Castle Biosciences Inc (CSTL) Q2 2026 Earnings Call Transcript

$2.9 million for the same period in 2025, primarily attributable to higher personnel costs. Higher personnel costs reflect headcount expansions in our administrative functions, as well as merit and annual inflationary wage adjustments for existing employees. Cost of sales expenses were $23.7 million in the second quarter of 2026, compared to $17.6 million in the second quarter of 2025, primarily due to higher expenses for lab supplies, higher personnel costs, and higher lab services costs. The increase in lab supplies and lab services costs reflects higher test report volumes. Increases in personnel costs reflect a higher headcount due to additions made to support business growth in response to growing test report volumes as well as merit and annual inflationary wage adjustments for existing employees. R&D expenses were $14.5 million for the quarter compared to $12.8 million for the same period in 2025, primarily due to higher personnel costs driven by increased headcount to support continued business growth as well as increased advisory board, clinical trial, and travel costs related to our pipeline initiatives. Total non-cash stock-based compensation expense, which is allocated among cost of sales, R&D, and SG&A expense, was $11.6 million for the second quarter of 2026, compared to $11.2 million in the second quarter of 2025. Interest income was $2.4 million for the second quarter of 2026, compared to $2.9 million in the second quarter of 2025. Our net loss for the second quarter of 2026 was $2.1 million, compared to net income of $4.5 million for the second quarter of 2025. Diluted loss per share for the second quarter was $0.07, compared to diluted earnings per share of $0.15 for the same period in 2025. Adjusted EBITDA for the second quarter was $12.4 million, compared to $10.4 million for the comparable period in 2025. We continue to support and invest in growth initiatives while focusing on thoughtful expense control. We expect to achieve positive adjusted EBITDA for the third quarter, the fourth quarter, and the full year 2026, and absent any strategic direction shift as well as for the full year 2027. Net cash provided by operating activities was $15.2 million for the second quarter of 2026, and net cash used in operating activities was $6.9 million for the six months ended June 30, 2026. Net cash used in investing activities was $41.8 million for the six months ended June 30, 2026, and consisted primarily of purchases of marketable investment securities of $109.6 million, purchases of property and equipment, partially offset by the maturities of marketable investment and debt securities, along with the sale of equity securities. As of June 30, 2026, we had cash, cash equivalents, and marketable investment securities of $266.8 Our strong balance sheet continues to provide financial flexibility to invest in our growth priorities. In closing, we delivered strong financial results through the first half of the year, continuing our longstanding history of consistent execution and performance excellence. I'll now turn the call back over to Derek.

Thank you, Frank. In summary, we continue to execute at a high level, and I'm encouraged by the momentum we're carrying into the remainder of the year. None of this would be possible without the dedication of the entire CASEL team, and I'm proud of what they have accomplished through their unwavered commitment to improving patient care. Thank you for your continued interest in CASEL. Now we will be happy to take your questions. Operator?

Thank you. In order to allow everyone in the queue an opportunity to address the CASEL management team, please limit your time on the call to one question and only one follow-up. If you have additional questions, please return to the queue. Please stand by while we compile the Q&A roster. And our first question comes from Max Masucci with Ross Capital Partners. Please go ahead.

Hi, good afternoon. Congrats on a great quarter. So first question on Advance ADTX, nice to see the unanimous panel vote for the crosswalk. And we'd love to get your initial thoughts on the rate associated with the crosswalk, you know, whether the decision matched your expectations and just any updated expectations around the transition to a full commercial launch.

Yeah, good question, Max. Derek here. So, first of all, in our analysis before we submitted our request to be crosswalked to that code, we believe that CASEL, that that was the most appropriate code. The crosswalk code is for a test that predicts drug response to patients with psoriasis. The advanced AD test, as you know, predicts systemic drug response to people with atopic dermatitis, similar kind of technology approaches, etc. So we thought that was the appropriate crosswalk to take care of that. Obviously, the panel did, too. I think it was a 21-0-0 vote in favor of crosswalking. The rate of 36.75, I think, is a very, very strong rate for our test. So we are quite pleased with the panel's recommendation or at least voting outcome there. And as you know, CMS will go ahead and take that input. And I think we see preliminary draft 2026 CLFS rate schedules in late September. So we're looking forward to seeing that affirmed going forward. I think from an overall perspective, as that goes on with the clinical laboratory fee schedule effective January 1, 2026, that gives us a good benchmark in order to go ahead and set conversations with commercial payers as well regarding reimbursement rates, et cetera. So I think it's a very nice, consistent plotting launch going forward here, which lets us get in a better position to open up a full loss in the future.

That's great. Second question, can you just give a bit more detail around the Tissue Cipher ASP trends in the second quarter, you know, any one-timers, and just looking at the $20 million guidance rates, is that mostly captured by the improved Tissue Cipher volume growth outlook, or is there any expectation, you know, or improved expectation on the ASP side for Tissue Cipher?

Frank?

We did have a pickup in ASP, Max. We've been selling the test for long enough now that we've got a bit more experience in terms of expected rates and actual collected rates. And so we were able to increase the ASP a bit in the first half of this year. Now, having said that, I wouldn't expect to see the same stepwise increase in the back half. I think, you know, we all are evaluating our payer experience and comparing that to our expectations, but I would not expect to see it again. So most of the raise in our guide here is based on performance to date, and your continued performance of our two primary revenue drivers, DecisionX melanoma and tissue cycle.

Great. Thank you.

Our next question comes from Thomas Flatton with Lake Street Capital. Please proceed with your question.

Hey, good afternoon. Congrats on the quarter. A few questions. Given the volume growth on TissueCypher, anything you can share with us with respect to Salesforce expansion to really keep maximizing on this opportunity?

We have continued to sort of expand as we see territories hitting a forward-looking, you know, $2.5 million in revenue, Thomas. We don't necessarily give out specific numbers, but we're kind of floating around 100 sales represented or sales territories for both our gastroenterology division and our dermatology We think that's probably pretty close to where it needs to be from a tissue cipher standpoint and dermatology sample for that matter. So I think we're kind of there. That being said, we had expansions last year and we had expansions late second quarter this year here. So we aren't even seeing the full fruits, I guess, of those expansion opportunities. But we feel pretty comfortable with coming in from a volume year-over-year of 50%, 52% is what we believe we're on track for. So that's very quite positive.

Got it. And then in the DETECT-AD study that you're doing with Sybase, how much of a window do you need to have a clinical effect from a preventative perspective? Like how early does the test need to detect potential flares?

I think that's to be determined, I think, maybe. based upon our market research interactions with our investigators and also interactions with our medical dermatologists who are skin cancer doctors. But, of course, the majority of what they see in their practice is basically atopic dermatitis in terms of diseases like this. The commentary there is that, you know, we have high-dose steroids. We can start those up in a couple of days in advance. You've got a topical JAK inhibitor. That works pretty quick as well. So one could say you could go as short as a day and a half, two days in advance. We'd like to see if we can get earlier than that so it gives patients the time to maybe use less high-powered topical therapies to kind of keep control and keep their symptoms depressed or suppressed. So I think we'll kind of look at that, see if the data unwinds this fall preliminarily and get a good positive set for what that looks like. And that being said, the patient research that we have done recently in the second quarter of this year, there is such an acute need to be able to say, so you're telling me I could use a disposable, I mean, not a disposable, a pen that will be able to help me kind of understand my disease, control my disease as if I was a diabetic, wanting to really appreciate how do I stay dialed in to being as normal as possible. So that's a very, very positive feedback set there. So I think we have a range of what we could detect in advance of an actual flare to be extremely clinically meaningful to both patients and their clinicians. The other end of the equation that we are getting commentary on, which I think is quite positive as well, is that once my flare has resolved, if I can't get ahead of it, that is, how long do I stay on my sort of rescue medications before I can begin tapering those medications off? Again, we should be able to predict the front end, and if they can't suppress their flare completely and it actually becomes symptomatic, hopefully it's much more mild than if they didn't know that. And the back end, rather than sort of having their sort of rescue medication treatment plan be sort of, well, once the symptoms resolve themselves, you know, stay on your high-dose steroids for, what, five days, four days, three days, We believe that one of the uses of this device will be able to go ahead and help patients taper off of their rescue medications quicker or stay out longer if they still have this underlying heavy biological disease pattern going on. And then the final thing, which is quite exciting, is that we also have seen broad trends in the marketplace where patients would desire to sort of lengthen out their injection rates, lengthen out their use of oral therapies. So rather than kind of following what's on the label is to say, well, I've got copay exposure potentially. I don't like the idea of taking injections every two weeks. Can I sort of take fewer injections and kind of lengthen out the frequency but also still be controlled? And right now we talk to our dermatological colleagues. They're telling us that's all, of course, basically empirical. You know, the last patient I had here, Derek, was able to go from sort of two-week injections of one drug to three and then to four. But when they got to five weeks, they all of a sudden had a heavy flare, the knowledge up. So we said, well, go back to four. work, this device should be able to help a patient who wants to take that as a pathway of choice and let them potentially sort of lengthen out therapy dosage once they're well controlled to go ahead and just be on less medication over time, which I think most people would appreciate.

That's super helpful.

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

Good afternoon. This is Ben on for Mason. thanks for taking the questions on the q1 call uh you guys noted that you started to see some quarterly seasonality beginning to emerge for tissue cipher um in your view do you see any of that seasonality continue to play out in q2 um how should we think about the quarterly pacing for that test and the balance of the year and then i guess as we look ahead to next year should we think of that seasonality um similar to 2026 or will that become i guess even more pronounced frank you want to take it or you take that?

Yeah, hey Ben. I think that we, as tempting as it is to look sequentially at these tests, I think we really need to look on a trend line. And if you look at the trend on tissue cipher, it's pretty steady growth. We had a little bit lower Q1, a little higher Q2. If you kind of smooth that over four quarters, you get closer to a pretty consistent trend. And so I would say in the first place, I would look sort of at that multi-quarter pathway. But secondly, yeah, the seasonality we saw in Q1 did seem to be driven by fewer patient encounters. And just as we see on the derm side, we will probably continue to see that on tissue cipher. But, you know, we get to Q1, we'll look year over year and look at the multi-quarter trend rather than just sequentially quarter to quarter.

Got it. That makes sense. And then among the advanced AD test orders that you've received to date, are you seeing any signs of repeat ordering there, increasing utilization among the initial cohort of accounts, or is that still mostly first-time trial orders? Thanks for taking the questions.

I don't have the raw data in front of me to answer that quantitatively, Ben. But my recollection the last time we reviewed that last month was that we are seeing both new ordering customers as we sort of release this to additional customers, get their staff trained up or the clinician trained up on how to do this non-invasive scraping technique, get kits in the offices, et cetera, that we are seeing the sort of new ordering adoption we expect to see based upon the emphasis for putting it on from a Salesforce standpoint. And we have, I think, very few clinicians who have sort of been one and done. So we do see heavy repeat users going on right now.

Our next question comes from Subi Nambi with Guggenheim Securities. Please go ahead.

Hi, this is Ethan on for Subi. Thanks for taking our question. So what are your top priorities for R&D investments this year, and how much do you expect R&D to increase year over year?

My question was – Good to talk to you. Thanks for the question. Yeah, I'm sorry. I tracked you. Yeah, I think we'll continue to see some increase in R&D as we continue to focus on newly internally developed programs. I think you've heard us say before we're very excited about the pipeline we have and the way the story at CASEL has evolved from the IPO days when we really had one kind of primary product to now two therapeutic areas and multiple products in each opportunity. pipeline. So we will see some increase. It's a deliberate investment, and we are running CASEL for not only near-term quarter-to-quarter growth, but also mid- and long-term growth to ensure long-term value creation well past 2030, 2035. So some increase, but I think in terms of priority, it will continue to be those programs within our existing therapeutic areas that line up so well in our commercial footprint.

Our next question comes from Matthew Parisi with KeyBank Capital Markets. Please go ahead.

Yes, this is Matthew Parisi on for Paul Knight at KeyBank Capital Markets. Congrats on the great quarter, and thanks for the questions. You guys had a pickup in SEC volumes for the first time since it lost coverage and you stopped marketing the test. Could you provide some color on what is driving the resurgence?

SCC volume. SCC volume. What's driving that?

I think the number one driver of SCC volumes is the clinical value, existing customers seeing the test and how they use it to manage their patients' high-risk MSL carcinomas. We did what I think we talked about at first quarter earnings. allow, sounds like a funny word, encourage, I guess, our sales force to say, hey, our predominant focus is and will remain on the short-term cutaneous melanoma, but you have this atopic dermatitis test, you have this squamous cell carcinoma test that's had great clinical value. We need to make sure that we are spending some time on those elements, a small amount of time, but sometimes. So I think it's a combination of existing users, more working days in the second quarter, certainly, and some return to some promotional time with our sales force.

Thank you. And then if you could provide an update on the Provise GI pipeline test.

Sure. So we have, as you know, when we acquired Provise, we had a portfolio of IP that came out of Hopkins, was licensed in the Provise. They had a tissue-based assay, SO-Predict, that we made available in the first, I guess, early first quarter of this year. as a reflexive test or backstop test in those few cases that we couldn't get a tissue cipher result to a physician under the expectation that, hey, the most well-documented, the most viable test that predicts progression of Barrett's disease to high-grade dysplasia or cancer is the tissue cipher test. But if we're unable for features of the way the biopsy was taken, et cetera, and not to get a spatial limbics test to work. It would offer up ESO-PREDICTA as a backup in those few cases. Regarding the cell collection device, it also worked out a sponge which was fit into a capsule and attached to a string that went through the capsule, and the expectation was it wouldn't swallow that, let it go down into your lower esophagus, maybe upper stomach or lower esophagus. The capsule dissolves, the sponge pops out, and you pull the sponge back out with that string. We have protocols for cell collection devices that are in design and sort of ready to go here. So I would say probably the update on that, probably maybe first half of next year is for the right timing.

Thank you. Appreciate the questions.

Our next question comes from Kyle Nixon with Canaccord Genuti. Please go ahead.

Hi, this is Alex V. Kaysen, along for Kyle Mixon. Thank you for taking our questions, and congrats again on the strong quarter. Just following up on something I was previously asked, we're about half way through the year now. On Tissue Cipher, you exited 2023 at about 26% patient penetration, with about 2% to 3% incremental penetration each of the next two years, about 31 exiting 25, and you followed that up with a really strong first half, and particularly 2Q. Just understand that there's a lot of runway here, but could you qualify the opportunity I had for this test? Does any low-hanging fruit remain, or could we perhaps have to see some step-up in expenses to reach the rest of this opportunity over time? Just trying to get a sense of how durable this level of growth is going forward. Thanks.

Yeah, just clarifying there. We think we exited 25 at about 10 to maybe 11 or 12 percent patient penetration on the addressable patient market. And if the numbers we provided earlier today, you know, would get us to, you know, maybe 15 percent middle teens. We are certainly going to begin to face the headlines of big numbers. And, you know, by definition, the easier physicians to convert are the first ones, and the ones that come later are perhaps take a bit more work. So at some point, we'll begin to see that. But I think, importantly, at this juncture in the life of that test and the marketing of that test, we still have maybe way too many, you might think, physicians who haven't yet had the chance to be educated on the clinical benefit of using tissue cipher for their various esophagus patients. And so lots of runway ahead as we convert those physicians that don't yet have the opportunity. So we will begin to get into those big numbers and begin to get into that more mature phase, but that test has a long way to go yet.

Got it. Thank you. And just on the Novitas LCD, which impacts the Pittsburgh Lab, and the multi-X LCD, which impacts the Phoenix Lab, does mid-27 kind of remain a reasonable time frame for potential return of payment for SEC? And importantly, have there been any recent chats or review of new data that perhaps invokes incremental confidence in the ability to flip one of these decisions specifically?

So we have no, I guess, public commentary about data discussions with either Medicare contractor. As you may know, there is no timeline for their response. We've heard nothing, by the way, negative, so don't take that commentary as negative from a standpoint of a return to coverage. We did model out based upon a very, very limited database that maybe it would take a year, year and a quarter to have those Medicare contractors work through the reconsideration request. That would be sort of in the second half of this year. So I think, you know, expecting to see daylight in the second half of 2026 I think is a reasonable expectation. Once a draft was posted, we don't really have any sense right now, is would they work quicker to go from draft to final, or would they follow the currently path, which has roughly taken the entire year to finalize a draft LCD to final. So I think guidance has been pretty consistent, which is to say if we see a positive draft coverage LCD coming out from either one of the Medicare contractors in the latter half of this year, or the second half of this year, I should say, then we should anticipate roughly a year later regaining coverage for Medicare beneficiaries, which would be a fantastic opportunity to really advance their care. So that's how I would kind of view that, per se. We, of course, always are generating additional publications, additional evidence developed to support the correct decision to enable Medicare beneficiaries to benefit from this test on a broad basis. So that's being worked through right now.

Thank you very much.

Your next question comes from Mark Massaro with BTIG. Please proceed with your question.

Hey, guys. This is Megan on from Mark. Thank you for taking our questions. Curious about the FDA breakthrough device designation. Can you just give maybe a ballpark range or any additional color for when you're thinking about the timing of the FDA approval?

What's the last part?

FDA approval.

Oh, approval. So I would separate those two things here, Megan. So the breakthrough device designation enables us to sort of go to the front line, get other special features, I guess you would say, in terms of the review of that, of a submission. I don't know if we've talked publicly about our timing of that. I would think we might expect to have FDA clearance-slash-approval maybe later on this year, early next year. Great. Thank you. BGE gives you an opportunity to really have more powder in your gun, I guess you would say, in addressing the FDA. There are certain expectations on both sides of the table.

Awesome. Thank you, guys. And you continue to deliver strong unit growth in melanoma volumes this quarter. We're just curious if you've seen any changes in the competitive environment and melanoma over the recent months.

Yeah, we had talked through, I guess, the first quarter earnings was a high year-to-year growth rate, and we hopefully tried to speak intuitively, which is to say we think at the end of the year we're going to come in with between kind of mid to high single-digit growth, and I think we're right on track to achieve what our internal goals are. So we're seeing the promotional responsiveness, the value of our test in the marketplace hasn't really changed a whole lot. That's fantastic, of course.

Thank you, guys.

Our next question comes from Puneet Soda with Leering. Please proceed with your question.

Hi, this is Philip on for Puneet. Thanks for the question, and congrats on a great quarter. I know there were a lot of questions on Pissure Cypher already, but if it's all right, I just want to double-click more on volume growth this quarter. A big step up, obviously, both year over year and sequentially after the seasonal dip in the first quarter. So I just want to ask, can you talk a bit more about what drove the reacceleration? Was it mostly seasonal combined with execution? Or is there anything else you could call out in terms of growth mix or deficit use that may have played a role?

Frank, you or me?

Yeah, sure. So we don't yet have the procedures data for the second quarter. And as we noted in our last call, first quarter was lower in terms of upper endoscopy procedures than we've seen in prior quarters. But again, I think that the important focus here is on that multi-quarter trend, you know, maybe trailing forward. and you draw a nice trend line, and you see the tissue ciphers, you know, fairly steady, fairly in line with where it's been through those maybe trailing three or four quarters. So we believe we probably – I don't know it yet. I don't know if we did. We probably saw more procedures in the quarter than we saw in Q1. But, you know, when you trim that out, it's just a good solid increased penetration on the volume side for tissue cipher through the last year.

Got it. That makes sense. And then I also wanted to ask, did you see any impact from ATA disenrollment on your test volumes this quarter, just with enhanced marketplace subsidies now lapsed and coverage down in 2026? Are you seeing it in either ordering volumes or shift towards self-pay that pressures collections? And is a younger, more commercially insured franchise like Advanced AD more exposed than melanoma and tissue safer? I know it's more Medicare skewed.

I don't think we have any visibility to be able to comment on that question, I guess I would say. Okay, no worries. I don't think, I was trying to think about our test report data for second quarter. I don't recall our reimbursement team saying there was a change in the mix of insured patients commercially, Medicare patients commercially, Medicare managed patients commercially, or Medicaid. Medicaid, we've always had a very low exposure, a couple of points is all. So I guess you would say, well, if there are less people ordering tests or going to doctors because they chose to back out of their insurance, we have no way to see that, I guess you would say.

Got it. Fair enough. Thank you so much.

Our last question comes from Robbie Bamberger with Baird. Please go ahead with your question.

Hi, guys. This is John for Robbie. Thank you for taking my questions. First, I guess just, again, on kind of the lower-than-expected seasonal volumes there for Decision DX Melanoma and 2Q, given some of those Salesforce items you mentioned, And it's kind of what informs confidence in that mid-to-high single-digit growth for the year. And, you know, I guess how should we think about year-over-year volume growth in 3Q and 4Q for that test as well, too?

So I guess confidence is we have an enterprise model, I guess, similar to you that you do on the outside and we're on the inside. And based upon what we see in our model against actuals, we believe we're still tracking towards what we thought we would do, which is kind of mid to high single digits for the year. In terms of third and fourth quarter, second half expectations, I guess that would sort of take our first half and get a range and see how you get to the second half from a full year end volume growth is the way I would approach that.

And then I was just wondering, too, you know, how you're kind of thinking about the progression of Vance AD, TX rollout here. Any plans to kind of further broaden this out for the rest of the year? And maybe, you know, maybe by the end of the year, how many clinician offices are you maybe trying to target here as part of your phased approach?

So we are still managing sort of, I guess, field-based expectations. So maybe the best way to go ahead and say it is that our field force in dermatology, I believe, for the remainder of the year, or at least certainly third quarter, is we're relatively, you know, 80%, 85% or 85% focused on cutaneous melanoma from sort of a call-focused commission bonus perspective, with the remaining 15% being, I guess, more heavier weighted to advance AD tests and some on SCC from a bonus standpoint, just to make sure that we're balancing out both near-term needs, mid-term needs, and long-term needs. So that will certainly, I think, change a bit of the acceleration in a positive manner for Advanced AD without having us hopefully see a sacrifice in melanoma focus. We are still trying to manage volume so we don't get too far ahead of ourselves. But as you would know, if you don't create demand, then there isn't much of a reason to have Medicare or commercial payers to really step up and pay attention. and as we sort of create volume, we can also model collections against our internal collection model as we get more confident with that towards the end of this year or half of the third quarter. That will let us go ahead and say now we should plan on opening things up a bit more in 2027.

We have reached the end of the question and answer session. I would now like to turn the floor back over to Derek Maitzold for closing comments.

Thank you, Operator. This concludes our second quarter 2026 earnings call. We thank you again for joining us today and for your continued interest in Castle Biosciences.

This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.