Castle Biosciences Inc Q3 FY2020 Earnings Call

Good afternoon and welcome to the Castle Biosciences Third Quarter 2020 Conference Call. As a reminder, today's call is being recorded. We will begin today's call with opening remarks and introductions, followed by a question-and-answer session. I would like to turn the call over to Frank Stokes, Chief Financial Officer. Please go ahead.

Thank you, operator. Good afternoon, everyone and welcome to Castle Biosciences' third quarter 2020 financial results conference call. Joining me today is Castle's Founder, President and Chief Executive Officer, Derek Maetzold. Information recorded on this call speaks only as of today, November 9, 2020. Therefore, if you are listening to the replay or reading the transcript of this call any time sensitive information may no longer be accurate. A recording of today's call will be available on the Investor Relations page of the company's website for approximately 3 weeks. So before we begin, I would like to remind you that some of the information discussed today may contain projections or other forward-looking statements regarding future events or the future financial performance of the company, including the expectations and assumptions related to the impact of the COVID-19 pandemic and are made pursuant to the Safe Harbor provision of the Private Securities Litigation Reform Act of 1995. Forward-looking statements are based upon current expectations and involve inherent risks and uncertainties and there can be no assurances that the results contemplated in these statements will be realized. A number of factors and risks could cause actual results to differ materially from those contained in these forward-looking statements. These factors and other risks and uncertainties are described in detail in the company's Annual Report on Form 10-K for the year ended December 31, 2019 and in the company's other documents and reports filed with the Securities and Exchange Commission. These forward-looking statements speak only as of today and we assume no obligation to update or revise these forward-looking statements as circumstances change. I'll now turn the call over to Derek.

Thank you, Frank and good afternoon, everyone. These are exciting times at Castle and I appreciate you taking the time to join us today. As always, I would like to start today's call by thanking the Castle team for their hard work and dedication to improving the lives of patients with skin cancer. We successfully executed our strategic priorities in the quarter and remain optimistic about our growth initiatives' ability to position us well for both near-term and long-term value creation. This afternoon, I'll now discuss our performance for the quarter, along with recent developments, touch on what we believe the continued impacts of COVID-19 will be on our business and then turn it back to Frank, who will provide more detail on the third quarter results and our financial position. In the third quarter, we saw strong performance on multiple fronts. This includes increased year-over-year revenue, the return to year-over-year increases in DecisionDx Melanoma reported volume and the successful execution on our commercial launch of DecisionDx-SCC. Our gene expression profile test for patients diagnosed with cutaneous squamous cell carcinoma, commonly referred to as SCC and with one or more high-risk factors. In other words, patients that today's guidelines label as high risk. We estimate the high-risk SCC US-only population to be 200,000 patients. To start, we are pleased that for the third quarter of 2020, we had an increase in total revenue to $15.2 million or 3% from $14.8 million in the third quarter of 2019. This includes prior-period revenue for the third quarter of 2020 of $1.5 million compared to $3.2 million for the same period of 2019. I am pleased to report that report volume for DecisionDx-Melanoma, our current primary revenue driver returned to year-over-year growth for the third quarter of 2020. As a reminder, our DecisionDx-Melanoma test is used to guide or inform management of patients who were diagnosed with early-stage cutaneous melanoma. The diagnosis of cutaneous melanoma requires a biopsy to be performed and that the dermatopathologist render a diagnosis of cutaneous melanoma. In the third quarter of 2020, we provided 4,404 DecisionDx-Melanoma test reports, representing growth of 7% compared to the third quarter of 2019 and a 46% increase over the second quarter of 2020. We delivered this increase in year-over-year report volume, even as our analysis of third-party data tells us that in the third quarter cutaneous melanoma diagnoses decreased by approximately 12% compared to the same quarter in 2019. Thus we are very pleased with our third-quarter volume growth in the context of this baseline of reduced diagnosis and therefore patients. We continue to believe that the reduced cutaneous melanoma diagnoses are due to delays or cancellations in patient visits, attributable to the COVID-19 pandemic, which then result in reduced diagnostic biopsies and thus reduce diagnoses in melanoma and appropriate patients for us to test. Additionally, as we have all seen, COVID cases are beginning to increase again in parts of the US, and that brings uncertainties about the continued impact to our business. As I just mentioned, diagnoses were down 4% in the third quarter compared to the third quarter of 2019. However, third-party data also showed an increase of diagnoses in the third quarter of 2020 compared to the second quarter of 2020. If patient trends continue without a significant change, based on our third-party data, we estimate that the annual diagnoses of cutaneous melanoma may be reduced by approximately 20,000 or more compared to 2019's incidents. That is to say, we expect COVID to continue to impact our DecisionDX melanoma volume in the fourth quarter and into 2021 due to delays in the overall number of patients diagnosed with cutaneous melanoma. Although there is a trend of increased diagnoses in the third quarter from the second quarter of 2020. Additionally, at some point, we believe the delayed melanoma diagnosis will be diagnosed, but we are uncertain as to when. Our commercial team continued with their promotional efforts of combined in-person and virtual events during the third quarter. This parallel out our continued successful conversion of the majority of our in-person, peer-to-peer programs to virtual meetings. Additionally, we did capture additional clinicians to order our DecisionDx-Melanoma test for the very first time during the third quarter of 2020. Turning to reimbursement, we accomplished an important DecisionDx-Melanoma milestone in the third quarter. As you may recall, the Medicare administrative contractor or MAC, Palmetto MolDX issued a draft, local coverage determination policy or LCD in August 2019. The final positive expanded LCD and the accompanying billing and coding article were approached in October 2020. The effective date for the Palmetto LCD and the billing and coding article is November 22, 2020. Importantly, this LCD article was nearly identical in terms of coverage to the draft August 2019 LCD. Meaning that the expanded LCD provides reimbursement for the significant majority of Medicare beneficiaries, whose clinicians order DecisionDx-Melanoma as part of their patient management plan. It is also worth noting that comments were received during the comment period and 100% of the comments were supportive of the expanded coverage. We believe this represents great alignment between Palmetto's assessment of the appropriate use of DecisionDx-Melanoma and the clinicians that use our test to guide their patient management decisions. Additionally, Noridian, the MAC that oversees our laboratory in Arizona issued an identical LCD, an article to the Palmetto LCD, but Noridian LCD and article will be effective on December 6, 2020. In addition to what we see as positive news surrounding our DecisionDx-Melanoma test. We successfully executed on a launch of DecisionDX-SCC, which became commercially available on Monday, August 31, 2020. The DecisionDX-SCC test is intended for use in adding actionable, patient-specific information to risk assessment and to help guide management decisions in patients diagnosed with cutaneous squamous cell carcinoma with one or more risk factors. These so-called higher-risk cutaneous squamous cell carcinomas. We have submitted our technical assessment dossier for Medicare coverage to Palmetto MolDX and in the third quarter, Palmetto confirmed that it was accepted as complete. Accordingly, we expect a draft local coverage determination policy to be posted in 2021 with finalization expected approximately 12 months following the draft. As a reminder, we expect Medicare to be our largest payer for DecisionDX-SCC, as a typical age and time of diagnosis of SCC is near 70 years. While it's certainly early and the US is still dealing with COVID, we have seen strong interest from clinicians. You should recall that the target customer for our DecisionDX-SCC test is the same target customer for our DecisionDx-Melanoma test. That is dermatologists and most surgeons in a sub-specialty of dermatology, who have a medical dermatology practice. Thus we anticipate having significant leverage from our existing dermatologically focused sales team. From clinical availability on August 31, through October 31, 2020, DecisionDX SCC has been ordered 282 times by 193 clinicians, most of which were existing DecisionDX melanoma customers. Turning to our DecisionDx-UM test for patients diagnosed with UV melanoma. We delivered 318 reports in the third quarter of 2020 compared to 356 reports in the third quarter of 2019. As it relates to the impact of COVID-19, our UM test monthly year-over-year comparisons are difficult to interpret, due to the low incidence of UV melanoma. That being said, we continue to believe the year-over-year decrease is due to the pandemic, as the majority of UV melanoma diagnoses are made incidental to a routine eye exam and routine eye exams are largely delayed during the second quarter. Due to our belief that the majority of UV melanoma diagnoses occur incidental to a routine eye exam as compared to the majority of cutaneous melanoma diagnoses being self-identified by the patient. We expect recovery in the diagnosis of UV melanoma and our order volume for DecisionDX-UM to be time-shifted relative to the recovery that we have observed for our DecisionDx melanoma test. As you know, two key components of our growth strategy for near and long-term value creation, are evidence development to support appropriate use of our tests and support coverage by commercial payers and a strong pipeline. We saw strong progress in both in the third quarter. Data from a systematic review and meta-analysis of the DecisionDX melanoma test was published in print in the September 20 issue of the Journal of the American Academy of Dermatology or JAAD. Under multivariate analysis, the DecisionDX melanoma test was shown to be independent from other clinical factors such as age, breast, lung, tumor thickness, ulceration, and node status. And our DecisionDX melanoma test improved upon the risk assessment performed with these staging factors alone. Under the strength and recommendation taxonomy or SRT system, SRT, a systematic review and meta-analysis provides for the highest level of evidence for prognostic biomarker. That is Level 1 evidence. The SRT system is used by the American Academy of Dermatology and other organizations to evaluate the quality, quantity, and consistency of evidence supporting tests such as DecisionDX melanoma. Additionally, the publication of a retrospective study showing that DecisionDX melanoma impacted management decisions for patients diagnosed with Stage 1 to 3 melanoma, appeared in future oncology. Study authors developed a recommended melanoma patient care pathway that incorporates DecisionDX melanoma test results to help inform frequency and duration of follow-up visits, blood work, and surveillance imaging in line with predicted metastatic risk. Our patients' DecisionDX melanoma test results were found to have an impact on the number and duration of follow-ups and surveillance visits and that patients assessed as having a higher risk of metastasis, as designated by DecisionDX-melanoma Class 2 test results, received more intensive management than patients assessed as having a low risk, as designated by DecisionDX melanoma Class 1 test results. Clinicians using the test were shown to adjust patient management in a risk-appropriate direction, within recommendations of national guidelines. The outcomes from this study parallel those of our previously published clinical utility articles and should help further drive market penetration and reimbursement. With regard to our pipeline. Last week, we launched our second new test for 2020. By the way, not just the second in 2020, but the second in a span of 10 weeks. This test is named DecisionDX-DiffDx melanoma or DiffDX melanoma for short. DiffDX-Melanoma is our test for patients with a suspicious or difficult to diagnose pigmented lesion and it became available for clinical use on Monday, November 2. DiffDX-Melanoma is designed to aid dermatopathologists in characterizing difficult-to-diagnose melanoma lesions and classifies these lesions as benign or suggestive of benign neoplasm or malignant or suggestive of melanoma. A small number of lesions will fall into the intermediate risk group, meaning that malignancy cannot be excluded. We had several goals in mind when we set out on this pipeline program a couple of years ago. Our target product profile called for a gene expression profile test with a high level of accuracy and have improved rates of actionable results and technical success, while minimizing intermediate results and including populations that have been underserved by existing technologies. We also took the same development approach that we used for DecisionDX-Melanoma test with learnings gained over the last 8 years or so. Specifically, we started to believe that melanoma or a benign lesion knows more about itself than we do. So rather than pre-determining the selection of which genes matter, we let the tissue itself tell us which genes were important. As the development data was being analyzed, we used our latest artificial intelligence tools to identify a final gene lesion algorithm. We then tested this development or training cohort in an independent clinical validation. By the way, these are the same tools that we used for our DecisionDX-SCC test. Based on the intent to treat analysis of our validation study, which was presented just this morning at the American Society of Dermato-Pathologies Annual Meeting, DiffDX-Melanoma accurately diagnosed malignant and benign cases with a 99.1% sensitivity, 94.3% specificity, 93.6% positive predictive value, and a 99.2% negative predictive value. Importantly, the intermediate risk result occurred in just 3.6% of the cases, which was better than a target performance within the development of the test. Additionally, our technical success rate was 96.6%. To sum, we are so fortunate to have a research and development team located both in Friendswood, Texas and Phoenix, Arizona that work as a well-oiled machine and in 2020 they are 2-for-2, having completed validation on two clinically significant tests in skin cancer. DecisionDX-SCC and DiffDX-Melanoma, both of which we expect to have positive impacts on the lives of patients diagnosed with skin cancer. To support our DiffDX Melanoma test, two peer-reviewed articles were submitted and subsequently accepted by Skin, the Journal of Cutaneous Medicine and are expected to be published later this month. The first article is our development and validation study and includes the data I just outlined on DiffDX Melanoma's performance. The second is a clinical utility study that demonstrated that DiffDX-Melanoma test results increased diagnostic confidence in dermatopathologists. The clinical utility study also demonstrated that clinical management decisions were influenced by DiffDX-Melanoma, in a manner that aligned with the test results in the majority of cases included in the study. These findings suggest that the DiffDX-Melanoma test can help clinicians provide more informed patient management plans and improve care for patients with difficult-to-diagnose lesions. We entered 2020 with a single end market skin cancer test that had a total US addressable market of 540 million. With the launch of this third skin cancer test, we estimate that for DecisionDX-Melanoma, DecisionDX-SCC, and DiffDX-Melanoma combined, our total addressable US market is now approximately $2 billion. You may recall that we expanded our commercial team in the third quarter of 2020, to create a dedicated sales force to support the launch of our DiffDX-Melanoma test. This dedicated team is primarily introducing the DiffDX-Melanoma test to dermatopathologists, while our existing sales team will remain focused on DecisionDX-Melanoma and DecisionDX-SCC. At the end of the day, we believe that our DiffDX-Melanoma test should be ordered by both dermatopathologists and dermatologists. Thus, it is our intention, once we are past this initial launch period, to fold this new dedicated team into the existing sales team as well as further expand such that we expect to exit 2021 with approximately 55 outside sales territories. As we have discussed in order to continue to increase our substantial body of evidence to support our gene expression profile tests, we are accelerating investments in our research and development activities including our clinical trials. As we stated on our last earnings call in August, we recently initiated two key trials. The first is the personalized study, in which we are evaluating DecisionDX-Melanoma for interactions with adjuvant therapies. The second is the CONNECTION study, which is collecting long-term outcomes for up to 10,000 patients who have been tested with DecisionDX-Melanoma. We believe these studies combined will provide us with the largest database on patients with melanoma and their tumor biology. We will provide more information on these studies as we make progress. The development of our pipeline continues to be an important part of our long-term growth strategy and we are or will shortly be initiating new clinical research and development programs for tests and other dermatologic diseases with high clinical need. We look forward to discussing these programs with you in 2021. I will now turn the call back over to Frank, who will provide additional details relating to our financial results.

Thank you, Derek. To reiterate, we are pleased with the continued progress we made in our strategic growth initiatives in the third quarter, which we believe positions us well for near- and long-term growth. In the third quarter of 2020, we reported revenue of $15.2 million, a 3% increase from $14.8 million in the third quarter of 2019, primarily due to higher per-unit revenues and increased test volume, partially offset by reduced revenue adjustments related to prior periods. In addition to inferior test revenue, our third-quarter revenue includes positive adjustments related to tests delivered in prior periods of $1.5 million compared to $3.2 million in the third quarter of 2019. We are pleased with our ability to maintain strong gross margins. During the third quarter of 2020, our gross margin was 84% compared to 88% for the third quarter of 2019, reflecting the expansion of laboratory staff and preparation for both launches of DecisionDX-SCC and DiffDX-Melanoma, as well as anticipated further volume growth for DecisionDX-Melanoma. Our operating expenses for the quarter ended September 30, 2020 were $16.6 million compared to $8.6 million for the same period last year. The increase was driven primarily by higher SG&A, which increased by $4.6 million, partly attributable to higher personnel costs associated with our increased headcount and in particular, our expanded sales and marketing team and administrative support functions. Stock-based compensation included in SG&A was $1.5 million for the third quarter of 2020 compared to $0.2 million in the same quarter of 2019, reflecting both higher post-IPO stock option valuations as well as additional awards outstanding due to growth. R&D expense increased by $1.5 million and was primarily associated with increases in personnel costs attributable to additional headcount as well as higher expenses for professional fees associated with our recently initiated clinical studies. As we've discussed over the past couple of quarters, with regard to our R&D expense, we expect further increases as we continue to fill critical roles, progress key clinical studies including the two Derek just mentioned and continue to invest in activities to support our products and position us well for continued growth. As noted on our second quarter earnings call in April 2020, we received a one-time payment of $1.9 million in relief funds automatically allocated to Medicare providers under the CARES Act from the US Department of Health and Human Services. Based on guidance issued by the government at that time, we concluded that we would be able to retain the payment. History moves consistent with other health care companies that received such payment. In September, HHS changed the criteria for retaining this payment. Based on this change in criteria, we reversed the income recognized previously. Interest expense decreased $0.4 million for the third quarter of 2020 compared to the third quarter of 2019, primarily due to interest on the convertible promissory notes that were outstanding last year. These notes converted into common stock in connection with the IPO in July of 2019. We began monthly scheduled repayments of our term debt in June and have paid down $3.3 million through September 30, 2020. The third quarter of 2019 included two non-operating items that did not recur this year: a debt extinguishment gain of $5.2 million related to the convertible notes mentioned above and certain mark-to-market losses of $2.7 million, which were primarily associated with a separate convertible note transaction entered into just prior to last year's IPO. Our net loss for the 3 months ended September 30, 2020 was $4.6 million compared to net income of $5.8 million for the 3 months ended September 30, 2019. Diluted loss per share attributable to common stockholders for the 3 months ended September 30, 2020 was $0.23 compared to diluted earnings per share attributable to common stockholders of $0.05 for the 3 months ended September 30, 2019. Operating cash flow for the third quarter was negative $3 million compared to positive $0.8 million in the prior-year period, primarily reflecting the previously mentioned planned acceleration of investments in the business, including increased R&D expenditures and the expansion of our sales and marketing team. For the 9 months ended September 30, 2020, we generated $10.3 million of operating cash flow compared to $2.5 million during the same period in 2019. As a reminder, our operating cash flow for the 9 months ended September 30, 2020, benefited from an advanced payment of $8.3 million from CMS, which will be applied against future Medicare claims that we submit for reimbursement. Originally, recruitment was to start in August of 2020, but recent legislation has delayed the start of the recruitment until April 2021, which will continue for a period of up to 17 months. Excluding the $8.3 million payment, our adjusted operating cash flow, a non-GAAP measure, for the 9 months ended September 30, 2020 was $0.1 million compared to $2.5 million for the same period in 2019. Finally, we had cash and cash equivalents at September 30, 2020 of approximately $183.1 million. We believe our current cash position allows us to confidently continue to invest in R&D and sales and marketing activities to support the continued growth of our dermatology diagnostic portfolio, as we build the company for near- and long-term growth. I'll now turn the call back over to Derek.

Thank you, Frank. In summary, with our strong execution in the third quarter, we are pleased with our third-quarter results. We are optimistic that our investments and our growth initiatives will continue to drive growth and position us well. Before we move on to Q&A, I want to express my gratitude to our employees. It is through their dedication to improving the lives of people diagnosed with skin cancer that we remain well positioned for near-term and long-term success. This concludes our remarks. Thank you for your continued interest in Castle. Operator, we are now ready for Q&A.

Thank you. Our first question comes from Max Masucci with Canaccord Genuity.

Hi. Thanks for taking the question. So it's nice to see DecisionDX-Melanoma volumes return to growth. Can you just give us a sense for what the recovery trends are that played out towards the end of Q3? And then how things are trending just with the recent COVID-19 resurge and whether clinicians are better equipped to deal with the pandemic this time around to avoid the magnitude of declines that we observed back in April?

Thank you for your question, Max. I can address part of it, and perhaps Frank can provide some additional insights. We don’t usually assess the marketplace for physician visits at the end of October or early November to see how patient returns are trending post-third quarter. The third-party data we obtain from Symphony Health takes about a month to be fully accurate regarding diagnosis rates, so the most reliable data we have really only goes up to late September or early October. It seems that while we are still waiting for the data to mature, there hasn't been any noticeable national decline in patient visits despite the rise in COVID cases in August and September. We hope that this will continue as we move through the fourth quarter, indicating that physician practices managed to optimize their operations over the summer and that patient flow has not suffered significantly. The concern lies in possibly finishing 2020 without seeing a significant trend improvement in the decline of diagnoses in these last months of the year. There are many patients who may be diagnosed with more serious and aggressive melanoma, which poses a risk to patient care. For our Castle business, this could lead to higher test volumes once these patients are diagnosed. Regarding trends post-third quarter, it’s still too early for us to provide concrete insights. Frank, would you like to add anything?

Yes, I think we're still seeing this dual impact on physicians. You're probably noticing fewer patients, partly due to logistical concerns. Previously, we were often comfortable with double booking appointments. If you’ve ever been to the doctor, you might have found yourself next to someone wondering about their appointment time. That was manageable with multiple consultation rooms, but now there are real limitations. Additionally, some patients are still hesitant to go out at all, especially to medical facilities. While we expect this concern to eventually decrease, the news about the fall COVID cases remains stubbornly high, which continues to affect people's mindsets.

Thank you. And our next question comes from the line of Catherine Schulte with Baird.

Hi guys, this is actually Tom on for Katherine. I appreciate the questions. So maybe just on the DiffDx launch, I mean, I understand it's been a week since the official launch, a couple of weeks since you guys hosted the webinar. I was just curious, what's the qualitative feedback been from the industry and the clinicians on the response data that you guys presented? And how have conversations gone with docs you've had who previously ordered the first to market test and how those gone and do you get a sense that they are open to making a switch to your test?

On our DiffDX-Melanoma test, it's too early I guess to really give anything that's going to be meaningful. We made the test available clinically on Monday of last week. So really only in market 5.5 or 6 days today. I would say that we did more market research ahead of launch for both our DiffDX-Melanoma test and our Squamous Cell Carcinoma tests than we ever did before and part of that is just maturing as a company, of course, having more resources. And I believe that the target product profile that we were guided towards pursuing a couple of years ago, when we started our program, was can you get to a really high technical success rate? So that the majority, the vast majority of specimens we sent you actually come back with a result of some kind. And can you narrow that sort of intermediate risk selling down as much as possible so that most of the time we get back an actual data of either saying the biology looks like it lines up with a benign lesion or the biology looks like it lines up as the malignant melanoma. And if you can achieve those things, then we're in like Flynn. And I think as you saw from our investor call, I guess it was about 10 or 12 days ago now, we hit all those boxes. We were able to maintain and actually have significant accuracy scores for both sensitivity and specificity while maintaining a very narrow intermediate zone. I think the market research that we conducted over the course of the summertime into the early fall hit the mark there. Now what do we think is going to happen in the marketplace? As we kind of move out of the availability of last week and look at the first sort of month or two of uptake, my sense is that we will have clinicians who perhaps have either been using on a routine basis or sporadically the other gene expression profile test. I think if we walk in there and show them our data and obviously be careful, because we don't have any head-to-head trial comparisons and there is no reason to overstate the hand you've been dealt. But I think to go ahead and walk up and have an honest conversation, saying this is the kind of target product profile you asked us to deliver; we have done it. Is there interest here in having you evaluate our test in your next year for that patient? I think that's to come over very positively, because again we hit everything on all four cylinders. And sort of the final aspect, which I think is quite real is to say, we have over 4,200, 4,300 clinicians, dermatologists, and surgeons in the last year, who have ordered our DecisionDX-Melanoma tests. One of the beauties and one of the reasons why some of your peers encouraged us to develop the DiffDX-Melanoma test was because of the ability to really hand dermatologists and the patient a very quick one-two punch, since over two ends up lining up. That's the DiffDX-Melanoma test is producing a tumor biology signature that looks like malignant melanoma and the dramatic pathologists and you as a dermatologist make that call. We can very rapidly turn around the results for our DecisionDX-Melanoma test so that the right treatment planning can be initiated. Now as a dermatopathologist, what you agree that's in the best interest of patient care. So I think we have a couple of parts of things there that make us very bullish I guess in terms of initial openness to evaluate and try our product out and I think our ability to deliver results in a fashion that's near what our validation study will go ahead and drive the rest of the equation. So we're quite positive there. I think it's too early to understand in the marketplace that those dermatopathologists who've had not embraced gene expression profiling as an appropriate ancillary test. What would be the trigger that we're kind of move them from being non-users or non-believers to trying our product out and getting the benefit of having a more accurate diagnosis. That I think we'll have to work in the marketplace and maybe take a bit longer to kind of get a really good feel of how the adoption part of that was, was a request to also to say there are some difficult-to-evaluate lesions that aren't even included in the validation studies of some of these existing tests. If you could include some of those sub-types that would really make me much more encouraged to think about the value of it using a gene expression profile test to help get to a better more accurate and more confident I guess, I would say diagnosis. So we tried to tackle all those things, Tom. And as I said, we were successful. I think we'll have to report back here another couple of months here, how the early market trends look.

Sure. I appreciate the information. If I could add a follow-up, I believe you briefly mentioned something about new ordering physicians for DX-Melanoma this quarter. How is that trend going, and are there any updates from the sales team? Have they attempted to expand their reach given the potentially limited access, and are they still experiencing limited access more generally?

In the third quarter, compared to the second quarter, I believe that all sales territories across the US are back open. In the second quarter, there were regions where strict orders limited our field force and dermatologists from conducting in-person activities, which resulted in shutdowns at various times. As we concluded the third quarter of 2020, we observed that all territories and doctors had resumed operations. There was an increase in in-person clinician and sales calls, which is encouraging, and this trend has developed positively since the second quarter. Looking ahead to the fourth quarter, we still notice lower melanoma diagnosis rates in the third quarter of 2020 compared to the previous year. Clinicians are facing challenges returning to their pre-COVID patient numbers, likely due to space limitations and cleansing protocols. Additionally, we have third-party data suggesting that even in practices nearing full capacity, the number of new skin cancer diagnoses—both melanoma and other types—remains lower than prior to the pandemic. This may be related to older patients being more hesitant to seek treatment for concerning skin changes. However, we expect improvements over time. Melanoma doesn't disappear, and if someone is observing an unusual spot on their skin for an extended period, they will eventually need to make the decision to seek medical advice. I hope that happens early on for their benefit. Frank, would you like to add anything?

Yes. And just to answer the question on clinicians. We had fewer new ordering clinicians this quarter, Q3 of 2020 than we did in Q3 of 2019. But just to be clear that doesn't mean we had fewer physicians ordering it. It just means the pool of new physicians was fewer than last year. But anecdotally, we had physicians who ordered for the first time in the quarter, despite only having virtual interactions with our field team, which we think is great. We much rather be live and in person, but I think it's a tribute to the outside folks that they are finding ways to pivot to virtual interactions that are, in fact, quite effective.

Thanks, Tom.

Thank you. And we have a follow-up from Max Masucci with Canaccord Genuity.

Hi, everyone. I think I missed out there. It's good to see the initial volume of DecisionDX-SCC starting to come in. Are there any early adoption trends you’re noticing? Can you give us an overview of how the sales interactions are progressing, especially in terms of cross-selling opportunities and how they compare to the early days of the DecisionDX-Melanoma launch?

Thank you for the question, Max. I can share more information about the DecisionDX-SCC test than I can about the DiffDX-Melanoma test due to the timing. I don't want to get overly excited, but launching new diagnostic tests is challenging to predict, especially during a time with limited access and interaction. I'm very pleased that in the first two months on the market, we received 284 orders from 193 doctors, which I consider fantastic. When we compare these initial two months to other diagnostic tests of similar market sizes, we haven't seen results like this from other companies. So, it's off to a very promising start. While I don't want to set high expectations too soon, the progress is encouraging. One of our primary goals in our commercial efforts is to educate clinicians as we launch DecisionDX-SCC. The critical measure for us is the number of doctors ordering the test compared to the volume of tests ordered. I would much prefer to have a significant number of doctors, say 1,000 to 3,000, integrating our DecisionDX-SCC test into their practices rather than just a handful of doctors ordering many tests. This broader engagement from frontline dermatologists will lead to a more sustainable business, particularly as reimbursement improves. These initial metrics are promising, especially considering it's only been about 8 to 9 weeks since our launch. The trend is quite positive. Most doctors who have ordered our DecisionDX-SCC test are also current users of our DecisionDX-Melanoma test, which supports our belief that building our business around customer needs in the dermatology and skin cancer space is beneficial. We're already observing this with our performance in the initial market phase. As we move into the fourth quarter and into next year, I'm excited to see how the DecisionDX-SCC test impacts patient care and engages a growing number of healthcare providers. This sets us up for strong opportunities in the future.

Absolutely. You're receiving payment for some of your DecisionDX-Melanoma volumes on an out-of-network basis with certain commercial payers. Can you provide insight into whether this is feasible for DecisionDX-SCC and DiffDX? Are there any specific factors that might affect your decision to pursue out-of-network payments for your upcoming test launches?

Yes, Max. We won't be recognizing revenue for the new tests right away. The two tests we've mentioned will only account for revenue once we actually receive payment. This will occur through the appeals process and from commercial payers. We believe we will be successful in this area. As you know, we do bill for the test as we believe the evidence shows that the test provides value in diagnosis. We will appeal and push that through. I'm not sure how long it will take to reach the same status as our first two tests, but we are committed to working on it. We have a strong reimbursement and claims appeals team, and we are confident they will eventually achieve positive results.

Great. Thanks for squeezing me back in.

And our next question comes from the line of Sung Ji Nam with BTIG.

Hi, thanks for taking the question. Maybe another one for DecisionDX-SCC. Obviously good volume aggregate and was wondering, was there a backlog built into that ahead of the launch or should we anticipate continued growth in terms of volume from the 282? I know, obviously understanding that given the recent resurgence in COVID, there might be some disruptions in terms of patient flow.

We appreciate the question. We currently have a significant number of collaborating centers in the US, over 50, I believe, and this is through the second quarter. Our investigators, who are clinicians, are engaged with our DecisionDX-SCC test. We did not proactively announce its clinical availability in advance, so we did not suggest that clinicians hold off on patient referrals. The figure of 282 reflects a typical ramp-up in launching without any pent-up demand. Additionally, our sales force, which is responsible for the DecisionDX Melanoma test targeting dermatologists and surgical oncologists, is the same team launching the DecisionDX-SCC test. The solid reimbursement for the melanoma test is driving our revenue growth. Our strategy for this launch is to ensure that every sales call starts with the DecisionDX Melanoma test. Once we've educated the physicians, we will then introduce the DecisionDX-SCC. Most physicians are interested in complying with the order, although there are a few who have requested to discuss SCC first, and we accommodate that. Overall, the majority of physicians have responded positively. As we move forward with the launch, not all 32 sales representatives were focused on DecisionDX-SCC at the end of August and early September; they began by promoting the melanoma test before introducing SCC, which resulted in a gradual ramp-up through September and October.

Great, that's very helpful. And then just a clarification question for the DecisionDX-Melanoma study that you guys are doing to determine the appropriateness of adjuvant therapies. Are you guys still looking at gene expression profiling or are there other biomarkers that you might consider incorporating?

So the protocol enables both, I guess, I would say. So we're looking at the ability of obviously the currently validated end market DecisionDX melanoma test to identify which patients should be on adjuvant therapy. We also are including additional genomic analyses and also including some liquid biopsy polls to make sure we can tackle all the questions properly at one time.

Great. And then lastly from me, and it's great to see that you're adding new physicians. Was curious, in terms of for your existing physicians, are there efforts underway to help them identify additional patients for the existing physicians that are currently using DiffDX melanoma?

Okay. I think you're talking about initiatives to help practice marketing activities, which we would like to help our dermatology, it's got much more productive skin cancer specialists, certainly. But that's not the question you asked. Yes, I think there is still plenty of room for same-store sales growth. So certainly any new ordering clinician in the third quarter or first-time ordering doctor probably didn't start out July 1 with 10 patients. That's almost always a ramp as somebody evaluates and adopts our test. So our existing customers are usually more productive just because they are hopefully ordering during the whole quarter as opposed to at some time in the third quarter. We do see opportunities in our ordering doctors to expand the appropriate use of our tests. So for example, there are some dermatology practices or physicians where they may be initially or currently using our test for only people who are clearly in the sentinel lymph node biopsy referral base. So somebody who has a melanoma that's 0.8 millimeters or thicker. That's not also rated, so we see a lot of dermatologists initially order our test, where they're thinking about referring out that invasive surgical procedure, because that's where they're concerned about risk they pick 0.8, 0.7, 0.9 as their sort of threshold to start ordering our test and we see no orders from anybody diagnosed with melanoma between 0.3 and call it 0.8 millimeters. They're seeing those patients, but they made the decision in their minds that the risk is low enough, I don't need to worry about it. But that being said, a significant number of sentinel lymph node procedures occur in those patients with those thinner melanomas and there are certainly recurrences that occur and potentially death for melanoma. And so part of our commercial teams' efforts are to arm each individual sales representative with their own physician data. And if I look and see that Dr. Maetzold sold for example has is a pretty good user of our test. He seems to be incorporating in the patient care, but he only uses that on 0.8 millimeter or thicker than may would tailor their discussions or message to walk in there and say, hey, I think there's a lot of patients who could benefit from the value of our test in this sort of 0.3 to 0.8 millimeter range. Can we talk about that, please? And when that happens, well over a couple of effective conversations we do see, many times that the same store doctor begins using our test in those thinner melanoma patients, which is fantastic for patient care.

Great, thank you so much for taking the questions.

You're welcome.

Our next question comes from the line of Puneet Souda with SV8 Leerink.

Yes. Hi Frank and Derek, a couple of quick questions here. The volume came in a little bit lower than our estimate in cutaneous melanoma. Just wanted to get a clear view on number one, some of the things that you talked about, but just to specifically, the sales rep access to dermatology facilities. Do you expect that to tick up in the fourth quarter or maintain sort of at the same levels? We're asking this, because obviously we are seeing some challenges from sales rep accessing the oncology clinics in the sort of the virtual setting and I mean doing more virtual versus in person. But obviously those are immuno-compromised patients, whether patients are a little bit different. And then the second question is, how should we think about volumes in the fourth quarter, given sort of what you're seeing here? And on top of it, the impact from holidays, if any?

Great questions. I'll address them in order of importance and then see if Frank can clarify or if you can check what I might have missed. Historically, in the years leading up to our IPO and last year, fourth quarter orders or melanoma diagnoses tend to be similar to the third quarter, typically in the same range. We do observe seasonality outside of a COVID environment, where the third and fourth quarters usually show similar trends. The first quarter aligns somewhat with the fourth quarter, whereas the second quarter typically sees growth in diagnoses, followed by relative flatness in the subsequent three quarters. Thus, in a normal year, we wouldn’t expect a significant rise in melanoma diagnoses in the fourth quarter, similar to the third quarter. Regarding rep access, we have noticed improving trends month-to-month over the second and third quarters. This improvement can be attributed to practices becoming more comfortable, along with national data indicating healthcare practices returning to their normal states. We also saw better representative access in the third quarter compared to the second quarter. Our projections indicate continued improvement over time. However, it’s difficult to predict how much stronger the fourth quarter will be given the concerning resurgence of COVID in September and October and its effect on the mix between in-person and virtual calls. On the other hand, we estimate about 20,000 patients may have delayed melanoma diagnoses. It might be overly optimistic to expect them to come in during the fourth quarter; it seems implausible that it would happen all at once. Guiding you on modeling for 2021 is challenging, especially as we consider the impact of vaccinations on patient behavior. Generally, the fourth quarter should align with the third quarter in terms of melanoma diagnosis rates. Our representatives have noted improved access compared to the second quarter, and this trend is likely to continue into the fourth quarter if the U.S. marketplace experiences significant changes. This is a positive sign indicating we are moving closer to pre-COVID conditions in our sales trends, which will significantly influence what we observe in the fourth quarter. An important aspect to consider is how many missed patients receive proper melanoma diagnoses, which leads to the question of when and how this will occur.

Okay, that's helpful, thanks for the details there. The second and I'll try to wrap in another question. And as well, is number one, from a point of ASP, it came in again a little bit light versus our estimates sort of in about 250, 260 lower from Q2 to Q3. Just wondering, if there was anything to note there? Is it just reflective of the Medicare population that may not be accessing the clinics as much compared to the commercial payer population of patients? And then on the expanded LCD. Derek, this is, you said November 22 as the date and Noridian is December 6. So when should we start looking at the potential date for when you can book revenue for these expanded cases? If you can elaborate on those two. Thank you.

So yes, Puneet, I don't see anything, there are nothing in the ASP trends for the quarter caused us concern. I think that number is going to move around a little bit quarter-to-quarter. It does seem that the patient base who is most reluctant to get back into the flow is the older population who are, by definition, we're told the most vulnerable. So I suspect there is a modest amount of mix impact there that may have driven that. But generally, we'll see it move a little bit quarter-to-quarter, but nothing durable or persistent there that strikes us. And then you will talk about LCD?

On the LCD, we expect the expanded LCD and its related billing and coverage article to be effective for the entire year of 2021. Considering the dates of November 22 and December 6 for both MACs, the most crucial aspect is how Medicare determines the date of service for a test like ours, which is typically the date of surgery or when the biopsy was performed. In our workflow, this is usually the case. This means that if a patient had a biopsy on Saturday, November 21, and the dermatologist ordered the test on Monday, November 23, we would report it with a service date of November 21. Therefore, we're looking at approximately 3 to 4 weeks' worth of melanoma diagnoses that occurred primarily in December, which would qualify for reimbursement under the expanded LCD. Our laboratory and billing teams will ensure that all relevant cases are appropriately submitted under the LCD, as we have always done. From a modeling perspective, instead of the typical three-month quarter for Medicare claims, we may end up with a timeframe that resembles three months and three weeks.

Great, thank you.

Thank you. And now I will turn the call back over to President and CEO, Derek Maetzold, for any further remarks.

Thank you, Andrew. Now, this concludes our third quarter 2020 earnings call. I thank you again for joining us today, and for your continued interest in Castle Biosciences. Have a good day.

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program, and you may now disconnect.