In 2024, we expect our capital allocation priorities to remain consistent. These include the continued assessment and evolution of our commercial team, focused R&D efforts to build evidentiary support and develop tests, and as a lesser priority, exploring strategic opportunities in our current therapeutic areas. In conclusion, our 2023 financial and operational results were outstanding. We delivered strong growth in both revenue and test report volume as we continue to execute on our growth initiatives. I’ll now turn the call back over to Derek.
Derek Maetzold: Thank you, Frank. We believe our success in 2023 has allowed us to enter 2024 with momentum, and the potential to further position the company as an industry leader. I would like to conclude today by thanking our Castle team. Our excellent progress in 2023 is due to their accomplishments and dedication to the patients that we serve. This concludes our remarks. I thank you again for your continued interest in Castle Biosciences. Operator, we are now ready for Q&A.
Operator: [Operator Instructions]. First person we have online is Kyle Mikson of Canaccord.
Kyle Mikson: Hey, thanks, guys, for the questions. Congrats on the quarter. Wanted to start with the ’24 guidance and the underlying growth in the dermatologic test business. If you back out as you see revenue in ’23 you might have had like $160 million to $170 million in quarter revenue. If you annualize the sequential growth in the fourth quarter, you’ve got about maybe 17%, 19% annual growth. if you apply that to the core revenue base there, it gets you maybe like $200 million in revenue next year. Then the guide would imply that the new tests, like, as you said, TissueCypher, IDgenetix, like don’t grow next year, or I guess this current year? So maybe just talk about what the core growth of the derm tests, Dx-SCC looks like this year, and if there’s anything that’s going to be happening in 2024 that causes growth to decelerate a bit to lower levels.
Derek Maetzold: Yes, sure, Kyle. I don’t — I might need to get with you right then. I wasn’t track in your math there. Yes, you should you should recall that the 2023 actual results have a full year of SCC revenue included. The 2024 expectation only has this quarter for SCC. We’re taking out our SCC test out of that guidance for the rest of the year — Q3 and 4. So to apples — if you want to apples to apples the growth — you need to sort of either back out SCC from 2023, or kind of think about what it would look like for ’24, just in order to avoid having to reduce or change guidance negatively, if SCC is no longer reimbursed, we just we take it out the rest of the year. And that would be, as we talked about in the past, Kyle, that would be a just a terrible outcome for patients.
I mean, we’ve already got significant evidence that we’ve published showing that ART is widely used. It’s really bad for patients, and if you properly use ART only where it’s appropriate, our test can save the system about $900 million a year or so. And that would be a poor outcome for healthcare costs and for patients, but we are assuming we don’t have that coverage for the rest of the year.
Kyle Mikson: Okay. That’s helpful.
Derek Maetzold: And then the second part is no, we don’t see — we don’t think that TissueCypher or the other tests are not growing. We expect those tests to continue to grow.
Kyle Mikson: Yes. I think that you kind of clarified the what’s going on, like the dynamics on the guide or so. That was great. Just follow up on — simple one on gross margins. I guess going forward, if we are kind of like taking out SCC for a little while, should we model like a lower gross margin than what we’ve seen in the past? Because you still have the volume, but like you’ve got such great low-80%s gross margins, what’s the right way to think about that going forward? And then maybe just related to cash, I mean, could you guys — did you kind of say you could generate cash this year based on what you’ve done the past couple quarters?
Frank Stokes: Let me take the first part. As you know better than we do, Kyle, when you’re not paid appropriately for a service you provided, it has a negative impact on group gross margin. So if we were to not have coverage for one or any of our tests, then that would impact that gross margin. With appropriate coverage in place, we think those margins are stable. If you recall, our long range guidance was gross — adjusted gross margins, I mean, I should correct that — adjusted gross margins in the 80% range. So those should be stable. This quarter will be a cash use quarter from operations, I would expect. And then the rest of the year, it’ll depend on what the reimbursement picture looks like.
Operator: Thanks all. We now have Subbu Nambi of Guggenheim.
Brandon Kramer: Awesome. This is Brandon on for Subbu. We have just got a quick two parter on TissueCypher. Alright. A little bit of a delay. Quick two-parter on TissueCypher. Can you hear me?
Frank Stokes: Yes, we can hear you.
Brandon Kramer: Hello? Got it. Sorry about that. Just a quick two parter on TissueCypher. You mentioned in your last call that some of the key performance drivers were that newly diagnosed or rescoped patient population of about 400,000 patients. And then secondly, the need for the patients in the non-dysplastic group making up about 95% of the overall patient population. I just wanted to clarify, what impact did that have in the fourth quarter, and what are your expectations for both of those drivers going into 2024? Thank you.
