Q3 2023 DermTech Inc Earnings Call

November 2, 2023

Ladies and gentlemen, thank you for standing by welcome to dumb tax third quarter 2023 financial results call. At this time, all participants are in a listen only mode.

After the speaker's presentation, there will be a question and answer session.

To ask a question during the session you will need to press star one on your telephone you will then hear an automated message advising your hand just right.

To withdraw your question. Please press star one one again please be advised that today's conference is being recorded I would like now to turn the conference over to Steve can say Bo. Please go ahead.

Thank you operator, welcome to <unk> third quarter 2023 earnings call.

With me on today's call are Brent Christiansen, 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 statements regarding projections of the future performance or financial outlook of <unk>.

Performance patient benefits cost effectiveness commercialization and adoption of our products and the market opportunity for our products 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 continue to cause such differences are described in today's press release and our most recent filings with the SEC, including our annual report on Form 10-K filed on March <unk> 2023, and our quarterly report on Form 10-Q filed on.

November <unk> 2023.

We undertake no obligation to update these statements, except as required by applicable law or.

Our third quarter 2023 earnings press release, and SEC filings are available on our Investor Relations website.

A recording and transcript of this call will be available on our website later today with that let me turn things over to breath.

Thank you, Steve and thank you everyone for joining us.

We're really excited by the significant improvement in many of our top line and operating metrics. We're just a few months into our strategy of prioritizing reimburse test and revenue growth and we're already seeing faster progress than we expected.

In the third quarter Asps for Derm Tech melanoma tests, or DMT and test revenue grew at solid year over year and sequential rates. We also reported an improvement in the Medicare proportion of billable samples to an all time high Mark which is about half of our addressable market as well as an increase in our total proportion of reimbursable.

<unk> tests.

We recorded a positive gross margin a significant expense and cash burn reductions nearly all of our key performance indicators are heading in a positive direction and we believe that with more time to refine our commercial tactics, we will continue to improve our operating results.

Before I take you through several elements of our recent progress let me take a step back to reframe the opportunity.

First we have a great technology that can significantly enhance the standard of care for evaluating melanoma.

One element is the most aggressive form of skin cancer and claims approximately 8000 lives annually in the U S.

Dermatologists are working hard to provide great patient care, but they face capacity constraints and limitations with traditional methods such as surgical biopsies the.

The DMT detects genomic markers that are correlated with an increased risk for melanoma and can aid decision by clinicians.

Second we believe there is a place for the DMT and every dermatology office alongside established protocol.

The DMT is non invasive and rules out melanoma with a 99% negative predictive value.

Whether it's using the DMT in a sensitive areas such as the face, while providing clinicians and patients with peace of mind for our clinic clinically suspicious lesion that the clinicians don't want to biopsy. There is room for it to be used in several ways.

As an example, if we capture just 5% of the approximately 4 million surgical biopsies performed each year at a price that's in line with the Medicare rate the revenue potential is over $150 million annually.

And third we can lower the cost to the healthcare system by ruling out the need for certain surgical procedures, while also providing a better patient experience.

Insurance providers continue to expand access to our tests and we've cleared administrative and billing hurdles with certain payers were a favorable coverage policy an agreement where in place earlier. This year. For example, we're now seeing consistent reimbursement from two national government payers and one of the regional Blues plans, we also sign.

An agreement with Highmark during the third quarter, bringing the DMT as an in network benefit to one of the largest blues plans in the U S with approximately 7 million members.

We will continue to reinforce our message around the clinical and health economic benefits of the DMT with payers that don't yet cover our test and continue to improve reimbursement patterns, where coverage already exists. There is more to do but we're on the right track with 133 million covered lives today.

Our visibility with payers also improves through state legislative efforts bills mandated insurance coverage of genomic testing or biomarker bills are gaining visibility across the U S. As lawmakers advocate for improving the access to potentially life saving genomic tests.

One example was the recent passage of the California, biomarker, Bill, which mandates coverage based on specific criteria effective in January of 2024.

California's profile as a large state with a significant Medicare population makes us an important step in strengthening the access for patients more than 10 states have now passed biomarker bills and several states currently have bills, making their way through the legislative process.

Our trust II study, which we initiated in 2022 should provide additional real world evidence regarding the DMT performance.

The result, if positive may support Reengagement with payers. This study is designed to follow a cohort of 2000 to 3000 patients with negatively tested lesions for up to one year and also assesses the histological diagnosis of up to 1000 lesions that tested positive with the DMT, we expect to have top line data before the end of <unk>.

2023.

Still in the early days of evaluating feedback from the field and our customers, but it is evident that the immediate impact has been positive on boosting asps and test revenue.

First we aligned incentive compensation for our sales team with prioritizing reimbursed tests and revenue over volume growth. We have also improved reporting and made our operating dashboards more robust to support the field with targeting reimbursed tests.

Throughout the rest of the organization, we've aligned incentive compensation and projects to prioritize asps and revenue growth.

We've also dissolve certain territories and burst others to focus on reimbursed samples, where we already have insurance coverage or where we have healthy volumes that can facilitate positive discussions with payers.

As a result, we reduced our sales territories from approximately 70% to roughly 60.

Third we've shifted our spending more closely to sales team enablement, rather than broad based marketing efforts, we've improved our customer and patient facing collateral and highlighted key insurance providers that cover our test we still plan to participate in national dermatology conferences, such as bulk clinical which we attended in mid October to meaningfully <unk>.

Gage key opinion leaders and support presentations that highlight the clinical value of the DMT.

We're also recalibrating, our direct to consumer marketing tactics to capitalize on areas, where we have insurance coverage.

Lastly, we appointed Mark <unk> at September as our Chief commercial officer.

Mark has a proven commercial leader with over 20 years of experience driving the commercialization of multiple novel molecular diagnostics.

He served in commercial leadership roles with leading health care companies directing sales marketing medical affairs customer success and market access teams, we're grateful to have him on our team during this transformational period.

As we've shared we are intentionally pursuing a strategy that prioritizes robust asps and revenue growth over volume growth in the short term the.

Third quarter results reflected the shift in addition, we anticipate that the reduction and realignment of sales territories could further impact billable sample growth over the next few quarters, we will prioritize test volume again, when we were further down the path of sustained revenue growth.

In closing my vision is for the DMT to be deployed universally as part of the melanoma care pathway, we began taking important steps to execute against this goal.

We're prioritizing reimbursed tests silver volume growth to grow revenue.

Engaging clinicians with a clear message to improved traction in communicating the DMT is clinical value proposition.

We're continuing to improve payer coverage for the DMT and finally, our total operating expenses and cash burn are at the lowest levels in approximately two years, while we're generating higher revenue.

I look forward to a strong finish in 2023 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 summarize our key financial and operating metrics for the third quarter, then recap how we are thinking directionally about our outlook for the rest of 2023.

I'll wrap up by outlining our liquidity profile and cash runway targets all.

All comparisons are to the same quarter of the prior year unless otherwise noted.

Test revenue was up 8% to $3 7 million and increased 4% sequentially largely due to higher asps for the DMT.

Billable sample volume declined 13% to approximately 15710 and was down 10% sequentially.

The year over year and sequential decrease was partly due to the impact of the field from our prioritization of reimbursed tests and the overall reduction in the size of our sales force.

As previously noted we also stop testing samples from pediatric patients and certain Fitzpatrick skin types earlier in the year based on guidance from our lab accrediting organization, which also affected the year over year comparison.

The sequential decrease was also partly due to typical seasonality we see during the summer months.

Contract revenue was <unk> 2 million compared to <unk> $1 million. The increase is from activity related to clinical trial progress of our biopharma customers.

Total revenue increased 10% to $3 $9 million, primarily on higher test prep.

Drilling into our test revenue drivers first ASP was up 24% to $235 per sample and up 15% sequentially.

The Medicare proportion of billable sample volume improved again, increasing sequentially from 25% to 27%.

In the last two quarters. This proportion has increased by four percentage points and has been a key component of ASP improvement as.

As Brent noted, we're finally benefitting from the new payer coverage. We brought on this year that took multiple quarters to clear administrative and billing obstacles, but we're now being consistently paid by tricare and the VA and one of the newer regional blues plans.

Working with the other regional Blues plans, where we have a favorable coverage policy in an agreement to achieve consistent payment behavior.

Net prior period adjustments had a negligible impact on test revenue during the third quarter.

Even with favorable payment trends and the Onboarding of new Payors Asps fluctuate as payers have and could continue to update their administrative procedures documentation requirements or indications for use among other things for obtaining obtaining reimbursement even those payers with positive coverage policies <unk> contracts.

Second we had approximately 2250 unique order and clinicians in the third quarter down 7% sequentially.

With approximately 4210 unique ordering clinicians during the last 12 months, we've penetrated 47% of our total current.

Market of 9000 dermatology clinicians.

Third our average quarterly utilization or average number of tests ordered per unique ordering clinician was 7.0 billable samples in the third quarter versus seven two in the second quarter and seven five in the year ago period.

Turning now to operating expenses.

Cost of test revenue was $3 7 million, an increase of less than 1%, yielding a test gross margin of 1% the.

The increase in cost of test revenue was primarily due to higher infrastructure costs related to our new lab.

Sales and marketing expenses were $8 1 million or 44% decrease largely due to lower employee related and marketing expenditures.

Research and development expenses were $3 6 million or 37% decrease primarily due to lower employee related and lab supplies costs.

General and administrative expenses were $8 3, million% to 6% decrease driven by lower employee related costs offset by higher infrastructure costs related to our new facility.

Total operating expenses decreased substantially due to the restructuring actions, we implemented in the second quarter.

On a full year basis, using the third quarter as a benchmark our operating expenses could be lower than the $25 million to $30 million in annualized cost savings.

When we announced the restructuring plan.

Net loss was $19 2 million, which included $3 2 million of noncash stock based compensation expense compared to a net loss of $28 8 million, which included $4 9 million of noncash stock based compensation expense.

Moving now to our 2023 outlook, we believe DMT volumes for 2023 will be flat to modestly down compared to last year, primarily due to our prioritization of reimbursed tests and the impact in the field to our change in tactics.

Asps and test revenue are moving in the right direction and we believe these topline metrics should increase versus 2022.

Providing specific guidance remains difficult until we see a good trend for several quarters and payer reimbursement behavior and the sustained effectiveness of our new commercial tactics.

And lastly, a review of our liquidity profile and balance sheet.

At quarter end, we had cash cash equivalents restricted cash and marketable securities of $71 7 million, which includes net proceeds of approximately <unk> 5 million from stock issuances under our at the market or ATM facility during the period.

When excluding nonrecurring costs related to our restructuring plan. Our net cash burn has declined from approximately $100 million for 2022 to approximately $65 million based on an annualized third quarter run rate a 35% decrease.

We'll continue to be rigorous with our capital allocation and look for additional efficiencies and cost savings as we finalize our plan for 2024.

We believe we have cash runway into the first quarter of 2025. In addition to the significant expense savings driving Asps and revenue is a key factor that helps preserve and potentially extend our cash runway.

In summary, we significantly improved many of our key operating and financial indicators in the third quarter, our new commercial tactics are taking hold and supporting our strategy of increasing the proportion of reimbursed tests and growing revenue.

We believe this approach is the best way to reach a meaningful revenue inflection point, while sustaining our cash runway.

With that I'll turn the call back to the operator for Q&A.

Thank you as a reminder to ask a question. Please press star one on your telephone and wait for your name to be announced to withdraw. Your question. Please press star one again please.

Please standby, while we compile the Q&A roster.

The first question comes from Thomas Flaten with Lake Street Capital markets. Your line is open.

Thank you and good afternoon, thanks for taking the questions.

Kevin with respect to the significant cost reduction that we see in the P&L as the third quarter kind of a nature or do you expect additional savings as we roll through the fourth quarter as well.

Yes.

Originally said that using the fourth quarter of 2023 would be the benchmark moving forward. So while we also said that we are pleased that were a little bit ahead of where we thought we would be we are still working to find some additional savings. So it's yet to be determined I would still point to the fourth quarter is probably the best benchmark for what the cash burn should be good.

Going forward got it.

And.

And I think in <unk> prepared comments, you mentioned that you were starting to see some flow through from recently contracted payers are you guys, specifically, calling those payers out from a sales rep messaging perspective, or how are you going about educating the docs on which payers pay and which don't.

Yeah, Hi, Thomas This is Brett what we've done is.

Again, we changed a lot of the tactics just to get to reinforce revenue and Thats, how salespeople who are paid there is incentives across the organization is our focus we've got some really good tools that we give the salespeople that allows for them to see where claims are coming that helps them prioritize where we've got reimbursement in where we don't we also realigned the territory.

So in general the territories, we've got today have pretty good reimbursement, that's how they are aligned and thats. How they were selecting did but we're also giving them tools to help them understand the practices and where the opportunity exists within their own territories. So.

All of it is with a focus on ESP and more reimbursed tests in the door, we're still welcoming all tests, but anything that we know we can get paid for is the priority with the field.

But youre not specifically engaging the doctors in a conversation about which patients are likely to be covered versus not.

No we're not.

Got it appreciate it thank you.

Please standby for the next question.

The next question comes from Mark Massaro with <unk>. Your line is open.

Okay.

On for Mark Thanks for taking the question.

Our national plan.

During the prepared remarks that you are getting paid based on plan today.

We are a precursor to a formal contract.

And just curious.

And that one has been progressing.

Awesome.

You talk about.

Here shortly.

I was just wondering if it.

Thanks.

Yes, Hi, Vivien. Thanks for the question. This is Brett yes, so we.

We've got really strong coverage today again, we're about 45% of all covered lives and Thats, a 45% increase just this year in reimbursement for the <unk> melanoma test as far as the national payer goes.

Depending on how you define a national payer if it's one of the the big four United Aetna Cigna anthem, we have yet to get positive policy decision for any of those or but we are billing for those tests, we are running appeals.

And we've got really strong coverage with the blues plans, having seven of the largest 10 blues plans covered across the U S. So between Medicare those large blues plans and other regional payers, where we're in a pretty good spot with coverage and we're continuing to have a pretty good conversations with the national payers that we believe will come onboard eventually.

The value proposition the critical utility everything is just too good we just need to continue to.

Pressure those payers and have meaningful conversations so we can get them on board.

Okay perfect.

If I could just squeeze in a follow up.

And I think you've added around $133 million.

Covered lives.

So in terms of the contribution of our recent payer wins here in Q3 and.

Should we think about all that.

Having been operationalized already alright, thanks, Tom Rooney.

Got it thank you.

And that could happen.

Newport.

Yes Vivien.

The 133 as the total amount of covered lives. We have is today, that's the increase from call. It $91 million from the end of last year and so in Q3 as we were bringing on those new payers throughout 2023. It was really Q3 was really the first meaningful quarter that we had any benefit from those plans.

And as we mentioned the government plans of Tri care VA started paying us consistently in the third quarter. We also had one of the regional blues plans start paying consistently theres. Other plans that have not started paying consistently and some of those new covered lives in 2020 through that actually haven't paid hardly at all so we do have additional benefit.

That we will get into.

In the future as we continue to bring on those new plans.

Even within Q3, it wasn't I'd say, even the full quarter that those few plans that did start paying was benefiting us. So there is definitely upside still from the coverage, we have and as we continue to bring on new coverage again, we will look to accelerate the ramp up period to get the benefit in the future.

Okay perfect understood if I can.

I'll just squeeze in one more here.

I understand you're not providing formal guidance.

How do we think about volume trending into Q4 from here sequentially.

And just give any more granularity on the tradeoffs.

<unk>.

Between volumes and E&P with that.

And that's it thanks.

Sure Vivien.

The strategy change and focus change that we announced really on the last call. After Q2 was making really trying to prioritize asps and revenue versus volume. It was really important for us early in the lifecycle of the DMT to make sure that volume was growing that gets the attention of payers it.

<unk>, a lot of utilization and awareness with dermatologists and patients and so.

Prior to really Q2.

Volume was really our.

Our focus as an organization to change that we made the shift was around making sure we monetize that volume because we've seen some pretty good volume growth in the past, but we wanted to make sure that asps were going up and frankly with all the wins that we've had.

In market access this $133 million covered lives.

We want it we want to get the test volume in the door more representative of reimbursement and so all of the changes that we made were around <unk>.

Incentives targeting activities messaging everything with a focus of ASP and what we said was we were okay with that pretty dramatic shift in focus if volume was flat or even decline we did see it declined slightly this.

This past quarter and that could persist for a quarter or two as we continue to ramp asps and keep the focus on revenue and we've said we'd be okay with that because again, we've got to make sure that we're monetizing the volume and making sure we get the right percentage of reimbursed tests in the door and we will start growing volumes again.

After that but we want to make sure that's the focus at least in the near term.

Thank you for taking my question.

Please standby for the next question.

The next question comes from Andrew Brockman with William Blair. Your line is open.

Our next question comes from Andrew Brockman with William Blair. Your line is open.

Please standby for the next question.

The next question comes from Alex Nowak with Craig Hallum. Your line is open.

Okay, great good afternoon, everyone.

Going back to the national payers. The team here has been working for years to get to let's say one of the top four players to come in and reimbursed the DMG test.

As you join I don't know six months or so ago.

When you reviewed how the team is communicating with the payers and what they are providing the payers where whether it be the trust data or economic data.

Or any other detail what sort of changes have you made there and the communication with the payers.

Hopefully make this more likely we will get one of those big guys over the finish line.

Yes, thanks for the question Alex So.

Of the four national payers, we did have three reiterate at negative policy decision early in the year really prior to my arrival.

When we look at the story of the messaging everything that appears should look at to evaluate coverage of the DMT. It's a great story, it's a great story for payers.

There is a ton of cost savings here for payers.

They just cover the tests and so what we saw what my understanding is what we saw from from those negative policy decisions was.

The lack of siding most of the most recent data our health economic data that shows these tremendous savings to the system.

That's probably true we're a small company it's hard to get these payers attention. We've got a really strong story, we'll keep hitting them with the trust to data that we will see at the end of the year is an opportunity once we publish that to revisit the tests with some of those payers that have given us. This negative policy decision and then theres a whole bunch of.

Advocacy that we've stepped up and need to continue to step up with patients dermatologists and anyone that's going to advocate for this test, which really is superior is superior patient care, it's great for patients it's good for payers.

Really does benefit all of our stakeholders and it's just it's just a comprehensive message that we need to continue to hit them with.

We're confident we're going to get there really in.

And look if we get continued to have more regional wins more of the blues wins all of that puts pressure as well on a national payers. We know we're going to get there. It's just that it takes a little bit of time.

And I think Alex you know if you remember I cited in my experience. It takes a lot of time, sometimes with these national payers that at my previous organization.

I joined that organization 15 years into into the product launch we still did have coverage for many of the national payers. So it does take a lot of time, we've got a really attractive value proposition that I know is going to resonate with payers. It's just it's just going to take us a little bit to get there.

One of the things that I've talked to the team about over the years our return check was.

If we need to get a guideline out there <unk>, what's your view on it I mean guidelines, obviously super important from your old employer.

Other health care names is super important.

And it's always been a little bit dismissed that we need AAD guidelines, but what's your view.

Well I think it certainly would help.

I don't know that we need it.

Honestly, if you think about.

Yeah.

Some of the headwinds that we have within dermatology it isn't that dermatologists in my opinion are waiting for guidelines it really as they need to understand where this test fits within their practice.

Some of the changes that we've made for messaging is about.

Helping them understand exactly what it is.

Remember genomics is still fairly new to the dermatology specialty so we're explaining what the test is what it is not it isn't.

A diagnostics. So we're not diagnosing melanoma were ruling out melanoma and that has a tremendous value to patients and dermatologists because again, there's some lesions that they see that are very suspicious that theyre going to go right to biopsy, that's fine with us, but when there is a lesion that you're uncertain about that is mild to moderate.

Atypical somewhat suspicious you don't want to do biopsy and many of those cases, we want to start there we want it we want to get those biopsies because they don't want to do them and the <unk> melanoma test is noninvasive and a perfect solution with a really good patient experience. So.

We've had maybe some missed opportunities with.

With the messaging that we've remedied and we're just now getting that rolled out I think that's going to resonate with dermatologists and look we at 10% of the 4 million biopsies that are done every year. That's 400000 tests that would be a pretty good start to to where we want to go and so that's what we've done.

Lines would help.

And we would certainly welcome that but I don't think it's a critical piece that's missing.

Okay.

Makes total sense and then lastly, the biomarker bills your home state now passed one number of other larger states have passed them recently they go into effect next year.

With that actually I guess, what the work internally that you've done because that it should be a material boost to the asps next year.

Well you know what it should do is it should boost policy and contracting with our market access teams. Because these biomarker marker bills are pretty explicit with what should and should not be covered and depending on the state and California is one of those that we did call out in the script here that is really going to be positive and should influence payers to cover.

The DMT and so where the team is doing as you know where were taking these legislative.

Headlines as they happen and we're taking them to payers and just incorporating that into our message to again encourage them to cover the DMT sooner than they.

They should have an effect. This is why we called it out in the script, we're really optimistic with this trend and hope that it continues and the mountain.

The momentum of these biomarker bills in various states right. This is where when say a national payer has to cover in a number of states and also for Medicare advantage populations. If they don't cover more broadly now they've got disparities of coverage within their populations, which makes it difficult to kind of administer so.

Again, it's not something that we view is going to be the one silver bullet, but it's amounting piece of <unk>.

Actions that should help bring on coverage in the future.

Yes totally agree I appreciate the update thank you.

Thanks, Alex Thanks, Alex as a reminder to ask a question. Please press star one one on your telephone and wait for your name to be announced.

Please standby for the next question.

The next question comes from Dan Brennan with Cowen Your line is open.

Hey, this is Joe on for Dan.

Just first now that gross margins will turn positive.

Way to think about how fast these might shape up and you can start driving some leverage here. Despite volume may be being sustainably lower for a bit closer to about 500 billable sample level for a few quarters.

Yeah, Hey, Joe.

The margin rates at this early stage and it's impacted by a couple of Big thing. So Asps will certainly help margins quite a bit even if we keep everything else equal so as our focus on asps and revenue growth that will help the margins and then as we've moved into a new laboratory, which we completed back in queue.

One we can now focus on finding additional cost savings and efficiencies and we have a number of efforts focused on those things.

That along with getting some additional capacity absorption of our fixed costs will help in those margins. So we do believe that over time, we've got runway to bring the Cogs below $200 Mark.

Again, we're working on those things now it's not just through the capacity absorption, but also a number of process improvements. So we're working on those things and it's something that some of them can take a little bit longer if we're talking about technology changes and such but we do see a pathway of having some meaningful gross margins in the future.

Great and then just in terms of the Medicare portion of billable samples is there some sort of range that you think you can draw.

With number in the next year or two and how do you think.

ASP like optimistic scenario.

Yes, Joe.

We just know it can go higher so.

It's 50% of the opportunity by itself, just because 50% of biopsies done in dermatology, our Medicare claims and so it's such a massive opportunity for us. It's it's been it along with other reimbursed covered tests have just been a focus of ours.

And something we're watching closely we just know it can go higher and we'll find out where it settles in.

In the future, but that is the focus today, yes like many things.

We have this quarter showed some really good progress.

We've been flat for a while and so before already to kind of really give any detailed forward looking guidance on any of these metrics, we do want to see a little bit of a trend. So we can see if we can sustain that improvement.

Great. Thanks, a lot.

Please standby for the next question.

The next question comes from Mason Chirico with Stephens. Your line is open.

Hey, guys. This is Jacob on for Mason lots already been covered today, so I'll just keep that one.

So on the trust to study timeline, if we were to think about a best case scenario. The timeline for our results to read out I know you said results might readout by the end of this year topline results, but then for results to read out for to get published for you to submit the payer the payer review and adopt coverage and you start getting paid how should we think about that.

There's a lot of variables, there, but any way to give us a general timeline on what that would look like it looked like if everything went right.

Yes, Jacob this is Brent really really good question I didn't really insightful.

What we've said is we expect to see topline data by the end of the year and we're still going through our publication strategy. So.

We're trying to decide where and when that can be published and we'll we'll have a probably a better view of that.

The year comes to a close and as we start to see that topline data, but for now it's a consideration we still think we will see the data this year, but publication is something we just haven't talked about that will take a little bit of time and the publication timeline. It is really dependent on which.

Which.

<unk> gets it gets published in and so then as it relates to like the payer review it depends on when the pair of these cycles kick in so if it's published after the first cycle than a.

The year of say a payer has two cycles in the year then they wont get a chance to review until ahead of the next cycle. So again theres a lot of depends here, but it really is dependent upon which publication we choose when the timeline is and then what are the cycles are for each of the payers.

Okay got it.

Keep it to one thanks guys.

Please standby for the next question.

The next question comes from Andrew Brockman with William Blair. Your line is open.

I show no further questions at this time this will conclude the Q&A session and the conference call. Thank you for parts.

<unk> you may now disconnect.

[music].

Okay.

Sure.

Yes.

Yeah.

Yes.

Yeah.

Okay.

Yes.

Okay.

Sure.

[music].

Ladies and gentlemen, thank you for standing by while Clinton Dumb tax third quarter 2023 financial results call. At this time all participants are in a listen only mode. After the speaker's presentation, there will be a question and answer session.

To ask a question during the session you will need to press star one on your telephone you will then hear an automated message advising your hand, just right to withdraw your question. Please press star one one again, please be advised that today's conference is being recorded.

I would like now to turn the conference over to Steve can say Bo. Please go ahead.

Thank you operator, welcome to <unk> third quarter 2023 earnings call with me on today's call are Brent Christiansen, 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 995.

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 statements regarding projections of the future performance or financial outlook of <unk>.

Actual results could differ materially from those described in such statements.

Statements, except as required by applicable law.

Our third quarter 2023 earnings press release.

SEC filings are available on our Investor Relations website.

A recording and transcript of this call will be available on our website later today with that let me turn things over to breath.

Thank you, Steve and thank you everyone for joining us.

In the third quarter ASP for <unk> melanoma test or DMT and test revenue grew at solid year over year and sequential rates. We also reported an improvement in the Medicare proportion of billable samples to an all time high Mark which is about half of our addressable market as well as an increase in our total proportion of reimbursable.

<unk> tests.

We recorded a positive gross margin and significant expense and cash burn reductions nearly all of our key performance indicators are heading in a positive direction and we believe that with more time to refine our commercial tactics, we will continue to improve our operating results.

Before I take you through several elements of our recent progress let me take a step back to reframe the opportunity.

First we have a great technology that can significantly enhance the standard of care for evaluating melanoma.

One element is the most aggressive form of skin cancer and claims approximately 8000 lives annually in the U S.

Dermatologists are working hard to provide great patient care, but they face capacity constraints and limitations with traditional methods such as surgical biopsies the.

The DMT detects genomic markers that are correlated with an increased risk for melanoma and can aid decision by clinicians.

Second we believe there is a place for the DMT and every dermatology office alongside established protocol. The DMT is noninvasive and rules out melanoma with a 99% negative predictive value.

And third we can lower the cost to the healthcare system by ruling out the need for certain surgical procedures, while also providing a better patient experience.

For example, we're now seeing consistent reimbursement from two national government payers and one of the regional Blues plans. We also signed an agreement with Highmark during the third quarter, bringing the DMT as an in network benefit to one of the largest blues plans in the U S with approximately 7 million members.

More to do but we're on the right track with 133 million covered lives today.

One example was the recent passage of the California, biomarker, Bill, which mandates coverage based on specific criteria effective in January of 2024.

California's profile as a large state with a significant Medicare population makes us an important step in strengthening and access for patients more than 10 states have now passed biomarker bills and several states currently have bills, making their way through the legislative process.

Our trust II study, which we initiated in 2022 should provide additional real world evidence regarding the DMT is performance.

The results are positive may support Reengagement with payers. This study is designed to follow a cohort of 2000 to 3000 patients with negatively tested lesions for up to one year and also assesses the histological diagnosis of up to 1000 lesions that tested positive with the DMT.

We expect to have top line data before the end of 2023.

As we consider the evolution of our commercial business during the quarter. It's worth quickly reviewing the tactical initiatives, we undertook in July to prioritize reimbursed tests and maximize revenue we're still in the early days of evaluating feedback from the field and our customers, but it is evidenced that the immediate impact has been positive on boosting asps and test.

Revenue.

Throughout the rest of the organization, we've aligned incentive compensation and projects to prioritize asps and revenue growth.

We've also dissolve certain territories and Bruce others to focus on reimbursed samples, where we already have insurance coverage or where we have healthy volumes that can facilitate positive discussions with payers.

As a result, we reduced our sales territories from approximately 70% to roughly 60%.

Gage key opinion leaders and support presentations to highlight the clinical value of the DMT.

We're also recalibrating, our direct to consumer marketing tactics to capitalize on areas, where we have insurance coverage.

Lastly, we appointed Mark <unk> at September as our Chief commercial officer.

Mark has a proven commercial leader with over 20 years of experience driving the commercialization of multiple novel molecular diagnostics.

As we've shared we are intentionally pursuing a strategy that prioritizes robust asps and revenue growth over volume growth in the short term the.

Third quarter results reflected this shift in addition, we anticipate that the reduction and realignment of sales territories could further impact billable sample growth over the next few quarters, we will prioritize test volume again, when we were further down the path of sustained revenue growth.

In closing my vision is for the DMT to be deployed universally is part of the melanoma care pathway.

We began taking important steps to execute against this goal.

We're prioritizing reimbursed tests silver volume growth to grow revenue.

Engaging clinicians with a clear message to improved traction in communicating the dmt's clinical value proposition.

I look forward to a strong finish in 2023 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 summarize our key financial and operating metrics for the third quarter, then recap how we are thinking directionally about our outlook for the rest of 2023.

I'll wrap up by outlining our liquidity profile and cash runway targets all.

All comparisons are to the same quarter of the prior year unless otherwise noted.

Test revenue was up 8% to $3 7 million and increased 4% sequentially largely due to higher asps for the DMT.

Billable sample volume declined 13% to approximately 15710 and was down 10% sequentially.

The year over year and sequential decrease was partly due to the impact of the field from our prioritization of reimbursed test and the overall reduction in the size of our sales force.

As previously noted we also stopped testing samples from pediatric patients and certain Fitzpatrick skin types earlier in the year based on guidance from our lab accrediting organization, which also affected the year over year comparison.

The sequential decrease was also partly due to typical seasonality we see during the summer months.

Contract revenue was <unk> 2 million compared to <unk> $1 million. The increase is from activity related to clinical trial progress of our biopharma customers.

Total revenue increased 10% to $3 $9 million, primarily on higher test revenue.

Drilling into our test revenue drivers first ASP was up 24% to $235 per sample and up 15% sequentially.

The Medicare proportionate billable sample volume improved again, increasing sequentially from 25% to 27%.

In the last two quarters. This proportion has increased by four percentage points and has been a key component of ASP improvement.

Fred noted, we're finally benefitting from the new payer coverage, we brought on this year.

Multiple quarters to clear administrative and billing obstacles, but we're now being consistently paid by Tri care, the VA and one of the newer regional blues plans.

We're working with the other regional Blues plans, where we have a favorable coverage policy in an agreement to achieve consistent payment behavior.

Net prior period adjustments had a negligible impact on test revenue during the third quarter.

Even with favorable payment trends and the Onboarding of new Payors ASP fluctuates as payers have and could continue to update their administrative procedures documentation requirements or indications for use among other things for obtaining obtaining reimbursement even those payers with positive coverage policies <unk> contracts.

Second we had approximately 2250 unique ordering clinicians in the third quarter down 7% sequentially.

With approximately 4210 unique ordering clinicians during the last 12 months, we've penetrated 47% of our total current.

Market of 9000 dermatology clinicians.

Third our average quarterly utilization or average number of tests ordered per unique ordering clinician or 7.0 billable samples in the third quarter versus seven two in the second quarter and seven 5% in the year ago period.

Turning now to operating expenses.

Cost of test revenue was $3 7 million, an increase of less than 1%, yielding a test gross margin of 1% the.

The increase in cost of test revenue was primarily due to higher infrastructure costs related to our new lab.

Sales and marketing expenses were $8 1 million or 44% decrease largely due to lower employee related and marketing expenditures.

Research and development expenses were $3 6 million or 37% decrease primarily due to lower employee related and lab supplies costs.

General and administrative expenses were $8 3, million% to 6% decrease driven by lower employee related costs offset by higher infrastructure costs related to our new facility.

Total operating expenses decreased substantially due to the restructuring actions, we implemented in the second quarter.

On a full year basis, using the third quarter as a benchmark our operating expenses could be lower than the $25 million to $30 million in annualized cost savings.

When we announced the restructuring plan.

Asps and test revenue are moving in the right direction and we believe these topline metrics should increase versus 2022.

Providing specific guidance remains difficult until we see a good trend for several quarters and payer reimbursement behavior and the sustained effectiveness of our new commercial tactics.

And lastly, a review of our liquidity profile and balance sheet.

We'll continue to be rigorous with our capital allocation and look for additional efficiencies and cost savings as we finalize our plan for 2024.

In summary, we've significantly improved many of our key operating and financial indicators in the third quarter, our new commercial tactics are taking hold and supporting our strategy of increasing the proportion of reimbursed tests and growing revenue.

We believe this approach is the best way to reach a meaningful revenue inflection point, while sustaining our cash runway.

With that I'll turn the call back to the operator for Q&A.

Thank you as a reminder to ask a question. Please press star one on your telephone and wait for your name to be announced to withdraw. Your question. Please press star one again please.

Please standby, while we compile the Q&A roster.

The first question comes from Thomas Flaten with Lake Street Capital markets. Your line is open.

Thank you and good afternoon, thanks for taking the questions Ken.

Kevin with respect to the significant cost reduction that we see in the P&L is the third quarter kind of a nature or do you expect additional savings as we roll through the fourth quarter as well.

Yes, we are.

Going forward got it.

<unk>.

Yeah, Hi, Thomas This is Brett what we've done is we've.

Again, we changed a lot of the tactics just to get to reinforce revenue and Thats, how salespeople who are paid there is incentives across the organization is our focus we've got some really good tools that we gave the salespeople that allows for them to see where where claims are coming that helps them prioritize where we've got reimbursement in where we don't we also realigned the territory.

So in general the territories, we've got today have pretty good reimbursement that's how they are aligned and that's how they were selected.

But we're also giving them tools to help them understand the practice is and where the opportunity exists within their own territories. So.

All of it is with a focus on ESP and more reimbursed tests in the door, we're still welcoming all tests, but anything that we know we can get paid for is the priority with the field.

But youre not specifically engaging the doctors in a conversation about which patients are likely to be covered versus not.

No we're not.

Got it appreciate it thank you.

Please standby for the next question.

The next question comes from Mark Massaro with <unk>. Your line is open.

Okay.

Thanks for taking the question.

I think for a national plan.

In the prepared remarks that you are getting paid by some plan today.

They are a precursor to a formal contract.

And just curious.

Dial up on that one has been progressing.

Awesome.

You talk about Q.

Here shortly.

I was just wondering if it.

Thanks.

Yes, Hi, Vivien. Thanks for the question. This is Brett yes, so we.

Depending on how you define a national payer if it's one of the the big four United Aetna Cigna anthem, we have yet to get positive policy decision from any of those four but we are billing for those tests, we are running appeals.

<unk> proposition the critical utility everything is just too good we just need to continue to.

Pressure those payers and have meaningful conversations so we can get them on board.

Okay perfect.

If I could just squeeze in a follow up.

And I think you've added around $133 million.

Covered lives.

So in terms of the contribution of the recent payer wins here in Q3 and.

Should we think about all that.

Having been operationalized already alright, thanks, Tom remaining benefits.

And that could happen.

Sure.

Yes, Vivien so the the 133 as the total amount of covered lives. We have is today, that's the increase from call. It $91 million from the end of last year and so in Q3 as we were bringing on those new payers throughout 2023. It was really Q3 was really the first meaningful.

<unk> that we had any benefit from those plans and as we mentioned the government plans of Tri care VA started paying us consistently in the third quarter. We also had one of the regional blues plans start paying consistently theres. Other plans that have not started paying consistently and some of those new covered lives in 2020 through that actually haven't paid harder.

At all so we do have additional benefit that we will get in.

In the future as we continue to bring on those new plans.

Okay, perfect understood and if I could.

I'll just squeeze in one more here.

I understand you're not providing formal guidance.

How do we think about volume trending into Q4 from here sequentially.

Just give any more granularity on the trade off.

<unk> recently.

Between volumes and E&P with that.

And that's it thanks.

Sure Vivien.

The strategy change and focus change that we announced really on the last call. After Q2 was really trying to prioritize asps and revenue versus volume. It was really important for us early in the lifecycle of the DMT to make sure that volume was growing that gets the attention of payers it.

That's a lot of utilization and awareness with dermatologists and patients and so.

Prior to really Q2 volume was really our.

Our focus as an organization that change that we made the shift was around making sure we monetize that volume because we've seen some pretty good volume growth in the past, but we wanted to make sure that asps were going up and frankly with all the wins that we've had.

In market access this 133 million covered lives.

We want it we want to get the test volume in the door are more representative of reimbursement and so all of the changes that we made were around incentives.

The volume and making sure we get the right percentage of reimbursed tests in the door and we will start growing volumes again.

After that but we want to make sure that's the focus at least in the near term.

Awesome. Thank you for taking my question.

Please standby for the next question.

The next question comes from Andrew Brockman with William Blair. Your line is open.

Our next question comes from Andrew Brockman with William Blair. Your line is open.

Please standby for the next question.

The next question comes from Alex Nowak with Craig Hallum. Your line is open.

Okay, great good afternoon, everyone.

Going back to the national payers. The team here has been working for years to get to.

Let's say what are the top four players to come in and reimbursed at DMG test.

As you join I don't know six months or so ago.

When you reviewed how the team is communicating with the payers and what they are providing the payers where whether it be the trust data or economic data.

Or any other details.

Sort of changes have you made there and the communication with the payers.

And hopefully make this more likely we will get one of those big guys over the finish line.

Yes, thanks for the question Alex So.

<unk>.

Florida agile pairs, we did have three reiterate a negative policy decision early in the year really prior to my arrival.

When we look at the story of the messaging everything that appears should look at to evaluate coverage of the DMT. It's a great story, it's a great story for payers.

There is a ton of cost savings here for payers.

They just cover the tests and so what we saw what my understanding is what we saw from from those negative policy decisions was the <unk>.

Lack of siding or most of the most recent data our health economic data that shows these tremendous savings to the system.

That's probably true.

A small company, it's hard to get these payers attention. We've got a really strong story, we'll keep hitting them with the <unk>.

Just two data that we will see at the end of the year is an opportunity once we publish that to revisit the tests with some of those payers that have given us. This negative policy decision and then theres a whole bunch of advocacy that we have stepped up and need to continue to step up with patients dermatologists and anyone that's going to advocate for this test which.

Early is superior is superior patient care, it's great for patients it's good for payers.

It really does benefit all of our stakeholders and it's just it's just a comprehensive message that we need to continue to hit them with <unk>.

We're confident we're going to get there really in.

And look if we get continue to have more regional wins more of the blues wins all of that puts pressure as well on a national payers. We know we're going to get there. It's just that it takes a little bit of time and.

And I think Alex if you remember I would cite as my experience. It takes a lot of time, sometimes with these national payers at my previous organization.

I joined that organization 15 years into into the product launch we still didn't have coverage for many of the national payers. So it does take a lot of time, we've got a really attractive value proposition that I know is going to resonate with payers. It's just it's just going to take us a little bit to get there.

One of the things I've talked to the team about over the years our return check was.

If we need to get a D guideline out there <unk>, what's your view on it I mean guidelines, obviously super important from your old employer.

Other health care names is super important for and it's always been a little bit dismissed that we need AAD guidelines, but what's your view.

Okay.

Well I think it certainly would help.

Don't know that we need it.

Honestly, if you think about.

<unk>.

Some of the changes that we've made for messaging is about.

Helping them understand exactly what it is remember genomics is still fairly new to the dermatology specialty. So we're explaining what the test is what it is not it isn't.

Moderately atypical somewhat suspicious you don't want to do biopsy and many of those cases, we want to start there we want to we want to get those biopsies because they don't want to do them and the <unk> melanoma test is noninvasive and a perfect solution with a really good patient experience. So look I think we've had maybe some missed opportunities with.

With the messaging that we've remedied and we're just now getting that rolled out I think that's going to resonate with dermatologists and look we at 10% of the 4 million biopsies that are done every year. That's 400000 tests that'd be a pretty good start to to where we want to go and so that's what we've done.

Guidelines would help.

And we would certainly welcome that but I don't think it's a critical piece that's missing.

Okay makes total sense and then lastly, the biomarker bills. Your home state now passed one number of other larger states have passed them recently they go into effect next year.

Could that actually I guess, what the work internally that you've done that it should be a material boost to the asps next year.

DMT and so what the team is doing is we're taking these legislative.

Headlines as they happen and we're taking them to payers and just incorporating that into our message to again encourage them to cover the DMT sooner.

They should have an effect. This is why we called it out in the script, we're really optimistic with this trend and hope that it continues yes.

Mountain.

Momentum of these biomarker bills in various states right. This is where when say a national payer has to cover in a number of states and also for Medicare advantage populations. If they don't cover more broadly now they've got disparities of coverage within their populations, which makes it difficult to kind of administer so.

Again, it's not a.

That we view is going to be the one silver bullet, but it's amounting piece of action.

Action that should help bring on coverage in the future.

Yes totally agree I appreciate the update thank you.

Thanks, Alex Thanks, Alex as a reminder to ask a question. Please press star one one on your telephone and wait for your name to be announced please.

Please standby for the next question.

The next question comes from Dan Brennan with Cowen Your line is open.

Hey, this is Joe on for Dan.

Just first now that gross margins have turned positive is there any way to think about how fast these might shape up and you can start driving some leverage here. Despite volume may be being sustainably lower for a bit closer to about 1500 billable sample level for a few quarters.

Yeah, Hey, Joe.

The margin right at this early stage and it's impacted by a couple of Big thing. So Asp's will certainly help margins quite a bit even if we keep everything else equal so as our focus on asps and revenue growth that that will help the margins and then as we've moved into a new laboratory, which we completed back in Q1.

We can now focus on finding additional cost savings and efficiencies and we have a number of efforts focused on those things so that along with getting some additional capacity absorption of our fixed costs. We'll help in those margins. So we do believe that over time, we've got runway to bring the Cogs below the 200.

Dollar Mark.

And again, we're working on those things now it's not just through the capacity absorption, but also a number of process improvements. So we're working on those things and it's something that some of them can take a little bit longer if we're talking about technology changes and such but we do see a pathway of having some meaningful gross margins in the future.

Great and then just in terms of the Medicare portion of billable samples is there some sort of range that you think you can drive that number in the next year or two and how do you think that might affect asps.

Optimistic scenario.

Yes, Joe.

We just know it can go higher so.

We'll find out where it settles in in.

In the future, but that is the focus today, yes like many things.

We have this quarter showed some really good progress.

Great. Thanks, a lot.

Please standby for the next question.

The next question comes from Mason carry co with Stephens. Your line is open.

Hey, guys. This is Jacob on for Mason lots already been covered today, so I'll just keep that one.

So on the trust to study timeline, if we were to think about the best case scenario. The timeline for our results to read out you said results might readout by the end of this year topline results, but then for results of readout for to get published for you to submit the payer the payer review and adopt coverage and then you start getting paid how should we think about that I know.

There's a lot of variables, there, but any way to give us a general timeline on what that would look like it looked like if everything went right.

Yes, Jacob this is Brent really really good question I didn't really insightful.

What we've said is we expect to see topline data by the end of the year and we're still going through our publication strategy. So.

We're trying to decide where and when that can be published and we'll we'll have a probably a better view of that.

The year comes to a close and as we start to see that topline data, but for now it's a consideration we still think we will see the data this year, but publication is something we just haven't talked about that will take a little bit of time, yeah in the publication timeline, it's really dependent on which.

Which.

<unk> gets it gets published in and so then as it relates to like the payer review it depends on when the pair of these cycles kick in so if it's published after the first cycle than a.

Okay got it.

Keep it to one thanks guys.

Please standby for the next question.

The next question comes from Andrew Brockman with William Blair. Your line is open.

I show no further questions at this time this will conclude the Q&A session and the conference call. Thank you for part.

<unk> you may now disconnect.

Q3 2023 DermTech Inc Earnings Call

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