Lucira Health, Inc. (LHDX) Q3 2021 Earnings Call Transcript

Lucira Health, Inc. (LHDX)
Q3 2021 Earnings Call
Nov 11, 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 Lucira Health's 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.

[Operator instructions] I would now like to hand the conference over to your first speaker today, Greg Chodaczek. Please go ahead, sir.

Greg Chodaczek -- Investor Relations

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

Before we begin, I'd like to remind you that during the 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 may 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, Greg. Good afternoon, everyone, and thank you for joining us. Welcome to the third quarter 2021 earnings conference call. As the world continues to navigate the waves of new COVID-19 variants, as well as the continued spread among the unvaccinated and among those who are vaccinated yet infected, we continue to see the need and subsequent demand for decentralized testing options.

Testing remains a critical contributor to the return to normalcy and customers welcome accurate, easy-to-use, and reliable options that provide quick results. Our LUCIRA COVID-19 All-In-One Test Kit and our LUCIRA CHECK IT COVID-19 Test Kit, provide lab-quality molecular testing in a small, easy-to-use form factor for use anytime and anywhere while producing PCR quality results on the spot. Throughout the past 18 months, we have seen testing volumes fluctuate in the range of 800,000 to 1.5 million per day in the U.S. Irrespective of these fluctuations, this is a substantial volume of daily testing.

The market for testing remains strong as does the demand for our tests. Lucira's is an accurate and convenient testing alternative to lab tests, the benefit of which is that immediate on-the-spot results inform early treatment or quarantine decisions thereby aiding in the fight against further infectious outbreaks. We believe that our efforts over the past eight years have resulted in what we believe is a versatile testing platform that we are well on our way to achieving manufacturing scale that the initial commercial channels have been defined and success has been demonstrated in selling into these channels. We further believe that the success that we are enjoying as a result in large part of the efforts of the expanding team of highly skilled Lucira employees, contractors, consultants, partners, and suppliers who leverage their experience and passion to deliver a great product to our customers.

We will continue to revolutionize the at-home testing market for infectious diseases, starting with Lucira's COVID-19 test kit. We welcome the advent of antiviral medications for COVID-19 and look forward to their commercial availability. As with antiviral medications for influenza, these drugs appear to be most effective when taken early in the course of infection. This speaks to the utility of Lucira's accurate on-the-spot molecular test as a companion diagnostic that can be used to detect infection early.

We anticipate the same benefit from our multiplexed Flu A, Flu B, and COVID-19 test kit, which is in development for both influenza and COVID-19 treatment medications. Looking back on the quarter, we are pleased with what we have accomplished and the steps taken to propel Lucira to the next level. Lucira's test provides lab accuracy in an instrument and reader free fully disposable form factor that is easy to use and easy to carry. Lucira's test is readily carried in luggage, for example, when traveling.

Our test does not require cleaning, calibration, or an app and is powered by two AA batteries included with the test kit. Since commercialization, we have seen our tests used in several capacities, including but by no means limited to the following: one, aiding in the travel and leisure and corporate enterprise testing markets due to its fully self-contained form factor and ease of use. Users may test at home or in their hotel room and then produce a LUCI pass on our easy-to-use text-based reporting system as a proof of a negative test result. The LUCI Pass can be shown at an entrance store to an enterprise, for example, or submitted as a PDF to an airline website when obtaining a boarding pass.

This is a convenient and time-efficient testing means for travel. We have had reports of individuals traveling extensively using the LUCI Pass. Two, supporting concierge medicine doctors as they travel to patients, a visiting physician can start the test to part to make their next stop before the test is completed and then the patient can easily communicate results back to their physician. This nicely fits the mobile workflow of the modern healthcare practitioner.

And three, families are able to test all family members concurrently and medical clinics and dentist offices test patients on the spot. The elimination of an instrument or reader means that there is no testing bottleneck or lab capacity issue as many people can be tested simultaneously as there are Lucira tests available and there is no investment in testing infrastructure required. We believe we continue to establish ourselves as a leader in the untethered mobile molecular testing environment and will continue to build and capitalize upon the many opportunities that are provided by the Lucira technology. During today's call, I will review our third quarter highlights, provide a business update and discuss our plans and outlook for the future.

I will then turn the call over to Dan, who will give a more detailed review of the financial results. Before turning to a more detailed review of the third quarter, I would like to provide a financial summary. We are encouraged by our strong third quarter. Our organic revenue growth continued to accelerate as the quarter progressed.

In the third quarter of 2021, we reported revenue of $15 million, representing a 21% sequential growth from the previous quarter of 2021. Gross margin, when excluding impairment and certain obsolescence charges, is continuing to improve sequentially as our volumes increase. Although we anticipate we could be at a positive gross margin run rate by the end of 2021, we are instead prioritizing increased investment in manufacturing capabilities in response to demand. In fact, total demand exceeded total shipments in the third quarter of 2021, and accelerating the product ramp in the Dominican Republic remains a primary focus.

We remain on track to bring the Dominican Republic facility to capacity production in the first half of 2022. To this end, senior Lucira manufacturing personnel are now stationed in the Dominican Republic and will continue to be so on an ongoing basis in partnership with the team from our contract manufacturer, Jabil. We believe this joint presence has yielded positive results. Based on our demand trends and operational achievements, we are forecasting fourth quarter 2021 revenues of at least $30 million and 2022 revenues in excess of $150 million.

Our business strategy is to grow revenues, increase margins and expand the product pipeline. To drive this strategy, we remain focused on several key initiatives that we discussed last quarter. As a reminder, these initiatives focused on opportunities generated by our over-the-counter indication, growing international revenue, and aiding in the worldwide reopening and control of COVID-19 and its variants. Many of these initiatives were vital to driving revenue during the third quarter, and we had several significant milestones.

We are excited to share the strides that we have made toward these goals. First, looking at our over-the-counter indication. The LUCIRA CHECK IT Test Kit was granted FDA authorization via EUA in the first half of 2021. As a result, a test allowing 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 oversight from a healthcare professional.

FDA authorization was an instrumental milestone and is the foundation that we continue to build upon. A vital mission of ours is to make our product accessible. We strive to provide customers with ready access to testing with an accurate, easy-to-use, at-home alternative to centralized testing via various distribution channels. While demand in all distribution channels has remained strong, we paused online sales of our product late in the second quarter to better support large contracts.

We are pleased to share that we have reopened online sales for our LUCIRA CHECK IT Test Kit on our website and on Amazon. Our decision to allocate inventory to our online retail channels was based solely on our desire to get tests into the hands of retail consumers and had nothing to do with overall demand, which remains very strong. Now turning to international business. Last quarter, we mentioned the growing globalization of our sales and its contribution to revenue.

We continue to support international customers and as in the U.S. see vigorous demand. Our quality and regulatory affairs team has been instrumental in facilitating the importation and approval processes of various countries, along with our international partners. As an example, in October, we received pandemic special access route, or PSAR approval for our LUCIRA CHECK IT COVID-19 Test Kit by Singapore's Health Sciences Authority.

This is an essential step in our continued international commercial expansion. As part of the approval, we have partnered with Labgistics Asia to import and distribute Lucira's products in Singapore. While the continued presence of COVID-19 and the rise of its variance are unfortunate, we continue to see demand for testing, particularly as the world continues to reopen and COVID-19 becomes endemic. To support the sales ramp, we have taken several steps and made essential personnel investments to sustain this growth.

Our sales strategy has been developed to service the various sales channels to capitalize on the growing demand and to increase access to our product. This strategy includes business to business, including corporate enterprise sales, partnerships with telehealth and testing service providers, events, and travel and leisure. International, including enterprise and government; business to consumer, which is serviced by our online presence; healthcare, including hospital networks, clinics, dentists, preprocedural testing, and more. The four sales strategies are resourced with experienced sales executives and team members.

Our commercial team led by chief revenue officer, Kevin Collins, has demonstrated effective selling into these channels. This team onboarded beginning in the second quarter and expanded further during the third quarter. As Lucira continues to grow, so does our executive team, and we have made several top-tier additions during the third quarter. In August, Ghazi Kashmolah joined the company as chief quality officer and executive vice president of regulatory affairs.

With over 30 years of experience, Ghazi and his expanding team are playing an important role as we expand globally, bring new products to market and manufacture increasing volumes of our current product. Additionally, in September, Tony Allen joined the company as chief operations officer. With over 25 years of experience in operations and management, Tony and his expanding team have been instrumental as we increased production, streamlined operations, and increased product availability in a growing number of countries. During their brief tenure with Lucira, both Tony and Ghazi have made profoundly positive impacts on the business.

Moving to manufacturing. In the second quarter, we opened a new production facility in the Dominican Republic, run by our manufacturing partner, Jabil. We are delighted to report that we have worked through many of the initial start-up challenges associated with the new production center and that we currently have two lines running. We anticipate having all four production lines operating at full capacity in the first half of 2022.

As these lines ramped during the third quarter, we began to see improved efficiencies in the Dominican Republic, while at the same time, we experienced continued labor shortages in our Michigan plant. Ultimately, this led us to the decision to consolidate all current manufacturing into the Dominican Republic and to implement a fifth line that will be operational and then at capacity in the first and second halves of 2022, respectively. We expect the Dominican Republic production facility to be able to support our near-term business needs. I would like to acknowledge the team in the Dominican Republic for their strong performance, as well as to complement those who worked hard and made key manufacturing innovations in Michigan.

One of the benefits of Lucira's platform technology is its ability to be adapted to diagnose other infectious diseases. It was designed with this flexibility in mind. In addition to the COVID-19 test, a pipeline of new tests is either in full-scale development or in feasibility. And seeing the positive commercial success of the COVID-19 test has led us to redouble efforts to bring additional tests to market.

With this in mind, I would like to provide an update on a few products in our pipeline. The first is what we refer to as our ABC test, a multiplexed Flu A, Flu B, and COVID test. With a single swab sample, a user can have results from these three tests all in one device at the same time. This development program is fully resourced and is on track for a 2022 FDA submission.

Pending the submission process and regulatory approval, we anticipate that this product could be available to support the 2022 flu season. Second, we have commenced feasibility testing on a menu of additional respiratory and SCI indications. As we have more updates on our pipeline and our progress, we will provide them as we prioritize follow-on tests for full-scale development. Lastly, I want to briefly mention that as a result of its utility, we are more fully resourcing the internal team behind the Luci digital reporting platform.

The Luci platform 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. This text-based platform is a value-added service that we view as an important complement to our testing platform. Broadening the capabilities of Luci is the mission of this growing internal team, and we look forward to sharing more with you in subsequent quarters. Before I end, I want to acknowledge, recognize, and thank all of our employees and contractors, the leadership and continually improving execution that this growing team is providing is the reason for the success that we enjoyed in the third quarter.

The entire management team and I are honored to work with such a skilled and experienced team. 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 third quarter 2021. Overall, from a commercial perspective, we had no activity in the third quarter of 2020 and the third quarter of 2021 represented our third full quarter of such activity. Net revenue for the third quarter of 2021 was $15 million.

Our net revenue was primarily driven by contracts of businesses and distributors, healthcare providers, international sales, and direct sales to consumers. Gross loss was approximately $1.5 million for the third quarter of 2021, and negative gross margin was 10%. Increases in both gross loss and negative margin from the second quarter of 2021 were primarily due to a $1.3 million inventory obsolescence charge and a $1.6 million long-lived asset impairment charge, partially offset by increased manufacturing production. Selling, general, and administration expenses were $11.8 million in the third quarter of 2021, compared to approximately $1.7 million in the same period in 2020.

The increase was primarily related to increasing personnel-related costs and third-party services to facilitate commercial activities and public company compliance. R&D expenses were $14.3 million in the third quarter of 2021, compared to $8.8 million in the same period in 2020. The increase was primarily related to activities to support new products and validation of manufacturing activities. Loss from operations was $27.6 million in the third quarter of 2021, compared to $10.5 million in the same period in 2020.

The increase in operating loss resulted from increases in operating expenses combined with our gross losses previously described. Net loss was $27.5 million in the third quarter of 2021, compared to $11.8 million in the same period in 2020. The increase is related to the operating loss previously described, partially offset with a charge in other expense, primarily relating -- primarily resulting from noncash derivative liabilities recognized in the third quarter of 2020 associated with the issuance of convertible notes. We ended the third quarter of 2021 with $117.3 million in cash, compared to cash at $58.2 million at year-end 2020.

The increase in cash is primarily related to net proceeds received from our initial public offering. We believe our cash will sustain us through the balance of 2022. As Erik mentioned, we're seeing strong demand trends, and we believe this demand for our COVID-19 test will remain for the foreseeable feature. As such, we are forecasting fourth quarter 2021 revenues of at least $30 million and 2022 revenues in excess of $150 million.

I'll now turn the call back over to Charlotte for Q&A.

Questions & Answers:

Operator

Thank you. [Operator instructions] Your first question comes from the line of Derik De Bruin from Bank of America. Your line is now open.

Derik De Bruin -- Bank of America Merrill Lynch -- Analyst

Hi. It's Derik. Can you hear me? 

Dan George -- Chief Financial Officer

We can. Hi, Derik. 

Derik De Bruin -- Bank of America Merrill Lynch -- Analyst

Great. Hi. So, thanks for the update. So, I've got a number of questions, so I'll just go through them.

I guess, first of all, what's your capacity expectations, manufacturing capacity expectations in terms of number of units being produced by mid-'22 and exiting '22?

Dan George -- Chief Financial Officer

Yes. So yes, great question, Derik. We should be at 1 million units a month by the end of the first half of 2022.

Derik De Bruin -- Bank of America Merrill Lynch -- Analyst

Great. And when you look at your expectations in the 2022 guide, what are you assuming for ASPs? And I guess how did prices return in 3Q and 4Q as well? Just what are you sort of baking into pricing for this?

Dan George -- Chief Financial Officer

We're going to provide a more fulsome update of 2022 when we provide guidance in Q1. But for now, I would just look at -- I would probably keep your model consistent with ASPs that you currently have.

Derik De Bruin -- Bank of America Merrill Lynch -- Analyst

Got it. And when you look at the guide that you're assuming for the revenues, is that inclusive of the ABC test, the COVID test, are you assuming anything for that? And I guess what -- when do you expect to have -- when do you take trials for that?

Dan George -- Chief Financial Officer

Yes. It's not -- I mean, the revenue that we provided was really a floor because we haven't provided any guidance for 2022, and we understand it's quite difficult for one to get their arms around that. It doesn't include anything incremental related to the multiplex ABC test. It's all COVID-19 organic revenue.

Erik Engelson -- President and Chief Executive Officer

And an answer to part 2, Derek, the timing of going through all of the testing will be such that we plan to submit to FDA and assuming an EUA pathway have results and an approval in time, assuming all that happens, as I've described, to hit the end of your flu season in 2022.

Derik De Bruin -- Bank of America Merrill Lynch -- Analyst

One final question. So how much of that $150 million for next year is committed? I mean, how much of that do you have direct line of sight we're building to?

Dan George -- Chief Financial Officer

I would just say that -- I would just say, based on the current pipeline, our current revenue is probably north of 75% contracted. So, we feel very confident we have great visibility into our -- into the 2022 revenue based off the pipeline. I would think of it in terms of a lot of our contracts probably half of our contracts have binding elements to them that range out to six months, and all of our contracts have a 12-month forecast. So, we provided that number because we feel very confident about our ability to hit it from a demand perspective, but also importantly, very confident from a production perspective as well.

Derik De Bruin -- Bank of America Merrill Lynch -- Analyst

OK. Great. I'll turn back.

Erik Engelson -- President and Chief Executive Officer

Thank you, Derik.

Operator

Your next question comes from the line of Brian Weinstein from William Blair. Your line is now open.

Brian Weinstein -- William Blair -- Analyst

Good afternoon. This is Brian. Thanks for the questions. Maybe just to start super short term.

Any commentary on the most recent trends you're seeing here in mid-November, obviously, cases have come down a bit, but the commentary on demand seems pretty strong. So, any color on what you've seen so far in Q4 would be helpful.

Dan George -- Chief Financial Officer

Yes. We actually have seen -- thanks for the question. We've seen no letup in demand. And in fact, when we look back at demand -- at total testing over time in the U.S.

since the pandemic started, it fluctuates between 800,000 and 1.5 million tests per day. So, the TAM is just enormous compared with our volume of sales. And as a result of that plus people's interest in our product, we have just not seen any change in demand.

Brian Weinstein -- William Blair -- Analyst

OK. And just a follow-up question on the guide, especially on the '22 floor. Can you give us a sense of where that demand is expected to come from? What segment of those kind of four that you've outlined is going to -- do you expect to be the largest contributor?

Erik Engelson -- President and Chief Executive Officer

Yes. So, we anticipate that of the four, the largest contributors are B2B and International. However, hospital systems can be a wild card and could come and surprise us from behind with high demands. And we've seen some of that behavior in 2021.

Brian Weinstein -- William Blair -- Analyst

OK. And then just one more follow-up to the guide. 45 million tests a month, somewhere getting to -- I'm sorry, $45 million a month and $1 million run rate, $45 ASP, obviously, that's way beyond the $150 million floor. So just curious why that $150 million number is the right floor, how much of discounting what it could be, and some of the puts and takes there.

Erik Engelson -- President and Chief Executive Officer

Yes. No, great question. And we'll say that we're providing appropriately conservative guidance driven by a bottoms-up pipeline analysis and just our current best efforts at estimating this. But as we gain further resolution, as Dan mentioned, we'll come back with more refinement.

Brian Weinstein -- William Blair -- Analyst

OK. Thanks for the time, guys.

Erik Engelson -- President and Chief Executive Officer

Thank you.

Operator

There are no further questions at this time. Presenters, please continue.

Erik Engelson -- President and Chief Executive Officer

Thank you, Charlotte. I want to thank everyone again for your time this afternoon and for your interest in Lucira Health. We believe that we have the right product, at the right time with the right team to manage what now appears to be evolving into an endemic disease across the developed world. We are very excited about the future at Lucira, and we look forward to speaking to you soon.

Operator

[Operator signoff]

Duration: 31 minutes

Call participants:

Greg Chodaczek -- Investor Relations

Erik Engelson -- President and Chief Executive Officer

Dan George -- Chief Financial Officer

Derik De Bruin -- Bank of America Merrill Lynch -- Analyst

Brian Weinstein -- William Blair -- Analyst

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