Dermtech - Q2 Review

Hi All - Here’s my review to Dermtech’s latest report.

1. Performance/numbers. Several QoQ accelerations at play ---- YoY is meaningless in this biz as Dermatologists were essentially closed in Q220. Billable samples were up 25% QoQ (13% prior Q). Unique HCPs were up 19% QoQ (15% prior Q). Quarterly tests ordered per HCP was up from 7.8 to 8.2. All in all, I think the numbers are good. But, at the end of the day, given 4.5M Melanoma Biopsies per year ---- Dermtech did 11,750 this Q. These numbers need to get a *lot larger* to get super interesting. Gross margins were also up this Q ---- John thinks that the long term can be 70%+ GM. Lots to prove, but I think the story has potential.

2. How do Dermatologists have that “aha moment”? Consider the typical use case where they have that moment. Biopsy showed negative ---- but PLA+ found a Melanoma. Meanwhile, the Dermatologist was going to re-evaluate the mole in 6-12 months. Per John Dobak – “These types of experiences are often catalysts that accelerate utilization of our melanoma test bioclinician, as it helps them realize how the sensitivity and accuracy of our platform can potentially save lives.”

3. They have increased their target Dermatologist population from 5,000 to 10,000. The total number of practicing dermatologists is 13,000.

4. Expanding sales to 72 sales people and 9 directors. Essentially double the number they have been operating from since Q420. This is going to be a key enabler. Takes about 9 months to 15 months to onboard sales people, well. I bet their traditional 9 to 15 month onboarding is faster given their momentum/products.

5. Ray Bassi – their new Sales VP has two decades of Derm sales experience. He was at Allergan for 18 years. He knows a lot of people ---- and the belief is that the time to market on acquiring salespeople is faster, because of him/his connections. We shall see if that thesis plays out.

6. Primary care. 30K PCPs (in addition to the 10K Derm population). Dermtech is seeing similar claims volumes from PCPs as small Derm practices. Building strategy for this market ---- inclusive of cross selling by sales channel + inside sales + focused PCP sales people + primary care networks.

7. Primary care networks. Pilots are going on, now. Each of these primary care networks will bring 300+ PCPs. With that said, I’m unclear how much value these networks bring ---- would imagine that each doctor still needs training/handholding. Particularly as Derms are trained a certain way ---- validation from “corporate” is one thing but true belief/first hand knowledge is another…. With that said, lets see what the Pilots suggest. Could be a very good thing.

8. Belief is that Carcinome will do very well w Primary Care. Also belief is that PCPs are interested in the Melanoma product. But much more interested in non melanoma (e.g., Carcinome) as a routine product ---- for basal cell carcinoma and squamous cell carcinoma. PCPs have challenges in Derm referrals. Further, there is patient reluctance to take referrals ---- Carcinome can help. The timing to this product is H122.

9. Started Piloting a telemedicine product in Florida. Dermtech Connect app for IOS and Android. Store/Forward for Patients in Florida.

10. Payor access. Recently contracted w smaller payors w 400K in Northeast w another 350k in contracting stage. This in addition to the recent large wins they’ve had ---- BCBS in Texas, California, Illinois. They also continue to work with other national payers and multistate blues plans. RE Cigna ---- Dermtech has turned in everything Cigna wants…and are in “wait mode”. I do realize/recognize these things take time. Remember, that when the rumor of Cigna was out there ---- the equity popped 30% in one morning. No idea when this announcement will happen, but I feel like it’s just a matter of time. Particularly as they have doubled their salesforce ----- and will be sending a lot more samples in and a lot more claims….. Cigna will be sort of forced into making the call.

11. Luminate. Will assess ultraviolet related gene mutations. Dermtech is in the process of optimizing it now. They have 1300 subjects enrolled. In this quarter, the expect a final validation of the product —— and expect to be in market in Q4.

12. Dermatologists may be more closed given Delta. Kevin Sun mentioned that Dermatologists are around 50% open given Delta. With this said, they also now have history on how to navigate the Pandemic.

13. Valuation. You can’t *really* value this business as it’s still early days having captured less than 1% of the Melonama annual Biopsy TAM. But, if you play things out. 70 Sales reps at near term scale. 120 samples per month per rep (currently at 95). ASP of $500 (currently at $247, but everyone expects this to ramp up significantly). Then, at current valuations, this is trading at 20 times future state sales. I realize that this is flawed, but again, this is very early days. Also, this doesn’t account for the Carcinome product or Luminate product revenues. Nor does this account for material growth in PCPs and Telemedicine. Lot of opportunity on all these fronts.

14. All in all, lots to like. Risk is all around execution ---- onboarding sales people, new products, payors, and developing more of a “consumer”/pull through type brand. I don’t buy the theory that Dermatologists won’t come on board —— I’ve heard at least one Dermatologist say that they add their own service fee on top of PLA to make a margin. And, at the end of the day, this product nets more patients to a Dermatologist, not less. Lots to like ---- and in particular, John Dobak comes across as very impressive and trustworthy.