Lucid Diagnostics Inc. (NASDAQ:LUCD) Q3 2023 Earnings Call Transcript

Lucid Diagnostics Inc. (NASDAQ:LUCD) Q3 2023 Earnings Call Transcript November 14, 2023

Operator: Good morning, and welcome to the Lucid Diagnostics Third Quarter 2023 Business Update Conference Call. All participants will be in a listen-only mode. [Operator Instructions] Please note that this event is being recorded. I would now like to turn the conference over to Michael Parks, VP, Investor Relations. Please go ahead.

Michael Parks: Thank you, operator. Good morning, everyone. Thank you for participating in today’s third quarter 2023 business update call. The press release announcing our business update for the Company and financial results for the three and nine months ended September 30, 2023 is available on the Lucid website. Please take a moment to read the disclaimer about forward-looking statements in this press release. The business update, press release and this conference call include forward-looking statements, and these forward-looking statements are subject to known and unknown risks and uncertainties that may cause the actual results to differ materially from statements made. Factors that could cause actual results to differ are described in the disclaimer and in our filings with the U.S. Securities and Exchange Commission.

A doctor using a microscope in a lab, conducting research on cancer treatments.

For a list and description of these and other important risk factors and uncertainties that may affect future operations, see Part I, Item 1A entitled Risk Factors and Lucid’s most recent annual report on Form 10-Q filed with the SEC and subsequent updates filed in quarterly reports on Form 10-Q and any subsequent Form 8-K filings. Except as required by law, Lucid disclaims any intentions or obligations to publicly update or revise any forward-looking statements to reflect changes in expectations or in events, conditions or circumstances on which the expectations may be based or that may affect the likelihood that actual results will differ from those contained in the forward-looking statements. I would now like to turn the call over to Dr. Lishan Aklog, Chairman and CEO of Lucid Diagnostics.

Dr. Aklog?

Dr. Lishan Aklog: Thanks, Mike, and thanks, everyone, for joining us this morning. I look forward to offering an update on Lucid’s business as well as its finances. I don’t think it’s hyperbole to say that this third quarter has been the most important quarter in the Company’s history. We crossed several critical milestones in translating test volume growth into revenue and revenue growth. We’ve had eight consecutive quarters of steady growth in test volume. We performed 2,575 commercial EsoGuard test which is 17% quarterly growth and 137% annual growth. Even more importantly, we recognized revenue of $783,000, which is a nearly 400% increase quarter-on-quarter and nearly 1,000% increase annually. We had strong contributions from our Lucid test centers, the Satellite Lucid test centers and our high-volume Check Your Food Tube testing events, which are gaining traction as well as traction with our strategic accounts, which I’ll discuss further.

These include health systems and academic centers. Our strategic accomplishments include the following: we upgraded our revenue cycle management infrastructure and processes, as we discussed in our last call, and we’ve been delivering solid results with EsoGuard claims processing and payments. In a very strong boost to our clinical utility data to support in-network payer coverage engagement and we’ve reported near perfect results in over 1,500 patients across three studies that have been released. The Clue Study, the PREVENT registries and our San Antonio fire department study. Two of these have been accepted for peer review publication and one is pending. We’re accelerating our activities and direct contracting with employers to offer EsoGuard as a benefit.

Our first contract was signed and testing has begun this quarter. We hired a VP of employer markets that’s pushing this initiative forward. As we announced recently, we also launched the 2.0 version of our EsoGuard assay, which has demonstrated significant improved performance and lower costs. First, a couple of background slides here. A bit about our EsoGuard Esophageal DNA test. EsoGuard is the first and only commercially available test that’s capable of serving as a widespread tool to prevent esophageal cancer death through early detection of esophageal pre-cancer. The 16,000 annual esophageal cancer deaths are preventable. Early pre-cancer detection, however, is necessary to prevent cancer. We often talk about cancer prevention rather loosely, but it’s important to emphasize that our target, our goal here is to prevent cancer while most initiatives, most screening tests are just detecting cancer early, which would be insufficient in this particular cancer.

Less than 5% of those are recommended for screening undergo endoscopy and we now have an opportunity with this test to improve that number and to potentially save lives. The test is recommended in major professional society for clinical practice guidelines. Just a quick overview of EsoGuard’s performance. We’ve used the term that the performance is really unprecedented with regard to cancer and pre-cancer detection. You could see here in the blue, the EsoGuard results for cancer, pre-cancer and early stage pre-cancer, very competitive to other comparable early infection tests, whether it be Cologuard, colorectal stool test, Guardant Shield’s colorectal blood test. But the key differentiating factor here that makes this unprecedented is its performance in the critical pre-cancer phase, which, as I mentioned, is necessary to have an impact in this disease.

You could see that our overall pre-cancer defection rate is nearly 90%, which is again unprecedented and substantially better than other early detection tests. And if you move earlier on to the early pre-cancer stages, we continue to maintain excellent detection of those levels and other screening tests really have no ability to detect this early pre-cancer. These results are really critical for our ability to detect early pre-cancer to have an impact on esophageal cancer deaths. The EsoGuard commercial opportunity is quite large. There are at least 30 million patients who buy existing professional society guidelines or at-risk chronic heartburn patients were recommended for pre-cancer screening. Medicare has established a payment rate of $1,938 and that rate has held up in pricing and payments from commercial payers.

That leads to a very large multibillion dollar total addressable market. And our gross margin of the test is over 90% at — even at current volumes right now. So we’re really proud to report that we continue to show growth in EsoGuard testing volume. This is our eighth consecutive quarter of meaningful quarter-on-quarter growth in two consecutive years. We performed 2,575 tests in the third quarter, which is a 17% increase from the prior quarter and a 137% increase from the prior year. This is still well below our near-term laboratory manufacturing capacity, which is over 10,000 tests per quarter. I should note that this result has been with our sales team headcount remaining flat. We’ve used the term and mid throttle approach, which is exactly what we’re doing here.

We’re trying to drive test volume to support claims history and clinical utility. And this is — at these volume levels, we have sufficient volume to do that. We won’t push to a full throttle until we get continued progress on payment, and we plan at least for the coming quarters to keep our sales reps the sale headcount flat, which may, at some point in the coming quarters, reach the limits of our per rep productivity, but we’ll watch those numbers over the coming quarters. This slide shows continuing trends with regard to the referral sources for testing and the operator. We continue to have about a 2:1 ratio between referrals from primary care physicians and referrals from specialists or institutions. One trend that continues to increase is that the percentage of cell collection procedures that are performed by Lucid personnel, either in physical Lucid test centers or on the Satellite Lucid Test Centers continue to rise and now represent over 80% of the total volume.

So, a few comments on several aspects of our commercial execution. Our field team, as I mentioned, has been able to drive steady volume growth despite a flat sales headcount and continuing improvements in productivity. As I mentioned, our satellite Lucid test centers where our clinicians go to physician practices on a regular cadence and perform EsoCheck cell collections. This Satellite Lucid Test Center model remains a top driver of our test volume and really expanded our geographic reach and our ability to be front and center with physician practices. Our Check Your Food Tube pre-cancer detection events, which we started earlier this year continued to grow. We’ve had dozens of events. We are expanding beyond firefighters. It’s been our first event with policeman.

And we’re also engaged earlier with the group leadership, whether it be a union or other entity regarding contracting as opposed to just simply submitting the claims for those events. Another important update is that we’re transitioning to use our long time telehealth partner, UpScript, as the physician prescriber for all events, which will greatly enhance the efficiency of these testing events and the processing of these patients. As I mentioned, we are making a major push into direct contracting. It’s an area — it’s been an area of focus for us for a couple of quarters. We’ve had our first contracted employer Ancira, which we’ve announced and the testing at multiple sites for that employer has begun and will continue through this quarter.

And we’re very excited that we’ve hired a new VP of Employer Markets with 30-plus years of experience in employer benefit sales. And he starts this week and we’re really looking forward to a significant productivity from him. As I’ve mentioned on prior calls, we’ve been pushing harder on strategic accounts. These have longer lead times would have the opportunity for significant yield. And we are gaining traction with health systems with academic medical centers. We have active testing now at the Avita Health Center in Florida, Northwestern Medicine in Chicago and even at Mayo, Scottsdale. We’ve been pushing quite hard, as we’ve talked about on prior calls on market access. So market access, just to remind folks, really has two pillars. One is revenue cycle management, which is the process of claims submission, adjudication, peer-to-peer appeals and prior authorization.

We’ll talk about that in some detail and also the payer relations side, which is getting positive medical policy and coverage, our legislative advocacy work, working with managed care plans and the Veterans Administration as well as lab benefit management. And we are pushing hard with persistence and creativity. We have a new VP of Market Access, who’s working hard on payer pilots. We’re quite active in the biomarker states, which I’ll touch on in a bit and other initiatives to drive payers to provide coverage for the EsoGuard test, so we can continue to convert test volume growth into revenue. So a few more details on this. On the revenue cycle management side, we announced last quarter that we had transitioned to and upgraded our revenue cycle manager to Quadax, and we have seen some initial very promising results with regard to claims processing and payments.

I’m happy to report that that initial spike and initial positive news has held up. That’s the allowed claims percentages, which is the percentage of claims submitted that where the payer allows payment. That has remained really solid and steady, as has the average allowed payment, which approaches our Medicare payment rate. So we’re really excited about that. And that’s — we’ve been driving the revenue and where we expect to be revenue growth moving forward. We also have had meaningful activity on the appeal side. We have a robust and active pipeline of claims that are going through appeals, and we are seeing successful appeals based on medical necessity versus guidelines. Something that once we get in front of medical directors through the appeals process, we are able to have very strong conversations particularly when the appeal is based on medical necessity by explaining the support of existing clinical practice guidelines for our test.

As I mentioned on the payer relations side, we’re pushing quite hard. As I mentioned also our new VP of Market Access is now actively engaged with multiple commercial payers, and we’re pursuing multiple pathways to commercial coverage. These include active discussions with pilot programs such as CED programs, which are coverage with evidence development programs that we look to secure in the coming quarter or two. And I can’t overstate how important the burst of positive clinical utility data that we’ve seen over the past quarter, how important that is in support of our payer engagement. As I — finally, as I hinted at, there is biomarker legislation that’s now in over a dozen states which mandate coverage of certain biomarker tests in those states, and it offers us a very promising path to coverage is something that we’re actively engaged with.

To hear a few more details on our clinical utility studies that we’ve announced. We have four studies, one of them retrospect, three of them prospective that we’ve previously reported on. The San Antonio Firefighter study has been accepted for publication with 385 patients. The CLUE Study, which is our prospective multicenter observational study. We had interim data on just under 300 patients that was submitted for peer review and is currently undergoing review. Since that data was released, we’ve increased the total number enrolled and in whom data has been collected to 535, which gets us within a hair’s whisker of being able to complete enrollment and close out that study and submit the full data set for peer review. The heart registries, which we — are the PREVENT registry and the subset of that, which is to prevent firefighter registry is a prospective multicenter observational registry that we run, and we’ve announced interim data that’s been accepted for publication, and we’ll continue recruiting really for the foreseeable future as this data is useful not only for clinical utility but also in clinical validity and also to enhance the research and development efforts in our laboratory.

We’ve had 641 patients to date. So a total of over 1,500 patients, which is a substantial amount of clinical utility data that will serve us well in our near-term engagements and discussions with commercial payers. Finally, the AFB study, which is a prospective virtual patient randomized controlled study is still recruiting. We’re at just under 80 patients and looking for a couple of dozen more patients before we close that out and do the final analysis. I’ll point out and remind you that as we’ve noted in our press releases, the data from the three studies where we’ve released data has been outstanding with really near perfect results and near perfect concordance, but that means this is the critical thing from a payer perspective is that 100% of positive patients are being referred for confirmatory endoscopy and that nearly 100% of patients who are EsoGuard negative are not being referred for endoscopy with the occasional one or two patients who were referred for indications other than screening for pre-cancer.

So those are outstanding results, which demonstrate the ability of EsoGuard to serve as a triage test and have a substantial impact on medical decision-making, which is really the definition of clinical utility in this setting. Finally, as we reported earlier this week, we launched our EsoGuard 2.0 version of the assay, which we’re very excited about. This improves on the already unprecedented cancer and pre-cancer detection results that we’ve already shown that are based on our EsoGuard 1.0. This breakthrough was a result of implementation of a technique called multiplexing, which allows all of the genes, the two genes to be assessed in one sample and it allows us to run the assay three times and do a consensus call of positive and negative results, which has a significant — which can significantly improve the performance of the assay near its cutoffs.

That — the analytic validation studies or AV studies that were used to get this to launch. That data is being presented at this week’s Association of Molecular Pathology Annual Meeting 2023 in Salt Lake City. As we also reported, we are upgrading our NGS sequencing platform to a higher-throughput Illumina NextSeq 1000 to accomplish — to accommodate, excuse me, the increased EsoGuard testing volume that we’ve demonstrated. Both of these updates, the 2.0 version of the assay as well as moving to the NextSeq will have — will allow us to have significantly lower per sample sequencing costs. Also, as we announced, we’re having — very excited, we’re holding an Investor Day in New York City on December 13th from 10:00 a.m. to 2:00 p.m. where we and other key opinion leaders and other experts will be providing really an in-depth educational event on all things, Lucid all things EsoGuard, and further details of this will be provided on our investor website when they’re available.

With that, I’d like to pass the baton off to Dennis, who will provide us with our financial update.

Dennis McGrath: Thanks, Lishan, and good morning, everyone. The summary financial results for the third quarter reported on our press release that was published last night. On the next three slides, I’ll emphasize a few key highlights from the quarter, but I encourage you to consider those remarks in the context of the full disclosures covered in our quarterly report on Form 10-Q, which was filed with the SEC last night and is available on our website. With regard to cash at $24.1 million, this does not include the $5 million additional funding shortly after the end of the quarter. As the funding occurred two weeks earlier, pro forma cash would have been $29.1 million. The sequential change in the cash balance reflects a third quarter burn rate of $8.5 million, including a reimbursement to PAVmed of approximately $2.2 million.

Absent this payment, the burn rate would have been $6.3 million, which is slightly less than the average burn rate for the first three quarters of $6.6 million. Given the pro forma cash of just over $29 million and a steady state for the burn rate below $7 million, the simple math suggests that if this rate is sustained, it puts our runway to more than a year. The burn rate for most of the year has been softened by PAVmed deferring most of its quarterly management service payments since October of last year. This PAVmed optionality for paying the outstanding intercompany obligation in stock or cash at PAVmed’s election serves to increase PAVmed’s ownership while strengthening Lucid’s balance sheet. This flexibility, payment in stock or cash has created some breathing room for Lucid to allow cash collections to catch up to the submitted reimbursement claims, which we will talk about in a second.

With regard to AP, accounts payable, since the beginning of the year, if you examine the trend for the key current asset accounts, namely prepaid expenses and vendor deposits, and you compare that sum against the quarterly changes in the sum of vendor payables and accrued expenses, there is no substantive volatility, just mostly timing differences. Hence, the burn rate is not substantially influenced by changes in the net working capital balances. With regard to the intercompany debt to PAVmed, it’s flat sequentially, and the reflected balance is largely pegged to be settled in stock issued to PAVmed. Shares outstanding, including unvested restricted stock awards as of today is 44.7 million shares, which includes 276,000 shares purchased by employees during the quarter as part of their participation in the Company’s employee stock purchase plan as well as 115,000 shares issued during the quarter in connection with conversion notices received from a convertible debt holder.

The GAAP outstanding shares of $42.3 million are reflected on the slide as well as on the face of the balance sheet in the 10-Q. With regard to Slide 17. Slide 17 compares this year’s third quarter to last year’s third quarter and similarly for the nine-month totals on key — certain key items. I trust you’ll review the information in my comments in light of the cautionary disclosure or the bottom of the slide about supplemental information, particularly non-GAAP information. Revenue of $783,000 from the third quarter reflects actual cash collections for the quarter, plus a small amount of invoice EsoGuard test delivered to the Veterans Administration. As you can see, that is about a 10x increase over the prior year quarter and about a fivefold increase over the second quarter of this year.

Test volume at just under 2,600 tests for the quarter represents just about $5 million in submitted claims for the third quarter. You will recall from our discussion in the last quarterly call that we made a major change and upgrade to our revenue cycle management company. So far, for the first six weeks of the fourth quarter, weekly collections have been averaging about 33% higher than the third quarter with a weekly high so far of $95,000 in a particular week. With regard to revenue recognition, a key determinant is the probability of collection. And therefore, due to the fact that we are in the early stages of the reimbursement process means revenue recognition occurs when the claim is actually collected first when the patient report is invoiced and submitted for reimbursement.

As you’ll see in our 10-Q, this is called variable consideration in the jargon of GAAP’s ASC 606 revenue recognition guidelines. And presently, there is insufficient predictive data to reflect revenue when the test report is delivered to the referring physician. Our non-GAAP loss for the second quarter of $9.3 million reflects a 3.1% sequential decrease compared to the second quarter loss and approximately a 9.4% decrease year-over-year as a result of the cost control initiatives we put in place at the beginning of the year. Slide 18. Slide 18 is a graphic illustration of our operating expenses for the periods reflected. Total non-GAAP operating expense is $10 million for the third quarter of 2023 and is a fairly flat sequentially — is fairly flat sequentially and year-over-year.

Except for G&A that included some increased IP filing fees, all operating expense categories were in line or lower. Cost of revenue primarily consists of EsoCheck devices, lab supplies and fixed lab facility costs. The modest increase in cost of revenue of about $85,000 is directly tied to the sequential increase in test volume, sequential test volume increases of about 375 tests and about $200 of variable cost controls, cost accounts for the slight increase between the second and third quarters. Effectively, an 11% marginal cost of sales for the increased test volume quarter versus quarter. The non-GAAP loss is slightly better sequentially by $0.01 per share and $0.06 per share year-over-year. On a GAAP EPS basis, noncash charges accounted for approximately $0.12 per share in the quarter, including approximately $0.07 per share related to the change in fair value of the convertible debt.

If you normalize the loss by adding back the effect of the change in fair value of the convertible debt, the GAAP EPS improved by $0.07 year-over-year for the quarter and approximately $0.26 year-over-year for the year-to-date comparison. Some reimbursement details. Since the new revenue cycle manager was put in place Quadax took over in mid-June. 5,000 claims representing approximately $10 million in pro forma revenue have been submitted for reimbursement. About 70% have been adjudicated and 30% are pending. Out of the 70% that have been adjudicated, approximately 39% have resulted in allowable amount by the insurance company with a mean average of $1,863 per test, essentially right at the Medicare rate. Of those denied, about 58% require either additional information were deemed not medically necessary or require a prior authorization.

About 36% were deemed to be non-covered. With that, operator, let’s turn it open for questions.

See also 20 Most Advanced Countries in Journalism and 10 Best Investments for Beginners According to Experts.

Q&A Session

Operator: [Operator Instructions] Our first question comes from Kyle Mikson with Canaccord.

Kyle Mikson: First question on the RCM situation. You said that weekly collections were — I think trending like 30% higher. Just wondering how that kind of flows into the P&L. You did $700,000 in revenue this quarter, or I guess, last quarter in 3Q. Could you approach based on that math with the 30% higher collections, everything, could you approach or exceed $1 million maybe in the fourth quarter based on the higher collections? Or just kind of thinking about the run rate or the kind of inflection point in volume and revenue going forward.

Dennis McGrath: Yes. First off, the collections are directly related to the future revenue that will be recognized. The only small piece, we do have this study with the VA to the extent we have additional tests with them and that last clinical study is near its conclusion, although there will be another upcoming one and that is recognized on an invoice based — there’s only a handful of revenue last quarter. And to my comments collections are increasing, increasing at a increasing rates. The average so far for the quarter puts us over $1 million in recognized revenue for the fourth quarter. So your assumption is correct.

Kyle Mikson: Okay. And then the — actually, you know what, on this note about the financials. Just looking at the slide with the EBITDA and net income and everything, it’s pretty similar year-to-year and even the nine-month data is pretty — I mean, it hasn’t really contracted much, I guess, like you’re still kind of probably burning a similar amount of cash. What you guys thoughts on getting cash burn down over time? Or is that a priority for you as you think of the profitability as EsoGuard kind of like it’s out there in the field more broadly. And like I just said, like flux and everything out there in terms of adoption. Is that like what levers can you pull? I think you mentioned something about like reps stabilizing and everything, maybe possibly increasing over the long term, but how are you thinking about all these things like kind of converging into like expenses and cash burn?

Dr. Lishan Aklog: Let me give some high-level comments and then Dennis will. I think some of your assessment of the numbers might tweak a bit. So look, this is the balancing act like we’ve said it before, we’ll say it again that what we’re balancing here is driving test volume growth to now a level that is sufficient for us to really have sufficient same history to engage with the medical directors of payers and so on and so forth, while trying to keep our burn rate down in this particular environment, and that involves keeping our sales headcount flat for this entire year. So that’s — we’ve been really happy, honestly, with how that’s worked and that the test volume growth has been steady. We’ve been able to do that with a flat headcount while making the progress that we need on the revenue cycle management side, claims processing, claims payment and so forth.

So I do think, Dennis, maybe you can sort of dive a little bit more into the impact of the reduction in force and the restructuring early this year with regard to our burn rate over the past year as well as moving into the future.

Dennis McGrath: Yes. So Kyle, if you look at that EBIT number of $9,251 on Slide 17. The inclusive of that is about 2,250 in intercompany obligations from Lucid to PAVmed. And as I indicated in my comments, ideally, the PAVmed would accept that in stock. And therefore — and which has been the case where the majority of time since last October. If you back that out, that gets you right to around the burn rate that I commented on, that’s sub-$7 million. And we believe the levels of OpEx that we’re seeing right now, we can maintain until we see the acceleration of collections to a higher degree, which will then definitely accelerate in our go-to-market strategy, and we know exactly where those initiatives would gear up. And so if you look at how that burn rate can change over the next four quarters, let’s say, over 2024, collections is a key part of that.

Even if the submitted claims of $5 million a quarter stayed relatively flat. The demand side of this equation is still pretty strong. Then as you increase the amount of collections, you did the calculations based upon the information I gave you for the first six weeks and you’re over $1 million. As that continues to increase as a percentage of that five-minute submitted claims, the burn rate will go down. And we’re expecting, based upon the initiatives from our market access team and now having published data on clinical utility, that certain — that trend certainly should be realized. So we think that we’ve hit the right tone with the level of OpEx. Obviously, if those assumptions on the revenue collections are not hit, and we see that as only a remote possibility.

But if true, then we would seek to reduce our OpEx even further. But as Lishan indicated, we’re trying to strike that balance. Claims history is important to get reimbursement. The — and it’s just important because you need to have the attention of the Chief Medical Officers for them to deal with what our market access team are presenting to them. So we think that the OpEx will remain flat. Our collections will increase. The burn rate will be down because of all those — some of those factors.

Kyle Mikson: Okay. Thanks Dennis and then Lishan for the earlier comment. Lishan, on the EsoGuard 2.0 assay, a couple of questions about that. I guess, first, like why is now the right time for the assay launch? I mean I feel like 1.0 is been in the market for a couple of years. It’s not fully penetrated just yet. It’s still kind of like on that upward trajectory. How are you thinking about FDA approval for the new assay, how much data has been generated and like how much will be generated going forward in publications and that sort of thing? And then how much lower in cost of goods sold with this lower — with this 2.0 assay have compared to the former. And also the turnaround time. I feel like that’s something that might improve or actually may expand or increase with this newer assay as well. So some of those factors, if you could just touch on those it’s great to know.