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spk04: Good afternoon and welcome to Castle Biosciences third quarter 2022 conference call. As a reminder, today's call is being recorded. We will begin today's call with opening remarks and introductions, followed by a question and answer session. I would like to turn the call over to Camilla Zuccaro, Vice President, Investor Relations and Corporate Affairs. Please go ahead.
spk01: Thank you, operator. Good afternoon, everyone. Welcome to CASEL Biosciences' third quarter 2022 financial results conference call. Joining me today is CASEL's founder, president, and chief executive officer, Derek Massold, and chief financial officer, Frank Stokes. Information recorded on this call speaks only as of today, November 2, 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 range of anticipated total revenue in 2025 and expected operating cash flow positivity by 2025, and our expectations and assumptions related to the impact of the COVID-19 pandemic, macro conditions, inflation, and of Hurricane Ian. 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 also 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 September 30, 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, cash flow, and operating 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.
spk09: Thank you, Camilla, and good afternoon, everyone. Today, we are pleased to share that Castle Bioscience has delivered another strong quarter, growing revenue by 58% and total test report volume by 57% over the third quarter of 2021. Based upon our year-to-date results and the momentum in our business, we've increased our full year 2022 guidance to between $132 and $137 million. representing anticipated growth of at least 40% from 2021 total revenue. Before I discuss the quarter in greater detail, I'd like to reiterate a few key points from our investor day that we held in September. In terms of our corporate strategy, we will follow our three guideposts to achieve what we believe is exceptional execution. The guideposts, exceptional employees, continuous evolution and improvement, and customer and solution-centric, are grounded in Castle's mission, vision, and values, and are foundational to how we operate our business. As it relates to this first guidepost, Exceptional Employees, it's important that I express my gratitude to those who make Castle what it is, and to acknowledge that we wouldn't be where we are if it weren't for those of you who call Castle home. So to all Castle employees, thank you for your dedication, your efforts, and your productivity. As it relates to the remainder of this call, I will review highlights from the quarter. I will then turn the call over to Frank, who will provide financial highlights for the period, and we will finish up by responding to any questions that you may have. Let me now begin with our core dermatology business. For our skin cancer tests combined, we delivered 9,824 test reports, a 34% increase over the third quarter of 2021, and a 4% increase over the second quarter of 2022. Overall, our skin cancer tests combined, we estimate that our third quarter 2022 test report volume represents marker penetration of approximately 4%. And for the nine months ended September 30th, 2022, we saw approximately 1,801 new ordering clinicians and approximately 6,763 total ordering clinicians for dermatologic tests combined. For Decision EX melanoma, we delivered 7,354 test reports, an increase of 34% over the third quarter of 2021. We believe the most significant drivers of our strong growth are the clinical impact our tests can contribute to the management of melanoma, coupled with our prior commercial expansion investments intended to educate our customer base. As it relates to the clinical impact, expanded real-world data from our collaboration with the National Cancer Institute showed improved survival for patients who had the benefit of a 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 plans. Specifically, patients diagnosed with melanoma and tested with DecisionDx melanoma had a 27% improvement in melanoma-specific survival compared to untested patients. And as a reminder, the melanoma-specific survival at three years was more than double of what was seen when NCI collaborated with Genomic Health and their OncotypeDx breast cancer test a couple of years earlier. A key study published in the third quarter in the Journal of the American Academy of Dermatology show that decision DX melanoma, with integrated algorithms that combine clinical and pathologic factors with the decision DX melanoma continuous score result, provides more personalized and accurate survival prognoses than clinical and pathologic factors alone, which can help guide risk-aligned patient management. Further, the studies show that using decision DX melanoma test results in conjunction with current staging guidelines can help refine patient risk reduce unnecessary procedures, and ultimately improve patient care. As the National Comprehensive Cancer Network, or NCCN, guidelines recommend risk-aligned decisions for individual patients, the use of DecisionDx melanoma test results could aid identifying patients with more or less aggressive cases of melanoma to align treatment decisions more accurately with patient risk and help ensure a more appropriate allocation of healthcare resources. We believe the continued growth in evidence, such as the NCI collaboration and the publication in the Journal of the American Academy of Dermatology I just discussed, continues to demonstrate the impact that our tests can have toward improving patient outcomes. We believe this march in data, coupled with our commercial expansion efforts, are key factors that drove the accelerated market penetration this quarter. From a seasonal perspective, the third quarter has historically been flat or down sequentially, as well as the fourth quarter. Despite this typical seasonality of our dermatology business, we established another record in test volume, which you feel is a result of continued strong execution and careful investments in our growth initiatives. Now, let's turn to our diagnostic gene expression profile, or DGEP offering, which includes both MyPath melanoma and Difty X melanoma tests for use in supporting diagnosis of melanoma or benign lesion in patients with a difficult to diagnose melanocytic lesion. The primary call point for these tests is the dermatopathologist or the general pathologist. As we discussed during our second quarter call, we reestablished a dedicated sales team to focus on our diagnostic GEP offering. We have just more than 65 dermatology outside sales territories that are now focusing exclusively on our dermatology call points supporting both DecisionDx melanoma and DecisionDx SCC, and we have a small team focusing on our diagnostic GEP offering. We believe this adjustment to our sales teams will allow for the focus of our diagnostic GEP test offering in a manner that will support its growth appropriately. We also believe that this realignment of our commercial sales team could contribute to improved reach and frequency for all of our cancer tests. And historically, we've seen that our target market is promotionally responsive. So we believe this change will contribute to continued momentum as we move into 2023. Historically, it takes about two quarters for dermatology sales reps to reach a level of optimal productivity. We expect to evaluate the impact of our diagnostic GEP commercial team investment in our second quarter 2023 review. As it relates to reimbursement, You will recall that one of our motivations to acquire MyPath Melanoma in 2021 was to pull forward reimbursement for our diagnostic GEP business as MyPath Melanoma was covered under an existing LCD. In the second quarter of 2022, Palmetto posted a draft LCD that would expand coverage to include DiffDx Melanoma as well. With MyPath Melanoma already covered by Medicare, This would ultimately give both tests Medicare coverage. Benchmarking against historical timing patterns, we believe the DIF DX LCD should be finalized by the end of the second quarter of 2023. Now let's turn to our Decision DX SCC test. We continue to see strong test report volume momentum in the third quarter of 2022, with volumes up 75% from the year-ago period. As with our growth in decision DX melanoma, we believe our strong growth in volume for decision DX SCC test is due in large part to the combination of the high clinical need in SCC coupled with the value our test provides. Further, we are pleased to see the growth of decision DX SCC volume has come in conjunction with our strong growth in decision DX melanoma volume, not at the expense of it. As it relates to reimbursement, we discussed on our second quarter earnings call, Novatos, the Medicare contractor that manages claims related to our Pittsburgh, Pennsylvania laboratory, completed the medical review of our decision to the SSCC test in the first quarter of this year. And they subsequently priced our test at a rate of $3,873 per test, the usual and customary rate for risk stratification or prognostic gene expression profile tests. such as those used in patients diagnosed with breast, prostate, and other cancers. Also recall that Novitas posted a broad draft LCD entitled DL39365 Genetic Testing for Oncology back in May. Novitas did extend the comment period by an additional 45 days, and this comment period ended on September 6, 2022. We did not have additional updates at this time. In late September, CMS released the draft 2023 Clinical Laboratory Fee Schedule, or CLFS, pricing update for tests with new codes. Both our DecisionDx SCC and DiffDx melanoma tests were signed new PLA codes earlier this year and were included in the draft 2023 CLFS. DiffDx melanoma was cross-rocked to MyPath melanoma, which is what we recommended. and what we believe is appropriate for a diagnostic support test like DIF-DX melanoma. However, CMS proposed crosswalking our prognostic risk stratification decision DXSCC test to MIPATH melanoma as well. This was against the majority and the minority recommendation from the Clinical Diagnostic Laboratory Test Advisory Panel, also known as the CDLT Advisory Panel, as well as against our recommendation. The majority recommendation of the CDLT Advisory Panel was for DecisionDx-SCC to be crosswalked to DecisionDx-Melanoma. We had met with CMS and submitted comments to point out that the function and resources for risk stratification tests are significantly different from those required for diagnostic support tests. We expect CMS to communicate a final determination on our 2023 rate late in the fourth quarter of 2022. Let's turn to our gastroenterology franchise. We delivered 690 tissue cipher test reports in the third quarter, nearly doubling the number of test reports delivered in the second quarter. We believe the momentum that we are seeing will continue based upon several key factors. First, CMS granted advanced diagnostic laboratory test status or ADLT status for the test earlier in the year. which exempts tissue cipher from what is called the 14-day rule, simplifying the billing process for Medicare patients. Second, the American Gastroenterological Association, or AGA, published its clinical practice update on new technology innovation for surveillance and screening in Barrett's esophagus. And the best practice advice statement stated that the tissue cipher test may be beneficial for risk stratification of patients with non-dysplastic Barrett's esophagus, which we believe represents on the low end, approximately 348,000 endoscopies per year, or approximately 90% of the intended use market for tissue cipher. This clinical practice update provides guidance to clinicians on advances and innovation regarding the screening and surveillance of Barrett's esophagus. So it represents an important development in helping us drive greater product awareness and penetration. Third, Given the momentum we saw in the first half of the year, we added additional outside sales territories late in the third quarter of 2022. We also updated our sales to and marketing materials for the third quarter so that we are finishing the year and going into 2023 with refined messaging and more impactful materials that we believe will better inform and educate gastroenterologists and drive greater levels of product adoption. We'll be training these personnel and bringing them up to speed. which we believe will put us in a strong position of growth going into 2023. On the reimbursement front, recall that Medicare granted ADLT status to Tissue Cipher late in the first quarter. As part of the ADLT process, the original list price was set at the reimbursement rate through the end of 2022. This rate is $2,350. Beginning January 1st, 2023 and going through December 31st, 2024, so a two-year time period, the reimbursement for tissue cipher will be determined based upon the median private payer allowable rate that was received between April 1, 2022 and August 31, 2022. Data from this time period has been submitted to Medicare, and we expect the rate for 2023 to 2024 to be published in December 2022 or early January 2023. To summarize, We are pleased with the results to date of our gastroenterology business. Keep in mind that our acquisition of this business, as well as our mental health business, was intended to build a stronger, profitable revenue growth trajectory for us with material revenue contribution beginning in 2024, 2025, and beyond. Our primary filters for our decision focused on estimated total addressable markets that were larger than any individual in-market dermatology test, which we anticipated could drive material revenue for the long term, products that were on the market but not necessarily generating material revenue, that were first in class or best in class with proprietary algorithms, and that had already succeeded in achieving some percentage of positive reimbursement coverage. We believe TissueCypher met these criteria. Finally, we are entering the next phase of integration for TissueCypher, enhancement and optimization of processes and workflows which we expect to complete by the end of the second quarter of 2023, or around 15 to 18 months post-acquisition. Now, let's turn our attention to our mental health franchise. We delivered 1,208 Idigenix test reports in the third quarter of 2022, up 46% from the 827 test reports in the limited period during the second quarter of 2022 from April 26th forward, when the acquisition was final. We believe the integration is progressing nicely, and we are pleased with the progress we've seen so far. However, as with our gastroenterology acquisition, we have a 15- to 18-month phased integration plan and are still early in the process. We believe IgGenX also met our acquisition filters of an estimated total addressable market that was larger than any individual in-market dermatology test, which we anticipated, again, could drive material revenue for the longer term. that was on market but not necessarily generating material revenue, that was first in class or best in class with proprietary algorithms, and had already succeeded in achieving some percentage of positive reimbursement coverage. Our integration efforts will be critical to fully leverage the patient value of our mental health franchise. We believe the pharmacogenomics and mental health opportunity won't just be a matter of a single large market but could be an opportunity to enter a series of very large markets. One of our integration objectives is to focus on those market segments where we expect the value of Idigenics will be easily seen by clinicians and their patients. For example, the older patient population represents not just a large market, but one with a very high unmet clinical need. These patients often have complex medical histories and conditions and can be on multiple medications for their conditions. Our Idigenics test provides drug-gene interactions drug-drug interactions, and lifestyle factors into a single test report. We believe that this proactive and early decision by the developers of IGNX is why the results from the randomized controlled trial in 2018 show that patients with severe and moderate to severe depression who were treated with IGNX guided therapy selection versus trial and error experienced higher response and remission rates. In fact, as I mentioned earlier, we came to believe during diligence that IGNX was a best-in-class pharmacogenomic test because of this prospective inclusion of drug gene, drug drug, and lifestyle factors that are built into the bioinformatics or algorithm analyses. In fact, a systematic review and meta-analysis was just published online in Clinical and Pharmacology and Therapeutics, evaluating the pharmacogenomics tests that had published clinical trials in patients with major depressive disorder. Their analysis confirmed what we came to believe during our diligence that the one pharmacogenomic test that displayed the most significant impact in a randomized controlled trial was the IgDNx test with a risk ratio of 2.46 compared to the overall risk ratio seen in randomized controlled trials of 1.46. We believe that the overall mental health market represents a $5 billion estimated US TAM opportunity, and in our view, is likely penetrated. We believe that our plan will enable us to gain share and make substantial inroads in the coming years. I will now turn the call over to Frank, who will provide details relating to our financial results and guidance.
spk10: Thank you, Derek. Good afternoon, everyone. Before I begin with our third quarter results, I would like to state that we may see impacts to our fourth quarter results due to Hurricane Ian. Historically, a significant number of orders for our skin cancer tests have come from clinicians based in Florida. But at this time, we're still assessing the potential impact that Hurricane Ian could have on our test volumes and financial results for the fourth quarter of 2022, which will depend on future developments that cannot be predicted at this time. As such, we're unable to predict the extent to which our future test report volumes and our results of operations, financial condition, and cash flows will ultimately be impacted by Hurricane Ian. Now turning to the third quarter of 2022, we developed another strong quarter of top-line growth, and we've raised our outlook for anticipated total 2022 revenue to $132 to $137 million from $130 to $135 million. In the third quarter of 2022, revenue was $37 million, an increase of 58% over the third quarter of 2021, tracking closely to our overall test report volume growth. Once again, higher revenues were largely driven by our dermatologic tests, primarily DecisionDx melanoma and DecisionDx STC. The higher revenues also reflect Medicare reimbursements for DecisionDx STC, as Derek discussed earlier, partially offset by the effect of higher negative revenue adjustments related to tests delivered in previous periods, which were negative $.3 million for the three months ended September 30, 2022, compared to negative $.1 million for the three months ended September 30, 2021. Excluding the effects of revenue adjustments related to tests delivered in prior periods, adjusted revenue was $37.3 million, an increase of 58% over the third quarter of 2021. Our gross margin for the third quarter was 69.8% compared to 77.9% in the third 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 76.2% for the quarter compared to 80.9% the same period in 2021. As we previously discussed, our GAAP gross margin will continue to be negatively impacted by the amortization of intangible assets associated with recent acquisitions. Our total operating expenses, including cost of sales for the quarter ended September 30, 2022, were $58.5 million compared to $35.3 million for the third quarter of 2021. Sales and marketing expenses increased by $9.1 million for the three months ended September 30, 2022, compared to the three months ended September 30, 2021, attributable to higher personnel costs, including salaries, bonuses, and stock-based compensation. Personnel costs have increased through the expansion of our dermatology-facing commercial team headcount in 2021 and through our acquisition of Stronostics in December 2021 and Althea DX in April 2022. as well as increases in personnel costs for existing employees. The remainder of the increase in sales and marketing expense is primarily associated with travel, training events, meetings, and other general increases. General and administrative expenses increased by $4.9 million in the third quarter of 2022 compared to the third quarter of 2021. The increase is primarily attributable to higher personnel costs, including salaries, bonuses, and stock-based compensation. The higher personnel costs reflect expanded headcount at our administrative support functions including related to the acquisitions of Synoptics and AltheaDX. R&D expense increased by $3.4 million in the third quarter compared to the third quarter of 2021, attributable to higher personnel costs, primarily due to expansions in headcount in support of our growth, higher pay rates, and higher stock-based compensation expense, and also due to higher costs for clinical studies. Cost of sales, exclusive of amortization of acquired intangible assets for the three months ended September 30, 2022, increased by $4.4 million compared to the three months ended September 30, 2021, primarily due to higher personnel costs attributable to additional headcount in our laboratory testing operations, including increased headcount attributable to the addition of Cernostics and Althea DX, as well as higher pay rates. We also saw increases in the cost of supplies and services, reflecting the higher activity levels and increases in prices. Inflation has been a stubborn force and is impacting us most in terms of personnel costs. Given we believe the macro conditions are going to remain challenging, we expect future impacts due to inflation. Total stock-based compensation expense, which is allocated among cost of sales, R&D, and SG&A, totaled $9.2 million for the third quarter, compared to $5.2 million for the third quarter of 2021. We expect material increases in stock-based compensation expense in future periods, reflecting mainly higher rewards outstanding due to growth in our headcount. As of September 30, 2022, we had 517 employees compared to 311 as of September 30, 2021. As of September 30, 2022, the total unrecognized stock-based compensation cost related to outstanding awards was $94.4 million, which is expected to be recognized on a straight-line basis over a weighted average period of 2.8 years. We expect to continue granting stock-based compensation awards, which we expect to further contribute to increases in stock-based compensation expense in future periods. Operating expenses this quarter also included change in fair value of contingent consideration of $0.2 million, a net gain that is primarily related to the remeasurement of the liability for earn-out payments in connection with our acquisition of Althea DX and reflects changes in management's projections regarding attainment of certain commercial milestones. was no such activity during the three months ended september 30 of 2021. the contingent consideration expense can 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 ended september 30 2022 of 2.3 million dollars which is related to the developed technology we acquired from the myriad mypath lab synopsis and althea dx in mid to late 2021 and April 2022, respectively. Our net loss for the third quarter of 2022 was $20.2 million, compared to a net loss of $11.8 million for the third quarter of 2021. Basic and diluted loss per share for the third quarter was $0.77, compared to basic and diluted loss per share of $0.47 in the third quarter of 2021. Adjusted EBITDA for the third quarter was $-8.3 million, compared to $-5.5 million for the comparable period in 2021. Net cash used in operating activities was $35.7 million for the nine months ended September 30, 2022, and was primarily attributable to the net loss of $46.5 million, the change in fair value of contingent consideration of $18 million, increases in AR of $5.7 million, partially offset by non-cash stock compensation expense of $26.4 million, depreciation and amortization of $7.7 million, and the increase in accrued compensation of $3.7 million. Finally, we had cash and cash equivalents at September 30, 2022, $134 million. Additionally, the company held $132 million in short-term investments, which we purchased in order to take advantage of higher interest rates and help offset inflationary impacts. These investments are classified as available for sale, therefore are carried at fair value, are not considered part of our cash holdings, and are reported separately as marketable investment securities. Also, unrealized gains and losses for these securities will be reported on the balance sheet under accumulated other comprehensive income or loss and not as part of net income. As we outlined in September at our Investor Day, we anticipate achieving total revenue in the range of $255 million to $330 million for the year ending December 31, 2025. Combining our expectations for strong top-line growth and gross margins, along with a continued disciplined approach to capital allocations, We expect our net operating cash flow to be positive by 2025. I'll now turn the call back over to Derek.
spk09: Thank you, Frank. In summary, we delivered another strong quarter with an increase in revenue of 58% over last year, with total test report volumes trending closely at 57% growth. Our executing well on our growth plans and expect to finish the year in a position of strength with accelerated momentum going into 2023. I would like to conclude today by thanking our CASEL team and all of you for your continued interest in CASEL. Now, we will happily take your questions. Operator?
spk04: Thank you. If you would like to ask a question today, please press star, followed by one on your telephone keypad. In order to allow everyone in the queue an opportunity to address the CASEL management team, please limit your time on the call to one question and only one follow-up. If you have any additional questions, please return to the queue. Please stand by while we compile the Q&A roster. And our first question today goes to Catherine Schulte of Baird. Catherine, please go ahead. Your line is open.
spk03: Thanks for the question. I guess first on Hurricane Ian, you say you're still assessing the impact there. Can you just give us a sense of what the impact was in October, how that's recovered so far, and what's assumed in guidance?
spk10: Hey, Catherine. Yeah, if you recall back to some of the analysis we did way, way back at the beginning of the vid, there's a reasonable lag between when a patient is biopsied and when a decision DX melanoma order is placed, and it's in the two- to three-week range, and so we really would not have started to see that until recently. So far, things appear not to be too disruptive, but we just wanted to highlight that Because of that lag, we don't yet have our arms around what the full impact could be. And that's why we were just noting that for everybody to keep in mind here.
spk03: Got it. But is there something in guidance to assume that there'll be some sort of impact there?
spk10: Our view on what that impact is is included in what we've raised, too.
spk03: OK, got it. And then maybe for SCC, you talked about the final determinations to come out. Any update on potential pathways for ADLT status and application for that test?
spk09: You broke up at the beginning of that. Can you repeat the first part of the question again, Catherine?
spk03: Yeah, I just said for SCC, you know, heard your comments on Medicare. I'm waiting for the final determination around the payment for the new code, but is there any update on, you know, potential ADLT status or submitting an application for that test?
spk09: Yeah, so we certainly believe in our assessment that the SCC test should qualify for ADLT status, and we're evaluating our approach there. you shortly as we sort of move forward.
spk03: Got it. Thank you.
spk04: Thank you. And the next question goes to Kyle Mixon of Canaccord. Kyle, please go ahead. Your line is open.
spk02: Hello. This is Alex on the line for Kyle Mixon. Great quarter. I just wanted to cover really briefly. So you discussed that in 3Q you had the new dedicated sales team from iPath melanoma and 50X melanoma. Can you go into that more and just characterize how the length of this team has been? It sounds like it's been roughly a quarter since this has been underway. And I have one more after that. Thank you.
spk09: Yeah, so good question here. I should clarify that. We began interviewing, and I think the hiring date for the group was probably what, Frank, mid-September, I think, so they're still completing training now. So I would say they were new employees doing at-home training during September, so there would have been no impact from the third quarter, per se. That being said, we also had sort of refocused our dermatology-facing group more closely aligned with the cutaneous melanoma test and the STC test. So if the If history is a predictor of the future for kind of sales effectiveness, I would expect, obviously, we'd expect to see some modest improvement here in the fourth quarter in terms of as they come out of training and get in the field more often. But we'd be really looking towards first quarter performance to kind of do a recheck and resize correctly. Do we want to make some adjustments here in the second quarter of 2023? Got it. Thank you for that color.
spk02: I appreciate it. One more question, if that's all right. So, I was wondering if you could provide, I guess, some more qualitative color on early adoption of tissue cipher.
spk09: Thanks. Yeah. So, okay. So, let's take a step back. So, one is that they had no commercial facing effort until we, acquired the company in December of 21. So the chief executive officer was the only sort of salesperson. I think he put it in every other Friday in the afternoon type thing because he had CEO duties to do to run the company. So I would kind of call, we were starting from a very low base of awareness and certainly a very, very low user base when we acquired the company in December of 21. We ended up staffing up an initial sales force of, I think, 14 outside sales territories, effective January 2nd of this year. They spent most of the first quarter in training, or part of it in training, part in a field. We made a subsequent second staffing up, and also in kind of the mid-September time period. And that additional group of nine people, I think, bringing us to 24, 20 to 24 territories total. is moving through training as we speak. So that sort of is the commercial background in terms of sales rep investments. So qualitative adoption. If you look at the sort of market assessment of how Barrett's esophagus breaks out from a dysplasia grading perspective, we believe about 90%, so nine in 10 patients, probably is diagnosed with a Barrett's esophagus lesion but the pathologist can't see any dysplasia. So we would call that non-dysplastic bare testophagus. And of the remaining 10%, it's kind of split roughly between patients who have low-grade dysplasia and patients with what we would call indefinite dysplasia. So it's kind of in the middle of it. It's kind of a warm dysplasia, I guess, if you want to view as a non-pathologist. So in that background, we believe that the most important element or the use of our tests most likely would be adoption in that large 90 percentile group, which we think is at least 348,000 patients diagnosed per year with nondysplastic Barrett's disease. Now, why is that? It turns out that a significant proportion of patients that end up progressing to either high-grade dysplasia or esophageal cancer are hiding out in that nondysplastic Barrett's esophagus group. And so, from a patient perspective and certainly a gastroenterologist perspective, the utility of our test is pretty clear to say, hey, I know my pathologist sees sort of no dysplasia. I know they have the disease Barrett's esophagus. If I use your test, then based upon your, I think, seven clinical validation studies, including the pooled analysis at Mayo Clinic back in April of this year, I'm going to be able to find a significant number of those patients who have a high risk tissue cipher test score And if I look at that from a standpoint of what does that mean for my patient, it turns out that non-dysplastic patients who have a high-risk tissue cipher test result end up having a risk of progression to high-grade dysplasia or esophageal cancer that's actually slightly higher than low-grade dysplasia. And at least the standard of care across the community GIs in the U.S. today is that many of those people with low-grade dysplasia on pathology do in fact receive endoscopic eradication therapy, which is most commonly ablation therapy. So it's a very actual endpoint. And what we're seeing today is that the majority, roughly 90% or so of our orders coming in, in fact, match that non-dysplastic BE group. So I hope that maybe that answers part of the qualitative question. The other part, I think, is that as we have seen with the launch of our melanoma test, our squamous cell carcinoma test, or DIF-DX melanoma test in November of 2020, even though we believe we have a very exciting, a very clinically actionable test, it does take repetition, you know, three, four, five sales calls to have a gastroenterologist go from being unaware of our test, which is almost all of them, by the way, to being aware, to being interested, to trying it, and to beginning to incorporate into their practice. So we are quite pleased in seeing this sort of growth in the second quarter and third quarter of this year relative to the quarter versus quarter change because the feedback that we're getting is right along with our expectations.
spk02: Thank you very much. You're welcome.
spk04: Thank you. And the next question goes to Puneet Suda of SVB Securities. Puneet, please go ahead. Your line is open.
spk07: Yeah, hi, guys. Thanks, Eric. Thanks for taking the question. So maybe just on, you know, SEC, just given that that's an important point for the fourth quarter, you know, if you could walk through maybe, you know, sort of potential scenarios, you know, obviously there's an ADLC side of things, but then on the other side, you know, you could potentially apply to other MACs. And so maybe just walk us through if, the coverage was lost, what is the timeline to revenue impact, first of all? Secondly, are you able to pursue it through another jurisdiction? And if ADLP or another jurisdiction was the route, when do you think you can sort of address this? Obviously, you know, a couple of questions there, so thanks for covering those.
spk09: Yep, absolutely, Puneet. Good to hear you. So as we talked about, I guess, at this second quarter call, and a bit less so today, we requested a medical review through Novitas earlier this year. We were setting up that test to be processed out of our Pittsburgh, Pennsylvania laboratory, which Novitas oversees Pennsylvania for Medicare. And we requested had very positive interactions and came out of that with a thumbs up in our perspective. We were asked to submit a pricing dossier, which we did in late March, I think it was, or mid-March, ahead of our first reports being issued, which happened in April. And as you know, Novitas prices at $3,800 and change, which I think what they did was they basically crosswalked us over to Oncotype for breast, Oncotype for prostate cancer. So that all kind of lined up pretty well. And then as you alluded to, I think in June of this year, NOATAS published a broad, essentially a biomarkers and oncology draft LCD, looking to try and offload a medical review from their responsibility, that's maybe a little harsh to say, but to try and reduce work and be more efficient, to one of three databases. And so if you were included in those databases, then they assume that you'd be covered. And if you weren't included, they assumed that you would not be covered. That was the lay of the land for background. And as the audience may know here, usually for draft LCDs, there's a 45-day public comment period. We believe due to a significant number of people wanting to comment, that was actually doubled to 90 days and closed out in early September of this year. Our consultants believe, and I guess we're aligned to believe with our consultants, that there's a high likelihood that that LCD would not finalize as is and might be modified to include a fourth pathway, such as if you aren't already reviewed and covered by one of these other three databases, we'll go ahead and do the medical review that we're supposed to under our Medicare contract anyways. That probably is the most likely scenario, but that being said, you're saying, well, what happens if they finalize the LCD as is and you aren't in NCCN at that point in time? What does that mean? Our benchmarking would suggest that, you know, the earliest maybe Novitas might issue a final LCD is sometime in the middle of late first quarter, but that's based upon limited historical data, to be honest. They would have to issue a finalized LCD by, I think, the date they posted the draft. So that would occur by June of 2023. You'd have a typical 45-day implementation period, notice period. So maybe if those date ranges are accurate, you might have a gap in coverage maybe between sort of April through maybe July, depending on which date's accurate. So that's that part. In the meantime, as you would expect, we're working with other groups including NCCN for reviews, and so that may come along at some point in time in the interim between now and then. We also, as you may recall from I guess 2020 or 2021 earnings calls, we did submit back in the summer of 2020 a technical dossier or technical assessment and a request to Palmetto for medical review for the SEC test. We know we got caught up in the middle of COVID, as you would expect, and so things haven't been running as fast as they used to run at Palmetto pre-COVID. That potential outcome could be known anytime, you know, next quarter, first quarter of next year. That would take a, if it goes through a standard sort of review cycle, that would take, you know, we'd assume if it got posted, say, January 2nd of 2023, we wouldn't plan for coverage, a model for coverage, until January 2024, about a 12-month cycle period there. So I think the gap could be, you know, six months, nine months, potentially, under the current scenarios there. But again, our current belief is that nothing's 100% certain anyways. We think there's a high likelihood that that LCD gets modified from Novotox, but again, we're not the ones on the inside evaluating what kind of comments they received.
spk07: Got it. Super helpful. Thanks for all those details. And on, you know, you obviously raising the, you know, full year guide here and appreciate the prior comments on the 2025 guide. You know, Derek and Frank, you know, how should we think about sort of 2023 growth here? Just given the sales rep increases that you've had, This DX is getting reimbursed. I mean, there's potential for some change on the SBC coverage here, but decision DX continues to have a solid momentum. So maybe just talk to us about sort of how should we think about given sort of where we stand today, 2023. Thank you. Frank?
spk10: Frank, you want to cover that? Yeah, I think the setup is great, Vinit. We've got really good sales people out there. We've got a lot of data coming. I think that the volume validates the clinical utility of each of our tests here. And, you know, we still are well positioned competitively. So I think the setup is terrific for 23. And we're excited about it and think that the data is demonstrating our careful investments are paying off.
spk07: Got it. And then this last one, if I could ask on tissue cipher. Is there any, you know, you've submitted the median payer rates already. Is there any reason why tissue cipher should dramatically, you know, sort of differ from the ADLC rate, which was, I believe, you know, slightly lower versus the initial rate that was assigned to it? But should it stay in the same ballpark? Thanks so much.
spk09: Well, let's see here. So one is that once ADLT status was attained as a new ADLT on March 28th of this year, the next nine months were, the price was set at the original list price, which was at 2315 or 2350 rate way back when. So I wouldn't necessarily call that the first ADLT rate. I would call that the original list price during the collection period. So we've obviously collected data during the first six months, that would end in September, and we'll sort of have our first ADLT rate posted towards the end of this year. So I'd have a hard time seeing that rate going lower, but again, that's Medicare calculating the median private payer rate.
spk04: Thank you, and the next question goes to Thomas Flayton of Lake Street. Thomas, please go ahead, your line is open.
spk06: Hey, Derek, I was wondering if you might be able to provide some color on how you guys are integrating the SEER data into both the reimbursement side of the business as well as into commercial messaging.
spk09: Okay. So from a commercial messaging perspective, we certainly have trained up and outfitted the field team. So the sales group, the medical science liaison group, the other medical directors have in terms of the data as it's been presented in abstract and poster form. So they are educating clinicians on the value that we're seeing there. Now, you know, an abstract is not the same level of evidence or review as a publication, but that's what we are working with right now. And that message that we've talked about before has been well received by clinicians, especially those who might be a little doubting of, you know, what does this really do for me? What it does for is it gives you more accurate information to make a more informed decision, and that when you make those decisions, outcomes should improve. And this data seems to show that link is between tested and untested patients, similar to oncotype for breast cancer, right? I mean, oncotype for breast cancer as a comparator is really focused on removing unnecessary long-term taxane therapy, I guess, as opposed to somehow improving survival. So similar kinds of withdrawal of unnecessary procedures or treatments, but the reality of it is that people who are picked up as having more aggressive disease are being funneled to where they should be funneled. That's how we see the data. So that's been released to the field probably during the second quarter this year. Again, though, it's not as strong as a publication, so we will have another more important wave as we see a publication come out into the public domain. From a commercial payer perspective, we have, I guess I would say, tested the waters slightly. But the reality of that is until that's in a peer-reviewed publication, that's going to be put aside as that's a very interesting comeback when I can pull up in PubMed or Google Scholar myself. So I don't think the impact on that one is, I think the impact is zero today. on the commercial payer landscape, and two, you know, that's a great question to get back in touch with us, you know, a quarter or so after the publication gets out the door.
spk06: Got it. And on the DERM sales team, I know they've been in the field in the expanded size for a while now. How would you maybe quantify or qualify them being on the ramp to kind of full productivity?
spk09: Dermatology? I think the dermatology sales team hit full stride probably, you know, late first quarter, second quarter. Frank, is that right? Now, we did have, I think, a couple of dermatology representatives move over the tissue cipher earlier this year and a couple move into the dermatopathology group, right? It was just one. I can't remember. So there is some backfilling, as you'd expect anyways, right, in typical organizations. So I think, one, Third quarter volume, second quarter volume penetration probably reflects everybody being fully effective, knowing you've got just some background normal noise.
spk04: Thank you. And the next question goes to Mark Massaro of BTIG. Mark, please go ahead. Your line is open.
spk08: Hey, guys. Thanks for the questions, and congrats on the strong beat and raise. I know there's been a lot of detail covered on the squamous cell carcinoma test, but I think a little bit of clarity could be helpful here. So I know that Novitas priced it at $38.73 earlier this year. I guess, were you expecting – it sounds like you were not expecting a crosswalk to the MyPath melanoma test, and instead you were expecting – a crosswalk to decision DX melanoma. I guess I'm trying to put this in perspective. Is there any risk that you don't get paid here in Q4? And I know that there are a lot of moving parts to 2023, but I'm just wondering if you expect to get similar payment for SEC in Q4 as you did in Q3.
spk09: So the preliminary determinations, so the short answer is yes. The preliminary, determinations turn final, you know, whenever they post them, but they're effective January 1st, 2023. So I would not expect any influence up or down in the fourth quarter. That would just, that would be unprecedented. In terms of our expectations, I think given that, that Novitas and of course CMS Central is under no, no restrictions to follow what their approach, but, but I think if we look across the land, risk stratification tests like our SCC tests have historically been crosswalked over to Oncotype for prostate or Oncotype for breast cancer. We would have expected that to be the normal approach, to be honest, or they could have taken a position that there's another risk stratification test run by the same company for another skin cancer and crosswalk up to decision X melanoma, that would be less likely than more likely. More likely would be aqua-type breast. We certainly, as I mentioned, had some interactions with the central Medicare group out of Baltimore last month, and I believe that, one, this is a good group of people that we dealt with over the years, and they try to do the right thing for patient care and for companies. My hope is that they understand the difference now between the level of resources needed to both develop and produce a diagnostic support test like MyPath versus a risk stratification test like our SCC test would act accordingly. But of course, that's their call, not mine. But no impact in the fourth quarter. I think that shouldn't be expected.
spk08: Okay, perfect. So sorry to clarify, you think it's now more likely if there is a change that it would go to the oncotype breast at 3873 rather than your MyPath melanoma. And just also to clarify, you think there may be an update from CMS later in calendar Q422?
spk09: Yeah, COVID has thrown off sort of the normal posting periods. You may recall that pre-COVID, if we can think back that far, typically I think they usually got out the postings The next year's updated rate schedule, like the Friday after Thanksgiving or two Fridays afterwards, that shifted a bit the last couple of years. But sometime in December is when I would expect to have the final rates, not just for the test with new codes, but all codes would be posted with the final determination. Now, I think there are a potential for it to remain the same at 3873, I guess, potential to be crosswalked down to my path. potential to be crosswalked up to decision X melanoma. And there's a fourth option, which is that they could go ahead and throw back and have the max move forward from a gap-filled process. And that would go into effect in 2024 with the current rate staying throughout 2023. That'd be the typical process. So there is a fourth potential outcome.
spk04: Thank you. And the final question goes to Mason Carrico of Stevens Inc. Mason, please go ahead. Your line is open.
spk05: Hey, guys. Thanks for taking the questions. Most of mine have been answers, so maybe just one quick one here for me. Thinking about the ramp for DecisionDx SCC in 2023 in terms of test volumes, how have conversations differed with docs when it comes to the early adoption of that test versus DecisionDx melanoma when that test was early in the adoption curve? Have you guys seen a lot of leverage in the work you've done already? in terms of educating derms on these types of tests or any color on, you know, maybe the overlap of who's ordering?
spk09: Yeah, so there is a, so last first, there is a significant overlap between clinicians who are current or had already adopted the decision DX melanoma test and those who are now adopting the squamous cell carcinoma test. And I think that's probably due to two factors. One of them is that we've obviously sat and had conversations about the additional value that one receives in managing melanoma when you have our test results in hand along with the clinical and pathologic factors versus not having our test results in hand. So they're already kind of thinking through and appreciate and have integrated that concept into practice reality. So when we walk into that same clinician the next day, and talk about, you know, we see a gap here in people with high-risk squamous cell carcinoma. Here's how we see the world. Do you agree with that? You can generally get head nodding, of course, and then they would follow along and saying, well, so what I really need to think through is am I going to make changes in how I manage these patients with your result? And once they get there, then I think they become, you know, initial customers that might, you know, dabble a bit and test our test and begin adopting it. So I think that's quicker. than it was when we introduced the melanoma test a few years ago when there was nobody doing risk stratification in anything in dermatology like this. So certainly that was helpful. I think the other element, of course, is even though we made the test available before 2015, it was really 2015 when we went to 14 sales representatives across the U.S., and that was sort of Maybe it was the first real launch, but we were at 14 people then. We're in the mid-60s right now, so that's a nice, significant increase in terms of the visibility in the marketplace. So I don't quite know if it's a more aware clinician, and that's leading to quicker adoption. If it's having us being around those same clinicians for three or four or five years now, and they're easier to kind of have a conversation with and accept the message, or if it's also just promotional size of the company that's kind of a driving factor. But all of those, I think, are part of the mix of saying, certainly, we're seeing more rapid adoption with the squamous cell carcinoma test and with melanoma, but it's all of those features, I think, together.
spk05: Got it. That makes sense. Thanks, guys.
spk04: Thank you. We have no further questions. I'll now hand back to Derek for closing remarks.
spk09: Thank you, Nadia. So this concludes our third quarter 2022 earnings call. I want to thank you again on behalf of the CASEL team for joining us today and for your continued interest in CASEL Biosciences.
spk04: Thank you. This concludes today's call. Thank you all for joining. You may now disconnect your lines.
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