its related testing.

Until management can get approval for their standalone flu test and start demonstrating demand for it, I’m on cue for the short term.