Earnings Call Transcript - MDXH Q4 2021

Operator, Operator

Good day, ladies and gentlemen, and welcome to the MDxHealth Full Year Results and Business Update Conference Call. As a reminder, this conference is being recorded. At this time, I would like to turn the conference over to Troy Williams of LifeSci Advisors. Please, go ahead. Pardon the interruption. Please standby. We are experiencing a momentary delay. Please, stand by.

Unidentified Analyst, Analyst

These forward-looking statements are subject to inherent risks and uncertainties. These risks and uncertainties are detailed in the company's most recent annual report. MDxHealth expressly disclaims any obligation to update any such forward-looking statements to reflect any changes in its expectations with regard to them or any changes in events, conditions, or circumstances on which any such statement is based unless required by law or regulation. I will now turn the call over to Michael McGarrity, CEO of MDxHealth.

Michael McGarrity, CEO

Thanks, David, and thank you all for joining us for our 2021 full-year release of results for MDxHealth. With me today is Ron Kalfus, Chief Financial Officer. We believe we are at a clear turning point in the growth of MDxHealth and that this growth will be sustainable. While we have continued to face headwinds of patient flow and sales rep access associated with the pandemic, we are confident that in 2022, these will all begin to turn into growth-driving tailwinds. I will speak to the specifics of and the basis for our view. And Ron will comment on our financial and operating results for the quarter and the year. But first, let me point to a few highlights. Our Q4 revenue grew by 46% over Q4 2020, and our full-year 2021 revenue grew 20% over the prior year, demonstrating our efforts to continue to drive adoption of our clinical pathway menu for prostate cancer, even amidst the lingering impact of Delta and Omicron variants associated with the pandemic. These growth rates are particularly encouraging in light of the clear impact of the pandemic on cancer screenings, with prostate cancer screening rates estimated to be down 50%, coupled with sales rep access limited by a similar factor. Absent any surge in the pandemic variants, we are trending toward our pre-pandemic volumes for both Confirm and Select. We expect this trend to continue and drive sustainable growth going forward. We are also confident that our sales team is engaged in driving both our total ordering physician base and committed clinical pathway adoption within that base. Internally, we view these metrics as the critical drivers of adoption, unit growth, and revenue. As restrictions ease, patient flow returns, and rep access reopens, we will begin to report on these metrics. Our patient flow has been particularly impacted as our current menu is pre-cancer diagnosis. This is an important delineation as it lends itself to a greater restriction of patient flow compared to patients already diagnosed with cancer. And while prostate cancer rates have elevated during this period due to delayed screenings noted, and positive biopsy rates will likely trend higher for a period, we believe this reflects our underlying growth as we return to normal dynamics in the market. Our total ordering urologists have not been adversely affected through the pandemic, and we view this as a leading indicator of our return to growth. It should also be noted that while our test volume increased modestly in 2021 in spite of these factors, our accelerated revenue growth reflects our demonstrated commitment to operating discipline and advancement of our payer coverage and associated reimbursement for our Confirm test. We are confident that the same growth leverage will apply to our comparable SelectMDx test volume beginning in 2022, with the finalization of the MolDx foundational LCD covering our Selected indication. Moving to our market introduction of a urinary tract or UTI testing service in the last quarter of 2021, we are encouraged by our progress based on a number of leading indicators. First and foremost, our diligence around the market, competitive landscape, and alignment of the UTI test with our focus into urology, and fit into adoption within our current menu customer base has been confirmed. Second, we are beginning to see adoption of our UTI offering even amidst the market and access challenges noted. Finally, we expect UTI testing services to begin contributing to revenue in 2022 and will provide additional comment on our view forward and guidance for 2022. But first, let me turn the call over to Ron for a review of our financial and operating results for 2021.

Ron Kalfus, CFO

Thank you, Mike. The pandemic has indeed continued to present challenges throughout 2021, not just for MDxHealth, but across the diagnostic sector. While volumes remain choppy during the year and grew modestly over 2020, we were able to grow our revenues at a higher rate, thanks to improved revenue cycle management and higher average selling prices. Total revenue for 2021 was $22.2 million, an increase of 20% as compared to total revenue of $18.5 million for 2020. Services revenue amounted to $21.9 million, an increase of 21% as compared to $18.1 million a year earlier. Revenue from ConfirmMDx represented over 90% of service revenue for all periods. Gross margins for the year were 47.5% for 2021 as compared to 43.6% for 2020, representing a gross margin improvement of 390 basis points primarily related to a higher average selling price. Operating expenses for 2021 were $37.4 million, up 6% from $35.2 million for 2020. Excluding non-cash expenses such as depreciation, amortization, and stock-based compensation, operating expenses for 2021 were $33.1 million, an increase of 10% over 2020, primarily driven by R&D expenses related to our future product pipeline. Turning to payer coverage, we are awaiting a final local coverage determination or LCD for our Select tests, which we expect to be issued by Palmetto by mid-year. As you may recall, a draft LCD for biomarkers for prostate cancer published by Palmetto GBA under its MolDx program, citing evidence of the clinical utility of SelectMDx, was issued in May of 2021. Finally, we ended the year with $58.5 million in cash, strengthened by gross proceeds from our January equity raise of €25 million, approximately $30 million, and in November, the initial public offering on the NASDAQ of $45 million. This concludes my brief overview of the results. I will now turn the call back to Mike.

Michael McGarrity, CEO

Thanks, Ron. I hope it is clear that even amidst the challenges presented by this environment, Ron and I, along with our entire team across all of our operating functions remain committed to and believe in our focus on execution and our clear path to drive growth. We are very excited that all the fundamentals are in place and that our turnaround of key operating areas and sales talent is complete. All of these factors provide visibility to and confidence in the following guidance for 2022. We expect revenue of between $25 million and $27 million, which would equate to revenue growth of between 13% and 21% over our 2021 revenue of $22.2 million. We expect our SelectMDx tests to be issued a final Medicare coverage decision and contribute to revenue and gross margin accretion in the second half of the year. We expect UTI testing, which services we introduced in late 2021, to also begin to contribute to revenue and gross margin accretion in the second half of the year. We will provide more clarity on that contribution at the mid-year release. We expect to advance our menu expansion into active surveillance to provide additional growth opportunities, and we will update on our progress and timelines again at mid-year. Finally, we believe that our current and expanded offerings will drive our growth based on our earned reputation for laboratory service, accuracy, turnaround time, and a menu that will drive standardization to MDxHealth. In fact, we know that we are only as good as our customers think we are, and we appreciate that expectation. So as we look forward, MDxHealth is committed to being a growth company as defined by my experience with Stryker, which means that we will deliver sustainable growth based on a commitment to focus on execution. And that will serve as the foundation for value creation for all of our stakeholders, including patients, customers, employees, and shareholders. Thank you for your interest in and support of MDxHealth. And now I will turn the call back over to Kevin for questions.

Operator, Operator

Our first question today comes from Jason Bednar of Piper Sandler.

Jason Bednar, Analyst

Hey, good afternoon. Thanks for taking the questions here. A few from us today. I guess, first, the test volumes were a little lighter than what we were thinking, but I guess curious if you could quantify at all the headwinds you may have been seeing out there from Omicron. And then how you'd characterize patient flow into practices and resulting test volumes here, just the last few months is really moved through the worst of the Omicron wave. Maybe talk about the exit velocity that you've seen from January to February.

Michael McGarrity, CEO

Yeah, hey, Jason. Not unlike a number of the diagnostics companies, we pointed to a bit of the difference between our patient population and associated flow pre-diagnosis versus cancer diagnosis. But we are beginning to see those patient flows come back. I think there was a little bit of a carryover from the end of the year into Q1 with choppiness on the opening and sales rep access, and particularly what we've seen with staffing and capacity within practices. We expect those to turn, and we'll be reporting on that turn as we come out of Q1 and into Q2.

Jason Bednar, Analyst

Okay. Alright, that's helpful. Thanks, Mike. And I guess maybe as we think about menu expansion for the business with the active surveillance program, how should we be handicapping the timing of a potential launch for introduction here? I mean, you did give some thoughts later this year. Is that updating timing later this year, or is that truly something where we could expect to actually have something on the market later this year, just to clarify that?

Michael McGarrity, CEO

Yeah. I think I'm pointing to mid-year for two or three reasons, Jason, that I'm noting. We expect really good visibility on a couple of the key drivers. Number one, the coverage of our Select test. Two, good visibility to our UTI introduction uptake and view forward on volume, payer coverage, and adoption through our customer base, and our active surveillance. So, we would expect to give clear expectations on potential launch dates, but we would not expect or anticipate any contribution to revenue or P&L for those in 2022.

Jason Bednar, Analyst

Alright. That's helpful, looking forward to that later this year. And then I guess your final one for me, I just totally appreciate all the details around guidance for the year, very helpful. Is there any way to desegregate maybe what you're assuming internally with respect to volumes versus price gains for Select and Confirm, what inflection in revenue maybe you might be baking in once that final LCD is received by mid-year as we are all expecting to occur? And then additional detail you'd be willing to provide on what's assumed for UTI would be helpful. Thank you.

Michael McGarrity, CEO

Yeah, Jason. We think our unit volume for both Confirm and Select will begin and continue to accelerate from here into mid-year, and that's part of the view that we'll provide there. As far as coverage, we'll have much better visibility to our Select. We've made real progress on the Confirm side with three factors; our revenue cycle management, our cash collections, and our coverage, driving additional payer coverage. When we look to Select, we expect the same to really provide. If you look at our inclusion in the NCCN guidelines, we expect that to boost our focus in driving the pathway to take the unit volume and then from a revenue perspective. We'll gain visibility to our coverage from Medicare, and that would begin to contribute to our revenue in the back half of the year. So we expect that to start in Q3. We just want to ensure we do not get ahead of any expectations there regarding contribution and timing. However, we're confident in our coverage and the contribution beginning, and we will provide good visibility to that for the back half of the year at mid-year.

Jason Bednar, Analyst

Alright. Perfect. Thanks so much.

Michael McGarrity, CEO

Thanks. Chris.

Operator, Operator

Our next question comes from Kevin DeGeeter of Oppenheimer.

Kevin DeGeeter, Analyst

Hey guys, thanks for taking our questions. Maybe just wondering, UTI, can you just comment on the early experience on reimbursement, kind of how some of your customers are thinking about the ability to receive reimbursement or existing codes, sources, miscellaneous, and just kind of where you might be on how we should think about ASP for that product?

Michael McGarrity, CEO

Yeah. So Kevin, we like what we see on a couple of different clients from a UTI perspective and I will highlight them again because I think it's important to note that we're really looking forward to providing some good number guidance. What we'd like to do is confirm a couple of things. One, the fit with our call point and our sales reps focus on our current urology customer base; that's been confirmed. Number two, that we can drive adoption into that base from a unit volume perspective and adoption of our tests; that's been confirmed. Number three, if we look at the market, we segment it as those customers using traditional culture methods and those customers using one of the other main competitors. I would say we want to be able to confirm that we can position ourselves well, due to better turnaround, better test, or better standardization focus from our representatives and laboratories; that's been confirmed. As far as the reimbursement payer mix, we have good visibility to payer coverage. What we want to get is a little more data as we have with Confirm and Select regarding our particular mix, the reimbursement rates from those, both Medicare, commercial, private payers, and then give you an overview of the average sale price. But I would say we haven't seen anything in our experience thus far that would change any of our views as to our, A; launch fit into our test, and B; the growth it can provide our business.

Kevin DeGeeter, Analyst

Perfect. And then just maybe one more from us, and that's just on the sales force, particularly the U.S. commercial organization. Your current thinking on opportunities to perhaps expand and extend that network in 2022. And specifically, as we think about that LCD update, is that a potential inflection point for more aggressive investment into the commercial infrastructure? I'm just trying to put that into the context of the revenue guide.

Michael McGarrity, CEO

Yeah, Kevin, I got that. Our revenue guidance does not imply any additional sales spending or add to our sales force. We think at this point based on our 2022 projections and guidance, we're right-sized. If we feel we can accelerate growth as patient flow returns and all these factors flip, as we know they will, then we'll do that. But it's not incorporated or factored into our 2022 view at this point.

Kevin DeGeeter, Analyst

Extremely helpful. Appreciate the update.

Michael McGarrity, CEO

Thanks, Kevin.

Operator, Operator

And we can now go to Mark Massaro of BTIG.

Mark Massaro, Analyst

Hey, guys, thank you very much for the questions. Recognizing that SelectMDx is a urine-based test pre-biopsy, and ConfirmMDx is a tissue-based test, post-biopsy. Is there any reason to think that Select is likely to perhaps outpace Confirm, just recognizing the sample type and where it sits in the workflow? And then a second part to that question, are you seeing urologists holding back ordering SelectMDx because the Medicare decision is not finalized, or are they ordering regardless of the reimbursement status?

Michael McGarrity, CEO

Thanks, Mark. A couple of points to make. Number one, regarding adoption. We like the mix and profile of the two tests in our menu, because the Select market from a unit perspective is significantly larger than the Confirm negative biopsy market. Yet, the Confirm reimbursement ASP is likely meaningfully higher than the Select. So, if we drive unit growth, which our sales team will be doing, then we like the way that drives revenue. If our Select volume goes where we know it will go and our Confirm volume continues to grow, we like that mix for providing really sustainable growth. As far as the Medicare coverage affecting adoption, our adoption to date and units for 2021 show it has been clear that we've managed to drive adoption of our Select test into urology from a unit perspective. It's essential for us to demonstrate market appetite, market opportunity, clinical utility, and clinical validity. The first thing payers want to see is if it is being used. We've demonstrated all that, which is reflected in both the draft LCD and inclusion in the NCCN guidelines from a clinical utility perspective. So, we expect this body of work to begin to drive both volume and, clearly now, revenue because that has been a cost carrier for the business over the last three years since I've been here. We're looking forward to the accretion from the gross margin that revenue coming over that volume provides. The same applies to UTI. Hopefully, that answered your two or three points in that question.

Kevin DeGeeter, Analyst

Yeah, that's super helpful. You did generate a nice beat on Q4 revenue. You did come in a little bit lighter than us on volume. You talked about improved revenue cycle management. Can you give us a sense of whether or not you had any one-time catch-up payments from prior quarters, and then should we expect any of those, if any, later in 2022?

Michael McGarrity, CEO

No is the answer to that second part of your question. We acknowledge that predicting unit volumes over the last few months and a couple of quarters has been challenging. But we feel positive about the predictability and projectability of our business based on our driving of units which we know will become evident and obvious this year. The real improvements we've made on coverage and collection are reflected in our revenue growth, which is getting ahead of the units. We like that difference, but we know that the other catches up, so we don't expect any contraction in our average sale price as our collection patterns over the last couple of quarters. We expect improvement from both the Select volume and the UTI volume.

Mark Massaro, Analyst

Okay, great. And then my final question. Did you have any volumes for UTIs in Q4? I had a small number. I understand you soft-launched it. I'm really just asking, has this been broadly commercialized across your channel nationwide? And I guess I'd be curious if you could just speak to your confidence on understanding how reimbursement will play out for this test. It was asked earlier if these are existing or miscellaneous codes, but have you started billing for this test as well?

Michael McGarrity, CEO

Yes. We did have unit volume in Q4; not material to report. We have now entered into a full launch with our salesforce and will begin to report our volume and revenue associated with UTI. We expect it to contribute to revenue and have had reimbursement experience with a variety of our payers. Ron and I just want to ensure we have enough data and experience to provide you with a good view forward on how we foresee that contributing to our revenue. We have a clear understanding of the reimbursement landscape, and we anticipate this contributing to our 2022 revenue growth.

Mark Massaro, Analyst

Okay, great. That's it for me. Thank you.

Michael McGarrity, CEO

Thanks, Mark.

Operator, Operator

Our next question comes from Thomas Franken of KBC Securities.

Thomas Franken, Analyst

Hi, thanks for taking my question. Two from my side. First question is with regards to the Select test and the implications of the potential LCD coverage that you're looking at in the coming months. To which extent would you see this as a catalyst for driving further coverage or reimbursement coverage on the price insurers as well?

Michael McGarrity, CEO

Yeah, Thomas, first of all, thank you for staying up late and joining us. We appreciate it. Yes, we view that model based on our experiences with Confirm. Typically, Medicare acts as a catalyst for broad commercial private payer coverage. That's our expectation. In advance of that, our coverage reimbursement team has already been focused on getting payers up to speed on the clinical utility and value, alongside the update on the NCCN guidelines, such that we expect to see similar results as we did with Confirm.

Thomas Franken, Analyst

Okay. Thank you. And secondly, on the UTI tool, we already talked a bit about how you look at reimbursement moving forward there. I was also wondering how you view potential guideline inclusions there. Is this also a relevant aspect for UTI, and how do you look at that?

Michael McGarrity, CEO

Different patient segments are involved, with NCCN applying to our cancer menu, and UTI being on the infectious disease side. However, one of the key criteria for us entering the market was the clarity of market need for more rapid, multiplexed organism susceptibility tests compared to traditional culture methods. We believe this need is evident, and that was part of the reasoning for our entry into this market. So while it's driven by distinct value propositions, we do believe that the fit with our sales team, customer reach, and the fact that it complements our prostate cancer menu aligns well and presents a solid value proposition to urologists.

Thomas Franken, Analyst

Alright. Thank you very much.

Michael McGarrity, CEO

Thomas, thank you.

Operator, Operator

As there are no further questions, that concludes today's conference call. We thank you for your participation and you may now disconnect.