Castle Biosciences Q2 2023 Earnings Call Transcript

Quartr
Provided by Quartr
August 2, 2023

There are 10 speakers on the call.

Operator

Afternoon, and welcome to Parcel Biosciences Second Quarter 2023 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 Tukumar, Vice President of Investor Relations and Corporate Affairs.

Speaker 1

Thank you, operator. Good afternoon, everyone. Welcome to Castle Biosciences' Q2 2023 Financial Results Conference Call. Joining me today is Castle's Founder, President and Chief Executive Officer, Derek Massel and Chief Financial Officer, Frank Stokes. Information recorded on this call speaks only as of today, August 2, 2023.

Speaker 1

Therefore, if you are listening to the replay or reading the transcript of 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 3 weeks. 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, TAM and similar items referenced in our earnings release issued today and statements containing projections regarding future events or our future financial or operational performance, including our anticipated 2023 total revenue and our 2023 to 2025 outlook, Our expectations regarding reimbursement for our products and the impact of our investments in growth initiatives and expanded commercial teams. 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 A number of factors and risks could cause actual results to differ materially from those contained in these forward looking statements.

Speaker 1

These factors and other risks and uncertainties are described in detail in the company's annual report on Form 10 ks for the year ended December 31, 2023, under the heading Risk Factors 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. 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

Speaker 2

assessing our revenue and

Speaker 1

operating performance. Reconciliations of 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.

Speaker 3

Thank you, Camilla, and good afternoon, everyone. As you saw from our announcement a few minutes ago, Castle Biosciences delivered yet another strong quarter, growing revenue by 44% and total test report volume by 52% Compared to the Q2 of 2022, based on strong first half execution and confidence in our business, Coupled with our expectations for the second half of twenty twenty three, we are raising our full year revenue guidance and currently expect to deliver at least $180,000,000 An increase of at least 31% over 2022. Before I get into the quarterly highlights, Let me address some of the excitement around our CisionDx SCC test. First, let's talk about coverage. We were reviewed by the Medicare contractor Novitas in the Q1 of 2022 and received coverage since April of 2022.

Speaker 3

Separately, Novitas published on July 27, 2023, a proposed LCD entitled, genetic testing for oncology. This proposed LCD attempts to encompass genetic tests that are used in oncology and includes language that proposes non coverage for DECISION DX CC, among a number of other laboratory tests. The common period closes on September 9, 2023. Separately, on June 8, 2023, both PalmettoMoldDx and MRIdian Post to proposed LCDs recommending non coverage for DecisionDx SCC. The common period for these Medicare contractors For the proposed LCDs ended on July 22, 2023.

Speaker 3

2nd, we were extremely pleased to see that the division of new technology of CMS completed its review of our application for advanced diagnostic laboratory test status, also known as ADLT status. As we expected, we were granted ADLT status effective June 30, 2023. There are 4 criteria that need to be met to achieve ADLT status. One of the criteria means that we have proven that our decision to ex SCC test yields a test result that predicts the probability Of the specific SCC patient developing metastasis, that is our test works. Another criteria means that we've also proven that our DECISION DX SCC test provides new clinical diagnostic information That cannot be obtained from any other test or combination of tests.

Speaker 3

That is, our test is independent of all other clinical pathologic risk factors Or any other test or combination of tests that predict metastasis. We view this incredible achievement as a mark of our mission to develop innovative tests That improved patient care. And looking at tests that have received ADLT status, Castle has 5 tests That have been designated as ADLTs. Stated differently, 1 third of all ADLTs are offered by us, Castle Biosciences, clearly demonstrating that we do develop innovative tests that improve patient care beyond what is clinically available. Now I mentioned ADLT status because while it is not used for the purposes of coverage through a local Medicare contractor, Meeting these two criteria that I mentioned lays out some of the positions that we have and will be communicating as it relates to the analyses contained in the 2 aforementioned proposed LCDs.

Speaker 3

Separately, as part of our comments to MolDX And our upcoming comments on Novitas, we are very pleased to present results from our recently completed large multicenter cohort study That included analyses into the value of our tests to identify patients who are eligible for adjuvant radiation therapy Under current NCCN guidelines. Specifically, our question was, what value can we provide in ruling in or ruling out Adjuvant radiation therapy to this high risk population. I cannot emphasize enough the clinical importance of this question. There are 3 significant areas to think about. The first is from the perspective of the known accuracy limitations if one relies upon clinical The second is, does our test provide an indication of not just who may have a high enough risk of metastasis to warrant Consideration of adjuvant therapy, but can we find patients whose outcomes could be improved with adjuvant radiation therapy?

Speaker 3

And finally, the healthcare cost impact of adjuvant radiation therapy is enormous. In fact, our data shows that patients who receive adjuvant radiation therapy with our highest risk Class IIb test result have a roughly 50% reduction In their 5 year metastasis rate compared to matched patients who did not receive asthma radiation therapy, But also had a Class 2b test result. In creating a weighted average cost using data from both IQVIA As well as published costs of treatment data, it looks like adjuvant radiation therapy runs around $60,000 per patient, Not to mention the potential long term complications if the patient was over treated in the first place. This cost It is important when you recognize that the majority of tests results are Class I or Class IIa and these patients did not see A treatment benefit from adjuvant radiation therapy. We expect the study to be published in the near future and look forward to sharing the results in greater detail With our clinician customers, our Medicare contractors, and of course, you.

Speaker 3

Well, there are clearly some current unknowns regarding future coverage. We identified a significant unmet clinical need. We were successful in developing and validating not only analytic validity, clinical validity and clinical utility for DECISION DX SCC test, But can also now see outcome differences in patients who receive adjuvant radiation therapy. Given that we believe there are roughly 200,000 patients diagnosed each year with high risk SCC And who are eligible for asthma radiation therapy per current NCCN guidelines, the potential impact on improved outcomes And reduced healthcare cost is tremendous. Now let me take you through the remaining execution and strategy highlights in the quarter And then Frank will provide highlights for the period, including with your questions.

Speaker 3

Let's start with our core dermatology business. For DecisionDx Melanoma and DecisionDx SCC combined, test volume was 11,278, Growth of 33% year over year and 13% from the prior quarter. We continue to see new clinicians order our tests for the very first time With approximately 567 new ordering clinicians and more than 2,060 total ordering clinicians for all three dermatologic tests during the quarter. For Distition DX Melanoma, we delivered 8,597 test reports in the 2nd quarter, An increase of 21% over the Q2 of 2022. We continue to believe the most significant drivers of our strong growth Are the clinical impact our tests can contribute to the management of melanoma and strong evidence supporting our tests, coupled with our prior commercial expansion investments intended to educate our customer base.

Speaker 3

For DECISION DX SCC, we delivered 2,681 Test reports in the Q2, an increase of 99% over the Q2 of 2022. As with our growth in CisionDx melanoma, We believe that our strong growth and volume for DECISION DX SCC is due in large part to the combination of the high unmet clinical need For SCC, coupled with the value our test provides clinicians and their patients. As you recall, a pillar of our growth strategy is a continued development of evidence to support clinical use of our tests, including impacting outcomes. 2 key studies were published in the Q2. I'm going to focus my remarks on just one of them.

Speaker 3

That is the study data related to our collaboration With the National Cancer Institute's SEER program registries published in JCO Precision Oncology. We are very pleased with this large unselected patient population study and that the real world data showed testing with DECISION DX Melanoma Provided significant prognostic information in regard to survival outcomes. Specifically, patients who were clinically tested with CisionDx melanoma Had an associated lower melanoma specific and overall mortality relative to those patients who did not have the benefit of the CisionDx melanoma testing, that is they were in the untested group and that is they live longer. In fact, CisionDx melanoma testing was associated with a 29% lower melanoma specific mortality And a 17% lower overall mortality relative to patients who did not receive DecisionDx melanoma testing. As you would expect, we will be sharing the full publication with our clinician customers as well as providing them to the NCC and Melanone panel.

Speaker 3

Now let's turn to our gastroenterology franchise. During the quarter, we delivered 1447 tissue cipher test reports Compared to 352 in the Q2 of 2022, we also announced during the quarter new data demonstrating the value of our tissue Cypher test in providing objective risk stratification information that can inform improved management decisions for patients with Barrett's Esophagus. Additionally, tissue cipher was selected as the winner of the Best Use of Artificial Intelligence in Healthcare Award And the 7th Annual Medtech Breakthrough Awards Program. As you will recall, we acquired tissue cipher from Sarnostics in December 2021, Giving us a leading risk stratification test designed to predict future development of esophageal cancer in patients with Barrett's Esophagus. Barrett's Esophagus is the only known risk factor for the development of esophageal cancer, one of the fastest growing cancers in the U.

Speaker 3

S. With a 5 year survival rate of less than 20%. Since the acquisition, we have made considerable progress with our integration efforts and process improvements. We moved into our new laboratory in Pittsburgh during the Q2 of 2023 and have seen strong adoption from the gastroenterology community, So much so that our orders have outpaced our forecasts and current operational capacity. As such, we elected in July temporarily paused accepting additional clinic orders for the test in order to bring our process improvements and additional instrumentation and personnel online.

Speaker 3

We are currently working through these efforts and believe that we will be able to begin accepting new orders prior to the end of the Q3. Despite this temporary pause in ordering, we expect report volume for the second half of twenty twenty three to increase compared to the first half. Turning to our mental health franchise, we delivered 2,681 ID Genex test reports in the Q2 of 2023, Up from 827 a year ago and up 25% from the prior quarter. As a reminder, during the Q2 of 2022, Castle only delivered test reports from April 26, the date we acquired the test through June 30. We continue to be pleased with the momentum we are seeing thus far.

Speaker 3

In fact, we recently announced real world study data demonstrating that the use of iDgenics to guide medication management And significantly improved medication response and remission rates in patients diagnosed with moderate to severe depression compared to current standard of care treatment. This data was consistent with our previously published randomized controlled trial. Additionally, ECRE, an independent nonprofit organization improving the safety, quality and cost effectiveness of care across all healthcare settings recently concluded its Genentech test assessment of iGenentech with a 4 out of 5 rating. As commercial payers utilize equity valuations to assist them in making coverage decisions, We believe this is another important metric to encourage payers to recognize benefits of our iGenx test. We believe our iDOGENIX testing solution has the potential to accelerate our impact on patient care in an area of high unmet clinical need by offering incremental value to patients and clinicians over the standard trial and error approach.

Speaker 3

With this comprehensive genetic test analysis help clinicians match patients with the right medication, including identification of drug drug interactions and drug gene interactions With lifestyle factors to improve medication response remission rates, we feel IGX offers a truly compelling and personalized benefit for meta health treatment. I will now turn the call over to Frank, who will provide details relating to our financial results and outlook.

Speaker 4

Thank you, Derek, and good afternoon, everyone. 2nd quarter revenue was $50,100,000 an increase of 44% over the Q2 of 2022. Overall, the increase primarily reflects strong growth in revenues from DecisionDx Melanoma and DecisionDx SCC. Adjusted revenue, which excludes the effects of revenue adjustments related to tests delivered in prior periods, was $50,200,000 An increase of 47% over the Q2 of 2022. Our gross margin during the Q2 was 73.5% compared to 71.9% in the Q2 of 2022.

Speaker 4

Our adjusted gross margin, which excludes the effects of intangible asset Amortization related to our acquisitions and revenue associated with test reports delivered in prior periods was 78% for the quarter compared to 77.6 percent for the same period in 2022. Turning to expenses, our total operating expenses, including cost of sales for the quarter were $71,300,000 compared to $38,800,000 for the Q2 of 2022. Affecting comparability with the prior year was a $20,400,000 benefit or $0.78 per share during the 3 months ended June 30, 2022 For the change in fair value of contingent consideration related to the Somnostics acquisition, there was no similar item in the current year. After considering that item, the largest driver of the increase in total operating expenses was SG and A expenses, which increased by $7,200,000 compared to 2022, Attributable in large part to higher personnel costs, including salaries and stock based compensation, primarily within the sales and marketing functions. Cost of sales expense increased by $3,400,000 primarily due to higher laboratory related costs associated with the higher test report volume.

Speaker 4

R and D expense increased by $1,400,000 in the Q2 compared to the Q2 of 2022, which was attributable to higher personnel costs driven primarily by grow the business in the long term such that our operating expenses would decrease as a percentage of revenue and over time increase at a lower rate than revenue. Total non cash stock based compensation expense, which is allocated among cost of sales, R and D expense and SG and A expense, totaled $12,800,000 for the Q2 compared to $8,800,000 for the Q2 of 2022. The increase was primarily attributable to our annual equity awards In December of 2022, interest income increased by $2,000,000 for the Q2 of 2023 compared to the Q2 of 2022, Primarily as a result of higher interest rates and our purchases of marketable securities beginning in the Q3 of 2022. Our net loss for the Q2 of 2023 was $18,800,000 compared to a net loss of $1,600,000 for the Q2 of 2022. Adjusted EBITDA for the 2nd quarter was negative $5,300,000 compared to negative $11,200,000 for the comparable period in 2022, An improvement of $6,000,000 Net cash used in operating activities was $3,800,000 for the Q2 of 2023 $29,200,000 for the 6 months ended June 30, 2023.

Speaker 4

As you recall, cash used during the Q1 of 2023 Reflects the payout of employee annual cash bonuses as well as certain healthcare benefit payments totaling $17,700,000 that are not expected to recur during the remainder of 2023. Net cash provided by investing activities was $1,200,000 for the partially offset by purchases of marketable investment securities of $86,400,000 and purchases of property and equipment of $7,400,000 Our balance sheet remains strong. We ended the quarter with cash, cash equivalents and marketable securities of $225,500,000 and no debt. Together with anticipated cash generated from sales of our tests, we expect that our cash operating runway will extend through 2025. As Derek mentioned, we are raising 2023 revenue guidance to at least $180,000,000 Additionally, we are reaffirming that we expect to achieve to $330,000,000 in 2025.

Speaker 4

We expect to achieve this result by driving test report volume growth across our entire portfolio And further market penetration, reimbursement progress and to a lesser extent ASP growth. Supporting our longer age targets for ASP improvements, We note that we had multiple successes for capsules test with commercial health plans and expect to continue making progress over time. The combination of growing the top line and driving margin leverage should contribute to our reaching our 2025 target of net operating cash flow positivity. Further, we believe we have the ability to pull various operating levers, primarily on discretionary spend in sales and marketing and R and D Without materially impacting the long term growth prospects of the company, we continue to believe that our current growth initiatives and associated expenses are important to sustain top line growth And just as importantly, expand our competitive lead, create stickiness across all our current tests and renew our pipeline for long term success and value creation. In summary, our fundamentals remain strong.

Speaker 4

There is plenty of runway for growth across our entire test portfolio, and we believe our ability to I'll now turn the call back over to Derek.

Speaker 3

Thank you, Frank. In summary, our 2nd quarter results were excellent. We delivered strong year over year growth in revenue and total test report volume, Driven by continued execution on our long term growth plans. I would like to conclude today by thanking our Castle team. We wouldn't be here without their dedication and commitment.

Speaker 3

Thank you for your continued interest in Castle. Now we will be happy to take your questions. Operator?

Operator

Please standby whilst we compile the Q and A We have our first question from Karl Nixon of Canaccord. You may proceed.

Speaker 5

Hey, guys. Thanks for taking the questions. Congrats on the great quarter. So Derek, on the Novitas LCV, It's been withdrawn and reposted already. Maybe just provide your view on the additional kind of steps you're aiming to take here going forward, what you can do, I guess.

Speaker 5

And then separately, just, you know, Noridian is another option, I guess, possibly. Maybe talk about If you could have any luck getting reimbursement through Noridian for SCC. And then also maybe just going off that, Why is the process potentially different for Neridian Novitas? Maybe that could kind of inject some confidence or optimism in this whole situation? Thanks.

Speaker 3

Yes. Hi, Kyle. Good to hear from you. I guess maybe top line here is that we did provide some, I think rather extensive detail in our filing a few minutes ago as well as in the remarks just 5 minutes ago or so. So I don't have anything specific around that to talk through with Novitas and stuff.

Speaker 3

From a Noridian question perspective, keep in mind that Noridian is under a Joint operating agreement with Palmetto's MOLDE X program, so that would go through the MOLDE X program from a coverage perspective.

Speaker 5

Okay. Is there well, I mean, is there any chance that you could kind of They have multiple labs across the country.

Speaker 3

I just wondering if

Speaker 5

you can kind of like be more or less covered for SEC through that lab Rather than the one in FitzGruggs?

Speaker 3

Yes. I would maybe change the answer or answer a slightly different question, if that's Kyle, I think based upon the data that's been developed since we developed or validated the test in the first place, Data we presented over the course of the springtime, this benefit that we're now seeing in our test to help Identify people who could really have a significant clinical benefit from adjuvant radiation therapy should all lead 1, I would hope, If one does an evidence based review about the value of our test and really helping to improve not only treatment Selection about outcomes in the Medicare beneficiary population. I would hope that as that data is being reviewed by whatever Medicare contractor is reviewing it, so that would have an impact on saying, does covering our tests benefit Medicare patients? And if it does, you should cover it. And that's our expectation on an outcome at the end of the day.

Speaker 6

Okay. That was great.

Speaker 5

And then if I could squeeze another one in on melanoma for guidelines. I believe there was an NCCN panel In like mid July, can you just confirm, Derek, if you were able to submit each of the publications in time for that meeting? Could those folks, kind of see that data basically? And what are the next steps and the timing going forward? Can I just ask just like an update from them?

Speaker 3

So yes, we did submit Both the, DLLA managed that was published in April, by those 3 academic centers, Cleveland Clinic, Northwestern and OHSU. And we did also submit the NCI SEER publication. Of course, both of those show a nice association If you use our test, people actually live longer compared to not using our test clinically. We would hope that wasn't part of an active discussion With the NCCN Group. On a timing perspective, they've been pretty consistent the last 4 or 5 years even through COVID.

Speaker 3

I wouldn't expect us to see anything posted publicly until kind of the December, January time period. They're usually About a 5 or 6 month cadence after they have their midyear meeting is when they go ahead and post an update.

Speaker 5

Okay, perfect. Thanks so much, Daryl. Appreciate it.

Operator

We now have Sung Ji Nam of Scotiabank.

Speaker 2

Hi, thanks for taking the questions. Just another question on the NCI SEER data. Congratulations on the public safety there. Was curious if there are additional studies that might be underway, what additional information you might be gathering there? Or do you think you have to fix the data to kind of sway the decision makers for SCCN and other guidelines.

Speaker 3

You mean additional studies with the NCI and SEER program or general?

Speaker 2

Specifically with NCI SEER, but if there are others that you said, you said that could be also compelling.

Speaker 3

Okay. Yes. So, our collaboration is ongoing. I think the NCI group of the SEER program kind of update the tumor registry files maybe once a year they Re merge up the next year's data. And so one of the expectations that we do have from this ongoing collaboration is to see Multiple publications and as the patient numbers and the matching grows and we have longer term outcomes, we'll be able to look at things like, I mean, for example, Subgroups, even though the first paper was able to go and look at groups of patients by staging up and down, How does this test perform in terms of the Medicare patient population, for example?

Speaker 3

Do you end up seeing a significant improvement And overall survival or melanoma specific survival in the Medicare age population who gets to use our test clinically versus those untested. So there Our analyses or manuscripts like that, I think we will continue to see rolling out on an ongoing basis, hopefully the next couple of years to be honest. We do have other studies that are ongoing and some that we're planning still. 1 of our core tenants, as you know, is that I don't think one has ever done proving time and time again the value of our test for patient care. One of the studies that was recently published here, I can't remember, was this Q1 last fall was our DECIDE study, an early look at that data set, Looks at a prospective patients who are using our test initially to decide On going forward with a similar to biopsy procedure or not and then what happens on outcomes with those exact same patients.

Speaker 3

So we published the An early analysis, I would call that probably analysis 1, maybe 6 months ago or so, and you can bet there'd be further data Coming out now, I think as we see those outcomes improvements, all that data NCI is still in paper, Decide and other protocols we haven't discussed publicly should hopefully keep raising the bar that our tests make a difference in inpatient outcomes.

Speaker 2

Great. Thank you. And then just a quick follow-up on the inflammatory skin disease pipeline. Just kind of curious what the latest update is and what the next milestones might be?

Operator

Thank you.

Speaker 4

Yes.

Speaker 3

We hadn't Plan on discussing elements of that here. I think back in the end of the Q1, we discussed that we have We are very, very pleased with our enrollment so far. We have 57 committed sites who are investigator sites, I think all within the U. S. That could be About 1 or 2 overseas and enrolled just over 7 50 patients to date.

Speaker 3

And we are chewing through The initial discovery and development data now and expect to update The Street here in the second half of this year. It's not going to be obviously today, But we are working through the analysis of that data and hopefully we can go and have a public discussion about that shortly. So prior to the end of 2023,

Speaker 5

I guess is the

Operator

yes. We now have Thomas Flatman of Lake Street Capital Markets. Please go ahead when you're ready, Thomas.

Speaker 6

Yes, hey, thanks. Good afternoon. Congrats on the quarter. Frank, I was wondering if you could maybe walk through some of Thinking on the guide, at $180,000,000 that would be a second half slightly lower than the first half. So I'm curious if you could comment on some of the conservatism there Or apparent concern?

Speaker 4

Yes. No change there, Thomas. We as we said back in June, we're not assuming SCC revenue in our guidance and forward looks here. So That continues to be the case.

Speaker 6

Got it. And then I was wondering if you could maybe share specific to DX Melanoma, Is this a depth or breadth play or both? I know you mentioned some new prescriber counts, but if we could narrow that down at the ex Melanoma, I'm curious if this Coming more from new docs or increasing the depth within docs that are already on board?

Speaker 4

I think we're still seeing both. We are continuing to penetrate with new physicians, which is terrific. And we're continuing to have physicians order our tests for more and more of their patients. And the other thing that we always Remind is that, melanomas are not a community dermatologist isn't seeing a melanoma every day. So Once you convert that doctor, there's sort of a lead time as their volume builds just as their patient flows come through.

Speaker 4

So We're seeing, I've called it same store growth and new store growth in the past, and we're still seeing both on melanoma. And we think, as I said in my conclusion, we still think we Got it. Just a long runway there before we're through penetrating melanoma, just a long way to go on it.

Speaker 6

And then just related to that, can you give us a sense of how many of your docs are ordering both DX Melanoma and SCC?

Speaker 4

I don't think we gave a specific number, but we have said that we do and we definitely continue to see We continue to see a big overlap there, which was our thesis. That was a big part of our strategy was that we would be able to leverage Sales effort across both products very effectively. And when I look at the growth or I look at the volumes in melanoma for the quarter, That just confirms for us that we can grow our squamous cell product without losing momentum in melanoma, Without cannibalizing, if you will, that growth as well.

Speaker 6

Excellent. Appreciate you guys taking the questions. Sorry, Derek.

Speaker 5

Yes,

Speaker 3

we actually put it In the filing, 70% of the clinicians ordering And that's the current ratio that we're looking at there. We would never expect that to get maybe above 80% because there are Many, many Mohs surgeons, who is a subspecialty of dermatologists that do Mohs surgery by definition, Who don't really do work or don't do surgery on people with invasive melanoma. So 70% as of today, I think reflects a very, very high Cross fertilization recognition of value across both cancer types.

Speaker 6

Excellent. Thanks guys.

Operator

We now have Puneet Souda of Needham Partners.

Speaker 7

Hey, Derek, Frank. Thanks for taking the questions. So First of all, congrats on the quarter and really on the ADLT payment, that's remarkable as one of the highest in the industries. But For a minute, leaving the coverage decisions and complexities aside, just talking about the ADLD payment, think I heard Frank saying you're not expecting SDC payments in the second half. Wondering if you can Talk about 2 things.

Speaker 7

Number 1, have you did you receive any payment since July 1, when this was effective? And then, how should we think about 2024 for the payments here for SDC? And I know it's a bit complex issue given all the coverage and scenarios there, but whatever you can provide there would be helpful.

Speaker 4

Yes, just a clarification there. What I said is that our guide did not include any SCC revenue. So Just to clarify that. Okay.

Speaker 7

Yes. Thanks. Yes. Just one minute.

Speaker 4

Yes. We would as Derek said, the evidence is pretty overwhelming. And when you see the ability to correctly guide some of this treatment like asthma radiation therapy, It's a compelling benefit to patients. So we really believe the evidence is clear and that eventually This test will receive appropriate coverage, not necessarily for the benefit of Castle, but the benefit of patients. This is something that the patient group needs.

Speaker 7

Got it. And if I may, When you talk about further data generation sort of, can you talk a little bit about the level of data that is needed for this test In order to really highlight the clinical utility so that, a sophisticated MAC such as MolDX that has done Some rigorous reviews of clinical evidence can potentially cover this test down the road. Again, timing It's tough to call out on that, but wondering if that is part of the strategy longer term to generate that data and submit MolDX for coverage.

Speaker 5

So

Speaker 3

Regarding the proposed MolDX LCD on SCC, When I read through that, it looks to me that there are core Issues in terms of the knowledge of how squamous cell carcinoma is treated today And that led to sort of not quite interpreting our published data so far, as well as I think missing some core and Key references. So for example, the premise was of the MolDX team, I think was that We don't think adjuvant radiation therapy is actually useful in people with SCC, but Adjuvant radiation therapy is recommended for every high risk patient by every relevant guideline committee from AAD to NCCN to American College of Radiology to ASTRO. So it's a funny thing that the reviewer or reviewers at MolDX felt they Could make a conclusion that adjuvant radiation therapy is not useful and used In the Medicare population for SCC. So if you start with that argument, then you say, well, what's the use of your test? I mean that part, the rest of it kind of flows together.

Speaker 3

So Our perspective is that we would hope that with our submissions to MolDX, we would hope that with the addition Several key publications, including our second validation including the adjuvant radiation therapy, including analysis 2 of our prospective clinical utility study That there would be enough evidence during the course of the next year to have the MolDX group realize that maybe the evidence Analysis could be refreshed and updated and lead to continued coverage. We believe we have the evidence needed to meet Medicare's requirements.

Operator

Thank you. We now have Mason Caraco from Stephens.

Speaker 6

Hey, guys. Congrats on the quarter. A quick one on the Novitas LCD for me. Given the irregularities we've seen in that process, do you expect the draft to follow the standard 12 month timeline from draft Finalization, is there a chance it could be finalized sooner?

Speaker 3

I don't know if we have any insight there, Mason, To add, it would just be speculation.

Speaker 6

Okay. And then on the tissue cipher operational constraint, how should we think about The capacity that will come online whenever you guys begin accepting clinical orders again and how that will trend or scale as we progress throughout the remainder of the year?

Speaker 4

Yes, we believe that we'll get that Derek said, by the end of the quarter, we think we'll have kind of be back online, and I think we'll continue to see the nice growth we've seen there. We had an interesting timing here with this quarter. As you know, we opened our Pittsburgh lab and had a move there. And So we just want to make sure that we are offering appropriate turnaround times for our customers and their patients. So I think we'll see we We certainly expect to see the return to growth once we take those orders, start opening for orders again.

Speaker 6

Got it. Okay. Thanks, guys.

Operator

Thank you. We now have Sasha Inchanche from Baird.

Speaker 8

Hey, guys. Congrats on the

Speaker 9

quarter and thanks for the questions. I guess, first, just following up on that pause in order to tissue Cypher. Can you just talk about what You made to expand capacity there. How much of a revenue headwind is that? And is the disruption causing any frustration in your ordering base?

Speaker 3

I think as we've said in our remarks there, I think put into the Filing 2, the primary item here was that the adoption The test for patient care outran our forecast on the upside. And so that was The decision was that we should treat our customers honestly and directly and just say, hey, until we can have these Post lab move efficiencies be implemented and scale up properly, we should just tell you. Let's kind of put it put on pause for a few weeks here And we'll come back to you. In terms of the feedback from the field, I'm unaware of a single unhappy customer. In fact, most were I can't believe you guys actually did this upfront.

Speaker 3

We've never seen companies in the GI space that actually treat us honestly. So I don't think that'll be any kind of an issue for us sort of say, hey, we're ready to go ahead and begin accepting orders and we're at a turnaround time that we think maximizes patient care. What can we do? How do you want us to help you get restarted again? That I think will be a non issue, Catherine.

Speaker 9

Okay. Got it. Then maybe just going back to Puneet's question. I understand that your guidance doesn't assume SEC reimbursement going forward. But Can you just confirm that you're still getting paid by Novitas as of today?

Speaker 9

And is it your understanding that you'll most likely keep getting paid until a potential final LCD becomes effective?

Speaker 4

Yes. We do have reimbursement for the test now, Catherine. And Beyond that, we would be guessing if we made any other predictions.

Speaker 8

All right, great. Thank you.

Operator

Thank you. We now have Mark Massaro with BTIG. Please go ahead when you're ready.

Speaker 8

Hey, guys. This is Vivian on for Mark. Thanks for taking the question. So just circling back to 3rd party guideline inclusion, could you just remind us where you stand and any dialogue you've had with The NIH and Memorial Sloan Kettering in addition to NCCN, and you're thinking about likelihood of SEC Inclusion and guidelines, maybe perhaps ahead of BDM? Thanks.

Speaker 3

You're asking a question relative to the Novitas LCD?

Speaker 5

The Yes. Okay.

Speaker 3

So the NIH database And the Sloan Kettering database referenced in that proposed LCD only review Individual gene mutations. So individual gene analyses, they're more like aggregating or curating databases. They don't review RNA based tests and certainly not multiple gene tests. So that's those two groups would never review any of the sort of MOLDIX reviewed kind of test, right, gene expression profile test. On NCCN, I believe they met in Late April or early May, we did submit a package as you would expect us to go ahead and do.

Speaker 3

That's a relatively new committee. I mean, it was established maybe in 2016, 2017, 2017, 2018 maybe 3 or 4 or 5 years ago. If we go back and track the time between their sort of spring meeting and the time they update guidelines, that varies quite a bit. Last year when they met in, I think it was early May, they posted updates I think earlier in the Q1 of this year. So that was kind of an 8 or 9 month cycle time Compared to the melanoma group, which is always about 5 or 6 months or so.

Speaker 3

So I don't know if we can predict or provide Any factual kind of guidance about saying would we expect something in September versus December that would be based on any kind of Analysis, to be honest.

Speaker 8

Okay, perfect. Thanks so much for that. And I guess, As far as the assumptions baked into the rate guidance, you talked about being able to use the guide in the absence of SEC reimbursement. So I was just curious as far as your long term guidance, what are the puts and takes there and

Operator

what's contemplated for SEC long term? Thanks.

Speaker 4

Yes, thank you. We did reiterate our 2025 long term targets and indicated we expect to be able to achieve those Without SCC as part of our business. But having said that, again, we do think that the evidence is very strong. And so We would certainly hope to have a better outcome than that.

Speaker 8

Okay. Awesome. Thanks for taking the questions.

Operator

I can confirm we have no further questions on the line. So I'd like to hand it back to Derek for any final remarks.

Speaker 3

Thank you, operator. This concludes our Q2 2023 earnings call. We thank you again for joining us today and for your continued

Operator

Thank you all for joining today's call. You may now disconnect your lines and please enjoy the rest of your

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Earnings Conference Call
Castle Biosciences Q2 2023
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