CareDx, Inc.

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.

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.

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.