DermTech (DMTK 6.23%) is trying to redefine the process for identifying skin cancer. The current approach involves a visual inspection and an invasive biopsy -- a highly inaccurate method that most patients don't like. DermTech's products help consumer avoid worrying about accuracy or surgery. While there are many risks for this $1 billion business, DermTech has immense potential to grow and become the new standard of care, rewarding patient shareholders handsomely.
What makes DermTech special?
DermTech created PLA, a small patch that is easy to use, accurate, and noninvasive. It's placed on the skin in question for a few seconds, then sent to the company's commercial lab for precise analysis. Within 72 hours, DermTech sends a physician report to the patient's doctor to take the next steps.
DermTech's PLA has less than a 1% chance of reporting a false negative -- in other words, telling patients they're OK when they ought to be worried -- compared to the traditional treatment's 11%-19% chance. PLA will also detect 91%-95% of actual positive cases, compared to just 68%-85% accuracy compared to traditional methods.
PLA potentially costs less to perform -- an estimated $760 when reimbursed by Medicare, compared to almost $950 for a traditional biopsy -- making it a more appealing option for insurers, and boosting its odds of wider adoption. DermTech's product also delivers results as much as two or three times quicker.
DermTech has six patents that protect its intellectual property and gene expression profiles until 2029 -- along with 12 pending patents -- so competitors would have difficulty replicating DermTech's products. DermTech's products also benefit from any would-be rivals' high barriers to entry. Gaining FDA approval and Medicare coverage is difficult, expensive, and can take years between development and commercial sale.
Delivering positive results
DermTech's trailing-12-month revenue reached $9.1 million, and second-quarter 2021 assay revenue increased over 900% over two years and 267% year over year.
The second quarter of 2020 for DermTech was lumpy because of the pandemic, so looking at growth from 2019 gives a more accurate outlook. Testing volume reached 11,750 tests, growing 309% over two years and 25% sequentially. These results have likely been driven by rapid growth in Dermtech's number of sales agents -- growing 10% sequentially and 91% year over year to 44 agents -- and increased average selling price. The average selling price reached $248 in the second quarter of 2021, growing 23% from one year ago and 6% from the last quarter.
The management team sees strong full-year results -- with assay revenue of $12.5 million at the midpoint of guidance -- representing 194% growth over 2020.
Investors should hope that this strong revenue growth will help the company finally begin to generate profits. Gross margins for DermTech were 11% in the second quarter, and while that is a major increase from the negative 118% gross margin it posted in the second quarter of 2020, the margins for this business need some work. DermTech hada net loss of $17.1 million in the second quarter -- which is almost six times higher than the same-quarter revenue.
High risk, high reward
DermTech has a large addressable market, and with the introduction of its product Luminate -- which looks for UV damage to skin -- the company believes it has an opportunity to administer 31.5 million tests, or more than 2,600 times its current testing volume. With two additional products in the discovery stages, DermTech believes it has a total addressable market of $10 billion.
But prospective investors need to understand how hard it'll be for DermTech to reach that goal. It still faces a huge challenge to successfully commercialize its product, considering 37 of its 44 sales representatives have been hired in the last two years. All of these salespeople are very new to DermTech, and they may well be facing a steep, long learning curve in learning how to successfully market the company's product. The company is also trading at 126.6 times trailing-12-month sales. , with the market clearly expecting flawless execution that the company can't remotely guarantee.
If DermTech can successfully commercialize its product and grow revenue, margins, and testing volume -- all of which investors should monitor-- the company has the potential to be worth $10 billion or more. That will be a steep hill for the company to climb, however, and it also has the potential to disappear in 10 years if it fails to successfully bring its product to the market. Currently, the company has $230 million on the balance sheet, meaning three more years of the sort of losses like it's posting now could leave it in dire straits. Nonetheless, this disruptive company has immense potential, and if it succeeds, it could be a life-changing long-term investment.
Editor's note: A previous version of this article misstated DermTech's trailing-12-month revenue; the correct figure is $9.1 million. The Fool regrets the error.