DermTech, Inc. (NASDAQ:DMTK) is a molecular diagnostic company that has developed a proprietary, non-invasive technique for sampling the surface layers of the skin using an adhesive patch called the DermTech Smart Sticker™. The company's primary focus is on facilitating the diagnosis and management of melanoma, the deadliest form of skin cancer.
Business Overview
DermTech's core technology enhances the evaluation of lesions suspicious for melanoma by detecting genomic markers associated with the disease. The company's flagship product, the DermTech Melanoma Test (DMT), utilizes the Smart Sticker to non-invasively collect skin samples for analysis. The DMT has demonstrated a 99% or greater negative predictive value, meaning it can effectively rule out melanoma in clinically ambiguous pigmented skin lesions.The company's addressable market is substantial, with approximately 4 million surgical biopsies performed annually in the United States to diagnose nearly 190,000 new cases of melanoma. DermTech believes its non-invasive approach can provide a valuable supplement to the current standard of care, allowing clinicians to make more informed decisions about which lesions require biopsy.
Financial Performance
In the fiscal year ended December 31, 2023, DermTech reported annual revenue of $15.3 million, a net loss of $100.9 million, and negative operating and free cash flows of $77.0 million and $77.9 million, respectively. The company's financial performance has been impacted by the ongoing investments required to drive adoption of its technology and build out its commercial infrastructure.During the fourth quarter of 2023, DermTech reported test revenue of $3.7 million, a 38% increase year-over-year, driven by a 55% improvement in average selling price (ASP) for the DMT. Billable sample volume declined 11% year-over-year to approximately 15,580, as the company prioritized reimbursed tests over total volume growth. Contract revenue was $0.2 million, down from $0.3 million in the prior-year period.
Operational Highlights
DermTech has made significant strides in expanding payer coverage for the DMT, adding approximately 42 million new covered lives in 2023. The company now has coverage from seven of the top 10 Blue Cross Blue Shield plans, as well as favorable coverage decisions from the Blues plans of Rhode Island and the Mid-Atlantic region. However, the company continues to face challenges in securing consistent reimbursement from certain payers, which has impacted its financial performance.In January 2024, DermTech announced positive top-line results from the TRUST 2 study, a large-scale clinical trial involving more than 20,000 patients. The study reaffirmed the DMT's real-world clinical utility, with a negative predictive value of 99.7% for ruling out melanoma. These results are expected to strengthen the company's discussions with payers that have not yet provided coverage for the test.
Restructuring and Cost-Saving Initiatives
To align its resources with its strategic priorities, DermTech has undertaken a series of restructuring actions, including a workforce reduction of approximately 15% in June 2023 and an additional 15% reduction in January 2024. The company expects these actions, along with other cost-saving measures, to result in an approximately $40 million annualized reduction in total operating expenses compared to 2022.Looking ahead, DermTech is guiding for total operating expenses of approximately $80 million in 2024, a significant decrease from the $121.2 million reported in 2022. The company believes these cost-saving initiatives, combined with its focus on driving ASP and revenue growth, will help it navigate the evolving landscape of skin cancer diagnostics.
Liquidity and Cash Runway
As of December 31, 2023, DermTech had cash, cash equivalents, restricted cash, and marketable securities of $59.3 million. The company estimates its cash runway will extend into the first quarter of 2025, not exceeding 12 months from the filing of its 2023 Annual Report on Form 10-K.To support its ongoing operations and future growth, DermTech may need to raise additional capital through equity offerings, debt financings, collaborations, or licensing arrangements. The company's ability to secure such financing on favorable terms will be crucial in determining its long-term viability.
Risks and Uncertainties
DermTech faces several risks and uncertainties that could impact its future performance. These include the company's ability to continue expanding payer coverage and reimbursement for the DMT, the potential for increased regulatory oversight of laboratory-developed tests, and the competitive landscape in the skin cancer diagnostics market.Additionally, the company's reliance on a single product, the DMT, and its limited commercial history pose risks to its long-term success. Failure to achieve widespread adoption of the DMT or to develop and commercialize additional products could significantly hamper DermTech's growth prospects.
Conclusion
DermTech is navigating a complex and evolving landscape in the skin cancer diagnostics market. While the company has made progress in expanding payer coverage and demonstrating the clinical utility of its DMT, it continues to face challenges in securing consistent reimbursement and achieving profitability.The positive results from the TRUST 2 study and the company's ongoing cost-saving initiatives provide reasons for cautious optimism. However, DermTech's long-term success will depend on its ability to drive further adoption of the DMT, develop a diversified product portfolio, and secure the necessary funding to support its operations and future growth.