DermTech, Inc. (NASDAQ:DMTK) Q4 2022 Earnings Call Transcript

DermTech, Inc. (NASDAQ:DMTK) Q4 2022 Earnings Call Transcript March 2, 2023

Operator: Good day and thank you for standing by. Welcome to DermTech’s Fourth Quarter 2022 Financial Results Conference Call. At this time, all participants are in a listen only mode. After the speakers presentation there will be a question-and-answer session. Please be advised that today’s conference is being recorded. I would now like to hand the conference over to your speaker today, Steve Kunszabo, Head of Investor Relations.

Steve Kunszabo : Thank you. Welcome to DermTech’s Fourth Quarter 2022 Earnings Call. Joining me on today’s call are Dr. John Dobak, 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 including projections of future performance 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 fourth quarter 2022 earnings press release and SEC filings are available on our Investor Relations website. A recording and transcript of today’s call will be available on our website later today. With that, let me turn things over to John.

John Dobak: Thank you, Steve, and thank you, everybody, for joining us. When we were last together in early November, I shared that our capital and energy was focused on two important priorities: expanding coverage of our DermTech Melanoma Test, or DMT; and alleviating payer friction in our commercial channel. We’ve steadily advanced against these objectives, and 2023 is off to a great start. In the last few months, we’ve expanded our coverage footprint from 91 million lives to 124 million lives, a 36% increase and a gain that is roughly equivalent to bringing on the second largest national commercial insurance provider. Billable sample volume in the fourth quarter grew 48% to approximately 17,460 tests versus last year. Billable sample volume was solid overall, and we expected a modest sequential decline primarily due to seasonal impacts and lingering pressure from commercial payers that hindered increasing usage.

We believe that payer friction may be starting to ease slightly. And based on the trends we’ve observed thus far this year, we expect mid-single-digit sequential growth in test volumes in the first quarter. Overall, the steps we’ve taken to stabilize our average selling price, or ASP, for current volume, including a greater focus on generating covered billable samples seem to be showing positive signs. We are pleased to report normalized fourth quarter ASP of $239 for the DMT, which is sequentially higher, but we still expect variability going forward primarily due to fluctuating payments from non-contracted commercial payers. Nonetheless, all this points to monetizing existing demand in the quarters ahead. We continue to believe the most effective step we can take to accelerate top line momentum is to bring on more commercial payers.

To grow ASP and to remove barriers that increase customer usage, it is still all about the payers and will be throughout 2023. We achieved our first major goal we set, adding 30 million to 40 million covered lives by the end of the first quarter of 2023. Specifically, our coverage footprint expanded by 33 million lives in the past few months, and the gains came from a broad mix of regional payers, policy stemming from the second largest lab benefits manager in the U.S. and its relationship with health plans and two national government payers. Importantly, we now have six of the top 10 largest Blues plans in the country, providing access to our test. We also have visibility into adding more covered lives from other regional payers. Our recent momentum demonstrates that certain payers recognize that DMT test results are clinically meaningful and actionable, improve patient care and reduce health care costs.

Overall pricing for the coverage we’ve recently added remains in line with our long-term targets. We remain closely engaged with four national payers and are on track for scheduled comprehensive reviews throughout 2023. We believe these meetings could lead to coverage that would ultimately increase ASP and revenue. It’s important to remember that in all cases where we are awarded coverage, the financial benefit could be delayed one to two quarters or more as additional administrative contracting and billing steps need to be taken by both parties. Overall, we are pleased with the recent progress we’ve made to expand coverage for the DMT. We have more work to do and bring on at least one national payer in 2023 is at the top of our priority list.

The National Comprehensive Cancer Network, or NCCN, also recognizes that our technology may aid health care providers in identifying at-risk lesions for biopsy and surveilling potential melanoma. For the third consecutive year, our technology is included in the guidelines with a 2A recommendation. In a recent update to its guidelines, the NCCN strengthened its recommendation for using the DMT in guiding patient care decisions. We also recently held our national sales meeting. It’s always a great event that reinvigorates the entire commercial organization. This year, we emphasized the DMT’s clinical value proposition and an enhanced customer service experience, including electronic ordering of our test, regional billing, concierge services, and health care provider training programs.

Importantly, our sales effort is structured to pull through test volumes in geographies where we’ve recently picked up coverage. In addition, we initiated our TRUST 2 study in 2022. This study is prospectively designed to follow a cohort of approximately 3,000 patients with negatively tested lesions for up to one year. This study also assesses the histopathologic diagnosis of up to 1,000 lesions that tested positive with the DMT and includes analysis of the TERT add-on test. We expect to release top line results in the second half of 2023 to provide additional evidence in support of our payer discussions. Finally, we continue to see incremental progress from our targeted programs in primary care. Our agreement with Sonora Quest a reference laboratory partnership between Banner Health, the largest primary care network in Arizona and Quest Laboratories continues to ramp up.

We received unanimous approval from Banner Health’s medical review team to incorporate the DMT into their melanoma care pathway. Sonora Quest is now working to complete Electronic Medical Records, or EMR integration and his training staff at Banner clinics throughout Arizona. We expect this work to be completed in the next couple of months. We are also expanding our pilot with an important payer provider IDN, due to the initial success of this arrangement. We continue to believe that the primary care segment represents a significant market opportunity for our technology. We’ll continue to look for ways this year to increase access to this channel through additional distribution and reference lab arrangements. With that, I’ll turn the call over to Kevin for a more detailed financial review and then wrap up with a few closing thoughts on my transition that was announced today and why patients are at the heart of everything we do.

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Kevin Sun: Thanks, John, and good afternoon, everyone. I’ll start by recapping key financial and operating metrics for the fourth quarter and full year, then outline how we’re thinking about 2023 top line growth. I’ll finish by covering our liquidity profile and cash runway targets. Billable sample volumes were up 48% year-over-year for the fourth quarter to 17,460 and up 53% year-over-year for 2022 to 68,230. Assay revenue in the fourth quarter decreased 9% to $2.7 million, largely due to a $1.5 million of downward revenue adjustment due to changes in collection estimates for samples reported in prior periods. Full year 2022 assay revenue increased 25% to $13.8 million, which included $1.8 million of net downward prior period adjustments.

Contract revenue was $0.3 million during the fourth quarter, up from $0.2 million in the year ago period. The fourth quarter benefited from the recognition of deferred revenue upon completion of several contracts. Total revenue for the fourth quarter fell 5% year-over-year to $3.0 million, primarily on lower assay revenue. Total revenue for the full year 2022 was up 23% year-over-year to $14.5 million, primarily due to higher assay revenue. Looking more closely at our fundamental assay revenue drivers. First, ASP was $154 per sample in the fourth quarter, down 39% year-over-year and 19% on a sequential basis. Medicare ASPs continue to trend higher due to last year’s code edit update. Non-contracted commercial payers continue to reduce their payment rates, leading to the downward adjustment for the quarter.

Normalizing for these adjustments in both periods, fourth quarter ASP would have been $239, up approximately 10% sequentially. Second, we had approximately 2,420 unique ordering clinicians in the fourth quarter, up slightly from the prior quarter. With approximately 4,110 unique ordering clinicians during the last 12 months, we penetrated 46% of our current target market of 9,000 dermatology clinicians. Third, our average quarterly utilization or average number of tests ordered per unique ordering clinician was 7.2 billable samples in the fourth quarter versus 7.5 in Q3 and 6.5 in the year ago period. Finally, Medicare samples represented about 24% of our billable samples in the fourth quarter, which was unchanged as a percentage from the third quarter and up modestly from 23% last year.

We continue to evaluate and implement tactics to bolster penetration of this large market segment, which represents about half of the annual total biopsies for melanoma. Focusing next on operating expenses. Cost of assay revenue was $3.3 million, a 9% year-over-year increase, yielding an assay gross margin of negative 22%. The increase in cost of assay revenue was primarily due to increased demand. The reduction in assay gross margin from negative 1% in the year ago period was primarily the result of lower ASP. Sales and marketing expenses were $13.6 million during the fourth quarter, a 2% year-over-year increase, largely resulting from higher employee-related costs and marketing expenditures. Research and development expenses were $5.1 million, a 15% decrease from the year ago period, primarily due to lower lab and clinical study costs.

General and administrative expenses were $9.8 million, 37% higher compared to the fourth quarter of 2021. The increase was driven by higher infrastructure costs for our new building and increased employee-related costs. As a result of our continued focus on operational efficiency, we expect total cash operating expenses will be slightly down for 2023 despite planned volume growth. Net loss for the fourth quarter was $28.2 million, which included $5.3 million in noncash stock-based compensation expense compared to a net loss of $26.1 million for the same period of 2021, which included $3.8 million of noncash stock-based compensation expense. Moving now to our 2023 outlook. The commercial headwinds we faced during the last several months have improved, and we’re working our way through payer friction that could continue to express billable sample volumes and ASP in the near term.

We expect to steadily grow DMT volumes during 2023, but ASP is difficult to forecast due to potential delayed positive impact of recent coverage wins and potential reduced non-contracted commercial payments. As a result, we’re not providing revenue guidance until we have better visibility on ASP trends. And lastly, a view of our liquidity profile and balance sheet. At year-end, we had cash, cash equivalents, restricted cash and marketable securities of $129.8 million. Based on our fourth quarter expenses and expected additional operating efficiencies, we believe we have sufficient funds along with the ability to access capital for cash runway through the third quarter of 2024 or more than 18 months from today. Now I’ll turn the call back to John.

John Dobak: Thanks, Kevin. As we mentioned today, I am transitioning from my role as DermTech’s CEO. After 11 years leading this great company, it’s the right time. When I look out nine to 12 months at the leadership needs for DermTech, I believe a CEO with a strong background in scaling around a large commercial opportunity will be an ideal fit. We have achieved significant adoption, broad payer coverage with a deep pipeline of additional payer opportunities and built out the infrastructure for scale to capture the tremendous opportunity in front of us. I remain fully committed to DermTech until a successor is found that can build on my vision to transform dermatologic care for our noninvasive Genomics platform. I am grateful for the dedication and perseverance of my team and all the hard work they put in to build a strong foundation for our long-term success.

I’m reminded by patients and physicians almost daily why it’s important that we succeed as we are potentially saving lives and changing the way melanoma is detected and treated. With that, I’ll share an especially powerful patient story that encapsulates why I have led this company for the past 11 years. One of our patients had a large scar from a previous excisional surgery on a pigmented lesion that ended up being benign, and they, therefore, refused a biopsy on a different suspicious pigmented lesion. As a result, she was referred to a different dermatologist office that used our technology. The new physician administered the DMT, which came back positive and was further confirmed through histopathology as early-stage melanoma. While the patient unfortunately was diagnosed with melanoma, she can be effectively cured with a wide excision because it was caught early.

If our technology wasn’t available and she neglected to have the lesion assessed, this positive outcome may not have occurred. This is a great example of how our noninvasive test was able to accurately inform physician decision-making and improve patient care. With that, I’ll turn things back to the operator for Q&A.

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Q&A Session

Operator: Thank you. Our first question comes from Thomas Flaten with Lake Street Capital Markets. You may proceed.

Thomas Flaten: Great. Thanks for taking the question, and thanks, John, for everything and best wishes going forward. Kevin, I was just hoping maybe you could provide a little bit of extra help on stretching the cash runway out. It seems that it would either require a pretty significant gap up in revenues or a significant gap down in expenses to give you the full seven quarters. From a burn perspective, you’re down, call it, $18 million a quarter versus what you’ve been burning in the past. Any additional guidance you could provide to us there?

Kevin Sun: Yes. We’re committed to finding additional cost savings throughout the year and monetizing our healthy demand. We do expect the recent payer wins to improve ASPs, and we’ve demonstrated that we can support higher volumes through improved efficiency and reduced expenses, even with our already highly efficient operation. We may deploy the ATM opportunistically in the future upon catalysts and if market conditions are favorable, while being mindful of the cost of capital in this environment.

Thomas Flaten: And I know it’s only been a couple of months since you guys had the early January announcements about new payer wins. Anything you can share with us with respect to integration, bringing those up to speed, kind of looking forward to when we might be able to see those monetized in the revenue stream?

Kevin Sun: Yes. As we mentioned in the prepared remarks, it does take at least one to two quarters or possibly longer to see that benefit. As of thus far, we have seen little benefit so far. We do expect that different payers coming on board will help us and provide benefit of different patterns and if we’re going to give the specifics. We believe the TRICARE agreement will probably help the most, but we already know that it will take a few months for them to update some of their policy manuals before we can get paid on a routine basis. Outside of that one, I’d say the Louisiana contract is the one that will — is already starting to see some benefit. And again, we had some healthy volumes from that territory and it was growing nicely, too. So those are the two that will probably have the most immediate impact.

Thomas Flaten: Great. And then just one final one. The Medicare percentage of revenue seems to be stubbornly stuck at 24%. Is there any way of incentivizing or driving the sales reps towards trying to push for more Medicare volume. I’m sure you’ve already thought of that, but I’m just curious kind of what’s happening on the field level to increase that penetration.

John Dobak: Yes. This has always been a challenge, Tom, as we’ve always talked about, and we also asked ourselves why it’s been stuck at that. I would just note that as our total volume increases, even though it’s at 24%, the absolute number of samples that come from Medicare has been growing nicely. We do provide incentives for our sales force to drive covered billable samples, and that would include Medicare. So we’re doing all the things and we’re continuing to try a lot of different things to try to drive that percentage higher. It is a bit of a conundrum, but we’re still — it’s part of our top priority is driving more Medicare proportion. And we’ll eventually hit on one of these things that really works.

Thomas Flaten: Appreciate it. Thanks, guys.

Operator: Thank you. Our next question comes from Max Masucci with Cowen. You may proceed.