Castle Biosciences, Inc. (NASDAQ:CSTL) Q2 2023 Earnings Call Transcript

Castle Biosciences, Inc. (NASDAQ:CSTL) Q2 2023 Earnings Call Transcript August 2, 2023

Castle Biosciences, Inc. misses on earnings expectations. Reported EPS is $-0.06 EPS, expectations were $1.01.

Operator: Good afternoon, and welcome to Castle Biosciences Second Quarter 2023 Conference Call. As a reminder, 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, Vice President, Investor Relations and Corporate Affairs.

Camilla Zuckero: Thank you, operator. Good afternoon everyone. Welcome to Castle Biosciences’ second quarter 2023 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, August 2, 2023. 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. Before we begin, I would 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, TAM, 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 2023 total revenue and our 2023 to 2025 outlook, our expectations regarding reimbursement for our product, and the impact of our investments in growth initiatives and expanded commercial teams. 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 year ended December 31, 2023, under the heading Risk Factors and in the Company’s other documents and reports 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, cash flow, and operating performance. Reconciliations of these non-GAAP financial measures to the most directly comparable GAAP financial measures are presented in the tables 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. As you saw from our announcement a few minutes ago, Castle Bioscience has delivered yet another strong quarter growing revenue by 44% and total test report volume by 52% compared to the second quarter of 2022. Based on strong first half execution and confidence in our business, coupled with our expectations for the second half of 2023, we are raising our full year revenue guidance and currently expect to deliver at least $180 million, an increase of 31% over 2022. Before I get into the quarterly highlights, let me address some of the excitement around our DecisionDx-SCC test. First, let’s talk about coverage. We were reviewed by the Medicare contractor Novitas in the first quarter of 2022 and received coverage since April of 2022.

Separately, Novitas published on July 27, 2023 a proposed LCD entitled Genetic Testing for Oncology. This proposed LCD attempts to encompass genetic tests that are used in oncology and includes language that proposes non coverage for DecisionDx-SCC, among a number of other laboratory tests. The common period closes on September 9, 2023. Separately, on June 8, 2023, both Palmetto, Moldyx and Meridian posted proposed LCDs recommending non coverage for DecisionDx-SCC. The common period for these Medicare contractors for the proposed LCDs ended on July 22, 2023. 2nd, we were extremely pleased to see that the Division of New Technology of CMS completed its review of our application for Advanced Diagnostic Laboratory Test Status, also known as ADLT Status.

As we expected, we were granted ADLT Status effective June 30, 2023. There are four criteria that need to be met to achieve ADLT status. One of the criteria means that we have proven that our DecisionDx-SCC test yields a test result that predicts the probability of the specific SCC patient developing metastasis, that is, our test works. Another criteria means that we’ve also proven that our DecisionDx-SCC test provides new clinical diagnostic information. That cannot be obtained from any other test or combination of tests. That is, our test is independent of all other clinical pathologic risk factors or any other test or combination of tests that predict metastasis. We view this incredible achievement as a mark of our mission to develop innovative tests that improve patient care and are looking at tests that have received status, Castle ADLT has five tests that have been designated as ADLTs. Stated differently, one third of all ADLTs are offered by us.

Castle biosciences clearly demonstrating that we do develop innovative tests that improve patient care beyond what is clinically available. Now, I mentioned ADLT status because, while it is not used for the purposes of coverage through a local Medicare contractor, meeting these two criteria that I mentioned lays out some of the positions that we have and will be communicating as a release to the analyses contained in the two aforementioned proposed LCDs separately. As part of our comments to Moldyx and our upcoming comments on Novitas, we are very pleased to present results from our recently completed large multi center cohort study that included analyses into the value of our tests to identify patients who are eligible for Adjuvant radiation therapy under current NCCN guidelines.

Specifically, our question was what value can we provide in ruling in or ruling out Adjuvant radiation therapy to this high risk population? I cannot emphasize enough the clinical importance of this question. There are three significant areas to think about. The first is from the perspective of the known accuracy limitations if one relies upon clinical and pathologic staging features alone in informing which eligible patients may benefit and which may not. The second is, does our test provide an indication of not just who may have a high enough risk of metastasis to warrant consideration of Adjuvant therapy, but can we find patients whose outcomes could be improved with Adjuvant radiation therapy? And finally, the healthcare cost impact of Adjuvant radiation therapy is enormous.

In fact, our data shows that patients who receive adjuvant therapy with our highest risk Class 2B test result have a roughly 50% reduction in their five year metastasis rate compared to matched patients who did not receive aAsthma Radiation therapy, but also had a Class 2B test result in creating a weighted average cost using data from both Icuvia as well as published costs of treatment data. It looks like Adjuvant radiation therapy runs around $60,000 per patient, not to mention the potential long term complications if the patient was overtreated in the first place. This cost data is important when you recognize that the majority of tests results are Class 1 or Class 2A, and these patients did not see a treatment benefit from Adjuvant radiation therapy.

We expect the study to be published in the near future and look forward to sharing the results in greater detail with our clinician customers, our Medicare contractors, and, of course, you. Well, there are clearly some current unknowns regarding future coverage. We identified a significant unmet clinical need. We were successful in developing and validating not only liquidity clinical validity and clinical utility for DecisionDx-SCC test, but can also now see outcome differences in patients who receive Adjuvant radiation therapy. Given that we believe there are roughly 200,000 patients diagnosed each year with high risk SCC and who are eligible for asthma radiation therapy per current NCC and guidelines, the potential impact on improved outcomes and reduced healthcare costs is tremendous.

Now let me take you through the remaining execution and strategy highlights in the quarter, and then Frank will provide highlights for the period, including with your questions. Let’s start with our core dermatology business for DecisionDx-Melanoma and DecisionDx-SCC Combined test volume was 11,278, growth of 33% year over year and 13% from the prior quarter. We continue to see new clinicians order our tests for the very first time, with approximately 567 new ordering clinicians and more than 2060 total ordering clinicians for all three dermatologic tests during the quarter. For DecisionDx-Melanoma, we delivered 8597 test reports in the second quarter, an increase of 21% over the second quarter of 2022. We continue to believe the most significant drivers of our strong growth are the clinical impact our tests can contribute to the management of Melanoma and strong evidence supporting our test, coupled with our prior commercial expansion investments intended to educate our customer base.

For DecisionDx-SCC, we delivered 2681 test reports in the second quarter, an increase of 99% over the second quarter of 2022. As with our growth in Decision-Dx-Melanoma, we believe that our strong growth and volume for DecisionDx-SCC is due in large part to the combination of the high unmet clinical need for SCC coupled with the value our test provides clinicians and their patients. As you recall, a pillar of our growth strategy is a continued development of evidence to support clinical use of our tests, including impacting outcomes. Two key studies were published in the second quarter. I’m going to focus my remarks on just one of them. That is the study data related to our collaboration with the National Cancer Institute’s SEER program registries published in JCO precision oncology we are very pleased with this large unselected patient population study and that the real world data showed testing with DecisionDx-Melanoma provided significant prognostic information regarding survival outcomes.

Specifically, patients who were clinically tested with DecisionDx-Melanoma had an associated lower melanoma specific and overall mortality relative to those patients who did not have the benefit of DecisionDx-Melanoma testing. That is, they were in the untested group and that is they lived longer. In fact, DecisionDx-Melanoma testing was associated with a 29% lower melanoma specific mortality and a 17% lower overall mortality relative to patients who did not receive DecisionDx-Melanoma testing. As you would expect, we will be sharing the full publication with our clinician customers as well as providing them to the NCC and Melanin panel. Now, let’s turn to our gastroenterology franchise. During the quarter, we delivered 1447 TissueCypher test reports, compared to 352 in the second quarter of 2022.

Tyler Olson/Shutterstock.com

We also announced during the quarter new data demonstrating the value of our TissueCypher test in providing objective, risk stratification information that can inform improve management decisions for patients with Barrett’s Esophagus. Additionally, TissueCypher was selected as the winner of the Best Use of Artificial Intelligence and Healthcare Award. In the 7th Annual Medtech Breakthrough Awards Program. As you will recall, we acquired a TissueCypher from Sernostics in December 2021, giving us a leading risk stratification test designed to predict future development of esophageal cancer in patients with Barrett’s Esophagus. Barrett’s Esophagus is the only known risk factor for the development of esophageal cancer, one of the fastest growing answers in the US.

With a five year survival rate of less than 20%. Since the acquisition, we have made considerable progress with our integration efforts and process improvements. We moved into our new laboratory in Pittsburgh during the second quarter of 2023 and have seen strong adoption from the gastroenterology community, so much so that our orders have outpaced our forecasts and current operational capacity. As such, we elected in July temporarily paused accepting additional clinical orders for the test in order to bring our process improvements and additional instrumentation and personnel online. We are currently working through these efforts and believe that we will be able to begin accepting new orders prior to the end of the third quarter. Despite this temporary pause in ordering, we expect report volume for the second half of 2023 to increase compared to the first half.

Turning to our mental health franchise, we delivered 2681 ID GenX test reports in the second quarter of 2023, up from 827 a year ago and up 25% from the prior quarter. As a reminder, during the second quarter of 2022, Castle only delivered test reports from April 26, the date we acquired the test, through June 30. We continue to be pleased with the momentum we are seeing thus far. In fact, we recently announced real world study data demonstrating that the use of Ideogenics to guide medication management can significantly improve medication response and remission rates. In patients diagnosed with moderate to severe depression compared to current standard of care treatment. This data was consistent with our previously published randomized controlled trial.

Additionally, ECRI, an independent nonprofit organization improving the safety, quality and cost effectiveness of care across all healthcare settings, recently concluded its genetic test assessment of Igenics with a four out of five rating. As commercial payers utilize equity valuations to assist them in making coverage decisions, we believe this is another important metric to encourage payers to recognize the benefits of our Igenics test. We believe our Ideogenics testing solution has the potential to accelerate our impact on patient care in an area of high unmet clinical need by offering incremental value to patients and clinicians over the standard trial and error approach. With this comprehensive genetic test analysis to help clinicians match patients with the right medication, including identification of drug drug interactions and drug gene interactions with lifestyle factors to improve medication response and admission rates, we feel Igenx offers a truly compelling and personalized benefit for mental health treatment.

I will now turn the call over to Frank, who will provide details relating to our financial results and outlook.

Frank Stokes: Thank you, Derek. Good afternoon, everyone. Second quarter revenue was $50.1 million, an increase of 44% over the second quarter of 2022. Overall, the increase primarily reflects strong growth in revenues from DecisionDx-Melanoma and DecisionDx-SCC. Adjusted revenue, which excludes the effects of revenue adjustments related to tests delivered in prior periods, was $50.2 million, an increase of 47% over the second quarter of 2022. Our gross margin during the second quarter was 73.5%, compared to 71.9% in the second quarter of 2022. Our adjusted gross margin. Which excludes the effects of intangible asset amortization related to our acquisitions and revenue associated with test reports delivered in prior periods was 78% for the quarter, compared to 77.6% for the same period in 2022.

Turning to expenses, our total operating expenses, including cost of sales for the quarter, were $71.3 million, compared to $38.8 million for the second quarter of 2082. Affecting comparability with the prior year was a $20.4 million benefit, or seventy eight cents per share, during the three months ended June 30, 2022, for the change in fair value of contingent consideration related to the Synopsis acquisition. It was no similar item in the current year. After considering that item, the largest driver of the increase in total operating expenses was SG&A expenses, which increased by $7.2 million compared to 2022, attributable in large part to higher personnel costs, including salaries and stock based compensation, primarily within the sales and marketing functions.

Cost of sales expense increased by $3.4 million, primarily due to higher laboratory related costs associated with the higher test report volume. R&D expense increased by $1.4 million in the second quarter compared to the second quarter of 2022, which was attributable to higher personnel costs driven primarily by expansions in headcount in support of our growth and other costs associated with clinical studies. We plan to diligently manage expenses while also prudently investing to grow the business in the long term, such that our operating expenses would decrease as a percentage of revenue and over time increase at a lower rate than revenue. Total non-cash stock based compensation expense, which is allocated among cost of sales, R&D expense and SG and A expense, totaled $12.8 million for the second quarter, compared to $8.8 million for the second quarter of 2022.

The increase was primarily attributable to our annual equity awards granted in December of 2022. The. Interest income increased by $2 million for the second quarter of 2023 compared to the second quarter of 2022, primarily as a result of higher interest rates and our purchases of marketable securities beginning in the third quarter of 2022. Our net loss for the second quarter of 2023 was $18.8 million, compared to a net loss of $1.6 million for the second quarter of 2022. Adjusted EBITDA for the second quarter was negative $5.3 million compared to negative $11.2 million for the comparable period in 2022, an improvement of $6 million. Net cash used in operating activities was $3.8 million for the second quarter of 2023 and $29.2 million for the six months ended June 30, 2023.

As you recall, cash used during the first quarter of 2023 reflects the payout of employee annual cash bonuses as well as certain health care benefit payments totaling $17.7 million that are not expected to occur during the remainder of 2023. Net cash provided by investing activities was $1.2 million for the six months ended June 30, 2023, and consisted primarily of the maturity of marketable investment securities of $95 million, partially offset by purchases of marketable investment securities of $86.4 million and purchases of property and equipment of $7.4 million. Our balance sheet remains strong. We ended the quarter with cash, cash equivalents and marketable securities of $225.5 million and no debt. Together with anticipated cash generated from sales of our test, we expect that our cash operating runway will extend through 2025.

As Derek mentioned, we are raising 2023 revenue guidance to at least $180 million. Additionally, we are reaffirming that we expect to achieve $255 million to $330 million in 2025. We expect to achieve this result by driving test report volume growth across our entire portfolio and further market penetration, reimbursement progress and to a lesser extent, ASP growth. Supporting our longer age targets for ASP improvements. We note that we had multiple successes for Castle’s test with commercial health plans and expect to continue making progress over time. The combination of growing the top line and driving margin leverage should contribute to our reaching our 2025 target of net operating cash flow positivity. Further, we believe we have the ability to pull various operating levers primarily on discretionary spend in sales and marketing and R&D without materially impacting the long term growth prospects of the Company we continue to believe that our current growth initiatives and associated expenses are important to sustain top line growth and just as importantly, expand our competitive lead, create stickiness across all our current tests and renew our pipeline for long term success and value creation.

In summary, our fundamentals remain strong. There is plenty of runway for growth across our entire test portfolio and we believe our ability to create value for shareholders in the near and long term remains intact. I’ll now turn the call back over to Derek.

Derek Maetzold: Thank you Frank. In summary, our second quarter results were excellent. We delivered strong year over year growth in revenue and total test report volume driven by continued execution on our long term growth plans. I would like to conclude today by thanking our Castle team. We wouldn’t be here without their dedication and commitment. 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] You have our first question from Carl Nixon of Canacord. You may proceed.

Carl Nixon: Hey, guys. Thanks for taking the questions. Congrats on the great quarter. So, Derek, on the you know, it’s been withdrawn and reposted already. Maybe just provide your view on the additional kind of steps you’re aiming to take here going forward, what you can do, I guess, and then separate. You know, Neridian is another option, I guess. Possibly maybe talk about if you could have any luck getting reimbursement through Meridian for SCC and then also maybe know, going off that why is the process potentially different for Neridian and Novitas? Maybe that could kind of inject some confidence or optimism in this whole situation. Thanks.

Derek Maetzold: Yeah. Hi, Carl. Good to hear from you. I guess maybe top line here is that we did provide some, I think, rather extensive detail in our filing a few minutes ago, as well as in the remarks just five minutes ago or so. So I don’t have anything specific around that to talk through with Novitas and stuff. From the Norridian question perspective, keep in mind that Meridian is under a joint operating agreement with Palmetto’s Moldyx program. So that would go through the Moldyx program from a coverage perspective.

Carl Nixon: I mean, is there any chance that you could kind of because you have multiple labs across the country. I just wondering if you can kind of be more or less covered for SEC through that lab rather than the one in Pittsburgh?

Derek Maetzold: Yeah, I would maybe change the answer or answer a slightly different question, if that’s okay. Carl, I think based upon the data that’s been developed since we developed or validated the test in the first place. Data we presented over the course of the springtime. This benefit that we’re now seeing in our test to help identify people who could really have a significant clinical benefit from adjuvant radiation therapy should all lead one, I would hope. If one does an evidence based review about the value of our test and really helping to improve not only treatment selection but outcomes in the Medicare beneficiary population. I would hope that as that data is being reviewed by whatever Medicare contractor is reviewing it, that would have an impact on saying, does covering our tests benefit Medicare patients? And if it does, you should cover it. And that’s our expectation on an outcome at the end of the day.

Carl Nixon: Okay, that was great. And then if I could squeeze another one in on Melanoma for guidelines. I believe there was an NtCN panel in mid July. Can you just confirm, Derek, if you were able to submit each of your publications in time for that meeting, could those folks kind of see that data, basically? And what are the next steps in the timing going forward, potentially for an update from?

Derek Maetzold: So, yes, we did submit both the Dillon manuscript that was published in April by those three academic centers cleveland Clinic, Northwestern, and OHSU, and we did also submit the NCIC or publication. Of course, both of those show a nice association with if you use our test, people actually live longer compared to not using our test clinically. We would hope that wasn’t part of an active discussion with the NCCN group. On a timing perspective, they’ve been pretty consistent the last four or five years, even through COVID, I wouldn’t expect us to see anything posted publicly until kind of the December, January time period they usually about a five or six month cadence after they have their mid-year meeting is when they go ahead and post an update.

Operator: We now have Sung Ji Nam from Scotiabank

Sung Ji Nam: Hi, thanks for taking the questions. Just another question on the NCI SEER data. Congratulations on the publication. There was curious if there are additional studies that might be underway, what additional information you might be gathering there, or do you think you have sufficient data to kind of sway the decision makers for NCCN and other guidelines?