Castle Biosciences, Inc. (NASDAQ:CSTL) Q4 2023 Earnings Call Transcript

Castle Biosciences, Inc. (NASDAQ:CSTL) Q4 2023 Earnings Call Transcript February 28, 2024

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Operator: Good afternoon, and welcome to Castle Biosciences Fourth Quarter and Full Year 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 now 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 fourth-quarter and full year 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, February 28, 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 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; ; 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 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. 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 annual report on Form 10-K for the year ended December 31, 2023 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 has 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 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.

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Q&A Session

Derek Maetzold: Thank you, Camilla, and good afternoon, everyone. I’m happy to report that we closed outstanding fourth quarter, achieving very strong results for 2023, with fourth quarter revenue of $66.1 million. We grew revenue 60% year over year for the full year to $219.8 million, nearly $45 million above the midpoint of our expectations at the beginning of 2023, We’ve now grown revenue at a 43% CAGR rate over the last five years, continuing our track record of consistent execution. We also achieved impressive test volume results by delivering a total of 70,429 total test reports in 2023, representing 59% growth compared to 2022. Furthermore, the fourth quarter marked the second consecutive quarter in which we achieved positive cash flow from operations and positive adjusted EBITDA.

In 2023, we achieved numerous accomplishments, and I would like to take this opportunity to highlight some of them. We opened our new state-of-the-art laboratory in Pittsburgh, Pennsylvania; received advanced diagnostic laboratory test or ADLT status for our DecisionDx-SCC test, bringing our total to five tests that have been designated as ADLTs; expanded our significant body of evidence across our entire test portfolio; made progress across our pipeline initiatives; and won multiple awards for being a top workplace. None of our accomplishments would be possible without the hard work and strong execution of the entire Castle team, and I can’t thank them enough. As I just mentioned, we expanded our significant body of evidence across our entire test portfolio in 2023.

I want to touch base on specifically on DecisionDx-melanoma. We have demonstrated clinical validity, utility, and patient impact in fifty peer-reviewed publications, and studied the test in more than 10,000 patients, including two 2023 publications, demonstrating an association with clinical use of our tests and improved patient outcomes. The first publication is from our collaboration with the National Cancer Institute’s SEER program in an unselected prospectively-tested real-world patient population, which show that testing with DecisionDX-melanoma was associated with lower melanoma-specific and overall mortality relative to untested patients. That is, patients who received DecisionDX-melanoma as part of their clinical care live longer. Specifically, 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 as part of their clinical care.

The second publication is from an independent multicenter study of sentinel lymph node negative patients, showing that patients who received routine imaging after high risk DecisionDx-melanoma test scores, had an earlier recurrence diagnosis, with lower tumor burden leading to better clinical outcomes, including improved overall survival. We believe these studies demonstrate the clear positive impact testing with DecisionDx-melanoma has on patient outcomes. And further, DecisionDx-melanoma is the only melanoma prognostic test shown to be associated with improved patient survival. Now let me take you through execution strategy highlights from the fourth quarter and the fiscal year, and then Frank will provide additional financial highlights before we turn to your questions.

Let’s start with our core dermatology business, which continues to perform extremely well. For DecisionDx-melanoma and DecisionDx-SCC combined, test volume was 44,772 in 2023, a 33% increase over 2022. We are very pleased with our volume performance and believe these two core dermatology offerings continue to represent a significant growth opportunity. We continue to see overlap between clinicians who order our DecisionDx-melanoma test and those who adopt DecisionDx-SCC. In fact, during the year ended December 31, 2023, approximately 78% of all clinicians ordering DecisionDx-SCC had also ordered our DecisionDx-melanoma tests during the same period. We believe this is evidence of a high unmet clinical need that our tests are designed to address, coupled with the fact that clinicians who diagnose and manage early-stage cutaneous melanoma skin cancer also diagnose other skin cancers, like cutaneous squamous cell carcinoma.

For DecisionDx-melanoma, we delivered 33,330 test reports in 2023, a 20% year-over-year increase. Consistent with prior years, our third and fourth quarter test volume reflected normal seasonality. We believe the documented clinical impact our tests have in improving outcomes in patients diagnosed with cutaneous melanoma including improved survival, coupled with our prior commercial expansion investments, have been and continue to be significant drivers of growth. Moving on to our DecisionDx-SCC tests, we continue to see a very strong test report volume momentum with 11,442 test reports delivered in 2023, an increase of 92% compared to 2022. As with our growth in DecisionDx-melanoma, we believe that our strong growth for DecisionDx-SCC is due in large part to the combination of a high clinical need in the high risk patient population, coupled with the value that our test provides.

We continue to expand on the body of evidence surrounding the tests. For instance, a study published just last month in the Journal of Clinical and Aesthetic Dermatology found that using DecisionDx-SCC to guide decisions surrounding adjuvant radiation therapy, or ART, could result in significant Medicare healthcare savings of up to approximately $972 million annually. Data show that integrating the objective DecisionDx-SCC tests into the management of patients diagnosed with high-risk SCC who are ART-eligible identify those who may safely avoid ART, eading to an improvement not only in health outcomes, but also a reduction in the cost in the Medicare population. I would now like to turn to our TissueCypher. I’ll remind you that as part of our strategic growth plans, we acquired Cernostics and the TissueCypher test in December 2021.

The adoption of the TissueCypher Barrett’s Esophagus test has exceeded our expectations to date. As you may recall, this test expanded our estimated in-market commercial US time by $1 billion, and we believe that it contributes to long-term value creation, and also positions us to make a meaningful impact on patient care in other areas with unmet clinical needs. We delivered 9,100 TissueCypher test reports in 2023, compared to 2,128 test reports in 2022, which is more than 300% growth. We continue to be extremely pleased with the reception of TissueCypher by the gastroenterology clinician community, and based on current volume growth trends, we plan to expand this commercial team modestly in the second quarter of 2024. As you may recall, we had multiple data announcements during 2023, bringing our total to 14 peer-reviewed publications, demonstrating the ability and performance of our TissueCypher tests, and risk stratifying patients with Barrett’s Esophagus disease to guide risk-appropriate treatment plan decisions.