Lucid Diagnostics Inc. (NASDAQ:LUCD) Q4 2022 Earnings Call Transcript

Lucid Diagnostics Inc. (NASDAQ:LUCD) Q4 2022 Earnings Call Transcript March 14, 2023

Operator: Welcome to the Lucid Diagnostics Business Update and Fourth Quarter 2022 Financial Results Conference Call. At this time, all participants will be in a listen-only mode. Later, we will conduct a question-and-answer session. I would now like to turn the call over to your host, Michael Parks, Vice President, Investor Relations. Mr. Parks, you may begin, sir.

Michael Parks: Thank you, Paul. Good morning, everyone. Thank you for participating in today’s fourth quarter 2022 business update call. The press release announcing our business update for the company and financial results for the year ended December 31, 2022, is available on the Lucid website. Please take a moment to read the disclaimer about forward-looking statements in the press release. The business update, press release and this conference call, both include forward-looking statements and these forward-looking statements are subject to known and unknown risks and uncertainties that may cause 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.

For a list and description of these and other important risks and uncertainties that may affect future operations, see Part I Item 1A entitled Risk Factors in Lucid’s most recent annual report on Form Q-10 filed with the SEC and subsequent updates filed in the quarterly report on Form Q — 10-Q and any subsequent Form 8-K fillings. 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 like now to turn the call over to Dr. Lishan Aklog, Chairman and CEO of Lucid Diagnostics.

Dr. Aklog?

Dr. Lishan Aklog: Thank you, Mike, and thank you everybody for joining us this morning. I look forward to giving you a positive update on our activities for the past quarter and recent weeks. As those of you who’ve been with us for a while have noticed, we’ve changed the timing to hopefully better serve our shareholders to have our quarterly calls in the morning part of the open in our press releases in the evening prior. So I’ll start with some recent highlights before doing a bit of background and then diving further into details. We’re really excited about the steady significant strides we’ve made over the past quarter. As you’ll see, the EsoGuard test volume growth has remained strong and we’ve seen some nice acceleration particularly in this quarter and a rapidly increasing satellite Lucid Test Center activity that is now driving nearly one-third of our testing volumes.

We’re very excited to report that we’ve secured in-network EsoGuard contract with the largest secondary PPO, MultiPlan, and this provides access to EsoGuard to approximately 60 million consumers of that participated in the networks. Our commercial payer engagement and claims history is accelerating. In-network EsoGuard contracts are now averaging over $2,000 per test and all of the PPO contracts we’ve secured are priced at or above the Medicare rate. I’ll dive into this a little bit further later, but we’ve launched a really important initiative for us. We’re calling it our Direct Contracting Strategic Initiative and the goal here is to engage directly with large ASO or Administrative Services Only self-insured employers, unions and other such entities.

As we reported in the press release, we had a successful launch of our high-volume CheckYourFoodTube events and we have a robust near-term pipeline of additional events coming up in the next month or two. Our laboratory, we’re very proud to say, handle the unexpectedly record peak volumes from these event and this reflects a lot of effort we’ve made in enhancing our operational efficiencies. We received FDA clearance to market a non-sterile version of EsoCheck. These increases our margins and mitigate potential supply chain issues associated with sterilization. We’re making good progress collecting clinical utility data, which is a key driver of future in-network commercial payer contracting, and as we’ll describe in more detail, we secured financing of just under $25 million, which extends our cash runway well into 2024.

For those of you who are new to the story, just a few slides here to give you some background of Lucid Diagnostics is a commercial stage, cancer prevention, medical diagnostics company and we’re focused on early precancer detection, specifically in patients with longstanding chronic heartburn or gastroesophageal reflux disease, also known as GERD who are at risk of developing highly lethal gastroesophageal cancer. And our mission is very simple, which is just to prevent death from this cancer in at-risk patients with chronic heartburn. The data on esophageal adenocarcinoma is awful. It’s highly lethal and it continues to become more prevalent, about 16,000 deaths in 2021, a similar number with the slight uptick in 2022. It’s — and the incident has increased 500% far outstripping all other cancers over the last four decades and it’s a very, very lethal condition.

It’s the second most lethal cancer with an over 80% five-year mortality rate, and most importantly, the Stage 1 five-year mortality. So right at the early stages, it still carries at over 40% mortality rate. So in order to have an impact on those death early precancer detection is necessary and that’s not currently occurring. It hasn’t historically occurred and less than 5% of those patients who are recommended for screening are undergoing traditional endoscopic and that’s where we cut price. So our lead products, EsoGuard and EsoCheck are the first and only commercially available test that’s capable of serving as a widespread screening tool to prevent esophageal cancer death through the early detection of esophageal precancer. EsoGuard is an esophageal DNA test that uses next-generation sequencing to detect early changes in the precancerous conditions, as well as cancer and EsoCheck is a noninvasive cell collection device that allows the samples to be performed accurately in an in-office set.

We are very proud last year and we’re excited that both major gastroenterology societies, the American College of Gastroenterology and American Gastroenterological Association now support EsoCheck as an alternative and acceptable alternative to endoscopy for the early detection of this precancer to prevent deaths from the cancer. The commercial opportunity here is large. The minimum at-risk population defined by these guidelines. The most recent updated guidelines is $30 million. Medicare has established payment of $1,938 and will show later that, that payment flow is being respected and that results in a very large addressable market in the tens of millions of dollars. We also have a very high gross margin at over 90% and we’ve made some progress.

We’ll highlight again in getting our COGS down and getting us towards that 90% or greater numbers. Our commercial strategy is now really very well owned. We have two referral sources that we target, primary care physicians and specialty — specialists and institutions. And you can see here that our interaction with them is different, when we discuss with primary care physicians, we’re just encouraging them. So we’re educating them and then encouraging them to order the test as they would any other cancer screening test or like still DNA testing or other test. With the specialist and with the institutions, there’s an opportunity to build a consolidated program centered around EsoGuard that’s focused on esophageal cancer, precancer and gastroesophageal reflux.

We also now have three modalities by which the — where the cell collection procedure is performed, where the EsoCheck procedures performed and that — and the operator is different. We have our physical Lucid test centers, which are now 13 locations in 11 states and our own nurse practitioners perform testing there and that continues to remain robust. In the last couple of quarters, we’ve steadily expanded what we referred to as our satellite Lucid Test Centers where our nurse practitioners have scheduled days at physician’s offices and they can perform the EsoCheck procedure on patients who are already scheduled at the physician’s office and this provides a very attractive expansion in our physical reach and our overall horizon. And then, of course, at the — particularly at the specialists and the large institutions, the physician practice itself will often perform the procedure, either one of their nurses or nurse practitioners or their physician system.

We continue to show nice steady growth in EsoGuard testing volume. Here are the numbers by quarter. We’re reporting the estimated numbers for this quarter as we’re now quite close to the end of the quarter and you can see on an annualized basis, we’re at a steady approximately 200% per year compounded growth rates. To dive in a little bit deeper on where this testing is occurring and where these referrals are coming from and who is performing the procedure. We continue to have about 60% of our referrals are coming from primary care physicians that we think that will continue to be the case and that might up — tick up over the coming quarters. And this is because that’s where most of these patients are patients with gastroesophageal reflux are rarely seen by specialists or institutions and they’re generally managed by their primary care physicians.

Another important trend is highlighted in the right pie chart. This is the breakdown of who’s actually performing the EsoCheck collection procedure. You can see that — and where you can see that 29% of these are at our physical Lucid test centers, 31% are in the satellite Lucid Test Centers. If you recall, both of these, so 60% of the tests being or the sample being collected are being collected by our nurse practitioners in one of these venues. And the proportion that are — of the overall number, that 31% that are being performed at satellite Lucid Test Centers is steadily increasing. It was 22% in the third quarter. But we still have a robust activity as well in the individual physician practice. We launched another horizon, another location and opportunity and model for patients to get — to bring to the testing directly to adverse patients in high-volume events that we’re referring to as CheckYourFoodTube Precancer Detection Events.

The first event was highly successful. We’ve been in partnership with the San Antonio Fire Department. You could see in the images here, that’s our nurse practitioner, working with the Fire Department, our nurse practitioner team and others working with the Fire Departments to test 391 at-risk firefighters over two weekends. And this was quite successful, the tests were all performed and we’ve seen positive. So we’ve seen positive results that are leading to endoscopies in patients, including patients in their 40s and a few in their 30s. So excited that those patients have had the opportunity to get an noninvasive biomarker test that is confirmed on endoscopy, we’ll put them in the proper surveillance and monitoring regimen to prevent them from developing esophageal cancer.

So we’re taking this model and where we are — we are granting and repeating. We have a robust near-term pipeline of future events, targeting unions and other groups across the country and expect to be updating you on these in the coming months. This, as I mentioned, is a very important area of focus for us and we’ll be doing this in conjunction with the Direct Contracting Strategic Initiative that I previously mentioned. As I mentioned, we’re very excited to have signed an in-network agreement with MultiPlan. MultiPlan is the largest secondary preferred provider organization and one of the largest independent providers outside of the large health plans. This expands EsoGuard access to approximately 60 million customers. MultiPlan partners with 700 payers across the country, including all of the top 10 payers and 1.2 million healthcare providers.

Photo by National Cancer Institute on Unsplash

They process $74 billion in commercial health plan medical charges in 2022. If you look overall at our contracting and payment status, really solid progress in this regard. The engagement we’re having with commercial payers is accelerating. As you see on the right in the pie chart, we continue to have really 90% of the tests being ordered and performed our own commercial payers. So that’s where our immediate focus is. We have 13 commercial payer in-network contracts for EsoGuard that we’ve secured and the really gratifying point here now we’ve done enough of these is that the price is holding. Our average contracted prices over $2,000. Our list price is $2,500. So all — and all of our contracts are somewhere between the Medicare, the PPO contracts are somewhere between the Medicare payment rate of $90 — $70, $38 at our $2,500 list price.

So therefore in-network contracts. We’re out-of-network contracts, the out-of-network payment continue — out-of-network payments, they continue to respect our charges. The average payment is $1,440, and that lines up nicely with about a 50% to 60% out-of-network benefit that’s goes with most planned. The key drivers to expanding future in-network commercial payer contracting are progressing well. These two primary drivers are generating claims histories. We are now generating claims histories. We have hundreds of claims with many of the large — the larger plants and this is how you — once you reach a threshold, this is how you have the opportunity to engage with these plans on potential in-network coverage and what data they need in order for us to secure that in-network coverage.

We’re also starting to see claims that are working their way through the denial process and appeals process, and we have been seeing some payments that were initially denied paid on appeal. I’ll remind you that this entire process of submitting claims through our own laboratory only started in mid-third quarter. So we’re just still in the early stages of this, but the progress is really gratifying. We’re also in the process of generating the primary focus of the commercial payers, which is demonstrated in clinical utility. I’ll show a little bit later on what that entails. So good solid progress on that. And as I mentioned, we’ve launched a Direct Contracting Strategic Initiative. This involves engaging directly with entities — self-insured entities, such as employers, unions, public service departments and others who are under the ASO umbrella.

So they have only administrative services through one of the plans that they control their own test and directly engaging with them, provide the opportunity to secure contracts that are outside of the traditional commercial payer contracts and an opportunity for meaningful revenue. This model of targeting ASO entities has been used successfully by other cancer detection companies such as GRAIL and we’re studying their model and working closely with their alumni, as well as with other consultants to help us quickly drive this initiative, which we think will be an important part of our future activity. I’d mentioned clinical utility data. Again, this is extremely important. The larger plans we want to see that there is a clinical utility and performing EsoGuard test.

The definition of clinical utility is very straightforward in this case. They want to know that if a physician orders the test and it comes back positive that the physician will change whether it comes like positive or negative or alter medical decision making, specifically that if it’s positive, the physician will order a confirmatory endoscopy, and if it’s negative, that the physician will not order an endoscopy. And so documenting is very simple, folk in the medical decision-making algorithm is very important to justify the coverage of this test for payers. And so we are in the process of collecting a multipronged approach to collecting both retrospective and prospective data documenting positive clinical utility with the EsoGuard test. I’ll start with the here in rough order of when we expect the results to come out.

The — one of the nice things about these CheckYourFoodTube events is that we have an instant shot of hundreds of patients that we can analyze this initial one as we will — is retrospectively — in a retrospective analysis of prospectively collected data on what happened to the firefighters who got tested and how did their testing leads to the appropriate medical decision making. So this study has completed IRB approval and the data is now all in place and it’s being analyzed and will be submitted shortly for peer review. We also have a retrospective study that’s well on its way and nearly completed. This is a single center study from NYU that had 374 patients that were collected and we’ll analyze decision-making in clinical utility and we expect that to be completed and submitted for peer review shortly.

The two prospective efforts that we have is our Lucid registry. We have some significant breakthroughs in terms of streamlining that process and we expect now every patient that is tested by one of our nurse practitioners to be offered the opportunity to enter into the registry that’s allowed us to collect both clinical utility data, but also clinical validity data into the future. And then the CLUE study is a prospective multicenter clinical utility study as well, which has started enrolling. We’re looking to get a critical mass, the critical number of patients across these studies. You can see the numbers on the right here by midyear next year. And then finally, there’s a prospective virtual patient randomized controlled trial, where physicians are interviewed and received casing yes and they’re asked how they would respond to that.

That’s a very well-validated approach that payers have accepted in the past for clinical utility. So we’re adding that to the mix as well and we’ll expect to enroll about 100 patients in that. I apologize I understand that the slides were not showing. Okay, let me just spend 20 seconds on each of the slides, just to highlight again, as this slide, the commercial payer mix, 90% commercial payers and 12% Medicare Medicaid. I apologize for that. Here is the slide on the clinical utility data that I just summarized, showing the retrospective and prospective studies and the number of patients that we’re targeting to enroll by midyear this year. I apologize for that. A quick summary on our lab operations, again, very proud and excited that our laboratory shows — continues to show enhanced operational efficiencies, probably, the most important number from this slide is the proportion of samples that have sufficient DNA.

That number has plummeted. It’s winning around 6% now from a much higher number when we first took over the laboratory from the third-party and we look forward to continuing that low rate moving forward that provides much more utility when we get those numbers down low. Our turnaround times have remained solid over the last couple of quarters at nine days. And the CheckYourFoodTube with the San Antonia Firefighters was sort of a spontaneous stress test for our system and the team passed with blind colors, they were able to perform 100 EsoCheck procedures in a day with 50 per day by the nurse practitioners and the laboratory received on one day 200 samples that was able to process that on one day with the current — with our current infrastructure.

And just finally, some updates on the manufacturing side. As I mentioned at the beginning, we submitted EsoCheck for market approval — market clearance and received the 510(k) to be able to market it without sterilizing. This is a non-sterile procedure, is going into the mouth in the esophagus and the purpose of this was to enhance many aspects of our operation. As you see, it further reduces our COGS by approximately 10% after a substantial decrease in our cost of goods from transferring to high-volume manufacturer and lead times have been cut dramatically. The sterilization has come across the industry a major source of supply chain issues and constraints that’s been eliminated and ETO sterilization is the hot topic right now with environmental issues and we’ve obviated that being a factor in our testing.

We also have a new EsoGuard cell collection kit with a new manufacturing site and new improved design and the cost of goods for manufacturing these is also decreased by approximately 20%. So, with that, I’ll pass on the slides to Dennis to talk about our financial detail.

Dennis McGrath: Thanks, Lishan, and good morning, everyone. So if you go to the next slide. So the Board has authorized a $20 million preferred offering at an $11 million secured convertible debt. We completed the initial closing of the preferred in the amount of $14 million and have until the end of May to complete the remaining $6 million. The financing was priced in accordance with NASDAQ at the market closing bid price rules. The accredited investors were led by a family office familiar to our IR firm and some long-term high net worth shareholders for participants in total, but share a long-term vision for the company. After exploring a variety of alternatives, this preferred structure created a mutual win for the company and the investors by matching an attractive dividend with a strong incentive to hold the stock for more than two years.

Additionally, yesterday, we entered into a securities purchase agreement to issue $11 million in convertible debt securities with an accredited investor that has provided the same type of structures for PAVmed over the years and currently holds PAVmed’s existing debt with similar terms. We expect to close the funding in the coming days. The note interest is only for six months and has a $5 voluntary conversion price and a 7.9% interest rate. Amortization does not begin until a six-month anniversary, which we can then pay in cash or in stock. Both structures keep stock out of the market for long periods of time, likely two years in the case of the preferred, which allows the company to complete its work on clinical utility studies and improving reimbursement.

Our runway is substantially elongated through deepen 2024. On a pro forma basis, when combined with our cash at the beginning of the year, results in pro forma cash of approximately $46 million. For the fourth quarter, the change in cash from the third quarter was $4.5 million. Please refer to the two Form 8-Ks that were published last evening for additional details on both financings. So the summary of financial results for the fourth quarter and the year that we reported in our press release that was published last night will be corrected as the tables reflect PAVmed’s consolidated operations set of the standalone lucid financials, we apologize for that. We will be publishing PAVmed released this afternoon, which include both PAVmed consolidated and Lucid standalone.

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 a full disclosure covered in our annual report on Form 10-K that was filed with the SEC last night and is available on our website. So on the balance sheet. You see the year-on-year changes. But the cash, as mentioned from the third quarter to the fourth quarter was a $4.5 million sequential decrease and it was $30 million for the year. Vendor payables were relatively flat for the sequential quarter and for the year, offset by intercompany debt to PAVmed, which increased to $3.3 million at 12/31 and both Boards have authorized the ability for Lucid to pay that in stock rather than cash to preserve the cash at the loose level.

Shares outstanding, including unvested RSAs as of today is 43.4 million shares. The GAAP outstanding shares are reflected on the slide, as well as the face of the balance sheet in the 10-K. Next slide. So slide 20 compares this year’s fourth quarter to last year’s fourth quarter of certain key items, as well as year-over-year comparison. Just to review the information in my comments in light of the cautionary disclosure at the bottom of the slide about supplemental information, particularly the non-GAAP information. Revenue for the fourth quarter reflects actual cash collections for the quarter. The prior year reflects the fixed monthly fee received from the third-party lab that we used before setting up our own lab earlier last year. Revenue recognition, a key determiner is the probability of collection as we’ve mentioned in our calls in the past.

So the vast majority of patient out-of-network claims submission means revenue recognition occurs when the claim is actually collected and we’re in the early innings of that versus when the patient report is invoiced and submitted for reimbursement. As you will see in our 10-K, this is called variable consideration in the jargon of gaps, ASC 606, revenue recognition guidelines, and presently, there is insufficient predictive data to reflect revenue when invoiced. Our GAAP and our non-GAAP loss for the fourth quarter, $10.5 million is fairly flat compared to the third quarter loss of $10.2 million. Slide 21 is a graphic illustration of our operating expenses for the periods reflected. Total non-GAAP OpEx was relatively flat sequentially. Cost of revenue primarily consists of EsoCheck devices, lab supplies and fixed lab facility costs.

It is being presented in our 10-K and 10-Qs as operating expense consistent with practices of other diagnostic companies. Sales and marketing increases were offset by decreases in R&D and G&A, which allow the operating expenses to be relatively flat. So, with that, Operator, let’s open it up for questions.

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Q&A Session

Operator: And our first question comes from Kyle Mikson from Canaccord Genuity. Your line is open.

Dr. Lishan Aklog: Kyle, good.

Dennis McGrath: Good morning, Kyle.

Operator: Just one moment. Seem to be having a little technical difficulty here. All right. Mr. Mikson, your line is open

Kyle Mikson: Hey, guys. Can you hear me now?

Dr. Lishan Aklog: Yeah. We can.

Kyle Mikson: All right. Perfect.

Dennis McGrath: Yeah.

Kyle Mikson: Interesting. Yeah. So congrats on the results. Thanks for the questions. On the effect of ASP here was $95, it seems like have the denial rate for reimbursement seems like still pretty high. Cash collection is pretty low. It’s not like super surprising I guess. But just the ASP dynamics, you’re talking about out-of-network $1,400 payment and then commercial payers, $2,000, PPOs at the Medicare rate, which is like almost $2,000 as well. So would you mind just walking through why the revenue per test is so low and when that inflection point occurs and what kind of like catalyzes that?

Dr. Lishan Aklog: I’ll let Dennis dive into that deeper, but maybe just provide a high level. This is a bit of a moving target, right? Because the average life cycle of — the cycle for payment can run up to 90 days. There’s claims adjudication out and so forth. So what we’re seeing in any particular quarter in revenue is really a snapshot of what was going on with submissions a while back. But I’ll let Dennis a little bit further in detail.

Dennis McGrath: Correct. So, as Lishan indicated, the submitted claims do take some time to process and beginning in the fourth quarter, those amounts start to trickle in. There was more than 200 insurers that were billed claims leading up to the fourth quarter and into the early part of the first quarter. In the first quarter, we are starting to collect at an accelerated pace. It’s still early in the game and claims are being adjudicated both from a denial and appeal, as well as asking for additional information. That will — that steam will pick up as the year unfolds. The fourth quarter is not indicative of what the first quarter results are so far and we expect that the coming quarters that reimbursement will improve MultiPlan certainly helps with that endeavor, as well as we are getting paid from some of the larger players, United, particularly, and we’re getting paid out-of-network rates.

That backlog should continue to pick up and so that, ultimately, we’re hoping that in time, when we get to full reimbursement, there will be a match in terms of when the claims are submitted and the cash is collected. But for now, there is a large gap between those timeframes.

Dr. Lishan Aklog: If I could just add a couple of things, just to, again, emphasize the sort of the phase shift here. We started submitting claims in the end of August. So basically mid-to-late third quarter. So the fourth quarter results, if you kind of take that typical 90-day cycle and those cycles are longer for new tests. One of those tests are more established, they tend to — the turnaround time take longer. So the fourth quarter numbers really reflect a small portion of the claims that were submitted in the — in only half of the third quarter. The other point I would make is, again, these are early numbers. We don’t have good denominator on this. But we don’t have — the number of — you sort of mentioned the denial rate, there really isn’t a denial rate yet, because the number of claims that have gone through the full adjudication process that have been divided is very low right now.