Q2 2023 DermTech Inc Earnings Call
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Good day, and thank you for standing by and welcome to the <unk> second.
Second quarter 2023 financial results conference call.
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I would like to hand, the conference over to your Speaker today, Mr. Steve table. Sir. Please go ahead.
Thank you operator, welcome to <unk> second quarter 2023 earnings call with me on today's call are Bret Christensen, 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 are based on.
Management's 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 or 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 second quarter 2023 earnings press release, and SEC filings are available on our Investor Relations website.
A transcript of today's call will be available on our website later today with that let me turn things over to Brad.
Thank you Steve and thank you everyone for joining us it's been a whirlwind since I joined <unk> in early May I would like to start with what excites me about leading term tech before I jump into the details of how we'll do some things differently moving forward.
First we have a great technology that should be a key tool for health care providers. The current standard of care is challenging with the solutions that have been traditionally available to clinicians, but we believe it needs to be better than performing 20 or more invasive surgical biopsies to find just one melanoma.
Melanoma is the most aggressive form of skin cancer and claims 8000 lives annually in the U S and.
The <unk> melanoma test or DMT is noninvasive rules out melanoma with a 99% negative predictive value and provides clinicians with objective and actionable genomic data for suspicious lesion.
My vision is for the DMT to be deployed universally as part of the melanoma care pathway and we have an excellent product to execute against this goal.
Second we are pursuing a large addressable market where significant patient need exists approximately 200000, new cases of melanoma are reported every year in the U S, resulting in $3 $3 billion in annual treatment cost. We can help lower these costs by rolling out the need for unnecessary surgical procedures, while also providing a.
Better patient experience that may encourage testing suspicious lesions earlier. This is important because early stage diagnosis has a five year survival rate of 99%, whereas our late stage diagnosis drops the survival rate significantly to 30%.
Genomic changes May proceed visual changes for melanoma and the DMT detect genomic markers that are correlated with an increased risk for melanoma and can aid decision, making by clinicians.
Third, we're making solid progress with insurance providers, expanding access to our tests, but still need to reinforce our message around the clinical and health economic benefits of the DMT and improve our onboarding process once we complete agreements.
Many payers that have comprehensively reviewed the most current data have issued favorable coverage policies and signed agreements during the last several months.
We've expanded covered lives approximately 45% to $133 million in 2023, and now work with seven of the top 10 blues plans and two large governmental payers.
These steps expand access to the DMT as an in network benefit and improved reimbursement overall, we've made good progress, but must continue to be focused on payers.
Based on our coverage today, we reached approximately 45% of total covered lives in the U S. We have a strong foundation that aligns with our intense focus on prioritizing reimbursed tests and boosting revenue.
Covered lives footprint, coupled with the fact that less than a third of our total billable sample volume is reimbursed today clearly supports a path to monetizing the significant DNP volume we already have.
For example, if our annual volume stayed relatively flat at the 2022 level of roughly 68000 tests, but we doubled the percentage of these tests for which we are reimbursed or test revenue could more than double from the approximately $14 million, we generated last year.
We are okay with trading some volume growth in the short term for a healthy average selling price or ASP and revenue gains will prioritize test volume again, when we further when we're further down the path of sustained revenue growth.
In addition to our coverage wins, we've received a favorable recommendation from <unk>, a well recognized nonprofit technology assessment firm.
Cri is focused on health care technology evaluation safety to improve quality reduce costs and achieve better outcomes across all health care settings. We believe this favorable recommendation could further influenced coverage decisions by commercial payers.
Our visibility with payers also improves through state legislative efforts bills mandated insurance coverage of genomic testing or so-called biomarker bills are expected to be effective in several additional states in late 2023 in early 2024 <unk>.
While makers across the U S have advocated for improving access to potentially life saving genomic tests.
Our trust II study, which we initiated in 2022 should provide additional real world evidence in support of ongoing payer discussions. This is a prospective study designed to follow a cohort of two to 3000 patients with negative lead tested lesions for up to one year.
The study also assesses assesses the histopathology diagnosis of up to 1000 lesions that tested positive with the DMT.
We expect to release top line results in the second half of 2023, the resulting data if positive could support reengagement with many payors.
Across the organization, we made some tough decisions to streamline operations and put all our energy into scaling the DMT and prioritizing reimbursed tests to grow revenue.
Building, a strong foundation by having success with the DMT has to come first we believe in the power of our noninvasive skin genomics platform and recognize that it has a broader array of applications in dermatology, but we need to win with the DMT before we consider these other opportunities.
The DMT is Asps and test revenue were both up sequentially in the second quarter, which is a good start as we reposition the business around this new strategy, but we have more work to do.
We're starting to make some adjustments adjustments, especially around the tactics, we are deploying to generate reimbursed tests and maximize revenue.
First and perhaps most importantly, we've aligned incentive compensation for our sales team with driving reimbursed tests and revenue over total volume growth. In addition, we've expanded payor mix and analytics reporting to allow the field team to target providers with reimburse billable samples based on our already healthy demand.
Second we dissolved certain territories and merged others to focus on reimbursed samples, where we already have broad insurance coverage over the last two quarters. We've trimmed our sales team from approximately 70 60 reps to facilitate this objective.
Third we're going to shift our spending more closely to sales team enablement, rather than broad based marketing efforts, we still plan to participate in national dermatology conferences, but our presence at regional conferences will be more targeted based on several factors.
We'll also recalibrate calibrate our direct to consumer marketing tactics to capitalize on areas, where we already have insurance coverage, we need to build the empty adoption at the ground level with clinicians and this change in our approach should improve traction and communicating the DMT is value proposition.
Lastly, we've realigned our support infrastructure, including Concierge service services and medical Affairs support in territories, where we have insurance coverage for DMT.
We've also improved the integration of electronic health records, with our customers, which significantly reduces billing friction and increases the success rate of appeals with Payors.
In closing, we believe we have now right sized the business across all functional areas and sharpened our focus our capital and energy are concentrated on three key priorities prioritizing.
Prioritizing reimbursed tests over total volume to grow revenue continuing to expand coverage for the DMT and sustaining our cash runway.
We will scrutinize every dollar we spend to ensure it supports achieving these goals and generates a strong return I'm excited to have joined <unk> three months ago to lead this great team and I look forward to the many successes ahead of us with that let me turn the call over to Kevin for a more detailed financial review. Thanks.
Thanks, Brett and good afternoon, everyone I'll start by reviewing our key financial and operating metrics for the second quarter, then summarize how we're thinking directionally about our outlook for the back half of 2023.
Ill conclude by outlining our liquidity profile and cash runway targets.
Billable sample volume declined 5% year over year, and 2% sequentially for the second quarter to approximately 17450.
The decrease resulted from our prioritization of reimbursed tests and as we noted last quarter, we stopped testing samples from pediatric patients and certain Fitzpatrick skin types based on guidance for our lab accrediting organization.
Test revenue was down 14% year over year to $3 6 million largely due to a 0.3 million downward revenue adjustment, resulting from changes in collection estimates for tests run in prior periods as well as lower billable sample volume.
Test revenue was up 4% sequentially on higher Asps and lower prior period adjustments.
<unk> revenue was <unk> 4 million during the second quarter up from zero point $1 million in the year ago period the.
The increase is from new agreements with two large biopharma customers. It's important to remember that high margin contract revenues remain uneven as it is linked to the clinical trial progress of our Biopharma customers.
Nonetheless, these deals are a great way to increase awareness and usage of our smart sticker technology.
Total revenue for the second quarter fell 6% year over year, a 4.0 million.
Primarily on lower test revenue total revenue was up 14% sequentially on higher contract and test revenue.
Into our test revenue drivers first ASP was $204 per sample in the second quarter down 10% year over year, but up 6% sequentially Medicare.
Medicare Asps continue to trend higher due to better collection success in the Medicare proportion of billable sample volume grew sequentially from 23% to 25% in the second quarter of 2023.
Certain non contracted commercial payers continue to reduce their payment rates, leading to a downward adjustment for the quarter.
Normalizing for prior period adjustments second quarter, ASP would have been $221, which was up modestly on a sequential basis, we still expect variability going forward, primarily due to the lag in recognizing financial benefit from new payer coverage and fluctuating payments from non contracted commercial payors.
In cases, where we see both a favorable coverage policy and a signed agreement in the first half of 2023. We believe we are wrapping up the final administrative steps to start getting paid.
Second we had approximately 2420 unique order and clinicians in the second quarter down 5% from the first quarter with approximately 4350 unique ordering clinicians during the last 12 months, we penetrated 48% of our current target market of 9000 dermatology clinicians.
Third our average quarterly utilization or average number of test ordered per unique ordering clinician was up sequentially to $7. Two billable samples in the second quarter versus 7.0 in the first quarter and $7 seven in the year ago period.
Focusing next on operating expenses cost of test revenue was $3 9 million, a 21% year over year increase yielding a test gross margin of negative 10%.
The increase in cost of test revenue was primarily due to higher infrastructure costs from our new lab and higher materials expenses.
Sales and marketing expenses were $13 1 million, which was 13% lower than the previous year. The decrease was largely attributed to attributable to reduced marketing expenditures.
Research and development expenses were $3 9 million, a 44% decline from the year ago period, primarily due to lower employee related and clinical study costs.
General and administrative expenses were $15 2 million $6 3 million or 71% higher compared to the second quarter of 2022.
The increase was driven by approximately $2 9 million of additional noncash stock based compensation expense and <unk> 5 million of severance costs related to our former Ceo's departure, approximately $2 1 million in nonrecurring restructuring charges and approximately $1 2 million from increased infrastructure cost related to our new facility.
The entire restructuring charge was booked to G&A, even though the restructuring actions also included the sales and marketing functions.
The fourth quarter of 2023 will be the benchmark moving forward and will set a new run rate for operating expenses.
We expect that the third quarter of 2023 may have limited costs from winding down certain programs.
Net loss for the second quarter was $31 4 million, which included $7 5 million of noncash stock based compensation expense compared to a net loss of $29 6 million for the same period of 2022, which included $4 8 million of noncash stock based compensation expense.
Moving now to our 2023 outlook.
We continue to anticipate DMT volumes in 2023 will be relatively flat compared to last year due to our prioritization of reimbursed tests ESPN test revenue have begun to slowly tick up and we plan for full year Asps and test revenue to increase when compared to 2022.
Providing specific guidance remains difficult due to potential additional delays related to recent coverage wins and possible tightening by non contracted payers.
As Brent noted, we're okay trading some volume growth in the short term for healthy Asps and revenue gains we.
We anticipate emphasizing volume growth again, when we have reached a meaningful revenue inflection point.
And lastly, a review of our liquidity profile and balance sheets.
At quarter end, we had cash cash equivalents restricted cash and marketable securities of $89 7 million, which includes net proceeds of approximately $4 5 million from stock issuances under our at the market or ATM facility during the period.
Based on the expected $25 million to $30 million in annualized cost savings from our restructuring actions. We believe we now have cash runway into the first quarter of 2025.
In addition to these significant expense savings driving Asps and revenue is a key factor that helps preserve and even extend our cash runway.
Asps and revenue grow during the rest of 2023 and through 2024, we have the potential to push our cash runway out even further.
In summary, we're making solid progress and reorienting, our effort around winning with the DMT and growing revenue and have extended our cash runway now I will turn the call back to Brendan.
Thanks, Kevin before we wrap up and move to Q&A I will share an especially powerful patient story that encapsulates why I joined <unk> one of our sales reps was recently training physician staff on how to apply our smart sticker correctly at an office, where the doctor hadn't previously used the DMT <unk>.
Physician volunteer to apply the DMT at one of his own lesions that he and his colleagues believed would that look like melanoma, but was ambiguous test came back double gene positive, indicating a strong correlation with melanoma a biopsy of the lesion was Vincent to two pathologists, who determined it was stage one melanoma importantly, the doctor shared with us that.
The lesion that was identified as melanoma look nothing like hundreds of lesions. He has previously diagnosed in his career.
His story captures the critical need for precision gene genomics as cancer is a disease of the genome and the current visual assessment standard is challenging even for and expertly trained medical professional the.
The physicians lesion has since been ex size and he's credited us with potentially saving his life. He's also began using the DMT in his practice now I'll turn things back to the operator for Q&A.
Thank you.
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One moment, please our first question.
Our first question will come from Thomas Layton of the Lake Street capital markets Your.
Your line is open.
Hey, Thanks for taking the question guys and congrats on the quarter.
Kevin I was wondering if you could help us think through how we should think about gross margins you Bob.
Utility to account for it but your Asps should grow as you focus on profitable test volume can you just help us think through that.
Yes as expected the increased in the per test Cogs was primarily due to those higher infrastructure cost for our new lab.
Wages were also higher but now that we've moved into the new lab, we're working on various initiatives to reduce Cogs going forward.
As you know gross margin is a combination of per unit Cogs as well as Asps and.
And because we have a challenge estimating asps is with the delays tied to <unk>.
Onboarding new coverage.
We're not ready to give a margin.
Forecast.
But what we can say is we are committed to reducing these costs going forward and as we said before because of our test the primary pls, a two gene assay using PCR technologies.
We have opportunity to reduce it from the $200 roughly that it is now, but we're just not ready to give specific guidance because it's a combination of both of those items.
ASP improvement as well as.
Our per unit cost reduction.
Got it.
And then I was wondering if I could ask you to comment on the new territories and there was some noise on the line, but I think you said you were down to 60 territories now could you give a sense of percentage wise or some other way what the coverage looks like in these kind of idealized territories, where you do have better coverage.
Yeah, Hey, Thomas it's Brad So what we did is we said we went from roughly 70 territories, a few quarters ago to around 60% today and the point of that really is to align those territories, where we do have our best reimbursement and so it varies with each territory, but certainly Medicare is.
Universal is out there in every territory and then the commercial payers just varies by territory, which is why we did dissolve and merged a few territories as well to get down to that number we will look to expand in the future may be as as.
Coverage does change and improve and some of those areas, but for now we just believe the ROI on that spend with the sales force is is best where we've got the the commercial coverage as well as Medicare and so we better aligned the territories, but we have also provided that information so that our reps can appropriately target the right physicians with the <unk>.
<unk> mix of coverage.
And then definitely vary.
<unk> by state and territory by territory, but some of the best.
Coverage on a specific territory basis with Medicare as well as kind of stay the local regional Blues plan, we might have 70 80 or more percent of covered lives in that area.
Excellent I appreciate you guys, taking the questions. Thank you.
Thank you.
One moment please for our next question.
Yeah.
Okay.
And our next question will come from the line of Alex Nowak Craig Hallum.
<unk> group your line is open.
Hi, Good afternoon, everyone. This is Albert who on for Alex.
One of the biggest challenge for Genentech has been getting the big national players or threat.
And your first full quarter being that certain tech can you walk through how you're restructuring the clinical care teams to push for those coverage wins.
Yes sure Albert Thanks for the question.
Let me start, though by saying one of the things I said when I got to term Tech is I was actually quite impressed with the level of covered lives that we already had achieved as well.
Big commercial payers are going to be important to us and we continue to have really good discussions with those payers. We have 133 million covered lives today and this new focus is around continuing to drive those covered lives higher but also really making sure that we get our fair share of reimbursed tests in the door that more closely mirrors.
Covered lives, which is currently at about 45% so 45% of covered lives, but again less than a third of the tests. We get today are from those payers and reimbursed. So thats the short term focus as far as the the conversations and progress with the national payers.
We believe theyre going to come around and when where we get payers to look at our most recent health economic data, it's very convincing and so these things take time and we will continue to have good conversations with those payers. We did get some negative policy decisions from a few of them earlier this year, but we have chances to go back with EC Cry, but.
Also when we released trust II data later this year and so we're optimistic we're going to get there for now we've got really really strong reimbursed.
<unk> out there, we just need to make sure that that that really closely mirrors. The tests that are in the door and thats going to be the focus in the short term.
Okay Gotcha.
We've heard from clinics is how to fit DMT into the practice, so what sort of marketing changes are you making in regard to this.
Albert I can take that one as well so the message is really important and one thing I've learned in my short tenure at <unk> as the value proposition to me is really clear and we need to tell a really convincing story to dermatologists in the office setting.
Is that I said in my remarks. This is a tough thing to do to find Melanomas and it's why we believe dermatologists err on the side.
A lot of biopsies, you don't want to Miss melanoma in the office setting. There's also because of that there is a lot of lesions. They don't want to biopsy, where theres cosmetic sensitive areas. Some of those that they'd prefer to photo and follow but again to be say, if you end up doing a lot of biopsies to make sure you don't Miss melanoma that tells me.
There is a clear place in every practice for the <unk> melanoma test and Thats what were starting to get.
Some early utilization in those areas and we'll look to expand later on but look. This is this is a win win for everybody. We want to work with dermatologists and not against them and integrating this into their practice and to me. There is a clear value proposition for some of those edge cases that they're hesitant to biopsy.
Got it and I got two more questions here. So during the call you mentioned some of these cells structure changes in compensation.
After he joined the company can you reiterate that part and the second question is can you give us the latest again on the clinical trials.
New study Readouts should we expect this year and next year I know you touched on this during the call, but just to reiterate this for me. Please thank you.
Yes, sure so the incentives that I mentioned in the.
In the opening remarks is really about I spin.
Specifically called out sales.
Sales rep incentives, but honestly the incentives across the organization have been aligned to revenue and the change there is simply that early on the focus was volume and we've spoken a lot about volume in previous earnings calls and that was the right move honestly, you've got to drive volume you've got to show demand you've got to show payers.
There is demand for your product in the marketplace, you've got to get dermatologists comfortable with using your product and you got to get patients aware and all of that means volume is really critical early on in our product lifecycle like the <unk> melanoma test now, though with 45% of covered lives. The focus for us is going to be around revenue and so.
<unk> simply just aligned incentives to that end and <unk>.
Specifically the sales force that I called out in my opening remarks have a new comp plan that is based off of revenue and not just volume what thats going to do is thats going to force all of us to have the difficult conversations are more difficult conversations with dermatologist to make sure that it is being used at the right way and that we're getting.
More of those reimbursed tests in the door and that's going to be again the focus in the short term, it's probably the most immediate change that needed to happen and I think it also just facilitates the improvement of the message and the value proposition and so that's what we've done in the field too.
To change that.
They also as far as the clinical data, Kevin probably have some things to add here. The one thing I called out my opening remarks was.
Trust II, which is that prospective trial up 2% to 3000 patients looking at a negative DMT result, and following those patients for up to a year.
We anticipate doing a top line readout sometime later this year by the end of the year and again, that's going to be an opportunity for us to go back and revisit the conversation with payers that have given us a negative coverage decision.
Yes.
As we mentioned two due to changes in guidance from our accrediting organization, we've stopped testing samples from pediatrics and so we did kick off a utility study around pediatrics to try to gather more data melanoma is very rare in the pediatric population, but obviously a noninvasive approach using genomics.
The DMT allows for is a very good candidate for our usage.
Okay.
Thank you guys. Good luck.
Thank you.
Again to ask a question. Please press star one on your phone and wait for your name to be announced to withdraw your question. Please press star one again.
One moment please for our next question.
Our next question will come from Andrew Brachman of William Blair. Your line is open.
Okay.
Hi, guys. This is Dustin online for Andrew.
Just a first question I wanted to ask about the biomarker Bill as you mentioned there.
They are being considered by wall makers.
Impact of those have potentially.
Volumes and Asps.
Legislation gets passed and what states would be most impacted there.
Hey, Justin this is Brett it's a it's a fluid situation.
There are many states that have either planned proposed or passed legislation around requiring health insurance companies to cover.
Tests that offer critical Biomarkers and so if you look at the language in the number of states that are are actively involved in this already the language of those bills varies state to state and there's many that are in some process along the way to pass legislation that the count is probably around 18 today.
But it's a growing less than pretty fluid. It's it's an opportunity again for us too.
To go back to the table with many payers that havent covered it will certainly be a push from a legislative standpoint to cover these types of tests.
Understood and then just two more financial questions for us.
In light of the restructuring.
Point to point and settlement.
Annualized Opex savings can you just walk through where.
The reduction will be kind of by Opex.
Opex item.
Kevin you mentioned in the fourth quarter is going to be the real run rate that we should expect so where should that be.
And then second.
Tap the ATM in the quarter, how should we think.
Are you guys using that facility going forward from here. Thank you.
As we mentioned the restructuring affected really.
Most departments across the organization so while the charge itself was booked into G&A.
There was.
Impacts and effects on sales and marketing and even within the.
Financial results for the quarter, you could see the R&D expenses are trending down so the restructuring again, a big part of it was the prioritization of DMT.
And with the suspension of pipeline activities and programs that has a natural impact on the R&D line and then with the changes to the commercial focus that Brett outlined.
The reduction of broad marketing type of initiatives versus very more targeted and salesforce enablement there'll be impacts on the sales and marketing line, but it's really all up and down the Opex line items.
On the ATM.
So we've taken the important steps to reduce that cash burn through those operating expense reductions as part of the restructuring and our focus on improving reimburse test volumes.
The ATM, it's one of the lowest cost of capital options in the current environment and since valuations are fluid we've used the ATM to provide some flexibility as we evaluate strategies and options to capitalize the business in a thoughtful way will continue to be mindful of relevant considerations as we evaluate deploying the ATM in the future.
Okay, great. Thank you Kevin that's it from us.
Yes.
Thank you.
This will conclude the Q&A session of the conference and it also concludes the conference call itself. Thank you all for participating you may now disconnect and have a pleasant day.
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