Castle Biosciences Q2 2025 Earnings Call Transcript

Quartr
Provided by Quartr
August 4, 2025

Key Takeaways

  • Positive Sentiment: We delivered $86.2 million in Q2 revenue, beat expectations with 26,574 test reports, maintained strong gross margins, ended the quarter with $275.9 million in cash and raised full-year guidance to $310–$320 million.
  • Positive Sentiment: DecisionDx Melanoma volumes reached 9,981 reports in Q2 (up 16% sequentially and 4% YoY), marking the largest Q2 sequential rise since IPO and management reiterated high-single-digit volume growth guidance for 2025.
  • Positive Sentiment: TissueCypher test reports nearly doubled to 9,170 in Q2, a 92% YoY increase, driven by recognition of unmet clinical need and commercial optimization efforts.
  • Negative Sentiment: DecisionDx SCC faced a Novitas non-coverage LCD effective April 24, 2025, prompting reconsideration requests to both Novitas (accepted as valid) and MolDX, with final coverage outcomes and timelines still uncertain.
  • Neutral Sentiment: Castle advanced pipeline initiatives through a collaboration with Sybase on an atopic dermatitis flare test, in-house development of an AD therapy-response genomic signature targeting late-2025 launch, and leveraging the ProVise acquisition for multi-omics GI diagnostics.
AI Generated. May Contain Errors.
Earnings Conference Call
Castle Biosciences Q2 2025
00:00 / 00:00

There are 12 speakers on the call.

Operator

Good afternoon all, and thank you for joining us for the Castle Biosciences Q2 twenty twenty five Earnings Call. As a reminder, this call is being recorded. We will begin today's call with opening remarks and instructions followed by a question and answer session. I'd now like to turn the call over to Kamida Zucker, Vice President, Investor Relations and Corporate Affairs. Kamida, when you're ready.

Speaker 1

Thank you, operator. Good afternoon, everyone. Welcome to Castle Biosciences second quarter twenty twenty five results conference call. Joining me today are Castle's founder, president, and chief executive officer, Derek Massold, and chief financial officer, Frank Stokes. Information recorded on this call speaks only as of today, 08/04/2025.

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 three 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, intended use populations, and similar items referenced in our earnings release issued today and statements containing projections regarding future events or our future financial or operational results and performance, including our anticipated 2025 total revenue, our expectations regarding reimbursement for our products, opportunities for growth, clinical value of our tests, impacts of seasonality and other trends, the timing of targeted milestones, our m and a strategy, our ability to capitalize on strategic opportunities, including our recent Sybase and ProVise transactions and the impact of our investments in growth initiatives, including our ability to achieve long term growth and drive stockholder value.

Speaker 1

Forward looking statements are based upon current expectations and involve inherent risks and uncertainties, and there can be no assurances that the results contemplated in these 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 12/31/2024 and its quarterly report on Form 10 Q for the quarter ended 06/30/2025 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 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. Following a strong first quarter, our team closed up a very successful second quarter that was ahead of our expectations. We believe this strength reflects the clinical value our tests provide to clinicians and their patients. Thanks to the strong execution by the entire Castle team, we delivered revenue of $86,200,000 and total test report volume of 26,574, with test for our core revenue drivers growing 33% year over year compared to the 2024. Additionally, we are pleased to have maintained strong gross margins and a healthy balance sheet, ending the quarter with $275,900,000 in cash, cash equivalents, and marketable securities.

Speaker 2

This financial strength positions us well to continue investing in our near term growth initiatives, including expanding our body of clinical evidence and commercial team optimization efforts along with strategic investments and pipeline developments to support longer term growth. Today, I will walk you through business highlights from the second quarter, and then Frank will provide additional financial highlights before we turn to your questions. Onto our quarterly highlights. For DecisionDx Melanoma, we delivered 9,981 test reports during the quarter, which resulted in a sequential increase of approximately 16% compared to the 2025 and a year over year increase of approximately 4% compared to the 2024. On an absolute number basis, this is the largest second quarter over first quarter sequential increase in volume for DecisionDx Melanoma we have seen since our IPO in 02/2019.

Speaker 2

We expect continued solid growth in the second half of the year. And as a result, we are reiterating our expectations for high single digit volume growth for DecisionDx Melanoma for the full year 2025 compared to the full year 2024. Castle has invested in generating a substantial body of evidence to support the clinical performance and use of our DecisionDx Melanoma test. We're particularly proud of our ongoing collaboration with the National Cancer Institute's Surveillance Epidemiology and End Results Program Registries or NCI SEER for short, which was initiated back in 2021 and continues to evolve. Prior studies have shown that clinicians use DecisionDx Melanoma to inform both avoiding sentinel lymph node biopsy surgical procedures in low risk patients and initiation of surveillance imaging and referrals to medical oncology in high risk patients, which enables early detection of recurrences and earlier initiation of therapy.

Speaker 2

Early detection has been shown to improve outcomes to a greater extent when therapy is initiated with a smaller metastatic tumor burden, which improves net health outcomes. In fact, during the second quarter, we presented novel research aimed at enhancing the clinical management of patients with cutaneous melanoma at the twenty twenty five American Society of Clinical Oncology annual meeting. This NCI SEER study presented an updated matching of patients who received DecisionDx Melanoma as part of their clinical care to those who did not. This large real world cohort included thirteen thousand five hundred and sixty patients with cutaneous melanoma whose treatment plan was managed with the results of our DecisionDx Melanoma test. This represents the largest real world study of gene expression profile testing to date.

Speaker 2

The clinical use of DecisionDx Melanoma was associated with a thirty two percent reduction in mortality risk compared to untested patients, meaning patients whose treatment plan did not include the use of our DecisionDx Melanoma test. These results provide further evidence of our test association with improved patient survival. Moving on to our DecisionDx SCC test, we are very pleased with our volume performance, delivering 4,762 test reports in the 2025. As a reminder, DecisionDx SCC reimbursement for the second quarter reflects a Novitas local coverage determination policy or LCD that went into effect for days of service on or after 04/24/2025 and included non coverage language for our DecisionDx SCC test. That said, early in the third quarter, we submitted our DecisionDx reconsideration request for both the Novitas and MolDx LCDs.

Speaker 2

Under CMS guidelines, MACs have up to sixty days to accept or reject a reconsideration request. Importantly, we have already received notification from Novitas that based upon CMS guidelines, our reconsideration request was determined to be a valid request and was accepted as such. We are still awaiting notification from MolDX. Well, this is not an indication of the likelihood of coverage. It is a step forward in the process.

Speaker 2

It's important to note that as is the case for development of a new LCD, there is no specified timeline for a final reconsideration decision. We expect to keep you informed of updates as appropriate. Now let's turn to our gastroenterology franchise. Tissue Cypher continued its strong momentum in the second quarter, delivering 9,170 test reports compared to 4,782 in the same period of 2024. This represents a 92% year over year growth compared to the 2024.

Speaker 2

We continue to believe the growth drivers for Tissue Cypher in 2025 and beyond include, first and foremost, a recognition of the unmet clinical need, and two, continued commercial optimization, which includes a strong focus on education and awareness. Lastly, moving on to our pipeline initiatives. In June, we entered into an exciting collaboration and license agreement with Sybase, a Swedish based public company that focuses on advanced electrical impedance spectroscopy or EIS technology, which includes both desktop and point of care instruments. The initial goal of the collaboration is to advance the development of a diagnostic test that predicts flares in patients diagnosed with atopic dermatitis. A US market with an estimated patient population of up to twenty four million people.

Speaker 2

We expect that should our development program be successful. This test will enable us to meet another significant unmet clinical need for many of the clinicians who have already adopted our DecisionDx Melanoma and SCC test for use in skin cancers. Staying with this atopic dermatitis theme, I'm pleased to provide an update regarding our internally developed pipeline test. As we've talked about in the past, we have a program underway to see if our novel specimen collection technique, coupled with gene expression profiling, would be successful in identifying a genomic signature that could predict treatment responses to patients who are diagnosed with moderate to severe atopic dermatitis and eligible for or seeking systemic therapy, be it an injectable biologic or an oral therapy. Based upon our analysis to date, we believe that our development program has been successful.

Speaker 2

Specifically, we have identified a signature which has been validated in an independent patient cohort that identifies patients who are elected to have strong relief from the atopic dermatitis symptoms, specifically in their response as measured by three core indexes. First is an improvement in their eczema area and severity index or easy score as is known. Second is improvement in itch symptoms, and third is a reduction in flares. Assuming continued success with our validation assessment, we expect to launch this pipeline test by the 2025. Lastly, our provides acquisitions brings a robust technology pipeline, which has the potential to increase our current GI offerings.

Speaker 2

Specifically, we believe there is an opportunity to create a multi omics approach for improved test value in Barrett's esophagus as well as a non endoscopic sample collection device for pipeline opportunities to potentially expand screening and diagnostic support for patients with Barrett's Esophagus and other GI diseases. And with that, I will now turn the call over to Frank.

Speaker 3

Thank you, Derek, and good afternoon, everyone. Reiterating Derek's sentiment, we are pleased to report strong second quarter financial results. Net revenues for the three months ended 06/30/2025 decreased by 800,000 or 1% to $86,200,000 compared to the three months ended 06/30/2024, due to a $12,500,000 decrease in revenue from our dermatological tests, offset by an $11,700,000 increase in revenue from our non derm tests. The $12,500,000 decrease in net revenue for our dermatological tests was primarily attributable to our DecisionDx SCC test, and the $11,700,000 increase in net revenues from our nonderm tests was largely attributable to our Tissue Cypher test. While we do not typically disclose revenue by test, we estimate that revenue from DecisionDx SCC for the 2025 was just above $15,000,000 If you exclude DecisionDx SCC revenue from both the 2025 and 2024, our normalized revenue growth for the 2025 would be approximately 23%.

Speaker 3

We are providing this information for this quarter due to specific circumstances regarding DecisionDx SCC non coverage decision, which went into effect during the 2025. Adjusted revenue, which excludes the effects of revenue adjustments in the current period related to tests delivered in prior periods, was $86,200,000 for the 2025, a decrease of 1% compared to the 2024. For total revenue for 2025, we are raising our revenue guidance to $310,000,000 to $320,000,000 up from the previously provided range of $287,000,000 to $297,000,000 which reflects the DecisionDx SCC LCD with a date of service effective date of 04/24/2025. Again, we do not disclose revenue by test, but for an apples to apples comparison for 2025 revenue growth, if you exclude DecisionDx SCC revenue from both our '24 and '25 totals, our normalized revenue growth range in 2025 would be approximately 21% to 26%. Our gross margin during the 2025 was 77.3% compared to 80.7% in the 2024.

Speaker 3

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 79.5% for the quarter compared to 83.2% for the same period in 2024. Turning to expenses. Our total operating expenses, including cost of sales for the 2025, were $90,400,000 compared to $82,000,000 for the 2024. Sales and marketing expenses for the quarter were $35,100,000 compared to $32,700,000 for the same period in 2024. The increase is mainly due to higher organizational and business development activities costs and higher sales related travel expenses.

Speaker 3

General and administrative expenses were $22,900,000 for the quarter compared to $18,400,000 for the same period in 2024. The increase is primarily attributable to higher personnel costs and higher information technology related costs. Higher personnel costs reflect headcount expansions in our administrative support functions as well as merit and annual inflationary wage adjustment for existing employees. Cost of sales expenses were $17,600,000 in the 2025 compared to $14,500,000 in the 2024, primarily due to higher personnel costs, higher lab services costs and higher expenses for lab supplies. Increases in personnel costs reflect a higher headcount due to additions made to support business growth in response to growing test report volumes as well as merit and annual inflationary wage adjustments for existing employees.

Speaker 3

Higher expenses for lab services and lab supplies also reflects higher test report volumes. R and D expenses were $12,800,000 for the quarter compared to $14,100,000 for the same period in 2024, primarily due to lower expenses for clinical trials. Total noncash stock based compensation expense, which is allocated among cost of sales, R and D and SG and A, was $11,200,000 for the 2025, down from $13,200,000 in the 2024. Our net income for the 2025 was $4,500,000 compared to net income of $8,900,000 for the 2024. Diluted earnings per share was $0.15 compared to diluted earnings per share of $0.31 in the 2024.

Speaker 3

Adjusted EBITDA for the second quarter was $10,400,000 compared to $21,500,000 for the comparable period in 2025. Net cash provided by operating activities was $20,800,000 for the 2025 and $14,800,000 for the six months ended 06/30/2025. We continue to expect to deliver positive net cash flow from operations for 2025. Net cash used in investing activities was $50,800,000 for the six months ended 06/30/2025, and consisted primarily of purchases of marketable investment securities of $92,800,000 our asset acquisition of Provize, purchases of property and equipment and purchases of debt securities classified as held to market, partially offset by the maturity of marketable investment securities. As of 06/30/2025, we had cash, cash equivalents and marketable securities of $275,900,000 As we look beyond pre buys and the license agreement with Sybase, we look to put the strength of our balance sheet to work through a disciplined and strategic approach to capital deployment, focusing on investing our capital for stockholder value.

Speaker 3

As it relates to M and A, our strategy is centered on complementing our existing portfolio to drive mid- to long term value creation. In today's dynamic reimbursement environment, we consider diversification, expanding both our test portfolio and payer mix, while also maintaining a disciplined approach with an aim to ensure any transaction supports near and midterm profitable growth. Our key M and A priorities at this time include: one, pursuing opportunities where a test is already on the market and has established reimbursement two, favoring tests that complement our current portfolio and or offer high clinical value in adjacent therapeutic areas finally, exploring areas where we can develop pipeline tests that enhance the value we deliver to existing customers.

Speaker 4

In conclusion, I'm pleased with

Speaker 3

our excellent financial results in the second quarter, continuing our long standing history of strong execution and performance excellence. I'll now turn the call back over to Derek.

Speaker 2

Thank you, Frank. In summary, we delivered another strong quarter and furthered our position as a leader in both our dermatologic and gastrointestinal testing franchises. We are excited about our performance in the first half of the year and believe our ability to create value for our stockholders in the near and long term remains intact. Thank you for your continued interest in Castle Biosciences. Now we will be happy to take your questions.

Speaker 2

Operator?

Operator

Thank you very much. We now have to start the q and a session. Our first question comes from Thomas Flaten from Lake Street. Thomas, your line is now open.

Speaker 4

Good afternoon. Thanks for taking the questions and congrats on a great quarter. Just first, with the breakthrough designation you got for DX melanoma just a few weeks ago, anything you can share with us on your plans to seek FDA approval, studies, etcetera? Just lay out kind of the bigger strategic thinking there.

Speaker 2

Thanks, Thomas. Derek here. Yes, with the breakthrough designation device status approved or authorized, we are marching our efforts to go ahead and push forward towards a FDA submission. Timing of that, I don't think we need to make it public at this point in time, but that's part of our expected outcome for seeking PDD in the first place. Got it.

Speaker 4

And then, Frank, with the numbers that you kindly shared around SCC, it seems that kind of on an ASP basis, you may have gotten more than just a kind of a twothree, onethree split throughout the quarter. Are you getting paid on any of the volume that isn't Medicare at this point?

Speaker 3

We get paid episodically on commercial commercial claims. Yes. Not not not insignificant percentages, but we do we do get some payments.

Speaker 4

But but remove that from our thinking going forward as consistent with prior guidance?

Speaker 3

There will be some. One of the challenges you have is just timing, Thomas. A lot of times that comes out of period.

Speaker 2

So sometimes you'll see that show up

Speaker 3

in prior period revenue. But yes, we'll have some modest payments. But again, it's not a significant percentage.

Speaker 4

Got it. Thank you.

Operator

Thank you very much. Our next question comes from Mason Curryshaw from Stephens. Mason, your line is now open.

Speaker 5

Hey, guys. Thanks for the questions here. I think you've historically talked about six months for a sales rep to reach average productivity. Could you give us some insight into how many GI reps had reached that level of tenure maybe at the start of q two as well as how many have now hit that threshold as of today?

Speaker 2

I think we, we scaled to the current level of territories, I think, just before year end. So they would have been certainly in training in the first quarter. So I would think as we're exiting into the third quarter now, you'd assume if our modeling was correct about six months to exactly will be up to full speed, we should be hitting that with a, with a fully maturing, as we call that, sales team in the third and fourth quarter of this year.

Speaker 5

And now that that I well, I guess I'm assuming that the the derm sales force is refocused on melanoma. Could you just give us some insight into kind of what you saw in terms of utilization trends once that shift happened and and how that's progressed since?

Speaker 2

I actually don't think I can from a a a data standpoint. As you know, with the with the LCD being effective April 24, however, there are some there are some laboratory orders coming in and reports that were going out with the data service before April 24. So we didn't really make a hardship till the end of the quarter anyways from sort of a compensation focused standpoint. And, also, the SCC test is important to our clinicians as well. So I think going forward, we can go ahead and see what the third and fourth quarter looks like from sort of a future modeling standpoint if they're solely focused on the melanoma test.

Speaker 4

Got it.

Speaker 6

Okay. Thank you.

Operator

Thank you very much. Our next question comes from Mark Massaro from BTIG. Mark, your line is now open.

Speaker 6

Hey, guys. Congrats on a good quarter, the beating, raise. I wanted to start with your internal developed products for atopic dermatitis. It's nice to see that the program has reached sort of your internal hurdles. So, you know, now that you're planning or still on track to launch it by year end 2025, can you just give us a sense for what the reimbursement outlook is for atopic dermatitis.

Speaker 6

Is this something where you're gonna pursue an LCD, or are there reimbursement mechanisms in place that you could benefit from?

Speaker 2

So one is we are are on track still. I believe it will have this test available clinically as appropriate on a limited launch basis by the end of the year so that so that, I guess when we set that expectation on September 2122. Yeah. So we're on track for that aspect. Reimbursement perspectives, we have three or four areas we're pursuing in parallel.

Speaker 2

Not sure which will end up being the ones that will be the largest revenue drivers in reality. I'd rather not go into detail right now until we see how a couple of those mature out. But suffice it to say, we think there is substantial clinical value to a patient going from sort of a standard of care approach, which is trial and error sounds negative. It's basically trial and trial, to saying, hey. If if you if if your symptoms are severe enough where you, are looking at going from topicals only and taking that step across the transom to systemic therapies, why wouldn't you want to, given the cost of those therapies, in the case of DUPIXENT, the need for injection versus oral, Why would you want to understand when you make that significant up step in terms of therapeutic efficacy as well as side effects as well as cost?

Speaker 2

You want to have your patients understand that they can select tests they can use our tests to go and figure out if this patient is more likely to be a very, very strong responder to JAK inhibitors versus not. So that's quite exciting from our standpoint. But but because of that, I think reimbursement has a couple of options there to go forward. From a modeling standpoint, I would say, you know, starting out the end of this year, I think revenue driving impact is is new is is immaterial for 2026 because it's just launching. So this is more, I think, smooth in the '27, '28, '29 as we see how '26 matures.

Speaker 6

Okay. Great. And my second question, you know, your squamous cell carcinoma volume certainly exceeded my expectations. And I, you know, I recognize that the non coverage decision went live in April. So I I think on the last earnings call, you talked about how you plan to continue to offer the test.

Speaker 6

And so recognizing that you've submitted your reconsideration request for Novitas and MolDex. Should we continue to expect you to continue to offer it perhaps until a time that you hear back from the reconsideration request? Is that the right

Speaker 7

way to think about it?

Speaker 2

Yeah. So we are, we certainly expect over the next couple of quarters to have volume moderate down as we aren't focusing educational sales efforts on that test specifically. We aren't looking to remove the test from the marketplace. I think we we built Council Biosciences to be first and foremost focused on developing innovative tests that make a significant clinical difference in the lives of our patients or the patients that our doctors, are treating. And this is no exception.

Speaker 2

I think this LCD process we've talked about in the past is quite disappointing from a patient care perspective given that Novitas was quite quick in their turnaround is accepting our reconsideration submission as valid, I think that gives us expectations here to move forward even though, of course, that's a beginning of a reconsideration process. So I wouldn't see us removing SCC's marketplace in any time in the short term. I think it's the right patient care decision to keep it available. That will have some moderating impact on COGS, I guess, you would say, margin perhaps. But that's, I think, at the end of the day, the position that we think is right for patients, which means it's right for cash.

Speaker 6

Okay. Great. If I can sneak one last one in. One for you, Frank. Looks like you beat consensus by about 15,000,000 in q two on revenue.

Speaker 6

You raised, I think, the midpoint of the guide by 23,000,000. Can you just give me a sense for, you know, the drivers in the back half of the year and and and remind us about any, seasonality between q three and and the q four?

Speaker 3

Yes. So on melanoma, as we've said, each quarter, we see seasonal flatness typically from Q2 to Q3 and Q3 to Q4. And so that's been the historical trend and that data is in our MD and A that you can see there. Other than that, we're seeing good strong drivers across the business and accordingly raise our guidance accordingly.

Speaker 7

Okay. Thanks for the time.

Speaker 4

Yes.

Operator

You very much. Our next question comes from Puneet Souda from Leerink Partners. Puneet, your line is now open.

Speaker 7

Yes. Hi, guys. Thanks for the questions here. First one on TissueCipher, a strong growth there in the quarter. Just wondering how we ought to think about the cadence of volume growth here at third quarter, fourth quarter.

Speaker 7

And wondering if you're willing to provide anything in terms of 2026 for that.

Speaker 2

We're not gonna maybe last first.

Speaker 3

Not yet. We we we haven't provided any insight into '26 yet. But, yes, we agree. Good good good continued growth in that test test volume trends.

Speaker 7

Okay. Just but in in terms of the overall guide for this year, any context you can provide there in terms of the volume growth we ought to think about?

Speaker 3

I'll give it a try, Puneet. Our guide does assume continued growth in volumes in TC. We expect at some point to hit seasonality with that test. But right now, we're still just very underpenetrated. And so we don't yet see seasonality in it.

Speaker 7

Got it. Okay. And then, appreciate the details on the reconsideration request, the sixty days. Could you elaborate when do you expect exactly to hear back from MolDX? And what was submitted this time around in the reconsideration request package?

Speaker 7

It seems that you have, you know, you have a expectation of positive outcome. Please remind me, mean, if I'm incorrect on that. But and and tell us, you know, how are you thinking about the sort of the overall timing from all the x? And then if it was, again, the reconsideration request was turned down, what would be the other avenues at this point in time?

Speaker 2

So I'll probably take a step up and answer the questionnaire. So one is that we submitted reconsideration request to both Novitas and the MolDx group. Novitas was quite speedy in terms of turning around a acknowledgment or statement that they that they they accepted the reconsideration submission as valid under CMS guidelines, which we expected, by the way. The Palmetto request went in at the same time, I think, maybe same day, the next day of April or something like that earlier earlier in July. Under CMS guidelines, max have up to sixty days to take to acknowledge receipt as being valid or not valid.

Speaker 2

We haven't heard back anything yet, which is, I think, what we think of maybe on the on the script. So I'd expect to hear back towards sort of, you know, within by by Labor Day time period, I think, would be the right timing of that. So that's my expectation. In terms of the package that went in, we certainly aren't gonna post it off, like, the actual package. But if you go ahead and dial back, you you may recall that when those draft LCDs posted in the 2023, once the open comma period closed for both Novitas and for Palmetto, neither one of them were under any obligation to cite any published evidence or literature that had a publication date after the close of this open comma period.

Speaker 2

So I think it was maybe August and then maybe early September twenty twenty three, respectively. So since that time period, we had, I think, eight or nine or seven or eight, peer reviewed publications come to fruition. I think, one set or a couple of them essentially dealt directly with questions or comments that MolDx had asked us about in the draft LCD. So those are those were published in the interim. We did send those to MolDX, but they were not reviewed because they don't have to review things after the close of comment period.

Speaker 2

We also, published two studies that were multicenter in nature, demonstrating that our DecisionDx SCC test can predict responses to patients who are receiving adjuvant radiation therapy. To our knowledge, there was no other biomarker that has been demonstrated in squamous cell carcinoma to predict adjuvant radiation therapy response. Those two publications represented the largest single study ever performed in the SCC population. And the other one was the second largest study ever performed. So we think with the robustness of that data and the use of our test that was demonstrated after the common periods were closed to actually identify patients that will get a response from radiation therapy versus those that will not is an important and significant clinical use, which is the, I guess you'd call it, the verbalized feedback we've got, not only from clinicians but also from our Medicare contractors.

Speaker 2

So I think within that packet of eight or nine publications, there is significant new evidence that goes beyond the LCD and by

Speaker 4

the

Speaker 2

CMS Annual, both MACs should go ahead and accept our submissions as valid. I think that covers it maybe.

Speaker 7

And just yeah. I just wanted to clarify if, again, if if we if you I mean, if if there's a decision that was negative, what are the avenues that are that are left at this point?

Speaker 8

Or if

Speaker 2

But we already have a positive from Novitas.

Speaker 1

No. I think he means the reconsideration. Oh.

Speaker 7

The reconsideration. Yeah.

Speaker 2

That's a good question. I guess if if MolDx comes back and says, you know, we don't think your submission is valid, we would request in I don't think it's a posted information, but we would certainly want to understand exactly why they believe that's the case. I I would have a very hard time to understand how, from a medical regulatory standpoint, they could make such a case, but we would work with work with both MolDX as well as with, central CMS to understand what we would believe would be a incorrect, conclusion. I don't know about timing, etcetera, but that but that's just the MolDX Avenue. Mhmm.

Speaker 2

The Novitas Avenue is moving forward.

Speaker 4

Okay. Okay.

Speaker 7

Alright. Thanks, sir.

Operator

Yep. Thank you very much. Our next question comes from Carl Mixon from Canaccord Genuity. Carl, your line is now open.

Speaker 8

Hey, guys. Thanks for the questions. Great quarter. So just on the gross margin in the quarter, beat our model, beat the Street. Could you talk about the impact from the SEC reimbursement kind of roll off in the quarter?

Speaker 8

It seems like that was much better than we had feared. So could you talk about that? And maybe going forward, what that looks like kind of the next few quarters into 2016?

Speaker 3

Yes. We did it wasn't as low as a normalized gross margin will be because we did have payments for part of the quarter. So I would expect the back half of the year adjusted gross margin doesn't look quite as good as it did Q2. Having said that, it's still one of the better gross margins in the sector, and we work hard to maintain that through disciplined spending in facilities, etcetera.

Speaker 8

Would the Frank, would the mid-70s make sense for adjusted gross margin for like a 4Q, for example?

Speaker 3

Yes. I think we said low to mid-70s, Kyle. Think that's what we said

Speaker 8

in the past. Okay. Okay.

Speaker 4

I'm sorry. Adjust your Yes.

Speaker 8

Of course. And then, Frank Adjust your income. The cash flow from operations positive for the full year. But when you think about the first half of year, think it was like $15,000,000 or so from ops. If you take out SEC, I mean, it seems like it would be just a little bit better than breakeven maybe.

Speaker 8

When you look at the 2026 outlook, just excluding SEC from the top line, of course, what's the kind of cash flow progression as you think about TissueCypher kind of ramping, but on the return and rebounding, Could you be positive next year as well?

Speaker 3

We have not guided for operating cash flow for '26, but those trends are I concur with your view of those trends, we don't have significant spending increases that might change that. So I think we would be on trend if that from the fourth quarter into '26.

Speaker 8

All right. And then and then, Derek, last one for you. On the kind of the GI business, Is there any, you know, there's no cross selling going on today with the two, with the acquired test and to do Cypher. But do you anticipate that like the conversations with GIs, for example, is it's going to be a little more streamlined and could accelerate the growth of that, you know, that segment like that? Or do you is it just like a, you know, not the most complimentary at this point?

Speaker 2

Mister Cipher and I need predict. You should predict? Yeah. I think I I think what we see the the most significant value out of the Prophise acquisition is not sort of saying you can pick one of the other doctor. The our tissue cipher test with with the work that the person did is is clearly the most validated test that's available today, and the accuracy metrics are extremely good, although everything can be better.

Speaker 2

So it it would be a complementary test, I guess, you would say is probably the way to position that today. But the but the exciting part of what we see is the potential ability to combine spatial omics with genomics, either be it methylation islands like we got a path from the revised acquisition or if it's gonna be next gen sequencing. But if we can get to sort of a spatial omics plus something, which could be methylation technology or sequencing add ons, we believe that we will be able to get to a more accurate test by using more than one modality or platform versus one alone. So that's the sort of first large focus we have. And clearly, work coming out of Hopkins, coming out of ProVise will assist us in accelerating how to get there.

Speaker 2

And then the and then the next opportunity that we see here is to really take the capsule and sponge work that they've spent two years working on and see how we can accelerate that development as a as a potential future test, again, mainly for use in gastroenterology offices.

Speaker 8

Okay. Just to clarify, you're not expecting any material revenue from EsoPredict?

Speaker 3

No. Not discrete revenue. No.

Operator

Okay. Thank you very much. Our next question comes from Suzu Neman from Guggenheim. Suzu, your line is now open.

Speaker 9

Hey, guys. This is Subbu Nandeep from Guggenheim. For DecisionDx Melanoma, will you need any further studies to support FDA approval?

Speaker 8

For what?

Speaker 3

We need more data for FDA approval.

Speaker 2

We don't we don't believe that would be the case. I think the the the the easy conversation that was had with the FDA regulators regarding our BDD application, I would think that we have plenty of data that would that would support that approval as is. We won't know that, of course, till we go into that process, but we would have taken it through the breakthrough designation device status if we hadn't felt comfortable with that, Subaru. So I think we're we feel confident that the level of data that we have out there now would support FDA authorization clearance approval depending on the approach they would take.

Speaker 9

Uh-huh. Thank you for that, Derek. And then, Derek, how are you prioritizing internal resources between the assets acquired in the prebice acquisition, the site based collaboration, and the atopic dermatitis asset that you're developing internally?

Speaker 3

How are we prioritizing them?

Speaker 9

Yes.

Speaker 1

Yes. Prioritizing internal resources with all of our initiatives.

Speaker 2

So the the so I guess starting with provides first and maybe repeating a bit, talking about with Kyle there. We believe that the ability to go from a single platform spatial omics test to a multi platform, multi omics approach will yield a more clinically viable test at the end of the day. So, to be quite frank, we have ongoing r and d investments in tissue cipher and folding in an extra platform is actually not adding much resources. It's just expanding the protocol side of the capture both opportunities. So that's not really a prioritization issue or that.

Speaker 2

I think we've been looking for opportunities to look down the road to expand in the future our value to our gastroenterology customers. We believe that the capsule sponge technology that provides had developed will be one of those sources to get there. So that is an additional R and D project. But again, it fits in within their current Tissue Cypher budget anyways, largely speaking today and tomorrow. On the side based opportunity, as we've talked about, I think we, on the earnings call, plus out of the slide to our corporate presentation deck on the data that we see today.

Speaker 2

Our internal test really was focused on or is currently being focused on patients who are taking that step from topicals only, most likely have moderate to severe atopic dermatitis. They're taking the step over the transom to get to a systemic therapy. That's really where that test is focused. Whereas the initial studies that we're focusing on for CyVase technology are really taking people across the spectrum who are being medically treated with topicals and with, systemic therapies to be able to say, if you have a a atopic dermatitis condition, you're on a therapy of some sort, but you continue to have flares, which are you could call those breakthroughs, I guess, in in symptoms, we we hope that our technology will be able to demonstrate that you can use our test or our tool every couple of days, every day, every three to four days, and predict a flare in the future, near term future, adjust your therapy so that you hopefully either reduce the severity of that flare up, which is a significant burden on patients that also translates to reduced itch itch flare ups as well, or you may be able to wear that altogether.

Speaker 2

And so to me, they're they're quite complimentary to the exact same medical dermatologist who is interested in in in eczema skin management. And it turns out that the majority of those physicians or dermatologists are the same customers treating skin cancer. So we have another opportunity for really a strong overlap, and the same customer who hopefully knows about Castle skin cancer tests, uses them. And then we we introduced both our internal atopic dermatitis test group predicting therapy response as well as later on the the the probe that we have from Sybase, it's a very, very nice way to kind of walk into the same offices that are medically oriented and help them solve more patient problems from the same one company. Does that kinda get to the question?

Speaker 9

One quick one, a follow-up to Kyle's question on the margins. Based on the current Tissue Cipher trajectory, do you expect the mix shift to pull downward on your margins this year just because Tissue Cypher is a lower margin test? Or have you made some improvements to not really affect that?

Speaker 3

Yeah. We we we have approved, the cost structure on Tissue Cypher a good bit. It is still lower gross margin than GEP testing, though. So depending on how volumes grow there, it

Speaker 4

could be a bit of a a bit of

Speaker 3

a deluter to gross margin. But, again, it it it would be we would still have one of the better gross margin in the sec Still hit those target

Speaker 4

we we got ahead.

Operator

Thank you very much. Our next question comes from Kathryn Schuttle from Baird. Kathryn, your line is now open.

Speaker 10

Hey, thanks for the questions. Maybe first, just as we think about your guide for high single digit DecisionDx Melanoma volume growth for the year, and that would imply low double digit growth in the back half. So as we think about going forward, is that back half growth rate the right go forward assumption? Or do you think high single digit would be a better baseline?

Speaker 3

We've reached at high single digit for the full year, Catherine. So,

Speaker 2

we continue to have that expectation.

Speaker 1

Right. As a jump

Speaker 10

yeah. As a jumping off point for next year was the question.

Speaker 3

Is it jumping off point for next year? I don't have guidance yet for next year on on the product. But, as we said before, we still think that the test has plenty of room to grow, and continue to penetrate that patient base.

Speaker 10

Okay. And then maybe on Tissue Cypher, how should we think about how much growth is being driven by adding new clinicians versus further penetrating your ordering base? And maybe just talk to what kind of trends you see in terms of order rate ramps as providers mature.

Speaker 2

I don't know if we disclosed that information publicly yet, Catherine. I love someone we couldn't have in the future. We are so early on in penetration. I can't, off the top of my head, to be honest, give you a are we seeing more growth from existing customers who are seeing better penetration in their practice? Are we seeing more from new customers both of are they happening?

Speaker 2

I think in the past, we we sort of talked about potential, that the the the GI office practice brings to me some different challenges compared to dermatology, where in dermatology, the biopsy for a melanoma or squamous cell carcinoma is being done in the office setting. So you've got the same staff, the same dermatologist or NPPA in the same facility. Whereas in gastroenterology, the actual endoscopy is being done in the ambulatory care center, which is typically not brick and mortar associated with the actual GI clinic. There's a different person I'll swap over. So my my sense is that what we're seeing here is that we are getting, solid growth from new first time ordering customers because we're still it's just so early in the game.

Speaker 2

And once we get somebody on board who buys in a tissue cipher, then, you know, after the first couple of orders, the question really becomes how do you make sure that the endoscopy work going on in the ambulatory care center gets transferred to the right personnel in the actual GI clinic so that the test is ordered appropriately at the right time. So both will be both will be ongoing strong for a while is my expectation.

Operator

Thank you very much. Our next question comes from Sanjee Nam from Scotiabank. Sanjee, your line is now open.

Speaker 11

Thank you so much. Thank you for taking the questions. Maybe on the DecisionDx Melanoma, was curious if you could talk about the progress you're making with the private payers there. And given the NCI, the real world study, the largest of such kind, do you think that's a big enough impetus for you to gain further traction with the commercial payers going forward?

Speaker 3

Yes, Sanjeet. Thanks. I think I think like most high value molecular diagnostic tests, we see a lot of resistance from the payer community on the private side. That resistance is driven less from data or lack of data and more just from self interest, frankly. And so, we continue to generate data.

Speaker 3

We continue to generate impressive data. You know, more than half the physicians are using are using our our melanoma test. And and so, you know, I think the payer community is kind of getting to the point of having a red face test problem. I mean, how do they go and say this test is experimental and investigational when 55%, 60% of the doctors are using it regularly in their practice? That doesn't sound investigational or experimental to me unless you think two thirds of the physicians are unqualified to practice medicine.

Speaker 3

And if they want to make that assertion, we would be happy to have that debate with them as well. So I think we continue to see penetration there. Very, very slow progress. The other challenge we've talked with you about before is the need to work through the lab benefit managers, the third party lab benefit managers and technical assessment groups. And their cycles, tend to be well, they tend to be long and drawn out, but they also tend to be somewhat regular.

Speaker 3

And so even when you accomplish a change in policy, that policy may not be rolled out until next year. And then each of the member plans, they have their own timelines. And so there's sort of a long kind of a cascade, if you will, of seeing a policy change actually be resolved in change in coverage policy. So we think we've got more than ample evidence. It's sort of beyond clear.

Speaker 3

But there's just a there's a self interest and a resistance on the part of the commercial payers across the board as you've seen in all all categories of testing in in your universe.

Speaker 11

Got it. That's super helpful. And then just on Cybase, the Cybase collaboration, and apologies if you guys have discussed this previously, but they seem to have a product for melanoma as well. And was curious if there are opportunities for collaboration for melanoma going forward or if that's part of the the, you know, the partnership that you you guys have announced earlier in the quarter? Thank you.

Speaker 2

No. Okay. Thank you, Sanjee. I think we discussed back when we announced the Cybase collaboration. What was that?

Speaker 2

A month ago? A month ago? A couple of areas. One is that is that Cybase developed two, I guess, platforms or boxes, you could call it, for the electrical impedance spectroscopy technology. One of them is a is a sort of a desktop based unit with a with a probe that's attached to a to a flexible wand.

Speaker 2

The other one is a small pen device. Our focus is really on developing the small portable pen device that would be used by a patient, for example, as opposed to being in an office where that where that desktop unit sits and focusing more on newer indications like atopic dermatitis, flare, etcetera. So we cannot fold in the current desktop melanoma test into this initial collaboration, but it's certainly something as we go forward that we'll be jointly evaluating and saying if there's a right time for that to have Castle collaborate with that in The US, that's great. If not, we can let it go along from a parallel structure standpoint.

Speaker 11

Got it. Thank you so much.

Speaker 3

You're welcome.

Operator

Thank you very much. We currently have no further questions, so I'd just like to hand back to Derek for any further remarks.

Speaker 2

This concludes our second quarter twenty twenty five earnings call. Thank you again for joining us today and for your continued interest in Castle Biosciences.

Operator

As we conclude today's call, we'd like to thank everyone for joining. You may disconnect your lines.

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