Castle Biosciences Inc Q3 FY2021 Earnings Call

Good afternoon and welcome to Castle Biosciences Third Quarter 2021 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'd now like to turn the call over to Camilla Zuckero, Executive Director of Investor Relations and Corporate Communications. Please go ahead.

Thank you, operator. Good afternoon, everyone. Welcome to Castle Biosciences third quarter 2021 financial results conference call. Joining me today is Castle's Founder, President and Chief Executive Officer, Derek Maetzold; and Chief Financial Officer, Frank Stokes. Information recorded on this call speaks only as of today, November 08, 2021. 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 three weeks. 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 expectations and assumptions related to the impact of the COVID-19 pandemic, and are made pursuant to safe harbor provisions 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 Quarterly Report on Form 10-Q for the quarter ended September 30, 2021, 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. In addition, some of the information discussed today includes financial metrics such as adjusted revenue and adjusted gross margin, which are non-GAAP financial measures. We believe these metrics provide useful supplemental information in assessing our revenue and cash flow performance. Reconciliations of these non-GAAP financial measures to the most directly comparable GAAP financial measures are presented in the tables at the end of our earnings release issued earlier today, which has been posted on the Investor Relations page of the company's website. I will now turn the call over to Derek.

Thank you, Camilla and good afternoon, everyone. Thank you for joining us today for Castle's third quarter of 2021 earnings call. We are pleased to discuss with you this afternoon another strong quarter, including a 54% increase in revenue and a 71% increase in adjusted revenue year over year, despite the lingering impacts of decreased cutaneous melanoma diagnoses of 16% compared to historical pre-COVID numbers in 2019. In August, we raised our 2021 revenue guidance to $89 million to $93 million. We are pleased to say that we are on track to meet this increased range. As I just noted, third quarter 2021, cutaneous melanoma diagnoses were down 16% compared to the pre-COVID third quarter 2019, but it is too soon to know the impact on fourth quarter diagnoses. We can tell you that October was solid with trends similar to third quarter trends, but I would note that all else being equal, fourth quarter volume is typically flat to slightly lower than third quarter due to the holidays and fewer working days. However, we may see some positive offsets to these factors in the fourth quarter from successes in our growth initiatives, including our expanded commercial team and recent publications of evidence supporting our test. I'll discuss this in more detail in a moment. You may recall from the onset of the pandemic, we made the strategic decision to accelerate investments in our growth initiatives, including expanding our commercial team, as well as our R&D programs, both for our commercial and pipeline tests. We made these decisions as we believe they would ensure we remain in a position to impact patient care, ensure our resiliency, and continue creating value for stockholders in the near and long term. Further, we identified two additional areas of strategic growth that we believe complement our existing business in line with our focus of addressing indications with unmet clinical needs to improve patient care. The first was our acquisition of the Myriad myPath Laboratory LLC, and the associated myPath melanoma test and, more recently, the pending acquisition of Cernostics. We are seeing excellent progress across these initiatives, which I will discuss today, followed by Frank providing additional detail on our financial results. As always, it is important to begin with a special thank you to the Castle team. I'm proud of their commitment to patients and their consistent execution, which enabled us to deliver another strong quarter and further our position as the leader in dermatologic diagnostics. We delivered 7,727 total gene expression profile test reports in the third quarter of 2021, compared to 4,779 in the same period of 2020. This includes 5,505 DecisionDx-Melanoma test reports delivered, a 25% growth compared to 2020 and 33% growth compared to 2019, despite cutaneous melanoma diagnoses remaining below historical 2019 levels by approximately 16% based upon our analysis of third-party data. As we've discussed, we expanded our sales team to around 60 to 65 dermatology-facing representatives in the second quarter of 2021. They completed training and were on the ground beginning on July 1st. With this expansion, each of our sales representatives is now promoting and educating on all three of our proprietary skin cancer test offerings, utilizing our existing sales channels and calling on dermatologists as their primary call point. The team grew their experience and territory knowledge in the third quarter. We expect them to continue toward optimal productivity, which we believe takes about two quarters. During the quarter, approximately 90% of our sales calls were in-person, which is consistent with what we saw in the second quarter of 2021. Importantly, we have significantly increased our in-person group, peer-to-peer programs compared to the third quarter of 2020, and these continue to be widely attended. We believe this reinforces the high value that our tests provide to clinicians and their patients. At the beginning of the pandemic, we actively searched for methods to increase our engagement with clinicians to counteract the limited in-person access to offices. We determined that accelerating our plans to integrate our ordering process with the electronic health records systems our customers use would be beneficial for a variety of reasons even once offices reopen. We began integrating our ordering process with electronic medical records platforms on an individual practice by practice basis earlier last year, and last week, we announced our agreement to establish the interface with Modernizing Medicine's electronic health record system, EMA. Our interface with this system is expected to streamline the ordering process. The EMA platform has been ranked number one by dermatologists for the past eight years by Black Book. The interface is designed to enable dermatologic clinicians to order Castle's DecisionDx skin cancer tests, and then receive and review results from directly within a patient's electronic medical record. We expect our interface with EMA to be complete by the end of this year. As we look ahead, we have seen that our market is promotionally responsive. So we expect that our Salesforce expansion efforts, along with our increasing expansive body of evidence supporting our test. We have 33 peer-reviewed publications now for DecisionDx-Melanoma alone should position us well for growth across our suite of dermatologic tests in 2022. Turning to our DecisionDx-SCC for patients diagnosed with cutaneous squamous cell carcinoma and one or more risk factors. We've delivered 934 reports in the third quarter of 2021. We first introduced this test to the market on August 31, 2020, and early adoption of this test continues to exceed our expectations. We've discussed the value of leveraging our established dermatologic commercial channels for SCC as well as for our comprehensive diagnostic offering and for the nine months ended September 30, 2021, approximately 76% of clinicians who ordered DecisionDx-SCC also ordered DecisionDx-Melanoma during that same time period. As we've previously discussed, the technical dossier for our DecisionDx-SCC test was submitted for MDX review to PALMETTO and Meridian in the second quarter of 2020 and we received confirmation of acceptance of the submission as being complete in the third quarter of 2020. As of today, the PALMETTO MolDX program has not posted a second open comment period for 2021. Given the timing, we believe it's likely that the next open comment for MolDX LCD's will be in the first quarter of 2022. Moving on to our comprehensive diagnostic offering for difficult-to-diagnose melanocytic lesions. We delivered 913 test reports for myPath melanoma and DecisionDx, DiffDx melanoma combined for the third quarter of 2021. You may recall that a few years ago we began development of our DiffDx melanoma test to address this unmet medical need to provide improved clarity around difficult-to-diagnose lesions. In addition to developing a test with high sensitivity and specificity, our target product profile included the criteria of having both a low technical failure rate and a low intermediate test result rate, that is, being able to report out clinically actionable, likely benign, or likely malignant test results for more than 95% of orders. We succeeded in achieving our target product profile. As I said earlier, as part of our strategic growth plan, we identified two additional areas that we believe complement our existing business and align with our focus of addressing indications with unmet clinical needs, with the acquisition of myPath melanoma being the first. We determined that housing both gene expression profile tests for use in difficult-to-diagnose lesions and providing structure to the ordering process could enable us to serve more patients with the strongest evidence and highest clinically actionable test results possible. So the question is, did we accomplish our objectives or not? And the answer is yes. Let me explain. We presented data that I'll review here at the American Society of Dermatopathology Annual Meeting last month. This study reviewed clinical order data from June 3, 2021 through August 31, 2021, essentially the first three months that we're able to offer both myPath melanoma and DiffDx melanoma under the comprehensive diagnostic offering workflow. In just this time period alone, we're able to increase the reporting of actionable test results of either likely benign or likely malignant from 78% for melanoma alone to 99% when used in conjunction with DiffDx melanoma in a comprehensive diagnostic offering workflow, thus enhancing diagnostic confidence and delivery of clinically actionable results to healthcare providers and their patients. In addition, we saw significant growth in our CDO volume during the third quarter and with myPath being covered under existing MolDX LCD, we're able to significantly advance or pull forward reimbursement timing on our CDO business compared to DiffDx melanoma alone. The second area of strategic growth we identified that complements our existing business and aligned with our focus of addressing indications with unmet clinical need is the pending acquisition of Cernostics and its TissueCypher platform, including the first-to-market TissueCypher Barrett's Esophagus test. We expect to close the deal before the end of 2021. We are excited about the potential our combined teams have to accelerate our impact on patient care and address the unmet clinical need in Barrett's Esophagus. The TissueCypher test is designed to objectively and accurately predict progression from non-dysplastic indefinite dysplasia and low-grade dysplasia in Barrett's Esophagus to high-grade dysplasia or esophageal cancer. This is critical as esophageal cancer carries a high mortality rate with five-year survival rates under 20%. Also, because intervention in patients with Barrett's Esophagus, such as esophageal eradication therapy, which includes ablation and other interventions, has been proven to reduce progression to cancer. But unfortunately, the incidence of esophageal cancer is increasing at one of the fastest rates of all cancers in the US. So we need new clinical tools to reverse this growth trend in the diagnosis of esophageal cancer. So what do we like about Cernostics and what are the factors that influenced our decision to acquire them at this time? TissueCypher for Barrett's Esophagus serves an indication of high clinical need by improving risk stratification for patients that have been diagnosed with non-dysplastic indefinite for dysplasia and low-grade dysplasia Barrett's Esophagus. In other words, it parallels the risk stratification solutions we offer with our DecisionDx-Melanoma, DecisionDx-SCC, and DecisionDx-UM tests. This is also a large market, but patients that fall within the current intended use equate to 384,000 patients on an annual basis. And when assuming the current Medicare rate, the current TissueCypher intended use population alone expands our in-market estimated US total addressable market by approximately $1 million. We also liked the GI market in general with approximately 13,000 or so targetable clinicians. This market is of similar size to the skin cancer dermatology-focused market. And we have demonstrated that we know how to effectively educate and promote to a customer base of this size. And finally, we are adding another innovative technology platform to our R&D and clinical laboratory groups, expanding beyond multianalyte gene expression profile tests to multianalyte spatial biology tests. For our near term, we see TissueCypher and the GI market as a parallel to our experiences in the dermatology market. Despite not having any field team presence, Theranostics has been successful in generating interest in usage from a number of GI specialists. We expect to build an initial sales group of 13 to 15 representatives in addition to MSLs and internal sales associates. Before I close, I am excited to share with you that we published our inaugural ESG report today. Castle was founded on the guiding principle of doing the right thing at the right time. Although we are still early in our journey as a public company, our focus on ESG factors began with our guiding principle in 2008. We laid the cornerstones of integrity, transparency, collaboration, and innovation. We believe building a strong ESG program that is relevant to our core business and our stakeholders is essential for success. The launch of this inaugural report marks an important milestone in our journey and demonstrates our desire to move Castle forward and progress our ESG goals. Additionally, it reinforces our commitment to improve the lives of patients, positively impact our communities, and ensure Castle remains a great place for our valued employees to learn and grow. I will now turn the call over to Frank who will provide additional details related to our financial results.

Thank you, Derek and good afternoon, everyone. With a strong third quarter, Castle continues to deliver on our stakeholder commitments and made considerable progress on our growth initiatives. In the third quarter of 2021, we delivered total revenue of $23.5 million, a 54% increase over the third quarter of 2020. Overall, the increased revenues reflect higher report volumes for both DecisionDx-Melanoma and DecisionDx-Uveal melanoma and higher per unit rates, partially offset by lower positive revenue adjustments related to tests delivered in prior periods. The higher per unit rates reflect our expanded Medicare LCD for our DecisionDx melanoma tests that went into effect in December of 2020, as well as a higher Medicare rate for DecisionDx uveal melanoma that went into effect at the beginning of this year. Our adjusted revenue, excluding the effects of revenue adjustments related to tests delivered in prior periods, was $23.6 million, a 71% increase over the third quarter of 2020. Our gross margin during the third quarter was 78% compared to 84% in the third quarter of 2020. Our adjusted gross margin, excluding the effects of intangible asset amortization and revenue associated with test reports delivered in prior periods, was 81% compared to 82% for the same period of 2020. Our total operating expenses, including cost of sales for the quarter ended September 30, 2021 were $35.3 million compared to $19.1 million for the same period last year. The largest driver of the increase was higher SG&A, which increased by $10.9 million for the three months ended September 30, 2021 compared to the same period in 2020, attributable in large part to higher personnel costs associated with our increased headcount, which includes salaries, bonuses, benefits, and stock-based compensation. These higher personnel costs were primarily attributable to the expansion of our sales and marketing teams, as well as administrative support functions. The remainder of the increase in SG&A was primarily associated with the return of in-person and hybrid conferences, in-person peer-to-peer promotional programs and training events, as well as a partial return to more normalized travel costs. R&D expense increased by $4.4 million in the third quarter of '21 compared to 2020 and was primarily associated with increases in personnel costs attributable to additional headcount to manage and run our clinical studies and increases in other expenses associated with increased clinical study activity. As we continue to support our commercial products, as well as our pipeline initiatives, and continue to expand our body of evidence, we expect our R&D expense to increase further. Total non-cash stock-based compensation expense, which is allocated among cost of sales, R&D, and SG&A, totaled $5.2 million for the quarter ended September 30, 2021, compared to $2.1 million for the quarter ended September 30, 2020. We expect further increases in stock-based compensation expense in future periods, reflecting both higher post-IPO stock option valuations, as well as additional awards outstanding due to growth in our headcount. Our net loss for the third quarter of 2021 was $11.8 million compared to a net loss of $4.6 million for the third quarter of 2020. Diluted per share attributable to common stockholders for the third quarter of 2021 was $0.47 compared to a loss of $0.23 for the third quarter of 2020. Operating cash flow for the nine months ended September 30, 2021 was negative $16.2 million compared to a positive $10.3 million for the same period in 2020. It was primarily attributable to the net loss as well as the recoupment of a portion of the Medicare advanced payment and increases in working capital requirements, partially offset by non-cash charges. You'll recall that the prior year operating cash flow benefited from the receipt of $8.3 million associated with the Medicare advanced payment. This year, beginning in April, recoupment of the advance payment began. As of September 30, 2021, $5.3 million has been applied to the balance in recoupment. Investing cash flows during the nine months ended September 30, 2021 were primarily associated with the $33 million payment for the acquisition of myPath melanoma. Finally, we had cash and cash equivalents at September 30, 2021 of $363 million and no debt.

Thank you, Frank. As always, none of our achievements are possible without the hard work and strong execution of the Castle team, whose dedication enables us to deliver on our commitments to our stakeholders, and importantly, continue to impact patient care. Our progress and our growth initiatives in the third quarter, including expansion of our dermatologic commercial team and our R&D programs, both for our commercial and pipeline tests positions us well for continued value creation. This concludes our remarks. Thank you for your interest in Castle. Operator, we are now ready for Q&A.

The first question comes from Sung Ji Nam with BTIG. Please proceed.

Hi, thanks for taking the questions. Maybe Derek, could you talk about, now it's been a year, right? Since we've seen delays in terms of melanoma diagnosis, are you hearing anything from the ground in terms of potential impact that that's been having as far as the stages of diagnosis or whatnot that you might be hearing?

We've received various informal comments regarding the situation in offices across the US, which should be publicly available soon. I don't anticipate any significant increase in late-stage melanoma diagnoses, specifically stage three or four. However, we have noticed a trend in recent meetings this fall indicating that tumors, measured by Breslow's thickness, appear to be increasing. This suggests that patients are not being diagnosed during regular healthcare visits with primary care physicians; instead, they are only seeking medical attention when a mole has grown large enough to cause concern about melanoma. This represents a risk for the patient population. In summary, the impact of COVID has led many patients to feel more comfortable using telehealth or renewing prescriptions by phone over the past 18 months. Consequently, 20% of patients who might not have been seen in person, and whose moles went unnoticed during check-ups, are those who are currently being overlooked.

That's helpful. And then I just have one follow up. Are there any updates in terms of your non-skin cancer programs that are underway? If there are any changes in terms of the timeline of what you have discussed in the past?

No, we've seen, I think we discussed this maybe at a conference here in the fall. So we have yet to disclose a couple of our other targets, but all of our programs right now, we're running ahead of our internal estimate forecasts. I believe that what we're seeing is that most of our pipeline programs are being executed that are more high research organizations that are community-based versus hospital-based, and they seem to have sort of come out of COVID ready to start new protocols, I guess you would say, and they're seeing patients. So we don't see any delay in terms of timelines of our earlier estimates earlier this year.

Thank you, Ms. Nam. The next question comes from Kyle Mikson with Canaccord. Please proceed.

Thanks. Hi guys. Thanks for taking the questions. So I wanted to start with the guidance. If I'm doing the math, it looks like a sequential decline in revenue and total revenue. And so I'm just wondering if you're assuming the same level of third quarter access, like the 90% in-person calls or the same type of melanoma diagnoses trends at 16% below baseline. And I'm just a little bit surprised given the upside the additional reps could provide. So could you talk about maybe some of the conservatism or tempered expectations that you're making in there? Thank you.

Sure. Kyle, so I guess maybe the most important thing is that we began seeing, I guess recovery is a funny word. Nice changes in growth trends in sort of May and June time period. Those carried over quite well through the third quarter and October finished out very strong. We do know that in November, there were a few working days because of the Thanksgiving holiday, as well as in December. I don't want to say we're being overly conservative, but maybe you could put in that respect, but typically speaking in a non-COVID year, 2016, 2017, 2018, and 2019, you would typically see fourth quarter diagnosis of melanoma being flattish to third quarter as part of a normal seasonality. Now, that being said, I do agree with you that we are very pleased with the field force expansion that occurred on July 1 of this year, and it could be that we are being too conservative in hindsight, as you mentioned here now. We certainly don't see any negative trends through October that would cause concern, but we also felt that our guidance was adequate for the rest of the year.

Okay. Thanks. Thanks. No, that's helpful. And, I noticed in your, I guess, presentation deck that the potential effect of LTV for SCC and DiffDx is now officially 2023. Not a huge surprise there. I'm just wondering if you could talk about the expectations for private payer and commercial payer coverage in '22 for the rest of your tests. And are there any products that are kind of better positioned to receive in our coverage sooner than others and maybe just due to the growing portfolio of data or some of the guidelines effects as well? Thanks.

Yep. So that's, I'll try and tell it apart here a little bit here. One is that given us already November 08, I think it's highly likely that we'll see an open meeting posted by Palmetto and Noridian for the week of Christmas holidays or between Christmas and New Year. So I think the likelihood of obviously a 2021 open trauma meeting and LCDs associated with that occurring before year end is unlikely. So our assumption here is that they must be working towards the first quarter 2022 posting a meeting set, which would push by definition out about a year or so between then versus when they could have at the absolutely limit of time turn a draft LCD to do a final informal one. It could have come earlier, certainly, but I think it's better to be upfront conservative than assume a faster term. In terms of coverage on the commercial side of the basis, we certainly are seeing some revenue coming in from other newer launch tests, predominantly the DecisionDx-SCC test and we expect that to continue in modest amounts during 2022. I don't think we could expect a guideline change or update in 2022 for squamous cell carcinoma. I think that group meets in the fall, I think of every year. So I think that would be probably the earliest towards the end of 2022 that we would see an update which wouldn't have much effect on passing that through on a commercial payer. On the combined diagnostic or comprehensive diagnostic offering, this combined offering of myPath melanoma and DiffDx melanoma, we did see earlier this year, earlier in 2021, a change in NCC and guidelines that recognized that gene expression profile tests that assist in the diagnosis of difficult-to-diagnose melanocytic lesions are included there. We would hope to see some forward movement with some of the payers in 2022, since a number of them put the NCCn guideline inclusion as sort of the final litmus test to go and pull through from a normal reimbursement trend or coverage. So I think we have expectations for a number of things going forward in 2022 that will hopefully build on our revenue expectations throughout the year. As it relates to the DecisionDx-Melanoma test, we did see some progress, the smaller plans in the second and third quarter of 2021. We would expect that to continue as we have additional evidence being published later this year and in the next year as well.

That was great and very helpful. Before I leave, I have one quick question. It was nice to see the news about HR integration. I have two questions about that. First, can you discuss your current electronic ordering rate, and if possible, provide some quantification or qualification? Second, do you plan on expanding to other ambulatory HR systems like Next Gen, Epic, and Athena over time?

So you're talking about the integration that would modernize the medicine and the EMA platform? Yeah. So one is we haven't disclosed the online ordering in the past, I guess we'll look at that maybe have it in the future here. It's a small but important part of the business through our current online ordering portal with physicians who want it electronically. So that's been going on, but I would say that's a less than half of the volume because there are a number of customers who still value fax machines going over with laboratory reports, and that's just how they operate as a practice. However, that being said, the opportunity to integrate both ordering processes for all of our tests, by the way, as well as having reports received through EMA, I think is very exciting and throughout 2021, we did test it with a number of practices, and individual practice-by-practice solution and when they were interested in that, we saw them kind of converting business from being fax-based to EMA-based ordering. So we expect that over the course of 2022, we will see practices, and it could be on a practice level. It could be on an individual clinician level, go from 0% to 100% online ordering through EMA and receipt of results. I believe that's going to reduce the number of times that we might miss appropriate patients because the doctor's kind of busy that day. It's a Friday afternoon. And by the time they go ahead and come back in on Monday or Tuesday, they've forgotten, did they order the test or not? This should make that much easier and smoother from a convenience standpoint. And the fact that we were able to load in all of our test offerings, I think we will expect to see nice lift throughout the year as that becomes more integrated into our customer solutions. We certainly are entertaining talks with the other electronic medical record companies who work with dermatologists, keeping in mind, of course, that we believe that about 90% plus of patients with melanoma are initially diagnosed and managed by community-based private practice individuals. So some of the services I'm thinking about, Epic and others who are really have a much more command than hospital-based systems don't really fall into our EMR interests per se. So we are looking forward to going and seeing the sort of national rollout through Modernizing Medicine to see the impact that has on the business and then going from there.

Okay. Makes sense. Really interesting to hear. So I'll leave it there my question, but thanks so much for taking them.

The next question comes from Thomas Flaten with Lake Street. Please proceed.

Great. Thanks guys for taking the question. I wanted to follow up on a comment, both from the prepared remarks and also the press release with respect to the two quarters of time to get the sales reps to optimal productivity. I think you put some caveats around that Derek in past calls that it might take longer because of access, etcetera. So are we, or have you seen an acceleration there? So can we expect that they're fully productive by year-end? Or do you think it's two quarters from now? So kind of into the first half of next year? I just wanted to clarify that.

Good question. No, I don't think it will take a year for them to get up and running. We've had good access; about 90% of our calls have been in person for the last two quarters. Comparing that to what I hear from other molecular diagnostic peers, many are seeing only 75% or even 40% in-person calls. I believe there's something different about Castle and dermatology. We have three product offerings that are highly clinically actionable for dermatologists diagnosing early-stage skin cancers, like melanoma and squamous cell carcinoma, which sets us apart from other companies facing more resistance to in-person interactions with customers. I'm not sure if I would describe this as a Castle difference in the value of our tests and the educational value our representatives provide compared to others, but it is a noteworthy dynamic. From our perspective at Castle, we aren't observing any long-term shifts on a broader scale. There may be variations at the practice level, but nothing nationally that raises concerns for the future.

Got it. And then speaking of commercial teams, I believe on the last call, you had talked about having a team ready to go for January 1. Is that still the plan to support that product commercially?

Yes. Yes. I think interviews are being completed this week. We expect to have offers go out and people to start during early December and given the profile of the individuals that we believe will go ahead and come on board at Castle, they nearly all have a really nice structural gastroenterology experience set. So we would hope they hit the ground running post-training in the early January timeframe. So that remains on track.

And then just a quick one on the atopic dermatitis psoriasis program you guys had put out the study design in a poster. I think it was a few weeks back. And it sounds like you've set it up as a treatment selection test, but given the non-invasive sampling platform, is there an opportunity to extend that into response monitoring as well? Or how are you guys thinking about combining those two opportunities if you are?

I guess you read the poster well, didn't you. I think the first objective is to really look at which biologic or which systemic therapy a patient's highly likely to get clearance from and by clearance, we don't mean partial. We're hoping we end up with that with nearly a 100% clearance in our responders. And we expect just the opposite to go ahead and find therapies that this patient is could have a modest to minimal response to. So if a physician and a patient can really take six off the table and put two on. However, as you noted in that poster there are serial collections over time. And so by response monitoring, we may be able to pick up three months in advance, for example, before a patient begins to lose response. I think it's too early to comment on that, but that might be a great value for patient care. Obviously, it creates a better per patient annuity for the company going forward if, in fact, we can demonstrate that. I appreciate you guys taking the questions. Thanks so much.

The next question comes from Catherine Schulte with Baird. Please proceed.

Hey guys, thanks for the questions. I guess first, just on the expanded Salesforce, curious if we could get a little bit more granularity there. How much of the quenching growth came from your new cohort of reps and how much more do you think that they could contribute in the fourth quarter?

We don't, we haven't analyzed those at my level per se and maybe importantly is that we had no areas of the country and we had only 32 dermatology-facing representatives with wide out areas. We covered the whole US with bodies. So when we went from 32 dermatology-focused people to roughly the mid-60s, that wasn't sort of covering areas that we hadn't covered before where you could say you had sales of zero and you went to something. So I don't think we can accurately answer that question with any integrity. We were quite pleased with seeing the growth in terms of the productivity of the overall sales groups over the course of July, August, September, and October. So as I mentioned earlier too, I think it was Kyle's question. We didn't want to come out and be overly conservative on the fourth quarter here, but we are quite pleased with the triangulation that we were seeing in August, September, and October with the expanded sales organization and that should go ahead and bleed us forward quite well in '22.

Okay, great. And then can you give us an update on the personalized study, how enrollment is going and when we could get early data there? And then any additional details on the Decide study you highlighted in your 10-Q on S1B decision-making and outcomes?

We've noticed some slower progress in 2020 and early 2021 regarding new centers joining, largely due to COVID. Most of our initial placements were at academic centers, which delayed their processes for observational studies. However, we've seen significant improvement in the last quarter, so I anticipate that we might have some initial data by the end of next year, although that timeline could be a bit optimistic. It is reasonable to expect results showing which patients benefited from the use of a PD1 inhibitor for Stage three disease and which did not. This information could greatly enhance patient selection, avoiding situations where patients either don't receive necessary therapies due to insufficient data or receive them unnecessarily. Both of these aspects present a favorable outlook as we head into 2022. Regarding the Decide study, it's progressing well without any enrollment slowdowns in 2021, mainly because our centers were operational during the earlier stages of COVID. This study will track patients who choose to use our tests to guide sentinel biopsy procedures and monitor their long-term outcomes, comparable to other studies we released earlier this year. We should expect to see preliminary top-line data, though it will reflect shorter follow-up times, later next year.

Thank you, Ms. Schulte. The next question comes from Puneet Souda with SVB Leerink. Please proceed.

The first question I have is regarding the derm practices. Are you noticing any changes recently? Specifically, is there any lasting shift in how they interact with the sales reps, particularly in terms of the time they allow for these interactions? Traditionally, the engagement in dermatology has been longer. Have you observed any trends post-COVID that raise concerns in this market? I'm interested in the volumes and the impact you've seen, as we were anticipating a stronger recovery. Could you clarify what you're currently observing in the market as of November? That would be very helpful.

So on a macro basis, I have not heard of any structural changes or trend changes, certainly on a practice-by-practice basis, we are aware that as kind of Delta moved through that there were some practices and certain locations that said let's go ahead and put off seeing you back in person for another month or two until we're comfortable, but that's expected, right Puneet. I think I look as sort of our data being able to have 90% of sales calls in person now for two quarters running, the second quarter and third quarter of this year is interesting. When I compare that to, I guess what I'm hearing from some of our other molecular diagnostic peers who are seeing 75%, 40% in-person calls, there's something different about, I think Castle and dermatology. I want to believe that the fact that we have three product offerings that are all highly clinically actionable to dermatologists who are diagnosing early-stage skin cancer, be it melanoma or squamous cell carcinoma set us something differently than those other companies who have molecular diagnostic tests but are finding much more resistance towards getting back in person with customers. So I don't know if I want to perceive that as a Castle difference in terms of the value of our tests and the level of educational value that our representatives bring to an office versus other companies. But it certainly is a dynamic which is different. So I can't say from a Castle standpoint, we aren't seeing any kind of long-term shifting that we're aware of on a macro or systemic basis, it might be happening on a practice-by-practice basis, but nothing I can point to nationally and say, this is something to be concerned about going forward.

Got it. And then question on the Medicare prior quarter adjustment, Frank, how should we think about that going forward? Just wanted to clarify. And in terms of data readouts given the conference lineup Derek, could you just maybe lay out for us what are some of the things that we ought to watch out or the next couple of months? Thanks for taking my questions.

Sure. The previous period relates to all payer categories, and we will continue to observe fluctuations with some positive and negative outcomes. The key point is that we have improved in accruing a rate per test that aligns more closely with our actual collection experience. Last year in the same quarter, it exceeded $1 million, and this quarter showed a difference of about $90,000 on $24.5 million, which is a significant improvement. However, it's important to note that all companies will experience prior period adjustments occasionally. Additionally, as mentioned before, if squamous and DiffDx grow rapidly, we may eventually benefit from the appeals process, which could slightly increase the prior period adjustments.

So, in relation to sort of milestone timing in 2022, there are a couple of meetings in the January time period that have shorter abstract dates. So that might be something to look at it in terms of a milestone, a data presentation AAD this year, I think is in March. And they offer a late-breaking opportunity that we would hope to have some day to go in there as well. So I think around the AAD time period is an area where you would expect to go and see some activity. The next kind of spring meeting that's of importance is the American College of Mohs Surgery or ACMS, and that's always kind of late April early May. ASCO, as you know, is in June, but we really operate in early-stage skin cancer. So we might have activity there, but to be honest, that's not the customer base that we would care about, it's really dermatology for us as a company. So those are the ones I would line up there earlier that we would expect to go and see some important data from a penetration-driving perspective be presented.

Thank you, Mr. Souda. The next question comes from Paul Knight with KeyBanc. Please proceed.

Derek. Thanks for your time. The Theranostics acquisition. I know you were expecting genetic test coding like today or soon in anything else on update with Theranostics.

Yeah. So there was a Draft LCD that I think is finalized either today or tomorrow, but they were already in the billing article there. So, the Theranostics program overall we really like the gastroenterology channel, I guess you would say. We really like the TissueCypher test for Barrett's Esophagus. As you know, we think that there's around 384,000 patients who are getting endoscopies every year and could be eligible for a TissueCypher test. That's more than our melanoma and our squamous cell carcinoma test potential combined. So we like that from that standpoint. We also think that over the next couple of years, we'll be able to either find or develop through Theranostics or through our current approach with RNA some additional tests so that we can turn around in '25 maybe, and say, gee, just like in dermatology, you went from having a foothold to having three or four tests, and you're perceived by gastroenterologists as being the leader in this kind of GI space. So I think that's our vision to get there. Now more practically, in the short term Theranostics did complete their medical evaluation review with Novatos earlier this year and have been receiving routine payments on all their Medicare claims since that point in time. They do have an established list price on the clinical laboratory fee schedule of $2,513. So we feel like all of the checkboxes are there to say, let's go out and help support the appropriate use of a test that really has had no commercial efforts so far. If it makes a difference to patient care, we expect to have good, solid ordering uptake next year. Although, as you mentioned, we announced the deal last month that our expectation here is that '22 is building revenue and '23 is when we see really accretive ad, but we are going to see revenue next year, certainly.

And then the Frank and Derek on the gross margin, it was down a bit sequentially, anything going on in supply chain and held the environment in the lab tech side?

No, Paul, fortunately none of our consumables are sitting on a barge off Long Beach right now. Most of our consumables come from Waltham, Mass, and we've had no issues there. The modest impact on gross margin is really just because of the success of the two new products. We had over 1800, almost 1900 tests, the majority of which we didn't accrue any revenue for, but we did have to book the associated costs. So that's what we're seeing there, the impact of the number of tests for which we are not accruing revenue.

Thank you.

There are no additional questions waiting at this time, so I'll pass the conference over to Derek Maetzold for closing remarks.

Thank you, operator. This concludes our third quarter 2021 earnings call. Thank you again for joining us today and for your continued interest in Castle Biosciences.