Lucira Health, Inc. (LHDX) Q2 2021 Earnings Call Transcript

Lucira Health, Inc. (LHDX)
Q2 2021 Earnings Call
Aug 12, 2021, 4:30 p.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Good day, and thank you for standing by. Welcome to the Lucira Health second-quarter earnings conference call. At this time, all participants are in listen-only mode. After the speakers' presentation, there will be a question-and-answer session [Operator instructions] I would now like to hand the conference over to your first speaker today, Hannah Jeffrey from Gilmartin Group.

Please go ahead.

Hannah Jeffrey -- Gilmartin Group

Thank you, Laurie, and good afternoon, everyone. Earlier today, Lucira Health released financial results for the second quarter ended June 30, 2021. A copy of the press release is available on the company's website. Joining me today on today's call are Erik Engelson, president and chief executive officer; and Dan George, chief financial officer.

Before we begin, I'd like to remind you that during this conference call, the company will make forward-looking statements regarding future events. We encourage you to review the company's past and future filings with the SEC, including, without limitation, the Risk Factors section in the company's annual report on Form 10-K and quarterly reports on Form 10-Q, which identify the specific factors that may cause actual results or events to differ materially from those described in these forward-looking statements. These factors include, without limitation, statements regarding product development, product potential, the regulatory environment, sales and marketing strategies, capital resources, or operating performance. With that, I'll now turn the call over to Erik.

Erik Engelson -- President and Chief Executive Officer

Thank you, Hannah. Good afternoon, everyone, and thank you for joining us. Welcome to the second-quarter 2021 earnings conference call. I would like to start by saying that we are excited about the substantial progress we have made during the second quarter of 2021.

Lucira has capitalized on the solid foundation built since our inception, and we look forward to continued success. During today's call, we will recap the progress and accomplishments of the second quarter of 2021, discuss our ongoing strategy, and talk about the future. Dan will then transition into a more detailed walk-through of our second-quarter financial results. Lucira was founded on the mission of revolutionizing at-home testing for infectious disease by putting lab-quality molecular testing in a small, easy-to-use form factor for use anytime, anywhere that would produce PCR-like quality results on the spot.

Our strategy has always been motivated by our belief that earlier treatment or quarantine would greatly aid in the fight against any infectious outbreak. Shifting the current climate of testing begins with create an accurate, easy-to-use, and readily available tests. We believe our platform checks all of the necessary boxes and will become a testing platform of choice for many different infectious diseases. During the past year and a half, we have seen a real-time shift in the testing market and an increased need for decentralized testing.

The unfortunate arrival of COVID helped to abbreviate the typical time required to launch a decentralized testing platform. Our COVID-19 All-In-One Test Kit was developed to help alleviate many of the burdens and logistical issues associated with centralized testing and to provide patients with an accurate and convenient testing alternative. With COVID acting as the catalyst, we are excited to continue to advance the Lucira decentralized testing platform. I would like to provide a financial summary before turning to a more detailed review of the second quarter.

Following the first quarter's commercial debut, Lucira produced record results in the second quarter of 2021. During the second quarter, we recorded revenue of $12.4 million, representing a 175% sequential growth from the previous quarter of 2021. In addition, our gross margin is continuing to improve sequentially as volume increases. Although we anticipate that Lucira could be at a gross margin positive run rate by year-end 2021, our focus is less on gross margin in the near term in favor of continued investment in production capability optimization during the second half of 2021.

Our quarterly revenue was a direct culmination of contributions from several key initiatives that we have been focused on throughout the first half of 2021. These initiatives are rooted in the following areas: one, opportunities generated by the OTC indication; two, opportunities from international demand and three, worldwide reopening versus control of COVID and new variants. During the second quarter, a leading driver of revenue for Lucira resulted from the FDA issuing an EUA authorizing our OTC use of the Lucira Check It Test Kit. Lucira Check It, which allows users to detect a positive result in as few as 11 minutes or to confirm a negative result within 30 minutes is available to individuals without requiring a physician prescription or healthcare professional oversight.

In addition, the OTC EUA authorization has opened up many distribution channels and partnerships for Lucira. Regarding commercialization, we are focused on targeting large businesses and have initiated several partnerships during the quarter. These partnerships reflect large orders of our test kits and for their duration can provide steady recurring revenue as discussed last quarter, an example is our partnership with the Chase Center in supporting their reopening. We were the sole supplier of tests as the Chase Center reopened to fans.

Additional examples of commercial partnerships include Manta, which customized the workflow for the Lucira All-In-One Test Kit and was utilized by athletes and individuals traveling to Japan in the summer of 2021, and more recently, AZOVA, which negotiated authorization to sell the Lucira Check It Test Kit with AZOVA's video observation services for travel to Hawaii. We are continuing to partner with businesses and distributors and believe Lucira can become a leader in decentralized testing. Another key area of demand for us this quarter was from international customers and distributors. With the rise of new COVID variants and much of the world still experiencing low vaccination rates, Lucira is working to support partnerships and corporate customers, both domestic and international.

We had an international interest in the latter half of Q2, and we predict that this trend will continue and expect to see increased international sales in the second half of 2021. We plan to provide a regional breakdown once an established ordering cadence is achieved. Also in the quarter, the Lucira Check It Test Kit was available for online purchase through Amazon.com, creating a nationwide distribution channel for Lucira. Late in the second quarter, we made the decision to temporarily halt sales through Amazon and our website as we prioritize distribution to our partnerships.

We intend to reactivate online ordering again in the second half of 2021. As the world begins to balance reopening with the emergence of new variants, Lucira aims to remain at the forefront of decentralized testing. We are noticing that the market is evolving. Quality and reliability are more of a focus, and the Lucira Check It is designed to optimize these factors in a convenient form factor that provides results on the spot.

Given the current environment, it will be essential to continue forging relationships and partnerships, domestic and international. We believe COVID will be endemic and will require testing for years to come, and in the immediate future, testing will be heavily relied upon as the world begins to return safely to normal. Regarding new COVID variance, we perform routine surveillance of emerging variants, including the Delta variant and others by regularly evaluating reactivity against published sequence databases. Based upon these evaluations, current variants that have been highlighted by the CDC and the WHO are detected by our test.

In addition, our technology enables test reactivity to new variants without sacrificing accuracy. In addition to the accuracy of the Lucira test, the companion LUCI Pass text-based reporting system aids reopening efforts. The LUCI Pass provides users an easy way to receive a digitally verified test result and to access this result for up to seven days on a smartphone. As events, venues, workplaces, and travel continue to require proof of a negative test, LUCI Pass provides users with flexibility and convenience.

In fact, it could be more time-efficient and safer to test and result in the comfort of one's home, hotel room, or car and then to show LUCI Pass as evidence of a negative molecular test result than to mingle among others of indeterminate COVID-19 status during group testing. To support the sales ramp, we have focused efforts on expanding manufacturing capabilities. During the second quarter of 2021, we announced that the opening of a new manufacturing center in the Dominican Republic with our manufacturing partner, Jabil. This new manufacturing facility has the potential to manufacture about 1 million units per month at full capacity.

Lucira products is currently being produced at this facility. We are excited about the progress that has been made after only two quarters of commercialization and anticipate that this facility will be operating at full capacity in the first half of 2022. Investment in supply chain has been made to mitigate potential disruptions resulting in more than approximately $36 million of inventory on our balance sheet. In addition, although confident in our ability to procure materials used in the manufacturing processes, we are aware of industrywide shortages that could result in certain materials being thinly supplied, and as a result, we are keeping a close eye on this.

We, of course, have work to do but are gratified to see customers, governments and businesses recognize our product's unique attributes. We will continue to optimize the supply chain and manufacturing in order to meet global demand. In support of the manufacturing expansion and top-line growth, we continue to add to our executive team and are pleased by the level of talent that we have been able to attract both to this team, as well as throughout the company. In May of 2021, we hired a chief revenue officer, Kevin Collins, who brings experience as a global commercial business leader.

Kevin, in turn, hired a handful of seasoned healthcare professionals with commercial experience and their efforts immediately yielded additional partnerships in healthcare professional, distribution, and government channels. The investment in our sales organization is paying off and the demand from the business and global government community is building. We continue to add experienced talent to the management team and throughout the organization commensurate with growth. Looking to the future, our focus is to build upon the momentum established in the first half of 2021.

We believe there is a significant growth opportunity with our COVID-19 test kit. Based on recent changes that many member states of the European Commission made in their policies, we made the strategic decision to forgo applying for temporary allowance of our Lucira Test Kit in countries that fall under the EC. Instead, we plan to submit our application through the standard CE certification process in the first half of 2022 for Lucira Check It Test Kit. In June 2021, we decided to withdraw our last pending EUA application that was intended to expand the current prescription EUA to also include suspected asymptomatic individuals.

We decided it was more valuable to focus our efforts on a 510(k), which we plan to submit to the FDA in the second half of 2021. We do not expect this withdrawal of this last pending EUA to have a revenue impact. In addition, we are increasing investment in assays and products for the detection of sexually transmitted infections and other respiratory infections, and we have fully resourced the development of the multiplex COVID-19 flu product. The market demand for the COVID-19 test kit is underscored to us, the utility of the Lucira technology, and we intend to capitalize upon the potential of this technology across many products.

While additional product launches will take time, we are redoubling investments to speed parallel development processes. We are excited about our future and look forward to the upcoming quarters. I will now turn the call over to Dan George, our CFO, for a detailed discussion of our financials.

Dan George -- Chief Financial Officer

Thanks, Erik, and hello, everyone. Please refer to our press release issued earlier today for a summary of our financial results for the second quarter of 2021. Overall, from a commercial perspective, we had no activity in Q2 2020 and Q2 2021 represented our second full quarter of such activity. Net revenue for the second quarter of 2021 was $12.4 million.

Our net revenue was primarily driven by access to the OTC channel through our EUA authorization, resulting in direct sales to consumers, contracts with businesses and distributors, and international sales. Gross loss was approximately $70,000 for the second quarter of 2021 and gross margin was negative 1%. The decrease in gross loss and negative margin from the first quarter of 2021 was primarily the result of increased manufacturing production. Selling, general and administration expenses were $6.1 million in the second quarter of 2021, compared to approximately $900,000 in the same period in 2020.

The increase was primarily related to increasing headcount and third-party services to facilitate commercial launch and public company compliance. R&D expenses were $10.1 million in the second quarter of 2021, compared to $4.6 million in the same period in 2020. The increase was primarily related to activities to support new product validation, new products, and validation of manufacturing activities. Loss from operations was $16.3 million in the second quarter of 2021, compared to $5.5 million in the same period in 2020.

The increase in operating loss resulted from our gross loss and increases in operating expenses, as previously described. Net loss was $16.2 million in the second quarter of 2021, compared to $6.6 million in the same period in 2020. The increase is primarily related to the operating loss previously described. We ended the second quarter of 2021 with $161.7 million in cash, compared to cash of $58.2 million at year-end 2020.

The increase in cash is primarily related to net proceeds received from our initial public offering. Based on our current plans, we believe our existing cash resources will be sufficient to meet our capital requirements and fund our operations through 2022. While we are not offering -- while we're not officially offering annual guidance for 2021, we do expect continued quarterly sequential revenue growth, with the emergence of the more contagious Delta variant and low vaccination rates in most of the world, combined with the ease of use and flexibility of our COVID-19 test kit, we believe demand will remain robust for the foreseeable future. I'll now turn the call back over to the operator for Q&A.

Questions & Answers:

Operator

[Operator instructions] And our first question is from Brian Weinstein of William Blair. Please ask your question.

Unknown speaker

Hey, guys, good afternoon. This is Griffin on for Brian. Thanks for taking my questions here. Just first on the Manta, AZOVA partnerships.

Can you give us a sense of the size of those and maybe in dollar terms or volumes? Are there any committed volumes moving forward? And then just more broadly on partnerships like this and I'll call it the institutional settings, employers, schools, entertainment, etc. What are the -- what kind of duration are you talking with clients in these opportunities?

Dan George -- Chief Financial Officer

Yes. I would say, Griffin, that we won't get into necessary specifics around those partnerships. But I think that they're fairly representative of a lot of the deals that we're seeing today. Kevin and his team have done a great job of bringing in a lot of contracts that have durability, forecasted volumes, I would say, greater than the majority of what we're seeing now are contracts and purchase orders that have forecasted amounts that range anywhere between three to 12 months.

Unknown speaker

Got it. That's helpful. Thank you. And then just on the manufacturing ramp, I heard the comment reaching full capacity in the first half of '22.

Can you just give us a sense of your current capacity in relation to that $1 million per month?

Erik Engelson -- President and Chief Executive Officer

Yes. So, Griffin, we're in the single-digit -- we're in hundreds of thousands of units at this point, and we're looking at a fairly linear trajectory up to the million.

Dan George -- Chief Financial Officer

Yes. I might catch one through a little bit of color there that we kicked off the Dominican Republic facility here in the Q2 time frame. We're just producing commercial units out of that DR facility now. So as we gain experience with the DR, our capacity will grow.

And I would expect to see, call it, over time, 80% to 90% of our unit production will be derived from that facility.

Unknown speaker

OK. And then the decision to pull the online distribution channel. First, is it fair to say that current demand is exceeding supply? And then if you could quantify that, any sense of based on inbound orders and the sales funnel, any sense of just how much demand is outstripping current supply?

Dan George -- Chief Financial Officer

Well, I would say that demand is robust right now. We made the decision -- we didn't want to partially fulfill that channel, and we had larger commercial orders that we decided to prioritize. So we felt that that was the prudent move to make, especially considering that those distributors have a better opportunity to meet the demands of the public than we would just through our website or through Amazon.

Unknown speaker

Got it. Appreciate the time, guys. Thank you.

Operator

Our next question is from Derik De Bruin of Bank of America. Please ask your question.

Unknown speaker

Hi. This is John on for Derik. That's a very interesting agreement you guys struck. I wanted to ask about how much volume you guys are getting from the Olympics deal.

And more generally, could you break out the OTC of the new channel versus the app home volumes? Thank you.

Dan George -- Chief Financial Officer

Yes. We won't necessarily speak about the specifics around our deal with Manta. It's more to be illustrated by the type of arrangements that were -- deals that we're striking today. Most definitely getting the OTC indication had a fairly dramatic impact on our demand, as you can imagine, as once we receive the OTC indication, the rate limiters around receiving the script are going into a physician to actually get the product we removed.

So with those inhibitors being removed, we were able to expand our reach. And I would say, from an OTC perspective, we're looking at 70%-plus of our total revenue is derived from that OTC channel versus the existing Rx at-home channel.

Unknown speaker

Gotcha. Gotcha. That's helpful. And in terms of the competitive landscape, could you provide an update as you and others pushed into the at-home market?

Erik Engelson -- President and Chief Executive Officer

Yes. So it's a very -- I mean, compliments to them on the very nice product. This is a very different product that we have. In that, there's no instrument -- additional instrument required.

The instrument is effectively built into our test at very low cost. And what that does is it makes the Lucira Test extremely easy to use. We're as proud of the consumer usability as we are the clinical results. So we're seeing, at least for Lucira that we're growing off such a small base initially for Lucira into such a large ocean of opportunity that we're not, at this time, feeling impacts of competitive threats.

Unknown speaker

OK. Thank you.

Operator

And our last question is from Rahul Rakhit of LifeSci Capital. Please ask your questions.

Rahul Rakhit -- LifeSci Capital -- Analyst

Hey, guys. Thanks for taking the questions. Can you hear me OK?

Erik Engelson -- President and Chief Executive Officer

We can. Go ahead, Rahul.

Rahul Rakhit -- LifeSci Capital -- Analyst

Just a quick one for me. In terms of -- you guys are bringing back the online sales through Amazon and through your own website. I know you touched on this a little bit, maybe help us understand what the demand, I guess, exactly looks like in the past? And then how do you kind of expect that to be a contributor looking ahead through the rest of this year and coming into next year?

Erik Engelson -- President and Chief Executive Officer

Maybe I'll just comment qualitatively and then turn it over to Dan. But we intend to bring back online ordering in the second half of the year, whether that's on Amazon or on our website or both to be determined. But, Dan, I don't know if you want to --

Dan George -- Chief Financial Officer

Yes. I mean, we see the business as primarily B2B going forward. Of course, we're going to offer the product at a consumer level as well. But I think our sales team has done a great job of qualifying customers, and we've had inbound interest from very sophisticated customers who really understand the importance of molecular testing and understand the requirements and needs for testing proactively.

So we see that being predominantly making up the lion's share of our demand for the foreseeable future.

Rahul Rakhit -- LifeSci Capital -- Analyst

Got it. OK. I appreciate that. And then I guess maybe just one more.

In terms of manufacturing, and maybe you could just provide a little bit more color on what's happening and what needs to happen between now and then to get to that optimal point for the manufacturing capacity?

Erik Engelson -- President and Chief Executive Officer

Absolutely. We're delighted, by the way, with the partnership with Jabil. That was the right partnership for Lucira. And it's a working relationship collaboratively, particularly -- well, both in Michigan, where we started and had impressive start-up work, and then later in the Dominican Republic with a great team in the DR.

So very happy with that. It's just your standard ramp-up of a new manufacturing process. It's going extremely well. We're very pleased with it.

If we could wave a magic wand and make it go faster, we would. But these things go at a certain rate. And the good news is we're applying the right teams to this and are very happy with the way it's going.

Rahul Rakhit -- LifeSci Capital -- Analyst

Got it. OK. No, I appreciate that. And congratulations on a great quarter.

Thanks for taking the questions.

Erik Engelson -- President and Chief Executive Officer

Thank you.

Operator

And we have a question from Derik De Bruin of Bank of America. Please ask your question.

Unknown speaker

Hey, thanks for getting me back in. I know you guys mentioned the sequential growth in the revenues for the rest of the year, but I was wondering what the outlook for the COVID testing looks like from what you see for 2022.

Dan George -- Chief Financial Officer

I mean, we're not necessarily going -- talking about 2022 right now, but we see robust demand, and we see the majority of the world not being inoculated, being impacted by variance, and testing becoming more and more important every day. So although COVID's [Inaudible], we're optimistic, and we see that we don't see any signs of slowing down demand for our product anytime in the near future.

Erik Engelson -- President and Chief Executive Officer

I mean, what we've been saying since the time of the IPO that COVID will remain endemic and we're seeing reinforcement of that for better or for worse for society. And that testing will continue to play a very important role going forward. You can imagine that it's going to take somehow controlling this over the entire planet to be able to significantly bring it under control. And as the virus replicates in places where there's not vaccination, not mask wearing, for example, then the virus throws up variants, and those variants can challenge existing control measures.

So for all of the above, testing remains important. And it's particularly important to be able to identify asymptomatic positives. And for that, at least from what we can see today, the only way to effectively do that is with a test like Lucira's that's molecular and very accurate.

Unknown speaker

Gotcha. Thank you.

Erik Engelson -- President and Chief Executive Officer

Thank you, John.

Operator

And there are no further questions at this time. I will now turn the call over back to Erik Engelson, CEO, for his closing remarks.

Erik Engelson -- President and Chief Executive Officer

Thank you, Laurie. I want to thank everyone again for your time this afternoon and for your interest in Lucira Health. We are very excited about the future at Lucira, and we look forward to speaking to you soon. Thank you.

Operator

[Operator signoff]

Duration: 34 minutes

Call participants:

Hannah Jeffrey -- Gilmartin Group

Erik Engelson -- President and Chief Executive Officer

Dan George -- Chief Financial Officer

Unknown speaker

Rahul Rakhit -- LifeSci Capital -- Analyst

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