Castle Biosciences Q4 2023 Earnings Call Transcript

Quartr
Provided by Quartr
February 28, 2024

There are 11 speakers on the call.

Operator

Good afternoon, and welcome to Castle Biosciences 4th Quarter and Full Year 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 now like to turn the call over to Camilla Ziguro, Vice President, Investor Relations and Corporate Affairs. Please go ahead.

Speaker 1

Thank you, operator. Good afternoon, everyone. Welcome to Castle Biosciences' 4th quarter and full year 2023 financial results conference call. Joining me today is Castle's Founder, President and Chief Executive Officer, Derek Messold and Chief Financial Officer, Frank Stokes. Information recorded on this call speaks only as of today, February 28, 2024.

Speaker 1

Therefore, if you are listening to the replay or reading the transcript of this call, any time sensitive information may no longer be accurate. A recording of today's call will be available on the Investor Relations page of the company's website for approximately 3 weeks following the conclusion of the call. Before we begin, I would like to remind you that some of the statements made today will contain forward looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These forward looking statements include, but are not limited to, statements about our financial outlook, 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 2024 total revenue and our 2025 outlook, our expectations regarding reimbursement for our products and the impact of our investments in growth initiatives and expanded commercial team. Forward looking statements are based upon current expectations and involve inherent risks and uncertainties.

Speaker 1

There can be no assurances that the results contemplated in these statements will be realized. A number of factors and risks could cause actual results to differ materially from those contained in these forward looking statements. These factors and other risks and uncertainties are described in detail in the company's annual report 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 or to be filed with the Securities and Exchange Commission. These forward looking statements speak only as of today, and we assume no obligation to update or revise these forward looking statements as circumstances change. In addition, some of the information discussed today includes non GAAP financial measures such as adjusted revenue, adjusted gross margin and adjusted EBITDA that have not been calculated in accordance with generally accepted accounting principles in the United States or GAAP.

Speaker 1

These non GAAP items should be used in addition to and not as a substitute for any GAAP results. We believe these metrics provide supplemental information in assessing our revenue and operating performance. Reconciliations of these non GAAP financial measures to the most directly comparable GAAP financial measures are presented in the tables at the end of our earnings release issued earlier today, which has been posted on the Investor Relations page of the company's website. I will now turn the call over to Derek.

Speaker 2

Thank you, Camilla, and good afternoon, everyone. I'm happy to report that we closed an outstanding 4th quarter, achieving very strong results for 2023. With 4th quarter revenue of $66,100,000 we grew revenue 60% year over year for the full year to $219,800,000 nearly $45,000,000 above the midpoint of our expectations at the beginning of 2023. We've now grown revenue at a 43% CAGR rate over the last 5 years, continuing our track record of consistent execution. We also achieved impressive test volume results by delivering a total of 70,429 total test reports in 2023, representing 59% growth compared to 2022.

Speaker 2

Furthermore, the 4th quarter marked the 2nd consecutive quarter in which we achieved positive cash flow from operations and positive adjusted EBITDA. In 2023, we achieved numerous accomplishments, and I would like to take this opportunity to highlight some of them. We opened our new state of the art laboratory in Pittsburgh, Pennsylvania, received advanced diagnostic laboratory tests or ADLT status for our DECISION DX SCC test, bringing our total to 5 tests that have been designated as ADLTs expanded our significant body of evidence across our entire test portfolio, made progress across our pipeline initiatives and won multiple awards for being a top workplace. None of our accomplishments will be possible without the hard work and strong execution of the entire Castle team, and I can't thank them enough. As I just mentioned, we expand our significant body of evidence across our entire test portfolio in 2023.

Speaker 2

I want to touch base on data specifically on DECISION DX melanoma. We have demonstrated clinical validity, utility and patient impact in 50 peer reviewed publications and studied the test in more than 10,000 patients, including 2 2023 publications demonstrating an association with the clinical use of our test and improved patient outcomes. The first publication is from our collaboration with the National Cancer Institute's SEER program and then unselected prospectively tested real world patient population, which showed that testing with CisionDx melanoma was associated with lower melanoma specific and overall mortality relative to untested patients. That is patients who received PrecisionDx melanoma as part of their clinical care lived longer. Specifically, 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 DECISION EX Melanoma as part of their clinical care.

Speaker 2

The second publication is from an independent multicenter study of symptomolithnode negative patients, showing that patients who received routine imaging after high risk CisionDx melanoma test scores had an earlier recurrence diagnosis with lower tumor burden leading to better clinical outcomes, including improved overall survival. We believe these studies demonstrate the clear positive impact testing with CisionDx melanoma has on patient outcomes. And further, the CisionDx melanoma is the only melanoma prognostic test shown to be associated with improved patient survival. Now let me take you through execution strategy highlights from the Q4 and the fiscal year, and then Frank will provide additional financial highlights before we turn to your questions. Let's start with our core dermatology business, which continues to perform extremely well.

Speaker 2

For DECISION DX Melanoma and DECISION DX SCC combined, test volume was 44,772 in 2023, a 33% increase over 2022. We are very pleased with our volume performance and believe these 2 core dermatology offerings continue to represent a significant growth opportunity. We continue to see overlap between clinicians who order a DECISION DX melanoma test and those who adopt DECISION DX SCC. In fact, during the year ended December 31, 2023, approximately 78% of all clinicians ordering DECISION DX SCC had also ordered our CisionDx melanoma test during the same period. We believe this is evidence of a high unmet clinical need that our tests are designed to address, coupled with the fact that clinicians who diagnose and manage early stage cutaneous melanoma skin cancer also diagnose other skin cancers like cutaneous squamous cell carcinoma.

Speaker 2

For DECISION DX Melanoma, we delivered 33,000 330 test reports in 2023, a 20% year over year increase. Consistent with prior years, our 3rd and 4th quarter test volume reflected normal seasonality. We believe the documented clinical impact our test has on improving outcomes in patients diagnosed with cutaneous melanoma, including improved survival, coupled with our prior commercial expansion investments, have been and continue to be significant drivers of growth. Moving on to our DECISION EX SCC test. We continue to see very strong test report volume momentum with 11,442 test reports delivered in 2023, an increase of 92% compared to 2022.

Speaker 2

As with our growth in DECISION DX Melanoma, we believe that our strong growth for DECISION DX SCC is due in large part to the combination of the high clinical need in the high risk patient population, coupled with the value that our test provides. We continue to expand an embodied evidence surrounding the test. For instance, a study published just last month in the Journal of Clinical Anesthetic Dermatology found that using DecisionDx SCC to guide decisions surrounding adjuvant radiation therapy or ART could result in significant Medicare healthcare savings of up to approximately $972,000,000 annually. Data show that integrating the objective Precision X SCC test into the management of patients diagnosed with high risk SCC who are ART eligible to identify those who may safely avoid ART leading to an improvement not only in health outcomes, but also a reduction in the cost in the Medicare population. I would now like to turn to our tissue cipher test.

Speaker 2

I'll remind you that as part of our strategic growth plans, we acquired Serenostics and the Tissue Cipher test in December of 2021. The adoption of the TissueCipher Barrett's Esophagus test has exceeded our expectations to date. As you may recall, this test expanded our estimated in market commercial U. S. Time by $1,000,000,000 and we believe that it contributes to long term value creation and also positions us to make a meaningful impact on patient care in other areas with unmet clinical needs.

Speaker 2

We delivered 9,100 TissueCipher test reports in 2023 compared to 2,128 test reports in 2022, which is more than 300% growth. We continue to be extremely pleased with the reception of tissue cypher by the gastroenterology clinician community and based on current volume growth trends, we plan to expand this commercial team modestly in the Q2 of 2024. As you may recall, we had multiple data announcements during 2023, bringing our total to 14 peer reviewed publications, demonstrating the ability and performance of our tissue cipher test in risk stratifying patients with Barrett's Esophagus disease to guide risk appropriate treatment plan decisions. Turning to our mental health business, we delivered 10,921 iD Genetics test reports in 2023 compared to 3,249 test reports in 2022, which is more than 200% growth. We believe a significant driver of growth is our differentiated test for the treatment of mental health conditions, including identifying drug drug, drug G and lifestyle factors to improve medication response or admission rates in a large underpenetrated mental health market.

Speaker 2

In fact, real world evidence confirmed the consistent impact of iGenetics on medication response and remission rates in patients with major depressive disorder or MDD. Specifically, the study found that real world patient outcomes were strongly aligned to the results of a previously published randomized controlled trial, which show that patients whose medication management was guided by IgNx were 2.65 times more likely to achieve remission of depressive symptoms compared to patients whose medication was not guided by our test. Moving on to our inflammatory disease pipeline initiative to develop a genomic test or a series of tests aimed at predicting response to systemic therapy in patients with moderate to severe atopic dermatitis, psoriasis and related conditions. Last quarter, we shared some early yet promising discovery data. The data demonstrated that with moderate to severe atopic dermatitis, we're able to show that using our non invasive method of tissue sampling coupled with gene expression profiling can separate out responders and non responders.

Speaker 2

Furthermore, our inflammatory skin disease pipeline test could help distinguish atopic dermatitis, psoriasis and mitosis fungoides skin lesions to help ensure proper therapy selection based upon an individual patient's molecular profile. We expect to provide you with additional development updates in the second half of twenty twenty four with the test targeted for launch by the end of 2025, assuming a positive outcome of our discovery, development and validation efforts. I will now turn the call over to Frank, who will provide details relating to our financial results and outlook.

Speaker 3

Thank you, Derek, and good afternoon, everyone. Reiterating Derek's sentiment, we're excited with the strong year we had in 2023 and the momentum we are carrying forward. In the Q4 of 2023, we delivered total revenue of $66,100,000 a 72% increase over the Q4 of 2022, and we delivered $219,800,000 for the full year 2023, a 60% increase over 2022. The increase was driven by higher ASPs and test volume growth. Adjusted revenue, which excludes the effects of revenue adjustments in the current period related to tests delivered in prior periods was $70,200,000 for the quarter $224,300,000 for the full year 2023.

Speaker 3

For 2024, we anticipate generating total revenue of $235,000,000 to $240,000,000 driven by further consistent execution on our growth plans. Our gross margin here in the Q4 was 77.8% compared to 69.4% in the Q4 of 2022 and our gross margin for the full year was 75.4% compared to 70.6% in 2022. Our adjusted gross margin, which excludes the effects of intangible asset amortization related to our acquisitions and excludes the effects of revenue adjustments in the current period associated with test reports delivered in prior periods, was 82.3% for the quarter and 79.9% for the year compared to 74.6% and 77% for the same periods in 2022. Turning to expenses, our total operating expenses including cost of sales for the quarter ended December 31, 2023,

Speaker 4

were $71,800,000 compared to $61,200,000 for the prior year and were $287,800,000 for the full year compared to $209,900,000 for 2022. Sales and marketing expense increased by $27,100,000 or 31.2 percent for the year ended December 31, 2023, compared to the year ended December 31, 2022, primarily attributable to higher personnel costs. General and administrative expenses increased by $10,100,000 or 17.9 percent for the year ended December 31, 2023, compared to the year ended December 31, 2022, primarily attributable to higher personnel costs and higher information technology and software related costs. R and D expense increased by $1,700,000 in the 4th quarter and by $8,700,000 for the full year 2023 compared to 2022, primarily consisting of higher personnel costs and higher clinical studies expense, partially offset by lower expense from advisory boards and consulting services. Total noncash stock based compensation expense, which is allocated among cost of sales, R and D expense and SG and A expense, totaled $51,200,000 for the year ended December 31, 2023, compared to $36,300,000 for the year ended December 31, 2022.

Speaker 4

We expect material increases in stock based compensation expense in future periods attributable to both existing awards outstanding and anticipated additional grants to our current and future employees.

Speaker 3

We expect to complete an annual grant of equity awards to our employees in March of 2024.

Speaker 4

Interest income was $10,600,000 for the full year 2023 compared to $4,000,000 in 2022, primarily a result of higher interest rates and our purchases of marketable investment securities beginning in the Q3 of 2022. Our net loss for the Q4 of 2023 was $2,600,000 compared to a net loss of $20,600,000 for the Q4 of 2022 and our net loss for the full year 2023 was $57,500,000 compared to a net loss of $67,100,000 for 20.22.

Speaker 3

Diluted loss per share for the Q4 was $0.10 compared to diluted loss per share of $0.78 in the Q4 of 2022. Diluted loss per share for the full year of 2023 was $2.14 compared to diluted loss per share of $2.58 for 20.22. Adjusted EBITDA for the Q4 was $9,400,000 compared to negative $10,400,000 for the comparable period in 2022, an improvement of $19,800,000 For the full year 2023, adjusted EBITDA was negative $4,400,000 compared to negative $42,600,000 in 2022, an improvement of $38,200,000 Net cash provided by operating activities was $18,600,000 for the 4th quarter and net cash used in operating activities was $5,600,000 for the year ended December 31, 2023. We expect the Q1 of 2024 to be a net operating cash used quarter due to annual cash bonus payments and certain healthcare benefit payments that are not expected to recur during the remaining three quarters of 2024. Net cash used in investing activities was $16,200,000 for the 12 months ended December 31, 2023, and consisted primarily of purchases of marketable investment securities of $189,100,000 and purchases of property and equipment of $13,600,000 partially offset by the maturity of marketable investable securities of $186,500,000 We increased our cash position by more than $13,000,000 in the Q4 of 2023 compared to the Q3 of 2023, ending the year with cash, cash equivalents and marketable securities of $243,100,000 In the current high interest rate environment, we believe our strong financial position allows us to continue to invest in our business, execute on our strategic growth plans and maintain our competitive lead.

Speaker 3

In 2024, we expect our capital allocation priorities to remain consistent. These include the continued assessment and evolution of our commercial team, focused R and D efforts to build evidentiary support and develop tests and as a lesser priority exploring strategic opportunities in our current therapeutic areas. In conclusion, our 2023 financial and operational results were outstanding. We delivered strong growth in both revenue and test report volume as we continue to execute on our growth initiatives. I'll now turn the call back over to Derek.

Speaker 2

Thank you, Frank. We believe our success in 2020 has allowed us to enter 2024's momentum and the potential to further position the company as an industry leader. I would like to conclude today by thanking our Castle team. Our excellent progress in 2023 is due to their accomplishments and dedications to the patients that we serve. This concludes our remarks.

Speaker 2

I thank you again for your continued interest in Castle Biosciences. Operator, we are now ready for Q and A.

Operator

Thank you. Team. 1st person you have on the line is Kyle Nixon of Canaccord. Your line is open.

Speaker 5

Hey, thanks guys for the questions. Congrats on the quarter. Wanted to start with the 2024 guidance and the underlying growth in the dermatologic test business. If you back out SEC revenue in 'twenty three, you might have had like $160,000,000 to $170,000,000 core revenue. If you annualize the sequential growth in the Q4, you get about maybe 17%, 19% annual growth.

Speaker 5

If you apply that to the core revenue base there, it gets you maybe like $200,000,000 revenue next year. But then the guide would imply that the new test like TissueCyber, ID Genetics like don't grow next year or I guess this current year. So maybe just talk about what the core growth of the derm tests ex SEC looks like this year and if there's anything that you anticipate happening in 2024 that causes growth to like decelerate a bit to level levels? Thanks.

Speaker 4

Yes, sure, Kyle. I don't I might need to get with him and write down. I wouldn't tracking your math there. Yes, you should recall that the 2023 results have a full year of SCC revenue included. The 2024 expectation only has this quarter for SCC.

Speaker 4

We're taking out our SCC test for out of that guidance for the rest of the year Q2, Q3 and Q4. So to apples if you want apples to apples the growth, you need to sort of either back out SCC from 2023 or kind of think about what it would look like for 2024 just in order to avoid having to reduce or change guidance negatively if SCC is no longer reimbursed, we just would take it out for the rest of the year. And that would be as we talked about in the past, Kyle, that would be just a terrible outcome for patients. I mean, we've already got significant evidence that we've published showing that ART is widely used. It's really bad for patients.

Speaker 4

And if you properly use ART only where it's appropriate, our tests can save the system about $900,000,000 a year. So that would be a poor outcome for healthcare costs and for patients, but we are assuming we don't have that coverage for the rest of the year.

Speaker 5

Okay, that's helpful.

Speaker 4

And then just the second part, we don't see we don't think that tissue cipher or the other tests are not growing. We expect those tests to continue to grow.

Speaker 5

Yes. I think that you kind of clarified the what's going on like the dynamics in the guide, so that was great. Just follow-up on simple one on gross margins. I guess going forward, if we are kind of like taking out SCC for a little while, should we model like a lower gross margin than what we've seen in the past? You saw the volume, but like you've had such great low 80s gross margins.

Speaker 5

What's the right way to think about that going forward? And maybe just related to cash, I mean, could you guys did you kind of say you could generate cash this year based on what you've done over the past couple of quarters?

Speaker 4

Let me take the first part. As you know better than we do, Kyle, when you're not appropriately for a service you provide, it has a negative impact on gross margin. So if we were to not have coverage for 1 or any of our tests, then that would impact that gross margin. With appropriate coverage in place, we think those margins are stable. If you recall, our long range guidance was gross adjusted gross margins, I should correct that adjusted gross margins in the 80% range.

Speaker 4

So those should be stable. This quarter will be a cash use quarter from operations, I would expect. And then the rest of the year, it'll depend on what the reimbursement picture looks like.

Speaker 5

Okay. That's helpful. I'll leave that for you. Thanks.

Speaker 3

Thanks, Carl.

Operator

Thank you. We now have Subbu Nabi of Guggenheim.

Speaker 6

Hey, guys. Can you hear me okay?

Speaker 4

Yes, we got you.

Speaker 6

Can you hear me okay? Awesome. This is Brandon off for Subu. We can. Could I have a quick 2 parter on tissue cipher?

Speaker 6

All right.

Speaker 5

A bit of

Speaker 6

a delay. Quick two parter on tissue cipher. Can you hear me?

Speaker 4

Yes, we can hear you. Hello?

Speaker 6

Okay, got it. Sorry about that. Just a quick 2 parter on tissue Cipher. You mentioned in your last call that some of the key performance drivers were that newly diagnosed or rescoped patient population of about 400,000 patients. And then secondly, the need for the patients in the non dysplastic group making up about 95% of the overall patient population.

Speaker 6

I just wanted to clarify what impact did that have in the 4th quarter? And what are your expectations for both of those drivers going into 2024? Thank you.

Speaker 4

Yes. So we as I think we shared, we think the market there may be a little bit bigger than we had anticipated when we first were looking at TissueCipher. The right population for us to think about there is the surveillance endoscopy. So patients that are having a surveillance endoscopy or an upper GI endoscopy for Barrett's Esophagus. And we've got really good data now that says there are about 417,000 or so of those a year, which is a higher number than we thought.

Speaker 4

Now the second piece of that so that's the total pool, but we're not appropriate well, it would not be useful to physicians to test on patients who have that procedure and then come back from pathology with high grade dysplasia. And that's about 5% or 6% of those cases are high grade dysplasia. And the reason is just that at that point, that's going to be concerning enough that the physician is going to want to go ahead and ablate that patient. So you can kind of take if you want to use round numbers, take 90% of the 417 and that's the group we think we are appropriate for each year. Now that's more of a you would want to think of that as more of an incidence type measure because there are certainly more patients than that that have Barrett's.

Speaker 4

But if they're not having that surveillance endoscopy, then they're not candidates or we wouldn't be able to test. That's the tissue we test is the pitch biopsy tissue from the surveillance endoscopy.

Operator

Thank you. Your next question comes from Sung Ji Nam of Scotiabank.

Speaker 7

Hey, thanks for taking the questions and congrats on the year. Maybe starting out with SCC, just kind of DecisionDx SCC. You talked about the overlap with the CisionDx melanoma in terms of, I think, over 70% of the orders are coming in for both, if there's overlap. Just kind of curious, given that you've had SCC commercially available now over a year, just curious kind of what you're seeing from the same store sales, if you will, standpoint, just based on with the physicians and their experiences with SCC, kind of if you're seeing any trends in terms of reordering patterns and things like that?

Speaker 2

Hi, Sung Ji, Derek here. We hadn't disclosed in following today the press release as far as I recall. We do expect and did expect early on that clinicians who diagnose a skin cancer of cutaneous melanoma will also be the same medically oriented dermatologists who will diagnose the skin cancer squamous cell carcinoma. So we assume there'd be significant kind of overlap from a perspective of will this dermatology customer be seeing these kinds of patients. And 2, it was also our belief that if these clinicians who adopted or were using our CisionDx melanoma test appropriately for medical necessary purposes that they would be more open to I guess seeing how the use of our test for squamous cell carcinoma would go ahead and fill what we see as a significant unmet need.

Speaker 2

So what I think we're seeing is the actual experience of our expectation, which is good by the way.

Speaker 6

But

Speaker 2

I think the other aspect here is to say why. And the why part to me is that in patients with high risk squamous cell carcinoma, there's this pinch point here. And as Frank mentioned earlier, 99% of the patients that we test today are eligible under guidelines for adjuvant radiation therapy or ART. And adjuvant radiation therapy has been recognized as an effective treatment for high risk patients for I think at least 2 or 3 decades. We've published data recently, presented last summer to the Medicare contractors, demonstrating that not only can our test identify patients who are in this high risk category, who will have a low risk of progression or a high risk of progression compared to the population based estimate, but also able to go ahead and demonstrate that we can find people who are eligible for ART who actually have a very, very likelihood of getting any kind of response.

Speaker 2

And the benefit to that of course is avoidance of radiation complications, the therapy itself and at least based upon a publication back in January this year, the use of our test in these ART eligible patients, to help rule out unnecessary intervention probably saves the Medicare Trust Fund north of $900,000,000 which is a great way to improve healthcare outcomes by reducing complications with no benefit and of course cost extraction.

Speaker 7

Got it. And then just on just a follow-up on the tissue cipher, obviously great to see that product outperforming your expectations. Just kind of curious, looking back, what do you think are the key drivers of the outperformance other than that market being actually bigger than you had initially estimated?

Speaker 2

Well, you took away one of the drivers, but okay. I think that what we saw during diligence prior to the acquisition was a fairly rapid sort of head nodding, yes, I would call it, from the gastroenterologist that we contacted during diligence about market interest is what's the on that need really like. And I think to a tee there is good recognition saying, hey, we have this FDA approved device radiofrequency ablation tool or tools that we use in people with high risk Barrett's disease on pathology, high risk on pathology. And this tool is going to be very, very effective at really stopping progression to esophageal cancer in its tracks. The problem is that we also recognize that because we don't intervene with people with nondysplastic various esophagus disease, which is that ends up being the larger population of people who actually progress to cancer because we're just surveying them.

Speaker 2

And so the ability of our test to say, hey, you can take a non dysplastic Barrett's disease, which has a lower chance as a population of progressing compared to a high risk on pathology Barrett's patient. We can demonstrate with our test that the risk of progression is actually higher or the same as depending on what study one looks at as a high risk pathology patient that therefore the use of intervention like RFA ablation would be a fantastic way to basically halt those patients' likelihood of progressing. And so that was a fairly easy concept to present to gastroenterologists during diligence. And I think besides sort of undersizing the market opportunity during diligence a couple of years ago and that obviously having impact in terms of volume. The other area is that the assumptions we made in terms of physician interest in really getting to a better treatment plan for their patients is being realized.

Operator

We now have the next question from Mason Perico from Stephens Inc.

Speaker 8

Hey, guys. This is Jacob on for Mason. Thanks for the questions here. Just one on SEC real quick. So on the potential of updated NCC and guidelines including DecisionDx SCC, do you perhaps have any insight into what level inclusion or what the language would have to look like in NCC and guidelines to meet the threshold of the Novitas draft LCD based on how it's currently written?

Speaker 8

Or maybe what are different ways that SEC could be included in the updated guidelines, but for whatever reason still not be covered?

Speaker 2

So we don't have any insight in terms of how that might be considered or discussed. I can tell you what we think is probably appropriate maybe. So within the current squamous cell carcinoma NCCN guidelines, there is a table that sort of defines patients in the categories of risk. Having 1 or more of these clinical pathologic factors puts you in kind of the high risk patient population and having a subset or multiple factors puts you in what they call the very high risk patient population. Both of those populations are eligible for adjuvant radiation therapy.

Speaker 2

We would think it's probably appropriate given how it's structured in the NCCN guidelines to basically add our DECISION DX SCC test result as a molecular factor in that sort of clinical pathologic and now molecular factor table, putting people in the categories of high risk of very high risk disease, that to me makes the most logical sense out of the current structure. So that might be an expectation we would kind of have because it just seems to be the easiest way to have a clinician contemplate the value of our tests. The second question is, if the Novitas LCD finalizes as is, what does that mean, I guess, was your question, if I got it right, Jacob. I would think that, one, that nobody has any experience with this Novitas LCD to see how different inclusions are approached with different tests. But I assume if it was included somewhere like I just described, then that should be considered a covered test, at least based upon, I don't want to say just natural common logic there, but that seems to make the most sense.

Speaker 8

Yes, that makes sense and that's helpful. Thanks for that color there. And then one follow-up here on your pipeline atopic dermatitis test. Mentioned it on the call that you plan on watching it by the end of 2025 and maybe some additional data this year. But just on in terms of reimbursement for that test, is there a foundational LCD in place that you could obtain Medicare coverage for?

Speaker 8

Or would it have to go through the whole submission draft to final LCD process?

Speaker 2

That's an excellent question. So there is no foundational LCD or even test specific LCD covering these kinds of tests that could help guide which systemic therapy one should use for psoriasis or atopic dermatitis patients. So that doesn't exist at all today. However, it's also important to understand that we think that the inflammatory skin disease test is likely to be a younger population anyways. So you're looking at different reimbursement opportunities besides sort of Medicare playing an important role relative to say, melanoma or skin cancer.

Operator

We now have Catherine Schuch

Speaker 9

This is Tom Peterson on for Catherine. Thanks for taking our questions and congrats on a solid quarter and solid 2023. I guess maybe one for Frank to start. How should we be thinking about OpEx growth in 2024? And I heard your comments on sort of the cash flow from operations cadence here in 2024, but given the reimbursement outlook, I guess, how confident are you in achieving the positive cash from operations target in 2025 that you previously set?

Speaker 4

Hey, thanks for the question. As we said before, we still we haven't changed or amended that long range target guidance that we gave, I guess, 1.5 years ago maybe at this point. So we're still on track for that. I think you'll see OpEx growth will be lower than revenue growth. But like other companies, we continue to see pressure on costs and inflation is real.

Speaker 4

So it impacts every aspect of your business at this point. So there's growth to grow the business. There's growth as a result of inflation in the economy. And then there's also we're working hard to be financially disciplined to make sure we manage to that. So still maintaining the guidance we gave and feel good about getting there.

Operator

We now have Thomas Flaten of Lake Street.

Speaker 10

Hey, thanks. Congrats on the quarter. Just to clarify, Frank, it was implied in an answer you gave earlier, but if Novitas finalizes as it is, you will continue accepting SDC claims even though you're not going to get paid on them. Is that a fair assumption?

Speaker 4

We haven't that's a bigger question, Thomas, is you stop making a test available if it's not being appropriately reimbursed. I don't know that we've made that decision. I think that there's a lot that goes into It's a valuable test. It's important for patients. We're seeing every day with literally thousands of doctors how it's changing the way they're treating their patients.

Speaker 4

And you and I talked about it. My dad is 85 and if he had a small squamous cancer on his head and the just because it was a little bit over a centimeter and the doctor wants to do head above the shoulders radiation therapy, that's awfully tough. I mean that's that'd be tough to put a patient through. So we haven't made any decisions about keeping or dropping availability of the test, but we would have to wrestle with that at some point if it got there, I guess.

Speaker 10

Got it. And you mentioned expanding the tissue side for sales force. And I think last time you mentioned specific numbers, 24 reps. Is that going up to 30? Can you give us some quantify can you quantify that?

Speaker 10

And then as a follow on to that, any changes you're making to the ID Genetics sales team?

Speaker 4

So I don't think we've discussed

Speaker 2

the numbers we're targeting growth. The plan we're working towards is a early 2nd quarter expansion plan. I don't think we've disclosed numbers that we can all correct now.

Speaker 4

And then on ID Genetics, Thomas, we're keeping eye on that one. As you saw from the report, we're getting we're very pleased with the traction we're getting there. Again, it's just it's such a that test makes such a difference to the physicians who are ordering their patients. And we really would like increase the size of the megaphone for that. It's a great test and it gets good traction.

Speaker 4

But we're also reiterating an earlier answer, we're also being very careful on operating expenses and trying to balance that. So we're likely not seeing the volume growth that we could possibly see there, but we're making sure that we also don't have a big increase in cash usage.

Operator

We now have Mark Massaro of BTIG. You may proceed with your question. Hey guys, this is Vivian on for Mark. Thanks for taking the question. I'll maybe just keep it to 1.

Operator

So on the recent publication in BDM, also recognizing that you did publish a study on SEC fairly recently, earlier this year. What additional evidence of readouts should we be expecting on the SEC front?

Speaker 2

So we had discussed, I guess back in the summertime that we had presented data that have been published in abstract form to both Medicare contractors that were reviewing our SCC test. One piece of data was a sort of request, I guess you would say from the MolDX program to really have a more clearer understanding of the independent value that our SCC test adds on top of NCCM or BWA staging systems. And so, a publication that focuses on that has been accepted and it shall come out shortly. So that's one significant piece of data that we think answers a significant portion if not all, and they can be all as too aggressive there of the Pimeta MALDI X questions, I guess you could call those in the draft LCD. The other article which has also been accepted and we presented this data last summer and last fall certainly to both Medicare and also clinicians focuses on the newer data of our tests to take patients who are eligible for adjuvant radiation therapy, identify the proportion of patients who get a really strong benefit from that intervention and more importantly perhaps from a healthcare system and patient care perspective, identify the majority of patients who appear to get no benefit from adjuvant radiation therapy.

Speaker 2

And as such that allows a clinician and a patient in a shared decision making process to say, hey, you are eligible for ART based upon the decision DX SCC test result. However, say it was a low risk Class 1 test result, you have a low likelihood of progressing. So it's not 0, but it's a lower likelihood than I thought you would be at risk for relative to your clinical and pathological factors. And by the way, a Class 1 test result in this test from Castle also demonstrates that you have a very low likelihood of actually receiving any benefit from adjuvant radiation therapy. So that study has also been accepted and again should be out shortly.

Speaker 2

So I think those are some noteworthy near term publication milestones that are not only important for the clinical use of our test with clinicians thinking through where do I use this test, how do we use how to get value out of it, but also hopefully for both of the Medicare contractors.

Operator

Okay, great. Thanks for taking the question.

Speaker 2

You're welcome.

Operator

Thank you. We have no further questions. So I would like to hand it back to CEO, Derek, for any final remarks.

Speaker 2

This concludes our Q4 and full year 2023 earnings call. We thank you again for joining us today and for your continued interest in Castle Biosciences.

Operator

Thank you.

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Key Takeaways

  • Record 2023 financial performance: Revenue grew 60% year-over-year to $219.8 million, with a 43% five-year CAGR, 70,429 test reports (+59% yoy), and positive cash flow and adjusted EBITDA in Q4.
  • Core dermatology tests drive growth: DECISION DX Melanoma volumes rose 20% to 33,000 reports, and DECISION DX SCC volumes surged 92% to 11,442 reports, backed by clinical evidence of improved survival and potential Medicare savings near $972 million.
  • TissueCypher adoption exceeds expectations: Barrett’s Esophagus test volumes climbed over 300% to 9,100 reports in 2023, expanding the total addressable market by ~$1 billion and prompting a planned commercial team expansion in Q2 2024.
  • Rapid growth in mental health testing: ID Genetics pharmacogenomic tests more than doubled to 10,921 reports, with real-world data showing 2.65× higher remission rates in major depressive disorder when guided by the test.
  • 2024 outlook and priorities: Company targets $235–240 million in revenue, ~80% adjusted gross margins, continued R&D and commercial investments, and expects operations‐cash flow positive quarters after Q1.
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Earnings Conference Call
Castle Biosciences Q4 2023
00:00 / 00:00