Castle Biosciences Q1 2024 Earnings Call Transcript

Quartr
Provided by Quartr
May 2, 2024

There are 11 speakers on the call.

Operator

Good afternoon, and welcome to Castle Biosciences First Quarter 2024 Conference Call. As a reminder, today's call is being recorded. We will begin today's call with opening remarks and introductions, followed by a question and answer session. I would like to turn the call over to Camilo Zuccaro, Vice President, Investor Relations and Corporate Affairs. Please go ahead.

Speaker 1

Thank you, operator. Good afternoon, everyone. Welcome to Castle Biosciences' Q1 2024 Financial Results Conference Call. Joining me today is Castle's Founder, President and Chief Executive Officer, Derek Masold and Chief Financial Officer, Frank Stokes. Information recorded on this call speaks only as of today, May 2, 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 teams. Forward looking statements are based upon current expectations and involve inherent risks and uncertainties, and there could be no assurances that the results contemplated in these statements will be realized.

Speaker 1

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 quarterly report on Form 10 Q for the quarter ended March 31, 2024, under the heading Risk Factors and in the company's other documents and reports filed or to be filed with the Securities and Exchange Commission. These forward looking statements speak only as of today, and we assume no obligation to update or revise these forward looking statements as circumstances change. In addition, some of the information discussed today includes non GAAP financial measures such as adjusted revenue, adjusted gross margin and adjusted EBITDA that have not been calculated in accordance with generally accepted accounting principles in the United States or GAAP. These non GAAP items should be used in addition to and not as a substitute for any GAAP results.

Speaker 1

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

Speaker 2

Thank you, Camilla, and good afternoon, everyone. Building on our strength and momentum from 2023, I'm pleased to share that Castle delivered a strong start to the year, growing Q1 revenue by 74% and total test volume by 40% compared to the Q1 of 2023. With our team's consistent execution and successful track record of building a differentiated portfolio of tests across our therapeutic areas, we remain confident in our business and are raising our full year 2024 revenue guidance to $255,000,000 to $265,000,000 from the previously reported guidance of $235,000,000 to $240,000,000 Now let me take you through execution strategy highlights in the quarter and then Frank will provide additional financing highlights before we turn to your questions. Starting with our core dermatology business. For DecisionDx melanoma and DecisionDx SCC combined, test report volume was 11961 for the Q1 of 2024, a 20% increase over the same period in 2023.

Speaker 2

We believe our core dermatology offerings continue to present a long term growth opportunity for us. Studies have shown that these two tests can positively impact patient outcomes and help reduce health care costs. For DECISION DX Melanoma, we delivered 8,384 test reports in the 1st quarter, an 11% year over year increase. As we've discussed, driving test adoption through robust clinical evidence remains a priority for us. This quarter was no exception.

Speaker 2

As you know, our DECISION DX Melanoma test has 2 clinical uses, ruling out a sentineliftobiopsy surgical procedure and predicting risk of recurrence, so the patients can have their treatment pathways adjusted to be more aligned with their biological risk of progression. While one could view these two uses as separate and parallel, the use of our test to rule out a supplemental biopsy surgical procedure must be accompanied with evidence that avoiding this procedure will not put them in harm's way, that is that they have an excellent prognosis should they choose to avoid the synovial biopsy surgical procedure. To this end, I'm pleased to review data from an oral presentation that took place at the March 2024 meeting of the Society of Surgical Oncology. At this meeting, data was presented from 1 of our multicenter prospective U. S.-based studies.

Speaker 2

The data examining the performance of DECISION DX Melanoma in safely ruling out a central to biopsy surgical procedure show that patients with a T1 or T2 melanoma and predicted to have less than a 5% likelihood of a positive sentinelift node by our test, no patients as of the date of the data poll for this presentation predicted to have a less than 5% likelihood of a positive node actually had

Speaker 3

a positive node.

Speaker 2

That's a negative future value of 100% for this use of our test. But as I noted earlier and is clinically important, the study also examined the recurrence of patients who are predicted to have a less than 5% likelihood of a positive node and chose to forego that surgical procedure, as well as patients who were also predicted to have less than 5% likelihood of a positive node, but who for personal preference chose to undergo that surgical procedure anyway. I'm pleased to say that both of these groups were recurrence free during the follow-up period, which had a median follow-up of 2 years. That is, in these two patient populations, our tests had a negative predicted value of 100% for risk of recurrence. This is powerful data that shows the exceptional clinical value that CisionDx melanoma brings to improving patient care decisions and outcomes.

Speaker 2

Separately, in February, we announced a peer reviewed publication of study data showing that DECISION DX melanoma provided significantly better risk stratification than the current American Joint Committee on Cancer Staging System in patients with Stage 1 melanoma.

Speaker 4

This is an

Speaker 2

important patient group as it represents the largest group of melanoma patients. This publication reports the results of 2 large stage 1 cohort studies, including 5,561 patients from the National Cancer Institute's SEER program. This study supports the use of our DECISION DX melanoma test in Stage 1 melanoma to obtain more precise information about a patient's risk of disease progression to again inform more personalized risk aligned treatment and surveillance nasal plans. Looking ahead, we will certainly be focusing our educational effort on these highly compelling data along with the findings from our two publications in 2023 that highlighted the fact that the clinical use of our DECISION DX melanoma test correlated to improved patient outcomes. That is patients live longer compared to those patients who did not have DECISION DX melanoma included as part of their clinical care.

Speaker 2

That is they were untested. Moving on to our CisionDx SCC test. We continue to see strong report volume momentum with 3,577 test reports delivered in the Q1, an increase of 48% compared to the same period in 2023. DECISION DX SCC continues to be supported by a robust and growing body of evidence. We are particularly excited about a study that was published in March of this year that showed in addition to providing risk stratification information, our decision to the X SCC test identified patients most likely to benefit from adjuvant radiation therapy or ART for short and those who can consider deferring treatment given the lower likelihood of benefit.

Speaker 2

This ART response data is of high clinical importance for a couple of reasons. First, ART has been shown to be an effective adjuvant intervention in patients with high risk SCC. However, some high risk SCC patients are either not responsive to ART or the likelihood of metastasis is lower than predicted by their clinical pathological risk factors. In either case, these patients can be subject to ART, which carries both significant complications as well as cost. So the ability of our decision to the SCC test to assist identifying those who are likely not to benefit from ART from those who are likely to benefit from ART has high clinical actionability.

Speaker 2

Furthermore, based off of our 3 year real world data, more than 98% of the patients that we test clinically are eligible for ART consideration under 1 or more of the existing guidelines. Importantly, this was the 3rd peer reviewed study published since the start of 2024 demonstrating DECISION DX SCC's clinical and or economic value in guiding ART decisions in the high risk cutaneous squamous cell carcinoma patient population. Now let's turn to our gastroenterology franchise. During the Q1 of 2024, we delivered 3,429 TissueCipher test reports compared to 1383 in the Q1 of 2023, which is 148% growth. As a reminder, we believe the total market opportunity encompasses approximately 415,000 patients annually who meet the intended use criteria for this test, representing an estimated U.

Speaker 2

S. Addressable marketplace of approximately $1,000,000,000 As such, we believe our tissue cipher test represents significant long term growth opportunity as we're in the very early stages of market penetration. We're excited about the growth prospects of the test and we are equally pleased by its clinical utility to determine a patient's individual risk of progression from Barrett's Esophagus to cancer. Turning to our mental health business, we delivered 4,078 IgGenix test reports in the quarter compared to 2,150 in the Q1 of 2023, which is 90% growth year over year. We believe the ongoing momentum we're experiencing is in part driven by our unique value proposition.

Speaker 2

In fact, data shows that using our test, which considers a combination of drug gene, drug drug and lifestyle factors, contributed greater remission and greater relapse control in patients with major depressive disorder and anxiety than the trial error method of therapy selection. Further, we recently announced new data showing that while 2 thirds of iGenx recommendations for patients ages 65 and older were due to drug gene interactions, 1 third were due to drug drug or lifestyle factor interactions. Highlighting the value of the IgNX 3 in-one approach to providing tailored guidance for neuropsychiatric medication selection. Moving on to our pipeline, we're making good progress on our inflammatory skin disease pipeline initiative and expect to provide you with additional updates in the second half of this year. This pipeline genomic test for patients with moderate to severe atopic dermatitis, psoriasis and related conditions is targeted for launch by the end of 2025, assuming a positive outcome of our discovery, development and validation efforts.

Speaker 2

Lastly, I'm honored to share that for the 3rd year in a row, Castle has earned a Top Workplace USA Award, underscoring our position as a leader in creating an exemplary workforce culture. I want to thank each and every member of the Castle team for their continued hard work. I will now turn the call over to Frank, who will provide details relating to our financial results.

Speaker 4

Thank you, Derek, and good afternoon, everyone. As Derek highlighted, we delivered excellent financial results to start the year. Revenue was $73,000,000 for the Q1 of 2024, an increase of 74% over the Q1 of 2023. The increase was driven by higher ASPs and test volume growth. I'd note that Q1 2024 volume reflects our historical quarter over quarter seasonality that is flat over the 4th quarter.

Speaker 4

Further impacting our Q1 2024 volume is the timing of our national sales meeting, which occurred in the Q1 this year compared to the Q3 in previous years. Historically, the Q2 sees growth sequentially over the Q1, and we expect the Q2 2024 to follow our typical Q2 volume trend. Adjusted revenue, which excludes the effects of revenue adjustments in the current period related to tests delivered in prior periods was $71,300,000 for the Q1 of 2024, an increase of 64% over the Q1 of 2023. Our gross margin during the Q1 of 2024 was 77.9% compared to 70.5% in the Q1 of 2023. And 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 80.5% for the quarter compared to 76.5% for the same period in 2023, an improvement of 400 basis points.

Speaker 4

Turning to expenses, our total operating expenses including cost of sales for the Q1 of 2024 were $78,400,000 compared to $73,600,000 for the Q1 of 2023. Sales and marketing expenses were $30,500,000 compared to $29,900,000 for the same period in 2023. The increase is mainly due to higher expense for training events and speaker conferences and expenses for salary and wages, partially offset by lower expense for travel and lower stock based compensation expense. General and administrative expenses were $18,000,000 compared to $16,800,000 for the same period in 2023. The increase is primarily attributable to higher expense for professional services, higher general administrative costs and higher salaries and wage expense, partially offset by lower stock based compensation expense.

Speaker 4

Cost of sales expenses were $13,900,000 in the Q1 of 2024 compared to $10,200,000 in the Q1 of 2023, an increase of $3,700,000 primarily due to higher personnel costs and increased expenditures on supplies. The increase in personnel costs primarily consists of higher salaries and wages, employee benefits and bonuses reflecting headcount additions made to support business growth as well as merit and annual inflationary wage adjustment for existing employees. Supply and service expenses increased largely due to our higher test volumes. R and D expenses were $13,800,000 in the quarter compared to $14,400,000 for the same period in 2023, primarily consisting of lower clinical studies expenses and advisory board services, partially offset by higher personnel costs. Total non cash stock based compensation expense, which is allocated among cost of sales, R and D and SG and A, totaled $12,700,000 for the Q1 of 2024, down from $13,500,000 for the Q1 of 2023.

Speaker 4

Interest income increased by $700,000 for the Q1 of 2024 compared to the Q1 of 2023. The increase primarily reflects higher interest rates earned on our cash equivalents and our purchases of marketable investment securities beginning in the Q3 of 2022. Our net loss for the Q1 of 2024 was $2,500,000 compared to a net loss of $29,200,000 for the Q1 of 2023. Diluted loss per share for the Q1 of 2024 was 0 point 0 $9 compared to diluted loss per share of $1.10 in the Q1 of 2023. Adjusted EBITDA for the Q1 of 2024 was $10,500,000 compared to negative $15,100,000 for the Q1 of 2023, an improvement of $25,600,000 The substantial year over year improvement primarily reflects strong top line growth along with continued disciplined expense management.

Speaker 4

Net cash used in operating activities was $6,800,000 for the Q1 of 2024 due in part to annual cash bonus payments and certain healthcare benefit payments that are not expected to recur during the remaining 3 quarters of 2024. Net cash used in investing activities was $19,700,000 for the Q1 and consisted primarily of purchases of marketable investment securities securities of $60,800,000 and purchases of property and equipment of $9,200,000 partially offset by the maturity of marketable investment securities of $50,200,000 Net cash provided by financing activities was $10,600,000 for the 3 months ended March 31, 2024 and consisted primarily of $10,000,000 of proceeds from issuance of long term debt and $1,100,000 of proceeds from contributions to our 2019 employee stock purchase plan, partially offset by the $500,000 payment of employee taxes attributable to the vesting of restricted stock units. We ended the quarter with cash, cash equivalents and marketable securities of $239,200,000 As Derek mentioned, we are raising our 2024 revenue guidance to $255,000,000 to $265,000,000 up from $235,000,000 to $240,000,000 reflecting strong Q1 execution. In conclusion, we're very pleased with our execution in the Q1 of 2024, highlighted by strong revenue and test volume growth and an upward revision of our full year revenue expectations.

Speaker 4

I'll now turn the call back over to Derek.

Speaker 2

Thank you, Frank. In summary, the Q1 marked an excellent start to the year with strong execution across the company. I'd like to conclude today by thanking our Castle team. Thank you for your continued interest in Castle. Now we will happy to take your questions.

Speaker 2

Operator?

Operator

Thank you. The first question comes from Sabu Nambi with Guggenheim. Your line is open. Please go ahead.

Speaker 5

Hey, thank you for taking my questions. Could you provide initial thoughts on how should we think about Q2 across the different products? The typical seasonality for derm, but how should we think about tissue cipher, ID Genetics and we should still assume no revenue for SCC, right?

Speaker 4

Yes. So we the guide only has SCC through this month, through May. And we're still early in TC and ID Genetics. So I'm not sure that we're feeling seasonality yet in those two products. But in the case of tissue cipher, we probably need maybe 1 more quarter to be able to be a little bit more accurate in our modeling there just because we as you recall, we had the pause in orders in the Q3 last year.

Speaker 4

So we're probably seeing that just beginning to normalize. So we're liking what we're seeing. I don't there may be seasonality there, but we're probably not able to model that in just yet.

Speaker 5

Got it. Thank you. And then on LTT final rule, I think we all have clarity, but just any additional thoughts given that all your current marketed proprietary tests are all approved under New York CLEP. Could you provide any additional color just specifically on tissue paper, which has conditional approval? And my understanding is it still is under coverage, but any thoughts there?

Speaker 2

Yes. So our Pittsburgh laboratory, which is where tissue cipher is run out of, past, I guess, that's the New York City inspection as a permanent laboratory. The conditional approval for tissue cypress, the timing process with New York State as I understand that. So given the FDA language of New York State Department

Speaker 4

of Health approval, initial approval, I think all of

Speaker 2

our marketed proprietary tests are in good shape.

Operator

Our next question comes from Kyle Mixon with Canaccord Genuity. Your line is open. Please go ahead.

Speaker 3

Hey guys, thanks for the questions. Congrats on the quarter. Yes, I guess Frank, why the decision to exclude SEC past May? Why is May the right month, I guess, in June to think about that? And then maybe for Derek, does the recent publication and the guidelines for SEC make a difference with reimbursement over time, like maybe like post this, like in the aftermath of the decision?

Speaker 3

Thanks.

Speaker 4

Sure. I'll go first, Kyle. I mean, we could pick any month, right? We just we know where we are now, and so that's the we've got visibility on May. And so that's given the uncertainty in timing, that's where we pick to put

Speaker 2

the pin in it. Regarding the measure I discussed on the call earlier, Kyle, So we actually had 4 or we saw 4 different publications come out around SCC, either primary publications or one was an expert panelconsensus review recommendation on clinical use of a test. On the one I highlighted on the call, which was really the one focusing on the use of our test to predict therapy response to adjuvant radiation therapy. That's a pretty significant manuscript because more than 98% of the patients that we test clinically today are eligible for adjuvant radiation therapy under 1 or more of the society guidelines out there, including NCCN. So that is our population that we're testing and the ability to rule out a substantial number of patients, the majority actually, who we would predict would not receive a clinically discernible benefit really has a great impact on patient care in terms of reducing complications through unnecessary procedure and also has a great savings to the Medicare trust funds since these are mainly Medicare based patients.

Speaker 2

So I think from a coverage perspective, if this article and these 3 article other 3 articles are not included in the reviews of any final LCD, these would certainly be clinically relevant articles to reopen up or challenge or initiate a reconsideration process, at least in our eyes.

Speaker 3

Okay. That was great guys. Just a quick one. The dermatologic ASP increased 40% year over year. I think that makes sense given I think recent SEC ASP trends were pretty good, but it's also a 13% sequential increase from the 4th quarter.

Speaker 3

So what's driving some of this movement? And can we similar double digit increases quarter over quarter going forward?

Speaker 4

I wouldn't model that level of increase going forward. We had some good progress on collections and we did have some earlier claims, prior period claims that we collected at a higher rate than we had anticipated, which accounted for some of the out of period or prior period revenue. But we're continuing to make progress, but my expectation is it's slow and steady rather than accelerating.

Operator

We now turn to Sung Ji Nam with Scotiabank. Your line is open. Please go ahead.

Speaker 6

Hey, this is Corey Rosenbaum on for Sung Ji. So regarding the final rule on the FDA's LDT regulations, I recognize your existing products are not affected. Obviously, they will take multiple years to be phased in and they may face hurdles along the way. But does this change your strategy or the timeline for your development pipeline, specifically for the inflammatory skin disease products? I know it might be too early to tell, but any insight here would be great.

Speaker 2

That's an excellent question, Corey. So our guidance so far has been that we believe we were on track or remain on track to launch the initial version of our tests for inflammatory skin disease therapy response prediction by the end of 2025. There are a number of things of areas within the final rule that the FDA indicates they're going to be clarifying in the next period of time. I'm not sure if that means 2 months or 2 days or 6 months. We certainly plan to have discussions around what this means for future marketed tests since there's no way that will be launched by May 6 this year.

Speaker 2

But as of right now, I would say that we're so far out between now and the end of 2025 that I wouldn't we wouldn't be positioned to go ahead and say that that timing should change at this point. But obviously, as we work through the final rule and understand how we want to how we would have newer tests managed, we can provide clarity in future quarters.

Speaker 6

Great. That's great insight. Appreciate it. And also you previously mentioned a potential expanded market opportunity for uveal melanoma in the early detection of the disease. Are there any updates in terms of the development pipeline there and we might be able to get some updates on that initiative?

Speaker 2

Not on this call here, but that's a good question there. So I can't recall any internal milestones that provide clarity on that, but let's get back to you guys in the summertime.

Operator

Our next question comes from Thomas Flaten with Lake Street. Your line is open. Please go ahead.

Speaker 2

Great. Appreciate you

Speaker 3

guys taking the questions. On the Q4 call, you mentioned that in early 2Q, you would be evaluating a sales force expansion for tissue Cipher. Do you have any updates for us on that?

Speaker 7

Yes. So

Speaker 2

we've actually expanded our sales force for tissue Cipher. The majority of the expansion territories were filled, I think, effective April 1, and there's a couple that come in, in the last week or 2. So the initial expansion efforts in 2Q are essentially done. We do plan on kind of watching the expanded territories once we have the representatives trained up in the field full time, see how the responsiveness is and may look to do an additional expansion here in the second half of twenty twenty four, depending on kind of what we're seeing in terms of territory productivity growth. But otherwise though that expansion you could say was largely completed by now.

Speaker 2

So you're really talking about sort of beginning to see, I think, an impact of that. We estimate 5 to 6 months from the date of hire to when you begin to see good productivity coming out of a new area manager. So I would think towards the end of Q3, Q4, we should be able to see publicly a nice impact on expansion.

Speaker 3

Got it. And then Frank, the updated 2024 guidance is within range of your 2020 5 original long term plan. How should we think about 2025 in the context of having increased the guidance to this level for 2024?

Speaker 4

Recall that our guide, Thomas, assumes that we even though the evidence is, in our view, even to layperson clear that our SCC test has great clinical utility, we are assuming that, that comes out of our revenue in the back half of this year in 2025. So we would have that headwind there. But you're right, we're close to there as we sit here today.

Speaker 2

Got it. Appreciate it. Thank you.

Operator

We now turn to Paul Knight with KeyBanc. Your line is open. Please go ahead.

Speaker 8

Hi, Derek. A question on the tissue cipher and ID genetics are you're seeing obviously big growth there. Are you is it kind of pull through or are you really putting in a focused marketing effort on those two tests?

Speaker 4

Yes. We hey, Paul. Thanks for the question. We definitely market all of our tests in a very thoughtful and deliberate way. So we do see great demand for those tests, but the hurdle to achieve that or to recognize that demand is physician education.

Speaker 4

And that's really what our marketing effort is focused around is physician education, making sure that the targeted healthcare providers understand the benefit to their patients of using our tests. So with both of those tests, once a healthcare practitioner understands that benefit, then there's really good pull through. They get it and they become adopters in many cases pretty quickly. But to get them there, we have to educate. So these are still fairly pinpoint use here on these tests.

Speaker 4

It's not it's a very distinct subset of patients. And so we need to first illustrate to the physician which subset of his patients will benefit and then to help them understand what that benefit is. And then for many of them, then they want to say, okay, I get it, I get which patient, I get how it can help. Now walk me through your data and let me get comfortable that you're going to do what we think we're going to do here. So we have a very I mean, it's very detailed, very in-depth.

Speaker 4

The team has done an incredible job. Our physician facing materials are incredibly well developed. We've got a large team of very smart people that work very hard to put that together and it's very effective, but you still have to get in front of the physicians. So that tip of the spear interaction is still very important.

Speaker 8

On SCC, are physicians ordering that test? Are they also ordering more and more DX Melanoma tests as

Speaker 2

well meaning? I don't know if you've analyzed Yes. Is there a halo effect of having them see better utility for both disease states, you mean? It's interesting. I don't Frank was going to cut me off and vice versa.

Speaker 2

We haven't analyzed that from our perspective on a

Operator

Ladies and gentlemen, thank you for your patience. We have the speakers reconnected. Paul, please continue with your question.

Speaker 8

Yes. The question on the halo effect of subsequent orders after an SCC prescription.

Speaker 4

Yes. Thanks, Paul. I gave such a great answer. I hate that it got cut off. We do think there's nice halo or pin action there.

Speaker 4

The clinical utility for the 2 tests is very similar. So once you illustrate a healthcare practitioner the benefits of the SCC test to that group of patients, it's a fairly easy adjacency to demonstrate the benefit to melanoma patients of our melanoma test. So, it's very similar clinical utility just for 2 different distinct groups of patients. And, we your instinct is right. That's a short step to the adjacency there.

Speaker 2

Thanks.

Operator

Our next question comes from Mason Perico with Stephens. Your line is open. Please go ahead.

Speaker 7

Hey, guys. Thanks for taking the questions. I'll actually just keep it to one here. There's been a lot of questions in past quarters on how you guys will shift around resources if decision DX SEC happens to lose coverage. I want to ask about the capital allocation strategy if coverage were to remain in place and cash generation was to remain elevated.

Speaker 7

How would you rank order your priorities in terms of organic investments if that was to play out? How would you think about sales team additions across the franchises and what other investments

Speaker 2

would you prioritize if that happens to play out? I'll start with that here and Frank can adjust it. So I think we have plans that assume SEC coverage is maintained, but once the sort of cloud is lifted, then we can execute those with higher levels of confidence based upon what you just pointed out, which is cash generation opportunity, right? So I think that we're probably close to where we should be in terms of our skin cancer dermatology focused sales team. We even with this most recent expansion going what into the mid-30s, I guess, with tissue cypher, we probably are 60% to where we need to be at the end of the day.

Speaker 2

So we would certainly look at pulling forward some of those territory expansions. Although again, we also want to balance that against breaking too many relationships at the same point in time between existing customers with having them deal with new area managers as hires versus the ones they've been dealing with. So that's a balancing act there. We have certainly also held back on scaling our IGX sales team and marketing team as well, due again kind of waiting and watching and also getting our feet comfortable with where we're targeting our efforts and making sure that we're getting the kind of response that we expect. So there are a number of areas there.

Speaker 2

I could see us deploying capital in terms of just improving the rate of penetration of our existing tests without much of a change in the core CisionDx melanoma and SCC dermatology teams. I think below that level, there are probably some additional internal R and D activities that we'd be comfortable moving a little more quicker on that we haven't talked about publicly. So we could see some deployment around internally developed pipeline tests, although one could say part of that might also need to be weighed against the sort of additional clarity from the FDA final rule here in terms of how they're going to deal with new LDT tests. So that's something we would thoughtfully look at, evaluate, understand what we do know, we don't know. And I think the last one there probably is saying, are there acquisition targets out there we'd be more comfortable pursuing versus not pursuing.

Speaker 2

And obviously, in a couple of years, we'd like to turn around and say we have 2 or 3 marketed reimbursed tests in sort of the gastroenterology area. Those could come from internally generated assays, although it would be nice to find some additional tests that are out there that already have coverage and have been marketed because that could go and slip in right away. But again, that's not necessarily a core rush. But if it looks sort of out to maybe 2027 and turnaround, it would be nice to have 2 or 3 tests that are clinically actionable and valued by our dermatology, I mean, by our gastroenterology customers. The same goes for sort of this mental health franchise call point.

Speaker 2

And at that point in time, of course, we would have expected to launch our inflammatory skin disease test or series of tests to the dermatology market. We are evaluating right now is that sort of a separate parallel sales force that makes most sense to our customers. Is that too confusing? So we should actually go to a much higher level of the number of dermatology sales representatives, but covering 3 or 4 products to the same customers. So we have to work through what makes sense from a customer perspective and a confusion perspective.

Speaker 2

And so those are the kind of things I would say in order of ranking, commercial expansion efforts, some R and D internal activities and then are there other things that we can bring in a company that have been developed by others again.

Speaker 7

Got it. That's helpful. Thanks, Barrett.

Operator

Our next question comes from Catherine Schulte with Baird. Your line is open. Please go ahead.

Speaker 9

Hey guys, thanks for the questions. First for MolDX, I think we're coming up on the 1 year mark from the squamous cell draft LCD at the beginning of next month.

Speaker 10

Have you had any additional conversations

Speaker 9

with them? And what do you think the likelihood is they could reverse their decision in the final LCD?

Speaker 2

So we have ongoing interactions with the MolDX medical directors as well as the other Medicare contractors as well, which I think we have always done that, we've tried to anyways, I would say. So they are certainly aware of these newer publications that have come out that support the clinical use of our tests, obviously, from standpoint of risk stratification as well as predicting response or lack thereof to adjuvant radiation therapy. Even our risk stratification table has more than doubled in terms of the number of patients under study and published studies. So hopefully those kinds of published elements make an impact on them. I think the pumpkin date according to the Medicare Part of Integrity Manual, is 365 days and data is being posted.

Speaker 2

I've seen in the past where there were times when MolDX has taken a month or 2 longer, which I guess they're asking for a grace period on that. So we think kind of a June, July time period is the right time period to still think about, I think, in general. Now in terms of likelihood of them, reversing is a funny word. I would say the medical records at MolDX, I think, have been fairly consistent publicly and also with us that they're going to try and review the literature, do the right thing from an evidence based perspective. And if they miss things, they are very appropriately look to take in public comments and say, we kind of missed something here, we should go and make a change as opposed to kind of digging in their heels and saying, well, we said this a year ago and we had nothing to go ahead and put on your comments for.

Speaker 2

So I think the most relevant recent example that we have talked about last fall was sort of the Cipher LCD, which sort of went from a foundational non coverage LCD to a foundational covered LCD between draft and final posting. I think there are parallel elements between the Cipher data development and SCC, but of course, that's in our eyes, not necessarily the eyes of the Molby external collector. So I'm quite hopeful that once they see the significantly newer and greater data, certainly publications that were answering directly some of the questions they had about our test as well as this new ART response data provides an element of knowledge that we aren't creating new treatment pathways. Our test is having a tremendous impact in improving appropriate care within existing treatment pathways for patients based on both risk stratification information as well as this newer data regarding adjuvant therapy, adjuvant radiation therapy response.

Speaker 9

Okay, great. And then on tissue Cypher, just with volume is flat sequentially here, you mentioned you're still figuring out that seasonality. So do you think that was seasonality? Or were there other dynamics going on there beyond that and the national sales meeting?

Speaker 4

Yes. I think it's probably some seasonality there and maybe there could be a little bit of kind of pull forward, I guess, pull through. There may have been some patients who were seen when we were in a pause on taking orders and those orders came through in the 4th quarter, which might have shifted them from they might have been 3rd quarter orders and got shifted to 4th. And unfortunately, we don't know for sure. So that's a bit of a proposition there.

Speaker 4

So I think after this quarter, we'll probably be able to see what a normalized kind of cadence looks like and be a little bit more able to see where we are in the penetration pathway there.

Speaker 9

All right, great.

Speaker 1

Thank you.

Operator

Our final question today comes from Mark Massaro with BTIG. Your line is open. Please go ahead.

Speaker 10

Hey, guys. This is JV on for Mark. Thanks for taking the questions. And I apologize if this has been covered already. I had some technical difficulties.

Speaker 10

But so I think in recent months, we started to see a pickup in opportunistic M and A. You have a very strong balance sheet. So I was just wondering how you're thinking about deploying that balance sheet, just in light of recent competitor valuations, and potentially adding to the bag here specifically for derm? Thanks. Yes,

Speaker 4

of course. So, you're right. Assets are challenged in valuation in many cases. We certainly look at other opportunities. I think inorganic growth is down the priority as we think about, 1, the value of what we have in house and 2, our own capabilities.

Speaker 4

And so we always look at things, we always evaluate things and give them an objective view. But I think for now, external growth is still further down the list of priorities.

Speaker 10

Okay, great. Thanks for taking the question.

Speaker 2

Thank you.

Operator

This concludes our Q and A. I'll now hand back to Derek Mattsold for closing remarks.

Speaker 2

Thank you, operator. This concludes our Q1 2024 earnings call. Again, I thank you for joining us today and for your continued interest in Castle Biosciences.

Operator

Ladies and gentlemen, today's call has now concluded. We'd like to thank you for your participation. You may now disconnect your lines.

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Earnings Conference Call
Castle Biosciences Q1 2024
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