Earnings Call Transcript - MDXH Q2 2021

Operator, Operator

Good day ladies and gentlemen, and welcome to MDxHealth Half Year Release of Results and Business Update Conference Call. As a reminder, this conference call is being recorded. 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 Company’s most recent annual report. MDxHealth expressly disclaims any obligation to update any such forward-looking statements to reflect any change in its expectations with regard thereto or any changes in events, conditions or circumstances on which any such statement is based unless required by law or regulation. And now, at this time, I’d like to turn the conference over to Mr. Michael McGarrity, Chief Executive Officer of MDxHealth. You may begin your conference, and please go ahead sir.

Michael McGarrity, CEO

Thanks, Cody. And thank you all for joining us for our 2021 midyear release of results for MDxHealth. With me today is Ron Kalfus, Chief Financial Officer. We are encouraged by our expected progress in the first half of 2021. Our results reflect that the key fundamentals of our business are now in place and will begin to drive sustained growth for MDxHealth. Our confidence is based on the following actual results and additional leading indicators. Volumes for our ConfirmMDx test increased for the third consecutive quarter, up 4% sequentially in Q2 over Q1, compounding on the 6% Q1 growth over Q4 of last year. For SelectMDx test, volume increased an even greater 16% sequentially over Q1, while year-over-year growth for Q2 was 82%. Also notable, we received a draft coverage decision on our SelectMDx test for Medicare. And while we cannot be certain of the timing of a final coverage decision, we believe this is a clear indicator and validation that our SelectMDx test will be afforded coverage for a Medicare patient population on a national basis. Our compelling clinical data, broadening market adoption, healthcare economic value to payers and providers, and our inclusion in the NCCN guidelines supports this expectation. Based on these positively trending results, I believe it is important to characterize what we are seeing in the market with regard to the pandemic dynamics and its influence on our volume trends. First, from a patient flow perspective, we see that there’s likely a backlog of patients that deferred physician visits will be coming back into the healthcare system as the pandemic lifts. These patients have put off important PSA screenings for prostate cancer, estimated to be down 48% in 2020 and associated biopsies based on PSA and risk factors. While we are still in the early days of this now very elastic return to normal patient flow, we are confident that our work and focus on adoption of both SelectMDx and ConfirmMDx in the diagnostic pathway of prostate cancer can and will become the standard in clinical urology practice. We believe our growth trend will clearly reflect that we are outperforming the pandemic to best characterize it and at the anticipated lift of patient flow over the coming quarters, however choppy it may be, will prove out these leading indicators. Further, despite the continued effect of the pandemic together with the emergence of the Delta variant, and the continued limitations on sales force access, our team has continued to engage and drive adoption of our menu into the diagnostic pathway of prostate cancer. Before I turn the call over to Ron, I would like to highlight that we’ve spoken to the restructuring of leadership, focus and execution within our sales organization, and that we will look to take advantage of what we believe we are building as a best-in-class sales team to drive additional channel opportunities into our urology customer base. In fact, the first of those opportunities has been realized as we have begun to introduce a urinary tract infection or UTI test, as our first channel opportunity through our direct sales team into urology. I will comment further on this opportunity for MDxHealth and advancing our strategic initiatives. But first, let me turn the call over to Ron for a review of our financial and operating results for the first half of 2021.

Ron Kalfus, CFO

Thank you, Mike. The pandemic continues to impact sales rep access and the return to normal patient flow for not only MDxHealth, but the healthcare industry as a whole. While various companies may be viewed as comparable to MDxHealth, it should be noted that each disease state in cancer diagnostics has a unique profile related to the impact from the pandemic and its associated recovery. While we have seen signs of recovery evidenced by the sequential increases in volume and revenue for both of our products, we may continue to experience some fluctuations with expansion and contraction by geographic regions, particularly with the emergence of the COVID Delta variant. Moving on to our results, total revenue for the first half of 2021 was $10.7 million, compared to total revenue of $9.9 million for the first half of 2020. Revenue from ConfirmMDx and SelectMDx for the first half of 2021 amounted to $10.5 million, an increase of 9% as compared to $9.6 million a year earlier. Q2 2021 services revenue was up 43% from Q2 2020. Gross profit on products and services for the first half of 2021 was $5.2 million, as compared to $4.7 million for the first half of 2020. Gross margins on products and services were 48.6% for the first half of 2021, as compared to 47.4% for the same period in 2020, representing a gross margin improvement of 120 basis points. Operating expenses in the first half of 2021 were $17.7 million, consistent with the same period last year. Excluding non-cash expenses such as depreciation, amortization and stock-based compensation, operating expenses for the first half of 2021 were $15.7 million, an increase of $0.3 million, or 2%, over the first half of 2020. Finally, following a successful equity raise of €25 million or approximately $30 million by U.S. and European investors, including existing shareholders, we ended the half year with $31.3 million in cash and cash equivalents. Our cash burn remained comparable to prior year at $13.1 million for the first half. 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, and our entire team across all of our operating functions, remain committed to and believe in our focus on execution and our clear path to build value. We expect the fundamental drivers of our business will become clear and obvious, as we go forward. While we will not be providing specific guidance for the remainder of 2021, I would like to emphasize our expectations and what we will advance and deliver going forward. First, as urology group practices in general and our customer base specifically move towards standardization of menu and laboratory service providers, as well as adoption of clinical diagnostic pathways, we expect to leverage this trend into sustainable growth for MDxHealth. Second, the recent determination by MolDx, that our SelectMDx test meets the necessary conditions to qualify for coverage for Medicare patients and its draft coverage LCD will not only catalyze our focus efforts to expand coverage among commercial and private payers but will most importantly, together with our inclusion in the gold standard NCCN guidelines, support our efforts to accelerate adoption by the urology community. Third, as I noted previously, we have refocused our R&D resources, from product support and advancement of our existing menu to now investing into menu expansion that will supplement and contribute to our future growth. Our efforts here will expand our menu into active surveillance, where we believe we can deliver clinically actionable results for both selection and monitoring of patients for active surveillance. All of these initiatives are designed to put MDxHealth in the position to be the only company in the prostate cancer diagnostic space that can take a patient from an elevated PSA all the way through the diagnostic pathway. Lastly, but notably, as I commented earlier, we’re commencing a limited market introduction of a UTI test into our urology channel where approximately 20% of the 10 million cases in the U.S. market present annually. This market is one of the few remaining substantial opportunities for rapid and actionable multiplex molecular diagnostics to convert from traditional culture methodologies. We believe that this conversion is now well-characterized, and that we can participate in this trend within our current and targeted customer base. Also, it is important to note that this menu expansion is the result of a comprehensive and rigorous investigation over the last year to confirm market dynamics, competitive landscape, reimbursement and clinical utility for our urology customer base. That diligence has informed our decision to take this initiative. We are confident that our assay design, which will incorporate a highly multiplex panel of both organism and drug susceptibility markers or targets, will provide timely and clinically actionable results to our urology customer base for both diagnosis and treatment. While it would be premature to provide guidance on the impact to our growth and value creation, we are positive and optimistic that we can leverage this opportunity as the first of a number of potential channel opportunities to drive growth, and that this revenue would be accretive to our P&L and gross margin when recognized. We will look to update on our view and progress in the strategic initiative as we come in 2022. It is important to note that these initiatives are consistent with our building brand, which is based on a reputation for quality of people and diagnostics within the industry, and our mission at MDxHealth to provide highly accurate and clinically actionable neurologic solutions to inform patient diagnosis and treatment, while improving healthcare economics for payers and providers. So, as we look forward, we carry the highest sense of responsibility to this commitment, the focus and execution. It is also important to note that these strategic initiatives take our total addressable market to over $4.5 billion in the U.S. alone. We believe this puts us in a unique and proprietary position in the urology space and will serve as the foundation for our growth and success. I would like to again communicate very clearly that throughout the coming year, our team will be singularly focused and dedicated to driving sustainable growth and that our commitment to focus on execution 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’ll turn the call back over to Cody, for any questions.

Operator, Operator

Thank you. We’ll take our first question from Lenny Van Steenhuyse from KBC Securities. Please go ahead.

Lenny Van Steenhuyse, Analyst

Hi. Good evening, gentlemen. I hope you can hear me well. Two questions from my side. You mentioned indeed a bit of a choppy patient flow, a bit of an elastic patient flow now as the pandemic continues to linger. Do you observe any changing behavior with urologists to adapt to this changing long-term, let’s say normal as the patient flow continues to be choppy? And does your approach to existing and novel customers shift? And then I’ll have a follow-up to that. Thank you.

Michael McGarrity, CEO

Yes, Lenny. Yes, we do likely see, as I commented that this patient flow that has been or backlog that has been building, will come back through the system. We have clear visibility to the fact that, and I run the risk of overusing the pathway term. But I think it’s important because, previously, I think, prior to my joining the Company, there was always a question about whether this is a Confirm company or a Select company? Hopefully, our message is very clear that we have a prostate cancer menu. And when applied in the diagnostic pathway is just very clear and straightforward adoption profile. As these patients come back through, I think that will become evident. Secondly, we’ve made the conscious decision to continue to invest in Select as part of that pathway as opposed to waiting until we had coverage. We think that as well will pay dividends. When you look at the growth rate for our Select in combination with the progress with Confirm on the pathway, we have a lot of leverage in our P&L and associated gross margin based on our confidence that we will be able to run coverage over our Select test. So, that investment will, I think our patients there in focus will pay off and then our expansion into active surveillance as well puts us in a unique space. We are very positive; we probably just need a little bit more clarity as to the release of that patient flow.

Lenny Van Steenhuyse, Analyst

Thanks for that. And perhaps zooming into the UTI side, I was wondering if you could elaborate a bit on, let’s say, the process behind the addition of the tests, and how the financial dynamics of that test compare to Confirm and Select in terms of pricing and margin?

Michael McGarrity, CEO

Sure, Lenny. I briefly mentioned it, but I want to emphasize that we're developing a focused and unique channel in urology. This is becoming increasingly apparent, allowing us to explore partnerships and distribution opportunities based on our access to this channel. It's important to clarify that our strategy is driving our actions, not the other way around. We believe this aligns perfectly with our sales strategy and process. I want to highlight the work we've done to validate this, and from an economic standpoint, the situation is quite clear and mitigated in terms of risk. From a pricing perspective, we have a well-defined framework, with our Select and Confirm tests potentially priced at around $1,500 and coverage in the high hundreds. We are confident that as we start recognizing revenue from this opportunity, it will positively impact our P&L and gross margin. We'll provide more details as we collect a quarter or two of experience, focusing on a quality and well-executed launch. Based on my experience, some challenges may arise, but we are confident in the groundwork we've laid and look forward to providing better visibility as we move into next year.

Operator, Operator

We’ll take our next question from Kevin DeGeeter with Oppenheimer.

Susan Chor, Analyst

Hi. This is Susan calling in for Kevin. Just a few questions. I believe the comment period for the new LCD ended in July, and I was just wondering if you guys have any thoughts or any comments that you would call out.

Michael McGarrity, CEO

Yes. Susan, I probably have to lean on my difficulty in projecting the timing. I would just say that our confidence is very, very high and the data, the clinical utility, I think the inclusion in the NCCN guidelines is quite compelling. We expect the comment period to reflect that. So, we are through that. And I think from my perspective, it’s like the FDA and Medicare, we just can’t and don’t want to guide to a specific timing. But we know over the coming months we’re very, very confident, next between the fall and the spring that we will be issued a final coverage decision. As I commented previously, we think that provides a significant tailwind for the Company. We’ll approve out our focus on continuing to drive Select while we were not getting coverage.

Susan Chor, Analyst

Okay. Thank you. And just actually another question on the other LCD, L37733. There was an update to that LCD, I think at receiving expanded coverage. I was wondering how that might impact Select and if at all.

Michael McGarrity, CEO

Yes. We don’t view or have any particular comment on that. We believe that our Select reimbursement and clinical utility package stands on its own.

Susan Chor, Analyst

And one last question. I wanted to know what the impact of Delta is on the Company’s commercial organization, specifically in-person sales, travel and things like that.

Michael McGarrity, CEO

Yes. I mean, it’s clearly had an impact as it has on all sales organizations, particularly in the diagnostics space. I don’t want to quantify it to some specific impact. I would just say that the biggest impact is probably on access. Our team is fully engaged and has been productive. But access will clearly open up, or we anticipate that. I think all the companies in our space are reporting about 50% estimated, management estimates; those are mine. That’s probably right from an access perspective. But, we’ve been, as I said, fully engaged.

Susan Chor, Analyst

Great. Those are all the questions from us. Thank you.

Michael McGarrity, CEO

Thanks Susan. Cody?

Ron Kalfus, CFO

Cody, can we move to the next question?

Michael McGarrity, CEO

Cody? Please bear with us. There might be some technical issues on the backend.

Operator, Operator

I do apologize for the inconvenience. We will now take our next question from Laura Roba from Degroof Petercam. Please go ahead.

Laura Roba, Analyst

Yes. Many thanks for the clear presentation. Three questions on my side. What does your current development pipeline mean in terms of R&D expenses? Could you provide some guidance on that? Second question, how do you balance the focus between the commercial relevance of your existing products and the development of the new solutions? And finally, when do you expect to launch the UTI? Thanks.

Michael McGarrity, CEO

Thanks, Laura. In terms of R&D and operating expenses, our focus on expanding our menu and active surveillance will entail some investment in R&D, but we believe it will be offset by our business growth. It's worth noting that this won't significantly increase our fixed expenses related to headcount; it relates more to clinical studies and samples typical for a project like this. We are committed to maintaining operational discipline regarding our expenses and cash management, and that will continue. Regarding your second question about focus, we are being diligent in that process as I've highlighted the importance of execution. I want to emphasize that this is not contradictory; rather, it aligns with our strategy. Our target customer—specifically, those qualified for Select and Confirm, along with our UTI test—is consistent and complementary. We don’t foresee this as dilutive to our focus; instead, we believe it enhances our sales team's quality and standardizes operations in the neurology space. This is why I reference the $4.5 billion total addressable market; we believe we are uniquely positioned to serve this market comprehensively. Concerning market introduction, based on my experience, we seek to introduce this product in a focused and high-quality manner to our customer base. Over the next quarter or two, we will clarify our full launch strategy and its integration into our future business vision. As we develop our internal models for value creation and engage with you and the market, we are confident it will drive growth. We just don’t want to rush things, but we feel very positive about this.

Operator, Operator

Thank you. And that does conclude today’s question-and-answer session as well as today’s conference. We do thank you all for your participation. And you may now disconnect.