CareDx Q3 2023 Earnings Call Transcript

Quartr
Provided by Quartr
November 8, 2023

There are 12 speakers on the call.

Operator

Good day, everyone, and welcome to today's CareDEX, Inc. 3rd Quarter 2023 Earnings Conference Call. At this time, all participants are in a listen only mode. Later, you will have the opportunity to ask questions during the question and answer session. On your telephone keypad.

Operator

Please note this call is being recorded. I'll be standing by if you should need any assistance. It is now my pleasure to turn the call over to Greg Hodecek, Managing Director. Please go ahead.

Speaker 1

Earnings call. Good afternoon, and thank you for joining us today. Earlier today, CareDx released financial results for the quarter ended September 30, 2023. The release is currently available on the company's website at www.caredx.com. Joining the call today is Alex Johnson, President of CareDx's Patient and Testing Services Abhishek Jain, Chief Financial Officer and Robert Woodward, Chief Scientific Officer.

Speaker 1

Also joining the call today is Michael Goldberg, Chairperson of the Board. 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 the federal securities laws, earnings release, 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, expectation regarding coverage decisions, pricing and enrollment matters, and our financial expectations and results are based upon current estimates and various assumptions.

Speaker 1

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. Earnings call. Accordingly, you should not place undue reliance on these statements. For a list of descriptions of the risks and uncertainties associated with our business,

Operator

conference call. Please see our filings with the Securities

Speaker 1

and Exchange Commission. The information provided in this conference call speaks only to the live broadcast today, November 8, 2023. CareDx disclaims any intention or obligation, except required by law, to update or revise any information, financial projections or other forward looking statements, whether because of new information, future events or otherwise.

Speaker 2

Earnings call.

Speaker 1

This call will also include a discussion of certain financial measures that are 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 with the SEC. Call. I will now turn the call over to Alex.

Speaker 3

Thank you, Greg. Good afternoon, everyone, and thank you for joining today's call. I'm Alex Johnson, President of CareDx's Patient and Testing Services and member of the newly formed Office of the CEO, along with Michael Goldberg, Chairperson of the Board and Abhishek Jain, CFO. I'd like to begin today's call by briefly covering the CEO transition we announced last week. Michael, Abhishek and I are aligned on the importance of executing against CareDx's strategic priorities and increasing shareholder returns While the Board conducts its search for a new CEO.

Speaker 3

We have strong confidence in our leadership team and in the entire CareDx team to move the company forward. For those of you whom I've not yet met, I have managed CareDx's largest business, the testing services business for the past 2 years. Prior to that, I had responsibility for our lab products business as well as for business developments. I've been incredibly fortunate to have worked with Michael SynCareDx's IPO nearly a decade ago and with Abhishek for the past 2 years. I've also been privileged to work with Peter Maag, who many of you know as our former longtime CEO and current Board member for the better part of 15 years dating from our time together at Novartis.

Speaker 3

On behalf of CareDx, we thank Reg for his contributions to advanced transplant care during his tenure. We have a strong foundation for future growth and we wish him the very best. Earnings call. Moving on to our Q3 performance. Today, I'm going to discuss our Q3 performance and results, discuss our decision to raise full year 2023 revenue guidance.

Speaker 3

And finally, I will provide additional context around the transplant market environment and our patient advocacy efforts. In Q3, CareDx reported revenue of $67,200,000 an increase of 7% as compared to normalized Q2 2023 revenue. Normalized Q2 2023 revenue results excludes previously discussed financial impact of $7,800,000 related to Medicare claims billing that were held over from the Q1 of 2023 and recognized Q2 revenue. Our Q3 revenue for testing services came in at $47,800,000 growth of 5% compared to the normalized Q2 of 2023. Our patient testing services results grew 2% quarter over quarter to 38,400.

Speaker 3

After the period of uncertainty in the last few quarters, we now see a baseline being set in testing services business as patient testing services volumes appear to have stabilized. We continue to be well placed in the transplant market which is growing and is expected to continue to grow. Next, our Digital Transplant Solutions business grew 33% year over year $9,900,000 driven by organic growth and from our recent acquisitions. Some of our earlier acquisitions are beginning to scale nicely, helping us to drive both operating leverage and strengthening our moat. Our lab products business realized revenue of $9,500,000 earnings call.

Speaker 3

With year over year growth of 33% driven by the success of our NGS base portfolio. We are pleased with our improved performance, We are pleased with our continued progress to actively reduce our overall expense base. This helped mitigate the billing article impact of lower full year revenue on our results. We will continue to look for ways to be more effective and efficient. Our adjusted EBITDA loss was $10,900,000 in the quarter as compared with normalized adjusted EBITDA loss of $18,100,000 in Q2.

Speaker 3

Our goal is to be operating cash flow adjusted EBITDA positive and we are pleased to show demonstrable progress on this metric. We have confidence in our outlook going forward. Earnings call. As announced last week, we are raising guidance and now expect CareDx's full year 2023 revenue to be in the range of $274,000,000 $278,000,000 Abhishek will provide additional details during his remarks. In light of our strong cash position and belief that our stock is currently undervalued, we will continue to opportunistically pursue stock repurchases as part of our previously announced stock repurchase program.

Speaker 3

Next, I'll discuss our reimbursement coverage. In Q3, 2 previously announced catalysts came to fruition. We received Medicare coverage for AlloSure Lung and for heart care. Since its launch in 2021, AlloSure Lung has become increasingly valuable for lung transplant patient care. HeartCare multimodality coverage was approved for surveillance.

Speaker 3

This has established a path for multimodality reimbursement call that can be generalizable for other testing modalities in our portfolio such as AlloMap Kidney and UroMap. We continue to focus on increasing commercial payer coverage. For example, 1 national plan and 3 regional plans expanded coverage for AlloMap Heart to start at 6 months as compared to 1 year. We also gained coverage 2 new regional plans for AlloSure kidney. Moving to catalysts.

Speaker 3

When we have talked about catalysts in the past, We have highlighted our robust pipeline of clinical testing solutions, which is exciting and we will continue to cover in future calls. Today, I want to highlight progress on a slightly different catalyst, one which can facilitate greater payer coverage for AlloSure kidney And that is K OAR. K OAR, our kidney allograft outcomes registry has now completed the last clinical visits in Q3 We will next move to data analysis. We anticipate a publication in 2024. Payor has the potential to provide additional insights to payers, including Medicare with respect to the clinical utility of AlloSure Kidney, including surveillance use in a wide variety of kidney patients.

Speaker 3

Our priority is to be good stewards of capital in this new environment, to invest in our strongest businesses and pipeline products efforts to deliver on our mission to bring innovation to transplant patient care, while also creating the most value for investors in the short to midterm. Our strategy has not changed. We have nearly a quarter century commitment to improving transplant patient outcomes, extending long term allograft survival, And this will continue. We are confident that patients and investors can both benefit from the innovation and commercialization expertise of the CareDx team. Next, I want to address the conversations around GLP-one drugs and their potential impact on kidney transplant volumes.

Speaker 3

There are about 550,000 dialysis patients in the U. S. And only about 25,000 kidney transplants per year with organ supply continuing To Be the Limiting Factor. While GLP drugs have a potential to delay or may eliminate the need for dialysis in some patients, There's also the potential to help increase the number of dialysis patients eligible for a kidney transplant by improving their overall health or reducing their BMI.

Speaker 4

Earnings call. With respect to supply, it may be useful

Speaker 3

to note the potential impact of GLP drugs on the living donor pool, which is a major driver of kidney transplant volumes. Living donation volumes have the potential to increase beyond current trend lines as potential donors become healthier due to GLP-1s and feel more confident to donate their kidney. Before I turn the call over to Abhishek, I would like to touch on our advocacy efforts On behalf of transplant patients, we have been actively engaged in discussions with Medicare and HHS, as well as helping to support legislative action and advocacy efforts to restore full patient access for Medicare beneficiaries. We have made good progress to date. On August 15th, a bipartisan group of 14 members of Congress wrote to CMS Administrator, Chiquita Brooks LaSure, challenge CMS to reconsider these new limits on access to critical molecular tests that benefit transplant patients.

Speaker 3

In September, the Wall Street Journal editorial board published 3 editorials, decrying the rollback in coverage for Medicare patients. Then in mid September, Maldex held open meetings for public comment on the proposed LCD. Periodix was proud to have presented at both the Maldex Palmetto and the Noridian Open Meetings on Molecular Testing for Alligraft Rejection. We and the broad transplant community will continue to fight for access to transplant innovation. With that, I'd like to turn the call over to Abhishek to discuss additional details on our quarterly results and outlook, and we'll go from there to Q and A.

Speaker 3

Abhishek? Thank you, Alex. In my remarks today, I will provide some additional details on quarterly financial results, residual impact of

Speaker 2

the billing vertical divisions on our financials and closed with an update on guidance. Unless otherwise noted, remarks will focus on non GAAP results. Also, my comparisons with Q2 'twenty three results will exclude the financial impact of $7,800,000 related to Medicare test that was held over from the Q1 of 'twenty three and recognized in Q2 revenue and referred to as normalized second quarter. Please refer to GAAP to non GAAP reconciliation for detailed information. Key highlights of Q3 results were: number 1 reported revenue of $67,200,000 Our testing services revenue at $47,800,000 increased approximately 5% as compared to normalized 2nd quarter revenue of $45,600,000 Patient setting services volume appears to be stabilizing as it increased 2% as compared to the last quarter.

Speaker 2

Number 2, our products as well as Patient and Digital Solutions businesses delivered another strong performance with each business growing over 30% year over year. Number 3, adjusted EBITDA losses number 4, collections were 103 percent of our reported testing facilities revenue, making it the 4th consecutive quarter of net positive cash collection. Number 5, we maintained a strong cash position of $268,200,000 And last but not the least, SEC concluded its inquiry and does not intend to recommend an enforcement action against the company. Given the strong results in the Q3 of 'twenty three, we are raising our revenue guidance for the full year 'twenty three to $274,000,000 to $278,000,000 call from our previously announced guidance of $240,000,000 to $260,000,000 Moving to the details, reported testing services revenue Q3 was $47,800,000 up approximately 5% as compared to normalized revenue of $45,600,000 in the 2nd quarter. Reported testing services volume for the 3rd quarter was approximately 38,400 tests, up 2% as compared to the last quarter.

Speaker 2

The volume increase was distributed across all organs. In the Q3, MolDX covered heart care for use In Heart Transplant Surveillance for the 1st 12 months post transplant. RK tests not meeting the coverage criteria were not recognized in revenues in Q3 post Noridian adoption of the billing article. Lastly, Our revenues in Q3 were positively impacted by a one time claim settlement with a large Medicare Advantage payer for outstanding claims. Our non GAAP testing services gross margin was 74% in the Q3 of 'twenty 3 as compared to 73% last quarter.

Speaker 2

Normalized 2nd quarter testing services non GAAP gross margin was 68%. Our current quarter gross margin included one time benefit of the claim settlement as discussed previously and the benefit of the Stanford royalty approval reversal, which will now be paid at a lower date. Earnings conference call. Now turning to other businesses. Our Patient and Digital Solutions business recorded revenue of $9,900,000 earnings release of growth of 33% in the Q3 of 2023 as compared to a year ago.

Speaker 2

Non GAAP gross margin improved 10 percentage points to 39% in the 3rd quarter as compared to 29% in the same quarter last year. Gross margin expansion has been driven by the organic revenue growth, continued cost savings initiatives and higher gross margin profile of our new acquisitions. Our products business delivered $9,500,000 in revenue in the Q3 of 'twenty three, an increase of 33% as compared to the Q3. Non GAAP gross margin improved to 58% in the Q3 of 23% as compared to 44% in the same quarter last year, an increase of 14 percentage points. Our goal is to continue to look for opportunities to further improve gross margin for this business.

Speaker 2

We are continuing to work on-site consolidation that will streamline our manufacturing operations, increase efficiencies throughout our supply chain and importantly group patient care. Turning to operating expenses and adjusted EBITDA. Non GAAP operating expenses for the Q3 were $57,700,000 down approximately $1,200,000 sequentially from Q2 2023. Earnings call. The decrease in our R and D and sales and marketing spend of $4,400,000 as compared to last quarter was driven by the full quarter impact of our actions call.

Speaker 2

Related to workforce reduction, prioritization of our investments in R and D and continued cost savings and discretionary spend. G and A expense increased $3,200,000 as compared to last quarter and driven by various litigation matters and our response to the billing article division. Q3. We reported negative adjusted EBITDA of $10,900,000 compared to normalized negative adjusted EBITDA of $18,100,000 Q2 of 'twenty three, an improvement of $7,200,000 as compared to last quarter. We are pleased with the progress earnings release we have made in reducing adjusted EBITDA losses.

Speaker 2

Turning to cash. We continue to maintain a strong balance sheet with cash, cash equivalent and marketable securities of $268,200,000 and no debt. For the Q4 in a row, our collections were greater than 100% of our testing services revenue. We have now collected over $22,000,000 in incremental cash in the last four quarters. As a reminder, we have expanded our selection program to include overdue payments from commercial and Medicaid payers similar to Medicare Advantage.

Speaker 2

I would also like to note that we earned $3,200,000 in interest income in the Q3 of 'twenty three. As Alex mentioned earlier, based on our cash position and belief that our stock is currently undervalued, We are continuing to opportunistically pursue stock repurchases. Turning to the impact of billing article revisions on our financials and mitigation plan. 1st, billing article revisions added complexity and uncertainty that were disruptive to our business. In the past two quarters, we focused our efforts on operational implementation of billing article requirements, both internally and with transplant centers.

Speaker 2

We made great progress and the results speak for themselves in terms of new TRS production and supplementation. We are pleased to report that TRF adoption for our kidney and heart testing services was over 90% at the end of September, ahead of our initial target. 2nd, in Q3 'twenty three, we are seeing testing services volume Stabilize across Allgem and we have implemented necessary changes in our billing and revenue recognition pathologies. As you heard from Alex, we believe we are seeing a baseline being set. Our previously announced cost reduction program is largely complete, helping us partially offset the impact of the billing article on our financials.

Speaker 2

Our goal is to be operating cash flow and adjusted EBITDA positive based on this new level of revenue. And we have levers to bridge the gap: number 1, profitable organic growth number 2, increased reimbursement of our unpaid tests number 3, reduce G and A expenses, specifically elevated legal spend and finally drive further efficiencies in our operating expenses. We are actively pursuing each one of these levers. Quarterly earnings call. Finally, turning to guidance.

Speaker 2

Based on the strong results in Q3 'twenty three, we are raising our full year 'twenty three revenue guidance earnings call to be in the range of $274,000,000 to $278,000,000 an increase of $26,000,000 at midpoint. Our device guidance, number 1, assumes Medicare reimbursement remains as currently implemented number 2, assumes approximately $4,000,000 in revenue headwinds going into Q4 associated with the full quarter impact of heart care tests data outside of the new coverage criteria post noted in adoption and the one time settlement with a large medical advantage payer for outstanding claims. And number 3, we also assume approximately 5% lower testing services volume due to Q4 seasonality around holidays and potential weather disruption. Based on our assumption of a new revenue baseline being set and with viable levers to bridge the GAAP to be cash flow and adjusted EBITDA positive, we do not expected need to raise cash in foreseeable future. We continue to be proud of the operational excellence and the financial discipline demonstrated by the entire team during the quarter.

Speaker 2

With that, I'll hand over to the moderator to open the line for questions.

Operator

Our first question comes from Andrew Cooper, Raymond James.

Speaker 5

Hey, everybody. Thanks for the questions. Maybe first, just want to make sure I caught you right, Abhishek, on the gross margin dynamic. So can you just give us maybe a dollar amount for the one time MA settlement, just so we can sort of adjust for that. And then as we think about the trajectory from there, does 3Q really feel like the stable place in terms of what the cost of goods on testing services can look like, is there more room to improve on that front?

Speaker 5

Or is it purely sort of a reimbursement calculus to continue to see the gross margin rise?

Speaker 2

Yes. Hi, Andrew. Good to talk to you. And on the gross margin side for the testing services, the 74% is slightly higher because of couple of one time events that I called out. And those couple of events, as I called out also in my guidance, they were about $4,000,000 If you were to kind of think about the gross margin going forward, I'll take you back to Q2 normalized gross margin, which was about 68%.

Speaker 2

Now having said that, we have made more progress in our gross margins in Q3. So modeling it about 70% may not be a bad idea, number 1. And number 2, of course, we continue to look for more operating leverage come in as the revenue were to grow and as we move forward, but More to come on that as we go forward and probably in the next call.

Speaker 5

Okay, helpful. And then appreciate you sizing the heart surveillance headwind in 4Q. Just curious in terms of what's maybe on the docket Q. Try to fight for expansion of that beyond that 12 month window. Do you need incremental studies.

Speaker 5

Do you feel like there's a way to take what you already have and maybe repackage in a way that can move the needle there? Just how should we think about the trajectory there on heart care and potentially expanding beyond 12 months for surveillance.

Speaker 6

Hi. Yes, this is Robert. Thanks for the question. We do see opportunities in various studies and publications that we anticipate coming out both from CareDx and from some of our customers' key accounts that are using these tests and publishing independently. So we'll be tracking those and looking for those to make a difference

Speaker 5

Okay, great. And maybe just one last one quickly. With the closing of the SEC issue without any decision to move forward from the body, anything else you can provide in terms of DOJ or the UPIC audit in terms of progress, has there been ongoing conversations? Or just what's the timeframe we should think about potentially hearing some amount of closure on the remaining outstanding inquiries.

Speaker 2

Yes, sure, Andrew. And in fact, the whole You've seen in Q3 that we previously disclosed in the month of September that they sent us a letter and they're not recommending any kind of enforcement action. And we're extremely pleased with this outcome. And of course, we were looking into the matters similar to civil investigative demand that we had received from the DOJ. So having this letter and the conclusion from SEC is a good outcome for us.

Speaker 2

As far as the DOJ is concerned, probably I'll be speculating if I were to kind of provide more color there. But I just want to say that we are cooperating. This matter has been on pace for a couple of years, and we'll see as to how So we think the matter would be resolving, but nothing more to say on the DOJ side. Robert, do you want to talk about the UPIC side?

Speaker 6

Yes, I could mention just the UPIC that there was some movement on that in the quarter and They haven't requested any additional claims or taken other actions. And obviously, like any of these audits, we intend to appeal them. There's always an ongoing appeal process, and eventually get to an independent review at some point.

Speaker 5

Great. I will stop there and let others ask. Appreciate the time.

Operator

Our next question comes from Matt Sykes, Goldman Sachs.

Speaker 7

Hey, guys. This is Prashant on for Matt. Just wanted to get your thoughts on what you're looking for in a search for a new CEO and what the duration of your search looks like? Sure. This is Michael.

Speaker 7

I'll take that one. We're looking for somebody who can continue to execute the strategic plan that we are currently on, improve performance and deliver long term profitable growth to our investors. In my experience, it generally takes 6 to 9 months to install, not to identify, but to install new CEO. So, the Board is entirely confident executive leadership team in place today to be able to put the plan together that they will be solely responsible

Operator

call. Our next question comes from Brandon Couillard, Jefferies.

Speaker 4

Thanks.

Speaker 8

This is Matt on for Brandon. I appreciate all the color around kind of volume stabilizing and then the number of initiatives underway to get to adjusted EBITDA and cash flow positive goals. Any more clarity you can provide in terms of timing on those now that you feel a bit more comfortable with both the cost actions and kind of stabilization of volumes. How should we think about when you could hit those targets. Thanks.

Speaker 2

Yes. I'll probably take like A step back here that last year in Q3, we could have taken the ground that we are going to be profitable in the first half of this year. And had we not been impacted by the billing article, we would have been profitable in the Q1 itself of this year. Then we were hit by the billing article. And if you recall, in the Q2, our testing services dropped by almost like $25,000,000 on an apple to apple basis that I called out in my last script.

Speaker 2

So you are looking at about $100,000,000 of GAAP to bridge there. And if you look at the adjusted EBITDA now, which is at About $11,000,000 for the current quarter. I think we are extremely proud and pleased with the progress that we have made on this particular goal returning to operating cash flow positive and adjusted EBITDA positive. On specific timing, we'll provide more color in our next call because we have multiple levers as I was kind of alluding to that we have probably the secular growth in the transplant volume market and in our testing And then, of course, how we are able to kind of get paid on some of the tests that we're not getting paid because there is a renewed focus on the coverage and everything. And of course, if you need to be more thoughtful on our operating structure and be more efficient and effective there, that is definitely on the table too.

Speaker 2

So there are multiple levers, and we have made good progress. We feel comfortable where we are. But in terms of the specific time lines, we'll wait for the next quarter call So that we have a little bit more information as to how things are stabilizing in Q4.

Speaker 7

Thanks.

Speaker 2

Q and A session.

Operator

Our next question comes from Mark Massaro, BTIG.

Speaker 9

Hey, guys. This is Vivien on for Mark. Thanks for taking the questions. So last quarter, you discussed clinic hesitation around ordering kidney surveillance testing. It appears like this dynamic might be behind us.

Speaker 9

So Can you just discuss what factors or headwinds sort of rolled off for you to drive these volumes here in Q3? And can you just remind us of any one time benefit or prior period collections that happened here in Q3. I know you spoke about the Medicare one timer, but Just any other one timers that we should be backing out? Thanks.

Speaker 3

Thanks. And I think we're really pleased with some of the progress that we've seen over the last 6 months. One of the effects of having 6 months to do this is a lot of the transplant centers now have had time update their systems, their procedures, the education. So where I think there was a lack of understanding of not just how to do things, but what to do, now clinicians have had enough time to absorb this and really institutionalize what they're thinking. So we're very much looking ahead and feel very good that These centers have a very good understanding of where their ordering is today and opportunities for the future.

Speaker 2

Sure. And let me take the second part of your question around the one time versus Q3. I called out a couple of those pieces. The first one is, after the Nordian adopted the billing article on the Heart Care, we are not recognizing that revenue post adoption. So that means going into Q4, the revenue that we recognized for those heart care tests prior to the Nordigen adoption, That will not be available going into Q4.

Speaker 2

And the second event is this one time claim settlement, and the number is about $4,000,000 for these two events. So that's the piece that I would call out on a one time. But other than that, there isn't any material that would need to be modeled from the numbers standpoint.

Speaker 9

Okay, perfect. Understood. And then I guess any updates to provide on when we might see a readout on the SHORE study? Can you just remind us what studies you've completed or underway that support the use of heart care and just how you're thinking about additional evidence generation on that front?

Speaker 6

Sure. We're actively performing analysis on the SHORE data, including data monitoring. This is an ongoing study, but we're looking at an interim readout and so working on putting that together with the goal of getting some publication 1 or 2 publications out in 2024. Just a reminder that AlloSure Heart and AlloMap Heart are both already covered without restriction on time. Question earlier about extending beyond 12 months is only for the combined heart care results.

Speaker 6

And in many cases, and when docs have a specific need and reason and desire for the best management of patients to order heart care, we'll work with them

Operator

Our next question comes from Alex Nowak, Craig Hallum Capital Group.

Speaker 10

Okay, great. Good afternoon, everyone. I want to go back around the CEO transition, maybe just expand on the departure of Rej. There's obviously a lot of moving parts here with the story. I think the company needs a leader out there to navigate through all those moving parts.

Speaker 10

So why the departure now? And just how important is it for the Board to name its successor fairly quickly here to guide the company during the challenging time?

Speaker 7

Yes. Alex, this is Michael. These are complex situations, and there's Elements of it that are personal in nature. So I'm not going to provide much more call. Other than to say it was mutual and the time was right.

Speaker 7

In part, the time was right because The company Board wanted to set themselves up for success in 2024 and we're into the planning process We're establishing that budget and operating plan now. So we wanted to make sure that extraordinarily capable group of senior leaders that Reg had cultivated. We're in a position to 100% responsible for constructing that plan because they're going to be 100% responsible for its execution. Now, we think that the executive team here is stable. We think they're extraordinarily capable and well qualified and experienced in this business.

Speaker 7

And By virtue of the structure that we've set up in office of the CEO with Abhishek, Alex and myself, we meet on a daily basis. There is no missed beats or decisions deferred. We're operating the business as a functional CEO. So, we're prepared operate on that fashion until the Board is comfortable that we've got a CEO identified and installed. So I wouldn't worry.

Speaker 7

In fact, I would be cautiously excited.

Speaker 10

Okay. Understood. Appreciate all the information there. And then again, on the revenue and the cash burn, we can kind of go into a little pieces there. But just to kind of level set us, if we take the revenue from this quarter, call it $270,000,000 on an annualized basis, is that going to be floor that we can then grow off of for 2024.

Speaker 10

And then same thing on the cash burn. If you just look at the cash change, about $60,000,000 of cash earnings release quarter. I assume that's got to be the low point here, and we're only going to get better on the go forward. Is that all correct?

Speaker 2

Yes, Alex, maybe a couple of changes there in those assumptions. The firstly on the cash, for example. So the overall reduction of about $14,500,000 that includes your investing activities we called out, the acquisitions there. If you look at our operating cash, that's about $10,000,000 So that probably would be the first piece that I will call out. And maybe the second piece that I would suggest on the cash to have a look because we were impacted by the billing articles in Q2.

Speaker 2

So look at the testing services impact of the billing article in the last two quarters and how much cash burn did we really have on the operating side in the last two quarters. That will give you some sense as to The cash burn would probably be in that range going forward Without company taking any actions. And then I called out that, okay, how do I reduce that cash burn? So The reduction in the cash burn again comes from the multiple levers that we are currently assessing. We brought down the impact of the billing article from, say, dollars 100,000,000 to Now we are just a little bit of losses of, say, dollars 11,000,000 in the current quarter.

Speaker 2

Now we need to bridge this remaining gap and revenue growth, the secular growth that could be out there in the market, the transplant volume market has been growing in the high single digits and how we continue to kind of Grow Our Testing Services volume alongside that. That would be our first lever. The second lever, of course, is going to be that how do we Continue to work with our commercial payers to improve the coverage and continue to expand our collections program to be able to get paid, how we have been paid in the last few quarters to reduce the cash burn. And of course, the 3rd lever that is definitely on the table looking into our cost structure, specifically all the legal expenses. If you were to pare down the SG and A, beat the G and A spend Back to the levels where we were in the second half of last year prior to the billing article impact, that will give you another sense as to how much higher the G and A spend has been because of the billing article.

Speaker 2

So we have the levers here to be able to reduce that cash burn. I'll basically make certain assumptions So that I'm in the ballpark, and I'll provide more color on most of these in our next earnings call. But the $15,000,000 is not the cash burn in my mind, Q3.

Speaker 10

Excellent. Very helpful. And then just a final question here. Looking through the 10 Q during the prepared remarks, and I know reimbursement is always a tricky item. And I'm just trying to understand the interpretation Some of the heart care language in the 10 Q.

Speaker 10

The 10 Q talks about letters being submitted to Noridian claiming why heart care should be covered. And so the question is really, is Nureedian actually reimbursing for heart care right now and the company is getting paid for that? Or is it more Karyak's interpretation that Neurian should be getting paid for heart care.

Speaker 2

So Andrew, this has been a year where Things have been so very complicated, and we want to be more transparent in our 10 Q, and we have provided the disclosures in a lot more detail, but let me unravel that for you. On the Heart Care, basically, after the noted in adoption, which was 816, Post that, we have not revenue recognized any test on the heart care, which is, say, not for surveillance and greater than 1 year. So that's completely out. So that's exactly what it says, nothing more than that, that we are in compliance with what Noted in adopted on Page 16. It's as simple as that.

Speaker 2

So the baseline has already been set based on everything which is out there from the billing market standpoint and what we've been asked to do on the coverage standpoint.

Speaker 10

Okay, super helpful. Thank you so much.

Speaker 11

Hey, guys. Thanks for taking the question. This is Jacob Kranzberg on for Mason. Appreciate the color around volumes finding like a more stabilized level this quarter actually increased slightly sequentially. But just wondering, given you found a stabilized level, given the multiple iterations of the billing article and the LCD, as well as the recent coverage room with HeartCare, could you maybe give us some color whether qualitatively or quantitatively on growth across organ type, specifically heart and kidney?

Speaker 3

Yes, sure. I can this is Alex. I can give a little bit of context on that, Jake. I think for the growth in volumes and testing service volumes This past quarter, we saw growth from all three organs. And so we felt very good that This baseline now has really created the stabilization that we can grow from.

Speaker 11

All right. Got it. Thank you.

Operator

Our final question comes from Dipesh Patel, H. C. Wainwright.

Speaker 4

Thank you, guys. This is Dipesh on for Yi. Could you perhaps clarify if you expect to see any further updates from MolDX regarding the coverage of molecular

Speaker 6

I think where we're at right now is that after a couple of iterations of a billing article and the perspective of the community that those were changes to coverage. And they then proposed a draft LCD that is now open for comment. And So it was the open comment period for 2 of the MAX has already passed, 2 more are in process, and then we would expect them to move forward. And based on draft and the comments they've received produce a final coverage policy from that. And so that's I think what we would expect to happen.

Speaker 6

We've been surprised in the past, different from our expectations, but that's the normal process. And the timing around that is something we're often asked and that's sometime before August of next year. There's a rule that has to be finished before their original draft was released.

Speaker 4

Got it. That's very helpful. And then lastly, how might you expect the testing volume to grow sequentially going forward? Earnings

Speaker 3

call. I think we're certainly in this quarter, certainly there's nothing that would mega change from the guidance and the thinking that we've seen so far. So I think now that we've seen a baseline being set, I think there's growth ahead of us and we'll have to see how the quarter plays out, certainly in terms of weather and winter storms and such. But we're feeling like we've certainly hit some stabilization and a baseline that we can grow from.

Speaker 4

Got it. That's very helpful. Thank you very much for the detail.

Operator

We have no further questions in the queue at this time. I would now like to turn the call back over to today's speakers.

Speaker 3

Great. Thank you. We wish you the very best this afternoon. Thank you all.

Operator

This does conclude today's program. Thank you for your participation. You may disconnect at any time.

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Key Takeaways

  • CareDx reported Q3 revenue of $67.2 million, up 7% sequentially, with testing services up 5%, Digital Transplant Solutions and lab products each rising 33%, and improved adjusted EBITDA loss of $10.9 M versus an $18.1 M loss in Q2.
  • The company raised its 2023 revenue guidance to $274–278 million from $240–260 million, maintained $268.2 million in cash and marketable securities, and will pursue opportunistic stock repurchases.
  • Management secured Medicare coverage for AlloSure Lung and HeartCare tests, expanded commercial payer coverage for AlloMap Heart and AlloSure Kidney, and is advancing its K OAR registry with data slated for publication in 2024 to support further reimbursement.
  • After implementing the billing article and achieving over 90% TRF adoption, testing volumes have stabilized at a new baseline, and cost-reduction measures position CareDx to reach operating cash flow and adjusted EBITDA positivity through organic growth, improved collections, and expense efficiencies.
  • Following its CEO transition, CareDx formed an Office of the CEO led by Alex Johnson, Michael Goldberg, and Abhishek Jain to execute strategic priorities and lead the business pending a permanent CEO appointment.
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Earnings Conference Call
CareDx Q3 2023
00:00 / 00:00