NEW YORK – Citing a nosedive in Cue Health's share price since the firm went public and a shifting post-pandemic reality, investment management firm Tarsadia Investments has sent a letter to the diagnostic test development firm urging it to begin a strategic review and realign its costs.
In a statement issued Thursday, Tarsadia, which represents multiple long-term Cue stockholders, said that Cue has "failed to adapt to a rapidly changing post-COVID reality" and encouraged the company to begin investigating strategic alternatives, realign its costs, and enhance its board of directors. In its letter to Cue, Tarsadia noted that Cue's share price and quarterly product revenues have plummeted 97 percent since it went public in 2021, according to the letter.
For the second quarter, Cue said that total revenues fell 89 percent year over year. The firm implemented a cost reduction plan in May, laying off 326 employees. The May layoffs followed two previous rounds of layoffs in January 2023 and June 2022.
Tarsadia said the shareholders it represents have "grave concerns" about Cue's strategic direction and noted that it has had multiple meetings with Cue management and its board of directors but that the board failed to implement Tarsadia's proposals. Tarsadia added that the company has not meaningfully adjusted its cost structure as revenues have declined.
Tarsadia also noted that Morgan Stanley analysts have projected that Cue will be required to raise $75 million in new equity in Q4 2023, resulting in a dilution to existing shareholders' ownership of more than 50 percent.
"Cue's excessive cash burn is the result of a management team that is blindly building a corporate empire without consideration for unsustainable overhead expenses, return on capital, or preserving its valuable cash resources," the letter stated. The firm's entrance into new business areas, including its Cue Care service, which provides telehealth and prescriptions, in addition to diagnostic testing, has been a "failure," Tarsadia added.
The investment management firm recommended that Cue undergo a strategic review of its management's long-term business plan and the capital required for that plan. It added that the board is responsible for determining whether the execution risk and capital required to move forward with the business plan will create more value than other alternatives and suggested the board form a committee of independent directors to help with the review.
Tarsadia also recommended that Cue realign its cost structure and capital allocation, saying that it believes Cue must save an additional $50 million per year to extend its liquidity runway into 2025. Cue's cost structure "does not reflect the reality of a post-COVID revenue environment and Cue's valuable remaining cash resources must be focused on its core businesses." It added that the company should curtail its non-core businesses, namely its Cue Lab and Cue Pharmacy offerings, and should focus sales efforts on large-scale commercial deals that include upfront payments, rather than direct-to-consumer and small and midsize customers.
The investment management firm's third recommendation was the appointment of independent stockholder representatives to the board of directors "who can contribute a sense of urgency and fresh perspective to board deliberations." The representatives should be appointed to the strategic review committee, it added.
Tarsadia's legal counsel is also submitting a request to inspect Cue's books and records to investigate possible mismanagement and test the propriety of Cue's public disclosures, it said.
Tarsadia described itself as a "single-family office that provides management services to its family clients." Some of its family clients are long-term shareholders of Cue with holdings that make them a "top 10 stockholder."
In an email, a Cue spokesperson said the board is evaluating the letter and "will continue to act in the best interests of all shareholders as we execute on our strategic plan."
The board "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," the spokesperson added.