CareDx Inc (CDNA) 2022 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the CareDx Inc. Third Quarter 2022 Earnings Conference Call. Today's conference is being recorded.

At this time, I'd like to turn the conference over to Ian Cooney. Please go ahead.

Good afternoon, and thank you for joining us today. Earlier today, CareDx released financial results for the quarter ended September 30, 2022. The release is currently available on the company's website at www.caredx.com. Reg Seeto, Chief Executive Officer; and Abhishek Jain, Chief Financial Officer, will host this afternoon's call.

Before we get started, I would like to remind everyone that management will be making forward-looking -- making 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 and results, 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.

The information provided in this conference call speaks only to the live broadcast today, November 3, 2022. CareDx disclaims any intention or obligation, except as required by law, to update or revise any information, financial projections or other forward-looking statements, whether because of new information, future events or otherwise.

This call will also include a discussion of certain financial measures that are not calculated in accordance with generally accepted accounting principles. Reconciliation to the most directly comparable GAAP financial measure may be found in today's earnings release filed with the SEC.

I will now turn the call over to Reg.

Thanks, Ian. Good afternoon, everyone, and thank you for joining us to CareDx's Third Quarter 2022 Earnings Conference Call. Today, I'd like to focus my discussion on the following 3 topics: The first is our differentiated financial profile in Q3 results. The second is our growth platform over the next 18 months, which we call the 3Cs, catalyst in the pipeline, collections, improvements and coverage expansion. The third is building on our vision of leadership in the transplant ecosystem.

Moving to the first topic. During the last earnings call, we made a commitment to achieve adjusted EBITDA profitability by the first half of 2023. Since then, we have made tremendous progress towards this committed goal. Notably, we meaningfully improved our adjusted EBITDA losses in Q3 versus Q2. This is a trend break we like, especially when combined with our strong balance sheet and debt free position. As a management team and Board, we believe maintaining the strong financial position is critical to (inaudible) sustainable business, especially in this current economic environment.

We plan to deliver on our profitability goal, and this will enable us to operate as a self-funding business. This has been a constant source of feedback from our long-term shareholders and truly differentiates CareDx when compared to others in our space. As highlights in our financial position, we, one, we retained an excellent cash position with $291 million in cash and marketable securities on the balance sheet; two, we maintained a higher gross margins highlighted by 73% GAAP and 74% non-GAAP in our testing services; three, we achieved strong volume growth with a 15% year-over-year and 3% sequential growth; and four, we improved our adjusted EBITDA position to enable our progress towards profitability.

Regarding Q3 results, overall revenue for the quarter was up 5% year-over-year and down slightly sequentially to $79.4 million, primarily driven by testing services, with lower market growth than we projected, higher-than-anticipated shift in payer mix to more commercial pays resulting in an increase in non-reimbursed test; three, an incremental 1% sequestration reduction for Medicare test and one-offs with the impact of Hurricane Ian in the last week of patient testing. There was also a lower growth in our products business from the impact of foreign currency and ongoing staffing shortages in HLA laboratories that have slowed new installations. Despite these, we're able to improve our adjusted EBITDA versus Q2 2022, and we are on track to achieve adjusted EBITDA profitability in the first half of 2023.

Now on transplant volumes, the year-over-year growth for Q3 2022 was mid-single digits. Based on the early signs of a stronger recovery we saw in Q2, we expected higher sequential growth versus what transpired in Q3. Notably, it has taken 18 months for transplant volumes to finally reach the same baseline levels we last saw in Q2 of 2021. Transplant center staffing shortages and decreased living donor kidney transplants remain 2 of the biggest challenges to market growth.

Our testing services remains a strength, with leadership across kidney, heart and lung. With kidney, we remain focused in executing on our long-term strategy with now more than 100 transplant center and community nephrology practice following AlloSure kidney protocols. Today, we have more than 75% usage across kidney transplant centers, and we saw an increase in commercial market share in these transplant centers. The entry into community nephrology has been an outstanding success and is now approaching 10% of our overall kidney volumes. We have more than 200 practices use AlloSure Kidney in Q3 due to our community nephrology expansion. This represents a significant potential as the majority of transplant patients are managed in the community setting. Although the community patients have a lower coverage level, we have an ongoing commitment to support all patients regardless of payer coverage.

With heart, the attachment rate for HeartCare remains above 95%. This demand continues to reflect the value of multimodality. As a reminder, we're the only Medicare-covered gene expression and Donor Derived test in heart and the only test with multimodal coverage through Medicare. Today, more than 90% of heart transplant centers in the United States use the cardiac offering.

Now on to lung. AlloSure Lung addresses a significant unmet need by providing a noninvasive option in the highest risk transplant patient population, where 1 in 2 lung transplant patients will fail within 5 years. The use of AlloSure Lung exceeded (inaudible) benchmark, and we already achieved a greater than 60% penetration in transplant centers within 12 months of commercial launch. This uptake in lung reflects the incredible demand in the lung transplant community with greater than 2,000 tests ordered in Q3.

Now moving on to the second topic. As we're working towards a sustainable, profitable model, we're excited by the future opportunities to accelerate revenue growth. We are focusing our efforts over the next 18 months on 3 priorities, for the 3 Cs: catalysts in the pipeline, collections improvement and coverage expansion.

Now on to the first C, catalyst and pipeline. I am pleased to announce the following: First, we can share that AlloMap Kidney is currently under MolDx's review. And secondly, we are completing clear implementation work on UroMap in preparation for a future mode exhibition. We look forward to bringing these latest innovations to clinical use to improve patient care.

Now on AlloMap Kidney, this truly delivers on the market need for a quantitative (inaudible) AlloMap Kidney is built upon our leading FDA-cleared gene expression test AlloMap Heart. AlloMap Kidney is being built specifically for kidney transplant patients. UroMap has now completed analytical and clinical validation, and we are finalizing implementation in our Clear Labs. The breadth and quality of data for UroMap are best in class defined in multiple New England Journal and Medicine publications. UroMap is a gene signature that can assess both the problem of rejection and the problem of BK virus nephropathy.

Now on to the second C, collections improvement. We continue to ramp up infrastructure and we'll share a new metric which looks at the ASP on reimbursed test. Notably, our (inaudible) test has not changed over the last 7 quarters. Abhishek will cover this in more detail. During the last 6 months, we've ramped up our internal infrastructure and third-party support to address the increased workflow across the different pay stages with pre-submission, submission and appeals. We're starting to see signs of improvements in our cash collection with improved collections in Q3 versus the prior quarter and year-over-year. However, the reality of collection cycles of Medicare Advantage and commercial plans means that visible progress will (inaudible).

Now on to the third C, coverage. The number of non-reimbursed tests continues to increase with our intentional strategy to launch a new organs such as lung and to move into community nephrology, where coverage is lower. However, this volume growth creates a long-term opportunity. In the meantime, we are working towards obtaining payer coverage to get these tests covered and reimbursed by private pays. Heart represents our biggest P&L lever. For example, using 2021 volume numbers, we would have collected over $100 million in incremental adjusted EBITDA if our current commercial test enjoyed the same broad coverage as AlloMap Heart, the gold standard at about 70%. Now as a reminder, AlloSure Kidney is at above 70%. AlloSure Heart is between 25% and 30% coverage, and AlloSure Lung is less than 5%.

We're now targeting 2 specific milestones that are expected to expand our coverage in AlloSure Heart and AlloSure Lung. On AlloSure Heart, we're expected -- we're encouraged by the inclusion of underwriter (inaudible) in the proposed guideline updates at the April International Society of Heart and Lung Transplant meeting. As a reminder, AlloMap Heart is part of the ISHLT guidelines already, which was pivotal in expanding pay coverage. On AlloSure Lung, we are working with MolDx to achieve determination of coverage by Medicare. There is clear demand in the lung transplant community with over 2,000 patients that have used AlloSure since the launch. Notably, there are only 2,500 lung patients transplanted each year and 15,000 patients in the community.

Now moving on to third section, our vision and strategy. Our vision is to be the lead in the transplant ecosystem and is one of the few companies 100% dedicated, 100% is dedicated to transplant, CareDx has emerged as a market leader across the transplant patient journey, and built an incredibly deep moat within the transplant centers. Today, we are #1 in post-transplant biomarkers in kidney, heart and lung. We're #1 in transplant medication coverage, discharge with greater than 100 transplant centers. We're #1 in transplant quality Monterey, with greater than 40 centers. And we're #1 in transplant-specific apps with more than 55,000 downloads through our app, AlloCare. And we're #1 in next-generation sequencing based HLA typing.

As a reflective milestone, (inaudible) recently announced that there has been now more than 1 million patients transplant in the U.S., with 500,000 or half of those in the last 15 years. We are proud that more than 100,000 transplant patients have used the CareDx offering over those last 15 years, representing 20% of transplant patients to the U.S. during this time.

Moving to guidance. As you saw in our press release, we lowered our guidance and now expect full year revenues to be in the range of $320 million to $325 million. This guidance is driven by the lower Q3 revenues and higher-than-anticipated shift in commercial payers. Abhishek will cover this in more detail in his section.

In closing, we are committed to delivering on our path to profitability in the first half of 2023. And as a summary, one, we demonstrated our ability to improve our adjusted EBITDA despite a lower revenue quarter; and two, we've highlighted which set of potential revenue growth drivers to accelerate growth through the 3 Cs. Catalyst in the pipeline, we anticipate commercial launch is AlloMap Kidney and UroMap, collections improvements through increased infrastructure including engagement third parties and coverage expansion through AlloSure Lung reimbursement and the potential inclusion of Donor Derived cell-free DNA and like AlloSure in the United States sort of guidelines. We look forward to the next 18 months as we continue to execute on our strategy.

With that, I'll turn over the call to Abhishek to discuss our third quarter financials.

Thank you, Reg. We are pleased to report that we are making progress on the commitments we made last quarter on returning to adjusted EBITDA profitability. I would also like to echo the comments about our confidence in being able to expand coverage and improve collections over time and leverage our business model. Reg alluded to our differentiated financial profile. Let me provide further details on the same and Q3 results. Number one, strong cash position of $291 million and self-funding business model; number two, solid volume growth and impressive gross margin performance; number three, progress on our path to adjusted EBITDA profitability; number four, the strength and the consistency of our ASP on reimbursed debt.

I want to start by highlighting our financial strength. We ended the quarter with $291 million in cash, cash equivalents and marketable securities, and no debt. We continue to invest in our portfolio in line with our goals of preserving principal diversification and maximizing returns. In Q3 '22, we generated over $1.2 million in net interest income. We do not require to raise capital, and have the flexibility to deploy capital that increases value for our shareholders. This is a unique story in our space. We remain confident that the business is self-funding into the foreseeable future.

Moving to the quarter. In Q3, we recorded total revenues of $79.4 million, up 5% compared to $75.6 million in the third quarter of '21. Testing Services revenue was down, 2.6% to $64.8 million. Product revenues increased 10% year-over-year to $7.2 million, and Patient & Digital Solutions revenue increased 185% year-over-year to $7.4 million. Our revenues in Q3 '22 were impacted by slower-than-anticipated market volume growth, a high mix of noncovered debt, final and second part of sequestration cut, a one-off with Hurricane Ian and FX headwinds on our product business.

Although the growth was lower in Q3 as compared to Q2, we were pleased to finally see total transplant volumes return to the same level that they were more than 18 months ago. It has taken longer than expected. For the quarter, our testing volumes grew by 15% year-over-year towards 46,500 tests. We saw sequential volume growth in all organs. The non-GAAP gross margin for the quarter was 67% compared to 70% in the third quarter of last year and 69% in Q2. The change in gross margin versus the last quarter is primarily driven by our product business returning to its normal gross margin.

We continue to maintain healthy gross margin of 74% in our testing services business, despite the continued increase in the mix of unpaid debt. We are very pleased with the durability of our gross margin profile and proud of our lab and the supply chain team as they continue to drive efficiency.

Non-GAAP operating expenses for the third quarter were $57 million, down $5 million sequentially from Q2 '22. We are extremely pleased to see this trend change, given our committed goal of achieving positive adjusted EBITDA in the first half of '23. This was achieved by focusing on 3 factors: number one, financial discipline across the organization; number two, operating efficiencies driven by process improvements; number three, increasing effectiveness in strategic areas of driving growth and in collections and expand in coverage. Notably, despite the reduction in OpEx, we continue to invest in clinical development with studies across solid organ and stem cell transplants.

For the third quarter of '22, we recorded negative adjusted EBITDA of $2.5 million compared to negative adjusted EBITDA of $5.7 million in the previous quarter. We made a lot of ground on our commitment and are pleased with the progress towards our goal of delivering positive adjusted EBITDA in the first half of '23 and are confident in our ability to continue to drive profitable growth.

Now let me turn to ASP. In order to provide further clarity on our ASP, this quarter, we are beginning to disclose the ASP for tests where we receive reimbursement. Our ASP for reimbursed test has been essentially flat and above $2,500 since Q1 of '21. The overall ASP started to change in Q1 '21, which was the first full quarter impact of AlloSure Heart. As a reminder, during 2020, our overall coverage in testing services was above 70%, but the addition of AlloSure Heart was only covered at 25%. Our focus is on expanding coverage versus the overall changes in ASP as these include noncovered tests.

To reflect this point, ASP on paid test was slightly above $2,500 in Q1 '21 and has remained above $2,500 in this most recent quarter. This is in contrast to our overall ASP, which includes non-covered tests. We want to highlight this metric to emphasize that we are not seeing any price degradation for our tests and the change in total ASP, which includes nonpaid test, is driven by our strategy to: number one, grow market share in community nephrology; number two, increased penetration in new areas such as lung, where we are yet to receive broad reimbursement coverage; and number three, launched in areas that drive innovation, such as multi-modality in heart.

As with AlloSure Heart, coverage is an area that will expand over time. As a reminder, our non-GAAP gross margin of 74% has been achieved with greater than 70% coverage for AlloMap Heart and AlloSure Kidney, a 25% to 30% coverage for AlloSure Heart, and a less than 5% coverage for AlloSure Lung. Our goal is to expand coverage to above 70% across our testing services portfolio using AlloMap Heart as the gold standard for coverage and reimbursement.

As discussed in our previous calls, our strategy of gaining market share and helping patients improve long-term outcomes, coupled with market dynamics, has resulted in an increased percentage of non-reimbursed tests. The durability of our adjusted gross margin has allowed us to offset these incremental non-reimbursed tests while providing us an opportunity through expanded coverage and improve collections over time that we are vigorously projecting. Regarding the information requests from the government, we do not have any material updates to report. We continue to cooperate and are moving expeditiously in responding to the request.

Turning to guidance. We are revising our full year guidance in the range of $320 million to $325 million from $325 million to $335 million previously. This change in midpoint is driven by lower Q3 revenues and higher-than-anticipated shift to commercial payers. Specifically, for Q4, in setting the guide, we have assumed that there is no further sequestration cuts. We do not plan for one-off impacts such as Hurricane Ian. We have built on lower market growth in our range. And lastly, we have assumed a higher commercial payer mix across the range.

To close, we have an enviable financial position, healthy adjusted gross margin, strong cash position and solid volume growth. We have demonstrated our commitment to return to positive adjusted EBITDA in first half of '23 by staying prudent on operating expenses while ensuring that we continue to invest in areas that will drive future growth.

With that, I'll open the call for questions.

(Operator Instructions) We'll take our first question from Brandon Couillard with Jefferies.

Maybe just starting with the guidance for the year and implied for the fourth quarter. You've been running kind of around $80 million in revenue in the first 2 quarters of the year. That would imply a step up of $4 million or $5 million sequentially into the fourth quarter. Can you just elaborate on the level of confidence in that and how we should be modeling the realized ASP trends sequentially? Is there another kind of 5%, 6%, 7% step down again in 4Q?

Brandon, it's Reg here and I'll hand over to Abhishek to take some more questions and comments. And for us, we have a strong run rate going to that $320 is what you just sort of described. And where we think there's actually further opportunity in the marketplace will come from the testing services. We do see growth in the products business and also with digital. So the guide Abhishek has outlined and go through step-by-step few as well now.

So Brandon, the way the change in the guidance of the midpoint from $330 to $322.5, that primarily has been on account of 2 factors. The first one is the carryover to Q3 revenue that came in at the low end of our expectations. And the second change in the guidance midpoint is primarily due to the slight modification that we have made on the market growth and the payer mix assumption based on the Q3 results. So those are the 2 factors that are changing at midpoint up from $330 to the $322.5.

Now with the level of confidence, and I think that was the other question that you asked. So I think that targets a very balanced guidance. And the way I think about it that the market growth, the way we are assuming as of right now, that it will stay around the (inaudible) slightly above, and that's what we are assuming that our testing services volume growth will stay in line or slightly above the market growth. We have made sure that our mix will continue to shift towards the commercial payers, and there will not be any sequestration cut. So those are the 3 or the 4 pieces that we are assuming in our guidance, and that provides us a good confidence in the guidance that we are providing.

Well, we may not be in a position to talk too much about 2023 yet, but how should we think about the ASP trend as we model out next year in a degree of further erosion, any parameters you can maybe get us to sort of think about that line into next year?

Yes, Brandon, I'll take the question, then I'll hand it off to Abhishek. I think it wasn't that clear, but I think you talked about ASP trends, if I understood. And I think for us, what we want to get to is -- and you heard sort of about (inaudible), this really is about coverage. It's not about ASP to say for us. And I think you saw that we've shown a slide now, which for the last 7 quarters, where we get reimbursed tests we have achieved in excess of 2,500. And the key here is how we now focus on getting additional coverage or focus on additional collections in these areas, which will then overall benefit that inflection point with ASP.

So we've delivered a series of catalysts, which goes through launches, which goes through coverage and which goes through looking at different collections to improve that overall profile. But I think we've often talked about and we've seen this over the last few quarters (inaudible), trying to show the transparency that really there is when we get reimbursed, we're reimbursed at a pretty constant rate, right? Where we're not reimbursed, that's what we have to work on, right? We have to work on how do we get coverage, right? And then we have to work on how do we collect, they're the key pieces. Which is why we focus so much on talking about 3C. This is the area we've built an infrastructure around. We've demonstrated during this quarter, we had the path to profitability, right? That's the key metric we put out for next year in our last earnings call, how do we get to profitability? Can we demonstrate and that's why we said the first half of next year. So OpEx, I think we have a good handle and we demonstrated that. The second thing is now laid out this 18 months sort of period of how we now build on getting improve collections, how we leverage the catalyst, which we expect to come and then also how we build on coverage as part of that process.

But I'll let Abhishek talk more on specifics if it's required on the ASP. But just to manage expectations, this is where we're tilting towards.

No, I think, Reg, you have covered it very well. So I think this is what we have been trying to discuss and provide the clarity in the past, that the way we look at the ASP that is basically to make sure that we are actually taking care of the strategy of getting into the community nephrology, for example, or getting into the new organs or providing the multimodality for heart. And we spent a lot of time in our prepared remarks on that one. And the key point that, Brandon, that our ASP for the paid test has not changed. Now the question is how do we start to get paid on some of the unpaid tests or the non-covered test, and that is the whole piece on the collection and the coverage. So those are the 2 pieces. And that's where we are going to be focusing on.

That's the last one. What next steps in terms of the timeline for kidney care? And how do we think about the timing of the potential commercial launch next year?

Yes. We're really excited about some of the catalysts that we have coming up, and that's why we're thrilled to share what is happening with KidneyCare with AlloMap Kidney, and now that were submitted to more for expert review. And for us, we know that there's demand for this test because we saw that through the (inaudible) enrollment where this was really the study that people wanted to do, and really understand more about this multi-modality approach. They weren't really interested in doing another donor derived cell-free DNA test. And we really see that being in the marketplace from the market research we've done.

The other thing that we also have taken away in this demand is having a quantitative test that is one that you can sort of get a longitudinal measure on as well as you do these tests. And so for us, the market prep is the team are prepared for our market materials. The organization infrastructure is already in place. I think we've obviously had some nice publications as a result of this so in terms of the offering itself is being defined. And so again, we look forward to exciting period and review process when we have those discussions. But clearly, this is a key catalyst for us, which is we have put in the pipeline and along with UroMap as well.

Brandon, this is the operator. If you're may be muted, did you have any other follow-ups? Hearing no response, we'll take our next question from Alex Nowak with Craig-Hallum Capital Group.

This is Connor on for Alex. I guess, first, MolDx is holding a contractor advisory committee meeting in mid-November to kind of discuss the coverage of transplant tests? I mean, what's going to be discussed at this meeting? Is CareDx invited to present? Kind of just some color from you guys would be helpful there.

Yes. No, thanks, Connor. I mean, I think what has been laid out there is it's an (inaudible) event. People can obviously attend and we'll be attending as part of that. But it's really being run by subject matter experts, and it's a meeting that's being run by Noridian and Palmetto. So we were shown how (inaudible) is a field that transplant gets an additional meeting looking at this process. And we think we've done a lot to bring transplant to the forefront. There is an existing LCD process, which are going through, which doesn't change the universal LCD, which was completed, I believe, in June of 2021, which we're going through current approvals through at this time point.

There was, in the past, some CAT committees that were held, for example, infectious diseases that was one held in 2021. And I think about 14, 15 months later, there was an update in terms of on LCD, which actually became a broader LCD. So I think the thing here is that we've been invited -- I think everyone's been invited to attend. It's open, although they won't be taking questions from those attending. It's by subject matter experts, and it's by Noridian as well as Palmetto, that's being hold over 2 days, one above the diaphragm, one below diaphragm, and we look forward to learning more about that at the meetings.

Got it. Okay. That all makes sense. And then just couple of questions to dig a little deeper on the pricing side. I mean, I know you mentioned you're having some success in appeals kind of through this better infrastructure you're building. But just to kind of dig a little deeper, like, when do you expect that to kind of help ASPs stop their decline? And then just kind of -- is the impact to ASPs still roughly 25% Medicare, 75% commercial or kind of how are we thinking about that right now?

Yes. I'll make some comments, and I'll hand over to Abhishek. Again, as we mentioned with Brandon as well, I mean, the way you want to think about this coverage, we've shared the ASP on reimbursed. There was a set of slides attaching with this webcast. And I think when tests are reimbursed, they're pretty much reimbursed about $2,500 across the portfolio. And I think that's the important thing that once you take that on.

Where we don't get reimbursed is, a, if we don't have coverage or if we don't collect -- so it's pretty simple, right? We need to collect and we need to get coverage as part of that. So I'll let Abhishek decide how he wants to answer that, but I just want to get across, again, kind of the notion is you need coverage and collections. Talking about the ASPs being the red herring because here, you talk about -- there has been no price actually (inaudible) at the slides we presented as well over the last 7 quarters. So when we get reimbursed, get reimbursed well.

No, I think you have covered it well Reg. I would only add to that, that on the collections infrastructure when we talk about there's a pre-submission, submission and the post-submission side of it. On the pre-submission now we are building the capacity. We've almost doubled the capacity there by putting in more internal resources there then comes to submission and the post submission on the appeal side. In fact, we are now contracting with the third-party agencies. Again, we have doubled our capacity there.

Now how soon we are going to be seeing the results. A lot of these payers are basically, as you know, the Medical Advantage of the commercial payers, and they have a long payment time. So generally, it is not very immediate that you build the capacity and then you will start to see the results. So this will definitely, to Reg's point, it will come, and those are the pieces that we are trying to work on.

Got it. That makes perfect sense. And then maybe just one more. I mean the timing of the CAC meeting kind of comes when you're seeking reimbursement for long. I mean I guess just it's been on their desk for a while. Just any incremental updates there, feedback from MolDx. What are they saying, things like that?

Yes. As I mentioned, there's an existing pathway, which is the universal LCD, which has been in place since June of 2021. We don't believe we'll be caught in any changes. The key here is that there is an existing process, we submitted, we have good ongoing discussions with MolDx. And so we look forward to continuing those discussions.

Again, this is really just a subject matter experts. There is no agenda that's been set. We've talked about CAC meeting as well. The only -- if we took a precedent where we saw that with infectious disease, actually went in and actually broadened the LCD in that sense. So again, we don't know the agenda, it hasn't been set. It also says it on the website. But again, we do look forward to hearing more about it, but we've submitted under the current process, which is the existing process.

We'll take our next question from Matthew Sykes with Goldman Sachs.

This is [Prashant] on for Matt. Congrats on the quarter. So just 2 questions for me. First one, according to recent data, it seems like transplant volumes have recovered post COVID, seems to be trending upward compared to prior couple of years. Do you see that continuing? And how do you account for that in your guide, if at all?

Yes, I'll comment about the overall transplant volumes, and I'll let Abhishek end this (inaudible) the guide, but for us, if you look at -- and I think this is also covered in the slide in the webcast where it's taken 18 months to get transplant volumes back at where it was at its previous peak or high. And so we're thrilled that it's finally there, but it has taken 18 months. And I think nothing is a given because we did see some sequential growth not as strong as we'd seen in Q2 where we saw a slightly stronger recovery with the mid single digits, and we saw it in probably the single digits again this quarter.

Longer term and midterm, it really is an exciting opportunity. There are multiple levers that will increase the number of organs that are done in the United States. And I think we can go into a couple of different areas there, including improvements in perfusion, the advent of more living donors, which has been impacted the most during this time period. We also know there are government initiatives, increasing the number of donation and transplantation rates that are taking place here as well. And really, there's a lot of different places where organ donation can go up. At this stage, I think we haven't sort of seen that full rebound. We saw that impacted again this quarter with not hitting that higher projection we had as well. So Abhishek, I'll let you talk about the market growth in terms of the guide.

Yes. Thanks, Reg. So when we start to look at the market growth, actually, the Q3 transplant volume growth was lower than Q2. Now when I start to look back to the last 3 quarters where we had seen the transplant volume to recover from a high single-digit decline since the third quarter of '21 to a mid-single-digit growth in the last quarter. That growth of 4% actually came in at the low end of our expectation. And that kind of impacted some of our expectations of testing services revenue for the current quarter.

Now when we start to look at going forward, we have actually pruned down our market growth assumptions a little bit in line with what we have seen in the last couple of quarters. And we will see as to how this kind of pans out in the next 2 before we actually start to make more further changes there.

Got it. That's really helpful. And then one last question. Could you talk about how you see the longer-term opportunity for cell transplant? Is there a timeline to realize this opportunity further out? Or do you see any factors that could accelerate the development of this opportunity?

For us, cell therapy is really an exciting area. And I think for us, it's really predicated on cell therapies, making it on to market. And as of this stage, there hasn't been one in the solid organ side that have made it through. And I think that's sort of the key. And as we built out, I think our different strategic steps, that's more meaningful contribution probably in the 5-year time period when you have more of these different therapeutics that are approved on the cell therapy side.

However, that said, we have increased the number of partnerships we've held. We're really excited by the progress we're making here. It is a really exciting stage of development. And for us, it's one that for us as a company that's fully dedicated to transplant, it gives us multiple options. We have been focused on solid organs, now expanding different organs. As part of that, you're seeing with kidney, heart and lung more to come as well. And now we've had the chance also to get in stem cell, which is probably more of a nearer-term opportunity than cell therapy. And then longer term beyond 5 years is cell therapy. But again, anything transplant is open for business from outside. But thanks for the question.

We'll take our next question from Mason Carrico with Stephens.

This is Jacob on for Mason. So just following up here on the AlloMap Kidney submission to MolDx. Now that it's been submitted, I know it's largely out of your guys' hands, but just kind of wondering what maybe your guys' internal timeline or expectation is to get Medicare coverage for that test? Is the fourth quarter of 2023 still a possibility? Or is that largely off the table at this point?

Yes. I mean we've submitted the application. Typically, there's like the 6-day plus it's probably been a little bit longer in what we've seen, obviously, with the current process. And I think for us, we'll just have to wait and see the feedback from there. We, again, so we've built a pretty robust package with the publications we've been able to do and I think, with the demand that exists out there as well. But I think once again, it really is not dependent on us, but dependent on others. We just respond and provide answers where we are asked questions as part of that process.

Yes. Understood. So in terms of the launch there, once you do get positive coverage, but do you anticipate focusing the initial launch within transplant centers? Or do you plan on driving adoption in both transplant centers as well as patient community setting? And then any additional color on the difference in clinician behavior in those 2 settings? Do you see one being more strongly adopted than the other?

Yes. I mean, I think they are 2 very different stages, right? I mean I think you have transplant centers where we're in more than 75%. We're clearly the leader there. We have extensive protocols. And in the community, it's still fairly early. It's fairly diffused, although we had more than 200 synergies AlloSure last quarter and we're starting to get protocols there as well. But I would think of them as 2 very different segments in terms of that approach. And I think there's still more education that has to be done on the community side about usage of AlloSure or other Donor Derived cell-free DNA and its utility. I think it's important not to just try to push on the up to provide the right education supported by strong clinical data with multicenter prospective studies and transplant-specific test.

But on the -- as we look at AlloMap Kidney, I think it's probably more geared towards probably where there's existing adoption of AlloSure and using that as a basis because they don't want to understand the utility of multimodality. Again, it depends on the data. We think we have strong data and I think we have a good experience in what we've seen in HeartCare as well.

We'll take our next question from Yi Chen with H.C. Wainwright.

Hey, this is (inaudible) on behalf of Yi Chen. We just have a couple of quick questions. The first one being -- and I'm sorry, I missed it during your prepared remarks, but what are the -- any color on the dip in revenue quarter-over-quarter. And then the second one being, I guess this was answered a little bit in the previous question, but any color or timelines as it relates to both of your upcoming catalysts?

Yes, I'll take the catalyst question, and then I'll hand over to Abhishek. I mean, for us, there's a set requirement of what one has to submit, and we've done that for AlloMap Kidney in UroMap when the preparation for that, as we mentioned in the prepared remarks. And then it's actually a back and forth after the submission and normally, there's ongoing dialogue with the agencies to take place. So it's for hard for us, and it wouldn't be appropriate for us to comment on timeline.

But what we do know is that we have good relations. We have good discussions. And again, we feel really good about the scientific robustness of the packages we have delivered on AlloMap Kidney and plus we'll deliver for UroMap. And again, just to call your data, I mean, UroMap, for example, New England General Medicine publications apart from AlloMap, I don't think others have gone and been submitted with such robust data.

So again, we feel really good by the approach we're taking. The timelines we've remiss, but the organization prepared for all types of scenarios. So again, our goal is to have a fairly efficient field force. It's concentrated. It's one where they know the stakeholders, there's a bit of (inaudible) some of those stakeholders as well. Handing over to Abhishek.

On the revenue side, the testing services revenue dropped by about a couple of million dollars versus the last quarter. So there are a couple of factors there. The first one, of course, when I start to look back, we didn't anticipate the sequestration impact that we will have in Q3 2022. And we also made some assumptions on the market growth and the payer mix. Now the first piece on the sequestration that came in as we had projected because we knew that this is going to be about 1% further cut on the Medicare rate. That impacted 1/3 of the overall revenue drop.

The other drop came in because the market growth that the way we were anticipating, the market growth actually came in at the lower end of our range. So that was the other impact, the 1/3 of the drop. And the last -- and the third piece of the puzzle is basically your payer mix. We anticipated a payer mix and the actual payer mix came in slightly higher than that. So that would be the third part. So those are the 3 pieces.

We have no further questions in the queue. I would like to turn the conference back to your presenters for any additional or closing remarks.

Reg here, again. Thanks for all the folks all listening in, and thanks for the great question and from the different analysts. We have a real incredible mission here at CareDx which is how do we improve patient outcomes, organ outcomes for various subsets of special patients in the transplant community along that patient journey. So for us, this is all we do day in and day out. We thank you for taking time to listen to this call and supporting us and CareDx all we do as well. Thanks again. Have a great day.

Ladies and gentlemen, this concludes today's conference. We appreciate your participation. You may now disconnect.