CareDx, Inc.

Q1 2023 Earnings Conference Call


spk01: the centers and practices who were not ready for this change, nor had planned for this change, especially the centers who were required to update their IT systems. The transplant community has spoken out over the last few weeks on this unprecedented situation. The leading professional transplant associations, ASTS, AST, and ISHLT, and the leading patient associations, NCAREF and TRIO, have all reached out to Moldex directly on this matter. They also reiterated the importance of non-invasive molecular testing in transplant patient care and some went as far as to raise concerns about the implementation timeline and process and implications of patient care. In fact, on Monday, a press release was sent out highlighting the results of a new survey conducted by four leading patient groups, Transplant Life Foundation, Transplant Families, Transplant Recipients International Organization, and the Heart Brothers Foundation, showing that 95% of patients surveyed are concerned that the new Medicaid billing article limits coverage of non-invasive pro-transplant tests. Furthermore, the majority of patients surveyed believed that reduced coverage of non-invasive blood tests would negatively impact their post-transplant care, and they should have been consulted as part of the process for Medicare policy changes. The survey included the views of over 1,000 patients as well as caregivers and families. Now on to Q1 results. Testing services had a great first quarter with 17% year-over-year volume growth. We delivered almost 50,000 tests, beating the year-over-year market growth of 10%. We also grew sequentially by 5% versus last quarter, beating the minus 3% quarter-over-quarter market growth. In Q1, we recorded a total revenue of 77.3 million. If we had submitted the impacted March test to Medicare in the first quarter, our total revenue would have been approximately 86.2 million, a year-over-year increase of 9%. In addition, our testing services revenue would have grown 6% to $70.7 million. Q1 would have been a record quarter for CareDx if we factored in the impacted tests that we plan to submit to Medicare in Q2. Our non-testing services business continues to deliver meaningful contributions to our overall revenues. Specifically, patient and digital solutions deliver the highest ever revenues of $8.6 million, representing a 39% year-over-year growth. For the first quarter, we reported gap loss of $23.7 million and a non-gap loss of $5.8 million and adjusted EBITDA loss of $6.4 million. If we'd included the revenue from the impacted March test, we would have recorded a positive adjusted EBITDA of $2.5 million. Notably, we would have achieved our key 2023 goal, which was to deliver a positive adjusted EBITDA in the first half of 2023. Abhishek will cover this in more detail in his section. Now, I'll update you on our efforts to operationalize the changes by the March 31st effective date and the ongoing complexities. Firstly, it has taken a lot of effort and will require ongoing effort to support continued patient care. Since the March billing article was announced, we've been working nonstop to update our forms, our systems, and processes to accommodate these changes. This has been a significant undertaking across our testing services business line. While the following is not an exhaustive list of what the company has been doing since March 2nd, it is truly amazing what has been accomplished over the past nine weeks. Since the start of the billing article, we've reached out to 80% of our 550-plus transplant centers, community hospitals, and practices. Each center, hospital, and practice has multiple providers and support staff that have to be educated, requiring us to visit numerous times, with some centers having more than 20 people that need to be educated. This has involved thousands of interactions. We've had to update our internal IT system processes and test requisition forms, also called TRS, and workflows. All centers using paper TRS have had to be updated with new requirements, and centers using our portal are now being migrated over to our new customer care portal. All centers using electronic medical records are being worked on as part of this process, and we are dependent on the center adjusting its system workflows. Changes to IT systems need to be scheduled well in advance and working on these center by center. Secondly, the effective date for implementation was only four weeks after the billing article revision. It should be noted we began our efforts to operationally implement the March billing article requirements during March to be ready by the effective date of March 31st. While we've made excellent progress, it takes time for transplant centers and healthcare systems to make these operational changes and update their system workflows. We can report now as of the end of April, approximately 50% of the test orders received and now in the new forms and with the new required information. It has taken a Herculean effort to get to this stage. While we continue making strong progress on the operational implementation, we will not be completed by the end of the second quarter. As an indicator of this uptake and adoption, we've seen a progressive increase in percentage of completed submitted forms. We ended April, as we mentioned, 50%, and we're trending in May at 60%, and we expect to be at 80%, 85% of forms with requisite information by the start of the fourth quarter as more transplant center systems are updated. Given the impact of the March billing article to our business model, we've taken steps to reshape the organization, which will deliver annualized cost savings of $40 million to $50 million. Abhishek will cover this in greater detail in his section. Moving on to guidance. Given the uncertainties between interpreting Moldex, the written positions, and our operational implementation taking time, we believe it is prudent to withdraw guidance. We will revisit this in our next call, the earnings call, once we've gained a better understanding of this evolving landscape. So what are the next steps for CareDx? Firstly, we'll implement the updated 2023 plan in response to the revised billing articles by continuing the all-hands-on-deck approach to operationalize the plan, physicians, centers, and practices Alex Johnson and his team have done a fantastic job working day and night to get this implemented. We're going to align the organizational structure and strategy as the landscape evolves. The management team's been working on this, and that effort's also being led by Abhishek, our CFO. And we're going to be following up with Moldex and Eridian CMS about these changes. Secondly, we'll continue to deliver on the 2023 plan, especially the three Cs. On collections, we have made significant progress over the last two quarters, while testing services collections are greater than testing services revenues. On coverage, we've captured wins from the recent ICHLT guidelines, especially with earlier reimbursement for ALMA as early as two months, and we're in multiple active discussions to increase commercial coverage. There's been significant work as part of our strategic plan where we now expect to see this to come together over the next few months. On catalysts, we await decisions and have ongoing discussions with several pipeline catalysts. Given the recent BA changes, some of these dossiers have been updated. We'll continue to produce and submit clinical data demonstrating the clinical benefits of individual diagnostic tests and our multimodality offerings, including heart care. Lastly, the company will be leaner, more efficient, and aligned to the new and evolving landscape. We have enough cash in our balance sheet, and we do not anticipate needing to raise any cash in the near future. Before I hand the call over to Abhishek to go over the financials, I want to thank all the employees of CADX who have worked tirelessly to educate health care providers on the billing article changes and to help transplant centers become operationally ready. The efforts were exemplary driven by their unwavering commitment to serving patients and the broader transplant ecosystem. Handing over to Abhishek.
spk06: Thank you, Reg. We are pleased to share results from the first quarter. The key takeaways are, number one, we had a good quarter despite the operational challenges associated with the implementation of the billing article. Number two, we have some early lead indicators to start assessing the financial impact of the billing article. Number three, we now have plans underway to mitigate the financial impact. Number four, we are withdrawing guidance due to the factors outside of our control. We had a good first quarter where we delivered on our financial imperative. Number one, we maintained a solid cash position of $286 million and generated positive cash from operations for a second consecutive quarter. Number two, our testing services volume growth beat market growth quarter over quarter and year over year. Number three, we maintained our momentum in collections that increased 10% year over year and were at 110% of our reported testing services revenues. The impact of improved collections has started to show on ASP Dynamics. Number four, we had our highest ever quarterly revenues for patient and digital services business. And number five, all three businesses improved gross margin year over year. And it would have been a record quarter if we were to consider revenue associated with the impacted March test of 8.9 million as we would have then reported our highest ever testing services revenue and reported a positive adjusted EBITDA. Let me provide details. Firstly, with revenues. In Q1, we reported total revenues of 77.3 million down 3% year over year. If we were to include the revenue associated with impacted March test, we would have delivered revenues of 86.2 million for adjusted revenue, representing a 5% increase as compared to the last quarter and 9% year-over-year. This would have been our highest-ever revenue in a quarter. Testing services revenue for the first quarter was 61.8 million, down 7% year-over-year. Testing services revenue, including the revenue associated with impacted March tests, would have been 70.7 million, our highest ever testing services revenue in a quarter, or adjusted testing services revenue, representing 8% growth as compared to last quarter and 6% year-over-year. Our testing services volumes grew by 5% quarter-over-quarter as compared to a negative 3% growth for the transplant volumes. Also, our testing volume growth of 17% year-over-year beat the market growth of 10%. Despite tough market conditions, strong test volume growth demonstrates the value of our tests with proven clinical utility. Turning to ASP. Adjusted testing services revenue growth of 8%, outpaced volume growth of 5%, or would have delivered a positive overall ASP change an inflection point that we have been seeking with our focused strategic efforts. In Q123, we would have improved the ASP despite the continued headwinds from volume mix shift, primarily driven by, number one, getting paid for long outstanding Medicare Advantage claims, and number two, having an increased price per test as a result of improved collections in Q422. As a reminder, we used historical collections per test to recognize our revenues for non-Medicare tests in a given quarter. Importantly, ASP on our paid test continues to be approximately $2,500. We track this measure to exclude the impact of makeshift as a result of our strategy and market dynamics as we had discussed in the past. This is a metric that we use to ensure that there is no price degradation for our test. Turning to testing services gross margin. Our gap testing services gross margin improved to 75% as compared to 73% in the same quarter last year. And non-gap testing services gross margin improved to 77% as compared to 74% in the same quarter last year. Half of this improvement in gross margin was driven by volume growth and the impact of improved collections on revenues. The rest of the gross margin improvement was driven by two factors. Number one, the positive impact of one-time reversal of a crude amount associated with royalty payment, and it was partially offset by the impact on gross margin due to unrecognized revenues of $8.9 million associated with impacted mass tests. The cost of running these tests has been part of cost of sales. Now turning to non-testing services business. In Q1, our digital and patient solutions business revenue was at 8.6 million, a growth of 39% year-over-year, and our highest ever for a given quarter for this business line. We are pleased to see our strategy of investing in our digital and patient solutions paying off, and our acquisitions helping us both drive the business results and strengthen our moat. Gap and non-gap growth margin for a digital and patient solutions business were 23% and 31% in the first quarter of 23, as compared to 21% and 28% in same quarter last year. Though the non-gap growth margin improved by 300 basis points year over year, the team is continuing to look for further opportunities to improve. Products business delivered 6.9 million in revenue, similar to same quarter a year ago. Gap growth margin for our products business was 41% in first quarter of 23 as compared to 35% in same quarter last year. Non-gap product growth margin was 52% in the first quarter of 23 as compared to 44% in same quarter last year, an improvement of 800 basis points. As discussed in our previous calls, improving growth margin for products business stays the core focus area for the company, and we're making good progress at it. Turning to operating expenses and adjusted EBITDA. Non-GAAP operating expenses for the first quarter were 61.7 million, up about a million, sequentially from Q4 22. The increase in our GAAP operating expenses was mostly driven by increased legal expenses. For the first quarter of 23, we recorded negative adjusted EBITDA of 6.4 million compared to negative adjusted EBITDA of 3.7 million in the previous quarter. If we were to consider unrecognized revenues associated with March impacted tests, we would have recorded a positive adjusted EBITDA of 2.5 million. Turning to cash, we continue to maintain a strong financial profile as emphasized by our robust balance sheet and cash balance of $286 million and no debt. We generated positive cash from operating activities for the second quarter in a row. Importantly, the first quarter is usually a seasonally weak quarter for cash usage as we pay annual bonus to our employees. Our focus on cash collections and working capital management contributed to achieving positive cash from operating activities. I would also like to note that we earned $2.7 million in interest income for the first quarter of 2023. Now to the second takeaway. Lead indicators to assess the financial impact of the billing article. RECH has already provided color on how the billing article revisions have impacted our strategy and on the operational challenges to implement the changes required for hundreds of transplant centers and the ecosystem around it. All of our efforts have now been shifted to operationally implementing the changes required by the billing article. Though we are seeing adoption of revised processes, this is a Herculean effort that could not occur by the effective date of 331, especially for our kidney services. Given the significant change, complexity, and related uncertainty, it is difficult to assess the financial impact of the billing article yet. However, let me share with you lead indicators. Number one, education. The first step in implementing the billing article is the education of the transplant centers, providers, and support teams. I'm pleased to inform that we have educated approximately 80% of all centers. It covers 90% plus of our volumes for kidney services, and the education is ongoing. This sets the path for adoption of the new requirements. Also, it is important to note that after the first four weeks, post the effective rate of billing articles, we are experiencing lower testing volumes as centers and clinicians are still learning, transitioning to the new processes, and need to update the IT system. Number two, adoption. At the end of April, approximately 50% of our incoming test requisitions were on newly implemented forms. That included required information to comply with the billing article. This is trending at approximately 60% in May so far. I think it speaks highly of our teams that have been working nonstop to implement new processes and system updates. We expect to continue to see an increase in the adoption to approximately 80% to 85% by the fourth quarter of 23. Number three, claim submissions. For LHR kidney tests starting March 31st, 23, we have not been billing any test to Medicare unless they come with the requisite information on the new test acquisition forms. Otherwise, we are going back to the prescribing transplant centers to collect that information. I would like to note that this will add significant operational burden on KDX. As shared earlier, there's still a large percent of incoming tests that are coming on old forms or are incomplete. Also, if a test is pending collection of requisite information, it will impact revenue recognition. For our LOMAP-HART and LHO-HART tests, we are continuing to follow our Medicare reimbursement submission process. In addition, we plan to inform Noridian that until Noridian adopts the revised billing article, KIDX will continue to submit LHO-HART tests for reimbursement only when used in conjunction with LOMAP-HART, including the test where we have not obtained additional information as required by the billing article. However, post-June 30th, 23, we plan to submit to Medicaid only those tests that meet the billing article requirement. Please refer to our 10Q for further discussion on billing articles and its impact and associated risks. Turning to our third takeaway on our plans to mitigate the impact of the billing article. The billing article will impact testing services business based on the early trends of lead indicators. Therefore, we have started to align our cost structure. We expect these actions will help drive approximately 40 to 50 million in annualized savings. As we increase our understanding of the financial impact, we will adjust our actions to minimize cash burn. It is important to note that during the transition period of operational implementation, we will require more resources to deal with significant additional administrative burden in certain areas. Here is a quick summary of various actions that we are taking. We are restructuring our workforce and our goal is to reduce approximately 12% of our headcount as compared to what we had in the beginning of the year. Number two, we are reviewing our test volumes specifically in areas where the tests are not covered and are not reimbursed even after appeal. Number three, prioritization of clinical studies and R&D spend to stay focused on the most important areas that would help us improve coverage and drive revenues. Number four, review of legal spend and reduction of discretionary spend to the extent possible. In addition to looking to reduce expenses, as Reg mentioned, we will continue to focus on our three Cs, key strategic areas to drive upside. Turning to guidance. We're withdrawing our 23 revenue guidance at this time, given a multitude of unknown variables related to the billing article, as we have discussed during this call, many of which are outside our control. Specifically, number one, interpretation of MOLLE's policy in the context of two billing article revisions since March 2nd. Number two, adoption of the billing article by Noridian and updation of IT systems by centers to incorporate new test forms. Number three, impact of transition on testing services volume during the period of education and implementation. Number four, rate of adoption of new forms, percent completion of the requisite information, and success in collecting information from the TRF. We will revisit this in our earnings call for second quarter of 23 once we have gained a better understanding of the evolving landscape. In summary, we had a good first quarter. it could have been even better had we not hit the challenges due to billing article revision. All efforts now are on operational implementation of the requirements of billing article revision to increase the rate of adoption as much as possible. We are taking necessary actions to adjust our cost structure and do not anticipate a need to raise cash in near future. We will continue to build on our key strategies by enhancing our efforts to improve coverage and collections areas that we can influence. With that, I'll hand over the call to Reg.
spk01: Thanks, Abhishek. I think let's have Greg, if you can work with the operator to open the line to Q&A. Thank you.
spk07: Certainly. If you would like to register a question, please press the 1 followed by the 4 on your telephone. You will hear a three-tone prompt to acknowledge your request. If your question has been answered and you would like to withdraw your registration, you can press the one followed by the three. And our first question is from the line of Matt Sykes from Goldman Sachs. Please proceed with your question.
spk08: Hi, good afternoon. Thanks for taking my questions. Maybe the first one for you. I appreciate the color on, you know, the percentage of forms and Abhishek, I know you said that volumes, testing volumes were lower as you've seen recently. But maybe just help us frame the impact and maybe provide a little more granularity on sort of what testing volumes have trended to date and what it looked like in April and the first start of May, just so we can kind of help frame sort of the revenue picture.
spk04: Yeah, Matt, thanks for the question.
spk01: I'll make some introductory remarks and I'll hand over to Tal Bishkek as part of that. And I think we have some early read on the market volume and clearly There's a bit of, you know, interim flux that we've gone through, a few of the complexities as part of that process. For example, you know, some of the centers with EMRs, we actually need them to actually update the forms on their side, which has created a bit of an issue. So there is a bit of this transition dynamic. So I'll hand over to Abhishek to go into specifics.
spk06: No, thanks, Saj. And as we were saying, that this is a complex change, and there are still a lot of education that the clinicians and the centers need to go through and transition their new processes. And, of course, as we said, that in the first quarter, our testing services volume were pretty solid. But after we have implemented these new test requisition forms, it has started to basically, due to the change management of this whole exercise, it started to kind drop a little bit from there from that standpoint. It's in the range of high teens as of right now based on the early indications like the first three or four weeks and we'll basically see as to how this shapes up in the next few weeks.
spk08: Got it. Thanks for that caller. And then maybe just in terms of like one of the debates post this has been sort of the frequency of tests and and suppose you can change the forms and and re-educate the centers and Do you foresee a drop in frequency for some of your tests in terms of that waterfall that you've traditionally had for your testing services?
spk01: Yeah, I'll add some color and then I'll have Abhishek talk. So, I mean, what we've found during this process, the key is really getting operationally ready. I mean, I think centers with focus less on, you know, is this trying to, you know, full course surveillance. The question is, when will centers be ready and operationally ready? That's the most important thing. And I think With 550-plus centers, we've had to reach out, and with many of these centers that weren't ready, that's the key bottleneck. It's this operational implementation. We've had thousands of interactions. If these aren't up, then that sort of discussion goes away. So I think what we've seen is this trend of how do we get the centers up and running, and then how do we get these forms in the right format? So I think that's why the team under Alex has made significant progress going from this 50% in... at the end of April, and now in the start of, you know, May, we're starting seeing that about a 60% range. But I'll let Abhishek add some more color.
spk06: Yeah, I think you have covered it pretty well, Reg. We are still trying to assess, and I don't know, Matt, if you know that there was another billing article that came late last week, and we're still trying to interpret everything that is out there, and we will basically make that assessment.
spk01: Yeah, there are some positives out of that, you know, that new billing article that have come through as well, Matt, which remove some of the earlier sort of issues that were raised, such as this, what was known as this seven-day rule, and also the requirement for a center to have the, you know, center protocol, for example, which has shifted more to the physician side. Robert will cover that more in detail as questions come up, but there have been some changes that I think will address that as well.
spk08: Got it. And if I can squeeze one more in, just Abhishek, just on the $40 million to $50 million annualized cost savings, in terms of how we should think about that phasing in, over the course of this year. Could you maybe help with a little additional color on that?
spk06: Yeah, sure, absolutely. So we have already started to take the actions and then my sense is that you will start to see in Q3 a proportionate impact to start to happen, right? not necessarily the full one-fourth of that $40 to $50 million, but I would say still a significant portion of that you will start to see in Q3, and then you'll start to build from there. And then Q4 and Q1, you'll probably start to see one-fourth of that impact and the benefits start to show up.
spk04: Great. Thank you very much.
spk07: And our next question comes from the line of Andrew Cooper with Raymond James. Please go ahead.
spk03: Hey, everybody. Thanks for the question.
spk10: Maybe first, you know, you gave a lot of those comments on kind of the rate of completed forms, but I just want to understand, when you say completed forms, are those completed in a way that, to your knowledge, does meet the requirements for reimbursement or just completing the information that then CMS or MoldyX or Noridian would need to contemplate to decide whether or not to actually reimburse for that test? Meaning, In the indication where you need to be replacing a biopsy, is it just that there's commentary to support or is it you think this is enough to actually justify the payment?
spk06: Yeah, so I'll make a few comments and then I'll let Robert make additional comments there. The way we have rolled out the new test requisition forms, we basically specifically ask the information that ensures that whether they are meeting the requirements of the new billing articles. So, yes, if they are complete, that would mean that they are billable. And what the numbers that we have been sharing in our call, I would say the 90% plus of those forms, they are basically billable to Medicare.
spk03: Okay. That's helpful.
spk10: And then, you know, I think when we initially spoke kind of after the first of the billing articles came out, there was some conversation around some incremental data, some things you could do on multimodality, you know, sooner versus later. I think potentially the comment was, you know, within sort of a month of that early March start. Can you give us an update for where you are in terms of driving, you know, more confidence in multimodality as opposed to single modality as a path forward?
spk01: Yeah, Andrew, I mean, I think multiple modality, I'll make some comments and hand over to Robert, but this is an area where, you know, we've obviously seen a lot of, you know, cleaning utility and, you know, demand from the marketplace given to the complementary technologies that will come. And I think we've had very, you know, good active dialogue with Moldex as part of that. So, Robert.
spk05: Yeah, you know, we certainly believe there's sufficient evidence to demonstrate that. the validity and the utility of heart care, our primary multimodality that we'd be discussing. There's even several independent publications on that utility. So we discussed our approach with Moldex, and they requested we submit some data. So we're preparing a detailed analysis that we will submit very shortly to them for consideration.
spk04: Great. That's good to know.
spk10: And then, lastly, I know you made sure to point out not anticipating a need for cash. We did see during the call a shelf debt file. So just a little bit of a thought, is that just corporate housekeeping, anything we should be thinking about, kind of any comments in regards to those two things as they fit together?
spk06: Sure. I'll take this one, Andrew. And then I just wanted to highlight that we as a company have been extremely prudent, and you will be able to see this from our performance in the last few quarters that we have been very focused on managing our cash. We ended the quarter at $286 million in Q1 when last year we used almost like $20 million. This year we were positive on the operating cash flow generation. So that basically shows the importance of cash for us as a management team. And this is going to stay the focus that as we assess and as we basically build a better understanding of the financial impact here, we will continue to make sure that we are doing the right things so that we don't have to raise cash.
spk01: Yeah, it's just part of standard housekeeping, and as we made prepared marks, there's no plan to do any raising. Thank you.
spk04: Great. I'll stop there. Thanks, guys.
spk07: And our next question is from the line of Brandon Quillard from Jefferies. Please proceed with your question.
spk13: Hey, thanks. Good afternoon. I want to check on the 8 to 9 million delayed March orders that you expect to submit in 2Q. Isn't there a chunk of additional orders in April and May that may also get deferred? So I was just thinking about recouping that, but also a portion of it that you're not going to be able to recognize again in 2Q as well. So if you can help us find that.
spk06: It was very difficult to hear you, Brendan. I'm sorry. If I were to rephrase, you're talking about the $8.9 million of tests that we did not submit in Q1 that we plan to submit in Q2.
spk04: So is the question around the revenue recognition for those tests? We cannot hear you, Brendan.
spk14: Yeah, that's right. I'm talking about the 8 to 9 million that you didn't submit in March, but you expect to recognize in 2Q. Isn't there another chunk in 2Q that would also get pushed out? So how do you think about the magnitude, I guess, of those two numbers?
spk06: No, I think that's the part of the complexity, right, Brandon, that we're trying to get better handle on. So, for example, the adoption of the new test acquisitions that we are seeing, the adoption has been about 50% and it has improved to 60%. There's still the remaining 30% to 40% that will come in Q2, where we will have to go back and supplement the information so that that meets the requirement of the new billing article. And then to your point, until the time we have been able to collect that information on those set of forms, we will not be able to recognize the revenues. So you are right that there will be more like a lag now on some of those tests that we were able to recognize revenue very easily in the past.
spk01: Yeah, and Brandon, part of that is why also, you know, Abhishek factored that into the, you know, considering guidance. I would break this into, you know, the time point of March 31st, the effective date. And I think, you know, the test from that pre-effective date was submitted. I think what you're hearing from us is that given the changes in the billing article requirement, different forms that, If we have them, you know, complete on new forms and in the right, you know, format, then those will be submitted. And I think we've communicated, you know, that training at the 50% mark in May, now training at the 60% mark, we continue that to increase. For those other tests, we will go back to the centers and request that information. So that's the lag curve that you're talking about. But we'll have a better feel on that adoption rate, which is why that's so critical.
spk14: Okay, that's helpful. And then the $40 million to $50 million of targeted cost savings, can you bucket that for us between the three OPEX lines, R&D, SG&A, and sales and marketing? And is that net of additional remediation costs that you're having to spend all the education efforts and hand-holding with customers?
spk06: So I would say that, yes. Instead of providing you the color breakdown the cogs and the optics. I think this is kind of so Recent that we are still I probably just tell you that It's primarily related to the headcount a lot of actions that we have already taken and then those headcounts are basically cutting across I would say different P&L lines on the R&D on SNM and the GNA and On the COG side, you will not see a lot of headcount reduction as of right now, because we are still processing the tests that we are receiving. And as we basically build more understanding of the volumes and everything, we'll probably see, but at the same time, any actions that we were supposed to be taking on the headcount, we've already taken those actions. And then, of course, some of the other pieces that I highlighted, that we're looking into the discretion spend, the legal spend, and focusing on the rightful studies on the clinical trials and everything. So there are a lot of pieces there. And I would say that we are looking across all functions. It's a fairly sizable from the magnitude standpoint.
spk14: Okay, last one. You do have a buyback authorization out there. Is that currently being contemplated, you know, given the sell-off in the stock? And number two, what are the prerequisites exactly to, you know, feeling comfortable enough to re-establish guidance to help us understand what you need to see and get clarity on before feeling comfortable putting that back out there. Thanks.
spk06: Sure. So on the shared buyback, we put a pause on the buyback after the billing article came. So that's the first answer, Brendan. And once we get more understanding, then we will make a decision on that one.
spk01: Yeah, I think also on the guidance, I'll make some comments. I'll also let Abhishek talk more about it. I think We've talked about, you know, we're four weeks in, so we have some lead indicators now, and I think the other things that Abhishek was, you know, going through, I think the key ones is understanding that adoption, for example, and that uptake, which, you know, we're training at the moment. I think the other thing is understanding when, for example, Neridian adopts the first or the second of the billing articles they have and is at this time point. I think also discussion with Moldex. You know, they've done two revisions within eight weeks as well during this time. I think one of the other key variables is that out of our control of centers, and so I think, you know, for example, we've gone back to some of the, you know, centers, and these are large institutions, and they're fully supportive of what we do as a company and have gone back to their IT systems. That takes a couple weeks, and then we have the meeting with IT systems. That takes a couple weeks. So, in other words, with best practice, you have centers wanting to work with us, and as you're aware, to schedule these IT meetings, sort of meeting sometimes in a normal scheme of things takes up to a year. So I do think there are these variables, which I think we'll have more insight into, and I think we communicated and prepared remarks to look at that at the next quarter. But I do think we'll have certainly more of these lead indicators and sort of more understanding of some of these uncertain variables. Abhishek, anything else to add?
spk04: You got it.
spk07: And our next question is from the Line of Mark Massaro with BTIG. Please proceed.
spk09: Hey, guys. Thanks for taking the questions, and sorry to hear the headaches from this new policy. You know, my first question, you know, I understand, of course, that you suspended the 2023 revenue guidance. I just wanted to make sure that it would be logical that you're also suspending your adjusted EBITDA positivity goal in the first half of 23.
spk06: And that's true, Mark. We never guided the adjusted EBITDA. That was basically our goal. The guidance was around the revenues and that's the reason we were more explicit in calling that one out. But of course, given all the impacts and everything, the adjusted EBITDA goal for the second quarter is not there anymore.
spk01: Yeah, one thing, Mark, I think it's an excellent question because I think in our prepared marks, we really wanted to focus on the, at least mention the operational execution and the plan that we had in 2022 and how we continued that into 2021. I mean, I think what we demonstrated, once you included the impacted March test, we had the adjusted EBITDA of 2.5 million, which happened during what we had sort of projected and why we had this operational focus. And we thought part of that commentary might have been lost if we didn't mention it up front. So I think it's a good reminder of, you know, what we've executed as an organization, particularly over the last six to nine months, to get there and focusing on those three Cs, which remain unabated and a core focus for us. Yes, I think, you know, Abhishek has answered where we are with the billing article.
spk09: Okay, great. And Medicare is not your only payer. So, you know, I'm curious if you've had conversations with any commercial health plans, whether or not they have any intent of following the new Medicare policy.
spk01: Yeah, Mark, that's excellent. We talked about the three Cs, and I think what we've demonstrated with Firstly, the first thing with collections is that we can build an excellent plan and execute on it. And I think that's where you're seeing these collections exceeding the revenues and adding to the cash each quarter. So we're really excited by what we've been able to do there. On the prepared remarks, you probably heard about coverage. And I think this is an area where you're right, there's a significant opportunity in other areas, including where we've covered ICHLT guidelines, getting all the coverage for on the Allomap, and I think also as we look at some of the areas, both we have active areas of both on the kidney and the heart side that we're working on to share some news with in the next few months, which I think will be positive for the organization. So I do think this is the next stage of an area of opportunity for us. I do think there are multiple areas working with payers where we can talk about all the great work that we've developed, the science supporting our products, and I think this is well underway. So we feel good about what we'll be able to share in the next few months on the commercial side of things. Again, it all starts with a plan, Mark, and I think we did this deliberately last year with the three Cs. We're really executing the collection side. You're seeing that flow through, and I think now as we work with our commercial coverage team, we're starting to see some really exciting, good discussions, which we'll share more in the next few months.
spk09: Okay. You guys have been committed to data development, and one of the large studies you're working on is the SHORE study. It would seem that if you could publish perhaps an interim readout of that, I think the goal is to enroll, I think, 3,000 patients, but I think if you were to put out an interim readout, that might help satisfy, you know, perhaps CMS. Can you give us a sense for, one, whether or not you think that's true, and two, What are your plans to potentially show interim data? When do you think we might be able to see that?
spk05: Hi, this is Robert. So we're actively working on that. As you know, when you start one of these clinical trials, you start enrollment, but it takes time to get the full enrollment started, and then you have to follow each of those patients for the assigned amount of time. And in the middle of SHORE, COVID happened, and so enrollment took longer than we expected. That kind of explains where we are today. However, we do have this same goal that you've mentioned of a readout as soon as we can put one together. So we're actively in analysis of the data we have and working with our clinical operations group to ensure we've got quality data that we're working with to produce a publication.
spk09: Okay, thanks. Maybe last one for me. I think this has been asked, but maybe I'll try again. you guys talked about the 50% in April, now 60% on the forms. I think what we're trying to extrapolate is, you know, does that suggest the sort of, you know, an impact of up to 40% of volumes going forward? And, you know, I think related to that, I think another transplant player in the space talked about, I think headwinds of somewhere around 10 to 15%. So I guess I'm trying to marry the 10 to 15% I heard yesterday to trying to interpret the 60% metric that you gave tonight.
spk06: Yeah, let me take a shot at it, Mark. So the adoption rate that we're providing of the new TRS, that 50% and it has gone up to 60% in May. So for the remaining 30 to 40%, we will still go back to those transplant centers and we will require or request for that information. So there's an additional administrative burden there, but that doesn't mean that you cannot recognize the revenue. So it's not lost. So I think I just want to make sure that that's pretty clear. The other piece that you're probably looking for, I don't know what is that 10 to 15%, but maybe the other piece that we discussed in the call was around this initial impact on the volumes, the early indicators that we have seen that I basically discussed earlier. So that's the only other piece that on the volumes, the early indicators, some of the headwinds that we are seeing.
spk01: Yeah, Mark, I think just to be consistent, I think the initial disruption volume trends, I think were fairly consistent with what others have said, actually. If I looked at the range, I think Abhishek had shared it was the teams, right? And I think that's consistent with what we've heard from others. I think what we're sharing here is that we, as a company, we take what we do seriously. And I think at the same time, what we're doing is the forms have to be updated and we know that systems have to be updated and we're responsible to do that, which is what we're doing. I think if certain centers who are on EMRs and we're dependent on them, we can't say, let's submit old forms just because they've been sent over because they need to be, we need to go back and say, can you please clarify this? I just want to make that important distinction, Mark, because as a company, that's important for us to follow that process and that's what has been requested. So the good thing about that is there's time to go back to those centers as part of what's allowed in this process. But we just want to make clear that it doesn't mean it's lost volume. It means that what you do is you want to make sure what you submit is what's being required. And I don't know if others certainly have, you know, EMRs where they can certainly, you know, if they haven't changed them, then they need to be updated at those centers.
spk09: Okay. Yep, that makes sense. Thank you for the clarification. Absolutely. Thank you.
spk07: And our next question is from the line of Alex Novak with Craig Hallam Capital. Please go ahead.
spk12: Okay, great. Good afternoon, everyone. Maybe a similar question along the same vein. The $8.9 million of revenue that was withheld from reimbursement here in Q1, is that basically an absolute worst-case scenario of what the impact of revenue and volume could be from March 7th to the end of Q1?
spk06: So, basically, these are the tests for our Yellow Shore Kidney Medicare, and these are all the tests, every single test, because we did not bill anything during that period. So, yes, you are right.
spk12: But it includes for-cause and for surveillance, I guess I'm trying to understand, or is it only surveillance?
spk06: No, it includes every single Medicare test.
spk12: Okay, understood. And then I just want to be clear. So on one hand, you're making these big cost cuts. You're laying off 12% of the workforce at CARE-Dx. But on the other hand, you're also saying you're going to challenge Neridian directly. You're saying that the billing articles aren't consistent with the LCDs. You opened up with that, that Neridian still needs to pay for these tests. So is that challenge to Neridian a bit of a Hail Mary out there? and potentially pushing them to maybe not implement the Moldex policy?
spk04: This is Robert.
spk05: I think, you know, what we said was that, you know, we believe these are changes. I don't know that there's a specific challenge generated in there. We will, of course, follow them as the, you know, we've worked with Moldex to make sure that we understand and what we need to follow. We do believe that these are changes and we'll work to address that. as you've seen, you know, in the professional societies that have addressed them as well.
spk01: Yeah, Alex, I think in our preparing rocks, we had numerous discussions with Moldex and planned out for discussions with them. We also reached out to CMS for the matter and plans to reach out to Meridian. So I think this is dialogue. Yeah.
spk12: Okay. And, you know, from the CAC meetings that were in November and also from the coverage policy that came out, it looked like it was pretty clear that Medicare wanted more utility data on the surveillance population. I think they even said that, and one of the KOLs said that during the CAC meetings. So beyond new forms, you had the KOR study, which did have a big surveillance aspect. When should we expect to see more data from KOR get published in a peer-reviewed journal? And then other than forms, what other data could you show to generate why using cell-free DNA, why using gene expressions to monitor these patients is ultimately better for patient care? in both the forecast and the surveillance setting.
spk01: Yeah, Alex, I'll let Robert, you know, add some more commentary, but I just want to go back to what we shared before. I think if ourselves and others have seen this, you know, team's sort of impact, what we're sharing is that, you know, with the remaining those percentages is what we're working with is getting that updated, and I think that's the key, and I think, you know, what we've seen is the getting the right forms is the focus and the faster we do that, the better. So I do think that has been the focus of how do we ensure that as with others have had this teen impact, then what do we do with all the forms that are coming out? It's making sure they're compliant and what we see per the billing article request. So Robert, I don't know if you want to add more in terms of KRL data plus also some of the areas that Alex asked about.
spk05: Sure, we've got multiple approaches to this aspect of evidence generation in surveillance, and one of those, of course, is KOR, as you mentioned. It is a more mature study. It's been around longer than SHORE. It faces all of the same requirements that I mentioned for SHORE, but the additional requirement that if you're looking to have a measure of surveillance, you need to have the full time course for all of the patients. And so as that nears completion this year, then we'll start working on those and analysis and publications. We don't have a timeline yet.
spk12: Okay, understood. And then just the last question, just any status update of the DOJ investigation, the state inquiries, were any of these inquiries related to the reimbursement that Moldy X ultimately changed? And then I saw there's a lawsuit you filed against your liability insurance provider.
spk04: Just what was that for?
spk06: Yeah, there isn't any material update on the DOJ and the SEC side of the site. And I didn't catch the second part of your question, if there was any.
spk12: Yeah, I mentioned it was in the 10-Q. It mentioned Kearney Expo, the lawsuit against your liability insurance provider.
spk06: Yeah, so maybe that is basically that we might have initiated something with our insurance provider to recover some of the expenses that we have incurred on some of these legal cases.
spk04: Got it. Okay. All right. Thanks for the update.
spk07: And our next question is from the line of Mason Carrico from Stevens. Please go ahead.
spk11: Hey, guys. Maybe one just on how you're thinking about the market overall, sizing it up at this point, assuming, you know, this policy plays out as it's written, I guess. So how do you think about, you know, the overall testing opportunity for Allisher kidney? Thinking about the number of new kidney transplants each year, as well as the number of patients living with a kidney who would be, you know, more likely, you know, surveilled. I guess, just how are you thinking about the testing opportunity now?
spk01: It's a really good question about the market dynamics. I think one thing that hasn't been covered as much, I think we've talked about the impact on the market, and we obviously continue to beat the market growth as a company, but particularly at ICHC, for example, and in other meetings, there's a real excitement about what some of these organ transfer, organ perfusion companies can do, plus also with some of the other latest approaches to expand the organ base, such as using NRP. And so as we look at this, and we've always had this as part of our longer-term look at the transplant market, is that it has potential to double the number of transplants in space. It's a really good point because I do think transplant is a fairly unique space, and I think it's one which still has that you know, ability to grow. I think we talked a bit about the kidney side with living donors being sort of the most impacted during that COVID period and hadn't reached its sort of, you know, previous peak point post-COVID. But I do think it's a, you know, as you look at the space overall, there are multiple, you know, players entering to say, how can we sort of increase the number of, you know, organs or increase the viability organs? Or how do we expand, you know, alternative types of organs for this space? So it remains to be asked because at the end of the day, Mason, what you have is basically, you know, a lot of, you know, patients who don't have enough organs available. And so that unmet need remains. And you have, you know, essentially, you know, a large number of patients who get an organ, but this organ doesn't last, you know, a lifetime. And so I think, you know, you see the importance, for example, there was a New York Times article by one of the, unfortunately, one of the patients who shared her experience with this, where you know, she did pristine management of her organ, but where ultimately, you know, she was dealt with some of the secondary issues of long-time immunosuppression with malignancy. So I do think, you know, it's a really good point of, you know, transplants can double, but also at the same time that, you know, we continue to play a role in this space because I think, you know, this space still has a lot of areas to grow, particularly if you think of the impact of immunosuppression and other areas that we can address. So really, really nice points, Mason.
spk11: Yeah, thanks for that. And maybe to expand there a little bit, in terms of the change in testing frequency, if surveillance patients, you know, if you can only use these non-invasive tests when a surveillance biopsy would be used or, you know, for a four-cause biopsy, that's the only time these tests could potentially be reimbursed. I know we're still figuring that out, but But do you feel like Alisher's TAM has shrunk? Do you still feel confident that it's, you know, a large opportunity based on this new billing policy? I guess just any additional color there?
spk01: Yeah, I think what we've seen along with others is this team sort of impact in the first four weeks. That's a lead indicator that we both have. And I think, you know, the goal now is of those of the tests that we received is how do you make sure that they can be thought in the right forms. But I think, you know, us and others have seen sort of a similar impact, which is around the teens, right? The high teens is what, yeah, is what was described. So I think, you know, for us, you know, transplant at the end of the day is, you know, a set of patients who, you know, we think should be treated in a way that gives them every opportunity to have that organ for life. And I think in many ways, they're a very unique group who actually have to face with lifelong expression. They're a group who you know, know that the organs, you know, historically have failed. So for us, it's important to support that patient group. At the end of the day, that's our mission as an organization to do that, and I think that's really important. So I think it's still early. It's a really good question, but I think one of the things is we've highlighted it's early. We have, you know, four weeks of data, and now we have a week of May to talk about, and I think the good thing is, you know, more and more information will come through during this time as part of that process. But the goal is to operationally focus. We've demonstrated during the course of 2022 that we were able to operationally focus, which is why we sort of wanted to get out front the Q1 results and also how we were able to deliver on that. And now we have a new plan, which is Alex and his team, how do they ensure that the centers are operationally updated, the key gating step obviously being systems. So we can't We can't force centers to update their EMRs, but there will be a subset of centers which will not have those EMRs up to date, right, and will take time. So I think that's really important for us to focus on as well.
spk11: Got it. Thanks for that, Reg. And last one for me here, and I apologize if you guys have answered this, but in terms of the centers that have integrated their systems and are up and running, so to speak, have you seen a difference? or a decrease in orders from those centers in general? Are they still using Allisher kidney at the same frequency as they previously were, or has that changed at all? Are there any, you know, early indicators about how that's shaking out?
spk01: Yeah, I think everything's, you know, center by center. I think what we've seen is similar to others about this, you know, team's impact. So I think at a macro level, that's probably the what we've observed, what others have observed as well. I don't know if there's any additional commentary the team has to that, but I think that covers what we've seen and others have seen at the moment across the business.
spk07: And our next question is from the line of Yi Chen with HC Wainwright. Please go ahead.
spk02: Hey, this is Chade on behalf of Yi Chen. I'm sorry if I missed this during your prepared remarks, but could you provide color on the total number of centers you anticipate to educate every quarter and subsequently hope to see implementation of these new processes?
spk01: Yeah, what we shared is the complete universe of heart, kidney, and looking at not just centers, but also practice or community practice as well. I think we shared there were more than 550 in that total universe, and the team has been focus on where 90% of the volume is and that they've had 80% of those centers now currently educated as part of that process.
spk02: Okay, great. Thank you. And the last one on future catalysts, I know you made a brief remark about it, and also you addressed a few in your question and answer session, but are there any other readouts or publications that we need to keep an eye out for in this year?
spk01: Yeah, a lot of, I think a lot of, and I'll add Robert to that as well, I think a lot of the good questions came out in terms of, you know, when do we have some additional updates on areas which heart care is being prepared based on Moldex feedback for resubmission. I think also, you know, some of the other analysts have talked about on the, you know, kidney side and on the heart side some of the studies we're doing so they're more prepared. I think when we talk about catalyst flow, we were specifically talking about some of the new introductions And so there would be things such as when active discussions on allosterol lung, for example. I think another area was, you know, Euromat, which I think is a new modality, which provides, you know, a really interesting approach to the portfolio, just given there are no, you know, commercially available, you know, urine tests out there. And this comes from Cornell by the world-leading expert there, and also, you know, multiple New England journal publications. So I do think this, you know, space is welcome to additional types of what we call catalyst offerings, which I think the day is bringing, you know, new innovation to the space. And so, yeah, there are other areas that we would look at, particularly for Euromap for this year. Robert, anything else you want to add?
spk05: I think on specifically about publications, and I think I've mentioned that, you know, those are things that we work on as soon as we can from the output from the CAOR study and an interim readout on the SHORE study. Others are, you know, always in the works, but it's difficult to predict timing of publications that involve, you know, peer review, et cetera. So, hard to comment on timing of those. As Reg mentioned, you know, we still are pursuing all of our catalysts. They're all things that are of high impact to patient care, and we want to make sure that we make those available for patient care as soon as we can.
spk04: Thank you, Ed.
spk07: And there are no further questions in the queue at this time. I will now turn the call back over for closing remarks.
spk01: Thanks very much. I want to thank the analysts and the investors listening to this call and if there are any different folks or patients, for example, as well. And I think we know that it's been a tough time. We also know that what we do is a very unique space and one where I think there's obviously been some changes. And I think for us, We had a specific plan in 2022, which I think we've continued to deliver on Q1. I think moving forward, we have an updated plan, which the team's committed to executing on now as well and addressing some of the newer challenges that come through. And again, we thank you for your support, and we thank you for your commitment to transplant patients. Thank you again.
spk07: That does conclude your conference call for today. We thank you for your participation and ask that you please disconnect your lines.

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