MDxHealth SA (MDXH) Earnings Call Transcript & Summary

Ladies and gentlemen, thank you for standing by, and welcome to the MDxHealth Full Year 2019 Results Conference Call. [Operator Instructions] I must advise you that this conference is being recorded today on Wednesday, February 26, 2020. This presentation contains forward-looking statements and estimates with respect to the anticipated future performance of MDxHealth and the market in which it operates. Such statements and estimates are based on assumptions and assessments of known and unknown risks, uncertainties and other factors, which were deemed reasonable, but may not prove to be correct. Actual events are difficult to predict, may depend upon factors that are beyond the company's control and may turn out to be materially different. MDxHealth expressly disclaims any obligation to update any such forward-looking statements in this presentation to reflect any change in its expectations with regards thereto or any change in events, conditions or circumstances in which any such statement is based unless required by law or regulation. This presentation does not constitute an offer or invitation for the sale or purchase of securities or assets of MDxHealth in any jurisdiction. No securities of MDxHealth may be offered or sold within the United States without registration under the U.S. Securities Act of 1933, as amended, or in compliance with an exemption therefrom and in accordance with any applicable U.S. securities law. I would now like to turn the conference over to your speaker today, Michael McGarrity, Chief Executive Officer. Please go ahead, sir.

Thank you, Jolla, and thank you all for joining us for our 2019 full year released results for MDxHealth. With me today is Ron Kalfus, Chief Financial Officer. I am pleased to provide a positive update on our progress in Q4 as well as a view forward on our expectations for 2020. I'll be turning the call over to Ron for a full review of our financial results, but I would like to initially comment on the progress we have made in 2019 to refocus, restructure and deliver sustainable results. Highlights of our approach are as follows. First, we have driven a culture of focus and execution into every operating area of the company. Second, we have strengthened our management team within the operating areas that are key drivers of our results in sales, revenue cycle management and financial operations. Third, we have capitalized the company to provide the financial capacity to demonstrate our execution and commitment to delivering sustainable growth. Lastly, we have positioned the company to be the leader in the detection of prostate cancer with our menu of Select and Confirm tests, with broad payer coverage on Confirm and confidence in our coverage visibility for Select in 2020. In addition, as part of the management's assessment of the business, which included analysis of historical performance as well as future projections, we have made important updates to our estimates related to revenues, collections and receivables. As Ron will soon discuss, our analysis has led to our decision to change our accounts receivable carry time from 24 months to 12 months, the effect of which is a onetime reduction to our 2019 revenue from pro forma of $21.9 million to $11.8 million. It should be noted that this onetime adjustment better aligns us with industry standards related to carry time of receivables and better reflects our latest collections experience. It should also be noted that this is an accounting change and does not and will not affect actual units, cash or underlying reimbursement levels and will afford us the confidence to guide to our 2020 performance. More importantly and indicative of the improved operating performance are the strong results for Q4 2019. Our Confirm units grew 22% in Q4 compared to Q4 2018, and this also represents a 20% sequential unit growth from Q3 of 2019. At the same time, use of cash in Q4 decreased to $3.9 million, reflecting our improved operating discipline and improved cash collections. In addition, for the fiscal year 2019, Select units grew 61% over 2018. And while our focus in the back half of 2019 was largely positioning Confirm for growth, we expect Select to accelerate with the issuance of our final LCD expected in the coming months. And finally, cash operating expenses were down $12.3 million for the fiscal year 2019, representing a 27% improvement over 2018. We view this performance as sustainable because it is based on fundamental changes to our commercial and operating execution, led by the addition of John Bellano as Chief Commercial Officer; and Ron Kalfus as Chief Financial Officer. With their contributions, we have led a transformation of our talent and culture of focus, execution, performance and accountability. Specifically, with regard to our commercial organization, we have rebuilt our management and sales team focused on talent and experience in the complex process of changing clinicians' diagnostics approaches, specifically in prostate cancer. We now have a clear methodology of customer targeting and qualification, leveraging the established Confirm customer base and using data and analytics with regard to adoption and reimbursement coverage. And we are now seeing the early results of this focus lead to what we believe will be consistent and sustainable growth. This focus will also allow for uptake of Select into this space and a proven pathway for clinicians to provide clinically actionable results to guide diagnosis and treatment. Our confidence is based in this pathway that demonstrates the value of Select and Confirm, which we have referred to as a point of emphasis. We have invested in our sales team and existing customer base to build a stronger focus on and understanding of the value of our menu in the diagnosis and treatment of any patient that is screened for prostate cancer. While the American Cancer Society estimates 190,000 new prostate cancer cases in 2020, it can also be the most confounding to screen for, detect, diagnose and definitively treat. We believe we are the only company in this space to provide clinically actionable diagnostic tests at multiple points in the pathway of these patients. Not only do these aid clinicians to serve patients better by guiding appropriate treatment and intervention, but when adopted, drive cost savings and efficiency to both providers and payers from a health care economics perspective. We have a clear focus on qualifying our efforts to drive adoption in this key pathway within the urology community, and we are seeing evidence of the understanding and value proposition into this urology market, and ultimately, we believe the primary care market as well. Finally, we have taken this mission of operational focus and execution into our revenue cycle management operation to drive improved cash collections, fueled by the same culture changes and fortified by expected issuance of coverage for our Select tests in the first half of 2020. It should be noted that our proven expertise and execution in the coverage of all categories of payers with Confirm is very predictive of the same execution as we take Select through the coverage process. I will comment further on our view of 2020 initiatives going forward. But first, let me turn the call over to Ron to review financial results for 2019. Ron?

Thank you, Mike. I'll begin with our change in collection estimates that have impacted our 2019 revenues. As part of our assessment of the business and taking into account data that we've gathered and analyzed throughout the year, we have significantly revised our collection estimates for aged accounts receivable, having a negative impact of $10.1 million on 2019 revenues. We consider this significant revision to collection estimates as a onetime adjustment, primarily reflecting a reduction in the length of time the company carries accounts receivable from 24 months to 12 months. This onetime adjustment brings the company's revenue recognition in line with its updated collection experience and reflects the company's prioritization of accounts receivable aged 12 months or less. It's important to note that this change of estimate is an accounting measure in accordance with IFRS 15 and has no impact on our past or future units, cash or underlying reimbursement levels. On to an overview of our results. Total revenue for 2019 was $11.8 million compared to total revenue of $28.4 million for 2018. As mentioned, revenues for 2019 were impacted by a onetime adjustment of $10.1 million, following a significant revision to collection estimates. Excluding this onetime adjustment, 2019 revenues on a pro forma basis would have been $21.9 million, a reduction of 23% from last year, primarily due to the decline in units related to nonrecurring volume in the first half of 2018. Revenue from ConfirmMDx represented over 90% of product revenue. Gross profit on products and services for 2019 was $0, principally due to the onetime adjustment. Excluding this onetime adjustment, gross profit on products and services on a pro forma basis would have been $10.1 million, a decline of $6.6 million from 2018. This decline was primarily the result of the decline in revenues. Total operating expenses in 2019 were $43.2 million, an improvement of $5.6 million over 2018. Excluding noncash expenses, such as depreciation, amortization and stock-based compensation, operating expenses for 2019 were $32.6 million, an improvement of $12.3 million or 27% over 2018. Operating loss for 2019 was $43.2 million, an increase of $11.1 million compared to an operating loss of $32.1 million for 2018. Excluding the onetime adjustment, 2019 operating loss on a pro forma basis would have been $33.1 million, an increase of $1 million over 2018 primarily the result of the decline in revenues as well as an increase in noncash expenses of amortization of intangible assets, partially offset by the savings in operating expenditures. Our cash balance at the end of 2019 was $22.1 million, following an equity capital increase of EUR 9 million or approximately $10 million; as well as a loan facility with Kreos Capital in the amount of EUR 9 million or approximately $10 million. Operating burn for 2019 was reduced by almost $11 million to $22.2 million for the year. This reflects our continued operating discipline and our improved cash collections. Based on our current cash position and our projected revenues and collections, management believes that we have sufficient cash through the fourth quarter of 2020. Furthermore, the company is evaluating all financing options, including nondilutive funding, to extend its cash runway. This concludes my overview of the results. I will now turn the call back to Mike. Mike?

Thanks, Ron. During my first 9 months with the company, I was often asked to provide guidance and a view forward of how a turnaround of the company would unfold. However, I felt compelled to make an informed assessment of the company and the requirements needed to drive future growth and value. We have now completed that initial assessment, and I am very confident in our path forward based on the following actions and associated projections for the business. My conclusions are the following. We have clearly built a company uniquely capable of being a leader in the detection and treatment of prostate cancer. We have a body of scientific evidence and proven clinical utility in the market. We have a base of customers that can and will drive sustainable adoption of our menu with our improved focus, data, analytics and sales talent. And we have a team that will serve as the foundation for growth and value creation for all of our stakeholders. This gives me the confidence to now provide visibility in our 2020 guidance and the key indicators of that growth. We are projecting unit growth of 20% to 25% for Confirm and 25% to 30% for Select. We are projecting 2020 revenue of $27 million to $30 million. We anticipate LCD final coverage decision for Select in Q2 of 2020. And we also anticipate that this will provide immediate lift in our Select revenue and catalyze coverage in private and commercial payers. In summary, I will commit to all of our stakeholders that we will be relentlessly focused on execution in the following key operating areas of the business: top line unit and revenue growth through strategic and performance-based focus of our sales team, continued focus on broad-based coverage for both Confirm and Select with our current and prospective payer base, continued focus on our cash collections and billing and reimbursement operation to drive P&L optimization, and continued discipline in our operating expense management to drive efficiency and appropriate capital allocation. I am very confident in our ability to execute on all of these goals and believe we have the people in place to deliver on that promise to build value for all of our stakeholders, including patients, customers, employees and shareholders. Thank you for your interest in and support of MDxHealth. Now I'll turn back the call back over to Jolla for questions.

[Operator Instructions] Your first question comes from the line of Lenny Van Steenhuyse from KBC Securities.

Now in 2019, the focus was clearly on driving ConfirmMDx utilization from the existing client base, which should start to show nicely in the figures now, while on the other hand, Select grew more organically. I was wondering if that will still be the game plan for 2020 or if you do anticipate a pivot in your strategy throughout the coming year. And then as a short follow-up question, could you remind us what the current size of the sales force is exactly?

Sure, Lenny. We have approximately 30 direct sales reps in the U.S., which we believe will hold constant. And to answer your first question, yes, I communicated previously that the back half of the year was really focused on, which was critical to the company, getting stability and growth back into our Confirm business as well as defining very clearly our approach to driving leverage through our current customer base. We have incredible value in that base to drive both Confirm and Select. And as you know, with Select, we've clearly also demonstrated market adoption, clinical utility and understanding of the value of that test. And as we move into the period of time where we expect to get our LCD coverage, we now will be focusing throughout 2020, which is the basis for our guidance in driving both Select and Confirm into that pathway that I spoke to earlier. And we have good visibility to uptake of that and would expect to see the Select growth probably take -- become more obvious in the back half of the year after the coverage and expect to see, as evidenced with our guidance, that this 22% growth we had in Q4 is clearly sustainable.

Okay. And just a small follow-up on that. The gross margin, of course, took a dent in 2019. I was wondering, as volumes grow again in 2020, if you anticipate the gross margin improvement throughout the year. Or on the other hand, if you expect that faster SelectMDx growth might continue to put some pressure on these gross margins?

Yes. Ron, if you want to add a comment, but I'll just say that the 61% in Select growth in 2019 is very positive and reflecting the market opportunity and our ability to capitalize on that. It's clearly straight cost through our P&L on a gross profit basis. And yes, we would expect that to reverse as we get coverage in 2020, likely to become very clear in the back half. The second driver of that, obviously, is our improved cash collections, which we're very confident in our ability to drive. Ron, any additional comment there?