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

Hi, everyone. My name is Yuko Oku, and I'm on the life science tools and diagnostics team at Morgan Stanley. Before we begin, I'd like to remind our listeners that important disclosure information can be found at morganstanley.com/researchdisclosures. If you have any questions, please reach out to your Morgan Stanley sales rep. It's my pleasure today to host Biodesix, and speaking on behalf of the company, CEO Scott Hutton. Thank you for joining us today.

Yes, thank you, you as well.

Maybe to start, if you could begin by highlighting some Biodesix key accomplishments this year and what you're most excited about as we head into '24?

Yes, it's a great question. We've had a great 2023 thus far. Most recently in our recent earnings call, we were really proud to demonstrate and share 75% test volume growth, significant improvement on the gross margin front, taking gross margins up to 73%, revenue growing at 58%. And then on top of that, we published our ORACLE study, which was a long time coming. And so that is really related to our Nodify XL2 product. And in that study, we were able to demonstrate a 76% reduction in unnecessary invasive procedures. We also had an independent group of physicians that did their own study, and they demonstrated a 73% reduction in invasive unnecessary procedures. So all of that has happened really in the last few weeks and months. We continue to make progress with our ALTITUDE study, which I can go into greater detail on. But the sales team is performing exceptionally well, and we don't think there's a better time to be a part of the Biodesix team than now.

You've seen significant traction for your Nodify franchise, CDT and XL2. Could you comment on the competitive landscape there? And what you estimate the penetration might be for nodule risk management market?

Yes, I think as everybody knows, lung cancer remains the deadliest of all cancers. So there's a huge opportunity for us to make a positive impact anywhere from 1.6 million to 5 million nodules are eligible for risk assessment testing on an annual basis in the United States alone. So when it comes to penetration, even as the company that has first mover status with no known competition today, we're still relatively minor in terms of penetration. We've got huge opportunities to continue to grow. We've got approximately 60 sales reps covering the United States. And on the competitive front, because it is the deadliest of all cancers, lots of companies have prioritized lung cancer, some have failed over the years, others continue to make progress. For us, we look at it and say it's a big enough market opportunity to have multiple competitors. So we're going to be very mindful of those competitive threats and looking at how does their tests perform, what are the indications. And right now, the closest we have in terms of a competitor will be Veracyte with their nasal brushing classifier, but they've stated most recently that they don't plan on launching until they have Medicare coverage and the current study is still enrolling. So that could be 2025, 2026 at the earliest. I can't really comment on the test since they haven't published on their validation study. So we really don't know how the test performs.

Okay. Thank you for that overview. Maybe just stepping back for a second. When we think about the lung nodule testing or lung nodule risk assessment test and that market, is it still that most of the nodules are found on an incidental basis? Or there is a screening paradigm in place?

Yes. Yes. No, there is. The lung cancer screening modality that's approved today is CT scan. Unfortunately, the literature will show that only 4% to 10% of the screen eligible population participates. So to your point, we're just scratching the surface. We should fully expect a huge, huge improvement on that. And I think that's one of the reasons why we've seen a lot of investment into blood-based screening modalities, which are still years away, but I think they provide a lot of promise. Unfortunately, we know that we're missing a lot of cancers because that screening modality adoption is so low. And we believe that the best thing we can do to positively impact lung cancer treatment today is early detection and diagnosis. So for us, we fit into that, but it is mainly incidentally found nodules to date. And so if you're not familiar with that, right, a patient has a fall, they go in to an emergency room, get a chest x-ray. And in that scan, they say, hey, there's something suspicious here and they refer that patient on. So in a patient population that is heavily Medicare, there's going to be a number of comorbidities trying to find the appropriate patients is one of the biggest challenges for physicians in this space.

Got it. So CDT and XL2 work together as a rule in and rule out malignant or a high risk of cancer. Previously noted that you see physicians ordering both tests. Given that they're performed in tandem, what is the attachment rate for XL2 to CDT?

Yes, it's nearly 100%. So literally, like 99.9% of the time, they're ordered together. We do run them in cadence. And so we'll run Nodify CDT first because that is the rule in test and we got to identify the cancers first. We run that. Within 24 hours of receipt in our laboratory, we'll return those results to physicians. If that is a likely malignant result, then we'll cancel the Nodify XL2 test and destroy that. There's no reason to run it. If it comes back as in determinant or not likely malignant, then we'll run the Nodify XL2 test. And within 4 days, we'll return those test results but they still are ordered almost 100% of the time together. And we don't see that changing anytime soon. I think what it demonstrates is physicians see the clinical utility of both tests working in combination.

Okay. And could you comment on the progress of driving coverage with additional payers following string of private payer decisions for XL2? Could you elaborate on the interest you're seeing following the first decision? And are you currently in discussions with additional payers?

Yes, it's a great question. So with Nodify XL2 and Nodify CDT, we do have ADLT status on both or advanced diagnostic laboratory status for both. We do have Medicare coverage. And as you said, we have more progress being made on the private payer front with Nodify XL2 because that test has been available longer. We've stated before that we fully expect and anticipate to communicate private payer coverage being initiated for Nodify CDT here in the coming fourth quarter. We looked at those 2 timelines. We don't see anything out of the ordinary. If anything, we think both those tests are right on schedule, if not a little bit ahead of schedule. We can't comment on the ongoing dialogue publishing the ORACLE paper helps tremendously, right? The more data that you have out there and the quality of that data helps significantly. So a lot more private payer conversations based upon the data that's out there. And then I referenced some independent third-party research and studies that have also published recently that are confirming the same things that we stated and those have helped. But we see huge upside. But we also like to remind everybody that 60% of this patient population is going to be Medicare age.

Right. And I just want to dig into those ORACLE studies a little bit more. Could you give us like highlights of that study? And you talked about that generating traction on the payer side, but how is it resonating with physicians?

Yes. No, it's a great question. For our sales team, having new data out there is critically important. And so I stated earlier that what we showed and demonstrated was with the use of Nodify in a practice, physicians were able to change behavior. And in comparing that change in behavior, they highlighted a 76% reduction in unnecessary invasive procedures. So really, you think about it, and this patient population, again, we stated, we've got to get to them quick or sooner, right? So we don't want to have delayed diagnosis. Those physician practices are full of patients and a wait time can be anywhere from 3 weeks to 3 months to have that assessment. If it ends up becoming a late-stage cancer diagnosis, that's too much time that's passed. So highlighting that we can help prioritize and enrich the appropriate patients to intervene on, while reducing the number of interventions on inappropriate patients was critical to us. So it was actually in a real-world setting. This was an improvement over the original validation study, which was the PANOPTIC study. We also think that's a strong message as you usually don't see that, you don't see real-world performance improve over your validation study. So for us, obviously, that resonates. It's strong. I think individual physicians are still trying to figure out what the impact will be in their practice. And so we were equally as proud to publish 4 independent health care economic studies earlier this year. And that's where we're gaining a lot of interest. Individual accounts that are trying to do their own math and what the savings is for them, and we're not taking procedures away from them. These physicians have a backlog. There's an abundance of procedures. They're just trying to identify when do I intervene and ensure that, that is the right patient.

You're also running ALTITUDE randomized clinical utility study designed to evaluate performance of XL2 and CDT. Could you provide an update on ALTITUDE enrollment? And if successful, could this trial drive guideline inclusion?

Yes. We're really excited about ALTITUDE. So this is a first of its kind prospective study in pulmonology. So really, the same goal here is, let's demonstrate a change in behavior, let's try to highlight a reduction in unnecessary invasive procedures all the while demonstrating how strong the performance of the test is. We kicked the ALTITUDE study off during the pandemic. Unfortunately, I think everybody's clinical trials were negatively impacted in patient enrollment in the pandemic. So we have watched that kind of ramp and escalate coming out of the pandemic. Thus far, we've got a threefold improvement in 2023 over 2022, and we've begun adding additional sites. So we've got over 15 major academic institutions across the United States participating to date, have month-over-month record enrollments. We're still -- it's still too early to tell when we'll be able to release that final data and if there's an opportunity to have an interim analysis. But we're really eager to move into 2024, and we think it will be big. Your secondary question on guidelines. ACCP or the CHEST guidelines are the appropriate guidelines for this segment. They've not made a material update as a committee since 2016. So they've even said that they're way behind any of the updates that they did make were COVID-related, and so they've stated that they're looking forward to kind of catching up in their guidelines. So until we start to see that cadence of events and updates and progress, we don't quite know what additional questions they may have. But yes, we think ALTITUDE helps us significantly in getting us into guidelines, but also publishing on ORACLE, we think, was another big step towards that. So the major Annual Pulmonology Conference is CHEST that occurs here the week of October, so we're about a month away. So we're eager to see as we progress through the remainder of the year, what the ACCP guidelines do in terms of changing. There still is other opportunities with other guidelines, whether it's NCCN or Fleischner, and then the Society for Advanced Bronchoscopy has even stated that they're potentially going to kick off their own guidelines. So we think there's a lot of interest and opportunities to continue to promote and introduce blood-based diagnostics into that care continuum.

Great. And as you mentioned, CHEST is a big conference for you every year. What presentations and presence do you anticipate to have at the conference?

Yes. CHEST is really the biggest meeting and opportunity for us. So we'll have another big representation and presentation. I can't talk in great detail because a lot of the data is embargoed until the meeting. But we continue to focus on really show a real-world utility of the Nodify test in highlighting that performance. So you'll see more of the same. We also continue to highlight with the advent of additional screening products. We've been working on demonstrating that the Nodify test work equally as well in the screen detective population as it does in an incidentally found population, which it has to date. And we've continued to look at how our tests compared to imaging modalities like PET. And so we will have some information that we share there. So it's going to be a big meeting. We look forward to getting that data out there. And needless to say, it's all positive, it continues to promote and reinforce the value add that these 2 tests provide.

Great. I want to hit on some questions on IQLung franchise. Can you comment on trends you're seeing on IQLung NGS test and given high levels of competition in this space and pretty strong incumbents in the space? What is the sales strategy for penetrating this market? What differentiates your test versus competitors?

Yes. First and foremost, when it comes to differentiation, we always start with turnaround time. We have focused on getting test results back to physicians in an industry-leading fashion, and we've done so across all 5 of our tests, whether it's our ddPCR or our NGS GeneStrat test, we're going to get those test results in 36 hours or less, right, to physicians. So that's the most important thing. We should never have a physician that's waiting on a molecular test result to prescribe and treatment. So we take that serious. Secondarily, we're very mindful of our place with the 60 sales reps that I referenced in the United States. Lung cancer is diagnosed at the pulmonologist. So we're spending the majority of our time with pulmonology. The 2 Nodify tests are primarily utilized by pulmonologists. You mentioned the NGS space can be a crowded one. And so we're not trying to be a pan-cancer sales force. We really are focused on that lung cancer patient and following them through their care continuum. We also are very mindful of those incumbents, not only the amount of money they have, how entrenched they are, but the size of their sales force. So for us, it's about partnering the physicians across that lung cancer continuum, owning that call point and really demonstrating that our sales reps are going to provide a consultative support methodology and approach hopefully allowing them to become a trusted member of that treatment pathway.

Great. You also recently presented data for VeriStrat IASLC, could you give us a brief update on that data? And what's the key findings from that study?

Yes. Yes. So the INSIGHT trial was our study for VeriStrat and IQLung. We communicated recently that we have met our primary endpoint of 5,000 patients enrolled, and so we've begun shutting that down. We'll continue to track and monitor those most recent patients for up to a year and potentially up to 2. But we're really excited. This was a real-world utility study. So as new treatments and modalities of treating patients were introduced, we're able to show and demonstrate how the VeriStrat test could help guide and inform the appropriate treatment. Most recently, we've had a large number, and it's not a surprise as what we expected. But as the advent of immunotherapies and immunotherapy combinations came into play, we have now highlighted that VeriStrat still can act as an appropriate test for identifying those patients that will and those that will not respond to an immunotherapy and/or combo treatment. So VeriStrat is the first test of Biodesix launched. It's a proteomic-based test that really highlights the patient's immune system status and their ability to respond not only to the cancer, but the treatment that they're receiving. So again, 5,000 patients studied for the test. The test also has advanced diagnostic laboratory status with an exceptionally strong gross margin. So for us and our sales team, this data really keeps you present with the new treatment trends, and we're excited to continue to push that out and promote the test.

Great. And as you mentioned, VeriStrat and also GeneStrat is also like more established test in your portfolio. Could you comment on what you've seen with ASPs, given that they are more?

Yes, they've remained really strong, right? When we talk about having 3 of our 5 tests with ADLT status, that's where you're taking kind of the mean or median price. So we haven't seen much price erosion, much price change there. And even on the GeneStrat NGS and ddPCR front, pricing has been strong. We've made concerted efforts to continue to improve our internal processes that positively impacted, and you saw that with some of the gross margin improvements with a 9-point improvement quarter-over-quarter. And so we're going to continue to do that. We think, again, not only are we going to have the fastest turnaround times out there, but we think we can continue to become a little more efficient. But strong gross margins for all those tests. And again, being the only company focused along with 5 on-market tests, with Medicare coverage and strong gross margins. We think it continues to set us apart and differentiate us and it allows us to continue to compete in a differentiated place going forward.

Great. And then going to your biopharma services, last month, you were hopeful to see an uptake in biopharma in the second half after seeing some challenges due to clinical trials and delayed enrollment, how has that trended over the last couple of months?

Yes. I think everybody in this space was negatively impacted in COVID, and we've seen a lot of clinical trials slow, some stop, and we discussed that a little bit even in terms of how it impacted us with ALTITUDE. But we also saw was retrospective samples being difficult to secure. And so most biopharmaceutical companies have a CRO that will manage and hold those samples in a biorepository. And so getting access to those, even when you have them under contract over the last few months, it has been difficult. To your point, we have seen improvement, and we've been receiving more samples on a month-over-month basis than we had throughout the entire pandemic. So we still feel that, that portion of the business is on a strong growth trajectory and recovery. We -- when we look at dollars under contract, that's something else we started talking about recently. Most recently, we shared that, that had improved from $9.1 million to $9.3 million. That continues to improve. And so as that grows and gets to greater than $10 million, you can see it's really just a matter of working through this backlog to get to the retrospective samples and on prospective samples just continuing to support getting those patients enrolled. So we feel really good about it, especially from the perspective of the things we can control, but we'll continue to monitor closely any sort of impact in the coming months that may delay access to clinical trials. But we think that portion of the business will contribute at a greater rate going forward.

Some of your peers have also noted soft biopharma demand given portfolio prioritization due to the choppy macro, are you seeing any of those headwinds weighing on your Biopharma revenue?

We're not so much. We watch it closely. We were concerned coming out of 2022 into 2023 budget cuts. We talked about those trials that maybe were delayed or halted. We did not see that. We had 2 -- I think it was a total of 2 contracts that were very minimal, and they were early stage with small biopharmaceutical companies and I think it had more to do with just their cash position. And so we've continued to build that book of business and have not seen anything canceled. Now again, those headwinds can present themselves in many different ways and a delay here and there can be impactful. Our biopharmaceutical team is in contact with those biopharma partners daily and weekly. So we feel like we've got a pretty good idea of when those samples are coming in. But most importantly, we're really able to confirm that it remains a priority for them. And that's the key for us is we want to do meaningful work. I think the biopharmaceutical services team on the Biodesix side is exceptionally talented and gifted, and we're here to continue to support those biopharmaceutical companies and especially providing those key critical insights if they need.

You talked about a $9.3 million backlog. Could you remind me what the degree of client concentration is for that backlog? And what are the reasons and key capabilities that pharma partners choose Biodesix?

Yes. When we think of those partners, they really are pretty balanced. We have highlighted that about 70% of the major partners we've collaborated with and partnered with over time. But we look at it in terms of having good balance from early stage to late stage small biopharmaceutical company, the big biopharmaceutical company and also across different disease states. I think that's one of the other things people underappreciate what Biodesix is. Commercially, we are focused on lung only. But when it comes to research, discovery and biopharma partnerships, we are pan-cancer and disease agnostic. And so we'll apply any learnings we have. The real value is trying to answer those critical questions that they have. I think we offer the full portfolio, and then we have a number of assays that we haven't commercialized that we offer, and then we offer custom assay development for biopharmaceutical companies. So really, if you partner with Biodesix, you're looking at the opportunity to do multimodal, multiomic approaches, we can leverage our history with VeriStrat, right, having over 5,000 patients enrolled in INSIGHT and then more recently, kind of introducing Nodify into that portfolio. So we look at it and say it's really kind of a one-stop meets all your needs type of opportunity because we're agnostic and we're looking at pan-cancer on the biopharma front, I think it's really about making sure that we can continue to answer the questions critically. But the majority of biopharmaceutical needs are still coming in at a -- from a genomic perspective, right? And I think that's a trend that a lot of people have committed to and they stand behind. And I think others are looking at it and saying, if and when does that shift to proteomics and we feel like we're in a cool position when it comes to proteomics.

Great. You also presented data around Risk of Recurrence test. What were the key findings from that data? And you're also developing primary immune response tests. Could you tell us a bit more about those tests, if whether that could be eventually offered in the clinic, should we be thinking about that as a near-term or medium-term opportunity?

Yes. No, it's a great question. So the 2 tests or assays that you referenced are 2 tests that we discovered in-house, we've developed in-house and with third parties. And so the Risk of Recurrence test is a blood-based proteomic test, presurgical resection, we can identify those patients that will recur. In early-stage lung cancer, the guidelines state that surgical resection is deemed necessary and said surgical resection is deemed curative. Unfortunately, the literature shows that nearly 40% of those patients recur within 2 years post-surgical resection. So the value here is if you can identify those patients at time of resection, will change your approach instead of taking a wait-and-see approach. This is different than MRD. We've highlighted that we've partnered with Memorial Sloan Kettering on an MRD product, Minimal Residual Disease is going to be post-surgical resection. And so we think that puts us in a very unique position to be the only company out there that has both a pre and postsurgical resection, genomic and proteomic where we can highlight all that's going on with that patient in and around the time of surgical intervention. On your second question, we've stated that we do plan on commercializing this test. But given the current environment, we know we need to continue to validate the test and get more data. We'll do that. We're not rushing out to launch the test tomorrow. We want to be mindful of having the nearest term path to reimbursement, right, and minimize that time where we've got kind of no or low pay test out there. But we still hold Risk of Recurrence exceptionally high in our priority list. And that data that was -- that you referenced was actually a poster presentation at World Lung in Barcelona about 2 days ago. So it's brand new. I know the team in Barcelona gave me an update that there was a lot of interest and excitement around it. And so we think this being the first time that we've shared data, it will give us an opportunity to continue to leverage that. And we've worked with NYU here in New York and Dr. Harvey Pass on that test. So we'll look forward to sharing more information. On the PIR or Primary Immune Response test, this is more similar to what we talked about with VeriStrat where the whole goal with immunotherapies is, let's find and identify those patients that are going to respond. I think the end of the literature, at time of introducing the first immunotherapy for lung cancer stated that 1 in 3 patients would respond favorably. Real-world data sense is highlighted that, that number is significantly less than 1 and 3. And so for us, when you've got a costly treatment, we want to make certain that the right patient gets that treatment. And if it's not the right treatment, then let's put them on the one that gives them the highest likelihood of responding. And so this test similarly, again, it's not something we're prioritizing today given the current landscape. We offer both of these tests to our biopharmaceutical partners also, so they can conduct research on how those tests may positively impact not only their development, but their introduction of those drugs. So more to follow on primary immune response, I put it behind Risk of Recurrence in terms of timeline and really, I think we'll give more updates by middle of next year on Risk of Recurrence in our long-term plans. But I think it's fair to say with 5 on market tests, all of Medicare coverage, 3 with ADLT status, I think the thing that we've demonstrated is that we can commercialize test. We can get those tests reimbursed. And in many cases, we can get ADLT status for those tests, and we've got a commercial channel. So for us, if we can drop more tests into that commercial channel, we're going to continue to do it. We think that's one of the key differentiations for our team.

Great. You touched -- I touched on this in your opening comments, but you recently achieved a low 70s gross margin, expressed expectations are remaining around that level. What dynamics are baked into that guidance? And what does it assume for Biopharma?

Yes. The best thing about having the backlog in biopharma is our forecast accuracy is pretty high as we stay in context. So we actually have been able to factor in what test we think we'll be running. But the biopharma and gross margins remain strong. And so for us, it gives us great confidence. I talked about some of the process improvements that we made. I think there's still additional projects that will have a positive impact. We don't expect them to hit in the next quarter or 2. I think what you'll see is much more of the same from the team as we look out over the time horizon. I think we can keep those gross margins exceptionally strong, but somewhere in that kind of mid-70% range to low 70% range. And as you said, the 73% was a year-over-year improvement of 9 points off the 64% we had. So we always stated that we should be in those -- that mid-70% range. And now that we're back there, we plan on staying there. And I think we can squeeze out a little more improvement there. And we think that differentiates us. I think in the diagnostics space, there's one, maybe 2 other companies out there that have equally as strong gross margins or slightly better. And we're going to hold ourselves to a high standard to make certain that we maintain that position.

Okay. In the last minute or so, how are you thinking about balancing investment towards commercialization versus managing cash and extend runway. As your sales productivity continues to ramp with in-person access, how are you thinking about that cadence of new hires to support future growth?

Yes. Building the sales channel can be difficult. And now that we've built it and we feel like we've got the best pulmonology focused sales team out there, it's really continuing to set them up for success. And so we're not just going to expand to expand. We're going to be very intentional appreciating where there's opportunities to expand and grow. I've stated it before, we're still yet to see the sales rep cap out or max out. So until we see that, we really want to see what that sales rep productivity per person looks like, and we'll use that to guide future decisions. But we're really bullish on the ability to expand and continue to grow the sales force.

Okay. Well, that was a great overview. Thank you very much.

Yes. Thank you, Yuko. Appreciate it. Thank you, Morgan Stanley.