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spk00: Ladies and gentlemen, thank you for standing by. Welcome to DERM Tech's fourth quarter 2023 financial results call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 11 on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star 11 again. Please be advised that today's conference is being recorded. I would like now to turn the conference over to Steve Kinsebo. Please go ahead.
spk07: Thank you, operator. Welcome to DERM Tech's fourth quarter 2023 earnings call. With me on today's call are Brett Christiansen, our president and chief executive officer, and Kevin Sun, our chief financial officer. Our call today 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 statements regarding projections of the future performance or financial outlook of DERM Tech, the performance, patient benefits, cost effectiveness, commercialization, and adoption of our products, and the market opportunity for our products are based on management's expectations as of today 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 our most recent filings with the SEC, including our annual report on Form 10K filed today. We undertake no obligation to update these statements except as required by applicable law. Our fourth quarter 2023 earnings press release and SEC filings are available on our investor relations website. A recording and transcript of this call will be available on our website later today. With that, let me turn things over to Brett. Thank you, Steve,
spk04: and thank you everyone for joining us. We are encouraged by the sustained improvement in many of our key performance indicators as they continue to head in the right direction throughout the second half of last year. In the fourth quarter, ASP for the Dermtech Melanoma Test, or DMT, grew 55% year over year. Test revenue increased 38% on the same basis. We also reported another all-time record high in the Medicare proportion of billable samples, which is about half of our addressable market, and posted our highest gross margin in six quarters. With the additional restructuring actions we announced last month, we may see a total reduction in annualized operating expenses of approximately 40 million compared to 2022. We will continue to emphasize reimbursed tests and growing revenue. Before I take you through a few commercial highlights, let me briefly revisit the key pillars of our story. First, we have a proprietary, non-invasive skin genomics technology that has demonstrated it can enhance the standard of care for evaluating lesions suspicious of melanoma. Approximately four million surgical biopsies are performed annually to find nearly 190,000 new cases of melanoma. Dermatologists are working hard to provide great patient care, but their practice can benefit from new tools that supplement existing methods. The DMT rules out melanoma with a 99% or greater negative predictive value, or NPV, and can support decision-making by clinicians. Second, we and many leading clinicians believe there's a place for the DMT in every dermatologic practice alongside established protocol. As a starting point with dermatologists, we're aiming to identify the numerous instances in which a healthcare provider doesn't want to biopsy a clinically suspicious lesion, but still wants to provide patients with peace of mind. Our customers and patients can trust the results when they use our test, and there is room for it to be integrated into the current melanoma care pathway. And third, we can reduce healthcare costs by providing genomic data to clinicians who can rule out the need for certain surgical procedures while also providing a better patient experience. On the payer front, all the insurance providers we brought on in 2023, which represent approximately 42 million new covered lives, have started paying some claims for the DMT. We're determined to continuously improve the onboarding and reimbursement process with payers to speed up the revenue benefit. Finally, the Blues Plan of Rhode Island and a Blues Plan in the Mid-Atlantic recently issued favorable coverage decisions for the DMT. In January, we were incredibly pleased to announce positive top-line data for the TRUST-2 study. With a large cohort of more than 20,000 patients, the results reaffirmed the DMT's real-world clinical utility with an NPV of .7% to rule out melanoma, which is meaningfully higher than other currently available methods. For clinicians and patients, a high NPV delivers assurance that a suspicious pigmented lesion which tests negative is unlikely to be melanoma. This study is an important way to continue to build trust with our customers, and we're actively showcasing the clinical value of DMT in the field. The outstanding TRUST-2 study results will also allow us to reengage with insurance providers that don't cover our tests. We're working to make the full study available in a peer-reviewed medical journal and expect to have an article published in the next several months. We will continue to reinforce our message around the clinical and health economic benefits of DMT with all stakeholders. Our visibility with payers also improves through state legislative efforts. Bills mandating insurance coverage of genomic testing or biomarker bills are gaining traction across the US as lawmakers advocate for improving access to potentially lifesaving genomic tests. Legislation has now been enacted in 14 states and eight additional states introduced biomarker bills in 2023 that are making their way through the legislative process. Moving now on to our commercial business, where we continue to dedicate substantially all of our resources to growing, reimbursed tests and boosting revenue. We now have two quarters behind us since we changed our approach. We believe it is evident these changes have had a positive impact on our top line, but we're still refining our tactics as we learn more. First incentive compensation for our sales team continues to be linked to reimbursed tests and revenue over volume growth. We're also arming the field with robust analytics reporting to support these goals. More recently, we reduced the target list for our sales managers. This change also allows us to foster stronger relationships with our customers and increases touch frequency in the field. Second, as a result of additional restructuring actions we undertook in January, we dissolved certain sales territories and merged others to further optimize our footprint and focus on the highest value regions. As a result, we reduced our sales territories from approximately 60 to roughly 55. We're intentionally pursuing a strategy that prioritizes ASP and revenue growth over volume growth in the short term. In closing, we've significantly improved many of our key operating and financial indicators for two consecutive quarters. We believe this approach is the best way to reach a meaningful revenue inflection point. With that, let me turn the call over to Kevin for a more detailed financial review.
spk03: Thanks, Brett, and good afternoon, everyone. I'll outline our key financial and operating metrics for the fourth quarter, then summarize how we're thinking about 2024. I'll wrap up by recapping our liquidity profile and cash runway estimates. All comparisons are to the prior year period, unless otherwise noted. Test revenue was up 38% to 3.7 million, largely due to a higher ASP for the DMT. Test revenue was flat sequentially. Billable sample volume declined 11% to approximately 15,580 and was down less than 1% sequentially. The year over year and sequential decrease was partly due to prioritizing reimbursed tests ahead of total volume and the overall reduction in the size of our sales force. As previously noted, we also stopped testing samples from pediatric patients and certain phytoepatric skin types in early to 2023 based on guidance from our lab accrediting organization, which also affected the year over year comparison. The sequential decrease was also partly due to seasonality we have previously seen during the year end holiday season. Contract revenue was 0.2 million compared to 0.3 million. The decrease is from the timing of activity related to clinical trial progress of our biopharma customers. Total revenue increased 31% to 3.9 million, primarily on higher test revenue. Drilling into our test revenue drivers. First, ASP was up 55% to $238 per sample and up 1% sequentially. The Medicare proportion of billable sample volume hit another all-time record high, increasing sequentially from 27% to 28%. In the last three quarters, this proportion has increased by five percentage points and has contributed to the ASP improvement. We're beginning to see consistent payment from TRICARE at the VA, as well as improving payment from certain of the BLUES plans we signed on last year. The revenue benefit is ramping from the big increase in covered lives we've achieved, but we still need to clear administrative and billing obstacles in some cases before we improve payment behavior from certain insurance providers. Net positive prior period adjustments had a negligible impact on test revenue during the fourth quarter. ASP may fluctuate in the future if payers update their administrative procedures or other requirements for payment, even those payers with consistent reimbursement history. Second, we had approximately 2,200 unique ordering clinicians in the fourth quarter, down 2% sequentially. Because we're currently focused on building deeper relationships with clinicians, rather than creating broad awareness for the DMT, the level of unique ordering clinicians may continue to be flat or even modestly down in the short term. Third, our average quarterly utilization or average number of tests ordered per unique ordering clinician was 7.1 billable samples in the fourth quarter, up from 7.0 in the third quarter and versus 7.2 in the year ago period. Turning now to operating expenses. Cost of test revenue was 3.4 million, an increase of 4% yielding a test gross margin of 7%. Our quarterly test gross margin was the highest it's been in six quarters. The increase in cost of test revenue was primarily due to higher infrastructure costs related to our new lab. Sales and marketing expenses were 8.4 million, a 38% decrease, largely due to lower employee related and marketing expenditures. Research and development expenses were 3.3 million, a 34% decrease, primarily due to lower employee related and lab supplies costs. General and administrative expenses were 8.4 million, a 14% decrease driven by lower employer related costs offset by higher infrastructure costs related to our new facility. On a full year basis, including the impact from our comprehensive restructuring actions and other efforts to identify cost reductions, we expect an approximately 40 million annualized reduction in total operating expenses versus 2022. Total operating expenses for 2024 are currently estimated to be approximately $80 million. Net loss was 19.1 million, which included 3.2 million of non-cash stock-based compensation expense compared to a net loss of 28.2 million, which included 5.3 million of non-cash stock-based compensation expense. Net loss decreased 32% while test revenue increased 38%. Moving now to how we're thinking about 2024. We believe DMT volumes could be flat to modestly down for the first half of 2024 compared to the same period last year, primarily due to our focused on reimbursed tests and the impact in the field from our restructuring actions and the change in tactics. We'll continue to emphasize ASP and revenue growth. And lastly, a review of our liquidity profile and balance sheet. At year end, we had cash, cash equivalents, restricted cash and marketable securities of 59.3 million. Cash burn is estimated to decline to 55 to 60 million annually based on the fourth quarter 2023 run rate, a roughly 40% decrease from our net cash burn in 2022. We believe we have cash runway into the first quarter of 2025, not to exceed 12 months from today's 10K filing. In summary, our plan demonstrated sustained results in growing revenue during the second half of 2023 while operating with a leaner organization. Now I'll turn the call back to Brent.
spk04: Thanks, Kevin. Before we wrap up and move to Q&A, I'll share a compelling patient story that inspires us as we forge ahead. A patient was seeing her dermatologist on a monthly basis for severe acne treatment without any other concerns. During her last visit, she mentioned a mole on her arm that she hadn't noticed before. The clinician evaluated the mole and wasn't concerned, but because the patient was worried, a DMT was ordered. The test came back positive, indicating a correlation with melanoma. A biopsy of the lesion was then sent to a pathologist who confirmed it was melanoma, and the patient was referred to a surgical oncologist. The healthcare provider is still in shock that this patient may have otherwise walked out of the office. This story, much like others we hear on a regular basis, highlights the critical need for precision genomics as cancer is a disease of the genome and the current visual assessment standard is challenging, even for an expertly trained medical professional. The DMT helps clinicians evaluate higher risk lesions alongside other traditional tools. With that, I'll turn the call back to the operator for Q&A.
spk00: Thank you. As a reminder, to ask a question, please press star one one on your telephone and wait for your name to be announced. To withdraw your question, please press star one one again. Please stand by one moment while we compile the Q&A roster. The first question comes from Thomas Flatten with Lake Street Capital Markets. Your line is open.
spk14: Hey, guys, appreciate you taking the questions. Just out of curiosity, I don't wanna clarify, Kevin, you said that you expect volumes in the first half of 2024 to be down relative to the first half of 2023. Did I hear that right? That's correct. Okay, so closer to where we were in three Q and four Q or a lesser reduction from the mid to high 17s?
spk03: Yeah, we're not providing specific guidance right now. We're happy with the performance in Q4 and again, where our updated strategy to prioritize reimbursed volume drove a 55% -over-year ASP growth and a 38% -over-year test revenue growth. Q4 was that second quarter of where we've achieved sequential growth in these top line metrics. So as we said, we believe the volumes could be down for the first half because of the impact in the field from the restructuring and the change in tactics. We have about 15 fewer sales territories now than we did in Q1 of 2023. We do plan to continue to emphasize throughout the organization our focus on driving ASP improvements, but providing any specific guidance right now remains difficult without having a trend for several quarters in payer reimbursement behavior and the sustained effectiveness of our updated commercial tactics.
spk14: Got it. And with respect to the $40 million reduction in OPEX relative to 2022, could you help us maybe spread those savings around? Is it kind of a pro-rata cut across the three OPEX lines or how should we think about that?
spk03: It would be fairly, I think, consistently spread as we saw within the fourth quarter results. So it is all up and down the organization where we've made cost saving and efficiency efforts. And so I think, as we said previously, looking at the fourth quarter of 2023 as kind of a benchmark going forward, that's a good kind of jumping off point for where we think expenses and costs will be in the future.
spk14: And then one final one, if I might. Was there anything, speaking to the Medicare penetration, was there anything specifically you did tactically to drive that number up or was this just kind of a natural evolution of the business where that's starting to get closer to where it should be in the kind of around about 50%?
spk04: Yeah, hi Thomas, this is Brett. I'll take that one. If you remember, there's quite a few tactics that we deployed starting in the middle of last year and they evolved throughout the year, but many of those were around the focus for the mix that comes in the door, reimbursed tests, and certainly a big portion of that is Medicare. If you remember, we changed comp plans for our field sales personnel to focus on revenue and reimbursed tests versus strictly volume, which was historically how comp was laid out for them. We also provided them with the analytics and targeting tools to help them understand where most of their reimbursement was coming from. And on top of that, we reduced the number of targets that each rep was calling on so they can go deeper into each practice and all of that has sort of paid dividends in the form of Medicare reimbursement, but also just overall ASP.
spk14: Fantastic, appreciate you taking the questions, thank you.
spk00: One moment for the next question. The next question comes from Andrew Brockman with William Blair, your line is open.
spk11: Hey guys, good afternoon, thanks for taking the questions. Maybe just one on the major commercial payers. In the 10K, I think you call out, you believe there's a possibility to secure some sort of contract from them over the next 12 to 24 months, can you maybe just sort of talk about some of the confidence behind sort of putting that timeframe out there or anything, which has sort of changed over the last handful of months here, thanks. Yeah, hi Andrew,
spk04: it's Brett. We continue to have really good conversations with the national payers. We're happy with where reimbursement ended this past year, adding 42 million covered lives and finishing about 45% of all covered lives for DMT. We did get, as you remember, three negative policy decisions last year from three of the nationals. We were having good conversations with one, but Trust2 is an opportunity for us when that's published in the next several months to go back to all the national payers and continue those conversations. And as we've said in the past, we're just optimistic because the economics of DMT are so strong for payers that we know they'll eventually draft favorable policy and cover the test.
spk11: Great, and then Brett, you sort of talked about reducing the target list for your commercial team. Anything analytically that you can share, which sort of shows that the greater frequency and greater touch here leads to either greater utilization of the test or even movements towards more reimbursed tests for those providers? Thanks.
spk04: Yeah, thanks, Andrew. We're still learning a lot from the revised tactics last year, but one thing we know is that selling DMT in dermatology requires time and frequency in the field. And we revised the messaging with the salespeople to start with a clinical argument for DMT, making sure that dermatologists understand the clinical utility, the .7% negative predictive value that we showed in Trust2. Then we figure out where we can integrate it into the practice. So it's a non-threatening message that gets them to say, look, there's sometimes I don't want to do a biopsy, and when I don't wanna do a biopsy, yes, I would use DMT. And whatever that percent of biopsies is, 20, 25, 30%, we work on integrating that into their practice so it becomes habit and just part of what they normally do. And that takes some time, it takes frequency, it takes a number of sales calls, and so that's why we think fewer targets allows for that to happen quicker.
spk00: I'll leave it there, thanks guys. One moment for the next question. The next question comes from Mark Macero with BTIG, your line is now open.
spk09: Hey guys, this is Vivian on from Mark, thanks for taking the question. So I guess on the ASP front, are there any health plan wins that haven't turned on yet? I think you alluded to some administrative and billing obstacles preventing payment where you do have coverage. So just any more granularity you could give there on what's preventing the
spk03: payments, thanks. Yeah, I believe for the most part, most of all of the wins that we had last year have started paying something, but there are certainly still upside potential in improving the payment rate, because again, sometimes it's documentation, sometimes it's specific processes we have to follow to allow for better payment with them. So they are improving, but there is still more room for improvement in the focus on those efforts to improve it as much as we can.
spk09: Okay, perfect, thanks Kevin. And then just any trends and utilization per ordering clinician to call out. I think we've chatted in the past that it takes a certain number of tests that clinicians need to get through to get their first positive results and really understand the value proposition. So just anything else to call out there?
spk03: Yeah, no, I think as we said before, because we're trying to go deeper right now, the number of unique ordering clinicians in any quarter could be flat or even modestly down, but with that same rationale, we would expect the utilization to increase, because again, if we're going deeper and making sure it's integrated in the practice, as Brett mentioned, making sure that the clinicians understand the clinical value and the best places to use the technology and how to get comfort to their patients with it, we do believe that it should drive increases in utilization on a per-doctor basis. And that's where we're focused right now. Instead of broad marketing and awareness, it's really going deep and trying to get advocates and trying to get them to understand where to use it and integrate it into their practice.
spk08: Awesome, thanks for taking the question.
spk00: One moment for the next question. The next question comes from Mason Keriko with Stevens. Your line is open.
spk12: Hey guys, thanks for the questions. Two quick ones up front for me here, if that's all right. Maybe on the news of discontinuing the TERT optional add-on assay, could you kind of talk about the cost benefit there from a COGS protest perspective? And in second, you guys had previously talked about some ongoing projects to drive down COGS. I think some of those depended more on volumes and scale. Others were more project related. So could you just walk through where you stand on some of those today?
spk03: Yeah, hey Mason. So with TERT itself, again, what we assessed as part of the TRUST-2 data set is that there was limited improvement in some of the key statistical measures or performance metrics of the test when TERT was included. And we also have determined through getting feedback from clinicians who use our test that TERT didn't really impact clinical decision making too much. So the reason that we decided to simplify the DMT and stop testing TERT was just that, to simplify it and based on the patient need and how it's being used in the clinical practice. As a benefit to that decision though, we should get some improvement in COGS. TERT was a DNA mutation that was run on a separate piece of equipment. And so that was the only use for that equipment. And there was also additional processing time and people needed to process those things. And again, part of the reason we also discontinued it is that we were only able to report out a test result in about a third of the time that was ordered or less. So we haven't quantified yet exactly what that will be because there will certainly be some direct cost savings from not having to use supplies and the labor. But as we're still working through what to do with the equipment, and now we also have fixed costs that are spread to other parts of the processing. So it should provide some savings, but we haven't provided definitive detail on that yet. And then it relates to the other cost saving measures. So we'll continue to focus on all sorts of things, whether it's systems improvements, whether it's material costs related to the configurations or different things within the kits, labor efficiency, automation. These are all things that we'll continue to work on as well as technology improvements. Some of them can go a little bit sooner than others. Some of them take some more work to validate and ensure that it doesn't affect how the test works. But we're committed to continue to improve the COGS profile. And as we saw just in Q4, we had just slightly lower volume than Q3, which meant that the fixed portion of the costs were spread over, again, a slightly lower base than in Q3. But we're also able to reduce the COGS on a per test basis, about 6% in Q4 sequentially. And that's the lowest cost per test that we've had since actually moving into the new laboratory. So we're committed to improving it, and we've already demonstrated some improvements to it. And we'll have some more information around TERT specifically once we get the change fully implemented.
spk12: Got
spk03: it, thanks,
spk12: Kevin.
spk00: As a reminder to ask a question, please press star one one on your phone and wait for your name to be announced. One moment for the next question. The next question comes from Dan Brennan with Cohen. Your line is open.
spk10: Great, thanks. Thanks for taking the question. Sorry, I joined a few minutes late, and I just wanted to understand a little bit, and you probably already addressed this. But in terms of the outlook for Q24, I don't think you're giving much, but I'm just wondering if there's any framework to at least consider from a price-volume standpoint how we might think about it.
spk03: Yeah, we're gonna continue to emphasize throughout the organization our focus on driving ASB improvements. But providing the specific guidance right now remains difficult without having a trend for several quarters in payer reimbursement behavior and whether or not there's the sustained effectiveness of our updated commercial tactics. So we're not providing any additional detailed guidance at this point.
spk10: Is it fair to think the streets got 20 million in revenue for 24 versus, they call it 15 million this year? Rather than be completely off sides, is there any framework at all to think about magnitude or is it just impossible at this point?
spk03: It's very challenging and difficult at this point based on the factors we've just said. But as we said, we'll continue to focus the team on driving those ASB improvements to drive revenue improvements, which we were able to demonstrate in Q3 and Q4 with the change in tactics, be able to get some improvements there. So that's where the focus will continue to be. But yeah, we're just not providing detailed guidance right now.
spk10: And on the Trust2 study, I think you talked about it's really important to engage with payers. Like what kind of payers are you specifically looking to engage with and any potential timeline of like review and decisions?
spk04: Yeah, hi Dan, it's Brett. Yeah, Trust2 is gonna help us with all outstanding payers that don't have a policy, a positive policy yet for DMT, specifically the nationals. We think it's a large cohort, 20,000 patients, our highest in negative predictive value that we have to date of 99.7. But all of our publications show over 99%. So it will help with the majority of payers in the discussions that we're having to date. And we expect that publication probably in the next several months. So it's a really good opportunity for us to put that in front of payers and restart any negative policy decisions, but also continue the ones that we're having today.
spk10: And just maybe one final one on that. So is NPV definitely the most important metric to consider? Like what else would the payers look at in the study?
spk04: Yeah, since it's a rule out test and what clinicians are looking to do is just rule out the need for biopsy and further procedures, the negative predictive value is really the, by far the most important factor for us. It's what they point to as a rule out test and we're pleased with that result. Great, okay, great, thank you.
spk00: One moment for the next question. The next question comes from Connor Chamberlain with Craig Hallam, your line is open.
spk13: Hey, good afternoon, this is Connor on for Alex. Thanks for taking my questions. So you've been working on getting these commercial payers online for years now. Can you maybe talk about how Durham Tech has evolved their approach in talking with these payers over time?
spk04: Hey, Connor, yeah, it's, we've been working a while to get payers on board, but if you remember, you know, we went public in 2019, had a bit of a blackout with COVID, but quickly got back on track with payers adding 42 million covered lives last year, seven of the top 10 blues. So we're having really good progress. These discussions just take time and they take more time with the nationals who tend to drag their feet and do a little bit more analysis. So the discussions are going well, it's impossible to predict when they'll come through, but Trust2 again is a really good opportunity for us to put some strong data in front of these payers and we're optimistic that we'll continue to progress throughout the year.
spk13: Great, and then just one more here. With current OpEx pushing about 80 million run rate for 24, and we're still getting minimal gross profit, just how do we make this math work?
spk03: So we believe we have, you know, cash runaway in its first quarter of 2025, not exceeding 12 months from today's 10K filing date based on our cash on hand, our most recent cash usage and our future operating projections. We're gonna continue to focus on driving ASP improvements to improve revenue and we'll continue to focus on trying to find cost saving measures and efficiencies wherever we can.
spk13: Great, thanks for the update.
spk00: I show no further questions at this time. This will conclude today's conference call. Thank you for your participation. You may now disconnect.
spk06: Thank you. Thank you. Thank you. Thank you. Thank you. Thank you. Thank you. Thank you. Thank you. Thank you. Thank you.
spk00: Thank you. Thank you. Thank you. Thank you. Thank you. Thank you. Ladies and gentlemen, thank you for standing by. Welcome to DERM Tech's fourth quarter 2023 financial results call. At this time, all participants are in a listen only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you will need to press star one one on your telephone. You will then hear an automated message advising you and your hand is raised. To withdraw your question, please press star one one again. Please be advised that today's conference is being recorded. I would like now to turn the conference over to Steve Kinsebo. Please go ahead.
spk07: Thank you, operator. Welcome to DERM Tech's fourth quarter 2023 earnings call. With me on today's call are Brett Christiansen, our president and chief executive officer, and Kevin Sun, our chief financial officer. Our call today 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 statements regarding projections of the future performance or financial outlook of DERM Tech, the performance, patient benefits, cost effectiveness, commercialization, and adoption of our products, and the market opportunity for our products are based on management's expectations as of today 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 our most recent filings with the SEC, including our annual report on Form 10-K filed today. We undertake no obligation to update these statements except as required by applicable law. Our fourth quarter 2023 earnings press release and SEC filings are available on our investor relations website. A recording and transcript of this call will be available on our website later today. With that, let me turn things over to Brett.
spk04: Thank you, Steve, and thank you everyone for joining us. We are encouraged by the sustained improvement in many of our key performance indicators as they continue to head in the right direction throughout the second half of last year. In the fourth quarter, ASP for the Dermtech Melanoma Test, or DMT, grew 55% year over year. Test revenue increased 38% on the same basis. We also reported another all-time record high in the Medicare proportion of billable samples, which is about half of our addressable market, and posted our highest gross margin in six quarters. With the additional restructuring actions we announced last month, we may see a total reduction in annualized operating expenses of approximately 40 million compared to 2022. We will continue to emphasize reimbursed tests and growing revenue. Before I take you through a few commercial highlights, let me briefly revisit the key pillars of our story. First, we have a proprietary, non-invasive skin genomics technology that has demonstrated it can enhance the standard of care for evaluating lesions suspicious of melanoma. Approximately four million surgical biopsies are performed annually to find nearly 190,000 new cases of melanoma. Dermatologists are working hard to provide great patient care, but their practice can benefit from new tools that supplement existing methods. The DMT rules out melanoma with a 99% or greater negative predictive value, or NPV, and can support decision-making by clinicians. Second, we and many leading clinicians believe there's a place for the DMT in every dermatologic practice alongside established protocol. As a starting point with dermatologists, we're aiming to identify the numerous instances in which a healthcare provider doesn't want to biopsy a clinically suspicious lesion, but still wants to provide patients with peace of mind. Our customers and patients can trust the results when they use our test, and there is room for it to be integrated into the current melanoma care pathway. And third, we can reduce healthcare costs by providing genomic data to clinicians who can rule out the need for certain surgical procedures while also providing a better patient experience. On the payer front, all the insurance providers we brought on in 2023, which represent approximately 42 million new covered lives, have started paying some claims for the DMT. We're determined to continuously improve the onboarding and reimbursement process with payers to speed up the revenue benefit. Finally, the Blues Plan of Rhode Island and a Blues Plan in the Mid-Atlantic recently issued favorable coverage decisions for the DMT. In January, we were incredibly pleased to announce positive top-line data for the TRUST-2 study. With a large cohort of more than 20,000 patients, the results reaffirmed the DMT's real-world clinical utility with an NPV of .7% to rule out melanoma, which is meaningfully higher than other currently available methods. For clinicians and patients, a high NPV delivers assurance that a suspicious pigmented lesion, which tests negative, is unlikely to be melanoma. This study is an important way to continue to build trust with our customers, and we're actively showcasing the clinical value of DMT in the field. The outstanding TRUST-2 study results will also allow us to reengage with insurance providers that don't cover our tests. We're working to make the full study available in a peer-reviewed medical journal and expect to have an article published in the next several months. We will continue to reinforce our message around the clinical and health economic benefits of DMT with all stakeholders. Our visibility with payers also improves through state legislative efforts. Bills mandating insurance coverage of genomic testing or biomarker bills are gaining traction across the U.S. as lawmakers advocate for improving access to potentially lifesaving genomic tests. Legislation has now been enacted in 14 states, and eight additional states introduced biomarker bills in 2023 that are making their way through the legislative process. Moving now on to our commercial business, where we continue to dedicate substantially all of our resources to growing, reimbursed tests, and boosting revenue. We now have two quarters behind us since we changed our approach. We believe it is evident these changes have had a positive impact on our top line, but we're still refining our tactics as we learn more. First, incentive compensation for our sales team continues to be linked to reimbursed tests and revenue over volume growth. We're also arming the field with robust analytics reporting to support these goals. More recently, we reduced the target list for our sales managers. This change also allows us to foster stronger relationships with our customers and increases touch frequency in the field. Second, as a result of additional restructuring actions we undertook in January, we dissolved certain sales territories and merged others to further optimize our footprint and focus on the highest value regions. As a result, we reduced our sales territories from approximately 60 to roughly 55. We're intentionally pursuing a strategy that prioritizes ASP and revenue growth over volume growth in the short term. In closing, we've significantly improved many of our key operating and financial indicators for two consecutive quarters. We believe this approach is the best way to reach a meaningful revenue inflection point. With that, let me turn the call over to Kevin for a more detailed financial review.
spk03: Thanks, Brett, and good afternoon, everyone. I'll outline our key financial and operating metrics for the fourth quarter, then summarize how we're thinking about 2024. I'll wrap up by recapping our liquidity profile and cash runway estimates. All comparisons are to the prior year period, unless otherwise noted. Test revenue was up 38% to 3.7 million, largely due to a higher ASP for the DMT. Test revenue was flat sequentially. Billable sample volume declined 11% to approximately 15,580 and was down less than 1% sequentially. The year over year and sequential decrease was partly due to prioritizing reimbursed tests ahead of total volume and the overall reduction in the size of our sales force. As previously noted, we also stopped testing samples from pediatric patients and certain dyspathic skin types in early to 2023 based on guidance from our lab accrediting organization, which also affected the year over year comparison. The sequential decrease was also partly due to seasonality we have previously seen during the year end holiday season. Contract revenue was 0.2 million compared to 0.3 million. The decrease is from the timing of activity related to clinical trial progress of our bio pharma customers. Total revenue increased 31% to 3.9 million, primarily on higher test revenue. Drilling into our test revenue drivers. First, ASP was up 55% to $238 per sample and up 1% sequentially. The Medicare proportion of billable sample volume hit another all time record high, increasing sequentially from 27% to 28%. In the last three quarters, this proportion has increased by five percentage points and has contributed to the ASP improvement. We're beginning to see consistent payment from TRICARE at the VA, as well as improving payment from certain other blues plans we signed on last year. The revenue benefit is ramping from the big increase in covered lives we've achieved, but we still need to clear administrative and billing obstacles in some cases before we improve payment behavior from certain insurance providers. Net positive prior period adjustments had a negligible impact on test revenue during the fourth quarter. ASP may fluctuate in the future if payers update their administrative procedures or other requirements for payment, even those payers with consistent reimbursement history. Second, we had approximately 2,200 unique ordering clinicians in the fourth quarter, down 2% sequentially. Because we're currently focused on building deeper relationships with clinicians rather than creating broad awareness for the DMT, the level of unique ordering clinicians may continue to be flat or even modestly down in the short term. Third, our average quarterly utilization or average number of tests ordered per unique ordering clinician was 7.1 billable samples in the fourth quarter, up from 7.0 in the third quarter and versus 7.2 in the year ago period. Turning now to operating expenses. Cost of test revenue was 3.4 million, an increase of 4% yielding a test gross margin of 7%. Our quarterly test gross margin was the highest it's been in six quarters. The increase in cost of test revenue was primarily due to higher infrastructure costs related to our new lab. Sales and marketing expenses were 8.4 million, a 38% decrease, largely due to lower employee related and marketing expenditures. Research and development expenses were 3.3 million, a 34% decrease, primarily due to lower employee related and lab supplies costs. General and administrative expenses were 8.4 million, a 14% decrease driven by lower employer related costs offset by higher infrastructure costs related to our new facility. On a full year basis, including the impact from our comprehensive restructuring actions and other efforts to identify cost reductions, we expect an approximately 40 million annualized reduction in total operating expenses versus 2022. Total operating expenses for 2024 are currently estimated to be approximately $80 million. Net loss was 19.1 million, which included 3.2 million of non-cash stock-based compensation expense compared to a net loss of 28.2 million, which included 5.3 million of non-cash stock-based compensation expense. Net loss decreased 32% while test revenue increased 38%. Moving now to how we're thinking about 2024. We believe DMT volumes could be flat to modestly down for the first half of 2024 compared to the same period last year, primarily due to our focused on reimbursed tests and the impact in the field from our restructuring actions and the change in tactics. We'll continue to emphasize ASP and revenue growth. And lastly, a review of our liquidity profile and balance sheet. At year end, we had cash, cash equivalents, restricted cash and marketable securities of 59.3 million. Cash burn is estimated to decline to 55 to 60 million annually based on the fourth quarter 2023 run rate, a roughly 40% decrease from our net cash burn in 2022. We believe we have cash runway into the first quarter of 2025, not to exceed 12 months from today's 10K filing. In summary, our plan demonstrated sustained results in growing revenue during the second half of 2023 while operating with a leaner organization. Now I'll turn the call back to Brent.
spk04: Thanks, Kevin. Before we wrap up and move to Q&A, I'll share a compelling patient story that inspires us as we forge ahead. A patient was seeing her dermatologist on a monthly basis for severe acne treatment without any other concerns. During her last visit, she mentioned a mole on her arm that she hadn't noticed before. The clinician evaluated the mole and wasn't concerned, but because the patient was worried, a DMT was ordered. The test came back positive, indicating a correlation with melanoma. A biopsy of the lesion was then sent to a pathologist who confirmed it was melanoma, and the patient was referred to a surgical oncologist. The healthcare provider is still in shock that this patient may have otherwise walked out of the office. This story, much like others we hear on a regular basis, highlights the critical need for precision genomics as cancer is a disease of the genome and the current visual assessment standard is challenging, even for an expertly trained medical professional. The DMT helps clinicians evaluate higher risk lesions alongside other traditional tools. With that, I'll turn the call back to the operator for Q&A.
spk00: Thank you. As a reminder, to ask a question, please press star 11 on your telephone and wait for your name to be announced. To withdraw your question, please press star 11 again. Please stand by one moment while we compile the Q&A roster. The first question comes from Thomas Flatten with Lake Street Capital Markets. Your line is open.
spk14: Hey guys, appreciate you taking the questions. Just out of curiosity, I don't wanna clarify, Kevin, you said that you expect volumes in the first half of 2024 to be down relative to the first half of 2023. Did I hear that right? That's correct. Okay, so closer to where we were in three Q and four Q or a lesser reduction from the mid to high 17s?
spk03: Yeah, we're not providing specific guidance right now. We're happy with the performance in Q4 and again, where our updated strategy to prioritize reimbursed volume drove a 55% year over year ASP growth and a 38% year over year test revenue growth. Q4 was that second quarter of where we've achieved sequential growth in these top line metrics. So as we said, we believe the volumes could be down for the first half because of the impact in the field from the restructuring and the change in tactics. We have about 15 fewer sales territories now than we did in Q1 of 2023. We do plan to continue to emphasize throughout the organization our focus on driving ASP improvements, but providing any specific guidance right now remains difficult without having a trend for several quarters in payer reimbursement behavior and the sustained effectiveness of our updated commercial tactics.
spk14: Got it. And with respect to the $40 million reduction in OPEX relative to 2022, could you help us maybe spread those savings around? Is it kind of a pro-rata cut across the three OPEX lines or how should we think about that?
spk03: It would be fairly, I think, consistently spread as we saw within the fourth quarter results. So it is all in the up and down the organization where we've made cost saving and efficiency efforts. And so I think, as we said previously, looking at the fourth quarter of 2023 as kind of a benchmark going forward, that's a good kind of jumping off point for where we think expenses and costs will be in the future.
spk14: And then one final one, if I might. Was there anything, speaking to the Medicare penetration, was there anything specifically you did tactically to drive that number up or was this just kind of a natural evolution of the business where that started to get closer to where it should be in the kind of around about 50%?
spk04: Yeah, hi Thomas, this is Brett. I'll take that one. If you remember, there's quite a few tactics that we deployed starting in the middle of last year and they evolved throughout the year, but many of those were around the focus for the mix that comes in the door, reimburse tests and certainly a big portion of that is Medicare. If you remember, we changed comp plans for our field sales personnel to focus on revenue and reimburse tests versus strictly volume, which was historically how comp was laid out for them. We also provided them with the analytics and targeting tools to help them understand where most of their reimbursement was coming from. And on top of that, we reduced the number of targets that each rep was calling on so they can go deeper into each practice and all of that has sort of paid dividends in the form of Medicare reimbursement, but also just overall ASP.
spk14: Fantastic, appreciate you taking the questions, thank you.
spk00: One moment for the next question. The next question comes from Andrew Brockman with William Blair, your line is open.
spk11: Hey guys, good afternoon, thanks for taking the questions. Maybe just one on the major commercial payers. In the 10K, I think you call out, you believe there's a possibility to secure some sort of contract from them over the next 12 to 24 months. Can you maybe just sort of talk about some of the confidence behind sort of putting that timeframe out there or anything which has sort of changed over the last handful of months here, thanks. Yeah, hi
spk04: Andrew, it's Brett. We continue to have really good conversations with the national payers. We're happy with where reimbursement ended this past year adding 42 million covered lives and finishing about 45% of all covered lives for DMT. We did get, as you remember, three negative policy decisions last year from three of the nationals. We were having good conversations with one, but Trust2 is an opportunity for us when that's published in the next several months to go back to all the national payers and continue those conversations. And as we've said in the past, we're just optimistic because the economics of DMT are so strong for payers that we know they'll eventually draft favorable policy and cover the test.
spk11: Great, and then Brett, you sort of talked about reducing the target list for your commercial team. Anything analytically that you can share which sort of shows that the greater frequency and greater touch here leads to either greater utilization of the test or even movements towards more reimbursed tests for those providers? Thanks.
spk04: Yeah, thanks, Andrew. We're still learning a lot from the revised tactics last year, but one thing we know is that selling DMT in dermatology requires time and frequency in the field. And we revised the messaging with the salespeople to start with a clinical argument for DMT, making sure that dermatologists understand the clinical utility, the .7% negative predictive value that we showed in Trust2. Then we figure out where we can integrate it into the practice. So it's a non-threatening message that gets them to say, look, there's sometimes I don't want to do a biopsy and when I don't wanna do a biopsy, yes, I would use DMT. And whatever that percent of biopsies is, 20, 25, 30%, we work on integrating that into their practice so it becomes habit and just part of what they normally do. And that takes some time, it takes frequency, it takes a number of sales calls. And so that's why we think fewer targets allows for that to happen quicker.
spk11: I'll leave it there,
spk14: thanks guys.
spk00: One moment for the next question. The next question comes from Mark Macero with BTIG. Your line is now open.
spk09: Hey guys, this is Vivian on from Mark. Thanks for taking the question. So I guess on the ASP front, are there any health plan wins that haven't turned on yet? I think you alluded to some administrative and billing obstacles preventing payment where you do have coverage. So just any more granularity you could give there on what's preventing the payment,
spk03: thanks. Yeah, I believe for the most part, most of all of the wins that we had last year have started paying something. But there are certainly still upside potential in improving the payment rate. Because again, sometimes it's documentation, sometimes it's specific processes we have to follow to allow for better payment with them. So they are improving, but there is still more room for improvement in the focus on those efforts to improve it as much as we can.
spk09: Okay, perfect, thanks Kevin. And then just any trends and utilization per ordering clinician to call out. I think we've chatted in the past that it takes a certain number of tests that clinicians need to get through to get their first positive results and really understand the value proposition. So just anything else to call out there?
spk03: Yeah, no, I think as we said before, because we're trying to go deeper right now, the number of unique ordering clinicians in any quarter could be flat or even modestly down. But with that same rationale, we would expect the utilization to increase. Because again, if we're going deeper and making sure it's integrated in the practice, as Brett mentioned, making sure that the clinicians understand the clinical value and the best places to use the technology and how to get comfort to their patients with it. We do believe that it should drive increases in utilization on a per-doctor basis. And that's where we're focused right now. Instead of broad marketing and awareness, it's really going deep and trying to get advocates and trying to get them to understand where to use it and integrate it into their practice.
spk08: Awesome, thanks for taking the question.
spk00: One moment for the next question. The next question comes from Mason Keriko with Stevens. Your line is open.
spk12: Hey guys, thanks for the questions. Two quick ones up front for me here, if that's all right. Maybe on the news of discontinuing the TERT optional add-on assay, could you kind of talk about the cost benefit there from a COGS per test perspective? And second, you guys had previously talked about some ongoing projects to drive down COGS. I think some of those depended more on volumes and scale. Others were more project related. So could you just walk through where you stand on some of those today?
spk03: Yeah, hey Mason. So with TERT itself, again, what we assessed as part of the TRUST-2 data set is that there was limited improvement in some of the key statistical measures or performance metrics of the test when TERT was included. And we also have determined through getting feedback from clinicians who use our test that TERT didn't really impact clinical decision making too much. So the reason that we decided to simplify the DMT and stop testing TERT was just that, to simplify it and based on the patient need and how it's being used in the clinical practice. As a benefit to that decision though, we should get some improvement in COGS. TERT was a DNA mutation that was run on a separate piece of equipment and so that was the only use for that equipment. And there was also additional processing time and people needed to process those things. And again, part of the reason we also discontinued it is that we were only able to report out a test result in about a third of the time that was ordered or less. So we haven't quantified yet exactly what that will be because there will certainly be some direct cost savings from not having to use supplies and the labor. But as we're still working through what to do with the equipment and now we also have fixed costs that are spread to other parts of the processing. So it should provide some savings, but we haven't provided definitive detail on that yet. And then it relates to the other cost saving measures. So we'll continue to focus on all sorts of things, whether it's systems improvements, whether it's material costs related to the configurations or different things within the kits, labor efficiency automation. These are all things that we'll continue to work on as well as technology improvements. Some of them can go a little bit sooner than others. Some of them take some more work to validate and ensure that it doesn't affect how the test works. But we're committed to continue to improve the COGS profile. And as we saw just in Q4, we had just slightly lower volume than Q3, which meant that the fixed portion of the costs were spread over again, a slightly lower base than in Q3. But we're also able to reduce the COGS on a per test basis, about 6% in Q4 sequentially. And that's the lowest cost per test that we've had since actually moving into the new laboratory. So we're committed to improving it and we've already demonstrated some improvements to it and we'll put out some more information around TERT specifically once we get the change fully implemented.
spk12: Got it, thanks Kevin.
spk00: As a reminder to ask a question, please press star one one on your phone and wait for your name to be announced. One moment for the next question. The next question comes from Dan Brennan with Cohen. Your line is open.
spk10: Great, thanks, thanks for taking the question. Sorry, I joined a few minutes late and I just wanted to understand a little bit and you probably already addressed this. But in terms of the outlook for Q24, I don't think you're giving much, but I'm just wondering if there's any framework to at least consider from a price-volume standpoint how we might think about it.
spk03: Yeah, we're gonna continue to emphasize throughout the organization our focus on driving ASB improvements, but providing the specific guidance right now remains difficult without having a trend for several quarters in payer reimbursement behavior and whether or not there's the sustained effectiveness of our updated commercial tactics. So we're not providing any additional detailed guidance at this point.
spk10: Is it fair to think the streets got 20 million in revenue for 24 versus, they call it 15 million this year? Rather than be completely off sides, I mean is there any framework at all to think about magnitude or is it just impossible at this point?
spk03: It's very challenging and difficult at this point based on the factors we've just said. But as we said, we'll continue to focus the team on driving those ASB improvements to drive revenue improvements, which we were able to demonstrate in Q3 and Q4 with the change in tactics, be able to get some improvements there. So that's where the focus will continue to be, but yeah, we're just not providing detailed guidance right now.
spk10: And on the Trust2 study, I think you talked about it's really important to engage with the community. With payers, what kind of payers are you specifically looking to engage with and any potential timeline of review and decisions?
spk04: Yeah, hi Dan, it's Brett. Yeah, Trust2 is gonna help us with all outstanding payers that don't have a policy, a positive policy yet for DMT, specifically the Nationals. We think it's a large cohort, 20,000 patients, our highest in negative predictive value that we have to date of 99.7, but all of our publications show over 99%. So it will help with the majority of payers in the discussions that we're having to date. And we expect that publication probably in the next several months, so it's a really good opportunity for us to put that in front of payers and restart any negative policy decisions, but also continue the ones that we're having to date.
spk10: And just maybe one final one on that. So is NPV definitely the most important metric to consider? Like what else would the payers look at in the study?
spk04: Yeah, since it's a rule out test, and what clinicians are looking to do is just rule out the need for biopsy and further procedures, the negative predictive value is really, by far, the most important factor for us. It's what they point to as a rule out test, and we're pleased with that result. Great, okay, great, thank you.
spk00: One moment for the next question. The next question comes from Connor Chamberlain with Craig Hallam. Your line is open.
spk13: Hey, good afternoon. This is Connor on for Alex. Thanks for taking my questions. So you've been working on getting these commercial payers online for years now. Can you maybe talk about how Durham Tech has evolved their approach in talking with these payers over time?
spk04: Hey, Connor, yeah, we've been working a while to get payers on board, but if you remember, we went public in 2019, had a bit of a blackout with COVID, but quickly got back on track with payers adding 42 million covered lives last year, seven of the top 10 blues. So we're having really good progress. These discussions just take time, and they take more time with the nationals who tend to drag their feet and do a little bit more analysis. So the discussions are going well. It's impossible to predict when they'll come through, but Trust2, again, is a really good opportunity for us to put some strong data in front of these payers, and we're optimistic that we'll continue to progress throughout the year.
spk13: Great, and then just one more here. With current OpEx pushing about 80 million run rate for 24, and we're still getting minimal gross profit, just how do we make this math work?
spk03: So
spk14: we believe
spk03: we have cash running away in its first quarter of 2025, not exceeding 12 months from today's 10K filing date based on our cash on hand, our most recent cash usage, and our future operating projections. We're gonna continue to focus on driving ASP improvements to improve revenue, and we'll continue to focus on trying to find cost-saving measures and efficiencies wherever we can.
spk13: Great, thanks for the update.
spk00: I show no further questions at this time. This will conclude today's conference call. Thank you for your participation. You may now disconnect.
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