Castle Biosciences Inc Q1 FY2023 Earnings Call

Good afternoon, and welcome to Castle Biosciences First Quarter 2023 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.

Thank you, operator. Good afternoon everyone. Welcome to Castle Biosciences' first quarter 2023 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, May 3rd, 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 three 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, total addressable market, 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 regarding reimbursement for our product, 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 quarterly report on Form 10-Q for the year ended March 31, 2023, 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. I will now turn the call over to Derek.

Thank you, Camilla, and good afternoon, everyone. As you saw from our announcement a few minutes ago, I am pleased to share that Castle Bioscience delivered another strong quarter, growing revenue by 57% and total test report volume by 73% compared to the first quarter of 2022, which we attribute to our continued focus on our long-term strategy, translating to strong near-term operational performance. We believe this performance sets us up for another excellent year and I would like to, first and foremost, thank our Castle employees. Our success is based on their dedication to our patient-focused mission. We believe if we focus on improving the outcomes of the patients that we serve, then clinicians should find value in ordering our tests. We should get paid fairly, and we will, therefore, have a great revenue growth profile. As such, we remain confident in our business and are reaffirming our 2023 total revenue guidance of $170 million to $180 million. Today, I will take you through execution and strategy highlights from the quarter, and then Frank will provide financial highlights in the period, including with your questions. First, I would like to put our first-quarter results in the context of our long-term strategy. We entered 2020 with an estimated in-market US total addressable market, or TAM, of approximately $547 million. Through thoughtful planning and executional excellence on our near- and long-term growth strategy, we have seen significant organic growth in the top line, diversified our portfolio with strategic investment, and increased our estimated in-market US-only TAM to $8 billion. We believe that our actions position us well for continued value creation in 2023 and beyond. What a great way to enter this year and have the opportunity to maintain focus on our long-term growth plans. Now let's get to our first-quarter results. Driven by successful execution of our growth initiatives in 2022, we saw strong year-over-year and sequential growth in our core dermatology business. We evolved our dermatology-facing commercial team in the third quarter of 2022. Our dermatology-facing sales team now consists of approximately 70 outside sales territories that are equally focused on DecisionDx-Melanoma and DecisionDx-SCC. In the first quarter of 2023, test volume for these two tests combined was 9,994, reflecting a growth of 39% year-over-year and 9% sequentially. This growth is an excellent reflection of our focus on operational execution, which we have demonstrated time after time since our IPO in mid-2019. Another pillar of our growth strategy is the continued development of evidence to support the clinical use of our tests, including impacting outcomes. I think most of us are aware that the value of risk stratification tests like DecisionDx-Melanoma is to improve decision-making accuracy when it comes to guiding patients down, for instance, treatment pathway A versus B or A versus C, all of which in cancer are likely based on assessing an individual patient's risk of progression or metastasis. We have, for years, generated data with our DecisionDx-Melanoma test that has shown clinicians using our test clinically do, in fact, make changes in the selection of their patient treatment pathways. We have always had an indirect chain of evidence that these changes would therefore result in either less intervention, like elimination of an unnecessary surgical biopsy procedure, or more intervention, like initiation of regular imaging based upon a higher-risk DecisionDx-Melanoma test result that should then enable early detection of a metastasis and earlier initiation of immune or targeted therapy. Early initiation of therapy is significant as the clinical studies with these agents in melanoma have shown that we get better responses if immunotherapy is initiated when the tumor burden is lower. We find lower tumor burden when we employ routine scheduled advanced imaging protocols like CT scans and brain MRIs compared to imaging those patients only following a symptom of metastasis. A key point to reinforce here is the word indirect. It is rare for a risk stratification test to prospectively demonstrate that better treatment pathway selections result in improved survival outcomes versus net health outcomes. As you might have seen from our release earlier today, I am pleased to discuss the publication of an independent multi-center clinical study that provides a direct chain of evidence that use of DecisionDx-Melanoma test results to guide radiologic surveillance led to improved patient outcomes. The study was conducted at three National Cancer Institute designated cancer centers: the Cleveland Clinic, Northwestern University in Chicago, and Oregon Health & Sciences Center. During the study time period, there were clinicians who had adopted DecisionDx-Melanoma within each of these institutions for clinical use, and there are also clinicians who had not adopted DecisionDx-Melanoma for clinical use. These differences in adoption within each of the three institutions enable the study authors to evaluate directly the impact of treatment pathways that were directed with DecisionDx-Melanoma test results to those patients whose treatment pathways do not benefit from DecisionDx-Melanoma test results—meaning patients who were not clinically tested but were managed within the same institutional setting. In addition to the opportunity to control for access to similar care opportunities by limiting the study to patients managed within their same institutions, the study authors also aimed to control for any impact on the performance of sentinel lymph node biopsy surgical procedures. Thus, the only patients evaluated were those who underwent a sentinel lymph node biopsy surgical procedure and were sentinel lymph node negative, meaning that they did not find any melanoma cells in the sentinel lymph nodes. This meant that all patients were staged as Stage I or II, which is the prime target for the clinical use of our DecisionDx-Melanoma test, given that greater than 90% of early-stage melanoma patients are Stage I or II at the time of diagnosis. Each of these institutions has treatment pathways for patients with a high-risk Class 2B DecisionDx-Melanoma test result that escalated their management plan to better align to the individual patient's risk of metastasis. That is, all patients underwent scheduled routine advanced imaging for the purpose of detecting metastasis when tumor burden was low and not symptomatic. In comparison, the control group included patients from the same institution who did not receive DecisionDx-Melanoma test results as part of their clinical care and who were managed appropriately according to guidelines, without a scheduled routine advanced imaging protocol, meaning that they were followed clinically, because the population risk of progression was low enough so putting these patients in a scheduled routine advanced imaging treatment plan was not appropriate based upon guidelines. The results were as we would have predicted from our indirect chain of evidence: patients who received a high-risk Class 2B DecisionDx-Melanoma test result and had treatment plans aligned to include scheduled routine advanced imaging, had their metastasis detected earlier than those who were followed with routine clinical exams only. Further, the DecisionDx-Melanoma tested group had recurrences detected approximately 10 months earlier than patients in the control group, and the average tumor burden was significantly lower, with 27.6 millimeters versus 73.1 millimeters for those in the non-tested control group with a p value of 0.027. This is important. As I mentioned earlier, recent studies with immunotherapy show that treatment for metastatic melanoma is more effective when treatment is initiated when the tumor burden is lower versus when the tumor burden is higher, which typically means detected asymptomatically with planned routine imaging versus symptomatically. And we saw this expected outcome in the study. Specifically, of patients who had a recurrence, 76% of the patients with a melanoma recurrence who received a change in care decisions that was linked to a DecisionDx-Melanoma Class 2B test result were alive following an average follow-up time of 45.6 months. In comparison, 50% of patients who were followed without the benefit of DecisionDx-Melanoma testing were alive following an average follow-up time of 63.3 months. The P value here was also significant at P equals 0.027. In summary, the study found that using DecisionDx-Melanoma to risk-stratify patients to guide care resulted in early detection of melanoma recurrence, while the tumor burden was lower, leading to improved treatment pathway decisions that were directly linked to improved survival. Now this independent study is very exciting from our perspective. It is even more exciting when you view this direct chain of evidence to the indirect chain of evidence within the large real-world unselected collaboration study that we have with the National Cancer Institute, or NCI, and their Surveillance Epidemiology and End Results or SEER programs patient registries. As you know from prior discussions, this ongoing collaboration has demonstrated a clinically and statistically significant indirect chain of evidence that patients who received DecisionDx-Melanoma test results have improved melanoma-specific survival and overall specific survival compared to patients who were not tested—those who did not have a benefit of DecisionDx-Melanoma test results as part of their clinical care. In fact, I am pleased to announce that the initial publication has been accepted, and we expect it to be available online by the end of the second quarter. We believe that clinicians who diagnose and manage early-stage melanoma as well as commercial payers should find these direct and indirect chains of evidence compelling. Now let's turn to our Gastroenterology franchise. We delivered 1,383 TissueCypher test reports in the first quarter of 2023, up from 56 test reports delivered in the first quarter of 2022 and a 34% sequential increase. You may recall, we hired the initial sales force in January 2022, spent a significant amount of time in the first quarter of 2022 in training and also had to work through the Advanced Diagnostic Laboratory Test application process and the impact on the Medicare 14-day rule. We continue to be extremely pleased with the reception of TissueCypher by the Gastroenterology clinician community and associations. For example, inclusion in the American Gastroenterology Association clinical practice update in July 2022. Regarding reimbursement, recall that Medicare granted Advanced Diagnostic Laboratory Test status to the TissueCypher in 2022. As part of the ADLT process, the reimbursement rate for TissueCypher from January 1, 2023, through December 31, 2024, was determined based upon the median private payer allowable rate that was received between April 1, 2022, and August 31, 2022, which is $4,950. Turning to our Mental Health franchise. We delivered 2,150 ID GenX test reports in the first quarter of 2023, a 77% sequential increase over the fourth quarter of 2022. As a reminder, no test reports were delivered by Castle in the first quarter of 2022. We have a thoughtful integration plan, which spans five to six quarters, and we are midway through that plan. As you can expect, we are pleased with the momentum that 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 recognized 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. Turning to reimbursement, I want to remind you that all of our proprietary tests have undergone medical review and, as of today, are covered by CMS for Medicare beneficiaries. Finally, we are looking forward to the official grand opening of our new laboratory in Pittsburgh, Pennsylvania later this month. After completing a rigorous transition, I am pleased to report the lab is fully functional, and we expect to have the capacity and ability to process our proprietary tests from a new laboratory location. I will now turn the call over to Frank, who will provide details relating to our financial results.

Hey, Derek, and good afternoon, everyone. First-quarter revenue was $42 million, an increase of 57% over the first quarter of 2022. Overall, the increased revenues primarily reflect an increase in revenues from DecisionDx-SCC and DecisionDx-Melanoma. We are pleased to see our non-dermatologic revenue continue to grow in the first quarter as a percent of revenue, in line with our expectations. Adjusted revenue, which excludes the effects of revenue adjustments related to tests delivered in prior periods was $43.4 million, an increase of 65% over the first quarter of 2022. Our gross margin during the first quarter was 70.5% compared to 71.7% in the first quarter of 2022. 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 76.5% for the quarter compared to 77.4% for the same period in 2022. Our total operating expenses, including cost of sales for the quarter ended March 31, 2023, were $73.6 million compared to $51.4 million for the first quarter of 2022. The largest driver of the increase was higher SG&A, which increased by $16.3 million compared to 2022. This was attributable in large part to the higher personnel costs associated with our increased headcount, which include expenses related to stock-based compensation, salaries, bonuses, and benefits. 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 sales and marketing expenses was primarily associated with travel, training events, and conference fees. R&D expense increased by $3.6 million in the first quarter compared to the first quarter of 2022 and was primarily associated with additional headcount to manage and run our clinical studies and increases in other expenses associated with increased clinical study activity. Total stock-based compensation expense, which is allocated among cost of sales, R&D expense, and SG&A expense, totaled $13.5 million for the first quarter compared to $8.4 million for the first quarter of 2022. The increase was primarily attributable to the effect of our annual equity awards granted in December 2022. In the first quarter of 2022, operating expenses included a change in the fair value of contingent consideration of $2.6 million or $0.10 per diluted share, which was related to the remeasurement of the liability for earnout payments in connection with our acquisition of Cernostics. There was no comparable expense in the first quarter of 2023. We had amortization of acquired intangible assets for the three months ended March 31, 2023, of $2.2 million, an increase of $0.6 million compared to the three months ended March 31, 2022. The increase is primarily associated with the amortization of developed technology attributable to the acquisition of AltheaDx in April of 2022. Interest income increased by $2.3 million for the first quarter of 2023 compared to the first quarter of 2022. The increase primarily reflects higher interest rates earned on our cash equivalents and our purchases of marketable investment securities during the third quarter of 2022. Our net loss for the first quarter of 2023 was $29.2 million, compared to a net loss of $24.6 million for the first quarter of 2022. Diluted loss per share for the first quarter was $1.10 compared to diluted loss per share of $0.97 in the first quarter of 2022. Adjusted EBITDA for the first quarter was negative $15.1 million compared to negative $11.4 million for the comparable period in 2022. Net cash used in operating activities was $25.4 million for the three months ended March 31st, 2023, of which $17.7 million was related to payout of annual bonuses as well as certain healthcare benefit contributions that are not expected to recur during the remainder of 2023. Net cash provided by investing activities was $16.6 million for the three months ended March 31st, 2023, and consisted primarily of the maturity of marketable investment securities of $50 million, partially offset by purchases of marketable investment securities of $30.1 million and purchases of property and equipment of $3.3 million. Finally, we had cash, cash equivalents, and marketable securities at March 31st, 2023, of $232 million, which we expect, together with anticipated cash generated from sales of our tests, will be sufficient to operationalize our business through 2025. I'll now turn the call back over to Derek.

Thank you, Frank. In summary, we are off to a great start in 2023, delivering strong year-over-year growth in revenue and total test report volume driven by our continued execution on our long-term growth plans. I'd like to conclude today by thanking our Castle team. I also thank you for your continued interest in Castle. Now, we will be happy to take your questions, Operator?

Thank you. Our first question today comes from Thomas Flaten with Lake Street Capital Markets. Thomas, please go ahead.

Hey. Good afternoon guys. Congrats on a great quarter. Derek, particularly in light of this morning's press release with that study that was showing a real impact on outcomes and even costs like the lower use of immunotherapy in the Dx-Melanoma patients. Can you just walk us through kind of the status of your current health economic argument that you're making to payers? And maybe give us a sense of how that's stacking up.

We are currently analyzing data for additional publications. To give you a qualitative response, let's look at some public data sets we have. Our test has two primary uses. One use is to avoid surgical biopsy procedures, which are based on factors like tumor thickness and ulceration status. When 100 eligible patients are sent to a surgeon, 100 surgical procedures are performed, but only 12 of those patients actually have a positive sentinel lymph node, indicating that the procedure could have been avoided if the test results were known. We've generated data suggesting we can likely identify about 75% of patients who would have a low likelihood of a positive node based on current guidelines, thus avoiding unnecessary procedures. If you consider that three to four patients per case could avoid these procedures, we need to look at the cost of sentinel lymph node biopsies, which can range from $21,000 to $24,000 when considering surgical and anesthesia costs, as well as other factors. If we average it at about $20,000, we see substantial savings from avoiding unnecessary surgeries measured against our DecisionDx-Melanoma test, which provides significant health care savings in the short term. On the other hand, the use of our test for risk of recurrence is also beneficial. Identifying patients who may qualify for adjuvant immunotherapy, despite having thicker tumors, is crucial. Shared decision-making is important, as it allows patients and clinicians to discuss all the information regarding treatment options, including the potential toxicities of immunotherapy. If there's a low chance of benefit due to low metastasis risk, these patients might not need to undergo immunotherapy. However, if a patient is identified early as low risk but later metastasizes, adjustments to their treatment can be made. The economic benefits for Castle’s test are substantial, and we will see how this year unfolds, especially in light of the article discussed earlier today. Does that address your question regarding the qualitative aspect?

Yeah. I think that's great. I appreciate that. And then finally, on the last call, we had some conversation about the ID Genetics code switching, and you thought you might have more commentary on this call. So I’m just curious if you have any updates for us?

No is the quick answer. We have things in process, but no update today.

All right. Thanks guys. Appreciate it.

Thank you, Thomas.

Our next question comes from Puneet Souda with SVB. Please go ahead, Puneet.

Hi, Derek, Frank. Thanks for taking the question. So just a clarification on the guide. I mean, you beat per by I think, close to about $5 million from our expectations. And just wondering, what's the conservatism in the guide that you didn't change the guide? So, just wondering if anything related to SEC or a different assumption, and just wondering what are you modeling for SCC in the guide for the full year?

Our view on the guide, Puneet, is to be conservative and ensure that we're putting out guidance that investors can rely on. And that we can be confident in without being overly worried about disappointing. So yes, we do have revenue from squamous cell in the guidance.

Okay. Derek, could you clarify and update us on the latest regarding Novitas and the other efforts for the SCC assay? What are your overall expectations? I believe we were expecting some news around May, so please share the latest information. Thank you.

Yes, there hasn't been an update since the year-end earnings in March. We still believe they will likely finalize the draft they released about a year ago. So, we should expect some developments regarding the LCD in the oncology biomarker area. As of now, we haven't received any official notice that they intend to let that expire, though that could be a possibility. However, I find that unlikely. Based on discussions we've had with third parties and consultants, their intention seems to be to streamline review processes with that LCD. If they see that someone they trust has already evaluated a certain test, they might adopt that conclusion to reduce their workload, without intending to be exclusionary. Although the draft wasn't written that way, we still expect they will finalize it to make reviewing previously evaluated tests more efficient while maintaining their responsibility for tests that haven’t been reviewed. Regarding timing, I thought we would have heard something by early to mid-May, but it's still early May right now.

Can you provide an update on your other efforts, ADLTs and other MAX that you had considered earlier? Are you still thinking about that as a backup option for this assay going forward for reimbursement? Thank you.

Yes. So our expectation from about four, five, or six months ago was that Palmetto was reviewing our application. Last detailed focused call we had with them suggested that they were reading the application because they were very topical questions that wouldn't have come from general knowledge. So I think that's positive for us. We have anything formal or informal recently that we hadn't talked about since, I think, the end of year-end earnings. I think in terms of the ADLT status, we do think we meet the PAM-related requirements that are out there, but we've chosen just based upon the timing that CMS is taking to kind of turn around ADLT applications that we should not come and if we have some at their antennas to it and just see that outcome material become public and it goes to public.

Our next question comes from Catherine Schulte with Baird. Please go ahead, Catherine.

Hey, guys. Thanks for the questions. I guess, first, can you just talk about the National Society for Cutaneous Medicine panel report that came out in March recommending DecisionDx-Melanoma, how much weight does this body carry in the dermatology community? And do you think there's any potential to sway NCCN? And related to that, are you still expecting the publication of the NCI SEER study before the NCCN submission deadline?

Yes, let me address those two questions. First, regarding the NCI paper, it has been accepted, and based on its publication timeline, it should be available before the end of the first quarter, specifically in the second quarter. I previously discussed this in more detail during the conference call. So, I anticipate it will be included in our submission and review cycle. Now, about the guideline publication. This organization includes many prominent figures in dermatology, with over half of them being former presidents of the American Academy of Dermatology. They have extensive experience in publishing and writing on melanoma. Their expertise and clinical practice could influence other guideline organizations like NCCN. In our view, different guideline and consensus groups will base their literature reviews on existing research. We believe this test has demonstrated evidence for use in specific situations, which should have some impact. This guidance is particularly important for physicians, dermatologists, nurse practitioners, or physician assistants who may be hesitant and waiting for validation. It is likely to assist in increasing our market penetration. Additionally, there are several payers that look for support from guidelines and don’t rely solely on one committee. Over time, we expect these kinds of endorsements from various committees and expert panels to positively influence the evidence weight, although we don't expect immediate changes on July 1. Our hope is that these three audiences will benefit from this, leading to a favorable turnover in coverage lives.

Okay. And then maybe on the matter discussed, you saw just over a 30% sequential volume growth increase. Can you just talk to what you're seeing there, given you seem to be in a pretty nice inflection point?

I think we'll just continue to be pleased with the clear clinical utility of the test, and it's one that I think is readily and quickly identified and recognized by clinicians. And so it is a larger patient population, and it's a cancer that clinicians are thinking about more often, even though we're not targeting all of them. There are about 1 million cases a year, and so, even though they aren't all eligible for our testing or appropriate for our testing, it is something that clinicians think about very regularly. And so, we're excited to see it. And we knew when we developed it, that we had a test that physicians were looking for, and I think this validates that the traction validates that.

In the first quarter, we made a significant change by shifting our focus from having 80% of our dermatology sales team working on DecisionDx-Melanoma to about a 50-50 split with DecisionDx-SCC. When we consider bringing on a new representative, it generally takes about two quarters to see the results from that hire. If we look at this change beginning around October 1, the first quarter should have been when we started seeing the benefits. Although we didn't highlight it during this call, one way we measure success in the dermatology group is by working both melanoma and SCC together, as we often engage the same customer base with both tests. Our goal is to integrate both melanoma and SCC into a unified productivity growth strategy. It's encouraging to witness strong growth in melanoma, and as you mentioned, there has also been impressive growth in the SCC test.

Our next question comes from Mason Carrico with Stephens. Please go ahead, Mason.

Okay. This is Jake on for Mason. Thanks for taking our questions. I guess first here, I know you guys aren't expecting TissueCypher ID Genetics to really have a material impact on the top line until '24, '25 timeline. But just given the new pricing for TissueCypher and sales teams reaching optimal productivity in the second quarter, it seems like TissueCypher is really set up to have a strong year. So I guess I'm just kind of wondering, what do you see as a risk or limitations that could hinder TissueCypher growth in 2023?

I believe both TissueCypher and IGX are progressing very well, possibly even exceeding our expectations from around a year to a year and a half ago. The fact that clinicians are accepting these products ahead of schedule makes me optimistic about having strong growth in the next four to five years. Based on the momentum we are witnessing in the first quarter, particularly with TissueCypher, along with the recent changes in reimbursement rates, there is potential for a more significant revenue impact in the latter half of the year than we previously anticipated. You seem to be on the right track with your observations. There are many variables to consider between early May and late December, but it appears we are on track. From a commercial or adoption perspective, we have not encountered any significant obstacles from customers. Gastroenterology presents a bit more complexity than dermatology. Unlike dermatologists who perform biopsies in their offices and have immediate access to results, gastroenterologists generally operate in ambulatory care centers or operating rooms, where patient interaction is different. This adds a layer of complexity in ensuring the office staff is aware of TissueCypher so that they can remind gastroenterologists to order the test once the pathology results come in. However, we view it as manageable work. We are very pleased with the first quarter results compared to the last quarter of the previous year. The comparisons for the first quarter might not be entirely relevant due to our previous challenges, such as the Medicare 14-day rule that hindered test ordering, which was resolved on April 1. Overall, we see a lot of potential, and while the adoption process in gastroenterology is quite complex compared to dermatology, we do not face significant obstacles in terms of doctor adoption.

Okay. Thanks. That's helpful. So then on the ramp of that GI sales team, just given the strong demand you have seen in Q1 and so far in Q2 here, any updated thoughts on how many reps could be added to that team this year?

We're evaluating that right now. We want to be a little careful and balance the disruption of the territories that are out there. But also, you're right, we see that the test is, again, similar to my comments on SCC, we knew when we looked at the test that it was very clinically relevant. We knew that physicians were looking for a solution like TissueCypher and we were really excited when we got the opportunity. And so it's nice to see that bear out. So we'll kind of balance try not to disrupt territories too much, but also recognizing we've got some more opportunity there that we could take advantage of.

The next question comes from Mark Massaro with BTIG. Please go ahead, Mark.

Hey, guys, congratulations on another great quarter. One of the numbers that seem to jump off the page to me was the ID Genetics volumes, which grew 77% sequentially. Can you give us a sense for what caused the substantial growth in that product? Was it sales execution or maybe more salespeople, or do you think it's broader awareness of all the multiple indications in mental health? Would love to just get a sense for what drove the growth? And how should we think about that going forward from here?

Thank you, Mark. We recognized the potential of TissueCypher when we first examined it and were thrilled about the opportunity it presented. We wanted to ensure that we communicated our message effectively and developed solid support for it. We have expressed previously that we didn’t want to rush this process and risk any missteps; we aimed for a thorough and accurate launch. As we’ve mentioned before, by the end of the year, we were very pleased with the team in place and the supportive materials available to convey our story. What we're experiencing now is the outcome of an excellent test in a significantly large and underserved market.

We did not increase the number of territories over the third and fourth quarter. Our plan was to sort of as you may recall from last quarter or even the fourth I mean, even in the third quarter, our approach to both IDgenetix and TissueCypher was to really take five quarters or six quarters to integrate these as we should, not necessarily slowly, but not to be overly aggressive. And I think TissueCypher is a good two quarters ahead of IDgenetix. So we're seeing the fruits of that labor beginning last fall into the spring. I think you're right. We anticipated we were seeing a very, very solid test that was competitively differentiated in a large market as Frank that has huge demand. It's a matter of organizing things and executing well. I don't want to say carefully from a careful standpoint, but just moving forward here, where we were quite pleased to go and see IDgenetix respond to the messaging that was kind of finalized and refined in the fourth quarter with a really, really nice strong team out there. But the team size did not change quarter-to-quarter, which just tells you the kind of demand that is out there when you get the message right.

Okay. Great. And apologies, I've been bouncing around calls, so I haven't heard your prepared remarks yet. But the TissueCypher test, can you just remind me when the ADLT rate of $4,950 went effective? And maybe just to remind folks, is that somewhere around 40% to 45% of your volume? So if those things are true, your ASP should probably be hovering in the almost $2,000 range. Any clarity there would be helpful.

Yes. We discussed some of those on prior calls. So the ADLT rate went into effect January 1 of this year. Because when it was granted, it will be that same rate through the end of 2024. So in this single two-year period, it's a two-year rate, and then 2025 is based upon the first half of this year's rate. So, the rate is consistent for two years; you can see it transparently. In terms of the volume mix, we are still a little low in terms of definitively saying what the mix of sort of years of age and older may settle out at versus under. But I think what we're seeing right now is it looks like the patient base is pretty close to cutaneous melanoma. So maybe kind of 45% of the patients are over age 65, which, I mean, most of them are Medicare, Medicare Advantage, not all of course, but most. The remaining 55% are below the age of 65 years. So I think that's where it'll probably settle out. But I would give ourselves some legal room around that number until we get through 2023 and get to a bigger base—before we can be more confident kind of in outlying years looks like. So your calculation, I think, in terms of average ASP, if you assume no commercial payment is certainly reasonable. And of course, not unreasonable at this point in time.

Our next question comes from Sung Ji Nam with Scotiabank. Please go ahead.

Hi. Thanks for taking the questions, and congratulations on the quarter. For the study that you've published or you're referring to this morning with the decision via melanoma guiding radiological surveillance. Just could you remind us if that's kind of the first of such study? And then are there plans for additional studies that you guys might support going in the future?

Yes, excellent question. So let's see here. I think one, maybe six or seven years ago, we had put together and used with clinicians, an indirect chain of evidence, as we would call it, right? So our test does risk ratify patients; if you use it within current guidelines, then there should be improved treatment pathway selection processes. People who look like they're low risk on pathology, but high risk on the Castle test, get an escalation of care within an existing pathway, and the reverse happens. If you follow the indirect chain of evidence, then the evidence shows that if you are actually in a high-risk treatment pathway, then the first care impact is really being undergoing routine scheduled imaging, which in melanoma sort of means pelvis to neck CT scans maybe four times a year and then brain MRIs a couple of times a year, but that varies slightly depending on the institution or medical oncologist. So that you can pick up metastatic spread earlier when it's asymptomatic, and the sort of Phase 3 trials for the immune therapy agents within melanoma as well as the targeted therapies, all show consistently that patients who get a better response are those where you detect a lower tumor burden of disease when they go on drug, i.e., detected by imaging versus a patient who has a seizure in the OR and you image them and they have a huge brain metastasis. So that's that indirect evidence we've used for a long time. And we are just a test, right? We aren't a therapy. You've got to act with our data to have that benefit for doctors. I think the paper that we discussed this morning, and I spent some time on the conference call here walking through, is really impactful because it shows you that three large NCI centers across the US had clinicians who had put our test within their treatment pathways compared to patients in the same centers who weren't tested, they actually live longer. I mean, that's fantastic, right? So you're able to pick up metastatic disease when it was a smaller volume, you get them on therapy, and they actually have a higher survival rate. I mean, you can't get almost—outside of a randomized controlled trial for a drug; you can't get much better data, despite there being limitations, of course, by the way. Now, going forward, I think that the National Cancer Institute study, which will come out here in a few weeks, is a powerful data set that is indirect in nature. And we also have other studies ongoing where that might be an output that we go ahead and see. So, clinically utility studies, almost like this article, this morning by Dilmen and Colleagues, where we looked at, do you use our test clinically? Yes. So let's enroll you in a study. You make changes that are within your own little pathway, which are largely the same. And then you'll follow the outcome. So, I would expect us to go ahead and see reporting on those kinds of studies that we have had ongoing through COVID, another year or two to provide, again, additional data showing not only do you have a test that you know risk stratifies. But you also have multiple publications now on showing a direct link of evidence that when you use our test, patients get put in the right pathway, they get disease picked up earlier when it spreads. They get on effective therapies, and they live longer. That is the ultimate goal, of course, of treating cancer or any disease that matter. So, yes, expect more of that that similar kind of data that's coming out that will be Castle's sponsor versus independent.

Got it. That's great to hear. And then just on the patient volume trends, just the first full year without—hopefully a pandemic impact here. Just kind of curious if you're seeing patient volumes kind of— is there any benefit from the delay of patients that were delaying their treatment or whatnot coming back and potentially improving—the volumes you're seeing?

That's a good question. I think the answer is no. I mean, the third-party vendors and their data sources do fluctuate via their contract changes year-over-year. So, it's hard to say, is it 2018 or 2019 data set the exact same sort of number of doctors and patients in 2023. I would say that I am not aware of any sort of underlying rise in melanoma diagnoses that have kind of recovered, I guess that is the case. So, I believe that most, if at all, of the growth we're seeing across our melanoma test, squamous cell, even tissue cypher—those are very low penetration is due to just increased physician adoption because they see the value of our test clinically. I do think that the one trigger that might change that on a macro level might be when we decide to cut the profit margins of telemedicine versus in-person medicine and the subsequent impact that will have on patients being seen by clinicians for things like high blood pressure or hypertension or diabetes, and somebody picks up the mole on the back of their neck that the patient didn't see beforehand. Those—that's the—I think that's the major shift I would think about saying when do you see across skin cancer that visual diagnosis being picked up. I think the major boulder to roll down the hill is going to be people are not motivated for telehealth. They are motivated for in-person visits, and that will pick up these incidental diagnoses.

We have no further questions. I'll turn the call back to Derek for closing remarks.

Thank you, operator. This concludes our first quarter earnings call. Again, thank you 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.