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spk07: 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 Camilla Zuccaro, Vice President, Investor Relations and Corporate Affairs. Please go ahead.
spk05: Thank you, operator. Good afternoon, everyone. Welcome to Castle Bioscience's first quarter 2022 financial results conference call. Joining me today is Castle's founder, president, and chief executive officer, Derek Matzold, and chief financial officer, Frank Stokes. Information recorded on this call speaks only as of today, May 9th, 2022. 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 statements made today will contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements include, but are not limited to, statements about our financial outlook, TAM, and similar items referenced in our earnings release issued today, and statements containing projections regarding future events or our future financial or operational performance, including our expectations and assumptions related to the impact of the COVID-19 pandemic. Forward-looking statements are based upon current expectations and involve inherent risks and uncertainty, 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 quarterly report on Form 10-Q for the quarter ended March 31st, 2022 under the heading Risk Factors 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. In addition, some of the information discussed today includes non-GAAP financial measures, such as adjusted revenue, adjusted gross margin, and adjusted EBITDA, that have not been calculated in accordance with generally accepted accounting principles in the United States, or GAAP. These non-GAAP items should be used in addition to and not as a substitute for any GAAP results. We believe these metrics provide useful supplemental information in assessing our revenue and cash flow performance. Reconciliations of these non-GAAP financial measures to the most directly comparable GAAP financial measures are presented in the tables at the end of our earnings release issued earlier today, which has been posted on the investor relations page of the company's website. I will now turn the call over to Derek.
spk02: Thank you, Camilla, and good afternoon, everyone. Thank you for joining us. Today I will take you through execution and strategy highlights from the quarter, and then Frank will provide financial highlights for the period. And then we will take your questions. As always, I want to thank all of our CASEL employees for their hard work during the quarter and continued dedication to our mission of improving health through innovative tests that guide patient care. We had a strong quarter, which we believe will provide us with significant momentum for the rest of the year. We delivered almost 70% growth in total test volume over the first quarter of 2021 and $26.9 million in revenue, which we attribute to our continued focus on our strategy and strong operational performance. We saw strong year-over-year growth in our core dermatology business and our combined dermatology test volume, that is decision DX melanoma, decision DX SCC, and our comprehensive diagnostic offering of MyPath melanoma and DiftyX melanoma, which grew by 69% over the first quarter of 2021. We continue to make careful investments intended to further accelerate growth in our core dermatology business, as well as investments in the two other pillars of our growth strategy, our pipeline initiatives and strategic opportunities. I will highlight across each of these pillars, starting with our strong core dermatology business. But first, I would like to emphasize that we entered 2020 with an estimated in-market U.S. total addressable market, or TAM, of approximately $540 billion. Despite the COVID headwind, with the launches of both DecisionDX-FCC and DIPC-X melanoma tests in the second half of 2020, we entered 2021 with an estimated in-market U.S. TAM of just under $2 billion. And as of April 2022, following our acquisition of Althea DX, we now have an estimated in-market US TAM of just under $8 billion, made possible by maintaining our focus on our three pillars of growth. Test reports for our flagship gene expression profile test, Decision DX Melanoma, grew by 48% in the first quarter compared to the first quarter of 2021, with 6,023 test reports delivered. As we have discussed, COVID-19 impacted diagnosis of cutaneous melanoma during 2020 and 21, according to our analysis of third-party data. We continue to see the data trending in ways that are not back to pre-COVID levels. However, now, two years later, we are considering these trends a new normal, for now, anyway. We have made decisions that we believe will strengthen our resiliency and position our business for growth, despite potential headwinds related to reduced diagnoses. And we believe our success in our dermatology franchise is driven by strong execution on these growth initiatives. For instance, we doubled our dermatology-facing representatives in 2021 to the mid-60s, where it stands now. As we communicated to you in the first half of 2021, We made the active decision to double our dermatology-facing representatives by July 2021 so that we would enter 2022 with a commercial team that could take advantage of the promotional responsiveness that we see in this market. So we feel good about the strong momentum we have seen so far in 2022. As we discussed, we will continue to assess the size of our commercial team and number of outside sales territories. Our assessments will include evaluation of our mix of outside sales territories, inside sales support, marketing, and medical affairs, and we'll adjust our investments based upon these evaluations. As I noted earlier, we believe that our market is promotion responsive, so we anticipate that our Salesforce expansion efforts, investments in R&D, our peer-to-peer programs, our interface with the leading dermatology electronic medical record system, modernizing medicine's EMMA system, and our federal supply schedule contract with the VA, which was recently expanded to include all of our skin cancer tests, should position us well for growth across our suite of dermatologic tests for the remainder of 2022. Another significant dermatology highlight was the presentation of our expanded National Cancer Institute collaboration with the SEER program. This expanded real-world data showed improved survival for patients who had the benefit of the DecisionDx melanoma test in addition to traditional clinical and pathologic data compared to untested patients who only had access to traditional clinical and pathologic factors to determine their treatment and follow-up plan. Specifically, patients diagnosed with melanoma and who received the DecisionDx melanoma test had a 27% improvement in melanoma-specific survival compared to untested patients. Let me restate this number as it is important clinically. When controlling clinical and pathologic factors as well as socioeconomic factors, patients who had the benefit of having decision DX melanoma test results in addition to clinical and pathologic factors had a 27% improvement in melanoma-specific survival. Switching now to DecisionDxSCC, we have discussed potential timing of Medicare coverage for this test. At this time, we remain uncertain on timing. However, we continue to plan for Medicare coverage prior to mid-2023. You will recall that the technical dossier for this test was submitted to Moldex for review to Palmetto in the second quarter of 2020. We expect to continue to offer this test to patients as we believe it is the right thing to do. Our billing department continues to bill payers, and as per our process, we expect to continue to receive some payments in 2022. Now, turning to our pipeline initiatives, we presented proof-of-concept data at the Revolutionizing Atopic Dermatitis 2022 conference last month. which concluded that our non-invasive skin scraping technique produces sufficient RNA to assess reproducible gene expression for inflammatory skin disease pipeline tests that's currently in development to predict therapy response. Specifically, data in the proof-of-concept portion of our ongoing development and validation study identified preliminary genes of interest. Importantly, the study demonstrated strong technical reliability and interoperative accordance for the skin scraping technique. So we feel confident about our non-invasive skin sampling approach. As you may recall, in 2021, we initiated a 4,800-patient prospective multicenter clinical study to develop and validate this pipeline test. We believe we are on track to have initial validation and development data in 2023, and we expect to launch this pipeline test by the end of 2025, which would add approximately $1.9 billion to our estimated U.S. TAMP. As we move to our last growth pillar, strategic opportunities, we are excited to discuss the ongoing progress of our tissue cycle integration, as well as our recent acquisition of the ADX and the IDGenX pharmacogenomic test for mental health conditions. As I mentioned above, the acquisition of these two laboratories expanded our in-market estimated US PAM by approximately $6 billion to now approximately $8 billion. As we've mentioned on past calls, we believe strategic opportunities enable us to build franchises in two complementary markets with existing commercialized products that addressed a clear unmet clinical need and have already gained Medicare reimbursement as well as select commercial coverage. And we have made these acquisitions in furtherance of our long-term growth and value creation objectives. For the near and mid-term, we will focus assessment of other strategic opportunities from the position of building our three franchise markets, Dermatology, Gastroenterology, and Mental Health Conditions. As it relates to our Tissue-Cyber Aerotisophagus test, we have seen the positive reception from clinicians that we identified during our market research in the second half of 2021. In the first quarter, CMS granted ADLT, or Advanced Diagnostic Laboratory, test status for the Tissue-Cyber test. ADLT status requires that a clinical diagnostic laboratory test provide new clinical diagnostic information that cannot be obtained from any other test or combination of tests, among other criteria. Of significant business importance is the fact that ADLT status exempts tissue site from what is called the 14-day rule, which simplifies the billing process for Medicare patients. We also announced in the first quarter an independent peer-reviewed article published in the Clinical Gastroenterology and Hepatology Journal. The study, a pooled analysis of five previously published clinical validation studies of 552 Barrett's esophagus patients, was led by Dr. Prasad Iyer, a recognized expert from the Mayo Clinic in the diagnosis and management of Barrett's esophagus. The analysis reinforces the ability of tissue cipher to significantly improve predictions of progression to esophageal cancer or high-grade dysplasia in patients with Barrett's esophagus compared to predictions based on clinical pathology variables alone, allowing for more informed disease management decisions to occur. For instance, one analysis evaluated the impact on tissue cipher in combination with clinical and pathologic factors that are known predictors of progression in patients with nondisplastic barotrophic disease. This patient group is particularly concerning, as we believe they represent approximately 348,000 endoscopies per year, or approximately 91% of the intended use market for tissue cipher. We continue to make progress on our Pittsburgh laboratory enhancements and we have signed our new lease to facilitate further progress for TissueCypher, which includes optimizing test turnaround time. You may recall our commercial team consists of 14 outside sales territories. Similar to our dermatology commercial team, we will continue to assess market response and determine what the appropriate commercial expansion will look like But based upon our initial market research, as well as initial provider response, we'd expect to add approximately 10 to 15 additional outside sales territories sometime in the third quarter, ending the year with approximately 25 to 30 outside sales territories. Let's turn now to our recent closure on AlfeaDx and the acquisition of the IgGenX test in late April. I want to reiterate our strategic focus and how this acquisition aligns well within this focus. CASEL aims to transform patient management by providing actual information in disease states with high unmet clinical needs. We accomplish this through four main factors. Number one, we identify high value clinical decision points that are poorly served by current subjective features. Number two, we focus on clinical decision points where the diagnosing clinician is the treating clinician. Number three, we limit our investment to proprietary products And number four, we identify subsequent disease states or clinical decision points at the same diagnosing or treating clinician basis, thereby providing multiple high-value tests to the same customer and leveraging our commercial investment. We believe IDGenX aligns with our strategic focus. Additionally, as you may recall from our April 4th announcement, IDGenX previously only had Medicare coverage for use in patients diagnosed with major depression. As we enter into May, Medicare coverage for the IgDX multi-gene test now includes seven additional mental health conditions for a total of eight. And as a reminder, a randomized controlled trial showed that patients diagnosed with depression who were assessed with the IgDX test showed a greater than 2.5 times improvement in remission compared to those patients who received the physician's choice without knowledge of their pharmacogenomic information. AltheaDx had a commercial team covering approximately 20 outside sales territories, and all joined the Castle family. We are excited about the potential IGX has to help patients diagnosed with mental health conditions. And we recently announced a collaboration with Camille Schreier, Miss America in 2020, for Mental Health Awareness Month to promote the potential of genetic testing and the IGX test to help improve treatment for mental health conditions. We look forward to updating you in the near term on our progress to HygieneX. I will now turn the call over to Frank, who will provide details relating to our financial results and updated 2022 revenue guidance.
spk01: Thank you, Derek, and good afternoon. First quarter revenue was $26.9 million, an increase of 18% over the first quarter of 2021. Overall, the increased revenues primarily reflect both higher report volumes for our DecisionDx melanoma and DecisionDx UM tests, partially offset by lower revenue adjustments related to tests delivered in prior periods. We believe the higher volumes are attributable to a combination of increased patient flows from the easing of COVID-19 restrictions and the effects of our dermatologic sales force expansion last year. Excluding the effects of revenue adjustments related to tests delivered in prior periods, Adjusted revenue was $26.3 million, an increase of 50% over the first quarter of 2021. For the three months ended March 31, 2022, and 2021, we recorded net positive revenue adjustments of $.6 million and $5.3 million, respectively, related to tests delivered in previous periods associated with changes in estimated variable considerations. We are raising our full-year 2022 revenue guidance and now anticipate generating revenue between $118 million and $123 million, which we believe will be driven by further consistent execution on our growth plans, and in particular, the Althea DX acquisition. Our gross margin during the first quarter was 71.7% compared to 86.7% in the first quarter of 2021. Our adjusted gross margin, which excludes the effects of intangible asset amortization related to our acquisitions, and revenue associated with test reports delivered in prior periods was 77.4% for the quarter, compared to 82.7% for the same period in 2021. As we saw in the first quarter, we continue to expect our gross margin percentage to be negatively impacted in the near and midterm by increased spending on investments to facilitate and support anticipated growth in report volumes in advance of obtaining reimbursement coverage for several of our tests. These investments may include additional laboratory personnel and related resources. Additionally, as we have discussed, our GAAP gross margin may also continue to be negatively impacted by amortization of intangible assets associated with Reclin acquisitions for the remainder of 2022. Our total operating expenses, including cost of sales for the quarter ended March 31, 2022, were $51.4 million compared to $27.1 million for the first quarter of 2021. The largest driver of the increase was higher SG&A, which increased by $12.3 million compared to 2021, attributable in large part to higher personnel associated with our increased headcount, which include expenses related to salaries, bonuses, benefits, and stock-based compensation. These higher personnel costs were primarily attributable to the expansion of our sales and marketing teams, as well as administrative support functions. Further, in connection with our acquisition of Cernostics, we hired an initial commercial team of 14 outside sales territories, along with conventional internal sales associates and medical science liaisons to support our launch of the TissueCypher Barrett's esophagus test. The remainder of the increase in SG&A was primarily associated with training events, meetings, travel, and other general increases. R&D expense increased by $4.9 million in the first quarter compared to the first quarter of 2021. It was primarily associated with increases in personnel costs, including increases in stock-based comp, attributable to additional headcount to manage and run our clinical studies, and increases in other expenses associated with increased clinical study activity. Total stock-based compensation expense, which is allocated among cost of sales, R&D, and SG&A, totaled $8.4 million for the first quarter, compared to $4.9 million for the first quarter of 2021. Operating expenses this quarter also included a change in fair value of contingent consideration of $2.6 million, or 10 cents per diluted share, and is related to the re-measurement of the liability for earn-out payments in connection with our acquisition of Stronostics. This expense could vary from quarter to quarter, depending on any changes in assumptions and valuation results. Further, we had amortization of acquired intangible assets for the three months ending March 31, 2022, of $1.6 million, which is related to the developed technology we acquired in May 2021 and December of 2021, attributable to the MyPath melanoma and tissue cipher tests, respectively. Our net loss for the first quarter of 2022 was $24.6 million compared to net loss of $4.3 million for the first quarter of 2021. Basic and diluted loss per share for the first quarter was $0.97 compared to basic and diluted loss per share of $0.17 in the first quarter of 2021. Adjusted EBITDA for the first quarter was negative $11.4 million compared to a positive $0.9 million for the comparable period in 2021. Net cash used in operating activities was $21.4 million from three months ended March 31, 2022. It was primarily attributable to the net loss of $24.6 million, accrued compensation of $6.9 million, and increases in accounts receivables of $2.7 million, partially offset by stock-based compensation expense of $8.4 million, and a change in fair value of continued consideration of $2.6 million, as well as depreciation and amortization of $2.2 million. Finally, we had cash and cash equivalents at March 31st, 2022 of $309 million and no debt. I want to reiterate that we believe our strong balance sheet positions us well for continued growth and value creation. And now I'll turn the call back over to Darren.
spk02: Thank you, Frank. In summary, we're off to a great start in 2022, delivering strong year-over-year growth in our current dermatology business and laser-like focus on strategy execution. We continue to make thoughtful investments to accelerate growth, and we are seeing results of those investments. I would like to conclude today by thanking our CASEL team. I thank you for your continued interest in CASEL. Now we are happy to take your questions. Operator?
spk07: Thank you. If you would like to ask a question, please do so now by pressing star followed by one on your telephone keypad. If you change your mind and would like to withdraw your question from the queue, please press star followed by two. We ask that when preparing to answer your question, please ensure that your device and your microphone are unmuted locally. Our first question today comes from the line of Puneet Sudha from SVB Lee Rink. Puneet, please go ahead.
spk04: Yeah. Hi, Derek, Frank. Thanks for taking my questions. The first one is on guide. I just wanted to understand. You delivered about a million ahead of us in the consensus, I believe, as well. And you were expecting $2 million for Altia DX. So given that, that seems to account for the increase in the guide at the midpoint, combining those two elements. So I just wanted to understand, given the momentum you're seeing in the market, is there anything that's giving you a pause a little bit? Is it still COVID sluggishness? Is there rep access, anything else that you would point to that is giving you more confidence? It appeared to me that you would have more confidence at this point in time, given where the current markets are, and we're somewhat out of COVID at this point in time, hopefully.
spk02: That's a great question, Puneet. Derek, I'll maybe give some flavor and Frank can correct me. I think that, one, this is only the first quarter, and so you're right. We exited last year with really, really strong momentum, certainly in our dermatology business. We're early on in the launch of both tissue cipher and, of course, only closed this quarter on Althea DX, and so there certainly is some conservative as I think in terms of thinking through the opportunities for the other new products, I guess we'd say, from a launch standpoint. But nothing we've seen reflects any kind of a pullback, rep assets, et cetera, et cetera. But you want to
spk01: I would just remind you that the range, the Althea revenue guide was one to three million rather than a single midpoint. And I think that the revised guidance reflects our enthusiasm and excitement about the tremendous execution in our core germ business that we continue to see.
spk04: Okay, that's helpful. And then, you know, Derek, maybe taking a step back, when you look at the AJCC guidelines overall, where decision BX melanoma is today, the momentum that you've had in the data generation that you've had over the last few years, The fact that decision DX melanoma, and correct me if I'm wrong, it's mid-teens to high-teens penetrated in the market. At what point do you think you can approach the HHCC guidelines and potentially we can see potential for inclusion of this test longer term into the guidelines? Thank you.
spk02: Yeah, excellent question. Again, I would maybe separate out slightly. So AJCC really is about diagnostic workup only. And I think it wasn't until the last version, which was probably, what, December 17 or January 18, when you saw them include even Oncotype for breast in terms of the diagnostic workup guidelines. So I think impacting AJCC diagnostic criteria is a ways off, but that's mainly because they try to harmonize with the WHO equivalent. As it relates to NCCN guidelines, maybe where your question was going, We certainly believe that this recent National Cancer Institute slash SEER collaborative study that we have ongoing with NCI is a very significant, real-world, large prospective data set that shows that when clinicians have an opportunity to incorporate the results of our test with the other standard of care information they get with them, you know, clinical and pathologic features that they're able to make you know, I'm interpolating here slightly, better decisions that result from living longer. And that's pretty significant. And given that it's not a CASEL study, but a third-party large NCI study, I think, should bear weight. I certainly think we should expect the NCCN committee's members to evaluate that data, and they should be doing what, you know, over 5,000 U.S. clinicians do, which is to incorporate it in use of their practice. Now, that being said, I think... The diagnostic numbers, as you know, around melanoma are kind of squishy. Part due, we think, to kind of the COVID squishiness. But I think we expected that we actually last year were at around 18% to 20%, more like 20%. Is that right? On a reduced number of diagnoses, correct. On a reduced number of diagnoses. So we're already sort of testing last year one in five patients. In doing some assessment work, it looked to us like things like Oncotype DX for breast cancer, for example, didn't get incorporated into NCCN guidelines for breast cancer. It hit around 30%. So we're kind of just a year or two away from there. So I think that will be around the corner is my expectation because clinicians are using our tests in record numbers to help treat their patients. And although we do recognize NCCN as being a laggard indicator of adoption, that laggerness is coming pretty close from our perspective.
spk07: Our next question comes from the line of Catherine Schulte with Baird. Catherine, please go ahead.
spk06: Hey, Dave. Thanks for the question. Yes, first, you mentioned melanoma diagnoses aren't yet back to pre-COVID levels. You know, where were they for the quarter? And then you mentioned you're considering this the new normal. You know, why don't you think that will rebound to pre-COVID levels? And does that change how you think about the ideal ultimate size of your sales force if diagnoses and or rep access is going to be different going forward versus pre-COVID?
spk02: A lot of yes-no questions there, Catherine. Let's see. First of all, we don't believe we have accurate first quarter diagnoses, numbers based upon the vendor that we've been using. We believe if there wasn't any pullback, there's nothing to indicate from kind of a Salesforce access perspective or knowledge to marketplace in January or February that Omicron had any material difference. I think the question is as asked, You know, we're in this about, what, seven quarters or so, and we keep wondering when we get back to diagnosing around 130,000 patients a year versus call it 110 or 115. And I guess in the short term, one, I can't tell when they come back, if that's due to kind of a reduction in telehealth over time or if we should. So we just sort of want to be as transparent as possible, obviously, and just indicate that, you know, as of now, we should probably view the normal patient flow as being what it's going to be. I think, unfortunately, those patients who had delayed diagnoses, which I think is largely due to the implementation of telehealth medicine, which I think for older patients certainly makes it much more difficult to get your phone around the back of your head or your back and say, hey, is that a melanoma doctor? So that's kind of concerning from a patient care standpoint. But I think until we sort of see that kind of primary care in-person activity returning, we would expect a slow dribble of these patients coming back in as they self-diagnose a melanoma that's bigger today than it would have been in a normal PCP interaction a year or two ago. But I think if people are modeling in kind of a rush to a catch-up of all these missing patients, I think that's hard to predict from our standpoint, which you've always said we just try to be a bit more open or transparent this time. I get them all?
spk06: Got it. You did. Oh, I know.
spk02: So in terms of size, the Salesforce question was buried there. I don't think it impacts that. We have such a large, untapped medical need here in melanoma. As you know, we're just now scratching the surface for squamous cell carcinoma, and we also have our MyPath and 50X test. Those are all largely at the same customer. So, you know, a few thousand less melanoma patients doesn't necessarily change the opportunity we have to really impact patient care who have skin cancer, one of a variety of skin cancers in the dermatologist's practice. So I think that doesn't impact our planning or decision-making process.
spk06: Okay, got it. And then for squamous cell, you know, you have those volumes drop sequentially, so just curious if you could talk through what you're seeing with that test. Is there seasonality there? Just a little surprised to see that given it's so early in the launch and given the Salesforce expansion. So any color on what you're hearing in terms of doc feedback would be great.
spk01: Yeah, Catherine or Frank, the physician feedback is tremendous. And it's the clinical utility of our squamous cell test may wind up being even more compelling than the clinical utility of our melanoma test, which is, of course, um well published and and well well validated um important to remember the reps our area managers are still uh directed to focus most of their time on the on the melanoma test and um given where we are in the reimbursement journey um we certainly don't want to have a melano um a swamus uh... uh... report at the expense of the melanoma. Now if a physician, and many of them do, if they want to talk about squamous, the area managers are well-equipped, well-trained, and they'll do it, but we are guiding them fairly heavily to focus the majority of their interactions on melanoma. So we're quite happy with where the squamous volume was this quarter. It may bounce around a little bit. I think that the real measure is going to be once we get the reimbursement puzzle fixed there, I think you'll see that start tracking angles and trends like melanoma.
spk02: Yeah, I wouldn't focus – any effort or concern around quarter over quarter, especially this quarter. You know, we haven't been in market in a, having launched the squamous cell test only in sort of late August 2020, we really don't have any non-COVID normal patient flow experience, assuming squamous cell tracks like melanoma does in terms of patient flow. And we've seen pre-COVID the number of patients diagnosed and report growth in first quarter over the fourth quarter being nothing to write home about. It's usually flattish or something like that. So I think this is not a difficult, from that standpoint, um and certainly we've heard um well i would say only positive impact in terms of the decisions we're having our tests make in terms of patient care assuming squamous shell tracks seasonality close to melanoma which i don't think there's a reason why it shouldn't i don't think we would expect melanoma to have a increase in the rate of diagnosis we expect our report growth to occur in the second quarter versus first quarter. We would see a little bit more in the third quarter versus second, and then you'd have third to fourth and fourth to first being kind of flatter. So that's not atypical. And I think reinforced now we're giving around 10% effort to kind of a launch product, but that's just due to kind of where we are in reimbursement is a perfectly adequate place we want to be at today.
spk06: All right, got it. Thank you.
spk07: Our next question comes from Mason Carrico with Stevens. Mason, please go ahead.
spk03: Hey, guys. Thanks for taking the questions. First, could you walk through some of the growth dynamics in the quarter for your dermatology portfolio specifically? Any color you can provide on growth you're seeing from a growth in new clinicians adopting use of the test versus increases in utilization?
spk01: Yeah, sorry, Mason. It was really twofold. We had a tremendous quarter in terms of new ordering positions. That is a metric that we not only track, but we drive area manager results or are impacted heavily by that. And the reason is because if we can convert a physician and have them begin using the test on a handful of their patients, we typically see as they review the data and see the benefit of the test that they'll expand it to a larger group. a great quarter in terms of new ordering physicians, and then continued volume and uptake from the docs we have. As Derek said, at this point, and I know you've heard us say we have a little bit of a tough time getting a real precise number on the total number of clinicians who are targetable in the country, just given the subspecializations that you see in dermatology. But somewhere around half the docs that are targetable here used the test in the last year. And that's, you know, one out of two is getting pretty close to standard of care. So I think that As we continue to see the penetration levels grow, physicians will see their colleagues, and they'll see that their colleagues are using the test and benefiting from the test. Also, this quarter, we had one of the most powerful study data points we've had yet, which was the the collaboration with NCI and the SEER data. So working hard to get that published, that's a key goal of ours, and we'll amplify the dialogue around that even more.
spk03: Got it. Thanks. That's helpful. On your ID genetics test, in the sense that it incorporates drug-to-drug interaction, I was wondering, one, Is that unique to ID genetics versus some competitor tests out there? And also, is there a general percentage of patients with major depressive disorder who are on one or more medications?
spk02: So I'll ask the first one, and we'll come back to the second one. So on the first one, there have been four clinical studies done with four different pharmacogenomic tests in patients with depression. Two are negative. Both of those only do, I'm sorry, there's been five, I guess. Two are negative. Both of those only do drug gene interaction reporting. Myriad's gene site test had a positive outcome study showing an improvement in terms of permission and response mates, if I recall correctly, compared to Fishman's Choice. They only report drug gene interactions. AltheaDx's early scientists made the proactive choice that actually both components are important, and the doctor should seize for the summary up of not only what the patient's on today, but also the genomic impact of their own body on on processing these kinds of therapies so that we saw obviously in the LCA-DX study a positive improvement in terms of both remission response rates. I don't want to raise up or cut down the validity of inter-study comparisons, but if you look at the gene site study, the robustness of responses was more muted than it was in the LCADX study. That could be a protocol design issue. It could be site selection. It could be timing of those studies done or it could be actually because you have one report that includes both drug gene and drug drug and one that does not. So our perspective is that when we share in an honest manner the protocol design and the ease at which a clinician can order the R-idigenic test, the fact that we give them one lab report back which includes what they want as opposed to saying, hey, if you're interested in the other part of therapeutic response, go over online and figure it out doctor we can't help you i think that's an important advantage to us now that being said the main opportunity i think is not so much grabbing share it really is helping these people the vast majority who have had not had access to pharmacogenomic testing to actually have better choices made the first time around so i think that's the real opportunity but we do think we have a very nice strong competitive advantage which is easy to communicate on the multiple medication issue, my understanding is that, yes, these patients and the patients for the other indications that we have approval for, anxiety, the extended approval with Medicare coverage a week or two ago, which included seven other indications that many of those patients are going to be on multiple drugs, unfortunately, which just increases the value of our test to clinicians and our patients. Perfect. Thanks, guys.
spk07: Our next question comes from Thomas Flatton with Lake Street Capital Markets. Your line is open.
spk02: Thank you, guys. I appreciate you taking the questions. Sticking with ID genetics, from a rep productivity perspective, obviously the guide is pretty marginal at this point, but 20 feet on the street, what kind of productivity could you get out of that team without a significant expansion in the, say, near to intermediate term?
spk01: Yeah. Hey Thomas, it's Frank. So, um, we, we would expect that, um, we, we at some point we'll expand that group. Uh, we'll do it as we grow volumes. Um, having, um, Medicare coverage in hand allows us to sort of scale that, um, as, as appropriate as, as the, as the volumes come forward. Uh, so, so I don't know, I can't guide you when we might expand. It's certainly, um, I think it's clear that, um, uh, there are, lots of uncovered areas that we could still tap. And so we'll use our typical castle structure of a group of outside area managers coupled with medical science liaisons and inside sales associates to penetrate that space. It's too early for us to really see at what point a rep is doing so much business that we need to scale that territory down a little bit. But I would suspect that in our behavioral health effort, we will probably take the same approach we do in our others, which is we would like our area managers to be able to spend about half their time converting new physicians and about half their time providing information and service to physicians who are using the test. And we'll give you more insight as we develop it here. And out of curiosity, are those territories built around high prescribers of certain basket of meds, or anything you can share about how those territories are built or designed?
spk02: So with the millions of potential patients, and only 20 or so or 19 sales territories out there. They were originally designed based upon just massive geography. There were some expansions done earlier last or late last year, earlier this year that were targeting much more so areas of responsiveness. But I think the opportunity here is to really, I mean, let us get past the next couple of months into integration to group. And as Frank said, organizing or integrating the commercial team and the medical teams into CASEL's approach, and we'll be able to go and march forward very, very strongly towards the end of this year, which is also part of why we wanted to make sure we were setting up modest expectations so that we aren't having to make rapid choices for the wrong reasons, but let's make rapid choices for the right reasons. Got it. Appreciate it, guys. Thank you.
spk01: Thanks, guys.
spk07: Our next question comes from Kyle Mixon with Canaccord. Kyle, your line is open.
spk02: Thanks. Hey, guys. Thanks for taking the questions. Just sticking with the acquisitions, the current term of your legacy term business, it's grown quite a bit through these acquisitions and the launch of all these products. But, you know, the legacy business is still below $2 billion in TAM. And I know the pipeline offers upside to like $6 billion. But you've added $1 billion from Ternopix and Vodbill from Alpia. I'm sure those are big reasons for the acquisitions. I'm just kind of wondering, though, like what gives you confidence you'll be able to successfully penetrate those incremental TAMs that you've added over the past year? And I guess it would be helpful to kind of talk about that in the context of, your objective to kind of achieve casual birth even by 2025 before we even launch some of these 5-5 tests on the germ side as well. Thanks. So clarify what you're thinking about with the word incremental. The incremental as in Cernostics incremental to dermatology or incremental in dermatology even? I just want to make sure we're answering the question correctly. Sure, Derek. So the $1 billion from Cernostics, the $5 billion from Althea, I mean, those are all kind of you know, relatively white space opportunities for Castle, right? So, like, what's going to give you confidence that you can kind of penetrate those successfully just given, you know, the kind of relatively niche in businesses, I guess? Thanks. Yeah, excellent question. So our belief as we kind of went through the COVID period of understanding where we were going to ensure strong growth in the kind of mid to long term, was do we only want to stay or should we only stay within dermatology or when we think we've gotten size properly in terms of infrastructure support back office support do we think it makes sense as well to maybe go outside of dermatology if we can find areas that offer the same kind of checkbox that we get with dermatology, which is to us, you know, are there more than one areas of high unmet clinical need that could be solved potentially with advanced vector diagnostics, yes or no? I.e., can we leverage a franchise investment through multiple products? Two was If we do it ourselves, that's a pipeline development timeline. And then as we know, it's an uncertainly elongated timeline to getting at least your first steps in reimbursement taken care of. And do we see areas where we could find things that would meet that, that we view as complementary to CASEL's strengths? And so I think going back to gastroenterology and our tissue cipher test for patients with Barrett's esophagus, there's a clear unmet clinical need as we talk to gastroenterologists who are concerned about the poor predictive value of pathology in terms of predicting which patients with Barrett's esophagus actually will go on to progress and which will not, and that results in both the undertreatment of people who maybe could be saved from advancing to adenocarcinoma of the esophagus, as well as over-management, which is really, you know, repeat endoscopies every year, every two years for the rest of one's life, when your chance of progressing is so low, is that really the right thing to do? And we felt that the opportunity in Barrett's disease, the clinical data that Serenostics had generated and published prior to the acquisition, and the sort of, as you put it, you know, wide-open green space to really be able to walk in there and frame the opportunity for gastroenterologists kind of checked all of our boxes and by the way, We also had Medicare reimbursement as well as reimbursement from some small commercial payers underfoot. So we felt, wow, we could walk in now. We'll have to integrate, obviously, the current employee base and hire new, but the opportunity to really kind of move this through a growth system in 2023, 24, 25, 26, and beyond looked like it had an awful lot of risk taken out due to Medicare coverage. due to the strong clinical publication track record. And we believe there are other disease states within the gastroenterologist marketplace that we will be looking to build up so that by the time we get to what, call it 2025, let me turn around and say, just like dermatology was in 2022, we have two or three or three or four tests now targeted to the same customer, offering good value that should let us leverage our investment. So that was kind of the gastroenterology analysis. When looking at the Althea opportunity, it was quite similar, which was to say, do we think we have a large unmet need here, and do we think that the product profile is competitive, if not highly competitive? And our answer was yes in both cases. Do we believe that this product could be a substantial growth driver in the next, you know, three, four, five years? Not really doing much in 2022. like tissue cipher isn't expected to, but really helping us move things forward in the middle of this decade and beyond, and our answer was yes. And having kind of designed in or indesigned drug-drug and drug-g interactions to us was a very interesting smart choice that we think, based upon our due diligence, makes a difference in the case of prescribing doctors. To make that easier, and make it, I hate to say mindless, but make it a much more easier choice to have everything in one report clearly is attractive to our customer base. And so it really is about execution for both the mental health business as well as for the GI business. And we believe that we've demonstrated that we not only could do well launching the melanoma test in 2015, I guess, 13, 14, 15, with a small sales force but also launching our our squamous cell carcinoma test and our different our 50x test during covet and being successful hopefully reduces outside concerns about execution risk it's really just a matter of blocking and tackling and what's exciting is that we've We've had an opportunity here to really take some of the digital marketing advances that AlfeaDX has been moving towards and really cross some of those across our other business lines so that at the end of the day, we're going to hopefully not only have the sort of excellent block and tackling that we do from a sales and marketing standpoint permeate both GI mental health. We'll also go ahead and take some of the learnings in terms of where we can actually make good, strong digital marketing investments to help drive further growth in our other business lines. So I think it's a win-win for both those acquisitions. um we would have liked to have these spaced out a bit more timing wise but you don't always look at gift towards the mouth all the time so i think we are quite excited about the integration um investment we're making the next three or four months that's for certain um and and looking at looking forward to seeing the contribution of both these acquisitions in 23 to 27 28. wow okay that was great sir thanks so much awesome real thorough answer i'm just thinking without the uh maybe the new indications for id genetics under the um coverage expansion i assume that's going to be the kind of like 1500 rate that's for depression if you can talk about any off-label use of the text um in these newly reimbursed areas to date and um you know ultimately is there any material upside to the 22 revenue or maybe gross margin expectations um being provided here today i don't think they're baked in um and if you could quantify the milestone payment um was was What was that in connection with this recent catalyst? That would be helpful, too. Thanks. So I'll answer a couple of those questions. I want to try and cover a couple. In terms of the expanded indications, those are disease states that I believe AltheaDx was reporting on prior to the expanded Medicare coverage. So what really was expanded wasn't so much the MOL-DX program saying, gee, we think that you can now add data to these patients. It was really about reviewing data in patients with those indications. The kind of overriding driver of sort of idea genetics is really looking at what CPIC does, C-P-I-C, which is a quasi-governmental body, or NGO rather, composed of academics and pharmaceutical companies as well as, I think, current or ex-FDAers, who really looks around and says, gee, of FDA-approved drugs, what do we know about drug-drug or drug-dine interaction? Let's create a list that's evidence-based so that as clinicians, physicians treating patients can go to the CPIC website and be able to see the various interactions that may be occurring on a drug-drug or a drug-dream perspective for different disease states. So, CPIC really is sort of the clearinghouse, I would say, for potential use of a test like Idigenics. Now, that being said, what I just described to you is not what doctors get paid to do. They get paid to see patients. And so, the actual value of CPIC is not seen very well, but the opportunity to go ahead and look at saying, hey, what are some areas of recognized drug gene or drug drug interactions that could be um added added to future reports and the and the cpic um group happens to be one of the consortia that one can look at and say does this make sense does it align with our current kind of customer call base should we look at developing data that could demonstrate that we can actually measure drug-drug or drug-gainer actions in these same patients with those disease states or those diagnostic states, and we kind of move forward from there. So I don't think I would characterize any use of the iGenX test as off-label. We really only report interactions that are relevant for patients which have certain state of disease or diagnoses today. We can expand that over time, of course, with with additional data development.
spk01: Did I answer that part of the question? Yeah, and Kyle, the milestone or contingent consideration potential payments are based on revenue growth and reimbursement performance.
spk07: Our next question comes from Mark Massaro from BTIG. Mark, your line is open.
spk03: Hey, Derek and Frank, good to hear from you, and thanks for taking the questions.
spk02: I wanted to ask about gross margins. So, you know, Frank, you talked about investments you'll make in lab personnel and amortization of intangible assets from acquisitions. You know, Legacy Castle, you know, you guys were quite unique with 80% gross margins. So can you just maybe help us at a high level think about your mid to long-term gross margin trajectory and when you think you might be able to get back to those potential 80% gross margins?
spk03: Or is this mid to high 70s, you think, maybe the new normal?
spk01: Yeah, I'll divide that more from a GAAP gross margin, which includes the amortization of intangible assets that were part of the acquisitions. That's going to change based on that amortization, right? There's not anything that's going to change there. But the adjusted gross margin, if you take that out, You know, when you're not appropriately paid for your service, it has a negative effect on gross margin. So when we do have the reimbursement path repaired or fixed or correct, I guess, is the way to think about it, then we would expect to get that close to the gross margin that we had before. ID Genetics is also run on Quad Studio, so similar throughput, similar workflow there. And so I think that it's a matter of getting reimbursement to catch up with volume, which is something we work very hard on. So, for example, one exercise.
spk03: Sorry, continue.
spk02: Derek. I was going to say, for example, one exercise that we don't do in our filings is just take the volume for the tests that you believe have reasonable reimbursement, such as the DecisionDx UM test, our DecisionDx melanoma test, and our MyPath melanoma test, and just use those as your... test report denominators and divide back into the cost of goods, and you'll see it sitting up where you expect it to go and be. So I think it's a matter of progress on a reimbursement that lets that volume that we're producing reports on today that aren't being reimbursed appropriately. That'll move the needle right back up, as Frank said. Okay, that's helpful. And then
spk03: I think your R&D outlook for the year contemplates 65 to 80 million in investment in 2022.
spk02: Can you give us a sense for the breakdown between DERM, GI, and mental health? And then, you know, you guys talked about how GI could sort of
spk03: you know, be maybe sort of a new area where you could add additional indications over time.
spk02: You know, how are you guys thinking about potentially adding those organically versus inorganically? And can you give us a sense for what that pipeline is that you acquired?
spk01: Yeah, I think your R&D number might be a little high, Mark. We'll make sure we get that cleared up for you. We haven't broken out how much is in which category. I would tell you that we will continue to support our in-market germ tests very aggressively. We'll continue to support tissue cipher and IV genetics very aggressively as well. We have been incredibly successful as a company in developing signatures internally. Our UM test was licensed, as you know, but our three germ tests, taking out the MyPath portion of our comprehensive diagnostic offering, those were all developed in-house. And so we've got a tremendous amount of confidence in our R&D team and their ability to develop signatures. The tricky part is just making sure that you're identifying a clinical question that physicians have and need an answer for. So if we can do that, we're confident that we can. And, by the way, we have identified questions in GI. So if we identify a question a group of physicians has, we're very confident we can develop a signature for it. So we would like to add additional products to our GI offering. We're working on several in berm as well, and we'll keep doing that. the opportunity with these groups of physicians is quite significant. And as we saw with our Twema cell quick uptake, when you educate a group of physicians on the value of gene expression profile diagnostic testing, when you have new patients that you can help them, it's a much easier putt to get them to understand that value in the next group of physicians.
spk02: Okay, that's great. One last one for me.
spk03: You know, you guys have a strong balance sheet with over $300 million of cash. You have been acquisitive recently. You know, you've got new channels where you can plug additional assets into. Valuations have declined significantly in the last three months.
spk02: How do you look at the environment for potential tuck-ins at this current time? I think one is, of course, you can never say never anyways. I think we have an opportunity here to really integrate, chew and digest, driving into three areas in terms of our current commercial opportunities in GI, in mental health, and in dermatology. We have laid out the fact that we believe dermatology is our significant near-midterm core revenue driver, certainly, and that one of our growth pillars is looking at external opportunities like tissue cipher and like ID genetics. That being said, I think that one of the leverage points that we like about dermatology is how do we leverage and their sort of mental health call points. So I think from an acquisition perspective, there are certainly items that are looked at all the time. I think it's much more likely if we make additional moves, the larger we'd be focused in growing out our current call points, we can get greater leverage value off those commercial investments. Do you want to add anything? This concludes our first quarter 2022 earnings call. Thank you again for joining us today and for your continued interest in Castle Biosciences.
spk07: Thank you everyone for joining us today. This concludes our call. You may now disconnect your lines.
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