Summary
- Today, we take our first look at DermTech, Inc., a small molecular testing concern.
- The company is seeing some sales traction and the stock sells for less than cash value, but DermTech's cash burn rate is more than concerning.
- A full investment analysis of DermTech follows in the paragraphs below.
Come friends, it's not too late to seek a newer world .”? Alfred Lord Tennyson
Today, we put the spotlight on a small diagnostic firm called DermTech, Inc. ( DMTK ). This company has what it is a potential " best of breed" and non-invasive way to test for melanoma. Its core product is seeing some sales traction and the company currently has a lot of cash on the balance sheet. However, cash burn is a major concern around DermTech. An analysis follows below.
Company Overview:
DermTech, Inc. is a molecular testing concern based out of La Jolla, California. The company develops and markets novel non-invasive genomics tests to diagnosis skin cancer, inflammatory diseases, and aging-related conditions in the U.S. The shares currently trade around $5.50 a share and sport an approximate market capitalization of $170 million.
November 2021 Company Presentation
The company's non-invasive tests to diagnose skin conditions that are more effective than traditional biopsy-based diagnostic tests. The company's main test right now is called the DermTech Smart Sticker. This replaces a scalpel to remove the skin cells off the surface of a mole. The DermTech Smart Sticker provides an accurate, non-invasive test to detect melanoma.
November Company Presentation
Second Quarter Results:
On August 8th, the company posted second quarter numbers . DermTech had a GAAP loss of 99 cents a share, slightly better than the consensus. Revenues rose nearly 36% on a year-over-year. However, revenues were only $4.23 million, and that was somewhat under expectations.
The company's net loss for the quarter widened to $29.6 million compared with a loss of $17.1 million in 2Q2021. Assay revenue increased by over 40% to $4.15 million while contract revenue declined some 60% to just to $86,000. Billable sample volume grew 56% to 18,320 compared to the same period a year ago. The company also saw a 67% increase in unique ordering clinicians to approximately 2,390.
Thanks to continued acceptance, DermTech Smart Sticker is now available to approximately 91 million covered lives. This breaks down as nearly 68 million for Medicare and Medicare Advantage and 23 million for commercial payers, which largely comes today from the Blue Shields of California, Illinois and Texas.
The stock got hit when management took down their full year assay revenue estimate to $16 million to $19 million from $22 million to $26 million previously. The company has streamlined the laboratory processes, which reduced the per unit cost of the DermTech Smart Sticker by 28% sequentially to $177 per, but the product is also seeing a lower average selling price, or ASP, which is a key reason for the downward sales guidance revision. ASP was under pressure due to Medicare billing code edits, which are expected to be improved in the coming quarters. The company is pushing the launch of their direct-to-consumer offering " Luminate" that assesses skin cancer risk to the first half of 2023 to conserve costs.
Analyst Commentary & Balance Sheet:
Since second quarter results came out, four analyst firms including BTIG and Oppenheimer have reiterated Buy ratings. However, all four analyst firms significantly cut their price targets on DermTech. Price targets now proffered range from $14 to $24 a share. Prior to price target revisions, price targets from these four analyst firms was in the $19 to $48 range.
Approximately one out of eight shares are currently held short. Numerous insiders have been frequent, but mostly small, sellers of the stock in 2022. They have sold approximately $500,000 worth of equity in aggregate so far this year. The last insider purchases of DMTK were in February of 2020. The company ended the second quarter of this year with just north of $175 million worth of cash and marketable securities on its balance sheet. Leadership believes this is sufficient capital to fund its current operating plan through the first quarter of 2024
Verdict:
The current analyst consensus has the company losing nearly four bucks a share in FY2022 even as revenues advance over 50% to some $18 million. Next year, revenue growth is expected to accelerate with the company doing some $30 in sales in FY2023. However, losses are expected to only come down around 10%.
The quote about the retailer that " loses money on every sale, but makes it up on volume" seems to describe DermTech's business model at this point in time. This explains why the stock is currently selling for less than the cash on its balance sheet.
It is projected that the company's revenue will increase some 65% next fiscal year to $30 million. However, at the current burn rate, almost all the company's funding will be used up by the end of 2023. This most likely means there will be a significant and dilutive capital raise at some to address funding needs.
November 2021 Company Presentation
DermTech would seem to make an interesting purchase for a larger concern given its technology and current cash on its balance sheet. Even a 10% penetration rate in the melanoma testing market could yield an over $300 million opportunity. However, outside of that scenario, it is hard to be positive on the stock until the company's cash burn subsides substantially.
Even in the mud and scum of things, something always, always sings .”? Ralph Waldo Emerson
For further details see:
Diving Into DermTech