Castle Biosciences, Inc.

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.

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.

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.