CareDx, Inc (NASDAQ:CDNA) Q1 2023 Earnings Call Transcript

CareDx, Inc (NASDAQ:CDNA) Q1 2023 Earnings Call Transcript May 12, 2023

Operator: Greetings. And welcome to the CareDx, Inc. First Quarter 2023 Earnings Conference Call. During the presentation, all participants will be in a listen-only mode. Afterwards, we will conduct a question-and-answer session. [Operator Instructions] As a reminder, this conference is being recorded, Wednesday, May 10, 2023. It is now my pleasure to turn the conference over to Greg from the Gilmartin Group.

Greg Chodaczek : Thank you, Jennifer. Good afternoon, and thank you for joining us today. Earlier today, CareDx released financial results for the quarter ending March 31, 2023. The release is currently available on the company’s website at www.caredx.com. Reg Seeto, Chief Executive Officer; Abhishek Jain, Chief Financial Officer; Alex Johnson, President of Patient Testing and Services; and Robert Woodward, Senior Vice President of R&D, will host this afternoon’s call. Before we get started, I would like to remind everyone that management will be making statements during this call that include forward-looking statements within the meaning of the federal securities laws, which are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995.

Any statements contained in this call that are not statements of historical facts should be deemed to be forward-looking statements. All forward-looking statements, including, without limitation, our examination of historical operating trends, expectations regarding coverage decisions, pricing enrollment matters and our financial expectations and results are based upon current estimates and various assumptions. These statements involve material risks and uncertainties that could cause actual results to differ materially from those anticipated or implied by these forward-looking statements. Accordingly, you should not place undue reliance on these statements. For a list and description of the risks and uncertainties associated with our business, please see our filings with the Securities and Exchange Commission.

The information provided in this conference call speaks only to the live broadcast today, May 10, 2023. CareDx disclaims any intention or obligation, except as required by law, to update or revise any information, financial projections or forward-looking statements, whether because of new information, future events or otherwise. This call will also include a discussion of certain financial measures that are not calculated in accordance with generally accepted accounting principles. Reconciliation to the most directly comparable GAAP financial measure may be found in today’s earnings release filed with the SEC. I will now turn the call over to Reg.

Reg Seeto : Thanks, Greg. Good afternoon, everyone, and thank you for joining us for CareDx’s first quarter 2020 Earnings conference call. As you’ll recall, we ended 2023 having been through a challenging environment in 2022. The four key challenges identified included the growth of the transplant market, marking the year at the low point in transplant since onset of COVID started 2022, changes in expectations and diagnostics sector, where we focus on achieving profitability and maintaining a strong cash position; three, an increase in the commercial payer mix with the full impact of Medicare Advantage and the increase in our commercial testing services volumes with new launches; and four, driving revenue growth also in our non-testing service business lines.

I will address the revised billing articles from MolDx shortly. Before I do, I would like to highlight our strong operational performance that saw a successfully executed plan to address those forward challenges. We continued that effort into Q1 2023, where the company, one, delivered its highest ever patient testing services volume and grew faster than market by 8 share points compared to the prior quarter. Two, we delivered cash collections at 110% of testing services revenues for a second consecutive quarter, representing approximately 10% year-over-year increase. This maintained our strong cash position of $286 million and to help generate $0.7 million in net cash from operating activities. Three, we delivered our highest non-Medicare revenues through improved payer coverage and collections with a 19% increase in sequential revenues.

Fourth, we delivered our highest ever patient and digital solutions revenue quarter as we doubled our contribution from our non-testing services business line. We are proud of these results and the strong operational performance and execution in Q1 2023. Now moving on to the billing article changes. We’re now faced again with a new set of challenges with the introduction of two revisions to the billing articles associated with Medicare coverage of AlloSure and AlloMap. The first revision was published on March 2 and the second on May 4, 2023. Addressing these changes require significant management time and the reallocation of organizational resources. We have updated our 2023 plan, which is now largely focused on the operational implementation of the requirements of the billing articles.

This will require significant ongoing efforts throughout 2023. In parallel, we’re aligning the company’s cost structure to this new and evolving landscape. Notwithstanding our focus on implementation, the company believes the billing articles are inconsistent with the LCDs. Both Noridian and MolDx response to public comments explain the intended scope of various LCDs and medical necessity. We believe the billing articles were changes to the LCD and not merely a clarification of existing coverage by MolDx for kidney services. For example, in heart care, MolDx direction has changed and they acknowledge that the March billing article is a change as to its previous billing article, which provided coverage only when AlloSure Heart was using in conjunction with AlloMap Heart.

Adding to this complexity, there is uncertainty whether and when Noridian, our Medicare administrative contractor, also known as a MAC, will adopt and issue these new billing articles. To date, they have not adopted either billing article from MolDx. Given these factors and out of an abundance of caution, we adopted a conservative approach and paused Medicare reimbursement submissions for AlloSure Kidney on March 7, 2023. The board and management team made this decision in consultation with third-party advisers. The decision is designed to give the company further time to understand and evaluate the implications of the March billing article. As a result, we did not submit claims for approximately 3,200 AlloSure kidney tests on Medicare reimbursement and did not recognize this revenue representing approximately $8.9 million on these tests in the first quarter of 2023.

We refer to these tests as the impacted March tests. We will be submitting these tests — plan to submit these tests during Q2. We’ve had numerous discussions with MolDx and plan further discussions with them. We’ve also reached out to CMS in this matter and plan to reach out to Noridian. While the transplant centers in CareDx will adjust and evolve over time, what has been concerning is the impact to patient care during this time of evolution and uncertainty. It was unrealistic to have a four-week implementation time line from when the March billing article revision was issued. Thousands of providers involved in the care of patients had to be educated on new forms and processes. Despite this being a near impossible feat we’ve focused the organization on these hundreds of centers and practices who were not ready for this change nor had planned for this change, especially since they were required to update their IT systems.

The transplant community has spoken out over the last few weeks on this unprecedented situation. The leading professional transplant Associations, ASTS, AST and ISHLT and the leading patient associations, Encare and Sure have all reached out to MolDx directly in this matter. They also reiterated the importance of noninvasive molecular testing in transplant patient care and some went as far as to raise concerns about the implementation time line and process and implications of patient care. In fact, on Monday, a press release was sent out highlighting the results of a new survey conducted by four leading patient groups, Transplant Life Foundation, Transplant Families, Transplant Recipients International Organization and the Heart Brothers Foundation showing that 95% of patients surveyed are concerned that the new Medicare billing article limits coverage of noninvasive blood transplant test.

Furthermore, the majority of patients surveyed believe that reduced coverage of noninvasive blood tests would negatively impact their post-transplant care, and they should have been consulted as part of the process for Medicare policy changes. The survey included the views of over 1,000 patients as well as caregivers and families. Now on to Q1 results. Testing Services had a great first quarter with 17% year-over-year volume growth. We delivered almost 50,000 tests beating the year-over-year market growth of 10%. We also grew sequentially by 5% versus last quarter, beating the minus 3% quarter-over-quarter market growth. In Q1, we recorded a total revenue of $77.3 million. If we had submitted the impacted March tests to Medicare in the first quarter, our total revenue would have been approximately $86.2 million, a year-over-year increase of 9%.

In addition, our testing services revenue would have grown 6% to $70.7 million. Q1 would have been a record quarter for CareDx if we factor in the impacted tests that we planned to submit to Medicare in Q2. Our non-testing services business continues to deliver meaningful contribution to our overall revenues. Specifically, Patient and Digital Solutions delivered the highest ever revenues of $8.6 million, representing a 39% year-over-year growth. For the first quarter, we reported GAAP loss of $23.7 million and a non-GAAP loss of $5.8 million and adjusted EBITDA loss of $6.4 million. If we included the revenue from the impacted March test, we would have recorded a positive adjusted EBITDA of $2.5 million. Notably, we would have achieved our key 2023 goal, which was to deliver a positive adjusted EBITDA in the first half of 2023.

Abhishek will cover this in more detail in his section. Now I’ll update you on our efforts to operationalize the changes by the March 31 effective date and the ongoing complexities. Firstly, it has taken a lot of effort and will require ongoing effort to support patient — continued patient care. Since the March billing article was announced, we’ve been working nonstop to update our forms, our systems and processes to accommodate these changes. This has been a significant undertaking across our testing services business line. While the following is not an exhaustive list of what the company has been doing since March 2, it is truly amazing what has been accomplished over the past nine weeks. Since the start of the billing article, we have reached out to 80% of our 550-plus transplant centers, community hospitals and practices.

Each center, hospital and practice has multiple providers and support staff that has to be educated, requiring us to visit numerous times with some centers having more than 20 people that need to be educated. This has involved thousands of interactions. We’ve had to update our internal IT systems, processes and test requisition forms also called TRS and workflows. All centers using paper TRS have had to be updated with new requirements and centers using our portal are now being migrated over to our new customer care portal. All centers using electronic medical records are being worked on as part of this process, and we are dependent on the center adjusting its system workflows. Changes to IT systems need to be scheduled well in advance and we are working on these center by center.

Secondly, the effective date for implementation was only four weeks after the billing article revision. It should be noted, we began our efforts to operationally implement the March billing article requirements during March to be ready by the effective date of March 31. While we’ve made excellent progress, it takes time for transplant centers and health care systems to make these operational changes and update their system workflows. We can report now as of the end of April, approximately 50% of the test orders received and now the new forms and with the new required information, it has taken a herculean effort to get to this stage. While we continue making strong progress on the operational implementation, we will not be completed by the end of the second quarter.

As an indicator of this uptake in adoption, we’ve seen a progressive increase in percentage of completed submitted forms. We ended April, as we mentioned, 50%, and we’re trending in May at 60%, and we expect to be at 80%, 85% of forms with requisite information by the start of the fourth quarter as more transplant center systems are updated. Given the impact of the March billing article to our business model, we have taken steps to reshape the organization, which will deliver annualized cost savings of $40 million to $50 million. Abhishek will cover this in greater detail in his section. Moving on to guidance. Given the uncertainties between interpreting MolDx, Noridian positions and our operational implementation taking time, we believe it is prudent to withdraw guidance.

We will revisit this in our next quarterly earnings call once we’ve gained a better understanding of this evolving landscape. So what are the next steps for CareDx? Firstly, we will implement the updated 2023 plan in response to revised billing articles by continuing the all hands on deck approach to operationalize the plan, physicians, centers and practices. Alex Johnson and his team have done a fantastic job working day and night to get this implemented. We aligned the organizational structure and strategy as the landscape evolves. The management team has been working on this, and that effort is also being led by Abhishek, our CFO. And we’re going to be following up with MolDx, Noridian, CMS about these changes. Certainly, we’ll continue to deliver on the 2023 plan, especially the 3Cs. On collections, we have made significant progress over the last two quarters, while testing service collections are greater than testing services revenues.

On coverage, we have captured wins from the recent ICHLT guidelines, especially with early reimbursement for AlloMap as early as two months and we’re in multiple active discussions to increase commercial coverage. There has been significant work as part of our strategic plan, where we now expect to see this to come together over the next few months. On catalyst, we await decisions in our ongoing discussion on the several pipeline catalysts. Given the recent VA changes, some of these dossiers have been updated. We’ll continue to produce and submit clinical data demonstrating the clinical benefits of our individual diagnostic tests and our multi-modal offerings, including heart care. Lastly, the company will be leaner, more efficient and align with the new and evolving landscape.

We have enough cash in our balance sheet, and we do not anticipate needing to raise any cash in the near future. Before I hand the call over to Abhishek to go over the financials, I want to thank all the employees of CareDx who have worked tirelessly to educate healthcare providers on the billing article changes and to help transplant centers become operationally ready. The efforts were exemplary, driven by the unwavering comment serving patients and the broader transplant ecosystem. Handing over to Abhishek.

Abhishek Jain: Thank you, Reg. We are pleased to share results from the first quarter. The key takeaways are: number one, we had a good quarter despite the operational challenges associated with the implementation of the billing article; number two, we have some early lead indicators to start assessing the financial impact of the billing article; number three, we now have plans underway to mitigate the financial impact; number four, we are withdrawing guidance due to the factors outside of our control. We had a good first quarter where we delivered on our financial imperatives. Number one, we maintained a solid cash position of $286 million and generated positive cash from operations for the second consecutive quarter. Number two, our testing services volume growth beat market growth quarter-over-quarter and year-over-year.

Number three, we maintained our momentum in collections that increased 10% year-over-year and were at 110% of our reported testing services revenues. The impact of improved collection has started to show on ASP dynamics. Number four, we had our highest ever quarterly revenue for patient and digital services business. And number five; all three businesses improved gross margin year-over-year. And it would have been a record quarter if we were to consider revenue associated with the impacted March tests of $8.9 million as we would have then reported our highest-ever testing services revenue and reported a positive adjusted EBITDA. Let me provide details. Firstly, with revenues. In Q1, we reported total revenues of $77.3 million, down 3% year-over-year.

If we were to include the revenue associated with impacted March test, we would have delivered revenues of $86.2 million over adjusted revenue, representing a 5% increase as compared to the last quarter and 9% year-over-year. This would have been our highest ever revenue in a quarter. Testing Services revenue for the first quarter was $61.8 million, down 7% year-over-year. Testing services revenue, including the revenue associated with impacted March test would have been $70.7 million, our highest ever testing services revenue in a quarter or adjusted testing services revenue, representing 8% growth as compared to last quarter and 6% year-over-year. Our testing services volumes grew by 5% quarter-over-quarter as compared to a negative 3% growth for the transplant volumes.

Also, our testing volume growth of 17% year-over-year beat the market growth of 10%. Despite tough market conditions, strong test volume growth demonstrates the value of our tests with proven clinical usage. Turning to ASP. Our adjusted testing services revenue growth of 8% outpaced volume growth of 5% or would have delivered a positive overall ASP change, an inflection point that we have been seeking with our focused strategic efforts. In Q1 ’23, we would have improved the ASP despite the continued headwinds from volume mix shift, primarily driven by, number one, getting paid for long outstanding Medicare Advantage claims and number two, having an increased price per test as a result of improved collections in Q4 ’22. As a reminder, we use historical collections per test to recognize our revenue for non-Medicare tests in a given quarter.

Importantly, ASP on our pay test continues to be approximately $2,500. We track this measure to exclude the impact of mix shift as a result of our strategy and market dynamics as we had discussed in the past. This is a metric that we use to ensure that there is no price degradation for our test. Turning to testing services gross margin. Our GAAP Testing Services gross margin improved to 75% as compared to 73% in the same quarter last year. And non-GAAP testing services gross margin improved to 77% as compared to 74% in the same quarter last year. Half of this improvement in gross margin was driven by volume growth and the impact of improved collections on revenue. The rest of the gross margin improvement was driven by two factors: number one, the positive impact of onetime reversal of accrued amount associated with royalty payment, and it was partially offset by the impact on gross margin due to unrecognized revenues of $8.9 million associated with impacted March tests.

The cost of running these tests has been part of cost of sales. Now turning to non-testing services business. In Q1, our Digital and Patient Solutions business revenue was at $8.6 million, a growth of 39% year-over-year and our highest ever for a given quarter for this business line. We are pleased to see our strategy of investing in our digital and patient solutions paying off and our acquisitions helping us both drive the business results and strengthen our moat. GAAP and non-GAAP gross margin for our Digital and Patient Solutions business were 23% and 31% in the first quarter of 23% as compared to 21% and 28% in the same quarter last year. Though the non-GAAP gross margin improved by 300 basis points year-over-year, the team is continuing to look for further opportunities to improve.

Products business delivered $6.9 million in revenue, similar to same quarter a year ago. GAAP gross margin for our products business was 41% in first quarter of ’23 as compared to 35% in the same quarter last year. Non-GAAP product gross margin was 52% in the first quarter of ’23 as compared to 44% in the same quarter last year, an improvement of 800 basis points. As discussed in our previous calls, improving gross margin for our product business stays a core focus area for the company, and we are making good progress at it. Turning to operating expenses and adjusted EBITDA. Non-GAAP operating expenses for the first quarter were $61.7 million, up about $1 million sequentially from Q4 ’22. The increase in our GAAP operating expenses was mostly driven by increased legal expenses.

For the first quarter of ’23, we recorded negative adjusted EBITDA of $6.4 million compared to a negative adjusted EBITDA of $3.7 million in the previous quarter. If we were to consider unrecognized revenues associated with March impacted test, we would have recorded a positive adjusted EBITDA of $2.5 million. Turning to cash. We continue to maintain a strong financial profile, as emphasized by our robust balance sheet and cash balance of $286 million and no debt. We generated positive cash from operating activities for the second quarter in a row. Importantly, the first quarter is usually a seasonally weak quarter for cash usage as we pay annual bonus to our employees. Our focus on cash collections and working capital management contributed to achieving positive cash from operating activities.

I would also like to note that we earned $2.7 million in interest income for the first quarter of ’23. Now to the second takeaway. Lead indicators to assess the financial impact of the billing article. Reg has already provided color on how the billing article revisions have impacted our strategy and on the operational challenges to implement the changes required for hundreds of transplant centers and the ecosystem around it. All of our efforts have now been shifted to operationally implementing the changes required by the billing article. Though we are seeing adoption of revised processes, this is a herculean effort that would not occur by the effective date of 3/31, especially for our patient services. Given the significant change, complexity and related uncertainty, it is difficult to assess the financial impact of the billing article yet.

However, let me share with you lead indicators. Number one, education. The first step in implementing the billing article is the education of the transplant centers, providers and support teams. I’m pleased to inform that we have educated approximately 80% of all centers. It covers 90% plus of our volumes for kidney services and the education is ongoing. This sets the path for adoption of the new requirement. Also, it is important to note that after the first four weeks, post the effective date of billing article, we are experiencing lower testing volumes as centers and clinicians are still learning, transitioning to the new processes and need to update the IT system. Number two, adoption. At the end of April, approximately 50% of our incoming test requisitions were on newly implemented forms.

That included required information to comply with the billing article. This is trending at approximately 60% in May so far. I think it speaks highly of our teams that have been working nonstop to implement new processes and system updates. We expect to continue to see an increase in the adoption to approximately 80% to 85% by the fourth quarter of ’23. Number three, claim submission. For AlloSure kidney test, starting March 31, ’23, we have not been billing any test to Medicare unless they come with the requisite information on the new test acquisition form. Otherwise, we are going back to the prescribing transplant centers to collect that information. I would like to note that this will add significant operational burden on CareDx. As shared earlier, there’s still a large percent of incoming tests that are coming on old forms or are incomplete.

Also, if a test is pending collection of requisite information, it will impact revenue recognition. For our AlloMap Heart and AlloSure Heart tests we are continuing to follow our medical reimbursement submission process. In addition, we plan to inform Noridian that until Noridian adopts the revised billing article, CareDx will continue to submit AlloSure Heart test for reimbursement only when used in conjunction with AlloMap Heart, including the test where we have not obtained additional information as required by the billing article. However, post June 30, ’23, we plan to submit to Medicaid only those tests that meet the billing article requirements. Please refer to our 10-Q for further discussion on billing articles and risk impact and associated risk.

Turning to our third takeaway on our plans to mitigate the impact of the billing article. The billing article will impact testing services business based on the early trends of lead indicators. Therefore, we have started to align our cost structure. We expect actions — we expect these actions will help drive approximately $40 million to $50 million in annualized savings. As we increase our understanding of the financial impact, we will adjust our actions to minimize cash burn. It is important to note that during the transition period of operational implementation, we will require more resources to deal with significant additional administrative burdens in certain areas. Here is a quick summary of various actions that we are taking. We are restructuring our workforce, and our goal is to reduce approximately 12% of our headcount as compared to what we had in the beginning of the year.

Number two, we are reviewing our test volumes specifically in areas where the tests are not covered and are not reimbursed even after appeal. Number three, prioritization of clinical studies and R&D spend to stay focused on the most important areas that would help us improve coverage and drive revenue. Number four, review of legal spend and reduction of discretionary spend to the extent possible. In addition to looking to reduce expenses, as Reg mentioned, we will continue to focus on our 3C key strategic areas to drive upside. Turning to guidance. We are withdrawing our ’23 revenue guidance at this time given a multitude of unknown variables related to the billing article as we have discussed during this call, many of which are outside our control.

Specifically: number one, interpretation of MolDx’s policy in the context of two billing article revisions since March 2; number two, adoption of the billing article by Noridian and update of IT systems by centers to incorporate new test forms; number three, impact of transition on testing services volume during the period of education and implementation; number four, rate of adoption of new forms, percent completion of the requisite information and success in selecting missing information from the TRX. We will revisit this in our earnings call for second quarter of ’23 once we have gained a better understanding of the evolving landscape. In summary, we had a good first quarter. It could have been even better had we not hit the challenges due to billing article revision.

All efforts now are on operational implementation of the requirements of billing articles divisions to increase the rate of adoption as much as possible. We are taking necessary actions to adjust our cost structure and do not anticipate a need to raise cash in the near future. We will continue to build on our key strategies by enhancing our efforts to improve coverage and collections areas that we can influence. With that, I’ll hand over the call to Reg.

Reg Seeto: Thanks, Abhishek. I think let’s have Greg, if you can work with the operator to open lines to the Q&A. Thank you.

Q&A Session

Operator: Certainly. [Operator Instructions] And our first question is from the line of Matt Sykes from Goldman Sachs. Please proceed with your question.

Operator: And our next question comes from the line of Andrew Cooper with Raymond James. Please go ahead.

Operator: And our next question is from the line of Brandon Couillard from Jefferies. Please proceed with your question.

Operator: And our next question is from the line of Mark Massaro with BTIG. Please proceed.

Operator: And our next question is from the line of Alex Nowak with Craig-Hallum Capital. Please go ahead.

Operator: And our next question is from the line of Mason Carrico from Stephens. Please go ahead.

Operator: And our next question is from the line of Yi Chen with H.C. Wainwright. Please go ahead.

Operator: And there are no further questions in the queue at this time. I will now turn the call back over for closing remarks.

Reg Seeto: Thanks very much. I want to thank the analysts and the investors listening to this call and if there are any different folks, patients, for example, as well. And I think we know that it’s been a tough time. We also know that what we do is a very unique space and one where I think there’s obviously been some changes. And I think for us, we had a specific plan in 2022, which I think we’ve continued to deliver on Q1. I think moving forward, we have an updated plan, which the team is committed to executing on now as well and addressing some of the new challenges that come through. And again, we thank you for your support, and we thank you for your commitment to transplant patients. Thank you again.

Operator: That does conclude your conference call for today. We thank you for your participation and ask that you please disconnect your lines.