Castle Biosciences, Inc.

Good afternoon and welcome to Castle Biosciences' third quarter 2019 conference call. As a reminder, today's call is being recorded. We will begin today's call with opening remarks and introductions, followed by a question and answer session. I would like to turn the call over to Frank Stokes, Chief Financial Officer. Please go ahead, sir.

Thank you, Catherine. Good afternoon, everyone, and welcome to Castle Biosciences' third quarter 2019 financial results conference call. Joining me today is CASEL's President and Chief Executive Officer, Derek Maetzold. Information recorded on this call speaks only as of today, November 11, 2019. Therefore, if you are listening to the replay or reading the transcript of this call, any time-sensitive information may no longer be accurate. A recording of today's call will be available on the Investor Relations page of the company's website for approximately three weeks. Before we begin, I would like to remind you that some of the information discussed today may contain projections or other forward-looking statements regarding future events or the future financial performance of the company and are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements are based upon current expectations and involve inherent risks and uncertainties and there can be no assurances that the results contemplated in these statements will be realized. A number of factors and risks could cause actual results to differ materially from those contained in these forward-looking statements. These factors and other risks and uncertainties are described in detail in the company's final prospectus filed with the Securities and Exchange Commission on July 26, 2019 relating to our registration statements on Form S-1 and in the company's other documents and reports filed with the Securities and Exchange Commission. These forward-looking statements speak only as of today and we assume no obligation to update or revise these forward-looking statements as circumstances change.

I'll now turn the call over to Derek. Thank you, Frank. Good afternoon, everyone. Thank you for joining us today. Please report strong third quarter performance, which includes increases in year-over-year revenue, volume and gross margin. For the third quarter, we reported revenue of $14.8 million. and increased of $11.1 million from the third quarter of 2018. Our primary growth driver, our DecisionDx melanoma test, we provided 4,126 test reports in the third quarter of 2019, compared with 3,136 reports during the third quarter of 2018, representing growth of 32%. Additionally, we continue to demonstrate growth in new ordered clinicians at 26% for the third quarter of 2019 compared to the third quarter of 2018. For further comparison of our growth in new ordering clinicians, note that we saw a 5% growth in the third quarter of 2018 compared to the third quarter of 2017. So a jump to 26% is substantial. Overall, we delivered 4,482 proprietary gene expression profile test reports for DecisionDx Melanoma and DecisionDx UM during the third quarter of 2019, representing overall growth of 30% compared to the third quarter of 2018. As you can see from our DecisionDx Melanoma test volume increase, we continue to see excellent growth following both our first quarter 2019 commercial expansion and our ongoing development of evidence. You may recall that in the first quarter of 2019, we increased the number of outside sales territories from 14 to 23, along with associated headcount for our commercial and medical affairs personnel. As a result of the acceleration of our growth in the second quarter and third quarter of this year, we decided to execute our commercial expansion plans in December 2019 and plan to add nine additional outside sales territories and hire additional commercial and medical affairs staff accordingly. With these additional nine, we will now have 32 outside sales territories. Turning to our DecisionDx UM test, we delivered 356 test reports for UV melanoma patients during the third quarter of 2019, a 10% increase in the same period last year. For the first nine months ended September 30th, 2019, UV melanoma test report volumes are up 6% compared to the same period in 2018. As a reminder, our DecisionDx UM test is standard of care for patients diagnosed with UV melanoma, and we currently test more than 80% of the estimated newly diagnosed patients in the U.S. Now, I would like to turn to several significant highlights from our third quarter. First, as it relates to our new pipeline products, We remain on track for commercial launch of our two pipeline products for the second half of 2020. DecisionDx-FCC for patients diagnosed with localized high-risk cutaneous squamous cell carcinoma and our test for suspicious pigmental lesions. We believe these two late-stage pipeline products will increase our estimated total addressable U.S. market by approximately $1.4 billion. Regarding DecisionDx-FCC, During October's annual meeting of the American Society for Dermatologic Surgery, we reported data from the clinical validation study for those tests for use in patients diagnosed with localized high-risk cutaneous squamous cell carcinoma, also called FCC. We estimate that approximately 1 million patients are diagnosed with high-risk FCC overall in the U.S. each year, and the incidence is growing. SCC has historically been viewed as a lower risk skin cancer relative to melanoma. However, due to the higher incidence rate, it is estimated that approximately 15,000 patients will die from SCC this year, more than will die from cutaneous melanoma. So the historically benign low risk disease today contributes more deaths than the most aggressive form of skin cancer. Our cutaneous squamous cell carcinoma is currently focused on the approximately 200,000 patients who are identified as having one or more high-risk or pathologic features. We believe appropriate use should be focused on the patient with one or more clinical or pathologic high-risk features. Now let's talk about the differences in treatment plans between low- and high-risk patients and where we believe our tests can impact treatment plan decisions. Currently, national cancer guidelines define two different treatment plans for patients with localized cutaneous squamous cell carcinoma based upon low-risk versus high-risk categorizations. Low-risk is defined as having no high-risk clinical pathologic features, while high-risk is defined as having one or more of these same features. Treatment plan differences include approaches to nodal staging, use of adjuvant radiation, Use of adjuvant chemotherapy, use of active surveillance, and clinical trial enrollment recommendations. The clinical issue facing physicians and their patients is that the positive predictive value, or PPV, of available staging systems is low. That is to say that the majority of patients identified as having high-risk disease do not actually go on to metastasize. This means that the majority of high-risk patients may be undergoing aggressive treatment plans they do not need and therefore will not benefit from. Our development goal is to identify a gene expression profile test that would enable a rule-out or de-escalation approach in these high-risk patients. I'm pleased to say that our R&D team, with the assistance of 23 active clinical study centers in the U.S., were able to develop a training cohort lock the gene-centered algorithm based upon this training cohort, and then complete validation in an independent cohort of 321 patients. Importantly, 93% of all validation cohort patients were high risk by the National Comprehensive Cancer Network, or NCCN, risk criteria. So our validation cohort mirrors the population that we believe meet the appropriate use criteria for our DecisionDx SCC test. The data presented at the American Society for Dermacologic Surgery showed a negative predictive value, or NPV, for DecisionDx SCC Class 1 test result of 91.1%. The result in PPV for the highest risk DecisionDx SCC Class 2B test result was 60%. This compared to a 35.3% PPV for the Brigham and Women's Hospital staging system, 20.9% for the American Joint Committee on Cancer's staging system, and 16.7% for NCCN's risk criteria. Regarding the potential clinical impact of our decision to X-STC test, 61% of patients who had a tumor with a class one or the lowest risk test result meaning a clinician could consider de-escalating care in approximately 60% of high-risk patients. And the highest-risk Class IIb test result provides the clinician with objective data to confidently proceed forward with implementing a high-risk treatment plan that may include adjuvant radiation, chemotherapy, and clinical trial recommendations as noted earlier. We have engaged through late last month a total of 56 U.S. Centers, who are working with us on both this initial validation study and ongoing performance studies for the DecisionDX-STC test, including a prospective study. The DecisionDX-STC test is the second skin cancer test discovered, developed, and validated by Castle Biosciences. Validation studies are underway for our third skin cancer test. This one targeted the patients with a suspicious pigmental lesion. We did not have a data update at this time. However, we continue to believe that pending successful validation, both the DecisionDx STC test and the Suspicious Tumor and Lesion test are in position to launch in the second half of 2020. Lastly, in the third quarter, we saw continued publication of evidence to support appropriate use of our DecisionDx melanoma test and coverage by commercial payers. One of these peer-reviewed studies was published in the American Journal of Clinical Dermatology by Daniel Dubin and colleagues entitled Level of Evidence for Gene Expression Profile Tests for Cutaneous Melanoma. The objective of the study was to review peer-reviewed published literature and establish the level of evidence for decision DX melanoma. A review of seven developments and validations for decision DX melanoma was conducted. The respective traits, weaknesses of each study were applied to the level of evidence criteria from major organizations that published guidelines for melanoma management, including the American Joint Committee on Cancer, the National Comprehensive Cancer Network, or NCCN, and the American Academy of Dermatology. This manuscript shows that based upon evaluation of all the published evidence of the decision DX melanoma test achieves, a higher level of evidence and the one determined by each of these groups. Of note is that the level of evidence achieved in Dr. Dubin's manuscript was due to the timing of the analysis without the inclusion or benefit of three prospective studies published between February and May of 2019. This study brings the total number of peer-reviewed publications to 22 that support one or both of the current Two clinically actionable uses of a decision DX melanoma test. The first clinical use of our test is to inform decisions on fentanyl lymphoma biopsy in patients when the tumor thickness is less than or equal to two millimeters. And the second use is to guide substance treatment plan decisions. As previously stated, we believe our continued investment in evidence development is key to supporting both patient penetration and coverage by commercial payers. We recently received notification that the American Medical Association CPT editorial panel accepted our application for a Category 1 Ma CPT code for our decision DX melanoma test. The code will be effective on January 1st, 2021. Attaining a Category 1 Ma CPT code means that we have met certain levels of evidence requirements. For example, the clinical efficacy needed to be documented in the literature, hence our focus on evidence development. Additionally, it requires that the test use be performed with a frequency consistent with the intended use, that this use is consistent with current medical practice, and that it is performed by many physicians or other qualified healthcare professionals. Our DecisionDx melanoma test was viewed as meeting all of these criteria, which we agree with. Thank you, Derek. We're pleased with the strong growth we delivered in the third quarter of 2019. We reported $14.8 million in revenue and