Earnings Call Transcript - CDNA Q2 2020

Operator, Operator

Greetings. Welcome to CareDx, Incorporated Second Quarter 2020 Earnings Conference Call. All participants will be in listen-only mode. Please note, this conference is being recorded. I will now turn the conference over to Greg Chodaczek. Sir, you may begin. Thank you. Good afternoon and thank you for joining us today. Earlier today, CareDx released financial results for the quarter ended June 30, 2020. The release is currently available on the company’s website at www.caredx.com. Peter Maag, Chief Executive Officer, and Michael Bell, 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. Any statements contained in this call that are not statements of historical fact should be deemed to be forward-looking statements. All forward-looking statements, including 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 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, August 04, 2020. 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 Peter.

Peter Maag, CEO

Thanks, Greg, and good afternoon, everyone. I’m pleased to welcome you to CareDx's call to review our results for the second quarter of 2020. Back on April's call, I mentioned our theme for 2020, Transplant Proud, and how proud I was of our team's response to the COVID crisis. Today, I can say that our team has taken CareDx to a new level. The dedication and resilience of every member of CareDx is truly inspiring. I want to thank our employees for improving the lives of transplant patients and their caregivers through their hard work and commitment. You embody what essential businesses and workers represent. Now, moving on to our outstanding results for the quarter. In the second quarter of 2020, we reported revenue of $41.8 million, a 33% increase compared to the second quarter of 2019. Growth came mainly from our testing services, which generated $36.3 million. We provided over 17,100 AlloSure Kidney and AlloMap Heart patient results, marking a 44% year-over-year increase. Our product revenue was $3.3 million, while digital revenue added $2.2 million. We consider these results exceptional, especially in a challenging environment. During this crisis, we have strategically invested in areas to enhance our position in transplant care, including our direct-to-patient capabilities and clinical activities focused on multimodality testing and digital solutions. These investments will enhance our precision medicine offerings in transplantation. Our digital acquisition has been invaluable, allowing us to adapt quickly and expand our transplant value offering. During March and throughout the second quarter, several cities saw rapid increases in COVID-19 cases, leading to more requests for RemoTraC and mobile phlebotomy. Consequently, our RemoTraC services experienced continuous growth, with over 40% of our patient results coming from these services. Under Reg Seeto's leadership, RemoTraC evolved from an idea to a significant service in just over four months, providing patients peace of mind by allowing them to avoid transplant centers and physician offices, thus reducing their COVID-19 risk. Currently, about 150 transplant centers offer RemoTraC, and over 4,000 kidney, heart, and lung transplant patients have enrolled. Our nationwide network of mobile phlebotomists has expanded to over 10,000. The pandemic has also changed how we engage with customers and present important clinical information. In late May, at the Virtual American Transplant Congress annual meeting, we hosted virtual sessions, symposiums, and presentations on cutting-edge content related to AlloSure, AlloMap, i-BOX, and kidney care. Having 10 abstracts accepted for presentation and seeing over 1,000 clinicians, patients, and investors attend our virtual session was a remarkable achievement for our clinical team led by Sham Dholakia. The strong turnout at our virtual event underscores our leadership position in transplant care and innovation. CareDx is taking action while others are talking, and our efforts are being recognized in the field. We are utilizing these new tools for communication with clinicians and patients and to engage with the transplant community. We are encouraged by positive feedback from nephrologists, cardiologists, transplant coordinators, and patients regarding our virtual advisory board. We will continue to support our customers and engage with physician advocates and transplant center administrators as much as possible. While we successfully adapted our testing services business, our product business faced challenges due to COVID-19 restrictions limiting access to hospitals and transplant laboratories. In May, we received CE mark for AlloSeq Tx 17, our leading solution for HLA matching of transplant donors and recipients. Although our launch efforts will experience delays in the U.S. and Europe, we have welcomed exceptional talent to our team, including Paul [indiscernible], who brings strong commercial leadership from Thermo Fisher. We continue to adapt to the evolving COVID environment in transplant centers, hospitals, and our own facility. We have implemented internal solutions to protect our employees while maintaining our commitment to supporting patients. Despite COVID-19 affecting large cities across the U.S., I am pleased to report that our operations continued without interruption. Our commitment to our mission remains strong as we prioritize patients. Regarding ongoing clinical studies, we experienced a slowdown in enrollment in OKRA during the second quarter, but an increase in SHORE and heart care utilization as many centers shifted to noninvasive surveillance. Our heart franchise performed exceptionally well in the second quarter, highlighting the value of our precision medicine solution. In this quarter, we recorded our first-ever AlloCell revenue, which demonstrates our progress in expanding our technology from solid organs to cell therapy. We are building an exceptional team and receiving inquiries from pharmaceutical and biotech companies about cell therapy opportunities, and we look forward to updating you on our progress. Lastly, regarding our balance sheet, we closed the second quarter with a strong cash position of $211 million following a successful public offering in June. The team, led by Mike Bell, has done an exceptional job, and we feel confident we have the right resources to accelerate our revenue growth and seize available opportunities. Before handing it over to Mike, I want to thank our employees once again. We are fully engaged and delivering services for more transplantations every day. I am optimistic about the remainder of 2020 and look forward to providing updates on our progress in future communications. Now I'll turn the call over to Mike to discuss our financials.

Michael Bell, CFO

Thanks, Peter. Turning first to the income statement, total revenue for the second quarter was $41.8 million, reflecting a 33% increase from the previous year. This revenue growth was mainly driven by AlloSure Kidney and AlloMap Heart. We saw greater adoption, largely due to the success of RemoTraC and the need for remote patient monitoring. Consequently, testing services revenue for the second quarter rose 41% year-over-year to $36.3 million. Our product revenue for the second quarter fell to $3.3 million due to COVID-related challenges mentioned earlier by Peter, while Digital Revenue was $2.2 million. In terms of gross margins, the gross margin for the second quarter of 2020 was 64%, compared to 63% in the same quarter of 2019. The non-GAAP gross margin for this quarter was 68%, up from 67% in the prior quarter. Sequentially, the non-GAAP gross margin decreased by about 300 basis points compared to the first quarter of 2020, mainly due to the rise in tests linked to RemoTraC or mobile blood draw services. Keep in mind that the cost of a mobile blood draw ranges between $100 and $150, which is higher than a lab draw. Although these additional costs will persist, we remain optimistic that gross margins will improve over time due to the operational leverage of our testing lab in Brisbane. For the second quarter of 2020, we reported a net loss of $6.6 million, an improvement from a net loss of $7.8 million during the same period in 2019. Our net loss per share for the quarter was $0.15, compared with a net loss per share of $0.19 in the second quarter of 2019. Non-GAAP net income for the second quarter of 2020 was $1.7 million, contrasting with a non-GAAP net loss of $0.1 million in the same period of 2019. Our non-GAAP net income per share for the second quarter of 2020 was $0.04, compared to a non-GAAP net loss per share of $0.00 in the same period of 2019. It’s important to note that both GAAP and non-GAAP net income for the second quarter include $4.8 million of other income related to the CARES Act provider relief funding we received in April. As a reminder, we define adjusted EBITDA as non-GAAP net income before interest, income tax, depreciation, amortization, and other income and expense. In the second quarter of 2020, we recorded a negative adjusted EBITDA of $2.8 million, compared to a positive adjusted EBITDA of $0.1 million in the second quarter of 2019. Our adjusted EBITDA for the second quarter of 2020 was influenced by the costs associated with RemoTraC and mobile blood draws, along with increased spending in R&D and G&A areas. In research and development, our clinical study expenses increased due to more activity in our SHORE study and upfront costs linked to the development agreement with Cornell signed in May. Our G&A costs also rose in the second quarter, primarily due to higher legal expenses from ongoing litigation. We also accounted for additional employee-related expenses to acknowledge the impressive performance of our employees during this unusual quarter. Peter mentioned that we are actively pursuing opportunities to strengthen our position during this crisis. As a result, we anticipate operating expenses to rise in the third and fourth quarters of this year. We will continue to develop our pipeline and focus on top-line growth, expanding our sales and marketing efforts beyond transplant centers to engage directly with patients and community nephrologists. In the second quarter, we significantly bolstered our cash position. In April, during the peak uncertainty of the COVID crisis, we raised about $24 million through our at-the-market program. We followed this up in June with a successful public offering of approximately 4.5 million shares of common stock, raising about $135 million. Consequently, cash and cash equivalents on June 30, 2020, totaled $211 million. As Peter mentioned earlier, this positions us strongly to capitalize on growth opportunities in our transplant platform. Our net operating cash flow was $24.1 million in the second quarter of 2020, including the $4.8 million CARES Act provider relief funding received in April and the $20.5 million obtained from CMS through its expanded, accelerated, and advanced payment program. It’s worth noting that we expect CMS to recoup the advanced payment between August and November this year. Moving on to guidance, while many transplant centers have returned to some level of normalcy over the past few months, we still face significant uncertainty regarding the ongoing impacts of COVID-19 on our business. Therefore, we will not be providing revenue guidance for the full year 2020 at this time. I'll now hand it back to Peter.

Peter Maag, CEO

Thank you, Mike. In closing, the second quarter was an exceptional quarter for CareDx. With COVID-19 limiting access to hospitals and transplantation centers in the United States, our team continued to roll out solutions like RemoTraC across the country to bring much-needed surveillance testing to transplant patients. We believe we are experiencing the beginning of a tectonic shift in the way clinicians are monitoring the health of transplant patients and precision medicine overall. The movement towards DNA and molecular testing from traditional biopsies is happening and we are well positioned for the shift. But importantly, we are also the reason for it. Thank you all for joining the call, and I'll open the call for questions.

Operator, Operator

Thank you. Our first question is from Brandon Couillard with Jefferies. Please proceed.

Brandon Couillard, Analyst

Thanks. Good afternoon. Peter just on RemoTraC, be curious to just get your prognostications of where you think that program can go, the portion of volume do you think it contributes in the back half of the year and is there some upper level where you think it will just be a remaining portion of the market, but just won't convert to a mobile phlebotomy model and sort of speak to what this program kind of goes next six months.

Peter Maag, CEO

Thank you so much, Brandon, and greetings to Nashville. Good to have you on the phone. So thank you very much for joining. Now RemoTraC is embraced by patients. They love it. It's an amazing service where we have phlebotomists going to the home of the patient that ensures that they get the blood draw in the convenient environment they’re used to. And so they don’t have to go to transplant centers. And this has been embraced by many patients across the country; 150 centers are using the service now. Now we’ve 4,000 patients on the platform. That number is growing every day, but it's really depending on where transplant centers are and what their stance is towards telehealth. Some centers have really jumped in and adopted telehealth solutions. Some other centers are actually moving now back as they're reopening up to face-to-face visits. And so it's hard to say; that's one of the reasons why Mike says it's hard to give guidance yet because there's a lot of variability across the country. But RemoTraC as a service is here to stay. We are all in. We have invested in the platform, and there are many, many patient care managers now on CareDX that are servicing this patient population. So there are significant growth drivers going forward.

Matt Akers, Analyst

I think you talked about lots in the AlloCare app later this year, maybe by September. Mike kind of mentioned some more direct-to-patient marketing programs. Are those two tied together, sort of talk about what that app is, how it helps you actually capture more volumes and not withstand the marketing plan looks like around that initiative.

Peter Maag, CEO

Thank you very much. This is in the broader context of CareDx managing the transplant patient journey, and you are here with RemoTraC. The reason why we were able to pivot quickly was having our digital solution encompassing our surveillance testing modalities. Now, with AlloCare, we are prone to tackle one of the biggest issues in post-transplant care, which is compliance and adherence to a standardized protocol. We are all about standardization, so we can fully individualize the offering. With AlloCare, we now have a simple patient app that allows the patient to monitor their schedule, to be able to monitor their medications and maybe even build a community for transplant patients. So we're very excited about this. This is another touchpoint for CareDx for the patient that ensures that there is a patient journey. So AlloCare is launching in September, and we are very excited about that launch.

Rachel Vatnsdal, Analyst

Hi. This is Rachel on for Steve today. Congrats on the nice quarter and thanks for taking the question. Can you provide an update on the transplant pipeline and the effects of the pandemic on donations, or have you started to notice the pipeline returning as geographic regions reopen?

Peter Maag, CEO

Overall, transplant volume is down about 7% year-to-date. However, there has been a strong recovery since living donations were paused for a few weeks. Many transplant centers across the country have returned to normal operations and may even be performing more transplants than before, as they are eager to resume support. Transplant volumes are increasing, and we do not anticipate further declines, even in cities experiencing COVID hotspots, as organs can be reallocated to other regions. For example, when Detroit faced challenges, Cleveland stepped in to take over organ allocations, resulting in a notable increase in transplants there, compensating for the decline in Michigan and Detroit. The system has shown it can adapt effectively. Looking ahead, we expect transplant volumes to continue rising over the next six months.

Rachel Vatnsdal, Analyst

Great. That's awesome. Can you provide more clarity on the timing of the OKRA and SHORE studies and whether the situation might improve given the delays caused by COVID earlier this year?

Peter Maag, CEO

Sure. With the context of AlloMap and AlloSure being kind of standard of care now, it's so well penetrated. I think CareDx has defined for many years that AlloMap post-transplant surveillance has been noninvasive. But now in this COVID era, we have seen a tectonic shift away from biopsies really into noninvasive procedures. The short trial and the combination of AlloMap and AlloSure has really demonstrated the power of our platform moving away from biopsy-driven protocols over to post-transplant surveillance. I think with OKRA being a more sophisticated study where we have AlloSure plus AlloMap, kidney plus the i-BOX scoring that is more driven by research coordinators and research events. And so we have seen some research coordinators being furloughed; some research activities actually put aside in these kidney transplant centers. And so on kidney, we have seen a small delay on the OKRA recruitment. But actually, as we are reopening up the country, the last week has been very promising on our recruiting of our OKRA study. I will say, as well, that we had a phenomenal second quarter even without OKRA being supportive. So this really speaks testimony to the value proposition that we bring to transplant centers overall.

Rachel Vatnsdal, Analyst

Great. Thank you. Those were all my questions.

Peter Maag, CEO

Thank you, Rachel.

Operator, Operator

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

Alex Nowak, Analyst

Hey, good afternoon everyone. In this, centers that have moved from doing more AlloSure's and AlloMap's during the heart of the pandemic and essentially going away from biopsy, has there been a durable benefit as these centers have reopened and tried to go back to normal? I guess said another way, do you think this pandemic at all has accelerated your penetration goals into some of those transplant centers?

Peter Maag, CEO

I would say from the proof is in the pudding and we'll need to see that in a couple of quarters, but absolutely. I think we have seen a true shift away from biopsy protocols into noninvasive procedures. I've talked to so many cardiologists who said we always wanted to retire our biopsy protocol and maybe now it's the time to do it. Now, the reality might be that some of them are going back onto biopsy. We'll see that in the past. But if you see the feedback from patients that don't have to spend more or less a day in a cath lab and undergo invasive procedures. And now they are doing this for the blood test. You wouldn't believe how many positive patient notes I receive and the entire team receives from patients that are saying, well, this is so much more convenient and not having to do that from home is even better. But, I think there's a true shift in care, but yet to be seen, right? I mean, this is one quarter and I think the heart franchise has been extremely successful. But I think this is something to stay.

Alex Nowak, Analyst

That's great to hear. Out of the 4,000 RemoTraC patients, how many are new to CareDX and using RemoTraC? Can you tell us if compliance has improved compared to traditional blood draws in the clinic? I recall that increasing compliance was a key part of the RemoTraC concept.

Peter Maag, CEO

Alex, you've been following this situation for quite some time, so I understand your question. We are closely examining these figures ourselves. There has been an influx of new patients joining the RemoTraC program, and it’s likely that some patients have had to delay their surveillance visits by a few weeks or even a quarter. However, I believe this reflects a new trend. RemoTraC has seen particular success in areas heavily impacted by COVID, such as New York, and we are noticing a rise in activity in Florida as well. RemoTraC is gaining momentum. That said, we will need a couple of quarters to fully assess the longevity of RemoTraC and its effects on surveillance. Your question touches on adherence, especially with CareDx now taking a more proactive role in patient scheduling. We anticipate significant long-term benefits in managing these adherence rates, but we need to ensure we provide evidence of this progress over time. One quarter is insufficient to gauge our success in this area. I’d like to invite Reg Seeto to share insights on RemoTraC and patient adherence as well. We have made substantial investments in our patient care management team. Reg?

Reginald Seeto, Executive

Yes, thanks, Peter. I've seen a stunning success with new centers and patients, as well as an increase in adherence. Peter mentioned that this is based on a full-month experience, showing consistent trends across the over a thousand patients enrolled in the program.

Alex Nowak, Analyst

All right. Understood. Thanks for that. My last question is if there are any updates on heart care reimbursement related to EMS and Palmetto. Also, when do you anticipate a request for kidney care reimbursement?

Peter Maag, CEO

Excellent questions. I'll give the Kidney care; this is really too early yet for us to comment on Alex. We will probably see this communicating about our reimbursement timelines on kidney care once we have clarity on heart care, and I will pass that question over to Mike Bell on heart care.

Michael Bell, CFO

Yes, on heart care, Alex, I think no change from really the status. Last time we spoke, we're still expecting that to go to the final coverage decision towards the back end of the year. It's usually within 12 months from the public comment period, which was up to October of last year. So we're expecting something around that timing.

Alex Nowak, Analyst

All right. Understood. Thank you everyone.

Peter Maag, CEO

Alex, keep your fingers crossed for us in the third quarter, right? So thank you for doing that.

Operator, Operator

Our next question is from Andrew Cooper with Raymond James. Please proceed.

Andrew Cooper, Analyst

Hi, thanks for the questions. Maybe just first, I think Peter, you mentioned it at least as potentially part of what went on in the quarter. But just do you have any sense for was there any amount of volume that might have been delayed from 1Q or sort of adjusted based on RemoTraC becoming available that we should think about as we think about pacing kind of through the remainder of the year.

Peter Maag, CEO

Excellent question, Andrew. We finished the second quarter very strong, and that trend is continuing into the third quarter. For our heart franchise, our numbers have been exceptionally strong in the second quarter, and we expect that momentum to carry on for the rest of the year. Regarding kidney volume, we have a significant opportunity as our overall penetration is still quite low. We are committed to building this franchise moving forward. Additionally, we are expanding our presence in community nephrology, indicating that there will be significant growth opportunities for CareDx in the future. Therefore, we anticipate continued growth ahead.

Andrew Cooper, Analyst

Thanks. That leads right into the next question I wanted to ask about the community nephrology effort. Should we consider this as building direct relationships in hospital or community settings, or is there an opportunity to partner with larger organizations that work with ESRD patients and those who are likely to be placed on transplant lists? How should we approach your strategy in addressing this?

Peter Maag, CEO

No, thank you so much, Andrew. You've been following the company, and we focus on the continuity of care throughout the transplant journey. We manage patients on the waitlist, during the transplantation procedure, and post-transplant. Reg Seeto has been instrumental in establishing our presence in the community and our study, which is a natural progression for growing our franchise from a transplant center into the community nephrology setting. It’s a very natural evolution. Over to you, Reg.

Reginald Seeto, Executive

Yes, thanks, Peter. With over 150 centers actively using our SHORE on a quarterly basis, we have achieved significant penetration within these centers. Now that we're three years in, we have patients transitioning to the community. With this in mind, we have developed a plan to strategically track these patients and also introduce new patients to our SHORE platform. We have established a team to support this expansion as part of our cost structure.

Yi Chen, Analyst

Thank you for taking my questions. Could you please comment on the transplant volume in the second quarter and early third quarter as compared to those in prior periods? And do you anticipate transplant volume will continue to go up during the remainder of 2020 or remain at current levels for an extended period of time due to the new COVID-19 cases in the country?

Peter Maag, CEO

Excellent question. I think this is really driven by two dynamics. One is living organ donation is back to a previous level and deceased donor donation has actually never stopped. So in a way, your question is whether living organ donation continues to increase, and I would say yes. I think there was a shell shock reaction in many transplant centers during COVID-19 that said, oh, we are backing off. And now, as they have learned how to deal with the crisis, we see a significant increase. The latest numbers on organ availability are actually significantly increasing due to COVID-19 because of cardiovascular deaths and, believe it or not, because of overdosing. So there's a lot more patients, unfortunately, that are overdosing. And there are more patients that are dying at home that are experiencing cardiovascular deaths, which leads to an increase in organ availability. With the increasing need for organ transplantation because we have a hundred thousand patients on the waiting list for kidney, so in a way I see a significant increase, which is also driven by a support of kidney health initiatives from CMS, which you might have read last year. We are kind of releasing the 1-year graft survival metric as the key quality metric for transplantation, and releasing that metric really allows transplant centers to take a little bit more risk when we are transplanting and not only taking perfect kidneys, but also taking kidneys that are okay. And that will drive volume. And the last thing that I would say Yi Chen, is that many of these centers are also financially driven on institutions and transplantation is a profitable activity within a hospital. As we read now, many hospitals are looking for sources of income. Transplantation might be an easy area to be because you have relatively low case rates, but these tend to be pretty profitable. So I think all these things will play into a significant increase in transplantation throughout the rest of the year.

Yi Chen, Analyst

Got it. Thanks. My next question is related to operating expenses, which have increased in the second quarter. Was that simply a result of the investment in RemoTraC and other COVID-19 related solutions? And do you expect that to remain at such levels as COVID-19 continues to spread?

Peter Maag, CEO

I'd like Mike to discuss our operating expenses. What we've done is commit fully to our investments, particularly in our direct-to-patient initiatives, and we'll assess the outcomes. As a company, we have demonstrated responsibility and a strong focus on establishing a sustainable business model for the long term. However, this quarter, we decided to go all in, unlike other companies that may choose a different approach. Now, I'll hand it over to Mike for more details.

Michael Bell, CFO

Yes, on the RemoTraC side, most of the impact we observed was in the cost of goods, affecting our gross margin significantly. Earlier, I mentioned a 300 basis point impact from RemoTraC on the gross margin, and those costs are likely to persist moving forward. In terms of operating expenses, we incurred costs related to RemoTraC as we developed our patient care manager and direct-to-patient capabilities. As Peter pointed out, this effort will continue in future quarters as we aim to reach more patients. Additionally, our operating expenses increased in the research and development area, partly due to COVID-related expenses associated with SHORE and greater demand for heart care, although some costs were unrelated to COVID. We also faced upfront costs for pipeline development with Cornell. On the general and administrative side, we saw an increase in our legal expenses. Overall, as Peter mentioned, we anticipate a shift in our business model moving forward, which will result in additional expenses, but all of this is aimed at driving top-line growth.

Yi Chen, Analyst

Thank you.

Michael Bell, CFO

Thank you, Yi Chen.

Operator, Operator

We have reached the end of our Q&A session. I would like to turn the call back over to Peter for closing comments.

Peter Maag, CEO

Well, thank you very much for your interest in CareDx. We will continue to keep you updated as we are going into the second half of 2020 and looking forward to keeping in touch with you. Thank you so much. Bye, bye now.

Operator, Operator

Thank you. This concludes today's conference. You may disconnect your lines at this time, and have a pleasant evening.