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spk02: Good afternoon and welcome to Castle Biosciences fourth quarter and full year 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 now like to turn the call over to Frank Stokes, Chief Financial Officer. Please go ahead.
spk08: Thank you, operator. Good afternoon, everyone. Welcome to Castle Biosciences' fourth quarter and full year 2020 financial results conference call. Joining me today is Castle's founder, president, and chief executive officer, Derek Metzl. Information recorded on this call speaks only as of today, March 8, 2021. 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 would 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, including expectations and assumptions related to the impact of the COVID-19 pandemic that 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 annual report on Form 10-K for the year ended December 31, 2020, 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.
spk09: Thank you, Frank, and good afternoon, everyone. Thank you for joining us today. This afternoon, I will discuss highlights from our significant achievements during 2020, recap select fourth quarter results, provide thoughts on current trends, and then close and why we remain confident in our ability to create near and long-term growth. And then Frank will provide additional detail on our financial performance. But before we get started this morning, I would like to discuss the announcement we made today regarding the launch of our DecisionDx melanoma integrated test result. We believe this launch represents a significant step forward in the care of patients diagnosed with cutaneous melanoma. Specifically, DecisionDx melanoma now outputs an integrated test result calculated by an independently validated artificial intelligence-based algorithm, what we call I31GEP, to provide a more precise prediction of sentinel lift node positivity in order to guide discussions and recommendations for the sentinel lift node biopsy surgical procedure. The I31GEP test report is based on an artificial intelligence-based neural network algorithm discovered and developed or trained on a multicenter cohort of 1,398 patients, locked, and then independently validated in a separate cohort of 1,674 prospective consecutively tested patients with melanomas of all thicknesses. The I31 GEP test report integrates an individual patient's traditional clinical and pathologic features with the DecisionDx melanoma test result score. What's exciting here is that based upon linear regression slope analysis, the integrated test result provides a near-perfect relationship between the predicted and the actual observed center left node positivity outcome in our validation cohort. We also expect to launch a mobile and web-based application on the I-31 GEP test later this year. The app is designed to allow clinicians to have an interactive platform to discuss their patient's risk on the integration of clinical pathologic features with the DecisionDx melanoma test score. We are excited about this evolution of our DecisionDx melanoma test. So what does this advance to precision with an integrated test result mean on a practical level. Let's take a specific patient example, a 62-year-old male patient with a cutaneous melanoma diagnosis, and that melanoma has a tumor thickness or a Breslow's depth of 0.7 millimeters. Using population-based statistics from AJCC, this individual patient would have had a likelihood of a positive sentinel lift node biopsy result of less than 5% using those clinical and pathologic features alone. That's important because the NCCN guidelines do not recommend that the sentinel lift node biopsy procedure be offered in a patient with a predicted less than 5% sentinel lift node positivity. Now, if we take that same patient and he is tested with our DecisionDx melanoma test and receives the lowest risk score or risk class, a class 1A test result, which has an accompanying DecisionDx melanoma score of 0.2, and that's out of a range of 0.0 to 1.0, then our integrated test result would predict a likelihood of sentinel left-hood positivity of 3.6%, less than the 5% predicted by clinical and pathologic features alone. However, Now let's look at that same 62-year-old male patient, but now his incision-EX melanoma test result is our highest risk class, class 2B, with an accompanying score of 0.8. Now this same patient, but with a different tumor biology profile with the integrated test result, is predicted to have a positive sentinel lift node likelihood of 15.6%. Compared to the 3.6% likelihood with the Class 1A score I just mentioned, and compared to the clinical pathologic features, population-based risk of less than 5%. Again, without having the benefit of our DecisionDx melanoma test, based upon clinical and pathologic features alone, this patient would have been managed as if they had less than a 5% likelihood of known positivity. And under NCCN guidelines, with that positivity number, they would not have been offered a sentient lymphoma biopsy procedure. However, by using our decision DX melanoma test in this patient, they had a predicted sentient lymphoma positivity of 15.6%, which is significantly above the 10% threshold that NCCN uses for recommending that a sentient lymphoma biopsy procedure be offered to that patient. This is clearly a more precise finding that will have a positive impact on patient care. So today's launch of a DecisionDx melanoma integrated test result is designed to provide more precise, more personalized prediction of the risk of sentinel lift-up positivity in order to allow patients to move from population-based to personalized and into more precision-based medicine and precision-based care. We are planning to move our other tests in the same directions both the commercially available tests and our tests in development. These are exciting outcomes at Castle Biosciences. Now, as always, I would like to thank the Castle team. I cannot express how proud and thankful I am of what we achieved in 2020 and the resiliency shown throughout the organization. Our team's hard work and commitment to improving the lives of patients with skin cancer allowed us to successfully navigate through this unprecedented year. We remain focused on our strategic initiatives and believe we are well positioned for future growth, providing dermatologic clinicians with valuable genomic information to better inform treatment decisions. In 2020, we delivered revenue growth of 21% over 2019, and our dermatologic gene expression profile test report volume, which includes our two new tests launched in the second half of 2020, grew over last year by 8%. This growth occurred despite a more than 20% reduction in melanoma diagnoses in 2020 compared to 2019, which I will discuss further in a moment. Key components of our near and long-term growth strategy include advancement of our innovative pipeline tests, including the two launches in the second half of 2020, as well as moving toward precision medicine that I just described, evidence development, reimbursement gains, and the initiation of new pipeline programs. We achieved all of our 2020 milestones in these areas. We started 2020 with one skin cancer test and ended the year with a suite of three tests, more than tripling our estimated in-market U.S. total adjustable market to $2 billion. This is a significant achievement for any year, even more so as we face extraordinary challenges from COVID-19. You may recall that Castle's proprietary DecisionDX melanoma test for patients diagnosed with cutaneous melanoma was developed and validated in-house. With the launch of our two additional skin cancer tests, DecisionDX SCC for patients diagnosed with one or more high-risk features with cutaneous squamous cell carcinoma, and DecisionDX DiffDX melanoma, designed to aid in characterizing difficult-to-diagnose monolithic lesions, We further demonstrated our ability to identify dermatologic diseases with high unmet clinical need where genomic tests have the potential to improve patient management decisions and then brought these tests to market. In 2020, we expanded our significant body of evidence with 11 supportive peer-reviewed articles published for our four proprietary gene expression profile tests and expect additional publications in 2021 having already received acceptance notifications. We believe our existing body of evidence provides us with a significant competitive advantage over potential entrants into the U.S. market. Decision-EX melanoma alone is supported by 28 peer-reviewed publications, and through December 31, 2020, has been ordered close to 69,000 times for use in patients with cutaneous melanoma. We expect to continue to invest in evidence development as it remains a key component of our growth strategy, supporting adoption of our tests by clinicians and reimbursement by commercial payers. Turning to 2021, although we are seeing areas of recovery, due to COVID-19, we continue to experience some headwinds to our GEP test report volume growth rate, including decision DX melanoma, our current lead revenue driver, which we believe is a result of reduced diagnoses of cutaneous melanoma. As I previously discussed, 2020 diagnoses of melanoma were down by more than 20%, or approximately 26,000 diagnoses compared to 2019. We continue to believe this is due to a mix of temporary closing of dermatology practices and our patient volume in the second and third quarter of 2020, as well as the shifting from in-person general healthcare visits to telemedicine visits, which we believe was a significant factor in the ongoing reduction in the diagnosis of melanoma, especially in the back half of 2020 and early 2021. For example, typically a patient would go in for their regular high blood pressure, diabetes, or just an annual physical visit, and the primary care clinician would identify a concerning mole, which after in-person testing would be identified as a melanoma. However, with telemedicine visits, we believe these identifications are not taking place as often. Given that our decision DX melanoma test is ordered by physicians after biopsies take place and the diagnosis of melanoma is rendered, a delay in the diagnosis of melanoma does reduce the pool of eligible patients. In addition to the impact of COVID, we believe the severe weather we have experienced in the first quarter in many parts of the U.S. has impacted dermatology practices and patient flow to date. As you may recall, historically, our first quarter is generally flat to the fourth quarter. Therefore, given the continued impacts from COVID, recent weather, and historical first quarter seasonality, we expect our first quarter 2021 DecisionDx melanoma test report volume to be softer than the fourth quarter of 2020. However, due to the effect of our first full quarter of expanded Medicare LCD for DecisionDx melanoma and other factors, for the first quarter of 2021, We don't expect the sequential softening in report volume over the fourth quarter of 2020 to translate into a commensurate softening in revenues in the first quarter of 2021 compared to the fourth quarter of 2020. Although we can't predict the trajectory of the recovery of these missing diagnosis of melanoma, we anticipate improvement in our volume growth rate for the second half of 2021 and into 2022, although we expect that it will not be linear. Specifically, we expect the majority of the estimated 26,000 patients who were not diagnosed in 2020, as well as those who are not diagnosed in early 2021, to be diagnosed later in 21 or in 22, which could be impacted by the timing of both COVID vaccinations and the return to in-person medical care. We know that the best patient outcomes are linked to early detection of cancer. So for the best patient care and outcomes, we are hopeful that these diagnoses will happen sooner rather than later. As you know, one important metric for us is the achievement of reimbursement milestones with our proprietary innovative tests. Our DecisionDx UM for UV melanoma and DecisionDx melanoma tests have both been designated by CMS as ADLTs, or advanced diagnostic laboratory tests. Practically, this means that the Medicare rate for our tests are evaluated every year based upon the median allowable private payer rate. For 2021, our rate for DecisionDx UM was set at $7,776, and our rate for DecisionDx melanoma is $7,193. In addition to our 2021 Medicare rate, it's important to remind you of the expansion of the LCD for DecisionDx melanoma. You may recall that we received initial LCD coverage in late 2018. The initial LCD covered the use of our DecisionDx melanoma test to guide sudden leptobiopsy surgical decisions. Palmetto and Iridium at that time did not evaluate coverage for the other management decisions, such as initiation of imaging surveillance, follow-up frequency, referrals to oncology, et cetera, that are in clinical use today. The initial LCD covered around 45% of clinically tested Medicare patients. We subsequently worked with Palmetto and Neridian regarding expansion of the initial coverage, as many clinicians were using our decision DX melanoma test for those other management decisions. Subsequently, an expanded draft LCD was posted in 2019 that covered those additional uses. This draft was converted to a final LCD that was effective on December 6, 2020. We estimate that the current LCD now covers slightly more than 90% of all clinical uses, meaning that in 2021, we expect the DecisionDx melanoma test to be a covered benefit for more than 90% of all Medicare beneficiaries. Let's now turn to the two skin cancer tests we launched in the second half of 2020. The technical assessment dossier for DecisionDx SCC test was submitted to Palmetto and Neridium in the second quarter of 2020. We received confirmation of acceptance of the submission as being complete in the third quarter of 2020 and believe, although there can be no assurances, that a draft LCD should be posted in 2021. We believe that the LCD could be posted in the first half of 2021, but I remind you that there is no specific timeframe under which Palmetto and Neridian must operate. We have also, in early 2021, submitted our technical assessment dossier for our decision DX DIF-DX melanoma test. We are hopeful the time frame for review for our DIF-DX melanoma test will be shortened, as Palmetto and Neridian had previously reviewed Myriad's MyPath melanoma test and found the intended clinical use to meet the definitions of medical reasonableness and necessity. As a reminder, our DIF-DX melanoma test has the same intended clinical use as Myriad's test. Accordingly, we also expect that a draft local coverage determination policy should be posted in 2021 with finalization in 2022. Now, I will briefly recap 2020 revenue and test volume highlights. In 2020, we increased revenue by 21% to $62.6 million from $51.9 million in 2019. This includes positive revenues related to prior periods of $0.2 million for 2020 compared to $2.5 million for 2019. As our business continues to evolve, we are focusing on total dermatologic test volume as a key metric for measuring our success. As a reminder, we announced in January that we delivered 16,790 total dermatologic gene expression profile tests in 2020, which represents an 8% increase in total report volume for dermatologic tests compared to 2019. Specifically, DecisionDx melanoma test results delivered in 2020 were 16,232. DecisionDx SCC test reports delivered in 2020 since the August 31st launch were 485. And the DiffDx melanoma test reports delivered in 2020 since the relaunch on November 2nd, 2020 were 73. Initial response to our two new skin cancer tests, DecisionDx SCC and DiffDx melanoma, did exceed our expectations. We believe this early performance is due in part to the high unmet clinical need that our tests are filling. Equally important, though, is the value that we are seeing through leveraging our dermatologic commercial channels. Being able to walk into an office of a current customer one who has adopted decision DX melanoma as an important tool in patient management, makes it easier to lay out the clinical need and value of our decision DX SCC test. In 2020, we successfully executed on two capital raises that together generated approximately $330 million in net proceeds. We plan to increase the investments we are making in the company to facilitate our growth initiatives and remain in a position of strength in the near term as well as lay a foundation for future growth. These initiatives include the expansion of our commercial team, acceleration of our R&D efforts to support our existing tests, and the advancement of our dermatologic pipeline tests. Regarding the expansion of our commercial team, you may recall we successfully completed two commercial expansions in 2019. We went from 14 outside sales territories to 23, and then to 32 by the end of 2019. Then in the third quarter of 2020, we added 10 additional sales representatives dedicated to the DIF-DX melanoma test, our test for suspicious pigmental lesions, with their focus being to introduce the DIF-DX melanoma test to dermatopathologists during the first six months of clinical availability before we expand introduction into the clinical dermatology community. We were actively recruiting for an additional 15 to 20 outside sales territories Our goal is to exit the first half of 2021 with approximately 60 outside sales reps, all of whom will sell our entire suite of skin cancer tests with call points focused on dermatologists, Mohs surgeons, surgeons who work in skin cancer, including surgical oncologists and head and neck surgeons, and dermatopathologists. We have seen that our GEP test report volume growth is responsive to promotional efforts and we are excited to see continued volume growth of our skin cancer test franchise. We are also accelerating our research and development activities, including two important studies that support our DecisionDx melanoma test. As previously discussed, we initiated two significant protocols for our DecisionDx melanoma test in 2020, and both are progressing well. The first is the personalized study, in which we will evaluate DecisionDx melanoma for interactions with adjuvant therapies. The second is a connection study, which will collect long-term outcomes for up to 10,000 patients who have been tested with decision DX melanoma. Together, these studies will add valuable data to our existing biobank of data on patients with melanoma and their tumor biology, which consists of approximately 60,000 tissue samples to date. We believe this is the largest database of its kind and are exploring opportunities to leverage the value of these data. With our industry-leading position, As the only diagnostic company with three commercially available tests for dermatologic cancer, we have demonstrated our ability to successfully develop, validate, and bring to market clinically actionable, innovative genomic tests. We start by identifying dermatologic diseases with high unmet clinical need, and we use the gene expression profile of an individual patient's tumor biology to assist clinicians and their patients better in forming treatment to optimize health outcomes and reduce healthcare costs. Due to the biological complexity of dermatologic cancers, developing accurate products takes scientific diligence, stringent clinical protocols, artificial intelligence expertise, proprietary algorithms, and significant investments of time and capital. Building on our proven process, I am pleased to announce that we have initiated working on a number of pipeline tests which branch out upstream, downstream, and parallel to our currently marketed tests. Although we are still in the early stages of development, we believe that we can launch three to five new tests by the end of 2025, utilizing our existing sales channels, potentially adding approximately $3.6 billion to our current U.S. total addressable market, with the result being a U.S.-only TAM of slightly more than $5.5 billion. As I said, these tests are in early-stage development, but we expect to provide additional details as soon as appropriate and before the end of 2021. Additionally, the leverage we see on a commercial side of our business translates to our clinical research initiatives. We had 220 active clinical research sites or centers in 2020. We anticipate we will work with many of these same centers on our development initiatives as those who worked on with DecisionDx Melanoma, DecisionDx SCC, and DiffDx Melanoma. I will now turn the call back over to Frank, who will provide additional detail relating to our financial results.
spk08: Thank you, Derek. We're pleased to report solid financial results, and along with the significant progress we made on our growth initiatives, we believe we are well positioned for near and long-term growth. We reported revenue of $17.3 million in the fourth quarter of 2020, compared to $17.6 million in the fourth quarter of 2019, which included $3.5 million in positive revenues related to prior periods, compared to $4.3 million of such revenues in the fourth quarter of 2019. Our full year 2020 revenue was $62.6 million, an increase of 21% over 2019, primarily due to higher per unit revenues and increased overall test volume, partially offset by reduced positive revenue adjustments related to prior periods. Full year 2020 revenue includes positive adjustments related to tests delivered in prior periods of $0.2 million, compared to $2.5 million for 2019. We were able to successfully scale the organization in 2020, achieving our internal expansion goals and headcount moved from 135 on December 31st of 2019 to 201 as of December 31st, 2020, representing growth of close to 50%. And in 2021, as of March the 2nd, we had 224 employees and continue to fill open positions. In 2020, we maintained strong gross margins, and for the fourth quarter and full year both, our gross margin was 85%, compared to 89% and 86% for the fourth quarter and full year of 2019, respectively, reflecting the expansion of laboratory staff in preparation for both launches of DecisionDx SCC and DiffDx melanoma, as well as in preparation of anticipated further volume growth for DecisionDx melanoma. As a reminder, A significant portion of our cost of sales expense represents fixed costs associated with our testing operations. Accordingly, our cost of sales expense will not necessarily increase or decrease commensurately with the change in net revenue from period to period. Our operating expenses for the fourth quarter and year-ended December 31, 2020, were $17.7 million and $59.5 million, respectively. compared to $13 million and $37.2 million for the comparable 2019 periods. The increase was driven primarily by higher SG&A, which increased by $5.1 million for the quarter and $18.3 million for the year, attributable in part to the expansion of our sales and marketing teams for the launch of our DIF DX melanoma test, administrative support functions, and higher personnel costs associated with our increased headcount, which includes salaries, bonuses, benefits, and stock-based compensation. R&D expense increased by $5.9 million in 2020 compared to 2019 and was primarily associated with increases in personnel costs attributable to additional headcount and costs incurred in our clinical study. As Derek discussed earlier, the acceleration of R&D efforts is a key growth initiative, and we expect to further increase our R&D expense 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, pipeline investment, and position us well for continued growth. Our recognition of other operating income of $1.9 million in the fourth quarter of 2020 is attributable to a favorable change in requirements associated with the Provider Relief Funds Program under the CARES Act. Interest expense decreased $1.9 million in 2020 compared to 2019, primarily due to interest on the convertible promissory notes that were outstanding in 2019. These notes converted into common stock in connection with the IPO in July of 2019. The decrease also reflects lower interest expense on our banking term loan facility, primarily due to at lower average balances outstanding. We terminated and repaid all amounts due on the term loan facility in December 2020 and currently have no debt. We recorded an extinguishment loss of $1.4 million during the year ended December 31, 2020, related to the early repayment and termination of our banking term loan facility. 2019 included certain non-operating items primarily related to debt conversion and mark-to-market activity leading up to the IPO. These items had a net positive effect of income on $2.3 million for the year ended December 31, 2019. Non-cash stock-based compensation expense, which is allocated among cost of sales, R&D, and SG&A, totaled $8.3 million for the year ended December 31, 2020. compared to $1.2 million for the year ended December 31, 2019. We expect material increases in stock-based compensation expense in future periods, reflecting both higher post-IPO stock option valuations, as well as additional awards outstanding due to growth in our headcount. Our net loss for the 12 months ended December 31, 2020, was $10.3 million, compared to net income of $5.3 million for the 12 months ended December 31, 2019. Diluted loss per share attributable to common stockholders for 2020 was 54 cents a share compared to diluted loss per share attributable to common stockholders of 21 cents for 2019. Operating cash flow for the three months into December 31st, 2020 was negative $0.4 million compared to positive $4.5 million for the same period in 2019. Adjusted operating cash flow, a non-gap measure for the three months into December 31st, 2020 was $1.5 million. For the 12 months into December 31st, 2020, we generated $9.9 million of operating cash flow, compared to $7 million during the same period in 2019. As a reminder, our operating cash flow for the full year 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. Recruitment will begin in April 2021 and continue for a period of up to 17 months. We have excluded receipt of the advance payment from adjusted operating cash flow, but as future claims are submitted for reimbursement and applied against this balance, we expect to include the advance payment and adjusted operating cash flow as it's recouped. Excluding the $8.3 million payment, our adjusted operating cash flow for the 12 months into December 31, 2020, was $1.5 million, compared to $7 million for the same period in 2019. Cash used in investing activities was $4.8 million in 2020 compared to $0.9 million in 2019 due to additional capital expenditures primarily related to expansion of our facilities. Net cash provided by financing activities was $305.9 million in 2020 primarily reflecting proceeds from the two public offerings of common stock partially offset by debt repayments compared to $88.3 million cash provided by financing in 2019 the majority of which was attributable to the IPO. Finally, we ended 2020 with a fortified balance sheet. We had cash and cash equivalents at December 31, 2020 of $410 million and zero debt. As we continue to make progress positioning ourselves as the leader in the dermatologic genomic testing, our near and long-term capital allocation priorities remain unchanged, and we believe allow us to continue creating shareholder value. They include, first, acceleration of our R&D efforts to build our expansive body of evidence that supports our marketed tests, as well as to develop our robust pipeline of tests, and second, the continued expansion of our sales and marketing team. Turning to our 2021 outlook, due to the uncertainties regarding COVID-19 and the related impact on the diagnoses of melanoma, we are not providing formal revenue guidance at this time. Although we can't predict the trajectory of any recovery, our core business and underlying fundamentals remain strong. We are excited about the opportunities that lie ahead and remain committed to building a dermatologic diagnostics company focused on making a positive impact on patient outcomes. I'll now turn the call back to Derek.
spk09: Thank you, Frank. In summary, our team's resilience and strength allowed us to deliver strong results and achieve all of our milestones for 2020, despite the unique challenges we all faced. As we continue to build our dermatologic franchise in 21 and beyond, You'll continue to put the patient at the center of everything we do. Before we move on to Q&A, I want to again express my gratitude to our employees. They drive our success. We thank and rely on them to continue to innovate, execute, and focus on improving the lives of patients diagnosed with skin cancer. This concludes our remarks. Thank you for your continued interest in CASEL. Operator, we are now ready for Q&A.
spk02: As a reminder, to ask a question, you will need to press star 1 on your telephone. To withdraw your question, press the pound key. Please stand by while we compile the Q&A roster. Our first question comes from the line of Puneet Sudham from SVB Larynx. Your line is now open.
spk05: Yeah, hi, Derek, Frank. Thanks for the questions. So first one is on the guide. I appreciate you pointing out softness in the first quarter and cutaneous melanoma volumes given the pandemic. But just wondering in terms of the step down here, should that be in line with what the step down we have seen, you know, low to mid single digit step down that we have seen here in third quarter and fourth quarter? Is that the right magnitude to think about it? And then just broadly, when we think about the full year, You obviously have a number of growth drivers here, commercial sales force that's expanded, head counts in commercial that's expanded significantly, and, you know, vaccinations are ongoing. So, you know, sort of maybe if you can provide us maybe what penetration in terms of cutaneous melanoma should we be expecting for the year if you can't provide us the volume for the year?
spk07: Thanks, Puneet. Just to clarify, when you're talking about step down, are you talking about volumes sequentially just through the quarter, or I want to make sure I understand what you're looking for.
spk05: Yes, sequentially for the first quarter, yes.
spk07: Yes, so, you know, recall, Puneet, typically fourth quarter to first quarter is sort of flattish. There's a number of factors that drive that. We think we understand what most of them are. I mean, I think a lot of them are. there's an impact of patients' deductibles resetting in January. And so you take the December holidays in Q4, you take that dynamic in Q1, we typically see flattish performance. When you go back and look year over year, the sequential quarter performance looks flattish. This year, we've got continued COVID impact, and we've also got some weather dynamics this quarter. So Although it's early yet and we aren't able to quantify, it does look like we're going to see some sequential softening in volumes just based on the continued macro factors facing physician visits. Now, as it relates to penetration, the difficulty there is just trying to predict how many melanoma diagnoses there are going to be this year. Having said that, we're going to very soon have a much larger megaphone for the physician audience And we have been optimistic that we are timing that with a corresponding resumption of normal commerce as we get through this vaccine cycle and get through some of the broader reopenings. And as we've said before, a year ago, I think we all sort of felt like maybe a switch would get flipped and everything would go back to normal uniformly. But we're clearly seeing regional differences, and we're seeing differences within the regions. So, I think getting a normalization of commerce will get back to that normal rate of diagnoses, and then we can be a little bit more predictive in terms of what penetration, what growth is going to look like.
spk09: That being said, as we noted, Vineet, despite what doesn't seem to be a recovery from the normal rate of diagnosis to melanoma in the first quarter, at least in third-party data, we aren't seeing a commensurate softening in revenues at this point in time. So, I would de-link those two slightly. The other question here, which is when will those estimated 26,000 patients who were not diagnosed last year begin showing up? I think the worst thing we can do from a public standpoint is to aggressively assume they all come back quickly, but those melanomas aren't going away. They're going to be diagnosed at some point in time. I don't know if that really starts at the beginning of third quarter of this year, a little bit in the second quarter or fourth, but certainly you would think over the next year and a half you would see a return to the normal cadence of the diagnosis of melanoma from a year-over-year standpoint.
spk05: Okay, thanks. And then, Frank, in terms of the prior period, we obviously saw a pickup here. How should we think about that prior period quarters going forward? Because I think the expectation initially was as the penetration rises, as the prior period revenue number should be declining over time. So maybe just give us a view as to how you're viewing revenue on that line.
spk07: Yeah, Puneet, I think we're going to continue to see the prior period number come down as we get more and more accurate in our accrual rates for our cutaneous melanoma business. Now having said that, that's gonna be offset somewhat by the new products that are being launched because the revenue there will be, almost all of that will be prior period as we collect on that just due to the appeal cycle. So it should converge as on the CM business and then if we are quite successful on the launch products then you could see that continue to be a factor in the revenue line.
spk05: Okay. And then my last one is on the sales reps. Can you maybe give us a sense of mix of the sales reps that are doing face-to-face detailing with the docs today versus those that are online? Or maybe how much of the time is face-to-face versus online today? And, you know, obviously expectation here would be that they would, you know, that would turn face-to-face in the second half of the year. Thanks. Thanks.
spk09: Yeah, so I'll come on the last half first. So I think you're right. I think our expectation is that, you know, I don't know what the percentage of face-to-face visits versus, say, having a really engaged conversation over the phone or email and text was in 2019. So we didn't quite capture data that way. But I would think that we would see, based upon current trajectories, a relative beginning of normalcy in kind of third and fourth quarter, as you said. We haven't pulled data for the first quarter yet, but we just came off of two semi-national sales meetings the last two weeks, and it seems to me, as Frank kind of mentioned earlier, it's regional in basis right now. You see a strong opening in areas where there's a lower level of case numbers and maybe more of an opening of society there as vaccines roll away through. Health care providers are largely taking care, of course, and so our representatives are doing more and more vaccine or post vaccine environment. We'd expect it to open up slowly. I would think in the second quarter and as you kind of indicated, all the macro press seems to assume that will be back into sort of a closer normalcy in the second half of 2021. OK, thank you.
spk02: Thank you. Our next question comes from the line with Paul Knight from Key Bank. Your line is now open.
spk06: Thanks for taking the time. The decision DX test, obviously, on squamous, getting some traction. Can you talk about what your reception in the market was and obviously a nice sequential bump there and what you're thinking about as Q1 and the year rolls out?
spk09: Paul, are you thinking about the squamous cell carcinoma test specifically?
spk05: Yeah.
spk09: Yeah, I think the reception of the squamous cell carcinoma test has been higher than our expectations were from kind of a forecast standpoint. And that's despite having us really sell the product or introduce it behind the DecisionDx melanoma test. So even though it's a launch product, we actually tried to orient the the field forces to basically continue to go ahead and talk first about the melanoma test, and then secondly, as there's time, the squamous cell test. So even though that dynamic was there, we were quite pleased with the uptake, and it was, again, ahead of our internal estimates. So why is that? I think that there's a mixture of two things, and I don't know which is more important, to be honest, at this point in time, but clearly an important factor is that There's such a great unmet need for clinicians and their patients to make a shared decision about the next course of action when you've been diagnosed with a squamous cell carcinoma of the skin that has one or more high-risk features because the accuracy of just pathology staging alone is just not that great. So I think one is we identified several years ago with actually our current melanoma customers a significant unmet clinical need, and I think the test is meeting the expectations clinically. I think the other part of it, though, again, which I don't know which is more important, is the fact that we anticipate that the ordering clinician, the ordering customer for a squamous cell carcinoma test is likely to have, what, 90 percent overlap at the end of the day with current melanoma customers. I think the fact that these dermatologists and most surgeons and MPs and PAs know the company, if they're ordering our melanoma test, they hopefully have thought through how to incorporate the results of our DecisionDx melanoma test in the patient care. And we walk in and that reputation, that expectation that I know how to use the test translates over once you start talking about squamous cell carcinoma. So again, I don't know. which one of those two factors is more important, except that certainly if there was no need, clinically you shouldn't expect any test orders to come in the door, but certainly having a, hopefully what I believe is a very positive reputation among the melanoma customers, I think translates pretty quickly to, okay, I get it, I can see the need, now let's talk about the patient population that could benefit.
spk06: And then can you talk a little bit about the competitive environment, alternative tests out there? Our impression is it's probably you're in a better position than you were based on our competitor review, but any thoughts there? For the squamous cell test again?
spk09: For melanoma specifically. Oh, on the next melanoma test? So we don't believe we have at this point in time any direct competitors in the U.S. offering tests today. We do anticipate having one or one of two of the smaller private European companies might be able to launch their test later this year, maybe next year. But as of now, the real competitor is really standard of care and helping clinicians appreciate that after 26 peer-reviewed publications, there's a significant weight of evidence that supports the use and value of our test and move them from point A to point B. Now, it's interesting. You know, pre-COVID, we had staffed up in December of 19 to 23 sales representatives. I'm sorry, to 32 from 23. And they were trained largely in December, and we sort of therefore had kind of a 50% expansion in the first quarter of 2020 ahead of COVID really impacting medical commerce. And we saw significant promotion responsiveness. I believe that as we scale our organization from 32 dermatology-facing cells representative to just above 60 in the next couple of months that will enter into the second half of the year in the same kind of response position that we saw a year ago this time. Thank you. You're welcome.
spk02: Thank you. Our next question comes from the line of Sujin Nam from BTIG. Your line is now open.
spk01: Hi, thanks for taking the questions. Just a couple of quick ones. One on the integrated test results, obviously that sounds very intriguing. Would you be able to talk about, I'm not sure if it's too early, but what's the magnitude of improvement adding that component to the overall test results from a performance characteristic standpoint? I don't know if that's the right way to think about it.
spk09: Yeah. Let's see here. So I don't have an answer that's going to be quite that direct, Sanjeev. Sorry about that. If I think about sort of using clinical pathologic features alone for clinicians to decide who to rule in and who to rule out for a sentinel-lift-a-biopsy procedure, if you then incorporate using continuous variables wherever you can find them, you know, our test itself, resolute thickness, mitotic rate, et cetera, we can reshuffle those patients both upwards and downwards, and that does result in the majority of patients being able to fall below a 5% likelihood of sentinel lift node positivity. So that's a significant reduction over what you would have with clinical pathologic features alone. As I mentioned in that example that we talked about on the conference call, we also can do the opposite now with much more precision. So we can take somebody who falls below the sort of threshold for thinking about performing a sentinel-to-biopsy procedure. And by using this integrated test result score, we could actually find people who would be recommended for a sentinel-to-biopsy consultation should you decide to incorporate the tumor biology on top of pathology. So that, to me, is a tremendous opportunity to both rule out where appropriate with very, very high precision and also rule in at the same time.
spk01: Gotcha. That's helpful. And then just on the, you know, obviously seeing very good initial volumes for screen-to-cell carcinoma, the SCC test, and I know you guys are targeting your existing DecisionDx melanoma customers, but are there cases where, I don't know if it's, again, too early to tell, but are there cases where some of the early adopters of SCC, you might be able to turn them into more robust users of DecisionDx melanoma? Or, you know, as we think about... kind of down the road, because that also drives, yeah.
spk09: I think the answer is yes. So right now, there are probably several hundred physicians who are Mohs surgeons who are not ordering clinicians of our decision to exit melanoma test. Now, why is that? Could be access point, you know, lack of promotion and responsiveness because we haven't been able to promote to them. Could be because they are inside of a larger dermatology practice, and they do mainly Mohs surgery full-time and don't really think about the melanoma patients they might be doing excision work on, but think maybe that's a medical dermatology partner who orders our melanoma test. We go and talk to them about the squamous cell carcinoma test, and in most cases, the Mohs surgeon is the one who's seeing these patients with one or more high-risk factors or features. We would hope that we would see the same kind of back benefit in terms of having them assess our squamous cell test and hopefully then also be open and be listening to the melanoma test in terms of where they could actually take charge of that from an ordering standpoint. So we do expect both the dermatologist who uses our melanoma test to be the adopter of our squamous cell test, and we expect to see a minority of clinicians, probably mainly most surgeons who would begin to be interested in hopefully adopt our squamous style test to get back into seeing the clinical utility of our melanoma test. So I think both ways benefit us going forward.
spk01: Great. Thank you so much.
spk05: You're welcome.
spk02: Thank you. Our next question comes in the line of Catherine Schultz from Baird. Your line is now open. Hey, guys.
spk03: Thanks for the questions. I guess first, you've talked about the Salesforce incentives for SCC being focused on ordering clinicians rather than volumes. Can you just comment on what kind of yardstick they're being measured against? You know, could 30% of your existing DERM customers be ordering SCC by the end of 2021? Or, you know, just how would you judge success there in terms of ordering clinicians by the end of the year?
spk09: Sounds like a more than less answer. You want to comment on that?
spk07: I don't know, Catherine, I don't know if we can give precision in terms of target for numbers. But what's interesting or what's exciting is that when you have a physician that embraces and understands the value of gene expression profile testing for one disease state, it's quite easy to get them to see that value in another. And so while we have certainly seen the success of melanoma make the launch of squamous cell more exciting. I think we're going to see the reverse improvement as well. I think you're going to have physicians who order squamous cell first who say, I see this value. And by the way, I've also got melanoma patients and I want the same value there. So I guess aspirationally, I think all of the physicians should order both, Catherine, but that's probably a bit hopeful. But I do think there will continue to be significant overlap. And And as we said, most of the orders for squamous came from physicians who were users of melanoma. So I think we'll continue to see those two numbers grow fairly in lockstep, I would think.
spk09: Yeah. I don't know what the specific target bonuses are set up in terms of number of new ordering doctors for FCC in 2021. Just to be frank, I guess you should say you should know that number, but I don't. But I think our expectation is that of the 4,500 clinicians who roughly ordered our tests in 2020, I guess that was actually third quarter data maybe, anybody who's seeing invasive cutaneous melanoma is likely to also be seeing squamous cell carcinoma probably two and a half to three-fold times that number. So it would be very surprising that at the end of the day, not the end of 21, mind you, the end of the day, the majority of those decision DX melanoma customers are not also going to be adopting SCC. I think in this sort of funny period of coming out of limited face-to-face meetings in the first quarter of this year, probably tailing in the second quarter, what that really means for kind of full-year in-person visits, we'll see continued acceleration, I would hope. But our business plan calls for having us to educate as many clinicians as possible about the value of our DecisionDx SCC test in 21 so we enter with a much wider base of ordering doctors than we would if we just focused on sort of finding the higher volume physicians only and being satisfied with the same number of orders coming in. I think that's an important distinction in terms of how our company introduces a test which is clearly going to be transformational in terms of patient care. And that sets us up, I think, for having a wider base of ordering clinicians at the end of 21 since it's in a far nicer position to grow hard in 22, 23, 24 post-Medicare coverage.
spk03: Got it. And then you've talked about the potential to launch these three to five new tests by the end of 2025. You know, when this year could we learn about what those indications are and, you know, when do you think we could potentially see the first of those tests launch?
spk09: First of the tests launch? I would say pick 2025, and then you can rotate around that. It could be that we see a very nice scale-up of the R&D efforts of a couple of our early protocols here in this year and next year, such that maybe you might see one or two launch as early as 2024, but I think safety-wise, 2025 at this point in time is a good thing to kind of go around. In terms of timing for sort of discussing specific targets. We're waiting on a couple of data points internally, and then thought we would have those conversations here later on in the first part of the year, I believe.
spk03: Okay, and then last one for me, just on the personalized study, what's the expected enrollment for that study, and when do you think that study could complete and read out?
spk09: I think it's a couple of years until we would see a readout. It could come as early as later on or in 2022 or later this year, but that's probably an aggressive statement, to be honest, so I wouldn't put that in a hard stand to hit target-wise. This is essentially a study which is taking people who can be treated on label with PD-1 inhibitors and assessing the impact of our test to help predict outcomes in those patients. When patients aren't on therapy, The time to recurrence is about, what, 1.2, 1.3 years, I think, from the time of diagnosis for stage three patients through recurrence. So it shouldn't be that long of a study in terms of reaching the endpoint, but it's too early to kind of make a hard projection there. And part of that, of course, depends upon sort of new patient flow and the sort of COVID time period. We were able to get up and running a number of targeted sites last year. We're quite pleased with that, but to have patients come back for routine blood exams, et cetera, takes a bit of time for that to mature out. I think that'll open up quite a bit in the middle of the year going forward.
spk02: Okay, great. Thank you. Thank you. Our next question comes from the line of Max Masucci from Canaccord Genuity. Your line is now open.
spk04: Hey, thanks for taking the questions. First one, just Q1 commentary. Can you just give us a sense even just directionally for the step up you're seeing in decision DX melanoma reimbursement under the expanded LCD. And are there any factors that might make the modeling exercise for decision DX melanoma ASPs in 2021 just more complicated than being sort of a black and white process?
spk07: Yeah, Max. So we, in the early days here, we are seeing that the expanded LCD criteria covers, a little over 90% of the Medicare population. So that's consistent with where we were, where we expected it to be. So that's good to see. And so that means that of the 45 or so of every 100 patients that are Medicare, you know, we're getting paid on, you know, low 40s of those in general. On the commercial side, it continues to be slow progress. You know, we have We still do not have positive policy from the big, large, major, the five big players there. But we are making progress on the regional players. And as we continue our track record of publications and evidence development, we expect to continue to push those over. But as we've said before, it won't be a giant stepwise improvement. It's going to continue to be blocking and tackling.
spk04: Okay, great. And then another just bigger picture one, just on the AI-based integrated decision DX melanoma test result, I'm assuming that this is something that your existing customers may have been asking for. And then second part, does the launch of a mobile app sort of suggest that you're positioning the company for success in a post-pandemic world when some of the virtual tools that are in place to help provide continued access to healthcare might remain in place?
spk09: A few questions in there. I think the last one is yes. I think that we've seen increase, well, even prior to COVID, within dermatology, there are some clinicians who would never pull out their iPhone and forward on something to a patient sitting across from them in their practice, and some that would. We do see, though, for instance, in the case of dermatologists, There are many clinicians who use an online app to determine if Mohs is an appropriate excision approach for people with basal cell or squamous cell carcinoma. So that's kind of a routine app which is used clinically with patients, by the way. We see that with other disease states and dermatology. So part of the sort of feedback that we got even pre-COVID was that, you know, when you guys get enough data to provide an integrated report like this, that really takes all the features we think about, clinical pathologic and gene expression profile and using your test, and you roll it into a more precise report, we'd love to see that available in terms of an online and a phone-based portal system so that we can make use of that time with our patients when we're seeing them in person. So I think that's a way going forward, especially with clinicians under 45, under 50 years of age who have grown up in medical school, with that approach in terms of education being part of their lives. That's a thing working with the trend. We do expect that as we gather data with our other tests that we would continue to roll those into the same platform so that we could provide more and more precise data. The other earlier part of your comment, I think if I recall, but I'll have you redirect me here when I take a breath, was that we believe there's a certain approach one should take to developing a a diagnostic or prognostic test like what CASEL does. The first thing is to see if you can go from using population-based outcome data like staging, clinical or pathologic features, and if the development of a molecular diagnostic test, in our case a gene expression profile test, actually adds value to what you have in front of you. What's that mean? It's independent of what the what the doctor and patient already have, then I think that moves you from a population-based to a more personalized base of healthcare management, which is fantastic. It's moving you closer and closer to precision-based medicine. I think as we were able to go ahead and successfully generate more prospective consecutively tested patient data in the last year, year and a half, two years, we were able to validate with an independent sample set The first rollout of this integrated test report in terms of predicting the sentinel lift node positivity rate of an individual patient based on using all these continuous factors, both the gene expression profile score as well as the clinical pathologic factors. And that's really moving, I think, from personalized to more precise medicine approach. And that's the feedback that we have received through market research earlier this year in terms of introducing this new rollout, this new way to think about moving again from personalized to much more precision-based medicine. So I think this will be a welcome improvement or next step, I guess you would say, in the melanoma test. We have more to do, certainly, but it represents a really significant clinical jump forward to really help provide a much more precise single-number recommendation with high confidence about what the patient may or may not be facing.
spk04: Great. Thanks for the questions.
spk02: Thank you. At this time, I am showing no further questions. I would like to turn the call back over to Derek Matzold, CEO, for one final statement.
spk09: Thank you, operator. This concludes our fourth quarter and full year 2020 earnings call. Again, I want to thank you for joining us today and for your continued interest in Castle Valley Sciences.
spk02: Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.
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