DermTech, Inc.

Ladies and gentlemen, thank you for standing by and welcome to Dermtech's first quarter 2021 financial results 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. And to ask a question during the session, you will need to press star and then the number one on your telephone keypad. I would now like to hand the conference over to Ms. Caroline Corner, Investor Relations. Ma'am, please go ahead.

Thank you, operator. Welcome to Durham Tech's first quarter 2021 earnings call. Joining me on today's call are Dr. John Doback, President and Chief Executive Officer, and Kevin Sun, Chief Financial Officer. This call will include forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. All statements made on this call that do not relate to matters of historical fact are considered forward-looking statements. Forward-looking statements made during this call, including projections of future performance, are based on management's expectations as of today, May 13, 2021, and are subject to various factors, assumptions, risks, and uncertainties which change over time. Actual results could differ materially from those described in such statements. Several factors that may contribute to or cause such differences are described in today's press release and DermTech's most recent filings with the SEC, including DermTech's annual report on Form 10-K for the year ended December 31, 2020. DermTech undertakes no obligation to update these statements except as required by applicable law. DermTech's press release with the first quarter 2021 results is available under the Investors Relations section of the DermTech website, www.dermtech.com, and includes additional details about DermTech's financial results. Also available on the DermTech website are DermTech's latest SEC filings, which you are encouraged to review. A recording of today's call will be available on the DermTech website by 5 p.m. Pacific time today. Now I would like to turn the call over to John.

Great. Thank you, Caroline, and thank you, everyone, for taking the time to join us today. We are pleased to have this earnings call in the month of May, which is the Melanoma and Skin Cancer Awareness Month. Skin cancer is the most common form of skin cancer in the U.S. and results in approximately 15 million diagnostic surgical procedures each year, with 4 to 4.5 million surgical procedures for melanoma alone. DermTech is a leader in non-invasive precision genomics to improve the pathway for skin cancer diagnosis, and this month is our time to showcase the advances in science we have brought to capture this large market opportunity. We believe our skin cancer vertical of products addresses a $10 billion market in the U.S. I will start by reiterating a couple of key messages that the medical community and various skin cancer foundations promote during the month of May. First, unprotected UV exposure is the most preventable risk factor for skin cancer, so using sunscreen with an SPF of 30 or higher, wearing protective clothing, and seeking shade where appropriate can help reduce the risk of skin cancer. Second, and most importantly, early detection of skin cancer, and particularly melanoma, is critical for survival. People are encouraged to perform skin self-exams using the ABCDE criteria to evaluate moles and to have annual skin checks performed by their healthcare provider. With our first product, DermTech is transforming the early detection of melanoma by identifying at-risk lesions that can be removed. Melanoma is the most aggressive form of skin cancer and is diagnosed approximately 200,000 times each year and results in more than 7,000 deaths in the US. Early and accurate detection of melanoma can save lives because when diagnosed at the localized stage, the five-year survival rate for melanoma is 99%. The pathway for diagnosing melanoma typically involves dermatologists conducting both surgical and non-surgical procedures. In many cases, dermatologists will often photograph moles at risk for melanoma and follow them over time for change, deciding whether or not a surgical biopsy is necessary. Our product is ideally suited for assessing moles that might otherwise be photographed by a healthcare provider and followed over time for change. It is in these moles where melanoma diagnosis may be delayed or missed, where the earliest stage melanomas may be found, and where our precision platform is well-suited to provide early detection. Importantly, in this non-surgical market opportunity, we do not directly complete with the surgical biopsy practice of the dermatologist. We believe the market for these typically photographed or followed moles may be at least as large as the current served market of actual surgical biopsies. As part of Skin Cancer Awareness Month, We've made a pledge to donate up to $1 million over the next four years to increase skin cancer awareness and support accessibility of skin exams. $5 will be donated to our nonprofit partner organizations for each person who pledges to schedule a skin exam. Aversion to surgical biopsy is one of the factors that limits patients' willingness to schedule skin checks. Our smart sticker technology addresses this problem, and combined with our enhanced early detection of high-risk lesions, we believe we can make an important stride in our quest to reduce melanoma deaths. Our donation will help support events, educational content, and programs to amplify a variety of voices who are joining the fight against melanoma. As we've noted before, DermTech's vision extends beyond skin cancer. Our platform has allowed us to create a new category of medicine we refer to as precision dermatology, which we believe has the potential to improve the diagnosis and treatment of a variety of skin problems. It is our mission to transform dermatology and to democratize access to high-quality dermatology care. We believe we can realize our vision by allowing any healthcare practitioner to accurately assess skin disease and health. Consequently, our vision also takes us beyond the dermatologist into primary care and with even more patient involvement via telemedicine. Our fundamental business model is to drive adoption and test volumes of our products in a variety of distribution channels that precision dermatology enables and then monetize this volume over time by obtaining payer coverage and or leveraging consumer pay options. Key drivers of our business are the continued development of our professional dermatology channel and other channels outside of dermatology, securing commercial payer coverage, and launching new products over the next 12 to 18 months. We made significant progress on these key drivers in the first quarter of 2021. Despite limited access to physician offices, the peak of the COVID pandemic in early January, and a severe weather event in February that shut down much of the country, we continued to receive a record number of billable samples and grew our base of unique users. Our average daily billable sample volumes increased from approximately 134 per day in Q4 of 2020 to 154 per day in Q1 of 2021. The only new challenge in the quarter related to sample volume was a modest dip in our proportion of billable Medicare samples. However, we still achieved record assay revenue of $2.2 million, primarily due to the favorable claim adjudication from our recent commercial payer contracts and an increase in our ASP to $234 per sample. We believe increasing sample volumes and ASP through additional payer success will provide a long-term compounding effect on future revenue growth. We also launched our PLA Plus second-generation test in April, which we believe will help boost adoption. The PLA Plus improves the sensitivity for melanoma detection up to 97% by incorporating a TERT mutation biomarker, which is recognized as a key driver mutation for early-stage melanoma. The launch of the PLA Plus may allow us to drive utilization among dermatologists and to reengage with users that have been slower to adopt the technology or that have only used the technology sporadically in the past. Our effort to expand dermatology continues to gain momentum, and we are making important progress with primary care networks. Due to the longer sales cycles associated with this effort, we do not have any specific news report on this call. However, we are tracking to initiate pilots with some leading U.S. networks. As noted on the last call, We've also undertaken an analysis regarding the expansion of our current direct sales team and to define the landscape of potential primary care clinicians we may be able to access with a limited direct sales effort. The preliminary data from this analysis, based on the sales of the PLA and PLA Plus, predicts a meaningful ROI from dedicating an additional $10 to $15 million per year in our U.S. direct sales footprint to allow us to expand access to dermatology, pursue a targeted selling approach in primary care, and prepare for the delivery of additional pipeline products into these sales channels. There is clearly a much larger potential investment that could be made to expand further into primary care, but this investment will need to be balanced against our success with integrated networks and the potential we see from our telemedicine effort. These potential investments will also need to be considered in the context of products like carcinome, which may be more ideally suited for primary care. We expect to finalize this planning effort in Q2 and will work to expand our existing sales team and deploy this direct sales organization against an expanded group of targets. It would not be surprising to need substantial additional investments specifically to launch more broadly into primary care. Our efforts in telemedicine are similarly gaining momentum. We recently completed beta testing of our technology solutions to allow store and forward submission of photographs of suspicious moles for review by a clinician. In June, we expect to commence an in-market beta test of this platform in a few select geographies. Assuming success of this in-market testing, we will continue to launch and expand this effort throughout the second half of the year. We also plan to develop additional technology solutions that will streamline access to remote skin sample collection for follow-on laboratory testing. We're also looking at partnering strategies with leading telemedicine companies to deploy our solution within their network. The second key component of our business strategy is monetizing our growing sample volumes by attaining commercial payer coverage. In the first quarter of 2021, our new commercial payer contracts with large blues plans in California, Illinois, and Texas became effective. While we had some early startup challenges with these payer contracts, claims and payments are processing more efficiently now. The startup challenges have mostly been resolved, which is reflected in the improvement of our overall ASP for the fourth quarter and revenue exceeding the high end of our Q1 guidance range, even though our Medicare proportion decreased from Q4. I will now address some recent developments that pertain to Cigna that became public through channels outside of DermTech. In April 2021, Cigna updated the medical necessity criteria of their genetic testing collateral document, which changed the PLA from an experimental, investigational, or unproven status to medical necessity based on the NCCN criteria. To date, the primary genetic testing policy released in February of this year has not been changed. We have spoken with Cigna and we are currently working with their medical team to further define the use and medical necessity criteria for the PLA test. There was some confusion reported by the media about our inclusion in the NCCN guidelines. However, it is clear from the Cigna testing collateral document that they have acknowledged our inclusion in the guidelines, and as we indicated earlier this year, we are included in the NCCN guidelines with a 2A recommendation. We believe the developments with Cigna are positive and we are optimistic that this will lead to favorable coverage. We will provide further updates on this matter after we have completed the process with Cigna and have more definitive information. In Q1, we also completed the economic impact study with OptumInsight or Optum, which we believe demonstrates the potential cost savings achieved with our PLA product. Optum developed an actuarial model that examined 27 million commercial claims to analyze the economic impact of inserting the PLA into the existing diagnostic pathway for pigmented suspicious lesions that relies on a visual assessment and histopathology. Based on a health plan population of 10 million commercial covered lives, the model suggests the PLA, priced at $760 per test, can produce aggregate savings of between $57 million and $81 million over a three-year period when compared to the current pathway alone. Additionally, the study demonstrates the present value net neutral cost or break-even price for the PLA during the same period is between approximately $1,200 and $1,400, or 57% to 82% higher than the Medicare reimbursed rate. The projected savings result from identifying melanoma at an earlier stage, reducing volume and spending associated with avoidable surgical biopsies of benign lesions, and reducing the incidence rate and cost of additional surgical procedures following a negative or inconclusive biopsy. This is the second economic study for the PLA and further supports the cost savings the test can provide for the healthcare system. We believe that commercial insurance payers will be interested in this data as reducing healthcare costs and improving patient care are important objectives. The model Optum has developed will be made available to payers. who can easily validate the claims analysis that was performed and input their own plan's population variables to determine the potential savings and return on investment by adopting the PLA. I will now turn to the third component of our business strategy, new product development. We spent the last year building out our R&D capabilities, and we believe we have reached a critical mass to accelerate our overall new product development. In Q1, we recruited teams of top-tiered scientists, bioinformaticists, and program managers in our clinical and development groups. We've also expanded our data management capabilities, including clinical electronic data capture, and have added a variety of in-house genomic capabilities, including next-gen sequencing and mass array platforms. This has led to the establishment of several academic collaborations and the initiation of new clinical efforts and studies in inflammatory diseases. We still have some additional infrastructure and capability build out to complete, but we are now seeing substantial momentum in a variety of development areas. Our efforts have led to the acceptance and presentation of four abstracts at the Society for Investigational Dermatology conference, which was held last week. Luminate development continues to progress as planned. Again, this product will assess ultraviolet-related gene mutations in normal appearing skin, which is related to skin cancer risk and photoaging. While a big focus in cancer care with genomics over the last five years has been early detection, we think the future is detection of precancerous genomic changes, and this is essentially what our Luminate product does. Enrollment for the internal verification study is complete. The purpose of this study is to confirm the assay's performance, establish the UV skin score algorithm, and confirm the skin sampling protocol. We have also commenced an external validation study to confirm the performance characteristics of the product and the initial algorithm. This study is currently enrolling at six U.S. dermatology centers with a plan to recruit up to 12 sites in total. The study has enrolled very robustly, and we have already completed an enrollment of more than half of our initial minimum target of 1,000 subjects. Consequently, we may expand enrollment beyond the initial target. We are still estimating an introduction of this product in the fourth quarter of this year. We're also making progress on the carcinome product to facilitate the diagnosis of basal and squamous cell skin cancer. As indicated on previous calls, this product is in the classifier verification stage. We believe that this stage will be completed by the third quarter of this year with validation testing beginning in the fourth quarter. Our clinical study to enroll subjects and samples for the validation study is fully up and running, and we expect to have completed enrollment in this validation cohort around the end of the third quarter of this year. We are still targeting an introduction of this product in the first half of 2022 as an LDT. In the first quarter, we also initiated our first clinical study in atopic dermatitis to evaluate genomic markers pre- and post-treatment with biological therapies such as dupilumab. These markers will be correlated with treatment response, including the eczema severity score, itch scores, and adverse events, among others. The goal of this study is to identify markers that will predict treatment response to the drugs and other related outcomes. The study will target enrollment up to 500 patients. Five clinical centers have completed their initiation and one center is already enrolling patients. At this time, we are not able to comment on when the product will be available for this indication, but we are building off some earlier work that we completed in this area and have a panel of genomic markers that we believe are relevant. If we can validate these markers in our current study, We believe we can develop fairly aggressive product timelines. We will update you on the progress of this program in the future. In summary, we are pleased with our Q1 performance and efforts to expand our commercial and development activities and infrastructure. Our financing efforts in the first quarter increased our cash and securities to approximately $258 million. We are excited about our efforts to expand beyond dermatology and our progress with integrated primary care networks. We are similarly enthusiastic to commence the in-market beta testing of our telemedicine platform and expand this offering in the coming quarters. Now I'd like to turn the call over to Kevin to go over our financial results.