Wanted to send along my thoughts around the latest report. Drop me a line with your thoughts ---- still early days at Dermtech…
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.
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.”
They have increased their target Dermatologist population from 5,000 to 10,000. The total number of practicing dermatologists is 13,000.
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.
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.
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.
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.
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.
Started Piloting a telemedicine product in Florida. Dermtech Connect app for IOS and Android. Store/Forward for Patients in Florida.
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.
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.
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.
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.
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.
Great post. I just wanted to mention/clarify something.
“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.”
Perhaps when you say they have doubled their sales force you meant will be doubling it soon. Correct me if I’m wrong. On the call, they mentioned that they have only added two or three people since last Q (I was actually surprised when they said that). If I remember correctly they are at 42 or 43 (up from 40 last Q)? I see that your valuation was based on 70 sales reps so I wanted to clear that up.
The goal is to have 75-80 “by Q4”. It wouldn’t surprise me if they miss this target due to interruptions from Covid, but I certainly hope they get there.
DMTK thinks that person to person selling is necessity to get Dermatologists to try their product. And practicing doctors love free samples, it is a way to help financially strapped patients. With offices still mostly closed down by delta Covid they can not get in, thus there no need for more salespeople now. But this will get better, booster vaccines and more people immune from infection. So they are hiring for a few/several months from now. DMTK stock owners should expect that any big increase in sales (if it comes at all) will not start until after Covid has faded from the news. f so this quarter may be disappointing. A chance to pick up shares cheaper?
I am convinced their melanoma product is a better mousetrap. But acceptance could still be slow if they can not market it well. So TBD. So far there has not been any big surge in demand from patients, it is likely most of them have never heard about it. That could change.
I am far less enthusiastic about their other pipeline products. Particularly one for basal cell carcinoma ,where in some unusual cases few if any malignant cells may be on the surface. OTOH maybe for this slow growing non metastasizing cancer a 95% ?? diagnostic success rate maybe good enough. We won’t know more about diagnostic success rate until clinical trails are completed.
DMTK thinks that person to person selling is necessity to get Dermatologists to try their product.
Increasing the sales force can be a futile effort to address an intractable problem. It destroyed a previous investment I had (sorry my memory fails me). I much prefer a product that sells itself. L’eggs Pantyhose was one such that Peter Lynch’s wife brought to his attention.
Long DMTK but reevaluating
I was long Dermtech but sold at a loss a while ago for the following reasons:
Saul’s way. I loved the story, but the numbers just didn’t back things up. I can’t wait for this story to play out when there are other companies that are killing it now.
Somebody (I think on this board) posted how hard it is to get doctors to change the way they do things. My partner worked in that world and he says healthcare is the true glacier. Just because something is better does not mean it will be adopted. Doctors keep being told about new shiny objects (just like we investors are!)and don’t want to chase them until there is solid proof.
To make things worse, dermatologists could actually lose money if they change. Do they get a surgical removal charge (in office) or lose it by using dermtech’s patch? Ditto for hospitals which have pathology labs. Negative incentive to change monetarily (so only goodness of heart for the patient…hmmm…)
IMO they should go after the primaries who can add a little fee to their business and be the hero in detecting the cancer. Or straight to the consumer - I can’t imagine ANYBODY who would prefer a biopsy to that patch. But this costs $$.
In the end I’m waiting for the story to play out before I re invest. Meantime, I’m watching the numbers and once a month, going on their website and looking at adoption in major metropolitan areas. Nothing has changed in months and months, but I’ll keep going up there once a month or so to check things out.
Thanks for providing several points of caution/concern.
Saul’s way - I agree. There are lots of companies doing great right now. Opportunity cost is real. I can’t blame anyone for investing in their highest conviction ideas (as you should).
Doctors changing - I agree (again). One of the first concerns raised with new medical treatments/devices is always that docs may not be quick to change (if they ever do). I can’t argue this point other than to say that time will tell. Once marketing/sales efforts ramp up, enough patients might request Dermtech and will cause doctors to adopt the product.
Doctors Losing Money - I somewhat disagree with this. I think (and believe Dermtech has even acknowledged) that doctors would be giving up some money if they opt for the DMTK patch over biopsy, but the thought is that they can make it up in volume. For example, say you have 4 people a day that get biopsied, and you tell another 8 people “we’ll watch it for a few months and wait.” Dermtech has called out this point specifically, saying that they can catch cancer that Derms miss due to waiting/putting off biopsies. Plus, some people may even put it off even if the doc wants to biopsy just because they don’t want to be cut. I can’t imagine anyone turning down a painless procedure (with no scars!) to find out if they have cancer.
I agree. DMTK is going after PCP and eventually D2C. They just launched a new telemedicine platform in FL less than a week before Q2 earnings were released.
In your last sentence you mentioned waiting for the story to play out before you reinvest. This certainly takes a lot of the risk off of the table, but probably takes away a lot of the gains too. When the story plays out (coverage announcements, new products, marketing/sales ramp), I imagine the lots of the gains will go with it. Just something to consider.
Also, when you say that you are watching adoption, are you referring to the “find a specialist” part of the website? I assume that is what you meant, but if there is another way to monitor adoption I’m sure everyone on here would find it useful.
Hi CMFFalcon (Zach),
Thanks for your comments. I see your point about the volume. That’s a good way for them to sell it.
And yes, you are right, I’m giving up some upside, maybe a lot (not to mention the 25% downside I sold it at). But it could be two years before they get there, given the lead times mentioned earlier.
And yes, I’m doing very low-tech research via the find a specialist page - I made up a list of about 8-10 areas (LA, Houston, NY, Boston, SF, Chicago, etc.) and I’m checking the adoption in each area. I started in March and since then the numbers have been about the same.
"And yes, I’m doing very low-tech research via the find a specialist page - I made up a list of about 8-10 areas (LA, Houston, NY, Boston, SF, Chicago, etc.) and I’m checking the adoption in each area. I started in March and since then the numbers have been about the same
Hi Monika, Not sure if you will find that many skin cancers in Boston/ Chicago/ NY
I would rather look into places like Florida, west coast and farming states.
Nice beaches, lots of midday surfing, northern european ancestry, lots of farming, lots of elderly people = lot of skin cancers
“Not sure you will find that many skin cancers in Boston / Chicago / NY”
I think you missed the “etc” part. Phoenix Miami etc also on the list. I was just responding to a question about how I was tracking the specialists who have adopted; choose your own cities to monitor.
Skin cancers are everywhere, as are practitioners
If dermtech only penetrates the geographical areas with sun and surf, then they are capturing only a fraction of their market.
I agree it’s low tech and inexact but it’s a little preview into how well Dermtech is penetrating their market
Not sure if you will find that many skin cancers in Boston/ Chicago/ NY
Skin Cancer Rates In Massachusetts Among Highest In Nation
New findings show diagnoses are on the rise; Cape Cod rates are double the national average
“Utah, Vermont and New Hampshire have the highest rates of skin cancer”
I was invested in dmtk for a while as I’ve dealt with precancerous skin related issues in the past and this technology looks powerful.
However the stock has taken a beating from when I first purchased it and I was visiting my dermatologist recently and I asked them about this company and their thoughts…
They said the dmtk sales people did come to their office but they found two main issues that are holding them back from purchasing…
The cost is almost $200 or so more than what it currently costs them to do what they have always been doing.
There’s also a concern around liability if they used dmtk sent that off to a lab and for whatever reason it was inaccurate the dermatologist feels they could be liable.
They said most people don’t mind having a little bit of skin cut out to have that piece of mind this could be applicable if you had a spot of concern on your face or somewhere much more visible that you would not want to cut but as definitely not the majority of the market…
All of that is really to say that at their office which is probably the nicest and biggest office of dermatologists in my city of several million people… They don’t see a compelling reason to switch what they’ve always been doing.
With that in mind I sold all of my dmtk, at a loss, of course it started going up the very next day and I do hope that it’ll continue going up because I like the idea of the technology and hope that all shareholders do well with it.
I personally sold because I wanted to move the money into other companies where I believe we’ll see greater and faster growth.
For example I put some into snow the day it was down 10% for no good reason that I could see and I feel higher conviction in its future prospects.
Hey guys, I think that 12 posts is enough on a thread about a company that clearly doesn’t match what we are looking for on this board. PLEASE DON’T ADD TO THIS THREAD.