CareDx - Earnings Call - Q4 2017

Transcript

Speaker 0

Greetings, and welcome to the CareDx Fourth Quarter twenty seventeen Earnings Conference Call. At this time, all participants are in a listen only mode. A question and answer session will follow the formal presentation. As a reminder, this conference is being recorded. I'd now like to turn the conference over to your host, David Claire.

Thank you. You may begin.

Speaker 1

Good afternoon, and thank you for joining us today. Earlier today, CareDx released financial results for the quarter ended December 3137. The release is currently available on the company's website at www.curedx.com. Peter Maude, 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, March 2238. This call will also include a discussion of a financial measure that is not calculated in accordance with generally accepted accounting principles. Reconciliation to the most directly comparable GAAP financial measure may be found in today's earnings release filed with the SEC. I will now turn the call over to Peter.

Speaker 2

Thanks, David, and good afternoon, everyone. Thank you very much for joining us. We had a very exciting fourth quarter. This afternoon, I will be providing an update on the recent achievements across our three core business drivers AlloSure, AlloMap and pre transplant. I will also provide commentary on the recent steps we have taken to simplify our balance sheet.

Mike will then provide additional financial details on our fourth quarter and full year performance and discuss our 2018 guidance. But let me start the call with a quote from Jim Kiesen, the President of Trio, the Transplant Recipients International Organization. As he presented the 2018 Innovation Award, he said, we have observed Peter and his team at CareDx for years and their dedication to innovation in the transplant field is noteworthy. It is great to see that CareDx is more and more recognized as a thought and innovation leader in the field of transplant care. Let me also make a comment on the new surrounding Foundation Medicines FoundationOne combined FDA and CMS national coverage decision.

I would like to congratulate the Foundation team on their milestones. Alongside others, they have been working hard to make sequencing based solutions available to cancer patients. We here at CareDx have made it our goal to bring sequencing based technology to the transplant clinic. And I believe we have a first mover advantage as this technology is revolutionizing the field of diagnostics. In addition to our great affinity for genomic information, we are deeply grounded in understanding transplant patient needs, as well as the community that supports them.

The combination of patient centricity and the utilization of latest technology mark the key value creation levers for us as a company. Now to AlloSure, our new donor derived cell free DNA solution for rejection surveillance in kidney transplant recipients. CareDx recently attended the Cutting Edge of Transplantation or CEAP meeting, where we hosted a symposium entitled Innovation in Allograft Health Surveillance, Clinical Implementation of Cell free DNA Testing for Transplant Patients. This well attended symposium included presentations by several key opinion leaders in the kidney and heart transplantation fields. Interest from SEADS attendees in AlloSure was strong.

We believe this represents a positive indicator for future adoption. We are currently preparing for the American Transplant Congress meeting in Seattle in June, which will be one of our key highlights this year. 2017 was a banner year for CareDx. We achieved total revenues of $48,300,000 a year over year growth of 19%. We also secured Medicare reimbursement for AlloSure and launched in the fourth quarter.

Following this favorable Medicare reimbursement decision, an estimated eighty percent of newly transplanted patients have AlloSure Medicare reimbursement coverage. AlloSure represents a transformational opportunity for CareDx and addresses a significant unmet need enabling better management of kidney transplant patients. Just a few months into the launch AlloSure is already making a positive impact on kidney transplant patient lives. During the initial quarter of the AlloSure launch, 32 centers began offering the test and CareDx provided two eighty two AlloSure test results to kidney transplant patients representing $500,000 in revenue. We are very excited that this initial AlloSure momentum has carried over into 2018 with 47 US transplant centers providing AlloSure testing to patients as of February 28.

Importantly, the initial AlloSure uptake includes both patients that have recently received a kidney transplant and patients that have received their kidney allograft in previous years. The AlloSure launch trajectory is in line with our projections and positions CareDx to deliver accelerated growth in 2018 and profitability during the second half of the year. We developed the AlloSure routine testing schedule based on our prospective start study 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.

We are focused on driving adherence to the AlloSure routine testing schedule and have seen multiple centers utilizing the recommended testing vertical for their kidney transplant patients. We had mentioned in January that the number of standing order patients by December was one hundred and fifteen of the two fifty patients that received an AlloSure. We define standing order patients as patients that will follow the surveillance protocol for at least one year. As we make progress in our launch efforts, the number of standing order patients will be a key metric to follow. In addition to our commercial efforts, we began enrolling patients in our renal transplant registry as part of our Medicare coverage with data development.

As a reminder, our Kidney Outcome Allosure Registry effort K OAR is a three year study enrolling 1,000 patients across 35 transplant centers with the primary endpoint centered on observing patient outcomes at one, two and three years post transplantation and the total number of renal biopsies performed. In addition to providing a wealth of clinical data, we estimate K OAR represents more than 1,000 AlloSure testing opportunities over the next five years representing incremental AlloSure volume as well as another revenue driver going forward. Consistent with our plans, the first K OAR patient was enrolled at the January and patients have continued to be enrolled in this innovative study. As of the February, nine centers have been initiated as registry study sites, which was in line with our plans. You will recognize a lot of the initial K OAR centers as key medical institutions in The United States, including Brigham and Women's Hospital, Tampa General Hospital, Baylor Scott and White, San Barnabas Medical Center, Washington University, John Hopkins, Medical University of South Carolina, University of Kansas Medical Center and the University of Colorado.

The clinical team is executing very well in all of our studies. We see the in house capability of running multi center studies like K OAR as a strategic capability for the company. It provides us with an additional touch point with the large transplant centers across the country and keeps us in direct dialogue with the key innovation hubs. Now shifting to AlloMap. Fourth quarter twenty seventeen test volume increased 8% year over year translating into 3,840 patient results, with associated revenue also increasing 11% to 8,100,000 Our efforts to increase AlloMap adherence will remain a key component of our growth strategy going forward.

With the focus of the team understandingly having shifted a little to AlloSure, we have identified 30 transplant centers where we believe patients would benefit from additional AlloMap usage. We are also in progress to increase our field team by four individuals, which will allow us to reduce our number of territories and realize better coverage in major metropolitan areas like New York, LA and Chicago. Additionally, recall that CMS recently implemented a change to its state of service policy known as the fourteen day rule, which became effective 01/01/2018. This change now allows CareDx to bill Medicare directly for AlloMap and AlloSure tests drawn in the hospital on the day of the patient's clinic visit. Previously, in addition to their normal blood work that was done at the hospital, patients would get blood drawn at a patient service center or at their home in order to receive an AlloSure or AlloMap test.

As we are dealing with large medical institutions, it will take a while to implement this new workflow for AlloMap. However, we believe this will ultimately have a positive impact on patient access to both AlloMap and AlloSure and will likely improve patient adherence to transplant center testing protocols. Also effective on 01/01/2018, the AlloMap Medicare reimbursement rate increased by fourteen percent to 03/1940. As a reminder, Medicare reimbursement has historically represented approximately 40% of our AlloMap revenue. We anticipate this reimbursement increase combined with the fourth quarter twenty seventeen expiration of the Roche royalty to increase AlloMap gross margins to at least 65%, representing an important contributor to our future profitability.

Our pre transplantation business with the Olarop product lines increased 7% in the quarter to $3,700,000 reflecting continued traction with our best in class HLA typing products. We estimate that our Olaroop products are used in more than 50% of the estimated 1,000 transplant labs worldwide. We continue to make progress on our next generation HLA typing product Olaroop QType. As a reminder, QType offers significant improvement in HLA typing compared to legacy methods, offering a faster turnaround time compared to current methods. By the February, we have performed demonstrations in 46 centers worldwide since our launch last year.

Actually 13 centers are using Olarib QType on a regular basis today, which is testimony to the demand and the great customer relationships that we have. I am pleased to announce that Olorope QType is validated on both the Roche Light Cycler and the ABI instruments. And we anticipate CE marking as well as revenues on both of these platforms in the first half of this year. All of our QTYPE represents an important growth driver for CareDx and should accelerate the company's path to profitability. QTYPE also provides a differentiated platform to further establish CareDx as a transplant focused company with solutions along the patient journey and to facilitate the use of pre transplant information for post transplant patient management.

Now I would like to make some comments on the progress we have made on another key priority, upgrading our financials. What a difference a year makes. This year we are timely filers, have simplified our balance sheet and have clear sights to profitability. Mike Bell, sitting across the table here has done a terrific job since joining the team a year ago. We have made great strides in not only upgrading our finance team, but also in improving and simplifying our balance sheet.

We recently announced the signing of a binding commitment letter with Deceptive Advisors, which will enable us to consolidate all of our outstanding debt into a single term loan on the closing date of April 1338. I'm also pleased to state that we have fully remediated the material weaknesses that were reported in our twenty sixteen ten ks and that Mike and his team have put in place the necessary processes to allow us to consistently file our SEC documents in a timely fashion. I would now like to turn the call over to Mike to discuss the financials. Mike?

Speaker 3

Thank you, Peter. I have to say that I'm incredibly excited by the progress the company has made since I came aboard a year ago. In addition to the launch of AlloSure, the team continues to make significant progress on our key finance and accounting objectives, which were to strengthen and simplify the balance sheet, to improve our financial reporting controls and to set out a path to profitability. As we've made tremendous progress in all these fronts, I'll now be able to look forward and help build CareDx into a great transplantation focused company with global reach. As Peter mentioned, we recently simplified our balance sheet with the signing of a binding commitment letter with Perceptive Advisors, which will provide a term loan of between $15,000,000 and $35,000,000 At the funding date of April 13, we'll use the new term loan to immediately pay off the remaining balance of our JJB convertible debt as well as the approximate $11,000,000 owed to Danske Bank and the Alenex former majority shareholders.

As a reminder, our JJB debt includes the option for JJB to convert the March 1 debt balance of $26,600,000 into Kerdijk's common shares at the conversion price of $4.33 per share. If JJB elected to fully convert the outstanding principal, this would represent approximately 6,100,000.0 shares. Per the JJB debt agreement, KDX was required to give them a thirty trading day notice period of our intention to prepay the debt, which we did on March 1. As of this time, JJB has given us formal notices of conversion for $20,700,000 of the outstanding principal, which equates to 4.8 common shares. The end of the thirty day notice period is April 13, at which time we'll draw either $15,000,000 or $25,000,000 from the new Perceptive Advisors term loan.

We'll also have the option to draw an additional $10,000,000 tranche within the next twelve months. Having the flexibility in what we initially and ultimately draw was very important to us as it allows us to optimize our level of debt based on our needs. Our strengthened finance team also makes significant strides remediating the material weaknesses that the company identified during 2016. As Peter mentioned, we were able to remediate all of those weaknesses for the twenty seventeen ten ks filing. Obviously, the company went through a steep learning curve, but it was great to see the team rise to the challenge.

Now turning to the P and L. As mentioned, fourth quarter AlloSure revenue was $05,000,000 We're very pleased with the initial revenue and the momentum of AlloSure following the launch with the test trajectory in line with our initial expectations. Fourth quarter twenty seventeen AlloMap revenue increased 11% year over year to 8,100,000 Our pre transplant revenue increased 7% year over year to $3,700,000 and as such total revenue in the 2017 was $12,500,000 representing a 15% increase compared to the prior year's 10,900,000 In addition, KDX achieved revenue of $48,300,000 for the full year 2017, which represents a year over year growth of 19%. For the fourth quarter twenty seventeen, our non GAAP net loss was $2,600,000 compared to a non GAAP net loss of $2,700,000 in the same period of 2016. Cash used in operations in the fourth quarter was $2,100,000 which was in line with our expectations and our total cash at December 3137 was $26,500,000 which consisted of $16,900,000 in cash and cash equivalents and $9,600,000 in restricted cash.

Note that $9,400,000 of the restricted cash was related to our JJB agreement, so that will become available for use when we refinance our debt in April. Turning to guidance. Initial 2018 revenue expectation is in the range of $61,000,000 to $63,000,000 We're focused on driving the company towards profitability and given our expectations for a ramp in AlloSure contribution as twenty eighteen progresses, the positive Medicare price increase for AlloMap and growth of our pre transplant revenues from AlloSure QType, we continue to anticipate reaching EBITDA profitability during the second half of twenty eighteen. With that, I'll pass back to Peter.

Speaker 2

Thank you, Mike. With our strengthened and simplified balance sheet CareDx is positioned to solely focus on executing on the huge opportunity in front of the company. I'm very proud of the team's accomplishment in 2017 and I'm looking forward to another record year in 2018. Before I open up the call for questions, I wanted to highlight the key elements and key events and full schedule we have for the remainder of the first half of twenty eighteen. On April 11, at the ISHLT Congress in France, we will hold an AlloMap symposium introducing the concept combining AlloMap and AlloSure for heart transplant patients.

On April 13, we anticipate to close our refinancing with Perceptive as the next step in simplifying our balance sheet. In early May, we will report our Q1 financials and the progress we are making on the AlloSure launch. Then on May 11, we will further accelerate customer interest at our AlloRope Q type meeting during the EFI Congress in Italy. And finally on June 5, during the AST Conference in Seattle, we will hold an AlloSure symposium with a subsequent press conference on the same day. With that, I will open the call for questions.

Speaker 0

Thank you. At this time, we will be conducting a question and answer session. Our first question is from Kevin Ellich from Craig Hallum. Please go ahead.

Speaker 4

Good afternoon and thanks for taking the questions. I guess starting off with the guidance Peter of 61,000,000 to $63,000,000 Could you give us any color as to how much you expect AlloSure to contribute to the guidance or what's

Speaker 2

in That's a good question. Well, you so much, Kevin. And I think we are giving always guidance on the total revenues to be expected. We are not breaking it down on individual product level. But what we can say historically is that we have said, our pre transplant business to be growing in the mid single digit type and then AlloMap is growing in the mid single digit volume wise and we'll get a little bit bump on pricing.

So if you take that into consideration, the remainder would come out of the AlloSure franchise.

Speaker 4

Sure. That makes a lot of sense. And then thanks for the detail on how many centers you have in the K OAR study. How many patients have actually been enrolled?

Speaker 2

We'll be updating you on the first quarter call on the specific enrollment numbers. We thought that for this call, the number of centers is really indicative on the ability for us as a company to execute. But think of this as being early in the process and the very steep ramp, because once these centers are up and running enrollment is going to start. And we have given ourselves as a target for overall enrollment to be concluded at June year. So the last patient of the 1,000 patients roughly being enrolled in June 2019.

And I think we're still tracking towards that target.

Speaker 4

Okay. That's helpful. And then I guess switching over to Mike, I think you made a you gave a comment about JGB has provided formal notices. Did you say it was 20,800,000.0 or 4,800,000.0 common shares?

Speaker 3

I said $20,700,000 of the principal had been converted, which is 4,800,000.0 shares.

Speaker 4

And that was as of today or March 1?

Speaker 3

As of today. Today?

Speaker 4

Okay, Any way you could give us your we have the December 31 cash and debt balances. Any way you could give us the current balances as of today as well?

Speaker 3

Well, I think we will report the Q1 cash balance when we report the Q1 numbers. And of course, the current debt is a moving target. And we'll be able to report on our sort of new debt number and where we are on April 13 when we've completed the perceptive term loan.

Speaker 4

Sounds good. Thanks guys. I'll hop back in queue.

Speaker 0

Our next question is from Yi Chen from H. C. Wainwright. Please go ahead.

Speaker 5

Hello. This is Mitchell on for Yi Chen. Thank you for taking our questions. So our first question is, how confident are you in meeting the 28% revenue growth guidance for 2018 given the number of 62,000,000 about $62,000,000

Speaker 2

Well, think we are firing in all cylinders at the company. You can see that AlloMap price increase has been a positive on the base business. You can see that AlloRope Q type is really providing us a lot of tailwind in the pre transplantation franchise. And then AlloSure is like I mentioned the transformational opportunity. 47 centers starting to use the test in the first few months into the launch is I think a great number and indicative of the unmet medical need.

So, we feel quite good about the guidance. And it's early in the year, but we thought that this is a good guidance to provide. And it is alongside what we've been targeting for as a company. So it's a good number.

Speaker 5

Okay, great. And then do you have any plans to accelerate revenue growth potentially past that guidance?

Speaker 2

Well, obviously, we have all of our growth drivers firing away and all of them growing. So I think right now the guidance is the best we can do. And we'll be updating you in our quarterly calls as we are progressing and updating our business guidance.

Speaker 5

Okay, great. And then do you foresee AlloSure revenue surpassing AlloMap by about 2019 or could it potentially be later than that?

Speaker 2

I think we're very early in the launch. As I mentioned, we're a few months into the launch. But given that AlloSure is a 10 times bigger market opportunity AlloMap. I think this is within well within the cards. Remember that AlloSure has 80% reimbursed right out of the launch gate.

So it has taken the company a very long time to get to the 80% reimbursement level. And we see that with AlloSure really one of the key elements for the success of this high value molecular diagnostic test is the reimbursement rate right out of the October 9 launch date. So yes, there is a lot of dynamics that play positively towards the AlloSure launch.

Speaker 5

Okay, great. Thank you so much.

Speaker 0

Our next question is from Bill Quirk from Piper Jaffray. Please go ahead.

Speaker 6

Great, thanks. Good afternoon, everybody.

Speaker 0

Hi, Bill.

Speaker 6

Hi. So I guess first question is just thinking about the aspirational guidance on 2019 that you talked about in the last conference call. I mean, it certainly seems to me given that your center expansion is running ahead of schedule, your KOR trial enrollment is on schedule. Is it can we move to the point where it's not so much aspirational any longer and it's becoming more concrete? Just curious how you're what you're thinking about right there.

Speaker 2

Somehow, Bill, I'm not surprised that you're asking this question and we have been well reversing this question because obviously we're giving guidance for 2018. But nothing has changed in the company in terms of our plans and our trajectory. If anything, I think we're seeing AlloSure tracking in many centers. And you know that we wanted to be in 20 centers against last year and we've superseded that goal. And then in the first quarter, we already at 47 centers, which is a little bit ahead where we originally thought in our launch projections.

So now we're well on our plan. I do think that we want to focus on the 2018 guidance and execute well against that number that we set ourselves. It does give me the opportunity to comment a little bit on the flywheel concept that we discussed earlier where the AlloSure ramp will be largely driven by standing order patients. And so think about the first quarter being significantly superseded in the fourth quarter, where we have standing orders adding to standing orders and the repeat testing really swings in. So fourth quarter dynamic will be very indicative of 2019 total sales, because we'll see the trajectory and growth rates in the fourth quarter really.

Speaker 6

Fair point, Peter. And actually just kind of thinking about the flywheel there. It looks like and to be fair, we have all of one quarter here to assess this, but it looks like roughly half the AlloSure patients are on standing order. Did that ratio kind of continue into the first quarter as well? I'm just trying to get a sense as to should we expect that the standing order percentage of patients not volume, but patients will increase or stay roughly at the fifty-fifty range on a go forward basis?

Speaker 2

Yes. And I think that's a good thing to monitor. I think the standing order patients will grow rapidly because the K or registry will feed the pool of the standing order patients. So in a way, the K OAR patients are really towards skewed towards the standing order patients. I have said in the past that I'm we were positively surprised about the number of patients that are in the year two, three and four that are coming into AlloSure.

And these are not necessarily standing order patients, but these are patients that are tested once and twice. So think of this as an interesting dynamic. I think overall, what's very important is that the total number of standing order patients is growing and we anticipate a steady growth of these standing order patients because that will mean the flywheel is continued to be set so to speak and is increasing.

Speaker 6

Understood. Thank you.

Speaker 0

Our next question is from Nicholas Jansen from Raymond James. Please go ahead.

Speaker 7

Hey, guys. Good afternoon. Just wanted to dive a little bit deeper into maybe reorder rates. And I'm sure certainly sure that of the 47 centers that are live, there are some that are heavier utilizers than others. But maybe just talk about the early experience from the October doctors and has no have they been more have you seen the October group improve and then the November group improve and the December group improve?

Just trying to get a sense of how kind of the segmentation of the adopters has been so far?

Speaker 2

Nick, great question. And think of us as having rehearsed very well with the AlloMap launches, always this protocol adherence. So adhering to this protocol is absolutely critical. And once a patient is placed on standing order, we do have now a team in place that is myopically focused on making sure when is the next testing opportunity and how can I schedule this patient and make sure that he gets the AlloSure at the right time? So I would say that, I mentioned 150 standing order patients.

This is well within our capability of managing 150 patients. And we are really driving adherence on these patients. In terms of the percentage of adherence, it's very high right now. So we feel very good about it. It will never be 100%, but this adherence north of 70% that we were aiming for in the K OAR study seems well within reach.

But keep in mind that the first year adherence is going to be significantly easier since these patients are mostly still treated in the hospitals versus the adherence in year two and three in the protocol will be a little bit tougher. But no, are driving adherence on AlloSure very, very tightly.

Speaker 7

Thanks. And then my second question would just be on as you think about the sales force, I believe you said you're going to be adding four people. Just your thoughts on kind of the realignments and where those bodies are being added? And how do we think about if it's necessary to even add more bodies to the organization given the size of the opportunity ahead of you?

Speaker 2

What we have learned in the first few weeks that you know that in these metropolitan areas, it really pays for having close interaction with the transplant centers and these large transplant centers well justify individual and personal attention. Probably also true, we learned in the last three months with all the weather that flying from even from major airports wasn't that easy. Cutting the territories into 10 territories across The U. S. Seem to be the right thing for us to do at this stage.

And we think that adding four to our existing field force is not dramatically expanding it. But that gives us good size. So don't think of us as now every quarter adding in additional territories. I think we with 10, we feel very comfortable to be able to cover the universe.

Speaker 7

Great. And then my last question for you Mike, maybe in terms of just if everything plays out as you expect in terms of the debt conversion, what's the fully diluted share count including options that we should be thinking about exiting, let's call it 2Q?

Speaker 3

Well, Nick, there's a prior to the of giving JGB the conversion notice on the March 1, we had 29,000,000 outstanding. They can convert 6,000,000. And then on top of that with warrants and options, there's another 6,000,000. So it's around 41,000,000 shares.

Speaker 7

Great. I'll hop back in queue. Congrats on the progress.

Speaker 3

Thank you.

Speaker 0

Thank you. This concludes the question and answer session. I'd like to turn the floor back over to Mr. Maag for any closing comments.

Speaker 2

Well, thank you very much for joining the call. We look forward to updating everyone as we continue to commercialize AlloSure, grow AlloMap and our pre transplant business and progress towards profitability. Thank you very much.

Speaker 0

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