Castle Biosciences Inc Q4 FY2022 Earnings Call

Good afternoon, and welcome to Castle Biosciences Fourth Quarter 2022 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 Camilla Zuckero, Vice President, Investor Relations and Corporate Affairs. Please go ahead.

Information recorded on this call speaks only as of today, February 28, 2023. 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. Before we begin, I would like to remind you that some of the statements made today will contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements include, but are not limited to, statements about our financial outlook, TAM and similar items referenced in our earnings release issued today and statements containing projections regarding future events or our future financial or operational performance, including our 2023 to 2025 outlook, our expectations and assumptions related to the impact of the COVID-19 pandemic and macroeconomic conditions and the impact of our investments in growth initiatives and expanded commercial teams. 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, 2022, under the heading Risk Factors 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 non-GAAP financial measures such as adjusted revenue, adjusted gross margin and adjusted EBITDA that have not been calculated in accordance with generally accepted accounting principles in the United States or GAAP. These non-GAAP items should be used in addition to and not as a substitute for any GAAP results. We believe these metrics provide useful supplemental information in assessing our revenue, cash flow and operating 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. We are not providing a target for or reconciliation of anticipated 2025 adjusted gross margin to gross margin, the most directly comparable GAAP measure because we are unable to predict certain items contained in the GAAP measure without unreasonable efforts. 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 Fourth Quarter and Full Year 2022 Earnings Call. Across the board, 2022 represents another fantastic year of execution for Castle. Before I begin discussing the highlights of our year, I'd like to start today by personally thanking the Castle team for their excellent execution, which enabled our fantastic results. Each and every employee contributes to our success. 2022 was a year of tremendous progress for Castle. We delivered strong financial results. We made meaningful advances on our growth initiatives and delivered value to our customers and the patients we serve. The fourth quarter was a very strong finish, driving our full year revenue to $137 million, the top end of our guided revenue range and a 46% increase over 2021. Our total test reports delivered were 44,419, a 58% growth over 2021. We believe our success in 2022 provides us with momentum for 2023 and expect full year 2023 revenue in the range of $170 million to $180 million. I will now turn to highlights with each of our businesses, starting with our dermatology franchise. We delivered 37,331 dermatologic test reports in 2022, a 41% increase over 2021. We believe our three dermatology offerings, DecisionDx-Melanoma, DecisionDx-SCC and MyPath Melanoma, despite our continued growth, represent significant future growth opportunities. We continue to see new clinicians order our dermatologic tests for the very first time. For the year ended December 31, 2022, we saw approximately 2,312 new ordering clinicians for our dermatologic tests, and total ordering clinicians for dermatologic tests were approximately 7,670. In developing our SCC test, we believe that in addition to addressing significant unmet clinical needs, we would see strategic opportunities for leverage as many of the clinicians who are already ordering our risk stratification, DecisionDx-Melanoma test would likely be the same clinicians who would be diagnosing patients with cutaneous squamous cell carcinoma with one or more risk factors, and therefore, would find value in our risk stratification DecisionDx-SCC test. We are seeing this leverage by virtue of the fact that for the year ended December 31, 2022, approximately 79% of all clinicians ordering DecisionDx-SCC had also ordered our DecisionDx-Melanoma test during the year. We believe the clinical value provided by our tests today, coupled with our investment in our growth initiatives, should continue to drive increased adoption. Our growth initiatives include regular commercial team assessments and evolution, as well as R&D investments and robust peer-to-peer programs. As it relates to commercial investments, in 2022, we re-established a dedicated sales team to focus on our gene expression profile test to assist in the differential diagnosis of pigment lesions. This means that we have a larger team focusing on our dermatology call point, primarily supporting DecisionDx-Melanoma and DecisionDx-SCC together, and a smaller focused dedicated team focusing on the dermatopathology call point. As we have seen historically, our target market is promotionally responsive. So we believe these expanded commercial investments can contribute to continued momentum in 2023. As part of our long-term strategy, we plan to continuously assess the impact of our commercial teams, including the commercial team that is now focused on DecisionDx-Melanoma and DecisionDx-SCC, and the separate diagnostic gene expression profile commercial team focused on dermatopathology. We will make moderate adjustments if necessary, but end 2023 with slightly more outside territories than we have today. In the long term, beyond 2023, with three dermatology offerings, we believe around 80 to 100 total outside sales territories for our dermatology commercial teams could make sense for us. As it relates to our R&D investments in dermatology alone, we had 12 peer-reviewed manuscripts published in 2022. Continuous serial publications support our educational efforts for both existing and new clinical customers. Before I turn to our gastroenterology franchise, I would like to comment on current expectations for DecisionDx-SCC. In the late fourth quarter of 2022, CMS decided to gap fill our DecisionDx-SCC rate. In a regular gap fill process, we would expect the outcome from this process to go into effect in January 2024. In the interim, and since we were just contractor-priced in the second quarter of 2022, we expect our current rate of $3.873 to be maintained during the gap fill process in 2023. Separately, we currently have coverage through Novitas following their evidentiary review that was completed early in 2022. Separately, there is a draft broad LCD entitled DL-39365 genetic testing for oncology, whose purpose, we believe, is to streamline reviews in the future. We have no new updates from Novitas on the status of this draft LCD. Separately, Palmetto MolDx has not issued a draft LCD to date, and we have no control over timing. If and when we do receive a MolDx LCD draft, we expect it would take about 12 months to finalize. So we expect to have a final coverage determination from MolDx in 2024. However, as I said earlier, we have no new updates from Palmetto about a potential LCD or timing. I would now like to turn our attention to our gastroenterology business. We delivered 2,128 tissue cypher test reports in 2022. You may recall, we acquired Tissue Cipher in December of 2021. We have made significant progress since then with our integration efforts and look forward to the opening of our new Pittsburgh laboratory in the second quarter of 2023, which is scaled to enable us to continue processing our tissue cypher test in Pittsburgh. Additionally, we expect the Pittsburgh facility to have the capacity to process our other tests as well. I will remind you that we hired the initial commercial team in early January 2022. Given the momentum that we saw in the second quarter, we added territories for our tissue cypher test in the late third quarter of 2022. As with our dermatology business, we will continue to assess the team and expect to add a modest number of territories as the year progresses. Finally, for tissue cypher, our 2023 and 2024 Medicare reimbursement rate is $4,950. As an ADLT, the Medicare rate will be recalculated for 2025 based on payer data collection between January and June of 2023. I will now discuss our mental health business. From late April, when we acquired ID Genetics, through the remainder of 2022, we delivered 3,249 tests. As with Tissue Cypher, our integration efforts are progressing according to plan, and we are pleased with the momentum we are seeing. As we have stated previously, we believe the pharmacogenomic and mental health opportunity isn't just a matter of a single large market but an opportunity to enter a series of very large markets. One of our integration objectives is to focus on those market segments where we expect the value of IGX will be seen by clinicians and their patients, including the value of drug-drug and drug-gene interactions with lifestyle factors all combined in a single test report. We entered 2023 with a solid commercial team in place and we'll look to add a few territories throughout the year. One final note on our IDgenetix test. The IDgenetix multi-gene panel test is currently reimbursed by Medicare at a contracted price of approximately $1,500 per test. IDgenetix has historically been billed to Medicare using a multi-test unspecified CPT code along with the IDgenetix test-specific MolDx Z code. In February 2023, MolDx notified us that as part of their annual CPT code updates, beginning in March 2023, IDgenetix should shift billing to a different multi-test generic gene sequencing CPT code and continue using the IGENX-specific Z code. The new CPT code is currently contracted at a price of $917 while going through CMS' gap fill process in 2023. The new CPT code does not describe all the components of the IDgenetix test. Therefore, we do not believe that the new CPT code in conjunction with the IDgenetix specific Z code provides additional specificity and thus, we believe the new CPT code is not appropriate for IDgenetix. Now I want to provide an update on our inflammatory skin disease pipeline test. As a reminder, the focus of this pipeline test is to be able to predict response to systemic therapy in patients who are diagnosed with inflammatory skin disease, such as psoriasis or atopic dermatitis, and are initiating therapy on systemic therapy or experiencing treatment-limiting side effects. Development and validation of this test is occurring under the umbrella of our identity study protocols. In 2022, we presented data supporting that our non-invasive collection method had demonstrated or passed our technical thresholds. I am pleased to report that as of February 2, 2023, we have 54 committed sites and 507 patients enrolled in the identity study. We expect initial development data in the second half of 2023, and we believe we are on track to launch this test by the end of 2025. If successful, we believe this test would add $1.9 billion to our estimated U.S. TAM. I will now turn the call over to Frank, who will provide additional detail relating to our financial results and what to expect in 2023.

Thank you, Derek, and good afternoon, everyone. We again delivered strong financial results in 2022, while continuing to make progress on our growth objectives, which we believe leaves us in a position of strength for 2023 and beyond. In the fourth quarter of 2022, we delivered total revenue of $38.3 million, a 53% increase over the fourth quarter of 2021, and we delivered $137 million for the full year 2022, a 46% increase over 2021. Overall, the increased revenues are primarily attributable to dermatologic test revenues, reflecting an increase in test report volume and higher per unit revenue. The increases in total revenue for the full year were partially offset by the effect of variations in revenue adjustments related to tests delivered in previous periods associated with changes in estimated variable consideration, which were net negative $2 million for the year ended December 31, 2022, compared to net positive $3.3 million for the year ended December 31, 2021. Revenue adjustments related to tests delivered in prior periods may fluctuate from quarter to quarter and over time. Our adjusted revenue, excluding the effects of revenue adjustments related to tests delivered in prior periods, was $37.5 million for the quarter and $139 million for the full year 2022. As Derek mentioned earlier, for 2023, we anticipate generating between $170 million and $180 million in total revenue, driven by further consistent execution of our growth plans. In order to support those growth plans, we increased the size of the organization in 2022, and headcount increased from 345 on December 31, 2021, to 543 on December 31, 2022. For 2023, we expect further increases in total headcount, including the modest adjustments to our commercial team, Derek just discussed, but not to the same extent as our headcount growth in 2022. Our gross margin during the fourth quarter was 69.4% compared to 77.6% in the fourth quarter of 2021, and our gross margin for the full year was 70.6% compared to 81.1% in 2021. Our adjusted gross margin, which excludes the effects of intangible asset amortization related to our acquisitions, and revenue associated with test reports delivered in prior periods, was 74.6% for the quarter and 77% for the year compared to 82.2% and 82.6% for the same period in 2021. We believe this compares favorably to the margin profiles of our peer companies. Our total operating expenses, including cost of sales for the quarter ended December 31, 2022, were $61.2 million compared to $40.2 million for the prior year and were $209.9 million for the full year compared to $134.2 million for the full year 2021. Sales and marketing expense increased by $37.6 million or 76.9% for the year ended December 31, 2022, compared to the year ended December 31, 2021. Approximately $23.1 million or 61.4% of the increase is attributable to higher personnel costs, including salaries, stock-based compensation and bonuses. The remainder of the increase in sales and marketing expenses was primarily associated with travel, training events and conference fees. General and administrative expenses increased by $18.6 million or 49.3% for the year ended December 31, 2022, compared to the year ended December 31, 2021, with increases primarily attributable to higher personnel costs, including salaries, stock-based compensation and bonuses. The remainder of the increase in general and administrative expenses was primarily associated with other general increases. R&D expense increased by $1.9 million in the fourth quarter and by $15.3 million for the full year 2022 compared to 2021 and was primarily associated with increases in personnel costs, including increases in stock-based compensation attributable to additional headcount to manage around our clinical studies and increases in other expenses associated with increased clinical study activity. Total noncash stock-based compensation expense, which is allocated among cost of sales, R&D expense and SG&A expense, totaled $36.3 million for the year ended December 31, 2022, compared to $21.7 million for the year ended December 31, 2021. We expect to continue granting stock-based compensation awards in future periods as we continue to grow our headcount. For 2023, we expect stock-based compensation expense to increase by approximately 30% to 35% over 2022. Income tax benefit was $1.8 million for the year ended December 31, 2022, and compared to $8.7 million for the year ended December 31, 2021. Substantially all of the income tax benefit was attributable to a reduction of $1.6 million of our valuation allowance on net deferred tax assets resulting from our acquisition of AltheaDx in April 2022. Specifically, we took into consideration the additional deferred tax liabilities resulting from the acquisition and determined that a portion of our existing valuation allowance should be reduced. Our net loss for the fourth quarter of 2022 was $20.6 million compared to a net loss of $6.4 million for the fourth quarter of 2021. And our net loss for the full year 2022 was $67.1 million compared to a net loss of $31.3 million for 2021. Our diluted loss per share for the fourth quarter was $0.78 compared to a diluted loss per share of $0.25 in the fourth quarter of 2021. Diluted loss per share for the full year 2022 was $2.58 compared to a diluted loss per share of $1.24 for 2021. Adjusted EBITDA for the fourth quarter and full year 2022 were negative $10.4 million and negative $42.6 million, respectively, compared to negative $6.9 million and negative $14.9 million for comparable periods in 2021. For the 12 months ended December 31, 2022, net cash used in operating activities was $41.7 million compared to $19 million for the same period in 2021. Net cash used in investing activities during the 12 months ended December 31, 2022, was $166.5 million, primarily attributable to the purchases of marketable investment securities of $135 million and the cash portion of the acquisition of AltheaDx of $27 million. In 2023, we expect our capital allocation priorities to remain consistent. These priorities include continued acceleration of our R&D efforts to build our expansive body of evidence that supports our marketing as well as to develop our pipeline tests, the continued assessment and evolution of our commercial team, and to a lesser priority, opportunistic tuck-in M&A in the areas of our existing franchises. Finally, we had cash, cash equivalents and marketable securities at December 31, 2022, of $259 million, which we expect, together with anticipated cash generation from sales of our tests, will be sufficient to operationalize our business through 2025. Before I close, I wanted to remind you that in September, we hosted an Investor Day where we outlined our 3-year financial targets. We anticipate achieving total revenue in the range of $255 million to $330 million for the year ending December 31, 2025, with adjusted gross margins in the range of 80% to 85%. Combining these expectations for strong top line growth and gross margins along with the continued disciplined approach to capital allocation, we continue to expect to be net operating cash flow positive for 2025.

Thank you, Frank. We are executing well against our long-term plans and are pleased with our successes in 2022. Again, we have a people-first culture, focusing on our patients, our customers, and our employees. It is this people-first culture, combined with offering innovative tests that drives our relentless pursuit of excellence in every aspect of our business, and we believe the momentum that we finished with in 2022 will provide us with another strong year of performance in 2023. This concludes our remarks. Thank you for your continued interest in Castle. Operator, we are now ready for Q&A.

The first question comes from Sung Ji Nam with Scotiabank.

Could you discuss your 2023 guidance and quarterly pacing, specifically addressing any typical seasonality and how we should view the first quarter?

Yes. Sure, Suji. I think that what we saw with the end of '22 is that we kind of have returned to a pre-COVID pattern of seasonality as it relates to melanoma diagnoses. So I think we're assuming that same kind of progression that we saw through 2019 into 2023. So the typical increased activity in the second quarter from patients identifying more lesions and more physician practice days, we would expect to see again this year.

And then just on the SCC reimbursement, could you just clarify kind of what's different from before? Just trying to figure out what's changed.

On SCC?

Yes, I just want to mention something I think.

Yes. No. I think same assumptions there, Sanjay. As Derek said, our guidance assumes that, that rate is durable through the year as we go through the gap fill process. We're assuming continued coverage. If something changes there, one way or the other, we'll have to adjust, but that's where we anticipate going through the year.

The next question comes from Mason Kariko with Stephens.

This is Jacob on for Mason. I guess first just on the closure of Althea San Diego Lab facility. How should we think about the magnitude of those cost savings there? What are the majority of those savings going to show up in the P&L? And what quarter do you anticipate hitting the full run rate of those savings?

Yes, thank you. We completed the close at the end of the year, which primarily brings benefits such as reduced real estate costs. Additionally, we have enough capacity in Phoenix, so we don't anticipate the staffing level increases that would have been necessary if we had continued operations in Southern California. I believe we won't fully realize the benefits in the first quarter as there is still some winding down happening, but I expect that by the second quarter we will start to see the full benefits from San Diego. Regarding Pittsburgh, we plan to be in that facility by the second quarter and anticipate completing the build-out then. It will likely take us a couple of quarters to fully realize the benefits related to COGS and efficiency from the Pittsburgh transition. Therefore, we expect to be in a transition period concerning COGS during the second and third quarters as we complete that process. However, these investments should significantly help us with COGS as we progress through the remainder of 2023 and into 2024.

And then sorry if you touched on this earlier in the call, we've been juggling a future, but what's the latest update on pursuing ADLT status for the SCC test? Just kind of any updates on how you're thinking about this opportunity on a timeline perspective?

So we do believe that DecisionDx-SCC would qualify for ADLT status based upon the criteria set forth in the statutes. However, because that process can be short or long, we are not commenting upon timing of when that may or not take place. So I would put that as a question mark. And as Frank mentioned earlier during his monologue, for 2023, I would have us all model or assume $38.73 is the price for SCC. It happens to be modified or changed because of ADLT that would represent upside to that.

Our next question comes from Thomas Flaten with Lake Street.

Derek, on the ID Genetic CPT code switch, is there any recourse for you there? Or is this a decision you're stuck with? Or how are you guys thinking about that?

We're exploring opportunities and actions on our end. So we'll probably have more to share towards the end of the first quarter or first quarter earnings.

You mentioned that 79% of the SCC orders also included DX melanoma. Is there something special about that? Is it just a matter of timing where the doctors have had melanoma at some point, or is there a specific feature of SCC that has influenced their choice of that product over melanoma previously?

That's an excellent question, Thomas. I think of a general medical dermatologist, they're going to see melanomas that will be appropriate for testing for melanoma test in squamous cell carcinomas with high-risk features. While I don't have the numbers here to necessarily give you exact differences here. We also have a group of dermatologists that are trained in Mo surgery. So Mo surgeons, as a subspecialty of dermatology, are a good number of Mo surgeons who don't perform Mo Surgery techniques on invasive melanoma. Some of that delta, I would never expect it to be 100% because some of the physicians are those Mo surgeons who preferentially are seeing or at least performing surgical procedures on patients with squamous cell carcinoma, many of whom have a high-risk factor or more, but they would not be necessarily doing surgical excisions in people with invasive melanoma. So that's part of the differentiation there.

The next question comes from Kyle Mikson with Canaccord.

This is Alex Vukasin on for Kyle Mikson. So I guess a good place to start would be, I was just curious about a comment on whether a genetic or TC Cipher could have a meaningful contribution to your assumptions for your 2022 guidance?

We certainly have revenue in the 2023 guidance for both tissue cypher and ID. However, if we step back to 2022 and our conversations around those two acquisitions, those weren't about creating lift in '22 or '23 in terms of revenue from a significant material perspective. Those are really about making sure that we continue to be a profitable, high-growth company in the middle of this decade and beyond. And so we do expect and we will receive, I guess, meaningful revenue from those combined products in 2023, but we're not expecting what you would call a material impact probably until 2024, '25 and beyond. That was the real goal of those acquisitions. So that hasn't changed from a thesis perspective.

And apologies if you want to touch on this a little bit previously. But just on that new CPT code for IDgenetix in the roughly $17 range, I believe, compared to the previous quarter, a roughly $150 range for the Medicare code. I was just curious if you could elaborate on the ways in which you feel that this new code doesn't fully appreciate what the test offers you stated that in your prepared remarks. I was wondering if you could elaborate on that.

The main difference is that this is a generic multi-gene panel test for pharmacogenomic and gene sequencing tests, which may include aspects related to cardiovascular diseases, Alzheimer's, and possibly mental health, as well as pharmacogenomic tests like ours. However, we know that when IDgenetix was originally developed, it was based on a combination of drug-gene interactions, which were integrated using an annotation algorithm that accounted for drug-drug interactions and lifestyle factors. These additional components are clearly not included in the description of this generic multi-panel code, which encompasses a broad range of indications and test types. Does that clarify things?

The next question comes from Puneet Souda with SVB.

You have Michael on for Puneet. I kind of wanted to dig back a little bit on the question about the guidance. So I was wondering, you mentioned tissue Cipher and maybe not a huge contributor, but how much of the guidance is really driven by growth in the core melanoma versus some of the other tests like maybe SCC?

We believe that a significant portion of our growth this year will come from the dermatology franchise. We anticipate continuing to increase our penetration in both the melanoma and squamous cell markets. Therefore, our guidance includes expectations for higher volumes for both tests throughout the year.

And I was wondering with the SCC franchise now that you have this dedicated sales force is going to be, I think, fully productive in the second quarter you said? And you also have the LTD coming online for GTX. I was wondering if you should expect any sort of meaningful growth ramps there perhaps in the second half of the year.

In terms of personnel or in terms of volume, I'm assuming, right?

Volume primarily, yes.

Yes. So that would be our expectation. We only reestablished that dermatopathology-focused group in, I guess, late September of 2022. So we do believe that we don't get full productivity in our sales teams until about six months after their training in the field. We obviously are seeing an impact now. We should see an impact in the first quarter of 2023, but we really would expect that to hit the ground running beginning late 2Q and the fall. Yes, is a short answer that we should see continued growth and acceleration of growth with those investments being made late last year.

The next question comes from Mark Massaro with BTIG.

This is Vivian on for Mark. So as far as your 80% to 85% growth margin target by 2025, which doesn't look too far off, can you just remind us of what remaining levers you're hoping to pull to reach that target?

Sure. As we said, we expect to see the benefits of the rationalization of our laboratories through this year and into that period of time. We were strained for capacity in Pittsburgh, which, of course, limits efficiency. In the case of Southern California, we have great efficiencies in our Phoenix Lab that we think benefit there. So the primary levers are rationalizing those labs, continued scale, which, of course, absorbs fixed costs, and continuing to drive the number of tests that are currently not paid or reimbursed appropriately, converting those to being appropriately reimbursed.

And just a quick follow-up. Could you potentially refresh us on the publication of the MPI data and how you're expecting that to unlock any reimbursement here?

Sure. The publication is in the review process of being submitted and undergoing comments. We obviously don't control the timing of the journal's speed of review and acceptance and online publication timing. It's our expectation or hope or our belief that that should be published in the first half of this year, at least based upon current trends that we're seeing from a review cycle standpoint and clearance that of NCI. So that would be the timing of it, at least by the end of June, I would think is a reasonable assumption. In terms of what that means impact-wise, we have been discussing with our customers for most of 2022 some of the preliminary abstract data. So there is awareness among customers of the value of our test is being proven out by this real-world large-scale prospective study population as reported up through the NCIC program. That's not nearly as effective as having a peer-reviewed publication to walk through in detail. We expect on the physician penetration standpoint to have another hit in terms of accelerating awareness of the value of our test, not just in terms of having the risk ratification confirmed in this large unselected patient population, but also in terms of the survival benefit that patients are experiencing when they're clinically tested with DecisionDx-Melanoma. Presumably, those results are then followed or impacting patient care compared to patients who do not receive our test clinically. This should be more impactful, I would think, when you have a full publication to have a clinician really wrestle and challenge and also read through what the actual study entailed in all the fine detail. Separately, we would expect that this is the kind of outcome data that we hear from our commercial payers and laboratory benefit managers, which is I hear you in terms of what your test does. It looks like it can reduce the frequency of unnecessary similar to biopsy surgical procedures, and I understand and appreciate the risk ratification in terms of reducing overtreatment in terms of patients who have a lower risk of recurrence likelihood than if you use staging alone. I appreciate all that. But can you show me, Derek, that actual patient outcomes, death outcomes are actually improved if I pay for your test versus if I don't? And that NCR article does exactly that. Now I wouldn't expect us to see policy coverage change in time, but I would hope as we go out through the remainder of 2023 and 2024 that becomes that significant landmark study that would force a commercial payer to say, you're right. We've been asking for this as being a litmus test of coverage that's been met right now. But again, I wouldn't see that being an automatic dime turn in July 2023. That's going to occur over a period of time.

Our next question comes from Catherine Schultz with Baird.

This is Tom on for Catherine. Wondering if you could just kind of build on that last point here, and maybe just give us a status update on the commercial payer progress towards Dx-Melanoma? And specifically just any expectations throughout potential NCCN guideline inclusion for '23?

Sure. A couple of comments there. It continues to be challenging to push over commercial payers. As I think you know, they are not necessarily swayed by evidence, but are driven by other factors. We did have some nice wins in the year that will begin to be implemented in 2023. But as we said before, I think that's going to continue to be steady but slow progress. I think it would take an NCCN positive inclusion to see any kind of step-wise increase in the rate there.

Now in terms of NCC and timing, as your second question there, Tom, historically, the melanoma group has had their in-person or a significant meeting, I guess, in the July time period that are you had July time period of each year, and the outcome of that is usually published at year-end, December, early January, or late November. So I would not expect to see any material updates for the remainder of 2023 until we get to that year-end publication date, which reflects sort of their mid-summer meeting cycle.

And then we touched on this before, but in getting the gross margin pacing for the year. I heard the comments for the clients on sort of the lab rationalization in tech here. But just curious about how you're thinking about gross margin pacing overall and how we should think about contributions from these tests, just some of the forward contributions?

I think that as with the other trends, that will be sort of a progressive trend, nothing stepwise appears to be there. In addition to efficiencies, of course, converting those zero pay tests to being paid has a big impact because that drops straight through. So we'll continue to see that. We would expect to see that move in the right direction here over time, but in a slower, methodical pace.

Those are all the questions we have for today. So I'll now turn the call back to Derek for concluding remarks.

This concludes our fourth quarter and full year 2022 earnings call. Thank you again for joining us today and for your continued interest in Castle Biosciences.

Thank you, everyone, for joining us today. This concludes our call, and you may now disconnect your lines.