A San Diego-based healthcare company where sales have dropped for its COVID-19 tests has angered a Newport Beach family office.
Tarsadia Investments LLC, a single-family office with more than $2 billion in assets under management, has accused Cue Health Inc. (Nasdaq: HLTH) of employing “a flawed capital allocation and unsustainable cost structure.”
Tarsadia, an investor in Cue, has also submitted a request to inspect the firm’s books and records.
Tarsadia urged the board of Cue to undertake a strategic review, which is Wall Street speak for selling itself.
“To date, the board has failed to take any concrete action on our proposals, and time is running out,” Tarsadia said in an Aug. 31 public letter to Cue’s board.
“Our board is evaluating the letter and will continue to act in the best interests of all shareholders as we execute on our strategic plan,” a Cue spokesman said in an email to the Business Journal.
Tarsadia Investments was founded by Chairman Tushar Patel, who helped run his family’s motel in Anaheim and over the years became a big hotel investor.
Tarsadia cuurently has 28 portfolio companies and typically invests $5 million to $75 million in technology areas of health and finance.
In 2018, Tarsadia participated in a Series B investment in Cue, which developed an online platform where users can easily access diagnostic tests. Cue, which says it has more than 100 patents, said its technology has the potential to transform how conditions are diagnosed and managed.
When COVID-19 struck, Cue pivoted to developing a test that could deliver results within 20 minutes to a patient’s smartphone. The company built production facilities and grew its headcount from 99 in early 2020 to 1,585 by the end of 2021.
Sales boomed to $618.1 million in 2021, up from $23 million in the prior year.
After Cue raised $200 million in a 2021 public offering that priced its shares at $16 each, they rose higher than $22.
Then the bottom fell out as testing fell out of the favor.
Its two analysts on average are predicting sales will fall 86% this year to $64.9 million and then rebound 52% to $98.8 million in 2024.
Shares have steadily fallen to 53 cents and an $81 million market cap.
“While COVID-19 initially provided a boom cycle to the industry, the rapid decline in testing as COVID-19 subsided created an equally large bust cycle,” Tarsadia said.
Tarsadia said Cue has expanded beyond its core competency of diagnostic tools into new business lines where it has no competitive edge and is competing against well-established and better-capitalized competitors.
“The failure in these endeavors is plain to see,” Tarsadia said. Cue “is blindly building a corporate empire.”
Worse, Morgan Stanley projects that Cue may soon run out of cash and be required to raise $75 million in new equity in the fourth quarter, according to Tarsadia. Cue had $128 million in cash and equivalents as of June 30.
“We have been patient investors of Cue over the past five years,” Tarsadia said. “However, the company’s dire financial straits and continued destruction of stockholder value have forced us to take the initiative.”