Diaceutics PLC (DXRX) Earnings Call Transcript & Summary

Hello, everybody, and welcome to Diaceutics' 2021 Full Year Results. I'm looking forward to talking to you about the transformation that has been taking place in our business over the past 12 months. But before I start, let me introduce our new Chief Financial Officer, Nick Roberts. Nick has been -- joined the company only past Friday, but has been working with myself and the outgoing CFO for the [ fight ] to transition into the role. Nick, talk about yourself.

Thank you, Peter. Firstly, can I say I'm delighted to have joined Diaceutics. It's such an exciting time in its growth journey. A bit about me. I'm a fellow chartered accountant with over 16 years' experience. I originally trained with Baker Tilly, now RSM, in their audit department where I eventually moved up to the position of Audit Manager before deciding to move into industry. Over the past 7 years, I've been fortunate enough to work with high-growth AIM-listed businesses, much like Diaceutics is. Most recently, I was the Head of Group Reporting at Ergomed PLC, a pharmacovigilance and specialist CRO industry, which services both the pharmaceutical and biotech industries. It has a specialism in oncology and rare disease, a lot like the cohorts that Diaceutics focuses on. Before that, prior to Ergomed, I was the Group Financial Controller at Ceres Power Holdings plc, which is a high-growth fuel cell technology business based in the Southeast of England.

Welcome to the team, Nick.

Thank you.

So let's dive right in. Diaceutics is a health tech data and services company and we're focused on a particular segment of the precision medicine market. Let me explain that. 30% of all FDA approvals over past years have been for drugs or therapies which are interdependent or dependent upon the way the patients are being tested. The problem with that is that up to 50%, 5-0 percent, of those patients will not get access to those drugs, those life-saving drugs, as a result of the diagnostic testing ecosystem and the issues surrounding it. We have observed our pharmaceutical clients, our customers and others, spending up to $15 million per therapy to eliminate these hurdles. That ladders up to a current available market today of around $250 million, but it is growing rapidly with projections of a $3 billion market by 2030. Diaceutics has focused its entire business on this space and I'll take you through in the slides how that works. Let me start by giving you a quick snapshot of our business and the results in 2021. And I want to focus first on the numbers on the right-hand side. It has been a really good year for us. We've had revenue of GBP 13.9 million, which represents an 18% constant currency growth. We have really begun to see a shift towards our DXRX platform. We opened the year with an assumption that 20% of our business would flow through the platform. But with our customer acceptance, along with our sales and marketing efforts, we have moved that to 60% adoption a full year ahead of our original targets. Of course, platform impact on our business has already begun to flow through into delivering on that high-margin business that we aim to be. In fact, we've seen an 8% improvement in our margins in 2021. We've continued to invest in the platform, GBP 5.2 million were spent in 2021, and I'll take you through where we have invested that to make sure that the 3 business drivers underpinning the business continue to grow and support scale in the company. If I turn to the left-hand side and just speak about those 3 value drivers a moment. I just want to remind you that what's underpinning that change in quality of earnings is a global platform network. And that network is allowing us to provide a global change management process to our clients in all the key customer markets that they focus on. We have a group of highly innovative products, which continue to differentiate us in a competitive marketplace. And we have a unique data repository, real-time, real-world data, which is driving the insights that our customer needs in order to support their investment in this space. Our transformation continued, not just in the quality of our earnings, which are represented here again on the right, but in fact in 3 other areas where we've continued to make investment. On the enhanced DXRX platform, we've added 4 new products, giving us a full 16 product suite serving all the diagnostic commercialization needs of our clients. We added 485 laboratories and some 13 service partners, which combined, allow us to provide a reach and serviceability that will reach into our pharmaceutical customer and other [ mol-ups ] to make sure that we're -- they're investing in the right space. And we commenced over 30 collaborations across that network. Those collaborations are essential to drive engagement with our partners, as well as providing [ exhaustive ] data back into our data repository. Our data itself has been augmented in 2021. We added 125 million patient records. Today, at 490 million patients, we believe that we have the largest single, real-world, real-time testing database globally. Within that data, we have augmented further our AI-enabled algorithms, which are disease-based focused to allow us to drive new insights for our customers. We doubled our data science team, and indeed, we started an automatic data feed into our pharmaceutical clients to ensure that, that platform is being integrated into their systems. But perhaps it is to the sales and marketing change that is most profound within 2021. We actually commenced 2021 with only 3 client managers or key account managers as we call them in the company. There are a couple of people in support. Those were appropriate for our old professional services business. But as we moved towards our platform goals and our platform business model, we swapped out those 3 and moved in 12 key account managers or client managers to support the growth in 2021 and growth thereafter. We've augmented those key account managers with 4 in operational support. We've split our business into 3 verticals, focusing on our data, our platform services and our professional services. Each of these are being led by 1 of my senior managers on the ExCo team. We appointed a new head of sales and marketing and we fully integrated a CRM system across the business. In total, this was a fundamental transformation of our business to really support scale and the high growth goals that we set for ourselves. I think the best way of capturing all of those changes is to return back to our strategic road map. And here, you can see our past, present and future road maps outlined. But it is around our 3 value drivers, our products, our data and our platform, where we have made the changes that I've mentioned in 2021. And those individually and collectively ladder down to a change in the quality of earnings, a shift to platform revenues, a shift to recurring revenues and indeed, driving significant improvements to our margin. As we look at 2022, our goal remains to become an embedded partner to our customers. And indeed, we believe that we're well on that track. We will continue to invest in products, data and platform to service our growing customer needs. All with a simple goal in our business model of being highly recurring tech-led revenue business. So one way of bringing this back to our customers is to really kind of look at their needs. And this particular slide identifies the key needs that they have across their prelaunch, launch and life cycle management thesis of their business. If I pull out a couple of examples of the questions that we addressed. Can I find patients for my clinical trials? How many labs can run my test? Or the launch date, how do I drive test adoption? How can I optimize testing quality? On the life cycle phase, how many patients are leaking from treatment? These are the questions that our products, our platform and our data all seek to serve. Another feature of our business is in multiple departments within our customers that we're serving and we are stretching all the way from the strategy, R&D, partnering, sales and marketing and right through to access. We're relevant in all of those departments and we're relevant to multiple stakeholders within our customers, all supporting that goal for being an embedded service partner. We've talked a little bit about our customers' key needs. And here, I just want to break that down and show how each of our value drivers are contributing to that need. First is our unique DXRX platform. This is a multi-tenant platform organizing our customers' diagnostic teams. We're increasingly plugging in both data and a global network of labs and partners directly to our customers' digital systems, which really helps embed us in their operations and eliminate real barriers to treatments getting access to the therapies. Simply, the bigger our network, the more we can leverage this and extract a greater share of our customers' wallet. Second are our products and these products are being delivered via the platform. They are highly differentiated in the marketplace and really support our ongoing growth. Let me explain how this works. You can see here on this slide the 3 phases of our customers' business: The clinical development, the prelaunch launch and life cycle. And diagnostic commercialization needs exist right across that continuum. On the left-hand side of each of these boxes, you can see the needs that we have identified with our customers, having worked on multiple projects with them. These needs ultimately ladder up to a full diagnostic commercialization program. And against these needs, we have both developed and innovated products and services that really serve each of these steps. We have enormous flexibility here. We can bundle projects and data and services together, and we can focus and zoom in on particular phases of our customers' business. And ultimately, live with each of these therapy brands for a long period of time. Our experience to date has allowed us to see that we can live with our therapy brand teams for up to 7 or 8 years within managing these diagnostic steps all the way through. And the last here is our data. I believe in our data, we have unparalleled capabilities. We've collected testing data and insights for over 9 years from thousands of sources and we use data science and machine learning to link and cleanse all that data. By [ limiting ] all the key stakeholders across the health care universe, we're able to track and monitor in real-time testing behavior of labs and physicians, which then help our customers segment, their physicians and target their education activities. We were really excited in quarter 4 2021 to move our U.S. data onto a weekly feed to our customers. The product is called Signal and has already triggered for us more than 13 data subscriptions and our largest-ever single customer contract for a top 5 pharma company, which we announced recently at $2.5 million. I think the best way to explain our products in use is through a couple of case examples. And here, I just want to pick out 2. The first is where we use that Signal product to deliver a weekly subscription feed to our pharmaceutical customer. This allowed them to identify patients via zip code who were positive on the biomarker and who were candidates for their therapy. The ultimate impact of that was we were identifying hundreds more treatable patients in the U.S. and feeding that right through to their sales force management systems. Our second example beneath that is where we used our Lab Education technology and service to establish a collaboration with some 75 laboratories in 14 different countries. Ultimately, we were replacing a new test scoring system that was being done in real time. The end result of that is we've identified 15% more patients routinely that will ultimately go on and benefit from our client drugs. You can also see here a couple of other examples on this slide and indeed, a reference from one of our new customers last year, Elevation Oncology, a company that is really driving precision medicine change at the front line and we're delighted to be able to work with them. Just before I pass over to Nick to take you through some of the financial results, I just want to speak about our ESG footprint. ESG has been a fundamental part of our business for many years. After all, we are very much focused on driving key change to patients' lives by making sure that they're getting tested better and getting access to life-saving treatments faster. However, it is the fabric of how we reach that which I think is interesting to observe in this slide. We've created a team of balance. We've created a culture that really infuses and imbues the qualities of that mission and we've continued to train our staff and retrain people on that platform business model. We've introduced graduates into our team. Collectively, it creates a very progressive and dynamic culture, very much focused, not just on making a difference to patients' lives, but in making sure that those qualities are a fundamental fabric of how we do business. Let me pass to Nick to take you through some of the financial highlights in 2021.

Thank you, Peter. Turning to the financial results. The first slide here, the financial KPIs, just summarizes, I think, some of the really important progress that the company has made over the last 12 months into 2021 and then leading into 2022 as well. 2021 started as a pivotal year of migration for the business, whereby there was the huge task of migrating customer contracts and business onto the platform. And we can see there in the bottom left corner, 60% of the revenues generated from customers in 2021, this transitional year, was generated through the platform. Along with this, we've managed to grow revenues to GBP 13.9 million. That's a 10% growth on last year. And when considered on a constant currency basis with 2020, it's very impressive 18% growth rate year-to-year. That increase in revenue and migration to the platform has driven profitability at a gross margin level. Here, we pulled out a 77% gross margin, up 2 percentage points on 2020. I think more impressively, the adjusted gross margins, though when you strip out the amortization of the technology platform, is a very impressive 89%, up 8 percentage points on 2020. That profitability we see flowing through to adjusted EBITDA up to GBP 2.3 million from GBP 0.5 million in 2020, and again, flowing into the operating cash flow, which is GBP 0.5 million compared to GBP 0.3 million in 2020. The business continues to invest in the platform. We invested GBP 5.2 million in the products, in the data, in the platform, down slightly on 2020, but that to be expected. 2020 was a platform launch year, and therefore, there was a much more intense level investment. We go into 2022 with a really strong balance sheet, GBP 19.7 million in cash, which positions us really well for the growth potential in future years. On this slide, I pulled out some of the key income statement lines. At the top, we've got revenue, gross profit and margins. I'll talk about those in a little bit more detail on the next slide, but I just wanted to pull out the key areas on this slide. We can see in the year that there were no exceptional costs. In 2020, we incurred GBP 0.4 million of exceptional costs. That was at the back end of 2020 and it was a restructuring exercise really to position the business for platform growth into 2021. As a result of some of the redeployment of people within the business, the increase in the sales and marketing team and bolstering some of the key management employees, we've seen a small increase in admin costs moving from GBP 10 million to GBP 10.4 million, but certainly very -- that's a very measured increase for the fundamental migration that the business has undergone, the transition in the year. The revenue profitability, again, flowing down to the adjusted EBITDA margin there. So we see that increasing from 4% to 16%, and really is an indication of the journey that the business on, remembering that this was a transitional year. And lastly, really, really happy to point out that the profit before tax is GBP 0.5 million. That's moved to a profitable position from being a loss of GBP 0.7 million in the prior year. I mentioned earlier that we'd talk in a bit more detail about the revenue growth and the enhanced margins. On the left-hand side here, we see the revenue has fundamentally changed in 2021 and is a reflection of the transitional journey we're on. The pink in the dark blue representing the new platform-based revenues, as I mentioned earlier, that now makes up 60% of the total revenue of the business. And as you'd expect it, the professional services, which is the legacy part of the business, that has started to transition at cost, and we see a decrease in that. That will continue in some form as part of the core offering in the business into future years, though. We have secured multiyear reoccurring revenue streams, both in 2021 and 2022, and that is a fundamental change in the business and the customer offerings and is lending itself to reoccurring revenue streams in future years. On the right-hand side, we look at the enhanced margins that the business has. At a very high level, the actual cost of sales has remained relatively static at about GBP 3.2 million for the year. You can see that the actual makeup of those costs has fundamentally changed from largely being staff and other costs, so what I call cash cost related, to being split roughly 50-50 between those cash costs and amortization of the platform. As I mentioned, this is a transitional year. So we expect to see, again, as we leverage the platform more, those staff and other costs continue to decrease. But of course, we continue to invest in the platform to remain a first mover and keep our competitive advantage. So as we do that, we'd expect to see more amortization flow in here. But again, if we look at the gross margins, 2 percentage points up to 77% in the year, and again, very impressive 89% when we strip out the amortization cost. Revenue and margin growth, I think, is demonstrating the financial advantages that the platform is bringing to the business and this is really putting us on a solid foundation to grow the business into 2022. On this slide, I'd like to talk about the strong cash and profitability journey that is going to facilitate the future of growth in the business. As Peter mentioned earlier, the total addressable market that Diaceutics is looking at is increasing and we are looking to invest in the technology, in the platform, in the data and the products to make sure that we maintain our first-mover advantage. Innovation is the key to Diaceutics and it's really going to be a key to driving the growth. As such, we will continue to look to invest in the business. The adjusted EBITDA and operating cash flows are moving upwards in the year and will continue to move upwards and they will facilitate the investment we want to make in our people. People are key to the business and they are really going to be key to the growth business. The net cash position, GBP 19.7 million, positions the business very strong and that will facilitate capital investment -- it did facilitate capital investment in 2021 and will continue to facilitate that investment into 2022. I put on here our headcount number. I think on reflection, a very small increase in headcount in the year, but probably doesn't reflect the fundamental redeployment of staff, the increase in the sales and marketing team and the restructuring that happened to position the business as platform-based and enable it to grow. It's worth noting that after the year-end at the end of quarter 1 2022, we continue to increase staff headcount to some 140 or so staff. They have been secured and are really going to enable the business to grow into the future. This final slide really highlights the transition that the business has undergone over the last couple of years. Since IPO in 2019 and the launch of the platform in late 2020, the business has undergone this fundamental transition to a platform-based business and credit to everyone at Diaceutics for the commitment and the drive to ensure that the right technology was in place so the platform was launched and ready to go. And then since then, migrating 60% of the business onto the platform revenues, driving that margin growth. A real credit to the dedication of the staff and the, over what I think is a very tricky and complicated transition. And that puts us on a really solid foundation for the growth into 2022.

Thanks, Nick. Maybe a couple of more slides just to provide an outlook going forward. Just want to kind of go back a step and remind us exactly what kind of our fundamental investment drivers. We're first to market with this platform into a segment that is growing in multiple different ways. I believe that we've built a competitive moat around our business with our 3 value drivers: Our data, our products and our platform. We have a strong balance sheet, which allows us to remain agile in light of our customer needs and we certainly have a proven track record with our customers that is allowing us to drive that platform as an embedded part of their diagnostic commercialization fabric in the future. All of that is laddering up to a high profitable -- highly profitable high-growth business and I believe that we remain very firmly on that trajectory. Let me end by giving a sense of the outlook of the business. We've touched a lot on the infrastructure investments that we've made to drive growth in the business. But that growth is already beginning to touch our business model and the quality of our earnings. We're already beginning to see more new therapy and indication launches from our customers. We're beginning to see them spend more of their wallet to really eliminate the diagnostic challenges that are denying patients access to their drugs. We're seeing them move beyond oncology into other orphan diseases, and indeed, into some of the more large mainstream diseases like cardiovascular medicine and autoimmune disease. And equally, we see the opportunity to continue to innovate at the front line of this business, bringing new products and new services in response to our customer needs. In combination, we believe that is what is underpinning our growth trajectory and our ability to deliver ongoing high-margin, high-growth business. We see momentum really coming through in the business at the end of 2021 and that momentum for growth absolutely continues. We look forward to reporting our results later in the year as to how we've been progressing against that. For now, from Nick and I, thank you very much indeed.

Thank you.