CareDx - Earnings Call - Q1 2017

Transcript

Speaker 0

Good day, ladies and gentlemen, and welcome to the CareDx twenty seventeen Q1 Preliminary Financial Results Conference Call. At this time, all participants are in a listen only mode. Following management's prepared remarks, we will host a question and answer session and our instructions will follow at that time. As a reminder, this conference is being recorded for replay purposes. It's now my pleasure to hand the conference over to Caroline Corner of Westrich Partners.

Ma'am, you may begin.

Speaker 1

Thank you for participating in today's call. Joining me from CareDx are Peter Maag, President and Chief Executive Officer and Michael Bell, Chief Financial Officer. Earlier today, CareDx released preliminary financial results for the quarter ended March 3137. The release is currently available on the company's website, www.caredx.com. Before we begin, I'd like to remind you that management will make statements during this call that include forward looking statements within the meaning of federal securities laws, which are made pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995.

Any statements contained in this call that are not statements of historical facts should be deemed to be forward looking statements. All forward looking statements, including without limitation, our examination of historical operating trends and our future financial expectations are based upon our current estimates and various assumptions. These statements involve material risks and uncertainties that could cause actual results to materially differ from those anticipated or implied by these forward looking statements. Accordingly, you should not place undue reliance on these statements. For a list and descriptions of the risks and uncertainties associated with our business, please see our filings with the Securities and Exchange Commission.

CareDx disclaims any intention or obligation, except as required by law, to update or revise any financial projections or forward looking statements, whether because of new information, future events or otherwise. This conference call contains time sensitive information and is accurate only as of the live broadcast today, May 2237. I will now turn the call over to Peter.

Speaker 2

Thanks, Caroline. Good afternoon, everyone and thank you for joining us. We have had a busy few months here at CareDx, especially with the exciting progress on the AlloSure reimbursement front. Jim Gleason, President of Trio, a patient organization dedicated to organ transplantation emphasized. The transplant community looks forward to having the AlloSure test available to support those long term post transplant life benefits, a great testimony to the immense patient need for better surveillance solutions for kidney transplant patients.

Also, as you may have seen, we have a new CFO on board. It's been great working with Mike over this last month. With his expertise in both finances and in diagnostics, we are working to streamline some of our financial procedures. Mike has also brought in some of his friends from Deloitte to support our financial reporting team and to help ensure we dot every I as we move ahead. I'll have Mike go over our preliminary financial results, but I'd like to first update you on the recent developments.

Our strong revenue results this quarter reflect continuing growth of our flagship AlloMap test. You recall that AlloMap is a high value diagnostic testing service that helps monitor heart transplant patients for the risk of rejection. AlloMap revenues were in the range of $7,700,000 to $7,900,000 this quarter, which reflect a volume increase of 12% compared with the first quarter of twenty sixteen. We provided approximately 3,750 AlloMap patient results in the quarter. So we're very pleased with our performance.

We continue to drive activities that increase the number of AlloMaps per patient or the adherence to a surveillance protocol. As discussed before, many centers set their own protocols when adopting AlloMap in line with our standard follow-up procedures. We have gathered information through pilot studies in three centers that by supporting centers in organizing the AlloMap component of their surveillance protocol, we have significantly increased their adherence. We've enrolled this program out to a total of 10 centers in the first half of this year. With this program in full swing, will continue to drive AlloMap underlying volume growth.

With efficiencies generated from this volume increase and the Roche royalty payments ending after the third quarter, the roughly 65% gross margin on AlloMap will help to support our path to profitability. Preliminary revenues for our pre transplant all the route business in the quarter were $3,700,000 which reflect a good quarter. As we have mentioned before, our Olarub product offer the best in class HLA typing solutions for transplant labs that are matching organs to recipients. You can find Olarub products in more than 50% of the roughly 1,000 HLA labs around the world. Last September, we launched Olarib QType to drive further growth in our pre transplant business.

Reception to QType continues to be very positive and we look forward to reporting back to you with the CE marking progress and validation of additional instruments. So we have solid revenues in our pre and post transplant co products encompassing the continuum of care as we execute on our strategy to build

Speaker 0

information company. We are very excited to be adding to our portfolio AlloSure and we've had some

Speaker 2

strategy recent great news. AlloSure, the first and only non invasive test that uses donor derived cell free DNA to directly measure organ injury and identify the probability of active rejection. AlloSure is not only bringing transformational sequencing technology to the clinic. AlloSure is also a transformational product for CareDx. With three major scientific publications, the relevant IP through the ImuMetrix acquisition, our best in class ClearLab and the commercial platform through AlloMap in place, we are extremely well positioned to execute on this opportunity.

Last month, we attained a draft local coverage determination LCD from Palmetto, Noridian and other Medicare administrative contractor, MACs for AlloSure. The draft local coverage decision was issued following completion of the MolDX, the Molecular Diagnostic Technical Assessment process by Palmetto. CMS has awarded Palmetto with the administration of the Molecular Diagnostics program. During the technical assessment process, subject matter experts and the MolDX team determine if an assay demonstrates clinical utility and fulfills the centers of Medicare and Medicaid services reasonable and necessary criteria. For us, Medicare is so important not only because of the expertise of the team at MolDex in regards to high value diagnostic test evaluations, but also because roughly eighty percent of all kidney transplant patients are covered under Medicare.

This means our reimbursement efforts for AlloSure are highly targeted, especially compared with other diagnostic tests that need to go through lengthy negotiations with multiple payers. As we laid out on our last call, there are three important phases of the MolDex process, the technical assessment review, the local coverage decision and reimbursement pricing setting. We now have a draft LCD and we are moving towards the reimbursement and price setting phase. Subsequent to a positive final LCD, will engage in pricing discussions. We anticipate that we will have completed the reimbursement process in the 2017 and are planning for full launch of AlloSure in October.

We have shared with you previously that we continue to leverage our existing resources for product launch. As 100 centers account for roughly 80% of the overall kidney transplant volume with a great overlap with our existing AlloMap offering, we are planning for a very efficient launch. On the clinical front, we presented AlloSure data at the twenty seventeen American Transplantation Congress, which was very well received by transplant physicians. Even more important for us were the many interactions that we had with investigators and key personnel from transplant centers who were eager to get their hands on the real life experience with AlloSure. With that excitement on great data and reimbursement underway, we feel very well positioned for the launch of AlloSure.

We are excited about AlloSure's market opportunity and we believe AlloSure has the potential to achieve more than $200,000,000 in revenue. We hope to leverage our established expertise in commercial platform to make this a highly efficient launch. How do we get there? I mentioned that transplant centers are highly concentrated group. We will market AlloSure to the 200 kidney transplant centers in The U.

S. Starting with centers where CareDx has an established presence through AlloMap and a clinical trial presence through DART. Second, we focus on Medicare as a payer with an established relationship, eighty percent of kidney transplantations are Medicare patients. We have strong relationship with the MolDX program also based on our history with AlloMap. Repeat testing similar to AlloMap patients on AlloSure will follow a surveillance protocol providing a recurring revenue opportunity with multiple tests provided.

And lastly, revolutionary technology targeted sequencing technology provides for fast turnaround time and competitive cost of testing. The approach of measuring cell free DNA is already a proven game changer in oncology and prenatal testing. Now we look forward to updating you further on our launch strategy and providing some reimbursement updates on coming calls. Moving on to a quick update regarding our balance sheet. During the quarter, we signed a debt agreement with JGB and we are in discussions to restructure our obligations with former majority shareholders in Sweden.

We believe these activities have the potential to increase our financial flexibility in front of our AlloSure launch. In closing, I'm very pleased that we received the draft LCD from Palmetto and hit that milestone as planned. But looking forward now, I'd like to remind you about our other milestones that we are excited about and you should monitor. The potential restructuring of our obligations with the former majority shareholders of Alenex, the AlloSure pricing which is expected later this year and our launch in October, the oligo p type launch activities with CE Mark expected later this year, as well as continued growth on AlloMap as we roll out our AlloMap at home program. I will now turn the call over to Mike to discuss our financials.

Speaker 3

Thank you, Peter. Firstly, I'd like to say that I'm pleased to have joined the team at such a critical time and ahead of such large commercial opportunities. While today we're reporting early preliminary results, I look forward to releasing final results in coming weeks and getting our financial protocols on track for more timely reporting in the future. Preliminary first quarter twenty seventeen revenue is in the range of $11,400,000 to $11,600,000 compared with 6,600,000 in the first quarter of twenty sixteen. The year over year increase in revenue reflects three drivers.

First, Olarup contributed revenue of $3,700,000 in Q1. Note that we completed the acquisition of the Olarup business in April 2016. Second, AlloMap U. S. Test volume grew 12% in first quarter twenty seventeen.

And third, we continue to improve our cash collection operations. These two AlloMap related drivers have resulted in AlloMap revenue in the range of $7,700,000 to $7,900,000 in Q1, up from $6,500,000 in the prior year. For Q1, our preliminary net loss was in a range of $6,800,000 to $5,800,000 compared to a net loss of $9,800,000 in the same period of 2016. I wanted to briefly comment on bringing our financial processes in order. The team here has faced some significant challenges because of the various acquisitions over the last twelve months.

That together with the late filing of the 10 ks impacted our ability to file this 10 Q on time. We expect to file a 10 Q in the very near future and going forward, we brought in Deloitte to work with the team to help us improve our financial close process and accounting controls. I'm already seeing a positive impact from this initiative and I'm confident that our future filings will be back on track for the next quarter. You'll see from the strong revenue performance on AlloMap that the team has successfully in house the billing activities. I actually think we can continue to get better in that area.

We've already upgraded a lot of the processes and activities, but based on my experience from previous companies, I see room to further improve. In one of the upcoming calls, I'd be happy to update you on our thinking on how to further increase collections and reduce our DSOs. Turning to guidance, we have no change there. For 2017, we continue to expect revenue to be in the range of 45,000,000 to $50,000,000 Our guidance is based on AlloMap and Olarup revenue and excludes any potential revenue from AlloSure. I'll turn the call back to Peter for closing comments.

Speaker 2

Thank you very much, Mike. We appreciate you joining the call. We are now happy to address any questions.

Speaker 0

Thank you, sir.

Speaker 4

Our first question will come from

Speaker 0

line of Bill Quirk with Piper Jaffray. Please proceed.

Speaker 4

Great. Thanks and good afternoon everybody.

Speaker 2

Hi, Bill.

Speaker 4

Hi. So I guess, first question here, you reiterated guidance. So is it safe to assume given we're pretty far into 2Q at this point that volumes continue to track kind of according to your plan?

Speaker 2

Absolutely. AlloMap is doing very well. You see that the 12% growth in the first quarter has been a very good solid growth. And we're tracking against our plans, absolutely.

Speaker 4

And then maybe Peter, you could just kind of elaborate a little bit more on the LLMAP growth. Obviously, the 12% number was I think certainly higher than the Street was looking for. So maybe you can just elaborate on pockets of the strength there. Is it sustainable? Maybe how should we be thinking about that metering itself over the balance of the year?

Speaker 2

Yes. Our activities to drive protocol adherence have bear borne a number of fruits in key centers. And they have been so positive that we are actually rolling this out in 10 more centers in the first half of this year. We see on average Bill that roughly if we look at the numbers patients experience about five to six AlloMaps over the lifetime after transplantation. And we think that based on these protocols, it could be in the 10 to 12 AlloMaps range if we actively involve ourselves in the process.

So translate that into 10 centers, there is going to be continued growth on AlloMap, which is very exciting. What we do here is we actually help these centers to schedule the AlloMap blood draw based on a predefined schedule. And by doing that, we ensure that they actually come to the center, get the blood drawn and the AlloMap is in the electronic medical record prior to the visit of the patient next time at the center. So that has proven to be very exciting and important, also medically for this patient to receive the AlloMap prior to the visit.

Speaker 4

Okay. Great. And then I guess last question for me is just on AlloSure and thinking a few steps ahead here in terms of getting to the pricing decision by the MAX. How should we think about this Peter? Gap fill, crosswalk kind of any chatter that you can share at this point would be really helpful.

Thank you.

Speaker 2

I think there are really three important elements when thinking about these pricings and you mentioned a couple. The first one would be a crosswalk type of methodology. While MolDX is not using our crosswalk specifically here, I think the really the analog product to be compared to is actually AlloMap. It's a post transplant surveillance method on a slightly different technology gene expression profiling. But with the price of 3,600 list and 2,840, I think it sets a nice analog for a type of crosswalk methodology.

When we're thinking about considering the health economic impact of AlloSure, clearly there is an easy comparison to alleviating the needs of biopsies in kidney transplantation. And these biopsies are very invasive and obviously a big issue. And then a bigger health economic impact even is the optimization of immune suppressive therapy and the issues that are associated with immune suppressive therapy over long periods of time. And the third element clearly is what was the investment, what is the cost of producing the test that will come into an equation of an evaluation on pricing of this product. And as there is underlying sequencing technology, you can probably appreciate that the experts also on the MolDex side are very familiar with cost associated with on the one hand the evidence development, but then also with the cost of producing a result.

And we have a lot of experience with that, but I think these are the three major elements for pricing of AlloSure.

Speaker 4

Okay, got it. Thank you, Peter.

Speaker 0

Thank you. Our next question will come from the line of Kevin Ellich with Craig Hallum. Please proceed.

Speaker 5

Good afternoon. Thanks for taking the questions. So, just following up on Bill's question on the strong AlloMap volume 12%. Do you think you guys should be able to continue that type of growth rate? Or how where should we see more fluctuation as the year goes on?

Speaker 2

Well, think if you look over the last few quarters, we have mentioned that we think of AlloMap growth somewhere between a 510% range. This quarter has been a very strong quarter with 12% growth. I think it's a product that has really found its place as a standard of care in heart transplantation. And what we saw actually last year that there was a bit of an underlying uptick in organ availability. I think that has supported AlloMap growth.

And Todd and the team are doing a very good job. Our Chief Commercial Officer, Todd Whitson, who came over from prenatal diagnostic testing company, has really helped to shape our marketing and sales focus and drives volume growth. So yes, I think the 12% is a good growth and let's see what we can do in the second quarter.

Speaker 5

Okay. That sounds good, Peter. And then just going back to AlloSure and we understand you've provided a lot of good detail on the process for the pathway for Medicare reimbursement, which you're looking for. I know eighty percent of the kidney transplant patients are in Medicare. What about the commercial side?

They're still twenty percent. Would you expect commercial reimbursement to follow suit very quickly? And do you think it'll be in the same sort of range that you're looking at for Medicare?

Speaker 2

I think we've been very successful in the company to not contract AlloMap below the Medicare rate. And in hindsight, I think that has been proven to be a very wise decision. And so we continue to believe that that's the right way forward. We do have relationships with payers that allow us to see the interest levels. And there are a few payers that I think are forward leaning and forward thinking about high value molecular diagnostic tests.

I think we're laser sharp focused right now on the Medicare reimbursement, because it is 80% and we follow the eightytwenty to 20 rule. What you'll see actually in the draft local coverage decision, what is very exciting is that there is no limitation on length of testing. So it actually AlloSure starts two weeks after transplantation and there's no limitation in terms of use. And the second one, it is actually a relatively broad label, where we think that we can actually provide a lot of AlloSure value to patients by monitoring these patients over a long period of time. So I think that's a we were very pleased with the outcome of the draft local coverage decision provided under Medicare.

Speaker 5

Great. And then on AlloMap, I think Mike mentioned 65% gross margin. I guess, have you guys ever provided where do you think those margins can go? And then what should we expect when obviously, we need to find out what the pricing will be for but do you think we should see something similar in terms of the gross margin on that product as well or ProStats as well?

Speaker 3

This is Mike. Yes, currently, the gross margin on AlloMap is between the 6065%. And absolutely, as we launch AlloSure and that starts to take on some of the overhead related to AlloMap then, we will be targeting around the 70% gross margin for Alimat.

Speaker 5

Targeted around 6%. Okay. And then Mike, since I got you, one quick one for you. On the balance sheet, do you think you need to you mentioned you kind of want to restructure the balance sheet a little bit. Can you give us any color on what you've learned over the last month since joining the company?

And also what you want to do with the balance sheet and where the cash burn lies right now?

Speaker 3

Well, with respect to the cash burn, we're burning around $3,000,000 a quarter on the operations. And with our current cash balance at the moment, that's going to get us well through the AlloSure launch. So that's our first priority is to get us there. I think towards the end of the year, we want to strengthen the balance sheet further to allow us to continue the commercialization into 2018. There's nothing specific we can share at the moment on that.

And when we can, we will do.

Speaker 5

Sounds good. Thanks, guys.

Speaker 0

Thank you. Our next question will come from line of Nicholas Jenson with Raymond James. Please proceed.

Speaker 6

Hey guys, thanks for the questions. First for me, just on that last point, Mike, I do believe from the Swedish shareholder perspective, there is a deferred payment in July that you're hoping to push out. Can you maybe just give us some clarity on when that payment's due? How we should be thinking about the time line for you guys to get rid of that or delay that? Thanks.

Speaker 2

Nick, thank you very much for the question. I think there are really two components for the Swedish shareholders. The one is the deferred acquisition payment. That's in the neighborhood of €6,000,000 And then the other one would be a loan agreement in the Alenex organization of roughly to make it they get to about $4,000,000 So there's a total obligation to $10,000,000 We have been in good relationship with the shareholders. They actually do own a significant portion of CareDx stock at this stage.

So we have been in very good conversations. And we see them in the past having deferred some of these payments that we will be able to defer some of these payments going forward. As we get closer to finalizing these agreements, we'll be sharing that news with you.

Speaker 6

That's helpful. And then thinking about the AlloSure commercialization, I know you're going to be leveraging your sales force pretty aggressively given the overlap. But just wanted to get your thoughts on how we should be thinking about if there's any sort of incremental sales hires, any new incremental marketing programs and dollars spent on the upfront commercialization process as we kind of think about that $3,000,000 per quarter cash burn? Thanks.

Speaker 2

Miano, thank you very much, Nick. And actually we're going to launch this product with seven people in sales and four of the medical sales liaison. So 11 people in the field. We have upgraded our marketing team already in the first quarter. So don't expect large expenditures and then changes in terms of cash burn

Speaker 6

Great. And then my last question would be if PAMA was to kind of stick to its word in terms of using commercial rates as benchmark for Medicare going forward, how do we think about your existing AlloMap franchise? I believe commercial is currently above of what Medicare pays you at the time being. So how much incremental revenue or opportunity would that be if that did get finalized as constructed?

Speaker 2

Thanks Nick for reminding me. We actually did mention that our calculation have led to a submission of 3,240 AlloMap pricing when we take the commercial contractor price. If we translate this into this roughly 15% sales increase to our overall volume on Medicare, we're talking about roughly 6% to 7% increase on same volume. So we see this as an upside opportunity. There's a lot jitter in the market around the implementation of PAMA, but we see this as a key upside going into the next year.

Speaker 6

Great. Thanks. I'll hop back in queue.

Speaker 0

Thank you. We have follow-up questions from the line of Kevin Ellich with Craig Hallum. Please proceed.

Speaker 5

Peter, just one follow-up for me. Why does it take two weeks before you can start the AlloSure testing? Our understanding was that prednisone does not impact the test capability like AlloMap.

Speaker 2

Kevin, I might not have understood your question. Can you repeat the two weeks?

Speaker 5

Yes. I think in your prepared remarks you said that you can start testing two weeks following the transplant. Is that right?

Speaker 2

Yes. Just after transplantation, when the procedure of transplanting an organ into an individual is causing a lot of damage of the cells. And just to be on the safe side that really the cell free DNA so that the damaged cells that we are measuring are really coming from a healthy and working organ. There is a two weeks lapse after transplantation before we can perform the first AlloSure test.

Speaker 5

Okay. Thanks.

Speaker 0

Thank you. There are no further questions in the queue. So now it is my pleasure to hand the conference back over to Mr. Peter Mag, Chief Executive Officer for some closing comments or remarks. Sir?

Speaker 2

Well, this is a very quick one. Thank you very much for attending the call and looking forward to updating you further on our further development. Thank you very much for joining.

Speaker 0

Ladies and gentlemen, thank you for your participation on today's conference. This does conclude the program and you may all disconnect. Everybody have a wonderful