DermTech, Inc.

Ladies and gentlemen, thank you for standing by, and welcome to DERM Tech's second quarter 2021 financial results conference call. At this time, all participants' lines 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. I would now like to hand the conference over to Caroline Corner of Investor Relations. Please proceed.

Thank you, Operator. Welcome to DermTech's second 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, August 4, 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 on DermTech's most recent filings with the SEC, including DermTech's annual report on Form 10-K for the year ended December 31, 2020, and quarterly report on Form 10-Q for the quarter ended June 30th, 2021. DermTech undertakes no obligation to update these statements except as required by applicable law. DermTech's press release with second quarter 2021 results is available under the investor 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'd like to turn the call over to John.

Thank you, Carolyn, and thank you, everyone, for joining us today. The second quarter was another great quarter for DermTech. Despite some choppiness in our selling environment as we emerged from the peak of the COVID pandemic, we continued to execute against our core business drivers, which are sample volume growth, payer access expansion, and pipeline product development, putting up record numbers in almost all commercial metrics. Briefly, for the benefit of those who might be new to the story, DermTech has developed a non-invasive skin genomics platform. We collect a skin sample with our adhesive-based smart sticker. With this platform, we can create a whole new category of medicine we refer to as precision dermatology and address large market opportunities in skin cancer and inflammatory diseases. For example, skin cancer is the most common form of cancer in the U.S., with approximately 15 to 16 million diagnostic surgical procedures each year. Our first product addresses melanoma skin cancer, for which there are approximately 4 to 4.5 million surgical diagnostic procedures performed each year in the U.S. We believe our skin cancer vertical of products addresses a $10 billion market opportunity just in the U.S. To highlight how our melanoma product has the potential to dramatically improve patient care by finding melanoma at the earliest stages when there is a 99% five-year survival rate, I will share an increasingly common anecdote we are hearing from our current users. Before I begin, I just want to let you all know that after some extensive market research, we are rebranding the name of our melanoma product to the DermTech Melanoma Test. which is comprised of the core pigmented lesion assay and the TERT gene add-on test, or PLA+. This rebranded name was overwhelmingly supported by dermatologists, and it simplifies our marketing messages. One application of the DermTech melanoma test is to assess moles suspicious for melanoma that, for a variety of reasons, might not be subjected immediately to a biopsy, but are photographed and or followed over time for change by a healthcare provider. 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. You can imagine the surprise and satisfaction dermatologists have when our test identifies an early stage melanoma in a lesion that they could not biopsy on that day. And this is the anecdote we are increasingly hearing about. The lesion the dermatologist surgically biopsied was negative, but the DermTech melanoma test picked up an early stage melanoma in a lesion they were going to reevaluate in six to 12 months, where the melanoma could have progressed to a later stage with a lower survivability rate. These types of experiences are often catalysts that accelerate utilization of our melanoma test by a clinician, as it helps them realize how the sensitivity and accuracy of our platform can potentially save lives. Shifting now to our first business driver adoption and sample volume growth of our DermTech melanoma test, we had record billable samples, assay revenue, and new ordering clinicians during Q2, despite continued limited access for our sales force to physician offices. Our average daily billable sample volumes increased from approximately 154 per day in Q1 to approximately 183 per day in Q2. Average selling price, or ASP, increased to $248 per sample, resulting in a record assay revenue of $2.9 million in Q2, compared to Q1 ASP of $234 per sample and assay revenue of $2.2 million. In addition, we increased our number of unique ordering clinicians in Q2 by approximately 230 clinicians, or 19% sequentially, to achieve a total number of unique ordering clinicians of 1,430. We believe increasing sample volumes and ASP through additional payer access, success with appeals, and increasing our Medicare proportion will provide a long-term compounding effect on future revenue growth. Our contract revenue was light last quarter at $0.2 million, which reflects the slowdown in activity for inflammatory drug trials due to COVID. However, we have recently seen an uptick in interest from companies looking to deploy our platform in their development programs. and we expect to have some additional new contracts in the second half of the year. During the height of the pandemic, we were forced to go deep into our current installed base of prescribing clinicians as access by sales professionals was limited. We noted on the last call that we started an analysis regarding the expansion of our current direct dermatology sales team. This expansion effort will allow us to broadly target potential prescribers, which will help raise the overall awareness of our technology and make it easier for patients to find a participating provider close to home. We completed this analysis in Q2 and plan to nearly double the target number of professional dermatology clinicians to approximately 9,000 to 10,000 compared to the approximately 5,000 clinicians which were in our initial target market. The territory alignment to address this larger group of dermatology targets requires us to expand to a total of 72 sales managers and nine regional directors. To implement this expansion, we recently hired Ray Bassey as our VP of sales to lead this effort. Ray has more than two decades of experience in dermatology sales, and we believe he's an ideal fit to help us transition our selling strategy to go broad throughout the professional dermatology channel. In Q2, we also completed our analysis for pursuing a targeted selling approach in primary care. Based on a claims data lookalike analysis, including biopsies and dermatologic drug prescription volume, we have identified approximately 30,000 primary care clinicians with claims volume similar to a small dermatology practice, and approximately 5,000 primary care clinicians with practice volumes similar to an average dermatology practice. We are currently assessing a strategy to address this population of primary care users, which may include some combination of cross-selling by our dermatology professional sales channel, inside sales, and a smaller focus team of primary care sales representatives. Through this effort, we will build our initial foundation for primary care selling, which we expect to further develop as our carcinome product for non-melanoma skin cancer becomes commercially available. In Q2, we completed some qualitative market research in primary care. This research indicated interest in the melanoma test, particularly among family physicians who practice some level of dermatology. In addition, most primary care clinicians were very eager to have a non-invasive solution for non-melanoma skin cancer, which they see routinely in their practices and have challenges with outside referrals to dermatologists due to excessive wait times, distance to the nearest provider, and patient reluctance to take the referral. As noted in the past, We are also currently moving into primary care setting through primary care networks. We continue to make progress with several large networks in key states where we have a commercial presence. As discussed previously, these efforts have longer sales cycles and can require executive management buy-in, vendor qualification, IT integrations, training and rollout plans, pilots to establish standard operating procedures, and finally contracting. We are at various stages in the process with a handful of large networks and have begun initiating some pilots. These networks span multiple states and have 300 or more primary care physicians. Some are both payers and providers, while others contract with third-party payers. While at this time we are not at liberty to disclose the specific names of these networks, we are working hard to move these efforts forward through the rest of the year and are optimistic we can secure some contracts over the next several quarters. Our telemedicine in-market beta test has recently gone live in Florida. Our telemedicine app, known as DermTech Connect, is now available for both iOS and Android, and we are now offering patient-initiated store-and-forward photographic review of suspicious moles by a dermatologist. This in-market beta test is designed to confirm the stability of our technology platform, establish marketing funnel metrics to acquire users, and tests are operational procedures for in-home sample collection. We expect this in-market testing to occur throughout the rest of this quarter and into the fourth quarter. Assuming success of this in-market testing, we intend to expand this offering to additional states and work to develop partnerships with other telemedicine companies and virtual care networks to expand access to the platform. We also plan to pilot the platform with existing dermatology customers as a value-added service they can offer their own patients And lastly, we plan to develop additional technology solutions that will streamline access to remote skin sample collection for follow-on laboratory testing. Our second business driver is to broaden our payer access. After our success in contracting with individual blues plans in Texas, California, and Illinois, we have invested in building out our payer access team to focus more closely on contracting with individual blues plans and regional payers. We have started to see progress with this effort by securing contracts with smaller regional players where there's an opportunity to grow payable volumes and we expect more plans to come on board in the future quarters. We have recently contracted with several smaller plans in the Northeast totaling approximately 400,000 covered lives with another 350,000 covered lives pending contract execution. Importantly, these plans also have primary care networks and we plan to approach these groups about deploying our platform. We continue to have substantive discussions with national payers and multi-state blues plans, some of these payers have requested to see the results of our trust study published, which has been accepted for publication and is expected to be available by the end of this quarter. We're also working to publish the results of the Optum study with the goal of enhancing our economic and clinical value position to these important payers. There are no definitive updates on Cigna, and as discussed last time, we have provided them with all requested materials to complete their process. I will now turn to the third business driver, new product development. Development on the Luminate product continues as planned. Luminate will assess ultraviolet-related gene mutations in normal-appearing skin, which is related to skin cancer risk and photoaging. We believe the future of skin cancer involves not just early detection of cancer, but detection of precancerous genomic changes, which is essentially what our Luminate product does. Our research and development team has identified several important cancer-related genes that are mutated by ultraviolet exposure, and we are currently optimizing the assay after successfully completing the internal validation study. We've exceeded the 1,000-patient target enrollment for our external validation that was conducted at multiple US centers, and it has now enrolled more than 1,300 subjects. We will begin final validation testing in the second half of Q3 with an expected introduction of the product in late Q4. We also continue to make product on the verification of gene targets for the carcinome product, which will facilitate the detection of basal and squamous cell skin cancer. We often field questions about the development challenges associated with this product and the timelines related to this stage of development. The primary reason for the extended verification stage is related to the complexity of this which is designed to differentiate two non-melanoma skin cancers, basal and squamous cell, from a variety of other suspicious lesions that are often surgically biopsied in this diagnostic pathway. The heterogeneity of the suspicious lesions requires larger numbers of genes, classifier genes, and more complex algorithms that require verification. As noted previously, our clinical study to enroll subjects and samples for the validation study is fully up and running, and we expect to have completed enrollment of this validation cohort around the end of the third quarter of this year. We are still targeting an introduction of this product in mid-2022 as an LDT. On our last call, we announced our first clinical study in atopic dermatitis to evaluate genomic markers pre- and post-treatment with biologic therapies such as dupilumab. Markers identified in the study will be correlated with treatment response, including the eczema area severity index, its scores, and adverse events among others. The goal of this study is to identify biomarkers that will predict treatment response to the drugs and other related outcomes. This study is actively enrolling and we are currently onboarding and training additional clinical study sites. We have made some progress against our target enrollment of 500 subjects with approximately 15% of the study currently enrolled. At this time, we are not able to comment on when a product will be available for this indication, but we are building off some earlier work 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, then we hope to develop fairly aggressive product timelines. We will provide updates as research progresses. In addition to all the activities discussed, we spent significant effort on building out additional core commercial laboratory and technology infrastructure. which had been paused due to the pandemic. As we've discussed in the past, we have yet to scale our business operations to a level that will allow us to capture the attractive market opportunity that is in front of us. Part of the scaling effort involves securing a new corporate headquarters, which will more than double our CLIA and R&D lab spaces to support expected higher volumes of commercial tests, as well as additional product development efforts. Our facility strategies will allow us to transfer our current CLIA license to the new building upon moving without any interruption to service. We spent considerable time negotiating the lease and feel that the terms are competitive given the high demand in the local life sciences real estate market. We also feel like we have partnered with a top-notch landlord and have an ideal location to attract and retain talent as we grow. We are very pleased with our Q2 performance and efforts to expand our commercial and development activities and infrastructure. We're also excited about our efforts to expand beyond dermatology, given our progress with integrated primary care networks and the commencement of our in-market beta testing of our telemedicine platform in Florida. We are, of course, carefully monitoring the situation with the Delta variant and other variants of concern. The rise in cases has created some uncertainty in the business outlook, which could cause us to adjust our plans. Given our past success in managing the growth of our business during the first few waves of the pandemic, I'm confident in our ability to achieve success in this challenging environment. Now I'd like to turn the call over to Kevin to go over our financial results. Thanks, John.