Biodesix, Inc. (BDSX) Earnings Call Transcript & Summary

Hi. My name is Yuko Oku, and I'm on the life science, tools and diagnostics team here at MS. Before we begin, I would like to remind our listeners that important disclosure information can be found at morganstanley.com research disclosures. It's my pleasure to host Biodesix, and on behalf of the company, the CEO, Scott Hutton. Thank you for joining us today.

Yes. Thank you.

Maybe to start, could you begin by highlighting some of the Biodesix key accomplishments this year and what you're most excited about as we head into '23?

Yes, it's a great question. 2022 has been a big year for us. As we come out of COVID, physicians returning to practice was key for us, right, focusing on the pulmonology call point. We know pulmonologists were disproportionately impacted during the global pandemic. So for us, first and foremost, just getting back to some sense of normalcy, having our sales professionals be able to call on physicians and have clinics be open. When it comes to achievements, obviously, we've shared that we're starting to hit some significant revenue and test volume milestones and achieving record over record performance, which we're very proud of. But also, we've announced some strategic partnerships recently. So a partnership with Philips, a partnership with Memorial Sloan Kettering. And then maybe most importantly, to the business in the near term CMS coverage for our notified CDT product. So that puts us in a position to have 5 products on market focused on lung, all with Medicare coverage. So a lot of other things in the works, some that we'll share here in the coming weeks and months. But we think 2023 is really going to be a big year, and we're poised for continued success.

Okay. Great. Well, that was a great overview. Thank you. And notified franchise is a very important franchise for you. So starting with CDT and XL 2, you're seeing great volume ramp as you mentioned on CDT already. What proportion of your Notify franchises order from Center Excellence versus community setting? Do you feel that you have adequate sales coverage in the community setting to commercially support that franchise? And anything you could share around improvements to rep productivity as an in-person interaction supplement resume?

Yes. No, great question. So for us, when our sales professionals go out, they do focus on those academic center of excellence settings. But each territory is going to be dramatically different, right? What centers of excellence do they have? Is it more rural, more urban territory. So for us, we start there. We do spend a lot of time looking at those referral pathways. -- right? -- incidental nodules can be found in an ER setting they get referred on to a PCP who refers on to a pulmonologist. And so we want to model and track that. We have built our sales force around those insights. And so for us, it really is about sales ramp and productivity. We have disclosed recently even during the first quarter of this year when we were coming out of the pandemic. We saw sales reps get to productivity numbers in 4 to 6 months. So we thought that was a good indicator. But we're mindful, right? Given the environment, we want to make sure that there is that sales rep productivity ramp and that we can get there quickly. We also are going to temper hiring. We're not just going to continue to hire. One of the things we've stated as a company is we've expanded Westward over the last few years, mainly because of the incidence and prevalence of lung cancer, right? You really start in the Southeastern United States, where it's higher. And as we move Western, you've got sales territories that are quite large. And so we're going to focus a lot on splitting those when we can, but it is going to be mindful and intentional with that sales rep productivity number that we're targeting.

Makes sense. And I just wanted to follow up on something you just mentioned. You mentioned that you're tracking with lung nodules are found. Is most of the volume -- most of the lung nodules discovered today still incidental findings or have the lung cancer screening updates started to have an impact on that screening adherence?

It's a great question. We're eager to see what gets reported out here in the coming months and quarters to see if there has been an impact Unfortunately, what we've seen over time, though, is that screening adherence is low badly. It's one of the reasons why lung cancer is still the deadliest of all cancers. one in 16 Americans is going to be diagnosed with lung cancer in their lifetime. So for us, it is about that awareness, getting people into screening programs earlier. Coming out of the pandemic in, there's a lot of questions about physician practice load, where they're focusing their time. So we can't state whether we've seen a big impact just yet, but we're hopeful. There's way too many incidental nodules being kind of the indication. And in a disease where you're dealing with an aggressive cancer, sadly, we've got to detect and diagnose these cancers sooner.

Great. And given many patients for when the routine wellness visits during a pandemic, that was definitely one of the concerns that's been raised by the medical community. Do you anticipate potential to see catch-up volume as patients come back to physician offices? Is that something that you're seeing in notify volumes today?

It's a great question. One of the difficulties when you say catch-up volumes is right, physician practices are capped. They can only see a certain number of patients per day. So what we're hopeful for and what we are seeing in some instances is physicians are targeting more at risk or high-risk patients. And so they're selecting that patient population instead of just showing up on a weekly basis and saying, we've got 15 patients in clinic today who are they, right, covering multiple disease states, they are starting to focus. We've also seen a focus on lung nodule clinics where they really focus spending a day on those patients. And so that gives you the ability to attempt to catch up, but they're capped. They're kind of limited. So we think that there is an enrichment that might be occurring and that benefits us having a blood-based offering because you don't have to actually schedule a visit for those patients. You can keep those patients remote, you can utilize mobile phlebotomy, get those blood test into us, we'll return those test results in 24 hours. -- then if they're positive on notified CDP and that visit. And so they can enrich that patient population. So it's a little nuanced, we don't think there's a huge catch-up. But what we do think is that addressable market has gotten significantly larger. On an annual basis, there's 5 million nodules that are eligible for testing. When you send patients away or you no longer see them, it's only going to get larger. And so we think that there's a much larger addressable market at playout.

Great. And One of the things that you've focused on in Biodesix data generation, you have the ORACLE study for X2 this year, and you're also running the ALT-2 study. Do you think the altitude data will be key to guideline inclusion? And when should we expect to see data from that study?

Yes. You mentioned Oracle and I'll start there first. So we stated that we're closing that study down. We've submitted for publication. So hopefully, in the coming weeks, we'll be able to share when we'll be publishing that data. We did an interim analysis at the end of last year. And there, we were able to highlight a reduction of unnecessary invasive procedures by 67% when a practice utilizes the notified testing strategy. So we feel confident and strong that, that's going to be received well. When it comes to data generation, any time you're dealing with guideline inclusion, more data is advantageous and beneficial. So we're really just focused on publishing good data, letting the test speak for themselves in terms of performance and utilization. Altitude is really a randomized prospective trial unlike anything that's been done in the space. And so we do think that will set the bar pretty high. And right now, we haven't established when we'll do our first interim analysis -- and I don't know if everybody knows or is where for us in the pulmonology space CHEST is the largest society meeting. It's usually in October or November of each year, and that's really where you want to be presenting that data. So as we look forward, I think that will be where we'll circle the calendar and say next year, going into that meeting would be the perfect time to have an interim analysis on the altitude. But again, it really is about as much data and the quality of the data as possible.

That's a great segue into the next question. So in person, meetings have resumed. Could you give us a little preview of what kind of presence you would have at the CHEST meeting this year?

Yes. So CHEST this year's middle of October in Nashville, Tennessee. As much as in-person meetings have resumed in the pulmonology space, there has not been an in-person at least a well-attended society meeting since October of 2019. So we've launched 3 different tests. Since then, we participated in COVID testing. We think we're a completely different organization. And we think our performance gives us the ability to show in a really strong manner going into this meeting. I can't disclose all of the data because some is embargoed through CHEST. We've already received word that we'll have 3 different podium presentations on Notify. We have a learning center presentation and a few other events. So I think it's fair to say we've been waiting for this. We launched Notify XL 2 at that last in-person meeting in 2019. notified CDT launched in March of 2020, right into the global pandemic. So we have not been in person. So we've achieved everything we've achieved without having a traditional society meeting. So for us, we look at it and say getting back meeting those physicians showing having a large presence there, it's key. It's critical. We've been looking forward to this for quite some time. We're excited, and we'll look forward to giving you an update afterwards. But it's going to be a big meeting for us.

So one of the more recent launches is the IQ lung NGS test -- could you comment on the traction that you're seeing in these early phases of launch? And given high levels of competition in the space, how are you thinking about differentiation from the other products? What is the hook for the sales pitch? And is this earlier, faster turnaround time enough of a differentiator to really penetrate that market?

Yes. I think it's -- short answer is yes. But we think it's a combination. And so for us, when we talk about that sales force, it really is about value add. Having a commercial background myself and once being a sales rep, I think the thing you want to do and enter is not only enter with confidence, knowing that the product portfolio that you are sharing and representing provides value. But for us, it's -- we want to provide value at any and all critical clinical insights. And so the ability to start with notify pre-cancer diagnosis and then offer 3 different treatment guidance products post cancer diagnosis, we think that adds inherent value. So we're not supporting the sales force that shows up with one product for one testing opportunity. Then the second part of the question is the launch has gone exceptionally well. We're really pleased about where we're at today. And that 72-hour turnaround time is the fastest on market. Again, when you're dealing with the deadliest of all cancers, time matters. And any physician would support that. I would say anybody else who says time doesn't matter. They're not looking at it from a patient perspective. And at Biodesix, not only are we mission-driven, but we're patient-centric. And so we try to put ourselves in that patient choose and/or their families shoes. And so waiting for test results, especially some of the precedent that was set with tissue where you could wait 3 to 4 weeks. There have been reports that 40% of patients were placed on a treatment without having those molecular test results in hand, mainly because they were waiting, and they didn't want to wait. So for us, we do pride ourselves on that, especially with this referral base because if you can refer a patient on to a specialist and they show with molecular test results in hand, whether you're putting on them on treatment at that visit or not, at least you're empowered to do so. So we think it's critically important. And we've talked about our pipeline, too. We want to continue to add products that are going to not only support that NGS offering but support helping physicians at each critical clinical question and providing an endpoint, providing guidance for them.

So Changi and VeriStrat some of your more established products in your portfolio. Are you seeing any headwinds to ASPs, given that it's been on the market for a while. It seems like all diagnostics companies see some headwinds to ASPs over time?

Yes. We're not. And so one of the -- when we think of VeriStrat if you're not familiar with VeriStrat that's a proprietary proteomic test, where we're measuring a patient's immune status. And so we're able to provide guidance, not only on the genomic side, what's going on with the tumor. But on VeriStrat the proteomic side, we can give insights into how is the patient responding or fighting that cancer or responding to the treatment. We do have ADLT status on that product, so it locks our price in. And so we feel really good about that. We've got additional data that we're going to be publishing and presenting on VeriStrat. It comes back to data generation. I think where companies get into difficult positions is when they stop investing in their product portfolio. We think we've got a great test. We do believe that, that being a proteomic AI-based test, it definitely was ahead of its time. We've got the INSIGHT study, which supports VeriStrat testing, and we're closing in on 5,000 patients. And so we're going to be looking to publish and present that at the next ASCO in the middle of 2023. But we think that, that portfolio where we can show up and provide those key critical insights, but also provide small panel on the genomics side with a rapid turnaround time or a broad panel, we think that fits physicians' needs and interests.

Great. And then maybe moving on to Biopharma Services. You've seen some challenges on the services side of the business due to clinical trial and sample delays due to the pandemic. Based on month-to-month trends you're seeing, how are you thinking about the recovery to revenues here?

Yes. We feel really good about it. One of the things that we track and measure is kind of dollars under contract. And so when we consider the business from that perspective, it's as robust and strong as it's ever been. So that's a good indicator. We also then look and say, "Hey, how is the dialogue going? What other biopharmaceutical companies are demonstrating interest. And we've got a lot of ongoing discussions and contract negotiations. So we feel really good about that. That's the part you can control. We all know that coming out of the pandemic access to samples, shipping delays, supply chain issues, even employees being forced to work remotely have impacted studies, and everybody has talked a little bit about that. We have seen, what I'd like to say is a good strong path towards recovery. So we think it plays a significant part in our business. But it's not just about the revenue, right, partnering with biopharmaceutical companies. It gives you great insight into where they're going, what the trends are, what research may be of value. And for us, it also gives us access to patient samples to help guide what new products should we be focusing on? Where we can invest in our pipeline. So we feel good about it. Right now, the lumpiness hasn't been something that we've been excited about, but gaining clarity and pursuing closure to some of those contracts in the coming months is where the teams focus.

And given that it is difficult to predict what's going to happen with the pandemic and the potential resurgence of cases down the road, how much is the risk contribution getting pushed out quarter-to-quarter baked into your guide?

Yes. We feel good about where we're at. Obviously, there could be an impact, as you said, things that are unforeseen. We all experienced that in 2020. So we're mindful of that. We really are focused on forecast accuracy, right? We want to meet and exceed expectations. If and when we think something will happen, right, we'll guide differently. But we feel good about our current situation and performance -- and -- but it's going to -- we're going to need to revisit that quarterly. I think when you look at it, the more contracts we have, the less lumpy it should be. But I think as you said it, right, whether it's monkeypox or COVID, a war, there's just so many things going on globally that we've got to take that into impact, especially when you're dealing with partners, right, because it's not really in your control.

Besides the COVID potential COVID impact with a lot of noise around weakening funding environment and shift towards focus on cash preservation, -- are you seeing any softening to biopharma demand or activity?

Not for us. As I talk -- when tracking those conversations and contract negotiations and dollars under contract, again, it's as strong as it's ever been. So we don't. Now we have seen biopharmaceutical companies kind of show and present and behave a little differently at some of the meetings, right? They've talked about cutting travel, cutting budgets. They've been less in-person attendance, if you will. And so for us, we're going to monitor that and be mindful. But the conversations we need to have are continuing to occur.

And then just more broadly, your AIML platform diagnostic Cortex the ability to generate multimodal data sets, what interest are you seeing from the biopharma community for these multimodal capabilities?

Yes. Great question. When you talked about some of the achievements, one of the things I didn't mention is we've published and shared earlier this year that utilizing our AI platform, we've broken the "black box" One of the challenges the diagnostic companies have faced is really answering that question of what are you measuring in what quantities, what abundance. And so we have -- when we say we've broken the black box, we're able to highlight a -- with a high level of confidence and fidelity exactly what proteins were measuring and what abundance. That is starting different conversations, right? When you think back over the last 10 years, any biopharmaceutical conversation that started with a proteomic test, and you couldn't tell them what was being measured that was a no-go. That was a nonstarter. So sharing that at ASCO, really reinvigorated some of those conversations. We are going to publish additional data and papers on that. The first one will probably be in Q4 of this year. And so we think that's going to continue to fuel that conversation. And it doesn't -- it's not just about our test, right? It really is about assay development and the ability to potentially lead to a companion diagnostic with a biopharmaceutical company.

And one of the things that you're particularly -- your particular strength in the diagnostic Cortex is the proteomics bit of it. Could you share some of the things that you've done to continue to innovate on that technology?

Yes. A lot of that's proprietary. There's a lot of know-how. We do have a significant amount of IP around those efforts. For us, we pride ourselves on kind of being a "pioneering proteomic, not in the fact that we're designing and developing proteomic platforms, but we're one of the only companies that has successfully commercialized multiple proteomic tests with high throughput and significantly strong gross margins. That really is one of the biggest challenges on the proteomics front. There's a lot of interest in proteomics, but you don't -- you haven't seen historically, many companies that can actually take those products and commercialize them. Why? Because they can't run enough samples on a daily basis. Turnaround time is too long. Cost of goods are too high. So for us, one of the things prepandemic that we are proud of is having nearly a 70% gross margin. And so we think as we work our way through that post-pandemic recovery, getting back to those kind of high 60%, low 70% gross margins, quick turnaround times and high throughput on our proteomic test. That puts us in a unique position. And so we'll disclose some of it at times, but a lot of it is proprietary.

Fair enough. And then just touching on some of the collaborations that you highlighted in your opening remarks. You recently announced a partnership with Philips to integrate notify test ordering with lung cancer orchestra patient management system. How are you thinking about the size of that opportunity? And how is it complementary to your commercial efforts?

Yes. When you think -- you really have to go back to kind of patient workflow. And so when you think about it through a physician's perspective, they're getting lots of input, lots of data. And so one of the first kind of offerings would be the radiologic or radiomic inputs. And so for us, we think this is big. If we can help streamline that conversation. So when a physician shows up, it's consistently positioned. It's a common language, and you can start to highlight and use the data to pull out patients that are optimal for testing, those that are optimal to go to a wait and watch or surveillance approach -- so we do think it's big. And we think it also leads to other potential partnerships. There's a number of players in the space, some of which we had conversations with. Some are ongoing. But we think there's going to be more of this where you're really trying to make ordering for a diagnostic test easier and giving them access and integrating into systems that are already in place is key and critical. And timing-wise, when we announced that, we said integration and kind of kick off by the end of the year. So we'll look forward to giving updates if not in Q4, it will be early in Q1, but we're continuing to make progress and very excited about this opportunity.

Right. And then do you see opportunities to form similar collaborations in the future?

Yes. I do think so. I think when you look at it and say, if physicians are struggling to get the right information at the right time, I think everybody rallying around that and supporting that. I don't think there's going to be one individual company that can solve all that. It's going to be a lot of players. So we do think that partnerships and collaborations like this are key and critical, and we fully expect that there will be more.

Okay. And then on MSK partnership, you also announced a relationship there with -- along with Brad, to develop novel assays, -- should we think of this as more medium-term or longer-term opportunity? And when could we hear an update from that?

Yes. For us, it's probably going to be mid to long term. We all know the discovery, development and validation of a diagnostic test takes some time. So we just announced the partnership. We've kicked it off. We're very excited. We think it speaks volumes to have a partner, not only in Bio-Rad, but MSK that's not only reputable but has the gravitas to help get us there. So for us, we've said that MRD will be our first focus. There are a lot of companies pursuing MRD test. And there's a number that already have MRD test. We think that we can get there fast. That's why we're partnering with MSK because you have physicians that are treating patients and you have direct access to patients, we think we can accelerate that. So we're hopeful that, again, similar timing with Philips Q4, early Q1, we can give greater clarity as to what that time line looks like. But we do think that this is a rich partnership. And MRD really is the only one we've disclosed, but we think there are other test development or discovery and development opportunities at play.

And then touching on your pipeline, how should we think about cadence of key publication or updates to risk of recurrence and primary immune response assays? And you previously mentioned that you anticipate some data around ASCO '23. Is that the right way to be think?

Yes, because ASCO really is the largest meeting where you have a strong biopharmaceutical and diagnostic presence and you're focused on treatment. We're going to continue to focus on that IQ longer that treatment guidance portion of the portfolio. That's the perfect place to have a presence and present and share data. So for us, the way we're looking at it because we've announced the partnership with MSK and highlighted an MRD test. We think we're in a unique position because we have our risk of recurrence test. And so the ability to put those 2 tests together is a significant differentiator. If you're not familiar, MRD is a postsurgical resection blood draw. That's our intent. And it will give you clarity as to that patient's status and the cancer status. Our risk of recurrence test, again, that's a proprietary proteomic test that we've discovered and developed. This is a presurgical resection blood draw to highlight those patients with the highest likelihood of recurrence. We think that puts us in a unique position to have data on those patients, both pre and post measuring different things. And so what we're hopeful for is probably going to see either a paper or a presentation on risk of recurrence first and then primary immune response to follow. We all know on the immunotherapy front, everybody is interested in immunotherapy. Everybody wants them. Really, the question is which patients will respond favorably to an immunotherapy. And sadly, the real-world data suggests that anywhere from kind of 10% to 30% of patients will respond favorably to immunotherapy, which is great for those patients, but we got to find a better treatment for 70-plus percent that remains. And so we're still really bullish on this test and eager to get that information out there also.

And then you've also taken on a number of facility and milestone restructuring initiatives, the strength of the balance sheet with nearly $80 million available via ATM and credit facility to draw on. What kind of deal structures are you exploring for additional liquidity?

Yes. Yes. I think in today's environment, I think everybody would view it the same way, right? We want to be open minded. You want to be opportunistic -- and so we continue to have conversations, but we also know that we're in a different position than many other companies, right, with 5 on-market tests, all with Medicare coverage, high gross margins and really the growth that we're experiencing, right, when we shared at our most recent earnings call, greater than 50% growth over prior quarter, greater than 50% growth over prior year quarter. We think that, that's the path forward. We want to be mindful of being a growth company and showing up that way. And so we continue to have many conversations on different facilities and options for us. But it really is about growth and fueling the company and setting us up for that positive growth.

And as you remain more prudent with cash then, what is the criteria to justify further spend in your view? And how do you keep that fine balance between cutting too much or spending too much?

Yes. It really is about the team and honoring our mission and our vision. And so for us, when we state that we're a patient-centric mission-driven values-based company with 5 on-market tests, all with Medicare coverage, growing at greater than 50%. It makes it a little bit easier, right? If we think that there's a path to growth and we can get a return on the near term, we'll continue to invest. Some of those mid- to longer-term opportunities were a little more critical now than we were 6 months, 9, 12 months ago. But those all have a path towards success also. And so we're not going to slow those down. Again, we're going to be prudent. We're going to be mindful of where we spend our money and our time. But again, when sales reps are getting to profitability in 4 to 6 months, and we can demonstrate that over and over, we really want to differentiate ourselves and say, "Hey, now is the time to grow. Now is the time to invest in Biodesix and our performance is supporting that. But again, investing in a study or a test that's going to be 5 years out, we may slow some of those, which is why our stance has always been don't discuss things in the pipeline until they're within kind of that 2-year time frame. And so there really isn't a match that we've disclosed that was on that 3-plus year horizon. So I don't think it's going to be a change to external investors and supporters.

Okay. And then just in the last few seconds here. To wrap up, what would you say is the most underappreciated aspect of Biodesix facility?

I think it's the team. I've stated it before. I'm honored, and I have the privilege of representing our team. When you look at what we've done and kind of our journey, really, it's about resilience. And so we had an opportunity to flex numerous times during the pandemic. And we succeeded and exceeded expectations. Now that we're getting back to who we are at our core, we think now is the opportunity for people to come in and inspect get to know the team, spend time with us. I'm just fortunate to represent the team. They're really the ones that are doing all the hard work. And we think some of the stuff we're doing is cutting edge. We stated it before, we think we're ahead of our time. And now we've got an opportunity to start showing that and demonstrating that. And so you'll see the team show in force.

Well, thank you so much, Scott, for joining us today and a great overview by this...

Yes. Thank you, Yuko, and thank you to the entire team. We appreciate the opportunity.