LumiraDx Ltd (LMDX) 2022 Q4 法說會逐字稿

Good day, and thank you for standing by. Welcome to the LumiraDx Fourth Quarter 2022 Earnings Conference Call. (Operator Instructions) Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker, Melissa Garcia. Please go ahead.

Hello, everyone. We'd like to welcome you to today's call to discuss LumiraDX Fourth Quarter and 2022 Full Year Financial results issued earlier today. With us are LumiraDx's Chairman and CEO, Ron Zwanziger; Deputy CEO, Veronique Ameye; and Chief Financial Officer, Dorian LeBlanc. The press release announcing our financial results is posted on the Investor Relations section of the company's website at lumiradx.com.

Before we begin, I would like to caution listeners that any statements we make today other than historical facts, are forward-looking statements made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Please be aware that all such forward-looking statements involve risks and uncertainties such as those detailed in our annual report on Form 20-F for the year ended December 31, 2021, which was filed with the SEC on April 13, 2022, and our report on Form 6-K that was filed with the SEC on August 16, 2022, and in other filings that we make with the SEC. Any forward-looking statements that we make must be considered in light of these factors. Actual results may vary materially.

Also, during today's call, we may refer to certain non-IFRS financial measures. Non-IFRS financial measures should not be considered in isolation from or as a substitute for financial information presented in compliance with IFRS. There is a schedule showing the reconciliation of these non-IFRS financial measures in our press release issued earlier today which can be found on our website at lumiradx.com.

I will now turn the call over to Ron Zwanziger for opening remarks. We will then provide financial and business updates before answering questions. Ron?

Thanks, Melissa. Good morning, everyone, and thank you for joining our fourth quarter results call.

As announced this morning, we continue to make progress commercializing new products to drive near-term growth as well as progressing our pipeline to deliver on our high-value products. These efforts advance LumiraDx's strategy transform point-of-care diagnostics while strengthening our financial position. As planned, we continue to adapt and shift the business in response to changing COVID market dynamics, leveraging new product innovation and introduction of combinations to retain and grow market share. At the same time, we are working actively with customers to redeploy instruments to broader community-based testing.

We continue to remain focused on expanding and diversifying our customer base, thanks to widely recognized performance and cost advantages over competitors. As we begin manufacturing multiple non-COVID test strips using common materials, we're realizing the benefit of our single, highly automated manufacturing process across our menu of assays.

Fourth quarter results were approximately $41 million, mainly from COVID sales. This performance was achieved with higher volume but lower average selling price based on market mix compared to the third quarter. We shipped approximately 1,500 platforms during the quarter, primarily in Europe.

Next, I would like to share progress against the key priorities we have communicated for advancing our strategy and driving financial performance. Our key priorities are to commercialize our newly authorized CE product portfolio in Europe and other international markets, to progress our US revenue pipeline and 510(k) plan, to accelerate the development of high-sensitivity troponin and molecular assays on the platform and to shape our organization and cost base to support strong innovation and commercial success.

First, we continue to deliver on our priority of commercializing new products in Europe and other international markets. We commenced commercial shipments of our NT-proBNP test in Europe into key accounts. This is a first of its kind product delivering quantitative results from the Fingerstick sample in 12 minutes and designed to allow immediate detection and referral of heart failure in primary care. Initial key opinion leader and customer feedback for this test has been very positive.

The HbA1c rollout, which began in Q3 is progressing well and together with CRP has catalyzed our instrument consolidation strategy. As a reminder, our current test menus designed to nominate -- enable customers to consolidate 3 different instruments they are currently using into a single LumiraDx platform and workflow right now with the opportunity to consolidate up to 6 instruments in the next 18 to 24 months.

Earlier this month, we also achieved NGSP certification in Europe for our HbA1c test, which now opens up many more tender opportunities in key European markets. Finally, Europe is not a huge respiratory market. However, innovation in the overall respiratory portfolio such as COVID Flu, COVID and RSV combos together with differentiated products, such as COVID Pooling and COVID Ultra, 5-minute have enabled us to defend our market share and coverage customers in the region.

Shifting to the United States. We are growing our U.S. revenue and pipeline and remain focused in the near term on respiratory tests. We're actively working on a 510(k) submissions for both COVID Ultra and COVID Flu combination tests. We initiated clinical studies earlier this year and plan to submit our 510(k) application for the COVID Ultra in Q2. This enabled us to continue sales after the public health emergency ends. We're still on track to complete the HbA1c [STAR] clinical studies this year.

With the respiratory system ending acquiring sufficient clinical samples to complete, COVID & Flu 510(k) requirements may be at risk, however, we are working with the Independent Test Assessment Program, ITAP. The ITAP established by the National Institute of Health, Rapid Acceleration Program, the RADx Tech program to achieve accelerated FDA EUA review for our COVID & Flu combination product.

Next, our commitment to accelerate the development of high-value assays and the capability to perform both antigen and molecular tests on our platform. We have made progress on 2 key programs since the start of Q4, troponin and Strep A molecular. In preclinical studies, our Strep molecular A test is demonstrating high sensitivity equivalent to the leading point-of-care molecular tests in the market. We anticipate starting clinical studies during the '23, '24 respiratory season with an IVDR submission in Europe and 510(k) submission in the United States in the first half of next year.

We have a strong molecular pipeline following this product, including COVID, TB, Flu A/B and Chlamydia , and Gonorrhea, where we have already demonstrated feasibility of the chemistry developed from our Fast Labs technology.

We have made good progress with our troponin test since our last update. In preclinical studies the test high -- has high sensitivity equivalent to laboratory analyzers within 12-minute test time from Fingerstick blood and venous blood and plasma samples. We expect to commence initial clinical studies in the fall with an IVDR submission in Europe and a 510(k) submission by mid-next year and faster access to select strategic markets such as the U.K. We continue to be excited about both programs, which are of high interest to our customers.

In summary, we continue to progress on our strategic milestones, enabling us to deliver our mission for improved outcomes at lower costs through fast anchored and comprehensive diagnostic information at the points of need.

I'll now hand things over to Dorian to go deeper into our financial performance. Dorian?

Thanks, Ron. For the 2022 fiscal year, LumiraDx revenue was $254.5 million compared to 2021 full year revenues of $421.4 million. Fourth quarter revenues in 2022 were $41.1 million, COVID antigen test strips from the LumiraDx platform contributed $25 million and Fast Lab Solutions COVID revenues were $8 million for the quarter. Non-COVID specific revenues in Q4 2022 were $8 million or 20% of total revenues, including $3 million of non-COVID specific point-of-care platform related revenues. This is the first quarter that we've had a meaningful percentage of non-COVID specific revenues.

As Ron mentioned, while COVID test volumes increased from Q3 to Q4, the geographic mix yielded a lower average selling price. As we progress in Q1 '23, we have seen both the change in customer utilization of COVID-only tests and a weak respiratory season led to a volume decline in test sales. We expect Q1 '23 total revenues between $18 million and $20 million as COVID testing declines and inventory at customers is consumed. We anticipate continued growth in the non-COVID portfolio outside of the U.S., and we expect strong contributions from our Flu COVID products for both the point-of-care platform and the Fast Lab Solutions for the '23, '24 respiratory season.

Total adjusted gross margins for 2022 were $63.2 million or 25%, adjusted gross margins exclude amortization, stock-based compensation, restructuring and impairment charges, but do include approximately $12 million of depreciation expense recognized as cost of sales. Core point-of-care test strip margins continue to exceed 80% for the quarter and the full year. In the quarter, the company recognized impairment charges on inventory and fixed assets related to the decline in COVID testing demand and the decision to forgo the commercial launch of the Amira COVID test.

The impairment included reducing the accounting carrying value from manufacturing equipment not currently in use and not currently installed of $23 million for Amira and $27 million for the uninstalled platform test strip manufacturing equipment. An impairment on the accounting carrying value of our inventory was recorded for $8 million for Amira, $7 million for Fast Labs and $32 million for raw materials and testing accessories associated with our COVID antigen test.

The installed base of instruments at the end of 2022 was approximately 28,000 instruments, an increase of more than 1,500 in the quarter. Our installed base includes approximately 6,000 instruments previously identified is located in nontraditional point-of-care settings, specifically for COVID testing and 5,500 instruments in Africa mainly under the grant we received on the Bill & Melinda Gates Foundation. We expect limited testing utilization from these instruments in 2023.

The transition of our European installed base from COVID-specific use cases to broad menu adoption has been one of our core successes since the launch of the new menu in Europe. Our high-value customer installations in the U.S. also provide us an excellent growth opportunity for our COVID Flu multiplex test for the '23, '24 respiratory season and beyond.

As discussed in our third quarter earnings call, we implemented additional restructuring activities in -- late in 2022 to reduce the costs associated with the excess capacity in our manufacturing facilities and to rightsize the organization. The full impact of these restructuring activities will be realized in Q1 2023. Nonetheless, fourth quarter adjusted R&D expenses were $19.3 million compared to $29.2 million in Q3 2022. And fourth quarter adjusted SG&A expenses were $23.1 million compared to $27.9 million in Q3 2022. Both as a result of our restructuring activities earlier in 2022 and the early impact of the changes we started implementing in the fourth quarter.

We continue to focus on managing our cost bases across the company have the ability, if necessary, to realize further savings as we progress in 2023.

Finally, in our results for the year, the net finance expenses of the company in 2022 include noncash foreign exchange losses of $81 million, resulting from the internal accounting revaluation of intercompany loans which has no present or future cash flow impact on the consolidated company. At December 31, 2022, our cash balance was $100 million. We announced in February an amendment of our senior debt facility to waive financial covenants through the end of June.

The value proposition of LumiraDx's combination of performance, highly scalable, low-cost test-reproduction and our expanding menu continues to resonate with customers and partners. We are especially pleased with the customer response in Europe for our expanded menu, and I'm happy to hand over to our Deputy CEO, Veronique Ameye to provide a commercial update on recent developments. Veroni?

Thank you, Dorian. We've been heartened to see the customer (inaudible) as we have commercially rolled out the new products over the last few quarters. The combination of lab comparable performance, menu and usability has opened up new -- proof cases for diagnosing and managing respiratory conditions, diabetes, heart failure, suspected deep vein thrombosis and pulmonary embolism as well as managing Vitamin K antagonist therapy in community-based settings.

I'd like to provide some details for 2 of our largest markets, one in the U.K. and the other in [DACH], which compromises Germany, Austria and Switzerland, where the strategy is being played out and quickly accepted in health care systems and by health care professionals and providers.

Early in the pandemic, the U.K. Department of Health and Social Care procured 1,500 instruments for fast accurate COVID testing in the community. These instruments were deployed in testing hubs, hospital emergency departments, (inaudible) and at hospital (inaudible). The variety of use cases enabled the users (inaudible) to experience the impact of lab comparable results in minutes. By moving testing from laboratory-based molecular testing to our platform, they were able to triage patients more quickly and reliably.

As the pandemic waned, the NHS has been redeploying these instruments for broader community care application. We believe this is a testament to their confidence in our platform. The LumiraDx platform has been recommended all NHS sites for implementation in the virtual ward program, which is intended to minimize hospital presence in the U.K. by proactively managing COPD, inflammation and frail patients at home and in other community settings and for ruling out deep vein thrombosis and pulmonary embolism or portable easy-to-use fully connected platform is ideal for nurses and health care practitioners to take testing into the community, including care homes and home visits [which allows] an immediate action near the patient.

The platform is also being used in community settings and primary care offices across the U.K. for fast, accurate and early detection of heart failure. A total of approximately 800 instruments have been requested by the NHS sites to be reallocated for these use cases since the asset repurchasing started, and we are working to deploy them to the designated sites and begin testing.

The opportunity in Germany, Switzerland and Austria is very different. COVID testing was more centralized in these markets, and our opportunity was with RNA STAR complete reagent due to their speed and performance as well as the platform, but mostly nonclinical applications. Now with the launch of INR, CRP, D-dimer NT-proBNP and HbA1c, we are seeing instrument placements and utilization grow.

In the past year, our customer base has grown from 100 to 350 plus with customers ordering multiple tests. A year ago, only 20% of customers in Germany were ordering 2 or more tests. Today, that number is more than 50%. A year ago, less than 5% of our customers in Germany were ordering 3 or more tests. Today, that number is more than 20%. Although harder to quantify with overall market volumes dropping, menu expansion with differentiated respiratory products has helped us retain COVID revenue, driving short-term value for the company.

If we look at our major COVID markets, namely the U.K., Italy and Japan. In the past year, platform revenue contribution from the 12-minute COVID antigen test has declined from over 62% down to just below 35%. The 2/3 of our respiratory revenue is coming from new and differentiated products, such as COVID Ultra pooling, 5-minute COVID Ultra and combination tests such as COVID Flu and COVID RSV.

The initial response to our recent losses of our unique Fingerstick assay for NT-proBNP has been extremely encouraging, and the product has been rapidly adopted by many of our primary care accounts and work has started to introduce the product into secondary care. A recent community voluntary healthy heart check exercise in cooperation with Medtronic at a city in England included our Fingerstick NT-proBNP test on a small number of patient volunteers. This resulted in the detection of 2% of patients with significantly elevated values and 10% of patients with intermediate values showing the incredible power of an effective screening at program to detect early heart disease and take immediate action.

In summary, we are very pleased with how the products are contributing to the overall commercial strategy and early success. We will now open the call for questions.

(Operator Instructions) Our first question will come from Jeffrey Cohen of Ladenburg.

So a few from our end. Firstly, you walked through some of the European business with INR, D-dimer, CRP, proBNP. Could you also talk about HbA1c? And could you talk about some of the past driving commercialization in Europe as far as tenders and geographies and some of the governments there?

Well, that's a very broad question. We've started winning tenders, but some of them take when you win them, it takes a while before they get implemented as they run out from the previous (inaudible), so that started happening in a number of countries. A1c is of a great deal of interest. And now with the new certification that we mentioned in our prepared remarks, we're able to bid on more tenders. The combination of CRP and A1c in particular, that pair is finding a great deal of interest with customers in quite a number of the countries actually essentially everywhere.

So pretty much everywhere in whichever country in Europe you're looking at, you can see that the sort of in different ways, but similarly, this is the combination of these various tests, [we're hoping] to drive acceptance. And up until now, because we've been launching one test at a time, we didn't have enough sort of combination test to be of interest to large -- very large number of locations, but that's clearly changing. And the virtual ward program, which Veroni described is showing the power of actually having a group now on the platform, we have the essential ingredients for [widespread] community testing. So I don't know if that answers your question.

Yes, that's helpful, Ron. So -- and generally speaking, on the tenders versus one-off sales, they may take longer to get through the system, but they tend to be larger in size and longer duration? Is that a good assessment?

Yes, I mean, that's true. But generally speaking, even most (inaudible) of the business is not tend to support it. But once a product goes in, once you've gone through the stage of working with the both key opinion leaders within the country and the specialists within the hospital unit or the district where it's been looked at, once you go through that, the sustaining power of these instruments tend to be very long. So it tends not to be that -- once they're in, it doesn't tend to be that different to tenders even though the tenders are contractually long. There's not really that much difference between them.

Okay. Got it. That's helpful. And then on the instrument placements for 2023, any sense of what you'd anticipate? I know that it was very strong for '22. Do you expect further fall through for '23? Or would you expect instruments placements to slow down?

Well, we certainly wouldn't expect them to slow down. I mean the response on the -- which I just commented to your previous question, of the link with CRP and A1c was part of the drive for the placement of the units in fourth quarter, and that the recent launch in the NT-pro is also driving a tremendous amount of interest. So no, by no means do we think they will slow down. I think we'll have a -- well, I suspect we'll have a really pretty good year for placements, simply based on the products we've recently launched in Europe.

Okay. Got it. And thanks, Dorian, for calling out some of the various revenue components. And any commentary on -- it sounds like most of your restructuring concluded during the fourth quarter. And it sounded like, although you made some commentary about some further on restructuring into the first quarter. Could you elaborate if you may?

Yes. The second set of restructuring that we did, the full impact didn't take place until the end of February. So in the first quarter, we still won't have quite the full impact of some of the restructuring, especially the restructuring that took place in our U.K. facilities. So we'll have an additional decline in the overall operating expenses, including the portions that go through cost of sales, stepping down from Q4 to Q1 and then again from Q1 to Q2 just based on the timing of those restructuring activities.

(Operator Instructions) Our next question will come from Matt Sykes of Goldman Sachs.

Maybe Ron, first one for you. Just -- you made some comments in the prepared remarks about pipeline progress in the U.S. Could you maybe provide a little bit more color on what you're expecting in terms of timing for tests obviously knowing that the approval process is relatively uncertain? But how are you thinking about sort of non-COVID test rollout in the U.S. as it relates to the regulatory process?

Well, so the -- in the short term, we're in the -- as we mentioned, the ITAP program, specifically around COVID Flu, Flu A/B, we're working through that and are expecting for that to clear, which will help us in the flu season at the end of the year.

We're also submitting, which we also mentioned. For the first time, a 510(k) on COVID -- on COVID, you may ask why COVID, why not our entire focus of the company is on non-COVID? Well, if the issue is -- it's the first time the agency will sink our instrument and they're obviously very familiar with our COVID test. So we're submitting that one first. And with that -- and then once that is done, we will be then adding, as we mentioned previously, additional tests with a focus on A1c, INR and also NT-pro at some point. So we expect to have those submissions in the clinical trials for those all done later this year and submit it in such a way that assuming everything goes smoothly, we have those to drive revenues in next year.

Got it. That's helpful. And then you all mentioned the NHS helping you with sort of the non-COVID conversion that's taking place there and redeploying those instruments. For other countries in Europe, are there other types of bodies similar to the NHS that can help you with that type of conversion? Or is it going to be more your own commercial efforts in acting that conversion in other countries? In addition, obviously, to the U.K., but I'm just wondering if there's any tailwinds you can receive from NHS like bodies in other countries in Europe?

Well, that's a very good question. We are actually underway. We focused on discussing the pickup in Central Europe, in Germany, Austria and Switzerland and then in as well as obviously the U.K. But yes, there are similar -- in one of our -- in our biggest European market, which is Italy, there is a similar program, which is slightly different and we'll talk about it more in the later on, but in Italy, the situation is slightly differently and that we still, in most cases, on the instruments because they are flat. And so it's much more of the [onus] on us to work with the various authorities and moving them to the right locations and that program is getting underway.

By the way, the same is true in Africa, where the strip revenues per instrument are very low, but there was a program there, and we're moving -- we've started moving with experimental programs around moving some of those issues -- some of those instruments into noncommunicable disease locations essentially meaning A1c initially. And so that's also going. So it's a very good question. We have a big focus on making sure that the instruments -- that we get these instruments redeployed.

Great. That's very helpful. And then last one, Dorian, for you. Just on '23, you kind of outlined the Q1 guide. I'm assuming that's total. Looks like based on my math, and correct me if I'm wrong, that you did about $8.5 million of sort of non-COVID in Q4. Is that a base we should think about for non-COVID? Is there any kind of growth rates or kind of bars around that growth for non-COVID that we should think about for '23?

Yes. No, I think that is a good base that we expect to grow from there throughout '23. So the difference in Q4 to Q1, the decline is entirely related to COVID and customer inventories from purchase of COVID late in Q4. So we would expect that, that base of [8] is the core base that we grow from -- for the non-COVID products.

Okay. And any commentary on potential growth rate for that? Or is it too early?

I think we'll hold that for now.

(Operator Instructions) Our next question will come from Vijay Kumar of Evercore.

This is Alexandra on for Vijay. So Dorian, you gave out the 1Q revenue expectations. I was just wondering if you could talk a little bit more about the cadence for the full year and how those numbers might ramp? And then also in terms of your cash burn. And you had previously stated that you were focused on exiting '23 with breakeven cash flows. Can we still expect that? And sort of how are you expecting cash burn to look this year?

Yes, certainly. So I think we would look at the full year as having great contribution from the non-COVID products in the growth is similar to the question that Matt just asked. I think we also have a tremendous opportunity in the second half of the year with the Flu COVID multiplex. We do have a very differentiated product, a single sample test results very rapidly for Flu A, Flu B will be COVID that fits well in the pharmacy segment, fits well in the physician office segment and any place where performance is really valued by the customers given the sensitivity of the platform. So the back half of the year converting what historically was our COVID business into a more complete respiratory testing business gives us a lot of momentum with the installed base that we have all in the right place to capture that opportunity in the U.S. to a lesser degree in Europe and then also a growing business in Japan for respiratory as well, which is obviously the second largest respiratory testing market.

So for -- if you think about the cadence of revenues for the year, the core non-COVID business we will continue to grow throughout the year, and then we have a good opportunity in the second half of the year on the respiratory, leveraging the installed base and the differentiation of the multiplex product.

On the second piece on the cash burn, that concentrating the respiratory revenues in that fourth quarter, we'll have a very strong cash impact on the company. Those are high margin, high-value sales in high-value countries when you look at the U.S. and Japan. So that will be a key portion to driving towards operating cash breakeven in the fourth quarter, and we are concentrating on managing the cost base to achieve that outcome.

Great. And then can I just ask another one on the point-of-care TB test. You guys had previously talked about finalizing the test strip design and manufacturing. And I was just wondering how that process is going as well as any preclinical studies you had?

Those have gone very well. We've got a fair number of results coming in. And I think we're on track to seek registration later this year. and to get it into some of the programs for the various organizations that help sponsor TB sales, particularly in Africa, and we're being aided significantly by the Gates Foundation in this process.

(Operator Instructions) Our next question will come from Mark Massaro of BTIG.

Maybe first one is for you, Dorian. I think, I believe adjusted gross margins came in at 25% for 2022, recognizing that your Q1 guidance was significantly below consensus. I guess, how should we think about your ability to hold gross margins at that level? Or is it right that we might expect perhaps a temporary pause until revenues pick back up?

Yes. No, that is right. You should think of it as a temporary decline in margin until revenues pick back up. We do still have a fixed cost base. As we highlighted in the script, we do have over $3 million of depreciation expense alone running through for the installed manufacturing equipment and we have the facilities expense as well. So there is a fixed cost element here. So at a $20 million quarter, it will be hard for us to have significant positive gross margin but the benefit of our manufacturing structure is that a $40 million quarter, that delta essentially flows right to the bottom line, a $75 million quarter that delta almost entirely flows through the bottom line just because the direct materials costs are so small on the disposable.

The other element, I'll remind you, Mark, is that we are still expensing any instruments that we install without having reagent rental agreements in place versus I know some of our peers are capitalizing those and spreading that expense over 3 or more years. So we are -- as we place 1,500 instruments in a quarter, we are taking $4.5-plus million hit directly to the P&L as the periodic cost.

And as we transition into more of the non-COVID broader menu, where we're able to do reagent rental deals, some of the tenders that we spoke about before, where you have multi-period commitments we'll start changing that business model and therefore, changing the accounting for that, but that will still be a burden, I think, in the first quarter for us.

Okay. That's helpful. And congrats on driving 20% of your revenue from non-COVID in the quarter. Maybe -- I know it's been asked a couple of times, but would love to just get maybe a little more specificity with respect to -- I think, Ron, you mentioned COVID Ultra. Is that to be submitted in Q2 '23? And then the COVID, I understand COVID is now going to be, I think, a stand-alone 510(k). And then can you talk about the timing of COVID Flu A/B. I guess the reason why we're asking the questions is just to try to fine-tune our modeling with respect to 2023 and 2024 revenue pacing coming from the United States?

Yes. No, entirely understood. That's why we explained that we're busy collecting and are not quite there, but closing in on finalizing the number of tests we did -- we need for the 510(k) we only have about 20% of the numbers left to collect. And then we'll submit the 510(k) for the COVID Ultra, we're not planning on submitting for the old 12-minute test. We're only going for the 510(k) on the 5-minute version because it's so differentiating and customers, as you heard from the conversion in Europe over to it has been quite fast. So we're only doing that one.

And then on the 510(k), we will then -- we're getting samples extremely difficult. We'll get some samples from the Southern Hemisphere, but then we'll have to get some additional samples in the U.S. But from a modeling standpoint, that's why we explained about the ITAP program where we're expecting to finalize that, and we expect to get the EUA on that to make sure that we have a smooth transition on the -- for the COVID Flu A, Flu B for the next respiratory season.

And I should also add and this probably won't surprise you that we've had tremendous customer response in the U.S. since your question was focused on the U.S., but we've also had tremendous customer response on Flu A, Flu B in Europe, which is Dorian commented, it doesn't tend to be a particularly strong market for flu, but in fact, quite a number of locations, including the U.K. and elsewhere, have actually bought a significant amount of COVID Flu, it could be the same product that we're taking in through the ITAP program.

Okay. That's great. I know that you have some good support from the Gates Foundation. I think on your Q3 call, Ron, you talked about partnership discussions. Would just love any sense or any update with respect to commercial partnerships or perhaps entities that could potentially provide non-dilutive financing? Anything on the partnership side would be really helpful.

We can -- there is really no update on that other than to say that we're continuing. We're very active working with a select group. And we do -- we think it's a fairly good probability we'll get something done, but we'll update you once obviously, when something is done.

(Operator Instructions) Our next question will come from Andrew Cooper of Raymond James.

A lot asked already. But maybe first, just hoping you could give a little bit more color. You had a actually pretty substantial dollar step-up in adjusted cost of goods quarter-over-quarter with pretty steady revenue. So just trying to get a sense for the gross margins and where we should see that stabilize relative to, like you mentioned, some of the fixed costs for some of the pieces that will come in and out as revenues grow?

Yes. So part of that is mix. And as the COVID antigen declines, and we mentioned it was a volume increase actually on COVID antigen in the -- from third quarter to fourth quarter but actually a lower average selling price just based on the geographic mix of where those sales occurred. So a little less in the U.S., a little more in the Middle East and in Europe. So that was a portion of that difference, Andrew.

And the other piece is that we still had beyond the impairments that we had -- we still did have some inventory write-offs to kind of get rid and flush through the last piece of the legacy of dealing with the very variable demand of COVID. So I think we've put that behind us now between the impairment and the fourth quarter inventory reserves. And we're looking forward to having a focus on products that are much easier to predict the growth rates and the consumption of and we'll be much easier on our manufacturing processes to stay efficient versus the challenges we've had and everyone's had on trying to predict demand and plan raw material purchases and production schedules around various waves during the pandemic as we kind of transition into what we're used to as a business with our legacy of just dealing with the respiratory season.

Andrew, just to add, we did a thorough spring cleaning of the balance sheet and generally -- but the company itself in the fourth quarter to transition us to the non-COVID, which was obviously the original plan of the company and the 1,500 instruments that we referred to primary in Europe, they were essentially off for the beginning of non-COVID sales, as we mentioned, particularly around CRP and A1c. And so I think the impact of that is going to flow in the numbers in the next few quarters.

Okay. Helpful. And then, Dorian, I think you mentioned also just if necessary, more room on OpEx to continue to trim throughout the year. I guess, what do you need to see to decide, hey, it is necessary? And then how do we think about where some of those potential areas are? And again, sort of what the thresholds or benchmarks might be to make some of those decisions, if necessary?

We're focused on strengthening the balance sheet. And Ron already mentioned that we're underway with very productive conversations that are really all anchored around the fact that we can generate tremendous performance on this very inexpensive to manufacture form factor in our test strip. So as we've got this menu that now is very compelling, meets a lot of the needs of a physician office trying to really run in a decentralized way, your comprehensive care for primary care. The value proposition of the platform has never been stronger, and that's really driving a number of great conversations that we're having.

So I think strengthening the balance sheet is the core part of the answer to your question, Andrew. We need to focus on that, which we have been doing as we updated in the prior call, and we're confident that we're going to work through that so that we can continue the momentum of populating the platform and growing the installed base, that's really what the focus is to grow the enterprise.

You asked about the criteria we would use. One of them which is probably very hard for you from the outside to see is the progress we're making around getting sort of changes in countries to major changes in their programs. Now we talked a great deal about the virtual ward because that's where it'll be implemented, but there are similar ideas running elsewhere. And so sort of the state of play of the effectiveness of the virtual ward program, the changes we're seeing in Germany and Austria already similar changes that are likely to happen. And so the nature of how we look at it will depend very much on how some of those go.

And I should say that the advanced indications we're having about changes that come to help us are all coming in our direction and particularly importantly, in large geographies. So the authorities dealing with health in much the same way that obviously there were obviously decisions made around why the U.K. is running this virtual ward program. There are similar things in our countries are dealing with different ways, and they're all coming in our direction because authorities everywhere are recognizing that it is the rapid testing in the community helps to lower cost to the various troubled health care systems around the world. And I'm focusing particularly on the larger geographies. And so partly an answer to your question about how we think about it, it depends how those are moving. And at the moment, they're all coming -- they seem to be all coming in our direction.

Okay. Very helpful. And then maybe just one more kind of on the pipeline. I just want to make sure when we think about the combo test COVID and Flu A/B. Is that form factor a COVID [Ag] and Ultra product? Is that one that we could think about the time -- the run time being 5 minutes? Is it more like the traditional 12? Is it something different? Just want to understand kind of where that's going to fit in the competitive stack versus what's out there and what may be to come from others as well?

Dorian, do you want to answer that question?

Yes. So the test of design is a similar design to the 12-minute COVID antigen using the independent channels. So it's a 12-minute run time on the Flu COVID. And what's nice is if you think about the most significant competitor that we see in the space for truly point of care, being able to get that result in 20 minutes or less and getting really high sensitivity, that competitive offering is 2 separate cartridges that require you to run them in series. We're accomplishing that in the single test strip in 12 minutes.

So we're very bullish on the competitive positioning and the feedback that we're getting from customers on the workflow, usability and time to result gives us a lot of confidence about how that will play out in the respiratory season in the back half of this year.

And is there any likelihood of that becoming an Ultra product over time or kind of mechanically not something that's necessarily feasible?

It is something that's feasible. And I think we were ensuring that we met the time lines to have the product in the market for the upcoming flu season versus continued development on [our still version].

But all our developments are going into the Ultra program. This was expedient to make sure we got it into the U.S. quickly. But in general, all our tests coming through are switching to the Ultra platform.

And I would now like to hand the call back to Ron for closing remarks.

Well, over the past couple of quarters, we focused on reshaping our business priorities, assets and organization tractors to accelerate the near-term delivery. Having done this, we've been able to now reinvest and bring momentum to our highest value programs. We continue to advance our product and pipeline strategy for transforming the $50 billion point-of-care diagnostic markets, and we look forward to updating you on our progress and appreciate your continued support. Thanks very much.

And ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.