CareDx - Earnings Call - Q3 2017

Transcript

Speaker 0

Good day, ladies and gentlemen, and welcome to the CareDx Third Quarter twenty seventeen Earnings Call. Today's conference is being recorded. And at this time, I'd like to turn the floor over to David Claire, ICR Investor Relations. Please go ahead.

Speaker 1

Good afternoon, and thank you for joining us today. Earlier today, CareDx released financial results for the quarter ended September 3037. The release is currently available on the company's website at www.caredx.com. Peter Maag, Chief Executive Officer and President and Michael Bell, Chief Financial Officer, will host this afternoon's call. Before we get started, I would like to remind everyone that management will be making 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, expectations regarding coverage decisions, pricing and enrollment matters and our future financial expectations are based upon current estimates and various assumptions. These statements involve material risks and uncertainties that could cause actual results to differ materially 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 sensitive information and is accurate only as of the live broadcast today, 11/09/2017. I'll now turn the call over to Peter.

Speaker 2

Well, thanks David and good afternoon everyone. Thank you for joining us. We had an exciting third quarter. This afternoon I'll be providing an update on our recent achievements and performance as well as commentary on CareDx's pathway to profitability. Mike will then provide additional financial details on the quarter.

We have just come back from the American Society of Nephrology meeting in New Orleans. And it was exciting to see the interest in AlloSure, our new solution for rejection surveillance for kidney transplant patients. CareDx is increasingly recognized as a company making great strides in providing the latest technology to the field of transplantation with a clear focus on improving long term outcomes for patients. During the third quarter, the CareDx team achieved several important milestones with respect to AlloSure. As a reminder, AlloSure measures donor derived cell free DNA to detect active organ rejection.

AlloSure represents CareDx entry into the large kidney transplant surveillance diagnostic market. In The U. S. Alone, there are more than eighteen thousand kidney transplants annually and an estimated two hundred thousand patients currently living with a transplanted kidney. There are approximately 10 times the number of patients living with kidney transplants compared to those living with heart transplants, translating into an addressable market opportunity of greater than 2,000,000,000 annually.

On August 24, Palmetto GBA, the Medicare administrator responsible for the Molecular Diagnostic Technical Assessment Program, commonly referred to as MolDex, announced AlloSure qualifies for Medicare coverage effective 10/09/2017. Then on September 26, CareDx announced AlloSure Medicare reimbursement will be $2,840 per test. This reimbursement rate recognizes the clinical utility and validity of our offering. Following the Medicare decision, an estimated eighty percent of kidney transplant patients have AlloSure reimbursement coverage upon launch of the test. In our industry, it typically takes several quarters, sometimes even years and negotiations with multiple payers to achieve 80% reimbursement coverage.

Additionally, eighty percent of all U. S. Kidney transplants take place in only 100 transplant centers grading a very concentrated group of centers for our initial focus. CareDx already has a presence in seventy percent of these high volume transplant centers with AlloMap. AlloSure represents a transformational opportunity for CareDx and given the favorable reimbursement rate, the high percentage of kidney transplant patients with Medicare coverage and our existing relationships with the top kidney transplant centers, we are well positioned to penetrate this $2,000,000,000 market opportunity.

Now I would like to provide some details on the initial AlloSure commercialization efforts. We officially launched AlloSure on October 9 and are very pleased with the initial interest from key opinion leaders, targeted transplant centers and patients. In October, we had 14 transplant centers order AlloSure. We view the initial interest and traction as indicators of a successful AlloSure launch. I'm also very pleased to share with you that last week we started to receive payments from Noridian for tests that have been performed on Medicare patients since the launch on October 9.

Note that we do not expect material revenues on AlloSure in the fourth quarter as it will take time for centers to make AlloSure part of their regular surveillance protocols going forward. As a reminder, based on our prospective start study, we developed AlloSure routine testing schedule as the recommended testing protocol to meet the surveillance needs of kidney transplant patients. The AlloSure recommended testing protocol includes seven tests during the first year followed by quarterly testing in the second year and beyond. The recommended testing protocol establishes standardized use across transplant centers and enables easier workflow through the use of standing orders, as well as providing a recurring revenue opportunity for CareDx. In addition to our commercial efforts, we are finalizing the details of our Medicare coverage with data development or CDD study.

This is our kidney outcome AlloSure Registry known as K OAR, which is a three year study enrolling 1,000 patients across 35 transplant centers with the primary endpoint centered on observing post transplant patient outcomes and the reduction of the total number of renal biopsies performed. Besides providing a wealth of clinical data, we estimate KO will include approximately 10,000 reimbursed AlloSure tests over the next three years, thus representing incremental AlloSure volume as well as another revenue driver going forward. We remain on track to enroll our first K OAR patient in January and will update you as milestones are achieved. We view registry study as an important component of our genomic information strategy. We launched our AlloMap registry in 2013 and currently have over 1,800 patients enrolled across 36 centers.

Through these ongoing studies CareDx is building a large database of genomic data in transplantation, annotated with clinical information, creating potential partnership opportunities with academic centers, transplant information technology companies and biopharma. Longer term, we believe data science insights generated from these studies will provide actionable real world evidence for clinicians and patients. Now turning to AlloMap. AlloMap is currently used in ninety percent of U. S.

Heart transplant centers and about fifty percent of new heart transplant patients receive AlloMap testing today. We are positioned to replicate the success in the kidney market with AlloSure, which over time would make AlloSure a high value diagnostic with at least $200,000,000 in annual revenue. Shifting to AlloMap with the third quarter twenty seventeen test volume increased 7% year over year translating into approximately three thousand eight hundred and sixty patient results with associated revenue of $8,200,000 Recall that in the 2016 CareDx recognized revenue of approximately $900,000 in AlloMap catch up payments because of billing issues that occurred earlier in 2016. Adjusting for this AlloMap revenue increased broadly in line with volume growth in the quarter. We have now concluded the in housing of our billing and reimbursement function and have returned to a steady state where volume and revenue growth should be more or less moving in parallel.

Our efforts to increase AlloMap adherence will remain a key component of our growth strategy going forward. Protocol adherence continues to positively impact our AlloMap franchise with more than 70 transplant centers currently with an AlloMap protocol in place. Our home phlebotomy service was made has made it easier for patients to engage with CareDx and adhere to their testing protocols. Going forward, we anticipate these ongoing efforts will drive AlloMap volume growth rates in the mid single digit range. In addition, last week CMS announced the change to its state of service policy known as the fourteen day rule, which means that starting 01/01/2018, CareDx will be able to bill Medicare directly for AlloMap and AlloSure test drawn in the hospital on the day of the patient's clinic visit.

This change in policy will allow for much easier patient access to both AlloMap and AlloSure and will likely improve patient adherence to transplant center testing protocols. Being able to draw AlloSure and AlloMap alongside other blood work is great news for patients and great news for all parties involved in the workflow. Consistent with prior communications, following PAMA implementation, the AlloMap Medicare reimbursement rate is set to increase by fourteen percent to three thousand two hundred and forty dollars on 01/01/2018. As a reminder, Medicare patients currently make up approximately 40% of our AlloMap revenue. We anticipate this reimbursement increase combined with the expiration of the Roche royalty on 10/01/2017 to increase AlloMap gross margins to at least 65% representing an important contributor to our future profitability.

Our Olaroop pre transplantation business increased 3% in the quarter to $3,900,000 reflecting continued traction with our best in class HLA typing products. We estimate that our Olaroop products are used in approximately 50% of the estimated 1,000 transplant labs worldwide. Our next generation QType product represented a step function improvement in HLA typing, offering a faster turnaround time with high precision compared to current methods. By the end of the third quarter, we have demoed the solution in 51 centers worldwide since our launch last year. We have received valuable input from these demos and are currently incorporating the feedback into the final development of the product both for the QTAP validation on the Roche Lightsizer and on the ABI instrument.

QType represents an important growth driver for CareDx and should accelerate the company's path to profitability. QType also provides a platform to further establish CareDx as a transplantation focused company with solutions along the patient journey and to facilitate the use of pre transplant information for post transplant patient management. Mike will touch on our outlook for the remainder of 2017 during his comments, but I wanted to take some time to update everyone on our efforts to clean up our balance sheet and our path to profitability. CareDx recently closed a very successful follow on offering raising approximately $18,300,000 in net proceeds, strengthening our cash balance and positioning CareDx to capitalize on the significant opportunities in front of the company. We have executed well on our strategy to strengthen our balance sheet and building on the momentum following the recent AlloSure and AlloMap Medicare reimbursement news.

We anticipate CareDx to become EBITDA positive in the second half twenty eighteen. Additionally, we have an aspirational goal of achieving 90,000,000 to $100,000,000 in revenue in 2019. Represents a transformational product launch opportunity for CareDx. Launching AlloSure and building a transplant patient focused genomic information business has created development opportunities for our existing teams and driven our success in attracting exceptional talent to the organization. In addition to strengthening the finance team, we have attracted key individuals for our commercialization efforts.

For example, with the additions to our customer care team, we can drive positive patient experience and adherence to the testing regimen. I am excited about the progress we are making here as improving patient outcome is what it is ultimately all about. With this, we look forward to updating investors in the coming months as we reach key milestones mainly focused on AlloSure commercialization. I will now pass the call to Mike to discuss the financials. Mike?

Thank you, Peter. I have to say that I'm incredibly pleased with the progress the company has made since I came on board six months ago. In addition to the launch of AlloSure, we've made good progress on our key financial objectives, which were to clean up

Speaker 3

the balance sheet, set out a path to profitability and improve our financial reporting and controls. We started the cleanup of the balance sheet at the beginning of the third quarter when we announced the restructuring of our obligations related to the Alenex acquisition. And as Peter mentioned, we recently strengthened our balance sheet with an upsized public offering, which was completed in October. The offering raised $18,300,000 in net proceeds and resulted in us having a pro form a cash balance at close of approximately $24,000,000 which excludes restricted cash of $9,600,000 This has enabled us to remove the going concern doubt from our financial statements as we believe our current cash balance will be sufficient for at least the next twelve months. We continue to focus on driving the company towards profitability.

This drive resulted in us lowering our cash used in operations to $2,200,000 in the third quarter, a further improvement compared to the second quarter's $3,200,000 rate. As Peter mentioned, given the recent AlloSure launch and AlloLap reimbursement news, we now have a path to reaching EBITDA profitability in the second half of twenty eighteen. We're also making steady progress in improving the finance and accounting function. In addition to bringing on new hires in the last quarter, we're working hard to remediate the material weaknesses that the company identified during 2016, and I hope to be able to provide further positive updates regarding this on future earnings calls. Turning to the P and L.

Third quarter twenty seventeen AlloMap revenue decreased 5% year over year to $8,200,000 As Peter referenced, adjusting for the $900,000 catch up payments that we recognized in the third quarter of twenty sixteen, AlloMap revenue increased 6% in the third quarter twenty seventeen from the prior year, which is in line with the 7% increase in test volume in the quarter. Our AlloMap business increased 3% year over year to $3,900,000 And as such, total revenue in the 2017 was $12,200,000 representing a 2% decrease compared to the prior year's $12,500,000 Again, adjusting for the $900,000 in the third quarter twenty sixteen catch up payments, total revenue increased 5% from the prior year quarter. For the third quarter twenty seventeen, our non GAAP net loss was $3,300,000 compared to a non GAAP net loss of $2,900,000 in the same period of 2016. Turning to guidance, we are tightening our revenue expectations and now anticipate full year 2017 revenue to be in the range of $47,000,000 to $49,000,000 As a reminder, our revenue guidance only includes AlloMap and AlloSure revenue and doesn't include any contribution from AlloSure. With that, I'll open up the call for questions.

Speaker 0

And first from Piper Jaffray, we have Bill Quirk.

Speaker 4

Hi, thanks. Good afternoon.

Speaker 2

Good afternoon, Bill. How are you doing?

Speaker 4

Very well. Thank you. Very well. First question, sorry, I must have missed it, but did you say 90,000,000 to $100,000,000 in 2019? Did I catch that correctly?

Speaker 3

Yes, Bill. I think that we said we have an aspirational target of revenue of 90,000,000 to $100,000,000 in 2019.

Speaker 4

Okay, very good. Thank you. And then just a couple of questions, Peter. First off, 14 transplant centers that have ordered AlloSure, can you speak to whether or not multiple physicians within those have ordered AlloSure? Or is this just kind of perhaps the initial champion within those organizations trialing out the product?

Speaker 2

Thank you very much. That's excellent question. I think we're early in the launch. We are right tracking towards where we wanted to be with AlloSure. I think 14 centers is slightly ahead of where we wanted to be.

So we feel good. And you can probably appreciate that some centers we have multiple clinicians ordering and in many centers we actually have the key opinion leader ordering AlloSure. So yes, I think most centers would have started using the test with our key opinion leaders testing that using the test.

Speaker 4

Excellent. Thank you. And then just a couple of housekeeping questions, I may. Mike, with some of the new accounting standards coming up, presumably between the publicly issued price point for AlloMap and AlloSure and albeit a short history of collections on AlloSure, we shouldn't have any issues with respect to accrual versus cash accounting and some of the changes that are coming into place for January 2018, correct?

Speaker 3

Correct. The changes should make it a lot more linear with respect to what we recognize being in line with volume. And we on AlloMap, we've got a very good history of payments. So that should be relatively straightforward on AlloSure, because the payments will be by Medicare again, that should make that relatively straightforward for us. So I'm not foreseeing any issues with the changes.

Speaker 4

Okay, very good. And then just last housekeeping question for me. I think I know the answer to this, but Peter or Mike, there's obviously continues to be some scuttlebutt around potential adjustments to PAMA pricing. And we'll certainly some prices for some routine tests appear to be calculated incorrectly. I would imagine that you don't anticipate any changes with respect to the AlloMap numbers that have come out from CMS in the preliminary document?

Speaker 2

No, our team has been very thoughtful in providing the analysis and the information that was requested from CMS for the PAMA pricing. And we see actually the pricing that came out completely in line with what we had submitted. So, bar any additional information which we are not aware of, we think that the PAMA implementation will be on the 3,240 that we've been communicating.

Speaker 4

Excellent. Okay. Thank you very much. Nice quarter and certainly best of luck with the new AlloSure launch.

Speaker 2

Thank you very much, Bill. Now AlloSure is truly a transformational opportunity for us.

Speaker 0

Moving on from Craig Hallum, we have Kevin Ellich.

Speaker 5

Good afternoon. Thanks for taking my questions. Peter, just wanted to go back to the AlloSure launch. Yes, 14 centers, a little bit better than we expected as well. Where do you expect to end the year at in terms of the number of transplant centers?

And what's the initial reception been like? You guys said you were down in New Orleans at ASN. I guess what takeaways did you guys come away with?

Speaker 2

I actually had the opportunity to go down there and over lunch invite a couple of opinion leaders. And by the evening, we had a significant group of the who is who on kidney transplantation sitting around the room and sharing our story on AlloSure. This is a transformational product for the community that has been waiting for a new tool to improve patient surveillance. So I think we're coming at a time where everybody's looking at these new technologies and what do they mean for transplantation is really what CureDx brings. In terms of the 14 centers, think we are right where we want to be.

And a bit of the outlook I think we had shared previously in our last financing where we said, this will be largely driven by 35 centers adopting K OAR next year. So if we were to end of next year with 40 centers having adopted AlloSure, I think that is that would be a great success. Where we're going to be ending up this year, I can tell you it's more than 14, but I think anything else would be a bit too early for me to share. We are four weeks in and we're very excited about the progress that we are making.

Speaker 5

Great. Then I think in your prepared remarks you said that you've actually started to receive reimbursement from Medicare for some of the AlloSure tests ordered. Is that correct?

Speaker 2

No. I think the team has worked extremely well and we were in close contact with Noridian and it was great to report that we have the first AlloSure reimbursed. Mike, did you want

Speaker 3

to add? No, it's just that we received the first payment last week and since then we're getting paid for test that we've built in Iridium.

Speaker 5

Okay. So it sounds like that payment came in as timely manner. That's great. I guess wanted to go back to the fourteen day rule comment, Peter, and the change that Medicare made to lab data service. Can you provide a little bit more color as to what that means?

I think a lot of people don't really understand underarrangements that go through the hospitals, but why will that help with adoption and compliance? And what does it mean for both AlloMap and AlloSure?

Speaker 2

Yes. The fourteen day rule basically says that now CareDx can bill Medicare directly even on tests that are drawn from hospitals during the day of other services being provided to the patient. In the past, what we have established is in the vicinity or around the hospitals draw sites that we're drawing the AlloMap blood draw alongside days that patients were visiting the center, but in a different location. This is now not necessary anymore and patients can actually be drawn for an AlloMap and an AlloSure alongside the regular blood work that they're getting at the center. So imagine now for our kidney transplant patients, they are being drawn a serum creatinine, we have the opportunity to also receive an AlloSure blood draw.

Since they're in many centers, serum creatinine are performed 25 times in the first year post transplant, there are multiple opportunities where an AlloSure can be drawn alongside all the other blood work. So this is a very substantial change to workflow. With AlloMap, we successfully have been mitigating that with other structures, but now it becomes so much easier and it's great for patients that they have directly access to blood draws at the hospital, which makes it so much more convenient.

Speaker 5

Sure. And I guess, do you know or is there a way to think about how much of a factor it was with AlloMap adoption when this was an issue before? Mean, doctors not ordering AlloMap or not adopting it because they would have to send patients off to a different drug station?

Speaker 2

Anecdotally, we know that it has been an issue, but with very few exception. AlloMap is a very high value test. And so the inconvenience factor of having to go to a different trial site might have been less of an issue, but it has been an issue. And of course, if you have to drive two miles in snow and ice up in the Northeast Of The U. S.

That had been anecdotally an issue. And now it's much so much easier. I don't think it's extremely hard for us to quantify the volume impact, but for sure it's a huge patient convenience factor.

Speaker 5

Great. That's helpful. And then my last question is, I guess thinking about I know we have the domestic launch of AlloSure to focus on, but could you maybe talk about the pipeline in terms of thinking about the next test you guys want to work on with cell free DNA and also maybe even expanding AlloSure into the international markets?

Speaker 2

Yes. And I don't think we have detailed the strategy here yet, but clearly cell free DNA is a pan organ opportunity. Cell free DNA can be tested in other organ systems. We have had some academic efforts ongoing in other transplant systems. So really rolling out cell free DNA for other organs will be a focus for the company.

And then AlloSure ex U. S. Will be a significant opportunity because there are more kidney transplants performed outside of The U. S. Than in The U.

S. But we haven't detailed that strategy. I think that probably will have to do with kitting off the product one day and then providing it through our Allerup channels. But I think we haven't talked about and detailed that strategy yet. We're right now we're laser sharp focused on the AlloSure launch.

The kidney transplant opportunity is the biggest opportunity and that's what we are focusing on.

Speaker 5

Got you. Thanks so much.

Speaker 0

All right. And moving on, we have Nicholas Jansen with Raymond James.

Speaker 6

Hey, guys. Congrats on another good quarter. My first question would just be on the targeted profitability discussion that you had. Just wanted to kind of get a sense of how quickly or what costs that need to be added to the model to deliver on kind of the Alisher ramp? And if you do hit that aspirational 90,000,000 to $100,000,000 revenue target in '19, what's the margin profile and EBITDA look like under those scenarios?

Speaker 2

You're moving us way into next year and then beyond, Nick. Thank you so much. Great question. Obviously, is all centered around AlloSure launch and how quickly AlloSure can ramp. I think we are pleased with the process that we are making progress that we are making on AlloSure.

But I think in the next stage will be what's volume looking like for AlloSure. So I'll turn that a bit to Mike. Mike, do you have

Speaker 3

any thoughts? Yes, Nick. Think one of the questions that you asked was how much additional costs we need to add. And I think we've been consistently saying that we've got the existing infrastructure for AlloSure both in the lab and also on the commercial side. So our incremental costs for AlloSure are going to be relatively minimal.

And therefore, we've been saying that if you're modeling gross margins initially on AlloSure of 60%, then that gross profit should be dropping down to the bottom line. I think you asked about the EBITDA margin in 2019, if we get to $100,000,000 revenue, that would be around the 20% mark.

Speaker 6

That's very helpful. And then just in terms of the timing of the K OAR registry trial, how quickly do we think we can start seeing centers ordering under that? And then kind of what's the expectation of that in terms of the timeline in terms of how many tests in 2018 associated with that trial?

Speaker 2

Nick, thank you. Great question. So we are online to have a first patient first visit in January next year in the first quarter. The 35 centers we have an aspirational goal of including all 35 centers throughout the year 2018. And then the recruitment of these patients happening within a six month timeframe.

So to build that model out is in December you would have the thirty fifth center recruiting the first patient and then another six months recruiting these patients in the last center. Does that make sense?

Speaker 6

Absolutely. And then my last question just on the Alenex side of the house that piece of the business actually kind of beat our expectations a little bit in the quarter. So just wanted to kind of get your broader thoughts on where that fits into the strategic organization of CareDx going forward and the timeline on Q type? Thanks.

Speaker 2

We are super excited about building a pre post transplant patient journey business, because the pre transplantation information is sometimes lost in the post transplant patient management. And I think we are the company well positioned in order to change that. I think short term, we are really focused on launching Q type. This is a transformation opportunity for the pre transplant business because it provides this rapid turnaround typing. I think we've been tripping up on a couple of validation efforts, especially on the ABI machine, but the team seems to have that under control now and we're looking forward to roll that solution out.

I think 51 demos is a very strong number. So we feel good about the number of demonstrations that we had. But I think Q type is really for next year a growth driver for the business, which should revitalize our pre transplantation business.

Speaker 6

Great. And then I just one quick one for Mike in terms of what's the pro form a cash and share count as we think about exiting 2017? Thanks.

Speaker 3

Profile with cash as you're exiting 2017 will be around $18,000,000 to $20,000,000 And from a share count perspective, after the offering, we had 27,500,000.0 shares outstanding. So that's where we are now.

Speaker 6

Congrats guys. I'll hop back in queue.

Speaker 0

All right. And we'll move back to Bill Quirk with a follow-up with Piper Jaffray.

Speaker 4

Great, thanks. Sorry, one quick follow-up question. Peter, of the going back to the 14 centers that have ordered AlloSure, can you just explain or elaborate on that? How many of those were clinical trial sites versus non clinical trial sites, people that have heard about AlloSure and clearly excited and wanted to be some of the first movers?

Speaker 2

Actually surprisingly, we have a mixed bag of these 14 centers, not all of them have been DART centers. So as we roll through the launch that we have found a number of centers that we're very excited to be in the first wave. As I mentioned, think in a previous call, I think we have focused on 70 centers in the initial launch period or pre launch period and have been able to convert 14 of those into testing centers. Of the 70 centers, obviously all DART centers had been part of the focus, but we moved beyond DART in order to have the 14 centers tested.

Speaker 4

And presumably all the DART centers are if they have been ordered already, they are presumably going to be here in the extended first wave, if you will?

Speaker 2

Yes. No, I think I would say that those centers that we have built close relationships with are destined to be part of AlloSure. What is probably true is in some centers we had more research oriented clinicians joining the DART trial. And now we are moving on to the clinicians that are really doing patient management on a daily basis that see patients in the clinic. So we have now added centers on the core focus that see many, many patients rather than being in the initial phase of start where we focused on key opinion leaders with a big scientific reputation.

We're now shifting the team focus to which are the centers that are high volume transplant centers.

Speaker 4

Very good. Thank you.

Speaker 0

All right. And ladies and gentlemen, that does conclude our question and answer session.

Speaker 4

I'd like

Speaker 0

to turn the floor back to Peter Mac for any additional or closing remarks.

Speaker 2

Thank you all for joining the call. We look forward to updating everyone as we continue to commercialize AlloSure, grow our core transplantation business and progress towards profitability. Thanks again.

Speaker 0

Ladies and gentlemen, that does conclude today's conference. We appreciate your participation. You may now disconnect.