Castle Biosciences, Inc. (CSTL) Earnings Call Transcript & Summary

Perfect, and that's exciting. And just sticking with like internal development. So you have like, I think, 2 pipeline tests in the German business. One of those is for inflammatory disease. There's one study going on, 4,800 patients. I believe it's ongoing. What's the time lines there? What should we expect in the next 12 months or so?

Yes. So that's a test, an umbrella test, I would call it. I think what I'm finding is that we'll be able to look at the same genes but probably have different signatures for each therapeutic drug out there. So that protocol is a prospectively-driven protocol looking at people who have what I would call an eczema-like syndrome diagnosis. So it could be psoriasis through CTCL, cutaneous T cell lymphoma through atopic dermatitis, where there are a variety of therapies available systemically. And the question has always been, if you read the Phase III studies and the FDA-approved labels and especially as more recently, approved therapies in the last 8, 9, 10 years, it looks like we've cured psoriasis. I mean the data looked so good in terms of total body clearance or people with greater than 90% body clearance on therapies. However, we still find today is that the average patient going on systemic therapy is still going through 3 or 4, 4 or 5 drugs before they find the one that works for their disease. That tells me there's an individualized signature opportunity there. And so the goal of this nearly 5,000 patient study is to longitudinally track people who are both newly diagnosed, i.e., going on systemic therapies, and those that have gone through a couple of therapies will continue to switch to find the best one possible. We believe at the end of the day, again, we will probably have one test that will direct therapy selection process. This is about probably several routines or algorithms that are in each test that will reweight the genes for certain patient types or certain drug responses. I think we did release some preliminary proof-of-concept data in April and May of this year at an eczema-like syndrome conference, which demonstrated that we can actually collect a very robust set of RNA off of our skin collection process. So that's checkbox #1. I think the next data flow probably is in the first half of next year in terms of getting at least the higher market share therapies with enough way to go ahead and say we are seeing a signature or signatures here that says where you increase our confidence level of having a highly clinical valuable test. I don't think we'll see anything this year, so I would kind of gate that from a milestone of the first half of next year.

Got it. So I mean there's a lot of great things going on in the derm side. Are you like just set there? Or you've been so like active from an M&A perspective. I mean would you think about bolstering maybe the derm side in the future just given your cash?

We certainly -- I guess if you use the real estate analogy, if you're a developer in the middle of Boston, you see every project in the middle of Boston. If you're a developer in Vermont, you see a project in the middle of Boston, everybody pass on it. So we're seeing everything first in derm. We frankly haven't found anything that's compelling. And in addition to that, the R&D guys hate when we say this, but we've never failed to develop a signature when we've tried to develop a signature. So I think we also are pretty confident if we find an area of unmet need, a question, a clinical question that hasn't been answered, we could develop a signature to answer and if it were clinically interesting and help the physician to help the patient. So we look at things, but we really frankly haven't seen anything very compelling in our pipeline. We talk about our lead program there, but we do have several other programs behind it that we're working on. So we've got a nice robust pipeline in derm already.

Got it. Kind of plays in through the presentation. So let's go to the other acquisitions that you've done recently. So Cernostics, TissueCypher. You acquired Cernostics, I think it was like late in 2021. TissueCypher diagnostic test for Barrett's Esophagus, which is like a precursor for esophageal cancer. Maybe talk about the payment rate for that because I know there's been some movement now with ADLT and so forth and the 14-day Medicare rule. Can you just kind of walk through that?

Sure. So when we were doing diligence late last year prior to signing the deal and then closing in December of 2021, we were seeing sort of 3 areas we wanted to go ahead and get right post close. One of them was to really begin to focus what had been a very productive and prolific research-based laboratory, doing a small clinical volume in Pittsburgh to being able to handle a larger clinical volume and shifting really from research work to a clinical lab focus and being able to scale that in advance and what we assumed it would be demand. So that was one area of pre-diligence work, and that scale-up and that build-out is going according to plan right now. The second element of concern we had was this older, I would call, arcane but not on a negative standpoint. Arcane Medicare rule that applies to protein-based tests, which essentially in brief says if you have a tissue source taken or a biopsy taken from a patient who's getting care in a hospital inpatient setting or outpatient setting and you have a test which was ordered within 14 days of that procedure being done, then for Medicare patients, you need to bill a hospital and the hospital can bill their Medicare contractor. The issue we've had, of course, is that many hospitals -- in fact, the majority are not inside a Novitas jurisdiction, which means many hospitals end up eating the cost of a test, let's bill that way. And that creates, obviously, quick CFO walking down the hall procedure saying, "Dr. Kyle, you need to stop ordering this test because I'm only getting reimbursed for." Great barrier to Medicare access, which is disappointing from a patient care standpoint. When the PAMA legislation was put into effect several years ago, CMS was quite direct in saying the way through getting protein-based assays exempted from the 14-day rule was to apply for advanced diagnostic laboratory test or ADLT status, which we were prepared to go ahead and do. We did that in January, and they approved ADLT status in the -- at the end of March of 2022. That took away that as a barrier to gastro neurologists thinking through the value of TissueCypher without having a hospital administrator thinking about the negativity downside of things. And every Barrett's patient, you do biopsy and I lose money because I'm having to eat the cost of the TissueCypher test. That was a very important barrier for us to remove, which we did in a fashion we thought would be timely. Now what does that mean? That also meant that the way the ADLT program works is that you are reimbursed for the first, in this case, the first 9 months of ADLT status at the original list price, not the current Medicare price. And so it turns out that the owners at Cernostics a few years ago had set the original list price at $2,350, I think or $1,500 and change, even though Medicare in 2021 was paying $2,500 and change. That was about a $150 reduction for the first 9 months of the product being in the marketplace. And we have a collection period from April 1 until August 31. And based upon the median allowable private payer rate in this collection period of these 6 months, we'll have our rate amount to be the same or it will change beginning January 1, '23 and then go into a normal annual cycle like our other tests do their ADLTs.

Could the rate be higher than...

Could be higher. I don't think there's a likelihood that it would drop lower than that, but it could be higher. We'll have to -- we're 21 days away from the answer, I guess. So...

Interesting. Okay. Got it. And maybe you acquired AltheaDX in April. It was an interesting acquisition. Mental health kind of was the focus, was the goal. IDgenetix, I believe, test depression, other mental disorders has reimbursement today. Maybe just talk about the value proposition. Why that makes sense with your current portfolio that you had at that time?

Yes. So I would take a step back and maybe put the Y into both Cernostics and TissueCypher for Barrett's Esophagus and Y for IDgenetix and Althea. And our thought process really began in 2020, separate from COVID but a part of COVID. But with the implementation of the 21st Century Cures Act in the year prior, one of the concerns we had was Medicare contractors went from having to have 3 meetings a year to review policies for test services, which was our interest, of course, to having no mandate for having 3 annual meetings a year. Basically, when you have a reason to have a meeting, have a meeting. So they sort of taking away of built-in deadlines. One of our concerns was, is that going to change the pace of review for tests like ours going through a Medicare review process? And while we didn't have any experience saying ours are going to be impacted by lengthening of review cycles, we had other peers in the diagnostics business that we're experiencing that already. And so the question we asked ourselves was, we have, I think, a great dermatology franchise that has low penetration that I think for the next 2 or 3 years, we would have nice growth in revenue, nice growth in volume as we grew penetration. But what happens in the middle of this decade? When our next test come out, are we going to have a business plan that's going to have a hiccup or at least a bump from a standpoint of launching a test? And where we used to kind of expect about 1 year, 1.5 year view by Medicare, or is that going to still be the same thing, or is that going to be elongated? And do we want to face that fiddle in '25, or do you want to be proactive and kind of address that going forward? So we began looking for companies or tests that had -- that we're meeting a high unmet clinical need, which to us said, if you got the results of this test, you're going to make a change as a clinician and how you treat your patient. And coupled with that, of course, is not high penetration. If you had tests out there that were 90% market penetrated, there's not much of a clinical need. So it's kind of the yin and yang of that area. Below that, you had proprietary testing versus a generic testing approach. But the most important trigger we added in to our filter factor was, have they already attained Medicare coverage? And is there some understanding of commercial coverage likelihood? And if we could achieve that with a small to nonexisting sales pace, then that lets us, I think, build carefully throughout the post-acquisition period so that we have really strong material contributors. Some revenues certainly in 2023. But more importantly, it was by '24 and '25 are these new companies going to really provide value to us as a company in terms of profitable revenue growth. because we're starting out without just ground zero, but we're actually fast first base because we have Medicare coverage and maybe other coverage. so Cernostics fit that bill in that it was a much larger TAM, very unique proprietary test. No sales force present. But we felt -- we like the profile. We like the data that was developed. And we figured we could solve those 3 issues we talked about earlier, which is Medicare 14-day rule app scale. And the third one being hiring commercial group and just launching carefully in the first year. That's hitting stride nicely. We still have another quarter or so of integration efforts. We figured it would take about 9 months to do it in a thoughtful port fashion, so we aren't defocusing the management team off of dermatology. Althea, very similar, although mental house sounds like it's a whole mental area of difference, actually at the same criteria. Very large TAM. We think the estimates that we looked at was around $5 billion, which is plus what Myriad estimates for their GeneSight test. So a huge category. Maybe all combined pharmacogenetic testing is less than 10% penetrated. And we looked at sort of the growth rates as well as Myriad GeneSight test during the COVID period. And once they reassembled the sales team post the LCD being granted couple of years ago, you're seeing a single test that will probably do more in revenue this year than our whole company will. So we felt very comfortable that this was a great opportunity to step into. The question is, do we? And if we do, how do we do that? And in our market research work and doc work that we did with the Board and also the management team throughout the course of last fall and early this spring, we came back with was to say, "Would you rather as a clinician have information about a drug gene interaction and then have your staff or you go back to your computer on to Epic or Apothecare or some other platform and type in all the drugs your patient's on, get a report on potential drug-drug interactions. Then you've got to think about, does this patient smoke or not? Do they have a heavy dietary issue that might cause other drug interactions because of the dietary intake? And then you have responsibility of integrating all that data? And so what does that mean? Or would you rather take our test report, which actually integrates through its platform, both drug gene and drug-drug and some environmental factors like smoking, great fruit juice intake, et cetera, and get a single report that recommends all those things being put together what that might look like. And it came back to say that sounds simpler. That sounds more complicated. I'll take a simple route. And so that was one of the areas that we were quite pleased at in the diligence process to say so there are competitors out there, but it looks like we've got a very strong competitive profile test. And thankfully, we don't have to rush to fix the whole. So we'll start out carefully integrate -- bring the culture of Castle around to the culture of AltheaDX, make sure that the laboratory is skilled properly ahead of needs and then begin to work through that process and what's driving revenue so that by the time we get into '24, we can say we've got 3 great strong businesses. Dermatology, which is still way the lead. We've got a GI division, which is material contributing revenue as well as in mental health as you would call it.

Got it. Okay. That was fantastic. Maybe just the last question, because we're kind of out of time, for Frank. So you guys have this goal of like cash flow breakeven by 2025. Is that -- so standing -- I mean do you need to like raise any money like in between now and then to get there?

No, that's still our expectation, and we don't anticipate having to raise capital.

And profitability is in the same kind of time frame? Or...

Operating cash flow positive.

Great. Awesome. Very important in this environment. Thanks, Frank and Derek. Thanks so much.

Thanks as well, Kyle.