CareDx Q2 2023 Earnings Call Transcript

Quartr
Provided by Quartr
August 8, 2023

There are 12 speakers on the call.

Operator

And welcome to the CareDx Incorporated Second Quarter 2023 Earnings Conference Call. During the As a reminder, this conference is being recorded Tuesday, August 8, 2023. It is now my pleasure to turn the conference

Speaker 1

quarter, CareDx released financial results for the quarter ending June 30, 2023. The release is currently available on company's website at www.caredx.com, Rhett Cito, Chief Financial Officer Abhishek Jain, Q1, Chief Financial Officer and Robert Woodward, Senior Vice President of R and D will host this afternoon's call. Call, 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, call, which are made pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. Call, any statements contained in this call that are not statements of historical fact should be deemed to be forward looking statements. All forward looking the statements including without limitation, our examination of historical operating trends, expectations regarding coverage decisions, call, 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.

Speaker 1

Call, you should not place undue reliance on these statements. For a list and description of the risks and uncertainties associated with our business, call, please see our filings with the Securities and Exchange Commission. The information provided in this conference call conference call, it speaks only to the live broadcast today, August 8, 2023. CareDx disclaims any intention or obligation, except as required by law, call, we will now

Speaker 2

begin to update or revise

Speaker 1

any information, financial projections or forward looking statements, whether because of new information, future events or otherwise. Call, this call will also include a discussion of certain financial measures that are not calculated in accordance with the generally accepted accounting principles. Call, reconciliations to the most directly comparable GAAP financial measure may be found in today's earnings release filed with the SEC. Call, I will now turn the call over to Rich.

Speaker 3

Thanks, Greg. Good afternoon, everyone, and thank you for joining us for CareDx's the Q2 2023 earnings conference call, our Q2 was focused on the following: 1, continued execution quarter, maintaining our strong financial discipline and structure. Overall, it was a successful operational quarter. Call, firstly, we delivered against our 2023 plan across the 3 Cs with key highlights since our last reporting being On coverage, we confirmed MolDX coverage with HeartCare. Next, on Catalyst, we received Allshore Lung MolDX approval.

Speaker 3

Next, On collections, we collected 110% of Q2 testing services revenues. Secondly, in response to the billing article, we achieved our adoption target of 80% plus for completed test requisition forms 2 quarters earlier than planned. Quarter, this was achieved in the month of June versus the end of Q4 target. Thirdly, we kept a strong cash position quarter $283,000,000 and debt free, which has enabled us to continue strategic acquisitions and restarting the share buyback. Quarter, given the above, we're able to issue updated 2023 revenue guidance.

Speaker 3

Now looking into the 3 Cs in more detail, we made excellent progress. Quarter, we're starting to build momentum and replicate what we've done with the Othersea collections. With Medicare coverage approved for both AlloSure Lung and Heart Care. We're especially pleased to see Heart Care MALDIX coverage confirmed. Call, as noted in the press release last week, we received specific coverage for heart care use in the heart transplant surveillance setting.

Speaker 3

As a reminder, HeartCare was approved by Moltex in 2020 and the billing article came into effect March 31 this year, which exchange coverage for 2 tests performed at the same encounter. This specific heart care coverage now establishes the path for multimodality reimbursement And is a major milestone in heart transplant care. In addition, it removes any doubt on this topic of multimodality. Call, I also want to share some more detail on our commercial pay coverage efforts since the ISH safety guidelines and billing article were announced. We have expanded and added regional coverage across all organs.

Speaker 3

As examples, in kidney, we've recently gained coverage from a national lab benefit manager. Quarter, we've added approximately 5,000,000 covered lives in kidney in the Q2. In heart, the focus has been on expanding AlloMap heart commercial coverage 1 year post transplant to earlier use starting at 2 months and early in Q3. A national payer quarter, we've begun covering our heart testing earlier in year 1. As a result, we've expanded coverage for AlloMap Heart in year 1 for 25,000,000 covered lives.

Speaker 3

Now on to pipeline catalysts. We have one of the broadest pipeline portfolios in transplant. We're proud to invest at 100% in transplant innovation quarter, we will later submit for multimodal testing once we have generated multimodal data as we did with HeartCare. We are particularly excited about UroMab, which offers a unique opportunity With the new modality in urine to provide insights into kidney transplant rejection. These approvals will take time, but as the leader in transplant innovation, We have introduced most of the current offerings in the market and understand the process to obtain approvals.

Speaker 3

As example with MolDX approvals, We were the 1st and only to receive gene expression profiling approval for heart with AlloMap. The 1st to receive donorized orphanage coverage kidney with AlloSure Kidney, the first and only to receive multimodal coverage for heart care through AlloSure Heart, quarter, the first and only to receive donorized sulfony encouraged for lung with AlloSure Lung and again, the only company to receive multimodal confirmation with HeartCare as a specific single testing service that combines 2 tests. Lastly, now onto collections. We delivered our 3rd consecutive quarter of testing services collections exceeding testing service revenues, in the last three quarters, we have now collected an incremental $20,000,000 quarter since Q4 2022 with 110% of cash collected over testing services revenues. We had a plan, quarter, we built it and continue to implement and execute against this plan.

Speaker 3

In addition to the success of the 3 Cs, call, we have made excellent progress with adjustments necessary due to the March billing articles. I am pleased to report that the education And implementation efforts of a cross functional team has led to increased adoption of our new TRS during Q2. We started in April at 50%, quarter, we ended May at 70% and in June, we ended at over 80%. As a result, we delivered our Q4 target earlier by 2 quarters quarter, we are pleased to announce that we are in a greater than 80% adoption

Speaker 2

rate with our new TRS.

Speaker 3

Although the forms are not complete, we started the process of obtaining additional information. Using the example that if more than 80% of TRS are completed, then under 20% are not. The team has been able to successfully collect information quarter, we are focused on over 40% of these latter tests. The net impact of these efforts on using 1 new forms quarter, and then to addressing incomplete forms is that we ended June with approximately 90% of all Medicare tests submitted for reimbursement. Call, with that said, I could not be proud of the organization, which has been faced with so many challenges since the start of March 2023, when the billing article was introduced.

Speaker 3

Call, the team has had to work nonstop across multiple work streams to implement these changes with the need to educate physicians and centers call, we will be conducting a few minutes to make operational changes with IT systems and with the business response given the financial impact of the billing article. Call, I continue to be impressed by the resilience of our people during this time of change. Given the successful implementation of the original 2023 plan And by delivering on the operational TRF adjustments 2 quarters earlier than planned, we now have more visibility

Speaker 2

quarter with the testing services

Speaker 3

business and are issuing updated revenue guidance for 2023 with the range of $240,000,000 to 260,000,000 call, I'll briefly review the Q2 financial results, but Abhishek will be providing more details on Q2 and guidance in his section. Call, for the Q2, we recorded revenues of $70,300,000 of which approximately $7,800,000 was attributed to the March AlloSure kidney test that was submitted to Medicare during the Q2. For the Q2, we reported GAAP loss quarter $25,000,000 and a non GAAP loss of $9,900,000 and adjusted EBITDA loss of $10,400,000 We ended the quarter with quarter, an excellent cash position of $283,000,000 driven by our financial discipline and focus on collections. Call, now back to the testing services revenue, which was $53,400,000 for the quarter, down 14% sequentially and 20% year over year. Quarter, this expected decrease was driven by the impact of the billing article, where we expected a low point in testing services volume during Q2.

Speaker 3

The testing services volume appear to be reaching an idea. The issue is we need to continue the process of education given the multiple updates that have come from MolDX. Changes require internal and Transfencer updates to systems and processes. As a reminder, There was a billing article released March 2nd, a second on May 4th, followed by a heart care approval update on August 2nd, And our MAC has not yet adopted either billing article from Maldex. In parallel, it should be noted That we have stated publicly, the company believes the changes introduced in the billing article this year are impermissible and introduce changes to the existing and prior coverage policies And prior public responses made by Noridian and MolDX.

Speaker 3

As previously stated, we're concerned about the implications of these revisions to transplant patients. While we've seen progress in heart, we believe the restrictions imposed on transplant surveillance monitoring for kidney transplant patients is worrisome. Surveillance biopsy protocols to which the use of non invasive tests is tied are often not in place due to the invasive nature of biopsies and now Assure period, the demonstrated ability to discriminate subsequent rejection that is early than it would have been otherwise identified. Now moving to non testing services business. Quarter, we saw strong contributions, which accounted for approximately 30% of revenues this quarter, once we exclude the March test submitted in Q2.

Speaker 3

Call, outpatient and digital solutions business delivered strong growth for the quarter quarter and reported revenues of $9,000,000 representing a 33% increase year over year and a sequential increase of 4.6%. As a reminder, This business will build de novo from strategic acquisitions and subsequent organic growth over the last 4 years. The recently announced acquisition of MediGo continues that strategy. We acquired the number one player in the OPO organ tracking space with close to 40% This is an exciting opportunity and time to start working with the OPOs to create linkages with transplant centers and to position our leading set of digital services. Call, this is an area undergoing rapid and real time change such as at Unis and provides us a unique opportunity to be sitting as this space evolves

Speaker 2

quarter and to capitalize on new opportunities.

Speaker 3

Our products business represents our global strategy. There are significant ex U. S. Opportunities quarter, we reported product revenues of $7,900,000 representing a 17% increase year over year and an increase of 15% sequentially. Quarter, offsetting some of this launch growth is the reduction in the mature parts of the products portfolio, which declined quarter over quarter.

Speaker 3

Call, I believe a sustainable, successful company has to have 1, a strong mission call, 2, a clear vision and 3, a well thought out strategy. The benefit of this approach has never been clearer as we faced a lot of change, chaos and challenges during 2023 with the billing article. We have always had a consistent strategy and with heart care, We saw a key validation of that strategy, which is the focus on delivering meaningful innovation to transplant patients. As a summary of where we are The unplanned changes rising with the billing article were addressed with a cross functional leadership approach, including sharing talent from other parts of the organization to help adjust to this change. 3, we continue to build out the company's strategy.

Speaker 3

The recent MediGo acquisition continues our stated vision to be the leader in the transplant ecosystem. Fall, we continue to execute on our 2 decade mission with a commitment to improve the long term outcomes of patients by providing innovative solutions along that patient journey. The recent MolDX approvals for HeartCare, now onshore lung reflect that commitment. Call, there were times when some investors and analysts asked if we should exit lung and exit multimodality. Staying true to our mission, We're now the only company to achieve these major MolDX milestones of lung and multimodal heart care approval.

Speaker 3

It's a high bar to be the first. Call, we are building a sustainable company, maintaining a financially strong company that allows us the flexibility to build our long term strategy. Quarter, we have a strong cash position and our long term goal for being adjusted EBITDA profitable has not changed as we operate with financial discipline. Call, in closing, I believe that CareDx is now an even stronger, more determined company as a result of these challenges. Call, I want to thank patients, caregivers, physicians and associations that expressed interest to support transplant innovation and access to care during this time.

Speaker 3

I also want to particularly thank the HeartCare work stream team who provided submission to MolDX. We always believe that HeartCare represents a stepwise improvement for heart transplant patients. Now turning over to Abhishek.

Speaker 4

Thank you, Reg. We are pleased to share the results from the 2nd quarter. Call, I'll address quarterly financial results, the impact of billing article implementation and close with an update on guidance. Call, we are pleased with our Q2 results. Considering the work required on the operational implementation of the billing article, key highlights are: number 1, Maintained a solid cash position of $283,000,000 using little cash in operating activities.

Speaker 4

Number 2, Continue to maintain our excellent momentum in collections that was over 110% of our reported testing services revenue for a 3rd consecutive quarter. Our collection efforts have helped us generate over $20,000,000 in incremental cash in the last three quarters. Reported revenue of quarter $70,300,000 a decrease of 13% year over year and 9% as compared to the previous quarter due to the impact of billing article. Number 4, achieved strong operational results in execution of the billing article requirements. New TRF adoption rate climbed over 80% quarter,

Speaker 3

we reported a strong

Speaker 4

quarter for overall test and kidney above 85% in the month of June, 2 quarters ahead of our initial target. Number 5, continued strong growth in our non testing services business with revenues of $9,000,000 for patient industrial solutions quarter $7,900,000 for products, representing year over year growth of 33% 17%, respectively. In addition, in the beginning of the Q3, we received Medicare coverage for AlloSure lung and reestablished Medicare coverage for heart care. Call, let me provide details, starting with testing services. Reported testing services revenue for the Q2 was $53,400,000 quarter, down 14% as compared to last quarter's testing services revenue of 61,800,000 If you recall, in the Q1 of 'twenty three, we did not submit claims for approximately 3,200 AlloSure Kidney test for Medicare reimbursement

Speaker 2

quarter and did not recognize

Speaker 4

revenue representing approximately $8,900,000 We refer to those tests as the impacted MOS test. Quarter, as planned, we submitted claims for reimbursement for these impacted mass tests and received payment and recognized revenue totaling quarter, approximately $7,800,000 in the Q2 of 2023. Our adjusting reported revenue in the 1st and the second quarter for these impacted March test, the testing services revenue was $45,600,000 in the Q2 of 2023 quarter, as compared to $70,700,000 in the Q1 of 2023 or down 36% sequentially. Call, the impact on our revenue was primarily driven by mix of 3 factors: number 1, expected reduction in volume number 2, adoption rate of new TRS and number 3, test not yet supplemented by the end of the quarter. Firstly, on reduction in volumes.

Speaker 4

Reported testing services volume for the Q2 was approximately 37,500 tests, Down 25% as compared to the last quarter. Approximately 80% of the volume decline was from our kidney testing services. Our KT testing was more impacted due to billing article restrictions on surveillance testing. Our heart testing services, we continue to build AlloSure heart test call, for reimbursement when used in conjunction with AlloMap Heart in line with the current coverage policy from Noridius. In addition, multiple revisions in the billing article made it challenging for us and for the transplant centers to continually adapt Q2, pausing their ordering of these tests.

Speaker 4

Now turning to adoption of new TRF and supplementation. In our previous earnings call, we had stated that we would not bill AlloSure kidney Medicare test after billing article effective date of March 31, 23, Unless it has the necessary information as required by the billing article. We also provided lead indicators on adoption of new TRF for kidney. We are pleased to report that new TRF adoption for our kidney testing services was over 70% in the 2nd quarter quarter, our initial success rate has been over 40% during the Q2 of 2023. Despite the Herculean efforts of the quarter, we have one year to obtain this additional information on the spending test and it provides an upside opportunity.

Speaker 4

Turning to testing services gross margin. Our GAAP testing services gross margin was 71% as compared to 75% in the last quarter. Quarter, our non GAAP testing services gross margin was 73% as compared to 77% in the last quarter. Quarter, if we were to exclude the $7,800,000 revenue associated with March impacted test, the adjusted testing services gross margin would be 68%. Quarter, the drop in gross margin was driven by the drop in testing services volume and associated revenues and we plan to improve over in the coming quarters.

Speaker 4

Quarter, now turning to our other businesses. In the 2nd quarter, our Patient and Digital Solutions business revenue quarter was $9,000,000 a growth of 33% year over year and our highest ever revenue for a given quarter. We believe call, our investments in this strategic business area are paying off and helping drive our financial results and strengthened HOTMOAT. Our recent acquisition of MediGo, call, an organ transplant supply chain and logistics company will further expand our digital footprint in the organ procurement organization market. GAAP gross margin for our Digital and Patient Solutions business was 26% in the 2nd quarter as compared to 20% a year ago.

Speaker 4

Call, our non GAAP gross margin was 33% in the 2nd quarter as compared to 29% in the same quarter a year ago. Call, non GAAP gross margin improved by 400 basis points year over year, a testament to our team's effort to improve margins By effectively integrating our acquisitions and driving growth by leveraging KDX's leadership position and capabilities in transplantation. Products business delivered $7,900,000 in revenue in the Q2 of 2023, an increase of 17% as compared to the same quarter a year ago. Call, GAAP gross margin for our products business was 50% in the Q2 of 2023 as compared to 42% in the same quarter last year. Non GAAP product gross margin was 59% in the Q2 of 2023 as compared to 54% in the same quarter last year, quarter, an improvement of 500 basis points.

Speaker 4

As discussed in previous calls, improving the gross margin for products business quarter, turning to operating expenses and adjusted EBITDA. Non GAAP operating expenses for the Q2 were $58,900,000 quarter, down about $2,800,000 sequentially from Q1 'twenty three. The decrease in our non GAAP operating expenses was driven by the actions call, we took to mitigate the impact of revisions in the billing article on our financials. We completed our workforce reduction in Q2 and prioritize expenses on R and D and clinical studies driving the expense reduction. We expect to see the impact of these quarter, we expect to continue to be in the Q3 for the full quarter impact.

Speaker 4

Our legal expenses though increased further, Pushing G and A expenses higher quarter over quarter, driven by the various litigation matters in our response to the billing article division. Our current assessment is that the legal expenses will stay elevated during Q3 and will start to normalize during the Q4 of 'twenty three onwards. For the Q2 of 'twenty three, we recorded negative adjusted EBITDA of $10,400,000 compared to negative adjusted EBITDA of $6,400,000 in the previous quarter. Turning to cash. We continue to maintain a differentiated financial profile as emphasized by our robust balance sheet and cash, cash equivalents and marketable securities of $283,000,000 and no debt.

Speaker 4

Net cash used in operating activities quarter, it was less than $1,000,000 for the quarter despite an adjusted EBITDA losses of over 10,000,000 Our superior cash management continued to be driven by our focus on cash collections and working capital management. Q3 in a row, our collections came in at above 110% of our testing services revenue, driven by continued increase in collections from our commercial customers. We have now generated over $20,000,000 in incremental cash from collections in the last three quarters And this remains a key area of focus as we continue to work through more opportunities in this area. I would like to also note quarter, we earned $2,700,000 in interest income in the Q2 of 2023. Turning to our second topic around the impact of quarter, we issued a brief overview of our financials and mitigated plans.

Speaker 4

In the Q2 of 2023, our teams were primarily focused on operational implementation of the billing article presentation, and we are very pleased with the progress we made on this front. Let me provide some color, starting with kidney testing services. Quarter, as discussed earlier, through a combination of new TRF adoption and supplementation based on June trends, approximately 90% of AlloSure kidney tests call, we now have the necessary information as required by the billing article divisions or reason for ordering, thus limiting the downside risk. Call, as it relates to heart testing, since there has been no material change in our billing practices, the reestablished coverage of Heart Care does not impact our quarter. Moreover, as Resh mentioned earlier, it is important to note that it clears the path for multimodality quarter and remove the uncertainty around this topic.

Speaker 4

Turning to our response on the financial impact of the billing article. Call, first on adjusting our cost structure. As discussed in our last earnings call, I'm glad to let you know that we are on track to drive approximately $40,000,000 to $50,000,000 in annualized savings. We have completed the workforce reduction exercise and achieved a 12% reduction in our headcount quarter, as compared to what we had in the beginning of the year, excluding any impact of acquisitions. We have reprioritized our projects call, we are reallocating resources instead of adding resources quarter, we expect to meet the additional administrative burden to meet the requirements of the billing article.

Speaker 4

Impact of the volume reduction is now reflected in our cost of testing However, as stated earlier, our legal expenses due to multiple legal matters, including our response to the billing article, quarter, we anticipate legal expenses will start to normalize during Q4 of 2020. Call, as Reg alluded earlier, we are focused on driving growth in our testing services business based on 3C's strategy And specifically driving commercial coverage and advancing our pipeline catalyst. 3rd and more specific to collections, Given our success, we are further expanding our efforts in areas such as Medicaid and overdue commercial payments to continue to drive collections ahead of our revenues. Finally, we are being thoughtful on the need to balance investment for long term growth and cost saving actions. We'll continue to evaluate and we'll appropriately as we gain more clarity.

Speaker 4

Our goal continues to be to minimize cash burn and become adjusted EBITDA positive. Finally, let me discuss our guidance for the year. We are issuing updated revenue guidance for $23,000,000 to $240,000,000 to $260,000,000 call, there has been considerable uncertainty due to the revisions in the billing article and likely become clearer in the coming months. Call, our guidance assumes the following: number 1, potential impact of the reestablished coverage of heart care limiting its use post 12 months and forecast number 2, operational implementation of newly established coverage To ensure systems and processes meet the requirement of the billing article. Number 3, uncertainty around the testing services volume as it It is still settling post the revisions in the billing article.

Speaker 4

Number 4, EloSure Lung Medicare coverage. Number 5, Last but not the least, the low end of our guidance assumes some impact from uncertain variables, including but not limited to a response from Noridian call, we anticipate Q3 to be the potential low point for testing services revenue quarter in 2023, In summary, we have received Medicare coverage for AlloSure lung, reestablished Medicare coverage for heart care and improved commercial coverage.

Speaker 2

We had

Speaker 4

a great second quarter based on the strong operational implementation of the requirements of the billing article. Call, we have taken necessary steps toward just our cost structure and focusing on driving long term growth. Our cash position stays strong call, we are pleased with $280,000,000 in cash and we do not see the need to raise cash in foreseeable future. I cannot be more proud of the operational excellence call and the financial discipline demonstrated by the entire team in driving the organization forward. With that, I'll hand over to Rich.

Speaker 3

Thanks, Abhishek. I think we'll open the line for questions. I'm going to hand over to the moderator.

Operator

And today's first question comes from Andrew Cooper at Raymond James. Please go ahead.

Speaker 5

Hey, guys. Thanks for the question. I guess, maybe first, just thinking about the volume trajectory here, I the last quarter update, you said down sort of mid teens. It turned it off a little bit worse than that. And I think in the period where we saw market wide transplant volumes pick call, I'll turn it back over

Speaker 2

to Jeff. So just maybe a

Speaker 5

little bit more detail on sort of what you're seeing to the degree you can give us some color in terms of cadence through the quarter and into July August call, that

Speaker 2

would be great. Yes.

Speaker 3

I'll make some comments, Andrew. Thanks for other questions and I'll hand over to Abhishek who will cover more details. So Firstly, I think with the overall transplant market volume as we'd predicted in over the last prior quarters, there was a nice rebound with the transplant volumes in sight, we think will be meaningful in the long term as we have the potential to double transplant volumes, I believe in that sort of five year plus period, which we had sort of alluded to. Secondly, as we look at some of the trajectory of the volume changes, one thing that came clear is this operational execution. We've had multiple updates.

Speaker 3

We've required multiple revisions. Execution, we've had multiple updates. We've required multiple revisions during this time. As a reminder, we had 2 billing articles within a 60 day period, which is sort of unprecedented, we've had further updates with new approvals. So part of it has been this ongoing education is part of that process, but I'll let Abhishek add any more commentary.

Speaker 4

I think, Raj, you have covered pretty much everything. Nothing further to add to that one. It's just I would want to underscore what Shrey was saying that You had the first billing article in the month of March and then we were we had another revision to the billing article in the beginning of May. And when you actually receive these revisions, it becomes extremely difficult, not only for us to actually Make the changes in our processes and making the changes to our IT system, but also then going back to the TransCon centers and having them To update their processes and their ordering system, right? And then, of course, they will make the changes and accordingly, then we will have to make the changes to our billing processes and the direct processes.

Speaker 4

So it's kind of a fairly disruptive process from that standpoint. So that's what I would want to highlight there.

Speaker 5

Call, I think, helpful. And maybe just one kind of on that front. If I think back to last quarter, the other thing you highlighted on the TRF goals was the time needed to get outside third party systems to implement these changes and that you were kind of on the waitlist And that was a big drag as to why 4Q instead of faster. So what changed on that front that let you get to 80%, 85% of these quarters coming in on the new TRS? And then I'll hop back in the queue.

Speaker 5

Thanks.

Speaker 3

Yes. Thanks, Sandra. I mean, I think it was something where we alluded that There was probably about 20%, which would take a longer time period. So we knew that the initial capture was around that 80% mark. What I would say is that, it really speaks to the persistence of the organization, the resilience organization, plus also the willingness of the centers and physicians to help us with Getting things operationalized, we've had more than 2 decades with helping to build this space and reflected with our commitment with some recent approvals both on the heart care and lung side, and I think centers were just wanting to help out.

Speaker 3

And I think what we alluded to, there were some that would take a longer time, which we'll still do so. But I think what we're seeing here is the team working extremely hard. Quarter, our relationships and also our reputation within these centers and physicians wanting to help out. So all in all, I mean, Everyone's been working pretty much non stop to be candid, but at the same time, really the reputation of CareDx and what we mean to TransDigm community has just really come through and through. So

Speaker 2

call, please go ahead. Thanks again.

Operator

Thank you. And our next question today comes from Brandon Couillard with Jefferies. Please go ahead. Call, I'll turn the call over to Eric.

Speaker 6

Thanks. Good afternoon. That's a lot to digest here. Maybe just A. J, starting with the guidance, I mean, you reported about $150,000,000 revenue in the first half.

Speaker 6

Can you just help us understand the second half bridge quarter, we expect to be off of that $70,000,000 base in the 2nd quarter or a $62,000,000 adjusted revenue base. And How should we think about 3rd quarter versus 4th quarter phasing in the context of what has been a lot of progress

Speaker 4

I had to put a lot of thought around given the fact that we are still kind of dealing with a lot of operational implementation related Complexities, right? Let me say this way that we wanted to provide a range To help the analysts and the investors to make sure what we have learned in the past few months so that we can help To start to kind of provide the range or the boundaries here. When I think about the guidance here, Brendan, to your point, yes, our first half has been about $147,000,000 $148,000,000 and then the top end of my range, the $260,000,000 That basically assumes the base revenue of your Q2, which you rightly pointed out. If you multiply that by 2, it would be closer to $120,000,000 We are basically baking in the limitations of the heart care coverage that got reestablished earlier this month, Which basically limits its use post 1 year and for cost. So if you were to basically take that piece out From that base plus the first half, you will basically get to our top end of our guidance.

Speaker 4

And then to come to the midpoint of our guidance, quarter, as well as any kind of volume adjustments if you were to make in Q3. So that basically gets you to the midpoint of the guidance. And of course, low point, as I've I am baking in for a bit more uncertainties because we still have not seen not really an adopt a billing article And we still are kind of waiting for those things to clear up in the next few months.

Speaker 3

Yes, maybe the one thing just comment on because I think when Brandon talked about the phasing, I think you mentioned that we expect probably Q3 towards the lower point and then Q4 to be more of the trajectory of moving forward with growth. So I do think that scenario, if you look at the specific phase and bit adding what Abhishek I'm trying to be here is be very thoughtful to get something out, so that there is a form of guide. And we're going to learn a lot more in this Q3, right? I mean, there's a lot of different variables. We've been pretty action packed quarter, I would say for sure.

Speaker 3

But I think we certainly know that getting this back is important and then we can sort of like Have further updates as we move through the quarter.

Speaker 6

Okay, that's helpful. And then on the heart care approval last week, What are the implications of that for Kids in Care? We hadn't received back from Molbex and Meridian yet? And quarter, should we expect a decision in the next few months? And secondarily, what is the likelihood that commercial payers follow Medicare quarter.

Speaker 3

Yes. I'll make some initial comments. I'll let Robert talk in a bit more detail. But I think we've always believed in multimodality. That's the first thing.

Speaker 3

I think the heart carrier is part of that strategy. It's been core for us Since we've developed our strategic approach and I think getting that approved was a significant validation first in 2020 and again now quarter as recent as last week. So I do think it's important that this provides a strategic platform for the company. I think at the same time, we have started obviously studies along those ways and as we've sort of shared in my script or prepared remarks, we're going to look at initial standalone commissions and then as more data is generated as part of that process. So I'll let Robert comment a bit more on this.

Speaker 3

Robert's been the architect of Really every major MolDX approval in the company, I went through those series of first and first NERMEs and Robert has been core to all of those and he really knows how to get these brief. So, Robin?

Speaker 7

Yes. I don't know

Speaker 8

that there's anything specific on kidney care. Heart care, obviously, we're happy with and that It helps us understand the path with MolDX as we worked with them on that, what's the path moving forward for multimodality across other organs and different testing types and modalities, obviously, our initial goal is to obtain independent coverage for the tests as we continue to generate data that would support multimodality coverage from Medicare. And I think the second part of the question you asked was impact on commercial coverage. And I think it's less about what the Medicare decision may impact on that is and more on we've been working with the private payers, the commercial payers Based on the guidelines and the publications and the data in the literature, which is really what helps move the needle forward with that.

Operator

Thank you. And our next question today comes from Mark Massaro with BTIG. Please go ahead.

Speaker 9

Call, I just wanted to touch base on the SHORE study, If you have a sense of the timing of an interim short readout, and what do you think it's going to take for Medicare

Speaker 3

Thanks very much. And I can cover the high level and I'll let Robert speak in more detail. But Specifically, the SHORE data is part of the SHORE study. I believe we've consistently at ICHLC and ADC released different sort of updates as part of that process, which we'll continue doing, Rob can comment in more detail as part of that. I do think we're a significant amount of body of evidence that we've generated has allowed us to get this multimodal approval.

Speaker 3

And as we've done previously, we will plan to generate and submit additional data for Beyond that time period as well, but

Speaker 2

for us

Speaker 3

it's we are leaders in this space. Again, Robert has driven every single One of our approvals through MolDX and so he really knows how to get these done. So Robert?

Speaker 8

Yes. You asked first about SHORE. Obviously, that's our large registry study in heart transplant. And as that continues to progress, will there be an interim publication? And obviously, Some data was presented in our symposium at ATC and we'll be working towards publication.

Speaker 8

Complete data monitoring and having a high quality publication to come out for that. You also asked about utility data and identifying where those data will support moving forward with requests for coverage beyond the 1 year. Call, I'll turn it over to you.

Speaker 9

Awesome. Thanks so much for that. And then can you just remind us, one for Abhishek, what's

Speaker 4

Yes. Jen, what we have shared in the past, you probably would have from a couple of quarters ago, we have been sharing the volume the and generally about 25% of typically that volume is covered by the Medicare. So that basically is the opportunity. Quarter, so that becomes basically one of the limitations. So that's how you will basically model the AlloSure lung opportunity there.

Speaker 7

I was just wondering what additional data Q1 2019, we plan to present here on kidney to ask Medicare to reconsider just like what happened with heart care. So like for example, what's the status of the KR study, I know that showed an improvement in graft survival back in 2021, just what are the data you're going to submit to Medicare?

Speaker 8

Call, as I was sure, we want to get This is completed and so once the K OAR study this is about surveillance and following patients long term and so really It requires the completion of the K OAR study, gathering of individual data points from individual patients for all the patients enrolled And then the data monitoring, data cleanup and analysis. So we're in the midst of all that process so that we can get that out. Of course,

Speaker 4

Okay. And then it was mentioned

Speaker 7

that the low end of guidance assumes, or I guess It depends on how Meridian would respond to the billing article. So I'm a little confused. What would Meridian say that would be necessarily new and represent a downside versus what we already know that Hovmeadow has said.

Speaker 4

Yes. So again, we have been surprised a few times, Alex, in the last few months, right, with all of these revisions coming out, right. And that probably is one of the reasons why we kind of took a step back in the first quarter, we withdrew this our guidance and this is basically to make sure that if there are any surprises, we do not know. That probably is the only reason why we have that some kind of like hedge baked in, in the low end of our guidance.

Speaker 3

Yes, Alex, I think specifically just dealing when Neridian does accept it, we'll have to deal with Reducing some of the full calls in greater than 1 year. So we have those numbers, which would then be part of

Speaker 2

that factor. Call, I'll turn it over to Eric.

Speaker 7

Okay, understood. And then just lastly, one more. Just in the 10 Q, there was a mention about CareDx receiving in Q2, a record request call from the CMS Recovery Audit Contractor, UPIC, I'm not familiar with them. They mentioned that there is a review is underway. Can you just expand on what this all means?

Speaker 8

I caught the second half of that about the UPIC audit. Yes, that's just that's Another type of audit that we have responded to, feel that we have a successful response, not concerned.

Speaker 2

Call, I'll turn the call back over to Jason. Okay. Thank you.

Operator

Thank you. And our next question today comes from Mason Carrico with Stephens Inc. Please go ahead.

Speaker 10

Hey guys, sorry if you've already answered this. We're jumping between a few calls tonight. But what percentage of the kidney tests With the necessary documentation or TRFs have you actually gotten paid on since you started submitting them?

Speaker 4

So let me take this question, Nathan. So as we were saying that the kidney volumes, The 85% plus of the incoming TRS in the month of June, they all came on the with the required information, right? And then of the remaining what we have been saying that generally we are doing the supplementation of the remaining test at about 40% of that rate. So from that standpoint, you basically would say that now we are able to kind of submit almost 90% of our incoming kidney volumes as billable. So the remaining test would be about that 10% that required yet to be supplemented.

Speaker 4

And this is only for Medicare, by the way. I just want to make sure that that's pretty clear.

Speaker 10

Got it. Okay. That's helpful. And then When it comes to your cost initiatives, I know that you've got some offsetting legal costs right now, but how much of that $40,000,000 to $50,000,000 quarter, and what are your expectations for when that full quarterly run rate of cost savings Will be recognized acknowledging that legal costs may be elevated near term and offset some of that?

Speaker 4

Yes, sure. So if you look at our operating spend, the S and M is down about 1,000,000 parts versus the last quarter. Historically, our Q2 is generally pretty high for the sales and marketing because of all the conferences that we have in the current quarter. So that's the first part. So we are definitely on the right trajectory in the sales and marketing.

Speaker 4

The second piece on the R and D, again, I think the team has done a great job in terms of making sure that we are working on the prioritized projects And they're able to kind of manage the expenses, and I think the number is down about $3,500,000 to $4,000,000 there as well. So I think we have made good progress in those two lines. On the G and A, of course, because of the legal spend, we were not able to see the impact that we wanted to basically see on that particular line. The last but not the least is the cost of testing services. You might see that cost of taking services is pretty similar to what we had in the last quarter.

Speaker 4

But last quarter, I just want to highlight that We had the one time Stanford Accrual Royalty Reversal and that basically had brought our cost of testing services Down last quarter. So if you were to compare the cost of testing services for say Q4 of last year or Q3, You probably will see that we have saved about like $3,000,000 to $4,000,000 both as a function of volume and some of the things that we are trying to do as a company. So Sambhi, I'm basically what I'm suggesting here is that we are making good progress on the $40,000,000 to $50,000,000 I still see that About 25% of this may come up in Q3 and the other 25% will start to show up in Q4 and beyond.

Operator

Thank you. And our next question comes from Yi Chen with H. C. Wainwright. Please go ahead.

Speaker 11

Call, Hey, everyone. Thanks for the question. This is Chetan on behalf of Yi Chen. And I believe you've just answered it, but This is a question for Abhishek. Any color on any future steps that are being taken to reduce operational expenses in order to $50,000,000 annual savings.

Speaker 4

So what I was actually suggesting, Ketan, that we have actually put Most of those actions in place already, because what I had suggested last time that as part of those actions, number 1, We will basically adjust our headcount structure and most of those actions are already complete. The second one was prioritization of the R and D projects, etcetera and that particular work is already in progress. The third piece of course we have spoken about the cost of testing services. Call, that is a combination of the volume related reduction that we definitely see automatically, but at the same time, some of the other things that we're trying to do to make sure call, we are able to kind of improve on the cost of testing services to preserve the gross margins of our testing services business. I would say that most of those actions are already in place.

Speaker 4

There are a few more actions, but I would say that probably would not be more than 20% of the number that we are trying to We are not taking our eyes away because there are some investments that we have to make for the long term growth as well. So I just wanted to make sure that that's pretty clear because in my script I do talk about some of the things that has happened recently, more particularly around the coverage decision, so that is also helping us offset some of the impacts that we are seeing on our top line. Call, I will now

Speaker 2

turn the call over to Mr.

Speaker 11

Thank you. And I'm sorry if you've already answered this question, but Any color on how long this impact of the billing article revisions could be seen on AlloSure kidney testing volumes?

Speaker 3

Yes, I think that's a bit of a Long, long question in some ways, but I think for us, we believe the billing article is impermissible. I think we've had that in our prepared remarks. That's the first thing. The second thing is that we've seen some changes in the 1st billing ad hall, 2nd billing ad hall, which quarter, led to some improvements. We've now seen the heart changes, sort of come through.

Speaker 3

So this is ongoing process where I think, again, we do not believe the The billing ad was permissible under the coverage policies and we're in working to see how that can be addressed. So I think that process continues. In parallel, we've actually addressed that by trying to adapt to this new environment and actually led to the operational implementation, which is what we've done and getting these forms, up to the rate of close to 90% operational execution, I think we're also seeing some progress with the billing article with the second billing article coming within 60 days and then also with some of these hard changes, but It's an ongoing process that we're continuing.

Speaker 4

Thank you.

Speaker 3

You're welcome.

Operator

Thank you. And ladies and gentlemen, this concludes our question and answer session. I'd like to turn the conference back over to Reg Cito for any closing remarks.

Speaker 3

Call, Yes, thanks very much. I mean, it's been a really busy quarter and I think you all know that and full of different milestones and different operational execution, we're glad to have reissued guidance. We know there will be a lot of different learnings that we have in the next during this next quarter. And I think at the end of the day, we're just proud of really bringing this innovation to transplant patients. It's not often easy being a leader, but You have to leave from upfront and you have to drive innovation.

Speaker 3

And we've had a strategy which we've had since the start of this year to execute on the 3 Cs. They've gone really well the course of the year and we've adjusted and adapted displaying article by having this operational focus and execution. Again, I want to give a special call out to the organization. Call, we will thank the patients and thank the physicians. But this particular quarter, in addition to those, I want to give a special call out to the CareDx team, just really Incredible with the level of effort and enthusiasm and resilience have demonstrated as we've had to adapt and adjust to this situation.

Speaker 3

So

Operator

call, we thank you all for attending today's presentation. You may now disconnect your lines and have a wonderful

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Key Takeaways

  • CareDx secured Medicare coverage milestones with MolDX confirming HeartCare multimodal heart transplant surveillance and approving AlloSure Lung, while expanding commercial coverage to an additional 25 million heart and 5 million kidney covered lives.
  • The company exceeded its collections targets for the third straight quarter, achieving 110% cash collections on testing services revenue, and ended Q2 with $283 million in cash and no debt, enabling strategic acquisitions and a share buyback restart.
  • Operationally, CareDx hit its new test requisition form adoption goal of over 80% two quarters ahead of schedule and now submits approximately 90% of Medicare tests successfully despite billing article changes.
  • Based on these achievements, CareDx issued updated full-year 2023 revenue guidance of $240 million to $260 million, reflecting improved visibility into testing services performance.
  • With one of the industry’s broadest transplant pipelines, the company is advancing multimodal innovations like HeartCare and UroMab in kidney, building on its track record of first-to-market MolDX approvals.
A.I. generated. May contain errors.
Earnings Conference Call
CareDx Q2 2023
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