Castle Biosciences - Earnings Call - Q4 2024

Executive Summary

• Q4 2024 delivered strong growth: revenue $86.3M (+31% y/y), diluted EPS $0.32, adjusted EBITDA $21.3M; full-year revenue reached $332.1M (+51% y/y) and operating cash flow turned positive ($64.9M).
• 2025 revenue guidance was set at $280–$295M; management flagged expected gross margin compression tied to anticipated Medicare non-coverage for DecisionDx-SCC effective April 24, 2025, while still guiding to positive adjusted EBITDA and positive operating cash flow for 2025.
• TissueCypher adoption accelerated (Q4 test reports +94% y/y; FY +130%) and dermatology volumes expanded (DecisionDx-Melanoma +8% FY; DecisionDx-SCC +43% FY), offset by IDgenetix headwinds and planned promo pullback late 2024.
• S&P Global consensus estimates were unavailable at the time of analysis; beat/miss vs Street cannot be determined. Values would be retrieved from S&P Global, but were not accessible due to request limits.

What Went Well and What Went Wrong

What Went Well

• Broad-based volume and revenue growth: Q4 revenues $86.3M (+31% y/y), FY revenues $332.1M (+51% y/y), with adjusted EBITDA of $21.3M in Q4 and $75.0M FY, demonstrating operating leverage.
• TissueCypher momentum and clinical validation: Q4 TissueCypher test reports 6,672 (+94% y/y); FY 20,956 (+130% y/y). NYSDOH assay approval broadened market accessibility; AGA guidelines recognized tissue-based biomarkers including TissueCypher.
• Management execution and cash strength: FY operating cash flow $64.9M and year-end cash, cash equivalents and marketable securities $293.1M, supporting continued investment and strategic opportunities.
  • CEO: “Castle delivered an outstanding fourth quarter that rounded out an exceptional 2024, including 51% revenue growth and 36% test report volume growth compared to 2023.”

What Went Wrong

• Medicare coverage risk for DecisionDx-SCC: Novitas finalized an LCD signifying non-coverage, effective April 24, 2025; management expects revenue/margin impact and will shift dermatology salesforce incentives predominantly to melanoma.
• Gross margin declined sequentially: Q4 GAAP gross margin 76.2% (Q3 79.2%), with management guiding 2025 GM to low–mid 70% and adjusted GM to mid–high 70% given SCC coverage changes.
• IDgenetix headwinds: Q4 reports fell to 3,125 (vs. 3,299 y/y); late-2024 promo reallocation to inside sales and non-personal promotion; 2025 volumes and net revenues expected to decline with uncertain long-term performance.

Transcript

Operator (participant)

Good afternoon and welcome to Castle Biosciences' fourth quarter and full year 2024 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 Camilla Zuckero, Vice President of Investor Relations and Corporate Affairs. Please go ahead.

Camilla Zuckero (VP of Investor Relations and Corporate Affairs)

Thank you, Operator. Good afternoon, everyone. Welcome to Castle Biosciences' fourth quarter and full year 2024 results conference call. Joining me today is Castle's Founder, President, and Chief Executive Officer, Derek Maetzold, and Chief Financial Officer, Frank Stokes. Information recorded on this call speaks only as of today, February 27, 2025. 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 following the conclusion of the call. Before we begin, I would like to remind you that some of the statements made today will contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.

These forward-looking statements include, but are not limited to, statements about our financial outlook, PAM, intended use populations, and similar items referenced in our earnings release issued today, and statements containing projections regarding future events or our future financial or operational results and performance, including our anticipated 2025 total revenue, our expectations regarding reimbursement for our products, including with regard to our decision to ex FCC test, opportunities for growth, impacts of seasonality and other trends, the size and structure of our commercial teams, the timing of targeted milestones, and the impact of our investment and growth initiatives, including our ability to achieve long-term growth and drive stockholder value. Forward-looking statements are based upon current expectations and involve inherent risks and uncertainties, and there can be no assurances 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, Form 10-K, for the year ended December 31, 2024, under the heading Risk Factors, and in the company's other documents and reports filed or to be 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. In addition, some of the information discussed today includes non-GAAP financial measures such as adjusted revenue, adjusted gross margin, and adjusted EBITDA that have not been calculated in accordance with generally accepted accounting principles in the United States or GAAP. These non-GAAP items should be used in addition to and not as a substitute for any GAAP results.

We believe these metrics provide useful supplemental information in assessing our revenue and operating performance. Reconciliations of these non-GAAP financial measures to the most directly comparable GAAP financial measures are presented in the tables at the end of our earnings release issued earlier today, which has been posted on the investor relations page of the company's website. I will now turn the call over to Derek.

Derek Maetzold (Founder, President and CEO)

Thank you, Camilla, and good afternoon, everyone. 2024 was another exceptional year for Castle, and I'm extremely proud of the strong execution by our entire team. With fourth quarter revenue of $86.3 million, we grew revenue by 51% year over year to $332.1 million for the full year 2024. Additionally, total test report volume grew by 36% in 2024 compared to 2023. Further, as of December 31st, 2024, the company's cash, cash equivalent, and marketable investment securities totaled $293.1 million, a $50 million increase over December 31st, 2023, which we believe will enable us to continue executing on our growth initiatives. Today, I will walk you through business highlights in the fourth quarter and full year 2024, and then Frank will provide additional financial highlights before we turn to your questions.

Starting with our core dermatology business, we delivered growth of 17% for combined DecisionDx-Melanoma and DecisionDx-SCC over 2023. Our dermatologic commercial team supports the promotion of both of these tests. Therefore, we look at the growth of these tests combined as the appropriate litmus test for our dermatologic portfolio's performance. For DecisionDx-Melanoma specifically, we delivered 36,008 test reports in 2024, an 8% increase over 2023. After correcting for underreporting, we believe the addressable market comprises approximately 130,000 patients, meaning that we exited 2024 with roughly 28% market penetration. We're pleased with our volume growth for 2024, and I would like to provide some additional context specifically for our fourth quarter volume for DecisionDx-Melanoma. We saw typical seasonality, with the fourth quarter historically having the fewest working days compared to the other three quarters.

Specifically, in the fourth quarter of 2024, we had two fewer working days than in the third quarter of 2024. Further, the overlap of Christmas and Hanukkah in December led to additional practice closures as compared to 2023. As a reminder, our DecisionDx-Melanoma test results provide clinicians and patients with actionable results aiming at answering two questions. The first being, does this patient have a likelihood of a positive sentinel lymph node that is below 5%? 5% has been the traditional guideline threshold for avoiding versus offering a sentinel lymph node biopsy surgical procedure. We have, in multiple prospective and retrospective studies, consistently shown that our DecisionDx-Melanoma test is able to identify patients who have a less than 5% rate of a positive sentinel lymph node biopsy.

We have also shown that patients who avoided a sentinel lymph node biopsy surgical procedure have excellent long-term outcomes. This data consistency sets our DecisionDx-Melanoma test apart. The second question our test results aim to answer is, what is the five-year likelihood of this patient having a recurrence? Again, we have shown in multiple prospective and retrospective studies that our DecisionDx-Melanoma test is an independent predictor of recurrence, that clinicians use our test results to assist with their decisions as to whether to escalate or de-escalate treatment pathways, and that clinically tested patients show improved survival compared to patients who did not receive our DecisionDx-Melanoma test as part of their clinical care. We continue to develop evidence to support our DecisionDx-Melanoma test, and currently, we have more than 3,000 patients enrolled in clinical studies.

We believe that the fact that we have been able to consistently demonstrate that we are adding independent value to traditional staging factors sets our DecisionDx-Melanoma test apart. These two uses of our test impact patients across all stages of localized melanoma, and we believe we have significant room for further penetration across clinical stages. Further, based on our 2024 data for this test, our orders generally align with the CIR data of incidence by T stage for patients diagnosed with melanoma. Despite having launched DecisionDx-Melanoma several years back, we continue to see new clinicians ordering our test for the very first time. Specifically, in 2024, we had 1,816 clinicians order DecisionDx-Melanoma for the very first time. This was similar to the number of first-time ordering clinicians in 2023.

While some existing customers may have settled into where they see the sweet spot for our test, we continue to have strong interest in usage that we need to then turn into further adoption. We currently anticipate mid to high single-digit volume growth for the full year 2025 compared to 2024, with the first quarter of 2025 being flat or slightly down compared to the fourth quarter of 2024, in line with typical seasonality and our expectations. Moving on to our DecisionDx-SCC test, we continue to see strong test report volume momentum with 16,348 test reports delivered in 2024, an increase of 43% compared to 2023. Further, we saw 1,510 new ordering clinicians for our DecisionDx-SCC test in 2024.

We believe that the addressable market of patients diagnosed with cutaneous squamous cell carcinoma and the presence of one or more clinical or pathologic risk factors is approximately 200,000 patients, meaning that we exited 2024 with roughly 8% market penetration. As a reminder, our DecisionDx-SCC test provides two actual test results. The first is predicting the risk of metastasis, and the second is predicting response to adjuvant radiation therapy. These uses are supported by 22 peer-reviewed publications since the launch of the test, including six studies published in 2024, two of which represented the largest and the second-largest studies ever published that evaluate the effectiveness of adjuvant radiation therapy in patients with cutaneous squamous cell carcinoma. Now, let's turn to reimbursement.

In January 2025, Novitas, the Medicare administrative contractor with jurisdiction over a laboratory in Pittsburgh, finalized the Local Coverage Determination, or LCD, that included language signifying non-coverage by Medicare for DecisionDx-SCC. The LCD effective date, originally in February 23, 2025, was subsequently extended to April 24, 2025. Should the LCD become effective as is, we would not anticipate receiving Medicare reimbursement for DecisionDx-SCC tests performed on or after April 24, 2025. We will be disappointed with the impact on patient care if we lose Medicare coverage, given the strength of the evidence in DecisionDx-SCC's ability to predict the risk of metastasis and impacting treatment pathways, and the ability to predict responsiveness to adjuvant radiation therapy.

I will remind you that a cost-effectiveness article that was published in January 2024 showed that using DecisionDx-SCC to guide adjuvant radiation therapy decisions could result in substantial savings to the Medicare program of up to $972 million per year. Now, let's turn to our TissueCypher test, our spatial omics test designed to determine a patient's individual risk of progression from Barrett's esophagus to high-grade dysplasia or esophageal cancer. We have published multiple performance studies showing that TissueCypher consistently outperforms traditional clinical and pathologic factors, providing physicians with an actionable assessment of the likelihood of a patient's five-year risk of progression to high-grade dysplasia or esophageal cancer. As such, we are thrilled with the positive reception TissueCypher has received from the gastroenterology community. In fact, we delivered 20,956 TissueCypher test reports in 2024 compared to 9,100 in 2023, representing 130% growth.

For the year ended December 2024, we had 1,234 new ordering clinicians for the TissueCypher test. Importantly, TissueCypher achieved a significant milestone in 2024, surpassing 25,000 test reports delivered since we acquired the test at the end of 2021, suggesting more clinicians may be recognizing its value. I would also remind you that in 2024, the American Gastroenterological Association, or AGA, released new clinical practice guidelines in endoscopic eradication therapy for Barrett's esophagus, stating that it can be effectively treated with endoscopic procedures like ablation, but noting that identifying high-risk patients is crucial. Importantly, TissueCypher was highlighted as the first prognostic assay capable of identifying a patient with Barrett's esophagus at risk of progressing to high-grade dysplasia or esophageal cancer. This recognition by the AGA reinforces TissueCypher's role in providing personalized and clinically validated risk stratification, helping clinicians better manage patients with Barrett's esophagus.

As we look at 2025 and beyond, the growth drivers we expect for TissueCypher include, one, the commercial team roughly doubling in size during the first half of 2024, with continued expansion throughout the second half of 2024 and the first few months of 2025. Two, the unmet clinical need and value of our test being further accepted by clinicians. Three, a strong focus on education and awareness. We believe that the addressable market of patients diagnosed with Barrett's esophagus with non-dysplastic, indefinite, or low-grade dysplasia is approximately 415,000 patients per year in the U.S., meaning that we exited 2024 with roughly 5% market penetration. We believe in our ability to maintain strong momentum for future growth and currently expect TissueCypher volume to be significant for the full year 2025 compared to 2024, although not as high as the 130% we delivered in 2024 compared to 2023.

Turning to our mental health business, due to changes in the market and our focus on allocating resources efficiently on profitable growth, in late 2024, we revised our commercial strategy for iGenX tests, reallocating resources to inside sales and non-personal promotions. In December 2024, we observed month-to-month decreases in iGenX test reports, which persisted throughout year-end 2024. We continue to offer our iGenX test and monitor performance. However, in 2025, we expect test report volumes and net revenues will continue to decrease and the long-term performance of this test remains uncertain. With that, I'll now turn the call over to Frank.

Frank Stokes (CFO)

Thank you, Derek, and good afternoon, everyone. As Derek highlighted, we delivered strong 2024 results, continuing our track record of consistent execution and strong financial performance.

In the fourth quarter of 2024, we delivered total revenue of $86.3 million, a 31% increase over the fourth quarter of 2023, and delivered $332.1 million for the full year of 2024, a 51% increase over 2023, and exceeding our guidance range. The full year 2024 increase was driven predominantly by test volume growth for our dermatologic and non-dermatologic tests, as well as our TissueCypher tests, along with a higher ASP for our DecisionDx-SCC test compared to 2023. Importantly, we've now grown total revenue at a 52% CAGR over the last five years. Adjusted revenue, which excludes the effects of revenue adjustments in the current period related to tests delivered in prior periods, was $85.8 million for the quarter and $333.8 million for the full year 2024.

For 2025, we anticipate generating total revenue of $280-$295 million, which reflects DecisionDx-SCC no longer being reimbursed by Medicare for services performed on and after April 24, 2025. Our gross margin during the fourth quarter was 76.2% compared to 77.8% in the fourth quarter of 2023, and our gross margin for the full year was 78.5% compared to 75.4% in 2023. Our adjusted gross margin, which excludes the effects of intangible asset amortization related to our acquisitions and excludes the effects of revenue adjustments in the current period associated with test reports delivered in prior periods, was 81.1% for the quarter and 82% for the year, compared to 82.3% and 79.9% for the same periods in 2023.

With the anticipated loss of DecisionDx-SCC coverage in late April, we currently expect gross margins in the low to mid 70% range and adjusted gross margin in the mid to high 70% range for all of 2025. Turning to expenses, our total operating expenses, including cost of sales for the quarter, were $82.3 million compared to $71.8 million for the prior year, and were $323.4 million for the full year 2024 compared to $287.8 million for 2023. Sales and marketing expenses were $123.5 million for the full year compared to $113.7 million for 2023. The increase is mainly due to higher personnel costs, higher sales-related travel expense, and higher organizational and business development activities. Increases in personnel costs reflect a higher headcount, as well as merit and annual inflationary and wage adjustments for existing employees.

General and administrative expenses were $76.6 million for the full year compared to $66.5 million for 2023. The increase is primarily attributable to higher personnel costs, professional fees, and IT-related costs and expenses. Increases in personnel costs reflect headcount expansions in our administrative support functions, as well as merit and annual inflationary wage adjustment for existing employees. Cost of sales expenses were $60.2 million for the full year compared to $45 million for 2023, primarily due to higher personnel costs and higher expenses for supplies and depreciation. Increases in personnel costs reflect higher headcount to support business growth in response to growing test report volumes, commencement of operations at our new Pittsburgh laboratory in the second quarter of 2023, as well as merit and annual inflationary wage adjustments for existing employees.

R&D expenses were $52 million for the full year compared to $53.6 million for 2023, primarily due to lower clinical studies costs, lower organizational development costs, and lower expense for laboratory supplies, partially offset by higher personnel costs. Total non-cash stock-based compensation expense, which is allocated among cost of sales, R&D expense, and SG&A expense, was $50.3 million for the full year, down slightly from $51.2 million for 2023, despite an increase of 25% in total headcount over 2023. Interest income was $12.9 million for the full year 2024, compared to $10.6 million in 2023, primarily a result of higher balances held in marketable investment securities.

Income tax expense was $3.3 million for the full year 2024, compared to $0.1 million in 2023, as we realized profitability and positive operating cash flows for the full year 2024 primarily as a result of state income taxes and the realization of pre-tax income in 2024. Our net income for the fourth quarter of 2024 was $9.6 million compared to a net loss of $2.6 million for the fourth quarter of 2023. Our net income for the full year of 2024 was $18.2 million compared to a net loss of $57.5 million for 2023. Diluted earnings per share for the fourth quarter was $0.32 a share compared to a diluted loss per share of $0.10 in the fourth quarter of 2023. Diluted earnings per share for the full year 2024 was $0.62 per share compared to diluted loss per share of $2.14 for 2023.

Adjusted EBITDA for the fourth quarter was $21.3 million compared to $9.4 million for the comparable period in 2023. For the full year 2024, adjusted EBITDA was $75 million compared to a negative $4.4 million in 2023. Net cash provided by operating activities was $24.4 million for the fourth quarter of 2024 and $64.9 million for the year ended December 31st, 2024. Historically, in the first quarter of the year, we have seen net operating cash use, due in part to annual cash bonus payments and certain healthcare benefit payments that do not recur during the remaining three quarters of the year. We expect 2025 to follow this historical trend. Importantly, we continue to expect to deliver positive net cash flow from operations for the full year of 2025.

Net cash used in investing activities was $50.1 million for the 12 months ended December 31st, 2024, and consisted primarily of purchases of marketable investment securities of $205.7 million and purchases of property and equipment of $28.3 million, partially offset by the maturity of marketable investment securities of $183.9 million. We ended the year with cash, cash equivalents, and marketable securities of $293.1 million, which we believe will allow us to invest in the business for long-term growth and to continue our efforts to drive stockholder value. In conclusion, we delivered strong financial results in 2024. In an effort to ensure the company is positioned for success in 2025, we expect to remain focused on strong execution coupled with our sound capital allocation strategy, including strategic opportunities. I'll now turn the call back to Derek.

Derek Maetzold (Founder, President and CEO)

Thank you, Frank.

In summary, we believe we've entered into 2025 in a boost of financial and operational strength as a result of our long-standing commitment to a science-driven approach to improve the lives of the patients we serve. Our continued investment in innovation, along with excellent execution, should enable us to deliver value to patients, clinicians, and stockholders. Thank you for your continued interest in Castle. Now, we will be happy to take your questions. Operator?

Operator (participant)

Thank you. In order to allow everyone in the queue an opportunity to address the Castle Management Team, please limit your time on the call to one question and one follow-up. If you have any questions, please return to the queue. Please stand by while we compile the Q&A roster. Your first question comes from Subu Nambi with Guggenheim. Please go ahead.

Subbu Nambi (Managing Director and Equity Research Analyst)

Guys, thank you for taking my question.

In our checks, we have noticed that private derms usually prefer DecisionDx-Melanoma, but derms in academic centers are still hesitant to order more broadly before guideline inclusion. One, do you agree? In the absence of guideline update, how should we think about the opportunity?

Derek Maetzold (Founder, President and CEO)

If I understood the comments back from your interviews, I guess that flies a little contrary to what the 1,800, the 1,800 new first-time ordering clinicians in 2024 that order the melanoma test. While it could be that there are clinicians who have been common users and they have kind of fallen into what they've used as sweet spots, so maybe there's not much expansion for some of those current customers, we did see substantial growth in new first-time ordering clinicians last year as well as in 2023.

From our perspective, outside of a few of the sort of NCCN centers, we do not hear much feedback at all regarding NCCN guideline inclusion or lack thereof as driving any sort of a personal decision around treating individual patients, except for, again, a couple of the NCCN institutions who, I guess, feel obligated to follow guidelines as opposed to treating patients individually.

Subbu Nambi (Managing Director and Equity Research Analyst)

Got it. Thank you for clarifying, Derek. I want to bring back to atopic dermatitis gene expression profile test that I think is planned to launch by end of 2025 if the validation study results come through. When should we expect reimbursement update for this product?

Derek Maetzold (Founder, President and CEO)

Reimbursement or launch updates?

Subbu Nambi (Managing Director and Equity Research Analyst)

Launch and reimbursement.

Derek Maetzold (Founder, President and CEO)

Yeah.

We do not, at this point in time, we believe, assuming, as you said, that the rest of the validation study finishes out successfully, that we would be on target at this point in time to still launch in late 2025. I think we discussed this earlier in January, maybe with third quarter earnings. Once we see what our final profile looks like and the relative value to both clinicians and payers, then the team's work in the next four, five, or six, seven months is to really work through that exact same question, Subbu, which is to say, how do we want to make this test available clinically so that it is doing good for patient outcomes and Castle is getting fairly reimbursed? There might be some non-traditional approaches.

I think one of the next several quarters of 2025, expect to have us provide some good clarity on that, I think. As of today, I want to see what the profile looks like so we can really focus in on what that reimbursement strategy will actually be post-launch, assuming we're successful, of course, in the R&D part of the business. Either way, though, I would say, starting from volume of zero to some volume that's higher than that, I would not expect much material revenue, I guess is the way to say it all, probably until, what, 2028, 2029 probably is the right time for you to think about that, Subbu.

Subbu Nambi (Managing Director and Equity Research Analyst)

Thank you.

Operator (participant)

Your next question comes from Sung Jin with Scotiabank. Please go ahead.

Sung Jin (Field Operations Analyst)

Hi. Thank you for taking the questions.

On TissueCypher and getting the New York State Department of Health approval there, what percentage of the addressable market does New York State represent?

Derek Maetzold (Founder, President and CEO)

Oh, that sounds like an AI Google question. I don't know off the top of my cup here. I'm assuming it's going to be demographically, there would be nothing different to say would not be similar to the population of New York as a percentage of the overall U.S. population. I don't think there's any, there's no age difference or no health difference that I would think would make them a heavier or lighter player than just the average percentage of the U.S. population lives in New York.

Sung Jin (Field Operations Analyst)

Gotcha. And then just on the Precision DxSCC, kind of what's the commercial strategy while you're continuing to resolve the reimbursement issues?

Just kind of curious if you will continue to offer the test to patients or clinicians that order the tests and how we should think about that for the.

Derek Maetzold (Founder, President and CEO)

It's a great question. Should we lose coverage towards the end of April, which is the current expectation, one, from just a non-Castle perspective, but more of a patient care perspective, it'll be hugely disappointing to have Medicare beneficiaries be referred to and undergo adjuvant radiation therapy. We know, based upon our two large multicenter studies that were published last year, that roughly 60% of them will not respond to that intervention. The other patients will, which is fantastic, but you're really over-radiating people. That will be disappointing if that continues to go on.

Despite the fact that use of our tests in directing radiation therapy, we believe, extracts over $900 million a year in excess of spend because you're removing ART from the patient. Now, that being said as background, I think how we would approach this today is to say if we believe there's a reasonably short-term approach to regaining reimbursement for Medicare, then we would leave the test on as is, I think, so that patients can benefit in the interim period. If we think it's a longer-term challenge to regaining coverage through Medicare, then I think we have to balance out somewhat of a need to the shareholders in terms of an impact on gross margins as well as the impact on Medicare pressure to go ahead and have that test covered.

Right now, I don't anticipate that we would make the choice of taking it off the marketplace completely. That seems quite harsh and not in the orientation of a patient-focused company.

Sung Jin (Field Operations Analyst)

Great. Thank you for taking the questions.

Operator (participant)

Thank you. We now have Thomas Flaten with Lake Street on the line.

Thomas Flaten (Senior Research Analyst)

Hey, good afternoon. Thanks for taking the questions. In the press release, you mentioned the potential for strategic opportunities with respect to capital allocation. Should we be thinking about existing verticals, new verticals, maybe both? Just help us out with that a little bit.

Derek Maetzold (Founder, President and CEO)

I think we are always looking at taking our capital and saying, "What can we do to invest in our current commercial efforts to drive appropriate volume and revenue on the top line?" Looking at what we can fund for internal pipeline and also external opportunities, as you noted there, Thomas.

From just a pure profitability driver for Castle, it's easier to model out and think about locating additional test services that fit in our current verticals because we already have an infrastructure there that we can go ahead and just diversify costs across. That being said, we were not in gastroenterology three years ago when we bought Synostics to acquire TissueCypher. I think we are focused both on seeing what assets are there that can fit within our current portfolios, but are not averse to looking at another area if it makes good sense and we see good strong upside.

Thomas Flaten (Senior Research Analyst)

Got it. Frank, one for you with SCC most likely disappearing from the top line. Keeping in mind you had a really strong adjusted EBITDA number in 2024, any help you can give us on how to think about adjusted EBITDA for 2025?

Frank Stokes (CFO)

Yeah, Thomas, we just continue to reiterate we expect to be adjusted EBITDA positive for the year. We haven't given any scope or scale to that.

Thomas Flaten (Senior Research Analyst)

Got it. Appreciate it. Thanks, guys.

Frank Stokes (CFO)

Yep. Thanks, Thomas.

Operator (participant)

Thank you. We have Punai with KeyBank on the line.

Yadvinder Punia (SVP)

Hi, Derek. Frank, question on SCC. Obviously, you're assuming that ends fairly quickly, but is there any residual from non-Medicare payers and private pay on SCC?

Frank Stokes (CFO)

Not significant commercial payment there on SCC. Still very early.

Yadvinder Punia (SVP)

Strategically, what's the M&A market in the world of diagnostics right now? Have you seen the pipeline mature and it's possibly a great market because deal flow has kind of been light, but research maybe has not slowed down? What's your feeling about are you buying things that are, let's call it, more mature in this world?

Derek Maetzold (Founder, President and CEO)

Frank?

Frank Stokes (CFO)

There's certainly lots of assets in the diagnostic space, Paul, but our filter is pretty thin. We certainly haven't changed that view or haven't had a sense that we loosened that filter. I think the same sort of discipline and approach is how we're comfortable thinking about things.

Yadvinder Punia (SVP)

As we think about 2025, how should we model SG&A? Is the sales force expenditure and overhead increasing in 2025?

Frank Stokes (CFO)

We have made some expansions to the TissueCypher sales force, and that's good. That was reflected in the Q4 number. I think we'll continue to get leverage in the P&L, but we don't see any very sweeping large changes to the sales force, but we will continue to add and invest in that asset as we see continued penetration on our test menu.

Yadvinder Punia (SVP)

Okay. Thank you.

Operator (participant)

Thank you. We have Mason Carico with Stephens.

Please go ahead.

Ben Penix (Financial Consultant)

Hey, guys. Thanks for taking the questions. This is Ben on for Mason here. I wanted to start with the Q4 impacts from the hurricanes and the holidays. Do you have a sense for these patients being able to be rescheduled in Q1 or potentially, I guess, late in Q4? How do these patients factor into your melanoma framework for the start of the year here in 2025?

Derek Maetzold (Founder, President and CEO)

Frank?

Frank Stokes (CFO)

Yeah. It's hard to say when patients get caught up. Excuse me. Derms are pretty full. We've spoken before, and the best analogy is when an airline cancels a plane, there aren't 180 empty seats on the next plane to put them on. They have to find ways to move them around, and docs have to do the same.

We do not really have a good sense of when those patients flow through and how many of them are lost. We think Q1 is probably going to set up like normal for Q1, and you have two very large physician meetings in the quarter. You have patient deductibles resetting. As we said in the release, we expect typical seasonality for Q1 that we have seen in past years.

Ben Penix (Financial Consultant)

Okay. Great. Thank you for that. I appreciate the gross margin color that you gave. I was just hoping that you would be able to provide some additional detail as SCC rolls off starting in April, just how we should think about the cadence there as we move throughout the year. Thank you for taking the questions.

Frank Stokes (CFO)

Yeah, sure.

Yeah, the adjustments we referenced and the expected adjustments or impact on gross margin would be at the time reimbursement is pulled back. It would not be phased in. It would be right at the end of that coverage.

Operator (participant)

Thank you. We have a question from Catherine Schultz with Vet.

Tom Peterson (Clinical Veterinarian)

Hey, everyone. This is Tom Peterson on for Catherine. Thanks for taking our questions. I wonder if you could kind of walk through your latest thoughts on SCC promotional efforts following assumed non-coverage here in late April. I guess specifically, how are you thinking about potential changes to the dermatology sales force incentive structure? Is there any contemplation around shifting those more towards DX melanoma?

Frank Stokes (CFO)

Yeah. Yes is the answer.

Depending on what we see between now and the end of April, we will be shifting, if not 100%, very, very close to that towards the melanoma test only beginning probably May 1st. Obviously, we'll watch and see what plays out in the next couple of months here if that's the right call or not. The only element that might change a switchback to some kind of a shared compensation, not 50/50 at all, but something else that's 90/10, 80/20 would be if we see a line of sight to having near-term reimbursement regained or maintained. Otherwise, the expectation here is that we move back to being closer to 100% for melanoma.

Tom Peterson (Clinical Veterinarian)

Got it. Thanks. I know you've got some questions and comments on the TissueCypher sales force expansion to end 2024. It sounds like maybe a couple of incremental adds here to start 2025.

I guess can you just give us some more color on where that sits today, what the expectation is for 2025, and if you could remind us how you think about that sales force size long-term?

Frank Stokes (CFO)

We think there's roughly 10,000 targetable gastroenterologists who perform upper endoscopies. In that group, there's a small number who are really focused on upper endoscopies and ablation procedures, etc., who are in that group there. We don't quite know today, or maybe I'm not as confident as I should be about how important or how unimportant the advanced practice participants are, nurse practitioners, physician's assistants in sort of maintaining clinical interaction with patients diagnosed with Barrett's esophagus.

If you just go ahead and assume that they aren't managing those patients per se, and it's really just the gastroenterologist with the MD or DO degree behind their name, then sitting in kind of the low 60s is probably insufficient by maybe 15-25 sales representatives. Part of our expectation here is to kind of watch and see how this most recent increase in territory size matures during the second quarter and then probably make additional expansion opportunities third and fourth quarter as we sort of see the relationships building among our expanded territories with the current customers and new customers who don't expand too fast to go ahead and cause more disruption, but expand at the right rate.

At the end of the day, I guess we should come back here is the we aren't quite sure if in the 60 range is where we should be sitting. Part of that's looking at promotion responsiveness and territory sizes and travel time, but probably somewhere between 60s-80s feels about right at full maturity.

Operator (participant)

Thank you. We have Maetz Morrissey with BTIG.

Vidyun Bais (Senior Equity Research Analyst)

Hey, guys. This is Vidyun on for Mark. Thanks for taking the questions. I'll just keep it to one. Just on the Novitas non-coverage of SCC, could you just remind us of the other pathways that are available to you in contesting that in either continuing discussions with Novitas or potentially flexing to a different lab such that you might be covered by a different Medicare contractor? Thanks.

Frank Stokes (CFO)

Yeah.

In the program integrity manual, there are outlined different processes and approaches one can take to interacting when there is an LCD in place. One of those would be a reconsideration request, which we would expect to enter into with Novitas if this policy finalizes as is. We are aware of another laboratory that has filed a lawsuit against Novitas for this LCD, Pacific Edge, that went up against a week or two ago. That may have an impact on the policy timing of this LCD being effective, or it may not have an impact, but at least there seems to be other laboratories who are aware of similar kinds of issues. There is also an administrative law judge challenge, which would usually take a patient to work with you to do that. That sort of are the main pathways within Novitas directly.

As you may recall, we do have an LCD opportunity with the MOLDI-X group. As we talked about last fall, when they finalized that policy, they did not, due to the timing of our publications, review the adjuvant radiation therapy response data, but dropped in a comment or two in the LCD being aware that they were aware of some promising early data. We take that as an indication that that is a very interesting or interested clinical use perspective. We are and would pursue that approach as well for a positive LCD through the MOLDI-X program. Those are the main avenues.

Vidyun Bais (Senior Equity Research Analyst)

Great. Thanks for taking the question.

Operator (participant)

Thank you. We now have Kyle Mickelson with CaniCode.

Kyle Mickelsen (Analyst)

Yeah. Hey, guys. Thanks for the questions. Just based on consensus, most estimates did not include SCC.

If you assume a quarter and a third of SCC, the guidance probably should have touched a bracket of $300 million. Could you just—and obviously, you didn't express that or provide that today—can you talk about the quarterly assumptions for SCC in 1Q and 2Q? Is that kind of flat relative to end of 2024 levels? Then the acceleration of DecisionDx-Melanoma throughout the year, maybe that benefits from the roll-off of SCC as the commercial team kind of reallocates its efforts.

Derek Maetzold (Founder, President and CEO)

Frank?

Operator (participant)

Frank, I think you're on mute if you're still on.

Frank Stokes (CFO)

I am. Thank you. I said I'll cover the guidance and let Derek answer the second part. The guidance assumes SCC coverage through the LCD effective date of April 24th.

Derek Maetzold (Founder, President and CEO)

In terms of acceleration of melanoma volume, as the back half of your question there, we went from being solely focused with the sales force more than less than half the current size we're at, Kyle. I guess it was summer of 2022 when we went to splitting sales force focus between melanoma and SCC, and we expanded quite a bit since that point in time. We would expect some accelerated growth once we return to a fully focused melanoma sales team. To be quite honest, I don't have any sort of recent history with this number of people in the field about what that might look like for momentum. I would rather not over or underset expectations, to be honest, at this point in time until we kind of see how our customers respond in the second quarter.

Kyle Mickelsen (Analyst)

Okay. That was great.

The second one, could you kind of talk about the white space or greenfield opportunities for melanoma tests, whether that's in the clinical opportunity market or academics or regional kind of differences, I guess? Is the penetration in the current practices a material growth driver, or do you have to kind of look outside that and maybe to adjacent areas?

Derek Maetzold (Founder, President and CEO)

Okay. Let me see if I can break it down briefly. We had—was it 1,800? 1,800 new ordering clinicians, first time ever last year. That was close to what we saw in 2023 as well. It is surprising, interesting, what you want to call that, that after being on the marketplace for several years, there were still that many numbers of kind of dermatologic or surgical customers who are adopting our tests for the very first time ever.

There is still, I think, good growth in 2025 and beyond of attracting clinicians who maybe they were tough to see, maybe they were residents coming into practice; they were not here three or four or five years ago. Maybe they were nurse practitioners or PAs that are fresh out of school and just learning about new technologies like ours. I think that is one area of growth going forward that I do not see necessarily slowing down a whole lot because of just the new clinicians going into dermatology and also just getting around to those who are either late adopters by style or maybe they are hard to go ahead and get a hold of and communicate to.

Frank Stokes (CFO)

In terms of current ordering customers, when we analyze our data, one of the things that we do look at is Breslow's thickness on the patients who our test is ordered in. If we kind of look at the NCI CER data, we can look at at least the reported melanoma cases in half the country relative to their Breslow's thickness and what's called their T stage or their tumor stage. We can then marry against what kind of orders we're seeing coming in from an individual clinician.

If we find out that the only orders that clinician is giving us are first-aid patients that are between, say, 0.8 mm thick and maybe call it 1.5 mm thick, and we're getting almost nothing else from that physician or that nurse practitioner or PA, we would say that clinician has sort of found what they believe is a sweet spot of our test in our practice because nobody only has those patients. We have articles and performance studies and clinical use studies that the sales force knows how to use that would go back into that same clinician who has sort of limited use of our tests for a certain patient population that, "Hey, this is what I'm seeing and what you're ordering. Can we kind of go through data over here in thinner patients and see the value that some of your peers are getting?

Would you agree to that?" In some cases, we aren't successful, but in other cases, we are successful in seeing that clinician review the data, think about how they would apply it clinically, and expand use in these other customer ranges. That is an opportunity as well. We do see other customers who are current customers who look like they're ordering our test across the spectrum of patients that they're diagnosed. That probably is close to 89-100% penetration for that individual clinician's practice. Obviously, that's really more about maintaining and reinforcing that they are making good clinical decisions based upon the use of our test.

Kyle Mickelsen (Analyst)

Thank you.

Operator (participant)

Thank you. I would now like to hand it back to Derek for some final closing comments.

Derek Maetzold (Founder, President and CEO)

Thank you, operator. This concludes our fourth quarter and full year 2024 earnings call.

Thank you again for joining us today and for your continued interest in Castle Biosciences.

Operator (participant)

Thank you all for joining. I can confirm that does conclude today's call. Please enjoy the rest of your day, and you may now disconnect. Thank you for your participation.