Biodesix, Inc. ($BDSX)

Good afternoon, everybody. I'm Luke Sergott. I cover life science tools and diagnostics here at Barclays. With me, it's my pleasure to have Robin Cowie, CFO of Biodesix. Thanks again for making it. And sorry for being a little bit late here. We had a little bit of break so we can run over.

But I guess let's start off, relatively unfamiliar with the business, outside of meeting you guys a couple of times and scaling up. So for those that aren't familiar with what you guys do, kind of walk us through just the 101 of where the technology, what the platform is and how you're building it and like kind of where you guys are going?

Yes, sure, absolutely. So Biodesix is a diagnostics company. We're dedicated to developing tests to help improve patients' lives and outcomes, focusing on specific clinical questions. Commercially, we're primarily focused in the area of lung. But on the research and development and on the services side, we actually are pan-cancer and pan-disease, so providing research services across the board. We have five tests on market in lung, all with Medicare coverage. Two are tests to help identify which patients are likely malignant and likely have lung cancer and need to move on to a biopsy or a surgery and those that can safely go on to CT surveillance. And then we have three tests that help identify the appropriate treatment for patients once they've been diagnosed with lung cancer. We leverage genomics, proteomics and radiomics AI to help accomplish that on our commercial front and then also on the services side, where we'll provide discovery of tests for pharma companies or diagnostic companies, development, regulatory, reimbursement support, all the way up through commercialization.

Okay. And on the -- so if I get the workflow, right, so somebody comes in with -- like how are they -- when is the test used in the workflow? Like when does the patient come in, where do you guys fit within that? And then obviously, you have from the diagnosis, risk stratification and then you go to the therapy selection, but where -- kind of where is your sales point? Is it on the physician? Is it on the oncologists? Like just give us a sense of where they fit.

Yes, we actually call on pulmonologists and just this past year began leveraging those relationships to begin calling on their primary care referral network. There's about 15,000 pulmonologists out there treating patients and about 15,000 primary care physicians that actually deal with the vast majority of lung nodules that are diagnosed each year. And it's estimated in the U.S., there's about 6 million patients annually with a lung nodule. Some of those are found through screening process...

I was just going to ask how do you find out you have a lung nodule? [indiscernible] my lungs are hurting me today.

Yes. Most of the time, it's incidental. So somebody goes in, they hurt their shoulder, they go in for a heart test or they have something else and they see a spot on the lung, and it that gets identified and referred either to pulmonology or to primary care for follow-up. The lung cancer screening adoption is very, very poor in the United States. So it's really -- it's incidental. And so you not only then have to deal with whatever brought you to the hospital in the first place, but then also following up on the lung nodule to make sure that it's not cancer. So that's where our test gets ordered, it's after the lung nodule is found, and we can help them determine if it's high risk and they need a biopsy or surgery or if it can be safely followed through CT surveillance. And then after -- and all of our tests are blood tests. So very easy and convenient for both the patient and the physician.

And from I guess on -- we'll get into the test development and how this shapes into your overall platform going forward. But from a technology perspective, you say genomics, proteomics and radiomics, like how did you guys come out and bring this all together? And if you can give us from -- is there a difference between your Nodify Lung, right, that's like the risk characterization and then you have your IQLung, which is your therapy selection, right? Are there any differences there in the technologies?

Yes, absolutely. So for Nodify, those are proteomic tests. So we use ELISA and LC-MS to measure proteins and autoantibodies in the blood. And then in the treatment guidance side, we use ddPCR for our very targeted panel of gene mutation testing. And then we use the Thermo NGS platform for our NGS test. And then finally, another proteomic test, VeriStrat, which measures the patient's immune system. We can actually measure when the body has triggered an acute chronic inflammatory response, which is where the immune system is actually helping the tumor instead of fighting it. And that's a MALDI-ToF mass spec.

Okay. That's really interesting. So talk about the reimbursement and the path here. And I just feel like the reason I thought all that was very interesting because like when you think about blood test, you always think about like NGS, right? And so you've been in the market for a while. And the reason I asked about reimbursement, it takes a while to get that. So are you planning to incorporate more multiomics in the next versions of your tests?

Yes, we do. We think there's no single technology that can answer every clinical question. And so for us, it's really important to use the technology that can best answer the clinical need. So the incorporation of radiomics into our pipeline, we're an expert in clinical proteomics. It's one thing to be able to measure proteins, it's another thing to be able to do it routinely and at margins that are scalable. Last year, our gross margins were 81% for the year. So we've excelled at optimizing this testing platform. And from a reimbursement standpoint, you're right, reimbursement is long and hard. And it's really important to continue to publish, get great clinical data and clinical utility to show how you impact care. In lung, about 60% of the patients are Medicare. It's a predominantly older disease. And we've got that down for our tests, and we've started to gain good momentum in the commercial payers for Nodify as we saw really strong increases in ASPs over the last 4 quarters.

How much coverage do you need more from the commercial side?

I'd like all of it.

Yes, I know. I mean...

We're in great shape now. We're at 81% gross margins now. And so now everything on top of it is just beneficial and flows through to the rest of the business.

Yes. It was more of a question like from a mix perspective, how much is not being reimbursed versus on your volume side?

It's a relatively small and shrinking percentage.

Okay. Fair enough. Fair enough. And then on the IQ side, as therapy selection, we talked about kind of this flywheel and you talked about the flywheel of like pharma accessing the data and working with you and you're going to get more companion diagnostics and informing better treatment decisions. Talk about that funnel and how that pipeline is building for you guys. And is this something that's scalable just on the IQLung? Or do you need to have like another test outside of that?

Yes. The majority of our testing on the biopharma services side is on IQLung, but we do a variety of other services. So we'll discover new tests for a company, we'll bring on new tests if they have early data on a different test and take it to a scalable, commercializable testing platform. We've announced last fall a partnership with Bio-Rad, where we developed an ESR1 test for breast cancer for them for the ddPCR platform, and had that from contract to LDT in about 4 months. So very rapid, very scalable. And the demand for our services is increasing. So our backlog is higher than we've ever seen it before, and the interest in what we're doing is continuing to grow.

Okay. And then how does that play in from -- as you're thinking about spend, investing in the business for growth versus investing for the next 10 years? Like how do you weigh that and like give us your near-term and longer-term priorities?

Our near-term priorities are growing the commercial organization and growing top line revenues to get to cash flow positivity. We did reach adjusted EBITDA positivity in the fourth quarter last year. So we're very happy to hit that milestone. And now it's continuing to move towards sustainable adjusted EBITDA and cash flow positivity. So that's our primary goal. The great part about the services side of the business is we use all the same equipment that we use for our commercial. So we're leveraging all of the equipment and the personnel. So it's really great operating leverage. And the larger that business grows, the more it pays for itself. So we do have several tests in our pipeline. A MRD -- combination MRD and proteomic test that we're developing with Memorial Sloan Kettering Cancer Center as well as VeriStrat in other tumor types. So we've actually studied VeriStrat in nine different tumor types, and we presented new data last year in prostate and some other tumor types to -- working to expand that and then working on digital diagnostics. So using imaging as the input instead of wet lab as the algorithmic input.

Yes. And ultimately probably marrying those two together.

Exactly. It's perfect. Lung is the perfect place for digital diagnostics because you always have an image. And so -- and there's over 50 different diseases treated by pulmonologists. So we think there's really great opportunity to marry the multiomics, right, the digital diagnostics along with the blood-based insights.

On the new tests with -- on the digital side, are they going to be a panel size? Like how many genes are you guys looking at?

On the digital side, it's actually not genes. It's looking at radiological features off of the CT scan.

No, I meant the digital PCR, ddPCR.

The ddPCR. The current on-market is four tests. So it's targeted for the earlier-stage cancers where you're really looking for a handful of mutations that have approvals. But in our services side, we can do -- we'll look at one mutation up to a couple of dozen mutations.

Okay. And then obviously, you'll just be able to scale that with other tests as they come on.

Absolutely.

That's really helpful. 80% gross margins, I mean, part of that, obviously, is just due to the test technology for mass spec, et cetera, but -- and the PCR. But as the market moves to whole exome, whole genome, why do you feel that where you guys are from a technology perspective that this is the right way to do it versus just jumping in and saying, let's just start sequencing everything.

Yes. I think it's definitely one approach is to get all the data and then be able to mine it, that works. We think that a more targeted approach works well for general population and general use. There's organizations like MSK who sequence absolutely everything and have the capabilities to do so on every patient, whereas the other clinics and clinics maybe farther out in the community don't necessarily have those capabilities. So we think it's really trying to provide the right test for the right patient at the right time.

Okay. And then as you continue on your growth, I mean, from a guide perspective, but also just as an infrastructure building on your own stuff, so like you guys are doing EMR integrations, right? So talk about how kind of the lift that you needed to do to get that and then what that -- ultimately kind of what you feel like that translates to on a reorder basis or increasing your market share basis?

Yes. The EMR integration is a really important project for us from a logistics standpoint, helping to identify the right patient for testing, helping to transmit the appropriate information from the office to us to cut out paper and fax machines, which is still the most commonly used ordering technique in medicine. It's kind of amazing that we're here and we can do so many things with technology and yet fax is still by far the majority. It's a big focus for us and for a lot of hospital systems to try and get away from using paper and better streamline the medical records. And so we think it's a really important part of our strategy going forward, not just from reorder rates and physician engagement, but from the operational standpoint and operating leverage.

And this is on Epic? Or is it across all of them?

Across all of them. There's many, many, many EMR systems.

Yes. So that should help. And I kind of touched on it before, but obviously, this helps just the ease of ordering and also it helps if a patient comes in and like just a sign comes up like, hey, probably you given this test. But outside of that, when you're thinking about the penetration of the market, you have your core pulmonologists that you're selling to now. Talk about the overall wallet share gains that you've had, the reorder rates and how those have picked up. And then couple that with new wins, right? So landing new hospitals or landing new pulmonologists. And are you seeing that time for them to accelerate or like, bring on more of those patients, start to shrink?

Yes, it's a great question. The great part about this market segment is everyone knows there's a problem. We know there are so many, many patients and managing all of them, finding the right patients and getting them to the right treatment path is complex, and we don't get it right all the time. In fact, about 20% of patients who go on to CT surveillance actually have cancer, so should have gone on for an intervention. About 65% of patients who get a biopsy didn't need it. And 35% of patients who got a surgery and had a portion of their lung removed didn't need it. And so this is really where we focus. And so getting to a clinical, yes, is really pretty straightforward. Physicians want more information to be able to help them make better informed decisions. It's the logistics that's the hard part. And that's getting integrated with the offices, that takes time. So getting to the yes is fairly straightforward, the pull-through with the office is really where a lot of our integration teams time -- where they focus.

Okay. And on that, I guess, like just creating efficiency within the overall diagnostic workflow. Talk about your ASP, what's your reimburse rate right now? And as you think about kind of where that adds cost and ultimately, you're taking cost out where you're talking about like does this patient need a biopsy, right, everybody -- 65% don't. And then on the other side, like the worst case is you don't have cancer and then like you got it.

Yes. So I've worked in reimbursement for about 20 years. And most of the time, when you're having a conversation with a payer, you're introducing a problem they may not be completely aware of and then telling them you have the solution to that problem they didn't necessarily know they had.

Consulting 101.

Exactly. This is a different space. So payers know, hospital systems know, physicians know they've got a problem. And from a payer standpoint, their second most expensive vertical is advanced cancer. So they want to catch those cancers earlier. They don't want those patients with cancer going on to CT surveillance. They also absolutely hate unnecessary care and paying for things that didn't need it is not something they love. And from a health system and physician standpoint, they want the right patient in the right group. So yes, there are cost savings by avoiding uneffective care and ineffective treatment decisions. But from a physician standpoint, they have a set number of patients that they can do biopsies on in a day. We're not changing necessarily how many patients are getting them. We're just trying to capture the right patients into those groups.

Yes, get them the right care at the right time.

Exactly.

Yes. And that's all they want to do anyway.

Yes. We spoke with one hospital system. They're in 5 states. They went through, they found in the last 6 months, they had 100,000 patients in their hospital system that had lung nodules and no follow-up.

That's horrible.

It's awful. And because time matters, you wait a couple of months and that cancer can advance.

How much of that is due to the patient compliance of just not wanting to go in and do the workup?

There's definitely some of that, particularly for those that are discovered incidentally, they go in for a stroke or a heart issue, you're focusing on something a little bit more urgent. But it's also just being able to identify those nodules, get them into the systems and manage them quickly.

Okay. And then -- I was just looking at the time here. Like I said, we can definitely go over because we started a little bit late. But as you're thinking about -- like so the digital ordering, you've talked about this, you have the EMR. Your overall like commercial organization, talk about what investments that you guys have made and ongoing investments here to continue to penetrate? I think -- I don't know if you told me the penetration number you have for the pulmonologist versus the PCP right now.

Yes. It's -- we're mid-single digits with the pulmonologists. We just really started calling on primary care. Our first group of primary care sales reps hit the field in the third quarter. So we're pretty early on. But volumes from primary care in the fourth quarter were about 12%, saw almost 70% year-over-year growth from that group, which was great; about 28% growth in pulmonology from -- on a much bigger end. So we're very pleased with how that's growing. We added about 35 sales reps last year, went from about 65 to almost 100. We'll add another 25 this year because we only have about 100 folks calling on about 30,000 physicians. And so our primary investment base is getting feet on the street to help educate and build the market.

Yes, hand-to-hand combat. What kind of growth are you guys looking for out of those reps? Like how -- so from the reps that you've had, let's say, for the last 2 years versus the ones, obviously, just onboarding, like what's the scale and productivity levels?

Yes. In the fourth quarter, average revenue per rep was about $1 million, which is great, especially because a very large portion of that sales organization is brand new with most of them hired in the second half of the year. Our reps, who have been in the field a little bit longer, we see really exciting productivity numbers, and we're seeing the new reps on the ramp towards those numbers. We think the $1 million is sort of a baseline for us. And -- but we haven't really seen in territories, we haven't seen them max out. So we're...

Yes, it's so new, right? I mean...

It's so new.

[indiscernible] penetrated.

Yes. We're really the first on market. We're building the market. And so it's a heavy education sell at this point, and we're learning and adapting every day.

So as you think about the overall lung workflow, right? So I mean, do you have any ambition to get into screening or replace the -- because it's just imaging based right now, right?

It's just imaging-based right now, but there are several MCEDs, the multi-cancer early detection or the SCEDs, single-cancer early detection tests that are out there that are coming. It's not in our pipeline right now, but we think that those tests will really supplement the market. There's a huge population that's eligible for screening that's just not going in, and these tests can help find them and put them into the funnel.

Any ideas like just from a commercialization to partner with them or like kind of link up with them as they educate the market and unlock a big piece of that, I feel like it would just be like an easy cross-sell to you or hand-off to you, if I...

We completely agree. We've had great conversations with many of those companies as they're working towards getting to market in lung.

This is great. I mean it's a great ramp and a great story.

Thanks very much. We're very excited about it.

I really appreciate the time. Thank you.

Thank you.