Conference Transcript - CSTL 2026-09-15

Robbie Bamberger, Analyst — Baird

Good morning, everyone. Thank you for joining us. I'm Robbie Bamberger, Senior Research Analyst covering life sciences and diagnostic companies at Baird. Very pleased to have Derek Matzhold, Castle's founder, president, CEO, and Frank Stokes, CFO. For anyone less familiar with the story, Castle's a molecular diagnostics company, builds, commercializes gene expression and tissue-based tests that change how physicians manage a patient across dermatology, gastroenterology, in ophthalmology. So before we get into specific segments of the company, would you mind just giving us a quick snapshot of the company coming off of Q2 earnings? What went right in the quarter? Anything you'd like to point to investors about the quarter specifically?

Derek Maetzold, CEO

So maybe I'll talk about the business top line and you can cover specific financials. So Castle Bioscience is a molecular diagnostics company. We have a number of tests on the decisions physicians make, but also improving outcomes. Either lives are extended or we're doing less on certain things that will make a difference. We focus on two main areas therapeutically or customer-wise, I would say. We have a dermatology sort of commercial and R&D vertical. We have a number of tests in there for our Decision DX melanoma test, our advanced AD test for directing therapy for atopic dermatitis, our squamous cell carcinoma test, And on the gastroenterology side, which is our other vertical, we have one test currently on the market there, which is tissue cipher, which is used in Barrett's esophagus disease to help direct care in that patient population.

Frank Stokes, CFO

So I think that we had certainly a good quarter. I think our two main revenue drivers, our melanoma test, our tissue cipher test, we saw good progress there. I think on tissue cipher, I would encourage sort of looking at a four-quarter kind of rolling growth trend. We're still fairly early in that launch, and that volume number is becoming more predictable, but still is not quite as easy to project with perfect precision, just given where we were on the launch. But we had good, strong, adjusted gross margins among the best in the sector, and that gives us lots of room down the P&L to invest in R&D and other activities for the company.

Robbie Bamberger, Analyst — Baird

Has anything changed, you know, on your view of 2026 since reporting Q2? Anything in Q3 or Q4 that you're thinking?

Frank Stokes, CFO

No. I think macro environment is largely the same. I think that it's important for folks to remember that inflation is still, you know, fairly durable. And when you look at operating expenses and things like that, it's important to recall that 4.5% up is flat. And so even when inflation eases, unfortunately, prices don't go down. They just go up less quickly. So inflation is still durable. I think maybe early in the year, maybe we were thinking or hoping we would see a little bit of ease there. But certainly, it's still intact.

Robbie Bamberger, Analyst — Baird

And maybe double clicking on tissue cipher specifically, the growth has been really, really good there. 9,000 tests last Q2 to 15,000 tests this quarter, so 63% growth. When you decompose Q2 volume growth, how much is essentially new order, new ordering from clinicians, you know, deeper utilization inside of those accounts, and overall just endoscopy, you know, procedure growth?

Derek Maetzold, CEO

So I would probably break that down in a couple of slightly different approaches. I think the growth in endoscopic procedures is a good macro level. We don't necessarily track that on a daily basis. That doesn't affect our business that much, you would say. But in terms of the number of patients diagnosed with Barrett's esophagus each year, we think the addressable market for us is around 415,000 patients who have either non-dysplastic disease, indefinite disease, or low-grade dysplasia, which are all in the target universe of tissue cipher. So a nice, big, consistent population. Post-COVID, we've certainly seen some growth in overall annual endoscopic procedures, but I think that's a nice trend to have. Now, in terms of tissue cipher growth, we were, based upon the 2Q performance, we, I guess you'd say, increased our overall volume expectations to somewhere between 50%, 52% year-over-year growth in volume, which is an excellent growth product for us and just shows you what the demand is for this test, which really is helping to direct what is this patient with Barrett's esophagus disease, what's their right pathway for it from a treatment standpoint. In terms of penetration within sort of marketplaces, we're still early in the launch curve. So we are still capturing a large number of new first-time ordering prescribing clinicians or gastroenterologists. I wouldn't call those late adopters. I think it's middle-of-the-road people right now. The second tier up is sort of current customers. Can we increase penetration current customers? Our sense right now is that if a gastroenterologist is going to make the decision that he wants to or she wants to incorporate tissue cipher test results in the care of a patient with Barrett's esophagus disease, it's awfully hard to go ahead and slice and dice that patient population. They sort of all have the same pathology. Some might have different risk factors than others, but the risk factor projections and progression likelihood are so soft that it's almost a all or none. So the trick becomes, though, if they want to adopt tissue cipher, they begin using it is just making sure that the workflow in their office so that when a patient comes into the clinic with a diagnosis of Barrett's esophagus disease from the last endoscopy a few days ago, couple weeks ago, that the nursing staff, the management staff, the MA around that gastroenterology when they're seeing that patient is aware of the fact that this clinician would like to have tissue cipher as part of the patient care. And that sort of is the second building block, is to make sure that they have the systems in place and a practice so that when they want to use a test, they recall and they get to order it. Above that level, there is the opportunity to really look at what we're seeing on a small scale right now maybe move into a larger scale, which is to say if you have enough of a mass of clinicians, call it 20 gastroenterologists in a given location. Five or six have already dabbled in or adopted tissue cipher for their patients. Why should the patients who happen to get cycled to gastroenterologist number 14 versus gastroenterologist number two be deprived, in my words, I would say not have actual tissue cipher tests? We are seeing on a small scale right now practice is beginning to say hey we have enough experience last couple of years why are we making this standard of care as we approach how we manage bear disease for the practice as a whole and so as we see more of those opportunities turn from kind of discussion and concept to saying this is a pathway we're going to implement we should see that as sort of the third level of growth overall is there a way to size of the 5500 clinicians that have ordered a tissue cipher test how many are fully activated or fully penetrated are any of them fully activated, or how would you size that? I don't have that data to give you today. I would say that if they adopt the tissue cipher, then they usually adopt it across all their patients, and the gap in what they want to adopt versus how they execute is the issue of the nursing staff turnover. The MA is not being at the right time.

Robbie Bamberger, Analyst — Baird

That's helpful, and you gave the framework of 50% to 52%, as you said, the first half grew 61% for tissue-safer volume. So when I bridged the two together, it implies back half a little bit of deceleration. Is there prudent conservatism in that? Are there reasons why growth would moderate other than maybe comps in the second half?

Frank Stokes, CFO

I think just one is a comps issue. The back half of the year was strong last year. But also, it does look like in first and second quarter, maybe there were some procedures pushed into second quarter that might have naturally been first quarter. And the best we can do is sort of we can suppose why that is. I think that like other areas of health care, when patients' deductibles reset, that changes their behavior. And they tend to put off care, put off physician visits. So I think if you, again, sort of take a rolling four quarter kind of approach, you can see what the inherent fundamental growth trend is.

Robbie Bamberger, Analyst — Baird

And then Tissue Cypher saw a nice ASP step up in Q2. I guess part of that came from how you're accruing your revenue. But can you help just decipher the durability there? Just how much of that step up reflects the better cash collection from you guys versus the accrual changes?

Frank Stokes, CFO

Well, they should match. The accrual and the cash collection should match. And so we, at this point, you know, we really launched that in earnest Q2 of 22. And the collection and And appeal cycle, we could spend the hour talking about lamenting that. But the payer behavior and appeal cycle takes a long time. And so by necessity, it's just a little bit further along before we can accurately and more confidently predict what we're going to collect. But I think where the consensus is, is a good ASP for TC right now. We don't model in either our guide or our working with other parties. We don't really model continued improvement. If we do see some improvement on the commercial side, we'll take it as it comes, but it's very difficult to project and to get right time-wise and scope-wise.

Robbie Bamberger, Analyst — Baird

Yep. And then just for tissue, say, for volumes, is there any lab capacity or turnaround time constraints for you guys just in terms of you scaling towards a 60,000 test level?

Derek Maetzold, CEO

We've scaled our Pittsburgh laboratory to stay six months, two years ahead of demand. So I think if we see an acceleration, we're well covered to go and handle that.

Robbie Bamberger, Analyst — Baird

Helpful. And maybe just think about the overall TAM, 415,000 patients a year who get an upper endoscopy, and they meet that intended criteria. So you mentioned last call you're at about 10% to 12% patient penetration, maybe mid-teens by the end of the year.

Derek Maetzold, CEO

What gets you to maybe 30% plus over time? i think that we are reasonably positioned in guidelines today i think that will improve over time but i don't think gastroenterologists necessarily appear to be guideline driven behaviorist at least when it comes to the use of of this kind of testing service yeah so it'll be helpful but not necessarily a driver um in the case of bear's esophagus management you already have tools that can essentially stop or cure Barrett's esophagus disease. So if you have high-grade dysplasia and many people with low-grade dysplasia, which is sort of a high rate is just before moving over the edge to having esophageal adenocarcinoma diagnosis, high-grade and low-grade in the U.S. today are largely intervened with, so ablation therapy, cryotherapy with Medtronic's Barrett's tool or surgical procedure to go ahead and basically remove the Barrett's lesion um so so they so gastroenterologists know that they can cure a patient of Barrett's disease and stop progression to esophageal cancer in its tracks if they intervene so the balance has always been in Barrett's disease is to say well we intervene with the high-grade patients who are the most aggressive chance likelihood to project into cancer and it's adenocarcinoma we now intervene with many people with low-grade dysplasia that leaves sort of the 95% of the patients diagnosed largely with this non-dysplastic disease, which as a population has a lower risk of progression. They don't routinely ablate or intervene with those patients that go ahead and kind of cure that Barrett's lesion. And that's where all the cancer comes from now because they aren't being treated. We can't treat them all. There's way too many, and that's way over treatment. So the value of our tests is to say, hey, we can find those bad actors who are hiding out in this non-dysplastic pathology grade, bring them up and say if you intervene this patient has a likelihood of no intervention progress into cancer like they had low grade or high grade dysplasia what a great opportunity to kind of stop a patient from progressing so that sort of natural if I see the tissue cipher result what am I gonna do I can actually stop cancer from progressing and the other side of the equation if they happen to have a non dysplastic lesion what we see sort of on a epidemiology basis is that patients are coming in more frequently than kind of guideline recommended so the guidelines would say maybe every three years plus or minus depending on other features um uh historical clinical features for example um but patients and and gastroenterologists perhaps are coming back earlier now maybe they're concerned about maybe i have the esophageal cancer it just got missed um but we have seen now with clinical use data that actually gastroenterologists who get a low risk tissue cipher result in those non-dysplastic patients are naturally widening up the come back to repeat surveillance endoscopy time, which is great care from a standpoint of patients, great use of healthcare resources. So the people who need the intervention get it, and the people who don't are going much more closer to guidelines in terms of repeat surveillance.

Robbie Bamberger, Analyst — Baird

Do you think there's a ceiling in the potential penetration of Barrett's esophagus above certain percentages?

Derek Maetzold, CEO

So we've seen in our rare cancer test for uhu melanoma, we think we have roughly 85 maybe 90% of all patients diagnosed each year receive that test as routine care. I think if you look at the breast cancer tests overall, my recollection is there's somewhere than 90, 95% of women who have breast cancer are getting access to one of these tests available out there. I think that's an aggressive upside. I think two-thirds or 60% upside penetration is probably the right thing to model for most molecular diagnostics. Now, that being said, you do have this intervention of ablation therapy or surgical procedure, which might remove that so maybe maybe that's too conservative but that's probably the right way to model this is 60 percent 65 percent yep and you're at about 100 territories now in gastroenterology with the additions you made in q2 um that aren't at full productivity yet so how much embedded growth is with those reps that essentially aren't at 100 productivity that need that will get to that 100 so i don't know if we can tease that out in terms of an inflection point i would say that we we did increase the size of our territories overall or rather a decrease the added sales reps back in the late fourth quarter, and again, second quarter this year, I would say entering in 2027, we should be kind of fully trained, fully in territory, and fully So the decisions we made last winter and this second quarter will bear fruit here in 27 Yep.

Robbie Bamberger, Analyst — Baird

And then how long does it take just a new gastroenterologist rep to reach full productivity once they start on?

Derek Maetzold, CEO

We model, which may not be the truth, about six months, five or six months, between going through training, learning who their customers are, gaining access on a routine basis.

Robbie Bamberger, Analyst — Baird

Would you mind just talking about the commercial coverage you have for Tissue Cipher today, and then are there large players you're still fighting for coverage with?

Frank Stokes, CFO

Largely, no policies, very few policies. We do have some plans that cover the test, but most of the plans don't have a policy for it. So, look, there's certainly adequate data to support the clinical utility of the test. The reality is, it really is not data that it takes. It really takes penetration and widespread utilization for plans not to be able to argue it's experimental, investigational.

Robbie Bamberger, Analyst — Baird

That's helpful. And, you know, thinking about AI, how much of TissueCypher's moat is the algorithm itself versus, like, the clinical outcomes that you have from it? And, you know, where else are you applying AI, whether that's in just the test development, lab operations, or the reimbursement workflow there?

Derek Maetzold, CEO

Ask the first part of the TissueCypher question again.

Robbie Bamberger, Analyst — Baird

Yeah, so I was essentially just asking, like, where are you applying AI within TissueCypher?

Derek Maetzold, CEO

In that, so tissue cipher was designed using a spatialomics platform by actually our head of R&D, Rebecca Critchley-Thorn, and there were, I want to say initially, there were 100, 200,000 image points that were looked at back in the early part of last decade. That went down to, I think, 35,000 points, and we're left with a test today of which 15 points is what's important for tissue cipher. Nine of those are proteins that we stay in for, if I recall correctly, and seven of them are overlapping morphology goals. And we apply the AI-driven algorithm to those factors that went from 35 down to this 15 feature set. So heavily involved from a development standpoint of that test from a spatialomics perspective. Now we do and have been applying AI to our other tests as well over time. So that's, I wouldn't say nothing new, but you have easier and quicker tools today, which is good for future improvement development. As it relates to the rest of the company, we have undertaken artificial intelligence initiatives on, I wouldn't say a measured basis, but a thoughtful basis to say, where can we improve the performance of counsel as a company? And so we have seen in areas of reimbursement, for example, where we can go ahead and take an AI-driven denial from an insurance company, recognize that it was AI-driven denial based on the word choices, and we can go ahead and use our agent to go ahead and develop a better, more specific appeal letter with less cost and more speed. And I think we'll be able to see over time, hopefully that will improve the appropriate payment rate by payers. In other areas of the company, similar to that kind of an agent benefit.

Robbie Bamberger, Analyst — Baird

Yep. Great. And then moving on to dermatology decision, DX melanoma, volume grew 3% year over year and sequentially, which was a little bit below the normal step up. But you noted that was due to the Derm commercial team adapting to carrying three products. So can you maybe just walk through what changed in the field? And then, yeah, maybe that would be the first question on that?

Derek Maetzold, CEO

So we went from roughly 50-50 promotional efforts between the melanoma test and squamous cell carcinoma to 100% beginning July 1st of 2025, so a year ago, a year and a couple months ago. We had a, I would call it a measured soft launch, a limited launch of our atopic dermatitis test in, I think, late November of 2025, still kept the majority of sort of the business focus, the bonus plan, on the melanoma test. We are still seeing good, strong background demand for squamous cell carcinoma. It happens to be when you walk into the same medical-oriented dermatologist, with very few exceptions, they are treating skin cancer, both melanoma and squamous cell, and they see an awful lot of atopic dermatitis patients. So despite focusing, you would say, the commission plan geared towards melanoma, they are getting questions and they are appropriately going ahead and having conversations about other two tests as well.

Robbie Bamberger, Analyst — Baird

And then, you know, how long do you think it'll take the sales force to fully absorb these new products?

Derek Maetzold, CEO

So we are holding back on the atopic dermatitis adoption, I guess, or openness. So still limited launch as we see how close our pre-launch model was to forecasting our average reimbursement rate, our ASP, over time. And as we get more confident and comfortable with that rate being close to what we want to get to, then I think we have a decision to make about how do we open up the advanced AD test to more clinicians and more of the time and hopefully have that built in to be what should be a 28, 29, 30 major contributor from a revenue standpoint.

Robbie Bamberger, Analyst — Baird

Any positive impacts for long-term decision DX melanoma penetration following the recent positive result from the phase 3 cancer vaccine?

Derek Maetzold, CEO

We were thinking the same thing too, so that's going on the same page. I think if we kind of roll back the wheels a couple of years, we had certainly been hopeful, been expecting either Merck or BMS to consider moving their immunotherapy PD-1 inhibitors into earlier stage patients. The majority of people diagnosed with melanoma have either stage 1 or stage 2a disease, which is a little bit thicker but still on the thin side of thicker. The minority of patients are diagnosed with stage 2b or 2c or have a regional disease, which in melanoma we call stage 3, for a variety of reasons, some of which could have been probably the lower low overall risk of recurrence in the stage 1 and 2a patients both companies chose to go ahead and stop developing adjuvant therapy indications of the stage 2b to 2c indication the vast majority of our testing the vast majority of the good use of our test is really in the stage 1 and 2a patients so that's disappointing i think that if the um as the as the combination vaccine trials move forward um the hope i would have from a patient care standpoint is maybe they move up into stage 2a or maybe even the stage 1 patients and the balance is going to be there the risk benefit to a patient because if you treat every patient with those there with those those therapies the majority will not benefit because they have such a low natural risk of recurrence that they didn't necessarily need to have a therapy plopped on them but our tests can hopefully identify those patients who actually have a higher risk of recurrence or have a melanoma that looks thin, but actually is acting like a very thick one, which you would have on label therapy. So that to me is the expectation downstream is that patients diagnosed with thinner melanomas could benefit from having our test identify. It actually is a very, very aggressive melanoma biologically, despite looking fairly nice under the microscope. This is a patient you should consider getting a vaccine or vaccine combination therapy.

Robbie Bamberger, Analyst — Baird

Yep. And then you reiterated the mid to high single digit growth for DX melanoma volume for the full year. First half was up 9%. That implies, you know, low to mid-single digits at the low on your range in H2. So what gives you confidence in re-acceleration from Q2, and then what specific levers get you there in the back half?

Frank Stokes, CFO

Yeah, we continue to be confident in where we guided volumes on the test, and I think that the levers there are just continued education, physician education. We publish regularly, even at this stage in the test life cycle. We still publish data supporting clinical utility, clinical actionability, and benefits to patient, including cost benefits. So we'll continue to do that, and I think our team will continue to execute and drive conversion. By definition, the last positions to convert are the hardest, the ones that convert first are easier. But we'll continue to support that and convert docs and then spread the use of the test through more of their patient base.

Robbie Bamberger, Analyst — Baird

And then your advanced AD test, TXS is for atopic dermatitis. Instead of a biopsy, it's just a simple skin scraping. The advisory panel voted 21 to 0 to recommend crosswalking at 3675 with CMS's preliminary determination due soon. Can you maybe walk us through what happens between now and then a final rate with that?

Derek Maetzold, CEO

Sure. So the final rate would be effective on January 1, 2027 is this current cycle. um historically um medicare has published their much of the culture after preliminary 2027 or the next year rates in in late september so i would expect in the next 13 14 15 days we'll go ahead and see that that that rate schedule for 2027 published in a preliminary draft form for all tests that are being repriced this year um medicare is not mandated to follow the recommendation of their advisory panel and many times that they do so I guess our base expectation is that is that being crosswalked to that 3675 test is appropriate it's it's almost the same technology same skin indication that test happens to be directing therapeutic response and psoriasis our test direct therapeutic response and atopic dermatitis both are seen by dermatologists so the inputs look pretty darn similar so we would expect them to do that if they if they don't do that then there's one of two things like either recommend gap fill which we go through contractor pricing for another year till 2028 or they might crosswalk to a different test but I would agree with you with a 21 to 0 vote that seems awfully odd that you'd have the experts in the field to be overridden if it was 50-50 different issue right but 21-0 sounds pretty unanimous to me yep and then what are the gates you still need to clear before a full commercial launch there um for atopic dermatitis it really well um so having uh knowledge of the clinical app fee schedule rate is one sort of more pegged to help confirm our asp model assumptions and then i think as we work through the rest of this year to go ahead and see how our asp growth in atopic dermatitis are matching our model make any adjustments as necessary in the upside or the downside and then i think we kind of can release that product over time in a more full launch potential.

Robbie Bamberger, Analyst — Baird

That's helpful. And then just moving on to DecisionDX, SCC, Medicare coverage change in April 2025. You've reconsideration requests out. You know the potential for regaining coverage eventually. So I guess what are the leading indicators we should be watching out for in this process?

Derek Maetzold, CEO

So we did submit in the early July of 2025 reconsideration requests to both Novitas and to the Metamol DX program. Both requests were considered valid, which means they looked at the file and said, yes, there's enough evidence here that we didn't review before that we should be reconsidering or reopening up this LCD. There are no time limits from the time of that acceptance of it being a valid reconsideration submission to when they have to act. Now, we have looked around, just look at other LCDs and various draft forms or reconsideration forms. There's not a whole lot of history there i think um there still is no reason why they either one could not get through a draft lcd being posted later on this year um but there's also necessarily no reason why they would have to it's a matter of just saying workload possibilities um i think once the draft posts assuming it's a positive change then um we just we're modeling roughly one year between posting date to being um beginning to regain coverage from medicare for payment so if it posts in late October would be late October 2027 from a standpoint. Now, from an internal modeling standpoint, we've taken squamous cell revenue out of our models until 2028 just because there's no reason to bake it into 2027. If it happens, it's a fantastic upside. It doesn't happen. There's no downside of the business process.

Robbie Bamberger, Analyst — Baird

And what new evidence has gone into that reconsideration file?

Derek Maetzold, CEO

So I think the most important two pieces of evidence is that the open comment period closed for both LCDs prior to having us publish our two back-to-back studies demonstrating that our test is able to predict responsiveness to adjuvant radiation therapy. Now, why is that important? 100% of the patients that we test or that we allow testing for squamous cell carcinoma are defined as having high-risk disease. They have one or more clinical pathological factors suggesting a higher risk than a low-risk patient with no factors of recurring and progressing. And radiation therapy is the only sort of adjuvant therapy used today in these localized high-risk tumors. We do have a PD-1 inhibitor from Regeneron that's used in a select population, more of which have already metastasized beyond the primary tumor or unresectable. And so adjuvant radiation therapy is the mainstay intervention. And so what we were able to demonstrate in two back-to-back multicenter studies was that if you take the decision DXCC test, of which, by the way, we had inserted radiation response genes during development because of the adjuvant radiation potential, and you propensity match that to the group of patients in our study set that did not receive radiation therapy, we found that we can find people who get a great response to radiation therapy, meaning roughly a 50% chance of reduction in elective metastasis over three years, which is the standard follow-up time for squamous cell. And similarly, we found a lot of patients, the majority, who actually we can't discern any clinical benefit from the use of agil radiation therapy, which is important because that's a high side effect intervention. I think significant side effects are greater than 90% in radiation therapy patients. Many patients who have squamous cell carcinoma also will have concomitant or later basal cell carcinoma, which is also responsive to radiation therapy. If you use radiation in a squamous cell patient at one point in time in a certain part of the body, you can't re-radiate that same location again. You have an increased likelihood of cancer, plus if it's on the head and neck, give an increased likelihood of brain radiation consequences. So to be able to remove people from radiation therapy is pretty darn significant from a patient care perspective. So neither Medicare contractor was able to review either one of those studies, and we believe that those two studies are a foundation. There's other data as well, but those are the main two items.

Robbie Bamberger, Analyst — Baird

Awesome, and that brings us to the end of our presentation. So please join me in thanking Derek and Frank and the team from CASEL for coming to our conference.