Earnings Call Transcript - MDXH Q4 2022

Operator, Operator

Greetings. Welcome to the MDxHealth Fourth Quarter and Full Year 2022 Earnings 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. Before we begin, I would like to remind everyone that we 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 our filings with the Securities and Exchange Commission, specifically in the company's annual report on Form 20-F. I will now turn the conference over to your host, Michael McGarrity, Chief Executive Officer. You may begin.

Michael McGarrity, CEO

Thanks, Shamali. And thank you all for joining us for our 2022 full year release of results for MDxHealth. With me today is Ron Kalfus, Chief Financial Officer. As you are likely aware, prostate cancer is the most common form of cancer in men. When I joined MDxHealth in 2019, my vision was to continue to build a company that answered the most important questions facing the urologist and patient. And there are three that provide the path that patients will take through diagnosis and treatment. One, do I need a biopsy? Two, is my biopsy actually negative or do I need further confirmatory analysis of my results in order to avoid repeat biopsies? And three, a biopsy is positive, what do I do now? MDxHealth has become the only company that can answer all of these questions. Our menu of tests inform the patient and urologist through the often confounding journey and improved treatment decisions along the way. 2022 was a transformative year for MDxHealth. We began the year with a single test generating substantially all of our reported revenue. Just 12 months later, MDxHealth now has a menu of four tests, all generating or poised to generate sustainable revenue growth and drive significant operating leverage throughout 2023. In addition, we began the year with a sales channel of 30 direct reps and finished the year with a channel of 54 direct reps as a result of the GPS acquisition. Milestone drivers of growth and value creation were reinforced with our acquisition of the Genomic Prostate Score or GPS test from Exact Sciences, which we believe has allowed us to establish a best-in-class sales team and unmatched menu to offer urologists. The launch of our ResolveMDx Urinary Tract Infection test, the first growth opportunity driven by the strength of our sales channel also played an integral role in our transformation, contributing close to $5 million in revenue and demonstrates two key aspects of our operating model. First, it validates our strategy by demonstrating that we can successfully identify innovative, high-growth diagnostic products that complement our existing portfolio. Secondly, results highlight the operating leverage of our business model by demonstrating how our process can seamlessly integrate a new diagnostic test into our existing sales and marketing channels, without incurring significant additional operating expenses. Before I turn the call over to Ron to comment on our financial and operating results for the quarter and year, I'd like to first point to a few key highlights for 2022. Our Q4 revenue grew by 114% over Q4 2021 and 15% when excluding the acquisition of GPS. Acceleration of unit growth for Confirm MDx was an important contributing factor in our topline performance as continued execution by our sales team helped drive unit demand. In full year 2022, billable test volume for Confirm increased by 11% over 2021 with Q3 growth of 14% accelerating to 21% in Q4. With an estimated 30% of prostate biopsies resulting in a false negative, we believe the 96% negative predictive value of the Confirm test significantly reduces the need for repeat biopsies and will continue to become the standard as we drive adoption. Our full year 2022 total revenue grew 67% over last year or 25% when excluding GPS, which reflects our continued focus and efforts throughout the pandemic to drive growth. And I would like to point out that while we're all excited to put the pandemic behind us, the impact on our business was profound. Prostate cancer screenings down 50% over the last couple of years, leading to increased rates of prostate cancer. In summary, our results reflect a clear focus on growth and execution as evidenced in the following. As communicated with the launch of ResolveMDx, we have validated the opportunity with our sales channel and customer base following many months of diligence and a clear set of criteria to substantiate the fit with our current menu, call patterns, and relationships. We also evaluated the product's opportunity to generate accretive contribution to our gross margin from day one. After 12 months on the market, we can comfortably state that this process has been validated and can be applied to source additional channel opportunities that do not require material investment. The acquisition of the GPS test represents a clear and compelling opportunity to expand our existing customer base and leverage the acquired customer base by cross-selling complementary prostate cancer diagnostics in our offering. We now are the only company that can provide a clear and clinically actionable precision diagnostic for risk stratification, post-positive or negative initial biopsy. We are confident that our ability to partner with our urology customers with an unmatched menu based on our reputation for excellence in laboratory services will allow improved efficiency through standardization. We continue to execute on our integration of the GPS test, while a complex and all-consuming process from both the sales and operating perspective, we have been focused in Q4 and into Q1 to transition all aspects of the business. In Q4, we completed the restructuring of our sales team with additional reps from Exact being territory realignment, alignment of performance-based incentive compensation, and cross-selling, cross-training of product offerings. We are confident that these efforts will provide for a high-performing sales team in 2023 and beyond. We have also been intensely focused on the customer experience, including transfer of physician portals, new pathology lab sample procurement, and Market Access contract payer coverage, all of which are critical in the laboratory model to efficiently receive, process, and report within the turnaround time expectations of our customers. I will provide further views forward and outlook for 2023, but first, let me turn the call over to Ron for a review of our financial and operating results for 2022.

Ron Kalfus, CFO

Thank you, Mike. As Mike mentioned, we are pleased to report our first consolidated quarter of the MDxHealth business with our revenue growth in the fourth quarter and full year 2022. Revenues for the fourth quarter ended December 31st, 2022, increased by 114% to $12.9 million versus $6 million for the same period last year. Excluding GPS, fourth quarter revenue increased 15% to $6.9 million versus Q4 2021. Total revenues for 2022 were $37.1 million, an increase of 67% as compared to total revenue of $22.2 million for 2021. Excluding GPS, total revenue for 2022 was $27.7 million, a solid increase of 25% versus 2021. 2022 revenues were comprised of $21.8 million for Confirm, $9.3 million for GPS, $4.9 million for Resolve, or UTI test, with the remaining revenues from Select and Other. Gross profit for 2022 was $19.2 million as compared to $10.6 million for 2021. Gross margins were 51.9% for 2022 as compared to 47.5% for 2021, representing a gross margin improvement of 440 basis points, primarily related to our product mix and the addition of GPS to our product menu. Operating expenses for 2022 were $57.1 million, up 53% from $37.4 million for 2021, primarily related to additional field sales personnel associated with the GPS business, as well as non-recurring transaction-related expenses of $3.2 million. Excluding non-cash expenses such as depreciation, amortization, and stock-based compensation, as well as the non-recurring transaction-related expenses of $3.2 million, our operating expenses for 2022 were $48.1 million, an increase of 45% over 2021. Operating loss and net loss for 2022 were $37.9 million and $44 million respectively, an increase of 41% and 52% respectively over 2021. Net loss also included a one-time financial expense of approximately $1.2 million related to replacing the company's debt facility. In total, non-operating, non-recurring expenses totaled $4.4 million. Cash and cash equivalents as of December 31st, 2022 were $15.5 million. Our balance sheet was strengthened recently from the February 2023 equity raise of $43 million, which includes gross proceeds of $3 million from the underwriters' over-allotment option. Including net proceeds of $40.4 million from this offering, our pro forma cash balance was $55.9 million for year-end 2022. Total cash collections during 2022 amounted to $32.3 million, an increase of 50% compared to 2021. Excluding collections from GPS, total cash collections in 2022 increased by 20% versus 2021. This concludes my brief overview of the results. I will now turn the call back to Mike.

Michael McGarrity, CEO

Thanks Ron. The last four years, we have been focused on driving execution and operating discipline across the organization. We have restructured our sales team, our revenue cycle management processes, and advanced coverage with payers through our commitment to Market Access as evidenced by the recent GPS coverage decision by UnitedHealthcare, the largest commercial health plan in the US. We have also seen positive developments with respect to treatment guidelines as the National Comprehensive Cancer Network or NCCN recently issued updated guidelines expanding the GPS indication to include high-risk localized prostate cancer patients. This expanded criteria to address high-risk patients further validates the clinical utility of GPS in making prostate cancer treatment decisions, and enables us to more fully serve our targeted patient population. Finally, I'd like to provide a brief update on the state of our end markets now that effects of the pandemic have begun to recede. At the end of 2021, we noted the headwinds of decreased patient flow and sales rep access to urologist's offices from the pandemic. Entering 2023, we are expecting a gradual, but steady return to normalized testing dynamics and access to providers. As noted previously, screenings for prostate cancer were down approximately 15% during the pandemic. Not surprisingly, this had the unfortunate effect of increased rates of positive biopsy and diagnosis of prostate cancer. In fact, source estimates cite positive biopsy rates have increased from 50% to 65% over this two-year period. With this pressure on both our SelectMDx post-elevated PSA and ConfirmMDx post-negative biopsy, we believe this underscores the efforts of our sales team during the pandemic to deliver consistent volume trends. All of these factors provide visibility to and confidence in following guidance for 2023. We continue to expect revenue of between $65 million and $70 million, which would represent revenue growth of between 75% and 89% over our 2022 revenue of $37.1 million. We expect our Select test to be issued a final Medicare coverage decision by mid-year and contribute to revenue growth and gross margin accretion in the second half of the year. We expect our gross margin to continue to accelerate as we experienced in the back half of 2022 and correspondingly reduce our operating use of cash. 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's offering for more urology customers. So, as we look forward, MDxHealth is 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 Shamali for questions.

Francois Brisebois, Analyst

Hi, thanks for taking the question. I was curious if you could share any metrics or insights regarding cross-selling after the acquisition.

Michael McGarrity, CEO

Franc, we will be providing revenue by product as we go forward by quarter in 2023 and I think as we begin to report that, we'll be able to comment specifically on the progress we're making there. One clear example that I referred to is our tissue-based combination of GPS and Confirm where our sales reps are standing on the other side of that biopsy and we're really the only ones that can provide an answer to that initial biopsy either way positive or negative. And we think that as I noted, we believe that partnering with our urology customers with this expanded menu adds real benefit and we're in the process, as you know, of through the integration of putting together best-in-class support for customers through portals, EMR, and all of the integration aspects coming from Exact. So, yes, we're confident it will drive cross-selling in the sales force is in position now beginning in Q1 to drive that.

Francois Brisebois, Analyst

Great. Lastly, regarding United, could you provide some insight into the potential impact they might have? Should we anticipate any additional successes, and will their effect on the topline take some time? Additionally, to secure the United partnership, it appears there was a competitive process due to your unique offerings. Can you elaborate on what set you apart that led United to choose your team?

Michael McGarrity, CEO

Yes, I believe the key differentiation lies in the low-risk patient population, where GPS has the most data and clinical utility among the three products addressing that segment. This population was clearly highlighted. Additionally, regarding your first question, we have established a patient-friendly and practice-friendly strategy for managing revenue cycles and payer relationships. The effect of any new Market Access contracts is expected to enhance our revenue primarily through increases in average sales prices, which we have observed over the past two years due to our internal operational efforts and the work of our Market Access Managed Care team. We are confident that this trend will persist as we secure more payer coverage for our complete range of services, including the contracts with GPS.

Francois Brisebois, Analyst

Thank you.

Michael McGarrity, CEO

Thanks, Franc.

Mark Massaro, Analyst

Hey, guys. Congrats on a strong 2022 and outlook for 2023. I guess my first one is maybe a big picture question for you, Mike, if prostate biopsy results are now turning positive about 65% at the time versus 50% pre-COVID, I think you said. Can you just give the generalist some practical ways as to how that becomes sort of a positive for the demand for your test going forward?

Michael McGarrity, CEO

Yes, thank you, Mark. I wanted to ensure I clearly communicate the trend we've observed. Before the pandemic, on average, we had about 50% positive rates for biopsies. During the pandemic, the reduction in screenings and delays, particularly with PSA tests, resulted in an increase in positive biopsy rates when patients returned to the system. Whether this will revert to the previous normalized rate of 50% is still uncertain. However, it does seem to obscure a potential over-performance during the pandemic. Our sales team effectively maintained volume under pressure. For instance, if a representative had a customer with 100 initial biopsies expecting 50 confirmations, that number has now decreased to 35, which significantly impacts the business. The good news is that with the introduction of the GPS, we can now address that patient population, regardless of whether the situation stabilizes at this level for a while before it declines. We are confident that patient flow will eventually return, albeit gradually. This shift in patient flow will transition from being a challenge to a benefit as it comes back through the system. However, given the fixed capacity of our system, it won't be able to accommodate all this demand in just a few quarters. We anticipate a return to pre-pandemic rates over time as we move forward.

Mark Massaro, Analyst

Okay. That's helpful. My second question is about Select reimbursement. I want to make sure I understand that you are subject to the new Umbrella foundational LCD process with MolDX. Did you submit your technical assessment to MolDX, and have they had a chance to respond? I’m curious if you can share any insights or conversations you might be having with MolDX that would enhance your confidence in this reimbursement being implemented in the second half of 2023.

Michael McGarrity, CEO

Yes, Mark. You mentioned that the new foundational process is quite different. I wouldn't describe it as interactive, but it's iterative. We submit our technical assessment, and they have a period to either reject it or ask questions. We've gone through a couple of rounds with them. Without getting into specifics, we feel that the trend of questions and clarifications is moving in a positive direction. By indicating mid-year, we're essentially allowing for another round of discussion. While it could potentially happen sooner and we might receive payment in Q2, we're letting the process unfold since we're among the first to experience it. What we've observed is that it may be becoming somewhat similar to the FDA's interactive PMA or 510-K processes. Therefore, based on our perspective of its progress, we are comfortable with the mid-year timeline.

Mark Massaro, Analyst

Okay, perfect. And then my last question for either of you guys. Nice to see the Confirm volumes accelerate increased from 14% in Q3 to 21% in Q4. I'm curious if you can maybe speak to some of the underlying drivers to the extent that you can parse it out? But I also wanted to ask, the Select volumes I think were down 6% in Q4. When do you think we can return back to growth on Select? And what are some of the drivers that are contributing to Confirm growing faster than Select on the volume side?

Michael McGarrity, CEO

Yes. I want to mention a few things. I’m not saying we’ve slowed down on Select, but we may have shifted our focus due to the impact on the profit and loss statement, as we bear all the costs. Increasing our volumes means we continue to absorb the cost of goods sold until we have sufficient coverage. We're confident in our customer base and our ability to increase adoption of Select. However, our primary focus over the past 120 days has been on integrating and cross-selling GPS and Confirm, which includes training our team. We are also adding 23 new representatives and cross-training existing MDx representatives on the GPS test and vice versa. Additionally, we’re encouraged by the developments with Resolve; our approach has been to avoid simply adding products for our representatives without a strategic plan since we wanted to avoid distracting from our main prostate cancer offerings. We've confirmed that our strategies align with our customer relationships and engagement patterns.

Mark Massaro, Analyst

Okay. Sounds great. I will let some others ask some questions.

Michael McGarrity, CEO

Thanks Mark.

Thomas Franken, Analyst

Hello. Thank you for taking my question. I have two questions. The first one is regarding the expansion of the commercial sales force. I understand that it has grown significantly to about 54 representatives. How do you view this development for the upcoming year? Are you planning to increase the commercial force even further next year?

Michael McGarrity, CEO

Hey, Thomas. Thanks for staying up late. One of our strengths moving forward is our ability to maintain our operating expenses. Currently, our sales team consists of 70 people in the field, including 54 direct representatives. This is clearly our strongest channel in the urology space, which is well-suited for our business while still allowing for additional channel opportunities. We believe that from an SG&A perspective, our operating expenses can remain very stable as we progress. Our goal is to grow into a $100 million business with a 65% gross margin and profitability. We are confident that this sales channel can help us achieve that, and any increase in operating expenses will be linked to scale and volume in our laboratory.

Thomas Franken, Analyst

Okay. That's very clear. Thank you. And with regards to the second question, I wanted to zoom in on the monitor and the access that you have in the pipeline. Could you perhaps provide some color or where you stand with that? And is there already any indication of what timelines might look like there?

Michael McGarrity, CEO

Yes, Thomas, we may still be taking a conservative approach. We are in the process of developing the assay based on the appropriate biomarkers and bioinformatics. We expect to gain clarity as we move from this stage to verification and validation, and then we'll start to address the go-to-market process concerning reimbursement coverage. Therefore, we believe that 2023 and 2024 will not show any impact from the monitor on our business from a P&L perspective, and we will provide updates as we progress.

Thomas Franken, Analyst

All right. Thank you very much.

Michael McGarrity, CEO

Thanks, Thomas.

Operator, Operator

And we have reached the end of the question-and-answer session and also this concludes today's conference. And you may disconnect your lines at this time. Thank you for your participation.