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

CareDx, Inc (NASDAQ:CDNA) Q4 2023 Earnings Call Transcript February 28, 2024

CareDx, Inc beats earnings expectations. Reported EPS is $-0.17, expectations were $-0.24. CDNA isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Greetings, and welcome to CareDx, Inc. Fourth Quarter 2023 Earnings Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions]. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Greg Chodaczek, Managing Director of Investor Relations. Thank you, sir. You may begin.

Gregory Chodaczek: Good afternoon and thank you for joining us today. Earlier today, CareDx released financial results for the quarter and full-year ended December 31, 2023. The release is currently available on the company’s website at www.caredx.com. Joining the call today is Alex Johnson, President of CareDx’s Patient and Testing Services; Abhishek Jain, Chief Financial Officer; and Robert Woodward, Chief Scientific Officer. Also joining the call today is Michael Goldberg, Chairman of the Board. Before we get started, I would like to remind everyone that management will be making statements during this call that includes 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 are examination of historic operating trends, expectations regarding coverage decisions, pricing and 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, February 28, 2024. 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 with the SEC. I will now turn the call to Alex.

Alexander Johnson: Thank you, Greg. Good afternoon everyone, and welcome to CareDx’ fourth quarter and full-year 2023 Earnings Conference Call. CareDx ended 2023 in a solid growth and market leadership position after a challenging start to the year. Our team spent the last year addressing the complexities associated with the billing article reconfiguring the company to adjust to the Medicare changes to coverage and fighting to restore patient access to transplant innovation. Before we move into the details of the quarter and the year, let me step back for a moment and offer a bit of perspective. We are still in the early stages of a $6 billion market opportunity to health care for some of the highest need patients in the U.S. health care system.

Transplant patients in the U.S. are experiencing incrementally improved short-term outcomes, but are still far away from having their newly transplanted kidney, harder lung lasts as long as it should. We continue to believe that effective care remains truly understanding transplant patient management. And this requires focus from our entire team working closely with some of the world’s best clinicians, researchers and transplant centers. Our ability to successfully lead and execute in this growing market in the face of complexities associated with the billing article revisions is reflected in our results. Last year, we executed deliberately, quickly and with high impact as demonstrated by our performance. We reduced our cost structure and stabilized our revenue base.

Consistent with our pre-announcement, we reported full-year revenue of $280 million, exceeding the high end of our updated guidance. We have regained our growth footing in our testing services business with patient test volumes up 4% quarter-over-quarter, an increase for the second sequential quarter in a row. We delivered about 40,000 tests in the fourth quarter and patient testing services volume was approximately 165,000 patient results for the full-year. We continue to make progress in driving our innovations into clinical practice. This year, we witnessed strong support from leading medical societies and from patients, advocating for access to transplant molecular testing, including AlloSure and AlloMap, underscoring the pivotal role our innovations play in improving transplant patient care.

In 2023, two new Medicare coverage approval supported the clinical value and market opportunity of our innovation pipeline. AlloSure Lung was the first donor-derived cell-free DNA approved for coverage by Medicare for lung transplant patients. And with the approval of heart care, in August 2023, our clinical approach of multimodality testing was confirmed by CMS. This approval defines a reimbursement pathway for our differentiated product portfolio, one that can leverage our rich pipeline of innovation to help improve patient outcomes. On the commercial payer side, we saw good progress. We ended the year with an additional 15 million covered lives. We expanded existing coverage for 31.5 million lives in our cardiothoracic business, primarily by adding coverage in the first six months post-transplant for AlloMap Heart.

Looking at our other businesses, we are pleased with the double-digit growth in both our patient and digital solutions and lab products business lines, representing year-over-year growth of 29% and 15%, respectively. Before moving on to 2024, I will touch on our recent Pat litigation news. As we mentioned in our statement following a jury verdict in late January, CareDx was assessed damages of approximately $96 million. We intend to seek judicial review of the jury decision and monetary damages. We expect there to be active briefing on this matter at least through Q3 2024 in the District Court. The matter would then be subject to appeal to the Federal Circuit. Precise timing would be speculative, but we would expect any resolution for the patent litigation to be a multiyear, multistep process.

Looking forward to 2024. In our testing services business, the focus is on strategic profitable growth, continuing to grow patient testing volumes and market penetration for AlloMap and AlloSure, while expanding reimbursement and coverage. There is a significant opportunity to gain coverage for nonreimbursed tests. This year, we will continue to invest in multicenter, purpose-driven studies to help secure additional reimbursement coverage. As mentioned last quarter, KAOR, our Kidney Allograft Outcomes Registry completed the last patient clinical visits, and we are now finalizing our data collection and monitoring. KAOR was designed to demonstrate the clinical utility of AlloSure in a variety of outcome, and we continue to expect a publication this year.

We also have other unique opportunities to publish evidence that can influence payer coverage policies by working with leading researchers who have had extensive experience with AlloSure Kidney. In heart, we anticipate an interim readout for our ongoing Surveillance HeartCare Outcomes Registry or SHORE. The data from patient encounters in the early years of SHORE have been collected and monitored. We are now working towards publication of an interim readout with the twin goals of supporting the utility of multi-modality testing and heart care coverage beyond year one. We expect publication in 2024. These studies are expected to generate the evidence that, along with the build-out of our revenue cycle management infrastructure, such as commercial payer coverage and billing appeals process, will support an improved rate of reimbursement.

In our Patient and Digital Solutions business, we aim to further increase the adoption of our portfolio offerings in 2024. Over 70% of transplant centers in the U.S. use one or more of our digital solutions. As we first shared last month, we have now started to roll out a new platform, which enables greater uptake of CareDx services. The platform called CareDx Pro is embedded within a transplant centers electronic medical record workflow. This allows clinicians and administrators to have a single interface to access our digital health and SaaS solutions as well as for clinicians to seamlessly order and view test results for AlloSure, AlloMap and HeartCare. Our growing lab products business is global. We have a strong portfolio, and we’ll continue to expand the business to a new transplant laboratories worldwide with best-in-class kitted products using NGS and QPCR technologies.

Our market leadership for NGS HLA typing through our AlloSeq Tx line and broad geographical footprint allows us to benefit from scale leverage as our products business grows further. From an operational perspective, we’ll remain focused on thoughtfully managing our cost structure and investments. You heard this during our Annual Investor Day last month, and it is worth repeating. This commitment underscores the dedication of our leadership team to driving growth and value for investors. We have taken multiple actions to reduce costs, including a recent Q4 action to streamline even further. You’ll see us continue to take steps to manage our near-term cost and COGS as we drive towards profitability. CareDx is taking a disciplined approach to investments that support our clinicians, patients and employees and deliver shareholder value.

Finally, I would like to touch on our advocacy efforts on behalf of the transplant patients. We and our coalition partners continue to be actively engaged in discussions with HHS and CMS, while we support patient advocacy efforts to restore full access for Medicare beneficiaries. The transplant community has made substantial progress. Some of you may have seen the honor of the gift efforts in Washington, D.C. in early December, where hundreds of transplant patients, physicians and advocates made publicly on Capitol Hill to stop the recent rollback in Medicare coverage. Notable speakers of the press conference included Senator [indiscernible], former Speaker of the House Newt Gingrich and Reverend Al Sharpton, which shows the wide-ranging bipartisan nature of the concerns here.

We and the broad transplant community will continue to fight for access to transplant innovation in 2024 and beyond. In fact, as recently last Friday, the Wall Street Journal published their fourth powerful editorial since September, highlighting the patient access issue for transplant tests and the coverage disparities for Medicare patients. We are encouraged by our momentum as we enter 2024. Our team is laser-focused on executing our plan. We are building on the testing services revenue baseline set in the second half of ’23, expanding patient access to our innovative portfolio across all three businesses and expediting our journey back to profitability. With that, I will ask Abhishek to share more details on our results for 2023 and our outlook for ’24.

From there, we will go to Michael Goldberg, our Board Chair for an update on our CEO search before moving into the Q&A. Abhishek?

Abhishek Jain: Thank you, Alex. In my remarks today, I will focus on our fourth quarter and full-year ’23 results before turning to ’24 guidance. Unless otherwise noted, my remarks will focus on non-GAAP results. Please refer to GAAP to non-GAAP reconciliations in our press release today for further information. I’ll start with the financial highlights. Number one, reported full-year ’23 revenue of $280.3 million, exceeding the high end of our updated guidance. Number two, delivered over 165,000 patient test results in ’23. Patient test volumes grew 4% in the fourth quarter to approximately 39,900 tests as compared to the third quarter, a second consecutive quarter of sequential growth. Number three, reported full-year ’23 testing services revenue of $209.7 million.

Fourth quarter testing services revenue of $46.7 million came in better than expected, primarily driven by volume growth. Number four, reported patient and digital solutions revenue of $37.1 million in ’23, up 29% year-over-year and product revenue of $33.5 million, up 15% year-over-year. Number five, maintained a strong cash position of $235.4 million at the end of December and no debt. And we bought 2.9 million shares for approximately $27.5 million in cash in ’23. Moving to the details, starting with Testing Services. Testing Services revenue for the fourth quarter was $46.7 million, down 2% as compared to the third quarter of ’23. As discussed in our Q3 earnings call, fourth quarter revenue was expected to be lower due to the fourth quarter impact of heart care tests that were outside of the new coverage criteria from MolDX as well as the exclusion of onetime settlement to the large Medicare Advantage payer.

As mentioned earlier, testing services volume increased by 4% sequentially, and we are pleased to see both kidney and heart franchisees grow for the second consecutive quarter. As Alex alluded earlier, we stay focused on executing in our testing services strategy to increase market penetration and drive volume growth. Our non-GAAP testing services gross margin was 72% in the fourth quarter as compared to 74% a quarter ago. We are pleased with the efforts of our lab operations team in keeping the gross margin above 70% despite a significant top line impact from billing article revisions. Our operations team continues to execute on reducing the shipping and specimen processing costs, improvements in inventory management and scrap reduction and optimization of collection kits usage.

Moving to our Digital and Patient Solutions and Lab Products businesses. Our Patient and Digital Solutions business recorded revenue of $9.6 million in the fourth quarter, up 14% year-over-year, and $37.1 million for the full-year ’23, up 29% as compared to ’22. Strong top line results were driven by both organic growth and our acquisitions of HLA Data Systems and MediGO. Our Patient and Digital Solutions business, non-GAAP gross margin for the fourth quarter was 42% as compared to 34% a year before. For the full-year ’23, non-GAAP gross margin improved by 600 basis points to 37% as compared to 31% in ’22. The gross margin expansion was driven by the top line growth, cost saving initiatives, our transition to a recurring SaaS-based model and the higher gross margin profile for our newer acquisitions.

Our products business recorded revenue of $9.2 million in the fourth quarter, up 8% year-over-year and $33.5 million for the full-year ’23, up a solid 15% year-over-year. Growth in the products business was driven by our higher-margin NGS offering. Products business non-GAAP gross margin for the fourth quarter was 46% as compared to 54% a year ago, primarily due to a onetime inventory charge associated with end-of-life for one of our products in this business. Products business non-GAAP gross margin for the full-year ’23 grew an impressive 500 basis points to 54% as compared to 49% in ’22, and it was driven by organic growth, cost efficiencies from supply chain optimization with ongoing manufacturing site consolidation and a continued shift to NGS offerings in our revenue mix.

Our team with focus on improving gross margins further as they drive for efficiencies and complete the planned site consolidation in 2024. Moving down the P&L. Non-GAAP operating expenses for the fourth quarter were $54.2 million, down approximately $3.5 million sequentially from Q3. So the sales and marketing spend increased $1.6 million, primarily related to our targeted policy efforts to restore Medicare coverage, G&A expenses came down $4.4 million as a result of our focus on reducing legal expenses. Our adjusted EBITDA losses in Q4 were $10.3 million as compared to $10.9 million in Q3. We have also accrued $96.3 million for damages awarded by a jury in the IP litigation case in the fourth quarter of ’23. As Alex mentioned earlier, we intend to seek judicial review of the verdict and believe that we have good and substantial defenses against the claims are less in the suit, and we will vigorously defend ourselves.

For further disclosures on this matter, please refer to our recently filed 10-K. Turning to cash. We continue to maintain a strong balance sheet with $235 million in cash, cash equivalents and marketable securities with no debt. Cash used in operations for the full-year ’23 was $18.4 million, down 27% as compared to $25.2 million in ’22. Despite the operational and financial challenges introduced by the billing article revisions, the improvement in cash used in operations in ’23 is a testament to the outstanding efforts of the entire CareDx team. The cash used in operations was positively impacted by our RCM initiatives that delivered a fifth consecutive quarter of collections over testing services revenue and added $17 million to cash in ’23.

Finally, I would also like to note that we earned $3.2 million in interest income in the fourth quarter and $11.9 million in 2023. Based on our current cash position and anticipated cash usage in operations, we continue to believe that we do not need to raise cash in the foreseeable future. Finally, turning to guidance. We expect full-year ’24 revenue to be in the range of $260 million to $274 million. The midpoint of our ’24 guidance assumes, number one, to low to mid-single-digit testing services revenue growth based on annualized actual testing services revenue for the fourth quarter of ’23. Number two, Medicare reimbursement remains as currently implemented. No incremental revenue assumed from new coverage decisions from either Medicare or large commercial payers.

Number three, mid-single-digit growth for both products and Patient and Digital Solutions businesses year-over-year. We’re expecting our gross margin to be approximately 63% to 65% with testing services gross margin slightly above 70%, products business gross margin in the mid-50s and Digital and Patient Solutions gross margin in the high 30s. We expect our non-GAAP operating expenses to be between $207 million to $215 million, down from an annualized fourth quarter run rate basis, while absorbing for meriting phases, benefits reset and inflation. We expect adjusted EBITDA losses to be between $20 million to $30 million in ’24, with quarterly improvements in adjusted EBITDA losses throughout the year. Before we open the line for questions, I would like to turn the call over to Michael to discuss the ongoing CEO search.

Michael?

Michael Goldberg: Thank you, Abhishek. We would like to briefly touch on the CEO search is well underway. The Board is leading an exhaustive search process aided by the search firm of Russell Reynolds. As communicated previously, we remain on track to announce a new CEO within the originally projected six to nine month time frame from the initiation of the search in November. The office of the CEO comprising of Alex, Abhishek and myself continues to successfully drive the business forward. For over two decades, CareDx has been dedicated to improving transplant patient outcomes and extending long-term allograft survival. And we look forward to a strong 2024. With that, I’ll hand it over to the moderator to open the line for questions.

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Q&A Session

Operator: Thank you. We will now be conducting a question-and-answer session. [Operator Instructions] Our first question comes from Andrew Cooper with Raymond James. Please proceed with your questions.

Andrew Cooper: Hi everybody. Thanks for the questions. Maybe just to start super high level. Obviously, a lot of noise, a lot that’s happened through the course of 2023. It feels like this 4Q result really kind of getting back to stability and the base to grow from. But did anything stand out when you think about sort of ordering patterns, the cohort of patients that you’re seeing those orders for or anything like that, I guess, across both kidney and heart in the fourth quarter. Just any surprises, any changes? Any commentary there on sort of what you’re really seeing in the end market would be great.

Alexander Johnson: No, I think — thanks for those nice comments. And I think it is back to stability, it’s back to growth. And I think we’re excited to continue to serve more patients. And I think Q4 was a terrific baseline to grow on. And before that, we grew on Q3. And so I’ll ask Abhishek to add some commentary. But I think the headline here is that we feel very good about consistent patterns that we’ve seen going forward for patient mix.

Abhishek Jain: Thank you, Alex. I think you have covered it pretty well that we are very happy to see the second consecutive quarter of our testing services volume growth, and that gives us a lot more confidence as how the business is progressing as well as the growth is coming from both of our heart and the kidney franchises. So that gives us all the more comfort that we are basically kind of growing in the areas where we need to. The good news is that we are seeing the market growth in the heart side, the franc fund volume growth to be in the double-digit last year. So definitely a lot more promise there as we enter into 2024.

Andrew Cooper: Okay. Helpful. And then, maybe just sticking to testing services, the gross margin side of things, like I said, obviously, some lumpiness through the course of ’23, but I think you said low 70s or slightly above 70 for the year. Just any puts and takes there. And then as it pertains to the ongoing sort of legal dispute, maybe talk about your ability to, if you had to digest some form of royalty, how you would think about that in terms of 70-plus percent margins with frankly, not a very large proportion of your test actually being paid for it all in the first place?

Abhishek Jain: Yes. So I think on the testing services gross margin having like above 70% that in itself is like very, very healthy we usually have been in the low 70s, mid-70s kind of the gross margin range and with the billing article revisions, if I were to take the noise out, we basically kind of dropped to mid-60s, high 60s, kind of gross margin range. And that’s the reason, I was happy to see that we came in slightly above 70% because I remember calling out the Testing Services gross margin without that noise is close to 68% to 70% in our previous calls. So from that standpoint, we started to definitely see the improvement there. And we’re continuing to work through as to how do we drop most of our revenue incrementals to the gross margin because we are not going to be increasing our spend other than the variable cost that we need to spend on the test that we need to run.

So that’s the first part. And the second piece, I think, to your question, that a lot of our tests are not being paid, you’re absolutely right. And I did kind of articulate that, that’s a significant opportunity that we have in front of ourselves. I took the example of Q4, 40,000 tests. Maybe you should be booking a $100 million revenue, but we booked $47 million. So there is a large opportunity, and that’s the piece that we continue to work on through like spending a lot of time and effort in generating the data that we need to and then going after the coverage. And finally, through our RCM initiative getting that whole coverage that we have gained coming through the collections to our revenue in the P&L. So it’s the overall process. So I still feel that continue to do that test and having that ability to gain that the opportunity that basically is the right thing to do as compared to worrying too much about the tests that are not paid today because we will get there.

Andrew Cooper: Okay. Helpful. And then maybe just one last one, if I can sneak it in. Just you’ve pulled a lot of cost out of the system. It’s been impressive from that perspective. As we think about the commentary on not needing to access markets, not needing a cash raise, how do you think about the path to breakeven as you sit today? Is there more costs you can pull out? Is it more a function of, hey, we’ve got to get the top line higher than where we are today? Just how do we think about that trajectory to get to EBITDA and cash flow breakeven longer term?

Abhishek Jain: No, that’s a great question, Andrew. And the way I kind of see about the adjusted EBITDA losses. If you look at the guide, we are guiding about $20 million to $30 million of adjusted EBITDA losses for the next year. Now in my mind, we will have basically the first half to be more front loaded with our losses, and you can kind of model it based on a low double-digit adjusted EBITDA losses as we begin the 2024 and hopefully get to a low single-digit kind of adjusted EBITDA losses by the time we get to the 2024 end. That will basically set us up pretty solid to get back to adjusted EBITDA profitability and generating cash flow from operations in 2025. I’m not guiding for the 2025, but that’s at least my thinking is that we are looking for improving the adjusted EBITDA losses throughout the year.

Andrew Cooper: Great. Yes, go ahead.