MDXH - MDxHealth: Who Doesn't Love A Good Prostate Exam?

2023-04-04 08:50:21 ET

Summary

• MDxHealth has 4 validated testing products with one more in the clinical pipeline. All are focused specifically on urology.
• The company expects to do ~$65-$70M of sales in 2023, but the valuation is a paltry $88M.
• The total addressable market (prostate cancer and UTIs) is massive at $4.8B.
• The share price is near an all-time month low and appears poised for a rebound.

Investment Thesis

MDxHealth ( MDXH ) presents a compelling risk/reward scenario. Due to a delay in CMS ruling as well as a recent $40M offering on Feb 2, shares are within 10% of their all-time low. The current market cap is $88M and the company expects to achieve between $65-70M of estimated sales for FY 2023 according to their most recent investor call. This represents revenue growth of 75-85% over FY 2022. The total addressable market is $4.8B. The stock appears poised for a rebound and trend up over time.

Company Summary

MDxHealth is a Belgian company that launched its first test product (Confirm mdx) in 2012. Their primary focus is the US Market where 95% of their tests are performed.

From their website, MDxHealth is a commercial-stage precision diagnostics company that provides actionable molecular diagnostic information to personalize the diagnosis and treatment of prostate cancer and other urologic diseases. They are dedicated to providing highly accurate and clinically actionable urologic solutions to inform patient diagnosis and treatment while improving healthcare economics for payers and providers.

Their primary focus is prostate cancer. Prostate cancer is the most common cancer and the 2nd deadliest cancer in US men. There are 268,000 prostate cancers diagnosed annually. Urology centers are constantly on the lookout for better testing, treatment and followup procedures.

2022 was a significant year for the company. They went from selling a single test product generating all revenue, to 4 products generating revenue 12 months later.

Share Price History

Below is a 15 month chart. Its IPO was in November 2021 at price around $12. Since that time, it has dropped significantly as the company works to get a sales force in place while also obtaining approval of several other tests for prostate cancer and Urinary Tract Infections (UTIs).

As one can see, it has been a downhill ride for shareholders with the most significant drop in Feb 2023 from a $40M capital raise . Existing shareholders punished the stock price, but the company is now well-capitalized moving forward. The time may be right for a significant turnaround as the company's products start to gain traction.

Technologies & Patents

Avisol Capital partners did an excellent article 1.5 years ago on MDxHealth technology and patents. I will use part of their article for this section.

MDxHealth's technology platform is a proprietary DNA-based technology that functions on standard commercial PCR (polymerase chain reaction) equipment. Called methylation-specific PCR ((MSP)), the company's platform uses methylated DNA biomarkers with the ability to detect a single cancer cell among 10,000 healthy cells in any type of body fluid or tissue.

MDxHealth owns or has exclusive rights to more than 22 patent families with 114 granted or pending patent applications, related to its molecular technology and cancer-specific biomarkers, that expire at various times between 2024 and 2036. The company has agreement with The Johns Hopkins University w.r.t. the intellectual property ((IP)) used in Confirm mdx. The company's ((EPI)) genomics research joint-venture "NXTGNT" with the University of Gent has continued for nearly a decade.

Summary of the Technologies & Costs

MDxHealth has 4 validated products to help with identifying and monitoring for prostate cancer & urinary tract infections (UTIs). The chart below shows how each technology fits within the prostate cancer diagnosis & treatment paradigm. ( Page 9)

Select mdx

Select mdx is a highly selective test to identify men at low risk for aggressive localized prostate cancer. It is a urine-based non-invasive "rule-out" test that improves the diagnostic disposition of patients by avoiding unnecessary prostate biopsies. It has a 95% negative predictive value. The cost for this test is ~$100. While Select mdx is validated and shown to improve health outcomes and lower costs, it does not have Medicare reimbursement, for now. More on this later in the article.

Confirm mdx

Next is Confirm mdx, which is a non-invasive "rule-out" test performed on previous biopsy tissue. It uses molecular tests to look at the changes of DNA or epigenetic changes. These changes radiate out from the tumor resulting in a field effect. Detecting the markers in these areas results in a much higher chance of actually detecting the cancer. This technology can be used in the early stages of localized (i.e. non-metastatic) prostate cancer. It is the only epigenetic test to identify men at risk for aggressive prostate cancer. This test is designed to be used if a biopsy comes back negative. This is b/c 30% of men who have a cancer-negative biopsy test, actually have prostate cancer. ( Page 11 )

To understand why this test is imperative, we must understand the limitation of current biopsies. Existing methods for biopsy sampling of the prostate gland takes approximately 1% of the prostate. So the location of the biopsies could miss the cancer resulting in a negative test. Therefore, the Confirm mdx test is essentially a double-check on the biopsy sample.

See diagram below for the differences b/w the tests. The left image is standard biopsy testing and the right image is using Confirm mdx.

If Confirm mdx shows a negative result, the patient then goes into active surveillance of the prostate. Clinical studies have demonstrated a predictive value of 96%. If the test shows a positive result, then there is additional followup via biopsies, MRI's, and so forth. The price for Confirm mdx is ~$250.

GPS

The next product is an Oncotype DX Genomic Prostate Score test. The company calls this product GPS. The test analyzes prostate cancer gene activity to predict disease aggressiveness and provide clinically meaningful endpoints. It is a non-invasive test performed on previously acquired biopsy tissue. It predicts adverse pathology, distant metastasis, prostate cancer mortality and pT3/Extra prostatic extension. For low risk patients, it provides additional information to help when deciding on whether to pursue active surveillance or more aggressive treatment options. For high risk patients, it provides information to help select treatment intensity.

MDxHealth acquired GPS from Exact Sciences ( EXAS ) in Aug 2022. The company paid $25M in cash plus another $5M in shares (at $7.23/share). Exact Sciences can also receive up to an additional $70M based on revenue milestones in fiscal years 2023 through 2025. This drug also included a small urology sales & marketing team. MDxHealth has since leveraged this sales team to also sell Select mdx, ConfirmMDx & ResolveMDx (mentioned below).

MDxHealth financed the acquisition through a $35M loan with an affiliate of Innovatus Capital Partners. Shareholders should see that as good news since issuing debt is highly preferable to issuing equity via shares. An additional $35 million can be drawn from Innovatus through a $20M term B loan and a $15 million term C loan in, respectively, 2024 and 2025.

Monitor mdx

The final product (for prostate cancer) is Monitor mdx, which is currently in development. It is a non-invasive alternative that risk stratifies patients for continued active surveillance vs. intervention, which may also improve patient compliance. We will not go into detail on this technology since it is still in development.

These products nicely demonstrate MDxHealth's approach to prostate cancer - gaining knowledge to make better treatment decisions. Their technologies help determining the risk of cancer and guide possible treatment from beginning to end. As the CEO McGarrity put it:

We now are the only company that can provide a clear and clinically actionable precision diagnostic for risk stratification, post positive or negative initial biopsy.

Resolve mdx

The fourth and final validated technology is Resolve mdx, which is a urine-based test that provides personalized antibiotics options for urinary tract infections. As many as 33% of urine cultures are polymicrobial, especially in elderly populations, and traditional urine culture may miss up to 67% of recognized uropathogens. Resolve mdx is highly accurate in that it can identify 19 pathogens, 6 classes of resistance genes and susceptibility to guide antibiotic selection. Test results are available in 24-48 hours, which is important since quick antibiotic administration is critical to getting ahead of the infection.

In summary, Resolve mdx improves antibiotic stewardship and improves patient outcomes b/c the right antibiotic is used on the pathogen. The company presentation (slide 14) suggests a $500 price for this test.

Total Addressable Market

The TAM for all 5 technologies is very large. Here is a chart from the company's presentation . All numbers below are for the US market only.

The company estimates the TAM is $4.8B, but remember that Monitor mdx is still under development. It could be that MDxHealth doesn't achieve their desired results with that product. Excluding Monitor mdx the TAM is still $3.3B. Even a paltry 4% market penetration for each technology would result in total annual sales of ~$130M just for its urology testing products. For UTIs, there are a suspected 10M cases annually. MDX Health management estimates the addressable market for UTI testing in the urology segment is 2M tests annually or $1B. 4% of this market results in an additional $40M in annual sales. Adding the 2 together gives us $170M. The current $88M MDxHealth market cap looks significantly undervalued.

It should be noted that the company currently does not have Medicare reimbursement for Select mdx. CEO McGarrity stated:

We expect our Select test to be issued a final Medicare coverage decision by mid-year and contribute to revenue growth and gross margin accretion in the second half of the year.

If CMS issues a positive decision, it will be a significant catalyst for the stock. If a negative decision is reached, the company can still sell Select mdx, but will not receive reimbursement from Medicare until the issue is resolved. During the most recent conference call, CEO McGarrity was confident a positive Medicare reimbursement decision would be forthcoming this summer. But there is a chance it could be sooner.

According to management, based on the decreasing back-and-forth with CMS, a decision could come in the second quarter regarding medicare reimbursement. But the company gave sales estimates assuming it will happen just before the third quarter. It is nice to see management being conservative with their sales numbers vs. hyping them up and then falling short if there is a delay.

Sales & Cash

Total revenues for FY 2022 were $37.1M vs. $22.2M in FY 2021, an increase of 67%. It is important to note that some of the sales increase came with the purchase of the GPS technology and sales team from EXAS. And Covid negatively affected sales more in 2021 so 2022 sales should naturally be higher. Regardless, the company expects FY 2023 revenue guidance to be b/w $65-70M, representing growth of 75-89% over FY 2022! This is another nice jump and suggests the sales team is gaining traction on product awareness & use in urology centers.

Operating expenses also increased by 53% to $57.1M in FY 2022 vs. FY 2021. This is also primarily related to additional field sales personnel associated with the GPS business unit.

MDxHealth has rapidly increasing sales, but they are still not generating a profit. According to the recent shareholder call , the pro-forma cash balance was $55.9M for year end 2022.

Value Proposition

As stated earlier the company expects 2023 sales to come in at b/w $65-70M. Considering the company's market cap is currently ~$88M, the market cap is due to rise as the year progresses if they can execute on their plans. Most young commercial biotech companies can trade at a market cap multiple several times their annual sales.

Also, TipRanks also has an average share price forecast of $9. But these ratings are often high so don't put much faith in them. Regardless, cutting this estimate in half gives us a share price of $4.50, which is a solid jump from the current share price.

But we can gain the most insight from management. To sum up their perception of how the company is posed to move forward, here is a snippet from CEO McGarrity during the March 8, 2023 conference call .

… one of the strengths that we have on our view forward is we feel our OpEx can be held pretty straight away here, right? Our sales team -- at this point, we have 70 people on the field, 54 direct reps. That is clearly the strongest channel in the urology in the space focused in our area.

So, that is very, very right-sized for our business and still allows for additional channel opportunities. So, we think particularly from SG&A perspective, our OpEx can be held very, very steady as we go forward. (Emphasis mine)

…our goal is to become $100 million business with a 65% gross margin and profitable, those are in our view and I think that we're very confident that this sales channel can take us there as currently constituted and that any expansion on OpEx would be driven by scale, volume through our laboratory.

This suggests they have all the pieces in place to increase sales without significantly increasing operating expense.

It is also important to note that all calculations above are only for the US market. The rest of the world can also benefit from these urology technologies.

Risks

The company faces competition from much larger players such as OPKO ( OPK ), Hologic ( HOLX ), ExosomeDx/Bio-Techne ( TECH ), Beckman Coulter/Danaher ( DHR ) & Prolaris. They are all in the Urology space and will not give up any market share uncontested.

The company may not receive favorable feedback from CMS regarding Select mdx. This will hurt revenues in the all important elderly demographic, which is the most susceptible to prostate cancer (for men) and UTIs (for men & women).

According to Avisol Capital Partners article , one important U.S. issued patent covering the IP used in Confirm mdx expired in 2022 and one will expire in 2024. The IP used in SelectMDx and other tests expire at various times between 2025 and 2036. Companies rely on these patents to keep generics off the market. At the same time, their technology is proprietary so there are some secrets to how they facilitate their tests.

And finally while sales are increasing quite rapidly, the company might not achieve enough positive cash flow before they need another cash infusion. This will cause more dilution.

Conclusion

MDxHealth is charging forward with innovative and low cost testing technologies in the urology space. They are the only company with an actionable precision diagnostic for prostate cancer risk-stratification. The $88M market cap is woefully low and will likely not last as investors realize the value proposition. 2023 will be a pivotal year for management to see if they can continue getting Urology centers to adopt their diverse prostate and UTI testing technologies.

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