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Ladies and gentlemen, thank you for standing by. Welcome to DermTech's Fourth Quarter 2023 Financial Results Call. [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.
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 fact 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 contribute to or 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.
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 6 quarters. With 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 noninvasive 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 is 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 health care 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 -- we can reduce health care 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 reaffirm the DMT is 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 test 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 8 additional states introduced biomarker bills in 2023 that are making their way through the legislative process.Moving now on to our commercial business, where we continue to dedicate substantially all of our resources to growing reimbursed tests and boosting revenue. We now have 2 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 reimburse 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 2 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.
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. The 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 sales force. 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 sequential 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 3 quarters, this proportion has increased by 5 percentage points and has contributed to the ASP improvement. We're beginning to see consistent payment from TRICARE to 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 improved 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 as 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 was 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 6 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 employee-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 employee-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 noncash stock-based compensation expense compared to a net loss of $28.2 million, which included $5.3 million of noncash stock-based compensation expense. Net loss decreased 32%, while test revenue increased 38%.Moving now to how we're thinking about 2024. 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 test and the impact in the field from our restructuring actions and the change in 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.
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 the 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 health care 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.
[Operator Instructions] The first question comes from Thomas Flaten with Lake Street Capital Markets.
Just out of curiosity, I want to clarify, Kevin, you said that you expect volumes in the first half of 2024 to be down relative to the first half of 2023. Did I hear that right?
That's correct.
Okay. So closer to where we were in 3Q and 4Q or a lesser reduction from the high -- the mid- to high 17s?
Yes, we're not providing specific guidance right now. We're happy with the performance in Q4. And again, where our updated strategy to prioritize reimbursed volume drove a 55% year-over-year ASP growth and a 38% year-over-year test revenue growth. Q4 was that second quarter of where we've achieved sequential growth in these top line metrics. So as we said, we believe the volumes could be down for the first half because of the impact in the field from the restructuring and the change in tactics. We have about 15 fewer sales territories now than we did in Q1 of 2023. And we do plan to continue to emphasize throughout the organization, our focus on driving ASP improvements, but providing any specific guidance right now remains difficult without having a trend for several quarters in payer reimbursement behavior and the sustained effectiveness of our updated commercial tactics.
Got it. And with respect to the $40 million reduction in OpEx relative to 2022, could you help us maybe spread those savings around? Is it kind of a pro rata cut across the 3 OpEx lines? Or how should we think about that?
It would be fairly, I think, consistently spread as we saw within the fourth quarter results. So it is all up and down the organization where we've made cost saving and efficiency efforts. And so I think as we said previously, looking at the fourth quarter of 2023 as kind of a benchmark going forward, that's a good kind of jumping off point for where we think expenses and costs will be in the future.
And then one final one, if I might. Was there anything -- speaking to the Medicare penetration, was there anything specifically you did tactically to drive that number up? Or was this just kind of a natural evolution of the business where that's starting to get closer to where it should be in the kind of around about 50%?
Yes. Thomas, this is Bret. I'll take that one. If you remember, there's quite a few tactics that we deployed starting in the middle of last year, and they evolved throughout the year. But many of those were around the focus for the mix that comes in the door, reimbursed tests and certainly a big portion of that is Medicare. If you remember, we changed comp plans for our field sales personnel to focus on revenue and reimbursed tests versus strictly volume, which was historically how comp was laid out for them. We also provided them with the analytics and targeting tools to help them understand where most of the reimbursement was coming from. And we -- on top of that, we reduced the number of targets that each rep was calling on so they can go deeper into each practice. And all of that has sort of paid dividends in the form of Medicare reimbursement, but also just overall ASP.
The next question comes from Andrew Brackmann with William Blair.
Maybe just one on the major commercial payers. In the 10-K, I think you call out you believe there's possibility to secure some sort of contract from them over the next 12 to 24 months. Can you maybe just sort of talk about some of the confidence behind sort of putting that time frame out there or anything, which has sort of changed over the last handful of months here?
Andrew, it's Bret. We continue to have really good conversations with the national payers. We're happy with where reimbursement ended this past year, adding 42 million covered lives and finishing at about 45% of all covered lives for DMT. We did get, as you remember, 3 negative policy decisions last year from 3 of the nationals. We're having good conversations with one, but TRUST 2 is an opportunity for us when that's published in the next several months to go back to all the national payers and continue those conversations. And as we've said in the past, we're just optimistic because the economics of DMT are so strong for payers that we know they'll eventually draft favorable policy and cover the test.
Great. And then, Bret, you sort of talked about reducing the target list for your commercial team. Anything analytically that you can share, which sort of shows that the greater frequency and greater touch here leads to either greater utilization of the test or even movements towards more reimbursed tests for those providers?
Yes. Thanks, Andrew. We're still learning a lot from the revised tactics last year. But one thing we know is that selling DMT in dermatology requires time and frequency in the field. And we revised the messaging with the salespeople to start with a clinical argument for DMT, making sure that dermatologists understand the clinical utility, the 99.7% negative predictive value that we showed in TRUST 2, then we figure out where we can integrate it into the practice. So it's a non-threatening message that gets them to say, look, there's sometimes I don't want to do a biopsy. And when I don't want to do a biopsy, yes, I would use DMT and whatever that percent of biopsies is, 20%, 25%, 30%, we work on integrating that into the practice so it becomes habit and just part of what they normally do. And that takes some time. It takes frequency. It takes a number of sales calls. And so that's why we think fewer targets allows for that to happen quicker.
I'll leave it there.
The next question comes from Mark Massaro with BTIG.
This is Vivian on for Mark. So I guess on the ASP front, are there any health plan wins that haven't turned on yet? I think you alluded to some administrative and billing obstacles preventing payments where you do have coverage. So just any more granularity you could give there on what's preventing the payment.
Yes. I believe, for the most part, most of all of the wins that we had last year have started paying something, but there are certainly still upside potential in improving the payment rate because, again, sometimes it's documentation, sometimes it's specific processes we have to follow to allow for better payment with them. So they are improving, but there is still more room for improvement, and we'll continue to focus on those efforts to improve it as much as we can.
Okay. Perfect. And then just any trends in utilization per ordering clinician to call out? I think we've chatted in the past that it takes a certain number of tests that clinicians need to get through to get their first positive results and really understand the value proposition. So just anything else to call out there?
Yes. No, I think as we said before, because we're trying to go deeper right now, the number of unique ordering clinicians in any quarter could be flat or even modestly down. But with that same rationale, we would expect the utilization to increase because, again, if we're going deeper and making sure it's integrated in the practice, as Bret mentioned, making sure that the clinicians understand the clinical value and the best places to use the technology and how to get comfort to their patients with it. We do believe that it should drive increases in utilization on a per doctor basis. And that's where we're focused right now. Instead of broad marketing and awareness, it's really going deep and trying to get advocates and trying to get them to understand where to use it and integrate it into their practice.
The next question comes from Mason Carrico with Stephens.
Two quick ones upfront for me here, if that's all right. Maybe on the news of discontinuing the TERT optional add-on assay. Could you kind of talk about the cost benefit there from a COGS per test perspective? And second, you guys had previously talked about some ongoing projects to drive down COGS. I think some of those depended more on volumes and scale. Others were more project-related. So could you just walk through where you stand on some of those today.
Yes. Mason, so with TERT itself, again, what we assessed as part of the TRUST 2 data set is that there was limited improvement in some of the key statistical measures or performance metrics of the test when TERT was included. And we also have determined through getting feedback from clinicians who used our test that TERT didn't really impact clinical decision-making too much. So the reason that we decided to simplify the DMT and stop testing TERT was just that to simplify it and based on the patient need and how it's being used in the clinical practice.As a benefit to that decision, though, we should get some improvement in COGS. TERT was a DNA mutation that was run on a separate piece of equipment. And so that was the only use for that equipment, and there was also additional processing time and people needed to process those things. And again, part of the reason we also discontinued it is that we were only able to report out a test result in about 1/3 of the time that was ordered or less. So we haven't quantified yet exactly what that will be because there will certainly be some direct cost savings from not having to use supplies and the labor. But as we're still working through what to do with the equipment, and now we also have fixed costs that are spread to other parts of the processing.So it should provide some savings, but we haven't provided a definitive detail on that yet. And then as relates to the other cost saving measures. So we'll continue to focus on all sorts of things, whether it's systems improvements, whether it's material costs related to the configurations or different things within the kits, labor efficiency, automation. These are all things that we'll continue to work on as well as technology improvements. Some of them can go a little bit sooner than others. Some of them take some more work to validate and ensure that it doesn't affect how the test works. But we're committed to continue to improve the COGS profile.And as we saw just in Q4, we had just slightly lower volume than Q3, which meant that the fixed portion of the costs were spread over, again, a slightly lower base than in Q3, but we're also able to reduce the COGS on a per test basis, about 6% in Q4 sequentially. And that's the lowest cost per test that we've had since actually moving into the new laboratory. So we're committed to improving it, and we've already demonstrated some improvements to it, and we'll have some more information around TERT specifically once we get fully -- the change fully implemented.
[Operator Instructions] The next question comes from Dan Brennan with Cowen.
Sorry, I joined a few minutes late, and I just wanted to understand a little bit, and you probably already addressed this. But in terms of the outlook for '24, I don't think you're giving much, but I'm just wondering if there's any framework to at least consider from a price volume standpoint, how we might think about it?
Yes, we're going to continue to emphasize throughout the organization, our focus on driving ASP improvements, but providing the specific guidance right now remains difficult without having a trend for several quarters in payer reimbursement behavior and whether or not there's the sustained effectiveness of our updated commercial tactics. So we're not providing any additional detailed guidance at this point.
Is it fair to think like the [ Street's ] got $20 million in revenue for '24 million versus, call it, $15 million this year? Is it like rather than be completely off sides? I mean, is there any framework at all to think about magnitude or just impossible at this point?
It's very challenging and difficult at this point based on the factors we've just said. But as we said, we'll continue to focus the team on driving those ASP improvements to drive revenue improvements, which we were able to demonstrate in Q3 and Q4 with the change in tactics, be able to get some improvements there. So that's where the focus will continue to be. But yes, we're just not providing detailed guidance right now.
And on the TRUST 2 study, I think you talked about it's really important to engage with payers. Like what kind of payers are you specifically looking to engage with and any potential time line of like review and decisions?
Dan, it's Bret. Yes, TRUST 2 is going to help us with all outstanding payers that don't have a policy, a positive policy yet for DMT, specifically the nationals. We think it's a large cohort, 20,000 patients, our highest in negative predictive value that we have to date of 99.7%, but all of our publications show over 99%. So it will help with the majority of payers in the discussions that we're having to date, and we expect that publication probably in the next several months. So it's a really good opportunity for us to put that in front of payers and restart any negative policy decisions, but also continue the ones that we're having today.
Got it. And just maybe one final one on that. So is NPV definitely the most important metric to consider? Like what else would the payers look at in the study?
Yes. Since it's a rule-out test and what clinicians are looking to do is just rule out the need for biopsy and for the procedures, the negative predictive value is really the -- by far, the most important factor for us. It's what they point to as a rollout test, and we're pleased with that result.
The next question comes from Conner Chamberlain with Craig-Hallum.
This is Conner on for Alex. So you've been working on getting these commercial payers online for years now. Can you maybe talk about how DermTech has evolved their approach in talking with these payers over time?
Conner. Yes, it's -- we've been working a while to get payers on board. But if you remember, we went public in 2019, had a bit of a blackout with COVID, but quickly got back on track with payers adding 42 million covered lives last year, seven of the top 10 Blues. So we're having really good progress. These discussions just take time, and they take more time with the nationals who tend to drag their feet and do a little bit more analysis. So the discussions are going well. It's impossible to predict when they'll come through. But TRUST 2, again, is a really good opportunity for us to put some strong data in front of these payers, and we're optimistic that we'll continue to progress throughout the year.
Great. And then just one more here. With current OpEx pushing about $80 million run rate for '24, and we're still getting minimum gross profit. Just how do we make this math work?
So we believe we have cash runway into the first quarter of 2025, not exceeding 12 months from today's 10-K filing date based on our cash on hand, our most recent cash usage and our future operating projections. We're going to continue to focus on driving ASP improvements to improve revenue, and we'll continue to focus on trying to find cost-saving measures and efficiencies wherever we can.
I show no further questions at this time. This will conclude today's conference call. Thank you for your participation. You may now disconnect.