CareDx, Inc (NASDAQ:CDNA) Q4 2022 Earnings Call Transcript

CareDx, Inc (NASDAQ:CDNA) Q4 2022 Earnings Call Transcript February 27, 2023

Operator: Good day, ladies and gentlemen, and welcome to the CareDx, Incorporated Fourth Quarter 2022 Earnings Conference Call. Today’s conference is being recorded. At this time, I would like to turn the conference over to Greg Chodaczek. Please go ahead.

Greg Chodaczek: Good afternoon and thank you for joining us today. Earlier today, CareDx released financial results for the quarter ended December 31st, 2022. The release is currently available on the Company’s website at www.caredx.com. Reg Seeto, Chief Executive Officer; and Abhishek Jain, Chief Financial Officer, 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 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, are examination of historical operating trends, expectations regarding coverage decisions, pricing and enrollment matters and our future 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 of descriptions 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, February 27th, 2023.

CareDx disclaims any intention or obligation, except as required by law, to update or revise any information, financial projections or other 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.

Reginald Seeto: Thanks, Greg. Good afternoon, everyone. And thank you for joining us. Welcome to CareDx’s fourth quarter and full year 2022 earnings conference call. During 2022 the company made significant progress towards our vision of being the leader in the transplant ecosystem, while delivering on our mission to bring innovation across the transplant patient journey. The focus of today’s call will be on the execution and progress in three key areas. The first is the path to profitability as we share CareDx’s differentiated financial profile versus our peers. The second is the focus on the 3Cs; catalysts, collections and coverage, where we hit an inflection point with collections during the fourth quarter of 2022. And the third is building leadership in the transplant ecosystem, especially with the development of our digital ecosystem.

Turning to the first topic on our financial profile. The economic environment during the past year, with high inflation and the threat of recession has further emphasized the importance of companies to maintain a strong financial position. Given this, we’re focused on maintaining a robust balance sheet with a plan to achieve profitable adjusted EBITDA in the first half of 2023. The following support this commitment. First, the company announced an authorized share buyback program in December of 2022 of upto $50 million over two years, demonstrating the board of directors and management’s conference in the business, cash position and long-term growth opportunities. As of the end of 2022, we repurchase 0.6 million of shares and have continued executing our program in early 2023.

We €“ secondly we ended 2022 with $293 million in cash and cash equivalents and marketable securities on the balance sheet and have no debt. Our solid cash performance was driven by improved cash collections infrastructure that we invested in significantly during 2022, which led to record collections for testing services in Q4 at 110% of our testing service revenues. We also generated $7 million of positive cash from operations in Q4 2022. And thirdly, even with a share buyback CareDx’s strong balance sheet and improved cash collections allows CareDx this flexibility to play our capital without raising additional capital. Now turning to the financial results, we delivered quarterly revenues of $82.4 million representing a 4% year-over-year growth.

For the full year 2022, CareDx recorded revenues of $321.8 million representing 9% year-over-year growth. Our testing services volume grew 19% year-over-year, which continued to outpace market growth of 4%. Our product revenues and patient and digital solution revenues showed meaningful growth year-over-year for the fourth quarter and full year 2022. Notably in the fourth quarter, products and digital accounted for more than 20% of our total revenues consistent with our strategy of growing business lines of scale. Importantly, excluding some elevated related milestones and clinical study startup costs in Q4 we have continued our trend of improved sequential adjusted EBITDA. As we move into 2023 we remain on track to deliver adjusted EBITDA profitability in the first half of 2023.

As revenues continue to grow, we see further improvement opportunities in gross margin, with multiple levers in our testing services as we drive to our long-term, non-GAAP gross margin target of $0.75 plus. Although not expected to have an impact in 2023, we have consolidated our products operations to improve product margins, with a plan closure of the Fremantle site in the middle of 2024 and to plan reduction in the footprint of the Stockholm site. Turning to our key 2023 to 2024 focus drivers. CareDx’s three catalyst, 3Cs catalyst, coverage and collections. Each represents a pivotal opportunity for growth as part of our strategy. Now starting with Catalyst. We’re excited by the potential addition of AlloMap Kidney, UroMap and Kidney. When launched, these best-in-class offerings will join the number one portfolio of post-transplant monitoring solutions, which include AlloMap Heart which was introduced in 2005, AlloSure kidney which was introduced in 2017, AlloSure Heart, which was introduced in 2020 and AlloSure Lung introduced in 2021.

We have a long and successful and proven history of delivering transplant innovation. Now moving on to AlloMap kidney. This is currently under MolDx LCD review process. AlloMap is built on a proven FDA clear transplant gene expression platform and provides a quantified result that can be measured longitudinally. The infrastructure is already in place, and we’re excited to bring this innovation to patients upon achieving approval from MolDx. Regarding UroMap, we’re preparing the final stages for MolDx submission. As a reminder, UroMap is a gene signature in urine that assesses both the probability rejection and the likelihood of a BK virus nephropathy. With publication in The New England Journal of Medicine we have a strong clinical validation across multiple publications and best-in-class data.

Over the last few years, we’ve invested in artificial intelligence as a core part of the company’s pipeline catalyst development in kidney and heart. As seen with the latest developments in AI and other industries, the use of AI will play a key role in transplant management. We plan to share more about AI kidney and AO COV throughout the year. Now turning to our second bridge. Despite the lack of broad reimbursement coverage in recently launched tests, we continue to support transplant patients and the community with new product launches. Over the past years, we’ve built extensive reimbursement coverage expertise and diagnostics experience with AlloMap Heart and AlloSure kidney. These serve as our gold standard for obtaining strong pay coverage, with a total coverage of greater $0.75 cents and greater than 70% respectively.

Now, this has taken time to achieve with AlloMap Heart and AlloSure Kidney, which were launched more than 15 and five years ago respectively. And newer products including AlloSure Heart and AlloSure Lungs are only one and two years post launch respectively, and are thus relatively early in their coverage lifecycle. Therefore it will take time to increase coverage, but we haven’t played plan through his peak success of AlloMap Heart and AlloSure Kidney. Importantly, during the fourth quarter, the International Society of Heart and Lung transplantation announced new guidelines, which support the expanded use of CareDx’s heartcare solutions AlloMap and now AlloSure in routine monitoring of transplant patients. The previous guidelines are more than a decade old.

And this update is more consistent with what has evolved over the last decade with the shift away from invasive surveillance biopsies. These new guidelines recommend early use of AlloMap Heart starting at two months post-transplant. This should allow us to capture multiple months of reimbursement for which we currently have limited coverage from some commercial payers. We’ve initiated discussions with these payers regarding this guideline update. Additionally, new guidelines support remote use of gene expression profiling and donor derived kidney and heart transplant surveillance as in HeartCare. This inclusion in ISO guidelines should lead to increased reimbursement over time. On AlloSure Lung, we are working with MolDx to achieve a determination of coverage by Medicare.

There is clear demand in the lung transplant community and with one in four new patients starting AllSure Lung in Q4, it is quickly becoming the standard of care for surveillance of these highly vulnerable patients. This potential improvement in coverage represents the single greatest opportunity for the company. The 2022 CareDx estimate non-reimbursed tests across our commercial portfolio represent greater than $180 million in potential revenue and hence EBITDA. Abhishek will cover this in more detail in the section. Now turning to our third C collections. As mentioned, we invested heavily in building our collections infrastructure during 2022 as we sort of shifting our pay mix to commercial, including Medicare Advantage. The necessary infrastructure has been built to address the increased number of prior authorizations and denials and appeals.

In Q2, and Q3 of last year, we saw signs of improvements within our cash collections, and the fourth quarter offer the significant proof point to our strategy. For the fourth quarter, we achieved our highest ever cash collections at 110% of revenues for testing services, representing approximately 10% year-over-year increase and demonstrating strong operational progress on this initiative. Collections will continue to be a significant focus for CareDx moving forward. With this strike catch up with Medicare Advantage, the improved process for future collections, and the ability to deal with new coverage through collections. We now continue to build on our vision of leadership in the transplant ecosystem. Not only is CareDx remained 100% focused on transplant, but the company’s established leadership building blocks across the entire patient journey.

Our leadership position is the cornerstone of our strategy as we deepen our mode, enabling the continuous monitoring of patients before and after transplant. We recently acquired HLA data systems; a digital lab platform which manages that connects over 20 HLA labs to EMR systems such as Epic and Cerner. This addition to our leading digital ecosystem expands our capabilities, allowing us to provide timely and accurate lab results clinicians for transplant decision-making patient care. This joins our leadership ecosystem where we’re either number 1 or number 2 in that space. To date, we’ve already established the leading position in post-transplant patient care. With molecular marking, we have over 100,000 unique patients that have used AlloSure and AlloMap offerings.

With medication discharge management, this is now more than 90-plus transplant centers with med action plan. And with our transplant focused app, we have over 65,000 downloads with AlloCare. Recently, we’ve built leadership in the transplant center, and we’re number one in quality and analytics with over 45 centers with in copy and we’re number two with transplant EMRs with and Transcat. And now we’re building leadership in the pre-transplant setting. We’re number one in next-generation sequencing or NGS HLA with AlloSeq Tx17 in the United States, we’re number two in dialysis patient referrals with over 70,000 patients referred through TX Axis and now we’re proud to have added HLA data systems, which is number two in the space. We are the only company 100% focused on the transplant patient journey, which sets us apart as a patient-centric company.

Now before turning to 2023 guidance, we wanted to revisit transplant volume dynamics. COVID-19 has created an extended time line for recovery and we believe we’re still in the early stages. Q4 2022 marked the first quarter where volumes were slightly above the pandemic baseline of Q2 2021, with most recovery driven by heart and disease stone as in kidney. That said, transplant volumes in Q4 2022 only grew 2% sequentially and this downward sequential trend has continued into Q1 2023, with current quarterly data for the first 7 weeks showing a negative or minus 3% sequential decline with decreases across all organs, including kidney, heart and lung. We hope the sequential trend increase would have continued, but this is what happened so far in Q1 of this year.

One of the key reasons behind this trend is that living donor kidney transplants remain below the pre-Covid levels and staffing shortages continuing to transplant in hospital centers. We recognize that we’re still early in the stages of transport volume recovery, but we believe there is time to double in the next 5 to 10 years. Drivers behind this future volume growth include increased use of high-risk organs, increase in expand use of organs through perfusion and improved transport, increase transplantation rates and post-transplant monitoring from the Advancing American Kidney Health initiative and finally, a rebound in living donors. Our testing service remains our core strength with leadership across kidney, heart and lung and the rate of adoption has been faster with each new organ that’s been used.

This core business has enabled us to build out across the transplant ecosystem and to be called the transplant company. This enables us to readily add services to transplant patients and to be considered the partner of choice. Now moving to guidance. For the full year, we expect revenues of $328 million to $338 million. Note, this guide excludes any contribution from pipeline catalyst and excludes any contribution from any major coverage changes. Importantly, we do expect to see cash collections to grow above testing service revenues as we now have a catch-up in the collection process for revenues not previously captured through collections. Abhishek will cover this in more detail during the section. In closing, we’re committed to maintaining a strong financial profile and remain on our path to adjusted EBITDA profitability.

Our core testing service business continues to gain commercial market share and grew five times above market for the full year. Our products and digital businesses are growing nicely and now represent approximately 20% of our business. We remain focused on the 3Cs, catalysts, coverage and collections. We continue to drive leadership throughout the patient journey and continue to unify our solutions to target better outcomes and better transplant care. Before I turn over the call to Abhishek to go over the financials, I want to thank all the employees of CareDx who worked tirelessly during 2022 to support patients and the border transplant ecosystem.

Copyright: lightwise / 123RF Stock Photo

Abhishek Jain: Thank you, Reg. We are pleased with the results from the fourth quarter and are excited about our leadership position across the transplant ecosystem and our ability to support patients and deliver life-saving services. I’ll focus on the following in my prepared remarks, Q4 and 2022 financial results, coverage, collections and guidance for FY 2023. I’ll start with CareDx’s differentiated financial profile versus our peers. We ended the quarter with $293 million in cash, cash equivalents and marketable securities. It is a $2 million increase as compared to the previous quarter, which included stock repurchases of 600K in the quarter. I would also like to highlight net cash provided by operating activities was $7 million in the quarter, driven by solid cash collections.

We saw an inflection point in Q4 in collections as a result of our investments in improving processes and scaling infrastructure in this key area. In Q4, we had our highest ever cash collections quarter, collecting 110% of our testing services revenue. This higher collection is particularly important as we recognize revenues for the present quarter based on the historical collections per test. Therefore, higher collections in a given quarter will become a positive for revenue recognition in upcoming quarters. We look forward to continuing this momentum in 2023. As we move towards profitability and breakeven adjusted EBITDA in the first half of 2023, we are confident that the business is self-funding into the foreseeable future. Moving to revenues.

In Q4, we recorded total revenues of $82.4 million, up 4% year-over-year and as compared to last quarter. For the full year 2022, we recorded total revenues of $321.8 million, up 9% year-over-year. Testing Services revenue for the fourth quarter declined by 5% year-over-year to $65.4 million and was up 1% as compared to last quarter. For the full testing services revenues were $263.8 million, which grew 2% year-over-year. Notably, our testing volumes grew by 14% year-over-year and 2% sequentially to approximately 47,700 tests in Q4. For the year, we provided approximately 182,000 tests, up 19% year-over-year. Importantly, our volume growth at 19% significantly outpaced the transplant volume market growth of 4%. Let me now provide some color on the drivers for the differences in year-over-year volume growth and year-over-year revenue growth for testing services.

Firstly, the primary driver of this lower revenue growth is our payer mix. Let me explain this. Our ASP on pay test has not changed since the start of 2021 at approximately $2,500. As a reminder, since last quarter, we started to share this new metric to highlight that there is no price degradation for our test. However, what has changed since the start of 2021 is the percentage of tests that are being reimbursed. This increase in non-reimbursed test has been a result of our commercial strategy of driving innovation with the launch of AlloSure Heart and AlloSure Lung and expanding in community nephrology to gain further market share. This commercial strategy resulted in increasing our commercial mix to 68% in Q4 this year as compared to 62% in the same quarter last year.

As Reg alluded in his remarks earlier, we are relatively early in the coverage life cycle for AlloSure Lung and AlloSure Heart, resulting in lower number of paid tests. This change in payer mix explains two third of the difference in our revenue growth and volume growth. This is why we focus on our first see coverage as we will coverage in these areas it provides a significant opportunity for future growth and profitability. Second point is the shift from Medicare to Medicare Advantage, which negatively impacted revenue growth by low single digits. As discussed in our prior calls, we have seen a shift of patients from Medicare to Medicare Advantage. To provide further clarity, we are sharing a new metric of the potential opportunity if we were to get paid on Medicare Advantage tests at the same rate as other reimbursed tests.

This opportunity represents approximately $20 million in incremental cash revenue for FY 2022 alone. This is why we focused on our second C collections. As the collections process and infrastructure continues to improve, we expect to be able to collect much of this cash and revenue opportunity. We’ll share this metric on an annual basis. Third point is Medicare sequestration impact in 2022 that was reintroduced in Q2 last year and will have a marginal impact on the growth rate in the first half of 2023. Now turning to nontesting services business. In Q4, product revenues increased 11% year-over-year to $8.6 million, while increasing 19% as compared to last quarter and Digital and Patient Solutions revenue increased 190% year-over-year to $8.4 million, driven primarily by our acquisition of the transplant pharmacy last year and up 13% as compared to last quarter.

For the full year 2022, profit revenue of $29.3 million grew 9% year-over-year, and our digital and Patient Solutions revenue grew by 180% to $28.8 million. Turning to gross margins. GAAP gross margin for the fourth quarter 2022 was 64% as compared to 66% in the fourth quarter of 2021. The Non-GAAP gross margin for the quarter was 67%, same as last quarter and as compared to 68% in the fourth quarter of 2021. GAAP gross margin for the full year 2022 was 65% as compared to 67% in 2021. The non-GAAP gross margin for the full year 2022 was 68% as compared to 70% in 2021. The change in our GAAP and non-GAAP gross margin year-over-year was primarily driven by lower gross margin profile of our transplant pharmacy business impacting overall mix. We continue to maintain healthy GAAP gross margin for our testing services, and it remained unchanged at 73% in 2022 and 2021, respectively.

Non-GAAP gross margin for our testing services for 2022 was at 74%, similar to 2021 despite strong test volume growth in areas where we have lower coverage. Our lab operations and supply chain teams drove efficiencies in multiple areas to absorb the costs associated with these incremental tests. We are pleased with the durability of our gross margin profile for our testing services business despite the investments that we are making in providing tests where we do not yet have broad coverage. It provides us a significant opportunity for the future. GAAP gross margin for our products business was 40% in 2022 as compared to 29% in 2021. The non-GAAP product gross margin improved by 10 percentage points year-over-year for the year 2022 at 49% as compared to 39% in FY 2021.

As mentioned, this stays an area of focus for products business with further plans to consolidate our manufacturing sites to drive efficiencies and improve margins. GAAP gross margin for our Digital and Patient Solutions business was 23% in 2022 as compared to 30% in 2021. The non-GAAP digital and Patient Solutions gross margin was 31% in 2022 compared to 44% last year. As discussed earlier, this change in non-GAAP gross margin year-over-year was primarily driven by our acquisition of Transplant Pharmacy business. Non-GAAP operating expenses for the fourth quarter were $60.4 million, up about $3.4 million sequentially from Q3 2022. The increase in our non-GAAP operating expenses was mostly driven by R&D as we paid for milestone payments and elevated start-up costs related to clinical studies in Q4.

Increase in our SG&A expenses were driven by higher collection costs as we ramped up our efforts in this area. For the fourth quarter of 2022, we recorded negative adjusted EBITDA of $3.7 million compared to negative adjusted EBITDA of $2.5 million in the previous quarter. Excluding Q4 specific elevated R&D expenses of approximately $2 million, we would have continued to make progress on our goal of achieving positive adjusted EBITDA. We remain on track to deliver adjusted EBITDA profitability in the first half of 2023. Moving to regulatory updates. First, we are pleased to report that the previously disclosed inquiry from a state regulatory agency in Q3 2021 has now been closed with no further information or action required. The agency recently advised the company that it has completed its review of our response and the information we provided to them.

Second, as you will see in our recently filed 10-K, we have identified material weaknesses in our internal controls over financial reporting primarily related to general information technology controls. However, we have not identified any misstatements in the financial statements as a result of these deficiencies. We have taken a number of actions to begin remediation, and we will consider the material weaknesses to be remediated if and when the applicable controls operate for a sufficient period of time, and we conclude through testing that the controls are operating effectively. Turning to guidance. For the full year 2023, we expect revenues to be in the range of $328 million to $338 million. Our goal in setting the guidance this way is to set a baseline for the year while waiting for the positive inflections from the pipeline catalysts and major payer coverage.

The guidance assumes no contribution from pipeline catalysts, assumes no major payer coverage decisions, assumes no ASP price degradation for reimbursed test consistent with what we have seen since the start of 2021. Guidance assumes continued shift to commercial payers, resulting in low double-digit declines in overall ASP or close to approximately 10%, which will be an improvement as compared to mid-teens declines last year. This improvement is driven by improved collection efforts, which we expect to continue, assumes patient testing volume growth in the low teens. It should be noted that market growth is still in early stages of recovery post COVID and have been uncertain as seen in the current Q1 2023 quarter-to-date data that shows sequential declines in transplant volumes across kidney, heart and lung.

To summarize, we have an excellent balance sheet with $293 million in cash, cash equivalents and marketable securities and no debt. We hit an inflection point with collections and collected 110% of our Q4 testing services revenue. We generated $7 million of net cash from operating activities in Q4, reduced AR as compared to last quarter and improved DSOs. We continue to gain commercial market share in testing services with volume growth of 19% year-over-year in 2022, significantly outpacing the market growth of 4%. We maintained our gross margin for testing services year-over-year despite a large increase in our tests that are not reimbursed and improved gross margin for our products business. We continue to move towards our goal of achieving positive adjusted EBITDA in the first half of 2023.

With that, I’ll open the call for questions.

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Q&A Session

Operator: Thank you. Our first question is from Andrew Cooper with Raymond James. Please proceed.

Andrew Cooper: Thanks for the time. Maybe just first, I want to talk about gross margins a little bit. I think it’s been really impressive over the course of the last, really, couple of years that you’ve been able to hold those testing services margins where you have, I guess, Thinking about the ASP dynamics you just laid out that don’t assume any improvements from some of the catalysts, etcetera. How much can you continue to absorb that, call it, low double-digit price decrease without having a bigger impact on the testing services gross margin because it’s been really impressive what you’ve done so far. So I just want to get a sense for what efficiencies are left to find?

Reginald Seeto: Yes, Andrew, firstly, thanks for the quality feedback there. The team has worked extremely hard with the efficiencies around the gross margins. There are multiple levers across that in the testing service. We look at automation where there’s increased volume, where there’s payer reimbursement and where we’ve had multimodality. So there’s a series of levers that we continue to add on, and it’s something that’s built into our plan. I think as we look at also the ASP dynamics, there has been improvement through the collections. And part of the plan is also work obviously on our coverage now overall as part of this plan. But I’ll let Abhishek to provide any additional commentary.

Abhishek Jain: Yes, sure. Rich, thanks for adding those — that color there. Andrew, in my mind, there are so many levers in our COGS bucket, right? Because in the lab, you can automate a lot of pieces of stuff. There are pieces in our shipping and the freight charges that there are opportunities there. And of course, I’m so proud of the team there, both on the lab operations side and on the supply chain side, the way they were they will engage with the vendors to negotiate and make sure that we are not impacted by the inflationary pressures that we are seeing in the market. So I would say a lot of things that the team has done in the past. But how much can they really absorb going forward? I’m really hopeful that they will continue to proceed the way they have done it in the past, and we’ll continue to find the efficiencies going forward as well.

Reginald Seeto: Yes, one other thing I’ll say is that if you look at gross margins, it’s not just with the testing services as noted during the call, I mean, with the products business. We’re actually looking at improving the gross margins there, as we’ve shared with some of the site consolidation we’re doing across the organization. So as a company, particularly in this environment, we do think gross margins is important. It’s not just in testing services where we’ve had that established, but also now looking at the products business and taking some efficiency opportunities there as well.

Andrew Cooper: Okay. Great. And maybe just 1 more kind of combo question still kind of linked to the P&L. I guess, one, can you give us a sense for in that ASP that you’re including in the guide? How much benefit from some of the accruals of that 110% you just collected in the fourth quarter, should we start to see sort of flow-through through the year and maybe the pacing of that? And then secondly, just a little bit more color on some of the R&D spend in 4Q that you’re calling out as onetime. Just what exactly it is and why it’s going to fall off in 1Q and beyond as well would be great. And then I’ll let others jump in.