DermTech, Inc.

Good day, ladies and gentlemen, and welcome to the DermTech third quarter 2021 earnings conference call. At this time, all participants are in a listen-only mode. Later, we will conduct a question and answer session, and instructions will follow at that time. If anyone should require operator assistance, please press star, then zero key on your touchtone telephone. As a reminder, this call may be recorded. I would now like to hand the conference over to your first speaker for today, That is Caroline Corner, Investor Relations. Please go ahead.

Thank you, Operator. Welcome to DermTech's third 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, November 9, 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, and quarterly report on Form 10-Q for the quarter ended September 30, 2021. DermTech undertakes no obligation to update these statements except as required by applicable law. DermTech's press release with third 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, Caroline, and thank you, everyone, for joining us today. A few weeks ago, we attended the Fall Clinical Dermatology Conference in Las Vegas. This is the second largest dermatology conference behind the American Academy of Dermatology's annual meeting in the spring. Not only did DermTech have a tremendous presence at the conference and our technology was showcased in a large plenary session, But in general, the potential of genomics and the inroads it is making into dermatologic care was visible at a level that I have not seen before. As I walked the halls of the conference, I overheard numerous dermatologists and industry people having discussions about genomic applications in dermatology, which again is a first for me, and it signals growing enthusiasm among the dermatology community about how genomics can improve patient care. With that, I will share with you an anecdote about how our DermTech melanoma test, or DMT, dramatically improves patient care. This particular story involves a dermatology physician assistant who had a history of atypical moles and concerns about melanoma. She was a bit skeptical about our DMT and wanted to try it on several lesions on her own body before offering it to her patients. One of the lesions tested turned out to be double gene positive and was subsequently diagnosed as an early stage melanoma in situ. She even retested one of the negative lesions six months later over some lingering concerns about it, and it remained negative, giving her significant peace of mind. She has become a real believer and regular user of the DermTech test and continues to use it for her own skin checks. This case study highlights how our melanoma test enables early melanoma detection while avoiding unnecessary surgical procedures. Many companies experienced softness in the third quarter, and DermTech was no different. Our growth challenges, for the most part, were external and included the Delta variant wave of the pandemic and pent-up vacation demand by both clinicians and patients. Sales rep access to physician offices declined again to less than 50% of pre-pandemic levels, and patient traffic for medical dermatology was soft, though this number is harder to quantitate. We also were impacted by Hurricane Ida, which disrupted the southeast in one of our fastest growing territories, Louisiana, but also had an impact on our more mature territories in the northeast due to extensive flooding as the storm moved across the country. We estimate that Hurricane Ida alone impacted our overall test volume by at least 5% in Q3 and continues to impact one of our larger customers in Louisiana that had their practice destroyed. Despite experiencing this trifecta of challenging external factors, we continue to execute against our core business drivers. Our year-over-year quarterly assay growth was healthy and increased 140% from 1.2 million to 3 million, with sample volumes growing from approximately 6,700 to approximately 11,720. For the year through the third quarter, we have performed almost 33,000 melanoma tests versus almost 16,000 for the same period last year, despite operating in a difficult environment with a suboptimally sized commercial team. Our Q3 assay revenue was essentially flat sequentially at $3 million, with a slight increase in ASP to $252 per sample. We also increased our Medicare proportion to record levels as we continue to penetrate this ideal patient population for our non-invasive melanoma test. We did see a healthy increase in unique ordering clinicians, which grew by 11% sequentially, or about 160 clinicians, to approximately 1,590. The modest increase Assay revenue growth, despite the increase in unique ordering clinicians, underpins the macroenvironmental headwinds that kept sample volume and consequently assay revenue relatively flat over Q2. The most significant development of the quarter was the completion of our Salesforce expansion and our effort to build a world-class dermatology sales organization, which we have been delaying for the past 18 months due to the pandemic. We now have 72 sales reps, nine regional directors, and two area directors to address a larger number of approximately 9,000 to 10,000 professional dermatology target clinicians. This team has an average of 13 years sales experience with an on average seven years in dermatology sales, along with 76 president's clubs winners, and all of them with new product launch experience. These reps are currently undergoing classroom and field training, and we are taking the time to be thoughtful as we split territories and onboard the new reps. We now have the core infrastructure to drive future growth and provide a buffer against regional external factors that can hamper this growth. We expect contributions from the new hires to kick in during Q1 2022 and beyond. We expect to approximately double our sample volume this year over last year, and we are optimistic a similar trend will continue and or accelerate through 20,022 Now that we have reached full commercial scale and the worst of the pandemic is hopefully behind us. Another positive recent development is the completion of our first pilot with an integrated primary care network in Florida. Due to the success of this pilot, we are now approved to commence sales of our melanoma test to their 78 clinics and approximately 300 providers. Through the remainder of this quarter, we will work to train and educate the providers in the network that have interest in accessing the technology, We currently plan to deploy our Florida sales team and medical science liaison team against this account to pull through potential adopters. The success of the pilot was due to the enthusiastic reception from the primary care physicians who participated in the effort and word of mouth interest from other network physicians that wanted access to our melanoma test. We also recently expanded the pilot with another large primary care network in the Midwest and are hoping to complete this pilot in the next one to two quarters. We have begun investing in the selling infrastructure to primary care networks, which consists of dedicated personnel and marketing initiatives to develop a robust pipeline of network opportunities. We have previously discussed various strategies to sell into the primary care channel, and we currently believe the most efficient strategy is to dedicate focused teams of sales reps against the networks after we have secured a commitment to introduce our melanoma test throughout the entire network. Through this effort, we will build our initial foundation in primary care selling, which we expect to develop further as the carcinoma product for non-melanoma skin cancer becomes commercially available. Our telemedicine in-market beta test continues to progress nicely in Florida. We are pleased with the volume of app downloads, which indicates interest in the offering. As expected, acquisition costs per teleconsult and per test order were initially high. However, these costs will decrease as we become more efficient with our digital marketing and social media targeting and after we optimize price and the customer experience. We are encouraged by these initial results and are working to expand the number of states where this solution is available. With further expansion, we will gain synergies with our Find a Doctor marketing effort by providing the telehealth option to patients that visit our Find a Doctor page. We are also developing channel partners to both leverage our technology solution and or offer our remote clinician-guided sample collection service. We recently established a contract with Dermatologist On Call, a leading dermatology telehealth provider in the U.S. Dermatologist On Call will provide teledermatology services as a covered benefit for 20 million lives in 2022. Under this agreement, a board-certified dermatologist will review a picture of a suspicion lesion submitted through the dermatologist on call's technology platform and order a DermTech melanoma test if warranted. Dermatologists on call will provide supervised remote collection of a skin sample using our SmartTest sticker, and the sample will be sent to our gene lab to run the test. An important part of our telehealth strategy will be to further expand partnerships with virtual care providers and develop our customer ecosystem beyond the brick and mortar. Building this customer ecosystem positions us to address an unmet need for access to dermatologic care and helps keep virtual visits as virtual as possible, which is especially attractive to other online healthcare platforms, including health insurers and employers. Our activity with regional and national payer groups remains robust and is our second core business driver. We recently signed agreements with a fairly large multi-state blues plan with approximately 2 million covered lives with effective dates within Q3 of this year. This plan covers new territories that were created with our recent sales expansion, so there will not be an immediate impact on revenue. However, we are optimistic it will facilitate adoption and awareness in the new territories. We are also pleased with the progress with several other important payers, and we are optimistic we will announce additional successful contracts in the coming quarters. The trust study has been published, and we are educating payers that requested to see the data published about the importance of the results. We are also working to publish the results of the Optum Economics study, which is another data set that payers have requested to see in peer-reviewed published form. We expect to have this paper submitted for peer review before the year end. We estimate we now have approximately 90 million covered and are contracted lies in the U.S. for our melanoma tests. Turning now to our third business driver, new product development, there are supply chain constraints across our development programs related to sequencing flow cells. We are not certain when this issue will resolve or if it will worsen in the coming months. Luminate development has been modestly affected. We still expect to have the validation complete and the product available for introduction in Q1. We originally planned for an introduction of Luminate in late Q4 with a broader marketing push in Q1 after the December holiday rush, so this delay does not materially affect our plans for a broader DTC effort in Q1 and throughout next year. We are currently pleased with the performance of the product and its ability to assess ultraviolet damage to key driver genes associated with skin cancer and photoaging. We also plan to pilot a direct selling effort to dermatologists, In this model, a dermatologist would acquire Luminate and sell it to patients to guide treatment decisions. There are several variables we need to understand about this model that need to be resolved in the pilot program before rolling this out more broadly into our commercial team. Carcinome cluster verification is progressing as planned, and we have completed enrollment in the validation study cohort. We have been able to manage the supply chain impact to this program thus far, And as soon as the verification effort is complete, which is targeted by year-end, we will look to validate the classifier with expected completion by mid-2022, pending any changes to the supply chain issue. Lastly, our effort in precision therapy for atopic dermatitis continues to scale up, and we expect to have all 24 sites enrolling in the study by year-end. We had a modest increase in our enrollment percentage, which was affected by various COVID factors already discussed. and we expect enrollment will accelerate as more sites come on board. Our contract revenue was light again this quarter due to the slowdown in activity for inflammatory drug trials related to COVID. Recently, we have had more engagement from companies looking to deploy our platform into their development programs, and we expect to have some new contracts before the end of the year. While the third quarter presented ongoing challenges related to the pandemic, we believe the table is set to support the long-term growth of DermTech Reaching full commercial scale with sales reach across the entire U.S. is an important milestone for us and one that has been delayed for many quarters. Our vision is to lead the genomic revolution in dermatology and skin health, and we now have the infrastructure to make this reality. Now I'd like to turn the call over to Kevin to go over our financial results. Thanks, John.