MDxHealth - Q4 2023
March 6, 2024
Transcript
Operator (participant)
Welcome to the MDxHealth fourth quarter and full year 2023 earnings conference call. At this time, all lines are in a listen-only mode. Following the presentation, we will conduct a question-and-answer session. If at any time during this call you require immediate assistance, please press star zero for the operator. This call is being recorded on Wednesday, March 6, 2024. 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 would now like to turn the conference over to Michael McGarrity, Chief Executive Officer.
Please go ahead.
Michael McGarrity (CEO)
Thanks, Ludy, and thank you all for joining us for our fourth quarter and year-end 2023 earnings conference call for MDxHealth. With me today is Ron Kalfus, Chief Financial Officer. Commercial execution and operating discipline are the two foundational drivers of our business and performance, and our fourth quarter and full-year results for 2023 demonstrate the continued success of this strategy. It is also becoming clear that our strategy is creating multiple sources of growth for our company, including test menu augmentation, cross-selling of complementary diagnostic solutions, and expanding payer coverage. With these growth drivers in place, we believe MDxHealth remains well-positioned to continue to deliver sustainable growth that will lead to adjusted EBITDA profitability in the first half of 2025.
I would now like to review a few of the financial and operating highlights from our fourth quarter and full year 2023 results that clearly demonstrate this execution. Fourth quarter revenue was $19.4 million, an increase of 50% over the prior year period. For the full year, revenue increased to $70.2 million, an increase of 89% year-over-year. Excluding the impact from GPS, total revenues in 2023 grew 42% year-over-year. In the fourth quarter, gross margin improved to 65.3% versus 66% in the prior year period, which represents a year-over-year improvement of 9.3 percentage points.
For the full year, gross margins were 62.6% compared to 51.9% for the prior year, an improvement of 10.7 percentage points, which reflects continued focus on operating discipline, cost management, and expanded payer coverage for our full menu of precision diagnostics. What these financial metrics speak to is that we are delivering on our mission to become a premier growth company in precision diagnostics focused in urology. In fact, when we step back and look at the progress from only a few years ago, our growth trajectory has been, I believe, quite compelling. In 2019, MDxHealth reported annual revenue of $11 million. Today, we are now projecting 2024 revenues of $79 million-$81 million, which represents a five-year CAGR, or compound annual growth rate, of over 50%.
Importantly, we have also maintained our operating discipline over this period of extraordinary top-line growth. Gross margins have dramatically improved from essentially no gross profit generated by the business in 2019 to over 62% for the full year 2023, and our focus on sales force productivity is allowing us to manage and maintain our operating expenses as we go forward. This dynamic is providing clear leverage in our P&L and reinforces our confidence in reaching adjusted EBITDA profitability. Of course, our world-class technology, outstanding clinical lab operations, and improved reimbursement for our tests are all major factors in our success. But without question, one of the ultimate drivers for sustained execution is the strong, and we believe, enduring relationships we have built in our urology customer base and key opinion leader community.
In my experience, these initiatives and resulting effect on our business underpin the strength of our business model. To that end, we remain relentlessly focused on the customer experience in order to maintain and advance our best-in-class reputation. Before my closing comments, I will turn the call over to Ron for a review of our financial and operating results. Ron?
Ron Kalfus (CFO)
Thank you, Mike. As Mike mentioned, we are pleased to report our positive results for the fourth quarter and year-end 2023, with strong reported growth in revenues and solid improvements in gross margins.
... Revenues for the fourth quarter ended December 31st, 2023, increased by 50% to $19.4 million versus $12.9 million for the fourth quarter of 2022. Fourth quarter revenues of $19.4 million were comprised of $8.8 million from GPS, $5.9 million from Confirm, $3.2 million from Resolve, and $1.3 million from Select. For the year 2023, our revenues were $70.2 million, representing an increase of 89% over the same period last year. Excluding GPS, full year 2023 revenue increased 42% over the same period last year. Moving below the revenue line, our gross profit for the fourth quarter was $12.7 million, an increase of 75% as compared to $7.2 million for the third quarter of 2022.
Gross margins were 65.3% for Q4 2023, as compared to 56% for Q4 2022, an improvement of 9.3 percentage points. For the full year 2023, gross profit was $43.9 million, an increase of 129% as compared to $19.2 million for the full year 2022. Gross margins were 62.6% for the full year 2023, as compared to 51.9% in the prior year, an improvement of 10.7 percentage points. Operating loss for the fourth quarter was $6.3 million, compared to $8.9 million for the fourth quarter of 2022, representing a reduction of 30%, driven by top-line growth and improved gross margin.
Full year 2023, operating loss was $27.3 million, compared to thirty-seven point nine million for the same period last year, a reduction of 28%. Cash and cash equivalents as of December 31, 2023, were $22.4 million. Our total use of cash for the fourth quarter was $10.3 million. The increase in cash use in the fourth quarter was driven by non-operating, non-recurring cash payments of $2.3 million, primarily attributed to the transition to a sole listing on Nasdaq. This concludes my brief overview of the results, and I will now turn the call back to Mike.
Michael McGarrity (CEO)
Thanks, Ron. As I've consistently communicated, MDxHealth is a growth company. Everything we do is based on and in a commitment to growth. Growth of our revenue, margins, and profitability, growth in our shareholder base, attracting high-quality institutional investors who understand our business and who have set high expectations for consistent execution and results. Simply put, we strive to say what we're going to do and then execute and deliver, which we believe will lead to recognition, appreciation, and differentiation of this consistency and associated long-term sustainable growth potential of our business. Growth of our offering is reflected in our progression over the last 18 months from 1 to 4 revenue-generating tests, with all of our prostate cancer tests covered by Medicare and included in the NCCN guidelines. And finally, growth stemming from our proven best-in-class channel, which has catalyzed multiple inbound opportunities for partnership, M&A, and distribution.
In our evaluation of any of these opportunities, we will apply the same diligence and rigor as we have with the GPS acquisition and Resolve channel opportunity. We have found ourselves with the luxury of being very selective with our opportunities and partners. As a final note, I often convey to people in any venue that we pass the friends and family test. This concept implies, in my belief, that if you have a friend or family member navigating the complex, confounding, and anxiety-inducing diagnostic pathway of prostate cancer, you would want the clinician and patient to have access to the MDxHealth menu. No other company offers a precision test at the multiple points along this pathway. We have a clinically actionable diagnostic from elevated PSA to initial biopsy.
Whether the result is negative or positive, we're ruling out unnecessary intervention and for risk stratification of patients that may need intervention. We continue our efforts to advance into optimal monitoring of the approximately 1.5 million patients in active surveillance annually with our Monitor project. It was particularly powerful at our recent national sales meeting to focus on the patients and the clinicians that we serve, and believe we are doing just that, and doing it the right way with the right people. To me personally, and all of us connected with the MDxHealth, that was quite compelling. In closing, we at MDxHealth will remain 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 I'll turn the call back over to Ludy for questions.
Operator (participant)
Thank you. Ladies and gentlemen, we will now begin the question and answer session. Should you have a question, please press the star followed by the number 1 on your telephone keypad. You will hear a 3-tone prompt acknowledging your request, and your questions will be polled in the order they are received. Should you wish to decline from the polling process, please press the star followed by the number 2. One moment, please, for your first question. Your first question comes from the line of Andrew Brackmann from William Blair. Your line is open.
Andrew Brackmann (Research Analyst)
Hi, guys. Good afternoon. Thanks for taking the question. Maybe to start here on guidance, can you maybe peel back the onion for us a little bit in terms of how you're thinking about this and from a build up of a test level? I guess any color that you can share, in which sort of areas of the portfolio might grow faster than others, and how you're thinking about price here as well. Thanks.
Michael McGarrity (CEO)
Yeah, Andrew, you know, we feel good about the balance of our menu. I think, as we've discussed and as I, as I've communicated, we're very confident that our sales force is selling not a test or going in with one of our tests, but selling our pathway. And that each of them has, over the past number of quarters, including GPS, demonstrated consistent growth as we go forward. We expect that to continue, and Resolve, obviously, at some point, the growth rate on that will normalize, but again, that was really important to validate our thesis that we can take advantage of channel opportunities that fit with our menu offering and into our customer base. So we think the adoption is sustainable, and then, you know, we have two drivers on the revenue side.
It's important to note that both, I think, are working in parallel, definitely over the last few quarters. So our sales team drives unit adoption into our customer base, and then our market access managed care team drives coverage, which shows up in our ASP, and we're confident that we can continue to drive the menu, but growth within each test from both a unit and revenue perspective. So we feel like it's pretty balanced, and we believe that's sustainable.
Andrew Brackmann (Research Analyst)
That's great. Thanks for that. And then, you know, as you move throughout 2023, you showed some nice leverage on the P&L. From here, can you maybe just sort of talk about the levers that you have there? Is it mainly revenue growth at this point, or is there any more room, I guess, on the cost side to also drive some further reductions in net adjusted EBITDA loss and burn here? Thanks.
Michael McGarrity (CEO)
Thanks, Andrew. Yeah. I think revenue growth obviously is key. Our gross margin has gotten to a point where it can drive the P&L below that line. And then I really think the strength of our business as we go forward is that we feel very confident that we can hold our OpEx, you know, pretty straight away through our inside model period, but definitely through, you know, through 2024 and beyond. We think we're very confident that our sales channel is right-sized, so we have 70 total people in the field, 50 direct reps. And the way we're driving adoption in a sustainable way through our pathway, you know, allows for what I commented on, which is, you know, we'll drive rep productivity.
It's the Stryker model that I'm familiar with, and so we think the leverage is really in holding our OpEx. We've driven it to the point through significant discipline on cost and headcount and operating discipline across our organization. So really, when we look at our P&L revenue growth, the gross margin where it is, and leverage in our OpEx, where really the expansion there is largely based on scale, the volume into our lab and our RCM group.
Andrew Brackmann (Research Analyst)
I'll leave it there. Thanks, guys.
Michael McGarrity (CEO)
Thanks, Andrew.
Operator (participant)
Your next question comes from the line of Thomas Vranken from KBC Securities. Your line is open.
Thomas Vranken (Research Analyst)
Hi, this is Thomas. Thanks for taking my question, and congratulations on the nice margin improvement. Two questions from my side. The first one is with regards to the multiple high growth opportunities that you mentioned that are under evaluation. Can you give a little bit more granularity there? Should we understand these more like in-house type of R&D projects, or are you really considering business development here?
Michael McGarrity (CEO)
Thomas, as always, thank you for staying up late, and I likely cannot give you a whole lot of granularity there, but only to point to what we've done so far, right? So, we run a growth strategy process here. We have for the last two years. To give you detail, we meet every other Thursday, and we've always been focused, a group of us, on what's out there, right? What, what's important in the space that we need to focus on, pay attention to, make sure we don't miss anything, and we are always looking outbound. I would tell you, over the last two years in that process, it's really flipped to inbound as we've, I think, become more obvious. You know, I've commented, my view is we had to do two things with MDxHealth.
We had to de-risk the business, which I think we are largely achieving, and we had to become more obvious, and, and that's showing up in inbound opportunities based on how challenging it is in the market dynamics today to A, build a channel, and B, have access to driving adoption of a diagnostic. But we're gonna be, you know, Resolve is a good model for that. That was really important. All of our diligence, which was very rigorous, as I noted, has played out in our ability to drive adoption, sustainable, sticky adoption into our customer base without diluting our focus.
Those are all part of the criteria that we look at with opportunities that are coming our way, and I think we have good examples, as I noted, with both an M&A with the successful integration and driving growth into a product, and secondly, with the channel opportunities. So we'll take a balanced look at opportunities that make sense for us. There's a lot of room in our space, in Urology, and we're confident that the way I would characterize it, I think, Thomas, is that if you looked at our menu 18 months ago, it looks very different today. And if you made the assumption that it might look different 18 months from now, I think that's a reasonable assumption.
Thomas Vranken (Research Analyst)
Okay, thanks. Maybe as a second question, I wanted to zoom in a little bit more on the revenue guidance for 2024. I noticed that the window is rather narrow, only $2 million variation. Can you comment on what drives this increased precision versus previous guidances from previous years?
Michael McGarrity (CEO)
Yeah, I got that question a number of times as we went through our process to put out guidance. And I think, you know, as we've... It's been difficult over the last few years. I mean, the combination of the pandemic as well as, you know, launching additional tests into our menu, per my previous comment. You know, I feel like we now have history, right, which is informs how you predict and project your business more accurately. So we believe that that's indeed a tight band, but we're confident that we can meet or exceed the expectations that we've put out to the street for 2024, for sure.
Thomas Vranken (Research Analyst)
Okay, thank you.
Michael McGarrity (CEO)
Thanks, Thomas.
Operator (participant)
Your next question comes from the line of Dan Brennan from TD Cowen. Your line is open.
Kyle Boucher (Associate)
Hey, good afternoon, guys. This is Kyle on for Dan. Thanks for taking the questions. I just wanted to ask, you know, on the quarter, if, if there's any granularity you can provide on, you know, maybe the, maybe the volume from Confirm and Select slash, you know, Resolve, too. Is there anything you can share there?
Michael McGarrity (CEO)
Hey, Kyle, I'm not sure I understand the question. So we've seen, you know, as reflected in the revenue and the growth per test, we've seen consistent growth with each of those from a unit perspective. We have seen ASP accretion. That was the point I made as far as our revenue drivers are twofold, right? Unit adoption and then our coverage, which shows up in our ASP. And so we've seen we're confident that we have seen that with each of our tests individually in the menu collectively. We don't put out a press release on every coverage positive coverage decision we get, but we have noted a couple of key ones in the past few quarters with United on GPS and Select with Cigna.
So yeah, we're confident we can see consistent growth, that that's driving our guidance of, of mid-teens. We believe that's very sustainable.
Kyle Boucher (Associate)
Got it. And so on the volume side, though, in the fourth quarter, was there anything you've disclosed there, you know, across the different tests?
Michael McGarrity (CEO)
Just what we disclosed, Kyle.
Kyle Boucher (Associate)
Got it. Okay. And, and just had one more. You know, on the, you know, just even the profitability in the first half of 2025, can you just remind us of your confidence there? You know, you reiterated that you'll get there in the first half of 2025, but if you found a target that was the right asset for the portfolio that, you know, might push this target out a bit, you know, what are your thoughts on that?
Michael McGarrity (CEO)
Well, if I understand your question, you're asking, would an additional opportunity that we're not currently offering be the catalyst for that? My answer is no.
Kyle Boucher (Associate)
Right.
Michael McGarrity (CEO)
Our current menu-
Kyle Boucher (Associate)
Okay.
Michael McGarrity (CEO)
Yeah, no, we're confident that we're not basing that on additional opportunities that would come in. So we're confident we can get there with our current menu, very clearly.
Kyle Boucher (Associate)
Got it. Thank you.
Michael McGarrity (CEO)
Thanks, Kyle.
Operator (participant)
Your next question comes from the line of Jason Bednar from Piper Sandler. Your line is open.
Jason Bednar (Senior Research Analyst)
Hey, good afternoon, guys. You know, I'll pack a few in here just to start. You know, looking at the performance in the quarter, you know, Resolve was the, really the big upside driver in the quarter, at least for all the DAR model. So really just a few questions here that come to mind. I mean, at first, you know, how much, how much more room for growth is there from this specific test? You know, when do those trends start to normalize? I think, Mike, you kind of alluded to that maybe happening at some point in 2024, but, you know, any other clarity there would be helpful. And then, you know, second, you know, given its size, it's probably becoming increasingly relevant from a margin standpoint. So can you remind us where margins on Resolve sit versus your other tests?
And then just, you know, maybe to come back to one of the questions earlier, but as you think about, you know, commercializing other tests, you know, you've obviously validated your ability to commercialize something with Resolve. You know, are you, are you exclusively looking in urology, male urology? Is that where you're, as you evaluate partnerships or M&A?
Michael McGarrity (CEO)
... Jason, thank you. Yes, so with Resolve, you know, candidly, that succeeded. We set our expectation internally, but it's exceeded our expectations, and I think it's based on the diligence that we did. And, you know, one aspect of our diligence, I should note, is that we-- which may not be customary, but, you know, we really involve our sales team and, and our smart reps who have access and understand how our customers adopt. And so all of that, our thesis is held with that. Now, the growth rate that we've had, you know, clearly that, that will normalize. But what I would say is that, that market, to, to the second part of your question related to Resolve is, you know, of the 10 million cases that present annually with UTI in the U.S., 20% of them present to urology.
So we have room to grow. But yeah, I would expect that to normalize as we go forward. Your - the second part of your question was related to margin. You know, all our margins, our criteria, which I've noted on any sort of channel opportunity, be it M&A or partnership license distribution, that's one of our key criteria, right? That it's accretive to our gross margin, day one, dollar one, and that's proven to be true. So while we don't break out margin by product, I think the accretion in our gross margin has been material but expected. We saw that coming. We knew how it would build based on the way we were building our menu and our expectations on cost control and pricing. So that's held, and we expect that to continue to hold.
Then as far as our growth opportunities, yes, urology is our focus. So we are a growth company focused into urology. I would just say, without speaking specifically, there's a number of opportunities for growth, that we see. Per my previous comment on the process we run, which is quite disciplined, we have a dashboard of opportunities that we see as, as viable. That coupled with, you know, to your, to your question, from an R&D perspective or the previous question, you know, our monitor project, we're, we're very excited about the potential there. Now, we're not guiding to that, we're not building that into any of our assumptions, but we think that that can really change the landscape for, the patients in active surveillance.
Jason Bednar (Senior Research Analyst)
Okay, all right. Very helpful. Maybe if I can drill in on gross margins a bit, maybe it's related to my last question there, but you know, pretty strong exit rate, you know, putting up the 65%+ exiting 2023. Was that strength due to testing mix with Resolve being stronger? And then maybe talk about the sustainability of that gross margin performance as we think through, you know, modeling future years. Should we be anchored to the 65% or plus or minus that level here in 2024 and 2025?
Michael McGarrity (CEO)
Yeah, I think plus or minus is probably right. And you're right in each of your assumptions of your question, right? So mix on any given quarter can move our margin, you know, a couple points. But our goal, you know, if we go back to a year ago, our goal was to target 65%, you know, plus or minus. So as we look at the coming quarters, you know, I think anywhere in that range of, you know, two or three points below or two or three points above is reasonable based on mix. Ultimately, could our margins start with a seven? It could, but we're not guiding or projecting to that right now. So we think we're building, and it's really important.
The two things we control are coverage, which drives our ASP, and cost, which we are very focused on. And so there's... You know, as we, as we scale our business, we're continually looking at ways to drive, you know, drive cost benefit that would affect margin. But also, as we look at opportunities, that last criteria I noted was, it's critical. We won't, you know, we really won't look at anything that isn't accretive, even if initially, not unlike Resolve, where it, it builds, and we have visibility to how it lands on our targeted gross margin. That's the way we think about those things, and we're confident that that margin is sustainable.
Jason Bednar (Senior Research Analyst)
Okay, great. And one last clarification question here. The $6.3 million operating loss in the period, I just want to confirm, that included one-time costs from the sole listing transition, correct? The figure would have been a $4.6 million operating loss, if not for those one-time costs. Do I have that right?
Ron Kalfus (CFO)
That's correct, Jason.
Jason Bednar (Senior Research Analyst)
Okay. Thanks, Ron. Thanks, guys.
Michael McGarrity (CEO)
Thank you.
Ron Kalfus (CFO)
Jason, thank you.
Operator (participant)
Your next question comes from the line of Mark Massaro from BTIG. Your line is open.
Mark Massaro (Managing Director)
Hey, guys, congrats on a great 2023. Yeah, so obviously a lot of the questions have been asked, but, okay, so if you're looking to either partner or acquire, I'd just be curious if you have a preference to either. And then, you know, Mike, you indicated that whatever you do would need to be accretive on day one. So I have to assume that if you, if you do look to bring in, you know, another clinical test, is it safe for me, for us to assume that reimbursement would need, would need to be in place already?
Michael McGarrity (CEO)
... That's a good assumption, Mark. We had quite an odyssey, as you know, with, you know, the reimbursement landscape is challenging for everybody in the CLIA lab diagnostics sector. So yes, that is indeed a key criteria, for sure. And as to the front part of your question, when we think about clearly, the GPS acquisition was somewhat transformative for us, particularly at our stage when we made the acquisition. From an M&A perspective, Resolve is a good example of and that's why I comment on it, it was really important that we got that right. So now we have a model for that, for what I would refer to, I obviously refer to more as channel growth opportunities that don't require the capital investment that an M&A or GPS.
But, you know, any M&A would have to look like the GPS, right, where we bought immediate revenue and gross margin accretion of the business. But I think your assumption is correct, that it would probably be more the latter, on our, you know, more near-term growth opportunities that we're looking at.
Mark Massaro (Managing Director)
Okay, great. And then, you know, as we're thinking about tuning up our models, you know, the 2024 revenue guidance is looking for 12%-15% top line. Is it fair for us to assume mostly volume growth for the year? You know, are there certain tests that you might see some ASP expansion? I know Select is pretty, you know, not quite achieved maturity yet. So how should we just think about that volume versus price dynamic?
Michael McGarrity (CEO)
Yeah, I think you're right in your assumption. Volume drives the majority of our growth projection. We tend to lean on ASP as a—I don't want to say upside, but support for that growth. But we expect our sales team to drive the growth that you're referring to through straight adoption from our customer base, and their expectations individually and as a group read on that.
Mark Massaro (Managing Director)
Okay, great. And then, if I'm looking at the numbers correctly, it looks like the OpEx came in at around $71 million for the year. I believe that's a 25% growth year-over-year. How should we be thinking about OpEx in 2024? And then maybe just sort of reconciling, you know, I think you were at a $10 million use of cash. You've got $22 million on the balance sheet. Just, help me think about cash utilization in 2024.
Michael McGarrity (CEO)
Yeah. So Ron can comment on your OpEx number. I think that's a little high with what we reported. But to your question, you know, we're confident that we can hold the OpEx here, as I noted, going forward. Sorry, Mark, the second part of your question was? Forgive me.
Mark Massaro (Managing Director)
Yeah, the cash utilization for the year. I know that you've talked about getting to Adjusted EBITDA-
Michael McGarrity (CEO)
Yeah
Mark Massaro (Managing Director)
-profitability in the first half of 2025, but-
Michael McGarrity (CEO)
So, yeah, I mean-
Mark Massaro (Managing Director)
Help us walk through to that.
Michael McGarrity (CEO)
Yeah. So, you know what? I think my comment there, Mark, would be, look, we want to be smart and prudent with our balance sheet. And I would just say that we have, we believe we have optionality there to continue to fund the business and fund our growth as we go forward. And that's probably, you know, as specific as I'll get. I mean, we have access to additional debt, and we're confident that we'll keep the company in a strong position here as we go forward to drive continued growth.
Mark Massaro (Managing Director)
All right, that's it for me. Thanks, guys.
Michael McGarrity (CEO)
Mark, thank you.
Operator (participant)
Thank you. We have reached the end of our Q&A session. Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.