CareDx, Inc. Q1 FY2021 Earnings Call

Greetings, and welcome to the CareDx, Inc. First Quarter 2021 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Greg Chodaczek, from Gilmartin Group. Please go ahead.

Thank you. Good afternoon and thank you for joining us today. Earlier today, CareDx released financial results for the quarter ended March 31, 2021. The release is currently available on the company's website at www.caredx.com. Reg Seeto, Chief Executive Officer, and Ankur Dhingra, Chief Financial Officer, will host this afternoon's call. Before we get started, I would like to remind everyone that management will be making statements during this call that include forward-looking statements within the meaning of the federal securities laws, which are made pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. Any statements contained in this call that are not statements of historical facts should be deemed to be forward-looking statements. All forward-looking statements, including without limitation our examination of historical operating trends, expectations regarding coverage decisions, pricing and enrollment matters, and our future financial expectations and results, are based upon current estimates and various assumptions. These statements involve material risks and uncertainties that could cause actual results to differ materially from those anticipated or implied by these forward-looking statements. Accordingly, you should not place undue reliance on these statements. For a list and descriptions of these risks and uncertainties associated with our business, please see our filings with the Securities and Exchange Commission. The information provided in this conference call speaks only to the live broadcast made in 2021. CareDx disclaims any intention or obligation, except as required by law, to update or revise any information, financial projections or other forward-looking statements whether because of new information, future events, or otherwise. This call will also include a discussion of certain financial measures that are not calculated in accordance with generally accepted accounting principles. Reconciliation to the most directly comparable GAAP financial measure may be found in today's earnings release filed with the SEC. I will now turn the call over to Reg.

Thanks, Greg. Good afternoon everyone and thank you for joining us. Welcome to CareDx’s first quarter 2021 earnings conference call. We had a very strong start to the year with a record first quarter result. Our vision of being leader in the transplant ecosystem continues to resonate as we remain focused on the transplant patient. As the largest transplant-focused company in the U.S., we're proud to be the leader in innovation by bringing the first and best-in-class transplant-specific technologies through AlloMap gene-expression profiling and AlloSure donor-derived cell-free DNA. Notably we are again first in driving new trends in innovation. We recently introduced the first and only recognized multimodality approach with heart care, which laid the foundation for kidney care in future years and other organs. I am proud our company continues to invest to bring innovation, especially in the transplant space which is often overlooked. As the CEO of CareDx, I am continually being told, or should I say reminded, that we are the transplant company. On behalf of CareDx I'm proud to accept that title and association. For our record first quarter, total revenue was $67.4 million, increasing 76% compared to the year-ago quarter. The driver of the quarter's growth was our testing services revenue which increased 89% to $59.3 million and we also saw product revenue increase 23% to $5.8 million. Digital and other revenues added $2.3 million to the top line. GAAP net loss for the first quarter was $0.7 million and adjusted EBITDA was positive $7.7 million. We remain focused on driving top-line growth through increased adoption of our offerings and continuing to invest in a rich pipeline across the transplant journey. During the first quarter we made significant progress along the following three fronts. One, advancing our testing services model; two, expanding our direct-to-patient strategy; and three, building our future pipeline through investing in specific scientific data and innovation. I'll tackle the first one, advancing our testing services model. In the first quarter, CareDx provided approximately 33,200 AlloSure and AlloMap test results to transplant patients, growing approximately 121% from the first quarter of 2020. Of these, approximately 5,000 new tests were part of heart care. Our focus has always been on our direct-to-center strategy with more than 150 kidney and more than 100 heart centers using our offerings during the first quarter. We feel very good about our strategic focus on building an ecosystem around the transplant center. As of the end of March, over 60 kidney transplant centers in the United States have now adopted AlloSure named testing protocols into their standard of care. We've also continued to expand our multi-center footprint. With the prior acquisition of Ottr, we've seen the benefit of offering transplant-specific software to improve U.S.-based transplant centers that Ottr worked with. In January, we announced the acquisition of TransChart LLC, an electronic health record software provider supporting U.S. transplant center needs. This acquisition added over 20 centers using TransChart. We believe offering an efficient end-to-end solution for transplant centers will lead to further adoption of our high-value healthcare solutions. This strategy, the focus on the transplant centers to build adoption in protocols, has been very successful. In addition, we recently started expansion into the community practice setting. During this quarter, now with the full team for the first time, we had more than 100 community practices start using AlloSure in the last quarter, with several ready to start protocols. Our community-dedicated team is doing a great job. Although early, we've been very pleased with the ability to continue our patient care from the center into the community with our patient care managers and through our AlloCare app. This focus on innovation is evidenced first-hand as the recently announced universal solid organ transplant LCD by Palmetto MolDX now provides a pathway for our future pipeline and multimodality surveillance approach to be introduced. We are proud to be leading the way, especially with multi-center and prospective data sets to generate clinical validity and utility for patients, physicians, and payors. It takes a leader to invoke change, and we are grateful to the patients, physicians, coordinators, and caregivers who work with us in leading change and bringing much needed innovation to the transplant journey. We talked about AlloSure lung in Q3 at our last earnings call. The recent universal LCD now includes the path for lung. The universal LCD can accelerate adoption for lung surveillance and our pipeline. We've previously submitted our technical assessment of AlloSure lung and we look forward to the review of this submission within Q2, 2021. This model also provides the path for future comprehensive multimodality pipeline development, which we are very excited about, because it will guide how we develop kidney care, lung, and other solid organs in bringing incremental utility and high value to physicians and centers. Our studies have been designed and developed this way. We look forward to updates on kidney care during the course of the year. On the second topic, expanding our direct-to-patient strategy. During our last earnings call, I mentioned that 2021 would be a direct-to-patient theme, which makes CareDx expand its services to physician and patient communities. During the first quarter, we expanded into the pre-transplant patient journey and acquired TX Services, the provider of TX Connect. TX Connect is a cloud-based service that allows nephrologists and dialysis centers to electronically submit referrals to transplant programs, closely follow these patients and assist these patients through the transplant wait-list process with the ultimate goal being transplantation. TX Connect now manages more than 20,000 referred dialysis patients and is fully integrated within transplant centers' workflows. More than 30 transplant centers are using this and over 500 referrals have been submitted and are now involved with this offering. This offering will allow us to better serve transplant centers as dialysis centers refer end-stage kidney disease patients to be assessed for transplant. Adding TX Connect to our robust digital platform will help us provide more integrated care at every critical step of the transplant patient journey. On the post-transplant patient journey, the rapid implementation of RemoTraC last year as COVID began to spread in the U.S. has given transplant patients the option of having their blood drawn outside the confines of a hospital or a transplant center and safely in their homes. Given the number of new COVID infections and the fact that U.S. transplant patients are still at higher risk of becoming severely ill from COVID, we believe RemoTraC is an appropriate solution to limit a transplant patient's potential exposure. Our patient care managers are doing a great job supporting patients and transplant centers with valuable support. We continue to impact COVID-19 mitigation; we saw the use of RemoTraC at about 40% of our testing volumes. As of March 31, 2021, we had over 7,000 patients on RemoTraC. Now on the third topic, building our future pipeline and investing in scientific data and innovation — this is the hallmark that sets us apart. Throughout 2021, we will continue to build upon our initial meaningful data planned to present at multiple industry events as we continue to drive innovation and be the leader in high-value healthcare solutions for patients and caregivers. Our clinical leader, Dr. Sham Dholakia, has been exceptional. We've been very busy over the last few months as new data sets were presented and showcased at multiple industry events. We continue to generate the highest number of abstracts and presentations for a transplant company and it centers around our focus on innovation, which continues to set us apart from opportunistic entrants. For testing services, we presented new transplant data in January at the ASTS Conference, the American Society of Transplant Surgeons. During this conference we sponsored two symposia with key clinicians discussing real-world experiences including AlloSure optimized care for transplant patients with initial data from animal studies and the rollout of the MAPLE study for AlloSure Liver. For this year's ATC conference we will have over 30 accepted abstracts and to combine that with over 20 abstracts at the ISHLT Conference last week, that's more than 50 abstracts across two major conferences from CareDx. Again, we're very proud of this. Back to ADMIRAL. ADMIRAL is a multicenter, two-year follow-up study using patients who have had AlloSure as part of their standard of care, while the CARE1000 study is an early snapshot at the one-year mark for the first 1,000 patients in the KOAR study. We're really excited and proud to be bringing the first long-term and only multicenter prospective datasets from the transplant community and the clinical utility they show as we submit AlloSure into the standard of care for transplant patients. In addition, during last month's National Kidney Foundation Spring Meetings, we had two well-attended programs featuring the latest kidney transplant surveillance data. The pipeline for new offerings continues to strengthen with the addition of our development program for AlloID. Early in 2021, we announced a partnership with IDbyDNA to develop infectious disease testing specific to transplant patients. AlloID will identify more than 100 pathogens and drug resistance markers in viruses and bacteria. Our customers have indicated very strong interest in adding the value of this testing for managing the health of immunosuppressed patients. In the products business, we saw continued transition to our AlloSeq franchise represented by hybrid capture technology. Over half of product revenue now comes from this NGS technology. During the first quarter, we also acquired BFS Molecular, a software company focused on next-generation sequencing-based testing solutions. The addition of BFS Molecular's software and algorithms further enhances our offering of world-class bioinformatics and transplant surveillance software. In new areas, such as AlloCell, we showcased the cellular transplant therapies portfolio at the recent TCT Conference, the Transplantation and Cellular Therapy Conference in February. Included in those presentations was a poster that we presented with our partner Atara Biotherapeutics on the central use of AlloCell, the standardized pharmacokinetic assessment in a clinical trial. While this is still early, we are excited about the value AlloCell can bring to Atara's clinical trial development of allogeneic cell therapy. Our offerings are making a significant difference in the transplant patient journey. We are building capabilities required to scale this business and realize the tremendous potential in front of us. During this quarter we enhanced our leadership team with key appointments and also further strengthened our financial position. Starting with the former, we announced new senior leadership appointments to create meaningful impact across these key growth areas and to enhance the patient journey. Included in these announcements was the hiring of Ankur Dhingra, our new Chief Financial Officer. Ankur brings extensive experience to CareDx with over 25 years of finance and accounting experience in the life sciences sector. We're really excited to have Ankur join the CareDx family and I hope you will have the opportunity to meet him during the course of this year. In the first quarter, we also significantly strengthened our cash position. We closed the quarter with $374.3 million in cash, following a very successfully executed public offering in January. Our balance sheet allows us to continue to drive revenue growth and take full advantage of opportunities available to us. Our capital deployments will remain focused on making meaningful impact in the transplant patient journey. As we look to the rest of 2021, there's lots to be excited about. With that, I will turn the call over to Ankur to discuss our financials and our updated 2021 revenue guidance.

Thank you Reg. Hello everyone, I'm very excited about being a part of such a dynamic organization. Over the past several years, CareDx has transformed itself into a premier diagnostics company and the leader in healthcare solutions for transplant patients and caregivers. In my first few weeks here at CareDx my conviction has only grown stronger that CareDx is uniquely positioned to realize this tremendous opportunity. Turning to the income statement. Our first quarter of 2021 testing services revenue increased 89% year-over-year to $59.3 million. The first quarter testing services revenue growth was driven by AlloSure Kidney and AlloMap Heart patient results and an excellent start to AlloSure Heart. Our first quarter product revenue increased 23% year-over-year to $5.8 million and our digital and other revenue was $2.3 million. Moving to gross margins. For the first quarter the gross margin was 68%, compared to a gross margin of 68% in the same period of 2020. The non-GAAP gross margin for the quarter was 70%, compared to 71% in the prior year's quarter. As you may recall, last year in Q2 we successfully built our RemoTraC service, which has been and continues to remain a big enabler for transplant patients to limit exposure to COVID. For the first quarter of 2021, net loss was $0.7 million, compared to a net loss of $5.8 million in the same period last year. Our net loss per share was $0.01 for the quarter compared to a net loss per share of $0.14 in the first quarter last year. On non-GAAP net income, our first quarter non-GAAP net income was $7.2 million compared to non-GAAP net income of $0.2 million in the same period. The basic and diluted non-GAAP net income per share for the first quarter of 2021 was $0.14 compared to zero in the same period of 2020. As a reminder, we define adjusted EBITDA as non-GAAP net income before interest, income tax, depreciation, amortization and other expense. For the first quarter of 2021, we recorded positive adjusted EBITDA of $7.7 million, compared to an adjusted EBITDA gain of $0.2 million last year in the same quarter. Our focus remains on driving top-line growth, continuing to expand our reach in the transplant ecosystem through our innovative products, services and a rich pipeline, and also efficiently scaling our business. Moving to the balance sheet, cash, cash equivalents and marketable securities at March 31, 2021 was $374 million. As Reg mentioned, we strengthened our cash position in the quarter as we successfully completed a public offering of approximately 2.2 million shares of common stock, raising roughly $189 million in net proceeds. In January, we repaid the CMS advance payment of approximately $20.5 million in full. Adjusting for this CMS repayment and the timing of certain annual outflows, our operating cash flow was neutral for the quarter. Turning to guidance, we are updating our 2021 revenue expectations to reflect our strong first quarter results and continued strong demand for our solutions. As of today, we anticipate $270 million to $280 million in revenue for the year. This represents an increase of $15 million at the midpoint versus our earlier guidance. Our new guidance balances the uncertainties around the ongoing pandemic and the continued market penetration of our products and services. We are very excited about the opportunities in front of us and the team is off to an excellent start to 2021. With that, I will open the call for questions.

The first question is from Brandon Couillard from Jefferies. Please go ahead.

Hey thanks. Good afternoon. Reg and Ankur, if I just annualize the first quarter revenue that would get me to the low end of the new range for the year which seems pretty conservative and sort of look out over the balance of the year, what are some of the puts and takes that would get you to the high end or above that new revenue outlook for the year? And Ankur any update in terms of some of the OpEx items for 2021? Thanks.

Yes Brandon, firstly, thanks for the question. We were really excited about the quarter we just had. It was a great Q1. We have three unique business lines which continue to grow at different rates. Really excited about the testing services which is growing well above the 50% range, the products business which is in the 10% to 20% range and also the digital business which is in the single digits. As we look at that I'm going to let Ankur comment a bit about the actual guidance range that we have set.

Yes, sure. So Brandon, as we were looking at the expectations for the year and considering that we're off to an excellent start as Reg was saying, we saw great execution by the team, an excellent first quarter, both on AlloSure Heart as well as the penetration in the nephrology setting. So very pleased with the momentum there. As we started looking at the entire year expectation we took our first quarter performance and then projected the remainder of the year. At the low end, you're right, we anticipated a continued strong performance similar to what we had in Q1 which represents that lower end, and then the high end represents our ability to continue to penetrate in the nephrology market setting. Our aim is to keep working that and as we continue to make further progress in the nephrology market, we'll keep looking at it through the year.

Got you. Then in terms of AlloSure Heart, the 5,900 tests that you ran in the first quarter, what's the capture rate in terms of number of heart patients that are getting an AlloSure Heart test as well and has the mix changed at all in terms of the Medicare versus commercial payers, and have you begun a dialogue with some of those commercial payers yet or is that less of a near-term priority? Thanks.

Yes, AlloSure Heart — we had the first full three months and for us it was really exciting to have that fully rolled out, particularly if you look at the different attachment rates which increased during this quarter. I'll hand over to Ankur to make a full comment.

Yes, from a heart care perspective, we saw slightly north of an 80% attachment rate for AlloSure Heart for the new patients, and there is a Medicare mix in it as well as a sizable commercial participation. We expect the commercial side to slowly convert to revenue over a period of time.

Reg, I'll leave it there. Thank you.

The next question is from Andrew Cooper from Raymond James. Please go ahead.

Hi guys, thanks for the questions. I want to focus on gross margins for a second on the testing services side. It was down sequentially but you had more tests and importantly more AlloSure Heart, which I would have thought would drive that number higher. Is there anything to think about there, whether it's some of the data generation costs or R&D costs that are captured in gross margin, or how should we be thinking about that metric? Would you have expected it maybe to trend a little higher than what we've seen in the last two quarters?

Yes, maybe I'll just clarify first and I'll hand it over to Ankur. As a reminder, with AlloSure Heart prior to getting commercial approval, about 60% of the testing we performed was done on a research basis and those research tests previously were not included in the commercial revenue numbers. So that affects how you should think about the comparisons. I'll hand it over to Ankur to answer the margin question.

Yes, on the margin side we don't see any structural issues. We continue to invest further in RemoTraC with our direct-to-patient part of the journey, and that investment primarily reflects in the testing services side of things. Moving forward, we do expect as we build out RemoTraC there will be some more investments through the year, but overall our ability to drive margins purely from the testing services perspective remains intact.

Okay, that's helpful. And then maybe just clarify — I know you said, Reg, Q2 on the technical assessment on lung, but can you give us a little bit more flavor on what you think payment could look like, when it could start and sort of what the process from there is, and then maybe lay out how you think about the next phase — what's after lung if that were to change, or the way you approach CMS and timing on any of the other organs or anything to that effect?

Yes, I think the universal LCD is important because it provides a pathway for other solid organs to be considered. Lung is the next organ we are bringing into that discussion. We've previously submitted our technical assessment for AlloSure lung and we look forward to review of that submission. This discussion will happen during the course of this quarter and we're looking forward to those conversations. It also relates to some of the initial guidance we had given in the prior quarter where we had expected some of these discussions in Q3. So the universal LCD creates a pathway for faster coverage for different solid organs. You should consider that all other organs are also fair game — we will be looking at them as well. We will continue to bring AlloSure across all those solid organs and then build the multimodality pathway.

Okay, and just to be clear, nothing from lung is included in the guide, correct?

Correct.

The next question is from Alex Nowak of Craig-Hallum Capital Group. Please go ahead.

All right, great, good afternoon everyone. I just wanted to follow up to Andrew's last point there on the LCD change. Just any comment on how the announcement changes the timelines for kidney care here, because AlloMap Kidney has always been an idea out there but it's often been a few years out. So what are you going to do on AlloMap Kidney, how could this pull forward any sort of announcements or reimbursement there, and what should we expect over the next couple of years?

Yes, Alex, great question. We were excited when we saw the universal LCD because it lays out the pathway for multimodality and recognizes the value that multimodality can bring by demonstrating incremental clinical utility. That's what we did in heart care and we were excited to see that included as part of the universal LCD. This provides precedence and guidance for how we would view our multimodality offerings for kidney care. So your assumption that it could pull things forward is reasonable — the LCD provides a clearer pathway for coverage and for demonstrating value to payors.

And the studies there are still supposed to read out end of this year, early next year on AlloMap Kidney?

Yes, the study will complete enrollment by the end of the year, but there are interim datasets we can obviously put out and one of the key things is developing publications. So you can expect interim data releases and subsequent publications as we move through the planned schedule.

Okay, that makes sense. And maybe on some of the clinical utility data on KOAR that you're going to present at the American Transplant Congress, are there particular endpoints we should be watching for such as eGFR improvement or graft survival?

Yes, that's a good way to think about it. You should be looking at correlations with eGFR and graft survival outcomes, and also at interpretations around subclinical rejection. The ADMIRAL study gave us useful proxies in terms of long-term multicenter data and you can expect parallels and learnings from that as we present the KOAR and related datasets.

The next question is from Steven Mah from Piper Sandler. Please go ahead.

Great, thank you. Congrats on a great quarter and great to meet you Ankur.

Yes, likewise, thanks.

Steven, it's Reg. No, I think all the different areas you mentioned — outpatient care managers, the use of the AlloCare platform — are all contributing to volume growth. As a reminder, when outpatient care managers do the scheduling and the calling, adherence is double that of when the center does it. So there's actually a premium service that's offered and also a relationship that's built. It's all about building overall stickiness and that's where the AlloCare platform comes in. I would say the patient care manager is one of the most impactful levers.

Okay, got it. And then maybe pivoting over to AlloCell, can you provide any updates on your AlloCell partnerships? I know you're limited to what you can say with your partners but maybe without naming names, could we get a sense on the number of partners you have and how should we be thinking about the timing of new partnerships and also clinical milestones and how you're going to update investors on progress in AlloCell?

AlloCell is an area of strong interest. We continue to see strong partner interest and participation. We are limited in what we can disclose publicly at this time, because partnership announcements and progress are often tied to the partners' clinical-stage milestones and their regulatory timelines. Some partners' studies progress more quickly than others, and that affects when we can disclose details. Overall, we are in a strong first-mover position, see sustained interest, and expect continued partnership development as these other companies progress through their clinical milestones.

Okay, great, thanks Reg for the color. And final one for Ankur — you were talking about RemoTraC a little bit. You guys are currently at about 40%: what do you think the steady-state level of RemoTraC will be going forward? And how do you think about the long-term impact on gross margins and your long-term goal of getting to 75% gross margins given the additional cost of the remote phlebotomy?

Yes, we are at levels around 40%, give or take a few points. Our expectation is that that's a good run rate and we don't expect substantial changes in the near term. From a long-term perspective, the investments we've made in RemoTraC largely represent the necessary structure for the medium term and enable us to continue improving gross margins on the path to our long-term goal of roughly 75% gross margin. We believe we've made the majority of that investment needed to support the service.

Okay, great. Thanks and congrats again.

This concludes the question-and-answer session. I would like to turn the call back over to Reg Seeto for closing remarks.

Again, on behalf of CareDx I want to say how excited we are to have such a strong start to 2021. Our mission is clear in how we bring innovation and continue to make a difference in the lives of transplant patients in terms of increasing their long-term outcomes and survival of their organs. With that, I want to thank everyone for dialing in and listening to how we have progressed as a company and we'll catch you during subsequent calls. Thank you.

This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.