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Cue Health Shareholders Express Concerns as Company Reckons With Post-COVID Reality


NEW YORK – In the midst of the COVID-19 pandemic, Cue Health was one of a handful of firms that leveraged the out-of-control demand for tests for SARS-CoV-2, culminating in its initial public offering two years ago.

But with the worst of the pandemic presumably behind us and the demand for COVID-19 tests at a fraction of what it was at the pandemic's height, Cue has seen its share price plummet. 

Against this backdrop, last month, investment management firm Tarsadia Investments notified the firm about its concerns around the company's direction and recommended the company begin a strategic review and realign its costs. Tarsadia represents multiple long-term Cue shareholders and said in its letter that Cue has "failed to adapt to a rapidly changing post-COVID reality" — a view that multiple other shareholders echoed in interviews with 360Dx

San Diego-based Cue has had a muffled public response to Tarsadia's letter. At the time the letter was made public by Tarsadia, a Cue spokesperson said the board was evaluating the letter and would "continue to act in the best interests of all shareholders as we execute on our strategic plan." The firm, he added, "consistently reviews our strategy to ensure that we are on the best path to creating long-term shareholder value and appreciates constructive feedback on our business." 

Last week, the company also announced its implementation of a shareholder rights plan, which is designed to reduce the likelihood that any entity can gain control of Cue through open market accumulation of stock without paying all other shareholders an appropriate control premium and on terms that wouldn't deliver sufficient value for all shareholders, Cue said in a statement. The rights would become exercisable if an entity, person, or group acquires beneficial ownership of 10 percent or more of Cue's outstanding common stock in a transaction not approved by the board.

In a document filed with the US Securities and Exchange Commission before Cue announced its plan, Tarsadia reported that it has formed a group that owns approximately 14 percent of Cue's outstanding shares.

At its core, Cue's current dilemma is how to turn around a business that was built around a once-in-a-lifetime crisis that inevitably abated and how it should pivot in a post-COVID world. 

In addition to the letter, Tarsadia's legal counsel has submitted a request to the board to inspect the company's books and records to investigate potential breaches of fiduciary duty or other wrongdoing related to mismanagement and test the propriety of the firm's public disclosures, it said in a statement released with the letter.

Cue's early days

Founded in 2010, Cue was originally called Ruubix before it changed its name four years later. Its flagship platform is the Cue Health Monitoring System consisting of a portable reader with a single-use test cartridge and a sample collection wand. Few had heard of the firm until the pandemic hit in 2020 and there were hardly any tests to detect and diagnose COVID-19. Into this vacuum, and with the help of the US government, Cue jumped into the vacuum by developing its technology to detect the SARS-CoV-2 virus. 

In early 2020, the company received $13 million in funding from the US Department of Health and Human Services' Biomedical Advanced Research and Development Authority (BARDA) to develop a COVID-19 test, which received Emergency Use Authorization from the US Food and Drug Administration for point-of-care use in June 2020 and for at-home and over-the-counter use in March 2021. The assay, which uses nucleic acid amplification technology, was the first molecular test authorized by the FDA for at-home use without a prescription.

After receiving its first EUA, the company received a $481 million award from the US Department of Defense to expand its production capacity for the COVID-19 test and provide 6 million assays by March 2021. Riding high on the success of its COVID testing business, in September 2021, the company went public at $16 per share in a $200 million initial public offering. 

Since then, however, effective vaccines for COVID have been developed, people who contracted the disease acquired natural immunity, more benign variants of the SARS-CoV-2 virus have evolved, and venues, such as schools and airports, that once demanded people get tested, have dropped such requirements. 

The need for COVID testing is nowhere near what it had been in 2020 or 2021. As a result, companies that booked record sales during the first year of the pandemic have since reported sharp declines in revenues due to soft COVID-related businesses.

During its first quarter as a publicly traded firm, the third quarter of 2021, Cue reported $223.7 million in revenues. For the most recently completed quarter, Q2 2023, the firm reported $9.9 million in revenues, a 96 percent drop.

Meanwhile, its stock price has fallen to $.45 per share on the Nasdaq as of Tuesday, a 98 percent drop from $20 per share at the close of Cue's first day as a publicly traded company, Sept. 24, 2021.

The company has tried to expand its business beyond point-of-care and at-home molecular diagnostic testing to account for the slowing demand for COVID-19 testing. In August 2022, the company launched its Cue Care service, allowing users who tested positive for COVID-19 on a Cue test to virtually consult with a healthcare provider and obtain treatment, if necessary. 

Earlier this year, the company launched a suite of diagnostic tests through its Cue Care platform. Kits include at-home sample collection supplies and samples are sent to an independent CLIA-certified laboratory for testing, with results returned via the Cue Health app. It also launched its pharmacy offering this year, allowing users to purchase over-the-counter medications or consult with a clinician to receive prescription medication. 

But in interviews, sources familiar with Cue and the current conflict with Tarsadia said that the expansion of the business was a mistake. Rather than returning to the core of the business as the COVID-19 pandemic waned, the company entered multiple extremely competitive markets with existing giants in the space: telemedicine, laboratory testing with home sample collection, and a pharmacy business. There are concerns that "management has lost its way and is spending without any capital discipline," said one investor who asked not to be identified.

In a presentation at the Morgan Stanley Global Healthcare Conference earlier this month, Cue's CFO Aasim Javed said that the Cue Lab and Cue Pharmacy businesses utilize the company's existing infrastructure. Because that infrastructure is already built, adding more tests or more treatments is "a relatively light lift," he said.

The broader offerings can also help with longer-term customer relationships. "People first come in and know about Cue and interact with Cue from a diagnostic standpoint, then they go in and see that we have other tests and other treatments to offer," Javed said. "And that kind of increases and enhances engagement, increases the long-term value of a customer, and we think that's extremely powerful."

Cue did not make management available to comment for this story. 

'No receptivity to changing course'

Other sources familiar with Cue and Tarsadia's conflict and who asked not to be identified noted that Tarsadia has spoken with Cue's management and board of directors about its concerns multiple times, but that management believes its current strategy is better than the alternatives. There's "clearly no receptivity to changing course" from the management team, one source noted.

Tarsadia's letter to Cue calls for a strategic review of the business plan and the capital required to execute on that plan, conducted by a special committee of independent directors with the help of financial advisers. It also calls for an additional $50 million in yearly cost savings, as well as the appointment of independent shareholder representatives to the board. 

The cost savings are a particular emphasis, as the company's cost structure is out of line with its production level, the sources said. The manufacturing plant was scaled for a much larger business at the height of the COVID-19 pandemic but scaling it down to account for actual demand is a necessity, they said. While management may believe there will be demand for that manufacturing capacity in the future, sources said that it is unrealistic and scaling down its manufacturing operations is an immediate way for Cue to save money.

Cue has also been seeking out the direct-to-consumer market, launching its DTC offering at the end of 2021 with an additional monthly subscription model. In his presentation at the Morgan Stanley conference, Javed noted that DTC makes up about 12 percent of Cue's installed base.

In addition to DTC, the company has also targeted government contracts, enterprise customers, and point-of-care providers. 

Sources close to the situation said that, instead of spreading itself to all four of those markets, the company should focus its efforts on enterprise customers that will provide upfront payments and large contracts, while slashing the sales and marketing budget to realize additional cost savings. 

R&D spending could also be cut, as the company needs to be selective and focus on the products that are closest to commercialization and regulatory approval instead of allocating funding to technology that won't generate revenue for another five years, they said. In addition to the Cue COVID-19 test, which received de novo FDA approval in June 2023, the company has submitted its molecular respiratory syncytial virus test and its molecular influenza test to the agency for de novo approval. Cue also received a $28 million contract from BARDA in August to develop a multiplex respiratory test for influenza A/B, RSV, and COVID-19. It also has multiple tests for sexual health in development, including a chlamydia and gonorrhea multiplex test.

According to those sources, the investment management firm is open to any strategic alternative that preserves and maximizes shareholder value. That may include licensing or selling patents, partnering with other companies to take over the non-diagnostic business lines, getting acquired, or selling the business, they said. Ultimately, they still believe there is a lot of value in Cue's technology, which is why it is pushing for changes. 

"There's a massive opportunity for at-home testing capabilities, but they're going about creating that value the wrong way," said an investor who did not want to be identified. 

In his view, the strategic review of Cue's business and the cost-cutting measures requested by Tarsadia are "the medicine that needs to be undertaken." 

Seeking assurances

Other shareholders agree with Tarsadia's critiques. Another large shareholder who did not want to be identified said that while there are things outside of Cue's control, such as FDA approvals and the changing tides of the COVID-19 pandemic, the company can control its spending. The shareholder said he and other investors "all simply want assurances that management is behaving as if capital is scarce and doing everything in their power to extend the runway, and the proposed special committee would go a long way to give us that confidence."

In his view, the company got ahead of itself with its vision of widespread home testing and is struggling to accept that the market isn't ready for that vision right now. Investors are looking for a clear path to profitability and viability, and Cue will need to provide that it wants to survive long enough to achieve its goals. 

"The product and the vision are spot on, but unfortunately the public markets are no longer rewarding potential," he said. 

He also noted that the manufacturing capacity was built during the height of COVID-19 testing, but that it's clear the demand has declined. He said he'd rather the company delay revenue because it is rescaling manufacturing capacity than continue spending on increased capacity just in case demand resumes.

He said that he would get rid of the DTC business line and would focus instead on seeking out government contracts and utilizing third-party provider sales networks until it's clear what products users actually want to purchase. 

A third long-term investor said that there were concerns before the pandemic about how the company was executing its business plan because the technology development was taking longer than anticipated, but the company "got very lucky with COVID." 

The other business lines, such as Cue Care and Cue Pharmacy, were not included in the original business plan and that expansion is "one of the key problems," he said, adding the original vision of the company is being "completely discarded now and replaced by other things that we did not invest in."

The at-home diagnostics business "still remains a great idea," he said, but the company is burning a lot of resources on products that are not creating value. "We have not seen any traction on any of these new ventures," he added. 

"For a period of time, they were one of the luckiest biotech companies on the planet," he said. But now, it's clear that Cue will run out of money and need to sell its assets if changes don't occur. The most urgent and necessary changes are severe cost-cutting measures, which need to come before any strategic review, he said. Hiring financial advisers is "a good way to waste time and waste more money," and the firm should be focused on identifying meaningful cost-cutting opportunities, such as selling its manufacturing facility.

Javed said during Cue's Morgan Stanley presentation that the company has achieved $150 million in annualized cost savings. Since June 2022, the company has gone through multiple rounds of layoffs and implemented two cost-reduction plans. Javed noted that Cue has reduced its operating expenses by about 40 percent since the fourth quarter of 2022 and that it will continue to evaluate financing opportunities to bolster its cash position. 

The firm has taken steps to reduce its administrative costs, as well, reporting in Q2 2023 that its sales and marketing expenses declined 53 percent year over year to $8.1 million. R&D expenses were $36.5 million for the quarter, down 17 percent compared to Q2 2022, while general and administrative expenses decreased 42 percent to $14.7 million. 

Javed noted in his presentation that management is "focused on executing its strategic plan" and said that he believes the firm is getting close to "unlocking some meaningful value" as its menu expands and its non-COVID tests garner regulatory approval.

Dissatisfaction with management's response was a through line in all of the investor conversations, with one shareholder saying it "seems that they don't even recognize how difficult the situation is." 

"This could've been, as an investor, one of the best biotech investments that we did, and now it really looks like a complete write-off," he said.