Lucid Diagnostics Inc. Q4 FY2021 Earnings Call

Greetings. Welcome to the Lucid Diagnostics Fourth Quarter 2021 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. Please note, this conference is being recorded. I will now turn the conference over to your host, Adrian Miller, Vice President of Investor Relations at Lucid Diagnostics. You may begin.

Thank you, operator. Good afternoon, everyone. This is Adrian Miller, Vice President of Investor Relations at Lucid Diagnostics. Thank you for participating in today's business update. Joining me today on the call are Dr. Lishan Aklog, Chairman and Chief Executive Officer of Lucid Diagnostics; and Dennis McGrath, Chief Financial Officer of Lucid Diagnostics. The press release announcing our business update and financial results will be available shortly on Lucid's website. Please take a moment to read the disclaimer about the forward-looking statements in the press release, the business update press release, and the 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 the statements made. Factors that cause actual results to differ are described in the disclaimer and our filings with the 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 10-K filed with the Securities and Exchange Commission and any subsequent updates filed on the quarterly reports on Form 10-Q and any subsequent Form 8-K filings. Except as required by law, Lucid disclaims any intention or obligation to publicly update or revise any forward-looking statements to reflect changes in expectations or in events, conditions, or circumstances on which those expectations may be based or that may affect the likelihood of the actual results will differ from those contained in the forward-looking statements. With that said, I would like to turn the call over to Lishan Aklog. Dr. Aklog.

Thank you, Adrian. Good afternoon, everyone, and thank you for joining us for our quarterly update on Lucid Diagnostics. We've chosen to conduct a separate call solely focused on Lucid, and we're excited to share the complete Lucid Diagnostics story every quarter. I'm pleased to report that Lucid Diagnostics is performing exceptionally well. Our rapidly growing team is making significant strides across all areas, establishing a strong foundation for our long-term growth strategy. Our robust balance sheet gives us the resources needed to execute this strategy. I would also like to express gratitude to our long-term shareholders for their continued support and commitment. Every day, our team is dedicated to growing Lucid while enhancing long-term shareholder value. I will begin by outlining our business, and then I will hand it over to Dennis for our financial update before we open the floor to questions. To provide some context about our company and mission, Lucid Diagnostics is a commercial stage cancer prevention diagnostics company targeting millions of chronic heartburn patients at risk of developing esophageal cancer. Esophageal cancer has high mortality rates, particularly in its early stages, making early detection crucial. Approximately 5% to 15% of these at-risk patients develop esophageal precancer, which can be monitored and cured through an endoscopic procedure that effectively halts cancer progression. While screening is recommended for many chronic heartburn patients, less than 10% actually undergo traditional invasive endoscopic screening. Unfortunately, many esophageal cancer diagnoses come too late for effective intervention. The key to a successful early detection program has been the lack of a widespread screening tool. We believe that our EsoGuard next-generation sequencing test, along with our EsoCheck cell collection device, is the first commercially available diagnostic test that can fulfill this role. We see EsoGuard as potentially becoming the standard of care for detecting esophageal precancer in at-risk patients, with a total U.S. market opportunity exceeding $25 billion, based on a Medicare payment of $1,938 for at least 13 million patients eligible for screening according to clinical guidelines. Now, let's look at how the commercialization of EsoGuard is progressing. The outlook is very positive, as we are seeing significant growth in EsoGuard testing volume. In the fourth quarter of 2021, we processed 303 EsoGuard tests, representing roughly a 50% increase from the third quarter and nearly 200% year-over-year growth from the same quarter in 2020. This positive trend has continued into the new year, with increased referrals to our Lucid Test Centers and tests conducted at gastroenterology and foregut practices. We're experiencing substantial growth across all regions, and our emphasis on these commercial channels is complemented by progress in multiple non-GI specialties. We're also gaining traction with community-based hospitals, many of which are launching EsoGuard programs. Additionally, large private equity-backed gastroenterology groups, such as Gastro Health, have begun to adopt EsoGuard testing. These partnerships enhance engagement with GERD patients and open opportunities for downstream revenue through various related medical services. A key component of our growth strategy is our expanding network of Lucid Test Centers. The program has evolved from a pilot in Phoenix, launched in the third quarter of 2021, to a regional initiative covering several key metropolitan areas including Denver, Salt Lake City, Las Vegas, Seattle, Portland, and Boise, Idaho. Each test center operates in leased medical suites and is staffed by trained nurse practitioners and medical assistants. Patients in these areas can now undergo a simple, noninvasive test for esophageal precancer. A nurse practitioner can conduct a significant number of tests daily, and the centers maintain modest fixed costs with promising margins. We are currently expanding our test center program into larger states across the country, supported by a robust compliance program. We’ve hired an experienced Director of Clinical Services to oversee this growth. Our experience has validated the test center model as a crucial driver of EsoGuard testing volume, simplifying the engagement process for our sales representatives with primary care physicians. We have also launched a telemedicine program with a third-party provider, UpScript. This allows patients aware of EsoGuard to request online video visits with telemedicine physicians, who can refer them for testing at our centers as appropriate. We’ve been piloting this with a modest advertising effort in Phoenix, which has produced promising results. Our sales infrastructure has significantly expanded in recent months. Since our first employed sales representative joined in September 2021, our team has grown considerably, now featuring three area directors, six market development managers, ten sales reps, and additional support staff. The sales training and process have been refined, equipping our team to effectively target primary care physicians and convert interest into action. Additionally, I'm excited to share developments regarding our laboratory operations. We recently announced that our wholly-owned subsidiary, Lucid DX Labs, has obtained certain licenses and other assets from our long-time CLIA partner, ResearchDx, allowing us to operate our own CLIA-certified and CAP-accredited laboratory. This new 20,000 square foot facility in Lake Forest, California, will significantly streamline important testing processes and provide a scalable infrastructure for our growth. We’re now able to handle our own billing and collection processes for EsoGuard, which simplifies revenue management. Regarding Medicare claims, we are now able to submit using the effective $1,938 payment rate. On the coverage side, we are in a holding pattern, nearing the two-year mark since we submitted our coverage technical file to the MolDx program. Although progress has been languishing, we were encouraged by recent meetings indicating support for esophageal precancer testing. Private payer discussions are ongoing, and we are seeing good payments around $1,150 per test, which reflects our current out-of-network coverage success. As for our clinical studies, expanding the clinical evidence for EsoGuard testing is a core piece of our growth strategy. We are currently enrolling patients in two international multicenter trials aimed at supporting FDA approval. We also have initiated several clinical utility studies that will yield important data to assist our payer negotiations. In conclusion, PAVmed's EsoCure device for treating esophageal precancer is progressing well, and a formal agreement was established for Lucid to exclusively commercialize this product, complementing our existing offerings. We continue to explore business development opportunities that align with our mission. With that, I will now pass it over to Dennis for a financial update before we take your questions.

Thanks, Lishan, and good afternoon, everyone. Our preliminary and summary financial results for the fourth quarter and for the full year ended December 31, 2021, were reported in our press release that was published just earlier today. We plan to file our annual report for Lucid Diagnostics in Form 10-K with the SEC in the coming days. And at that time, it will be available at sec.gov and on the Lucid website. As you already know from our previous quarterly corporate update calls, as a rule, EsoGuard tests performed are recognized as GAAP revenue when cash is collected by the company. Also as previously mentioned, this is more than likely to be true during this transition period of negotiating third-party private payer reimbursement contracts and related coverage policies. As reported to you last quarter, for compliance purposes during this reimbursement transition period, we negotiated a short-term month-to-month fixed payment arrangement with the contract laboratory that was processing the EsoGuard assay and was performing the insurance company billing and collections function. This commercial agreement became effective on August 1, 2021, and terminated concurrently with the opening of our own laboratory at the end of February 2022. We recognized $500,000 of revenue as part of the EsoGuard commercial agreement with ResearchDx for the year ended December 31, 2021. Now that we are operating our own laboratory following the February 2022 agreement, where Lucid Dx Labs purchased certain assets from ResearchDx, Lucid will have the ability to directly invoice CMS and private payers. Future revenues will be recognized based upon actual collections until such times that coverage policies are in place with CMS and payment contracts with the private payers. This obviously can result in the timing of revenues recognized versus the timing they are submitted for third-party reimbursement until these future conditions are all met. Consequently, it is our expectation that we will begin to recognize GAAP revenue related to our Lucid DX Lab in the second quarter of this year and will be adjusted based upon actual collections received for tests submitted for reimbursement by the laboratory. The number of EsoGuard tests performed and submitted for payment is provided in the press release and was discussed earlier by Lishan. Obviously, we're in the early stages of our commercial launch, particularly with our test centers. We'll continue to evolve our reporting metrics as various sales and marketing efforts further influence adoption, particularly with the ramp-up of our Lucid Test Centers and our EsoGuard telemedicine program in cooperation with UpScript. Presently, there are now five banking analysts who issued coverage on Lucid and others doing their diligence. The 2022 revenue estimates provided by the analysts are achievable. The quantity and collections are highly dependent upon the evolving reimbursement landscape. As you are likely aware from our last corporate update, the local coverage decision, as Lishan mentioned, has still not been published. But we are optimistic that it is being worked on and should be forthcoming. With regards to revenue, Lucid recognized $500,000 of revenues related to EsoGuard for the year ended December 31, 2021, despite the negative gross profit for last year, which reflects the initial test centers start-up related costs and at moderate volumes, incremental gross margins can be around 90%, and contribution margins were 60% to 65%. These lower volume amounts have a minimum level of fixed costs associated with just being operational. Now a few comments about operating expenses, sales, and marketing to start. For the year ended December 2021, sales and marketing expenses were approximately $5.3 million for the year compared to $1.3 million for the corresponding prior year period, with a $4 million increase principally related to the following items: approximately $1.7 million was an increase in compensation-related costs, largely related to an increase in headcount, approximately $1.1 million increase for outside professional services related to EsoCheck, EsoGuard, and consulting and other professional service fees, and just under $1 million increase in the management services agreement, the fee allocation from PAVmed related to the growth and expansion of Lucid's business and the services incurred through PAVmed. On the G&A front, G&A expenses were $12.8 million for the year ended December 31 compared with $1.5 million for 2020, with the approximate $11.3 million increase related to a couple of items. About $9.1 million of that increase was noncash stock-based compensation from restricted stock award grants for Lucid and PAVmed employees and non-employees. And approximately $2.1 million in consulting services related to patents, regulatory compliance, legal processes for contract review, the transition of our public relations and investor relations firms, and public company expenses. On the R&D front, the R&D expenses for the year 2021 were approximately $9.3 million as compared to $5.4 million for the prior year, with the increase of $4 million related to the following items. About $3.2 million were an increase in development costs about $200,000 in compensation-related costs, and approximately $400,000, an increase in the management services agreement with fee allocation from PAVmed. There's a table we provide in the press release. It was published earlier that adjusts each of these three components of operating expenses for the embedded noncash stock-based compensation expense. Without the stock-based compensation expense, total operating expenses were Lucid's; stand-alone were $17.7 million and $8.2 million for the years 2021 and 2020, respectively. With regards to the loss in per share amounts, Lucid Diagnostics reported a fourth quarter of '21 and a full year 2021 net loss attributable to common stockholders of $11.3 million and $28.1 million or a loss of $0.32 or $1.51 per common share, respectively, versus the same period in the prior year, the fourth quarter of '20 and the full year of $8.3 million or $0.59 a share in 2020. The press release also provides a table entitled non-GAAP, which highlights these amounts along with interest expense and other noncash charges, mainly depreciation, stock-based compensation, in financing-related costs so that it enables a better understanding of the company's financial performance. You'll notice from the table that after adjusting the fourth quarter and the full year GAAP loss by approximately $3.6 million and $10.3 million for noncash and interest costs for those two periods, the company reported a non-GAAP adjusted loss for the fourth quarter and for the full year of $7.7 million and $17.8 million or $0.22 and $0.96 for the quarter and for the full year per common share. Lucid had cash of $53.6 million as of December 31, and that compares to about $100,000 in the year-end 2020. Today, Lucid entered into a committed equity facility with an affiliate of Cantor Fitzgerald, where Cantor committed to purchase up to $50 million in the company's common stock from time to time at the request of the company. Any future funding from this facility is completely at the discretion of the company and if utilized likely would extend the company's runway well into 2024. Unlike PAVmed, Lucid is not eligible to put a shelf registration into action until after November 2022 for more than 12 months after the IPO. The Board considers having available financing options as part of their governance duties, even if utilization would finance us well into 2024. So with that, operator, let's open it up to questions.

Our first question is from Kyle Mikson with Canaccord Genuity. Please proceed with your question.

Congrats on the quarter, and thanks for the questions. So great updates, obviously. I just wanted to talk about the COVID impact in early first quarter. Clearly, there were headwinds that affected the diagnostics industry during January and February due to Omicron. Just was wondering what the impact on Lucid was kind of early in the first quarter. And could there be any systemic impact that lasted throughout the quarter rather than just kind of the transient impact?

Yes. As I've said before, our team has done a good job of insulating ourselves from some of these COVID-related effects. And that's primarily because our engagement with physicians is entirely outpatient-based. And our test centers are entirely under our control, and we control how we handle precautions at our test centers. So generally, we have not seen much impact compared to companies that call on hospitals where elective procedures and those things could be cared for. So we do get a bit here and there of centers at the absolute peak, which slowed down the ability of our reps to get into offices. But that's been relatively modest. As I've said before, the main issue was around travel, cancellation of flights and so forth. And that was a very narrow window during this last Omicron spike. So bottom line is that hasn't had a major impact that we expect moving forward.

Great. And maybe just one on the CLIA lab. So when do the benefits from that in-house lab really fully take shape or maybe have they already? And I guess, why did it make sense to acquire that capability kind of relatively early into the launch before Medicare reimbursement was secured?

So the benefits are accruing immediately. The key we have planned, and if you recall during the S-1, we talked quite a bit about the need to have this infrastructure in place moving forward. But the thing that's really dominated our thinking to move more quickly has been the complexities around using a third-party laboratory for billing and collection and invoicing of procedures as of tests submitted to payers when you marry that to our test centers. There are a lot of hurdles that come with that related to federal and other regulations. By having our own laboratory, it provides us with the ability, as Dennis mentioned, to invoice payers directly to really enter into direct negotiations with private payers and so forth. The impact beyond the initial price to get these licenses in place on the marginal aspects, and Dennis can elaborate on this, are really not significant since we do continue to use ResearchDx to help us run the assay through a management services agreement. So the big difference has been that it's allowed us to be the official laboratory of record and not have to go through various convoluted mechanisms to allow us to do so under a third-party arrangement. And Dennis, would you like to add anything more to that?

Yes. Eventually, we would establish our own lab. The timing made sense because starting from scratch could take over a year to obtain the necessary licenses. By acquiring certain assets and securing funding, we can expedite the process. We previously mentioned this in the registration agreement. As we are currently negotiating payer contracts, it is beneficial to have those contracts in the name of our own laboratory instead of under ResearchDx and dealing with the administrative hassle of a transfer. This year is a transitional phase, and since this was part of the funding plan, the opportunity arose to streamline the process. This allows us to be better positioned for negotiations with private payers and to establish coverage policies, making it logical to act now.

If I could just add one thing, Kyle, in terms of immediate benefits, we are actually able to secure our own revenue cycle manager. And that's been challenging because prior to this, we’ve been sort of at the mercy of the laboratory we used. So we hold all the cards now regarding efficient submission of claims, proper submission of claims, and efficient processes for appeals and processing claims across the board. So it's super critical, and we're really happy to have it all teed up and ready to go for our future expansion.

Yes, that was great. The benefits are clear. I just was kind of wondering about the timing, but I think that all was great color. That all makes a lot of sense now. And just moving to, I guess, denials of cash collections. Could you help us think about the denial rate during the quarter and where that kind of stands today? I heard the number, I think it was $11.50 from private payers. That's great. Obviously, a large portion of the target patient population is Medicare patients, and so it's obviously really not getting reimbursed right now. So could you help us think about maybe denial rate right now as well as is the flow of patients, the 300 or so tests during the quarter, I mean is that mostly private payer, patients or Medicare as well?

So the payer mix is a bit more skewed towards private payers than expected, given that the overall epidemiology suggests it should be about 60% Medicare. This skew is influenced by geographical factors and local variations. Regarding denial rates, we currently don't have accurate numbers since the majority of claims are still being processed. We are awaiting payments or denials for many claims. While we have encountered some denials, which are important for initiating the appeals process and engaging with payers, I cannot yet provide a percentage related to denials. We are seeing some network payments coming through, but most claims are still in the processing stage.

All right. Great. That makes sense. It’s fair. And for a final question just for kind of thought processes come together here, and it's kind of around the announcements that you made towards the end of the call regarding EsoCure and EsophaCap. Those are very positive, obviously. I guess first on EsoCure, I believe that PAVmed planned to conduct additional development work and animal testing of EsoCure to support like a planned 510(k) submission in early '22? Just wondering if that still stands.

So the answer to the first one is no. That early '22 timeline is not going to happen. The completion of these studies and verification and validation testing will take us further into this year. We don’t expect that to happen early. But the progress has been solid and great, and we look forward to getting to design freeze and getting verification and validation testing to allow us to submit to the FDA. We think we have a very good regulatory strategy to do so and to get it cleared for commercial offering. So the time just seems right right now to formalize the engagement with Lucid as it relates to licensing of the technology when it's ready for commercialization.

And then on EsophaCap, I mean, what does that mean for your competitive positioning – for Lucid's competitive positioning? Does the company basically think that it could control like certain players from entering the market if you use EsophaCap as a cell collection device?

There are two 510(k) cleared sponge-based devices in the U.S. The other sponge-based device is the Medtronic device, which has been off the market for a couple of years. The indirect answer to your question is right now, we do control the only 510(k) cleared sponge device for use in screening third patients with biomarkers. So I'll just leave it at that.

Okay, perfect. Thanks again, guys. Appreciate it, congrats on the quarter.

Thanks, Kyle.

Our next question is from Mike Matson with Needham & Company. Please proceed with your question.

Hey, good afternoon. So for the 300 tests that were performed in the fourth quarter, can you remind us how many test centers those were going through? I can't remember where you were at as of the end of the year. And then were they pretty evenly spread out? Or were they concentrated in one versus another?

I'll provide some insights on that. The numbers are relatively small, so I can't offer detailed numerical data. As you may recall, the first test center was launched but didn't become fully operational until September. For most of the fourth quarter, we only had the three test centers in the Phoenix area. The Salt Lake, Vegas, and Denver centers were not operational until the middle of the year. Thus, the majority of cases were not coming from the test centers, as they were still in the early stages, and instead, cases were primarily conducted by physician practices. The geographical reach is expanding nicely across the country, with the East being the busiest area, even though it doesn't have any test centers. We anticipate that an increasing number of cases will not go through our test centers. However, we are encouraged by the growth of non-Lucid test center activities at community hospitals, integrated health networks, academic medical centers, and large private equity-backed gastroenterology networks.

Okay. And just wondering if you could give us an update on the DTC campaign? I know you made some comments on it, but I think that the sales were really still limited only to the Phoenix area. Is that right?

Yes. Our philosophy with the direct-to-consumer aspect is we're really doing it in a controlled fashion. We don't think it makes sense to really blow it out until two things happen. One, we have a clear understanding of which modalities work and what the yield on each advertising dollar will be, and also until we get more traction with regard to reimbursement. So we're taking a careful approach regarding deploying dollars into advertising and have limited it to the Phoenix area where we do have billboards and TV and radio advertising, and we're continuing to do that. We are getting responses, and we are seeing patients passing through the telemedicine program and getting tested and completing the process that appears to be growing. With direct-to-consumer work, you typically need kind of three to six months of data to understand which modalities are giving you the best return on your investment, and so we'll continue to collect that data.

I think that summarizes well. The two gating factors are optimization and reimbursement. As both of those factors start to evolve, we'll have more of the DTC expansion and investment so that every dollar spent has a direct relationship to the yield of adoption and revenue.

Okay, got it. And then just as far as MolDx goes, I mean you're confident that this is going to happen. It's just a matter of time and just sort of a backlog at CMS.

Yes. I wish I could have more details. The fact that they held a CAC meeting, which covered our test along with others, is a strong indication that they're working on it. Prior to that, we had no real evidence that they had actually tested off our files. We feel they're working on it. We do have our team engaging with them. We check in regularly. All of that together, these LCDs have increasingly common batches centered around certain disease processes or other organizing factors. We just expect that a group of tests that fall under similar umbrella that are all being evaluated, we would expect to get a draft LCD sometimes still, we hope.

Okay, got it. Thank you.

Our next question is from Ross Osborn with Cantor Fitzgerald. Please proceed with your question.

Congrats on the progress. Thanks for taking my questions. I guess, maybe starting off with test centers. Can you walk through the timeline on the next set of locations?

Yes. We’re definitely accelerating things. The first group, we did one city, Phoenix, then we did three in three. Now we're moving towards doing them in larger batches and in larger cities. We've identified nine states where we're going to target, including most of the large states across the country. We're identifying our first target location in each of those, and we're looking to do a broader launch across multiple states. In terms of the solutions, we actually have set up the compliance infrastructure around replicating the test centers in states that have more complex laboratory regulations. There are various factors there, and we have an outstanding compliance council that has everything ready to go.

Okay, great to hear. And then maybe just in terms of education, I think we've previously discussed some pushback that nurses have given regarding a new offering and the basic workflow. Have you guys made any progress on developing more efficient education programs? Or is it really just knocking on doors? Just curious to hear that.

Yes. What you're referring to, of course, are not the primary care targets, where there is no workflow issue; it's purely engaging them on the disease and risk factors for cancer and the availability of the test. That doesn't require any change in workflow. On the gastroenterology front as well as larger primary practices, it’s actually gone pretty well. We're not really getting that pushback. We're getting centers to see this as a comprehensive program, either part of a broader program for gastroesophageal reflux disease or a chronic heartburn clinic around screening for esophageal precancer. There is now a better understanding of the downstream benefits to these larger entities around referrals and we’re seeing significant engagement.

Understood. Thanks for taking my questions.

Our next question is from Mark Massaro with BTIG. Please proceed with your question.

This is Jeanine, on for Mark. Hey, so on the initiation of the Cleveland VA study, could you maybe give a sense of timing for the initial readout? Just any major milestones to look out for there that could potentially help drive adapt LCD or guideline inclusion in the VA.

So, we don't have the precise timelines yet. However, we expect it will be completed fairly quickly. The investigators have already enrolled several patients since our announcement. We expect this study will be completed this year, and because there isn’t a long follow-up period, we can get the results fairly soon after enrollment. So I’m confident we can get it done this year.

Okay, perfect. Thanks. And maybe just one quick follow-up. Could you speak to your mix of prescribing physicians between PCPs and GI specialists? You did mention an uptick in non-GI specialties. So just how you view that trending looking to '22 here?

The non-GI specialties are mixed amongst large primary care centers in addition to the gastroenterology practices that are referring to our test centers. I would conservatively estimate the current mix right now, it is likely nearing 50-50 between GI specialists and primary care physicians. However, that number is rapidly changing. The fourth quarter's figures don't fully capture our current dynamics.

Okay, perfect. Thanks for taking the questions.

Good afternoon, Ed.

Congratulations on the rollout.

Thanks.

It looks like you guys have been adding about one city a month. And am I correct that you guys are going to be at a much faster pace over the next 12 months?

Yes, I think so. We're focusing on larger batches instead of smaller increments, targeting nine cities across nine states to open next. The rate-limiting factor is getting the sales infrastructure and sales reps in place to drive cases to the test centers. However, in many of the states we’re talking about, we already have a presence with market development managers and even sales reps who are already working with non-Lucent test centers.

Great. Well thanks for answering my questions and good luck. Thank you.

All right, thanks, Ed.

We have reached the end of the question-and-answer session, and I will now turn the call over to Dr. Lishan Aklog for closing remarks.

So again, thank you all for joining us today. And as always, for the great questions. We look forward to keeping you abreast with our progress via news releases and periodic calls such as this one. Again, I'm really excited that we're moving forward, and we will be able to provide dedicated calls for Lucid; this has been a great first opportunity. The best way to keep up with Lucid news updates and events is to sign up for our e-mail alerts on the Lucid Investor Relations website or follow us on social media, Twitter, LinkedIn, and YouTube. You can also contact us directly through Adrian, our VP of Investor Relations, at akm@padmed.com. Thank you, and have a great day.

This concludes today's conference, and you may disconnect your lines at this time. Thank you for your participation.