Castle Biosciences, Inc. (NASDAQ:CSTL) Q1 2024 Earnings Call Transcript

Castle Biosciences, Inc. (NASDAQ:CSTL) Q1 2024 Earnings Call Transcript May 4, 2024

Castle Biosciences, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Good afternoon, and welcome to Castle Biosciences First Quarter 2024 Conference Call. As a remainder, today’s call is being recorded. We will begin today’s call with opening remarks and introductions, followed by a question-and-answer session. I would like to turn the call over to Camilla Zuckero, Vice President, Investor Relations and Corporate Affairs. Please go ahead.

Camilla Zuckero: Thank you operator. Good afternoon, everyone. Welcome to Castle Biosciences First Quarter 2024 Financial Results Conference Call. Joining me today is Castle’s Founder, President and Chief Executive Officer, Derek Maetzold; and Chief Financial Officer, Frank Stokes. Information recorded on this call speaks only as of today, May 2, 2024. Therefore, if you are listening to the replay or reading the transcript of this call any time-sensitive information may no longer be accurate. A recording of today’s call will be available on the Investor Relations page of the company’s website for approximately three weeks following the conclusion of the call. Before we begin, I’d like to remind you that some of the statements made today will contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.

These forward-looking statements include, but are not limited to statements about our financial outlook and similar items referenced in our earnings release issued today and statements containing projections regarding future events or our future financial or operational performance, including our anticipated 2024 total revenue and our 2025 outlook, our expectations regarding reimbursement for our products and the impact of our investments in growth initiatives and expanded commercial team. Forward-looking statements are based upon current expectations and involve inherent risks and uncertainties and there can be no assurances that the results contemplated in these statements will be realized. A number of factors and risks could cause actual results to differ materially from those contained in these forward-looking statements.

These factors and other risks and uncertainties are described in detail in the company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2024 under the heading Risk Factors, and in the company’s other documents and reports filed or to be filed with the Securities and Exchange Commission. These forward-looking statements speak only as of today, and we assume no obligation to update or revise these forward-looking statements as circumstances change. In addition, some of the information discussed today includes non-GAAP financial measures such as adjusted revenue, adjusted gross margin and adjusted EBITDA that have not been calculated in accordance with generally accepted accounting principles in the United States or GAAP. These non-GAAP items should be used in addition to and not as a substitute for any GAAP results.

We believe these metrics provide useful supplemental information in assessing our revenue and operating performance. Reconciliations of these non-GAAP financial measures to the most directly comparable GAAP financial measures are presented in the table at the end of our earnings release issued earlier today, which has been posted on the Investor Relations page of the company’s website. I will now turn the call over to Derek.

Derek Maetzold: Thank you, Camilla and good afternoon, everyone. Building on our strength and momentum from 2023, I’m pleased to share that Castle delivered a strong start to the year, growing first quarter revenue by 74% and total test volume by 40% compared to the first quarter of 2023. With our team’s consistent execution and successful track record of building a differentiated portfolio of tests, across our therapeutic areas, we remain confident in our business and are raising our full year 2021 revenue guidance to $255 million to $265 million, up from the previously reported guidance of $235 million to $240 million. Now let me take you through execute some strategy highlights in the first quarter, and then Frank will provide additional financing highlights before we turn to your questions.

Starting with our core dermatology business. For DecisionDx-Melanoma and DecisionDx-SCC combined, test reported volume was 11,961 for the first quarter of 2024, a 20% increase over the same period in 2023. We believe our core dermatology offerings continue to present a long-term growth opportunity for us. Studies have shown that these two tests can positively impact patient outcomes and help reduce health care costs. For DecisionDx-Melanoma, we delivered 8,384 test reports in the first quarter, an 11% year-over-year increase. As we’ve discussed, driving test adoption through robust clinical evidence remains a priority for us, this quarter was no exception. As you know, our DecisionDx-Melanoma test has two clinical uses. Ruling out a sentinel lymph node biopsy surgical procedure and predicting risk of recurrence, so that patients can have their treatment pathways adjusted to be more aligned with our biological risk of progression.

While one could view these two uses as separate in parallel, the use of our test to rule out a sentinel lymph node biopsy surgical procedure must be accompanied with evidence that avoiding this procedure will not put them in harm’s way. That is that they have an excellent prognosis should they choose to avoid the sentinel lymph node biopsy surgical procedure. To this end, I am pleased to review data from an oral presentation that took place at the March 2024 meeting of the Society of Surgical Oncology. At this meeting, data was presented from one of our multi-center prospective US-based studies. The data examining the performance of DecisionDx-Melanoma in safely ruling out a sentinel lymph node biopsy surgical procedure showed that patients with a T1 or T2 melanoma and predicted to have less than a 5% likelihood of a positive sentinel lymph node by our test, no patients as of the date of a data pull for this presentation, predicted to have a less than 5% [that sort of a] (ph) positive node actually had a positive node.

That’s a negative future value of 100% for this use of our test. But as I noted earlier, and is clinically important, the study also examined the recurrence of patients who are predicted to have a less than 5% likelihood of a positive node and chose to forgo that surgical procedure, as well as patients who were also [indiscernible] 5%, likely have a positive node but who, for personal preference chose to undergo that surgical procedure anyway. I’m pleased to say that both of these groups were recurrence free during the follow-up period, which had a median follow-up of two years. That is in these 2 patient populations, our tests had a negative predictive value of 100% for risk of recurrence. This is powerful data that shows the exceptional clinical value that DecisionDx-Melanoma brings to improving patient care decisions and outcomes.

Separately, in February, we announced a peer-reviewed publication of study data shown that DecisionDx-Melanoma provided significantly better risk stratification than the current American Joint Committee on cancer staging system in patients with Stage 1 melanoma. This is an important patient group, as it represents the largest group of melanoma patients. This publication reports the results of two large Stage 1 cohort studies, including 5,561 patients from the National Cancer Institute’s SEER program. This study supports the use of our DecisionDx-Melanoma test in Stage 1 melanoma to obtain more precise information about a patient’s risk of disease progression to again inform more personalized, risk-aligned treatment and surveillance management plans.

Looking ahead, we will certainly be focusing our educational effort on these highly compelling data, along with the findings from our two publications in 2023 that highlighted the fact that the clinical use of our DecisionDx-Melanoma test correlated to improve patient outcomes that as patients live longer, compared to those patients who did not have DecisionDx-Melanoma included as part of their clinical care. That is they were untested. Moving on to our DecisionDx-SCC test. We continue to see strong report volume momentum with 3,577 test reports delivered in the first quarter, an increase of 48% compared to the same period in 2023. DecisionDx-SCC continues to be supported by a robust and growing body of evidence. We are particularly excited about a study that was published in March of this year that showed in addition to providing risk stratification information.

Our DecisionDx-SCC test identified patients most likely to benefit from adjuvant radiation therapy, or ART for short, and those who can consider deferring treatment given the lower likelihood of benefit. This ART response data is of high clinical importance for a couple of reasons. First, ART has been shown to be an effective adjuvant intervention in patients with high-risk SCC. However, some high-risk SCC patients are either not responsive to ART or the likelihood of metastasis is lower than predicted by their clinical pathologic risk factors. In either case, these patients can be subject to ART, which carries both significant complications, as well as cost. So the ability of our decision in the SCC test, to assist identifying those who are likely not to benefit from ART from those who are likely to benefit from ART has high clinical actionability.

Furthermore, based off of our three-year real-world data, more than 98% of the patients that we test clinically are eligible for ART consideration under one or more of the existing guidelines. Importantly, this was the third peer-reviewed study published since the start of 2024 demonstrating DecisionDx-SCC’s clinical and-or economic value in guiding ART decisions in the high-risk cutaneous squamous cell carcinoma patient population. Now let’s turn to our gastroenterology franchise. During the first quarter of 2024, we delivered 3,429 TissueCypher test reports compared to 1,383 in the first quarter of 2023, which is 148% growth. As a reminder, we believe the total market opportunity encompasses approximately 415,000 patients annually who meet the intended use criteria for this test, representing an estimated US addressable marketplace of approximately $1 billion.

As such, we believe our TissueCypher test represents a significant long-term growth opportunity as we are in the very early stages of market penetration. We are excited about the growth prospects of the test, and we are equally pleased by clinical utility to determine a patient’s individual risk of progression from Barrett’s esophagus to cancer. Turning to our Mental Health business. We delivered 4,078 IDgenetix test reports in the quarter, compared to 2,150 in the first quarter of 2023, which is 90% growth year-over-year. We believe the ongoing momentum we are experiencing is in part driven by our unique value proposition. In fact, data shows that using our test which considers a combination of drug gene, drug-drug and lifestyle factors contributed greater remission and greater relapse control in patients with major depressive disorder and anxiety than the trial-and-error method of therapy selection.

Further, we recently announced new data showing that while two-thirds of IDgenetix recommendations for patients age is 65 and older were due to drug gene interactions, one-third were due to drug-drug or lifestyle factor interactions, highlighting the value of the IDgenetix 3-in-1 approach to providing tailored guidance for neuropsychiatric medication selection. Moving on to our pipeline. We’re making good progress on our inflammatory skin disease pipeline initiative and expect to provide you with additional updates in the second half of this year. This pipeline genomic test for patients with moderate-to-severe atopic dermatitis, psoriasis and related conditions is targeted for launch by the end of 2025, assuming a positive outcome of our discovery, development and validation efforts.

Lastly, I’m honored to share that for the third year in a row, Castle has earned a top workplace USA award, underscoring our position as a leader in creating an exemplary workforce culture. I want to thank each and every member of the Castle team for their continued hard work. I will now turn the call over to Frank, who will provide details relating to our financial results.

Frank Stokes: Thank you, Derek and good afternoon, everyone. As Derek highlighted, we delivered excellent financial results to start the year. Revenue was $73 million for the first quarter of 2024, an increase of 74% over the first quarter of 2023. The increase was driven by higher ASPs and test volume growth. I’d note that first quarter 2024 volume reflects our historical quarter-over-quarter seasonality that is flat over the fourth quarter, further impacting our first quarter 2024 volume is the timing of our national sales meeting, which occurred in the first quarter this year compared to the third quarter in previous years. Historically, the second quarter sees growth sequentially over the first quarter and we expect the second quarter 2024 to follow our typical second quarter volume trend.

Adjusted revenue, which excludes the effects of revenue adjustments in the current period related to tests delivered in prior periods was $71.3 million for the first quarter of 2024, an increase of 64% over the first quarter of 2023. Our gross margin during the first quarter of 2024 was 77.9% compared to 70.5% in the first quarter of 2023, and our adjusted gross margin which excludes the effects of intangible asset amortization related to our acquisitions, and excludes the effects of revenue adjustments in the current period associated with test reports delivered in prior periods was 80.5% for the quarter compared to 76.5% for the same period in 2023, an improvement of 400 basis points. Turning to expenses. Our total operating expenses, including cost of sales for the first quarter of 2024 were $78.4 million compared to $73.6 million for the first quarter of 2023.

Sales and marketing expenses were $30.5 million compared to $29.9 million for the same period in 2023. The increase is mainly due to higher expense for training events and speaker conferences and expenses for salary and wages, partially offset by lower expense for travel and lower stock-based compensation expense. General and administrative expenses were $18 million compared to $16.8 million for the same period in 2023. The increase is primarily attributable to higher expense for professional services, higher general administrative costs and higher salaries and wage expense, partially offset by lower stock-based compensation expense. Cost of sales expenses were $13.9 million in the first quarter of 2024 compared to $10.2 million in the first quarter of 2023, an increase of $3.7 million, primarily due to higher personnel costs and increased expenditures on supplies.

The increase in personnel costs primarily consists of higher salaries and wages, employee benefits and bonuses, reflecting headcount additions made to support business growth, as well as merit and annual inflationary wage adjustment for existing employees. Supply and service expenses increased largely due to our higher test volumes. R&D expenses were $13.8 million in the quarter compared to $14.4 million for the same period in 2023, primarily consisting of lower clinical studies expenses and advisory-board services, partially offset by higher personnel costs. Total non-cash stock-based compensation expense, which is allocated among cost of sales, R&D and SG&A, totaled $12.7 million for the first quarter of 2024, down from $13.5 million for the first quarter of 2023.

Interest income increased by $0.7 million for the first quarter of 2024 compared to the first quarter of 2023. The increase primarily reflects higher interest rates earned on our cash equivalents and our purchases of marketable investment securities beginning in the third quarter of 2022. Our net loss for the first quarter of 2024 was $2.5 million compared to a net loss of $29.2 million for the first quarter of 2023. Diluted loss per share for the first quarter of 2024 was $0.09 compared to diluted loss per share of $1.10 in the first quarter of 2023. Adjusted EBITDA for the first quarter of 2024 was $10.5 million compared to negative $15.1 million for the first quarter of 2023, an improvement of $25.6 million. The substantial year-over-year improvement primarily reflects strong top-line growth along with continued disciplined expense management.

Net cash used in operating activities was $6.8 million for the first quarter of 2024 due in part to annual cash bonus payments and certain health care benefit payments that are not expected to recur during the remaining three quarters of 2024. Net cash used in investing activities was $19.7 million for the first quarter and consisted primarily of purchases of marketable investment securities of $60.8 million and purchases of property and equipment of $9.2 million, partially offset by the maturity of marketable investment securities of $50.2 million. Net cash provided by financing activities was $10.6 million for the three months ended March 31, 2024, and consisted primarily of $10 million of proceeds from issuance of long-term debt and $1.1 million of proceeds from contributions to our 2019 employee stock purchase plan partially offset by the $0.5 million payment of employee taxes attributable to the vesting of restricted stock units.

We ended the quarter with cash, cash equivalents and marketable securities of $239.2 million. As Derek mentioned, we are raising our 2024 revenue guidance to $255 million to $265 million, up from $235 million to $240 million reflecting strong first quarter execution. In conclusion, we are very pleased with our execution in the first quarter of 2024, highlighted by strong revenue and test volume growth and an upward revision of our full year revenue expectations. I’ll now turn the call back over to Derek.

Derek Maetzold: Thank you, Frank. In summary, the first quarter marked an excellent start to the year with strong execution across the company. I’d like to conclude today by thanking our Castle team. Thank you for your continued interest in Castle. Now we will be happy to take your questions. Operator?

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Q&A Session

Operator: Thank you. [Operator Instructions] First question comes from Subbu Nambi with Guggenheim. Your line is open. Please go ahead.

Subbu Nambi: Thank you for taking my questions. Could you provide initial thoughts on how should we think about Q2 across the different products. The typical seasonality for derm, but how should we think about TissueCypher, IDgenetix? And we should still assume no revenue for SCC, right?

Frank Stokes: Yes. Subbu. We — the guide only has SCC through this month through May. And we are still early in TC and IDgenetix. So I’m not sure that we are feeling seasonality yet in those two products. But — in the case of TissueCypher, we probably need maybe one more quarter to be able to be a little bit more accurate in our modeling there just because we — as you recall, we had the pause in orders in the second — third quarter last year. So we are probably seeing that just beginning to normalize. So we are liking what we’re seeing. I don’t — there may be seasonality there, but we are probably not able to model that in just yet.

Subbu Nambi: Got it. Thank you. And then on LDT final rule, I think we all have clarity, but just any additional thoughts given that all your current marketed proprietary tests are all approved under New York Lab. Could you provide any additional color just specifically on TissueCypher has conditional approval? And my understanding is it still is under coverage, but any thoughts there?

Derek Maetzold: Yes. So our Pittsburgh laboratory, which is where TissueCypher is run out of past, I guess — that’s the New York City inspection as a permanent laboratory. The conditional approval for TissueCypher is a timing process with New York State as I understand that. So given the FDA language of New York State Department Health approval of initial approval, I think all of our marketed proprietary tests are in good shape.

Operator: Our next question comes from Kyle Mikson with Canaccord Genuity. Your line is open. Please go ahead.

Kyle Mikson: Hi, guys. Thanks for the questions. Congrats on the quarter. I guess, Frank, why the decision to exclude SCC past May? Why is May the right month, I guess in June to think about that? And then maybe for Derek, does the recent publication and the guidelines for SCC make difference with reimbursement over time, like maybe like post this like any aftermath of the decision? Thanks.

Frank Stokes: Sure. I’ll go first, Kyle. We could pick any month, right? We just — we know where we are now. And so that’s the — we’ve got visibility on May. And so that’s given the uncertainty in timing, that’s where we were we pick to put the pin in it.

Derek Maetzold: Regarding the [indiscernible] guest on the call earlier, Kyle, so we actually had 4 — or we saw four different publications come out around SCC, either primary publications or one was an expert panel-consensus review recommendation on clinical use of the test. On the — what I highlighted on the call, which was really the one focusing on the use of our test to predict therapy response to adjuvant radiation therapy. That is a pretty significant manuscript because more than 98% of the patients that we test clinically today are eligible for adjuvant radiation therapy under one or more of the society guidelines out there, including NCCN. So that is our population that we are testing and the ability to rule out a substantial number of patients, the majority actually who — we would predict would not receive a clinically [indiscernible] benefit really has a great impact on patient care in terms of reducing complications through unnecessary procedure and also has a great savings to the Medicare Trust Fund, since these are mainly Medicare-based patients.

So I think from a coverage perspective, if this article — in these articles — other three articles are not include in the reviews of any final LCD, these would certainly be clinically relevant articles to reopen up or challenge or initiate a reconsideration process, at least in our eyes.

Kyle Mikson: Okay. That was great guys. Just a quick one. The dermatologic ASP increased 40% year-over-year. I think that makes sense given I think recent SCC ASP trends were pretty good. But it’s also a 13% sequential increase from the fourth quarter. So what’s driving some of these movement? And can we see similar double-digit increases quarter-over-quarter going forward?

Frank Stokes: I wouldn’t model that level of increase going forward. We had some good progress on collections, and we did have some earlier claims, prior period claims that we collected at a higher rate than we had anticipated, which accounted for some of the out-of-period or prior period revenue. But we are continuing to make progress, but I — my expectation is it’s slow and steady rather than accelerating.

Operator: We now turn to Sung Ji Nam with Scotiabank. Your line is open. Please go ahead.

Corey Rosenbaum: Hi, this is Corey Rosenbaum on for Sung Ji. Thank you for taking my questions. So regarding the final rule on the FDA’s LDT regulations, I recognize your existing products are not affected. Obviously, the rule will take multiple years to be phased in and make base hurdles along the way. But does this change your strategy or the time line for your development pipeline, specifically for the inflammatory skin disease products? I know it might be too early to tell, but any insight here would be great.