Castle Biosciences - Earnings Call - Q2 2020

Transcript

Operator (participant)

Good afternoon, and welcome to Castle Biosciences' Second Quarter 2020 Conference Call. As a reminder, today's call is being recorded. We will begin today's call with opening remarks and introductions, followed by a question-and-answer session. I would like to turn the call over to Frank Stokes, Chief Financial Officer. Please go ahead.

Frank Stokes (CFO)

Thank you, Operator. Good afternoon, everyone. Welcome to Castle Biosciences' second quarter 2020 financial results conference call. Joining me today is Castle's Founder, President, and Chief Executive Officer, Derek Maetzold. Information recorded on this call speaks only as of today, August 10th, 2020. Therefore, if you are listening to the replay or reading the transcript of this call, any time-sensitive information may no longer be accurate. A recording of today's call will be available on the investor relations page of the company's website for approximately three weeks.

Before we begin, I would like to remind you that some of the information discussed today may contain projections or other forward-looking statements regarding future events or the future financial performance of the company, including expectations and assumptions related to the impact of the COVID-19 pandemic, and are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements are based upon current expectations and involve inherent risks and uncertainties, and there can be no assurance that the results contemplated in these statements will be realized. A number of factors and risks could cause actual results to differ materially from those contained in these forward-looking statements.

These factors and other risks and uncertainties are described in detail in the company's annual report on Form 10-K for the year ended December 31, 2019, and in the company's other documents and reports filed with the Securities and Exchange Commission. These forward-looking statements speak only as of today, and we assume no obligation to update or revise these forward-looking statements as circumstances change. I'll now turn the call over to Derek.

Derek Maetzold (Founder, President, and CEO)

Thank you, Frank. Good afternoon, everyone. We thank you for joining us today. This afternoon, I'll discuss COVID-19's impact on our results, the recent trends we have seen, and our performance for the quarter. Frank will provide more detail on the second quarter results and our financial position. While our second quarter results reflect impacts from COVID-19, thanks to the strong execution by our employees, we are successfully navigating these challenging times. We are pleased that we maintain strong gross margins, saw a year-over-year increase in revenue, and delivered positive operating cash flow. Additionally, we are making strong progress on our near and long-term strategic growth plans. Importantly, in order to serve patients who have been diagnosed with melanoma and the clinicians who treat them, we maintain uninterrupted access to our proprietary DecisionDx-Melanoma test and our DecisionDx test, with normal turnaround times for delivery of test reports.

As you would expect, second quarter 2020 revenue and report volume were impacted by COVID-19. Specifically, in the second quarter of 2020, revenue was $12.7 million, an 18% increase from $10.7 million in the second quarter of 2019. DecisionDx-Melanoma test report volume declined 19% in the second quarter of 2020 compared to the second quarter of 2019. Let me provide some color here on this decline and the positive recovery trends we have seen. While test report volume remains a key test performance metric, I feel it's important to discuss test order trends as well, as it provides additional insight into current demand and our expectations for increased test report volume.

We believe second quarter 2020 year-over-year decline in DecisionDx-Melanoma test volume is due to the closing of dermatology practices and delays and/or cancellations in patient visits, resulting in reduced diagnostic biopsies and thus reduced diagnoses of cutaneous melanoma. Let me remind you, our DecisionDx-Melanoma test is ordered by physicians after biopsies take place and a diagnosis of melanoma is made. Third-party data suggest the largest declines in biopsies due to the pandemic occurred in April. We also saw our largest monthly decline in orders to date in April. Since April, throughout the second quarter, we have seen monthly sequential improvement in DecisionDx-Melanoma orders, leading to a year-over-year increase in June, which continued year-over-year gains in July. To further illustrate this improvement and demand trends, I will outline data points of orders by month for the second quarter. In April, DecisionDx-Melanoma orders decreased 45% year-over-year.

In May, orders decreased 39% year-over-year, and then in June, orders increased 10% year-over-year. We also saw positive year-over-year orders in July. We believe the improvement in DecisionDx-Melanoma test orders since April is driven in part by the reopening of dermatology practices and rescheduled patient visits, which have generally coincided with the easing of state and local government restrictions. According to data published by the Commonwealth Fund for the week of June 14th, visits to dermatology clinics had returned to their February 2020 baselines. Further, since April, we have seen the rate of DecisionDx-Melanoma orders outpace melanoma diagnoses. We believe this is partly attributable to our commercial team's successful pivot with its promotional efforts, which we anticipate will support further recovery.

We expect the near-term positive trends we have seen in test orders to continue, and as such, we believe our third quarter DecisionDx-Melanoma test report volume will increase, closely approaching pre-COVID levels. These expectations are primarily driven by the pandemic severity and the impact on state and local government restrictions on the U.S. healthcare system. Turning to our DecisionDx-UM test for patients diagnosed with uveal melanoma, we delivered 306 reports in the second quarter of 2020 compared to 376 reports in the second quarter of 2019. As it relates to the impact of COVID-19 on our test, monthly year-over-year comparisons are difficult to interpret due to the low incidence of uveal melanoma.

This being said, we believe the year-over-year decrease is due to the pandemic, and we believe that the majority of uveal melanoma diagnoses are made incidental to a routine eye exam, and we expect recovery in the incidence of uveal melanoma and thus our order volume to be time-shifted relative to the recovery that we observed for our DecisionDx-Melanoma test. On our first quarter earnings call, I provided some thoughts about how we are investing in the company in order to facilitate our strategic growth plans and remain in a position of strength as we move through the current COVID-19 situation, as well as lay a foundation for execution for the remainder of 2020 and 2021. I will discuss our recent progress on these plans now, which includes significant evidence development, advancement of our pipeline test, and expansion of our commercial team.

In the second quarter, we saw great progress with the publication of evidence to support appropriate use of our tests and coverage by commercial payers. For example, two systematic reviews and meta-analyses were published demonstrating that the DecisionDx-Melanoma test is an independent, significant predictor of recurrence and metastatic risk in patients with invasive cutaneous melanoma, achieving the highest strength of recommendation taxonomy for SORT level for a prognostic biomarker, that is, level one evidence. The SORT system is used by the American Academy of Dermatology and other organizations to evaluate the quality, quantity, and consistency of evidence supporting tests such as DecisionDx-Melanoma. This brings the total number of peer-reviewed publications that support one or both of the current clinically actionable uses of the DecisionDx-Melanoma test to 25.

The first clinical use of our test is to inform decisions on sentinel lymph node biopsy in patients when the tumor thickness is less than or equal to 2.0 millimeters. The second use is to guide subsequent treatment plan decisions. As previously stated, we believe our continued investment in evidence development is key to supporting both marker penetration and coverage by commercial payers. Turning to our pipeline, we are pleased with the continued progress of our pipeline tests, which importantly allow us to expand our services for patients who are diagnosed with early-stage skin cancers. We are on plan for our pipeline test, DecisionDx-SCC, for use in patients with high-risk squamous cell carcinoma to become commercially available at the beginning of September.

DecisionDx-SCC is designed to identify a patient's risk of metastasis in order to enable more informed, risk-appropriate clinical decisions regarding adjuvant therapy and other management options. In the second quarter, we saw three peer-reviewed publications supporting our DecisionDx-SCC test. This includes development and validation data, which are published in the Journal of the American Academy of Dermatology, or JAAD. The results demonstrate that DecisionDx-SCC is not only an independent predictor of metastatic risk, but our test was also shown to be the strongest predictor of metastatic risk relative to current staging systems and can complement clinical pathologic risk factors to better stratify risk of metastasis and thus subsequent treatment plan decisions in patients with high-risk SCC. We anticipate hosting a public webcast for investors in September to discuss our DecisionDx-SCC test concurrently with its commercial availability.

Additionally, our team completed the clinical validation work needed to launch our second pipeline test, this one for use in suspicious pigmented lesions. As we previously stated, we expect this test to become commercially available in the second half of 2020. This test is designed to assist dermatopathologists to make a more informed diagnosis for a suspicious pigmented lesion that cannot safely be ruled out as benign or ruled in as melanoma. We estimate that combined our three skin cancer products, DecisionDx-Melanoma, DecisionDx-SCC, and our test for suspicious pigmented lesions will have a total addressable U.S. market of approximately $2 billion, a $1.4 billion increase over our current total addressable U.S. market. Lastly, we are moving forward with our plan to expand our commercial team in the second half of 2020.

We are moving forward with these plans primarily to support the continued growth of DecisionDx-Melanoma, our lead product, but also to support the launch of DecisionDx-SCC. You may recall that in 2019, we more than doubled our commercial team, and despite the pandemic, we remain in position to continue to execute on our strategic plans for further commercial expansion in order to facilitate near-term and long-term growth. On June 29, we successfully completed a public offering for 2 million shares of our common stock with net proceeds to us of approximately $69.5 million and additional net proceeds of approximately $10.4 million on July 2 as a result of the underwriter's full exercise of their option to purchase an additional 300,000 shares.

We plan to use a portion of these proceeds to further support and accelerate our research and development activities, including two important studies that we have implemented to support our DecisionDx-Melanoma test. The first is the Personalized study in which we evaluate DecisionDx-Melanoma for interactions with adjuvant therapies. The second is the CONNECTION study, which will collect long-term outcomes for up to 10,000 patients who have been tested clinically with DecisionDx-Melanoma. We will provide more information on these studies as we make progress. I will now turn the call back over to Frank, who will provide additional detail relating to our financial results.

Frank Stokes (CFO)

Thank you, Derek. We are pleased with our execution and the progress we made on our strategic growth plans in the second quarter.

The main message we want you to take away from today's call is that the long-term fundamentals of Castle's business remain strong, and our expectations of where the business is heading have not changed. In the second quarter of 2020, we reported revenue of $12.7 million, an 18% increase from $10.7 million in the second quarter of 2019, primarily due to higher per-unit revenues and partially offset by reduced test volume and reduced revenue adjustments related to prior periods. In addition to in-period test revenue, our second quarter revenue includes positive adjustments related to tests delivered in prior periods of $2.3 million compared to $3.3 million in the second quarter of 2019. Looking forward, we anticipate significant declines in these prior-period revenue adjustments, particularly in the third quarter of 2020, due to lagging impacts of the pandemic.

We're also pleased with our ability to maintain strong gross margins, and during the second quarter of 2020, our gross margin was 83% compared to 81% for the second quarter of 2019, with the improvement primarily a result of increased operating leverage on the higher revenues. Our net operating expenses for the quarter ended June 30, 2020, were $11.2 million compared to $8.1 million for the same period last year. The increase was driven by higher SG&A of $3.6 million and increased R&D expense of $1.4 million, what was partially offset by the benefit of $1.9 million in pandemic relief funds automatically distributed to healthcare providers that we received from the U.S. Department of Health and Human Services pursuant to the CARES Act.

These increases in SG&A and R&D were primarily the result of higher personnel costs, particularly due to the expansion of our sales and marketing organization, but also due to the expansion of administrative support functions and R&D, as well as increases in administrative expenses associated with our growth, although these increases were partially offset by lower spending on travel and conferences during the quarter due to pandemic-related cancellations and restrictions. With regard to our R&D expense, we expect further increases as we fill critical roles, further the clinical studies Derek discussed earlier, and continue to invest in activities that support our products and position us well for continued growth. As a percentage of revenue, our SG&A expense was 82% for the second quarter of 2020 compared to 64% for the second quarter of 2019, reflecting impacts on revenue growth due to COVID-19.

Interest expense decreased $0.9 million for the second quarter of 2020 compared to the second quarter of 2019, primarily due to interest on the convertible promissory notes that were outstanding last year. As a reminder, these notes converted into common stock in connection with the IPO in July 2019. Our net loss for the three months ended June 30, 2020, was $1.4 million compared to $1.3 million for the three months ended June 30, 2019. Diluted loss per share attributable to common stockholders for the three months ended June 30, 2020, was $0.08 compared to $1.05 for the three months ended June 30, 2019. We generated positive operating cash flow for the second quarter of 2020, and Castle's net cash provided by operating activities was $13.5 million compared to net cash provided by operating activities of $0.5 million in the prior period year.

In the first half of 2020, we generated $13.3 million of operating cash flow compared to $1.8 million last year. Our operating cash flow for the second quarter benefited from an advance payment of $8.3 million from CMS, which will be applied against future Medicare claims that we submit for reimbursement later in 2020, as well as the previously mentioned one-time payment of $1.9 million in relief funds automatically allocated to Medicare providers under the CARES Act. Excluding these payments, our adjusted operating cash flow, a non-GAAP measure, was $3.3 million for the second quarter of 2020 compared to $0.5 million for the second quarter of 2019. Finally, we had cash and equivalents at June 30, 2020, of approximately $179.8 million, which includes net proceeds of approximately $69.5 million from our June 2020 public offering of 2 million shares of common stock.

Additionally, on July 2, 2020, the underwriters of the public offering exercised in full their option to purchase an additional 300,000 shares of common stock. The additional net proceeds were approximately $10.4 million. As a reminder, we withdrew our full-year 2020 revenue guidance on May 10, 2020, in light of the COVID-19 pandemic. While we are expecting continued commercial recovery in the second half of the year, we recognize that uncertainty remains and will not reissue guidance at this time. We believe our current cash position, along with cash generated from sales of our products, will be sufficient to fund our operating expenses for the foreseeable future. We remain confident in our ability to invest in the business and execute on our growth plans as we build the company for near and long-term growth. I'll now turn the call back over to Derek.

Derek Maetzold (Founder, President, and CEO)

Thank you, Frank.

Before we move on to Q&A, I want to express my gratitude to our employees as we recently marked our one-year anniversary as a public company. Castle's strong foundation begins with their dedication to improving the lives of people with skin cancer. During the second quarter, despite the COVID-19 impact, we continue to execute on our strategic growth plans and remain focused on current and future success. Thank you for your continued support and interest in Castle. This concludes our remarks. Operator, we are now ready for Q&A.

Operator (participant)

Thank you. Ladies and gentlemen, if you have a question at this time, please press star then one on your touch-tone telephone. If your question has been answered or you wish to remove yourself from the queue, please press the pound key.

To prevent any background noise, we ask that you please place your line on mute once your question has been stated. Our first question comes from the line of Vineet Khurma with SVB Leerink. Your line is open. Please go ahead.

Puneet Souda (Senior Research Analyst)

Yeah. Hi, Derek or Frank. Thanks for taking the question. First one is it's great to see, first of all, the improvement that you're seeing here across the quarter and that you're expecting to reach pre-COVID levels in the third quarter. I totally get that you are not providing a guidance just yet, but given the improvement, should we assume that it potentially could be in line with the first quarter pre-COVID levels? Obviously, there was a two-week impact there in March, so is that a reasonable point to work off with?

Or if anything else you can provide there in terms of improvement and totally recognizing that we're not out of COVID yet?

Frank Stokes (CFO)

Yeah. Thanks, Vineet. Thanks for calling in. Like I said, we're not ready. I don't think we have enough visibility to reissue guidance yet, but as it relates to Q1, just do keep in mind there that there is a lag between orders and report, and the test report is what actually triggers revenue. You're correct. There was certainly some impact in Q1 because of COVID, the early days of COVID, but we still believe that that natural cycle between order and report means that most of that revenue impact was pushed over into Q2.

Puneet Souda (Senior Research Analyst)

Okay. That's helpful.

In terms of the SVC launch, can you maybe just provide us, I mean, given the timing right around the corner, tell us in terms of the sales reps capability you have there, assume at this point they're trained and ready to go on that product. Also, how should we think about the potential volumes there? Again, given the timing, it appears that most of that is going to land in the fourth quarter.

Derek Maetzold (Founder, President, and CEO)

Yeah. Hi, Puneet, Derek here. From a sort of launch standpoint, we expect to make that available clinically, as we talked about on the call in the September time period.

We did, out of the awareness of caution, I guess, go ahead and switch our national sales or national training meeting for that launch to a virtual format here, but we expect, based upon the adjustments our team has made in the commercial group, that'll be highly effective in training up both our sales representatives and our medical science liaisons and the rest of the customer-focused team to be ready to launch this first pipeline test effectively in September. I would concur. I think on volumes, I'd rather not comment here. I think new product forecasting is tough anyways, but you're right. I would expect nothing material in the sort of third quarter of 2020 because if we get that out in early September, by the time we would get tissue from orders coming in, the quarter is almost maybe over.

I think the first indication of anything, probably you're right, is at the end of the fourth quarter, but I would probably say our forecasting expectation is that we will be well-staffed to handle a nice launch and an effective launch, and we'll kind of look at our forecast to re-challenge it probably at the end of first quarter next year after a couple of quarters of uptake.

Puneet Souda (Senior Research Analyst)

Okay. That's great. If I could ask on the current quarter, as you are seeing pickup across, as you pointed out, in July, you were continuing to see improvements across the business. Can you elaborate to us whether some of that demand was due to extended work hours at the dermatology practice, or was it essentially in line with normal work hours? Do you expect that, or would you expect that to normalize in sort of August and September?

Largely asking that because we were hearing from some of the derm practices that they were trying to accommodate a bolus of patients.

Derek Maetzold (Founder, President, and CEO)

Yeah. One, I wish I had quantitative data to share with you, and I don't have that, so I apologize for that. As you may recall, either at the year-end or maybe the one Q call, we had done a proprietary survey of our own customers, and they suggested that whenever they could reopen their practices, whatever that meant on a localized basis, they were planning on going from working an average of four days a week to five days a week to catch up.

They were hoping to go ahead and fit in the deferred or delayed or canceled appointments, obviously, and they also indicated they would try and position biopsies earlier ahead of other kinds of normal clinical follow-up visits, presumably because that's probably the more medically concerning aspect, and also procedures drive a higher income for practices as well. I don't have a sense, to be honest, if the sort of pickup that we saw between April and May and May and June and June being over last year and July being over last year's volume as well, if that's an indication of more volume, I mean, if that's the extra day coming through or not. I think it all points to, hopefully, patients getting treated properly and at the right cycle, and that would lead to subsequent orders and reports by us.

We feel good about that, but I can't point to, is that going from four to five days of work, or is that actually seeing more patients in the same period of time? I don't have any quantitative data on that one to help guide you.

Okay. That's fair. Just last one, if I could squeeze in on the personalized study for adjuvant therapy. Does that increase your TAM? Maybe could you provide some details around that? And for the other 10,000-patient melanoma study, what is the duration of that study, and is that a prospective study? Would you expect that study to be sort of the practice-changing outcomes of study? If you can elaborate on that. Thank you so much. Thanks for taking the questions.

Sure.

We'll go into more detail of that a little later in the quarter, I think, separately, but the personalized study is really focused on assessing the value of our test and helping to direct or guide decisions around adjuvant therapy, as you heard. I think those patients are largely baked into our overall TAM, to be honest. However, the majority of our test orders come from sentinel lymph node negative patients and thinner patients where they're really concerned, as a clinician and a patient, about undergoing a sentinel lymph node biopsy procedure and/or how do I follow the patient afterwards in terms of imaging, etc. We might be able to see a more rapid penetration of our TAM, but I would not add that on top of the current TAM calculation. We have that already in there as a stage one, two, three market basket for us.

On the connection study, that protocol is being run on clinically tested patients. I think we're hoping to have around half the patients true prospective and half the patients recent retrospective clinically tested patients so we can get some data out earlier rather than later. That's going to be a nice, very, very large data set for us to really establish clinical use and also real-life outcomes at a level that hasn't been seen, certainly, in the skin cancer diagnostic business ahead of us.

Puneet Souda (Senior Research Analyst)

Great. Thanks.

Operator (participant)

Thank you. Our next question comes from the line of Sung Ji Nam with BTIG. Your line is open. Please go ahead.

Sung Ji Nam (Managing Director and Senior Analyst)

Hi. Thanks for taking the questions, and congratulations on all the progress that you're making. Maybe a follow-up on the DecisionDx-SCC launch. Could you remind us again kind of the go-to-market strategy there?

Is it initially to target your existing customer base and also leveraging your current sales force? Just kind of would love to hear some initial plans there.

Derek Maetzold (Founder, President, and CEO)

Excellent question, Sung Ji. One is that our existing sales force, which is a reminder, is 32 outside sales territories, and they're paired with an inside sales associate group of, I think, seven or eight individuals. Our medical science liaison staff will be the ones launching this test clinically to clinicians. The target audience for this test, based upon our market research and our advisory interactions with our current community of clinicians, suggests that it'll be essentially a customer base that largely lines up with our current cutaneous melanoma customer base.

Sung Ji Nam (Managing Director and Senior Analyst)

Dermatologists who have a higher practice level in medical dermatology versus, say, cosmetic, and maybe within the medical dermatologists, those that are more interested in skin cancer management versus not. The Mohs surgeons, which is a subset of dermatologists—these are individuals that are fellowship trained or trained in Mohs surgery—are sort of the sort of skin cancer pinnacle of a given practice. We expect Mohs surgeons and the medically oriented dermatologists who are current customers to be our initial uptake orders of this test when it fits their exact focus and need directly.

Our expectation is to walk in there with a dialogue around our cutaneous melanoma assay to reinforce the value of what they get out of that test, to try and show our clinicians where they can perhaps get more use, and then to quickly turn the page and say, "By the way, we know you have a similar question to answer in people who already have one or more risk factors with cutaneous squamous cell carcinoma. Our R&D team listened to some of your peers. We were successful in developing an assay. Let's walk through that data and see if your patients can benefit." That is kind of the thinking right now, we would target predominantly our current DecisionDx-Melanoma customer base, which will be dermatology as a focus, and a sub-focus would be the Mohs surgeons within that group.

You want to add anything, Frank, or is that okay?

Great. Thank you for that. Then just on the commercial payer side, obviously, you guys are continuing to generate more evidence around your products, especially DecisionDx-Melanoma. Also, I'm seeing—and I'm not sure if I'm reading too much into it—but from your higher per unit revenue this quarter, there's been a modest increase sequentially as well, obviously, over a year. I was curious if you're gaining more traction on the commercial payer side or just in this kind of pandemic environment, if the conversations with the private payers—I'm just kind of curious how that's progressing—if there might be some more thinking outside of the box, just given what's going on in the world.

Derek Maetzold (Founder, President, and CEO)

Yeah. I'll add maybe a couple of comments, and Frank can adjust, I guess. Correct is such a harsh word.

With the exception of one or two planned interactions early in sort of the late March, April time period, where we had a couple of medical directors say, "Hey, I'm overwhelmed right now trying to get our COVID-19 testing policy organized properly." I haven't perceived from our managed care group that we've seen a significant sort of stiff arm by most accounts in terms of the review cycles they would do for our DecisionDx-Melanoma test. As you may recall from the IPO last year, we have a number of plans that we expect to complete their review cycles in sort of the third quarter of this year. Most of them, I think, are set up in the first quarter of every year. I'm aware of some positive interactions ongoing right now that should lead to some changes from negative to positive coverage.

I don't think that's related to COVID, though. I don't think it is. I think it's more related to the maturation of our data. I think the publication, certainly, of the initial and the subsequent systematic review and meta-analyses and that level of evidence is hard to ignore, I think, because that represents the highest potential level of evidence for a test like ours. I'm thinking as we kind of move into the third quarter here, we'll have an opportunity to at least unveil or discuss publicly some of the coverage policy decisions, kind of what led to a change from negative or no coverage to coverage as we go through the quarter at the close of the third quarter. Great.

Sung Ji Nam (Managing Director and Senior Analyst)

Lastly from me, on uveal melanoma, obviously a small part of your business now, just kind of curious, given the volume declines, it's pretty comparable to the decline you saw for melanoma. Obviously, that makes sense given if physician offices are shut down or hospitals are prioritizing other things, there's delayed diagnosis, etc. I was curious from a recovery standpoint, do you expect that business to recover at a faster rate, potentially, just given the urgency associated with that particular. Yeah. I think. Information provided?

Derek Maetzold (Founder, President, and CEO)

Yeah. I was hoping for that, actually. I think we're going to see just the reverse happen. Sung Ji, as you may recall from the urban COVID commentary, we did a review looking at how are patients with melanoma first detected or potentially having melanoma.

At least the U.S.-based literature, if you can trust it because it was all done by dermatologists, would suggest that 80% of people who end up getting diagnosed with melanoma usually self-detect that mole first. Either they do or their spouse or a friend says, "Hey, that spot in the back of your neck is getting worse now. Get it checked out." Our internal model suggested that we would think that the sort of post-COVID, in terms of patients being anxious about not going to a doctor, would go away a bit quicker in melanoma of the skin because it's a visible lesion.

In comparison, the information we've been able to glean from our ocular oncology customers, which are those retina specialists that really treat eye tumors, is that the majority of their patients that they end up managing or diagnosing with uveal melanoma are usually found incidental to an optometry or routine ophthalmology visit. I think given optometry practices were largely closed down for the second quarter, what we don't have a good handle on, just to be frank, is if you had a patient who was going in for their annual eye exam for a prescription lens change in April and that appointment was canceled, are they going to rush back in in September or August because of what? I guess that they felt their prescription was off, maybe so. I think we'll see a slightly slower recovery of that.

All that being said, it's also difficult to believe that somebody with a uveal melanoma that's accelerating from a growth standpoint is not going to have a visual disturbance sooner rather than later. I think at the end of the time, we will see kind of a delayed issue behind the DecisionDx-Melanoma test. Given that the volume is so low in that rare cancer, I'm not sure we can discern the actual facts behind that. Do you want to add anything, Frank, or?

Frank Stokes (CFO)

Yeah. I think the key there is just the small patient numbers here make that a little bit more difficult to try to trend out.

Sung Ji Nam (Managing Director and Senior Analyst)

Okay. Great. Thank you so much.

Frank Stokes (CFO)

Thanks, Sung Ji.

Sung Ji Nam (Managing Director and Senior Analyst)

Thank you. Our next question comes from the line of Catherine Schulte with Baird. Your line is open. Please go ahead.

Tom Lacy (Managing Director)

Hey, guys.

This is actually Tom, one for Catherine. Appreciate the color on the quarter in terms of how orders trended. I was just curious. I know you guys had said you still saw a year-over-year increase in July. I was curious even just directionally versus June, how that trended, specifically just trying to dig into whether you guys have kind of seen some pullback given that COVID has sort of flared up in early July. I think we've seen that consistently from peers. Just curious if you're seeing the same thing.

Yeah. Thanks for the question. We do want to be careful and avoid trying to make monthly disclosures here on some of these topics just because it is more effective, I think, to look at things on a quarter-by-quarter basis.

Derek Maetzold (Founder, President, and CEO)

I don't think we have seen the tightening up in some areas, I guess, or the retightening in some areas. We have not seen that affect physician encounters for dermatologists and their patients. I think that contrasts with early days in the COVID crisis when physicians and healthcare providers didn't—they were cautioning people not to visit, "Don't come in for a variety of reasons." Now, I think what you hear in most parts of the country are providers saying, "Hey, don't put off your healthcare. Don't put off your care needs. We'll find a way to treat you safely. We'll make sure you're comfortable. We'll make sure we're comfortable.

If you have healthcare needs, you need to be treated for those. That's one of the lagging impacts of this. I think a lot of people will find they had things that may be more acute than they could have been if they'd gotten treatment in a normal post-COVID cadence. We are cautious. We don't know what's going to happen. That's why we can't yet really make good solid predictions. At least so far, it looks like the healthcare provider community is continuing to practice its care in a normal fashion.

Tom Lacy (Managing Director)

Okay. Thanks for the color on that. Just one more, if I could dig in a little bit more to your thoughts or strategy behind the pipeline launches in the back half, specifically just around physician access and the ability to sort of get in front of reps.

Just curious. I know you guys had mentioned you had done some training virtually, but just any thoughts on how that launch sort of looks like in a COVID environment sort of compared to what we would typically think as a new product launch?

Derek Maetzold (Founder, President, and CEO)

Yeah. I guess I would say in a typical new product launch, our commercial team, I think, would have a mixture of relying upon competently trained sales representatives and medical science liaisons speaking to clinicians one-on-one or in small groups. We normally would have trained up a group of speakers, most of them being investigators, to develop, say, the squamous cell carcinoma test and maybe some other individuals who could not participate as investigators but are excellent speakers from a peer-to-peer standpoint.

It's ideal to train those people in small group, in-person settings so that not only can they understand the information, but as there's questions and discussions around the use of our test, maybe some data, strong points and weak points you can learn from a group dynamic. Those in-person meetings have had to be largely canceled because of concerns about what that means going back to my practice, for example, when I could have been exposed to the airport for a training opportunity. I think compared to a normal product launch, we're going to see a little more reliance in the first couple of months on in-person and some virtual sales calls and calls by medical science liaisons to individuals. I think we will see peer-to-peer opportunities kind of grow up a little slower in the COVID environment than you might expect in the non-COVID environment.

As we talked with Puneet earlier, I think at the end of the day, if we look back sort of at the end of the first quarter, end of the second quarter next year, I think we won't be able to see that as a negative or positive. Otherwise, we feel pretty good about the level of engagement that we're getting from our customers today on our cutaneous melanoma test. I think adding the squamous cell test to that dialogue, given it has a very similar use, you might say, is going to be easily worked into the normal sales call cycle.

I think the one thing, if you're asking me what might be different, is probably a little less reliance on having certainly peer-to-peer opportunities, as you would expect if we—if the major meetings in the fall, like the American Society of Dermatological Surgeons, was maintained as an in-person meeting, we would have had a lot of local programs there because that really would be the target audience of our customer base. With that being virtual/canceled, those sort of big opportunities are sort of taken away in the early fall of this year.

Tom Lacy (Managing Director)

All right. That's it for me. Appreciate the call, guys. Thanks.

Derek Maetzold (Founder, President, and CEO)

Yeah. Thank you. Thanks, Tom.

Operator (participant)

Thank you. Our next question comes from the line of Max Masucci with Canaccord Genuity. Your line is open. Please go ahead.

Max Masucci (Director and Senior Equity Analyst)

Hi. Thanks for taking the questions.

Derek Maetzold (Founder, President, and CEO)

To start, can you offer any additional detail just around the recovery of new doc ads specifically over recent weeks or months? What sort of virtual customer targeting initiatives from your sales force are resonating with dermatologists in the current environment?

Yeah. Two excellent questions, Max. I think one is that we did see concomitant with our sales expansion that occurred December 1, 2019, a nice acceleration, I guess you would say, of new ordering doc growth in 1Q 2020 over 1Q 2019. As you saw on the release of the script, that was reduced compared to our growth we saw last year. I think that's a direct result of having less face-to-face visits. Of course, having a lot of dermatologists seeing nobody in late March to maybe mid-May, for example, across the country.

We did see, commensurate with the increase in order flow going from minus 43% to minus 39% to plus 10%, a similar kind of regrowth in terms of new ordering docs. I think that feels pretty good that we're able to, in the time period where we had just virtual interactions with clinicians, we have a number of clinicians who began ordering off of a virtual interaction, which I think is positive about that. That kind of a Zoom call or that kind of a GoToMeeting small group call being effective in terms of having physicians think about the data that's being shared and think about the potential value and actually acting upon that.

I don't think that's as effective as in-person just because you don't have a really good chance of reading body language and being able to go deep on questions, but that's just part of what we're at. I think the recovery of that of new ordering doc growth feels like it was coming in parallel to the recovery in overall order growth. That feels good, I think, for the third and fourth quarter in terms of where we expect the business to be. Frank, do you want to?

Frank Stokes (CFO)

I concur. I would add it to that.

Max Masucci (Director and Senior Equity Analyst)

Great. Now your balance sheet is fortified. I know you're investing in your two newly announced trials and studies. Are there any other internal investments that you plan to accelerate following the financing and any change to your view on potential M&A or complimentary tuck-ins?

Derek Maetzold (Founder, President, and CEO)

I don't want to talk about M&A. Frank can do that. Certainly fortifying the balance sheet with the follow-on raise there in late June and, I guess, the shoe in early July was quite positive for us. As we had talked about going into that, the most important thing Frank and I had sat down with the management team in early January 2020 was, "When we get 12 months down from this point in time, we think we're going to be investing again in our cutaneous melanoma test to both drive utility and drive offensive data generation." We expected by the end of the year to have two successful product launches with the squamous cell carcinoma launch and the test for suspicious pigmented lesions.

We also planned on being able to initiate one, two, or maybe three additional pipeline programs before December 31, 2020, turns the corner. The most important commentary we had was, "We didn't want to reach the end of 2020." This was pre-COVID, mind you, and being in a position to say, "We have to make a choice because we didn't go back and take care of our job properly." We felt it was exactly wrong to have us say, "Rather than starting two pipeline programs, we're going to start one because we don't have enough capital in the bank." Part of our goal with that raise was to make sure we can invest aggressively and proactively for the business in 2022, 2023, 2024.

COVID just happens to be kind of a negative factor there, of course, so it's all the more reason to push forward. I think that's quite positive. Specific initiatives, we talked briefly about the DecisionDx-Melanoma large protocols that we initiated earlier this spring. Part of the proceeds will undoubtedly be used for R&D in cutaneous melanoma. I think as we've seen the data progress published for squamous cell carcinoma of the skin, we are—I wouldn't say we weren't excited before, but I mean, the impact that that test can have on a population that's probably, what, nearly twice the size of our melanoma population is just so fantastic. You can bet that we'll be increasing both commercial investments as well as R&D investments so that we can have patients and clinicians see the full value of that test as soon as possible.

Of course, then subsequent pipeline programs. You want to add clarity there?

Frank Stokes (CFO)

Yeah, sure. Max, we certainly are open-minded to M&A opportunities and happy to take a look. Having said that, I would note that we're still maybe 15% penetrated in our melanoma product, which is a $500 million TAM. We're just about to launch two new products. That's another $1.5 billion. We have so much runway ahead of us in the area we're in and so much opportunity for growth. We do not spend too much time looking outside of that. We will, of course, look at ideas. If it makes sense for shareholders, we certainly are positioned to do something. We are just excited about the space we have and the path ahead for the existing portfolio.

Max Masucci (Director and Senior Equity Analyst)

Great. That's it for me. Thanks.

Operator (participant)

Thank you.

I am showing no further questions at this time. I would like to turn the conference back over to Derek Maetzold for any further remarks.

Derek Maetzold (Founder, President, and CEO)

All right. Thank you, operator. Let's conclude our second quarter 2020 earnings call. Frank and I personally want to thank you again for joining us today and for your continued interest in Castle Biosciences.

Operator (participant)

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program, and you may all disconnect. Everyone, have a great day.