CareDx, Inc.

Stand by, your program is about to begin. Good day, everyone, and welcome to today's CARE DX, Inc. Third Quarter 2024 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, you will have the opportunity to ask questions during the question and answer session. Please note, today's call will be recorded. and I will be standing by should you need any assistance. It is now my pleasure to turn the conference over to Greg Hadacek, Managing Director. Please go ahead, sir.

Thank you, Chloe, and good afternoon. Thank you for joining us today. Earlier today, CareDX released financial results for the quarter ending September 30, 2024. The release is currently available on the company's website at www.caredx.com. John Hanna, President and 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 laws, 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 of 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 and descriptions of the risks and uncertainties associated with our business, please see our filings with the Security and Exchange Commission. The information provided in this conference call speaks only to the live broadcast today, November 4, 2024. CareDX disclaims any intention or obligation, except 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. Reconciliation to the most direct comparable GAAP financial measure may be found in today's earnings release filed with the SEC. I will now turn the call over to John.

Thank you, Greg, and thank you to all who are listening to today's call. CaretX had another strong quarter with year-over-year growth across our business. We reported revenue of $82.9 million, representing 23% year-over-year growth. We expanded our gross margins and managed our expenses well, leading to positive adjusted EBITDA of $6.9 million above our guide of being EBITDA-neutral. We generated $12.5 million in cash from operations and ended the quarter with a strong balance sheet of $241 million in cash and cash equivalents and no debt. We believe CARE-DX has turned the corner toward long-term profitable growth. In my prepared remarks, I will provide commentary on Q3 and insight into Q4 and our revised guidance. Then I will turn the call over to Abhishek, who will review our finances and guidance assumptions in further detail. In testing services, we delivered approximately 44,600 tests, up 16% from the prior year. This represents the fifth consecutive quarter of sequential growth in testing services volumes. Testing services revenue was $60.8 million, up 27% year over year, including $1.2 million in revenue from tests performed in prior periods. We have begun to execute the strategy we laid out at our 2024 Investor Day that will unlock profitable growth at CareDx by engaging transplant centers with solutions that include a synergistic portfolio of testing, digital, and lab products, and are seeing early successes with this strategy. The first step was to reorganize our go-to-market team into a structure that places our customers at the center of everything we do. To capture the testing services growth opportunities ahead of us, we have already added 15 of a planned 30 sales and marketing team members to promote and sell our leading transplant solutions. In addition, we are adding 20 team members to our billing organization, of which we have already hired approximately 10 team members to date, to drive greater collections and expand our ASP. In mid-August, the Centers for Medicare and Medicaid Services reaffirmed their commitment to covering testing for solid organ transplant monitoring, including for surveillance. I anticipate it will take two to three quarters for kidney transplant centers across the country to readopt surveillance testing protocols. Establishing a protocol at a transplant center is a departmental consensus process that may take several months to agree upon, draft, document, and logistically implement the workflow. Since the beginning of September, 10 transplant centers that we work with have established new protocols that include kidney surveillance testing. And we began to see a shift in our testing mix towards surveillance in the second half of September that continued through the month of October. In their August press release, CMS signaled that a future draft LCD may be introduced that we anticipate may address the rapidly growing literature in this field, including the recent Nature Medicine multicenter study of 2,882 patients demonstrating that surveillance with AlloSure kidney improves detection of all types of rejection. We continue to maintain an open line of communication and message advancements in the evidence supporting AlloSure testing to the agency and our MAC contractors. For example, in October, the American Society of Transplant Surgeons issued a statement on the importance of serial testing using donor-derived cell-free DNA in kidney and heart transplant patients. In kidney, they recommended serial testing in patients with stable renal allograft function to exclude the presence of subclinical antibody-mediated rejection. And in patients with acute allograft dysfunction to exclude the presence of rejection. In heart, they recommended using donor-derived cell-free DNA to rule out subclinical rejection. They also recommended that clinicians using donor-derived cell-free DNA also utilize peripheral blood gene expression profiling, such as our heart care solution, as a non-invasive diagnostic tool to rule out acute cellular rejection in stable, low-risk adult transplant recipients. On the commercial payer side, in the third quarter, we added 4 million commercial covered lives. And last week, Highmark Blue Cross Blue Shield issued a policy providing coverage for Allishore kidney. For heart care, coverage was expanded by Highmark to begin two months post-transplant from the previous coverage beginning six months post-transplant. As of the end of the third quarter, we have gained approximately 31 million covered lives nationwide across our testing services business. We anticipate that this coverage, coupled with the expansion of our revenue cycle management team, will contribute to ASP growth that we will benefit from in future quarters. Moving to our patient and digital solutions, we reported revenue of approximately 12 million, representing 20% year-over-year growth. First, as we migrate customers from on-prem to SaaS products, we generate monthly recurring revenue and are able to improve our pricing. Second, HLA labs that utilize our lab products are increasingly adopting our HLA lab information management software solution, which we believe is best in class in the industry. And third, among our testing services customers, we continue to sell our transplant pharmacy and medication adherence solutions to drive revenue growth. In October, we signed an agreement with the University of California Health System, which includes UCLA, UCSF, UC Davis, UC San Diego, and UC Irvine to implement MedAction Plan, our medication adherence SAS software application. MedAction plan is clinically proven to improve patient medication adherence, has been shown to contribute to significantly lowering 30-day readmission rates. Collectively, the University of California health system is one of the highest volume transplant health systems in the U.S., As we shared during our 2024 Investor Day, we've seen that the performance of accounts that had three or more CARE-DX digital solutions have a significantly higher new patient acquisition rate for testing services. We're encouraged by this early result from our account and portfolio-based approach aimed at addressing the needs of our center customers and creating long-term customer stickiness. Moving on to lab products, we reported revenue of $10.2 million, representing 7% year-over-year growth. The continued global adoption of our industry-leading ALICEQ-TX NGS-based HLA typing kits primarily drove this growth. We continue to innovate to offer best-in-class HLA typing products in the market. Two weeks ago, at the annual meeting of the American Society for Histocompatibility and Immunogenetics, or ASHI, the largest annual HLA lab meeting, we presented new data on ALICEQ-TX11, the next generation of our ALICEQ assay with increased coverage of Class II loci. We also announced the launch of our next generation assigned software for ALICEQ-TX HLA typings. featuring a newly improved user interface and streamlined workflow to view 24 or 96 multiplexed ALICEQ-TX samples in real time as results become available without waiting for the full batch to result. We expect to make the new assigned software available to HLA Lab customers in December of this year, adding a best-in-class software solution to complement our best-in-class Alloseq NGS chemistry. At ASHI, we also announced our newly improved Q-type rapid HLA typing solution for deceased donor organs, which now includes single-bead antigen resolution to facilitate virtual cross-matching for faster transplant organ allocation decisions. And finally, at ASHI, we also announced a partnership with Dovetail Genomics to launch an early access program combining CARITYX's ALICEQ-TX with Dovetail Genomics High C Link Prep technology to achieve high resolution genotyping and haplotyping without the need for family genotyping studies. The pairing of these technologies has the potential to improve transplant outcomes through better matching at the haplotype level. Our continued investment into HLA typing solutions demonstrates our ongoing commitment to delivering the most innovative solutions to support pre-transplant recipient and donor matching across solid organ and stem cell transplantation. Moving on to our corporate business updates and guidance. In Q3, we also made significant corporate progress. First, I added new senior executives to the company, including a chief operating officer, chief commercial officer, and chief data and AI officer, and reorganized our operating structure for long-term profitable growth. In addition, this past week, Chris Caesar, a seasoned market access professional from Pfizer, Myriad Genetics, and most recently Delphi Diagnostics, has joined CareDX to lead our global market access initiatives to drive coverage and reimbursement of our products. Second, during our 2024 Investor Day held mid-October, we laid out the CareDX three-year growth strategy and financial plan to becoming the most innovative company in diagnostics. We are targeting to exit 2027 with $500 million in revenue, 20% adjusted EBITDA profitability, and an additional $100 million in cash on our balance sheet. Third, the DOJ closed its investigation into CarityX with no findings of wrongdoing. The DOJ's decision follows the SEC's decision in September of 2023 to close its investigation and take no action against CarityX. We believe the closure of the DOJ's investigation underscores that the underlying allegations, which have now been reviewed by two separate government agencies, were meritless. And fourth, a competitor has dropped their pursuit of patent infringement claims and a potential injunction against our current Allishore testing method. While we believe competition is good for innovation and patient care, we will continue to defend the novel technology we first brought to market against what we view to be baseless claims of infringement. The jury verdict against CARE-DX's prior Allishore process remains under court review, and we intend to continue to push for the invalidation of all patents that have been asserted against us. Now turning to our guidance. Giving our strong year-to-date results and expected growth for the remainder of the year, we are raising our revenue guidance for fiscal year 2024 to the range of $327 million to $331 million from our prior guidance of $320 million to $328 million, a growth rate of approximately 17% year-over-year at the midpoint of our guidance. From the midpoint of our revised guidance, we continue to target a growth CAGR over the coming three years of approximately 15%. We anticipate the pacing of that growth to accelerate from low teens in 2025 to high teens in 2027. Excluding $14 million in one-time revenue in 2024, the growth rate for 2025 is anticipated to be in the high teens. During our Q4 earnings call, we will provide further details on our full year 2025 guidance. In summary, we had a strong quarter with year-over-year growth across all our solutions, including testing services, digital, and lab products. I want to close by congratulating the transplant community, including the hundreds of clinicians, thousands of patients, and over a dozen members of Congress that advocated in support of monitoring assays for solid organ transplant rejection, including for surveillance. We continue to advocate vigilantly on behalf of patients to ensure that they have the same longstanding access to monitoring assays that allow for early intervention of graft rejection and improved outcomes. I will now turn the call over to Abhishek to share more details on our third quarter financials and our guidance. Abhishek?

Thank you, John. In my remarks today, I will discuss our third quarter results before turning to revised 2024 guidance. Unless otherwise noted, my remarks will focus on non-GAAP results. For further information, please refer to GAAP to non-GAAP reconciliations in our press release, earnings presentation, and recent SEC filings. Let me start with the key financial highlights. Reported total revenue of 82.9 million for the third quarter, up 23% year-over-year. Delivered approximately 44,600 test results, up 16% year-over-year, and 2% as compared to the last quarter, representing the fifth consecutive quarter of sequential testing services volume growth. Reported testing services revenue of 60.8 million, up 27% year-over-year. including 1.2 million associated with tests performed in the prior periods. Reported patient and distal solutions revenue of 11.9 million, up 20% year-over-year, and products revenue of 10.2 million, up 7% year-over-year. Reported an adjusted EBITDA gain of 6.9 million compared to a 10.9 million loss in the same quarter of last year. Finally, generated cash of $12.5 million from operations and ended the quarter with $241 million in cash, cash equivalents, and marketable securities. Moving to the details, starting with gross margin. Our non-GAAP gross margin for the third quarter was 69%, up 240 basis points as compared to non-GAAP gross margin of 66.6% in the same quarter last year. Our non-GAAP testing services growth margin was 79% in the third quarter compared to 74% in the third quarter of 2023. The improvement in testing services growth margin was driven by volume growth, ASP expansion, as well as continued efficiencies in managing our lab operations. $1.2 million in revenue associated with tests performed in the prior period also added about 40 basis points to the non-GAAP growth margin. Our patient and digital solutions non-GAAP gross margin for the third quarter was 37%, as compared to 39% in the third quarter of 2023. Excluding our transplant pharmacy, which has a low gross margin profile, our patient and digital solutions non-GAAP gross margin for the third quarter was approximately 60%. Our product's non-GAAP gross margin was 46% in the third quarter, down from 58% in the third quarter of 2023, and in line with non-GAAP gross margin of 47% last quarter. Product gross margin can be impacted by the variability in our production schedule. In the third quarter of 2023, gross margin was higher due to an end-of-life bulk build for one of our HLA typing kits. We anticipate another end-of-life bulk build in the fourth quarter of this year. Moving down the P&L, non-GAAP operating expenses for the third quarter were $52.2 million, down approximately $5.5 million from the third quarter of 2023 and down $3 million from the previous quarter. The quarter-over-quarter decrease in our operating expenses was primarily associated with lower conference costs, push out of some expenses related to clinical trials, and lower legal spend. Our adjusted EBITDA gain for the third quarter was $6.9 million, compared to adjusted EBITDA loss of $10.9 million in the third quarter of 2023, an improvement of $18 million. This was driven by strong revenue growth, improved dose margin, and lower operating expenses. Excluding the $1.2 million in revenue associated with tests performed in the prior period, adjusted with our gain would have been $5.7 million in the third quarter. Turning to cash, we added approximately $12 million to our cash balance in the third quarter, primarily driven by cash generation from operating activities. We ended the quarter in a strong position with cash, cash equivalents, and marketable securities of $241 million and no debt. Turning to guidance, Based on the performance across our business in the third quarter of 2024, we are raising our full-year revenue guidance to $327 to $331 million from our prior guidance of $320 to $328 million. The midpoint of our 2024 guidance assumes testing services volume growth in the mid-teens and implied revenue growth of 30% year-over-year for the fourth quarter of 2024. The difference in our assumptions between volume and revenue growth is driven by ASP expansion. In October, we experienced an impact of approximately 1% in testing volumes due to Hurricane Milton. This is incorporated in our revised guidance. We are assuming blended ASP of approximately 1,335 per test for the fourth quarter and no changes to our Medicare coverage. Our patient and distal solution is expected to grow in the mid-teens year-over-year. In Q3, we recognize revenue of $1 million in one-time initial setup fee for the completion of HLA lab management software implementation. We do not anticipate this recurring in the fourth quarter. Our lab products will grow in the high teens year-over-year. Moving to gross margin, we now expect our gross margin to be approximately 69% for the full year 2024, driven by the improved testing services gross margin. We're expecting a slight ramp up in our operating expenses in the fourth quarter associated with scaling of our commercial organization and billing operations to accelerate revenue growth in line with our growth strategy. Due to improved revenue expectations and gross margin, we expect our adjusted EBITDA gain for the full year 24 to be between 18 and 22 million compared to previously guided gain of 9 to 15 million. With that, I would now turn the call over to John to deliver closing remarks. Thank you, Abhishek.

I want to reiterate how excited I am about CARITYX's future and the journey ahead. We have the right team in place addressing the right market with the right products to deliver profitable growth. I want to thank the entire global CARE-DX team for their strong execution in the third quarter. And with that, I'd like to ask the operator to open the line for questions.