DermTech, Inc. (NASDAQ:DMTK) Q3 2023 Earnings Call Transcript

DermTech, Inc. (NASDAQ:DMTK) Q3 2023 Earnings Call Transcript November 2, 2023

DermTech, Inc. beats earnings expectations. Reported EPS is $-0.57, expectations were $-0.68.

Operator: Ladies and gentlemen, thank you for standing by. Welcome to DermTech’s Third Quarter 2023 Financial Results Call. At this time, all participants are in a listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. [Operator Instructions]. Please be advised that today’s conference is being recorded. I would like now to turn the conference over to Steve Kunszabo. Please go ahead.

Steve Kunszabo: Thank you, Operator. Welcome to DermTech’s third 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 facts are considered forward-looking statements. Forward-looking statements made during this call, including statements regarding projections of the future performance or financial outlook of DermTech, the 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.

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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 2, 2023, and our quarterly report on Form 10-Q filed on November 2, 2023. We undertake no obligation to update these statements except as required by applicable law. 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 Bret.

Bret Christensen: 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 reimbursed tests and revenue growth, and we’re already seeing faster progress than we expected. In the third quarter, ASP for DermTech Melanoma Test or DMT, and test revenue grew at solid year-over-year in 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 reimbursed tests. We recorded a positive gross margin and significant expense in 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. Melanoma is the most aggressive form of skin cancer and claims approximately 8,000 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 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 in 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 area such as the face or providing clinicians and patients with peace of mind for a 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 where a favorable coverage policy and agreement were 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 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. 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’s 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 mandating insurance coverage of genomic testing or biomarker bills are gaining visibility across the U.S. as lawmakers advocate for improving access to potentially lifesaving 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 this an important step in strengthening 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 2 study, which we initiated in 2022, should provide additional real-world evidence regarding the DMT’s performance. The results, if positive, may support reengagement with payers. This study is designed to follow a cohort of 2,000 to 3,000 patients with negatively tested lesions for up to one year, and also assesses the histological diagnosis of up to 1,000 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 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’ve 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 ASP and revenue growth. We’ve also dissolved certain territories and merged 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’ve 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 Fall Clinical, which we attended in mid-October to meaningfully engage 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 Aguillard in September as our Chief Commercial Officer. Mark is 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 healthcare 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 ASP 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’ll 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’ve begun taking important steps to execute against this goal. We’re prioritizing reimbursed tests over volume growth to grow revenue, engaging clinicians with a clearer message to improve traction in communicating the DMT’s 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.

Kevin Sun: Thanks, Bret, and good afternoon, everyone. I’ll summarize our key financial and operating metrics for the third quarter, then recap how we’re thinking directionally about our outlook for the rest of 2023. I’ll wrap up by outlining our liquidity profile and cash runway targets. 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 ASP for the DMT. Billable sample volume declined 13% to approximately 15,710 and was down 10% sequentially. The year-over-year and sequential decrease was partly due to the impact to the field from our prioritization of reimbursed tests 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 $0.2 million compared to $0.1 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 proportion of billable sample volume improved again, increasing sequentially from 25% to 27%.

In the last two quarters, this proportion has increased by 4 percentage points and has been a key component of ASP improvement. As Bret noted, we’re finally benefiting from the new payer coverage we brought on this year. It took multiple quarters to clear administrative and billing obstacles, but we’re now being consistently paid by TRICARE, 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 and 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 payers, ASP fluctuates as payers have and could continue to update their administrative procedures, documentation requirements or indications for use, among other things, for obtaining reimbursement, even those payers with positive coverage policies and/or contracts.

Second, we had approximately 2,250 unique ordering clinicians in the third quarter, down 7% sequentially with approximately 4,210 unique ordering clinicians during the last 12 months; we’ve penetrated 47% of our total current market of 9,000 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 7.2 in the second quarter and 7.5 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 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, a 44% decrease, largely due to lower employer-related and marketing expenditures.

Research and development expenses were $3.6 million, a 37% decrease, primarily due to lower employee-related and lab supplies costs. General and administrative expenses were $8.3 million, a 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 identified when we announced the restructuring plan. Net loss was $19.2 million, which included $3.2 million of non-cash stock-based compensation expense, compared to a net loss of $28.8 million, which included $4.9 million of non-cash 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 due our change in tactics. ASP and test revenue are moving in the right direction, and we believe these top-line metrics should increase versus 2022. Providing specific guidance remains difficult until we see a good trend for several quarters in 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 $0.5 million from stock issuances under our at-the-market or ATM facility during the period.

When excluding non-recurring 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 these significant expense savings, driving ASP and revenue is a key factor that helps preserve and potentially extend our cash runway. 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.

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Q&A Session

Operator: Thank you. [Operator Instructions]. The first question comes from Thomas Flaten with Lake Street Capital Markets. Your line is open.

Thomas Flaten: Thank you. Good afternoon. Thanks for taking the questions. Kevin, with respect to the significant cost reduction that we see in the P&L, is the third quarter kind of a nagger or do you expect additional savings as we roll through the fourth quarter as well?

Kevin Sun: Yes. We 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 we’re 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 as probably the best benchmark for what the cash burn should be going forward.

Thomas Flaten: Got it. And I think in Bret’s prepared comments, he 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?

Bret Christensen: Yes. Hi, Thomas, this is Bret. What we’ve done is, we — again, we changed a lot of the tactics just to reinforce revenue, and that’s how salespeople are paid. There’s incentives across the organization. It is our focus. We’ve got some really good tools that we gave to salespeople that allows for them to see where claims are coming. It helps them prioritize where we’ve got reimbursement and where we don’t. We also realign the territories. So in general, the territories we’ve got today have pretty good reimbursement. That’s how they’re aligned and that’s how they were selected. But we’re also giving them tools to help them understand the practices and where the opportunity exists within their own territory. So all of it is with a focus on ASP 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.

Thomas Flaten: But you’re not specifically engaging the doctors in a conversation about, which patients have paid or likely to be covered versus not.

Bret Christensen: No, we’re not.

Operator: Please standby for the next question. The next question comes from Mark Massaro with BTIG. Your line is open.

Vidyun Bais: Hey, guys, this is Vidyun on for Mark. Thanks for taking the question. So, in terms of updates for national plan, I think I heard in the prepared remarks that you’re getting paid by some plans today. Is this sort of a precursor to a formal contract? And I’m just curious how dialogue on that front has been progressing. I also think I heard you talk about TRUST 2 moving the needle here shortly, so I’m just wondering if you could comment on that. Thanks.

Bret Christensen: Yes. Hi, Vidyun, thanks for the question. This is Bret. So we’ve got really strong coverage today. Again, we’re at about 45% of all covered lives, and that’s a 45% increase just this year in reimbursement for the DermTech Melanoma Test. As far as a national payer goes, depending on how you define a national payer, if it’s one of the big four, United, Aetna, Cigna, Anthem, we have yet to get a positive policy decision from any of those four. But we are billing for those tests. We are running appeals Pas, 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, we’re in a pretty good spot with coverage.

And we’re continuing to have pretty good conversations with the national payers that we believe will come on board eventually. The value proposition, the clinical utility, everything’s just too good. We just need to continue to pressure those payers and have meaningful conversations so we can get them on board.

Vidyun Bais: Okay. Perfect. If I could just squeeze in a follow-up, in terms of I think you’ve added, I think it’s around 133 million plus covered lives year-to-date. So in terms of the contribution of these recent payer wins here in Q3, should we think about all of that having been operationalized already, or is there some remaining benefit to ASPs that could happen in Q4?

Kevin Sun: Yes. Vidyun, so the 133 million is the total amount of covered lives we have as 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 TRICARE, VA started paying us consistently in the third quarter. We also had one of the regional Blues plans start paying consistently. There’s other plans that have not started paying consistently and some of that those new covered lives in 2023 that actually haven’t paid hardly at all. So we do have additional benefit that we will get in the future as we continue to bring on those new plans.

And 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’ll look to accelerate the ramp up period to get the benefit in the future.

Vidyun Bais: Okay. Perfect. Understood. And if I could just squeeze in one more here. So I understand you’re not providing formal guidance. Just how do we think about volumes trending into Q4 from here sequentially? And if you could just give any more granularity, I guess, on the trade-off you’ve been making recently between volumes and ASP with the recent reorg initiatives and that’s it for me. Thanks.

Bret Christensen: Sure, Vidyun. We — the strategy change and focus change that we announced really on the last call after Q2 was really trying to prioritize ASP 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 that gets the attention of payers. It creates a lot of utilization and awareness with dermatologists and patients. And so prior to really Q2, we — the volume was really our focus as an organization. The change that we made, the shift was around making sure we monetized 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 that we have talked about, and we want to get the test volume in the door more representative of reimbursement.

And so, all the changes that we made were around incentives, targeting, activities, messaging. Everything was 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 declined. And we did see it decline slightly 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’ll start growing volumes again after that. But we want to make sure that’s the focus, at least in the near-term.

Operator: 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.