Earnings Call Transcript - MDXH Q3 2023

Operator, Operator

Good afternoon, ladies and gentlemen, and welcome to the MDxHealth Third Quarter 2023 Earnings Call. 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. At this time, all lines are in a listen-only mode. Following the presentation, we will conduct a question and answer session. Also note that this call is being recorded on Wednesday, November 8, 2023. And I would like to turn the conference over to Michael McGarrity, Chief Executive Officer. Please go ahead, sir.

Michael McGarrity, CEO

Thanks, Sylvie, and thank you all for joining us for our third quarter 2023 earnings call for MDxHealth. With me today is Ron Kalfus, Chief Financial Officer. Today's comments will be brief and serve as a supplement to our Q3 pre-release. Third quarter results demonstrate our continued execution and commitment to deliver strong and sustainable growth for all of our stakeholders by focusing on commercial execution and operating discipline. Based upon the significant improvements made across our business, including our industry-leading diagnostic product menu, focused commercial organization, and overall operating efficiency, we believe MDxHealth is now on a path to deliver strong and sustainable growth that will lead to operating profitability in the first half of 2025. As the third quarter results demonstrate, this execution is translating into improvements across our entire P&L. Revenue has increased from $11 million in 2019 to the high end of our $65 million to $70 million guidance for this year, 2023. And revenue for the first nine months of 2023 has more than doubled compared to the prior year period. Gross margin has expanded more than 20 percentage points from midyear last year to 65%. Operating expenses have been managed and actually declined in Q3 year-over-year. Operating loss has been more than cut in half, with a 62% reduction for Q3 year-over-year. And cash burn has declined by almost 50% from Q4, 2022. These across-the-board improvements to our P&L give us visibility to operating profitability in the first half of 2025 and demonstrate why MDxHealth is a unique outlier compared to many other small-cap growth companies in the life sciences diagnostics sector. Over time, we expect investors will appreciate this distinction and increasingly view MDxHealth as a premier high growth leader in precision diagnostics with operating profitability targeted in the coming quarters, not years. Further building upon this expectation, we are very pleased to have garnered virtually unanimous shareholder support for our delisting from Euronext and consolidation of our trading to NASDAQ as approved on November 3. We expect the consolidation and trading of our common stock onto a single exchange will improve trading liquidity and reduce our administrative costs going forward. Before discussing our quarterly results in more detail, I think it is important to step back and comment on the last four years of our transformation of MDxHealth. First, we made significant changes in our leadership and sales team to ensure commercial execution and operating discipline. As I have commented, we now have 70 people in our field sales organization, with only five of them remaining from 2019, reflecting the full-scale restructuring of that team, as we prioritize talent, focus, incentive compensation, and performance expectations. Second, we navigated through the pandemic without compromising on this progress. Despite incurring additional operating expenses over this challenging period, it is now clear that our team's progress in advancing our initiatives lay the foundation for the improving growth and financial metrics that we have experienced over the last number of quarters. We also resisted the pull of the pivot to COVID testing, which while tempting, we felt would be dilutive to our strategic focus. Third, we executed a transformational acquisition of the GPS Test, which has solidified our comprehensive menu and established MDxHealth as the only provider of a clinically actionable test at each point in the diagnostic pathway of prostate cancer. Importantly, GPS, along with our select and confirmed tests, are all covered by Medicare and included in the NCCN guidelines. And finally, we validated the strength of our restructured sales team by introducing our first channel opportunity with the launch in 2022 of our Resolve mdx test. Resolve mdx is marketed to our urology specialist customer base where complex and often multi-organism urinary tract infections with specific susceptibility profiles, which in the first few quarters of sales is on a $10 million annualized run rate. I will provide a further view forward, but first, let me turn the call over to Ron for a review of our financial and operating results for Q3.

Ron Kalfus, CFO

Thank you, Mike. As Mike mentioned, we are pleased to report our positive results for the third quarter of 2023. Revenues from the third quarter ended September 30, 2023 increased by 73% to $19.3 million versus $11.2 million for the third quarter of 2022. Excluding GPS, third quarter revenue increased by 45% versus last year. Third quarter revenues of $19.3 million were comprised of $8.1 million from GPS, $6.6 million from Confirm, $2.7 million from Resolve, and $1.9 million from Select. For the nine months ended September 30, 2023, our revenues were $50.8 million, representing an increase of 110% over the same period last year. Excluding GPS, nine months revenue increased 38% over the same period last year. Moving below the revenue line, our gross profit for the third quarter was $12.6 million, an increase of 102% as compared to $6.2 million for the third quarter of 2022. Gross margins were 64.9% for Q3, 2023 as compared to 55.8% for Q3, 2022, an improvement of 908 basis points. For the nine months ended September 30, 2023, gross profit was $31.3 million, an increase of 161% as compared to $12 million for the first nine months of 2022. Gross margins were 61.5% for the first nine months of 2023 as compared to 49.6% for the first nine months of 2022, an improvement of 1,190 basis points. Operating loss for the third quarter was $4.6 million compared to $11.9 million for the third quarter of 2022, representing a reduction of 62% driven by improved margin and a 6% reduction in operating expenses. For the nine-month period, operating loss was $21 million compared to $29 million for the same period last year, a reduction of 27%, driven by improved margins, partially offset by an increase in operating expenses related to the additional field sales personnel associated with the GPS acquisition. Cash and cash equivalents as of September 30, 2023, were $32.7 million. Our total use of cash for the third quarter was $6.8 million, down 23% sequentially from $8.8 million in the second quarter. 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 as CEO 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. I can say without reservation that we are delivering on that commitment. Our menu and revenue growth opportunities look very different today than they did in 2019 and even at the beginning of 2022. Leveraging the strength of our sales channel, we remain focused on identifying new opportunities that will continue to drive growth. In short, while our menu looks quite different today than it did just 18 months ago, we would expect it will look different 18 months from now. When considering any additional growth opportunities, we will always apply the same discipline as we did with Resolve mdx, which involves conducting a rigorous due diligence process, analyzing market access, confirming complementary focus to our existing menu, and assessing the accretive impact on our gross margin and P&L dynamics. As we successfully execute on our business development strategy, we also expect to attract a growing number of prospective investors and partners, who will increasingly recognize MDxHealth's leadership position in urological life science diagnostics, and the significant growth opportunities that lie ahead for the company. 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 over to Sylvie for questions.

Operator, Operator

Thank you, sir. And your first question will be from Dan Brennan at TD Cowen. Please go ahead.

Daniel Sammarco, Analyst

Hi, Michael and Ron. Good evening. Thanks for taking questions tonight. This is Dan Sammarco on for Dan Brennan. Would you mind providing us with any detail on thoughts about commercial coverage timelines for Select?

Michael McGarrity, CEO

Yeah. Dan, we have obviously communicated coverage of our Select test by Medicare in Q2 of last year of 2022. And as I've noted, that is usually traditionally the catalyst for broader commercial coverage. Subsequently, we also announced coverage for our Select test by Cigna. We don't put out a release or communicate publicly every contract that we pick up, but that was clearly a meaningful and material accomplishment following our Medicare coverage. Our market access managed care team really has two drivers of growth for our top line of the business. The first is our sales team, which drives adoption of units into our customer base, and then our market access managed care team, part of our commercial team as well, which drives coverage, which shows up in our ASP, most notably is where that would appear. So, we've seen progress on both fronts and we expect that to continue.

Daniel Sammarco, Analyst

All right. Great. Thank you. And then in terms of coming in at the top end of your guidance for 2023, could you give us any initial thoughts on what you're seeing for 2024? And maybe touch a little bit more on the specific factors driving strength in Resolve.

Michael McGarrity, CEO

Yeah. So, I'll start with the second part. I mean, as I've noted, I think what we're seeing is candidly what we expected, and that was based on the work we did prior and the validation of all the aspects from an opportunity fit, access and viability of that we're providing a real solution. It's really important to note that our tests that we offer to our urology customer base is a highly complex test of both organisms and specific susceptibility profiles for those organisms. So, the patient population that presents to urology is very different than Medicare setting or other settings where UTI presents. These are patients that have comorbidities, whether it be enlarged prostate or BPH, which can lead to not only complex multi-organism infections but serial infections and hence, the referral to a urologist. So, we're confident that everything we worked to discover and validate during the diligence process is coming through as expected. As far as 2024, at this point, we'll likely expect to and plan to report a pre-release of our revenue and cash and likely a first visibility to 2024 at the beginning of January in conjunction with the J.P. Morgan conference.

Daniel Sammarco, Analyst

All right. Great. Appreciate the call. You guys have a good night.

Operator, Operator

Thank you. Next question will be from Andrew Brackmann at William Blair. Please go ahead.

Andrew Brackmann, Analyst

Hey, guys. Good afternoon. Thanks for taking the question. Can you maybe give a little bit more color around the recent wins from the cross-selling initiatives between Confirm and GPS? Just trying to sort of better understand how we should think about the durability of growth in both those franchises now that they're in the same bag. Thanks.

Michael McGarrity, CEO

We are confident that we are seeing the expected results from the integration process I mentioned. In the first couple of quarters of this year, we were still resetting and restructuring our sales territories as we expanded our team from 30 to over 50 representatives. As a former sales rep, I recognize the significant disruption this causes in each territory and the changes in customer relationships. However, we are optimistic about how we are managing this and ensuring that our sales team remains cohesive. We have also made changes to our programs and incentive compensation, which we believe provide a solid foundation for execution and growth. Over the last few quarters, we are starting to see positive results, especially with Confirm and Select after initial biopsies. It is significant that we are the only company able to provide clinically actionable diagnostic results at each stage of the pathway. We believe this is crucial, and we anticipate continued execution and growth for both products. Moving forward, we will share some internal metrics we track to manage and measure our progress.

Andrew Brackmann, Analyst

Okay. That's perfect. And then, I just want to sort of follow up on some of your comments about changes in the organization historically and how you see it evolving over time. Can you maybe just talk a little bit more about what categories within urology might seem to fit better than others as you sort of think about adding to the bag here over the next handful of quarters and years? Thanks.

Michael McGarrity, CEO

Sure, Andrew. I think you've made a couple of points that are important to note. So, our goal, and it was with Resolve was no exception and going forward, will be no exception is that we're not just looking to put more value into our sales reps' bags, but that's not our focus or the basis for the initiative. We only want to do smart things that we think Resolve mdx was really important to validate that. We can't afford to mismanage that one. It wouldn't speak to what we think we have in the field. So, actually, we think that the same diligence process applies to any growth opportunity, whether it be through the license or partnership or distribution or acquisition that will follow that same discipline as far as do we have access? Is it complementary to and not dilutive of our current focus within prostate cancer and urology more broadly? And does it provide is it accretive to our P&L from a gross margin perspective? And can we continue to drive execution growth as well as the two levers that I pointed to previously, from a sales team driving units and market access driving coverage? So, we're confident in that. And I've said we had to do two things with our business. Over the last four years, we have derisked the business, which we think we're demonstrating with our clear path to high revenue, best-in-class gross margin trajectory, and profitability. So, we're confident that we're becoming more obvious in that regard. So, where we were always focused on growth, looking out on it, I think it's fair to say there's more inbound coming, but we will only be very prudent and smart about what we would elect to do with our most valuable asset, which is our sales team and channel.

Andrew Brackmann, Analyst

Okay. Thanks, guys.

Michael McGarrity, CEO

Thanks, Andrew.

Operator, Operator

Next question will be from Thomas Vranken at KBC Securities. Please go ahead.

Thomas Vranken, Analyst

Hi, and thanks for taking my questions. And by the way, congratulations on the very solid P&L improvement. I wanted to zoom in a little bit more on those gross margins, and they have evolved very favorably this quarter. Just wanted to have a bit of insight on how you see that evolving into 2024? To which extent should we anticipate an impact of those increasing Select volumes?

Michael McGarrity, CEO

Thank you, Thomas. We appreciate your involvement. We expected this growth, and it's aligning with or even surpassing our projections. Looking back to the middle of last year, we were experiencing gross margins in the low 40% range, primarily because we had only one product, Confirm, generating revenue. However, we've introduced the GPS test, which offers broad coverage, our Resolve mdx test, and we expect coverage for Select to begin in Q2. Each of these additions, as we anticipated, contributes positively to our gross margin, which has been a significant reason for the GPS acquisition and our product strategy. The gross margin results we are seeing are consistent with our expectations. Regarding future growth, I believe it’s reasonable to assume that our gross margin could reach 70%. We will continue to expand our coverage and may potentially consider further expanding our menu.

Thomas Vranken, Analyst

All right. Thank you. And also I wanted to zoom in on the GPS test a bit. Based on where you stand today, how should we think about those contingent considerations in the coming quarters and years? Do you expect all of those earn-out payments to be triggers at this point?

Michael McGarrity, CEO

Yes, Thomas, we believe that the amendment with Exact Sciences regarding the earnout was significant and beneficial, extending the earnout period from 2023, 2024, and 2025 to 2025, 2026, and 2027. From the start of the acquisition, I've stated that we anticipate making the full earnout payment, as it is linked to revenue and the growth of the GPS product. Our business is structured to meet those milestones, positively impacting our revenue, profit and loss statements, and overall profitability. Therefore, yes, we expect to make these payments. We are also optimistic about the timing and our partnership with Exact Sciences, which demonstrates their confidence in our capability to execute and deliver results.

Thomas Vranken, Analyst

Okay. Thank you.

Michael McGarrity, CEO

Thanks, Thomas.

Operator, Operator

And at this time, Mr. McGarrity, we have no other questions registered. Please proceed with additional comments.

Michael McGarrity, CEO

I don't have any additional comments, Sylvie, other than to thank everybody for their participation and support. We look forward to reporting the next time. In the meantime, we'll go back to focus on execution. Thank you all.

Operator, Operator

Thank you, sir. Ladies and gentlemen, this does indeed conclude your conference call for today. Once again, thank you for attending, and at this time, we do ask that you please disconnect your lines.