CareDx Inc (CDNA) 2015 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to today's second-quarter financial results call. (Operator Instructions). As a reminder, this conference is being recorded.

I would like to introduce your host for today's conference, Ms. Lynn Pieper, with Investor Relations. Ma'am, you may begin?

Thank you. Thank you for participating in today's call. Joining me from CareDx are Peter Maag, President and Chief Executive Officer, and Ken Ludlum, Chief Financial Officer.

Earlier today CareDx released financial results for the quarter ended June 30, 2015. The release is currently available on the Company's website at www.CareDx.com.

Before we begin, I would like to remind you that management will make statements during this call that include forward-looking statements within the meaning of 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 fact should be deemed to be forward-looking statements.

All forward-looking statements including without limitation or examination of historical operating trends and our future financial expectations are based upon our current estimates and various assumptions. These statements involve material risks and uncertainties that could cause actual results or events to materially differ from those anticipated or implied with 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.

CareDx disclaims any intention or obligation except as required by law, to update or revise any financial projections or forward-looking statements whether because of new information, future events or otherwise. This conference call contains time-sensitive information and is accurate only as of the live broadcast today, August 10, 2015.

With that I will turn the call over to Peter Maag. Peter?

Thanks, Lynn. Good afternoon, everyone. As we have done on our previous quarterly calls, I would like to start this update with a patient story. Many of you may have seen recent news on the double hand transplant patient, eight-year-old, Zion Harvey. Zion was an ideal candidate for a hand transplant due to his previous kidney transplant. I encourage you to look up Zion's story and watch the videos about his experience online.

Zion's care is provided by the transplant program at Children's Hospital of Philadelphia. It is for patients like Zion that we at CareDx come to work every day.

This call marks one year since we completed our IPO. We are proud of the progress that we are making towards our milestones. In particular, we are advancing the utility of cell-free DNA as a biomarker in organ transplantation and moving cell-free DNA more and more to the center of our attention.

Accordingly, I would like to start this call by covering the recent highlights in our cell-free DNA pipeline and clinical development. I will next cover the updates in our AlloMap business where our focus continues to be increasing patient access to AlloMap as a surveillance tool in heart transplantation.

Ken will cover the financials for the second quarter and our guidance for 2015 and then we look forward to your questions.

Before we go into those specific updates, I would like to reiterate our three strategic objectives for the year.

Number one, develop cell-free DNA test and transplantation. Number two, increase the utilization of AlloMap. And three, add momentum through realizing inorganic growth opportunities.

Before moving to the pipeline, let me touch on our second-quarter financials. Total revenue was $7.1 million in the second quarter of 2015. AlloMap test volume reached a record level in the quarter and continues to be a strong foundation for our business.

In the quarter, we increased R&D and clinical expenses according to the previously outlined objective to develop new transplant surveillance solutions. These additional expenses were mainly driven by planned increases to our headcount which now includes 84 full-time employees versus 55 at the IPO and secondarily by anticipated clinical trial costs as we ramp up our cell-free DNA program.

I am pleased with the progress we have made toward the milestones we set for the development of our cell-free DNA program. Earlier this year we executed against our objective that we had outlined during the IPO road show. We were able to leverage our existing sample database in heart to establish the proof of concept of cell-free DNA in transplantation and demonstrate the correlation with organ rejection. This data highlighted at Symposia during ISHLT and ATC reconfirmed cell-free DNA as a biomarker for rejection.

We are now moving ahead with the development of an analytically validated assay available through our CLIA lab. We have set year-end 2015 as our target for delivery and the team is executing well against that milestone.

We have also made good progress on our DART trial. As a reminder, this is an observational study designed to demonstrate the clinical performance characteristic of cell-free DNA in detecting clinical and subclinical rejection in kidney allograft recipients. The study is also designed to demonstrate the correlation of circulating cell-free DNA to renal function using both serum creatinine levels and estimated GFR.

In the first phase of the DART study, we expect to enroll 200 patients in 6 to 10 centers and collect patient blood samples over a period of 18 months. As planned, we are proud to share that we have conducted site initiation visit at six transplant centers as of June 30, 2015. The participating centers and key opinion leaders are some of the leading doctors and transplant institutions in the country. They include Dr. Poggio at Cleveland Clinic, Dr. Bromberg at University of Maryland, Dr. [Harry Heron] at University of Pittsburgh Medical Center, Dr. Bloom at University of Pennsylvania, Dr. Matas at University of Minnesota, and Dr. Fischbach at Dallas nephrology.

As is our practice with all clinical activities, we plan to provide updates on center and patient numbers on future calls. We are on track to deliver an interim readout in the first half of next year with the timing primarily driven by the number of patient samples that are associated with clinical events, especially rejections. Following the interim analysis of DART 1 study, we plan to begin the second phase, DART 2, a clinical utility trial in the second half of 2016. These milestones are consistent with previous communications and we continue to be on track.

With the size of the kidney transplant surveillance market estimated at $1 billion, we are obviously very excited about the potential for our cell-free DNA kidney transplant surveillance testing solution. As we are developing cell-free DNA solutions, we are also building capabilities that allow us to significantly impact the management of patients.

It takes a village not only at the transplant centers but also for us as a company to provide novel surveillance solutions. In this context you will hear us and especially our CSO, John Sninsky, talking about shaping an ecosystem.

As a first example, let me talk about our patient test results portal. We began communicating clinical information via secure and HIPAA compliant Internet connections through the CareDx portal for client to institutions.

Being in some of the top 100 leading medical institutions in the US and building communication links that allow for instant interaction is valuable for future patient management activities. The success of this tool has encouraged us to further expand our Internet portal in the future. The Department of Health and Human Services decision last year to amend the CLIA regulations enables laboratories to provide direct patient access to completed laboratory test reports. As a small dedicated company, we see this as an opportunity to innovate and be part of improvements in the overall healthcare delivery system.

As a second example to the ecosystem, we recently announced a new relationship with DNAnexus, a leader in cloud-based genome informatics and data management. This collaboration will enable us to stay at the forefront of the evolving molecular data revolution and clinical diagnostics.

The volume of data derived from next-generation sequencing technology is immense. In addition, the demands of analyzing, storing, retrieving and presenting that data necessitates high quality scalable computing platforms. We believe that the collaboration with DNAnexus will put CareDx in a unique position because it will allow our bio-informatics team to develop solutions that deliver patient results in an effective and cost-efficient manner.

The third example to the ecosystem, we also began a collaboration with Horizon Discovery Group which is important since it helps us to define reference standards in the evolving field of cell free DNA. We have learned from the noninvasive prenatal testing companies that there are difficulties when describing performance characteristics of diagnostic tests. This is also true in the field of transplantation.

There are tests in transplantation that make uniform interpretations difficult because they greatly differ from one lab to the other. With Horizon, we will have an approach available through a reference standard that allows comparability. Our Internet portal and recently announced relationships with DNAnexus and Horizon highlight our approach to develop a best-in-class transplant diagnostics information ecosystem and there is more to come. Our investment in digital capabilities and high-quality information will remain a cornerstone of our corporate innovation strategy.

Apart from DART, we have two more clinical studies underway. Our Outcomes AlloMap Registry Study or OAR and our cell-free DNA outcomes AlloMap registry or D-OAR.

Starting with OAR, we continue to see growing enrollment, more than 1700 samples from 548 patients enrolled in the study were received from 20s centers as of June 30. This is up from 1300 samples at the end of the first quarter of 2015. The long-term outcome data collected will continue to build clinical evidence for the use of AlloMap. We see this not only as a long-term commitment to the field but also an invaluable source for future scientific [insight] generation.

We continue to make cell free DNA available for heart conditions as the research use only tests in combination with AlloMap through our D-OAR registry. D-OAR has been launched in 13 centers with 135 patients enrolled and 252 samples collected as of June 30. Both the number of samples collected and the patients enrolled nearly doubled in the quarter. This effort continues to support the evidence generation of cell-free DNA in transplantation.

Now turning to AlloMap, our surveillance solution for heart transplant recipients, we continue to see good volume growth in the second quarter. AlloMap was used for heart transplant patients more than 3250 times, a record level, representing an increase of 8% over the second quarter of 2014.

Our focus is on increasing AlloMap adoption which provides the foundation for growth for our business. Out of the 130 heart transplant centers in the US, AlloMap was used in 115 during the last 12 months. As of the end of the second quarter, there were 60 centers with established AlloMap protocols, up from 58 in the previous quarter.

I am upbeat by the early progress we are making with our new commercial strategy which coordinates AlloMap patient customer engagement, drives establishment and adherence to protocols, and supports transplant centers in optimizing their workflow.

Following the appointment of Josh DeFonzo in the commercial leadership role, we have divided the territories in the US into East and West and have hired two experienced managers to direct the surround sound system selling process in transplant centers. We are making this progress through several new initiatives.

The first is stakeholder engagement. This encompasses patient and healthcare professional engagement. Tactics include patient advisory boards and a newly formed visiting clinician program. Also, we focus on protocol development. The main focus here is to continue to expand the utility of AlloMap and how it is used in post transplant surveillance.

The next growth driver relates to improving workflow. Earlier we mentioned the web portal which is the great way to digitize user experience and improve the ease with which clinicians order, patients undergo and patient results are received.

Another important initiative centers around clinical data and education. With continued efforts like OAR, D-OAR and investigated initiated research, we will continue to increase supporting clinical data on AlloMap.

Last but not least we have targeted product development. Now this is exciting. Our team is preparing for the release of AlloMap Variability as an additional tool for heart transplant clinicians. This is a particularly exciting area for patients that are in the years two to five years post transplant. AlloMap Variability which is available from four AlloMap test results within a 24-month period will help clinicians with patient risk stratification.

Early data suggests that patients with higher score variability tend to have poorer outcome. We believe that this will further enhance our heart transplant surveillance offering.

As you know, we believe the total addressable market for AlloMap in the US is approximately $100 million. Patients in the two- to five-year segment represent about $40 million of the market, a segment that we are serving at approximately 30% thus far. We will be introducing this concept to interested centers at the Heart Failure Society of North America meeting in National Harbor, Maryland this September.

As we have always said, we believe a center by center approach is necessary to make material changes in the way transplant centers monitor and support their patients. With the organization that we are building in the field, and application of the right initiatives at each center, I am confident we have the commercial infrastructure to drive future growth in heart transplantation. The third quarter represented a good start.

On the reimbursement front, we continue to have positive coverage decisions from all the major carriers. As of June 30, 2015, we had been reimbursed for approximately 80% of all AlloMap results delivered in the 12 months ended December 31, 2014. AlloMap continues to be broadly reimbursed in comparison to other high-value molecular diagnostic offerings. We expect reimbursement to remain in this range going forward.

As you may recall, we announced earlier this year that the American Association -- American Medical Association included AlloMap in its recommendation for a test specific category 1 CPT code demonstrating that an additional independent organization has reviewed AlloMap and has deemed a unique CPT code is warranted. The effective date for the CPT 1 code should be either January 2016 or January 2017 depending on how CMS interprets the anticipated PAMA regulations that are not yet finalized.

We shared the expectation of industry expert that a change in Medicare reimbursement from current levels in either [Crosswalk] or [Capital] scenarios is unlikely.

We recently resumed marketing responsibility for AlloMap in Canada from Life Lab and were approved by the Ontario Ministry of Health for reimbursement coverage of AlloMap at $3600 under their out of country reimbursement program. While this is a positive outcome, as more patients now have access to AlloMap, we continue to expect only modest contribution of ex-US sales in 2015.

Let me summarize my part today with our upcoming milestones. Our first milestone rollout of AlloMap Variability September 2015, second milestone being the cell-free DNA availability through CareDx CLIA lab at December 2015, and the interim analysis of the DART 1 study in the first half of 2016.

I will now turn the call over to Ken to review our financial highlights and to provide guidance for the year.

Thanks, Peter. Hi, everybody. As you heard, revenue in the second quarter was $7.1 million, up 5% from the second quarter of 2014. As Peter noted, we had record AlloMap volume in the quarter. However, revenues grew slower than AlloMap volume. This is the result of a few quarterly fluctuating factors.

Last quarter we had the opposite scenario where revenue growth exceeded volume growth for the quarter.

In this second quarter, there was a dip in the mix of Medicare versus non-Medicare test volume. We expect that the higher AlloMap volume overall in Q2 will turn into revenue in the second half of 2015 with our higher reimbursement rates but quarter-to-quarter fluctuations may continue.

On July 1, we brought the reimbursement billing process in-house here at CareDx. We expect this to reduce the overall cost of our reimbursement effort and should increase effectiveness as we will now have direct ownership of and direct control over the reimbursement process ourselves. As we build out CareDx, we see this reimbursement capability as core for a leading molecular diagnostics company.

Cost of testing in the second quarter was $2.5 million compared to $2.4 million in the second quarter of last year. This was up 4% so the increase was generally in line with the higher AlloMap volume.

R&D expense was $2.5 million in the second quarter compared to $800,000 in the second quarter of 2014. This increase was primarily due to the headcount related expenses, cell-free DNA expenses and increased clinical trial expense during the quarter.

Sales and marketing expenses in the second quarter were also $2.5 million compared to $1.6 million in the second quarter of last year. This is related to increased headcount and consulting expenses, an increase in the marketing program such as physician forum speaker programs and advertising and other marketing expenses.

G&A expenses were $2.3 million essentially flat compared to Q2 of 2014 and lower than last quarter's expenses as we get over the start-up costs of being public and also year-end audit and legal fees.

In the second quarter of 2015, our net loss was $3.2 million compared to a profit of $900,000 for the same quarter in 2014. Basic and diluted loss per share of $0.27 in the quarter compared with positive earnings per share in the year-ago quarter. Remember in the second quarter of 2014 we acquired ImmuMetrix which resulted in a one-time tax benefit of $1.5 million which swung earnings into positive territory. Shares outstanding for the year's quarter were $11.8 million.

Turning to the balance sheet at the end of the second quarter, we had $36.9 million in cash and cash equivalents versus $39 million at March 30, 2015. The decline in cash of $2 million on the balance sheet is in line with our cash projections and our PL. We filed an S3 shelf filing this morning which is standard practice one year after going public.

We continue to expect our full-year 2015 revenue to be in the same range of $28 million to $30 million as we announced at the beginning of the year. Peter?

I'm delighted by the progress we made throughout the first half of this year as we move towards advancing our mission to improve patient outcome in transplant care. We look forward to updating you on our progress.

With that I would now like to open the call up to questions. Operator?

(Operator Instructions). Bill Quirk, Piper Jaffray.

Thanks and good afternoon, everybody. I guess first question, Peter, so I guess from a tracking standpoint, are you providing any additional cell-free heart tests outside of the D-OAR registry?

That is a very good question, Bill. In a way it is actually a cell free DNA organ in specific test. As soon as we have it through the CLIA lab, it will be available for those interested in having a cell free DNA test available for measuring foreign cell-free DNA in patient bloodstream. So as soon as we have it in the CLIA lab, we will make it broadly available. As of now, we don't make it available, we only make it available through our D-OAR study.

All right, that is very helpful. Then just to expand maybe a little bit upon the AlloMap Variability product and I know you certainly talked about this in the past in terms of the predictive power that multiple results can give. Just so we have our notes correctly, did you say four tests over was that 12 or 18 months?

Four tests over 24 months.

24 months, excuse me. Okay. So this is clearly going to be a tool to use to try to increase the penetration within that two to five-year post transplant population. Can you talk a little bit about maybe the timing around the sales force rollout? You mentioned September but obviously I would assume you will probably have some sort of national meeting prior to that?

Yes, no, we will do that in September as we have ongoing efforts gathering input from key opinion leaders and talking about Variability with these centers. Really the formal launch will be so to speak will be in September at the Heart Failure Society of America meeting. Think of us as right now doing this in a one-on-one kind of conversation setting while in September we think of this as a more formal established process.

Okay, very good. Thanks, guys.

Dan Leonard, Leerink.

Thank you. So Peter, you detailed a number of tactical efforts to accelerate your volume growth. Do you expect these efforts are going to gain traction in the short term here or should we assume sort of a time lag before they gain hold?

I am very upbeat about putting a team in place that builds the plan and the processes going forward. We communicated in the past a 15% to 20% AlloMap growth rate and with the right team and the right processes in place, we believe this is achievable going forward. There is still a lot of untapped potential and so think of us as getting back to these growth rates in a relatively short order if we have the right team and the processes in place.

Okay. And then my follow-up question, so can you share more around what the Variability score is going to look like as you productize that? Is that going to be a standard feature on all AlloMap reports and also could you share some of the feedback from some of the clinicians who have used that to date?

The AlloMap score in itself is an FDA regulated and cleared test so the Variability is we provide as part of a clinical consultation alongside an AlloMap test at centers one to opt into that process. So for those centers that will be opting into the process, we will receive a second sheet where we detail the AlloMap score alongside of AlloMap Variability. So it is really the secondary process because centers will need to opt in.

But once that is opted in you will see the AlloMap score and the multiple AlloMap score over time matched with the Variability score for the last four scores which give you a standard deviation of these scores which will be indicative if you compare that to publications that are provided on Variability in terms of space and certification.

Simply said, the higher variability, the higher the patient is at risk for poor outcomes in the future.

And I know you have had some advocates for this type of information in the past. Can you help us understand is there a meaningful portion of your customer base asking for this type of information or was it a couple of standout KOLs or any sort of early feel for what the demand might look like for this type of an offering?

I think what it allows us to do is to continue to generate data in a majority of these centers in the US that are affiliated with the OAR registry and that are affiliated with AlloMap. So don't think of this as a major, major initiative but an initiative that gets us back into the 15% to 20% growth range that we are looking for. There is a number of centers that are eager to receive that data on a standard basis but I probably would put them into the 20 to 50 type of center range not in the 100% of all centers that are using AlloMap.

Got it. Thank you.

Nicholas Janssen, Raymond James.

This is Bilal in for Nick. So I just had a couple of quick ones. You guys have recently been building the portfolio up and collaborating more extensively the latest one being DNAnexus. Can you elaborate on maybe what else you think you might want -- what other companies you might want to collaborate with and where you want to build your portfolio to strengthen the AlloMap product and maybe bolster the cell-free DNA franchise?

Yes, I think we highlighted a few times this bioinformatics area for the company as really the core in the future. If you see what comes out of the sequencing analyzers and then it gets translated into patient results, really what is very important is that you have a strong bioinformatics machine. But think of us as also partnering with institutions that allow us to have direct to patient communications in the midterm. That is what we reported on the patient portal and there are numerous associations out there.

For example, we partner with the Heart Brothers Foundation in Boston, a patient organization that is focused on heart transplant patients that allows us to communicate. So really think of this as a very broad ecosystem that we are trying to build and we continue to have collaborations alongside.

Great. And then just quickly looking at the DART trial, so you guys have six centers pretty much wrapped in which is right on par with your latest slide deck. I'm wondering how are further discussions going and should we assume that these six trials will most likely roll into the DART 2 study?

Absolutely. I think that has been always our plan to have DART 1 centers roll into DART 2 centers reducing the timeline to recruitment. You will see us actually DART 1 centers continue to increase from the six to the 10 because we see that as a unique entry point into collaborating with these centers.

Great. Thanks, guys.

Thank you. At this time I'm showing no further questions. I would like to turn the call back over to Mr. Peter Maag for closing remarks.

Thank you very much. We look forward to updating you on our progress and have a great evening.

Ladies and gentlemen, thank you for your participation in today's conference. This does conclude the program. You may all now disconnect.