MDxHealth SA (NASDAQ:MDXH) Q1 2024 Earnings Call Transcript

MDxHealth SA (NASDAQ:MDXH) Q1 2024 Earnings Call Transcript May 4, 2024

MDxHealth SA isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Good morning, ladies and gentlemen, and welcome to the MDxHealth First Quarter 2024 Earnings Call. At this time, all lines are in a listen-only mode. Following the presentation, we will conduct a question-and-answer session. [Operator Instructions] This call is being recorded on Wednesday, May 1, 2024. Before we begin, I would like to remind everyone that the company will make forward-looking statements during today’s call. Whether in prepared remarks or during the Q&A session, these forward-looking statements are subject to inherent risks and uncertainties. These risks and uncertainties are detailed in the Risk Factors section of the company’s filings with the Securities and Exchange Commission, specifically in the company’s annual report on Form 20-F. I would now like to turn the conference over to Michael McGarrity, Chief Executive Officer. Please go ahead.

Michael McGarrity: Thanks, Constantine, and thank you all for joining us for our First Quarter 2024 Earnings Conference Call for MDxHealth. With me today is Ron Kalfus, Chief Financial Officer. I am pleased to report that our business continued to generate strong top line performance in the first quarter of 2024 with revenue growth of 35% compared to the first quarter of 2023. Our results reflect our continued focus on commercial execution and operating discipline, which we believe will drive sustainable growth through 2024 and beyond. On our last call, I noted our strategy of creating multiple sources of growth. That proved to be the case for the first quarter of 2024. And in a moment, I’ll provide greater detail on some of the key factors that helped drive our strong performance.

But first, I would like to comment on the steps we have taken to further strengthen our balance sheet and support the execution of our growth strategy. Today, we announced a $100 million financing agreement with OrbiMed, of which $55 million has been drawn, and which enables us to refinance our former debt facility and significantly extends our cash run rate well through our projected turn to adjusted EBITDA profitability in the first half of 2025. We are obviously quite pleased to have the financial support and considerable commitment from OrbiMed, a leading health care-dedicated fund, which we believe reflects the significant growth opportunity for our company and the underlying positive dynamics in our target markets. And Ron will provide details of this financing later in the call.

Now a few brief highlights from our results that support our view that our growth trajectory is sustainable. We reported first quarter revenue of $19.8 million, an increase of 35% over the prior year period. Of note, and as I have consistently stated, we have two levers of revenue growth with our sales team driving unit adoption from our urology customer base; and our market access managed care team driving coverage, which shows up in our average sale price. In Q1, we clearly delivered on both levers with billed prostate volumes rising to over 12,000 billed tests, which represents unit growth of 16% year-over-year, with pricing and Resolve growth covering the rest. We believe this is an uncommon mix of strength and execution from our commercial team and are confident it is quite sustainable.

These two important metrics clearly underscore the growth opportunity ahead for us as we continue to expand our offering and build our market-leading position in precision urology diagnostics. We recently communicated our menu addition of our hereditary germline test that will augment our comprehensive menu of diagnostics in the pathway of prostate cancer. We received our first clinical samples at the end of Q1 ahead of our expectations, and now expect revenue contributions from the test in Q2 versus our previous view of second half of 2024. As an important fact to note, this offering supports clinically actionable decisions for both the patient and clinician at multiple points in the often confounding diagnostic journey for patients. hereditary germline testing, as with all of our prostate cancer diagnostics, is both covered by Medicare and included in the NCCN guidelines.

As with any growth opportunities we consider, we undertake a very rigorous and disciplined diligence process to ensure that new product will fit seamlessly into our commercial focus and bring value to our customer base. In evaluating such opportunities, it is of note, as was the case with the success of our Resolve test, that these drivers of growth most often come from our customer base as urologists increasingly turn to MDxHealth for solutions based on our reputation and influence among our urology customers. Our growing reputation, we believe, reflects our commitment to best-in-class laboratory service, customer experience support and patient advocacy. These developments, both individually and collectively, serve as the basis for increasing our 2024 revenue guidance to $83 million to $85 million from the previous $79 million to $81 million, which represents 20% year-over-year top line growth, which we view as a long-term sustainable goal.

These dynamics underscore our confidence in turning adjusted EBITDA positive in the first half of 2025. We have clear visibility to our use of cash declining over the coming quarters, coupled with our revenue growth and operating discipline. And we’re excited to deliver that metric in a few quarters. In a moment, I’ll provide some closing comments on the considerable progress we have made as well as our view of the future. But first, let me turn the call over to Ron for a brief review of our financial and operating results for Q1. Ron?

Ron Kalfus: Thank you, Mike. As Mike mentioned, today, MDxHealth closed and funded $55 million under a new loan and security agreement with OrbiMed Advisors, which replaces the company’s existing $35 million outstanding under our current debt facility. Furthermore, at our option, an additional $45 million can be drawn from OrbiMed, consisting of a $25 million Tranche B and the $20 million Tranche C. The B and C tranches can be drawn in 2025 and in 2026, respectively, at our discretion, subject to certain conditions. On to our first quarter results. We are pleased to report strong top line growth in the first quarter of 2024. Revenues for the first quarter ended March 31, 2024, increased by 35% to $19.8 million versus $14.7 million for the first quarter of 2023.

All of this growth is organic and reflects greater market penetration of our full line of tests into the large addressable market through outstanding execution of our sales and marketing team. Revenue from our prostate cancer tests made up approximately 85% of our Q1 2024 revenue. Moving below the revenue line. Our gross profit for the first quarter of 2024 was $12.1 million, an increase of 38% as compared to $8.7 million for the first quarter of 2023. Gross margins were 60.8% for Q1 2024 as compared to 59.3% for Q1 ’23. Operating loss for the first quarter was $6.6 million compared to $8.7 million for the first quarter of 2023, representing a reduction of 24%, driven by top line growth, improved gross margins and continued operating discipline.

Also of note is that we were able to drive a 35% growth in revenue with only a 7% growth in operating expenses, which was largely driven by sales commissions on that growth. This is a testament to the operating leverage we are now generating and believe is sustainable. Cash and cash equivalents as of March 31, 2024, were $14.5 million. This concludes my brief overview of the results, and I will now turn the call back to Mike.

Michael McGarrity: Thanks, Ron. Over the past few years, MDxHealth has evolved to become a premier growth story in precision diagnostics. Quarter after quarter, we are driving revenue growth and operating metrics toward profitability that far exceeds the secular growth rate within the clinical diagnostics sector. This progress is rooted in both the positive underlying demand we are seeing in our end markets and our team’s solid execution. This process has been catalyzed by expansion of our menu, from just a single test generating revenue at the beginning of 2022, to now four prostate cancer diagnostics, all of which are covered by Medicare and included in the NCCN guidelines. This menu expansion, carefully and thoughtfully conceived of with our marketing and KOL partners, coupled with the strength of our sales channel, altogether provide access to a nearly $5 billion U.S. addressable market.

It is important to note that our adoption and penetration has validated this TAM as accessible and viable, serving to drive considerable growth in the near and long term. Our view of growth is also supported by empirical evidence in the market. The increasing diagnosis of prostate cancer, particularly at an earlier stage of disease; coupled with greater appreciation by clinicians and patients of the clinical value of our advanced precision diagnostics at each point of the pathway, all drive acceptance by both patients and clinicians to guide optimal diagnostic and treatment options. In fact, I think it’s reasonable to say that men’s health in the urology segment, and prostate cancer in particular, is where women’s health and breast cancer were maybe 25 years ago from both a public and clinical perspective.

In our view, the earlier diagnosis of prostate cancer, along with the use of more precise diagnostics, are two trends that will only accelerate over time. And MDxHealth is exceptionally well positioned to benefit from these market dynamics. Finally, I would also like to note our relationships continue to improve and expand within the medical community. Our partnership with urology customers has always been best-in-class. However, over the past couple of years, we have also recognized and embraced pathology is a key partner in driving further adoption of our menu. This evolution is actively supported by our sales and marketing teams who have cemented a KOL network in pathology that complements the positioning of our menu and our overall growth strategy.

In summary, our company is positioned in the right end markets and leveraging best-in-class technology and customer service to position MDxHealth as one of the most widely recognized high-growth companies in precision diagnostics. And with the capital now in place to support our long-term growth, I believe our future is brighter now than at any point in our company’s history. As always, we carry a great deal of responsibility to provide value to all of our stakeholders, including patients, customers, payers and shareholders. So thank you for your interest in and support of MDxHealth, and now I’ll turn the call back over to Constantine for questions.

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Q&A Session

Operator: [Operator Instructions] Your first question comes from the line of Andrew Brackmann from William Blair.

Andrew Brackmann: All the color on this update. Maybe just to start here on the increased guidance for the year. Obviously, I think a lot’s going well for you guys on sort of the underlying basis. But can you maybe just sort of parse out for us the drivers of that increase? How much of that relates to the hereditary kind of testing launch and versus just sort of the overall better trends that you’re seeing in the quarter here?

Michael McGarrity: Yes, Andrew. No, we see, we have seen, and we expect to continue to see, balanced growth across our menu. So while we’re very encouraged by the germline initial acceptance, the basis for taking the guidance up is the fundamental menu and adoption of our pathway to the points that I commented on. And we think we’ll continue to see that through the quarter. I mean, our Q1 revenue growth was 35%, very balanced across our menu without germline. We expect that growth to continue. And at the midpoint of our new guidance, we’re at 20% growth. So we view that as reflecting our key and core prostate cancer menu.

Andrew Brackmann: And then on the financing, it appears that I think — and I think you said this, it takes you to cash flow positivity. But maybe just sort of also talk about the flexibility it provides with respect to the contingent payments to Exact Sciences. And maybe just sort of refresh us on how you’re currently thinking about those obligations and sort of the pathways that you have available to you.

Michael McGarrity: Yes, Andrew, we’re very confident and obviously appreciate the support and view from OrbiMed on the fundamentals of our business. Your comment about our earnout with Exact, so I’ve commented before that they are — it’s really a partnership there, and there is a component of the earnout whereby we, at our discretion, can push cash or equity to Exact Sciences up to 7.5% of the company. So we’ll be opportunistic as we go forward. And we do have, as you noted, a significant now in place flexibility to operate and to accelerate our growth going forward. And we believe that our — everything is in place at this point to take the company really all the way through, and we’re excited to continue to deliver results. That’s the focus of our operating team.

Andrew Brackmann: Perfect. Maybe if I could just sneak in one more here just on LDT regulation. Obviously, I think that read positive for you all when that came out a couple of days ago. But I just sort of thinking about future test launches or product modifications. Can you maybe just sort of talk about how that final rule might change things from a regulatory or cost dynamic for you guys moving forward?

Michael McGarrity: Yes, Andrew, we — I don’t want to say that — we’re obviously encouraged by what came out. It’s candidly what we anticipated just based on the body of evidence that we have in place with our menu from a data, clinical and scientific benefit, Medicare coverage, NCCN guidelines. And we’ve — I’ve always emphasized New York State approval as maybe the highest bar there is. And clearly, they lean on that as well. So we believe that all the criteria we have in place has been met. So that does give us relief as we go forward. To the second part of your question, I think it does two things that we also view very positively. Is one, it creates a significant barrier to entry for competition in our target markets and in our expanded menu offering.

And to the other part of your question, we always look at, and based on company experience and the challenges with coverage and guidelines and approvals, that we look at that at every opportunity we consider going forward, that those have been derisked. So we don’t — it doesn’t change our strategy of execution, our view of growth. And really we believe insulates us from a competitive perspective in the market for the foreseeable future.

Operator: Your next question comes from the line of Jason Bednar from Piper Sandler.

Jason Bednar: Congrats on all the updates here. Want to pick up on maybe some of the same topics Andrew was referencing. I’ll maybe focus on the EBITDA profitability time line. That first half ’25 profitability seems even more likely now. But I also would think of maybe there’s a chance to come sooner than what you previously thought in light of that revenue strength that you’re seeing here. And also, as Ron, you referenced the operating expense structure just continues to grow at a pretty modest rate. So maybe help us out, why not adjust that target alongside the bump in revenue guidance this year? Or are there just other investment decisions that you’re not contemplating in light of that revenue strength?

Michael McGarrity: Yes, Jason, I think our view has always been, if we put something out there, our expectation is that it will be met or exceeded. I think that’s the way we view our turn to EBITDA profitability in Q1 or Q2 of 2025, is what we’ve communicated. We’re very confident in that. I think I would leave it there right now. But our inside expectations are, as you know, higher than maybe what’s on The Street. And so we just focus on the execution. But this clearly, I think, cements our view that our business is a few quarters from really looking, I think, uncommon in our sector. At the revenue rate, at the growth rate, at our ability to hold our OpEx and be profitable from a P&L perspective, we like where we’re going. And we think we’ll look very strong as we look at the market opportunity.

Jason Bednar: Yes. Absolutely. I couldn’t agree more, Mike. Yes. Andrew was asking, too, about germline. And maybe that — with that contribution within your guide, it doesn’t sound like you really want to break out maybe the components of the kind of the $4 million bump to the midpoint revenue guidance this year. But maybe ask a different way on germline. What is — how should we think about the exit — revenue exit rate of that test from — exiting ’24? really just as we start thinking about building this contribution in for 2025.

Michael McGarrity: Yes, Jason, I think I want to make sure that the move on guidance wasn’t based on our germ line. We just — we were very encouraged that we received our initial clinical samples. I think for me, candidly, it validates the diligence that we did and do on these types of opportunities, and that really is based in our customer base, right? We don’t make these decisions inside, right? It’s all done in consultation with our customers and our key opinion leaders. So that, we feel very positive about. But the basis for the guidance is our fundamental menu and sales execution. So as we look out, I don’t want to guide to a specific product. But are we confident that we can drive adoption, sustainable adoption, into our customer base?