DermTech, Inc. (NASDAQ:DMTK) Q4 2023 Earnings Call Transcript
DermTech, Inc. (NASDAQ:DMTK) Q4 2023 Earnings Call Transcript February 29, 2024
DermTech, Inc. misses on earnings expectations. Reported EPS is $-0.56 EPS, expectations were $-0.54. DMTK isn't one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Ladies and gentlemen, thank you for standing by. Welcome to DermTech's Fourth Quarter 2023 Financial Results Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised that today's conference is being recorded. I would like now to turn the conference over to Steve Kunszabo. Please go ahead.
Steve Kunszabo: Thank you, operator. Welcome to DermTech's fourth quarter 2023 earnings call. With me on today's call are Bret Christensen, our President and Chief Executive Officer; and Kevin Sun, our Chief Financial Officer. Our call today will include forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. All statements made on this call that do not relate to matters of historical facts are considered forward-looking statements. Forward-looking statements made during this call, including statements regarding projections of the future performance or financial outlook of DermTech, the performance, patient benefits, cost effectiveness, commercialization and adoption of our products and the market opportunity for our products are based on management's expectations as of today, and are subject to various factors, assumptions, risks and uncertainties, which change over time.
Actual results could differ materially from those described in such statements. Several factors that may continue to cause such differences are described in today's press release and our most recent filings with the SEC including our Annual Report on Form 10-K filed today. We undertake no obligation to update these statements except as required by applicable law. Our fourth quarter 2023 earnings press release and SEC filings are available on our Investor Relations website. A recording and transcript of this call will be available on our website later today. With that, let me turn things over to Bret.
Bret Christensen: Thank you, Steve, and thank you, everyone, for joining us. We are encouraged by the sustained improvement in many of our key performance indicators as they continue to head in the right direction throughout the second half of last year. In the fourth quarter, ASP for the DermTech Melanoma test, or DMT, grew 55% year-over-year. Test revenue increased 38% on the same basis. We also reported another all-time record high in the Medicare proportion of billable samples, which is about half of our addressable market and posted our highest gross margin in six quarters. But the additional restructuring actions we announced last month, we may see a total reduction in annualized operating expenses of approximately $40 million compared to 2022.
We will continue to emphasize reimbursed tests and growing revenue. Before I take you through a few commercial highlights, let me briefly revisit the key pillars of our story. First, we have a proprietary non-invasive skin genomics technology that has demonstrated it can enhance the standard-of-care for evaluating lesions suspicious of Melanoma. Approximately 4 million surgical biopsies are performed annually to find nearly 190,000 new cases of Melanoma. Dermatologists are working hard to provide great patient care, but their practice can benefit from new tools that supplement existing methods. The DMT rules out Melanoma with a 99% or greater negative predictive value, or NPV, and can support decision making by clinicians. Second, we and many leading clinicians believe there's a place for the DMT in every dermatologic practice alongside established protocol.
As a starting point with dermatologists, we're aiming to identify the numerous instances in which a healthcare provider doesn't want to biopsy a clinically suspicious lesion, but still wants to provide patients with peace of mind. Our customers and patients can trust the results when they use our test and there is room for it to be integrated into the current Melanoma care pathway. And third, we can introduce help -- we can reduce healthcare costs by providing genomic data to clinicians who can rule out the need for certain surgical procedures while also providing a better patient experience. On the payer front, all the insurance providers we brought on in 2023, which represent approximately 42 million new covered lives have started paying some claims for the DMT.
We're determined to continuously improve the onboarding and reimbursement process with payers to speed up the revenue benefit. Finally, the Blues plan of Rhode Island and a Blues plan in the Mid-Atlantic recently issued favorable coverage decisions for the DMT. In January, we were incredibly pleased to announce positive top line data for the TRUST 2 study with a large cohort of more than 20,000 patients, the results reaffirmed the DMT's real world clinical utility with an NPV of 99.7% to rule out Melanoma, which is meaningfully higher than other currently available methods. For clinicians and patients, a high NPV delivers assurance that a suspicious pigmented lesion which tests negative is unlikely to be Melanoma. This study is an important way to continue to build trust with our customers and we're actively showcasing the clinical value of DMT in the field.
The outstanding TRUST 2 study results will also allow us to reengage with insurance providers that don't cover our test. We're working to make the full study available in a peer reviewed medical journal and expect to have an article published in the next several months. We will continue to reinforce our message around the clinical and health economic benefits of DMT with all stakeholders. Our visibility with payers also improves through state legislative efforts. Bills mandating insurance coverage of genomic testing or biomarker bills are gaining traction across the U.S. as lawmakers advocate for improving access to potentially life-saving genomic tests. Legislation has now been enacted in 14 states and eight additional states introduced biomarker bills in 2023 that are making their way through the legislative process.
Moving now on our commercial business where we continue to dedicate substantially all of our resources to growing reimbursed tests and boosting revenue. We now have two quarters behind us since we changed our approach. We believe it is evident these changes have had a positive impact on our top line, but we're still refining our tactics as we learn more. First, incentive compensation for our sales team continues to be linked to reimbursed tests and revenue over volume growth. We're also arming the field with robust analytics reporting to support these goals. More recently, we reduced the target list for our sales managers. This change also allows us to foster stronger relationships with our customers and increases touch frequency in the field.
Second, as a result of additional restructuring actions we undertook in January, we dissolved certain sales territories and merged others to further optimize our footprint and focus on the highest value regions. As a result, we reduced our sales territories from approximately 60 to roughly 55. We are intentionally pursuing a strategy that prioritizes ASP and revenue growth over volume growth in the short term. In closing, we've significantly improved many of our key operating and financial indicators for two consecutive quarters. We believe this approach is the best way to reach a meaningful revenue inflection point. With that, let me turn the call over to Kevin for a more detailed financial review.
Kevin Sun: Thanks, Bret and good afternoon, everyone. I'll outline our key financial and operating metrics for the fourth quarter, then summarize how we're thinking about 2024. I'll wrap up by recapping our liquidity profile and cash runway estimates. All comparisons are to the prior year period unless otherwise noted. Test revenue was up 38% to $3.7 million, largely due to a higher ASP for the DMT. Test revenue was flat sequentially. Billable sample volume declined 11% to approximately 15,580 and was down less than 1% sequentially. Year-over-year and sequential decrease was partly due to prioritizing reimbursed tests ahead of total volume and the overall reduction in the size of our Salesforce. As previously noted, we also stopped testing samples from pediatric patients and certain Fitzpatrick Skin Types in early 2023, based on guidance from our lab accrediting organization, which also affected the year-over-year comparison.
The potential decrease was also partly due to seasonality we have previously seen during the year-end holiday season. Contract revenue was $0.2 million compared to $0.3 million. The decrease is from the timing of activity related to clinical trial progress of our biopharma customers. Total revenue increased 31% to $3.9 million, primarily on higher test revenue. Drilling into our test revenue drivers. First, ASP was up 55% to $238 per sample and up 1% sequentially. The Medicare proportion of billable sample volume hit another all-time record high, increasing sequentially from 27% to 28%. In the last three quarters, this proportion has increased by five percentage points and has contributed to the ASP improvement. We're beginning to see consistent payment from TRICARE, the VA as well as improving payment from certain of the Blues plans we signed on last year.
The revenue benefit is ramping from the big increase in covered lives we've achieved, but we still need to clear administrative and billing obstacles in some cases before we improve payment behavior from certain insurance providers. Net positive prior period adjustments had a negligible impact on test revenue during the fourth quarter. ASP may fluctuate in the future if payers update their administrative procedures or other requirements for payment, even those payers with consistent reimbursement history. Second, we had approximately 2,200 unique ordering clinicians in the fourth quarter, down 2% sequentially. Because we're currently focused on building deeper relationships with clinicians rather than creating broad awareness for the DMT, the level of unique ordering clinicians may continue to be flat or even modestly down in the short term.
Third, our average quarterly utilization or average number of tests ordered per unique ordering clinician with 7.1 billable samples in the fourth quarter up from 7.0 in the third quarter and versus 7.2 in the year ago period. Turning now to operating expenses. Cost of test revenue was $3.4 million, an increase of 4% yielding a test gross margin of 7%. Our quarterly test gross margin was the highest it's been in six quarters. The increase in cost of test revenue was primarily due to higher infrastructure costs related to our new lab. Sales and marketing expenses were $8.4 million, a 38% decrease largely due to lower employer related and marketing expenditures. Research and development expenses were $3.3 million, a 34% decrease primarily due to lower employee related and lab supplies costs.
General and administrative expenses were $8.4 million, a 14% decrease driven by lower employer related costs offset by higher infrastructure costs related to our new facility. On a full year basis, including the impact from our comprehensive restructuring actions and other efforts to identify cost reductions, we expect an approximately $40 million annualized reduction in total operating expenses versus 2022. Total operating expenses for 2024 are currently estimated to be approximately $80 million. Net loss was $19.1 million, which included $3.2 million of non-cash stock-based compensation expense compared to a net loss of $28.2 million, which included $5.3 million of non-cash stock-based compensation expense. Net loss decreased 32% while test revenue increased 38%.
Moving now to how we're thinking about 2020. We believe DMT volumes could be flat to modestly down for the first half of 2024 compared to the same period last year, primarily due to our focus on reimbursed tests and the impact in the field from a restructuring actions and the changing tactics. We'll continue to emphasize ASP and revenue growth. And lastly, a review of our liquidity profile and balance sheet. At year-end, we had cash, cash equivalents, restricted cash and marketable securities of $59.3 million. Cash burn is estimated to decline to $55 million to $60 million annually based on the fourth quarter 2023 run rate, a roughly 40% decrease from our net cash burn in 2022. We believe we have cash runway into the first quarter of 2025, not to exceed 12 months from today's 10-K filing.
In summary, our plan demonstrated sustained results in growing revenue during the second half of 2023, while operating with a leaner organization. Now I'll turn the call back to Bret.
Bret Christensen: Thanks, Kevin. Before we wrap up and move to Q&A, I'll share a compelling patient story that inspires us as we forge ahead. A patient was seeing her dermatologist on a monthly basis for severe acne treatment without any other concerns. During her last visit, she mentioned a mole on her arm that she hadn't noticed before. The clinician evaluated the mole and wasn't concerned, but because the patient was worried a DMT was ordered. The test came back positive indicating a correlation with Melanoma. A biopsy of the lesion was then sent to a pathologist who confirmed it was Melanoma and the patient was referred to a surgical oncologist. The healthcare provider is still in shock that this patient may have otherwise walked out of the office.
This story, much like others we hear on a regular basis, highlights the critical need for precision genomics as cancer is a disease of the genome and the current visual assessment standard is challenging even for an expertly trained medical professional. The DMT helps clinicians evaluate higher risk lesions alongside other traditional tools. With that, I'll turn the call back to the operator for Q&A.
See also 11 Highest Paying Countries for Aerospace Engineers and 20 Fast Food Chains with the Most Locations in the World.
To continue reading the Q&A session, please click here.
