Earnings Call Transcript - MDXH Q2 2023

Operator, Operator

Greetings, and welcome to MDxHealth's 2023 Q2 and Midyear Earnings Call. As a reminder, 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. It is now my pleasure to introduce Michael McGarrity, Chief Executive Officer. Thank you. You may begin.

Michael McGarrity, CEO

Thanks, Doug. And thank you all for joining us for our 2023 Q2 and midyear earnings conference call for MDxHealth. With me today is Ron Kalfus, Chief Financial Officer. Following our strong first quarter results, our second quarter results further reflect our commitment to all stakeholders to delivering strong and sustainable growth. Our results and commitment, as always, are rooted in a consistent and unwavering focus on operating discipline and commercial execution. Our efforts to drive growth are reflected in our expanded menu that now consists of three tests for prostate cancer. At the three key decision points in the diagnostic pathway for urologists and patients, all of which are now covered by Medicare and included in the NCCN guidelines. In addition, we are seeing increasing demand for our Resolve mdx test for urinary tract infections, which was launched in 2022. As we anticipated, Resolve mdx is providing another source of consistent growth and expanding adoption based on its clinically actionable diagnostic results and the strength of our sales channel into urology. We believe our results also reflect a unique balance of menu and excellence in laboratory service as well as significant leverage in our P&L to take the company to operating profitability and value creation for, again, all of our stakeholders. Evidence of our belief is based on the following: our Q2 2023 revenue grew by 143% over Q2 2022. And when excluding the acquisition of GPS, our revenue increased 29%. We continue to execute on our integration of the GPS business. Specifically, we have completed the restructuring and integration of our sales team and are confident that this acquisition will make a significant contribution to our revenue growth, gross margin accretion, and path to profitability, which is consistent with our original thesis on the test fit within our business. Finally, our focus on operating discipline is evident in our anticipated progress that accelerated our gross margin from approximately 42% in Q2 last year to almost 60% in this quarter. As I have noted, we expect this trend in gross margin to continue and drive a corresponding linear decline in our cash burn, as reflected in our reported 48% or $8 million decline in total cash burn from the second half of 2022 to the first half of 2023. With our operating fundamentals in place and our menu and sales team poised to deliver sustainable growth, we now believe that we will turn adjusted EBITDA positive in the first half of 2025. We are confident in our ability to execute this view based on our top-line growth, improving margins, and breadth of our menu, all of which have positioned MDxHealth as an uncommon company profile within the precision diagnostic space. I will provide a further update and view forward for 2023, but first, let me turn the call over to Ron for a review of our financial and operating results for Q2. Ron?

Ron Kalfus, CFO

Thank you, Mike. As Mike mentioned, we are pleased to report our positive results for the first half of 2023. Revenues for the first half ended June 30, 2023, increased by 142% to $31.4 million versus $13 million for the first half of 2022. Excluding GPS, first half '23 revenues increased by 34% versus last year. Our first half revenues of $31.4 million were comprised of $14 million from GPS, $12.4 million from Confirm, $3.7 million from Resolve with the remaining revenues from Select and Other. In the second quarter, our revenues were $16.7 million, representing an increase of 143% over the second quarter '22. Excluding GPS, Q2 '23 revenues increased 29% over Q2 2022. Second quarter '23 revenues of $16.7 million were comprised of $7.8 million from GPS, $6.7 million from Confirm, $1.6 million from Resolve with the remaining revenues from Select and Other. Moving below the revenue line, our gross profit for the first half of 2023 was $18.7 million as compared to $5.8 million for the first half of 2022. Our gross margins were 59.5% for the first half of '23 as compared to 44.4% for the same period last year, representing a gross margin improvement of 1,510 basis points primarily related to our product mix and the addition of GPS to our product menu. Operating loss for the first half of 2023 was $16.5 million, a decrease of 3% over the same period last year, helped by our increased revenues and improved gross margin. Net loss for the first half of 2023 was $22.3 million, increasing by $4.2 million versus $18.1 million for the prior period, primarily from an increase in financial expenses, of which $3.9 million was a non-cash fair value adjustment to the GPS contingent consideration, and the remainder was primarily related to an increase in interest expense from our debt facility. Cash and cash equivalents as of June 30, 2023, were $39.5 million. Our total cash burn for the first half of 2023 was $16.5 million, down 48% sequentially from $24.5 million in the second half of 2022. We expect continued declines in operating burn in the second half of this year. This concludes my brief overview of the results, and I will now turn the call back to Mike.

Michael McGarrity, CEO

Thanks, Ron. Since joining MDxHealth four years ago, I have consistently maintained that our primary strategic objective is to create a world-class precision diagnostics company capable of delivering strong, sustainable growth with a clear path to profitability. With this objective in mind, I would like to note three particular examples of our progress and commitment to meet our stated objective. First, we believe that MDxHealth will reach and report positive adjusted EBITDA in the first half of 2025 by driving strong top-line growth and continued operating discipline. We have in place the most comprehensive menu of personal diagnostic solutions in prostate cancer, favorable reimbursement for our tests, and a sales and marketing team to drive growth and expanded payer coverage. These dynamics, along with our linear acceleration of gross margin, and corresponding reduction in cash burn serve as the basis for our outlook. Second, we strive to be a growth company focused on urology. There are multiple factors that are driving this growth, including our increasing scale through our comprehensive menu and commercial execution. Our customer support to drive the customer experience in our end markets and the potential upside from successfully identifying outbound and inbound growth opportunities to pipeline. I'd also like to note our access to and relationships with a very strong key opinion leader network, which plays a critical role to help drive awareness and quality of the MDxHealth brand. Based on these factors, we believe MDxHealth is fast becoming the company to partner with for our target customer base. And finally, as detailed in our release, we have reached an agreement with Exact Sciences to amend our GPS purchase agreement with regard to the earn-out by deferring the commencement of the three-year earnout payment period by one year. As a result, the first earn-out payment will not be made until 2025, with the final earn-out payment due in 2027. We believe this amended agreement reflects Exact Sciences' belief in our business trajectory and commitment to sustainable growth. We also view each of the specific terms of the agreement noted in our release and filings provide a clear straightforward path and plan for value creation driven by disciplined focus and execution. We have valued our relationship and partnership with Exact Sciences from the day of closing through integration and laboratory service, which will transfer to MDxHealth in 2024. We believe this agreement reflects all of the fundamental assumptions associated with the due diligence process, acquisition structure, and mutual cooperation and support between Exact Sciences and MDxHealth. In summary, while the last four years have been complicated by the pandemic we have navigated and persevered through this difficult period with an unwavering commitment to achieve our primary strategic objective. Looking forward, our focus on execution and growth will continue to drive progress across all of our operating disciplines and will indeed serve as the basis for our belief that MDxHealth is fulfilling its mission to become a leading high-growth precision diagnostics company with a clear path to profitability. By successfully executing on this strategy, we also expect to attract a growing number of prospective investors and partners who will increasingly recognize MDxHealth's leadership position and the significant growth opportunities that lie ahead for our company. To reiterate, we have built a culture driven by these principles of execution and growth modeled after my experience with the Stryker growth culture and dedication to three simple and straightforward driving principles. First, patience and quality first. Second, customers always. And third, take care of the sales force. They are frontline in our reputation for excellence that we are building, and they are supported by every operating function within the business. 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 now I'll turn the call back to Doug for questions.

Operator, Operator

Our first question comes from Mark Massaro with BTIG. Please go ahead with your question.

Unidentified Analyst, Analyst

This is Vivian on for Mark. I guess you briefly touched on the onboarding of Exact sales reps? I believe your commercial team now stands at around 70 all-in. So, I guess how should we think about the progress made on the cross-selling initiatives? And should we think about these reps having reached full productivity here? Thanks.

Michael McGarrity, CEO

Yes, Vivian. So, we have 70 total people in the field, of which approximately 54 are direct reps. As you know, a number of them did come over with the GPS acquisition. Yes, we're confident at this point as we make the turn at midyear, which was our anticipated and stated goal that we have the team cross-trained. We've restructured all the territories, incentive compensation. And yes, they're in production mode. We believe that the leverage we have of our menu will become evident as we go forward. In fact, in Q1 and Q2, we saw the early signs of that. So yes, we're very confident we have the right team, the right people, the right culture, and the right strategy to continue to drive growth.

Unidentified Analyst, Analyst

Okay. Perfect. Understood. And then on the coverage win with Cigna, can you just remind us how many covered lives this represents? And then I think I saw in your press release that the coverage for Select under Cigna should kick into the model in Q4. And as far as Confirm and GPS coverage, when should we think about those ones to kick in?

Michael McGarrity, CEO

So, I want to make sure I understand your question. So, Cigna's covered lives is approximately 15 million. Could you repeat the second part of your question? I didn't catch that.

Unidentified Analyst, Analyst

Yes. I think this is on the press release that Cigna coverage for Select should go live in Q4 this year. But where does Confirm and GPS...

Michael McGarrity, CEO

They are currently already covered by Cigna.

Unidentified Analyst, Analyst

Okay. Got it. Okay, perfect. And then maybe if I could just squeeze in one last one. The revenue guidance appears to be a little bit back-half-weighted. I think you've previously mentioned to us that it excludes the United wins. So, maybe just could you refresh us on some of the drivers in the back half that you're expecting to come online and just see particularly strong in these last two quarters?

Michael McGarrity, CEO

Yes, Vivian. We like our trend on the revenue, and we are reaffirming our guidance of $65 million to $70 million. So, that's clear that will include a pickup here as we go forward. We're not attributing any of that to the United coverage. We didn't anticipate the United coverage at the beginning of the year. So, we view that in coverage in and of itself doesn't drive adoption revenue necessarily. That would more likely show up in our average selling price. So, we think we're driving all the top-line aspects and are confident again in that guidance of $65 million to $70 million.

Unidentified Analyst, Analyst

Okay, thank you for taking my question.

Michael McGarrity, CEO

Thanks, Vivian.

Operator, Operator

Our next question comes from the line of Dan Brennan with Cowen. Please proceed with your question.

Dan Brennan, Analyst

Great thanks for taking question guys. Congrats on the quarter. Maybe just on the first thing on the guide for '25 for the adjusted EBITDA positive in the first half. Just what do we think about the levers to get there from both a gross margin basis on an OpEx basis?

Michael McGarrity, CEO

Dan, regarding OpEx, I believe we can maintain it at a steady level. The majority of our spending is focused on commercial execution, and we are pleased with the size of our field sales organization. We feel it is appropriately sized to support our growth over the next several years, particularly through 2025. The remainder of our OpEx will scale with business growth, dictated by the volume handled in our laboratory. We are confident that our sales team does not need to double, and our OpEx doesn't require a significant increase, which contributes to the leverage we have in our profit and loss statement. As for the gross margin, we have clearly stated our objective. We have solid visibility towards achieving a $100 million business with a 65% gross margin and profitability, and we remain committed to this timeline.

Dan Brennan, Analyst

On the exact agreement, you obviously secured another year. I believe the earn-out has increased by approximately $12 million, if I understood that correctly, and you issued some stock along with warrants. Can you explain how you weighed the costs of the additional earn-out against extending the agreement for another year? Please walk us through how the agreement works for MDxHealth.

Michael McGarrity, CEO

Yes, Dan. While I won't speak for Exact Sciences, we are confident that our partnership is beneficial. We believe we reached an agreement that serves the business and all stakeholders well. Extending the earn-out period by a year is certainly advantageous for us as we focus on revenue, gross margin, and achieving operating profitability. Based on our comments today, we anticipate that will take place before the initial payment in 2025 for an acquisition completed in 2022. We find the overall considerations reasonable, with the total earn-out increasing to a cap of 82.5%. Additionally, the equity component should be self-explanatory.

Dan Brennan, Analyst

Got it. And then on the full-year guide, great reiteration on the top line. Just I don't think there's an explicit guide for the burn. Obviously, you have the long-term kind of outlook, but can you just walk us through a little bit how we should think about the burn progression in the back half of the year?

Michael McGarrity, CEO

Yes, Dan. So, we expect, as you saw, we think what we saw in the back half of 2022 in the first half of 2023 is pretty much what we expected and communicated that we expected to see. We'll expect that burn to continue to decline, driven by the revenue growth and the gross margin acceleration. We're not guiding to cash burn. But if you put together our view that this continues to decline and that we flipped positive in the beginning of 2025, I think that would suggest, and we believe that we can continue to drive cash use down by quarter as we go forward.

Dan Brennan, Analyst

Got it. And then maybe a final one, just the components of the revenue contribution for the year. I don't think you've given explicit guidance, but just any way to think about like GPS is a little better than what we were looking for this quarter. UTI was good, was a little bit light, like any color how do we think about the back half of the year by product implicit within your revenue guidance?

Michael McGarrity, CEO

Thanks, Dan. Yes, our expectation from our sales team is that they're driving growth in each product of our offering. Obviously, for Confirm and Select, we saw good sequential growth in GPS in Q2. In Resolve, we're very confident that the growth trends there will continue. So, that's our expectation of the sales team. That's what they've delivered in Q1 and Q2. Obviously, we expect some seasonality in Q3, but for each of those menu items we expect to drive growth and take us to that $65 million to $70 million in revenue, confidently in 2023.

Dan Brennan, Analyst

Great. Michael thank you.

Michael McGarrity, CEO

Thank you.

Operator, Operator

Our next question comes from the line of Andrew Brackmann with William Blair. Please proceed with your question.

Andrew Brackmann, Analyst

Hey guys good afternoon. Great update here. Maybe just on Confirm and GPS, can you maybe just peel back the onion there a little bit around the drivers anything you can maybe tell us around sort of same account sales or sort of deeper utilization within your current accounts versus sort of the new account win now that you added a broader portfolio?

Michael McGarrity, CEO

Yes, Andrew. That's exactly what we're focused on when you think about our sales organization. So, the real rationale and strategic rationale for the GPS was that we had Confirm on the other side of initial biopsy for negative initial biopsies by bringing the GPS and we now stand as the only company that can be positioned post-initial biopsy and offer a clinically actionable diagnostic for both positive and negative initial biopsy. We took over new reps from Exact Sciences. They obviously had a lot of experience in GPS. Our MDxHealth reps had a lot of experience in Confirm. So, the task was to cross-train and drive leverage of that combination, and we think that Q1 and Q2 showed initial progress there. We would expect that to continue. I would say everything we've seen validates our diligence and our thesis on how this would fit with our menu. We believe our sales team is well-positioned and we expect them to continue to deliver growth with each product line or with each menu offering.

Andrew Brackmann, Analyst

That's great. And then maybe just on the competitive front here, specifically around the GPS test. Anything that you can maybe tell us around sort of changing dynamics with that competitive environment? It seems like most of the players here are experiencing a pretty solid backdrop, but anything you might be able to tell us?

Michael McGarrity, CEO

Yes. So, we have a clear view of the competitive landscape with the GPS. We have two main competitors. Obviously, I'll go ahead and name them. What we feel is our GPS test is very strong, and we think best-in-class positioned for the majority of patients, which are not the high-grade post-radical prostatectomy patient population. The evidence we can point to is the United coverage decision, which kind of uniquely called out the GPS test to be covered and actually named the other two tests not covered. So, we're really confident in the strength of our value proposition, where the majority of patients come out after initial workup and biopsy. There’s a lot of data out there in that higher-risk radical prostatectomy category. We're focused on the majority of the business. We also believe that we've got studies and data coming that can continue to advance our position as far as the levels of validation. But we like our position in the market, and we're confident that getting started here with the first couple of quarters shows our ability to grow within that competitive construct.

Operator, Operator

Our next question comes from the line of Jason Bednar with Piper Sandler. Please proceed with your question.

Jason Bednar, Analyst

Hi, thanks. Congratulations on a great quarter, Mike and Ron. I wanted to follow up on some of the earlier questions. Specifically, I want to dive deeper into Confirm mdx; the volumes and growth were really strong, definitely better than we expected. Was there anything specific in this quarter that we should consider as we plan for the second half of the year? Mike, I believe you mentioned possibly considering some seasonality. I’m not sure if that's a comment about Confirm or more general across the offering. I assume it's more general. Additionally, do you think we're seeing signs that doctor visits and proactive screenings are finally improving?

Michael McGarrity, CEO

Yes, Jason, to the first part of your question, nothing specific to Confirm. Other than what I commented on is that there's real value in having the GPS, I don't like to refer to them as GPS and mdx reps, but the previous GPS reps came over with knowledge and relationships and access and adoption from that test into their customer base. We have the same on the Confirm side. So, if we're able to execute on my previous comment of driving the leverage of those two tests, we're confident that they'll both continue to grow. Confirm obviously looked good in the second quarter. My comment on Q3 is somewhat just based on experience, and I think it’s not unique to us, that you always just want to see how Q3 goes. It can be driven by seasonality. And what we're seeing, to your second part of your question, as far as patient flow, a reminder during the pandemic, PSA screenings were estimated to be down 50%. That patient population or excess capacity has to come back through the system. It’s coming back through fixed capacity which has declined based on staffing shortages through the pandemic. We see those coming back. Everything reversing, but it's not going to happen over a quarter or two, which we don't necessarily view as negative. If we’ve commented, I think that we would expect that to occur over a number of quarters. We still think that expectation is reasonable. In Q3, just a little bit of pent-up vacation demand. This is just anecdotal. But we're confident that there won't be anything material that we don't expect. In the second half of the year, clearly, we're confident in to get within our guidance.

Jason Bednar, Analyst

Excellent. And then maybe one other follow-up on the adjusted EBITDA commentary being positive in the first half of 2025. It's great to have that line in the sand out there. Wondering if you could give us a sense of your view on capital needs between now and then as we just calibrate cash assumptions over the next 18 months to 24 months?

Michael McGarrity, CEO

I believe our balance sheet is strong, ending with over $39 million. We expect our cash burn to continue decreasing, alongside an acceleration in gross margin and revenue growth. We are confident that these factors will persist. Our sales team is focused on driving top-line growth. It's important to note that we started 2022 with one revenue-generating test and ended it with four, all covered by Medicare. This growth significantly contributes to our gross margin. The increase in gross margin stems from our Medicare coverage for Select, which has a strong margin, as well as GPS and our Resolve test. All these elements support our positive EBITDA outlook and are integral to our execution plan to achieve that goal.

Jason Bednar, Analyst

Okay. I guess maybe just to follow up then. I mean it doesn't sound like you have any plans or needs to secure additional capital between now and first half of '25. Or are you just kind of leaving that kind of as an open question for now, and we can revisit that down the road?

Michael McGarrity, CEO

How about both? We feel confident in our balance sheet and its capacity to guide us through the period of profitability. To refer back to Dan's question, this was largely the basis for extending the timeline of the earn-out period. We believe it's all coming together to genuinely support the business from a revenue, profit and loss, and balance sheet perspective.

Operator, Operator

Next question comes from the line of Thomas Vranken with KBC Securities. Please proceed with your question.

Thomas Vranken, Analyst

Hi, thanks for taking my question. Congratulations on the solid commercial results. Two questions from my side. First one is to dig a little further or build a bit further on the renegotiation of the earnout payments with Exact? Because there was also a loan that you had with Innovatus to finance that. Just wanted to know your current thinking on that given the fact that I believe that one was set to mature in 2027 as well.

Michael McGarrity, CEO

Thank you for joining, Thomas. Regarding the Exact earnout in the Innovatus facility, we had access to an additional $35 million. The Innovatus facility totals $70 million, of which we drew $35 million for the acquisition of GPS. The remaining $25 million was allocated to the upfront cash payment. Additionally, $5 million of the $30 million payment was taken in shares of MDxHealth by Exact Sciences, while $10 million was used to settle a previous loan. Therefore, we still have $35 million available, which we believe provides us with options as we move forward with the acquisition. Our balance sheet is now stronger due to this amendment to the purchase agreement. Regarding the loan maturity period in 2027, we are confident that we have options to restructure as we approach that timeline. We are optimistic about our path ahead and feel it is clear.

Thomas Vranken, Analyst

Okay. Thank you. And perhaps also to dig a little deeper into the Select test. So, I know that this one has obtained Medicare coverage as well. I just wanted to have a bit of your view on where you stand with regard to private insurance coverage. How do you look at that today? And what is a bit your outlook for the coming months and quarters there?

Michael McGarrity, CEO

Yes, Thomas, we expect Select to your question, to follow the same kind of profile that our other tests have, right, which is commercial and private payer coverage, we have for Select. Actually, you've seen that over the last few quarters, we've had revenue, and that's actually been accelerating with Select with non-Medicare commercial adoption. Our coverage team is clearly delivering on their mandate to drive coverage across our menu, which, as I noted, we see that likely being reflected in average selling price accretion. But Medicare is the catalyst, right? So, Medicare, whether for the test is usually and traditionally, the driver for commercial payer coverage. We expect Select to follow that same profile. So, as we go forward over the next few quarters, we expect to see continued coverage, and with Select in particular for commercial payers to follow.

Operator, Operator

Next question comes from the line of François Brisebois with Oppenheimer. Please proceed with your question.

François Brisebois, Analyst

Hi. Just a few here on my end. Can you just maybe talk about the change, and it broke up a little bit on my end in the prepared remarks, but maybe the changes from expectations that kind of led to this delay in payout on the agreement there with Exact. And then just secondly, can you just discuss a little bit about seasonality in your business? And what are the main drivers of seasonality in the third quarter here? Thank you.

Michael McGarrity, CEO

Yes. So, I'll take the second part first. I'm not calling out anything specific to us with regard to seasonality. I just think in the diagnostics space, Q3 can see some seasonality, we're not projecting anything out of the ordinary. As far as the basis for the amendment to the Exact agreement, I think it was really fortunate. We do view them as a partner and they've conducted themselves as we believe we have a partnership, and that's been evident. So, this was part of that partnership. I think that we view this as a favorable amendment for MDxHealth based on our path forward. And we're confident that, that's the outcome in the end product of this amendment.

François Brisebois, Analyst

Thank you.

Operator, Operator

There are no further questions in the queue. I'd like to hand the call back to Mr. McGarrity for closing remarks.

Michael McGarrity, CEO

No additional remarks, Doug, thank you very much, and thanks to all of you for joining and for the questions. We really appreciate it. We look forward to a follow-up. Everybody, have a good evening.

Operator, Operator

Ladies and gentlemen, this concludes today's teleconference. Thank you for your participation. You may disconnect your lines at this time, and have a wonderful day.