CareDx, Inc.

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.

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.

Thanks, Abhishek. I think let's have Greg, if you can work with the operator to open the line to Q&A. Thank you.