CareDx, Inc. Q4 FY2022 Earnings Call

Good day, ladies and gentlemen, and welcome to the CareDx, Incorporated Fourth Quarter 2022 Earnings Conference Call. Today’s conference is being recorded. At this time, I would like to turn the conference over to Greg Chodaczek. Please go ahead.

Good afternoon and thank you for joining us today. Earlier today, CareDx released financial results for the quarter ended December 31st, 2022. The release is currently available on the Company’s website at www.caredx.com. Reg Seeto, Chief Executive Officer; and Abhishek Jain, 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 of 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, February 27th, 2023. 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 fourth quarter and full year 2022 earnings conference call. During 2022 the company made significant progress towards our vision of being the leader in the transplant ecosystem, while delivering on our mission to bring innovation across the transplant patient journey. The focus of today’s call will be on the execution and progress in three key areas. The first is the path to profitability as we share CareDx’s differentiated financial profile versus our peers. The second is the focus on the 3Cs; catalysts, collections and coverage, where we hit an inflection point with collections during the fourth quarter of 2022. And the third is building leadership in the transplant ecosystem, especially with the development of our digital ecosystem. Turning to the first topic on our financial profile. The economic environment during the past year, with high inflation and the threat of recession has further emphasized the importance of companies to maintain a strong financial position. Given this, we’re focused on maintaining a robust balance sheet with a plan to achieve profitable adjusted EBITDA in the first half of 2023. The following support this commitment. First, the company announced an authorized share buyback program in December of 2022 of up to $50 million over two years, demonstrating the board of directors and management's confidence in the business, cash position and long-term growth opportunities. As of the end of 2022, we repurchased 0.6 million shares and have continued executing our program in early 2023. Secondly, we ended 2022 with $293 million in cash and cash equivalents and marketable securities on the balance sheet and have no debt. Our solid cash performance was driven by improved cash collections infrastructure that we invested in significantly during 2022, which led to record collections for testing services in Q4 at 110% of our testing service revenues. We also generated $7 million of positive cash from operations in Q4 2022. And thirdly, even with a share buyback, CareDx’s strong balance sheet and improved cash collections allow CareDx to deploy our capital without raising additional capital. Now turning to the financial results, we delivered quarterly revenues of $82.4 million representing a 4% year-over-year growth. For the full year 2022, CareDx recorded revenues of $321.8 million representing a 9% year-over-year growth. Our testing services volume grew 19% year-over-year, which continued to outpace market growth of 4%. Our product revenues and patient and digital solution revenues showed meaningful growth year-over-year for the fourth quarter and full year 2022. Notably in the fourth quarter, products and digital accounted for more than 20% of our total revenues consistent with our strategy of growing business lines of scale. Importantly, excluding some elevated milestone and clinical study startup costs in Q4, we have continued our trend of improved sequential adjusted EBITDA. As we move into 2023 we remain on track to deliver adjusted EBITDA profitability in the first half of 2023. As revenues continue to grow, we see further improvement opportunities in gross margin, with multiple levers in our testing services as we drive to our long-term, non-GAAP gross margin target of $0.75 plus. Although not expected to have an impact in 2023, we have consolidated our products operations to improve product margins, with a plan closure of the Fremantle site in the middle of 2024 and planned reduction in the footprint of the Stockholm site. Turning to our key 2023 to 2024 focus drivers. CareDx’s three catalysts, 3Cs catalyst, coverage and collections. Each represents a pivotal opportunity for growth as part of our strategy. Now starting with Catalyst. We’re excited by the potential addition of AlloMap Kidney, UroMap and Kidney. When launched, these best-in-class offerings will join the number one portfolio of post-transplant monitoring solutions, which include AlloMap Heart which was introduced in 2005, AlloSure kidney which was introduced in 2017, AlloSure Heart, which was introduced in 2020 and AlloSure Lung introduced in 2021. We have a long and successful and proven history of delivering transplant innovation. Now moving on to AlloMap kidney. This is currently under MolDx LCD review process. AlloMap is built on a proven FDA cleared transplant gene expression platform and provides a quantified result that can be measured longitudinally. The infrastructure is already in place, and we're excited to bring this innovation to patients upon achieving approval from MolDx. Regarding UroMap, we're preparing the final stages for MolDx submission. As a reminder, UroMap is a gene signature in urine that assesses both the probability of rejection and the likelihood of a BK virus nephropathy. With publication in The New England Journal of Medicine we have strong clinical validation across multiple publications and best-in-class data. Over the last few years, we've invested in artificial intelligence as a core part of the company's pipeline catalyst development in kidney and heart. As seen with the latest developments in AI and other industries, the use of AI will play a key role in transplant management. We plan to share more about AI kidney and AO COV throughout the year. Now moving on to AlloMap kidney. This is currently under MolDx LCD review process. AlloMap is built on a proven FDA cleared transplant gene expression platform and provides a quantified result that can be measured longitudinally. The infrastructure is already in place, and we're excited to bring this innovation to patients upon achieving approval from MolDx. Regarding UroMap, we're preparing the final stages for MolDx submission. As a reminder, UroMap is a gene signature in urine that assesses both the probability of rejection and the likelihood of a BK virus nephropathy. With publication in The New England Journal of Medicine we have a strong clinical validation across multiple publications and best-in-class data. Over the last few years, we've invested in artificial intelligence as a core part of the company's pipeline catalyst development in kidney and heart. As seen with the latest developments in AI and other industries, the use of AI will play a key role in transplant management. We plan to share more about AI kidney and AO COV throughout the year. Now turning to our second bridge. Despite the lack of broad reimbursement coverage in recently launched tests, we continue to support transplant patients and the community with new product launches. Over the past years, we've built extensive reimbursement coverage expertise and diagnostics experience with AlloMap Heart and AlloSure kidney. These serve as our gold standard for obtaining strong payer coverage, with total coverage of greater than $0.75 and more than 70% respectively. Now, this has taken time to achieve with AlloMap Heart and AlloSure Kidney, which were launched more than 15 and five years ago respectively. And newer products including AlloSure Heart and AlloSure Lungs are only one and two years post-launch respectively, and are thus relatively early in their coverage life cycle. Therefore, it will take time to increase coverage, but we haven't played plan through his peak success of AlloMap Heart and AlloSure Kidney. Importantly, during the fourth quarter, the International Society of Heart and Lung transplantation announced new guidelines, which support the expanded use of CareDx’s heartcare solutions AlloMap and now AlloSure in routine monitoring of transplant patients. The previous guidelines are more than a decade old. And this update is more consistent with what has evolved over the last decade with the shift away from invasive surveillance biopsies. These new guidelines recommend early use of AlloMap Heart starting at two months post-transplant. This should allow us to capture multiple months of reimbursement for which we currently have limited coverage from some commercial payers. We've initiated discussions with these payers regarding this guideline update. Additionally, new guidelines support remote use of gene expression profiling and donor-derived kidney and heart transplant surveillance as in HeartCare. This inclusion in ISO guidelines should lead to increased reimbursement over time. On AlloSure Lung, we are working with MolDx to achieve a determination of coverage by Medicare. There is clear demand in the lung transplant community and with one in four new patients starting AllSure Lung in Q4, it is quickly becoming the standard of care for surveillance of these highly vulnerable patients. This potential improvement in coverage represents the single greatest opportunity for the company. The 2022 CareDx estimate non-reimbursed tests across our commercial portfolio represent more than $180 million in potential revenue and hence EBITDA. Abhishek will cover this in more detail in the section. Now turning to our third C collections. As mentioned, we invested heavily in building our collections infrastructure during 2022 as we sort of shifting our pay mix to commercial, including Medicare Advantage. The necessary infrastructure has been built to address the increased number of prior authorizations and denials and appeals. In Q2, and Q3 of last year, we saw signs of improvements within our cash collections, and the fourth quarter offered the significant proof point to our strategy. For the fourth quarter, we achieved our highest ever cash collections at 110% of revenues for testing services, representing approximately a 10% year-over-year increase and demonstrating strong operational progress on this initiative. Collections will continue to be a significant focus for CareDx moving forward. With this strike catch-up with Medicare Advantage, the improved process for future collections, and the ability to deal with new coverage through collections. We now continue to build on our vision of leadership in the transplant ecosystem. Not only is CareDx remain 100% focused on transplant, but the company’s established leadership building blocks across the entire patient journey. Our leadership position is the cornerstone of our strategy as we deepen our moat, enabling the continuous monitoring of patients before and after transplant. We recently acquired HLA data systems; a digital lab platform that manages that connects over 20 HLA labs to EMR systems such as Epic and Cerner. This addition to our leading digital ecosystem expands our capabilities, allowing us to provide timely and accurate lab results to clinicians for transplant decision-making and patient care. This joins our leadership ecosystem where we're either number 1 or number 2 in that space. To date, we've already established the leading position in post-transplant patient care. With molecular marking, we have over 100,000 unique patients that have used AlloSure and AlloMap offerings. With medication discharge management, this is now more than 90-plus transplant centers with med action plans. And with our transplant-focused app, we have over 65,000 downloads with AlloCare. Recently, we’ve built leadership in the transplant center, and we’re number one in quality and analytics with over 45 centers with in copy, and we’re number two with transplant EMRs with and Transcat. And now we're building leadership in the pre-transplant setting. We’re number one in next-generation sequencing or NGS HLA with AlloSeq Tx17 in the United States, we’re number two in dialysis patient referrals with over 70,000 patients referred through TX Axis and now we're proud to have added HLA data systems, which is number two in the space. We are the only company 100% focused on the transplant patient journey, which sets us apart as a patient-centric company. Now before turning to 2023 guidance, we wanted to revisit transplant volume dynamics. COVID-19 has created an extended timeline for recovery and we believe we’re still in the early stages. Q4 2022 marked the first quarter where volumes were slightly above the pandemic baseline of Q2 2021, with most recovery driven by heart disease as well as kidney. That said, transplant volumes in Q4 2022 only grew 2% sequentially, and this downward sequential trend has continued into Q1 2023, with current quarterly data for the first 7 weeks showing a negative or 3% sequential decline with decreases across all organs, including kidney, heart, and lung. We hope the sequential trend increase would have continued, but this is what happened so far in Q1 of this year. One of the key reasons behind this trend is that living donor kidney transplants remain below the pre-COVID levels and staffing shortages continue to impact transplant in hospital centers. We recognize that we're still early in the stages of transplant volume recovery, but we believe there is time to double in the next 5 to 10 years. Drivers behind this future volume growth include increased use of high-risk organs, increase in the expanded use of organs through perfusion and improved transport, increase transplantation rates and post-transplant monitoring from the Advancing American Kidney Health initiative and finally, a rebound in living donors. Our testing service remains our core strength with leadership across kidney, heart, and lung and the rate of adoption has been faster with each new organ that's been used. This core business has enabled us to build out across the transplant ecosystem and to be called the transplant company. This enables us to add services to transplant patients and to be considered the partner of choice. Now moving to guidance. For the full year, we expect revenues of $328 million to $338 million. Note, this guide excludes any contribution from pipeline catalysts and excludes any contribution from any major coverage changes. Importantly, we do expect to see cash collections to grow above testing service revenues as we now have a catch-up in the collection process for revenues not previously captured through collections. Abhishek will cover this in more detail during the section. In closing, we’re committed to maintaining a strong financial profile and remain on our path to adjusted EBITDA profitability. Our core testing service business continues to gain commercial market share and grew five times above market for the full year. Our products and digital businesses are growing nicely and now represent approximately 20% of our business. We remain focused on the 3Cs, catalysts, coverage, and collections. We continue to drive leadership throughout the patient journey and continue to unify our solutions to target better outcomes and better transplant care. Before I turn over the call to Abhishek to go over the financials, I want to thank all the employees of CareDx who worked tirelessly during 2022 to support patients and the broader transplant ecosystem.

Thank you, Reg. We are pleased with the results from the fourth quarter and are excited about our leadership position across the transplant ecosystem and our ability to support patients and deliver life-saving services. I’ll focus on the following in my prepared remarks, Q4 and 2022 financial results, coverage, collections, and guidance for FY 2023. I'll start with CareDx’s differentiated financial profile versus our peers. We ended the quarter with $293 million in cash, cash equivalents and marketable securities. It is a $2 million increase as compared to the previous quarter, which included stock repurchases of 600K in the quarter. I would also like to highlight net cash provided by operating activities was $7 million in the quarter, driven by solid cash collections. We saw an inflection point in Q4 in collections as a result of our investments in improving processes and scaling infrastructure in this key area. In Q4, we had our highest ever cash collections quarter, collecting 110% of our testing services revenue. This higher collection is particularly important as we recognize revenues for the present quarter based on the historical collections per test. Therefore, higher collections in a given quarter will become a positive for revenue recognition in upcoming quarters. We look forward to continuing this momentum in 2023. As we move towards profitability and breakeven adjusted EBITDA in the first half of 2023, we are confident that the business is self-funding into the foreseeable future. Moving to revenues. In Q4, we recorded total revenues of $82.4 million, up 4% year-over-year and as compared to last quarter. For the full year 2022, we recorded total revenues of $321.8 million, up 9% year-over-year. Testing Services revenue for the fourth quarter declined by 5% year-over-year to $65.4 million and was up 1% as compared to last quarter. For the full testing services revenues were $263.8 million, which grew 2% year-over-year. Notably, our testing volumes grew by 14% year-over-year and 2% sequentially to approximately 47,700 tests in Q4. For the year, we provided approximately 182,000 tests, up 19% year-over-year. Importantly, our volume growth at 19% significantly outpaced the transplant volume market growth of 4%. Let me now provide some color on the drivers for the differences in year-over-year volume growth and year-over-year revenue growth for testing services. Firstly, the primary driver of this lower revenue growth is our payer mix. Let me explain this. Our ASP on paid tests has not changed since the start of 2021 at approximately $2,500. As a reminder, since last quarter, we started to share this new metric to highlight that there is no price degradation for our tests. However, what has changed since the start of 2021 is the percentage of tests that are being reimbursed. This increase in non-reimbursed tests has been a result of our commercial strategy of driving innovation with the launch of AlloSure Heart and AlloSure Lung and expanding in community nephrology to gain further market share. This commercial strategy resulted in increasing our commercial mix to 68% in Q4 this year as compared to 62% in the same quarter last year. As Reg alluded in his remarks earlier, we are relatively early in the coverage life cycle for AlloSure Lung and AlloSure Heart, resulting in lower number of paid tests. This change in payer mix explains two-thirds of the difference in our revenue growth and volume growth. This is why we focus on our first C coverage as we will coverage in these areas it provides a significant opportunity for future growth and profitability. The second point is the shift from Medicare to Medicare Advantage, which negatively impacted revenue growth by low single digits. As discussed in our prior calls, we have seen a shift of patients from Medicare to Medicare Advantage. To provide further clarity, we are sharing a new metric of the potential opportunity if we were to get paid on Medicare Advantage tests at the same rate as other reimbursed tests. This opportunity represents approximately $20 million in incremental cash revenue for FY 2022 alone. This is why we focused on our second C collections. As the collections process and infrastructure continue to improve, we expect to be able to collect much of this cash and revenue opportunity. We'll share this metric on an annual basis. The third point is Medicare sequestration impact in 2022 that was reintroduced in Q2 last year and will have a marginal impact on the growth rate in the first half of 2023. Now turning to non-testing services business. In Q4, product revenues increased 11% year-over-year to $8.6 million, while increasing 19% as compared to last quarter and Digital and Patient Solutions revenue increased 190% year-over-year to $8.4 million, driven primarily by our acquisition of the transplant pharmacy last year and up 13% as compared to last quarter. For the full year 2022, product revenue of $29.3 million grew 9% year-over-year, and our digital and Patient Solutions revenue grew by 180% to $28.8 million. Turning to gross margins. GAAP gross margin for the fourth quarter 2022 was 64% as compared to 66% in the fourth quarter of 2021. The Non-GAAP gross margin for the quarter was 67%, same as last quarter and as compared to 68% in the fourth quarter of 2021. GAAP gross margin for the full year 2022 was 65% as compared to 67% in 2021. The non-GAAP gross margin for the full year 2022 was 68% as compared to 70% in 2021. The change in our GAAP and non-GAAP gross margin year-over-year was primarily driven by lower gross margin profile of our transplant pharmacy business impacting overall mix. We continue to maintain healthy GAAP gross margin for our testing services, and it remained unchanged at 73% in 2022 and 2021, respectively. Non-GAAP gross margin for our testing services for 2022 was at 74%, similar to 2021 despite strong test volume growth in areas where we have lower coverage. Our lab operations and supply chain teams drove efficiencies in multiple areas to absorb the costs associated with these incremental tests. We are pleased with the durability of our gross margin profile for our testing services business despite the investments that we are making in providing tests where we do not yet have broad coverage. It provides us a significant opportunity for the future. GAAP gross margin for our products business was 40% in 2022 as compared to 29% in 2021. The non-GAAP product gross margin improved by 10 percentage points year-over-year for the year 2022 at 49% as compared to 39% in FY 2021. As mentioned, this stays an area of focus for products business with further plans to consolidate our manufacturing sites to drive efficiencies and improve margins. GAAP gross margin for our Digital and Patient Solutions business was 23% in 2022 as compared to 30% in 2021. The non-GAAP digital and Patient Solutions gross margin was 31% in 2022 compared to 44% last year. As discussed earlier, this change in non-GAAP gross margin year-over-year was primarily driven by our acquisition of the Transplant Pharmacy business. Non-GAAP operating expenses for the fourth quarter were $60.4 million, up about $3.4 million sequentially from Q3 2022. The increase in our non-GAAP operating expenses was mostly driven by R&D as we paid for milestone payments and elevated start-up costs related to clinical studies in Q4. The increase in our SG&A expenses was driven by higher collection costs as we ramped up our efforts in this area. For the fourth quarter of 2022, we recorded negative adjusted EBITDA of $3.7 million compared to negative adjusted EBITDA of $2.5 million in the previous quarter. Excluding Q4 specific elevated R&D expenses of approximately $2 million, we would have continued to make progress on our goal of achieving positive adjusted EBITDA. We remain on track to deliver adjusted EBITDA profitability in the first half of 2023. Moving to regulatory updates. First, we are pleased to report that the previously disclosed inquiry from a state regulatory agency in Q3 2021 has now been closed with no further information or action required. The agency recently advised the company that it has completed its review of our response and the information we provided to them. Second, as you will see in our recently filed 10-K, we have identified material weaknesses in our internal controls over financial reporting primarily related to general information technology controls. However, we have not identified any misstatements in the financial statements as a result of these deficiencies. We have taken a number of actions to begin remediation, and we will consider the material weaknesses to be remediated if and when the applicable controls operate for a sufficient period and we conclude through testing that the controls are operating effectively. Turning to guidance. For the full year 2023, we expect revenues to be in the range of $328 million to $338 million. Our goal in setting the guidance this way is to set a baseline for the year while waiting for the positive inflections from the pipeline catalysts and major payer coverage. The guidance assumes no contribution from pipeline catalysts, assumes no major payer coverage decisions, and assumes no ASP price degradation for reimbursed tests consistent with what we have seen since the start of 2021. Guidance assumes continued shift to commercial payers, resulting in low double-digit declines in overall ASP or close to approximately 10%, which will be an improvement as compared to mid-teens declines last year. This improvement is driven by improved collection efforts, which we expect to continue and assumes patient testing volume growth in the low teens. It should be noted that market growth is still in early stages of recovery post-COVID and have been uncertain as seen in the current Q1 2023 quarter-to-date data that shows sequential declines in transplant volumes across kidney, heart, and lung. To summarize, we have an excellent balance sheet with $293 million in cash, cash equivalents and marketable securities and no debt. We hit an inflection point with collections and collected 110% of our Q4 testing services revenue. We generated $7 million of net cash from operating activities in Q4, reduced AR as compared to last quarter, and improved DSOs. We continue to gain commercial market share in testing services with volume growth of 19% year-over-year in 2022, significantly outpacing the market growth of 4%. We maintained our gross margin for testing services year-over-year despite a large increase in our tests that are not reimbursed and improved gross margin for our products business. We continue to move towards our goal of achieving positive adjusted EBITDA in the first half of 2023. With that, I'll open the call for questions.

Thank you. Our first question is from Andrew Cooper with Raymond James. Please proceed.

Thanks for the time. Maybe just first, I want to talk about gross margins a little bit. I think it's been really impressive over the course of the last, really, couple of years that you've been able to hold those testing services margins where you have, I guess, thinking about the ASP dynamics you just laid out that don't assume any improvements from some of the catalysts, etcetera. How much can you continue to absorb that, call it, low double-digit price decrease without having a bigger impact on the testing services gross margin because it's been really impressive what you've done so far. So I just want to get a sense for what efficiencies are left to find?

Yes, Andrew, firstly, thanks for the quality feedback there. The team has worked extremely hard with the efficiencies around the gross margins. There are multiple levers across that in the testing service. We look at automation where there's increased volume, where there's payer reimbursement and where we've had multimodality. So there's a series of levers that we continue to add on, and it's something that's built into our plan. I think as we look at also the ASP dynamics, there has been improvement through the collections. And part of the plan is also to work obviously on our coverage now overall as part of this plan. But I'll let Abhishek to provide any additional commentary.

Yes, Rich, I appreciate your input. Andrew, there are numerous factors influencing our COGS. In the lab, we have the ability to automate many processes. Additionally, there are opportunities to optimize our shipping and freight costs. I'm very proud of our team, especially in lab operations and supply chain, for their collaboration with vendors to mitigate the impact of inflationary pressures in the market. The team has implemented numerous strategies in the past, but I wonder how much more they can handle moving forward. I'm optimistic they will maintain their current momentum and continue to uncover efficiencies in the future.

Yes, one other thing I'll say is that if you look at gross margins, it's not just with the testing services as noted during the call, I mean, with the products business. We're actually looking at improving the gross margins there, as we've shared with some of the site consolidation we’re doing across the organization. So as a company, particularly in this environment, we do think gross margins are important. It’s not just in testing services where we’ve had that established, but also now looking at the products business and taking some efficiency opportunities there as well.

Okay. Great. And maybe just 1 more kind of combo question still kind of linked to the P&L. I guess, one, can you give us a sense for in that ASP that you’re including in the guide? How much benefit from some of the accruals of that 110% you just collected in the fourth quarter, should we start to see sort of flow-through through the year and maybe the pacing of that? And then secondly, just a little bit more color on some of the R&D spend in 4Q that you’re calling out as onetime. Just what exactly it is and why it’s going to fall off in 1Q and beyond as well would be great. And then I’ll let others jump in.

Sure. There are two parts to your question, Andrew. The first concerns the improvements in collections and how they will help us address the challenges we face with the payer mix, as well as the benefits from increased volume. This time, I expect a low double-digit decline in our average selling price, around 10%, in contrast to the mid-teens decline we experienced last year. I anticipate a 5% improvement due to better collection efforts, which I expect will continue throughout the year. If we maintain a collection rate of 110% as we did last quarter, that will positively impact us moving forward. Regarding the second part of your question about R&D expenses, there were a couple of factors this quarter. The first was a milestone payment, which we had agreed upon with some partners in the past – we pay them when specific milestones are achieved. One such contract required a onetime milestone payment. The second factor pertains to clinical study payments, which can be somewhat irregular due to startup costs. We incurred some startup costs in the fourth quarter that raised our R&D expenditures. One last point to clarify expectations for this year: we expect the metrics related to collections and testing service revenue to continue to improve positively. Thank you for your questions.

Thanks. I’ll jump back in the queue.

Our next question is from Matt Sykes with Goldman Sachs. Please proceed.

Hi, good afternoon. Thanks for taking my questions. Maybe my first one, you had mentioned Reg, that post the ISHLT guidelines that you had had some conversations further conversations with payers. We’d love to know kind of what the feedback is from those conversations in terms of are these guys that they’re waiting for? And do you think you can achieve some momentum from that that you’re obviously not baking to your guide that we could see in 2023 from a coverage standpoint?

Yes. I see Matt. We were thrilled to get the ISHLT guidelines and what was shared at the end of last year is one of the areas we thought would be important for the organization, particularly as we look at LP coverage. I think I’d break it out to twofold. The first is on AlloMap, I think firstly, AlloMap is our FDA cleared test for gene expression profiling, sort of published in New England. And what was clear to us in the guidelines is there should be earlier coverage starting at month two. And there are some commercial payers today that don’t cover us that early. And so this has led us to actually initiate several discussions already with some national and regional payers this quarter to start those discussions. So there has been, firstly, receptivity to have those discussions, secondly, to allow us to present the information and then allow us to present some further rationale behind that earlier start, particularly because it’s given in the guidelines and names specifically. So I think it’s an on-going process, but one we’re particularly pleased with. The second is, if you look at HeartCare itself, this is an area which has now allowed us to actually trigger some of those discussions. As a reminder, previously, we weren’t necessarily getting those discussions on an ad hoc basis or even a routine basis with AlloSure part. But now there’s guidelines coming through, particularly with the recommended testing and also looking at some of the settings such as during COVID that has now allowed us to initiate those ad hoc discussions that is off cycle and allow those to take place as well. So that's how I’d bifurcate it. I think the first one is probably more readily sort of on a cadence perspective to capture. And I think the other one is now based on initiating those discussions. But certainly, from a company perspective, happy to have had that come through.

Got it. Thanks for that Reg. And then just Abishek, just a little more detail on that additional disclosure in the 10-K and the material weaknesses. Is there sort of a timeline for remediation that we should be thinking about? And is there going to be any additional costs incurred as a result of maybe further investment in technology stack or other types of costs that would be involved in the remediation efforts?

Yes, Matt. We recently identified this issue, and it does not affect the financial statements. I wanted to highlight that specifically. Additionally, these weaknesses need to be addressed over time, and you must test and validate the remediation before it can be considered complete. It will take a few quarters to fully remediate and disclose that. Regarding your second point, our company has grown rapidly in recent years, and we are working to enhance our infrastructure in certain areas. We are planning some investments in this area, which are already included in our plans.

Got it. Thank you.

Our next question is from Mason Carrico with Stephens. Please proceed.

Hey guys. Maybe a couple here on the adjusted EBITDA goal. Sorry if I missed this, but do you anticipate maintaining positive adjusted EBITDA going forward once you achieve that milestone in the first half?

Yes, I’ll take that question. And yes, absolutely. That is what the goal is, Mason. And I’m hoping that we will be using our operating leverage after the Q2 to be able to kind of stay positive. But at the same time, I just want to also make a mention that we will be evaluating our investment opportunities as they come up in the second half and going forward. And we will let you guys know if something were to happen there.

Okay. Got it. And then two other quick ones here. One, I guess, if we were to take a step back and say, look how level, what do you view, I guess, is the biggest risk to either not being able to achieve that net positive adjusted EBITDA in the first half or maybe it flipping back negative? What's the biggest risk there? And then the second part of the question is, what are you expecting stock comp to be in the upcoming year?

Regarding adjusted EBITDA, the main risk I see is related to market volume growth. If anything were to go wrong in that area, it could impact our goals. We are actively working on controlling our expenses to maintain prudence. That's the primary risk I identify. As for the second part of your question, could you please repeat it, Mason?

Stock comp, how we should be thinking about stock comp in the upcoming year?

Yes. I would basically assume a very similar trajectory of the stock comp going forward as well. I wouldn’t be thinking of too many changes there.

Got it. Thanks guys.

Our next question is from Alex Nowak with Craig-Hallum Capital Group. Please proceed.

Okay great, good afternoon everyone. Just first of all, how much revenue does the HLA digital systems add that acquisition? How much does that add in 2023?

Not material, Alex. So I wouldn’t call it out as one of the reconciling items to the guidance.

Okay. And then I just want to understand the testing volume growth that you’re expecting in 2023. So 2% to 5% top line growth, digital products are growing, call it, mid-teens, so that’s going to push the testing piece down a little bit. The market is indicating down to start the year on the testing volume side. So do you expect, I guess, at the end of the day, testing volumes to decline in 2023? Or how do we think about that growth in that business when you strip out all the ASP dynamics?

Yes. So I still feel there will be a positive growth because when I build the guide, I’m looking at mid-teens volume growth, right? And yes, of course, the start of the quarter has been relatively slow, but I expect that the market growth will pick up. And at least it will play out very similar to how it has played out last year. So that’s the first part. And the second part is that when I talk about the payer mix change, our ASPs are going to be better as compared to how it failed last year by about five percentage points, the mid-single digit is what I’m calling because of our collection efforts. And the delta between those two will basically provide us the increase in the testing services revenue growth. That's how I see it.

Okay. That is helpful. And then kind of a 2-part question here kind of on the regulatory side. Just any update from the multi-CAC meeting, any discussions with Medicare KOLs when should we expect the conclusion there? And then the second part is the inquiry that was settled. Was that with the DOJ or the SEC inquiry? Or was that a state inquiry? And then if it’s just the state, what’s the status of the DOJ, SEC, and the state inquiries? Thanks.

Yes. I think with the recent CAC meetings, and these are things that are initiated for a regular review. And I think there hasn’t been any recent or further updates from that. I think as we’ve talked in the past like in terms of benchmark tiling was that happens typically around a 15-month past sort of timeline includes a period of public comments as well as part of that. I think we’ve received extensive support across all organs from KOLs that we’ve talked about, the different biomarkers we have brought to the space and what they represent in terms of clinical practice across kidney, heart and lung. So for us, it’s even as recent as this weekend at the importance of what we do as an organization in bringing this breakthrough innovation is this something that all KOLs have spoken about. So we really feel thrilled about that level of support. It’s important for us. And again, we have this obligation to innovate in the space to continue to drive that innovation, and it’s gratifying to see that consistency come across from KOLs. It’s also; I think the timing of that meeting had just preceded the guidelines as well, which should come out from ISHLT. So it’s always good to get that reinforcement from an international organization. Sure. And let me take the second part of your question on the state regulatory update that I provided this time around. So it wasn’t the DOJ SEC matter. This was basically a state regulatory agency. So that’s the first part. And the second part of your question was if there is any other update that whole CID DOJ investigation. And the answer is that there are no material updates to report on that particular matter. We continue to cooperate with the request that we are receiving from these guys. And of course, there hasn’t been any questions raised around the safety or efficacy of our products.

And the other end quarter that happened late 2022, that was related to the DOJ, just so I’m clear?

No. This was a completely different inquiry. I think we should have some. So I didn’t quite get the question, but I think in October 2021, we disclosed what was in the filings at the time point, and this is one that’s been finished and completed from the feedback received.

Yes. It seems that in late 2022, there was another inquiry mentioned in the 10-Q, but we can discuss it later.

Late 2022, there was another state inquiry that we have received. This is basically recent fund, yes, and it’s an isolated case state from a single vendor in a state. That’s what we have disclosed. We are a single vendor in a state that we have disclosed.

Our next question is from Mark Massaro with BTIG. Please proceed.

Thank you for the question. I'm reviewing the guidance and appreciate the details provided. I'm looking at low teens volume growth in test services and a low double-digit decline in average selling prices, which leads me to estimate around 3%, or low to mid-single digits, in testing services revenue. However, for the full year, you're projecting a 2% to 5% growth. Last year, when I totaled the categories for products, digital, and other offerings, I noticed about a 7% growth, accounting for 18% to 20% of revenue. This indicates strong growth in products last year, but I don't see a robust outlook for products in 2023. Could you clarify if there were any one-time events in 2022 that might not recur, to help us understand the possible scenarios regarding your projections?

Sure, Mark. I think the 1 piece on the non-testing services side that I’ve been calling out is around the digital and patient solutions because that business grew like 180% year-over-year and that was primarily because of our acquisition of the Transplant Pharmacy. So that's not going to happen again in 2023. So that is a bit that probably you need to bake in.

That's super helpful. I guess, can you give us a sense for what the underlying growth of the transplant pharmacy is?

Instead of transplant pharmacy, let me provide you color on the testing services and let me call the other two businesses as the non-testing services. I’m expecting the testing services revenue growth to be very similar to what you called out from the low single digits to the mid-single digits, and our non-testing services would be high single digits, pretty similar to what you have seen last year.

Yes, I think the question that Mark was asking, what is the transplant. So the transplant pharmacy is essentially a white-glove service business that we have, and it essentially serves transplant centers in patients. And so it’s really built a reputation on this white-glove service. And focused on just on transplant patients, pretty similar with our mission and our vision to lead the transplant ecosystem. So that’s one area that has grown or had grown through that acquisition last year.

Okay. Great. And then, Reg, maybe just to clarify, did I hear you say that the underlying volume growth in transplant is, call it, around negative 3% here in Q1? And I know that you’ve called out a number of drivers to the challenging end market, things like staffing shortages, living donor transplant changes. I think a lot of the items that you call as potential benefits to the volumes. Many of those appear to be kind of multiyear drivers over time. I’m just curious if you see any short-term potential changes with respect to staffing shortages, for instance, is maybe one, but what are something that you guys can actively do to manage this in the near term?

The market dynamics are quite intriguing. As shown in the prepared slides from the webcast, we observed an increase in Q2 of last year, moving from 6% to 4%, and then a sequential decline to 2%. However, year-to-date, we've seen a decrease across seven quarters and seven weeks of data, with every organ group experiencing a decline, which is not what we anticipated. That said, I believe the underlying drivers are present. I meet with transplant centers weekly and ask them about their views on the current situation. The responses vary, but a consistent theme is that living donor numbers have not rebounded and staffing shortages have hindered their ability to perform procedures as frequently as they would like. This issue is prevalent across all groups. On the positive side, we have seen an increase in C stone transplants on the kidney side. Ultimately, I believe that the various areas you mentioned will evolve more rapidly than anticipated in terms of driver changes. For instance, transportation and perfusion devices can expand the patient pool. In heart transplants, we've traditionally relied on brain-dead donors, but now the inclusion of C stone donors—who were previously not considered—has broadened our options. Recently, I spoke with a center that plans to increase their heart transplants by implementing this alternative method using ceased organs. Therefore, I expect to see some changes in the near future. Living donors, however, remain the greatest point of variance and growth potential during this period. I also believe that government initiatives will bolster donation and transplantation rates, effectively coordinating the entire ecosystem. These unifying factors will certainly play a role, though the pace of change may differ, with expanding the donor pool likely being the first step, followed by the positive impact of government initiatives over time.

Excellent. If I can sneak in one final two parter. How are you guys doing with respect to RemoTraC? I know that you used to hover around 40% of your volumes. And then finally, you guys have $293 million of cash. Historically you’ve done a great job of bolting on tuck-ins, sort of differentiating the product suite across your portfolio. You recently acquired HLA Data Systems. So how should we think about and you’re about to achieve adjusted EBITDA positivity. How should we think about M&A funnel? And what sorts of things are you potentially looking at?

Yes, Mark, that's a great question. Historically, we've typically made between one to three acquisitions each year, focusing on small bolt-on opportunities that align with our HLA data systems. We excel at identifying smaller prospects that can enhance our competitive advantage or contribute to our revenue, as seen with the Transplant Pharmacy. We're optimistic about these opportunities since they often come to us, rather than us having to seek them out. We receive numerous inbound opportunities, but our priority is to find those that can establish leadership. So, that’s our main focus. While we continuously look for opportunities, we evaluate them based on what aligns with our organization's goals, especially our commitment to the transplant space. There are definitely viable opportunities out there, and we receive them routinely, which we assess thoroughly. We are excited about the coming year, particularly given our strong financial position, allowing us to allocate our capital wisely as we have in the past.

Okay. And then any update on RemoTraC or mobile phlebotomy?

No, nothing significant change there, Mark. Thank you again.

Our next question is from Yi Chen with H.C. Wainright. Please proceed.

Thank you for taking my question. My first question is, is there additional room for cash collection improvement?

Yes. As we mentioned, this is an area that we’ll start sharing quarterly pace of change. And I think what we’ve signaled is that we expect the cash collections to exceed the testing services revenues as we now play a bit of catch-up with, for example, some of the delayed processes and collections of past such as Medicare Advantage and also as we also add more commercial pay coverage on a regional basis. So there’s certainly the opportunity and we’ll compare this year-over-year for you and provide that metric.

Yes. Okay. And when do you expect to generate meaningful revenue from cell therapy monitoring?

Yes, that’s a great question. We have indicated that our cell therapy franchise, including AlloSure and other offerings, is likely to be more of a long-term endeavor, probably beyond five years. This is largely because we need the actual cell therapies to reach the market, and currently, none of the allogeneic cell therapies have done so in the U.S. There is significant activity in preclinical and Phase I and II trials, but unfortunately, no products have yet crossed the finish line. We are eager for that to change in the future. Our current focus is to engage early in the development process to establish research and clinical partnerships, so we are positioned to participate when these transformative opportunities reach critical scale. This is similar to our strategy in the solid organ space.

Got it. And lastly, maybe you touched upon this before. What evidence have you observed that make you feel confident the number of living donors will actually rebound in the coming quarters or years?

I think living donors is such a huge area as an opportunity. And I think I’ll share a real example for you, Yi Chen. I think how we think of behavior in the community and one of our team members actually his wife was actually needing a transplant and actually put out a post to get an organ and our touristic sense. And during that week, there were probably more than a dozen plus donors that stepped up and offered to help out during that time. So I do think there is that opportunity. I do think addressing staffing shortages, I think making sure there’s data time. I think now seeing the decline in some of the infectious diseases, which were quite high during Q4 last quarter go away, will be important. But I do think just knowing at least on the artistic side, not including directed donor, that there is always an incredible opportunity of human behavior that we’re seeing where people are willing to help out in this critical organ space, and we’ve seen it real-time in our organization.

Okay. Thank you.

Thank you again.

We have reached the end of our question-and-answer session. I would like to turn the conference back over to management for closing comments.

Thank you very much. 2022 was a challenging year, but in 2023, we aim to leverage our existing initiatives to further develop our organization and enhance collections as part of the infrastructure established last year. We also intend to prioritize the coverage of what we refer to as the 3Cs. We believe our organization has a significant role to play in the transplant ecosystem, which is a responsibility we feel not only from physicians but also from patients and associations. CareDx is seen as a key player in this area, and we embrace our leadership position. Therefore, in any discussions related to transplantation, we will be involved. I would like to once again express my gratitude to the CareDx team for their hard work in supporting patients and the larger transplant community throughout 2022.

Thank you. This does conclude today’s conference. You may disconnect your lines at this time and thank you for your participation.