CareDx, Inc. (CDNA) Earnings Call Transcript & Summary

So we're ready for our next presentation. We're lucky to have with us CareDx. Representing CareDx, we have Reg Seeto, CEO; and Abhishek Jain, CFO. A.J., Reg, welcome.

Thanks, A.J., and much appreciated. Really excited to be back in person at the meeting.

Yes, in-person is better. So you just reported your Q3 results, I thought this would be a good opportunity to provide investors with a brief overview of what were the key highlights from that report.

Yes. I think for us, we had, in our Q2 earnings, made a big commitment to drive towards the path to profitability and be differentiated in terms of our financial profile. So in terms of Q3, one of the big highlights for us was they were to show that progress, which is that path to profitability. It's also important for us to show our differentiated profile with our very strong cash position with over $291 million in cash, debt-free and also continuing our high margins. For example, our testing services were greater than 74% adjusted. So it was really good to be able to demonstrate that financial profile. The other thing for us is continue to deliver on leadership. It was really important for us in Q3. So continuing to make sure that we had strong penetration and growth across the different areas of our business, particularly on the solid organ side with testing services. So AJ if you add any additional highlights part of the quota.

No, I think you've covered it very well, Reg. I think I was extremely pleased to see the path that we covered on our commitment on the adjusted EBITDA profitability, absolutely. Of course, the market growth came slightly lower what we were anticipating. I think that probably is one piece. But at the same time, we continue to grow and we saw the growth coming in, in every single organ that we have been operating in.

It's just the whole economic environment is so different. I think we've seen that reflect in the diagnostic sector for us really just having that front and center in Q3 was really important.

Understood. And one of the things I noticed about your Q3 report is the mismatch between revenue growth and volume growth. Can you talk about your efforts to close that gap and achieve revenue growth for commensurate with your double-digit volume growth trajectory?

Yes, just touch briefly on first in the Q3 revenues, and I'll go into some of the plans we have in place. So firstly, for us, Q3 was down slightly versus what we had in Q2. I think there were some one-offs that helped drive that, including some foreign exchange impact we had on the products business. There was also a lower market growth than we had planned for. And also, there's a change in the pay mix. Another one-offs we had was with the impact of the hurricanes and also this sequestration, which now is finally completed after 2 quarters. So I think that was explaining some of the differences, what we had planned for during Q3 results versus what we actually saw. Now that said, I think what we outlined also in our earnings was this pathway of 2 stages. One is demonstrating this path to profitability, which we talked about by the first half of next year. And the second then is over the next 18 months to deliver on what we saw a series of different revenue growth accelerators. And the first of those is looking at what we can do on the catalyst side. So we have a couple of different key catalysts coming up in the kidney area, which, as you know, is the highest area of reimbursement and coverage. And that specifically would involve what we call AlloMap kidney, which is a gene expression profiling test. UroMap which is a urinary mRNA test. And we can go into more details in that later, but really having the opportunity to launch differentiated, meaningful tests and this concept of multimodality. The second is as we look at areas of coverage. In Diagnostics, what I've learned, and I think what we all know is getting coverage is key, coverage-collections, cover seeing collections. And so on the coverage side, we have a couple of different areas where we think we want to get back or have this 70% coverage level. We've been able to do that historically for AlloMap heart, which has been around since 2005. We've been able to do that for AlloSure Kidney, which has been around since 2017. And as we now go into new organs and as we launch into new areas and new offerings, this is the goal of getting that coverage levels up. So specifically, if we look at AlloSure Heart, which was launched at the end of 2020, the coverage level there is about 25% to 30%. So the goal is to bring in some guidelines, which are in the current draft format through ISHLT that will hopefully, once approved, allows them to engage with the national payers and then lead to further change in commercial coverage. That would be the key driver there. On the lung side, we have less than 5% commercial coverage, although we've launched. It's one of the fastest-growing segments in the testing services. It's also reflected by the fact that 1 in 2 patients will die within 5 years. Their organ will fail. So it's a huge area of greatest unmet need. And specifically here, the goal is to get AlloSure Lung coverage through MolDx. So that's the next stage we're hoping for, which would add about 25% coverage. So again, these different stages of coverage is so critical. And the goal is obviously get that gold standard greater than 70%. As a reminder, took Alumet more than about 10 years to get to this grand 70% coverage level, it took a variety of different stages. Stage 1 was really how do you do these multicenter prospective studies. It hasn't been classically done in diagnostics, but saying that we felt it was really important CareDx to do real studies and generate real data, not just do single center and retrospective studies. So we checked that, similarly what we did in AlloMap. The second thing was then how do you get long-term data. And so we've greater new data demonstrate clinical utility. The third then was getting guide getting randomized controlled studies. And then the fourth was getting into guidelines. So they're the 4 stages of what AlloMap did and how we're replicating or replicating that across our entire pipeline portfolio at this stage. The third area, which I think will be critical over the next 12 to 18 months is really looking at collections. Now what we learned over the last 6 to 9 months is historically, we've basically had a very easy goal in terms of reimbursement. It was basically [ submit Element ], which had broad coverage. It was split AlloSure Kidney which had broad coverage. And what we've learned is that there's been an increase in our commercial base test. And there's also been increase in Medicare Advantage-based test. And as a result of that, the complexity has increased. So building this infrastructure is really important for us and what we did in the first 6 months of the year and then going more into building capabilities, which is what we've done on the appeal side working with third parties. So really, the 3 -- these 3 Cs are absolutely critical over the next 12 to 18 months. We see a clear path of profitability, which is step 1. And then step 2, the 3 Cs, getting the catalyst over the next 12 to 18 months, getting the coverage over the next 12 to 18 months and then improving our collections, which we know become more complex in this day and age.

You made a lot of points there that I want to circle back to. So first off, on AlloSure Heart, you said you have 25% to 30% coverage today. You're hopeful there is a guideline update on the comp. Can you remind me the use case for AlloSure Heart as it relates to AlloMap? Are those used in the same patient as complementary tests? If that's the case, what's your attach rate? What does it do to the economic value per patient? Any way you could frame that pairing opportunity for me?

Yes. It's actually 2 different technologies. So AlloMap, as a reminder, is a gene expression profiling tool. It has 20 genes, 11 active and controls. It really is a measure of immune quiescence FDA-cleared test and [ salting ] which has pretty much become the standard within post-transplant heart testing. It was published in New England Journal of Medicine, for example, as well. So it really has been at the forefront of testing for post-transplant patients. What became clear there was also an unmet need for how do you increase clinical utility. And one of the areas that come out is, can you look at more antibody media rejection, but can you also add a test which increases that clinical utility. And so we had experience with donor-derived sulfur day on the kidney side. We thought it would be a good test to assess. So we then did studies involving AlloSure, which is a donor-derived sulfide cell-free test. It actually is a marker of injury. The donor-derived cell-free should not be going up in most patients because they're controlled through their control through immunosuppressants. But if they are going out told you, there's injury happening. So combining these 2 complementary tests with different technologies actually increase the use cases for the clinicians in this space because now they had a way from immuno quiescence and so a way of looking at cell injury as part of that.

And the attach rate is actually more than 95% because I know that you asked that question -- part of your question.

Yes, that's pretty unprecedented. I think we tried to -- I can't [ construct ] from Rx based and I think looking at precedents of such a high attach rate, we really couldn't find in concomitant usage across Rx or in other disease states. And I think what really -- and we did not set the pricing, we do not set the use case or set by MolDx who represents CMS. But we're really impressed by the adoption rate, which has happened within the heart transplant community.

And does that attachment rate differ by time post transplant? Or is it consistent across the number of times somebody would use an AlloMap post-transplant?

Yes. At this stage, that's 95% across the whole?

Yes. And then what does the opportunity look like then per patient? Because AlloMap is about $2,800, correct? I'm not sure the price on AlloSure Heart.

Yes, so we don't set the prices, but the price for AlloMap Heart is $3,240 through CMS and the price for AlloSure Heart is $2,751. AlloMap has gone through what's called the PAMA process. And AlloSure heart was set through MolDx.

So a $5,000 opportunity per time point?

Yes. where patients are covered today. I think for us, the goal is to obviously increase overall commercial coverage. But in the patients where it's covered by CMS, it's in excess of $5,000.

And what's your typical number of tests per patient post-transplant for heart? We'll start there.

Heart, it's interesting because when AlloMap was first launched back in 2005, it wasn't based on one protocol. And I think one of the learnings that we had feedback through market research and through just physician interactions is you really need to look at these patients longitudinally. You need to have a way of looking at what the change -- what changes happen over a period of time. And so that's why the team developed this concept of a surveillance protocol and how do you then look at these changes? Because at the end of the day, the unmet need remains, 1 in 3 heart transplant patients, their organ, [ wolf ], one into on the lung side Wolfin on the kidney side, it's 1 in 5. And so what we found from the experiential use is how do you then actually adopt a surveillance protocol. So at the time of launch, AlloMap wasn't part of the protocol, but now we've introduced what's called the HARTS protocol, and that's schedule of it's called 11.44, so 11 times the first year, 4 times in the second year in full-time and third year. But I think for experience today, it's probably 6 to 7 tests annually, but it varies between different centers as well because historically, heart transplant patients have been very invasive test driven by biopsies, but what we found during the course of COVID. And this is across all transplant. During the course of COVID, there was no alternative because essentially, biopsies were seen as elective test. They're obviously invasive. And so for the heart side, they actually had no [ Armorari ] at that time point, which led to, I think, the further adoption and use case for AlloMap and AlloSure at that time.

In that 6 to 7 tests in the first year and 4 each year thereafter on average?

Yes, we still see -- well, it's not -- we're still seeing the results of the protocol because this is only launched about 1.5 years ago. so we're seeing the time of that. But historically, for AlloMap, it was probably 3, 4, 5 tests during the lifetime. But I think now what we're seeing is an increase in utility.

And correct me if I'm wrong, but you're doing something similar in kidney, but starting with AlloSure and adding on the gene expression product as a complement? Is that -- one, is that accurate? And two, where you stand on adoption curve, attachment rate, similar questions to the heart project?

Yes. During the last quarter, we just announced that AlloMap Kidney had been submitted to MolDx. And so it hadn't previously been submitted. So it's still in research use at the moment. It's part of a study called OCR. What we found during different advisory boards doing market research as well as that one of the biggest demand is how do you increase clinical utility and how do you do it with complementary test. And what we saw with heart care, which is AlloSure, [ AlloMap ] element, there was a great demand for that. So at the end of the day, we feel that AlloMap represents a great opportunity, but it's all dependent on the clinical data. And we've had good clinical data that's being presented there. So yes, the goal is to continue with what we call Kidney Care, the same concept of combining AlloSure and AlloMap together. And we're just going through that process now having submitted it to our MolDx and under active review at this stage. We've got a couple of publications out there as well. And I think that's important to highlight the utility and how you can increase in AUCs, for example, as we went through the different publications and study results.

Lung, is it a similar approach where you have both the gene expression as well as the circulating cell-free DNA?

Well, lung, what we're doing is, firstly, getting people with experience with AlloSure first before we move on to the multimodality. I think we have a study, which is called ALAMO, where we're starting it in multimodality. But I think the key now is because we actually have launched -- also to get the experience and usage. Now what I can say is in the last 12 months because it's been around for 12 months, it's actually been a pretty rapid uptake. It's also something of this space. Because by -- in transplant and in medicine, first to know harm and then how do you bring tests that increased clinical utility and how do you then ultimately help the patients help the physicians and help the transplant centers. And what we saw with lung is actually a much faster rate of penetration than we've ever seen in any experience. So heart itself took probably good 10 years to get to that 90% penetration. 4 years out, kidney is probably at that great an 75%, 80% penetration. And in the lung and less than 12 months, we got to that 60% penetration. So really, it tells us a couple of things. There is a need. And secondly, is that the experience that's being garnered through the heart and the kidney experiences really played off in a long sybase people have this greater sense of appreciation, how do we do in which is not invasive, but actually gets the same results.

What are the growth factors in your products business?

Sorry, the growth factors?

Factors in the products business.

Yes. So digital [ hoping ]. So about 80% of our current business comes from testing services, and we have 2 other business lines, one is called digital and the other one is products. And products is evenly split. So it's about taking ? so it's about 10% of our business. The [ HLA ] typing is a smaller business, but it actually has been growing nicely. And the reason I say that is because historically, it's been non-NGS testing has been the standard used in this space. So what we found is during the peak of COVID, we actually launched the AlloSeq franchise, both in the U.S. and ex U.S., and that was the -- specifically looking at NGS hybrid capture typing, which is first ? the first what type of technology is in the space. It's called hybrid capture. So essentially, you can basically get -- look at the entire genome, and you don't have to repeat the test because you don't need to do a repeat you've covered entire genome and two, it improves the workflow. So that's actually critical for the different centers. So the growth driver for us is actually increasing the installations of NGS as it converts over the older technology and the newer technology. And so far, we've had a really good experience in the United States, we're now #1 in NGS. Now there's still a lot of opportunity for us to grow because the majority of HLA testing is the non-NGS typing. So it's really one of those classic market segments where we can really still convert over the existing non-NGS into NGS business. So we're really excited about that, plus the margins are quite reasonable for us in this space as well once we get them over to the NGS side. Ex U.S., we also have the typing there, and that's also going to be a growth opportunity for us. we do our [ kitted ] business ex U.S. And so for us, one of the drivers there is not just launching the test but going to different markets using distributors to do that, but also using feet on the ground. And that's the HLA typing business. Also ex-U.S., we have a kit for [ sulfide DNA ]. And we also have a kit for [ HCT ], which is stem cell, looking at home point ex-stem cell transplants as well. And so these areas we think we have good growth potential. On the stem cell side, for example, we won the largest tender in France full-arch for stem cell transplants. We've had good adoption in other markets as they assess this the HCT test ex-U.S. and also we've launched in the U.S. as well. So again, relatively early, but these are all ones during the time of COVID. And now we're bringing them out to the marketplace.

What's the penetration of NGS and HLA having right now? And where could it go?

Yes. I think from recollection, I don't have the exact numbers, but I think it's probably no more than 30% of the volume. So there's [ seen ] it still to grow, just a minority.

Plenty of runway.

Yes, plenty of runway to still increase into the conversion.

And can you give us an update on your AlloCell efforts?

Yes. For those who don't know, AlloCell is really our foray into looking at -- looking into cell therapy. And so as we built our plans several years ago, about 3 years ago, we worked firstly on being in solid organ transplants. We then went into -- is there a role that we can look at stem cell. And then the third area we said is, can we move into cell therapy? Now we thought cell therapy was really exciting because essentially, we saw the great results, which we're seeing in cell therapy on the hematological side. And so what we're looking now is can we get -- and they're all [ AlloGen ] -- sorry, they're autologous. So the goal for us in AlloCell is can we bring a way of looking at cell therapy from the allogeneic side because that will be the future allogeneic versus autologous. And so what we've developed over the last 18 months to the stealth team that developed multiple partnerships with different pharma groups and has been working on the research and clinical side. And so we've been able to build out different levels of partnerships. Now the real growth opportunity, however, it won't happen until these get commercialized or need to have AlloCell therapies launch in the marketplace. As of date, unfortunately, there are no allogenic cell therapies that have been launched. But the good thing by working out early, both in the preclinical and the clinical stages of Phase I, Phase II, it gives us the ability to ramp up not only the knowledge, but the relationships with these pharma partners now. We think moving forward that if things play out as they have on the hematological side with autologous cell therapy. This could be a really significant market. It's like a $5 billion to $6 billion TAM, particularly if we -- as the market evolves in oncology, how things will play out with cell therapy, particularly in the solid space because none we cracked that nut. And so it represents a significant opportunity, but that's probably more 5 years out.

You anticipated my question. I was going to ask you to forecast when we'd have commercially available allogeneic cell therapy. 5 years from now -- we'll reconnect to 5 years and see if that is occurring.

The key thing is single the foundational work. Now it's like anything. It's part of all this is replicating history. I'm a big fan of history. I don't know others in the room with their friends of history, but we found on the AlloSure side that really took early investments to really get the knowledge of understanding build those partnerships. And so on the Allo side, we're doing that now with pharma partners, building those relationships, getting to know the technology they're learning from us. We're learning from them. And basically, what you do is once you get the cell therapy, you really -- there's no tool today that can measure the uptake of the cells or engraftment uptake than what's persistence. No one can really tell that. So the great thing about having a universal measure, which doesn't exist today, unless it's a homebrew is really for us to create that universal standard. So really, it's a company driven by innovation. It's so important to find areas where we can be paradigm shift changing. And I think [ Allo?s ] one of those eras, it's bit when we went into sulfur everyone was saying, what's that bet you're making? And we had the ability to see forward. This is a real opportunity. It's back when we did AlloMap back in -- I wasn't here at that time, but I spoke with people who developed AlloMap and they had the foresight to say, we think there will be a game changer in the field of transplant with gene expression profiling. So they just having to start in a smaller market. So that was one of the challenges when they first launched.

Sure. Yes. Standard of care there was counterintuitive. You give somebody heart, you take a little bit back every few months.

It's actually quite brutal. I don't know if anyone knows any transfer recipients, but I think on the heart side, one of our leaders of our sales franchise, his daughters is a heart [ recipient ]. And every time she gets a had a biopsy, it's 5 pieces out of the end of [ myocardio ] and it's another 5 pieces. And so it actually ? really if you think of this really young or the 3 to the 5 was getting these pieces of the heart taken out. And I think for those who have a science background, if you take these [ hyaline scarring ] to lead to the different types of electrical reduction, the rhythms, et cetera. It is a real challenge. So and now she's occlusion of one of access points. So having something that's not invasive that particularly when we look at the studies, we're done the time, MEG image probably New England General paper, really showed in noninferiority. So I do think having these options are really important for patients.

That's great. Reg, has anything evolved in a competitive environment. I know there aren't many competitors in transplant. There are a couple -- there are different modalities folks explore. You mentioned urine earlier, and I think you have a year in product and development so does another company. Just any high-level thoughts on how the competitive environment has evolved, how you try to keep your edge over the competition?

Yes. I think for us, we embrace on competition. I think the more folks you bring in the space, the more attention it gets. And I think historically, transplant has suffered and it hasn't been an area that really has received a lot of attention, and I think bringing others is a good thing. So if we look at the competitive environment, I'll break it up probably into 3 segments. The first segment of those that typically follow the market leader and see where the direction they're going. And so you have Eurofins as an example, who are entering the space, following multimodality, rational players thinking how do we actually do good studies? How do we then move into the marketplace. There are a second set of competitive set who people are seeing transfer become more attractive, larger TAM, the growth rates were achieved, et cetera, the high margins. They said, how do we get in the space? And so there've been like 4 or 5 companies that have developed individual tests and say, how do we now play in this space. So you have multiple examples, and I can go through some of them. But they've all decided it's too tough to compete in the space or they don't know enough about it. So BioTechniques for example, a urine test called exosome-based test. But I think they thought it would be paradigm shifting then they found out that the test wasn't validated once they could have to be repeated in the independent cohort of samples. So then as a result of that, they probably felt the time to market, and it wasn't their core spots. They went out to license it. And then there's another company called [ Chronix at Time ], and they decided they were in competing the space. They sold their technology, a company called Oncocyte. And then there was another company called Nepris, which is now being ported from the market, their commercial test, but they went out and said, "We have a urine test and can we play in this space,? but that's being put as well. So I think there are a couple of players in this intermediate space who you say that it's an interesting area, and we wish them success. We hope they would is the famous phrase I think as a ship raises all tides. My strain analogy is not that good here, sorry. But it's probably a U.S. analogy. But anyway, so -- and then there's a third card where people are more opportunistic, and so we have companies in [ interio ] have a repurpose test and opportunity bring into the transplant space. So there's the 3 categories of competitors. Those who want to follow the lead of those who think it's interesting, but it ultimately then decide on the claims space and those are opportunistic. In terms of one of that competitive space, the way I'd also think about it is our focus as a transplant center. We know we have an absolute leading position in the transplant centers. And you talked about how do you stay ahead of the game? We've developed our plans 3 years ahead. So we have our -- every year, we show thematic prior to the start of January. And we -- basically, we represent to our Board, we have what are we doing in the next few years. Basically thematically in the 5-year plan. The 5-year plan is how do we eventually manage 1 in 2 transplant patients. So I think having the ability to think ahead and know where you're going to evolve the space is so critical. And so as you talked about where we do our focus, the first focus is a the transplant ecosystem and the transplanter. So basically there, we started doing all these things 3 years ago and people were saying, "Why are you doing all this stuff?? So we bought some transplant MRs. We're now the owner of transplant e-mails in the United States, and people thought well crazy their time to do it. We're now the #1 owner of medication discharge from the United States. People don't know why we did that. We're the #1 owner of quality systems in transplant centers. And people are saying, why are you doing all these things?? And we're in the top 3 of waitlist management of transplant patients, and we're #2 in terms of referring patients that are kidney patients from gases to transplant centers. And so we have the #1 downloaded app. So as we think of our ecosystem, it's really pre-transplant post, pre-transplant during transplant, post-transplant, in those cases when they come back in. So really building this ecosystem is so key for us. Now by doing that, no one else focused on it. So we think we have this incredible position of leadership because we focus on transplant, but also because we plan ahead a couple of years. Ultimately, where we'll go in a couple of years' time is how do you get into value-based care, for example. This is a key area that we're investing in now digitalization of our business. We're investing in data approaches. So this could be a future area that we'll share more in as well.

Great. And with only 2 minutes left, should we conclude on quick thoughts on capital deployment?

Yes. I think we have an incredible position with over $290 million in cash, and this is one of the strengths we have. And as we've built our strategy over the last 3 years, it involves 1 or 2 acquisitions, tuck-in acquisitions each year. That will be still a core part of what we do as part of our strategy. And I think how do we then do the GE model, which is basically get 1 or 2 leadership post-transplant ecosystem. And we continue to invest in organically. But I think of capital deployment, how do you also think of using that for external opportunities well, particularly because so many come across our space. Do you want to add some more color?

No, I think you have covered it Reg. In our mind, this provides us the optionality. So basically looking into the market, and this has been one of our key strengths, to be honest, if you look across the market and the industry because we have the cash, we are in a situation where we are not in a need to raise more cash. Now the question is very different as compared to what you would probably be asking from some of all the other companies in this space as to where you're going to be raising cash. So I think having this cash is a big strength, number one. Number two is the optionality that we have. And the third piece is that, okay, how we're going to use that optionality, be it the M&A side of the house? Or maybe at some point, we may want to use as to what will bring the most value for our shareholders and accordingly take care of that.

And would M&A be strictly in the transplant space? Or would you consider expanding beyond?

Yes. For us, we're a transplant-based company, anything that deals with that patient journey could be pretransplant post-transplant we'd be involved in. And I think already with our deployment areas such as EMRs or quality systems or into the digital space, it reflects our ability to connect all the dots, which is absolutely key for us.

Okay. Well, we'll leave it there. Reg, A.J., thank you for your time.

Well, thank you very much.

Thanks again. Thank you.