CareDx, Inc. Q3 FY2021 Earnings Call

Greetings, and welcome to the CareDx, Incorporated Third Quarter 2021 Earnings Conference Call. Operator instructions were provided. As a reminder, this conference is being recorded. It is now my pleasure to introduce Ian Cooney, Vice President of Investor Relations. Thank you. You may begin.

Thank you. Good afternoon, and thank you for joining us today. Earlier today, CareDx released financial results for the quarter ended September 30, 2021. The release is currently available on the company's website at www.caredx.com. Reg Seeto, President and 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 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 the 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 today, October 28, 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, Ian. Good afternoon, everyone, and thank you for joining us for CareDx's third quarter 2021 earnings conference call. During today’s call, I would like to focus on partnerships in transplant. Specific topics that cover today include delivering another record revenue quarter, connecting the patient journey, progressing multi-modality across our solid organ portfolio, launching AlloSure Lung, leading with long-term data generation and developing new areas of partnership. During Q3, we delivered record revenues of $75.6 million with growth of 42% over the prior year quarter. Notably, our Q3 testing services volumes grew 86% as compared to the year-ago quarter. This was achieved despite facing multiple headwinds in the form of the Delta surge and hurricanes. Transplant volumes and office visits in August were particularly impacted. So we've seen a return to more normalized run rates in September and into October. The primary driver of revenue growth was from our testing services, which increased 46% to $66.5 million. CareDx provided approximately 40,000 AlloSure and AlloMap patient results, growing 86% from the prior year quarter. In addition, revenue from our products business increased 21% to $6.5 million and digital and other revenues contributed $2.6 million to the top line. GAAP net loss for the third quarter was $11.9 million and adjusted EBITDA was positive $4.7 million. For kidney testing, we continue with our winning formula of protocol adoption and adding new centers. As of the end of September, more than 70 kidney transplant centers in the United States have now adopted regular AlloSure testing, and more than 320 kidney centers and community practices were using AlloSure. RemoTraC as a percent of volume maintained approximately at 40%. For heart testing services, the HeartCare attachment rate was 90%, highlighting the value of driving clinical utility through multi-modal innovation. This was achieved in less than 12 months, and underscores the importance of robust clinical data in driving adoption. Generating data through multicenter prospective studies continues to be an integral part of how we develop data that can be relied upon by physicians in a real-world setting. For example, the foundational HeartCare study we published in AJT included 740 patients across 27 centers. Others seeking to enter the space who have not invested in this magnitude of data generation have focused on retrospective samples and one- or two-center studies as an entry point. What we've seen with HeartCare is a strong position appreciated by the field because the data were generated prospectively and across many centers. As of the end of September, more than 130 heart transplant centers and practices were using our offerings. We are executing on our 2021 theme of connecting the patient on their transplantation journey. Combining our patient care managers with our digital offerings—such as AlloCare and TX Axis (previously called TX Connect)—has helped increase engagement and improve adherence. Specifically, we continue to see robust uptake of our AlloCare app, which is now available in both the Apple and Android stores. In addition, TX Axis added patient referrals to centers, and we now manage more than 38,000 patient referrals from over 1,000 dialysis practices. Moving on to multi-modal innovation: driven by the success of HeartCare, we continue to progress multi-modal approaches throughout our portfolio. We've invested over the last eight months to grow our portfolio of assets to better deliver incremental utility. Beyond HeartCare, our organ care portfolio includes KidneyCare, LungCare and LiverCare. KidneyCare is rapidly progressing in development, highlighted by a recent peer-reviewed publication in the Journal Kidney360. This 14-center study validated AlloMap to differentiate between rejection and immune injury. Notably, it also showed that AlloMap is complementary to AlloSure, delivering a combined area under the curve (AUC) of 0.89. Together, these biomarkers offer a comprehensive assessment of kidney health compared to the standard of care. Looking forward, we expect completion of enrollment in the OKRA study before year-end and plan CLIA lab validation. For LiverCare, we're now supporting the second-largest cohort of patients after kidney. We continue to enroll patients in MAPLE, the molecular assessment and profiling of liver transplant recipients. The MAPLE study examines five modalities including donor-derived cell-free DNA with AlloSure; tissue and gene expression with HistoMap and AlloMap, respectively; infection assessment; and artificial intelligence. The study began enrolling earlier this year, and we look forward to updating investors on our progress in 2022. For LungCare, the upcoming ELEMENT study is a long-term multicenter prospective study of multi-modality in lung transplantation. Regarding AlloSure Lung, we're proud to be addressing a significant unmet need in single-organ lung transplant patients. Supporting lung transplantation is absolutely critical, as survival rates are the lowest among solid organ transplant patients, with many lung transplant patients failing within five years. It was an exciting step forward for CareDx on October 12 when we announced the commercial launch of AlloSure Lung, marking our next step into being a pan-organ transplant services company. Regarding reimbursement, the team has been working very hard with payers to obtain coverage for AlloSure Lung. We're pleased that AlloSure Lung is already covered by multiple private payers and addresses a key unmet need for lung transplant patients. During the third quarter, we continued to demonstrate our global leadership in transplantation through peer-reviewed publications and by participating in and showcasing our latest clinical data. AlloSure Kidney is a platform that has demonstrated long-term data. These benefits were recently highlighted with a set of one-year outcomes in the TAIL study shared earlier this year at ATC. The study presentations throughout the year have highlighted the ability to predict novel donor-specific antibodies (DSA) and eGFR decline without causing complications. We're excited to present further scientific evidence differentiating AlloSure Kidney from other approaches. On the products front, we presented at two leading transplant conferences where we had a combined 14 abstracts highlighting innovation. At the 47th Annual Meeting of the American Society for Histocompatibility and Immunogenetics, we presented our latest data on AlloSeq HCT and AlloSeq Tx. At the Annual European Society of Organ Transplantation (ESOT), we announced the launch of our AlloSeq cfDNA clinical and research service. We're excited to expand our offerings and support continued innovation and growth in Europe, especially following the launch of our HLA typing service, which we announced in Q2 of this year. We continue to engage with innovators and leaders across our business lines as we explore partnerships. Most recently, we announced an exciting biopharma collaboration with Eledon Pharmaceuticals, where they will use AlloSure to help assess the efficacy of their lead asset AT-1501 in the prevention of rejection in upcoming clinical studies. We are thrilled to create a new market opportunity for AlloSure, where we will support the next generation of transplant therapeutics. On supporting innovation, I'd like to invite you to our Transplant Innovation Day during ATC week on November 5. Presentations will include D.A. Gros, CEO of Eledon; Dr. Bob Montgomery, who completed the first pig kidney transplant to a human; other leaders validating novel approaches; and Dr. Titte Srinivas on one of the largest independent validations of our assays. Before turning the call over to Ankur to discuss the financials, I'd like to welcome Art Torres to our Board. Art has a long history of advocating for underserved populations during his career, and more recently as a board member for nonprofit organizations. We're really excited to add someone of Art's depth, experience and breadth of perspective to our Board as we work toward building the future success of CareDx. I will now turn the call over to Ankur, who will review our third quarter financials.

Thank you, Reg. We are very pleased with the business performance and our financial results for the third quarter of fiscal year 2021. Let me provide you more details. Turning first to the income statement. Total revenue for the third quarter of 2021 increased 42% year-over-year to $75.6 million. We see continued strong adoption for our testing services and products. Testing services revenues grew 46% year-over-year to $66.5 million for the quarter, driven by strong volume growth of 86% with both heart and kidney contributing meaningfully to this strong growth. As Reg mentioned, and especially in August, we saw a reduction in both transplant volumes and testing volumes due to impact of hurricanes and the surge in the COVID Delta variant. These impacts were transitory and testing volumes recovered in September. We also continue to see higher growth in non-Medicare business. Overall, our business model of market penetration through addition of centers and patients continues to drive strong performance of our testing services business. Product revenues increased 21% year-over-year to $6.5 million driven by strong demand for our NGS products across all three regions. NGS now accounts for 55% of products revenue. Digital business revenues were $2.6 million, growing 6% year-over-year. Moving to gross margins. For the third quarter of 2021, GAAP gross margin was 67% compared to GAAP gross margin of 68% in the same period of 2020. The non-GAAP gross margin for the period was 70% compared to 70% in the prior year's third quarter. We continue to see strong volume growth in our testing services offerings and are investing to scale our capacity for the higher volumes across all organs. Non-GAAP operating expenses for the quarter were $49 million, up $3 million sequentially from last quarter. Our increased investments are focused on expanding our R&D pipeline of new services for transplantation, conducting clinical trials to provide data on clinical outcomes, continuing to build our commercial capabilities and scaling our infrastructure commensurate with the size of our business. For the third quarter, GAAP net loss was $11.9 million, compared to a net loss of $2.8 million in the same period of 2020. Net loss per share was $0.23 for the quarter, compared to a net loss per share of $0.06 in the third quarter of 2020. Non-GAAP net income for the quarter was $4.0 million, compared to non-GAAP net income of $5.1 million in the same period of 2020. Our basic and diluted non-GAAP earnings per share in the third quarter of 2021 were $0.08 and $0.07, respectively, compared to a basic and diluted non-GAAP earnings per share of $0.10 in the same period of 2020. As mentioned, we continue to invest across R&D, clinical, commercial and infrastructure as we scale our business for an upcoming larger pipeline as well as higher volumes of tests. As a reminder, we define adjusted EBITDA as non-GAAP net income before interest, income tax, depreciation, amortization and other expense. For the third quarter of 2021, we recorded positive adjusted EBITDA of $4.7 million, or 6% of revenue, compared to adjusted EBITDA of $5.6 million in the third quarter of 2020. Cash, cash equivalents and marketable securities at the end of the quarter were $363 million. Operating cash flows were neutral for the quarter. That's a strong balance sheet position, and our cash deployment focus remains on adding portfolio products and services across the transplantation journey. Investing into the future is critical as we execute against our multiyear growth plan. Turning to guidance. We are raising our 2021 revenue expectations to reflect our third quarter results and continued strong demand for our testing services. As of today, we anticipate revenue in the range of $290 million to $293 million for the year. The guidance assumes the impact of seasonally fewer working days in Q4 and projects continued market adoption and integration of our products and services. We are building a pan-organ transplant services business that connects the entire transplant patient journey. Our services and offerings are very well received by caregivers and patients. As the transplant partner of choice, we have a tremendous opportunity in front of us to provide innovative clinical and digital offerings across the patient transplant journey. We remain focused on realizing that opportunity. With that, I'll open the call for questions.

Our first question comes from the line of Matt Sykes with Goldman Sachs. Please proceed with your question.

Hi, good afternoon, Reg and Ankur. Congrats on the quarter. Maybe just for my first question on the guide, Ankur: I think if I looked at the high-end of the $293 million, that implies sort of sequentially flat in Q4. I think you mentioned—I might have missed something in your comments—about some seasonality there. But just wondering, is there continued uncertainty because typically Q4 has been sequentially up in prior years, or just what your thoughts are for Q4?

Yes, sure. Let me lay out the range and the entire guidance. So at the midpoint of the guidance, Q4 would be roughly $75 million, which is roughly flat to what our Q3 results were. The way we're looking at Q4, there are two main impacts. One is seasonality: certainly fewer working days in Q4 could potentially impact some of the testing volumes. We expect a lot of that to be offset by our core business model of continuing to add centers as well as transplant patients into our business. At the midpoint we are projecting that to be an offset. Historically, last year was an odd year because of COVID, but prior to that we've typically seen that kind of seasonality. The high end of the guidance presumes that our business model will more than outstrip any impact from the fewer number of working days in Q4, while the low end is the reverse scenario.

Got it. That's very helpful. Thank you. And then just on RemoTraC, Reg, you mentioned that 40% utilization ratio where you were last quarter. Given the Delta variant, did you just see more people getting used to the COVID environment and going back in, or how did you sense the RemoTraC uptake in this quarter with Delta impacting that?

It was pretty much around the 40% range. I think we said that over the last four quarters. What we see is variation in the actual geographical locations where this takes place. As with the rest of the United States, we see variation as to where more patients are actually going back into centers and where there is more concern over virus variants. That has affected the overall mix. The impact of the Delta variant and also some of the natural disasters we saw during this period led to changes in some of the actual days where there were patients going into certain locations. The Southeast was particularly impacted during the period. So the core RemoTraC adoption continues to do well, but the mix and balance of where it takes place geographically will change. We are looking at about 40% over the last several quarters.

Got it. And just one more for me, on the multi-modality and the data you've been putting out, including the Kidney360 article and peer-reviewed study: as you speak to transplant centers and decision makers, how is it resonating? It seems that the multi-modality data only increases the value proposition going forward.

Yes, the future of our field is multi-modality, and we've driven that innovation. What you're seeing with HeartCare is incredible—noticeable attachment in less than 10 months. I think it's been driven by the fact that we invested in extensive data generation. It's easy to try to enter the space, but it's hard to actually bring meaningful value to physicians and practices. That's why multi-modality has resonated so well—not only in research, but in real-world experience. For example, we expected to finish enrollment in OKRA before the end of this year because the excitement behind multi-modality has been clear. When centers had competing enrollment sites, many prioritized studies that offered broader multi-modal innovation. Some other studies we have seen are smaller and retrospective; OKRA multi-modality generated both scientific excitement and operational buy-in. We expect similar excitement in liver and lung as these programs progress.

You're welcome.

Our next question comes from the line of Alex Nowak with Craig-Hallum. Please proceed with your questions.

Great. Good afternoon, everyone. To start, can you comment on the lower ASPs in the quarter? If you take the testing revenue over volume, the price per test looks like it came down versus Q2 and the difference was pretty pronounced this quarter. So I'm curious: are you seeing any changes in Medicare billing practices? Or what else would influence that lower test price?

Yes, good observation. There are a couple of aspects. The primary driver is mix of business. As we see higher adoption, we're seeing much higher growth in the non-Medicare part of the business, and that is by far the largest impact on average revenue per test. A lot of that growth is driven by higher volumes in AlloSure where our mix of commercial coverage is different from the traditional kidney business. To your specific question about Medicare billing practices: no, we have not observed changes in Medicare billing practices. It's primarily the business mix where volume growth is exceptionally strong but the mix continues to evolve away from the core Medicare business.

Alex, one other way to think about it is that we're seeing really strong margins with both kidney and heart, which are built off strong commercial coverage. As we've launched into new areas quickly—AlloSure Heart and AlloSure Lung—this introduces a different payer mix in the early stages. It's important for us to drive leadership in these areas, and that's why you're seeing excellent volume growth. At the same time, there's a change in payer mix, which Ankur mentioned.

Certainly this is a multi-year commercial payer opportunity and we have plans and focus around that. It remains a meaningful opportunity for us.

Okay, that's helpful. And then what's the latest with Medicare reimbursement for AlloSure Lung? It seems MolDx has a backlog. How should we think about the revenue opportunity from lung next year?

We remain in touch with MolDx on this and continue to work with them on the information they are looking for. It will evolve, and we'll give you an update when we have an update. In terms of 2022, we will provide more specific guidance in due course, but you should certainly anticipate revenue from lung in 2022.

I would add that, as we look at mix—particularly lung, and also heart and liver—there is more of a focus for us to build out that commercial pay strategy. We aim to have leadership in all these organ spaces, each of which has different payment dynamics, so it is important to have tailored strategies.

On 2022, the company's been putting up sharp performance and has a number of pipeline projects. As you're thinking about guidance for '22, how are you thinking about the puts and takes? Are you focused just on core business growth, or are you also adding lung and multi-modality in the outlook?

Let me frame that. There are two distinct parts of the story. The core business—kidney and heart—we expect our business model to continue to drive adoption across centers and nephrology settings, and that core business can continue to drive meaningful double-digit growth. On top of that, catalysts would be lung becoming an additional contributor and KidneyCare becoming an additional contributor. Historically we provide more specific estimates when we get closer to approvals and validations. KidneyCare progress could be a catalyst sometime in 2022. If you look at prior inflection points—like AlloSure Heart in Q4 2020—you can see how approvals and data drove meaningful revenue contribution in following periods. As long as we continue to demonstrate clinical utility, we can influence reference standards and meaningful innovation. We've conducted advisory boards and market research, and we have a specific approach to a multi-modal clinical utility story.

And to add: we view this as a multiyear journey, not just 2022. Given current market penetration, there's a lot of runway in front of us for the next several years.

Our next question comes from the line of Mark Massaro with BTIG. Please proceed with your question.

Hey, guys, congrats on a good quarter. Looking back over the years, you typically saw sequential increases from Q3 to Q4. I have to imagine some of last year's improvement was pent-up demand. Could you give more clarity as to why the guidance came in a bit lighter than I would have expected? Also, how does the number of business days in Q4 compare to the prior year? And are you expecting any increase in COVID pressures in November and December?

First, nothing is changing in the business model: driving market penetration through additional patients and centers is progressing well. We have baked in any expected headwinds into our model. We've raised guidance three times this year; each quarter we've beaten and raised guidance. As you get toward year-end, the range matters more and the run rate is built into expectations. We've raised our guidance through the year by over $30 million from where we started. The final million of difference is within the normal forecasting range, and there's nothing structural changing in the business model.

That makes sense. Building off Alex's question: revenue per test declined—about 5% sequentially. As we think about next year, should we model continued declines as you add new tests and work through payer coverage, or is this closer to a flat run rate?

I'll give more detailed guidance when we provide full-year 2022 guidance. For Q4 guidance, I'm embedding a business mix similar to Q3 and carrying that forward. Generally, when we launch newer tests—AlloSure Heart earlier and AlloSure Lung now—those launches start with lower commercial coverage and have a mix impact. Over time, as we add commercial payer contracts and publish clinical utility data, those margins improve. So newer tests take a few years to reach the margin profiles of established services. For Q4 I'm assuming similar mix to Q3.

If I can sneak one last one in: you've talked about being active on M&A. Are you looking more at diagnostics, products, digital health and services, or are you open to therapeutics or devices? What's your appetite for smaller versus larger deals?

Our focus is anything that connects the transplant patient journey—from pre- to post-transplant. Earlier this year we expanded into digital connection with TX Axis, where we now manage a substantial set of dialysis patient referrals. In our biopharma collaboration with Eledon, we see a natural extension into therapeutics leveraging our platform. We're also watching cell and gene therapies as they relate to the transplant continuum. Regarding M&A, partnership, licensing or creative collaborations: we will look across the entire pre- and post-transplant continuum, whether therapeutics, med tech, digital or diagnostics. Our goal is to improve outcomes with innovative solutions and become the leader in the transplant ecosystem. Anything along those lines is of interest.

Our next question comes from the line of Andrew Cooper with Raymond James. Please proceed with your questions.

Hey, thanks. Maybe first on lung: when we think about MolDx taking longer than expected, is there anything specific they're asking for or are they just backed up? Is there any impact we should consider for future tech assessments for liver and other organs from MolDx timing?

As we've said, this is the first time we're going through the new Local Coverage Determination (LCD) process with MolDx. We're in regular contact with them and understand the information they're looking for. At this point, we don't expect anything that would impact our future submissions. We'll provide updates as appropriate when we have more clarity.

One caveat is that when we submitted material earlier it was under the prior system. Future submissions will be under the new system, so we'll have more clarity around guidelines and expectations as the process progresses.

Okay. When it comes to AlloSure Heart adoption, we've talked historically about roughly 25%–30% of the market being Medicare, the rest commercial. Are you seeing more ordering from the commercial side, which could be influencing the ASP dynamic? Or is there anything on the accounting side, cash versus accrual, to consider?

Orders are submitted by centers irrespective of insurance, so we can't attribute changes to front-end ordering systems. The change is driven by where volume growth is occurring: more tests are occurring in patients with different coverage than Medicare. Our revenue recognition does take into account collectability and contractual rates, and we assume slightly lower revenue on certain non-Medicare business based on those assessments. So a higher commercial mix does lead to lower average revenue per test initially.

To add: the AlloSure Heart attachment rate has gone up quickly, which is a testament to clinical utility. The team is actively working on commercial coverage. Even with the change in mix, the growth reflects strong clinical adoption.

We have dedicated teams adding capabilities to focus on discussions with commercial payers and to secure contracts, while continuing to publish clinical utility data to support those negotiations.

Thanks. Last one: for the headwinds from Delta and hurricanes, was there any product mix that was impacted more than others, or was it spread across the U.S. and largely on testing services?

The impacts were largely on testing services, both heart and kidney, and were most notable in August. These were transitory and the business recovered in September.

Our next question comes from the line of Matt with Jefferies. Please proceed with your questions.

Hey, thanks. Is there any way to help quantify the impact of Delta and weather on revenues in Q3? And did you pick up any of that volume in September, or are you expecting to catch up in Q4?

It's hard to precisely quantify because impacts were regional. Generally, when transplant tests are delayed, the testing sequence gets pushed out rather than lost; so some volumes shifted from August into September. It's regionally focused rather than a uniform decline.

Okay, that's helpful. Can you clarify what HeartCare testing volume was in Q3? I think you provided that number in Q1 and Q2.

We provided HeartCare volume data when we launched the test to help establish run rate, but for competitive reasons we will not continue to disclose that specific level of detail going forward.

Our next question comes from the line of Yi Chen with H.C. Wainwright. Please proceed with your questions.

Thank you. First question: a competitor recently launched a cell-free DNA lung test. How do you plan to position AlloSure Lung in the marketplace? Can we expect head-to-head comparison data in the future?

With AlloSure Lung, we've been engaged in this area since 2019. Centers reached out to us to help create reference standards and protocol guidance. As a leader in the space, we've prioritized prospective, multicenter data generation and real-world evidence. What we've seen from others is often retrospective, single-center analyses; our approach is to generate prospective, multicenter clinical data. We will continue to pursue rigorous scientific and clinical studies, and we will evaluate appropriate comparative analyses that are scientifically valid. Our focus is on generating high-quality evidence that supports clinical utility.

My next question: what percentage of the testing volume is based on new transplant patients?

We have not provided an exact percentage of testing volume attributable to new transplant patients. Historically, our messaging has been that a significant portion of new heart transplant patients are being tested (roughly one in two new heart transplant patients in early adoption scenarios) and a meaningful portion of new kidney transplant patients are being tested as well—on the order of about one in three new kidney patients in those early patterns. However, we do not disclose a specific overall percentage across all volumes.

Last question: do you have any information on how many transplant procedures have been rescheduled or cancelled at centers due to COVID vaccine mandates for recipients or donors?

We cannot specifically attribute volumes to vaccine mandate-related changes. In aggregate, overall transplant volumes were very strong in the first half of the year year-over-year. In Q3, transplant volumes were sequentially down about 5% from Q2.

There are no further questions at this time. I would like to turn the call back over to Reg Seeto for any closing remarks.

Thanks again for joining. This was a strong quarter, and we're pleased to discuss our work for transplant patients. We look forward to a strong finish to the year. And on a lighter note, happy Halloween to everyone—my kids often remind me to say that. Thanks again and have a great day.

Thank you for your participation. This concludes today's teleconference. You may disconnect your lines at this time. Have a great day.