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spk01: Good day, ladies and gentlemen, and welcome to CARE-DX Incorporated Fourth Quarter 2022 Earnings Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Greg Hudacek. Please go ahead.
spk08: Good afternoon, and thank you for joining us today. Earlier today, CARE-DX released financial results for the quarter ending. December 31st, 2022. The release is currently available on the company's website at www.caredx.com. Reg Seto, Chief Executive Officer, and Abhishek Jain, Chief Financial Officer, will host this afternoon's call. Before we get started, I would like to remind everyone that management will be making statements during this call that include forward-looking statements within the meaning of the Federal Securities Law, which are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Any statements contained in this call that are not statements of historical facts should be deemed to be forward-looking statements. All forward-looking statements, including without limitation, are examination of historical operating trends, expectations regarding coverage decisions, pricing and enrollment matters, and our financial expectations and results are based upon current estimates and various assumptions. These statements involve material risks and uncertainties that could cause actual results to differ materially from those anticipated or implied by these forward-looking statements. Accordingly, you should not place undue reliance on these statements. For a list of descriptions of the risks and uncertainties associated with our business, please see our filings with the Securities Exchange Commission. The information provided in this conference call speaks only to the live broadcast today, February 27, 2023. CARE-DX disclaims any intention or obligation, except as required by law, to update or revise any information, financial projections, or other forward-looking statements, whether because of new information, future events, or otherwise. This call will also include a discussion of certain financial measures that are not calculated in accordance with generally accepted accounting principles. Reconciliations of the most directly comparable GAAP financial measure may be filed in today's earnings release filed with the SEC. I will now turn the call over to Rich.
spk06: Thanks, Greg. Good afternoon, everyone, and thank you for joining us. Welcome to Caredex's fourth quarter and full year 2022 earnings conference call. During 2022, the company made significant progress towards our vision of being the leader in the transplant ecosystem, while delivering on our mission of bringing innovation across the transplant patient journey. The focus of today's call will be on the execution and progress in three key areas. The first is the path to profitability as we share Caredex's differentiated financial profile versus our peers. The second is the focus on the three Cs, catalyst, collections, and coverage, where we hit an inflection point with collections during the fourth quarter of 2022. And the third is building leadership in the transplant ecosystem, especially with the development of our digital ecosystem. Turning to the first topic on our financial profile. The economic environment during the past year, with high inflation and the threat of recession, has further emphasized the importance of companies to maintain a strong financial position. Given this, we're focused on retaining a robust balance sheet with a plan to achieve profitable adjusted EBITDA in the first half of 2023. The following support this commitment. First, the company announced an authorized share buyback program in December of 2022 of up to $50 million over two years, demonstrating the board of directors and management's confidence in the business, cash position, and long-term growth opportunities. As of the end of 2022, we repurchased 0.6 million of shares and have continued executing our program in early 2023. Secondly, we ended 2022 with $293 million in cash and cash equivalents and marketable securities on the balance sheet and have no debt. Our solid cash performance was driven by improved cash collections infrastructure that we invested in significantly during 2022, which led to record collections for testing services in Q4 at 110% of our testing service revenues. We also generated $7 million of positive cash from operations in Q4 of 2022. And thirdly, even with the share buyback, CareDX's strong balance sheet and improved cash collections allows CareDX the flexibility to deploy our capital without raising additional capital. Now turning to the financial results. We delivered quality revenues of 82.4 million, representing a 4% year-over-year growth. For the full year 2022, CareDix recorded revenues of $321.8 million, representing a 9% year-over-year growth. Our testing services volume grew 19% year-over-year, which continued to outpace market growth of 4%. Our product revenues and patient and digital solution revenues showed meaningful growth year-over-year for the fourth quarter and full year 2022. Notably, in the fourth quarter, products and digital accounted for more than 20% of our total revenues, consistent with our strategy of growing business lines to scale. Importantly, excluding some elevated related milestones and clinical study start-up costs in Q4, we have continued our trend of improved sequential adjusted EBITDA. As we move into 2023, we remain on track to deliver adjusted EBITDA profitability in the first half of 2023. As revenues continue to grow, we see further improvement opportunities in gross margins. With multiple levers, in our testing services as we drive to our long-term non-GAAP gross margin target of 75% plus. Although not expected to have an impact in 2023, we have consolidated our products operations to improve product margins with a planned closure of the Fremantle site in the middle of 2024 and a planned reduction in the footprint of the Stockholm site. Turning to our key 23 to 24 focus drivers, CareDx has three catalysts, three Cs, catalyst, coverage, and collections. Each represents a pivotal opportunity for growth as part of our strategy. Now, starting with catalysts, we're excited by the potential addition of Allomap Kidney, Euromap, and AIA Kidney. When launched, these best-in-class offerings will join the number one portfolio of post-transplant monitoring solutions, which include Allomap Heart, which was introduced in 2005, AlloShore Kidney, which was introduced in 2017, Alloshore Heart, which was introduced in 2020, and Alloshore Lung, introduced in 2021. We have a long and successful and proven history of delivering transplant innovation. Now moving on to Allomap Kidney. This is currently under Moldex LCD review process. Allomap is built on a proven FDA-cleared transplant gene expression platform and provides a quantified result that can be measured longitudinally. The infrastructure is ready in place, and we're excited to bring this innovation to patients upon achieving approval from Moldex. Regarding Euromap, we're preparing the final stages for Moldex submission. As a reminder, Euromap is a gene signature in urine that assesses both the probability of rejection and the likelihood of a BK virus nephropathy. With publications in New England Journal of Medicine, we have a strong clinical validation across multiple publications and have best-in-class data. Over the last few years, we've invested in artificial intelligence as a core part of the company's pipeline catalyst development in kidney and heart. As seen with the latest developments in AI in other industries, the use of AI will play a key role in transplant management. We plan to share more about AI kidney and AI CIV throughout the year. Now turning to our second C, coverage. Despite the lack of broad reimbursement coverage in recently launched tests, we continue to support transplant patients and the community with new product launches. Over the past years, we've built extensive reimbursement coverage expertise and diagnostics through our experience with Alimap Heart and Alishaw Kidney. These serve as our gold standard for obtaining strong payer coverage, with a total coverage of greater than 75% and greater than 70%, respectively. Now, this has taken time to achieve with Alimap Heart and Alishaw Kidney, which were launched more than 15 and five years ago, respectively. Our newer products, including Alishaw Heart and Alishaw Lung, are only one and two years post-launch respectively, and are thus relatively early in their coverage lifecycle. Therefore, it will take time to increase coverage, but we have a plan to repeat the success of Alimap Heart and Alishaw Kidney. Importantly, during the fourth quarter, the International Society of Heart and Lung Transplantation announced new guidelines which support the expanded use of Caredex's heart care solutions, Alimap, and now Alishaw, in routine monitoring of transplant patients. The previous guidelines were more than a decade old, and this update is more consistent with what has evolved over the last decade, with the shift away from invasive surveillance biopsies. These new guidelines recommend earlier use of Alimap heart starting at two months post-transplant. This should allow us to capture multiple months of reimbursement, for which we currently have limited coverage from some commercial payers. We've initiated discussions with these payers regarding this guideline update. Additionally, new guidelines support remote use of gene expression, profiling, and donor isophenate heart transplant surveillance as in heart care. This inclusion in ICTL guidelines should lead to increased reimbursement over time. On Allishaw Lung, we are working with Moldex to achieve a determination of coverage by Medicare. There is clear demand in the lung transplant community, and with one in four new patients starting Allishaw Lung in Q4, it is quickly becoming the standard of care for surveillance of these highly vulnerable patients. This potential improvement in coverage represents the single greatest opportunity for the company. The 2022 Cadix estimates non-reimbursed tests across our commercial portfolio represent a greater than $180 million in potential revenue and hence EBITDA. Abhishek will cover this in more detail in this section. Now, turning to our third C collections. As mentioned, we invested heavily in building our collections infrastructure during 2022 as we saw a shift in our pay mix to commercial, including Medicare Advantage. The necessary infrastructure has been built to address the increased number of prior authorizations and denials and appeals. In Q2 and Q3 of last year, we saw signs of improvements within our cash collections, and the fourth quarter offered a significant proof point to our strategy. For the fourth quarter, we achieved our highest ever cash collections at 110% of revenues for testing services, representing an approximately 10% year-over-year increase and demonstrating strong operational progress on this key initiative. Collections will continue to be a significant focus for KDX moving forward, with the historical catch-up with Medicaid Advantage, the improved process for future collections, and the ability to deal with new coverage through collections. We now continue to build on our vision of leadership in the transplant ecosystem. Not only has KDX remained 100% focused on transplant, but the company's established leadership building blocks across the entire patient journey. Our leadership position is the cornerstone of our strategy as we deepen our moat, enabling the continuous monitoring of patients before and after transplant. We recently acquired HLA Data Systems, a digital lab platform which manages and connects over 20 HLA labs to EMR systems such as Epic and Cerner. This addition to our leading digital ecosystem expands our capabilities, allowing us to provide timely and accurate lab results to clinicians for transplant decision-making in patient care. This joins our leadership ecosystem We're either number one or number two in that space. To date, we've already established the leading position in post-transplant patient care. With molecular marking, we have over 100,000 unique patients that have used AlloSure and or AlloMap offerings. With medication discharge management, this is now at more than 90-plus transplant centers with Med Action Plan. And with our Transplant Focused app, we have over 65,000 downloads with AlloCare. Recently, We've built leadership in the transplant center. And we're number one in quality and analytics with over 45 centers within COPI. And we're number two with transplant EMRs with Otter and TransChart. And now we're building leadership in the pre-transplant setting. We're number one in next generation sequencing or NGS HLA with LSE TX70 in the United States. We're number two in dialysis patient referrals with over 70,000 patients referred through TX Access. And now we're proud to have added HLA data systems which is number two in the space. We are the only company 100% focused on the transplant patient journey, which sets us apart as a patient-centric company. Now, before turning to 2023 guidance, we wanted to revisit transplant volume dynamics. COVID-19 has created an extended timeline for recovery, and we believe we're still in the early stages. Q4 2022 marked the first quarter where volumes were slightly above the pandemic baseline of Q2 2021. with most of the recovery driven by heart and deceased donors and kidney. That said, transplant volumes in Q4 2022 only grew 2% sequentially, and this downward sequential trend has continued into Q1 2023, with current quarterly data for the first seven weeks showing a negative or minus 3% sequential decline, with decreases across all organs, including kidney, heart, and lung. We'd hope the sequential trend increased would have continued, but this is what happened so far in Q1 of this year. One of the key reasons behind this trend is that living donor kidney transplants remain below the pre-COVID levels, and staffing shortages continue in the transplant and hospital centers. We recognize that we're still early in the stages of transplant volume recovery, but we believe there is potential for volumes to double in the next five to 10 years. Drivers behind this future volume growth include increased use of high-risk organs, increased and expanded use of organs through perfusion and improved transport, increased transplantation rates and post-transplant monitoring from the Advancing American Kidney Health Initiative, and finally, a rebound in living donors. Our testing service remains our core strength with leadership across kidney, heart, and lung, and the rate of adoption has been faster with each new organ that's been introduced. This core business has enabled us to build out across the transplant ecosystem and to be called the transplant company. This enables us to readily add services to transplant patients and to be considered the partner of choice. Now, moving to guidance. For the full year, we expect revenues of $328 to $338 million. Note, this guide excludes any contribution from pipeline catalysts and excludes any contributions from any major coverage changes. Importantly, we do expect to see cash collections to grow above testing service revenues as we now have a catch-up in the collection process for revenues not previously captured through collections. Abhishek will cover this in more detail during this section. In closing, we're committed to maintaining a strong financial profile and remain on our path to adjusted EBITDA profitability. Our core testing service business continues to gain commercial market share and grew five times above market for the full year. Our products and digital businesses are growing nicely and now represent approximately 20% of our business. We remain focused on the three Cs, catalyst, coverage, and collections. We continue to drive leadership throughout the patient journey and continue to unify our solutions to target better outcomes and better transplant care. Before I turn over the call to Abhishek to go over the financials, I want to thank all the employees of CareDx who worked tirelessly during 2022 to support patients and the border transplant ecosystem.
spk05: Thank you, Reg. We are pleased with the results from the fourth quarter and are excited about our leadership position across the transplant ecosystem and our ability to support patients and deliver life-saving services. I'll focus on the following in my prepared remarks, Q4 and 22 financial results, coverage, collections, and guidance for FY23. I'll start with KDX's differentiated financial profile versus our peers. We ended the quarter with $293 million in cash, cash equivalent, and marketable securities. It is a $2 million increase as compared to the previous quarter, which included stock repurchases of 600K in the quarter. I would also like to highlight net cash provided by operating activities was $7 million in the quarter driven by solid cash collections. We saw an inflection point in Q4 in collections, a result of our investments in improving processes and scaling infrastructure in this key area. In Q4, we had our highest ever cash collections quarter collecting 110% of our testing services revenue. This higher collection is particularly important as we recognize revenues for the present quarter based on the historical collections per test. Therefore, higher collections in a given quarter will become a positive for revenue recognition in upcoming quarters. We look forward to continuing this momentum in 23. As we move towards profitability and break even adjusted EBITDA in the first half of 23, we are confident that the business is self-funding into the foreseeable future. Moving to revenues, In Q4, we recorded total revenues of $82.4 million, up 4% year-over-year, and as compared to last quarter. For the full year 22, we recorded total revenues of $321.8 million, up 9% year-over-year. Testing services revenue for the fourth quarter declined by 5% year-over-year to $65.4 million and was up 1% as compared to last quarter. For the full 22, testing services revenues were $263.8 million, which grew 2% year over year. Notably, our testing volumes grew by 14% year over year and 2% sequentially to approximately 47,700 tests in Q4. For the year, we provided approximately 182,000 tests, up 19% year over year. Importantly, our volume growth at 19% significantly outpaced the transplant volume market growth of 4%. Let me now provide some color on the drivers for the differences in year-over-year volume growth and year-over-year revenue growth for testing services. Firstly, the primary driver of this lower revenue growth is our paired mix. Let me explain this. Our ASP on paid tests has not changed since the start of 21 at approximately $2,500. As a reminder, since last quarter, we started to share this new metric to highlight that there's no price degradation for our test. However, what has changed since the start of 21 is the percentage of tests that are being reimbursed. This increase in non-reimbursed tests has been a result of our commercial strategy of driving innovation with the launch of Alloshore Heart and Alloshore Lung and expanding in community nephrology to gain further market share. This commercial strategy resulted in increasing our commercial mix to 68% in Q4 this year as compared to 62% in the same quarter last year. As Reg alluded in his remarks earlier, we are relatively early in the coverage lifecycle for Alloshore Lung and Alloshore Heart, resulting in lower number of paid tests. This change in payer mix explains two-thirds of the difference in our revenue growth and volume growth. This is why we focus on our first C, coverage. As we build coverage in these areas, it provides a significant opportunity for future growth and profitability. Second point is the shift from Medicare to Medicare Advantage, which negatively impacted revenue growth by low single digits. As discussed in our prior calls, we have seen a shift of patients from Medicare to Medicare Advantage. To provide further clarity, We are sharing a new metric of the potential opportunity if we were to get paid on Medicare Advantage tests at the same rate as other reimbursed tests. This opportunity represents approximately $20 million in incremental cash revenue for FY22 alone. This is why we focused on our second C, collections. As the collections process and infrastructure continues to improve, we expect to be able to collect much of this cash and revenue opportunity. We'll share this metric on an annual basis. Third point is Medicare sequestration impact in 22. That was reintroduced in Q2 last year and will have a marginal impact on the growth rate in the first half of 23. Now turning to non-testing services business. In Q4, product revenues increased 11% year-over-year to 8.6 million, while increasing 19% as compared to last quarter, and digital and patient solutions revenue increased 190% year-over-year to $8.4 million, driven primarily by our acquisition of the transplant pharmacy last year and up 13% as compared to last quarter. For the full year 22, process revenue of $29.3 million grew 9% year-over-year, and our digital and patient solutions revenue grew by 180% to $28.8 million. Turning to gross margins, Gap gross margin for the fourth quarter 22 was 64% as compared to 66% in the fourth quarter of 21. The non-gap gross margin for the quarter was 67%, same as last quarter, and as compared to 68% in the fourth quarter of 21. Gap gross margin for the full year 22 was 65% as compared to 67% in 21. The non-GAAP gross margin for the full year 22 was 68% as compared to 70% in 21. The change in our GAAP and non-GAAP gross margin year over year was primarily driven by lower gross margin profile of our transplant pharmacy business impacting overall mix. We continue to maintain healthy GAAP gross margin for our testing services and it remained unchanged at 73% in 22 and 21 respectively. Non-GAAP gross margin for our testing services for 22 was at 74%, similar to 21, despite strong test volume growth in areas where we have lower coverage. Our lab operations and supply chain teams drove efficiencies in multiple areas to absorb the costs associated with these incremental tests. We are pleased with the durability of our gross margin profile for our testing services business despite the investments that we are making in providing tests where we do not yet have broad coverage. It provides us a significant opportunity for the future. GAAP gross margin for our products business was 40% in 22 as compared to 29% in 21. The non-GAAP products gross margin improved by 10 percentage points year over year for the year 22 at 49% as compared to 39% in FY21. As mentioned, this stays an area of focus for products business with further plans to consolidate our manufacturing sites to drive efficiencies and improve margins. Gap gross margin for our digital and patient solutions business was 23% in 2022 as compared to 30% in 2021. The non-gap digital and patient solutions gross margin was 31% in 2022 as compared to 44% last year. As discussed earlier, this change in non-GAAP gross margin year-over-year was primarily driven by our acquisition of transplant pharmacy business. Non-GAAP operating expenses for the fourth quarter were $60.4 million, up about $3.4 million sequentially from Q3-22. The increase in our non-GAAP operating expenses was mostly driven by R&D as we paid for milestone payments and elevated startup costs related to clinical studies in Q4. Increase in our SG&A expenses were driven by higher collection costs as we ramped up our efforts in this area. For the fourth quarter of 2022, we recorded negative adjusted EBITDA of $3.7 million compared to negative adjusted EBITDA of $2.5 million in the previous quarter. Excluding Q4-specific elevated R&D expenses of approximately $2 million, we would have continued to make progress on our goal of achieving positive adjusted EBITDA. We remain on track to deliver adjusted EBITDA profitability in the first half of 2023. Moving to regulatory updates. First, we are pleased to report that a previously disclosed inquiry from a state regulatory agency in Q321 has now been closed, with no further information or action required. The agency recently advised the company that it has completed its review of our response and the information we provided to them. Second, as you will see in our recently filed 10-K, we have identified material weaknesses in our internal controls over financial reporting, primarily related to general information technology controls. However, we have not identified any misstatements in the financial statements as a result of these deficiencies. We have taken a number of actions to begin remediation, and we will consider the material weaknesses to be remediated if and when the applicable controls operate for a sufficient period of time. and we conclude through testing that the controls are operating effectively. Turning to guidance, for the full year 23, we expect revenues to be in the range of $328 million to $338 million. Our goal in setting the guidance this way is to set a baseline for the year while awaiting for the positive inflections from the pipeline catalyst and major payer coverage. The guidance assumes no contribution from pipeline catalysts, assumes no major payer coverage decisions, assumes no ASP price degradation for reimbursed test consistent with what we have seen since the start of 21. Guidance assumes continued shift to commercial payers resulting in low double-digit declines in overall ASP or close to approximately 10%, which will be an improvement as compared to mid-teens declines last year. This improvement is driven by improved collection efforts, which we expect to continue. Assumes patient testing volume growth in the low teens. It should be noted that market growth is still in early stages of recovery post-COVID and have been uncertain as seen in the current Q123 quarter-to-date data that shows sequential declines in transplant volumes across kidney, heart, and lungs. To summarize, We have an excellent balance sheet with $293 million in cash, cash equivalents and marketable securities, and no debt. We hit an inflection point with collections and collected 110% of our Q4 testing services revenue. We generated $7 million of net cash from operating activities in Q4, reduced AR as compared to last quarter, and improved DSOs. We continue to gain commercial market share in testing services. with volume growth of 19% year-over-year in 2022, significantly outpacing the market growth of 4%. We maintained our gross margin for testing services year-over-year, despite a large increase in our tests that are not reimbursed and improved gross margin for our products business. We continue to move towards our goal of achieving positive adjusted EBITDA in the first half of 2023. With that, I'll open the call for questions.
spk01: Thank you. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you would like to remove your question from the queue. And for participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. Our first question is from Andrew Cooper with Raymond James. Please proceed.
spk11: Thanks for the time. Excuse me.
spk02: Maybe just first, I want to talk about gross margins a little bit. I think it's been really impressive over the course of the last really couple years that you've been able to hold those testing services margins where you have. I guess thinking about the ASP dynamics you just laid out that don't assume any improvements from some of the catalysts, et cetera, how much can you continue to absorb that, call it low double-digit price decrease without having a bigger impact on the testing service's gross margin? Because it's been really impressive what you've done so far. So I just want to get a sense for what efficiencies are left to find.
spk06: Yeah, Andrew, firstly, thanks for the positive feedback there. The team has worked extremely hard with the efficiencies around the gross margins. There are multiple levers across that. In the testing service, we look at automation where there's increased volume where there's payer reimbursement, and where we've had multiple modalities. So there's a series of levers that we continue to add on, and it's something that's built into our plan. I think as we look at also the ASP dynamics, there has been improvement through the collections, and part of the plan is also work, obviously, on our coverage now overall as part of this plan. But I'll let Abhishek provide any additional commentary.
spk05: Yeah, sure. Raj, thanks for adding that color there. Andrew, in my mind, there are so many levers in our Cox bucket, right? Because in the lab, you can automate a lot of pieces of stuff. There are pieces in our shipping and the freight charges that there are opportunities there. And of course, I'm so proud of the team there, both on the lab operation side and on the supply chain side, the way they will engage with the vendors to negotiate and make sure that we are not impacted by the inflationary pressures that we are seeing in the market. So I would say a lot of things that the team has done in the past, but how much can they really absorb going forward? I'm really hopeful that they will continue to proceed the way they have done it in the past and will continue to find the efficiencies going forward as well.
spk06: Yeah, one other thing I'll say is that if you look at gross margins, it's not just with the testing services as noted during the call. I mean, with the products business, we're actually looking at... improving the gross margins there, as we've shared with some of the site consolidation that we're doing across the organization. So, you know, as a company, particularly in this environment, we do think, you know, gross margins is important. It's not just in testing services where we've had that established, but also now looking at the product's business and taking some efficiency opportunities there as well.
spk02: Okay, great. And maybe just one more kind of combo question, still kind of linked to the P&L, I guess. One, can you give us a sense for in that ASP that you're including in the guide, how much benefit from some of the accruals of that 110% you just collected in the fourth quarter should we start to see sort of flow through through the year and maybe the pacing of that. And then secondly, just a little bit more color on some of the R&D spend in 4Q that you're calling out as one time, just what exactly it is and why it's going to fall off in 1Q and beyond as well would be great. And then I'll let others jump in.
spk05: Sure. So there are two pieces of your question, Andrew. The first one around the collection improvements and how that is going to help us bridge the gap between the headwind that we see on the paired mix and, of course, the benefit of the volume. So the way I've guided this time, so our ASP was mid-teens decline last year, but this time we are assuming a low double digit or probably somewhere around 10%. declines to the 5% is what I'm assuming based on the improved collection efforts, right? And that is basically what I'm baking in throughout the year as we move along. As our collections of 110% that we have seen in the quarter, last quarter, if we continue to collect more, then of course this is going to help us going forward as a positive. On your second part of the question around the R&D, So the R&D expenses, there were a couple of things going on this quarter. The first one was the milestone payment. So, of course, we had these agreements with some of the partners in the past where we basically pay them while achieving certain milestones. And one of those contracts basically required us to pay for the milestone, and that's where that payment came in. So that was a one-time one. And the second one, of course, is The clinical study payments, as you would know, that the startup cost would always stay a little bit more bumpy. And we paid some startup cost in Q4 that basically increased the R&D spend.
spk06: Yeah, one thing quickly, and just to lay out the expectations as well, some of the subs and quarters for this year at least, that metric of looking at cash collections versus testing service revenues is something that we anticipate to keep on sharing and in a positive way as well. So I think that should be just to set the cadence as well. But thank you again for the questions.
spk12: Thanks, I'll jump back in the queue.
spk01: Our next question is from Matt Sykes with Goldman Sachs. Please proceed.
spk07: Hi, good afternoon. Thanks for taking my questions. Maybe my first one, you had mentioned, Reg, that post the ISHLT guidelines that you had had some conversations, further conversations with payers. We'd love to know kind of what the feedback is from those conversations in terms of are these guidelines what they're waiting for and do you think you can achieve some momentum from that, that you're obviously not baking to your guide, but that we could see in 23 from a coverage standpoint?
spk06: Yeah, no, absolutely, Matt. No, we were thrilled to get the ISSA guidelines, and what was shared at the end of last year is one of the areas we thought would be important for the organization, particularly as we look at our pay coverage. I think I'd break it down to twofold. The first is on Allomap. I think, firstly, Allomap is our FDA feed test gene expression profiling sort of published in New England. And, you know, what was clear to us in the guidelines is there should be earlier coverage starting at month two. And there are some commercial payers today that don't cover us that early. And so this has led us to actually initiate several discussions already with some national and regional payers already this quarter to start those discussions. So there has been, firstly, receptivity to have those discussions. Secondly, to allow us to present the information and then allow us to... represent some further rationale behind that earlier start, particularly because it's given in the guidelines and named specifically. So I think it's an ongoing process, but one we're particularly pleased with. The second is, if you look at heart care itself, this is an area which has now allowed us to actually trigger some of those discussions. As a reminder, previously, we weren't necessarily getting those discussions on an ad hoc basis or even a routine basis with with Alishaw Heart, but now there's guidelines coming through, particularly with the recommended testing and also looking at some of the settings such as during COVID has now allowed us to initiate those ad hoc discussions that is off cycle and allow those to take place as well. So that's how I'd bifurcate. I think the first one is probably more readily sort of on a cadence perspective, to capture, and I think the other one is based on now initiating those discussions. But certainly from a company perspective, happy to have had that come through.
spk07: Got it. Thanks for that, Reg. And then just Abhishek, just a little more details on that additional disclosure in the 10-K and the material weaknesses. Is there sort of a timeline for remediation that we should be thinking about, and is there going to be any additional costs incurred as a result of maybe further investment in the technology stack or other types of costs that would be involved in the remediation efforts?
spk05: Yes, Matt. So we basically decently identify this, and then it does not have any impact on the financial statements. I just wanted to call that out very specifically here. And the second piece is that you need to actually remediate these weaknesses over a period of time, and then you need to test and prove it out before you can actually fully call it out, remediate it. So it will take a few quarters before we are able to kind of fully remediate and then also disclose that that phase. That's the first part. And the second part to your point is that I think we as a company has grown quite rapidly in the last few years, and then we are trying to catch up on our infrastructure in some of our infrastructural areas. And this is a piece where we will be making some investments, but we are already having those things in our plans. Got it. Thank you.
spk01: Our next question is from Mason Carrico with Stevens. Please proceed.
spk03: Hey, guys. Maybe a couple here on the adjusted EBITDA goal. Sorry if I missed this, but do you anticipate maintaining positive adjusted EBITDA going forward once you achieve that milestone in the first half?
spk05: Yeah, I'll take that question. And yes, absolutely. That is what the goal is, Mason. And I'm hoping that we will be using our operating leverage after the Q2 to be able to kind of stay positive. But at the same time, I just want to also make a mention that we will be evaluating our investment opportunities as they come up in the second half and going forward. And we will let you guys know if something were to happen that way.
spk03: Okay, got it. And then Two other quick ones here. One, I guess, if we were to take a step back and say, look high level, what do you view, I guess, is the biggest risk to either not being able to achieve that positive adjusted EBITDA in the first half or maybe it flipping back negative? What's the biggest risk there? And then the second part of the question is, what are you expecting stock comp to be in the upcoming year?
spk05: So on the adjusted EBITDA, I think the biggest risk that I foresee is around the market volume growth. So if something were to go wrong there, that probably is the only thing that I can think of. We are trying to do as a company a lot of stuff to manage our expenses and stay prudent there. So that is the risk that I foresee to hit our goal there. And the second part of your question was around What was the second question, Mason? Can you say that one more time, please?
spk03: Stock comp, how we should be thinking about stock comp in the upcoming year.
spk05: Yeah, I would basically assume a very similar trajectory of the stock comp going forward as well. I wouldn't be thinking of too many changes there.
spk12: Got it. Thanks, guys.
spk01: Our next question is from Alex Nowak with Craig Hallam Capital Group. Please proceed.
spk09: Okay, great. Good afternoon, everyone. Just first of all, how much revenue does the HLA digital systems add that acquisition? How much does that add in 2023?
spk05: Not material, Alex. So, I wouldn't call it out as one of the reconciling items to the guidance.
spk09: Okay. And then I just want to understand the testing volume growth that you're expecting in 2023. So, 2% to 5% top line growth. Digital products are growing, call it mid-teen. So that's going to push the testing piece down a little bit. The market's indicating down to start the year on the testing volume side. So do you expect, I guess, at the end of the day, testing volumes to decline in 2023? Or how do we think about that growth in that business when you strip out all the ASP dynamics?
spk05: Yeah, so I still feel there will be a positive growth because we're When I build the guide, I'm looking at the mid-teens volume growth, right? And yes, of course, the start of the quarter has been relatively slow, but I expect that the market growth will pick up and at least it will play out very similar to how it has played out last year. So that's the first part. And the second part is that when I talk about the pair mix change, our ASPs are going to be better as compared to how it fared last year. by about five percentage points. The mid-single digit is what I'm calling because of our collection efforts. And the delta between those two will basically provide us the increase in the testing services revenue growth. That's how I see it.
spk09: Okay, that is helpful. And then kind of a two-part question here, kind of on the regulatory side. Just any update from the MOL-DX CAC meeting, any discussions with Medicare KOLs, when should we expect a conclusion there? And then a second part of the inquiry that was settled, was that with the DOJ or the SEC inquiry, or was that a state inquiry? And then if it's just the state, what's the status of the DOJ, SEC, other state inquiries? Thanks.
spk06: Yeah, I think with the recent CAC meetings, and these are things that are initiated by for regular review, and I think, you know, there hasn't been any, you know, recent or further updates from that. I think, as we've talked in the past, Alex, in terms of benchmarks, if something was to happen, it's typically around a 15-month-plus sort of, you know, timeline includes a, you know, period of public, you know, comments as well as part of that. I think, you know, we've received, you know, extensive support across all organs from KOLs that we've talked about, you know, the, you know, the different biomarkers were brought to space and what they represent in terms of clinical practice across kidney, heart, and lung. So, you know, for us, it's even as recent as, you know, this weekend at CIOT, you know, the importance of what we do as an organization in bringing these, this breakthrough innovation is just something that, you know, all KOLs to a T have spoken about. So we really feel thrilled about that level of support. It's important for us. And again, you know, we have this obligation as the innovator in the space to continue to drive that innovation and it's gratifying to see that consistency, you know, come across from KOLs. There's also, I think, the timing of that meeting had just preceded the guidelines as well, which had come out from ICHLT. So it's always good to get that reinforcement from an international organization.
spk05: Sure. And let me take the second part of your question on the state regulatory update that I provided this time around. So it wasn't the DOJ SEC matter. This was basically a state regulatory agency. So that's the first part. And the second part of your question was if there is any other update on that whole CID DOJ investigation. And the answer is that there are no material updates to report on that particular matter. We continue to cooperate with the requests that we are receiving from these guys. And, of course, there hasn't been any questions raised around the safety efficacy of our products.
spk09: And the other inquiry that happened late 2022, that was related to the DOJ piece, just so I'm clear.
spk05: No, this was a completely different inquiry. I think we should have some, yeah.
spk09: Yeah, any comment, I guess, around, if it's a separate one, then any comment around that, just to make sure we're all clear.
spk06: So I didn't quite get the question, but I think in October 21 we disclosed what was in the findings at the time point, and this is one that's been, you know, finished and completed from the feedback we received. Yeah.
spk09: Okay, it just looks like late 2022, it looks like in the tank here, there's another inquiry that came, but we can talk about it later, I guess.
spk05: Oh, late 22, there was another state inquiry that we have received. This is basically a recent one, yeah, and it's an isolated case, state from a single vendor in a state. That's what we have disclosed. There's a single vendor in a state that we have disclosed.
spk12: Okay, understood. Thank you. Yeah.
spk01: Our next question is from Mark Massaro with BTIG. Please proceed.
spk04: Hey, guys. Thank you for taking the questions. Just kind of parsing through the guidance, you know, I appreciate all the color, low teens volume growth in test services, low double-digit decline in ASPs. That kind of nets me out at around 3% or so, call it low to mid-single on testing services revenue. But for the full year, you're guiding 2% to 5%. When I look at last year, and I add up the buckets for products, digital and products, I think you grew about 57% last year. It represented 18% to 20% of revenue. So really strong growth in products last year. But I'm not seeing a really strong outlook for products in 2023. So can you just give me a sense if there were any one-timers in 2022 that aren't likely to repeat, just to give us a sense for what the different scenarios are with respect to the range?
spk05: Sure, Mark. I think the one piece on the non-testing services side that I've been calling out is around the digital patient solutions, because that business grew like 180% year over year. And that was primarily because of our acquisition of the transplant pharmacy. So that's not going to happen again in 23. So that is the bit that probably you need to bake in.
spk04: That's super helpful. I guess, can you give us a sense for what the underlying growth of the transplant pharmacy is?
spk05: Instead of transplant pharmacy, let me provide you color on the testing services and let me call the other two businesses as the non-testing services. I'm expecting the testing services revenue growth to be very similar to what you called out from the low single digit to the mid single digit. And our non-testing services would be high single digit, very similar to what you had seen last year.
spk06: Yeah, I think the question that Mark was asking, what is the transplant? So the transplant pharmacy is essentially a white glove service group. you know, business that we have. And it essentially, you know, serves transplant centers and patients. And so it's really built a reputation on, you know, this white glove service and focused on, you know, just on transplant patients, pretty similar with our mission and our vision to lead the transplant ecosystem. So that's one area that has grown or had grown through that acquisition last year.
spk04: Okay, great. And then, Reg, maybe just to clarify, did I hear you say that the underlying volume growth and transplant is call it around negative 3% here in Q1. And, you know, I know that you've called out a number of drivers to the challenging end market, things like staffing shortages, you know, living donor transplant changes. You know, I think a lot of the items that you call as potential, you know, benefits to the volumes, many of those appear to be kind of multi-year drivers over time. I'm just curious if you see any, you know, short-term potential changes with respect to staffing shortages, for instance, maybe one. But what are some things that you guys can actively do to manage this in the near term?
spk06: You know, it's really interesting, this whole market dynamic. And I think, you know, we, as you can see in the prepared slides as part of the webcast, I mean, you know, you'd seen this increase in Q2 of you know, last year of, you know, going to 6%, then 4%, then 2% sequential, but then year-to-date on seven quarters, seven weeks of weekly data, it's at minus three across the total, but each organ group has had a decline. So that hasn't gone the way that we'd expected. But that said, I do think the drivers and all the intrinsics are there. You know, I meet with transplant centers every week, Mark, and I ask them the same question to see what's happening as well. from their viewpoint. And there's been various answers, but some of the consistent ones are definitely the living donor is not rebounded. And staffing shortages means that they can't always do procedures as they'd like to. And this is something that's seen across all groups as well. We do have seen an increase in deceased donors, though, for example, on the kidney side. So I think at the end of the day, some of the different areas that you described, they will happen faster than later in terms of drivers. So if you talk about you know, the transportation or perfusion devices, for example, that expands the pool of patients. So, for example, in heart, you know, strikingly it's been what you call, you know, DVD or brain-dead donors, but now you've expanded the pool by adding deceased donors, which is strikingly hadn't been there. And, you know, even recently as, you know, at CIOD on the weekend, I talked to one center which has, you know, increased the number of, you know, transplants they plan to do on the heart side, for example, by you know, using this alternative approach of using deceased organs. So I do think that there'll be changes that you start seeing, you know, hopefully sooner rather than later. I do think living donors, however, is the biggest beta, the biggest driver of delta that one could, you know, achieve, you know, during that time period. And I do think, you know, the government initiatives will put in actually enforce that donation transplantation rate and really force the whole ecosystem to play together. So I do think those unifying factors will play a role. But you're right, it'll be a different cadence. Probably the deceased expanding the donor pool is the first one. Then over time, I think some of those government issues will kick in quite nicely.
spk04: Excellent. If I can sneak in one final two-parter, how are you guys doing with respect to RemoTrack? I know that used to hover around 40% of your volumes And then, you know, finally, you know, you guys have $293 million of cash. Historically, you've done a great job of bolting on tuck-ins, sort of differentiating the product suite across your portfolio. You recently acquired HLA Data Systems. So how should we think about, you know, and you're about to achieve adjusted EBITDA positivity. How should we think about M&A funnel and what sorts of things are you potentially looking at?
spk06: Yeah, no, Mark, it's a great question. I mean, historically, we've always done, you know, anywhere from one to three acquisitions a year. That's, you know, these are small bolt-ons consistent with the HLA data systems. We have a unique ability to find, you know, smaller opportunities that really can add either to the moat or add, you know, such in the case of transplant pharmacy to some of the top lines. So we feel good about these opportunities because every one of them, people have come to us. It hasn't been one where we've had to sluice it out. I mean, we get so many inbounds, but it's really finding opportunities Those that can drive leadership marks. So those are going to be one or two. It doesn't really make sense to get something where it's still nascent or one where it's not going to be in a leadership position. So that's probably one of the key things to note. I think always one is to look across the board for opportunities, but also which makes sense for us as an organization. I mean, we're committed to the transplant space. So I think there's a defined number of opportunities. And again, we get these on a very routine basis and we assess them with a lot of rigor. So again, Excited by the year ahead. Great to be in this financial position and able to deploy our capital in the appropriate ways we have done historically.
spk04: Okay. And then any update on remote track or mobile phlebotomy?
spk05: No, nothing significant change there, Mark.
spk12: Okay, guys. Thanks for all the questions. Thank you again.
spk01: Our next question is from Yi Chen with HC Wainwright. Please proceed.
spk11: Thank you for taking my question. My first question is, is there additional room for... Hello? Is there additional room for cash collection improvements?
spk06: Yeah, as we mentioned, this is an area that we'll start sharing, you know, quality paces to each end. And I think what we've signaled is that we expect, you know, the cash collections to exceed the testing services requirements. you know, revenues as we now play a bit of catch-up with, you know, for example, some of the delayed processes and collections of parts such as Medicare Advantage and also as we also add more commercial, you know, paid coverage on a regional basis. So, there's certainly the opportunity. And we'll compare this year over year for you and provide that metric. Yeah. Okay.
spk10: And when do you expect to generate meaningful revenue from cell therapy monitoring?
spk06: Yeah, it's an excellent question. I mean, I think for us, we've always signaled that, you know, our cell therapy franchise, whether LSL or talking about some of the other Elohim and some of the other offerings we have, is something probably more on the, you know, greater than the five-year horizon. The reason we say that is because it's really predicated on having the actual cell therapies make it to market. And as of date in the U.S., none of the allogeneic cell therapies have made it to market. So there's a lot of activity, preclinical, phase ones, phase twos, but unfortunately no one's got over the line yet. And so we look forward to those in the future. And our goal now is to be very early in that process to develop those research and clinical partnerships so that we can be there once, you know, this transformative type of opportunity makes it to, you know, critical scale and mass. So similar to what we've done with our approach in the solid organ space.
spk10: And lastly, maybe you touched upon this before. What evidence have you observed that make you feel confident the number of living donors will actually rebound in the coming quarters or years?
spk06: Yeah, I think living donors is such a huge area of an opportunity. And I think I'll share a real example for you, Yi-Chen. I think, you know, how we think of behavior in the community. And one of our team members, actually, his wife was actually needing a transplant and actually put out a post to get an organ and altruistic sense. And during that week, there were probably more than a dozen plus altruistic donors that stepped up and offered to help out during that time. I do think there is that opportunity. I do think addressing staffing shortages, I think making sure there's theater time, I think now seeing the decline in some of the infectious diseases, which were quite high during Q4, last quarter go away, will be important. But I do think just knowing, at least on the altruistic side, not including directed donor, that there's always an incredible opportunity of human behavior that we've seen where people are willing to, you know, help out in this, you know, critical organ space. And we've seen it, you know, real time in our organization.
spk11: Okay, thank you.
spk06: Thank you.
spk01: We have reached the end of our question and answer session. I would like to turn the conference back over to management for closing comments.
spk06: Yeah, thanks very much. And I, you know, we really, you know, 2022 was, you know, a year, you know, that was difficult. I think 2023 is one where, you know, we want to build on the catalyst that we had to, you you know, build the organization to continue, you know, increasing collections as part of the infrastructure we built last year and also to focus on, you know, coverage or the three C's as we call them. Now, we think we have an incredible role to play as an organization in the transplant ecosystem and, you know, we certainly feel that obligation not only from physicians but patients and, you know, associations. You know, everyone looks at CADX to really play that role and you know, it's a role that we've gladly taken as to be leader in this space. So I think if you think of anything involving transplant, then, you know, we'll be involved in it. So I want to thank again, you know, the CareDx, you know, team for, you know, working so hard during 2022. And I also want to thank you to the analysts for the great questions and also to any shareholders or investors who may be listening in and hopefully, you know, supporting this space. It's such a critical one and it's a great one to be in. Thank you again and have a wonderful evening or afternoon, depending where you are. Thank you.
spk01: Thank you. This does conclude today's conference. You may disconnect your lines at this time. And thank you for your participation.
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