Earnings Call Transcript - MDXH Q4 2023

Operator, Operator

Good afternoon, ladies and gentlemen and welcome to the MDxHealth Fourth Quarter and Full Year 2023 Earnings Conference Call. At this time, all lines are in a listen-only mode. Following the presentation, we will conduct a question-and-answer session. This call is being recorded on Wednesday, March 6, 2024. Before we begin, I would like to remind everyone that the company will make forward-looking statements during today's call. Whether in prepared remarks or during the Q&A session, these forward-looking statements are subject to inherent risks and uncertainties. These risks and uncertainties are detailed in the Risk Factors section of the company's filings with the Securities and Exchange Commission, specifically in the company's annual report on Form 20-F. I would now like to turn the conference over to Michael McGarrity, Chief Executive Officer. Please go ahead.

Michael McGarrity, CEO

Thanks Ludie and thank you all for joining us for our fourth quarter and year-end 2023 earnings conference call for MDxHealth. With me today is Ron Kalfus, Chief Financial Officer. Commercial execution and operating discipline are the two foundational drivers of our business and performance, and our fourth quarter and full year results for 2023 demonstrate the continued success of this strategy. It is also becoming clear that our strategy is creating multiple sources of growth for our company, including test-menu augmentation, cross-selling of complementary diagnostic solutions, and expanding payer coverage. With these growth drivers in place, we believe MDxHealth remains well-positioned to continue to deliver sustainable growth that will lead to adjusted EBITDA profitability in the first half of 2025. I would now like to review a few of the financial and operating highlights from our fourth quarter and full year 2023 results that clearly demonstrate this execution. Fourth quarter revenue was $19.4 million, an increase of 50% over the prior year period. For the full year, revenue increased to $70.2 million, an increase of 89% year-over-year. Excluding the impact from GPS, total revenues in 2023 grew 42% year-over-year. In the fourth quarter, gross margin improved to 65.3% versus 56% in the prior year period, which represents a year-over-year improvement of 9.3 percentage points. And for the full year, gross margins were 62.6% compared to 51.9% for the prior year, an improvement of 10.7 percentage points, which reflects a continued focus on operating discipline, cost management, and expanded payer coverage for our full menu of precision diagnostics. What these financial metrics speak to is that we are delivering on our mission to become a premier growth company in precision diagnostics focused on urology. In fact, when we step back and look at the progress from only a few years ago, our growth trajectory has been, quite compelling. In 2019, MDxHealth reported annual revenue of $11 million. Today, we are now projecting 2024 revenues of $79 million to $81 million, which represents a five-year CAGR or compound annual growth rate of over 50%. Importantly, we have also maintained our operating discipline over this period of extraordinary top-line growth. Gross margins have dramatically improved from essentially no gross profit generated by the business in 2019 to over 62% for the full year 2023. And our focus on sales force productivity is allowing us to manage and maintain our operating expenses as we go forward. This dynamic is providing clear leverage in our P&L and reinforces our confidence in reaching adjusted EBITDA profitability. Of course, our world-class technology, outstanding clinical lab operations, and improved reimbursement for our tests are all major factors in our success. But, without question, one of the ultimate drivers for sustained execution is the strong and we believe enduring relationships we have built in our urology customer base and key opinion leader community. In my experience, these initiatives and the resulting effect on our business underpin the strength of our business model. To that end, we remain relentlessly focused on the customer experience in order to maintain and advance our best-in-class reputation. Before my closing comments, I will turn the call over to Ron for a review of our financial and operating results. Ron?

Ron Kalfus, CFO

Thank you, Mike. As Mike mentioned, we are pleased to report our positive results for the fourth quarter and the year-end 2023, with strong reported growth in revenues and solid improvements in gross margins. Revenues for the fourth quarter ended December 31st, 2023, increased by 50% to $19.4 million versus $12.9 million for the fourth quarter 2022. Fourth quarter revenues of $19.4 million were comprised of $8.8 million from GPS, $5.9 million from Confirm, $3.2 million from Resolve, and $1.3 million from Select. For the year 2023, our revenues were $70.2 million, representing an increase of 89% over the same period last year. Excluding GPS, full year 2023 revenue increased 42% over the same period last year. Moving below the revenue line, our gross profit for the fourth quarter was $12.7 million, an increase of 75% as compared to $7.2 million for the third quarter of 2022. Gross margins were 65.3% for Q4 2023 as compared to 56% for Q4 2022, an improvement of 9.3 percentage points. For the full year 2023, gross profit was $43.9 million, an increase of 129% as compared to $19.2 million for the full year 2022. Gross margins were 62.6% for the full year 2023 as compared to 51.9% in the prior year, an improvement of 10.7 percentage points. Operating loss for the fourth quarter was $6.3 million compared to $8.9 million for the fourth quarter of 2022, representing a reduction of 30%, driven by top-line growth and improved gross margin. For the full year 2023, the operating loss was $27.3 million compared to $37.9 million for the same period last year, a reduction of 28%. Cash and cash equivalents as of December 31st, 2023 were $22.4 million. Our total use of cash for the fourth quarter was $10.3 million. The increase in cash used in the fourth quarter was driven by non-operating non-recurring cash payments of $2.3 million, primarily attributed to the transition to our sole listing on NASDAQ. This concludes my brief overview of the results and I will now turn the call back to Mike.

Michael McGarrity, CEO

Thanks Ron. As I have consistently communicated, MDxHealth is a growth company. Everything we do is based on, and in a commitment to growth; growth of our revenue, margins, and profitability; growth in our shareholder base, attracting high-quality institutional investors who understand our business, and who have set high expectations for consistent execution and results. Simply put, we strive to say what we're going to do and then execute and deliver, which we believe will lead to recognition, appreciation, and differentiation of this consistency and associated long-term sustainable growth potential of our business. Growth of our offering is reflected in our progression over the last 18 months from one to four revenue-generating tests with all of our prostate cancer tests covered by Medicare, and included in the NCCN guidelines. And finally, growth stemming from our proven best-in-class channel, which has catalyzed multiple inbound opportunities for partnership, M&A, and distribution. In our evaluation of any of these opportunities, we will apply the same diligence and rigor as we have with the GPS acquisition and resolve channel opportunity. We have found ourselves with the luxury of being very selective with our opportunities and partners. As a final note, I often convey to people in any venue that we pass the friends and family test. This concept implies, in my belief, that if you have a friend or family member navigating the complex, confounding, and anxiety-inducing diagnostic pathway of prostate cancer, you would want the clinician and patient to have access to the MDxHealth menu. No other company offers a precision test at multiple points along this pathway. We have a clinically actionable diagnostic from elevated PSA to initial biopsy, whether the result is negative or positive, ruling out unnecessary intervention and for risk stratification of patients that may need intervention. We continue our efforts to advance into optimal monitoring of the approximately 1.5 million patients in active surveillance annually with our Monitor project. It was particularly powerful at our recent national sales meeting to focus on the patients and the clinicians that we serve and believe we are doing just that and doing it the right way with the right people. To me personally, and all of us connected with MDxHealth, that was quite compelling. In closing, we at MDxHealth will remain committed to driving sustainable growth, which will serve as the foundation for value creation for all of our stakeholders, including patients, customers, and shareholders. Thank you for your interest in and support of MDxHealth, and I'll turn the call back over to Ludie for questions.

Operator, Operator

Thank you. And ladies and gentlemen, we will now begin the question-and-answer session. Your first question comes from the line of Andrew Brackmann from William Blair. Your line is open.

Andrew Brackmann, Analyst

Hi everyone. Good afternoon. Thank you for the questions. To start with guidance, could you provide more insight into how you're approaching the buildup of a test level? Any details on which areas of the portfolio may experience faster growth and your thoughts on pricing would be appreciated. Thank you.

Michael McGarrity, CEO

Yes, Andrew, we feel good about the balance of our menu, I think. As we've discussed and as I've communicated, we're very confident that our sales force is selling not a test or going in with one of our tests, but selling our pathway. Each of them has over the past number of quarters, including GPS, demonstrated consistent growth as we go forward. We expect that to continue. And our Resolve, obviously, at some point, the growth rate on that will normalize, but again, that was really important to validate our thesis that we can take advantage of channel opportunities that fit with our menu offering and into our customer base. We think the adoption is sustainable. Then we have two drivers on the revenue side. It's important to note that both, I believe, are working in parallel, definitely over the last few quarters. So, our sales team drives unit adoption into our customer base and then our Market Access Managed Care team drives coverage, which shows up in our ASP. We're confident that we can continue to drive the menu and growth within each test from both the unit and revenue perspective. We feel like it's pretty balanced and we believe that's sustainable.

Andrew Brackmann, Analyst

That's great. Thanks for that. And then as you move throughout 2023, you showed some nice leverage on the P&L. From here, can you talk about the levers that you have there? Is it mainly revenue growth at this point? Or is there any more room, I guess, on the cost side to also drive some further reductions in net adjusted EBITDA loss and burn year? Thanks.

Michael McGarrity, CEO

Thanks Andrew. Yes, I think revenue growth obviously is key. Our gross margin has gotten to a point where it can drive the P&L below that line. I really think the strength of our business going forward is that we feel very confident that we can hold our OpEx pretty steady through our inside model period, but definitely through 2024 and beyond. We think we're very confident that our sales channel is rightsized. We have 70 total people in the field, 50 direct reps, and the way we're driving adoption in a sustainable way through our pathway allows for what I commented on regarding how much will drive rep productivity. It's the Stryker model that I'm familiar with. We think the leverage is really in holding our OpEx. We've driven it to the point through significant discipline on cost and headcount and operating discipline across our organization. So really, when we look at our P&L, revenue growth, and the gross margin where it is, and leverage in our OpEx is where really the expansion there is largely based on scale and volume into our lab in our RCM group.

Andrew Brackmann, Analyst

I'll leave it there. Thanks guys.

Michael McGarrity, CEO

Thanks Andrew.

Operator, Operator

And your next question comes from the line of Thomas Vranken from KBC Securities. Your line is open.

Thomas Vranken, Analyst

Hi, this is Thomas. Thanks for taking my questions and congratulations on the nice margin improvements. Two questions from my side. The first one is with regards to the multiple high-growth opportunities that you mentioned that are under evaluation. Can you give a little bit more granularity there? Should we understand this more like in-house type of R&D projects or are you really considering business development here?

Michael McGarrity, CEO

Thomas, as always, thank you for staying up late and I likely cannot give you a whole lot of granularity there, but only to point to what we've done so far. We run a growth strategy process here, and we have for the last two years. To give you detail, we meet every other Thursday and have always been focused a group of us on what's out there, what's important in the space that we need to focus on, pay attention to, making sure we don't miss anything, and we were always looking outbound. I would tell you over the last two years in that process, it's really flipped to inbound as we've, I think, become more obvious. My view is we had to do two things with MDxHealth: derisk the business, which I think we are largely achieving, and become more obvious, and that's showing up in inbound opportunities based on how challenging it is in the market dynamics today to; A, build a channel, and B, have access to driving adoption of diagnostics. Resolve is a good model for that. That was really important. All our diligence, which was very rigorous, as I noted, has played out in our ability to drive sustainable, sticky adoption into our customer base without diluting our focus. Those are all part of the criteria that we look at with opportunities that are coming our way, and I think we have good examples, as I noted, with both in M&A with successful integration and driving growth into a product, and secondly, with the channel opportunity. We'll take a balanced look at opportunities that make sense for us. There's a lot of room in our space into urology, and we're confident that the way I would characterize it, Thomas, is that if you looked at our menu 18 months ago, it looks very different today. If you made the assumption that it might look different 18 months from now, I think that's a reasonable assumption.

Thomas Vranken, Analyst

Okay. Thanks. And maybe as a second question, I wanted to zoom in a little bit more on the revenue guidance for 2024. And I noticed that the window is rather narrow on EBITDA, $2 million variation. Can you comment on what drives this increased precision versus previous guidances from previous years?

Michael McGarrity, CEO

Yes, I got that question a number of times as we went through our process to put our guidance. I think it's been difficult over the last few years. The combination of the pandemic, as well as launching additional tests into our menu per my previous comment, I feel like we now have history, which informs how you predict and project your business more accurately. We believe that, that's indeed a tight band, but we're confident that we can meet or exceed the expectations that we've put out to the street for 2024 for sure.

Thomas Vranken, Analyst

Okay. Thank you.

Michael McGarrity, CEO

Thanks Thomas.

Operator, Operator

Your next question comes from the line of Dan Brennan from TD Cowen. Your line is open.

Unidentified Analyst, Analyst

Hey good afternoon guys. This is Kyle on for Dan. Thanks for taking the questions. I just wanted to ask on the quarter, if there's any granularity you can provide on maybe the volume from Confirm and Select/Resolve too? Is there anything you can share there?

Michael McGarrity, CEO

Hey Kyle. I'm not sure I understand the question. We've seen, as reflected in the revenue and the growth per test, consistent growth with each of those from a unit perspective. We have seen ASP accretion. That was the point I made as far as our revenue drivers are twofold: unit adoption and then our coverage, which shows up in our ASP. We're confident we have seen consistent growth that's driving our guidance of mid-teens. We believe that's very sustainable.

Unidentified Analyst, Analyst

Got it. And so on the volume side, though, in the fourth quarter, was there anything you've disclosed there across the different tests?

Michael McGarrity, CEO

Just what we disclosed, Kyle.

Unidentified Analyst, Analyst

Got it. Okay. And just one more on the adjusted EBITDA profitability in the first half of 2025 can you just remind us of your confidence there? You reiterated that you'll get there in the first half of 2025, but if you found a target that was the right asset for the portfolio that might push this target out a bit, what are your thoughts on that?

Michael McGarrity, CEO

Well, if I understand your question, you're asking whether an additional opportunity that we're not currently offering would be the catalyst for that? My answer is no. We're confident that we're not basing that on additional opportunities that will come in. So, we're confident we can get there with our current menu very clearly.

Unidentified Analyst, Analyst

Got it. Thank you.

Michael McGarrity, CEO

Thanks Kyle.

Operator, Operator

Your next question comes from the line of Jason Bednar from Piper Sandler. Your line is open.

Jason Bednar, Analyst

Good afternoon, everyone. To begin, I want to highlight that Resolve was a significant positive contributor in the quarter. I have a few questions to discuss. First, what is the potential for further growth from this specific test? When do we expect those trends to stabilize? Mike, you mentioned this might happen sometime in 2024, but any additional insights would be appreciated. Second, considering its size, Resolve's margins are likely becoming more important. Could you remind us how Resolve’s margins compare to your other tests? Lastly, returning to an earlier question, as you explore commercializing other tests, given your success with Resolve, are you focusing exclusively on male urology when considering partnerships or acquisitions?

Michael McGarrity, CEO

Thank you, Jason. With Resolve, I'm pleased to say it has exceeded our internal expectations. This success comes from the diligent work we've done, including involving our sales team and knowledgeable representatives who understand customer adoption. Our growth rate will eventually normalize, but in the urology market related to Resolve, we see significant potential. Out of the 10 million UTI cases that occur annually in the U.S., 20% go to urology, indicating room for growth, which I expect to normalize over time. While we don't break out Resolve's margins specifically compared to our other tests, we are seeing an overall improvement in our margins, and we have insights into how that develops based on our pricing and cost control strategies. We are focused on growth in urology and have identified several opportunities. One exciting project is our monitor initiative aimed at patients in active surveillance, though we are not currently building that into our forecasts. Nonetheless, we believe it could have a significant impact on patient care.

Jason Bednar, Analyst

Okay. All right. Very helpful. Maybe if I can drill in on gross margins a bit, maybe it's related to my last question. But pretty strong exit rate, putting up the 65% plus exiting 2023. Was that strength due to testing mix with Resolve being stronger? And then maybe talk about the sustainability of that gross margin performance as we think through modeling future years. Should we be anchored to the 65% or plus or minus that level here in 2024 and 2025?

Michael McGarrity, CEO

Yes, I think plus or minus is probably right. You are correct in your assumptions regarding the testing mix affecting our margin a couple of points. Our goal, if we go back to a year ago, was to target 65% plus or minus. Looking at the quarters coming up, I think anywhere in that range of 2 or 3 points below or above is reasonable based on mix. Ultimately, could our margins start with the 7? It could, but we're not guiding or projecting to that right now. We're confident that margin is sustainable. The two things we control are coverage, which drives our ASP in cost, which we are focused on. As we scale our business, we continually look at ways to drive cost benefits that would affect margin. The last criteria I noted was critical; we won't look at anything that isn't accretive even initially, unless it builds and we have visibility to how it lands on our targeted gross margin.

Jason Bednar, Analyst

Okay, great. And one last clarification question here. The $6.3 million operating loss in the period, I just want to confirm that included one-time costs from the sole listing transition, correct? I think that really figure would have been a $4.6 million operating loss if not for those one-time costs. Do I have that right?

Ron Kalfus, CFO

That's correct, Jason.

Jason Bednar, Analyst

Okay. Thanks, Ron. Thanks guys.

Michael McGarrity, CEO

Jason, thank you.

Operator, Operator

And your next question comes from the line of Mark Massaro from BTIG. Your line is open.

Mark Massaro, Analyst

Hey guys, congrats on a great 2023. A lot of the questions have been asked, but I’m curious if you have a preference for either partnering or acquiring. Mike, you mentioned that whatever you do needs to be accretive on day one. If you consider bringing in another clinical test, can we assume that reimbursement would need to be already in place?

Michael McGarrity, CEO

That's a good assumption, Mark. We went through quite an odyssey with the reimbursement landscape, which is challenging for everyone in the clear lab diagnostics sector. Yes, that is indeed a key criterion for sure. In terms of preference for either partnerships or acquisitions, the GPS acquisition was somewhat transformative for us, particularly at our stage. Resolve is a good example of and that's why I comment on how important it was that we got that right. Now we have a model for channel growth opportunities that don't require the capital investment that an M&A or GPS would. Any M&A would have to look like GPS, where we bought immediate revenue and gross margin accretion to the business. I think your assumption is correct in terms of reimbursement being a standard moving forward.

Mark Massaro, Analyst

Okay, great. And then as we're thinking about tuning up our models that the 2024 revenue guidance is looking for 12% to 15% top line. Is it fair for us to assume mostly volume growth for the year? Are there certain tests that you might see some ASP expansion? I know Select is not quite achieving maturity yet. So, how should we just think about that volume versus price dynamic?

Michael McGarrity, CEO

Yes, I think you're right in your assumption. Volume drives the majority of our growth projection. We tend to lean on ASP as a support for that growth. We expect our sales team to drive the growth that you're referring to through straight adoption from our customer base and their expectations individually and as a group read on that.

Mark Massaro, Analyst

Okay, great. And then if I'm looking at the numbers correctly, it looks like the OpEx came in at around $71 million for the year. I believe that's a 25% growth year-over-year. How should we be thinking about OpEx in 2024? And then maybe just sort of reconciling, I think you were at a $10 million use of cash. You've got $22 million on the balance sheet. Just help me think about cash utilization in 2024?

Michael McGarrity, CEO

Yes. Ron can comment on your OpEx number. I think that's a little high with what we reported. To your second question, I think we want to be smart and prudent with our balance sheet. We believe we have optionality there to continue to fund the business and our growth as we move forward. I mean, we have access to additional debt, and we're confident we'll keep the company in a strong position here to support continued growth.

Mark Massaro, Analyst

All right. That’s it from me. Thanks guys.

Michael McGarrity, CEO

Mark, thank you.

Operator, Operator

Thank you. And we have reached the end of our Q&A session. Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.

Michael McGarrity, CEO

Thanks, Ludie.