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Greetings, and welcome to MDxHealth's 2023 Q2 and Midyear Earnings Call. [Operator Instructions]. As a reminder, this conference is being recorded.
Before we begin, I would like to remind everyone that we 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 our filings with the Securities and Exchange Commission, specifically in the company's annual report on Form 20-F.
It is now my pleasure to introduce Michael McGarrity, Chief Executive Officer. Thank you. You may begin.
Thanks, Doug. And thank you all for joining us for our 2023 Q2 and midyear earnings conference call for MDxHealth. With me today is Ron Kalfus, Chief Financial Officer.
Following our strong first quarter results, our second quarter results further reflect our commitment to all stakeholders to delivering strong and sustainable growth. Our results and commitment, as always, are rooted in a consistent and unwavering focus on operating discipline and commercial execution.
Our efforts to drive growth are reflected in our expanded menu that now consists of three tests for prostate cancer. At the three key decision points in the diagnostic pathway for urologists and patients, all of which are now covered by Medicare and included in the NCCN guidelines.
In addition, we are seeing increasing demand for our Resolve mdx test for urinary tract infections, which was launched in 2022. As we anticipated, Resolve mdx is providing another source of consistent growth and expanding adoption based on its clinically actionable diagnostic results and the strength of our sales channel into urology.
We believe our results also reflect a unique balance of menu and excellence in laboratory service as well as significant leverage in our P&L to take the company to operating profitability and value creation for, again, all of our stakeholders.
Evidence of our belief is based on the following: our Q2 2023 revenue grew by 143% over Q2 2022. And when excluding the acquisition of GPS, our revenue increased 29%. We continue to execute on our integration of the GPS business. Specifically, we have completed the restructuring and integration of our sales team and are confident that this acquisition will make a significant contribution to our revenue growth, gross margin accretion, and path to profitability, which is consistent with our original thesis on the test fit within our business.
Finally, our focus on operating discipline is evident in our anticipated progress and accelerated our gross margin from approximately 42% in Q2 last year to almost 60% in this quarter. As I have noted, we expect this trend in gross margin to continue and drive a corresponding linear decline in our cash burn as reflected in our reported 48% or $8 million decline in total cash burn from second half 2022 to first half 2023.
With our operating fundamentals in place and our menu and sales team poised to deliver sustainable growth, we now believe that we will turn adjusted EBITDA positive in the first half of 2025. We are confident in our ability to execute on this view based on our top-line growth, improving margins, and breadth of our menu, all of which have positioned MDxHealth as an uncommon company profile within the precision diagnostic space.
I will provide a further update and view forward for 2023, but first, let me turn the call over to Ron for a review of our financial and operating results for Q2. Ron?
Thank you, Mike. As Mike mentioned, we are pleased to report our positive results for the first half of 2023. Revenues for the first half ended June 30, 2023, increased by 142% to $31.4 million versus $13 million for the first half of 2022.
Excluding GPS, first half '23 revenues increased by 34% versus last year. Our first half revenues of $31.4 million were comprised of $14 million from GPS, $12.4 million from Confirm, $3.7 million from Resolve with the remaining revenues from Select and Other.
In the second quarter, our revenues were $16.7 million, representing an increase of 143% over second quarter '22. Excluding GPS, Q2 '23 revenues increased 29% over Q2 2022. Second quarter '23 revenues of $16.7 million were comprised of $7.8 million from GPS, $6.7 million from Confirm, $1.6 million from Resolve with the remaining revenues from Select and Other.
Moving below the revenue line. Our gross profit for the first half of 2023 was $18.7 million as compared to $5.8 million for the first half of 2022. Our gross margins were 59.5% for the first half of '23 as compared to 44.4% for the same period last year, representing a gross margin improvement of 1,510 basis points primarily related to our product mix and the addition of GPS to our product menu.
Operating loss for the first half of 2023 was $16.5 million, a decrease of 3% over the same period last year, helped by our increased revenues and improved gross margin. Net loss for the first half of 2023 of $22.3 million increased by $4.2 million versus $18.1 million for the prior period, primarily from an increase in financial expenses, of which $3.9 million was a noncash fair value adjustment to the GPS contingent consideration, and the remainder was primarily related to an increase in interest expense from our debt facility.
Cash and cash equivalents as of June 30, 2023, were $39.5 million. Our total cash burn for the first half of 2023 was $16.5 million, down 48% sequentially from $24.5 million in the second half of 2022. We expect continued declines in operating burn in the second half of this year.
This concludes my brief overview of the results, and I will now turn the call back to Mike.
Thanks, Ron. Since joining MDxHealth four years ago, I have consistently maintained that our primary strategic objective is to create a world-class precision diagnostics company capable of delivering strong, sustainable growth with a clear path to profitability.
With this objective in mind, I would like to note three particular examples of our progress and commitment to meet our stated objective. First, we believe that MDxHealth will reach and report positive adjusted EBITDA in the first half of 2025 by driving strong top-line growth and continued operating discipline. We have in place the most comprehensive menu of personal diagnostic solutions in prostate cancer, favorable reimbursement for our test, and a sales and marketing team to drive growth and expanded payer coverage. These dynamics, along with our linear acceleration of gross margin, and corresponding reduction in cash burn serve as the basis for our outlook.
Second, we strive to be a growth company focused into urology. There are multiple factors that are driving this growth, including our increasing scale through our comprehensive menu and commercial execution. Our customer support to drive the customer experience in our end markets and the potential upside from successfully identifying outbound and inbound growth opportunities to pipeline.
I'd also like to note our access to and relationships with a very strong key opinion leader network, which plays a critical role to help drive awareness and quality of the MDxHealth brand. Based on these factors, we believe MDxHealth is fast becoming the company to partner with for our target customer base.
And finally, as detailed in our release, we have reached an agreement with Exact Sciences to amend our GPS purchase agreement with regard to the earn-out by deferring the commencement of the three-year earnout payment -- payment period by one year. As a result, the first earn-out payment will not be made until 2025, with the final earn-out payment due in 2027.
We believe this amended agreement reflects Exact Sciences belief in our business trajectory and commitment to sustainable growth. We also view each of the specific terms of the agreement noted in our release and filings provide a clear straightforward path to and plan for value creation driven by disciplined focus and execution. We have valued our relationship and partnership with Exact Sciences from the day of closing through integration and laboratory service, which will transfer to MDxHealth in 2024.
We believe this agreement reflects all of the fundamental assumptions associated with the 2-way diligence process, acquisition structure, and mutual cooperation and support between Exact Sciences and MDxHealth.
In summary, while the last four years have been complicated by the pandemic we have navigated and persevered through this difficult period with an unwavering commitment to achieve our primary strategic objective. Looking forward, our focus on execution and growth will continue to drive progress across all of our operating disciplines and will indeed serve the basis for our belief that MDxHealth is fulfilling its mission to become a leading high-growth precision diagnostics company with a clear path to profitability.
By successfully executing on this strategy, we also expect to attract a growing number of prospective investors and partners who will increasingly recognize MDxHealth's leadership position and the significant growth opportunities that lie ahead for our company.
To reiterate, we have built a culture driven by these principles of execution and growth modeled after my experience with the Stryker growth culture and dedication to three simple and straightforward driving principles. First, patience and quality first. Second, customers always. And third, take care of the sales force. They are frontline in our reputation for excellence that we are building, and they are supported by every operating function within the business. So, as we look forward, MDxHealth is committed to driving sustainable growth, which will serve as the foundation for value creation for all of our stakeholders, including patients, customers, and shareholders.
Thank you for your interest in and support of MDxHealth. And now I'll turn the call back to Doug for questions.
[Operator Instructions]. Our first question comes from the line of Mark Massaro with BTIG. Please proceed with your question.
This is Vivian on for Mark. I guess you briefly touched on the onboarding of Exact sales reps? I believe your commercial team now stands at around 70 all-in. So, I guess how should we think about the progress made on the cross-selling initiatives? And should we think about these reps having reached full productivity here? Thanks.
Yes, Vivian. So, we have 70 total people in the field, of which approximately 54 are direct reps. and as you know, a number of them did come over with the GPS acquisition. Yes, we're confident at this point as we make the turn at the midyear, which was our anticipated and stated goal that we have the team cross-trained. We've restructured all the territories, incentive comp. And yes, they're in production mode.
And we believe that the leverage we have of our menu will become evident as we go forward. And actually, in Q1 and Q2, we saw the early signs of that. So yes, we're very confident we have the right team, the right people, the right culture, and the right strategy to continue to drive growth.
Okay. Perfect. Understood. And then on the coverage win with Cigna, can you just remind us how many covered lives this represents? And then I think I saw in your press release that the coverage for Select under Cigna should kick into the model in Q4. And as far as Confirm and GPS coverage, when should we think about those ones to kick in?
So, I want to make sure I understand your question. So, Cigna's covered lives is approximately $15 million. We -- could you repeat the second part of your question? I didn't pick that up.
Yes. I think this is on the press release that Cigna coverage for Select should go live in Q4 this year. But where does Confirm and GPS...
They are currently already covered by Cigna.
Okay. Got it. Okay, perfect. And then maybe if I could just squeeze in one last one. The revenue guidance appears to be a little bit back-half-weighted. I think you've previously mentioned to us that it excludes the United wins. So, maybe just could you refresh us on some of the drivers in the back half that you're expecting to come online and just see particularly strong in these last 2 quarters?
Yes, Vivian. We like our trend on the revenue, and we are reaffirming our guidance of $65 million to $70 million. So, that's clear that will include a pickup here as we go forward. We're not attributing any of that to the United coverage. We didn't anticipate the United coverage at the beginning of the year.
And so, we view that in coverage in and of itself doesn't drive adoption revenue necessarily. That would more likely show up in our ASP. So, we think we're driving all the top-line aspects and are confident again in that guidance of $65 million to $70 million.
Okay, thank you for taking my question.
Thanks. Vivian.
Our next question comes from the line of Dan Brennan with Cowen. Please proceed with your question.
Great thanks for taking question guys. Congrats on the quarter. Maybe just on the first thing on the guide for '25 for the adjusted EBITDA positive in the first half. Just what do we think about the levers to get there from both a gross margin basis on an OpEx basis?
Dan, we think OpEx, as I've commented, I think we can hold OpEx pretty straight away, right? We like the size of our -- obviously, the majority of that spend is driven by commercial execution. We like the size of our sales force. We think it's -- or our field sales organization, I should say. And we think it's rightsized to take us through the next few years of growth, definitely through that period of 2025. And the rest of our OpEx is really paced really strictly by scale.
So, just volume into our laboratory as we grow the business. So, we're confident that our OpEx does not need to -- our sales team doesn't need to double. Our OpEx doesn't need to materially accelerate, and that's part of the leverage we have in the P&L.
And the second part of your question as far as the gross margin, we've stated our goal in the very clear -- we have clear visibility to a $100 million business at a 65% gross margin and profitable. And we're continuing to believe that and putting a timeline around that.
Okay. On the exact agreement – so, obviously, you get yourself another year. I think the earn-out now went up by around $12 million, if I read it correctly, quickly, and you kind of issued -- gave them a little stock and there's warrants. Just kind of how did you think about costs from the additional earn-out versus buying yourself an additional year? Just kind of walk through the mechanics of kind of how the agreement works for mdx.
Yes, Dan. So, we think -- I won't speak for Exact Sciences, but we're confident and we believe it's very favorable to -- they are partners, that's clear, I think. And we think that we both came away with an agreement that we think is good for the business and for all the stakeholders.
So, moving the earn-out period back a year obviously is very helpful for us, right, as we drive revenue, gross margin, and turn operating profitable our expectation based on what our comments today, our view forward is that, that will all happen prior to the initial payment in 2025 of an acquisition completed in 2022. And we think the combination of the considerations from our view is, a, reasonable from the total earnout increasing to a cap of 82.5%. And then I believe that there -- a belief that the equity component of it hopefully speaks for itself.
Got it. And then on the full-year guide, great reiteration on the top line. Just I don't think there's an explicit guide for the burn. Obviously, you have the long-term kind of outlook, but can you just walk us through a little bit how we should think about the burn progression in the back half of the year?
Yes, Dan. So, we expect, as you saw, we think what we saw in the back half of 2022 in the first half of 2023 is pretty much what we expected and communicated that we expected to see. We'll expect that burn to continue to decline, obviously driven by the revenue growth and the gross margin acceleration.
So, we expect -- we're not guiding to cash burn. But if you put together our view that, that continues to decline and that we flipped positive in the beginning of 2025. I think that would suggest, and we believe that we can continue to drive cash use down by quarter as we go forward.
Got it. And then maybe a final one, just the components of the revenue contribution for the year. I don't think you've give explicit guidance, but just any way to think about like GPS is a little better than what we were looking for this quarter. UTI was good, was a little bit light, like any color how do we think about the back half of the year by product implicit within your revenue guidance?
Thanks, Dan. Yes, our expectation from our sales team is that they're driving growth in each product of our offering. Obviously, for Confirm and Select, we saw good sequential growth in GPS in Q2. In the Resolve, we're very confident that the growth trends there will continue. So, that's our expectation of the sales team. That's what they've delivered in Q1 and Q2.
Obviously, we expect some seasonality in Q3, but for each of those menu items we expect to drive growth and take us to that $65 million to $70 million in revenue, confidently in 2023.
Great. Michael thank you.
Thank you.
Our next question comes from the line of Andrew Brackmann with William Blair. Please proceed with your question.
Hey guys good afternoon. Great update here. Maybe just on Confirm and GPS, can you maybe just peel back the onion there a little bit around the drivers anything you can maybe tell us around sort of same account sales or sort of deeper utilization within your current accounts versus sort of the new account win now that you added a broader portfolio?
Yes, Andrew. That's exactly what we're focused on when you think about our sales organization. So, the real -- a lot of the rationale and strategic rationale for the GPS was that we had confirmed on the other side of initial biopsy for negative initial biopsies by bringing the GPS and we now stand as the only company that can be positioned post initial biopsy and offer a clinically actionable diagnostic for both positive and negative initial biopsy.
We took over new reps from Exact Sciences. They were obviously had a lot of experience in GPS. Our MDxHealth reps had a lot of experience in Confirm. So, the task was to cross train and drive leverage of that combination, and we think that Q1 and Q2 showed initial progress there. We would expect that to continue.
And kind of your embedded question is right also that we'll probably get a couple more quarters and then begin to speak to specifics around multiple test utilization within our customer base. But we -- everything we've seen I would say, validates our diligence and our thesis on how this would fit with our menu. And we're really confident in our sales team is hopefully is evident and we expect them to continue to deliver growth with each product line or with each menu offering.
That's great. And then maybe -- just on the competitive front here, specifically around sort of the GPS test. Anything that you can maybe tell us around sort of changing dynamics with that competitive environment? It seems like most of the players here are experiencing a pretty solid backdrop, but anything you might be able to tell us?
Yes. So, we have a clear view of the competitive landscape with the GPS. So, we have two main competitors. Obviously, I'll go ahead and name them, [indiscernible]. What we feel our GPS test is very strong, and we think best-in-class positioned for the majority of the patients, which are not high-grade post-radical prostatectomy patient population.
So, I think the evidence we can point to is the United coverage decision, which kind of uncommonly called out the GPS test to be covered and actually named the other two tests not covered. So, we're really confident in the strength of our value proposition, where the majority of patients come out after initial workup and biopsy. And there's a lot of data out there in that higher-risk radical prostatectomy category. We're focused on the -- in the majority of the business.
We also believe that we've got studies and data coming that can continue to advance our position as far as the levels of validation. But we like our position in the market, and we're confident that getting started here with the first couple of quarters show our ability to grow within that competitive construct.
Our next question comes from the line of Jason Bednar with Piper Sandler. Please proceed with your question.
Hi, thanks. Congrats nice quarter here, Mike and Ron. I wanted to start and really pick up on some of the questions that were already asked. But maybe to drill in deeper on Confirm mdx, the volumes and volume growth were really strong, definitely better than what we were thinking. Was there anything unique in the quarter we should be thinking about as we look to model ahead in the second half of the year.
Mike, I think you mentioned maybe taking into account some seasonality. I don't know if that's a Confirm comment or across the menu that you're referencing. I think it's probably across the menu. But -- just -- and then the other piece there, do we -- do you think we have signs here that doc visits and proactive screening is finally starting to take a turn for the better?
Yes, Jason, to the first part of your question, nothing specific to Confirm. Other than what I commented on is that there's real value in having -- the GPS, I don't like to refer to them as GPS and mdx reps, but the previous GPS reps came over with knowledge and relationships and access and adoption from that test into their customer base. And we have the same on the Confirm side. So, if we're able to execute on my previous comment of driving the leverage of those two tests, we're confident that they'll both continue to grow.
Confirm, obviously, it looked good in the second quarter. My comment on Q3 is somewhat just based on experience, and I think it's not unique to us, that you always just want to see how Q3 goes. And it can be driven by seasonality. And what we're seeing, to your second part of your question, as far as patient flow a reminder during the pandemic, PSA screenings were estimated to be down 50%. So that patient -- that patient population or excess capacity has to come back through the system.
And it's coming back through to fixed capacity which has declined based on staffing shortages through the pandemic. So, we see those coming back. Everything reversing, but it's not going to happen over a quarter or two, which we don't necessarily view as negative. So, if we -- I've commented, I think that we would expect that to occur over a number of quarters. We still think that expectation is reasonable.
In Q3, just a little bit of pent-up vacation demand. This is just anecdotal. But we're confident that there won't be anything material that we don't expect. In the second half of the year, clearly, we're confident in to get within our guidance.
Excellent. And then maybe one other follow-up on the adjusted EBITDA commentary being positive in the first half of 2025. It's great to have that line in the sand out there. Wondering if you could give us a sense of your view on capital needs between now and then as we just calibrate cash assumptions over the next 18 months to 24 months?
Yes. So, I think our balance sheet is in a good position, right? We finished with over $39 million. And obviously, we're counting on and have visibility to that cash burn continuing to decline coupled with the gross margin acceleration and then our revenue growth. So, we're confident in that view is based in our view that all three of those will continue to drive.
Our sales team will execute on top-line growth. You have to remember that we came into 2022 with one test generating revenue. We came out of 2022 with four test generating revenue and all covered by Medicare. That's a lot of the growth leverage that we have, and it runs right through the gross margin. So, the gross margin accretion is based on coverage for -- coming over Select for Medicare. Confirm, which carried a strong margin. GPS coming over, which was accretive to our gross margin and our Resolve test. So, all of those are pushing, the mechanics of our view of EBITDA positive and are part of the execution to get there.
Okay. I guess maybe just to follow up then. I mean it doesn't sound like you have any plans or needs to secure additional capital between now and first half of '25. Or are you just kind of leaving that kind of as an open question for now, and we can revisit that down the road?
How about both?
Got it.
No, we feel confident -- is that fair? We feel confident in our balance sheet and its ability to take us through that profitability period. And candidly, to refer back to Dan's question, this was a lot of the basis for and the rationale for pushing out the sequence of the earn-out period. So, we think it all -- we believe it's coming together to really support the business from a top line, from a P&L, and from a balance sheet perspective.
Got it. Very helpful, thank you.
Our next question comes from the line of Thomas Vranken with KBC Securities. Please proceed with your question.
Hi, thanks for taking my question. Congratulations on the solid commercial results. Two questions from my side. First one is to dig a little further or build a bit further on the renegotiation of the earnout payments with Exact? Because there was also a loan that you had with innovators to finance that. Just wanted to know your current thinking on that given the fact that I believe that one was set to mature in 2027 as well.
Thomas, thanks for joining. We are -- so the Exact earnout in the Innovatus facility, you're connecting them because obviously, we had access to an additional $35 million. So, the Innovatus facility is $70 million. We drew $35 million with the acquisition of GPS, just to -- the remaining $25 million of that went to the upfront cash payment. The other $5 million of the $30 million payment was taken in shares of MDxHealth by Exact Sciences, and then the $10 million was to pay off a previous loan we had. So that was the $35 million taken down.
So, there is $35 million remaining. We believe that gave us optionality as we were putting it together for the acquisition. We believe our balance sheet is in a strong position now strengthened by this amendment to the purchase agreement. And as far as the principal period of the loan that you -- of our debt facility that you referred to in 2027, we'll -- as we get closer to that, I'll just say we're confident that we have optionality there as well if you think about the potential to restructure. So, we like our path forward, and we think it's pretty clear.
Okay. Thank you. And perhaps also to dig a little deeper into the Select test. So, I know that this one has obtained Medicare coverage as well. I just wanted to have a bit of your view on where you stand with regard to private insurance coverage. How do you look at that today? And what is a bit your outlook for the coming months and quarters there?
Yes. Thomas, we expect Select to your question, to follow the same kind of profile that our other tests have, right, which is commercial and private payer coverage, we have for Select. Actually, you've seen that over the last few quarters, we've had revenue, and that's actually been accelerating with Select with non-Medicare commercial adoption. Our coverage team is clearly delivering on their mandate to drive coverage across our menu, which, as I noted, we see that likely being reflected in ASP accretion.
But Medicare is the catalyst, right? So, Medicare, whether regardless of the test is usually and traditionally, the driver for commercial payer coverage. We expect Select to follow that same profile. So, as we go forward over the next few quarters, we expect to see continued coverage, and with Select in particular for commercial payers to follow.
Okay. Thank you.
Next question comes from the line of François Brisebois with Oppenheimer. Please proceed with your question.
Hi. Just a few here on my end. Can you just maybe talk about the change, and it broke up a little bit on my end in the prepared remarks, but maybe the changes from expectations that kind of led to this delay and payout on the agreement there with Exact. And then just secondly, can you just discuss a little bit about seasonality in your business? And what -- what are the main drivers of seasonality in the third quarter here? Thank you.
Yes. So, I'll take the second part first. I'm not calling out anything specific to us with regard to seasonality. I just think in the diagnostics space, Q3 can see some seasonality, we're not projecting anything out of the ordinary.
As far as the basis for the amendment to the Exact agreement, I think it was really fortunately, we do view them as a partner and they've conducted themselves as we believe we have a partnership, and that's been evident. And so, this was part of that partnership. I think that we view this as is a favorable amendment for MDxHealth based on our path forward. And we're confident that, that's the outcome in the end product of this amendment.
Thank you.
There are no further questions in the queue. I'd like to hand the call back to Mr. McGarrity for closing remarks.
No additional remarks, Doug, thank you very much, and thanks to all of you for joining and for the questions. We really appreciate it. We look forward to a follow-up. Everybody, have a good evening.
Ladies and gentlemen, this concludes today's teleconference. Thank you for your participation. You may disconnect your lines at this time, and have a wonderful day.