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spk01: Good day, ladies and gentlemen, and welcome to the DermTech fourth quarter and full year 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 like to hand the conference over to your first speaker today. That is Caroline Corner, Investor Relations. Please go ahead. Thank you, Operator.
spk03: Welcome to Durham Tech's fourth quarter and full year 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, March 1, 2022, 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 quarterly report on Form 10-Q for the quarter ended September 30, 2021, In addition, you're encouraged to review the company's to be filed annual report on Form 10-K for the year ended December 31, 2021, for any revisions or updates to the information in this release. DermTech undertakes no obligation to update these statements except as required by applicable law. DermTech's press release with fourth quarter and full year 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. Our 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.
spk04: Thank you, Caroline, and thank you, everyone, for taking the time to join us today. In January of this year, we had a national sales meeting. This was our first national meeting with a fully scaled and resourced commercial team. an important milestone for DermTech and one that I've been waiting on for almost two years now. We now have the necessary capacity to drive adoption of our DermTech melanoma test, or DMT. With this test, we want to change the status quo of early melanoma detection through our non-invasive genomics platform enabled by our smart sticker. The quality of the sales team members is impressive in terms of their commercial experience in dermatology and the numerous accolades they received as sales managers and leaders from their prior companies. But what was most impressive was their motivation and enthusiasm to lead our effort to fundamentally change the practice of dermatology and bring the genomic revolution to dermatologic care. As we will discuss shortly, we believe our investments in the commercial organization are already contributing to the growth and adoption of our melanoma test. Turning to our 2021 performance, we finished the year with over 44,000 billable samples and $11 million in DMT assay revenue, which represents 86% sample volume growth and 160% assay revenue growth over 2020. For Q4 2021, compared to the same period of the prior year, we increased our unique quarterly ordering physicians from about 1,000 to approximately 1,800 providers. We are quite pleased with our 2021 performance, despite experiencing three waves of the COVID pandemic. In addition, as I just noted, we implemented a large commercial scale-up that has significantly redrawn our territories and reporting structures, resulting in some near-term disruption, but positioning us for the growth we see ahead. We often field questions from the investment community about the overall speed of our revenue and test volume ramp-up. In general, we believe we are making meaningful progress given the overall pandemic environment we have been operating in. However, another way to answer this question is to look at the historical performance of our peers. In about two and a half years since launching DMT in earnest, we reached the milestone of approximately 50,000 samples in a single year. And I will emphasize that in our effort to be thoughtful about scaling the organization during a pandemic with reduced physician access, our commercial team growth was slower than we anticipated two years ago. On average, it took many of the peers in our space approximately five years to achieve a similar level of adoption if they achieved that level of adoption at all as measured by sample volume. Another metric to look at is sales rep productivity. We had on average about 40 fully trained sales managers during 2021. These sales managers produced on average between 1,100 and 1,200 samples for the year. We estimate sales manager productivity for some of our peers during a similar period after product introduction was between 507 samples per year per rep. Now, we recognize that we do have a larger market opportunity for melanoma tests than some of our peers have for their respective tests. But if we look at company with a company with an even larger market opportunity than us, for example, one in colon cancer screening, we estimate historical sales representative productivity was approximately 1,000 samples per rep per year at a similar stage of commercialization. We are clearly seeing significant levels of adoption relative to our peers with the melanoma test, which is bringing transformational change to dermatology, a specialty that has not had much exposure to the genomic revolution, nor a product that dramatically changed their method of practice. Now, where we are lower relative to our peers is our top line revenue growth, which is hindered by our lower average selling price, or ASP, which was $252 for Q4 2021. As we have consistently discussed, we believe we will monetize this sample volume by growing our ASP. And as this price approaches our Medicare reimbursement rate of $760, we will see top-line revenue compound meaningfully. The main variables we look at to grow our ASP are increasing the Medicare and covered billable sample proportion, two, increasing our appeal success, and three, attaining additional payer coverage from third-party payers. Medicare represents half of the total addressable market, so ideally our proportion of Medicare samples should be 50%. While we have managed to steadily grow this proportion, we still have significant work to do here as our proportion for Q4 was 23%. We will continue to raise awareness of our product in the Medicare community through our digital marketing efforts, and continue to educate our customers on the benefits of the product to the Medicare population. Clearly, expanding our payer coverage will meaningfully improve our ASP. We currently have approximately 90 million covered lives. Given the fact that we lost approximately one year of payer activity due to the pandemic, our growth in covered lives since our Medicare coverage is on par with peer companies that introduced highly novel diagnostic tests. As we've discussed, we have significant ongoing activity with regional and national payers, and our team is hard at work educating them so they better realize the clinical value proposition which should ultimately lead to coverage. We continue to provide peer-reviewed publications that support coverage of our DMT. In March, we expect the results of the Optum Healthcare Economic Study to be published. Also, the 2022 edition of the NCCN guidelines reaffirms the 2A recommendation for the DMT. We also believe the 2022 document strengthens the overall recommendation by delineating our test as a standalone pre-biopsy assessment and removing some ambiguous preamble language that was present in the 2021 guidance document. We remain optimistic that we will achieve coverage in 2022 from at least one nationally recognized payer. Looking now at recent trends and the patterns we saw in the fourth quarter, we, like so many others, continued to see pandemic-related chopping itch, which continued into November. However, December proved to be quite strong, and we set new records for samples received and unique ordering clinicians, despite a significant drop-off in the last week of the year due to the holidays and Omicron surge. Like many companies, January 2022 remained challenging. However, our growth has recently rebounded, and February broke the sample record volume record that we set in December. Part of our commercial expansion involved developing our peer-to-peer and medical science liaison educational efforts, and we are seeing interest in this effort with well-attended physician-led educational meetings, suggesting the medical community is learning to live with the COVID. In March, we plan to attend the AAD annual meeting, and we'll have a significant presence and marketing effort there, including a prominently placed booth and marketing banners throughout the venue. We continue to invest in our direct-to-consumer marketing to facilitate patient education and to raise product awareness and demand. We currently average about 25,000 searches on our Find a Specialist tool each month by people who are potentially interested in the DMT. In addition, we have made progress with electronic medical record, or EMR, integrations through EMMA, the most common EMR used by dermatologists, and have onboarded nearly 300 locations. We have efforts to onboard approximately 200 additional locations, which should help with process efficiency. All of this gives us confidence that we expect to approximately double our billable sample volume in 2022 and more than double our DMT assay revenue. We continue our expansion into primary care. We have built a small team of account managers to engage with primary care network administrators and executives. The Florida IDN rollout continues, but was slowed due to Omicron. However, activity has recently picked up, and we expect to complete the first phase of this rollout to approximately 300 clinicians in the near future. As discussed previously, our initial efforts in Florida are centered around quantifying certain metrics regarding deployment into primary care, including such factors as the number of accounts a primary rep can handle, the number of sales calls needed to secure an order, conversion rates, and utilization ramp expectations. The pilot we have ongoing in the Midwest continues, but also had some Omicron delays. We have expanded our telehealth offering, DermTech Connect, which is now available in Florida, New York, Illinois, Pennsylvania, Connecticut, Colorado, Missouri, and West Virginia. There are also another 15 to 17 states in which DermTech Connect will be available in the coming month. As a reminder, the telemedicine platform is designed to match an interested patient with a participating independent dermatologist who can assess a suspicious lesion using the DermTech Connect store and forward telemedicine option. The dermatologist may, if warranted, also order our DMT test for the patient. We plan to gain synergies with our marketing efforts and find a specialist tool by providing the DermTech Connect option to people who visit our website, that are interested in connecting with doctors who use the DMT. We are pleased to report that Luminate development is now complete and the assay is currently being transferred into our commercial lab. The supply chain constraints related to sequencing flow cells we mentioned on the last call did spill into the Q1 a little bit and affected Luminate development slightly. We expect to begin introducing this product in the second quarter and recently hired a Vice President of Consumer Products, Adele Walker, with commercial experience from companies such as Allergan and SkinMedica to spearhead our efforts in the consumer-based genomic health and wellness testing market. Given Adele's background, we plan to commence the introduction of this product directly to the consumer with physician oversight. However, sometime in the future, we may look to deploy this test in deficient offices that have consumer product offerings as part of their practice. We are also exploring the development of additional consumer-oriented health and wellness tests to offer through our consumer channel. We continue to make progress on our carcinome test. Though we have more work to do there, the performance of the assay continues to improve, but we have not yet achieved our desired performance metrics. We are still targeting validation of the assay by mid-year and will work to generate utility data in the second half of 2021 to support a Medicare submission. We recently launched DermTech Stratum, to expand our presence and product offerings with the pharma and academic research community. Dermtech Stratum includes additional services such as biomarker identification, new target identification, patient segmentation and stratification, and bioinformatics support. In the last couple of quarters, we are pleased to have seen an increase in engagement with pharma collaborators and have multiple contracts in various stages of negotiation and several new contracts completed. Current indicators suggest that clinical trial activity is resuming after the pandemic induced lull, and we expect this increased activity to drive more research business through STRATUM. In summary, we believe the table is set for a robust 2022, as it will be the first year of commercializing the DermTech melanoma test at an appropriate commercial scale. While the vast majority of our effort will be spent securing adoption in the professional dermatology channel, which should drive nearly all the performance for the year, We will continue our expansion into primary care professional channel, the DermTech Luminate consumer channel, the DermTech Connect telehealth channel, and our DermTech Stratum research channel. I look forward to answering your questions during the Q&A. With that, I'm going to turn it over to Kevin to go over the financial results.
spk05: Thanks, John. Asset revenue for Q4 2021 increased 90% to $3.0 million compared to $1.6 million for Q4 2020. Assay revenue for full year 2021 increased 160% to $11.0 million compared to $4.2 million for 2020. Total revenues for Q4 2021 increased 49% to $3.2 million compared to $2.1 million for Q4 2020. Total revenues for full year 2021 increased 101% to $11.8 million compared to $5.9 million for 2020. Q4 2021 ASP was $252 per sample. a 34% increase compared to $188 per sample in Q4 2020, and was flat sequentially. Our potential assay revenue that could be recognized from having broader payer coverage is still meaningfully higher than the actual reported revenue. Billable samples for Q4 2021 were approximately 11,780 compared to approximately 8,300 for Q4 2020, or a 42% increase, and was up slightly sequentially compared to Q3 2021. Billable samples for full year 2021 increased 86% to approximately 44,620 compared to approximately 24,000 for 2020. Medicare samples represented about 23% of our billable samples in Q4 2021 compared to approximately 19% in Q4 2020 and 22% in Q3 2021. With approximately 2,800 unique ordering clinicians during the last 12 months, we penetrated 56% of our initial target market of approximately 5,000 dermatology clinicians who account for a high concentration of the total annual surgical procedures to diagnose melanoma. This translates into a 29% penetration of our expanded initial target market of 9,000 to 10,000 dermatology clinicians and penetration of about 22% of the 13,000 total practicing dermatology clinicians. We had approximately 1,800 unique ordering clinicians in Q4 2021, compared to approximately 1,040 in Q4 2020, or a 73% increase, and compared to approximately 1,590 in Q3 2021, or a 13% sequential increase. Our average quarterly utilization or average number of tests ordered per unique ordering clinician was 6.5 billable samples in Q4 2021, compared to 7.4 in Q3 2021, and 8.0 in Q4 2020. We continue to see new users typically ordering less per month when they first start using our melanoma test. Overall utilization did decline slightly, as expected, since we added more new accounts during the quarter. We still expect a higher number of overall ordering clinicians to contribute to higher billable sample volumes and offset a potentially lower utilization rate. Contract revenue decreased 65% to $0.2 million for Q4 2021 compared to $0.6 million for Q4 2020. As of December 31, 2021, we had a maximum of $4.2 million in potential remaining contract revenue related to our current agreements. Gross margin for Q4 2021 was 4% compared to 19% for Q4 2020. The decrease in gross margin was largely driven by lower contract revenue during Q4 2021 compared to Q4 2020. Asset gross margin for Q4 2021 was negative 1% compared to negative 9% for Q4 2020 and 3% for Q3 2021. Sales and marketing expense increased 161% to $13.3 million for Q4 2021 compared to $5.1 million for Q4 2020, primarily due to additional headcount for the commercial teams and additional marketing investment, including digital media, direct-to-consumer advertising, and professional promotions. We expect sales and marketing expense to continue to increase as we recognize the fully burdened cost of our expanded sales force for the full reporting periods and due to increases in our marketing initiatives to raise awareness of our technology. Research and development expense increased 213% to 6.0 million for Q4 2021 compared to 1.9 million for Q4 2020. The increase is primarily due to higher compensation-related costs, increased clinical trial costs, and additional lab supplies. We expect R&D expense to continue to increase as we ramp up our pipeline development efforts. General administrative expense increased 153% to $7.2 million for Q4 2021, compared to $2.8 million for Q4 2020. The increase was primarily due to higher payroll-related costs and higher stock-based compensation and higher audit and legal costs. We expect our general administrative expense to continue to increase as we implement systems and infrastructure to support our direct-to-consumer efforts and overall growth. Net loss for the fourth quarter of 2021 was $26.1 million, which included $3.8 million of non-cash stock-based compensation, offset by $0.3 million of benefit related to a non-cash change in fair value of the warrant liability, compared to a net loss of $10.7 million for the same period of 2020, which included $1.4 million of non-cash stock-based compensation and $1.3 million of expense related to a non-cash change in fair value of the warrant liability. At December 31, 2020, our cash, cash equivalents, restricted cash, and marketable securities totaled $228.5 million. We are issuing full-year 2020 assay revenue guidance to be between $22 million and $26 million, which represents growth of 100% to 136% over 2021. In addition, given the softness in January due to Omicron, but a nice recovery in February, We estimate Q1 2022 assay revenue to be between 3.4 million and 3.8 million, which represents growth of 55% to 74% over Q1 2021. We're very happy with the strong growth of all our key metrics during 2021, especially given the challenging pandemic environment. We are keenly focused on executing on our growth drivers during 2022. Now I'll turn the call back to the operator for questions.
spk01: Thank you. Ladies and gentlemen, if you have a question at this time, please press star, then the one key on your touch-tone telephone. If your question has been answered or you wish to remove yourself from the queue, you may press the pound key. We also ask that you please limit yourself to one question and one follow-up. One moment for our questions. Our first question comes from the line of Brian Weinstein from William Blair. Your line is open.
spk06: Hey, good afternoon. This is Griffin. I'm for Brian. Thanks for the questions. And just to start on the full-year guide, can you just talk a little bit more about the assumptions there in terms of, you know, where you think rep access is for the full-year utilization and, in particular, ASPs?
spk04: So we're comfortable with that guidance we gave. Again, when you look at periods when the virus has settled down, we see the growth that we expect. Some of this came from some numbers we saw back in actually the June-July time period where reps were doing six samples per day per rep, and if you amortize those numbers out over a larger sales team that we just put in place, the 72 reps, you can see how we are comfortable with the guidance that we can double our sample volume revenue. What we saw in February is very encouraging, and it suggests that that is achievable, and so we're comfortable with that. The ASP is very hard to model out. I'll let Kevin comment on that. And rep access, I think, is improving. And I think, again, it just points, given what we saw in January when Omicron was raging and what we see now in February, I think that just shows that when the environment normalizes and the frequency of visits that we can attain with physicians goes up, we see the kind of... the kind of demand and adoption of the product and sample growth that we want.
spk05: Yeah, as we mentioned on the call, so increasing our ASP, we've got three main variables, increasing the Medicare and covered billable sample proportion. So being that Medicare was 23% in Q4, we've got opportunity to improve our ASP by getting more Medicare patients as we raise the awareness in that population. And then also the covered contracts we have in California, Texas, Illinois, and others We also plan to increase our appeal success and then additional coverage. So we model moderate growth over the year because we can't predict when a payer will come on board. But as we can pull these levers with proportion and appeal success that we can drive activity in, we model some steady growth throughout the year. And then that's how we say that the revenue guide is essentially at least doubling the from 2021 with the upside based on our top end of the range of our guidance.
spk06: Okay. Thank you. And then just can you give us your updated thoughts on primary care and telemedicine, the sort of market expansive initiatives you're working on? Do you feel more or less confident about those with some of the pilots that have been going on?
spk04: Sure. So right now we see the best opportunity in primary care with these primary care networks or integrated delivery networks. They kind of exist to avoid referrals outside the network to specialists because it costs them money to do that basically, and so they want to retain the patients within their networks. Our melanoma test allows them to avoid referrals to dermatologists for melanoma, suspicious lesions, most of them which are likely to be negative, and so the referral never needed to occur in the first place. It's a top-down sell, so we start at the executive level, and then we have to sort of get a license to hunt, if you will, to offer the test to the physicians within that network. We just built up that team. We have a nice pipeline of opportunities that we're exploring there and that are moving forward. In terms of how we want to approach it, we want to understand how we need to deploy sales reps against a primary care network so that we can get the right pull-through of the product. And that's what we're trying to learn through the effort we have going on in Florida. And we just haven't gotten the rollout completed there because of the various pandemic waves that have occurred. But again, as Omicron has waned, we're back now training those doctors up, and then we'll understand those metrics, and that will inform us as we bring new IDNs on how we need to deploy against those types of accounts.
spk05: Yeah, regarding telemedicine, so, you know, we plan to have close to half the country available with DermTech Connect here in the coming months, as we just mentioned. And so, again, we've always viewed that telemedicine is a great kind of alternative for certain people, which obviously was highlighted during the heights of the pandemic. But telemedicine for diagnostic, especially for melanoma, it's a new market and it'll take some effort to kind of fully build that out. But we see that still as a good opportunity in the future and which is why we're investing into it in current day. But like John also mentioned on the call, we expect that probably 90% or so or more of our effort, our actual commercial effort for 2022 will come from the professional dermatology channel.
spk06: Okay, and if I can just get just one more on the contract revenues, the maximum of $4.2 million there exiting the year. Any sense of how we should be thinking about that, the case of that rolling off, and maybe what you're expecting in 2022 there?
spk05: Yeah, it's hard to predict because a lot of that, it's really backloaded in the trials. So the biggest portion of the contract revenue we receive is the extraction work once the trials have been fully enrolled and samples have been taken. So because of the pandemic delays, again, this is where a lot of the pharma trials were just delayed for a while. We are seeing that activity pick up now, but it is hard to predict of when they'll fulfill their enrollments and when we'll actually get those samples in. We hope to have some better insight here in the coming months as it looks like this pandemic wave is waning and seeing what activity these pharma companies can do. But as of right now, it's very hard to predict what it looks like throughout the rest of this year.
spk06: Okay. Thanks for your time, guys.
spk01: I think your next question comes from the line of Max Masucci from Cohen & Co. Your line is open.
spk02: Hey, thanks for taking the questions. I just want to start just curious if you're seeing any gross margin pressure due to rising input costs, inflation, supply chain disruptions, just I'd love to get your latest view on supply chain and if there's anything you can offer on the cadence of gross margins during the year, that would be great.
spk05: Yeah, we haven't seen a lot of supply chain issues or cost issues yet. So as the waves of the pandemic go down, the requirements on PCR supplies also go down, and so we haven't had challenges running our melanoma tests. We have seen just, I'd say, from inflation in general is wages, where San Diego is a competitive market and we have adjusted wages in certain laboratory areas that are in COGS to be competitive with the market. And then equipment, I'd say, longer-term equipment around additional capacity or some of the new technologies and things like that, that's where We haven't seen issues yet, but we have to be very good at planning on when we need to place those orders so that we can get their appropriate lead time. So quick, quick answer is we haven't seen a lot of impact yet, other than maybe some wages here just locally, given how hot the laboratory and scientific markets are here in San Diego. But we are monitoring it very closely.
spk04: It's also fair to say in anticipation of, you know, what was potential disruptions, particularly when the pandemic was at its peak, We've always kind of built up supplies and even headcount to make sure if people, you know, if we had an outbreak of the pandemic. So we've run a little bit rich in general in COGS because we just didn't want to get caught short when everything was turbulent during the pandemic. So that's another factor that we're trying to get that more in line with the growth we're seeing.
spk02: Yeah, makes sense. And then just curious if you've made Any more incremental ads to the sales force or, you know, the numbers have held steady since the Q3 call? And then in terms of the COVID impact you're seeing today, you know, is that more in your customer base in terms of access or, you know, within your sales force space?
spk04: We're at about 70 reps. I mean, I think we've had very minimal turnover, and we plan to kind of maintain our sales force at that 72 number throughout the year right now. We may add some reps in the primary care setting as we learn to understand what those metrics are, but we're still in the process of planning there. And then I'm sorry, the other question was,
spk02: Yeah, in terms of COVID or internal or external.
spk04: Yeah. I mean, look, the funny thing about Omicron is the doctors were getting sick. That's what we noticed, which was kind of different than the other waves. So not only, you know, access would go down, but we had, you know, some challenges with doctors going out for a week or two because they were picking up the virus. It's hard to say all those things. All I know is that, you know, As the numbers came down on Omicron and the people started kind of relaxing and going back to their daily lives, our volume picked up substantially. I think we saw, in terms of our average daily sample numbers, about 20%, 25% increase over what we saw from our prior peak in that December timeframe. We saw a robust rebound. We're optimistic we'll continue. We're just hoping that the virus is in the endemic phase so we don't go through these things, or we hope that just people learn to live with it. But whatever the issues are, it's clear the correlations between our success with adoption and the rise, the ebb and flow of the pandemic, it's a one-to-one correlation. You just see it. you know, with smooth sailing, I think we can see the kind of adoption we want to see with the product.
spk02: Got it. Just a final one for Kevin. Just in terms of the guidance, you know, I understand that the timing of new reimbursement wins is, you know, very challenging to predict, but, you know, if you look at the size and types of payers that you're engaged with right now? Do you see ASPs trending more gradually, you know, throughout 22, or should we expect more of a, you know, call it step function in the back half?
spk05: Yeah, we model a more gradual kind of increase throughout the year. Yeah, just because it is really so hard to predict. So we take it that if we get any of these payer wins, it's really upside to us. But, yeah, that's how we model it. It's more of a gradual ASP ramp.
spk02: Great. Thanks for taking the questions.
spk01: Thank you. Our next question comes from the line of Kevin DeGaeter from Oppenheimer. Your line is open.
spk07: Hey, can you – thanks for taking our questions. I guess ours, you know, first are on reimbursement. I appreciate you calling out the expectation for, you know, signing up one national payer. Are there any particular – you know, milestones that you think really sort of potentially drive some of those discussions potentially to fruition, you know, specifically you called out, you know, publication, you know, in March and, you know, some other features. But I'm just trying to better sort of appreciate that confidence and maybe if you can talk about, you know, kind of how you're thinking about potential reimbursement wins, you know, kind of beyond national payers, whether that's a total covered lives metric or some other feature, but I think we're just trying to better understand sort of what your understanding of the payer landscape is that's baked into your guidance.
spk04: Well, we just, we, you know, in the past we heard, well, we want to see the trust study. We want to see the Optum economic study. And those are now out in the public domain. And so the payers that asked for that data and that information, we're obviously going to circle back with them. And now that we have those, I mean, that gives us some confidence that they're going to take the look at the test the way they promised us to based on that data that was set to be published and needed to be published. You know, there was also some discussion about, you know, the NCCN wasn't totally clear. There was this preamble language, and we went to the NCCN. We asked them to clean it up, and they did. So obviously circle back with them. We're trying to address the things that the payers have spoken to us about, about what they want to see. We believe we have addressed them. That's why we believe we're making progress with the payers. As we talked about in the past, it's hard to predict We know that we've gotten some of the medical directors on board with the test. They've recommended the test to their policy panel, but it's the policy panel that we have no input into that has come back with an additional question or two. So we think we're doing what we need to do to educate the payers. We're providing the information they're asking for, and that's the best we can do in terms of trying to drive a potential coverage policy. And that's why we think it's a question of when, not if, to get these payers on board. In terms of regional payers, we've built out a team. We've got regional activity in all quadrants of the U.S. now, and it's the same thing there. It's a new product. Payers aren't good with new technology that totally changes, transform a particular pathway in medicine, and they have to get their head around it. We're in that same stage as with a lot of regional payers. where they're trying to understand that value proposition. Again, we think we'll have some success there, just like we talked about last call that we brought on a regional payer with another two million lives in the Midwest. So a lot of activity, we believe that activity is gonna bear fruit. We can't predict exactly when, but we like what we're seeing and we think it's positive activity.
spk07: Great. No, that's super helpful. And then maybe just, you know, like other sort of parsing part, you know, the guide here, if we back out, you know, Q1 revenue guide on assay, you know, that kind of implies 21 million or so for the last three quarters of 22, if my math is more or less correct. You know, should we, you know, think of this as more similar to kind of a step up with three quarters, you know, you know, give or take around kind of that $7 million kind of figure or, you know, a kind of pretty steady build for the year, you know, exiting, you know, $8 million, $9 million kind of range. I'm not looking for quarterly guidance, but just, you know, all of the annual guidance implies a pretty significant step up after Q1, so I just want to appreciate cadences.
spk05: Yeah, we estimate that it'll be kind of each quarter will be better than the next, right? Because with the sales force that we hired, I mean, Q1 is really the first quarter that they were fully trained and into the field and contributing. And so that's how we build the model is that as more time goes on and as those new reps can get fully up to speed, they'll contribute more over time. So that's how we model out is that every quarter is better than the last. Great. Thanks for taking our questions.
spk01: Thank you. Our next question comes from the line of Alex Nowak from Craig Hallam Capital. Your line is open.
spk09: Great. Good afternoon, everyone. Staying on that last point there, I was hoping you could expand on how that bigger sales force is helping out there in the field so far. Is productivity ramping similar to how you expected? Are the teams finding that now that the territories are a bit smaller, that they have a bit more capability to take on more employees? and then any initial jostling of the territories that's being included in that Q1 guide?
spk04: Well, I think it's early for us to know exactly what the appropriate ramp-up is. We've talked about it many times. We're trying to map that out, but we've always had sort of slowdowns when the virus occurs. We don't have a good number, but... Again, we saw a very robust February. I would say areas where we had a footprint already, maybe a territory that was too large because of the smaller size sales team before, that we now split and added a new rep. And now the frequency of calls has gone up to where they should be. That's where we're seeing the impact currently of the new sales reps. And places where there's virgin territory, that's where we're trying to map out what should that growth look like when it's a completely new territory. But hopefully in the next couple quarters, assuming we don't have another setback with the macro environment and the virus, we'll be able to understand what is the typical ramp-up for a rep, both in a virgin territory and someone who's now in a more right-sized territory with the adequate frequency of calls. But again, February is telling us the things we're doing, the things we put in place, the training, the peer-to-peer education, all those things are working and we just need to keep executing according to that plan and keep our fingers crossed that the environment stays more normalized than it's been in the past.
spk09: It's a bit hard to look at utilization just given you're adding a lot more physicians into the mix, but if you look at those physicians that have been using the test for, let's say, a year, year and a half or so or longer, Are you seeing that the same-store sales is already starting to increase from here?
spk04: We definitely know that time and consistency of sales calls leads to higher utilization with our customers in general. As we've talked about before, there's often a catalyst where the test finds something that a physician didn't expect, and that often is another catalyst to drive more utilization. And we see our consistent users that have had the consistency of sales calls, their utilization grows fairly steadily over time with some step changes when we have one of those moments. So that's really what we're looking for. The game is about frequency of calls. That's why we wanted to scale the sales team so that we could get the right size territory so we could get the right frequency of calls. The early... The early data from territories that were split where we had some presence, and now we see a higher frequency. We're seeing that frequency of call and regularity of visits improve the pull-through. So those are the things we're looking at, and I think it's pretty clear that it's all about regular customer engagement to drive that utilization.
spk09: Okay, understood. And then for carcinoma, can you expand on what you're doing there to improve the assay's performance? You're starting to look at additional genetic targets, or is this just basically a refinement of the current test?
spk04: It's a little bit of both. Refinement of the test, you know, a lot of the performance we have now has been done with sequencing, and sequencing doesn't quite have the fidelity and the dynamic range of, like, So we're migrating some of these targets into the PCR platform to get better differentiation. So that's a process going on. It's a complicated disease, as we've talked about. It's a complicated test because we're talking about two cancers that we need to differentiate from a whole host of other things, you know, a list of nine or ten others that are confused with those cancers. And so it's a challenging assay to develop. And so, but we are making steady progress, and we're confident we're going to solve the problem and the challenges there. We just, you know, it's a matter of adding more genes in and improving the algorithms through additional samples and, you know, training those algorithms with additional numbers of samples that go in to make it better and more effective at the discrimination.
spk09: All right. Understood. Appreciate the update. Thanks.
spk01: Thank you. Once again, if you have a question, please press start and the number one on your touchdown telephone. Your next question comes from the line of Thomas Flatton from Lake Street Capital. Your line is open.
spk08: Thank you, guys. Appreciate you taking the questions. First one, Kevin, for you on gross margin, could you give us some sense of the level of volume that we need to see to see some real positive movement in gross margins where you can kind of get closer to that ideal level? diagnostic margin? Are we talking 100,000, 300,000? I'm just trying to wrap my head around what that looks like.
spk05: Yeah, it's more complicated than just volume because ASP has such a tremendous impact on it. Even if you look at our current, you know, results for Q4, if our ASP was in the 500 to 600 range, I mean, we would already be at close to like a, you know, 50% margin or better. So it really is a combination of both of those, which again, because of the challenges with predicting when payers come on board. It's hard to model out the ASP. But that's how we think about it, right, is that our COGs for Q4 and for the full year, for that matter, for 2021, you know, about I think 42% or so of the COGs were fixed for the full year, and that represents capacity of about 125,000 to 150,000 tests given kind of the current footprint and the current equipment. And so where our year was at, you know, 44,620 tests, samples. We're not even utilizing a half or even a third of the capacity. So that's where the fixed cost can be leveraged up pretty well with just adding some management staff versus more space and more equipment. Where things, again, get a little bit more complicated is as we're building the new laboratory, which we'll look to enter into by probably Q3, Q4 of this year, we will greatly expand our capacity, not just for the improvements within the expected volume increases for the melanoma test, but for these other tests that are coming to market. So we're going through that work right now to see, you know, how can we minimize any potential overcapacity in the new laboratory. But that's why it's a little challenging to say at what volume is it, because it's really a combination of both volume and ASP.
spk08: And then just one other question on the guide. The volume that you're expecting this year is Is that virtually entirely from traditional dermatology, or are you anticipating any contribution from primary care market, telemedicine, et cetera? Just I'm trying to get a sense of how much they might be contributing this year.
spk05: Yeah, I mean, we've focused a big part of our efforts, as we mentioned, right, on the professional dermatology channel for the melanoma test. So that's why we say all of these efforts that we're doing within primary care, within telemedicine, within these new products, we think that they provide either a backstop or upside to it. So the newer products, Luminate, Carcinome, again, those are ones where we don't have a whole lot baked in, even if it's upside. Because, again, they're new, and we've got to either get some data for a Medicare submission in respect to Carcinome, or with Luminate, it's a different type of test than consumers are used to seeing. It's not a family lineage or hereditary disposition test, but it's a test that can provide actionable information to to help reduce risk of potential skin cancer in the future. So it's a great idea. We have great market research on it, but we've got to price test it, do some beta testing, see what kind of cost it takes to get the right number of leads into the top of the funnel and see what conversion looks like. So that's why we keep saying that 90% or more of our effort related to the guide even is really the professional dermatology channel for the melanoma test. Got it. Appreciate it, guys. Thank you.
spk01: Thank you. And the next question comes from the line of Mason Carita from Stevens. Your line is open.
spk10: Hey, guys. Just a quick question from me on Luminate. Given this is a consumer-based product and you'll be paid by consumers versus having to establish reimbursement, is it fair to assume this product could be accretive to gross margins in 2022 or maybe potentially 2023? And maybe similar to an earlier question, if not, is there a certain level where it could become accretive to gross margins that you could point to?
spk04: Well, we've become experts at digital marketing over the last few years, particularly as it pertains to the melanoma product, and we've learned the steps you have to go through to sort of introduce a product and get consumers interested and then drive them through the funnel. And we always call it a launch and learn, and it's a process that takes six to 12 months to kind of optimize the messaging, optimize the algorithms, and get that funnel and your customer acquisition cost to where they should be. So we wouldn't anticipate much in this year, and we would be looking to next year to provide some contribution because it's really the launch and learn. We've got to start understanding how to digitally market and how to drive those funnel metrics We do think that the way we develop the product, that it can be a meaningful product and that, you know, it can have, you know, a meaningful gross margin associated. So once it becomes mature, we'll be able to communicate more effectively what we think the contribution will be.
spk05: Yeah, and in terms of the setup within the laboratory, so there are shared technologies with our melanoma tests that we can leverage and just, you know, use some more current capacity. but it looks like that there will be some new technologies around the sequencing side of things. And so that's why when we're at a low volume in a launch and learn type of environment, we don't really utilize that equipment to the full scale. So it's possible it could be creative. And, again, it depends on the price testing that we have to perform during the launch and learn to see, you know, because the market research is good, When the rubber hits the road is when people are willing to put their credit card on the line and what is that price point. And so that's the key testing, one of the key testing areas that we have to do during this launch and learn to see if it will be accretive right away or not. Got it. Thank you.
spk01: Thank you. And I'm not showing further questions at this time. Ladies and gentlemen, thank you for participating in today's conference. This concludes today's program, HUANA All Disconnect. Everyone have a great day.
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