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

Good afternoon, everyone. Thank you for joining us this week at the JPMorgan Healthcare Conference. My name is [indiscernible], and I'm an associate on the JPMorgan Healthcare coverage team. I'm delighted today to be joined by the CareDx team. Joining us, we have John Hanna, President and CEO; and Abhishek Jain, the CFO of the company. Following their presentation, we'll have a short Q&A session. With that being said, John, please take it away.

Thank you so much, [ Jean-Luc ]. Thank you all for joining. I'm John Hanna, President and Chief Executive Officer here at CareDx. We are the transplant solutions company. We'll be making forward-looking statements in the presentation. Please refer to our safe harbor statement on our presentation that's posted on our website in the Investor Relations section. Since joining the company in April of 2024, we've assembled a strong group of executives to drive profitable growth here at CareDx. We have an amazing employee base that focuses on improving the care of transplant patients globally every single day. We have roughly 650 employees around the world, 180 in commercial roles focused on driving the growth of our business, 110 scientists and researchers building the next generation of innovative products to improve the care of transplant patients and over 80 software programmers developing digital solutions that help transplant centers more effectively care for their patients. Transplant is a large and growing market that consists of roughly $50 billion in spend from organ procurement to transplant procedures through to follow-up care and therapeutics for these patients. We perform approximately 46,000 transplants annually in the United States. So we effectively spend about $1 million per organ transplanted here in this country. This is a high acuity condition, and it is a profit service line for hospitals across the United States. At CareDx, we performed approximately 1 million tests for allograft rejection monitoring. We perform or distribute approximately 200,000 HLA typing tests annually to match organs to recipients. About 70% of the centers in the United States that do transplant use one or more of our digital solutions and products. And we filled about 150,000 prescriptions annually through our transplant pharmacy to assist transplant patients on getting on the right medications. We are the established solutions provider to transplant centers globally. Briefly turning to our preliminary Q4 2024 financial highlights. We announced on Monday morning before the market opened a 30% increase in revenue year-over-year for the fourth quarter. Testing volume increased approximately 14% year-over-year to 45,500. We had a positive EBITDA gain of $8 million to $9 million estimated on the quarter and closed the quarter with a cash balance of $261 million as of December 31st. The fourth quarter was our sixth consecutive quarter of testing services volume growth across all organs in our business, heart, lung and kidney. Our business is growing due to 4 building blocks of growth in testing volume. The first is transplant procedural volume. Transplant procedural volume is growing in the United States due to 2 main drivers. The first is government efforts to drive more transplantation, which is a curative procedure for many conditions feeding into transplant centers, including chronic kidney disease, congestive heart failure and congenital lung disorders. We see across the United States a change in the organ allocation system as well as programs such as the IOTA model focused on driving more transplants across the country so that patients can get these curative procedures. In addition, there are technological advances occurring, including technologies such as perfusion that make more organs viable or allow these organs to travel longer distances so that they can be transplanted into patients for which there is a better match. The second driver of our business is customer adoption. At CareDx, we offer a synergistic portfolio of solutions to transplant centers, all the way from the initial organ matching when an organ is procured, we offer HLA lab software, HLA lab typing products as well as waitlist management software to allow centers to manage the patients on their waitlist and get them the right organ. Within the center, we help with care quality and system efficacy through offering a transplant EMR. We have quality reporting software that ingests EMR data and provides dashboarding and reporting so that transplant centers can report their quality metrics to CMS. And we have staff augmentation solutions where we put individuals in these transplant centers to help the centers better manage the collection of data, the input of data and reporting. And then post-transplant, our graft health solutions include remote patient monitoring, graft health assessment through our LDT lab testing solutions as well as tissue diagnosis products that we plan to launch this year. We have found that in centers that utilize 3 or more of our patient and digital solutions, we generate about 50% more patients that get on our testing services and the revenue from those centers is 2x a center that uses less than 3 of our patient and digital solutions. And so for us, when we go into a transplant center, we're not just selling a diagnostic test, we're selling a solution that allows them to operate more efficiently, drive more transplant volume and improve the care and outcomes of patients post transplantation. The third driver of growth is improving patient adherence to our testing protocols. Currently, across our business, we see that patients in kidney, heart and lung have roughly a 50% adherence to the established protocols in our clinical validation studies for using testing, which is our ARTS protocol and 7 tests in the first year, 4 in the second and 4 in the third for a kidney transplant patient and HARTS protocol, 11 in the first year, 4 in the second and 4 in the third for heart and lung transplant patients. We have a team inside of CareDx of customer service specialists that contact patients directly to help arrange for their blood draw and to ensure that they are adherent to that testing regimen that's been ordered by their clinician. The fourth driver of growth is our pipeline. In 2025 and 2026, we'll be launching expanded indications for AlloSure that includes testing of simultaneous pancreas and kidney transplant and AlloSure Heart for pediatrics patients under the age of 15. We'll also be launching new diagnostic products over the next 2 years that are all geared toward driving more AlloSure Kidney utilization in the marketplace. The first is AlloMap Kidney, which is a product that looks at gene expression, a signature of immune activity to understand how the patient's immune system is accepting that new graft. The second is HistoMap Kidney, which is a tissue-based diagnostic test that subsegments rejection of the organ into antibody-mediated rejection, cellular rejection or mixed rejection so that the clinician can treat differentially based on the type of rejection. And the third product, UroMap, complements AlloSure in the setting where AlloSure is elevated to rule out BK virus and BKV nephropathy, so that the patient can get the right follow-up treatment, either increased immune suppression dosage or decreased immune suppression in the setting of a viral infection. Beyond volume growth, our evidence strategy is driving our revenue growth through increased ASP and cash collections. Here, we're showing the proportion of patients for claims that we submit by product that are covered under medical policy. For AlloMap Heart, which has been on the market since roughly 2006 when it obtained Medicare coverage, 90% of our claims submitted today are covered under medical policy. AlloSure Heart, roughly 40% of our claims are covered under medical policy, 1/4 of which are Medicare claims. This year, the Blue Cross Blue Shield Federal Employees Program made the decision to cover AlloSure Heart as a result of the [ SHORE ] publication that we put out in Q2 2024, demonstrating that a dual results on AlloSure and AlloMap Heart leads to an increased detection of rejection and biopsy. In lung, roughly 30% of the claims we submit are covered under medical policy. That product is our most recent product launch and the earliest in its coverage and evidence journey. And then in Kidney, AlloSure Kidney, roughly 60% of the claims we submit are covered today under medical policy and roughly half of those claims, 50% that we submit are Medicare-eligible patients. This year, Highmark Blue Cross Blue Shield issued a positive coverage policy for AlloSure Kidney as a result of the data generated in the Nature and Medicine publication looking at the utilization of AlloSure to detect subclinical rejection ahead of appearance of rejection on biopsy. We are continuing to build the evidence to support these products for transplant monitoring assays. And I talked about in heart, our SHORE study, which has roughly 2,700 patients enrolled with 5 years of follow-up across 67 clinical sites. In kidney, our KOAR study has 3,600 patients enrolled, 3-year follow-up across 56 sites. Importantly, in 2024, prior to the year-end, we submitted our first manuscript from the KOAR study for publication and look forward to seeing that in print in 2025. In lung, our ALAMO study is still enrolling patients, but plans to achieve 500 patients enrolled across 19 sites in 5 years of follow-up. And then lastly, in the cell therapy space, our ACROBAT trial is targeted to enroll 307 patients across 11 sites with 2-year follow-up, looking at stem cell transplantation and our product AlloHeme, predicting post-transplant relapse of disease. In October, we provided a long-term guide of $500 million to exit 2027 in revenue, which is a 15% 3-year compounded annual growth rate and greater than 70% gross margins across our business in 2027. We also anticipate in that year to do 20% adjusted EBITDA and add $100 million in cash to our balance sheet over the 3-year period. In our release on Monday, we provided an estimate of our guidance for 2025 of $370 million in revenue. We feel very good about our business. We had a strong fourth quarter and anticipate we'll achieve these goals. $370 million in revenue is roughly 17% growth rate year-over-year when you remove the onetime revenues that we achieved in 2024 of $17 million off of the $333 million estimate that we'll finish the year. Over the 3-year period, we see growth coming from several areas, including secular growth of the market. We estimate transplant volumes overall will grow mid-single digit. We believe that through our comprehensive suite of solutions and driving patient adherence, we can grow volumes an additional 7% over that period. We believe that our average selling price should increase roughly 3% over the period, low single digits. And then we're attributing 1% growth to our product pipeline to achieve the $500 million goal to exit 2027. Beyond solid organ transplant, we see a number of opportunities in adjacent areas. Our core product portfolio today, of course, includes both solid organ transplant and on the horizon, cell therapy with our AlloCell and AlloHeme products. Pre-transplantation, there are a number of conditions that flow into an organ transplant that are adjacent to us, including autoimmune disorders, cardiovascular disease, lung diseases and hematology disorders. And post-transplantation, patients are at high risk of infectious disease and cancer in particular, and there are opportunities to aid in therapeutic selection for these patients. On the horizon, we see ourselves expanding into the cell therapy monitoring space. There are roughly 5,500 clinical trials registered today on ClinicalTrials.gov, looking at autologous and allogeneic cell therapy across the world. 70% of those are focused in hematologic malignancies and solid tumors, 10% in autoimmune disorders and 20% in other areas such as diabetes and viral infections. Today, in the United States, the centers that do stem cell transplantation for hematologic malignancies and CAR-T cell therapy are the same centers that perform solid organ transplantation. So we have a high degree of channel synergy there where we're already in all of these centers today, selling our monitoring assays for solid organ transplant, and we intend to extend into cell therapy monitoring. We have 2 products that address that market. The first is AlloCell, which is a pharmacokinetic assay monitoring for the adoption of CAR-Ts when the patient is initially dosed with the therapy. The initial dosage of the therapy and the acceptance of that dose is a strong predictor of efficacy in CAR-T. The second is our AlloHeme product in the hematologic malignancy space where a patient fails on systemic chemo and moves on to a stem cell transplantation. And our assay is intended to monitor for the recurrence of that malignancy in the body by looking for the resurgence of the initial immune graft in the patient. So in summary, we believe that we have activated our strategy by putting the right team in place. We've identified the right market opportunities for CareDx, and we are launching innovative solutions to resolve unmet medical needs for patients in transplantation. Thank you.

Thank you very much, John, for that update. To kick off the Q&A, I'd love to start if I could do that.

Please.

Could you just start initially by providing some color and guidance on the seasonality of the testing services volume?

Yes, sure. Let me take that particular question. On the guidance of the $370 million that we have put up there for the 2025, as John mentioned in his remarks that that's about 17% growth year-over-year from the adjusted 2024 base. And when I say adjusted 2024 base, that's basically our reported revenues for 2024, which is $332.5 million. If you back out the $17 million, the revised base comes out to be about $316 million, and then you bake in about 17% growth from there. Now, if I were to provide that color based on the 3 business lines that we have got, starting with the more easier, the products business as well as the Digital and Patient Solutions business, we're expecting those 2 businesses to be growing at about 15%, mid-teens. Now on the testing services, now it's got 2 components. One is the volume and the other one is the price increase. And very similar to our long-range plan that we have put up there, we're expecting our volumes to be growing in the mid-teens and our price increase, we are baking in about low single digit. So that's we are baking in the overall guidance of the $370 million. Now to your other part of the question around the seasonality of the testing services volume, what we are kind of thinking that based on all the weather situation that we have seen across the country on the East Coast as well as on the West Coast, we believe that Q1 is going to be slightly softer. And 1,000 tests for our business could be like 2% growth, right? So in our mind, if I were to ask how to model this, I would model the Q1 to be slightly softer in about low single digits, about 2% to 3% growth. And then there will be a step-up in Q2, which will be about 5% to 6% growth. And then Q3 generally, because it's a seasonally softer quarter for us, I will basically bring the growth down there to about 2% to 3%, and then we will finish the year strong and again, 5% to 6% kind of a growth [ frame ]. So that's how I would basically model it.

Nice. Thanks, Abhishek. And we kind of heard a little bit about '25 and some of the surveillance of '25. And we saw some of the weather last week across the country, right? Can you kind of dig a little bit deeper? I know you mentioned a little bit the weather through '25 now. And anything you kind of want to peel a little bit more with respect to how you would think through that?

Yes. I think with respect to surveillance, we said on the Q3 call that we had 10 centers that had initiated surveillance protocols for kidney between September 1 and November 3. And that what we expect is that those centers will start newly transplanted patients on the surveillance protocol. They won't go back and test prevalent patients on a new protocol. So there should be no expectation of like a onetime step-up in volume. It will be a gradual growth as those protocols are adopted. We think it's going to take 2 to 3 quarters for us to implement these surveillance protocols and get clinicians back to utilizing the test in a kidney surveillance mode. And so we will continue to push on that through the first half of '25 and probably see the material growth, as Abhishek said, with a lift in Q2 and then again in Q4 in 2025.

Got it. Thank you so much, John. Any questions from the audience that we can help answer?