MDxHealth Q1 2024 Earnings Call Transcript

There are 8 speakers on the call.

Operator

Good morning, ladies and gentlemen, and welcome to the MDx Health First Quarter 20 24 Earnings Call. At this time, all lines are in listen only mode. Following the presentation, we will conduct a question and answer session. This call is being recorded on Wednesday, May 1, 2024. Before we begin, I would like to remind everyone that the company will make forward looking statements during today's call.

Operator

Whether in prepared remarks or during the Q and A session, these forward looking statements are subject to inherent risks and uncertainties. These risks and uncertainties are detailed in the Risk Factors section of the company's filings with the Securities and Exchange Commission, specifically in the company's annual report on Form 20 F. I would now like to turn the conference over to Michael McGarity, Chief Executive Officer. Please go ahead.

Speaker 1

Thanks, Constantine, and thank you all for joining us for our Q1 2024 earnings conference call for MDx Health. With me today is Ron Kalfas, Chief Financial Officer. I am pleased to report that our business continued to generate strong top line performance in the Q1 of 2024 with revenue growth of 35% compared to the Q1 of 2023. Our results reflect our continued focus on commercial execution and operating discipline, which we believe will drive sustainable growth through 2024 and beyond. On our last call, I noted our strategy of creating multiple sources of growth.

Speaker 1

That proved to be the case for the Q1 of 2024. And in a moment, I'll provide greater detail on some of the key factors that help drive our strong performance. But first, I would like to comment on the steps we have taken to further strengthen our balance sheet and support the execution of our growth strategy. Today, we announced a $100,000,000 financing agreement with Orbimed, of which $55,000,000 has been drawn and which enables us to refinance our former debt facility and significantly extends our cash runway well through our projected turn to adjusted EBITDA profitability in the first half of twenty twenty five. We are obviously quite pleased to have the financial support and considerable commitment from OrbiMed, a leading healthcare dedicated fund, which we believe reflects the significant growth opportunity for our company and the underlying positive dynamics in our target markets.

Speaker 1

And Ron will provide details of this financing later in the call. Now a few brief highlights from our results that support our view that our growth trajectory is sustainable. We reported 1st quarter revenue of $19,800,000 an increase of 35% over the prior year period. Of note, and as I have consistently stated, we have 2 levers of revenue growth with our sales team driving unit adoption from our urology customer base and our market access managed care team driving coverage, which shows up in our average sell price. In Q1, we clearly delivered on both levers with build prostate volumes rising to over 12,000 build tests, which represents unit growth of 16% year over year, with pricing and resolve growth covering the rest.

Speaker 1

We believe this is an uncommon mix of strength and execution from our commercial team and are confident it is quite sustainable. These two important metrics clearly underscore the growth opportunity ahead for us as we continue to expand our offering and build our market leading position in precision urology diagnostics. We recently communicated our menu addition of our hereditary germline test that will augment our comprehensive menu of diagnostics in the pathway of prostate cancer. We received our first clinical samples at the end of Q1 ahead of our expectations and now expect revenue contribution from the test in Q2 versus our previous view of second half of twenty twenty four. As an important fact to note, this offering supports clinically actionable decisions for both the patient and clinician at multiple points in the often confounding diagnostic journey for patients.

Speaker 1

Hereditary germline testing, as with all of our prostate cancer diagnostics, is both covered by Medicare and included in the NCCN guidelines. As with any growth opportunities we consider, we undertake a very rigorous and disciplined diligence process to ensure that new product will fit seamlessly into our commercial focus and bring value to our customer base. In evaluating such opportunities, it is of note, as was the case with the success of our RESOLVE test, that these drivers of growth most often come from our customer base as urologists increasingly turn to MDx Health for solutions based on our reputation and influence among our urology customers. Our growing reputation, we believe, reflects our commitment to best in class laboratory service, customer experience support and patient advocacy. These developments, both individually and collectively, serve as the basis for increasing our 2024 revenue guidance to $83,000,000 to $85,000,000 from the previous $79,000,000 to $81,000,000 which represents 20% year over year top line growth, which we view as a long term sustainable goal.

Speaker 1

These dynamics underscore our confidence in turning adjusted EBITDA positive in the first half of twenty twenty five. We have clear visibility to our use of cash declining over the coming quarters, coupled with our revenue growth and operating discipline. And we're excited to deliver that metric in a few quarters. In a moment, I'll provide some closing comments on the considerable progress we have made as well as our view of the future. But first, let me turn the call over to Ron for a brief review of our financial and operating results for Q1.

Speaker 1

Ron?

Speaker 2

Thank you, Mike. As Mike mentioned, today, MDx Health closed and funded $55,000,000 under a new loan and security agreement with Orbanet Advisors, which replaces the company's existing $35,000,000 outstanding under our current debt facility. Furthermore, at our option, an additional $45,000,000 can be drawn from OrbiMed consisting of a $25,000,000 Tranche B and the $20,000,000 Tranche C. The B and C tranches can be drawn in 2025 and in 2026 respectively at our discretion subject to certain conditions. Onto our Q1 results.

Speaker 2

We are pleased to report strong top line growth in the Q1 of 2024. Revenues for the Q1 ended March 31, 2024 increased by 35% to $19,800,000 versus $14,700,000 for the Q1 of 2023. All of this growth is organic and reflects greater market penetration of our full line of tests into the large addressable market through outstanding execution of our sales and marketing team. Revenue from our prostate cancer tests made up approximately 85 percent of our Q1 2024 revenue. Moving below the revenue line, our gross profit for the Q1 of 2024 was 12,100,000 an increase of 38% as compared to $8,700,000 for the Q1 of 2023.

Speaker 2

Gross margins were 60.8% for Q1 2024 as compared to 59.3 percent for Q1 2023. Operating loss for the Q1 was $6,600,000 compared to $8,700,000 for the Q1 of 2023, representing a reduction of 24% driven by top line growth, improved gross margins and continued operating discipline. Also of note is that we were able to drive a 35% growth in revenue with only a 7% growth in operating expenses, which was largely driven by sales commissions on that growth. This is a testament to the operating leverage we are now generating and believe is sustainable. Cash and cash equivalents as of March 31, 2024 were $14,500,000 This concludes my brief overview of the results and I will now turn the call back to Mike.

Speaker 3

Thanks, Ron.

Speaker 1

Over the past few years, MDx Health has evolved to become a premier growth story in precision diagnostics. Quarter after quarter, we are driving revenue growth and operating metrics toward profitability that far exceeds the secular growth rate within the clinical diagnostics sector. This progress is rooted in both the positive underlying demand we are seeing in our end markets and our team's solid execution. This process has been catalyzed by expansion of our menu from just a single test generating revenue at the beginning of 2022 to now 4 prostate cancer diagnostics, all of which are covered by Medicare and included in the NCCN guidelines. This menu expansion, carefully and thoughtfully conceived of with our marketing and KOL partners, coupled with the strength of our sales channel, all together provide access to a nearly $5,000,000,000 U.

Speaker 1

S. Addressable market. It is important to note that our adoption and penetration has validated this TAM as accessible and viable, serving to drive considerable growth in the near and long term. Our view of growth is also supported by empirical evidence in the market. The increasing diagnosis of prostate cancer, particularly at an earlier stage of disease, coupled with greater appreciation by clinicians and patients of the clinical value of our advanced precision diagnostics at each point of the pathway, all drive acceptance by both patients and clinicians to guide optimal diagnostic and treatment options.

Speaker 1

In fact, I think it's reasonable to say that men's health in the urology segment and prostate cancer in particular is where women's health and breast cancer were maybe 25 years ago from both a public and clinical perspective. In our view, the earlier diagnosis of prostate cancer along with the use of more precise diagnostics are two trends that will only accelerate over time. And MDx Health is exceptionally well positioned to benefit from these market dynamics.

Speaker 2

Finally, I would also

Speaker 1

like to note our relationships continue to improve and expand within the medical community. Our partnership with urology customers has always been best in class. However, over the past couple of years, we have also recognized and embraced pathology as a key partner in driving further adoption of our menu. This evolution is actively supported by our sales and marketing teams who have cemented a KOL network in pathology that complements the positioning of our menu and our overall growth strategy. In summary, our company is positioned in the right end markets and leveraging best in class technology and customer service to position MDx Health as one of the most widely recognized high growth companies in precision diagnostics.

Speaker 1

And with the capital now in place to support our long term growth, I believe our future is brighter now than at any point in our company's history. As always, we carry a great deal of responsibility to provide value to all of our stakeholders, including patients, customers, payers and shareholders. So thank you for your interest in and support of MDx Health. And now I'll turn the call back over to Constantine for questions.

Operator

Thank you very much. Ladies and gentlemen, we will now begin the question and answer session. Your first question comes from the line of Andrew Brackmann from William Blair. Please go ahead.

Speaker 4

All the color on this update. Maybe just to start here on the increased guidance for the year. Obviously, I think a lot is going well for you guys on sort of the underlying basis. But can you maybe just sort of parse out for us the drivers of that increase? How much of that relates to the hereditary testing launch versus just sort of the overall better trend that you're seeing in the core here?

Speaker 4

Thanks.

Speaker 1

Yes, Andrew. No, we see we have seen and we expect to continue to see balanced growth across our menu. So while we're very encouraged by the germline initial acceptance, the basis for taking the guidance up is the fundamental menu and adoption of our pathway to the points that I commented on. And we think we'll continue to see that through the quarter. I mean, our Q1 revenue growth was 35%, very balanced across our growth was 35% very balanced across our menu.

Speaker 1

Without Germline, we expect that growth to continue. And at the midpoint of our new guidance, we're at 20% growth. So we view that as reflecting our key and core prostate cancer menu.

Speaker 4

Thanks. And then on the financing, it appears I think and I think you said this, it takes you to cash flow positivity, but can you maybe just sort of also talk about the flexibility it provides with respect to the contingent payments to Exact Sciences and maybe just sort of refresh us on how you're currently thinking about those obligations and sort of the pathways that you have available to you? Thanks.

Speaker 1

Yes, Andrew. We're very confident and obviously appreciate the support and view from OrbiMed on the fundamentals of our business. Comment about our earn out with Exact, so I've commented before that it's really a partnership there and there is a component of the earn out whereby we at our discretion can push cash or equity to Exact Sciences up to 7.5% of the company. So we'll be opportunistic as we go forward and we do have, as you noted, a significant now in place flexibility to operate and to accelerate our growth going forward and we believe that our everything is in place at this point to take the company really all the way through and we're excited to continue to deliver results. That's the focus of our operating team.

Speaker 4

Perfect. Maybe if I could just sneak in one more here just on LDP regulation. Obviously, I think that read positive for you all when that came out a couple of days ago. But I just sort of thinking about future test launches or product modifications. Can you maybe just sort of talk about how that final rule might change things from a regulatory or cost dynamic for you guys moving forward?

Speaker 4

Thanks for the color and no other questions.

Speaker 1

Yes, Andrew. Well, we I don't want to say that we're obviously encouraged by what came out. It's candidly what we anticipated. Just based on the body of evidence that we have in place with our menu from a data clinical scientific benefit, Medicare coverage, NCCN guidelines. And I've always emphasized New York State approval is maybe the highest bar there is.

Speaker 1

And clearly, they lean on that as well. So we believe that all the criteria we have in place has been met. So that does give us relief as we go forward. To the second part of your question, I think it does 2 things that we also view very positively as one, it creates a significant barrier to entry for competition in our target markets and in our expanded menu offering. And to the other part of your question, we always look at and based on company experience and the challenges with coverage and guidelines and approvals that we look at that at every opportunity we consider going forward that those have been derisked.

Speaker 1

So we don't it doesn't change our strategy of execution, our view of growth and it really, we believe, insulates us from a competitive perspective in the market for the foreseeable future.

Speaker 2

Okay. Thanks, guys.

Speaker 1

Thanks,

Operator

Andrew. Your next question comes from the line of Jason Bednar from Piper Sandler. Please go ahead.

Speaker 3

Hey, good morning, guys. Congrats on all the updates here. I want to pick up on maybe some of the same topics Andrew was referencing. I'll maybe focus on the EBITDA profitability timeline. That first half twenty twenty five profitability seems even more likely now.

Speaker 3

But I'd also think maybe there's a chance to come sooner than what you previously thought in light of that revenue strength that you're seeing here. And also as Ron, you referenced in the operating expense structure just continues to grow at a pretty modest rate. So maybe help us out, why not adjust that target alongside the bump in revenue guidance this year? Or are there just other investment decisions that you're now contemplating in light of that revenue strength?

Speaker 1

Yes, Jason, I think our view has always been if we put something up there, our expectation is that it will be met or exceeded. I think that's the way we view our turn to EBITDA profitability. And Q1 or Q2 of 2025 is what we've communicated. We're very confident in that. I think I would leave it there right now.

Speaker 1

But our inside expectations are, as you know, higher than maybe what's on the street. And so we focus on the execution, but this clearly, I think cements our view that our business is a few quarters from really looking, I think, uncommon in our sector at the revenue rate, at the growth rate, at our ability to hold our OpEx and be profitable from a P and L perspective. We like where we're going and we think we'll look very strong as we look at the market opportunity.

Speaker 3

Yes, absolutely. Couldn't agree more, Mike. In the Andrew was asking too about DermLine and maybe that contribution within your guide. It doesn't sound like you really want to break out maybe necessarily the components of the kind of the $4,000,000 bump to the midpoint revenue guidance this year. But maybe ask a different way on germline.

Speaker 3

What is how should we think about the exit revenue exit rate of that test from exiting 2024 really just as we start thinking about building this contribution in for 2025?

Speaker 1

Yes, Jason, I think I want to make sure that the move on guidance wasn't based on our germline. We just we were very encouraged that we received our initial clinical samples. I think for me candidly, it validates the diligence that we did and do on these types of opportunities and it really is based in our customer base, right. We don't make these decisions inside, right. It's all done in consultation with our customers and our key opinion leaders.

Speaker 1

So that we feel very positive about, but the basis for the guidance is our fundamental menu and sales execution. So as we look out, I don't want to guide to a specific product, but are we confident that we can drive adoption, sustainable adoption into our customer base. It really follows, I'm not going to forecast similarly to resolve, but it really follows the same operating process, right, where we spent time and diligence validating everything that we think is important as we go forward. And once we put something into our sales channel, we're confident that it can drive revenue growth. And this particularly last comment I'll make here is that it really fits into our diagnostic pathway at multiple points.

Speaker 1

So when you look now as a patient has taken through elevated PSA all the way through to high grade intervention, active surveillance. Our menu really is a clinically actionable guide at each step in that process and we think that the germline and that was my comment on the understanding of risk for patients really makes sense for us to add that to our offer.

Speaker 3

All right, excellent. Just one more for me. Ron, as you were running through some of the overview on the debt terms, I think you mentioned those 2 additional tranches. They have maybe some conditions or terms. I don't know if you're willing to go into any of those today or if they're even relevant.

Speaker 3

But just are those revenue or EBITDA dependent or any other financial or operational bars that you need to clear in order to tap those additional term loans?

Speaker 2

Yes, maybe Go ahead, Ron. There are certain conditions, Jason. And if you look at our filings with the SEC, we've the agreement has been disclosed. So if you look there, you'll see to the extent that we could disclose, the conditions are there. Okay.

Speaker 2

Thanks so much guys.

Speaker 1

Thanks, Jason.

Operator

Your next question comes from the line of Mark Massaro from BTIG. Please go ahead.

Speaker 5

Hey guys, congrats on a strong quarter. I guess I wanted to ask, it's great to see the 35% growth in the quarter and the raise to the guidance, it sounds like the raise to the guidance is not on the germline. So is it safe to say that you're feeling good about the breadth of the portfolio throughout the course of the year? And then then are you willing to provide any qualitative comments on some of the product lines, whether it's Confirm or Select? Just give us a sense for how the overall portfolio did in Q1?

Speaker 1

Yes, Mark. I get the question. We do feel good. The guidance move is not based on germline. So your assumption is correct there.

Speaker 1

And if you go back a number of quarters when we made the GPS acquisition, we clearly stated that our focus was on, well, 2 things. 1, the integration, the transformation of our sales organization and the complexity of that, candidly, I may have underestimated that. I thought it would take a quarter or 2, it probably took 2 to 3. But at the mid year of last year, we really felt like we had that in place with the right team. And we had focused very strongly on that other side of the initial biopsy, right, because we're the only company that has an answer whether that initial biopsy is negative or positive.

Speaker 1

And those are tissue based tests that clearly carry the highest reimbursement and average cell price. So it was critical that we really cemented that piece of our business and that position in our urology customer base. And we feel like that effort is coming through and we're seeing that. So we're very confident in the trend in our GPS and confirm business. We did take some focus off Select through that process, but we're now back to the full diagnostic pathway offering.

Speaker 1

And that's where my comment on pathology becomes so important because we really have a pretty good system and I guess recipe for driving sustainable adoption of our pathway into these practices and it's critical that you have urology and pathology on board. So that's a material development I think in our focus and our strategy. And we expect germline to fit into that. And clearly our resolve opportunity has been validated as far as that diligence process as well as the strength of our channel. We're not knocking on doors to sell Resolve or Germline.

Speaker 1

We bring that right into and actually comes from, to my previous comment, our current customer base.

Speaker 5

Yes. And then probably not everyone on the call has gone through the terms of the OrbiMed deal. This is 5 years interest only and this is debt. Is there are there any other terms you can call out in terms of the financing over time and why you chose that over other alternative forms of financing? Well,

Speaker 1

couple of things there. Number 1, we don't think there's a higher quality partner in our space than Obermann. And as you can imagine, their diligence was quite rigorous on our business and our view forward. We think the structure gives us flexibility and optionality as we go forward, and also the time with that interest only period. So we think it's the ideal structure for where we are today and still allows us all the flexibility to continue to operate and execute with the business.

Speaker 1

So I think there was a number of criteria from our side and clearly we really value the commitment and we think that all of the different aspects of our business now give us that flexibility and really clear the path for our business all the way through.

Speaker 5

Excellent. Last one for me. As we're updating our models later today, is it reasonable to think that revenue could grow? It looks like revenue was up a little bit sequentially, but is there any reason to believe that as we think about any seasonality to the business, typically Q1 is I think, lighter. Q2 is typically higher.

Speaker 5

Is it reasonable for us to put in a slight increase sequentially in revenue throughout the course of the year?

Speaker 1

I think that is a reasonable assumption.

Speaker 5

All right. Congrats, guys. That's it for me.

Speaker 1

Thanks, Mark.

Operator

Your next question comes from the line of Daniel Brennan from TD Cowen. Please go ahead.

Speaker 6

Great guys. Thanks. Thanks for the questions. Maybe the first one, I know you talk about adjusted EBITDA profitability in the first half twenty twenty five. So is that can you remind us is that consistent with free cash flow positivity then?

Speaker 1

It is not. It's adjusted EBITDA.

Speaker 5

In terms

Speaker 6

of free cash flow positivity, Ron, like or Mike, excuse me, like when would you guys feel you would be

Speaker 5

We will be generating

Speaker 1

operating cash at that point. So it depends on how you define it. I guess from a P and L perspective, we would still have below the EBITDA line our debt service and earn out to exact, which we believe this facility solves for. And that's why we think in combination, our operating leverage coupled with the facility that we have in place now gives us that coupled with the exact equity earn out option sets us up very well for free cash flow.

Speaker 6

Perfect. Okay. And then on the guide, I know you didn't provide explicit guidance for 1Q previously, but I think you talked about revenues would decline quarter to quarter seasonally and obviously they didn't, they grew 2%. So, did 1Q come in better than you anticipated and if so, what came in better?

Speaker 1

Well, no, I would say that our inside expectations and model are coming along very much in line with our expectations. So we believe that from a market perspective and transparency perspective that we see upside to the original guidance we gave. And a lot of that is just based on seeing quarter after quarter continued execution and then when we go deeper into that execution and look customer by customer at the sustainability, the adoption and the commitment to our pathway that will continue to inform our view of our revenue growth. So we are very confident, as you can imagine, in the $83,000,000 to $85,000,000 and we will just continue to update on a quarterly basis.

Speaker 6

Got it.

Speaker 1

And I

Speaker 6

know there's been a bunch of questions trying to tease out some of the contributions in the quarter, but any help on Resolve in the quarter since that's a little bit different than your than the prostate portfolio? Just wondering how is Resolve doing? Is that still being a material contributor?

Speaker 1

It's still a material contributor. The growth rate is continuing to be sustained and we see continued adoption from our urology customer base of that test. So we view that as we view our entire menu. That's why I'm careful here to individually and collectively we're seeing strength across the menu. And obviously, the resolve fit within our customer base has been validated.

Speaker 1

So while we won't grow 100% quarter by quarter, sequentially, as that business has built, we do see sustainable growth with that offering.

Speaker 6

Got it. And then my consensus was at $18,000,000 and you obviously came in around $2,000,000 above that and the guidance raised at the midpoint is $4,000,000 So I'm just wondering versus your prior review, have you raised what you guys expected Q2 to Q4 to be? Or are you just kind of booking the 1Q upside that you saw?

Speaker 1

Yes. I guess, Dan, I'm not going to share our modeling exercise internally, but I would say that we as a team and our Board has a view of expectations that is probably higher than what's in the market. But we believe that our guidance reflects the confidence in our business and our clear visibility to our growth being sustainable. And that's why I point to 35% growth in Q1, but I lean on 20% growth. So I don't want to overplay my Stryker experience, but that's the way we think is that if you have the right team and the right menu, the right focus and the right execution, the 20% top line growth should be our goal forever.

Speaker 1

So at least that's our goal for the next few quarters.

Speaker 6

And then maybe last one, I know there's been several questions on the germline test and I apologize if you answered this, Mike, but did you give a price point on that test? Is it reimbursed today? And just anything on like sizing the addressable opportunity for that new germline test? Thank you.

Speaker 1

Yes, Dan. So the addressable opportunity is, I think the data would suggest that 10% to 20% of patients have hereditary risk. And so we view it as a real tool. It's kind of driven. That's why I made the analogy to women's health and breast cancer.

Speaker 1

As awareness becomes more clear and men become more aware of the risks and the importance of the diagnostic availability for prostate cancer. It's starting to look more like that. And we think the germline, whether it's driven by the patient or once they present, it's really meaningful information. And it can be at prior to elevated PSA, post elevated PSA, post initial biopsy. So we like the fit there and that was part of the diligence that we went through.

Speaker 1

And as far as the pricing, the Medicare rate for that test is $1800

Speaker 6

$800 Okay, great. Thank you.

Speaker 1

Thanks, Dan.

Operator

Our next question is from the line of Thomas Vranken from KBC. Please go ahead.

Speaker 7

Hi, thanks for taking my question and congrats on another quarter with solid progress as well as the upgrade of the guidance. Two questions from my side. I think the first one is also on the germline testing. So I understood based on the news that could start contributing to revenues as of Q2. Could you give an indication as to when you would expect the test to be accretive to margins as well?

Speaker 7

Is this going to be immediately or will this take some time?

Speaker 1

Yes, Thomas. So we don't break out margin by product, but we obviously I shouldn't say obviously, but part of our process before we introduce something is that we believe that it's accretive to our business from an operating and gross margin perspective, day 1, dollar 1. There's always a little bit of a ramp there, but it fits well into our P and L profile.

Speaker 7

Okay. Very clear. And as a second question, I also wanted to zoom in a little bit on the Orbit financing agreement. Could you give any sentiment whatsoever as to how we should think about the interest rates perhaps as compared to and the prior loan that was in place with Innovitis?

Speaker 1

Yes, Thomas, I think to Ron's point, I think we would just refer you to all of our filings for the detail on the facility, but we think it is strong both from a commitment and from a market perspective.

Operator

There are no further questions at this time. And ladies and gentlemen, this concludes today's conference call. Thank you very much for your participation. You may now disconnect.

Key Takeaways

  • MDx Health delivered 35% year-over-year revenue growth in Q1 2024 to $19.8 million, driven by a balanced increase in test volumes (up 16%) and higher average selling prices through improved coverage.
  • The company secured a $100 million financing agreement with OrbiMed (with $55 million drawn) to refinance existing debt and extend its cash runway into the first half of 2025, supporting its path to adjusted EBITDA profitability.
  • 2024 revenue guidance was raised to $83–85 million (20% growth) based on strong execution across the core prostate cancer diagnostics menu, with the new hereditary germline test now expected to contribute revenue in Q2.
  • Menu expansion continues with four Medicare- and NCCN guideline-covered prostate cancer tests, including the newly launched hereditary germline assay (Medicare reimbursement of $1,800), which augments the precision urology pathway at multiple clinical decision points.
  • Operating discipline improved leverage, with Q1 gross margin at 60.8% (up from 59.3%), a 24% reduction in operating loss, and only a 7% increase in operating expenses—highlighting a sustainable route to profitability.
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Earnings Conference Call
MDxHealth Q1 2024
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