Biodesix, Inc.

Good day and thank you for standing by. Welcome to the Biodesic second quarter 2021 financial results and business update conference call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 1 on your telephone. If you require any further assistance, please press star 0. I would now like to hand the conference over to your speaker today, Chris Brinzey, Investor Relations. Please go ahead.

Thank you, Operator, and good afternoon, everyone. Thank you for joining us today for a discussion of Biodesics, second quarter 2021 business highlights and financial results. Leading the call will be Scott Hutton, Chief Executive Officer. Scott will then be joined by Robin Harper-Towie, Chief Financial Officer. After the prepared remarks, we will open the call for Q&A. An audio recording and webcast replay for today's conference call will also be available online as detailed in the press release announcement for this call. Today we issued a press release announcing our business highlights and financial results for the second quarter 2021. A copy of the release can be found on the investor relations page of the company website. As a reminder, actual events or results may differ materially from those projected as a result of changing market trends, reduced demand, and the competitive nature of biodesics industry. Such forward-looking statements and their implications involve known and unknown risks, uncertainties, and other factors that may cause actual results or performance to differ materially from those projected. The forward-looking statements discussed on this call are subject to other risks and uncertainties, including those discussed in the risk factors section and elsewhere in the company's annual report on Form 10-K, the year ended December 31, 2020, filed with the Securities and Exchange Commission on March 16, 2021, as well as subsequent quarterly reports on Form 10-Q filed during 2021, if applicable. Additional information concerning factors that could cause results to differ materially from our forward-looking statements are described in greater detail in the company's press release issued today and in the company's filings with the SEC. I would now like to turn the call over to Scott Hutton, Chief Executive Officer.

Scott? Thank you, Chris, and welcome, everyone, to Biodesic's second quarter 2021 earnings conference call. I'm planning to kick the call off with highlights. then turn it over to Robin for financials, then I'll come back with a deeper discussion on the business. Biodesics is a patient-centric, mission-driven diagnostics company. Our mission is to improve every patient's care by empowering physicians with swift, comprehensive, and actionable insights. To that end, it was a productive quarter with 180% year-over-year growth in total revenue. Our first four blood-based tests which make up our core lung diagnostic testing, grew 109% year over year and 20% over the prior quarter. We ended the quarter with $56.3 million in cash, which was a $1 million increase over Q1. In addition, we're happy to announce we're bringing forward the launch of our 72-hour liquid next-generation sequencing test to the beginning of next year. which will increase our core lung diagnostic testing menu to five tests. This broad portfolio of blood-based tests, coupled with our focused sales strategy, allows our sales team to provide multiple solutions for the same patient at various parts of their journey. The Biodesics portfolio of lung diagnostic tests is continuing to advance as well. We have multiple studies underway, including the Altitude, Beacon, Insight, and Oracle Prospective Studies to continue to build the data supporting our on-market test, as well as our pipeline test, including risk of recurrence and primary immune response. Our progress in the quarter reflects our commitment to improving patient outcomes through high-quality tests and clinical data. Now let me turn it over to Robin to review the second quarter financial performance. Robin?

Thank you, Scott. Our second quarter total revenue was $11.9 million compared to $4.2 million for the second quarter of 2020, representing an increase of 180%. We are particularly pleased with the improved trends in our non-COVID business, which includes our core lung diagnostic testing and biopharma services, which grew revenue by 102% year over year and 3% sequentially. highlighted by strength in our core lung diagnostic business, which grew 109% year-over-year and 20% sequentially. The quarter-over-quarter growth in lung diagnostic revenue reflects a rebound as pulmonologists shifted from treating patients with COVID-19 to their more normal pre-pandemic workflows. As a result of our successful growth strategy, we triggered the previously disclosed Notify XL2 growth profit milestone from the acquisition of integrated diagnostics. Turning to biopharma services, second quarter 2021 revenue was $1 million compared to $0.6 million in the year-ago quarter and $1.7 million in the first quarter of 2021. As we've said, this business can fluctuate due to several factors, including contract timing, which can be longer under normal circumstances, but in this particular instance reflects the continued impact COVID-19 has had on overall clinical trial enrollments. Despite the impact it had in our quarter, prospective trials and our biopharmaceutical activities in this area remain robust, and we remain confident that we will see further improvements in the coming quarters. Overall, biopharma services remain a significant long-term opportunity for biodesics, particularly as prospective clinical trials begin to ramp back up. As anticipated, we did see a sequential decrease in total revenue as compared to the first quarter of 2021, which was driven primarily by the decline in COVID-19 testing services. COVID testing revenue was 6.1 million in the second quarter versus 23.2 million in the first quarter of 2021. As discussed on our last quarterly call, the decline was the result of rapidly falling COVID case volumes across the country and the corresponding decrease in demand for our COVID-19 testing services. As we've said before, we continue to expect COVID-19 testing services to represent a declining piece of our overall revenue going forward. Gross margin percentage in the second quarter 2021 was 40% versus 56% in the second quarter 2020. The decrease in margins over the prior year period was driven primarily by the significant year-over-year growth of our lower margin COVID-19 testing revenue which was 6.1 million in the current quarter versus 1.4 million in the second quarter of 2020. Gross margin in the quarter compared favorably to the 37% gross margin seen in the first quarter of 2021. The 300 basis point improvement in gross margin over the first quarter was a result in the growth in our higher margin lung diagnostic testing services revenue offset by the sequential decline in COVID-19 revenue. As this dynamic is expected to continue during the recovery from the pandemic, we will expect to see strong margin improvement in the remainder of 2021. Overall operating expenses, excluding direct costs and expenses, were $15.4 million in the second quarter of 2021 compared to $8 million for the same period of 2020 and $16.2 million for the first quarter of 2021. The year-over-year increase is primarily driven by non-cash stock compensation increases as a result of becoming a publicly traded company and investments in expansion of our sales force, as well as research and development teams. The sequential decline was primarily due to the reduction in the second quarter 2021 change in contingent consideration, which resulted from the milestone achievement in the second quarter. and now reflects a portion of the change in interest expense, representing the time value of money for the fixed and determinable obligation, as well as a reduction in performance-based compensation elements, including stock compensation costs. After beginning the expansion of our commercial organization, launching multiple new clinical trials, and investing in our pipeline, the net loss for the second quarter of 2021 was $11.4 million compared to a net loss of $8.3 million for the second quarter of 2020, and $7.0 million for the first quarter of 2021. Net loss includes non-cash expense related to consideration and stock-based compensation of $1.5 million recognized during the second quarter of 2021 compared to income of $0.9 million and expense of $2.7 million in the second quarter of 2020 and first quarter of 2021, respectively. Finally, turning to the balance sheet, we ended the quarter with $56.3 million in cash and cash equivalents an increase of approximately $1 million over the first quarter of 2021, primarily as a result of the collection of working capital balances from the first quarter of 2021. In addition, to further enhance our capital structure, we have applied for loan forgiveness on our $3.1 million PPP loan and expect to receive confirmation of forgiveness pending final review by the Small Business Administration. Looking forward, Due to the rapidly evolving nature of the pandemic, testing strategies, which include variants, vaccinations, and the resulting impact on healthcare in the U.S., we are not providing revenue or earnings guidance at this time. We do, however, expect year-over-year revenue growth with our gross margin percentage continuing to improve as lower margin COVID-19 testing service revenue is replaced with higher margin long diagnostic testing revenue. We continue to expect that COVID-19 testing revenue will decline throughout the year, subject to any major changes in the rate of the pandemic and our ability to enter into further testing services. However, we will continue to provide COVID-19 testing to our healthcare, schools, and other employer group partners and expect to evolve our offering as the country continues to move forward and we learn to live with COVID-19. While we expect to increase our overall operating costs during 2021 due to the execution of our growth strategy and investments in bringing new products to market, We are maintaining a disciplined focus on costs and are continuing to evolve our offering with the future launch of our new NGS test. Now I will turn the call back to Scott.

Thank you, Robin. Remember, our mission is to improve every patient's care by empowering physicians with swift, comprehensive, and actionable insights. We will do so by integrating Biodesic's molecular test into physician practices providing all of the testing needed for a lung patient through their continuum of care. One patient, one trusted company, multiple tests. We continue to build our company for long-term sustainable growth by investing in our sales infrastructure as we remain on track to double the size of our direct and dedicated sales force in 2021. The expanded sales force will better allow us to reach more physicians to provide them with a portfolio of tests to manage their patients from pre-diagnosis of lung cancer through treatment guidance and monitoring of their disease. Our test results aid the physician in making more informed decisions to direct the right patients on to biopsy or surgery, help many more avoid unnecessary interventions, and help guide treatment decisions. As we've previously stated, the first quarter of 2021 would be our high watermark for COVID-19 testing revenue. followed by a steady decline in subsequent quarters. While the overall rate of testing in the U.S. has tapered off from the prior quarter, we will continue to offer support to communities both locally and across the country with our WorkSafe COVID-19 testing program. What we have demonstrated at Biodesics over the last 15 months is a resilience and ability to adapt. The Biodesics team remains diligent in our efforts to meet the needs of our partners, physicians, and their patients. One of the exciting recent developments is our new liquid biopsy 52 gene next-generation sequencing test. The test was shown in a recent publication to have an unprecedented 72-hour turnaround time, which is significantly faster than the 7 to 14 days it takes for other NGS tests on the market. Again, time to treatment for patients with cancer is critical, and we strive to provide reliable blood-based tests as quickly as possible to support physicians and their patients. The NGS test complements the 36-hour Genistrat DDPCR genomic test and the 36-hour Veristrat proteomic test currently offered, with the expanded coverage of broader molecular markers. The tests are used at different points in the patient's continuum of care and provide a more complete testing offering to the physician for the care of their lung cancer patients. Our NGS test has been available for research and clinical trial use since 2018, and we're excited to make it broadly available for clinician use early next year. The NGS test will be yet another option for our national home phlebotomy team to add to their array of biodiesel blood tests, and if deemed necessary by the physician, can be facilitated in the convenience of a patient's home. We also continue to support the development and use of our diagnostic test by adding to the body of evidence, demonstrating their utility and value. We have multiple studies, including four prospective studies currently underway. InSight continues to measure the impact and utility of the VeriStrat test, the Altitude and Oracle Registry study evaluating the efficacy and utility of the Notify XL2 and Notify CDT test, and the Beacon Lung Trial evaluating the efficacy and utility of our primary immune response test. These studies and our continued efforts are a key component to our business and drives both clinical adoption and reimbursement. We announced a number of new initiatives in the quarter that will help us expand our pipeline of diagnostic tests and broaden our research capabilities. One was with DataVant, a data connectivity company that Biodesics is using to link data from the lung cancer-specific portion of our biobank to other data sources. This allows us to provide compliant and secure access to a more comprehensive database to our internal researchers and our academic and biopharma research partners. We also added a partnership with SEER to utilize SEER's Proteograph product suite to drive novel proteomic insights for translational research and to help define the biological underpinnings for new tests and biopharma services. Biodethics has become a trusted partner and runs SEER technology in conjunction with our other technologies and the Diagnostic Cortex AI platform for biopharma partners with interest in research and development. Lastly, I want to close with a thank you to all BioDesix teammates whose efforts, commitment, and daily contributions make it possible to achieve our ambitious mission to help improve the lives of patients. With that, I'll turn the call over for questions.

Thank you. As a reminder, to ask a question, you will need to press star 1 on your telephone. To withdraw your question, press the pound key. If you stand by, we'll be compiling the Q&A roster. And our first question comes from Teja Savant with Morgan Stanley. Your line is open.

Hi, this is Yuko on for Teja. Thank you for taking our questions. While COVID testing revenue this quarter came in below where we were, with the Delta variant driving up the number of COVID cases, could you comment on what you're seeing more recently on the COVID testing side?

Yeah, great question. Thank you, Yuko. You know, we monitor daily what's going on with the pandemic, as does everyone else. And as we've said before, our new normal really is this constant unprecedented change. And so for us, we are seeing a slight increase in testing, and we continue to monitor that as it focuses on transitioning to Delta, like you said, and then potentially even Lambda. Most importantly, we're here standing by and ready to assist our partners with testing as they see needs. But at this point in time, as you heard Robin state, we really are continuing to focus on decreasing that forecast quarter over quarter.

Got it. That was super helpful. And then previously you mentioned that pulmonologists have limited clinic volume as they're focusing their efforts on treating patients with COVID. Would you provide some color around the rebound you're seeing around the lung business?

Yeah, Yuko, great question. In the second quarter, we saw pulmonologists return to kind of a near level of pre-pandemic. We were very encouraged by this. Unfortunately, based upon your first question, focusing on the Delta variant, we continue to monitor this daily and weekly, as we know that as ICU beds fill, there's a chance that pulmonologists get pulled back into the front lines. So again, we're going to continue to monitor that. But recent days, weeks, and months we saw pulmonologists returning to pre-pandemic levels, focusing mainly on non-COVID patients, and it resulted in the productive quarter that you saw.

Great. Thank you very much.

Thank you. Thank you. Our next question comes from Brian Weinstein with William Blair. Your line is open.

Brian, are you there? Can you hear me? There you go, Brian. We can hear you now. We may have lost you again, Brian. Operator, I think we may have lost Brian. Maybe it's best if we go to the next question and we can come back to Brian.

Our next question comes from the line of Kyle Mikeson from Canaccord. Your line is now open.

Thanks. Hi, Scott and Robin. Hope you guys are doing well. So nice to see the diagnostics of the core testing business kind of grow sequentially, the 20% growth. I'm just wondering, do you think that could continue going forward based on what you're seeing in the practices and everything right now? Could you just talk about maybe your assumptions for the second half of the year just given. I know it's uncertain and everything, but the directional commentary could be helpful just in the core business. Thanks.

Yeah, thank you, Kyle. Yeah, we feel really good. You know, as we focus on those things that are in our control, supporting those pulmonologist needs, we've seen a significant increase, as you referenced. As we continue to progress, we're mindful that the pandemic is dramatically different now in 2021 than it was in 2020. our conversations with pulmonologists increase our confidence level that they'll be able to progress through this surge better than they did in 2020. They've learned a lot. They've applied those learnings, and they've got broader capabilities, as do we. So focusing on those things in our control, we feel good that we'll be there and ready to continue to support them, but we'll continue to monitor caseloads volumes, bed availability, and potential shutdowns, and support our physicians as best we can.

Okay. That's helpful, Scott. Thank you. And I was also wondering about the gross margin. Maybe this is for Robin. I mean, just maybe first, if you could provide, like, the core lung diagnostic gross margin, the quarter. You know, I don't know if you can kind of break that out, but that would be helpful. And also... You know, in the 10Q, there was something about like a termination of an agreement with Bio-Rad, like a royalty. I don't know if that's going to be material on gross margin, but could that help in the second half of the year and like beyond? Maybe if you guys could just kind of parse that out for me. Thanks.

Sure. Hi, Kyle. The lung diagnostic gross margins continue to be very strong. And while we don't break them out specifically in the queue, they do reflect what we saw pre-COVID. So if you look back at 2019, We were in the 70% to 75% gross margin range, and that continues for the non-COVID business. The Bio-Rad change is expected to have a minimal impact, and it's not expected to have a material change on gross margins.

Okay, makes sense. Quick question about the Salesforce. Nice to see that's ramping, Beak-Saniton's ramping this plan. Could you just remind us how the reps are comped? I was just wondering if there's like incentives that emphasize the lung testing over COVID just to make sure they're kind of incentivized, you know, for post-pandemic. Thank you.

Yeah, great question, Kyle. Thank you. We've not disclosed to date, but I'm happy to clarify. Our field-based sales team is not compensated on COVID testing. and nor have they been throughout. When we shifted back in early 2020 to a remote or virtual work environment and clinics began shutting down, we kept our entire sales team intact. There were no furloughs, no layoffs. We wanted them demonstrating resilience, becoming as creative as possible, and shifting all physician meetings for our core lung diagnostics towards virtual We wanted to be prepared for the rebound as we opened up earlier this year, and we believe confidently and strongly that that's why you've seen the performance that you have. We did not want our sales team shifting focus. We will, as a country, get through the pandemic, and as we do, we're going to remain focused on what matters most, which is partnering and collaborating with physicians to better enable them to treat their patients.

Great. And if I could, just one last question for me, bigger picture. Based on revised recommendations from the USPSTF, CMS is considering an adjustment to reimbursement policies for low-dose CT lung cancer screening. So like this new eligibility criteria includes lowering the screening start age, and so many commercial payers have already expanded coverage by adopting the new recommendations ahead of Medicare, which is obviously pretty uncommon. Do you think that's going to have any downstream impact on biodesics given your nodule management offerings?

We saw the USPSTF recommendations, at least the draft recommendations over a year ago, and given the broad support from physicians and many societies expected that to happen. So we actually included this change in our projections and in how we're looking at the business. And mainly it means there'll be more patients getting screened, which is great because we know that Catching cancer early is the best way to improve outcomes and even potentially affect a cure, and anticipate that that will lead to the very, very large number of nodules that are found. So that 5 million lung nodules that we estimate includes this change for the TAM.

Wow. Okay, thanks, Robin. Thanks for taking the questions. Talk to you soon. Great. Thank you, Kyle.

Thank you. As a reminder, to ask a question, you will need to press star 1 on your telephone. Our next question comes from, and I'm actually showing no more questions at this time. This does conclude today's conference call. Thank you for participating. You may now disconnect.