Biodesix, Inc.

Good day and thank you for standing by and welcome to the Biodesics first quarter 2023 earnings 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 11 on your telephone. You will then hear an automated message advising your hand is raised. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Chris Binsey of Biodesics Investor Relations. Please go ahead.

Thank you, Operator, and good afternoon, everyone. Thank you for joining us today for a discussion of Biodesics' first quarter 2023 business highlights and financial results. Leading the call today will be Scott Hutton, Chief Executive Officer. He will be joined by Robin Harper-Cowie, 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 first quarter 2023. A copy of the release can be found on the investor relations page of the company website. Actual events or results may differ materially from those projected as a result of changing market trends, reduced demand, and the competitive nature of biodiesel 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 for the year ending December 31st, 2022, filed with the Securities and Exchange Commission on March 6th, 2023, as well as on Form 10-Q filed today for the first quarter 2023 as 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. Biodethics is a patient-centric, mission-driven lung disease diagnostic company with a mission to unite physicians, patients, and biopharma to transform the standard of care and improve outcomes with personalized diagnostics. At BioDesics, we've built a comprehensive portfolio of precision diagnostic tests to support clinical decision-making across the lung cancer continuum of care. Our core lung diagnostic testing portfolio ranges from initial risk assessment of lung nodules with the Notify Lung Testing Strategy to post-cancer diagnosis treatment guidance, and monitoring with the IQ Lung Testing Strategy. Notify Lung consists of two blood-based proteomic tests, Notify CDT and Notify XL2, which are used by physicians to assess the risk of malignancy of a lung nodule. IQ Lung consists of three blood-based tests, the Genistrat NGS Genomic Test, the Genistrat DDPCR Targeted Genomic Test, and the Veristrat Proteomic Test. Offered as options within the IQ lung testing strategy, these three tests are used to inform treatment decisions and monitor for the rise of resistance mutations while patients are on therapy. All five of our core lung diagnostic tests are covered by Medicare, and we believe we're the only diagnostic company with five on-market tests for lung cancer, all with Medicare coverage. Throughout the quarter, we've continued to make excellent progress and I'm pleased with the start to the year. Looking at our financial performance, we reported total revenue of $9.1 million for the first quarter 2023, which represents growth of 38% compared to the same period a year ago. The quarter was again highlighted by the impressive growth of our core lung diagnostic testing business, which generated revenue of $8.6 million, reflecting approximately 86% year-over-year growth. We're exceptionally pleased with not only the growth in core lung diagnostic testing volumes, but in the accelerating ramp of that growth. Core lung diagnostics quarterly test volumes increased by 78% compared to the first quarter of 2022, the highest quarterly year-over-year growth in nearly two years, primarily driven by our Notify lung testing volumes. Following the seasonality seen in the beginning of the first quarter, our sales team has benefited from being in front of physicians and care teams on a day-to-day basis, as well as an increasing number of peer-to-peer physician educational events. Importantly, the momentum seen through the end of the first quarter has continued, and we're pleased with the start to the second quarter. In addition to the growth in volumes driven by our sales team, broadening reimbursement coverage remains an important part of our growth strategy. Building on the recent announcements of the first four private payer coverage policies for the Notify XL2 test, we're making excellent progress and expect to have additional updates for you in the coming months and quarters, including the anticipated first private coverage for our Notify CDT test, expected later this year. To further support our clinical adoption and reimbursement, we also anticipate several updates on clinical studies we're conducting, that will build upon and support the clinical utility of our Notify Lung and IQ Lung testing strategies. Specifically, we anticipate sharing additional data and updates from the Oracle study, evaluating the performance of Notify testing, and updated data from our Insight study, assessing the clinical effectiveness of Veristrat, our proprietary blood-based proteomic immune profiling test. Moving to our biopharmaceutical partnerships and service business, In the first quarter, we reported revenue of $411,000 for the quarter, which continues to be impacted by timelines for existing and new agreements resulting from delayed enrollment in clinical trials. On a positive note, we continue to have a strong backlog, and we ended the quarter with $9.1 million under contract but not yet recognized. While we're encouraged by the continued strength in the backlog, we assume the challenges our pharma partners are experiencing will remain for the next few quarters as projects flow and in some cases are delayed beyond our originally expected timelines. Longer term, we believe our ongoing efforts and advancements in explainability and transparent AI provide what we believe are unique insights and clarity to healthcare professionals and biopharmaceutical and academic research teams by providing the ability to identify key biological mechanisms driving specific outcomes for patient subgroups that may require a different approach or different treatment. I've said it before and cannot reiterate it enough. Lung cancer kills more people in the United States annually than the next three deadliest cancers combined, breast, prostate, and colon cancer. Time matters when treating these patients. We pride ourselves on Biodesic's ability to discover, develop, and commercialize a broad range of tests that can quickly provide critical results and insights back to healthcare professionals and care teams with best-in-class turnaround times for all tests to help improve patient outcomes. With our strengthened financial position, along with the products and team in place, we're confident in our ability to drive continued strong test volume and revenue growth in 2023 and beyond. Now let me turn it over to Robin to review the first quarter 2023 financial performance. Robin?

Thanks, Scott. First quarter total revenue was $9.1 million, a 38% increase over the prior year. Core lung diagnostic revenue in the first quarter was $8.6 million compared to $4.6 million for the first quarter of 2022, an increase of 86% over the prior year. In the quarter, we recorded total test volumes of approximately 7,600 versus approximately 4,300 for the first quarter 2022, a 78% increase. The growth in test volume was primarily driven by our Notify lung nodule testing, which includes Notify XL2 and Notify CDT tests. The difference in growth rates between volume and revenue was primarily driven by Medicare coverage for NotifyCDT achieved in the second quarter of 2022. Biopharmaceutical services revenue was $411,000 in the quarter compared to $915,000 in the first quarter of 2022, a decrease of 55%. As a reminder, this business can fluctuate due to several factors including contract timing and project execution, but in this instance reflects the continued delays of enrollment in prospective clinical trials to complete the projects and recognize revenue. As Scott mentioned, we ended the first quarter of 2023 with $9.1 million contracted, but not yet recognized as revenue. These dollars are tied to multiple agreements with different timelines and will be recognized as these projects are executed. COVID testing revenue in the quarter was negligible, and as we have guided, should not be modeled to contribute to revenue in 2023. In connection with the expiration of the Public Health Emergency Declaration today, May 11th, the company will no longer provide COVID-19 diagnostic testing services commercially. Gross margin percentage in the first quarter of 2023 was 65% versus 51% in the prior year quarter. Current gross margin trends reflect the growth in our higher margin core lung diagnostic testing business and receiving Medicare coverage for our Notify CDT test. Gross margin as a percentage of revenue for the first quarter of 2023 compared to the prior year quarter also reflects the expected decrease in the lower margin COVID testing revenue from a year ago. Looking to the remainder of 2023, we expect the overall gross margin percentage to continue to increase as a result of several factors, including the benefit of Medicare coverage for Notify CDT tests, the benefit of recently announced commercial payer coverage decisions for Notify XL2, as well as additional commercial coverage as we move through the year, and the operational efficiencies resulting from the growth in volumes for all of our tests. Overall operating expense, excluding direct costs and expenses, was $22.3 million in the first quarter of 2023, compared to $17.8 million for the same period of 2022. The increase in operating expense for the quarter is primarily driven from increased sales and marketing expense from the hiring of sales team members, increased travel-related costs due to the return to pre-pandemic level access to physicians, and increases in other non-employee-related costs. Operating expense for the first quarter of 2023 includes $2.3 million in non-cash stock compensation expense as compared to $1.3 million during the first quarter of 2022. Net loss for the first quarter of 2023 was $18.7 million compared to a $15.6 million net loss for the same period of 2022. The increase in net loss for the quarter included the increase in non-cash stock-based compensation, an increase of $1.3 million in interest expense primarily associated with the perceptive term loans facility, and the increase in costs from the expansion of our commercial team and effort. We ended the quarter with $25.3 million in unrestricted cash and cash equivalents as compared to $43.1 million in unrestricted cash and cash equivalents at the end of 2022, a decrease of $17.8 million, which includes the scheduled milestone payment of $2.2 million paid in January 2023 to integrated diagnostics and annual royalty payments of $0.7 million. After considering these, among other operating items, Our cash burn for the quarter for all non-financing activities was approximately $12.6 million. We remain focused on revenue growth and driving additional cost savings measures, primarily in areas that do not drive near-term revenue growth that will positively impact 2023 as we move through the year. Turning now to our 2023 guidance, we are maintaining the guidance provided last quarter of total revenue of $52 million to $55 million. Our guidance assumes continued strong year-over-year growth in our core lung diagnostic testing business, broader reimbursement of our five on-market tests, as well as modest expected growth in our biopharmaceutical services business. Our guidance does not project any COVID-19 revenue for 2023. The midpoint of this guidance represents approximately 60% annual revenue growth as compared to prior year core lung and biopharmaceutical services revenue. Now let me turn it back to Scott.

Thanks, Robin. In closing, I would like to thank all Biodesics teammates for their belief in and dedication to the Biodesics mission, vision, and culture, which revolves around our collective commitment and daily contributions to positively impact patients' lives. In so doing, we have established an exceptionally strong double-digit growth trajectory driven by our lung-focused sales team. We are expanding reimbursement of our on-market test with multiple coverage decisions from Medicare and private payers that we anticipate will contribute to our 2023 growth. Supporting this effort, we continue to successfully expand the growing body of clinical data to support the clinical utility of all five of our core lung diagnostic tests. We have established strong gross margins, which continue to improve with the scaling of our core lung diagnostic testing and reimbursement. And we are focusing on near-term revenue drivers with a cost-disciplined approach. With that, I'll turn the call over to the operator for questions.

Thank you so much, presenters. And as a reminder, to ask a question, you will need to press bar 1-1 on your telephone. So if there are questions, please press bar 1-1 again. And please stand by while we compile the Q&A roster. Your first question comes from the line of Andrew Ratman of William Blair. Your line is now open.

Hi, everyone. This is Dustin on the line for Andrew. Thanks for taking our questions. First, I want to just ask about the trends you're seeing recently thus far in the second quarter in terms of core lung volumes and ASPs, and maybe what are some expectations on pacing for the rest of this year?

Yeah. Hey, Dustin. Good to hear from you. Thanks for joining. Great question. Q2 is consistent with Q1. All of our sales professionals have access to accounts. Physicians are back treating those patients that they desired to treat and were last able to do so on a priority basis pre-pandemic. So they're back out identifying those patients with a high risk of lung cancer. And so we feel good about that. That was one of the challenges throughout the pandemic, as you know, was really ensuring that we had continued open access to physicians. Secondarily, what we're finding is that physicians' offices and schedules are full. So those patients that might have had a comorbidity, were immunocompromised or at risk and told to stay home during the pandemic, what we're hearing and seeing is that those patients are back in clinic following up with physicians. And so for us, We look at it as a green light. Our talented sales force is out supporting those physicians. They're collaborating. And we think we can maintain and continue to build upon the growth trajectory and successes that we've had. That momentum really will positively impact those gross margins, especially, as Robin said, now that we're stopping all COVID testing. So we really hope by year end that we're back to those pre-pandemic levels of low 70% on the gross margins. and continuing to have strong double-digit growth on our core lung diagnostic portfolio.

From an ASP perspective, our average sales price by product has been very consistent. As you know, Medicare accounts for about 60% of the population, so with the Medicare coverage for each, that really drives the majority of the payments. I would anticipate over the course of the year as we start to gain more and more private payer coverage for the Notify franchise that we could see some modest upticks, but really the biggest driver of ASP is, at least in the lung disease space, is Medicare.

Got it. Thanks for that. And then maybe just a related question on your recently expanded Salesforce. How are you guys measuring effectiveness there? And do you think the current level of sales reps now gives you a good level of growing your core lung franchise this year and next year?

Yeah, it's a great question. You know, again, as a first mover in this space, we really feel like we're out informing, educating, and empowering physicians to order diagnostic testing to help this patient population. So there's definitely going to be some territories that scale faster and some that are more of a laggard where they're coming on later and they're waiting for additional clinical data. So we feel that the sales force right now is appropriately positioned. We can continue to grow and scale with the sales team that we have. We really have yet to see a sales professional cap out or max out that territory. And so we still think there's room to improve on those sales rep productivity numbers and metrics. One of the more recent changes that we've made in 2023 is we've begun bringing on kind of a junior sales rep or an associate sales consultant. The goal here really is to enable our top performers with larger territories that are growing exceptionally fast, continue to enable them to go out and prospect bringing on new accounts allowing the associate the opportunity to provide support and onboarding and follow up with those accounts. We think that this will allow us to focus on some cost savings measures for the sales force, but it will also allow us to build a bench. So as we continue to grow and expand with the sales force, this will give us the pool of talent that's already been trained, already onboarded, that we can move into other territories as we get to kind of critical mass and are able to start cutting territories and focus on growth again. An additional cost savings with that is that'll minimize recruiting fees and expenses in future months. So we feel good about the size of the sales force now. Any sales professional would always say they would rather have more resources than less, but we know that this is a really large market opportunity, and we've just begun this journey. So we'll continue to expand, but we want to do it mindfully and intentionally to ensure that we keep costs in check.

Makes sense. Thanks, Scott. And then one more we have. Just wondering if you can give us an update on the VA contract ramp. What is utilization like across all those five tests? And are CDT and XL2 are those being ordered together within the VA contract? Thank you.

Yeah, great question and reminder for others. Last year, in the second half of the year, we announced that we'd been added to the VA fee schedule for all five of our core lung diagnostic tests. And an additional reminder, the VA had conducted a trial and an evaluation of Notify, utilizing Notify CDT and Notify XL2 together. That was an 11-site trial, and the results of that trial are what led to being added to the fee schedule. So we thought that was really indicative of performance, their view on how those two tests could help them with this at-risk patient population. So being added to the fee schedule really gave us the ability to go out and focus on expanding across the VA. We have done that over the last few months. and continue to focus on it. But the one thing that we would remind everybody of, it really is an introduction. So each and every time a sales rep makes a new call into that VA, again, they're informing, educating, and empowering that physician to order the test. And it takes a little bit of time. On the second part of that question, Dustin, we haven't broken out any of the test ordering volumes and trends. I think it's easiest and safest to state that it's going to be notified CDT and XL2 that lead the way and that we'll use acceptance on that fee schedule for the other three tests as an opportunity to introduce those over time.

Got it. Thank you. That's all from us.

Thank you so much.

Thanks, Justin.

Go ahead, presenters.

Oh, I'm sorry, I was just thanking Dustin for his questions.

Well, thank you so much. And your next question comes from the line of Alex Bocassin of Canaccord Genuity. Your line is now open.

Hi, this is Alex Bocassin online for Kyle Nixon. Very solid quarter, guys. I was just curious if you could comment on the BioPharma services revenue for the quarter. It seems a little bit lower than usual. Can you just kind of discuss what you think the cadence of biopharma revenue might be if you might face some continued headwinds over the year? Thanks.

Yeah, great to hear from you, Alex. Good question. You know, biopharma over the last three years really has been significantly impacted, and a lot of that's due to clinical trial enrollment, whether it was clinical trials that stalled or paused during the pandemic or trials that were closed. what we've really been monitoring and watching for is that rebound and kind of the return to normal cadence of events like we saw pre-pandemic. We've seen it on numerous fronts. That's why we're so proud and excited to share the dollars under contract. In 2023, we've had a record number of requests for proposals come in thus far. So we think that that's a leading indicator that the biopharma business and interest remains high and is rebounding. Unfortunately, when you're dealing with a lot of those existing contracts that are pulling retrospective samples, it's really reliant on getting access to those samples. And so we believe all of those contracts that are in place are still top priorities for our biopharma partners. We think they'll continue to proceed. But we were a little disappointed in how we finished 2022 and how we've begun 2023. obviously we would have liked to have seen more of those samples come in but again we think that that's still probably going to be you know a question mark going forward i think there's an opportunity for us to improve but the business has been lumpy for quite some time we think the second half of 2023 is going to be exceptionally strong and we we fully expect this quarter q2 to be an improvement upon q1 so we think we'll continue to build and scale throughout the year. But most importantly, we're focused on building the book of business. And we fully expect that book of business, which is a little over $9 million under contract at this point in time, we expect that to continue to grow. And it should be in the low double digits by next earnings call.

Got it. Thank you very much for all that great color. One last one from me. I'm just curious if you could kind of highlight Any upcoming readouts for Insight Deakin or any of your other studies that we can look forward to in the next few quarters? Thanks.

Yeah, no, great question, Alex. As a data-driven diagnostic company, obviously we're really excited to publish, present, and the more data we can get out there, the better off we're going to be. We just recently had a number of healthcare econ abstracts, and we'll be sharing those in a press release here soon. And it really goes to demonstrate and highlight the value of the notified testing strategy, the impact it can have at the hospital and clinic level, and really reinforcing the importance of intervening on those patients that need it most and prescribing a wait-and-watch approach for those patients that truly have a benign nodule. So we'll share more here in the coming days on that. And then as we head into meeting and conference season, we will have a number of abstract presentations and posters. We'll share more data on that as embargoes are listed. We're excited to share that insight, which, as you may recall, is our study on Veristrat, our proprietary immune profiling test. We are rapidly approaching the 5,000 patient mark. That was really our target. So by our next earnings call, we'll give an update on that. And I fully expect that we will have begun to close some of those sites as we'll begin wrapping up the Insight Trial. When we do so at that time, Alex will give you kind of a perspective outlook on when we'll publish, when we'll present, and what kind of data analysis we'll be looking at. And then also as a reminder, we've begun shutting down the Oracle study for Notify. And we have submitted that paper to be published. So we're hopeful here in the coming days and weeks that we'll have news to share on that paper publishing. But as a reminder, we did an interim analysis last year. And at that point in time, we were able to show by utilizing the notified testing strategy, those physicians were able to decrease unnecessary interventions by nearly 70%. Again, most importantly, taking tests that had really good validation data and now demonstrating that in a real-world environment, those tests are performing at an equal to or greater than performance rate. Those are the two main lookouts. Altitude continues to enroll at a strong rate, but we don't have any interim analysis here in the next quarter or two.

Great. Thank you so much. That's really helpful.

Yeah. Thank you, Alex.

Thank you so much. Your next question comes from the line of . Your line is now open.

on the call for . Thank you for taking our questions. Scott, with momentum building for Notify franchise, are you planning additional hires this year? And then also, your prior comments suggested your sales force is currently more focused on calling on physicians at academic centers. Does that still hold true? And if so, How are you thinking about the right time to start putting greater commercial push into the community setting?

Yeah, great question, Yuko. Good to hear from you. You know, we really are trying to be mindful of when and where we spend. I think like all other companies out there, we've got our eyes on a path to profitability that we haven't shared yet. But being a high-growth company and demonstrating the growth that we're demonstrating, we think it's a balance. And so for us, What we don't want to do is blindly go out and hire sales professionals and assume that each and every territory will be the same and that it gives them an equal opportunity to not only ramp at the same rate, but that they can hit the same sales rep productivity numbers. So if anything, we'll err on the side of proving it out first and trialing it before we bring on a fully burdened sales professional. We do have great successes in both the academic arena, but also in the community setting. And so, yes, we do focus on both. There's a number of territories right now where I would say some of their strengths are actually focused on the community-based pulmonologists. But again, it's going to vary across territories based upon the different, or at least the presence of different academic institutions, the referral networks, the different pathways. So for us, we really have to focus on all. But with our early entrance into some of our clinical trials and publishing, we've got strong support from some of the major academic institutions. So I wouldn't state that we've necessarily prioritized one over the other. A lot of it is a stepwise process. And as we balance that, I fully expect equal success across the board.

Great. Thank you for that. And then another quick question. With decision to discontinue COVID testing, Are there any associated expenses or cost savings that we should be thinking about as we think about OpEx trends through the year?

Not really. We had wound down our COVID testing over the last couple of quarters since you saw the test that COVID revenues really decreased. Part of our strategy with getting into COVID was to try not to invest heavily in that part of the business. We actually utilize the same technologies that we use for our Genistrat DD-PCR testing and for our Notify CDT testing. So all of that equipment, the supplies, everything is now being used and all of the personnel all now being used in the growth of our core lung diagnostics. So really leveraging what we had built to help scale core lung over the next year.

Great. Thank you so much.

Thank you so much.

Thank you, Hugo.

And presenters, there are no further questions at this time. Thank you for participating, presenters. This concludes today's conference call, and you may now disconnect. Have a great day.