Caris Life Sciences - Earnings Call - Q3 2025

Executive Summary

• Q3 2025 delivered a material beat and inflection to profitability: revenue $216.83M (+113% y/y) and diluted EPS $0.08, with gross margin at 68.0% and Adjusted EBITDA $51.17M; management highlighted a $37.9M revenue true-up and underlying gross margin ~61% ex true-ups.
• Wall Street consensus for Q3: revenue ~$174.22M and EPS -$0.136; actuals were a significant beat on both, and EBITDA materially exceeded consensus as well (see Estimates Context) [*].
• Guidance raised: FY25 revenue to $720–$730M (from $675–$685M) and clinical therapy selection volume growth to 21–22%; management also pointed to Q4 revenue of $200–$210M and mid-60s gross margin, with Q4 OpEx in the “higher $120M” range.
• Key drivers: strong clinical ASPs (total ASP $4,089 vs $3,256 in Q2), continued volume growth (50,763 cases), Caris Assure blood adoption (7,537 cases; 40% attachment to tissue), and lab efficiency (TAT: tissue 8 days, blood 7 days).
• Catalysts into Q4–2026: expected pharma R&D revenue step-up in Q4 ($20–$30M), progress on MRD reimbursement (CRC submission underway), early detection readouts (Achieve One 1H26) and potential LDT launch, and New York State approval for blood assay in process.

What Went Well and What Went Wrong

What Went Well

• Profitable quarter and strong operating leverage: gross margin expanded to 68.0% (+2,432 bps y/y), Adjusted EBITDA $51.17M, net income $24.33M; “We delivered another record quarter… achieving positive net income” — CEO David D. Halbert.
• ASP strength and reimbursement progress: total ASP rose to $4,089; management noted “stronger-than-expected collections… resulted in a $37.9M revenue true-up” and base tissue ASP reached ~$3,500, with Q4 base guide ~$3,600; goal >$4,000 in 1H26 — CFO Luke Power.
• Pipeline momentum: MRD colorectal data showed 96.3% PPA and 100% NPA vs a third-party assay; early detection studies (Achieve One complete enrollment; Achieve Two >15,600 enrolled) and incorporation of whole genome; “We’ll read out Achieve One in the first half of next year” — President David Spetzler.

What Went Wrong

• True-up dependence and underlying margins: excluding the Q3 true-up, underlying gross margin was ~61%, highlighting reliance on collections catch-ups; management emphasized they do not forecast true-ups.
• Pharma R&D sequential softness in Q3: revenue declined sequentially with projects shifting into Q4; guide implies $20–$30M in Q4, underscoring lumpiness and timing risk.
• OpEx expected higher in Q4: management flagged Q4 OpEx in the “higher $120M” range due to investment in early detection and commercial readiness, moderating near-term margin trajectory despite profitability.

Transcript

Operator (participant)

Good afternoon, everyone, and welcome to the Caris Life Sciences third quarter 2025 earnings call. My name is Shannon, and I will be your coordinator today. At this time, all participants are on a listen-only mode. After the speaker's presentation, there will be a question-and-answer session. To ask a question during the session, you will need to press Star 11 on your telephone. You will then hear an automated message advising you your hand is raised. To withdraw your question, please press star one one again. Please be advised that today's conference is being recorded. I would now like to hand the conference over to Russ Denton at Caris. Please go ahead.

Russ Denton (General Counsel)

Thank you. Earlier today, Caris Life Sciences released financial results for the quarter ended September 30, 2025. Joining from Caris today are David Dean Halbert, our Founder, Chairman, and CEO; David Spetzler, our President; Brian Brille, our Vice Chairman and EVP; and Luke Power, our CFO. Before we begin, I'd like to remind you that during this call, management will make forward-looking statements within the meaning of federal securities laws. These statements involve material risks and uncertainties that could cause actual results or events to materially differ from those anticipated. These risks are discussed in our SEC filings, including our prospective file with the SEC in connection with our IPO and our quarterly report on Form 10-Q to be filed with the SEC.

Except as required by law, Caris disclaims any intention or obligation to update or revise financial projections and forward-looking statements, whether because of new information, future events, or otherwise. The information in this conference call is accurate only as it is a live broadcast. This call will also include a discussion of non-GAAP financial measures, which are adjusted to exclude certain specified items. The reconciliation of these non-GAAP financial measures to the most directly comparable GAAP financial measures is available in the press release Caris issued today. A copy of today's presentation materials can be found on our Investor Relations website. I will now turn the call over to David Dean Halbert.

David Dean Halbert (Chairman and CEO)

Thanks, Russ. Good afternoon, everyone. Before the team walks through our exceptional financial results for the third quarter, I want to take a moment to speak about something even more important. The foundation that makes these results possible and the vision that continues to drive Caris forward. When I founded Caris, my goal was simple: to make precision medicine a reality. Our only purpose is to help patients live longer and have a better quality of life by applying personalized medicine to disease. In 2018, I made the decision to move Caris to whole exome and whole transcriptome sequencing. It was a bold move at the time, but I believed it was the only path forward. That decision put us at the forefront of precision medicine, where we've remained ever since. Seventeen years in, I can say with confidence that the mission has only grown stronger.

The power of our whole exome and whole transcriptome platforms across both tissue and blood has exceeded my expectations. The data that we have generated from these platforms, utilizing the cloud and AI, lays the groundwork for what comes next. The next step is what excites me most. I believe that in the not-so-distant future, the work we're doing today will move medicine beyond diagnostics and treatment into true prediction and prevention. We'll be entering a world where we can anticipate disease before it begins. We can intervene before it ever has a chance to form. I refer to this concept as the CLENS, or personalized disease prevention, where we can one day identify and eliminate pathogenic mutations before they ever become disease. In pursuit of this vision and to expand our current platform, I made the decision to incorporate whole genome sequencing into our early detection test.

It's another step forward. As you consider whole exome to be the highlight reel, whole genome is the full movie. Now, as we stand at the intersection of biology and technology, the possibilities are accelerating faster than I imagined. The rapid advancements in artificial intelligence, the explosion of data and sequencing, and the evolution of how data is analyzed and consumed are transforming what's possible. What began as a vision to make precision medicine a reality is happening, including a platform that we believe will redefine how we understand, predict, and ultimately prevent disease. This is the future we've built toward from the very beginning, and I'm excited to continue on this incredible mission.

Brian Brille (Vice Chairman and EVP)

Thanks, David. Thank you all for joining our Third Quarter 2025 earnings call. This is our second call as a public company following our June IPO. As David mentioned, we're pleased to report another record-breaking quarter, one that marks a significant milestone in Caris' history in terms of continued growth and underlying profitability. We've had an outstanding third quarter with total revenues increasing 113% year-over-year to $216.8 million. As shown on slide three, this result was driven primarily by strong performance from clinical profiling. Elective profiling services revenues increased to $207.6 million, representing an increase of over 121% year-over-year. Pharma R&D services revenues increased to $9.2 million, an increase of 18.3% year-over-year. On slide four, with respect to molecular profiling revenue, you can see the remarkable increase of 121% which was driven by consistent growth in clinical case volumes, as well as very strong growth in clinical ASP.

Clinical case volumes were slightly less than 51,000 individual profiles, representing growth of 18.2% year-over-year, in line with our expectations. Caris Assure for therapy selection continues to gain market share and produced 66% year-over-year case volume growth in the third quarter, which is an increase from the 56% year-over-year growth in the second quarter of this year. In addition, ASP increased to $4,089 per profile for growth of 87% year-over-year. This represents important sequential improvement from the $3,256 per profile in the second quarter. As you may recall, this is primarily due to the new CMS rate of $8,455, which took effect retroactively through November 5th last year, the date of MI Cancer Seek's FDA approval.

This mixed shift to MI Cancer Seek has driven the increase, and we've also made further progress with private payers. It also includes some overcollections and true-ups relating to prior-period cases, which Luke will discuss in more detail later. In summary, across the board, we've had a very productive third quarter, illustrated by the highlights on slide five. The strong revenue performance, combined with the operating leverage inherent in our business model, has produced significant margin improvement. Specifically, gross margins improved significantly to 68%, up from 43.7% in the third quarter of last year. It also represents a significant sequential move-up from the 62.7% in the second quarter. This was driven by several factors, including strong overall revenue growth, as well as lab and other operational efficiencies. In fact, with this gross margin improvement, we have successfully achieved another major milestone in our path to profitability.

In this quarter, we generated positive adjusted EBITDA of $51.2 million. Net income of $24.3 million, as well as positive free cash flow of $55.3 million. Together, this strong profitability profile provides valuable flexibility for ongoing investment in our technology platform for new products, as well as the ability to develop new channels, such as multi-cancer early detection. Luke will expand further on these important developments and our philosophy for strategic investment. In addition, our balance sheet continues to strengthen, and due to our cash flow performance, our cash on hand grew to a little under $760 million, an increase of 4.7% sequentially. This continues to provide us with important strategic flexibility for ongoing investment to develop Caris' extraordinary opportunities in MRD, monitoring, early detection, and other markets as well. Slide six illustrates the consistent and systematic growth that our team has generated in clinical profiling over many years.

We've grown clinical case volumes at a CAGR of 28% over the past five years, and this growth rate has continued in the first nine months of 2025 at 23.4% growth year-over-year. The sustained case volume growth reflects several factors. First, the unparalleled breadth and depth of our whole exome whole transcriptome assay technology, 23,000 genes, DNA, and RNA continues to resonate with oncologists, KOLs, and cancer center leadership. In addition, our differentiated coverage strategy, as well as research orientation and the Caris Precision Oncology Alliance, provides us a competitive edge in the market. Finally, we believe that the therapy selection TAM continues to expand with new indications, as well as ASP growth. Most importantly, we believe that the penetration rate for comprehensive genomic profiling remains relatively low at about 30% or so.

Providing us with growth opportunities to serve more physicians and patients with superior technology over many years. We also benefit from strong operating leverage associated with our established distribution channel, seasoned salesforce, and strategic relationships at both the institutional and the individual oncologist level. We are now consistently reaching approximately 6,000 oncologists across the country. In addition, there are other technological efficiencies, such as EHR integration, which have further enhanced the pipe connectivity with our clinical client base and have facilitated case volumes. For instance, we are now EHR integrated with approximately 2,800 clinical sites, and over 65% of our orders come in electronically. As you can see on slide seven, the Caris data set has continued to grow with our clinical profiling activity and now exceeds 959,000 genomic profiles and 660,000 match profiles.

Since every profile has been generated with our whole exome whole transcriptome technology for many years, our data set features 577,000 exomes and 628,000 transcriptomes. This gives our data set tremendous power for our own internal product development and continues to enhance our attractiveness as a preferred research partner for academic medical centers as well as biopharma. We continue to work with potential new partners for the Precision Oncology Alliance, and given the size and breadth that we currently cover, we're being very strategic about adding additional sites. We have important opportunities across the existing 97 sites for deepening relationship penetration and adding new modalities across the continuum of care. As communicated previously, the POA members benefit from access to our Code AI genomic data set, as well as the opportunity to publish with us.

The POA collaboration has produced a cumulative total of over 1,150 peer-reviewed publications, reflected on slide eight. In conclusion, we are very pleased with this latest quarter's performance and the demonstration of sustainable growth, profitable business model, and a very exciting future. I'll now turn the presentation over to Dr. Spetzler to discuss our progress on our product pipeline. Spetz.

David Spetzler (President)

Thanks, Brian. I will begin by giving a quick update on our MRD CRC solution on slide nine. We are working to obtain reimbursement on Caris Assure MRD colorectal. The data we submitted includes over 100 patient samples evaluated on the whole exome and whole transcriptome Caris Assure platform, incorporating our PPM gene expression and AI-based signature. As part of our submission, we also compared our performance to that of a commonly used third-party MRD assay in colorectal cancer, samples tested within 60 days of one another. Among these cases, we demonstrated 96.3% positive percent agreement and 100% negative percent agreement. The disease-free survival curve on the right shows that patients identified as likely to recur experienced shorter disease-free survival, while those predicted as no event remained disease-free for extended periods.

The separation between these groups, with the p-value less than 0.005, supports the test's ability to accurately distinguish recurrence risk. Using the ABCDEAI, MNMAI, and PPMOT scores, we demonstrated consistent signal detection and strong correlation with known molecular and clinical features. This data supports our belief that MRD detection, grounded in whole exome and transcriptome data, can capture a broader molecular landscape and offer deeper insights into tumor biology. In addition to our MRD colorectal, we continue to make progress on other solutions in our pipeline and expect to finalize these additional solutions for submission shortly. These are reflected on slide 10. The first is Caris Chromoseq, which is our therapy selection offering within the hematological malignancies cancer space, including AML, MDS, and MPN. As well as suspected myeloid malignancies where other causes have been ruled out.

As communicated previously, this approach utilizes both whole genome and whole transcriptome sequencing, and the solution provides more than 200x depth of coverage of the genome and approximately 1.6 billion reads per patient, enabling detection of mutations, fusion, copy number changes, expression, and fluidity across the genome. The second submission expected is for MI Clarity, which focuses on patients with breast cancer who are positive and HER2 negative, typically lymph node negative or with limited nodal involvement, primarily in stage one or stage two disease. MI Clarity combines our tissue platform and digital AI analytics to produce both early and late recurrence scores designed to inform individualized treatment and monitoring strategies, and we believe this will offer superior performance to existing third-party offerings. MI Clarity was developed and validated on samples from two large randomized controlled trials, and results will be shared at a large upcoming international conference.

We are very excited for these solutions and believe that they can continue to expand our unique approach to building out our suite of solutions in an efficient manner. Like our MRD colorectal submission and as stated on previous calls, we will hold off on providing potential launch dates until we have made it through the expected rounds of feedback. Finally, I will give a brief update on our current study's progress. As reflected on slide 11 on the early detection slide, our Achieve One study is complete with enrollment of 3,000 subjects. Achieve Two, which is targeting 25,000 subjects, is well underway with over 15,600 patients already enrolled. That brings our combined total to more than 18,600 subjects across more than 40 different cancer types and normal controls.

The Achieve program remains the cornerstone of our early detection platform, with particularly strong representation across normal and pre-malignant populations, over 14,000 normal subjects and more than 2,500 with advanced adenomas. This gives us a powerful data set to refine our assay performance and validate early signals across multiple tumor types. David already touched on this, but we are incorporating whole genome into early detection, and we will be utilizing the data set to provide readouts in Achieve One in the first half of 2026, utilizing the whole genome. On the right side of the slide, you can see our MRD and monitoring portfolio, which now includes more than 3,300 subjects across a range of indications, which are currently undergoing contracting and enrollment. Enrollment is balanced across key solid tumors with the largest cohorts in non-small cell lung cancer, rectal, and esophageal gastric cancers.

The data generated from these efforts will feed directly into our development pipeline and commercial readiness planning. As Brian mentioned earlier, we continue to believe that we are in the early innings of the potential for precision medicine and remain very excited for the impact that this will have not just on patients of today, but also those in the future. I will stop there and now pass it over to Luke for the financial updates. Luke.

Luke Power (CFO)

Thanks, David. Brian mentioned some of these already within the highlights. As you can see within our earnings release, we'll continue to provide a summary metric table. I'll go through the next few slides relatively quickly. Turning to slide 12, you can see we delivered another outstanding quarter with total revenue increasing 113% year-over-year, reflecting exceptional organic performance across the business. The main driver, as expected, was our molecular profiling business, which grew 121% compared to Q3 of last year. Our molecular profiling business continues to perform at a high level, and therapy selection volumes were up 18% for the quarter and 23% year-to-date, right in line with our expectations for mid-to-high teens growth in the second half of the year. This is separate from any potential new solutions that David mentioned earlier around MRD, Caris Chromoseq, MI Clarity, and early detection.

More importantly, this growth is showing up in the bottom line. We are seeing continued improved commercial reimbursement following our FDA approval for tissue and stronger-than-expected contracting for blood. These tailwinds drove gains in cash flow and adjusted EBITDA, and have also delivered better-than-expected ASP across both tissue and blood solutions. As Brian mentioned earlier, we also saw stronger-than-expected collections both on current and prior cases, and this resulted in a $37.9 million revenue true-up for the quarter. That true-up reflects increased payment activity from commercial payers and highlights a continued positive trend we have seen in reimbursement. As we've said before, as payer history continues to build, we expect these true-ups to become smaller over time, particularly post 9-12 months of launch. Even excluding that benefit, our underlying base ASP improved ahead of our expectations.

For tissue, we're now 10 months into launch of our FDA-approved solution and are beginning to see steady predictable patterns. This is reflected in the $3,500 base ASP for the third quarter and a little under $4,300 with the true-ups. We also still expect Q4 base ASP for tissue to be around $3,600. With the third quarter performance, including the true-up, expect the full-year tissue ASP to be trending slightly above $3,400 for the year. Within tissue, MI Cancer Seek continues to remain 78% of the total tissue volume. We surpassed a major milestone of 200 million covered lives for MI Cancer Seek, which includes governmental and commercial payers. That's a direct result of the excellent execution by our market access team. Switching to blood, blood space ASP reached $2,377 per case, and with true-ups, that exceeded $3,000 per case.

Improved tissue contracting continues to have a positive impact on our blood ASP. We are raising Q4 guidance to be in the $2,300-$2,400 per case range, which, along with the Q3 performance, would put us close to $2,500 for blood ASP for the full year. Within blood, another great market trend continues to play out. We saw it after Q3, where 40% of our blood cases also had a tissue case performed, which was up from the mid-30% range last quarter. Turning briefly to pharma revenue, as expected, revenue declined sequentially this quarter. Several projects and associated customer spend shifted into Q4, which is a similar pattern we experienced last year. That said, pharma revenue was still up 18% year-over-year, reaching $9.2 million.

For pharma, it continues to remain a smaller part of our overall mix, but it's strategically important, and our focus remains on building longer-term partnerships and multi-year agreements rather than one-off projects. Similar to prior year, we do expect sequential improvement as we move into the fourth quarter versus Q3 performance. These revenue numbers obviously had a very positive impact on our gross margin for the quarter, which was 68% and up from the 43.7% in the third quarter of 2024, and was the result of the continued excellent work by our labs teams in maintaining operating efficiencies with the increased volume along with that ASP improvement. In fact, one of the key milestones we achieved in Q3 was being able to get our turnaround time for tissue down to eight days and blood at seven days.

Considering the sequencing requirements for our whole exome and whole transcriptome solutions, this demonstrates the significant progress we are making on lab efficiencies and the excellent work by our teams. You'll also see this great trend on slide 14, and we believe, with the continued improvement in ASP and our updated revenue guidance, which I'll discuss in a little bit, that we should be getting to a 62% gross margin for the full year of 2025, which would be an increase from the 43.4% that we had in 2024. Moving down from an operating expense standpoint, we continue to demonstrate excellent operating leverage, and the 9% ramp year-over-year was primarily driven by an increase in stock-based compensation.

We continue to look for efficiencies, not just with the emergence of AI and the potential impact that has on business processes, but also on our R&D efforts, in which our efficiency efforts are supported by having one platform across the care continuum. In fact, due to the improved performance, we actually hit the milestone of not just having positive adjusted EBITDA, but also net income, which is a first in our 17-year history. The last item I will comment on from this slide before jumping to the guidance slide is free cash flow. Q3 was obviously great in this regard as we achieved positive free cash flow for the quarter in the amount of $55.3 million. This performance continues to strengthen our balance sheet and allows us to build up some dry powder ahead of the new solutions David discussed earlier.

With regards to our investment approach, and as I've stated before, this continues to be opportunistic, and we're currently assessing opportunities for expansion within marketing and sales, along with assessing any external opportunities that may arise. The main goal for us financially continues to be not to hoard profits, but to focus on our mission, as David Halbert discussed at the start of the call. Finally, jumping to slide 15, I'll give a brief update on guidance. As previously communicated, we'll continue to provide guidance on the total revenue and expected clinical therapy selection volume basis.

With regards to these, given the excellent performance of Q3, we're upping our total revenue to be within the range of $720 million-$730 million for FY25, which would be a 75%-77% increase over 2024, and increasing our expectations for clinical therapy selection volume to be within 21%-22% growth for the year. I will wrap up there, and we'll now turn it back over to the operator. Operator.

Operator (participant)

Thank you. As a reminder to ask a question at this time, please press star 11 on your telephone and wait for your name to be announced. To withdraw your question, please press star 11 again. Please stand by while we compile the Q&A roster. Our first question comes from the line of Vijay Kumar with Evercore ISI. Your line is now open.

Vijay Kumar (Senior Managing Director, Equity Research)

Hi, guys. Thanks for taking my question, and congrats on a nice spring share. Maybe my first question on the performance. Year in the quarter. ASPs clearly came in about. What is your implied Q4, assuming, Luke? I think. Revenues are down, I think, sequentially. Does it include any true-ups? What was underlying gross margins in CQ, excluding the true-ups?

Luke Power (CFO)

Yeah, Vijay. Yeah, as I stated in Q2, we'll never forecast any potential true-ups because, again, we don't know those until the end of each quarter. It's not assuming anything there. For total revenue for Q4, our assumption in the guidance we put out is the $200 million-$210 million range for total revenue. To answer your other question then, what was our underlying gross margin without the true-ups in Q3? That was about 61%. Excluding that true-up that we had in Q3.

Vijay Kumar (Senior Managing Director, Equity Research)

Understood. Maybe one on the clinical side here, this colorectal MRD data that you're showing. Is this enough for you guys to submit to CMS? Or what kind of data is needed? If there's any additional data that's required, could you update us on when we could expect the data?

Luke Power (CFO)

Yeah. I'll take that one. It is enough data for us to submit. We don't know how they'll necessarily respond and what additional data they will want, but we do have additional data ready. Some of the studies that we listed will be reported out soon.

Vijay Kumar (Senior Managing Director, Equity Research)

Sorry, when you say this is enough to submit, have you submitted, or are you planning to submit to the CMS?

Luke Power (CFO)

We like to only talk about that after it's been approved because the process is complex and long.

Vijay Kumar (Senior Managing Director, Equity Research)

Understood. Thanks, guys.

Operator (participant)

Thank you. Our next question comes from the line of Dan Brennan with TD Cowen. Your line is now open.

Daniel Brennan (Senior Equity Research Analyst - Managing Director)

Great. Thanks for the questions. Congrats on the quarter. Maybe just one more on price, if you don't mind. Just could you walk through a little bit of kind of the success on the underlying price, ex the true-ups, how you saw the progression in terms of payment rates against the $84.55 rate for the tissue side? How are you doing versus expectation? Maybe just give a little color on the commercial success there in Q3 versus Q2, and same thing on Medicare. Then kind of how are you thinking about, I think you said, kind of price in that same zip code, the underlying price for 4Q? Just kind of what's assumed in 4Q as we think about that underlying price and across Medicare and commercial?

Luke Power (CFO)

Yeah. Dan, so. Effectively, what we're assuming for our base, and it's what I said in the presentation, is about a base for tissue of 3,600 for Q4. Now, we obviously think there's a possibility it might come in a little bit higher than that, but I'm being cautious in the guidance I'm putting out there until I get a little bit more history of the payments. By the time we get to the end of the year, we'll have about nine months of payment histories from payers. And based on our historical experience, you're probably in that 9-12 months where you have a very established trend. What we saw in Q3 happen and what we've seen throughout the year is actually the response we're seeing from commercial payers has been very, very, very good. That's what's kind of driving it.

When we discussed, I think it was in Q2 as well, we have an underlying goal for ourselves too that we should be getting to an overall % of what the Medicare rate is for our overall ASP. I think we're probably about a quarter ahead of where we thought we were going to be at the start of the year. Again, that's due to the great work of the market access team and the billing team. I think what we'll see going forward is trying to get above my next goal for the company and the next goal for, obviously, the market access team in the first half of next year is to try and get above a $4,000 ASP for tissue. I think we can deliver on that.

Daniel Brennan (Senior Equity Research Analyst - Managing Director)

Great. Maybe just on the pipeline, just on early detection, you gave a lot of cover, David, in terms of the Achieve study. There is a lot of excitement in that space right now. Can you just kind of walk us through a little bit more of timelines? I think you said, what, Achieve Two, 16,000 enrolled, Achieve One. Just kind of walk us through kind of how we think about the cadence of publications, go-to-market. Would you guys consider launching an LDT? Just how does that work, and kind of the spending associated with that? Thank you.

Luke Power (CFO)

Yeah. We'll read out Achieve One in the first half of next year. The accrual rate on Achieve Two is pretty strong, so it's probably late next year or early in 2027 when we'll read that one out. We would consider an LDT launch for sure.

Daniel Brennan (Senior Equity Research Analyst - Managing Director)

That would be after Achieve Two you consider the LDT launch?

Luke Power (CFO)

No, before. I think Achieve One gets us where we need to be on that.

Daniel Brennan (Senior Equity Research Analyst - Managing Director)

Okay. Great. Thank you.

Operator (participant)

Thank you. Our next question comes from the line of Michael Ryskin with Bank of America. Your line is now open.

Michael Ryskin (Managing Director and Equity Research Analyst)

Great. Thanks for taking the question, guys. I want to dig into your volume guidance for the year. You bumped that up a little bit. You're looking at, I think, 21%-22% for the year. Pretty good cadence throughout the year. It is a little bit of a conservative assumption for 4Q. If I just look at the total volumes on a patient basis, you're kind of trending in that 50,000-51,000, 2Q, 3Q, 4Q. As we think forward to next year and just sort of beyond, what gives you confidence you can kind of re-accelerate that and take a step function? Maybe just talk about the sequential versus the year-over-year growth and how do we think about volumes progressing beyond the next couple of quarters. I got a follow-up. Thanks.

Luke Power (CFO)

Yeah. Thanks, Mike. Yeah, for Q3. Obviously, the 80% came in kind of in line with what we were expecting. The reason for that guide and the actual results, we were actually pretty cognizant about this coming into the year is that Q3 last year was actually probably one of our highest quarters at 35%. It was a very tough comp coming into the year, and we wanted to be careful setting expectations against that. Now, as you mentioned, what we did with the updated guidance is we're increasing the higher range on that volume based on what we've seen play out later in the quarter. We feel very good about being in that total 197,500-198,500 cases for the year as we sit here today. That would obviously get you in that kind of 22%.

Now, you asked about what we think for next year. We're not going to release a guide right now because of what Brian mentioned on the call, and I'll let Brian jump in in a minute about the commercial pipe. We've seen kind of an uptick after the summer months, especially among ordering physicians, and obviously, especially with our blood volume. One of the key things that we're working towards now for blood for Q4 is we got to 7,500 cases, probably a quarter sooner than we were anticipating earlier. Our expectation now is, okay, can we get above 8,000 cases for the quarter in Q4? Once we have that, one of the other key catalysts for blood that we've obviously mentioned on the previous call too is getting the New York State approval since we're not selling in New York right now.

I think that will obviously give another additional kick to the volume from blood. I think what we'll do at the end of the year, especially when we report our preliminary numbers in, probably for JP Morgan, we'll put out a guide around what we expect our therapy selection volume to be.

Michael Ryskin (Managing Director and Equity Research Analyst)

Okay. All right. If I can get a follow-up. On the strong EBITDA number in the quarter, the free cash flow, I mean, even if a good chunk of this was attributed to the true-up, clearly you're moving into profitability and cash flow positive earlier than you expected. Can you talk about incremental spend priorities and just, again, how do you balance the profitability versus the opportunity to reinvest back in the business? Just trying to get a sense of if things come through again on the top end, on the higher end, where that extra money will go. Thanks.

Luke Power (CFO)

Yeah. Yeah. So. And it's a great question because obviously we're in a fantastic position financially right now. And obviously, that's why David Halbert said what he said at the start of the call. We're going on to our next phase. One of those phases is obviously doing whole genome for early detection. There is going to be an increase in spend there. Now, for Q3, we did have kind of on the lower end of the previous range I put out for OpEx. It was like $114 million. Now, I do expect for Q4, based on obviously starting the Achieve One study and running whole genome for that, to be kind of in the higher $120 million for OpEx for Q4. That's going to be some of the investment too of those kind of additional free cash flow that we have for Q3.

The other thing that I mentioned on the call, we're also assessing opportunities for the sales and marketing teams with additional spend there. We spent kind of a lot of time in Q3 just thinking about, okay, how do we want to be structured as we go forward with the new solutions that we have in our pipeline along with our therapy selection? There is going to be an increase in spend there as well. There are also external opportunities that we'll continue to assess.

David Spetzler (President)

In my case, Brian, the business model that we've built over a number of years though gives us a tremendous amount of flexibility. The numbers have kind of definitely come into their own with respect to profitability. That's being driven by growth overall, but also by the operating leverage inherent in our business in both the tech platform, which is set up in sort of this one assay format that's very, very powerful, as well as the channel that we've built over many years. As you've mentioned before, our growth has sort of doubled over the past few years while headcount has been basically flat in the channel. We benefit from very strong relationships, senior relationships at the top of the house with respect to cancer center leadership, as well as individual physicians. We're up to 6,000 or so now ordering physicians.

It's a very efficient business model that we think is well-suited for ongoing profitable growth. I think it gives us, David Halbert directing us as well as Luke from a financial perspective, to invest in the business. Whether it's tweaking the sales force, as Luke was talking about, but also really leaning into what we think is a tremendous opportunity in early detection. It's not like we're going to have to make really tough decisions either way. I think this business model is going to support our strategic moves against what is, we think, just historic market opportunities across the whole molecular information landscape.

Michael Ryskin (Managing Director and Equity Research Analyst)

Great. Thanks, guys.

Operator (participant)

Thank you. Our next question comes from Doug Schenkel with Wolfe Research. Your line is now open.

Doug Schenkel (Managing Director, Head of Life Science Tools and Diagnostics)

Good afternoon, and thank you for taking my questions, guys. Starting on MRD, once you have MALDI X coverage, what's the commercialization strategy to scale that business? Specifically, what I'm getting at is, can you go after it, get after it with your existing oncology sales force without material headcount expansion? Relatedly, how should we think about initial pricing? Will that align with currently reimbursed tumor naive levels, or do you think MALDI X will actually allow for premium pricing given the breadth and depth of your assay?

Luke Power (CFO)

I’ll take the first part, which is very straightforward. I mean, our channel, our relationships with the physicians, the cancer centers, they love our technology, and they want additional modalities from us. MRD and monitoring falls very neatly into that. There’s really a pull from the marketplace to have the complete solution set from us. Doug, we’re not going to need additional headcount. It’s the same sales force, the same MSLs taking care of the physicians. It’s the same channel for us, dealing with the same physicians and same institutions. It’s a very efficient, very natural launch for us from that perspective. Spez, do you want to take or Luke, do you want to take the pricing part?

David Spetzler (President)

Yeah. I can take that. Yeah. So, Doug, obviously, we're going to be talking with MALDI X. We don't know. Obviously, we think there should be a premium to it based on what we're doing because it's obviously the exact same assay that we got covered for therapy selection. Obviously, it's a different indication now for MRD. We'll have those discussions. Given the position we're in, we're obviously not price sensitive. I think once we actually get to the stage of getting that approval, we'll be ready to launch it, even if it's not at a very high price, even if it's at something similar today.

Doug Schenkel (Managing Director, Head of Life Science Tools and Diagnostics)

Okay. Super helpful. Luke, I think it's another one for you, but just on a different topic. You got to a really robust 68% gross margin, and I think it was 24% adjusted EBITDA margin this quarter. As we think about new products and the mix shift towards liquid biopsy over time, I'm not sure it's going to be a straight line, but I can easily see in Excel how the gross margins move into the low 70s, the EBITDA margin gets into the high 20s. Anything you think we should be thinking about as we're updating our models for the next couple of years, given in Excel, it looks like things can move up pretty quickly, but there are definitely a lot of opportunities for you to invest in pipeline products.

Luke Power (CFO)

Yeah. Yeah. So there is a lot. And I know we've kind of discussed this as a company before. We don't want to be in a very high kind of positive EBITDA margin level. We want to reinvest this. And obviously, Brian mentioned the early detection, and that's David's vision. And that's kind of going to be one of the key things we're going to focus on going into next year along with MRD. I think for us, Doug, being in the position we're in, being in that 68% gross margin, and then without the true-ups, being in that kind of low 60s is a great spot for us because even without the true-up, and this was pointed out earlier, we're still in that kind of we got to neutral EBITDA, positive adjusted EBITDA, even without the true-up. So we're being very efficient there. I think for us.

Going forward, MRD, you probably know this, Doug. So MRD, obviously, there's a Medicare reimbursement. Commercial is starting to pick up, but it'll take a little longer for us when we switch that on. So MRD is probably not going to be a high gross margin product right off the bat. We're going to have to work on that similar to what we've done with therapy selection over the years. I think that's going to kind of compress it a little bit. For early detection, and we discussed this, we're going to launch that as self-pay. That's going to be a positive gross margin for us. We're going to be in a great position either way with the addition of the pipeline. From a forecasting modeling standpoint, I do want to cap that we're not going above 30% adjusted EBITDA numbers. We want to reinvest. That is the whole point of the company, is to think about the future.

Doug Schenkel (Managing Director, Head of Life Science Tools and Diagnostics)

Yeah. Totally makes sense. All right. Thank you again.

Operator (participant)

Thank you. Our next question comes from the line of Casey Woodring with JPMorgan. Your line is now open.

Casey Woodring (VP, Equity Research)

Great. Thank you for taking my questions and congrats on the quarter. You guys called out strong Caris Assure volumes this quarter. Another liquid biopsy competitor has also called out an acceleration in blood-based therapy selection volumes. Just kind of curious how you guys are seeing the market movement towards blood and has it accelerated in the past few quarters and expectations for that in the future year?

Luke Power (CFO)

Do you want me to take that, Brian, or do you want to take that?

Brian Brille (Vice Chairman and EVP)

Yeah. Let me take that. Yeah. So Casey, so. It was great for Q3, obviously seeing that acceleration in the growth rate from Q2. Especially knowing that we've only probably been a little over a year since we launched Caris Assure now. I think what we're seeing in the market and kind of what I called out in the presentation, what we're seeing is more concurrent testing, which is definitely benefiting us. Last quarter, about 35% of our blood cases also had a tissue case performed, and that went up to 40% for Q3. I think that's playing out. I think there's more indications. I think physicians are obviously getting more and more comfortable with what we're offering with the whole exome and whole transcriptome along with our tissue and seeing kind of the benefits of that. Obviously, the chip subtraction, which is unique to us and the sequencing that we do on that, I think they're starting to see that play out a little bit more.

Casey Woodring (VP, Equity Research)

Got it. That's helpful. Maybe just a quick follow-up. By our estimation, it looks like the guide implies a pretty sizable sequential step up in pharma R&D services in Q4. Can you just provide any color on visibility into that, how you're thinking about the Q4 ramp in pharma R&D? What percentage of that growth is going to be driven by the data licensing piece? Thank you.

Luke Power (CFO)

Yeah. So. For Q4, effectively, the $200 million-$210 million of total revenue that's in the guide, effectively, our molecular profiling, the guide is showing $180 million. And then we're showing $20 million-$30 million in pharma. Because you asked the question, how much is known, we have a lot of contracts working through the pipeline right now. And similar to what we saw in Q4 of last year, where we did have a pretty big step up, we do think there's going to be a step up from Q3. Again, what we would put in the guide for pharma for Q4 would be that $20 million-$30 million range because, again, it's going to depend on timing. Obviously, what we're trying to do as a company is not do a one-time deal and get into longer-term partnerships. Now, you asked about the data component.

There will be an element of that. But we're not going to start breaking out kind of the three pillars in pharma until we actually start getting kind of that pharma revenue greater than 10%, 20% of our mix. We've always been clinically focused. We're always going to be clinically focused, but we do think there's strategic importance within pharma. And we will build it up. But for now, for Q4, it's in that $20 million-$30 million for pharma range.

Casey Woodring (VP, Equity Research)

Got it. That's helpful. Thank you, guys.

Operator (participant)

Our next question comes from the line of Patrick Donnelly with Citi. Your line is now open.

Patrick Donnelly (Managing Director, Equity Research Analyst)

Hi. This is Albert Hooton for Patrick here. Thanks for taking the question. Going off Doug's earlier question, obviously, the EBITDA this quarter was very impressive. You also mentioned that the cap is around 30%. Just making sure our expectations are in line here. Would you say that Q4 is going to see around similar EBITDA margins as this quarter? Perhaps into the next couple of quarters, it ramps up a bit before getting capped at around slightly below 30%. Is that the right way to think about it, or what would you say next?

Luke Power (CFO)

Yeah. I would actually think, and what we're putting in the guide, because again, we're not assuming any true-ups. We have the kind of true-ups reflected for Q3. So that $200-$210 million, and obviously, with the 60, kind of mid-60s gross margin, and then your OpEx in the 120, you kind of get into that kind of somewhat similar to Q3, a little less than Q3, though, is what I would guide to.

Patrick Donnelly (Managing Director, Equity Research Analyst)

All right. Perfect. Thank you. And then as a follow-up, on another similar question earlier, on early detection, what would you guys say is your consideration for pricing strategy there? Obviously, there are only a couple of tests on the market today. Curious what you guys are thinking in terms of where to go in terms of pricing strategy and what are the considerations for early detection?

Brian Brille (Vice Chairman and EVP)

Yeah. I don't think we're—sorry, go ahead, Luke.

Luke Power (CFO)

Yeah. No, you go, Brian.

Brian Brille (Vice Chairman and EVP)

No, I was just saying that's not— Look, we think our capability is very special. And we'll present advantages both with respect to the technology as well as the data, sensitivity, and specificity. Like the rest of our platform, our philosophy is going to be premium capability at premium pricing. But we're not disclosing that right now.

Patrick Donnelly (Managing Director, Equity Research Analyst)

Perfect. Thanks so much.

Operator (participant)

Thank you. Our next question comes from the line of Subbu Nambi with Guggenheim. Your line is now open.

Subbu Nambi (Managing Director, Healthcare Equity Research)

Hey, guys. Thank you for taking my questions. You mentioned 43% of your blood test has tissue attached. Do you expect any momentum here in the coming 12 months? Where could this go long-term?

Luke Power (CFO)

Yeah. So it's a great question. I can't predict where it will go long-term. Now, we have seen that percentage obviously increase throughout the year. I definitely think that's a positive. Now, obviously, lung is kind of a key indication, especially for blood. That's a big portion of it. As more and more indications or more and more approvals for drugs come out related to that, I think you might see that. For Q4, what I would estimate would be in that 40% right now, based on what I'm seeing. Obviously, we do expect it to increase a little bit. I don't know whether that will—you are probably asking the question—will that get to 50%, 60% over the next year? It's a possibility. Until we actually see it play out with our kind of ordering physicians, I don't want to guide to anything there.

Subbu Nambi (Managing Director, Healthcare Equity Research)

Luke, always including. It's great. You opened the call with the announcement that your early detection test will have a whole genome backbone. What does your addition of whole genome to early detection mean for MRD? Would you adopt a similar strategy for MRD?

Luke Power (CFO)

We're pretty happy with the current sensitivity of MRD on the exome transcriptome platform. I don't know that that's necessary. There are aspects of whole genome that are particularly well-suited to early detection that are not necessarily directly translatable to MRD.

Subbu Nambi (Managing Director, Healthcare Equity Research)

Thank you for that, guys.

Operator (participant)

Thank you. Our next question comes from the line of Mark Massaro with BTIG. Your line is now open.

Mark Massaro (Managing Director, Senior Equity Research Analyst)

Hey, guys. Thanks for taking the questions, and congrats on the strong quarter. I wanted to ask a question about data in pharma. Other companies have talked about sort of a challenging pharma environment. Yet you guys leverage a massive data set with over 950,000 genomic profiles, both whole exome, whole transcriptome. I would just be curious if you could give us a sense for the types of conversations you're having with pharma. To what extent is a companion diagnostic pathway part of your strategic roadmap? Can you give us a sense for any multimodal model conversations you might be having with some pharma companies?

Luke Power (CFO)

Sure. I think that's a—yeah. We can definitely see a shift in attitude towards utilization of the data and development of foundational models and application of AI. There's definitely a trend in that. Incorporation of both image data and molecular data is emerging as something that becomes very, very important. The end goal, of course, is those companion diagnostic components. The value of the data at the end of the day is bringing new drugs to market. A CDX strategy is very important to that.

Mark Massaro (Managing Director, Senior Equity Research Analyst)

Great. I'll ask one other—I know you were asked about just what percentage of your tissue test can be accompanied by a blood test already. I wanted to just ask, you're seeing a nice sequential increase in your Caris Assure volume. I think it's probably too early to ask a question like this, but one of the larger competitors just reported a really huge liquid number in their Q3. I just wanted to get a sense if you're seeing any change in the competitive environment, or do you think it's just too early and it's just a matter of attaching blood to your tissue?

Brian Brille (Vice Chairman and EVP)

Mark, it's Brian, I don't think there's any real change in the competitive environment. Remember, this market is still very—the therapy selection alone is still relatively unpenetrated in the 30-35% range. We have a long way to go to educate, support physicians, help the institutions develop and support precision oncology programs, and facilitate the use of both solid as well as liquid. I don't—look, everybody's scaling, I guess, against an enormous opportunity and a TAM that continues to expand with earlier indications, with CDX, new modalities, molecular signatures, etc. I don't think there's any—I think if anything, it's positive as there's more utilization, more understanding of the underlying technologies. We think that given the differentiation that Caris offers, all of that is very, very beneficial for us.

Mark Massaro (Managing Director, Senior Equity Research Analyst)

Awesome. Congrats again.

Operator (participant)

Thank you. Our next question comes from the line of Jack Meehan with Nephron Research. Your line is now open.

Jack Meehan (Equity Research Analyst)

Thank you. Good afternoon, everyone. I wanted to start by asking about Caris Assure. If I look at the underlying ASP and strip out the true-ups in the quarter, it looks like it's stepped up still almost $500 relative to 2Q. I was just curious what is pulling that up. You talked about contracting with commercial payers on the tissue side. I'm wondering if that traction might be pulling blood along with it.

Luke Power (CFO)

Yeah. So Jack, exactly right. So obviously, having the FDA approval for tissue, when we're actually going to payers, we are asking them to include Assure in it. The other key component of Assure this year that's helping us drive up the ASP is, if you recall, we got a PLA code for Caris Assure in Q4 of last year. So we've been going through Gapfill this year. Obviously, the PLA code is on the clinical lab fee schedule, but it is not priced right now. We have been getting priced at the local rate of $36.49. What we do know is next year, it will be added to the clinical lab fee schedule at $36.49. That is helping too, having that PLA code. Right now, both of our solutions for therapy selection have individual PLA codes that are effectively priced on the clinical lab fee schedule. That is helping because a lot of the commercial medical policies pull from that kind of fee schedule.

Jack Meehan (Equity Research Analyst)

Okay, that makes sense. I just had a kind of bigger picture question around whole genome for early cancer detection. I was curious, what do you think you get beyond what you get with whole exome transcriptome today? From a workflow perspective, just how do you incorporate this and not add additional complexity relative to what you're doing for Assure today? I guess it just kind of boils down to, do you think the juice is worth the squeeze? Thanks.

Luke Power (CFO)

Yeah. In many ways, whole genome is a simpler assay than whole exome and whole transcriptome because you don't have hybridization, and you don't have baits. Operationally, there are advantages to whole genome. For the first part of the question, aneuploid changes are one of the first things that happens in cancer. You can see that early on, especially in precancerous lesions, and whole genome gives us more resolution there.

Operator (participant)

Thank you. I'm currently showing no further questions at this time. I'd like to hand the call back over to management for any closing remarks.

Luke Power (CFO)

I don't think so. Listen, we're very happy with this quarter. We're super excited about this marketplace. I think our prospects are very, very strong. We look forward to speaking with all of you again soon.

Operator (participant)

This concludes today's conference. Thank you for your participation. You may now disconnect.