MDxHealth - Q3 2024

Transcript

Operator (participant)

Good day, and welcome to the MDxHealth third quarter 2024 earnings call. All participants will be in the listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your telephone keypad. To withdraw your question, please press star then two. Please note this event is being recorded. Before we begin, I would like to remind everyone that the company 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 the company's filings with the Securities and Exchange Commission, specifically in the company's annual report on Form 20-F.

I now would like to turn the conference over to Mike McGarrity, Chief Executive Officer. Please go ahead.

Mike McGarrity (CEO)

Thanks, Keith, and thank you all for joining us for our third quarter 2024 earnings conference call for MDxHealth. With me today is Ron Kalfus, Chief Financial Officer. The third quarter marked another period of solid performance for our company, as demonstrated by year-over-year revenue growth of 21%, or when adjusted for select revenue backlog in the third quarter of last year following our Medicare coverage, an effective year-over-year revenue growth rate of 27%. Based on consistent commercial execution and operating discipline, we believe that our growing leadership position in the urology precision diagnostics will position us to generate strong and sustainable revenue growth of at least 20%, and we are confident we will meet or exceed that growth rate for the full year 2025. Before I hand it over to Ron for a review of our financial and operating results, a few comments on our focus and execution.

We reported third quarter revenue of $23.3 million, an increase of 21% over the prior year period. Once again, we are seeing consistently strong performance across our two main levers of revenue growth, with our sales team driving unit adoption and our market access team continuing to drive coverage, which shows up in our ASP. Both levers are working. For our sales team execution, for the quarter, our total billable volume was 22,795 tests, representing total unit growth of 30%. Test volumes for our tissue-based tests, which include Confirm mdx and GPS, came in over 10,000 for the quarter, an increase of 36% over the prior year period. For our liquid-based tests, which include Select mdx, Resolve mdx, and Germline, test volumes exceeded 12,000 tests, an increase of 24% over the prior year period. We are confident that our growth will continue to accelerate in a sustainable way.

We also had the opportunity to raise capital during the quarter. In September, we raised $40 million in gross proceeds, supported by strong institutional investor demand. Including the proceeds from the subsequent overallotment, our pro forma end-of-quarter cash stands at $53.5 million. Importantly, this meaningful increase to our cash position provides us with one way to meet all of our future obligations, as we anticipate reaching Adjusted EBITDA positivity in the first half of next year. The added capital resources will also allow our company to remain entirely focused on execution and growth. As I mentioned earlier, we have an extraordinary opportunity ahead of us as the leader in precision diagnostics focused on the high-growth urology market. In completing this financing, we'll ensure that we can remain 100% focused on driving shareholder value as we execute and provide value to our patients and stakeholders.

Our focus on execution is the key to our continued success. The quality and strength of our commercial team, which is comprised of highly experienced molecular diagnostic sales reps and strategic account managers, with support from our medical science liaisons, is providing greater access to our tests and increased adoption among key opinion leaders and large urology group practices. And that focus will drive continued execution rooted in our clinical value for both clinicians and patients based on the following dynamics. It is becoming more obvious to both urologists and pathologists that drawing additional molecular details from a prostate biopsy is critical to informing patient follow-up and intervention. The typical prostate biopsy samples less than 1% of the prostate, making it essential for urology and pathology to coordinate on what is actionable for optimal follow-up.

A negative initial biopsy is prone to 30% false negative rates, not due to inaccurate read by pathology, but due to the finite sampling of tissue. Our Confirm mdx test, with its unique methylation features, provides clear, actionable follow-up with a 96% negative predictive value, potentially obviating the need for repeat biopsy or, in some cases, detecting potentially aggressive cancer missed by the biopsy. Pathologists' understanding of this has led to increased sustainable adoption, driven by simply connecting these two stakeholders on the confident disposition of patient intervention. A positive biopsy requires risk stratification of that patient for innovation or potential active surveillance for the majority of patients with low or intermediate risk. The GPS test is the only test that has 20-year follow-up data for both adverse pathology and prostate-specific mortality.

In addition, it requires the least amount of tissue, five times lower than competing tests, which is quite compelling as pathologists appropriately are focused on tissue preservation of the limited sample derived from biopsy. Our strategic emphasis on addressing this challenge now has urologists and pathologists working in concert to provide the optimal post-biopsy patient pathway, as we are the only company that stands on the other side of initial biopsy with a clinically actionable result, whether positive or negative. It should also not be lost that we are convinced that our pathway is best for patients navigating the confounding aspects of intervention and/or surveillance, providing clear and clinically actionable information to both treating physicians as well as patients, avoiding unnecessary interventions while also accelerating treatment when appropriate.

Based on these dynamics, we are once again raising our 2024 revenue guidance from $85 million-$87 million to now $87 million-$89 million. This marks the third consecutive quarter in which we have raised our 2024 revenue guidance, which reflects the confidence in the diagnostic value of our comprehensive menu in urology and the increasing utilization from healthcare providers. This new guidance represents greater than 25% year-over-year top-line growth. I will follow up with closing comments and view forward, but first, let me turn the call over to Ron for a review of our financial and operating results for Q3. Ron?

Ron Kalfus (CFO)

Thank you, Mike. To follow on Mike's remarks, we're very pleased to report strong performance in the third quarter of 2024. Revenues for the third quarter ended September 30, 2024, increased by 21% to $23.3 million versus $19.3 million for the third quarter of 2023. Similar to the prior quarter, all of this growth was organic and delivered without expansion of our sales organization, which reflects the leverage we continue to generate from our sales channel and the greater market penetration of our full line of tests into the $5 billion U.S. addressable market. Moving below the revenue line, our gross profit for the third quarter of 2024 was $14.3 million, an increase of 14% as compared to $12.6 million for the third quarter of 2023. Gross margins were 61.2% for Q3 2024 as compared to 64.9% for Q3 2023.

The decline in gross margins is primarily due to the backlog of Select Medicare cases that were recognized in the third quarter of last year. Operating loss for the third quarter was $6.1 million compared to $4.6 million for the third quarter of 2023, driven by timing of clinical study expenses, GPS laboratory transition, backlog of Select revenue of approximately $1 million in Q3 of last year, as well as sales incentive compensation associated with the unit and revenue growth. Cash and cash equivalents as of September 30, 2024, were $49.3 million, which, as Mike noted, includes approximately $37.8 million in net proceeds from the recently announced equity financing. In addition, on October 28, the underwriters of our September offering exercised their over-allotment option to purchase an additional 2.2 million shares, providing MDxHealth with an additional $4.2 million in net proceeds.

This brings pro forma September 30, 2024, cash balance to $53.5 million. This concludes my overview of the results, and I will turn the call back to Mike.

Mike McGarrity (CEO)

Thanks, Ron. MDxHealth represents a unique and, in my view, underappreciated value for our patients and customers, and ultimately shareholders seeking high-growth opportunities within the medtech sector. We are a company generating robust and sustainable top-line growth well above our sector's growth rate, and our objective is to generate at least 20% year-over-year growth over the next several years. Our sales team has clearly demonstrated their ability to drive productivity as we have generated consistently greater than 20% growth without expansion, which can only happen when our customers adopt our diagnostic if/then pathway. We possess the single most comprehensive and advanced menu of precision diagnostics for prostate cancer, and we also enjoy excellent reimbursement coverage for our products. We focus on product opportunities in the high-growth urology market, where a growing number of physicians are utilizing molecular-based diagnostics to assess and stratify a patient's individual risk for prostate cancer.

The incidence of prostate cancer, unfortunately, is on the rise, largely due to the lingering effect of the pandemic, where screenings were estimated to be down 50%, and when coupled with the aging population, the rate of prostate cancer is expected to rise 5% annually on a compound rate going forward, and while we do not celebrate this, we are confident that each and every one of these patients is best served when placed on our pathway of precision diagnostics, and to be clear, the changes we are observing in urology diagnostics are not fleeting trends, but rather sustainable science-driven shifts in medical practice, which are being driven by a more advanced understanding of prostate cancer, leading to improved treatment options for cancer patients earlier in their journey.

Considering all these factors, we believe our long-term revenue growth objectives of at least 20% per year reflect these positive dynamics, driven by just two priorities internally: focus and execution. Every employee of MDxHealth operates under the belief and understanding that there is a patient and family on the other side of every sample we receive. We know that if we serve that mission, our growth and operating performance will follow. As always, we carry a great deal of responsibility to provide value to all of our stakeholders, including patients, customers, payers, and shareholders. Thank you for your interest in and support of MDxHealth. Now I'll turn the call back over to Keith for questions.

Operator (participant)

Yes, thank you. We will now begin the question and answer session. To ask a question, you may press star then one on your telephone keypad. If you're using a speakerphone, please pick up the handset before pressing the keys. Anytime your question has been addressed and you would like to withdraw it, please press star then two. At this time, we will pause momentarily to assemble the roster. And the first question comes from Thomas Flaten with Lake Street Capital Markets. Actually, just withdrew his question. The question's from Dan Brennan with TD Cowen.

Kyle Boucher (VP of Equity Research)

Hey, good afternoon, guys. This is Kyle on for Dan. Thanks for taking the questions here. I wanted to start with the guide. Looking at the guide for the year, you raised by about the amount of the beat. The midpoint of the guide implies sort of a Q-over-Q step down from 3Q. Is that just conservatism in the guide, or are there any specific factors that we should be thinking about in 4Q? Thank you.

Mike McGarrity (CEO)

Yeah, Kyle. I mean, Q3 can be a wildcard for seasonality. Clearly, our business grew right through that. Q4, just based on holidays, we look at our trends on a business-per-day perspective. So with less days, you can extrapolate, but we're very confident in meeting or exceeding our updated guidance.

Kyle Boucher (VP of Equity Research)

Got it. Thank you. And then maybe just another one on portfolio expansion. It's been about two years, just over two years since you acquired the GPS business. And how should we think about going forward how M&A fits into your overall strategy? And are you focused still more on an introduction of in-house developed tests, or maybe do you think you'll be more acquisitive going forward?

Mike McGarrity (CEO)

Yeah, Kyle. So we think we have a good mix of how we've put together our menu. Just over two years ago, we had one test generating revenue. We now have five, all covered by Medicare, all included in the guidelines. And it's really a mix, right? The GPS was clearly a transformative M&A, but if you look at Resolve and Germline, some of the growth opportunities that we've taken advantage of, coupled with our Monitor test and development internally, we feel like we've got a good growth trajectory. But I've always said that I feel like we had to do two things with our business over the last few years. We had to de-risk the business, and we had to become more obvious. And by more obvious, I mean as we continue to work with investors in the street, but also in the industry.

I think what we've put together from a channel, from an operating perspective, and from our kind of reach, access, and influence over our customer base, our growth strategy, which we run in a very disciplined fashion, we were always looking out. I think that's flipped over the last 18-24 months where it's coming inbound. But I've always commented on our diligence and rigor with our process for Resolve, as an example. Our belief and thesis that we could drive growth into the GPS test as part of our menu and relationships and access and influence over our urology and customer base, those have read right on that rigor of diligence. We'll take that same focus into opportunities that are in front of us or come to us today. There is significant growth in the urology market opportunity that we're not currently taking advantage of.

And I think that's a function of we have pretty good visibility of how to de-risk these and make sure that these are ready to go to market. Some of that's learned from our experience over difficulties with regard to coverage and making sure that these ideas not only come from usually our customer base or really smart sales reps, but that they're really serving a clinical need that fits with our approach. So we're optimistic that just like our menu looks very different than it did 18-24 months ago, if you made the assumption it will look different 18-24 months from now, that's probably a fair assumption, but likely not transformative M&A like the GPS, more what we would call channel growth opportunities that we can take advantage of based on our really de-risk channel and operating focus.

Kyle Boucher (VP of Equity Research)

Got it. Thank you.

Operator (participant)

Thank you. And the next question comes from Andrew Brackmann with William Blair.

Hi, guys. This is Kate on for Andrew. Thanks so much for taking the questions. Maybe just to start here, it looks like you're operating in a nice spot and expect that to grow nicely in Q4. Recognizing it's still just November, can you maybe just talk high-level about the revenue growth levers you see for 2025 and the variables that play there? Thanks.

Mike McGarrity (CEO)

Yeah, Kate. As I noted, I think it's a combination of the adoption that we're seeing of our menu in the urology, the effect of, and the benefit from really engaging pathology. I mean, when you look at our tissue-based growth, which clearly carries the majority of the revenue growth, that growth is accelerating as we've gone through the year with Q3 of 36%. So we really look at our pipeline, our customer base, and we have a number of customers that we drive menu within a particular urology group practice, and we drive utilization through a group practice. So if you have, it's not unlike any other really device or IVD, when you have a large urology group practice with 10, 15, 20 urologists, we may get adoption from a group of them. Expanding that is where we really generate leverage.

We have to remember that the market opportunity, our penetration rates while significant to signify adoption viability and market opportunity, we have room for growth within each of our product segments. I think that we really feel confident that the combination of our menu and the way that it's being adopted right now is very, very sustainable.

Okay, great. Thanks. Just one more from me. Could you maybe just talk to us about end market dynamics as you sort of think about drivers of test volume, how much of that comes from market penetration, share wins, utilization increases, and then maybe how do you see that evolving as awareness of the menu continues to grow? Thanks.

Yeah, Kate. I think if I understand the question, the adoption of our menu and the showing up in our sustainable growth is different than it was a few years ago where we had docs trying tests or evaluating it. We have a number of tools that we use that really drive, I don't want to use the term compliance through our pathway, but some reflect when I use the comment, "If then," that's what we're seeing is that when we get an adoption from urology pathology clinical coordinator, it really becomes sustainable. In other words, our reps, and this is part of the leverage we have in our business, right? We haven't really expanded our sales organization, nor do we feel the need to do that in the near term because customers are becoming self-sustained on our menu.

And my other comment about pathology is some of these pathology groups that accept the value of Confirm mdx and GPS for the reasons I stated, either they're in-house with the urology group, which drives that really sustainable, "If then," adoption, or they serve multiple urology group practices, which is real leverage on the push. So I don't want to overplay that, but it's made a big difference in our strategy. I think it's showing up in our growth, and it gives us the confidence to look forward through next year and believe and be very, very confident that it is sustainable for those reasons.

That's great. Thanks so much.

Thanks, Kate.

Operator (participant)

Thank you. And the next question comes from Mark Massaro with BTIG.

Vidyun Bais (VP of Equity Research)

Hey, guys. This is Vidyun on for Mark. Thanks for taking the questions. So it seems like volumes continue to tick along nicely here. Just given that confirm and select are already in NCCN guidelines and have Medicare coverage, just what do you see as the key levers for ASP growth from here? And in terms of adding commercial pay, are they looking for more evidence generation, or just what has dialogue been like on that front? Thanks.

Mike McGarrity (CEO)

Yeah. So I think I'd comment on that in the same way I did with the market opportunity, right? So we feel like in the lab business, everybody operates under a normal distribution curve, if you can visualize a Medicare, commercial, private, no pay. We've really tightened that up. I would say when I joined, that distribution curve was pretty wide, and our goal has been to make it more vertical and tighter, if you can visualize. And that's what we're doing. But we have opportunity. I mean, oftentimes we'll get a payer contract, and then the next step is medical policy. We get paid sometimes out of network. But all those efforts, our market access managed care team is part of our commercial organization.

I would say prior to our really putting our setup together, they were operating independently or a little bit siloed and really having them part of our commercial team communicating with each other and really working together with our understanding and our data and metrics and analytics around mix of patients within a practice. It really helps us with targeting, and that's really providing our leverage. So I would say I think we look as strong as anybody in the space as far as our distribution of payer mix, but there's still opportunity there. The market opportunity for our revenue growth is clearly driven by the broader market opportunity and our sales team driving adoption, but we have room there on the coverage side, and we're seeing that.

Vidyun Bais (VP of Equity Research)

Perfect. Thanks for the color, and then just a quick one on the newer germline test. I think you were expecting modest revenue contribution here in the back half. Just any qualitative color to share on the early uptake of that test? Thanks.

Mike McGarrity (CEO)

Yeah, Vidyun. Ron commented that the majority of our growth in Q3 was organic, so our position still stands. We do expect contribution here in the second half of this year, not material in Q3, but we're still very optimistic and positive about the opportunity there. And it's really following our Resolve introduction, right, where we did a limited launch. We also like to get time and experience from payers. We're very conservative on revenue recognition until we have enough data to assess and report revenue based on assumptions of coverage. So as we go through Q4 and into next year, I think you'll see visibility as to how that begins to ramp.

Vidyun Bais (VP of Equity Research)

Great. Thanks for taking the questions.

Mike McGarrity (CEO)

Thanks, Vidyun.

Operator (participant)

Thank you. And the next question comes from Thomas Flaten with Lake Street Capital Markets.

Thomas Flaten (Senior Research Analyst)

Hey, I appreciate you taking the questions. Mike, just to follow up on some comments you've made throughout the call about docs becoming self-sustaining on your menu, etc., can you share on what percentage of docs order multiple tests and anything along those lines to help us understand kind of what the growth opportunity is on a kind of individual doctor basis or how much you've grown on an individual doctor basis across the menu?

Mike McGarrity (CEO)

Yeah, Thomas, that's a metric we definitely track internally. We don't report it publicly, but it's the right metric to be thinking about, right? We have kind of two ways of looking at it. One, we track utilization by customer to understand, are they using the test occasionally, or is it really part of their practice on a pathway, for lack of a better term? And we have a number of tools to do that. So that drives sustainable adoption within a practice.

And then, as far as utilization by doc, yeah, we do track that, right, as far as if we can take a urology or a urologist or a urology group practice and see that they go from 1.5 to 2.5 tests per our menu of utilization, it really comes down to what we're seeing is our adoption is a lot stickier than it was a couple of years ago across our menu with very little exception, including Resolve. So every one of our Resolve customers, virtually every one of our Resolve customers, is a urology prostate cancer customer. That all goes together with our confidence that our adoption has become much more sticky. It clearly gives us the confidence to predict and project the business going forward and serves as kind of the basis for our confidence.

Thomas Flaten (Senior Research Analyst)

Got it. Super helpful, and then I don't remember hearing this on the call, but we've heard from some other folks in the industries that there's been some impact from the storms that came through at the end of the third quarter, beginning of this quarter. Anything you've heard anecdotally or anything you've seen in the data to support there being an impact to your business from the hurricanes?

Mike McGarrity (CEO)

Fortunately, no, other than keeping track of our people down there, but no, I wouldn't point to that as any sort of mitigation or challenge for us through the quarter, thankfully, so no, I wouldn't point to any impact specifically to that.

Thomas Flaten (Senior Research Analyst)

Excellent. Appreciate you taking the questions and congrats on the quarter.

Mike McGarrity (CEO)

Thank you, Thomas.

Operator (participant)

Thank you. And the next question comes from Jason Bednar with Piper Sandler.

Jason Bednar (Managing Director and Senior Research Analyst)

Hey, good afternoon, guys. Nice quarter here. Just a couple from us. First, can you talk about how you're thinking about the makeup, if you will, of that +20% revenue growth outlook for next year as you look across your legacy tissue and liquid-based tests and then that of Germline as well?

Mike McGarrity (CEO)

Yeah, Jason. Thank you. We think pretty balanced. If you look at the last few quarters, our growth and our guidance moves as well as our view of that being sustainable really has to come from a good mix. Obviously, the tissue-based tests account for about 80% of our revenue, so they somewhat carry the day, but we like the balanced growth we're seeing this quarter: 36% for the tissue, 24% for the liquid-based. We're very confident, and the liquid-based really has had no, as I noted, material contribution from Germline, so as that comes up and as we're talking this time next year, we would expect that to be contributing to that as well, so hopefully, we're signaling we feel like we've got very, very good footing with our understanding of the adoption profile and the way to predict and project the business across the menu.

Pretty balanced would be my view.

Jason Bednar (Managing Director and Senior Research Analyst)

All right. Excellent, and then positive, if it does come in the first half of next year, that's great. Can you maybe talk about the gross margin assumptions underlying that outlook, and I only ask because this has been the line where we've admittedly overmodeled your business here the past couple of quarters. Does the product mix shift, or should we be thinking about some other development that supports a move higher in gross margin that you might need to hit that positive EBITDA here in a couple of quarters?

Mike McGarrity (CEO)

Yeah. I would say that the flip to positive EBITDA is really a function of, I mean, our gross margin, we feel very confident in. We like the trajectory of that. That's somewhat quarterly dependent on, as our menu's expanded, on not only product mix but payer mix within that, within share those product offerings, but it's really about our confidence in our revenue growth and our confidence in our operating discipline with regard to OpEx. We are very confident that we can hold our OpEx pretty straight away here, and I would point to those two levers as the most material to flipping, which we have good visibility to. The gross margin, we expect to see that continue to trend the right way on a quarter-by-quarter basis as we look out, and that's pretty much set up for our assumptions.

We're not counting on significant margin accretion to meet that commitment.

Jason Bednar (Managing Director and Senior Research Analyst)

Okay. Perfect. Thanks so much.

Mike McGarrity (CEO)

Thanks, Jason.

Operator (participant)

Thank you, and that concludes both the question and answer session as well as the call. Thank you so much for attending today's presentation. You may now disconnect your lines.