CareDx Inc (CDNA) 2017 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the CareDx 2017 Second Quarter Financial Results Conference Call. (Operator Instructions) As a reminder, this conference is being recorded.

I would now like to introduce your host for today's conference, Mr. Mark Klausner of Westwicke Partners. Sir, you may begin.

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

Earlier today, CareDx released financial results for the quarter ended June 30, 2017. The release is currently available on the company's website, 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 facts should be deemed to be forward-looking statements. All forward-looking statements, including, without limitation, our examination of historical operating trends, expectations regarding coverage decisions, pricing and enrollment matters and our future financial expectations, are based upon current estimates and various assumptions. These statements involve material risks and uncertainties that could cause actual results to differ materially from those anticipated or implied by these forward-looking statements.

Accordingly, you should not place undue reliance on these statements. For a list and descriptions 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, 2017.

I will now turn the call over to Peter.

Thanks, Mark. Good afternoon, everyone, and thank you for joining us. I'll be talking you through our business updates, focusing on the continued growth of AlloMap, the exciting launch preparation of AlloSure and the EBITDA focus of Olerup, and then have Mike go over our financial results.

Last month, you might have seen the news that we provided our 100,000th AlloMap patient result. We are thrilled that we have been able to provide a noninvasive testing solution for so many heart transplantations, nearly 20,000 patients so far, and we are very proud of the fact that we are the standard of care for monitoring the probability of transplant rejection.

We continue our activities that are aimed at increasing AlloMap adherence. Many centers include AlloMap in their surveillance protocols for heart transplantations. We launched a program that provides patients coordination services to schedule protocol AlloMap tests and also convenient phlebotomy solutions, including home blood draws. We mentioned on our last quarterly earnings call that we ran pilot studies in 3 centers and plan to be in 10 centers in the second half of the year. I am pleased to report that we are currently in 9 centers. And we've previously mentioned our goal of driving AlloMap underlying volume growth toward the 5% to 10% range. And we are pleased with the progress being made under this patient service program.

We participated in a recent meeting at CMS, where the clinical lab fees schedule for 2018 has been discussed. Based on comments made at that meeting, we continue to believe that the implementation of PAMA pricing for 2018 is very likely, with announcement of the new rates as early as September. We anticipate that this will have a positive effect for CareDx since PAMA will create more certainty on pricing for our products. You might also recall that the private payer base rate that we had submitted for AlloMap could lead to a price increase on AlloMap in 2018 for the Medicare patients. Medicare patients make 40% to 50% of our AlloMap revenues.

Our success with increasing AlloMap usage is reflected in our top line. AlloMap revenues were $8.4 million this quarter, an increase of 16% compared to the second quarter 2016. We provided approximately 3,860 AlloMap patient results in the quarter, which reflects the volume increase of 7% compared to second quarter 2016. So we're very pleased with our performance. With economies of scale in our royalty payments to Roche ending after the third quarter, we believe the roughly 65% gross margin on AlloMap will help support our path to profitability. Mike and the team have been doing a good job on collections and improving our billing processes. I'll leave him to provide more color there.

For our pre-transplant Olerup business, revenue in the quarter were $3.4 million. As we have mentioned before, our Olerup products offer the best-in-class HLA typing solutions for transplant lab that are matching organs to recipients. And you can find Olerup products in more than 50% of the roughly 1,000 HLA labs around the world. Last September, we launched Olerup QTYPE. We achieved validation on Roche instrumentation. We continue to make progress on the validation of QTYPE on the ABI instrument and introducing the QTYPE product to HLA laboratories in the U.S. and Europe. We plan to provide a further update at the ASHI conference in September.

We recently learned that Thermo Fisher acquired Linkage Biosciences, which markets a q-PCR solution for HLA typing. After the acquisition, they communicated the discontinuation of their own q-PCR technology. We see this acquisition as confirmation of the dynamics in the solid organ HLA typing market, where time to result is important. Our QTYPE technology provides the fastest turnaround time and aligns with the resolution needs of rapid deceased donor typing. CareDx will now be the only provider of a TaqMan technology-based product for q-PCR, so we feel competitively well positioned here. Reception of QTYPE continues to be positive, and we are on track to submit for CE Mark this year. With the QTYPE product revenue, we anticipate that the Olerup product line will be a contributor to drive toward positive EBITDA.

So with solid performances with our core products, we are also looking ahead and preparing for the launch of AlloSure, which is a transformational product for CareDx. AlloSure is the first and only noninvasive test that uses donor-derived cell-free DNA to directly measure organ injury and identify the probability of active rejection. As you know, if you've been following our story, our near-term goal is to secure Medicare coverage and reimbursement for AlloSure. And we believe our efforts are advancing this test towards transplant community adoption. We are tracking well against our plan here.

You might recall that Palmetto GBA issued a draft local coverage decision, or LCD, in May, following completion of the MolDx tech assessment process. We have participated in recent open public meetings at Palmetto, Noridian and CGC -- CGS when AlloSure was on the agenda for discussion. And in all cases, AlloSure's review passed without comments. The next step in this process includes finalizing the local coverage decision and engaging with MolDx to support the value of AlloSure as we begin pricing discussions. AlloSure coverage with Medicare is essential, not only because of the reputation and expertise of the review team at MolDx in regards to high-value diagnostic test evaluation, but also because roughly 80% of all kidney transplant patients, our first AlloSure target population, have primary or secondary insurance through Medicare, meaning that once coverage with Medicare is finalized, the great majority of kidney transplantations will have access and coverage. This means our reimbursement efforts for AlloSure are highly targeted, especially compared with other diagnostic tests that typically require lengthy negotiations with multiple payers throughout the country.

While we are awaiting the future coverage decisions from the MACs, we are finalizing the details of our coverage with data development, CDD, plan. Our clinical trial plan for the CDD component focuses on the registry commitment, where we are proposing to follow up roughly 1,000 AlloSure patients and additional 300 contemporary controlled patients at more than 30 transplant centers for a 3-year period. The primary endpoint will be centered on observing patient outcomes post transplantation and the reduction of number of renal biopsies performed. With our expertise in designing -- I'll stop here for a second just making sure...

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Let me go back to the CDD plan and start with our clinical trial plan for the CDD component focuses on the registry commitment where we are proposing to follow up roughly 1,000 AlloSure patients and additional 300 contemporary controlled patients at more than 30 transplant centers for a 3-year period. The primary endpoint will be centered on observing patient outcomes post transplantation and the reduction of number of renal biopsies performed. With our expertise in designing, implementing and maintaining registry studies, we are convinced the study will be substantial contribution to the field of transplant medicine. Let me remind you that we are presently managing an AlloMap registry that started in 2013 and now includes participation of more than 1,600 heart transplant patients and clinicians from 35 centers in the U.S. We believe these efforts will advance our data-driven, evidence-based genomic information strategy.

We see the soon-to-be initiated renal transplant registry study as a win-win also for CareDx. We estimate that adoption may result in over 10,000 AlloSure tests over 3 years, which not only will highlight the significant unmet clinical need of renal transplant patients but also provide a nice boost to our top line. These numbers of tests also increases our confidence that CareDx will turn profitable in 2018. I look forward to updating you on this registry once the study is underway.

Based on our prospective [DART] study and unmet needs of renal transplant patients, we developed our AlloSure routine testing schedule that proposes 7 AlloSure tests in the first year and then quarterly subsequently. Based on our experience with AlloMap, we believe that the establishment of and adherence to this protocol will be an important element in providing key information for managing transplantations and in making the launch successful. So once we have reimbursement in hand, we have previously shared our plan to leverage our existing resource to launch AlloSure in October. We are planning for a very efficient launch at 100 centers around -- account for 80% of the overall kidney transplant volume and their significant overlap with our existing AlloMap customers. With a 10x larger market than AlloMap, we're excited about AlloSure's market opportunity. We believe AlloSure has the potential to achieve more than $200 million in revenues per year. The AlloSure website is up and running. Feel free to check out allosure.com. We will build this out as we go, especially under the More Information tab.

In closing, we feel that we are in great shape here at CareDx in front of 3 important milestones: one, receipt of the AlloSure final coverage decisions from MACs in the coming weeks; second, the finalization of AlloSure pricing, which is expected later this year and which drives our planned launch in October; and third, expected enrollment of the first patient in the first AlloSure CDD study in January.

I will now turn the call over to Mike to discuss our financials. Mike, your turn.

Thank you, Peter. This has been my first full quarter with CareDx, and I'm very happy with our progress. As well as focusing on the AlloSure launch, this quarter, we've also made significant progress with our balance sheet. On the last call, we said we were in discussions to restructure our obligations with the former majority shareholders in Sweden, and I'm very pleased that in July, we reported that we were successful with this effort. As we announced, we are able to restructure the obligations and defer payment from July 2017 all the way out to March 2019.

In addition, we're working hard to drive the company towards profitability. An impact of this effort was that net cash used in operations was $3.2 million this quarter. This was a dramatic improvement over Q1, which had an operating cash burn of $6.7 million. With our cash runway significantly improved and our ability to leverage our existing commercial and laboratory infrastructure for AlloSure, we now have the financial flexibility to get well beyond the October launch of AlloSure.

Turning to the P&L. Second quarter 2017 revenue was $12 million compared with $10.7 million in the second quarter of 2016. The year-over-year increase in revenue reflects the same 3 drivers we saw in prior quarters. Firstly, Olerup contributed revenue of $3.4 million in Q1. Note that we completed the acquisition of the Olerup business in April 2016. Secondly, AlloMap U.S. test volume grew 7% in the second quarter of 2017 compared with the second quarter of 2016. Thirdly, I'm pleased to disclose that we continue to improve our internal billing and collections processes. These improvements were reflected in the $8.7 million AlloMap cash collected this quarter compared to $7.6 million in the previous quarter. These 2 AlloMap-related drivers have resulted in AlloMap revenue of $8.4 million in Q2, up from $7.2 million in the prior year period.

For Q2, our non-GAAP net loss was $3.6 million compared to a non-GAAP net loss of $4 million in the same period of 2016.

Turning to guidance. For 2017, we've tightened our revenue expectations to be in the range of $46 million to $49 million. Our guidance is based on AlloMap and Olerup revenue and excludes any potential revenue from AlloSure.

I'll turn back the call to Peter for closing comments.

Well, thank you very much, Mike. Great to have you on board. We appreciate you joining the call. We are now happy to address any questions.

(Operator Instructions) Our first question comes from the line of Bill Quirk of Peter Jaffray (sic) [Piper Jaffray].

Bill Quirk from Peter Jaffray, I guess, is where I'm working today. Peter, first question for you. The commentary for the LCD ended on July 20, can you talk about any kind of initial feedback from Noridian or Palmetto?

Feedback and communication with Palmetto and the MolDx program has been excellent. This is (inaudible) mark from CareDx at this stage. Note, it has been truly excellent, and the communication with the team has been good. We're now in the process of finalizing the coverage and the data development registry commitment and then go into the pricing negotiations. I'm very pleased to mention under the sideline that we filed our pricing dossier already, but -- so we're well in line for the October launch.

And then, Peter, just on that last point, can you elaborate a little bit on pricing? Obviously, this is an NGS-based assay versus real-time PCR for AlloMap. So help us think a little bit about -- I guess pricing discussions have yet to happen, but any kind of early indications or anything that you can give us around pricing would certainly be most welcome.

I think you really -- the CareDx experience, with AlloMap is coming to fruition. We have a great platform in place, leveraging our existing relationships. This is truly a high-value diagnostic test, as you were mentioning, Bill. It's sequencing based. So when Palmetto normally looks at these products, they're looking at 3, 4 important components. One is what are the analog tests in the space. And for a post-transplant surveillance test, it's really AlloMap that is a very good analog in -- when considering pricing of a post-transplant surveillance solution. When they look at the cost, you were mentioning what it takes to develop and bring this test to make it available [to patients], we have a very clear understanding. For us at CareDx, it was roughly $50 million that we spend on developing the AlloSure test. So a substantial effort went into the development of this product. And then when they're looking at the health economic data, we, in post-transplant care, really have a little effort here to demonstrate that these noninvasive solutions are so far superior to the current surveillance solutions, provided that our health economic data is always very robust and builds the case for an AlloSure and an AlloMap to be included in the regimen for these patients.

Okay. And then, Peter, just -- maybe just a word on some of your last comments there. You talked about 7 AlloSure testing in year 1 following transplant and then kind of shifting to a quarterly methodology thereafter. Could you just elaborate a little bit on how you settled on 7? And then if we think about the thereafter piece of that, obviously, part of the -- with AlloMap, is it's been challenge to kind of keep those patients on the test kind of once we get a few years post transplant because they tend to stabilize? Can you help us think a little bit about what we can do differently here with AlloSure to make sure that we maintain them as patients through a much longer period of time?

Super question, and it's really that's why I mentioned it. I think the arts protocol, as we call it, the AlloMap routine scheduling protocol is very important for us to establish. Why did we come up with this number? We saw this in our DART trial as a good way of monitoring these patients. And so we have these -- the 7 AlloSures in the first year post-transplant and then the quarterly follow-up as the routine protocol. So we have the experience with DART. We have the experience with AlloMap, how normally these AlloMaps are perfectly -- in a perfect protocol administered. And then thirdly, we also looked at the KDIGO guidelines. These are the guidelines that are currently established for follow-up of these kidney transplantation. And these guidelines actually call for a very frequent follow-up, especially with serum creatinine. So AlloSure will nicely match into these guidelines. Your last question, I think, is a very important one. So what does CareDx do to make sure that these patients are followed up with us? And it's really 2 things that we mentioned on this call. The first one is we establish this routine testing protocol with our registry study. So think of the registry study as really a great launchpad on how to use the product. And secondly, we mentioned also our efforts in the AlloMap scheduling service, which will extend into the AlloSure scheduling service, where CareDx has been an active contributor to making sure that these patients are compliant. Compliance being a key issue for these transplant patients, and we'll address it directly with our service.

All right. Very good. And then just one last one, if I could squeeze it in, Peter. Given the QTYPE launch, maybe a word on why Olerup was down sequentially.

The Olerup business is really 3 product lines: the SSP product, the traditional sequencing and then the QTYPE PCR solution. The PCR solution is ramping up. Really, the ABI validation is at the core here. We'd love to get that off the ground much quicker. So we're a little bit behind on the QTYPE rollout based on the delay in validation now on the ABI. When you see the overall market potential for HLA testing, there's a significant opportunity for market share gains. And that's what we're modeling going forward based on our QTYPE launch. So the Olerup business is probably flattish right now. As we drive this to growth, we'll have a really strong bottom line focus on this business.

Our next question comes from the line of Kevin Ellich of Craig-Hallum.

Bill asked a lot of good questions. I'm glad he's from Piper Jaffray, actually. As for your comments about visibility on the 10,000 AlloSure tests over 3 years in the follow-up studies, just wondering, what sort of revenue visibility do you get from doing that post-launch study? Should we be assuming about $1,500 a test?

This registry study will be actually tailored to Medicare patients. So yes, these tests would be reimbursed under the Medicare regimen. And depending on the reimbursement that we achieve with Medicare on AlloSure, the $1,500 is a good benchmark.

That's helpful. And then, for sure, we know -- we understand that 80% of the kidney transplant patients who have Medicare as their primary, secondary insurance, but there's still a small portion that will be uncommercial. How should we think about commercial reimbursement for AlloSure? And have you started any of those discussions?

Our reimbursement efforts are laser sharp focused at the 80% opportunity, which is the Medicare reimbursement. We have had discussions because we have these discussions on a regular basis based on AlloMap. And we'll include AlloMap wherever -- sorry, AlloSure, on -- into these contracts as the opportunity arises. It's good to have these established relationship with these payers. So we're not coming new to the table. But really, our primary focus right now is the Medicare reimbursement since it's 80% of all the patient population. Keep in mind that many diagnostic tests actually never go beyond the 80% reimbursed test line at all. So we have a huge opportunity just right out of the gate.

Got you. That's helpful. And then just 2 quick ones for Mike. Mike, you talked about improved cash collections. Just wondering what you guys are doing to improve revenue cycle management. And lastly, what's the cash burn and kind of cash utilization? How should we think about that going forward?

Yes. Sure, Kevin. On the revenue cycle management, we put a new head of billing and collections in place. We've been improving our processes. We've been doing a lot of work to focus on getting the claims out quicker and following up with appeals a lot quicker. And we did have a backlog, so we're steadily clearing that backlog. I would say now we're at a point where it's sort of business as usual. We've got the processes well in place, and we're working pretty efficiently. There's still room for improvement, but I'm pretty happy with where we are. From a cash burn perspective you just mentioned, our cash burn in operations was $3.2 million, which was a dramatic improvement from the prior quarter. And we're looking at a similar cash burn for the next few quarters. And in our 10-Q, we've put an estimation that the current cash that we have will go through to March 2018.

(Operator Instructions) Our next question is from the line of Nicholas Jansen of Raymond James.

Most of mine have been answered, but maybe 1 or 2 follow-ups. First, in terms of the gross margin comments. Can you just tell how much that Roche royalty is currently being paid? And how do we think about the timing of when that rolls off? Is that 3Q or 4Q?

It's really the -- in September time frame. So think of those as being still in our third quarter numbers but then rolling off into the fourth quarter. So the 65% gross margin for AlloMap is a realistic number, especially as we then go into launching AlloSure and sharing some of the overhead expenses into multiple products.

That's very helpful. And then my second question just in terms of the 100-or-so transplant centers that do a majority of the kidney transplants. Maybe just talk us through your strategy in discussions with those right now. Obviously, there's a lot of overlap with heart transplant customers. So maybe just talk to us how you've been kind of doing dialogue with those? What's the time line of how quickly those 100 should ramp up? Just trying to get your thoughts on pre-commercial activities.

No, absolutely. Excellent question, Nick. And we actually shifted the field force in -- as of 1st of July to 75-25 in terms of 75% focused on AlloSure, 25% on AlloMap. So we're in focused prelaunch phase. We targeted 140 centers in July, have now consolidated that number to -- down to 90, which is -- which identified key interest in AlloSure. Actually, 35 of these centers are keenly interested. So we feel very well advanced on this very concentrated strategy on getting key centers interested into AlloSure. Being interest in AlloSure is not yet a conversion, but given that we'd like to launch this product at 35 key centers with [KDIGO] registry, which we recruit to in -- during January, you kind of get the strategy being very tailored, very focused on key centers, making sure that they adopt AlloSure according to the AlloSure protocol.

Thank you. This concludes our question-and-answer session. I would like to turn the call back to Peter Maag for closing comments.

Well, thank you so much for joining the call. We'll continue to keep you updated as we are progressing towards an exciting AlloSure launch and as we're making progress in the business. Thank you very much for joining us today.

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