Castle Biosciences, Inc.

Good afternoon and welcome to the Castle Biosciences Third Quarter 2020 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. Thank you, Operator. Good afternoon, everyone, and welcome to Castle Biosciences Third Quarter 2020 Financial Results Conference Call. Joining me today is Castle's Founder, President, and Chief Executive Officer, Derek Maetzold. Information recorded on this call speaks only as of today, November 9, 2020. 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. Thank you very much. These factors and other risks and uncertainties are described in detail in the company's annual report on Form 10-K for the year ended December 31, 2019, 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, and good afternoon, everyone. These are exciting times at CASEL, and I appreciate you taking the time to join us today. As always, I would like to start today's call by thanking the CASEL team. Through their hard work and dedication to improving the lives of patients with skin cancer, we successfully executed our strategic priorities in the quarter and remain optimistic about our growth initiative's ability to position us well for both near-term and long-term value creation. This afternoon, I'll discuss our performance for the quarter along with recent developments Touch on what we believe the continued impacts of COVID-19 will be on our business, and then turn it back to Frank, who will provide more detail on the third quarter results and our financial position. In the third quarter, we saw strong performance on multiple fronts. This includes increased year-over-year revenue, return to year-over-year increase in DecisionDx melanoma report volume, and the successful execution on our commercial launch of DecisionDx SCC. are gene expression profile tests for patients diagnosed with cutaneous squamous cell carcinoma, commonly referred to as SCC, and with one or more high-risk factors. In other words, patients that today's guidelines label as high-risk. We estimate the high-risk SCC U.S.-only population to be 200,000 patients. To start, we are pleased that for the third quarter of 2020, Thank you for joining us. returned to year-over-year growth for the third quarter of 2020. As a reminder, our Decision EX melanoma test is used to guide or inform management of patients who are diagnosed with early-stage cutaneous melanoma. The diagnosis of cutaneous melanoma requires that a biopsy be performed and that the dermatopathologists render a diagnosis of cutaneous melanoma. In the third quarter of 2020, we provided 4,404 DecisionDx melanoma test reports, representing growth of 7% compared to the third quarter of 2019 and a 46% increase over the second quarter of 2020. We delivered this increase in year-over-year report volume, even as our analysis of third-party data tells us that in the third quarter, cutaneous melanoma diagnoses decreased by approximately 12% compared to the same quarter in 2019. Thank you very much. COVID cases are beginning to increase again in parts of the US, and that brings uncertainties about the continued impact to our business. As I just mentioned, diagnoses were down 12% in the third quarter compared to the third quarter of 2019. However, third-party data also showed an increase of diagnoses in the third quarter of 2020 compared to the second quarter of 2020. If patient trends continue without a significant change, based on our third-party data, Thank you very much. Additionally, at some point, we believe that delayed melanoma diagnoses will be diagnosed, but we are uncertain as to when. Our commercial team continued with their promotional efforts of combined in-person and virtual events during the third quarter. This paralleled our continued successful conversion of the majority of our in-person peer-to-peer programs to virtual meetings. Additionally, we did capture additional clinicians who order our DecisionDx melanoma test for the very first time during the third quarter of 2020. Turning to reimbursement, we accomplished an important decision DX melanoma milestone in the third quarter. As you may recall, the Medicare Administrative Contractor, or MAC, Palmetto Mole DX, issued a draft Local Coverage Determination Policy, or LCD, in August 2019. The final positive expanded LCD and the accompanying billing and coding article were posted in October 2020. The effective date for the Palmetto LCD and the billing and coding article is November 22, 2020. Importantly, this LCD article was nearly identical in terms of coverage to the draft August 2019 LCD, meaning that the expanded LCD provides reimbursement for the significant majority of Medicare beneficiaries whose clinicians order Thank you very much. issued an identical LCD and article to the Palmetto LCD. The Neridian LCD and article will be effective on December 6, 2020. In addition to what we see as positive news surrounding our DecisionDx melanoma test, we successfully executed on a launch of DecisionDx SCC, which became commercially available on Monday, August 31, 2020. The DecisionDx SCC test is intended for use in adding actionable, patient-specific information to risk assessment and to help guide management decisions in patients diagnosed with cutaneous squamous cell carcinoma with one or more risk factors, these so-called high-risk cutaneous squamous cell carcinomas. We have submitted our technical assessment dossier for Medicare coverage to Palmetto Mold DX, and in the third quarter, Palmetto confirmed that it was accepted as complete. Accordingly, we expect a draft local coverage determination policy to be posted in 2021, with finalization expected approximately 12 months following the draft. As a reminder, we expect Medicare to be our largest payer for decision to get to SCC, as the typical age at time of diagnosis of SCC is near 70 years. While it is certainly early and the U.S. is still dealing with COVID, we have seen strong interest from clinicians. Thank you for joining us. DecisionDx STC has been ordered 282 times by 193 clinicians, most of which were existing DecisionDx melanoma customers. Turning to our DecisionDx UM test for patients diagnosed with UV melanoma, we delivered 318 reports in the third quarter of 2020 compared to 356 reports in the third quarter of 2019. Thank you for joining us. Thank you very much. are evidence development to support appropriate use of our tests and support coverage by commercial payers and a strong pipeline. We saw strong progress in both in the third quarter. Data from a systematic review and meta-analysis of the decision DX melanoma test was published in print in the September 20th issue of the Journal of the American Academy of Dermatology, or JADD. Under multivariate analysis, the decision DX melanoma test was shown to be independent from other clinical factors such as age, Breslau tumor thickness, ulceration, and node status, and our decision DX melanoma test improved upon risk assessment performed with these staging factors alone. Under the strength of recommendation taxonomy, or SORT system, S-O-R-T, Thank you very much. Diagnosed with stage 1 to 3 melanoma, appeared in future oncology. Study authors developed a recommended melanoma patient care pathway that incorporates decision DX melanoma test results to help inform frequency and duration of follow-up visits, blood work, and surveillance imaging in line with predicted metastatic risk. A patient's decision DX melanoma test result was found to have an impact on the number and duration of follow-up and surveillance visits and that patients assessed as having high risk of metastasis as designated by a decision DX melanoma class 2 test result received more intensive management than patients assessed as having a low risk as designated by a decision DX melanoma class 1 test result. Clinicians using the test were shown to adjust patient management in a risk-appropriate direction within recommendations of national guidelines. The outcomes from this study parallel those of our previously published clinical utility articles and should help further drive marker penetration and reimbursement. With regard to our pipeline, last week we launched our second new test for 2020. By the way, not just the second in 2020, but the second in a span of 10 weeks. This test is named DecisionDx-DifDx Melanoma. or DIF-DX melanoma for short. DIF-DX melanoma is our test for patients with a suspicious or difficult to diagnose pigmental lesion and it became available for clinical use on Monday, November 2nd. DIF-DX melanoma is designed to aid dermatopathologists in characterizing difficult to diagnose melanocytic lesions and classifies these lesions as benign or suggestive of benign neoplasm or malignant or suggestive of melanoma. A small number of lesions will fall into the intermediate risk group, meaning that validity cannot be excluded. We had several goals in mind when we set out on this pipeline program a couple of years ago. Our target product profile called for a gene expression profile test with a high level of accuracy and an improved rate of actionable results and technical success while minimizing intermediate results and including populations that have been underserved by existing technologies. We also took the same development approach that we used for our DecisionDX melanoma test with learnings gained over the last eight years or so. Specifically, we started the belief that melanoma or a benign lesion knows more about itself than we do. So rather than predetermining the selection of which genes matter, we let the tissue itself tell us which genes were important. As the development data was being analyzed, we used our latest artificial intelligence tools to identify a final gene list and algorithm. We then tested this development or training cohort in an independent clinical validation. By the way, these are the same tools that we used for our Decision DX SCC test. And based on the intent-to-treat analysis of our validation study, which was presented just this morning at the American Society of Dermatopathology's annual meeting, DiffDx melanoma accurately diagnosed malignant and benign cases with a 99.1% sensitivity, 94.3% specificity, 93.6% positive predictive value, and a 99.2% negative predictive value. Importantly, the intermediate risk result occurred in just 3.6% of the cases, which was better than a target performance within a 5 when we began development of the test. Additionally, Our technical success rate was 96.6%. To sum, we are so fortunate to have a research and development team located both in Friendswood, Texas, and Phoenix, Arizona, that work as a well-oiled machine, and in 2020, they are two for two, having completed validation on two clinically significant tests in skin cancer, DecisionDx SCC and DiffDx melanoma. both of which we expect to have positive impacts on lives of patients diagnosed with skin cancer. To support our DIF-DX melanoma test, two peer-reviewed articles were submitted and subsequently accepted by SKIN, the Journal of Cutaneous Medicine, and are expected to be published later this month. The first article is our development and validation study and includes the data I just outlined on DIF-DX melanoma's performance. The second is a clinical utility study demonstrated that DIF-DX melanoma test results increased diagnostic confidence in dermatopathologists. The clinical utility study also demonstrated that clinical management decisions were influenced by DIF-DX melanoma in a manner that aligned with the test result in the majority of cases included in the study. These findings suggest that the DIF-DX melanoma test can help clinicians provide more informed patient management plans and improve care for patients with difficulty to diagnose Melanocytic Lesions. You know, we entered 2020 with a single in-market skin cancer test that had a total U.S. addressable market of $540 million. With the launch of this third skin cancer test, we estimate that for Decision DX melanoma, Decision DX SCC, and Diff DX melanoma combined, our total addressable U.S. market is now approximately $2 billion. You may recall that we expanded our commercial team in the third quarter of 2020 and to create a dedicated sales force to support the launch of our DiffDx melanoma test. This dedicated team is primarily introducing the DiffDx melanoma test to dermatopathologists, while our existing sales team will remain focused on DecisionDx melanoma and DecisionDx SCC. At the end of the day, we believe that our DiffDx melanoma test should be ordered by both dermatopathologists and dermatologists. Thus, it is our intention Thank you very much. As we stated on our last earnings call in August, we recently initiated two key trials. The first is the personalized study in which we are evaluating decision DX melanoma for interactions with adjuvant therapies. The second is a connection study which is collecting long-term outcomes for up to 10,000 patients who have been tested with decision DX melanoma. We believe these studies combined will provide us with the largest database on patients with melanoma and their tumor biology. Thank you, Derek.

To reiterate, we are pleased with the continued progress we made in our strategic growth initiatives in the third quarter, which we believe position us well for near and long-term growth. In the third quarter of 2020, we reported revenue of $15.2 million, a 3% increase from $14.8 million in the third quarter of 2019, primarily due to higher per unit revenues and increased test volume, partially offset by reduced revenue adjustments related to prior periods. In addition to end-period test revenue, our third quarter revenue includes positive adjustments related to tests delivered in prior periods of $1.5 million compared to $3.2 million in the third quarter of 2019. We are pleased with our ability to maintain strong gross margins. During the third quarter of 2020, our gross margin was 84% compared to 88% for the third quarter of 2019. reflecting the expansion of laboratory staff in preparation for both launches of DecisionDx SCC and DiffDx melanoma, as well as anticipated further volume growth for DecisionDx melanoma. Our operating expenses for the quarter ended September 30, 2020, were $16.6 million compared to $8.6 million for the same period last year. The increase was driven primarily by higher SG&A, which increased by $4.6 million, Partly attributable to higher personnel costs associated with our increased headcount, and in particular, our expanded sales and marketing team and administrative support functions. Stock-based compensation included in SG&A was $1.5 million for the third quarter of 2020, compared to $0.2 million in the same quarter of 2019, reflecting both higher post-IPO stock option valuations, as well as additional awards outstanding due to growth. R&D expense increased by $1.5 million and was primarily associated with increases in personnel costs attributable to additional headcount as well as higher expenses for professional fees associated with our recently initiated clinical studies. As we've discussed over the past couple of quarters, with regard to our R&D expense, we expect further increases as we continue to fill critical roles, progress key clinical studies, including the two Derek just mentioned, and continue to invest in activities that support our products and position us well for continued growth. As noted on our second quarter earnings call in April 2020, we received a one-time payment of $1.9 million in relief funds automatically allocated to Medicare providers under the CARES Act from the U.S. Department of Health and Human Services. Based on guidance issued by the government at that time, we concluded that we would be able to retain the payment. This treatment was consistent with other healthcare companies that received such a payment. In September, HHS changed the criteria for retaining this payment. Now, based on this change in criteria, we've reversed the income recognized previously. Interest expense decreased $0.4 million for the third quarter 2020, compared to the third quarter of 2019, primarily due to interest on the convertible promissory notes that were outstanding last year. These notes converted into common stock in connection with the IPO in July of 2019. We began monthly scheduled repayments of our term debt in June and have paid down $3.3 million through September 30, 2020. The third quarter of 2019 included two non-operating items that did not recur this year, a debt extinguishment gain of $5.2 million related to the convertible notes mentioned above, and certain mark-to-market losses of $2.7 million, which were primarily associated with a separate convertible note transaction entered into just prior to last year's IPO. Our net loss for the three months ended September 30, 2020 was $4.6 million compared to net income of $5.8 million for the three months ended September 30, 2019. Diluted loss per share attributable to common stockholders for the three months ended September 30, 2020 was 23 cents compared to diluted earnings per share attributable to common stockholders of 5 cents for the three months ended September 30, 2019. Operating cash flow for the third quarter was negative $3 million compared to positive $0.8 million in the prior year period, primarily reflecting the previously mentioned planned acceleration of investments in the business, including increased R&D expenditures and the expansion of our sales and marketing team. For the nine months ended September 30, 2020, we generated $10.3 million of operating cash flow compared to $2.5 million during the same period in 2019. As a reminder, our operating cash flow for the nine months ended September 30, 2020 benefited from an advance payment of $8.3 million from CMS, which will be applied against future Medicare claims that we submit for reimbursement. Originally, recoupment was to start August of 2020, but recent legislation has delayed the start of the recoupment until April 2021, which will continue for a period of up to 17 months. Excluding the $8.3 million payment, our adjusted operating cash flow, a non-gap measure, for the nine months ended September 30, 2020, was $0.1 million, compared to $2.5 million for the same period in 2019. Finally, we had cash and cash equivalents at September 30, 2020, of approximately $183.1 million. We believe our current cash position allows us to confidently continue to invest in R&D and Thank you, Frank.