Q3 2022 DermTech Inc Earnings Call
Good day, and thank you for standing by and welcome to the <unk> third quarter 2022 financial results call.
At this time all participants are in listen only mode. After the speaker's presentation, there will be a question and answer session.
A question. During this session you will need to press star one one on your telephone you will then hear an automated message advising your hand, just raised please be advised that today's conference call is being recorded I would now like to hand the conference over.
Steven Cassava head.
Our relations.
The call is yours.
Thank you operator, welcome to <unk> third quarter 2022 earnings call. Joining me on today's call are Dr. John <unk>, Our President and Chief Executive Officer, and Kevin Sun, Our Chief Financial Officer. Our call. Today will include forward looking statements within the meaning of the private Securities Litigation Reform Act.
Of 1995.
All statements made on this call that do not relate to matters of historical fact are considered forward looking statements forward.
Forward looking statements made during this call, including projections of future performance.
Based on management expectations as of today and are subject to various factors assumptions risks and uncertainties, which change over time.
Actual results could differ materially from those described in such statements.
Several factors that may contribute to a cause such differences are described in today's press release and our most recent filings with the SEC.
We undertake no obligation to update these statements except as required by applicable law.
Our third quarter 2022 earnings press release, and SEC filings are available on our Investor Relations website, a recording and transcript of today's call.
We will be available on our website later today with that let me turn things over to Jeff.
Thank you, Steve and thank you everyone for joining us.
The third quarter of 2022 was positive as it relates to bringing on new Payors and increase in covered lives, but was tough in terms of sequential growth.
Billable sample volumes did grow 54% year over year, but were flat sequentially payers continue to impact the average selling price or ASP of our derm Tech melanoma test or DMT, which was flat excluding prior period adjustments, but down when include including those adjustments detailed.
Which Kevin will provide.
In addition, we are experiencing some pressure on billable sample growth as payers rollout their typical tactics to impede the adoption momentum we have generated this year, we are addressing this by expanding coverage and using our own tactics to reduce this pressure.
As we discussed on the last call. There was also some pressure on billable sample volumes during the quarter in territories with elevated sales rep turnover turnover has stabilized and is back to historical levels and our new reps are ramping up nicely now we are working to accelerate the historical ramp up period of new reps to minimize.
Future potential impact to billable sample volumes.
We believe the most impactful thing we can do to stabilize and then accelerate revenue growth is to bring on more commercial payers. It is it is a critical factor in growing asps.
And it removes a barrier to increasing customer usage to that end. We now have line of sight to adding 30 to 40 million covered lives by the end of the first quarter of 2023. This total would be more than a 35 per incent increase in our current covered lives in the U S and is roughly equivalent to the second largest national payer.
These covered lives come from a broad combination of payers, which demonstrates the momentum we have gained to raise awareness of the clinical and economic value proposition of the DMT. We've hit a milestone of more than 150000 DMT is completed and we believe these strong volumes are contributing to our progress.
With Payors.
We expect approximately half of these covered lives will be effective before the end of the year.
In addition pricing is consistent with our long term targets.
We recently executed an agreement with a large regional payers that cover 6 million lives and completed price negotiations with the national government payer that runs the largest integrated healthcare system in the U S.
We expect to be affected by the year end. We also received a policy from a large lab benefits manager.
The lab benefit manager is a particularly important win because it represents up to 8 million covered lives itself reaches potentially another $30 million covered lives through its relationships with health plans.
And it was an independently developed policy that clearly outlines the value proposition of our test in.
In addition, national payers are also leaning in more than they ever have and we've been able to leverage educational meetings with medical directors into upcoming scheduled comprehensive reviews. We see these upcoming upcoming comprehensive reviews as potential important near term catalysts for our Asps and revenue growth.
Overall, we have more had more positive activity with payers now than we've had at any time during the last two years a drought in activity, which was largely driven by the pandemic.
We believe we are now in a normalized trajectory to add payers at a similar rate as our more mature diagnostic peers.
It is worth noting the significant patient need exists in the large addressable market for melanoma skin cancer. There are 4 million biopsies each year defined approximately 200000 melanoma cases.
Annual treatment cost for melanoma are over 3 billion early detection matters as melanoma is very treatable when identified early overall, it's a $2 $5 billion market opportunity.
Along with the nice momentum, bringing on payers, we have two initiatives in primary care that can also help strengthen our ASP.
First our agreement with Sonora Quest, which is the largest laboratory testing network in Arizona establishes a reference testing model were Sonora quest builds insurance for the samples they generate and pays us a set fee per sample, we've completed systems integration and training of their primary care sales reps is on.
Going with.
We expect this arrangement to begin to begin commercial operations before the end of the year.
We're also receiving strong positive feedback regarding the primary.
Starting with an important payer provider and believe this pilot is tracking in the right direction.
I also want to emphasize that we further strengthen our operating discipline and are adjusting our operating expenses to be in line with our tempered near term revenue trajectory in.
In closing despite our top line metrics being flat sequentially long term improvement in Asps and revenue is clearly all about payers.
Substantially all of our capital and energy is focused on two important priorities expanding commercial coverage for our DMT to boost the ISP and alleviating payer friction in our commercial channel given the billable samples. We've demonstrated we can generate monetizing this demand at a higher Asa asps has the.
Potential to exponentially grow assay revenue I look forward to updating you again in the months ahead with that I'll turn the call over to Kevin for a more detailed financial review, Thanks, John and good afternoon, everyone I'll begin by summarizing our key operating and financial metrics for the third quarter and then review, how we think about our revenue outlook moving.
Forward I'll wrap up by covering our liquidity profile and cash runway targets.
Assay revenue in the third quarter increased 16% to $3 4 million largely due to a 54% year over year increase in billable samples to approximately 18080.
Contract revenue was flat at zero point $1 million during the third quarter looking.
Looking ahead <unk> contract research services continue to show promise as we've signed five contracts in the last six months on the heels of clinical trial activity picking back up in the Biopharma space.
Total revenue for the third quarter increased 18% to $3 6 million up from 3.0 million in last year's period, primarily on higher assay revenue.
Drilling down on our main top line drivers first ASP was $190 per sample in the third quarter down 25% year over year and 16% on a sequential basis. The second quarter of 2022 had adjustments that netted to a <unk> $2 million benefit.
For the third quarter, we change collection estimates for tests run in prior periods due to reduced commercial payment payer payments, which resulted in a 0.5 million downward revenue adjustment.
This ASP pressure was partially offset by a modest improvement in Medicare Asps due to the recently updated code at it.
Normalizing for these adjustments in both periods third quarter ASP would have been $217, which is flat sequentially.
Second we had approximately 2410 unique ordering clinicians in the third quarter up about 1% from roughly 2390 unique ordering clinicians in the second quarter with approximately 3910 unique ordering clinicians during the last 12 months, we penetrated 43% of our current target market of 9000 dermatology clinic.
<unk>.
Third our average quarterly utilization or average number of tests ordered per unique ordering clinician was seven five billable samples in the third quarter versus $7 seven in the second quarter and seven four in the year ago period.
Finally, Medicare samples represented about 24% of our billable samples in the third quarter, which was unchanged as a percentage from the second quarter and up modestly from 22% last year. It's important to highlight that Medicare represents half of the total biopsies for melanoma each year and then we continue to try to accelerate penetration of this market segment.
Focusing next on operating expenses cost of assay revenue was $3 6 million or 27% year over year increase yield again assay gross margin of negative 6%. The increase in cost of assay revenue was primarily due to increased billable samples offset primarily by lower per unit costs from efficiency improvements.
<unk>.
The reduction in assay gross margin from 3% in the year ago period, and 22% last quarter was primarily a result of lower asps and assay revenue.
Sales and marketing expenses were $14 $6 million during the third quarter, a 49% increase from the year ago period, primarily due to higher labor related costs from increased head count and marketing expenditures.
Search and development expenses were $5 7 million or 29% year over year increase largely resulting from higher employee related and lab costs.
General and administrative expenses were $8 8 million, 42% higher compared to the third quarter of 2021, the increase was driven by higher employee related and infrastructure costs.
As a result of our continued focus on operational efficiency. We further trimmed all our Opex line items and now expect total operating expenses to be modestly down in the second half of the year.
Net loss for the third quarter of 2022 was $28 8 million, which included $4 9 million of noncash stock based compensation compared to a net loss of $20 1 million for the same period of 2021, which included $3 7 million of noncash stock based compensation.
Moving now to our outlook for full year 2022 assay revenue.
Due to the factors we outlined today, we have reduced visibility into the short term path of our assay revenue as we wrap up the year.
As a result, we don't believe we will achieve the low end of our previous guidance range.
Due to challenges with commercial payers, which affect asps and the potential for significant additional changes of estimates for anticipated cash collections, it's difficult to provide a revised forecasts, but we do anticipate being able to achieve at least 13 million assay revenue for the full year 2022.
We expect the factors that we have restrained our growth in the second half of 2022 to spillover into 2023 as a result, we've tempered our internal projections for 2023 assay revenue until we have better visibility on ASP growth.
And finally, a review of our liquidity profile and balance sheet.
At the end of September we had cash cash equivalents restricted cash and marketable securities balance of $152 8 million. We believe we have sufficient funds along with the ability to access capital to extend our cash runway multiple quarters beyond our previous target, which was the end of the first quarter of 2024.
In summary, we are making steady progress with payers and much of our effort is focused on closing additional agreements to help accelerate our revenue trajectory extended our cash runway is another important priority and we are taking the appropriate steps to do this judiciously. We look forward to updating you again soon and with that I'll turn things back to the operator for Q&A.
Yes.
Thank you at this time, we will conduct a question and answer session. As a reminder to ask a question you will need to press star one one on your telephone and wait for your name to be announced.
Please standby, while we compile the Q&A roster.
Okay.
Our first question comes from the line of.
Andrew <unk>.
From William Blair. Your line is now yours.
Hey, John and Kevin.
On for Andrew.
Just wondering first.
The Medicare side, I know last quarter that was a big focus.
<unk> expected to come this quarter just wanted to.
For more detailed around that.
And what the expected tailwind for that can be.
As we enter the next quarter and into 2023.
Yes, the code at it was implemented at the beginning of October It does appear that the backdated the code at it too when the Medicare LCD was first effective which is January February of 2020.
Did take some benefit of this into the past couple of quarters and it has again some positive impact to ASP.
But I would say it takes a little while to flush it out completely and it has been netted with any other say negative or other prior period adjustments as we've reported in our financial statements.
Got it.
And around the private payer side I'm wondering if you can give us a sense of how widespread.
Hey collection issue is it just concentrated.
A couple of payers or is it more broader based on that and how have things been trending I guess where are we.
Today in the quarter.
Has that been getting better you've seen since year youre tactics that they've been doing that you mentioned that youre expecting to overcome.
Yes, the payment pressures from commercial payers are fairly broad.
We believe that it's in response to coming out of the pandemic and they are just tightening up across our industry in general.
The tactics, we've implemented to counteract that they do take a little bit of time. Many of those tactics are tied around improving the efficiency of getting medical documentation to help with appeals and as we do that the appeal is still take some time to process through that's why it's difficult for us to estimate ASP.
Going forward because the appeal process takes a while and then even as we get medical records. They could still figure ways to still deny claims in the future.
Now we do they are.
Addressing some of our customers with what we call redirect letters that sort of where they tried to discourage use of the product, but we're actually turns down to a positive as an example of what we're doing to counteract that when we bring the doctor into the solution.
And <unk>.
And have the Doctor go to the payer and say Hey, I want this test covered and so thats one of the other tactics that we do aside from the technology to make the claims efficiency in the medical records burdened lessened.
But but we're hearing about this broadly as Kevin mentioned and Theyre just try the tactics they've put in places too.
To put this administrative burden on our customers and we can combat it with technology solutions that are going to take some time, but but that's the pressure that we're feeling and those are the things we're doing to combat that.
Got it okay.
And lastly, I know you trimmed opex in this quarter a little bit.
Expectations to be down in the second half versus the first half.
Are there further plans of rationalization in 2023 or should we think of Opex being generally flat heading into the first half of 'twenty period growth for the year.
Yeah.
We think that we can.
Reduce our opex, even more we do have discretionary spend we have spend is tied to commercializing new products. We had some planned hires that we obviously will not need to go forward with until we see some improvement in the Asps and all of those things will allow us to achieve that.
The desired savings that we're looking for and help us extend our runway. So we're confident we can do that we have already shown that we can do that we made we made some steps last quarter to do that and we'll continue to do that and we think it's just prudent.
Until we see those improvements in the ASP.
That debt.
We're optimistic we're going to occur in the <unk>.
Coming quarters, as we get more of these payers wins behind us.
Okay, great. Thanks for answering my questions.
Thank you.
Our next question.
Comes from the line of Thomas Flaten with market Street with Lake Street capital markets.
Your line is now open.
Hey, guys. Thanks for taking the questions.
Just wanted to make sure I understood the guidance of doing at least $13 million.
Finality wasn't sure if it was COVID-19, probably some mix of all those things. We also as we've talked about did have some sales rep turnovers, who we were trying to understand what's causing that flattening. So we we went out and did a deep dive with all of our customers and.
Many of them and talked about what they're seeing and basically what came to the top is just this this payer pressure whether it was the administrative burden.
Of us having to obtain medical records and actually that the payers play. This game they require us to provide more medical records on more and more claims.
That's one of the things they do because they know it creates a burden on our customers and what they know it's going to impact our customers.
And so we started hearing about that and then it just it's hard to scale. This into practice when you've got that administrative burden. We also you know we heard about the redirection letters, but again, we have ways to come back those and we're working on those things again, there are technology solutions, where we can lessen that administrative burden and we're using.
Those are just the direction letters that they like to send you know if this is an out of network tests were using that to bring the doctor into to help us demand for coverage of the test and we think that can help us so.
That's really the result of US looking at what was going on with some of the flattening we saw over the quarter. There probably is some seasonality reality and we know that we heard docs were taking their vacations and some of them warm.
But that really doesn't account for everything and certainly that we had some of that rep turnover, but as we talked about that's kinda behind us and it really started to become clear that this payers are ramping up their game and that's because we were driving a lot of volume we're squarely on their radar screen and we think it's a typical playbook.
And we have to fight through it but I think the fact that we're adding all these covered lives in the progress and the momentum or assume with parents were gonna ultimately win that battle.
Yeah. We've also seen a game being played where if a payer who doesn't have a policy contract with US was previously denying a claim for an experimental or investigational they've recently switched it to be a denial reason for medical necessity and so in those cases, that's where we go get the records and tried to appeal. It but this is the game at the players play.
They know that they're gonna flip back to experimental investigational anyway, and so they're just causing us to have some glimmer of hope have us put more burden on physician customers to get the records have our staff go through the process of filing the appeals of the claims and then ultimately land in the same position. So again. This is what we believe is one of the tactics and the games at the payers of <unk>.
<unk>.
But.
Sorry, sorry, you'll go ahead no go ahead and answer questions, we answered that.
I was just going to ask if you have any thoughts insights into the kind of stagnant Medicare penetration I know there has been an issue kind of from the get go and it.
It seems to have flatlined here over the last three quarters.
Yes, we are working on that we're trying to understand why that's the case, we've looked at some of our peers and we also find against her appears that they don't really penetrate the Medicare proportion to their optimal payer mix either so we're trying to understand what that is.
And it is a core focus of ours to try to drive that Medicare proportion.
As our volumes do grow and they will grow we will continue to grow we already Grove story, but as they do grow even if the proportion is relatively flat we are seeing more samples and an absolute value an absolute number coming through but we haven't yet we have not solve that yet, but we're working like mad understand what that is and how we.
Can drive that higher utilization in the Medicare population.
Got it I appreciate you taking the questions. Thank you.
Thank you.
Our next question comes from Mac.
Max Musky, calling the line is now open.
Hi, this is <unk>.
My question.
<unk> volume came in a local branch of our expectation.
Trying to understand why that is the case when you impacted by Hurricane Ian.
Isn't that Florida at the Medicare, having <unk> and <unk>.
And qualification hospital after quota.
Total volume or when your sales turnover.
A meaningful driver out there.
Volume quarter.
So in general Hurricane Ian Ian did have some effects for over a couple of weeks in in Florida, I think in general the preparation before the the hurricane there was a general slowdown because the whole state was worried about that and then a clearly in the week <unk>.
After it hit there was obviously a slowdown.
Did cut across the state in a particular area, but we don't think the there was a major impact.
From that overall, but it definitely hit us there's no there's no doubt about it but we think there are some practices are offline for awhile.
In those areas, where we had a we were affected but.
The bigger issue that we're talking about this is right now an issue around payers and as breaking through the payor challenges that we're having that that is the main driver from all the work we did over the last few months.
Putting the pressure on the billable sample volumes and again, we feel confident we can push through it.
And it's going to take a few quarters, but.
We're pushing hard to get through that and that's really what we're focused on the clear that that's what the issue is.
Got it that's possible thanks for that clarification, and then on the medical record addict installations here that that's been implemented.
Last running you mentioned that.
That commercial parents to offer about the change will that expectation and root bear scenario, where input and choose to adopt the change.
We do still expect that we only had seen just a couple of commercial payors bumped back onto that code at it and now that that code. It. It does have an effective date all the way back to when the LCD was first effective it does give us the opportunity to appeal. Those claims that were previously paid and then rich.
Practice because of the code at it. So we are going to appeal them, but with the appeals like any appeals, we do likely we will have to grab some medical records and it will take a little bit of time to work through those appeals, but we do expect that coat added to benefit any payer who is relying on those code edits in terms of how they <unk>.
SS claims we should get paid on the first two body sites.
For pretty much any plan at this point.
Got it okay. Thanks for that color and then my last question is on the ramp up.
Elsewhere.
How has that been going a breakdown.
Expectations, particularly the one that you're back sale last quarter.
<unk>, how long it usually takes to ramp up the productivity up in your account for <unk> and are there any metric you can provide around your productivity or your expectation.
Technician for the rest of the year.
So we've talked about in the past that we thought it's somewhere between up to 15 months, maybe between 12 and 18 months for our sales were up to ramp up the productivity of course that was in a COVID-19 period and it was very hard for us.
To to really get a strong handle on that.
In the case related to the Rep turnover.
We're territory that we had a rep in and so there was already some seasoning of that territory. So we do expect a better ramp up period and as I mentioned in my on the call. We do feel like they are starting to ramp up back up in those territories, where we had some rep turnover, we do think it will be shorter than normal but but.
We still have some time to play up to see them get back up to that full productivity.
We're still.
We're still trying to get what is that metric a brand new rep and a fresh territory. What do we expect from a full ramp up period now now because we are broader coverage. We also need to understand that metric. If we change outta wrap what that ramp up period has been and.
We'll get those metrics over time.
Just that it's been challenging for the last two years because of the environment. We're operating in to have hard metrics today.
Got it thanks again for taking my question.
Thank you.
Our next question comes from the line.
Chihuahua to walk with Oppenheimer. Your line is now open.
Hi, This is Dan <unk> frankly, but thanks for taking the question just a quick one for me you mentioned that the commercial launch at peace in a request agreement. Later this year are you sharing when you expect the revenues from this agreement.
We haven't done that because we need to see what kind of productivity and utilization they'll get in that this has been a key theme that we've talked about we want to understand the utilization.
Within the primary care space, we know there's utilization there we've seen our own organic utilization in primary care, but we've never really deployed against it effectively.
With the cases and requests we will have reps growing out directly calling on primary care and we should be able to get a better sense of what that utilization rate is given a certain call frequency.
So we we're we're excited to get that going in debt to understand that better it's something we've been wanting to do you.
You may recall in the past we were talking about putting our own you know 10 or 20 person primary care salesforce out to get those metrics, we decided to do it instead.
Instead with this a menorah request opportunity that came along because it does include a payment mechanism for us and.
They have a meaningful number of reps there where we can get some data now we will be one of several products that are in their bag. So we're going to have this sort of sort that out but we're excited.
It means in terms of us understanding the opportunity in primary care, we know there's going to be less utilization per month in primary care, but it's such a vast opportunities that that is a really meaningful and significant potential market opportunity there and so we want to figure out how we can get there in the long term.
And understand those metrics or key to how we plan for that.
Alright, thanks for the out of color. Thanks for taking the question.
[noise].
Again as a reminder.
To ask a question and you will need to press star one one on your telephone.
Our next question comes from.
Mark Massaro from B T I G to.
The line is now yours.
Okay.
Okay.
Question Uhm.
Around nine cause I apologize.
I have it all ready.
<unk> <unk> <unk> <unk> <unk>.
And can macroeconomic issues.
It's actually a bill and if you could just comment in terms of Kobe Chang.
Punishing access has been paid.
I'm not sure that we said that the dermatology community immune to macroeconomic trends I don't think we've ever.
Said that and I.
Can't imagine her that much different.
I'm sure there are issues, maybe maybe there are some differences in terms of the the self pay cosmetic market that occurs in there that that.
Some influence of macroeconomic trends, there or lack of of impact there, but certainly we have not seen or said anything like that Ah.
As it pertains to macroeconomic trends.
Trends.
And what was the second half of the question.
Covid impacts yeah.
Covid, Yeah, Yeah, I you know.
I I don't think we're seeing much in terms of Covid. There is definitely we see we look at the trends their reports about prescribing and tracking the COVID-19 trends and we do see some fluctuations in there serving the 5% to 7% range up and down each month, but but.
I don't think that the Covid is is is really the issue again I'll just reemphasize. This right now is a payer game, we're making the progress with Payors that laboratory benefit pop manager policy is a great win for us.
Because it's a very nicely written policy independent it allows us to go after a much broader group of potential.
Insurance carriers with it. So this is about payers, we're making the progress with Payors I think all those other things or peripheral right now and that's where our attention is that's where we're focused we're very happy with the momentum and the progress we're making with payers. It's been nothing like anything we've seen before and that's all really just occurred.
And the last in the last quarter.
Okay.
Plenty thank you.
Thank you for your participation in today's confidence that does conclude the program you may now disconnect.
The conference will begin shortly.
To raise your hand during Q&A you can dial 911.
[music].
The conference will begin to Pee to raise your hand during Q&A you can dial 911.
[music].
Mmm.
[music].
[music].
[music].
Good day, and thank you for standing by and welcome to the <unk> third quarter 2022 financial results call.
At this time all participants are in listen only mode. After the speaker's presentation, there will be a question and answer session.
A question. During this session you will need to press star one one on your telephone you will then hear an automated message advising your hand is right.
Today's conference call is being recorded.
Now like to hand, the conference over.
The Stephen Gustavo head of Investor Relations.
The call is yours.
Thank you operator, welcome to <unk> third quarter 2022 earnings call. Joining me on today's call are Dr. John <unk>, Our President and Chief Executive Officer, and Kevin Sun, Our Chief Financial Officer. Our call. Today will include forward looking statements within the meaning of the private Securities Litigation reform.
Act of 1995, all statements made on this call that do not relate to matters of historical fact are considered forward looking statements forward looking statements made during this call, including projections of future performance based on management expectations as of today and are subject to various factors assumptions.
Risks and uncertainties, which change over time.
Actual results could differ materially from those described in such statements. Several factors that may contribute to our cause such differences are described in today's press release and our most recent filings with the SEC.
We undertake no obligation to update these statements except as required by applicable law.
Our third quarter 2022 earnings press release, and SEC filings are available on our Investor Relations website.
A recording and transcript of today's call.
It will be available on our website later today.
With that let me turn things over to Jeff.
Thank you, Steve and thank you everyone for joining us.
The third quarter of 2022 was positive as it relates to bringing on new payers and increasing covered lives but.
Was tough in terms of sequential growth.
Billable sample volumes did grow 54% year over year, but were flat sequentially payers continue to impact the average selling price or ASP of our derm Tech melanoma test or DMT, which was flat excluding prior period adjustments, but down when include including those adjustments detail.
Which Kevin will provide in addition, we are experiencing some pressure on billable sample growth as payers rollout their typical tactics to impede the adoption momentum we have generated this year, we are addressing this by expanding coverage and using our own tactics to reduce this pressure.
As we discussed on the last call. There was also some pressure on billable sample volumes during the quarter in territories with elevated sales rep turnover turnover has stabilized and is back to historical levels and our new reps are ramping up nicely now we are working to accelerate the historical ramp up period of new reps to minimize.
The future potential impact billable sample volumes.
We believe the most impactful thing we can do to stabilize and then accelerate revenue growth is to bring on more commercial payers. It is it is a critical factor in growing ASP.
And that removes a barrier to increasing customer usage to that end. We now have line of sight to adding 30 to 40 million covered lives by the end of the first quarter of 2023. This total would be more than a 35 per incent increase in our current covered lives in the U S and is roughly equivalent to the second largest national payer.
These covered lives come from a broad combination of payers, which demonstrates the momentum we have gained to raise awareness of the clinical and economic value proposition of the DMT. We've hit a milestone of more than 150000 DMT is completed and we believe these strong volumes are contributing to our progress.
With Payors.
We expect approximately half of these covered lives will be effective before the end of the year.
In addition pricing is consistent with our long term targets.
We recently executed an agreement with a large regional payers that cover 6 million lives and completed price negotiations with the national government payer that runs the largest integrated healthcare system in the U S.
We expect to be effected by the year end. We also received a policy from a large lab benefit manager.
The lab benefit manager is a particularly important win because it represents up to 8 million covered lives itself reaches potentially another 30 million covered lives through its relationships with health plans.
And it was an independently developed policy they clearly outlines the value proposition of our test in.
In addition, national payers are also leaning in more than they ever have and we've been able to leverage educational meetings with medical directors and upcoming scheduled comprehensive reviews. We see these upcoming upcoming comprehensive reviews as potential important near term catalysts for our Asps and revenue growth.
Overall, we have more had more positive activity with payers now and we've had at any time during the last two years.
Drought in activity, which is largely driven by the pandemic.
We believe we are now in a normalized trajectory to add payers at a similar rate as our more mature diagnostic peers.
It is worth noting the significant patient need exists in the large addressable market for melanoma skin cancer.
There are 4 million biopsies each year to find approximately 200000 melanoma cases.
Annual treatment cost for melanoma are over $3 billion early detection matters as melanoma is very treatable when identified early overall is at $2 $5 billion market opportunity.
Along with the nice momentum, bringing on payers, we have two initiatives in primary care that can also help strengthen our ASP.
First our agreement with Sonora Quest, which is the largest laboratory testing network in Arizona establishes a reference testing model were Sonora quest builds insurance for the samples they generate and pays us a set fee per sample, we've completed systems integration and training of their primary care sales reps.
Ongoing we expect this arrangement to be again to begin commercial operations before the end of the year.
We're also receiving strong positive feedback regarding the primary.
Starting with an important payer provider and believe this pilot is tracking in the right direction.
I also want to emphasize that we further strengthen our operating discipline and are adjusting our operating expenses to be in line with our tempered near term revenue trajectory.
In closing despite our top line metrics being flat sequentially long term improvement in Asps and revenue is clearly all about payers substantially.
Substantially all of our capital and energy is focused on two important priorities expanding commercial coverage for our DMT to boost the ISP and alleviating payer friction in our commercial channel given the billable samples. We've demonstrated we can generate monetizing this demand at a higher <unk> ASP has the <unk>.
Potential to exponentially grow assay revenue I look forward to updating you again in the months ahead with that I'll turn the call over to Kevin for a more detailed financial review, Thanks, John and good afternoon, everyone I'll begin by summarizing our key operating and financial metrics for the third quarter and then review, how we think about our revenue outlook moving.
Forward I'll wrap up by covering our liquidity profile and cash run rate targets.
Assay revenue in the third quarter increased 16% to $3 4 million largely due to a 54% year over year increase in billable samples to approximately 18080.
Contract revenue was flat at zero point $1 million during the third quarter.
Looking ahead <unk> contract research services continue to show promise as we signed five contracts in the last six months on the heels of clinical trial activity picking back up in the Biopharma space.
Total revenue for the third quarter increased 18% to $3 6 million up from 3.0 million in last year's period, primarily on higher assay revenue.
Drilling down on our main top line drivers first ASP was $190 per sample in the third quarter down 25% year over year and 16% on a sequential basis. The second quarter of 2022 had adjustments that netted to zero point $2 million benefit.
For the third quarter, we change collection estimates for tests run in prior periods due to reduced commercial payment payer payments, which resulted in a 0.5 million downward revenue adjustment.
This ASP pressure was partially offset by a modest improvement in Medicare Asps due to the recently updated code at it.
Normalizing for these adjustments in both periods third quarter Asps would have been $217, which is flat sequentially.
Second we had approximately 2410 unique ordering clinicians in the third quarter up about 1% from roughly 2390 unique ordering clinicians in the second quarter with approximately 3910 unique ordering clinicians during the last 12 months, we penetrated 43% of our current target market of 9000 dermatology clinic.
<unk>.
Third our average quarterly utilization or average number of tests ordered per unique ordering clinician was seven five billable samples in the third quarter versus $7 seven in the second quarter and seven four in the year ago period.
Finally, Medicare samples represented about 24% of our billable samples in the third quarter, which was unchanged as a percentage from the second quarter and up modestly from 22% last year. It's important to highlight that Medicare represents half of the total biopsies for melanoma each year and then we continue to try to accelerate penetration of this market segment.
Focusing next on operating expenses cost of assay revenue was $3 6 million or 27% year over year increase yield again assay gross margin of negative 6%. The increase in cost of assay revenue was primarily due to increased billable samples offset primarily by lower per unit cost from efficiency improvements.
<unk>.
The reduction in assay gross margin from 3% in the year ago period, and 22% last quarter was primarily a result of lower asps and assay revenue.
Sales and marketing expenses were $14 6 million during the third quarter, a 49% increase from the year ago period, primarily due to higher labor related costs from increased head count and marketing expenditures.
<unk> and development expenses were $5 7 million or 29% year over year increase largely resulting from higher employee related and lab costs.
General and administrative expenses were $8 8 million, 42% higher compared to the third quarter of 2021, the increase was driven by higher employee related and infrastructure costs.
As a result of our continued focus on operational efficiency. We further trimmed all our Opex line items and now expect total operating expenses to be modestly down in the second half of the year.
Net loss for the third quarter of 2022 was $28 8 million, which included $4 9 million of noncash stock based compensation compared to a net loss of $20 1 million for the same period of 2021, which included $3 7 million of noncash stock based compensation.
Moving now to our outlook for full year 2022 assay revenue.
Due to the factors we outlined today, we have reduced visibility into the short term path of our assay revenue as we wrap up the year.
As a result, we don't believe we will achieve the low end of our previous guidance range.
Due to challenges with commercial payers, which affect asps and the potential for significant additional changes of estimates for anticipated cash collections, it's difficult to provide a revised forecasts, but we do anticipate being able to achieve at least 13 million assay revenue for the full year 2022.
We expect the factors that we have to have restrained our growth in the second half of 2022 to spill over into 2023 as a result, we've tempered our internal projections for 2023 assay revenue until we have better visibility on ASP growth.
And finally, a review of our liquidity profile and balance sheet.
At the end of September we had cash cash equivalents restricted cash and marketable securities balance of $152 8 million. We believe we have sufficient funds along with the ability to access capital to extend our cash runway multiple quarters beyond our previous target, which was the end of the first quarter of 2024.
In summary, we are making steady progress with payers and much of our effort is focused on closing additional agreements to help accelerate our revenue trajectory extended our cash runway is another important priority and we are taking the appropriate steps to do this judiciously. We look forward to updating you again soon with that I will turn things back to the operator for Q&A.
Yes.
Thank you at this time, we will conduct a question and answer session. As a reminder to ask a question you will need to press star one one on your telephone and wait for your name to be announced.
Please standby, while we compile the Q&A roster.
Okay.
Our first question comes from the line of.
Andrew <unk>.
From William Blair. Your line is now yours.
Hey, John and Kevin This is Doug.
On for Andrew.
Just wondering first on the Medicare side, I know last quarter that was a big focus.
<unk> expected to come this quarter just wanted to add.
For more detailed around that.
And what the expected tailwind for that can be.
As we enter the next quarter and into 2023.
Yes, the code at it was implemented at the beginning of October It does appear that the backdated the code at it too when the Medicare LCD was first effective which is January February of 2020.
We did take some benefit of this into the past couple of quarters and it has again some positive impact to ASP, but.
But I'd say it takes a little while to flush it out completely and it has been netted with any other say negative or other prior period adjustments as we've reported in our financial statements.
Yes.
Got it.
And around the private payer side I'm wondering if you can give us a sense of how widespread.
A collection issue is it just concentrated.
A couple of payers or is it is it more broader based on that and how are things trending I guess why are we spending.
Today in the quarter.
Has that been getting better you've seen since you are your tactics that they've been doing that you mentioned that youre expecting to overcome.
Yes, the payment pressures from commercial payers are fairly broad.
We believe that it's in response to coming out of the pandemic and Theyre, just tightening up across our industry in general.
The tactics, we've implemented to counteract that they do take a little bit of time. Many of those tactics are tied around improving the efficiency of getting medical documentation to help with appeals and as we do that the appeal is still take some time to process through that's why it's difficult for us to estimate ASP going forward.
Because the appeal process takes a while and then even as we get medical records. They could still figure ways to still deny claims in the future.
And we do they are.
Addressing some of our customers with what we call redirect letters that sort of date, where they tried to discourage use of the product, but we're actually turned down to a positive as an example of what we're doing to counteract that when we bring the doctor into the solution.
And <unk>.
And have the Doctor would go to the payer and say Hey, I want this test covered and so thats one of the other tactics that we do aside from the technology to make the claims efficiency in the medical records burdened lessened.
But we're hearing about this broadly as Kevin mentioned and Theyre just try it the tactic they put in places too.
I put this administrative burden on our customers and we can combat it with technology solutions is going to take some time, but but that's the pressure that we're feeling and those are the things we're doing to combat that.
Got it okay.
And lastly, I know you trimmed opex in this quarter a little bit.
Expectations to be down in the second half versus the first half.
Are there further plans of rationalization.
2023, or should we think of.
Opex being generally flat heading into the first half of 'twenty period, great growth for the year.
We think that we can.
<unk>, our opex, even more we do have discretionary spend how we have spend is tied to commercializing new products. We had some planned hires that we obviously will not need to go forward with until we see some improvement in the Asps and all of those things will allow us to achieve that.
The desired savings that we're looking for and help us extend our runway. So we're confident we can do that we have already shown that we can do that we made we made some steps last quarter to do that and we will continue to do that.
And we think it's just prudent until we see those improvements NDA ASP.
That.
We are optimistic were going to occur in the coming quarters as we get more of these payers wins behind us.
Okay, great. Thanks for answering my questions.
Thank you.
Our next question.
It comes from the line of Thomas Flaten with market Street with Lake Street capital markets. Your.
Your line is now open.
Hey, guys. Thanks for taking the questions.
Just wanted to make sure I understood the guidance of doing at least $13 million.
If I said that as a base based on the first nine months that implies the fourth quarter of $1 9 million.
Assay revenue.
Is there a scenario you can envision where you would have that kind of a sequential drop almost 50% I'm just trying to put this into context.
Yes.
The guidance range that we have there.
Our demand is steady.
But what the upside has been limited by the commercial payer pressure that we've described.
We do expect some seasonal impacts in the fourth quarter due to fewer business days in the holidays, which we've seen often have a greater impact in the dermatology space. The greater challenge right now its really estimating the commercial payer collections and the impact of the ASP.
Okay.
So the.
So these kind of offensive tactics that they're running with the terms.
Can you quantify.
At least give us some sense of when they started and how significant you think they are in terms of ordering given that volumes were flat.
Okay.
Yes, so we started seeing some flattening over the summer and we are trying to sort it out because we've seen some flattening.
For the last couple of summers, we wasn't sure if with seasonality wasn't sure. If it was COVID-19 probably some mix of all of those things. We also as we've talked about we did have some sales rep turnover. So we were trying to understand what's causing that flattening. So we went out and did a deep dive with all of our customers.
With many of them and talked about what Theyre seeing and basically came to the top as justice. This payer pressure whether it was the administrative burden.
Uh huh.
US having obtained medical records and actually the payers play this game they require us to provide more medical records on more and more claims.
One of the things they do because they know it creates a burden on our customers and what they know it's going to impact our customers.
And so we started hearing about that and then it just it is hard to scale. This into practice when you've got that administrative burden. We also.
We heard about the redirection letters.
But again, we have ways to come back those and we're working on those things again, there are technology solutions, where we can lessen that administrative burden and we're using those redirection letters that they would like to send.
This is an out of network test, we're using that to bring the doctor and to help us demand for coverage of the test and we think that can help us so.
That's really the result of US looking at what was going on with some of the flattening we saw over the quarter Theyre probably in some seasonality reality, we know that we heard docs were taken the vacations and some of them longer.
But that really doesn't account for everything and certainly that we had some of that rep turnover, but as we've talked about that's kind of behind us and it really started to become clear that this payers are wrapping up their game and thats because we are driving a lot of volume we are squarely on our radar screen and we think it's a typical playbook.
And we have to fight through it but I think the fact that we're adding all of these covered lives in the progress and the momentum we're seeing with payers, we're going to ultimately win that battle.
We've also seen a game being played where.
Payer, who doesn't have a policy or a contract with US was previously denying a claim for an experimental or investigational they've recently switched it to be a denial reason for medical necessity and so in those cases, that's where we go get the records and tried to appeal. It but this is the game at the payers play they know that theyre going to flip back to experimental investigational.
Anyway, and so they are just causing us to have some glimmer of hope have us.
Put more burden on physician customers to get the records have our staff go through the process of filing the appeals of the claims and then ultimately land in the same position. So again. This is what we believe is one of the tactics and the games that the payers are playing.
Sorry, Sorry go ahead no go ahead ask your questions we answered that.
I was just going to ask if you have any thoughts or insights into the kind of stagnant Medicare penetration I know thats been an issue kind of from the get go and it it.
It seems to have flatlined here over the last three quarters.
Yes, we are working on that we're trying to understand why that's the case, we've looked at some of our peers and we also find against our peers that they don't really penetrate the Medicare proportion to their optimal payor mix either so we're trying to understand what that is.
And.
It is a core focus of ours to try to drive that Medicare proportion.
As our volumes do grow and they will grow we will continue to grow we are a growth story and as they do grow even if the proportion is relatively flat we are seeing more samples on an absolute value of an absolute number coming through but we haven't yet we have not solve that yet, but we're working like mad to understand what that is and how we.
Can drive that higher utilization in the Medicare population.
Got it I appreciate you guys, taking the questions. Thank you.
Okay.
Thank you.
Our next question comes from Matt <unk> of Cowen. Your line is now open.
Hi, This is <unk> on for Matt. Thanks for taking my question.
Our total volume came in a little bit sneaker brands.
Jason.
I'm trying to understand why that's the case when youre impacted by Hurricane Ian.
Given that Florida is the Medicare having great Jan and if so could you give us some quantification.
Quantification hospital.
Total volume or what your sales force turnover from Q2, a meaningful driver.
Volume weakness this quarter.
So in general Hurricane Eden, Ian did have some effects for over a couple of weeks in Florida I think in general the preparation before the hurricane there was a general slowdown because of the whole state was worried about that and then it clearly in the week after it.
Hit there was obviously a slowdown did.
Did cut across the state in a particular area, but we don't think there was a major impact.
From that overall, but it definitely hit US there is no. There is no doubt about it but we think there are some practices are offline for a while.
Those areas, where we had we were affected but.
The bigger issue that we're talking about this is right now an issue around payers and as breaking through the payer challenges that we're having that that is the main driver from all the work we did over the last few months.
Putting the pressure on the billable sample volumes and again, we feel confident we can push through it.
And it's going to take a few quarters, but.
We're pushing hard to get through that and that's really what we're focused on really clear that that's what the issue is.
Yes.
Got it that's helpful. Thanks for that clarification.
And then on the Medicare code at constellation, So thats great to hear that.
Implemented.
Last quarter, you mentioned that you expect commercial payer to also adopt the change.
All of that expectation and then is there a scenario where maybe.
In Q2 without the change.
We do still expect that we only had seen just a couple of commercial payors bumped back onto that code at it and now that that Codell. It does have an effect of data all the way back to when the LCD was first effective it does give us the opportunity to appeal. Those claims that were previously paid and then retreat.
<unk> because of the code at it so we are going to appeal them, but with the appeals like any appeals, we do likely we'll have to grab some medical records and it will take a little bit of time to work through those appeals, but we do expect that code edit to benefit any payer who is relying on those code edits in terms of how they process.
Claims we should get paid on the first two body sites.
For pretty much any plan at this point.
Got it that's helpful. Thanks for that color and then my last question is on the ramp up.
The sales floor.
How has that been going.
Is your expectation, particularly the ones that you're back sale last quarter.
Remind us how long it usually take to ramp up the productivity and your sales force.
Good bankruptcy and are there any metrics you can provide around their productivity or your expectation.
Further contribution for the rest of the year.
So we've talked about in the past that we thought it's somewhere between up to 15 months, maybe between 12 and 18 months for a sales rep to ramp up the productivity of course that was in a COVID-19 period and it was very hard for us to.
Two to really get a strong handle on that.
In the case related to the Rep turnover.
Were territories that we had a rep in and so there was already some seasoning of that territory. So we do expect a better ramp up period and as I mentioned in my on the call. We do feel like they are starting to ramp back up in those territories, where we had some rep turnover, we do think it will be shorter than normal but but.
We still have some time to play up to see them get back up to that full productivity.
We're still.
We're still trying to get what is that metric of brand new rep in a fresh territory, what do we expect from <unk>.
We'll ramp up period now now because we have broader coverage. We also need to understand that metric, if we change out or what that ramp up period has been and.
We will get those metrics over time.
Just that it's been challenging for the last two years because of the environment. We're operating in to have hard metrics today.
Got it thanks again for taking my questions.
Thank you.
Our next question comes from the line.
Thanks, Paul Dubois with Oppenheimer. Your line is now open.
Hi, This is Dan on for Frank Thanks for taking the question just a quick one from me.
Mentioned that the commercial launch of the scenario Quest agreement later this year are you sharing when you expect the revenues from this agreement.
We haven't done that because we need to see what kind of productivity and utilization they will get and that this has been a key theme that we've talked about we want to understand the utilization.
Within the primary care space, we know there's utilization there we've seen our own organic utilization in primary care, but we've never really deployed against it effectively with the cases sooner requests we will have reps going out directly calling on primary care and we should be able to get a better sense of what that utilization rate is given a certain call frequency.
So we're we're excited to get that going and to understand that better. It's something we've been wanting to do you may recall in the past we were talking about putting our own 10 or 20 person primary care sales force out to get those metrics.
Side to do it instead with this more nor a quest opportunity that came along because it does include a payment mechanism for us.
They have a meaningful number of reps that where we can get some data now we will be one of several products that are in their bag. So we're going to have to sort of sort that out but we're excited about what it means in terms of us understanding the opportunity in primary care, we know theres going to be less utilization per month and primary care, but it's such a vast opportunity that.
That is a really meaningful and significant potential market opportunity there and so we want to figure out how we can get there in the long term.
And understanding those metrics are key to how we plan for that.
Okay.
Thanks for the added color thanks for taking the question.
Okay.
Okay.
Again as a reminder.
To ask a question you will need to press star one on your telephone.
Our next question comes from.
Mark Massaro from BT.
Your line is now yours.
Thank you Gideon.
Thanks for taking the question.
And jumping around on calls here. So I apologize if this has been covered already.
And.
The dermatology call point is relatively a year.
Macroeconomic issue.
That view and if you could comment in terms of Kobe Chang.
How clinicians access hasnt great. Thanks.
I'm not sure that we've said that the dermatology community immune to macroeconomic trends.
I don't think we've ever.
Yes.
Said that I can.
Can't imagine they're that much different.
I'm sure there are issues, maybe maybe there are some differences in terms of the.
The self pay cosmetic market that occurs in there.
There is some influence of macroeconomic trends, there or lack of impact there, but certainly we have not.
<unk> said anything like that.
As it pertains to macroeconomic.
Trends.
And what was the second half of the question.
Covid impact Covid impact, yes, yes.
Yes.
Yes, yes.
I don't think were seeing much in terms of Covid. There is definitely we see we look at the trends there are reports about prescribing.
And tracking the Covid trends and we do see some fluctuations in there it sort of in the 5% to 7% range up and down each month, but but.
Yeah.
I don't think that the Covid is is is really the issue again I will just reemphasize. This right now as a payer game, we're making the progress with payers that laboratory benefit manager policy is a great win for us because it's a very nicely written policy independent.
How's us to go after a much broader group of potential.
Insurance carriers with it. So this is about payers, we're making the progress with payers I think all of those other things are peripheral right now and that's where our attention is that's where we're focused we're very happy with the momentum and the progress we're making with payers. It's been nothing like anything we've seen before and Thats all really just occurred.
In the last quarter.
Okay got it thank you.
Okay.
Okay.
Thank you for your participation in today's conference that does conclude the program you may now disconnect.