Castle Biosciences Inc (CSTL) 2024 Q3 法說會逐字稿

Good afternoon and welcome to Castle Biosciences third quarter 2024 Conference call.

As a reminder, today's call is being recorded.

We will begin today's call with opening remarks and introductions followed by a question and answer session.

I would like to turn the call over to Camilla Zuckero, Vice President, Investor Relations and Corporate Affairs. Please go ahead.

Thank you, operator. Good afternoon, everyone. Welcome to Castle Biosciences third quarter 2024 financial results conference call. Joining me today are Castle's founder, President and Chief Executive Officer, Derek Maetzold, and Chief Financial Officer Frank Stokes.

Information recorded on this call speaks only as of today, November 4, 2024. Therefore, if you are listening to the replay or reading the transcript of this call, any time sensitive information may no longer be accurate. A recording of today's call will be available on the investor relations page of the company's website for approximately three weeks following the conclusion of the call. Before we begin, I would like to remind you that some of the statements made today will contain forward-looking statements within the meaning of The Private Securities Litigation Reform Act of 1995. These forward-looking statements include but are not limited to statements about our financial outlook, total addressable market, and similar items referenced in our earnings release issued today and statements containing projections regarding future events or our future financial or operational results and performance, including our anticipated 2024 total revenue. Our expectations regarding reimbursement for our products and targeted launch dates and other milestones, and the impact of our investments and growth initiatives including our ability to achieve long term growth and drive stockholder value.

Forward-looking statements are based upon current expectations and involve inherent risks and uncertainties. And there can be no assurances that results contemplated in these statements will be realized. A number of factors and risks could cause actual results to differ materially from those contained in these forward-looking statements. These factors and other risks and uncertainties are described in detail in the company's annual report on form 10-K for the year ended December 31, 2023, and its quarterly report on form 10-Q for the quarter ended September 30, 2024. In each case under the heading risk factors and in the company's other documents and reports filed or to be filed with the Securities and Exchange Commission. These forward-looking statements speak only as of today and we assume no obligation to update or revise these forward-looking statements as circumstances change.

In addition, some of the information discussed today includes non-Generally Accepted Accounting Principles financial measures such as adjusted revenue adjusted gross margin and adjusted EBITDA that have not been calculated in accordance with generally accepted accounting principles in the United States or Generally Accepted Accounting Principles. These non-Generally Accepted Accounting Principles items should be used in addition to and not as a substitute for any Generally Accepted Accounting Principles results. We believe these metrics provide useful supplemental information in assessing our revenue and operating performance, reconciliations of these non-Generally Accepted Accounting Principles financial measures to the most directly comparable Generally Accepted Accounting Principles. Financial measures are presented in the tables at the end of our earnings release issued earlier today which has been posted on the investor relations page of the company's website. I will now turn the call over to Derek.

Thank you, Camilla and good afternoon, everyone. I am pleased to share that Castle Biosciences has delivered another strong quarter growing revenue by 39% and total test report volume by 41% over the third quarter of 2023. Our excellent performance continues to be supported by the strength of our innovative tests and the winning spirit of our entire team. We achieved positive cash flow and earnings highlighting the operating leverage in our business model that has continued to drive the frigid financial performance. Additionally, we have a substantial balance sheet capacity, allowing to invest in the business for long term growth and to continue our efforts to drive shareholder value.

Given our outstanding year-to-date results and confidence in our business momentum. We are raising our full year 2024 revenue guidance range to between $320 million to $330 million, reflecting year over year growth of 45% to 50%.

This change reflects an increase from our previously reported guidance range of $275 million to $300 million.

Now, I will walk you through execution and strategy highlights from the third quarter and then Frank will provide additional financial highlights before we turn to your questions.

Starting with our core dermatology business for DecisionDx-Melanoma, we delivered 9,367 test reports in the third quarter, a 9% year over year increase. Despite reflecting normal third quarter seasonality from a patient perspective, we estimate that we achieved approximately 30% market penetration and looking ahead, we see considerable growth opportunity as we believe DecisionDx-Melanoma has the potential to continue increasing market penetration in the coming years.

Our compelling body of evidence reinforces continued adoption including more than 50 peer reviewed publications supporting the clinical use of the test.

You will recall that our DecisionDx-Melanoma test assist clinicians with answers to two related but separate questions in the post diagnostic time period.

The first is what is the genomic or biologic risk of a patient having a positive sentinel lymph node which impacts the decision to perform or not perform a sentinel lymph node biopsy surgical procedure or SLNB.

And the second is, is the patient likely going to have a low risk of recurrence or metastasis in the next five years or a high risk of metastasis? The second question drives much of the post diagnostic treatment pathway to this end. We saw yet another independent study published in the third quarter. This study by Kriza and all focused on a predictive accuracy of the DecisionDx-Melanoma test for sentinel lymph node biopsy positivity. You may recall that several years ago, once we had an adequate base of research samples with long term follow up, we challenge ourselves with two questions. The first question was, was the algorithm that we developed in 2012, Still the best algorithm for evaluating the accuracy of our 31 genes?

The second question was if this remained the best algorithm, then could the performance of our DecisionDX-Melanoma test for predicting both sentinel lymph node biopsy positivity as well as risk of recurrence be improved. If we added clinical and or pathologic factors, we did not identify a better algorithm regarding the assessment of our 31 genes. So, we retained the initial algorithm and cut points that were established in 2012. But we did find that we can improve the accuracy of our patient report by incorporating different pathological factors for each use of our test, to a clinicians and understanding these additional results that they receive, we term the integration of these clinical pathologic factors, As i31-GEP SLNB for SLNB positivity and i31-GEP ROR for risk of recurrence. This was a great discovery because one could have assumed that the clinical pathologic factors for predicting a recurrence or metastasis to the sentinel lymph node will be the exact same as those needed for predicting recurrence that did not occur within a sentinel lymph node. I mentioned this background because this is the kind of science driven approach that I believe we have always strived for here at Castle, rather than assuming that these clinical pathologic factors would be the same for both uses. And that we understood the biology of melanoma than the melanoma itself. We instead intentionally evaluated each factor for each clinical use.

Now, back to Doctor Kriza and the colleague study, this study focused on the clinical performance of our 31-GEP SLNB test results.

What they found was that for patients predicted to have less than a 5% likelihood of a positive SLNB, the actual positivity rate was 0%.

In contrast, patients predicted to have a greater than 10% rate, had an actual positivity rate of 31.9% which was a highly statistically significant difference.

These results are just one example of the clinical value of our DecisionDx-Melanoma in enabling more precise and personalized management of Melanoma patients, improving patient selection for the SNLB surgical procedure and helping to reduce unnecessary procedures and their associated health care costs.

The data provided the evidence that DecisionDx-Melanoma can identify patients with a low risk of positivity who may safely forego SLNB as well as those with a higher risk who may want to consider the surgery.

To conclude, this is yet another publication demonstrating the impact of our test can have toward improving patient outcomes.

Moving on to our DecisionDx-SCC test, we continue to see strong test report volume momentum with 4,195 test reports delivered in the third quarter of 2024 an increase of 49% compared to the same period in 2023 helping drive test adoption are the more than 20 peer reviewed publications since so on to the test. We were especially pleased with the recent publication of a new study by Dr Emily Ruiz of the Brigham and Women's Hospital and colleagues further supporting the use of our DecisionDx-SCC test in guiding patient selection and decision making related to the use of adjuvant radiation therapy or ART in patients with high-risk cutaneous squamous cell carcinoma or SCC.

The study reinforces the ability of our tests to identify patients likely to benefit from adjuvant radiation treatment as well as the majority of adjuvant radiation therapy eligible patients who would be predicted to receive no clinically discernible benefit. Importantly, this is the second study published this year that demonstrates the ability of DecisionDx-SCC to identify patients who are more or less likely to benefit from adjuvant radiation therapy. The first study was by Dr Aaron and colleagues and was published in the American Society for Radiation Oncology's Prestigious Red Journal in May. Comparing the two studies. It is important to note that both demonstrated that patients with DecisionDx-SCC class two B test results which indicate the highest metastatic risk potential saw a 50% reduction in disease progression when treated with adjuvant radiation therapy and significantly slowing the spread compared to those who did not receive adjuvant radiation therapy. For patients with DecisionDx-SCC class 1 test results which represent the lowest metastatic risk. The studies found no difference in disease progression between those treated with adjuvant radiation therapy and those who remain untreated.

This study shows that class 1 patients who make up the majority of SCC patients can be counseled to consider safely deferring adjuvant radiation therapy underscoring DecisionDx-SCC value in ruling out unnecessary treatment.

Finally, this marks the sixth study since the start of 2024 demonstrating the value of DecisionDx-SCC test results in improving risk aligned patient care through precise tumor biology-based risk stratification.

Now let's turn to our TissueCypher test which is used to assess the individualized risk of esophageal cancer progression in patients diagnosed with Barret's esophagus disease.

As a reminder, Barrett's esophagus is the only known risk factor for the development of esophageal cancer. One of the fastest growing cancers in the US with a dismal five year survival rate of less than 20%.

We are pleased with how well TissueCypher has been received by the gastroenterology community. In the third quarter of 2024 we delivered 6,073 TissueCypher test reports compared to 2,829 reports in the same period of 2023 representing a year over year growth of 115%.

I'd remind you that in July 2023, we temporarily pause accepting TissueCypher orders and resume accepting new orders in a phased approach beginning in September 2023 which made for a slightly more favorable year over year comparison for the third quarter of 2024. Having said that, we are nonetheless extremely pleased with our third quarter 2024 results and year-to-date 2024 test report volume performance with the recent expansion of our commercial team. Earlier this year, plans for continued modest expansion to the end of 2024 sufficient capacity in our Pittsburgh laboratory to be demand momentum and very early stages of market penetration in an estimated USD 1 billion total addressable market. We believe we are well positioned for continued momentum with a significant runway for future growth.

Turning to our mental health business, we delivered 5,045 IDgenetix test reports in the quarter, compared with 2,791 in the third quarter of 2023 which is 81% year over year growth.

I will now turn the call over to Frank who will provide details relating to our financial results.

Thank you, Derek and good afternoon, everyone. As Derek highlighted, we are proud to report excellent financial results for the third quarter of 2024, revenue was $85.8 million an increase of 39% over the third quarter of 2023. The increase was driven predominantly by test volume growth for our dermatologic and non-dermatologic tests and higher average selling price for our DecisionDx-SCC test compared to the third quarter of 2023. I would remind you that our DecisionDx-SCC test was granted advanced diagnostic laboratory test or ADLT status effective June 30, 2023. This designation resulted in an increase in our DecisionDx-SCC tests average selling price starting in the third quarter of 2023. So, the impact of that improvement in average selling price has now been integrated into our results for a full four quarters.

Adjusted revenue which excludes the effects of revenue adjustments in the current period related to tests delivered in prior periods was $86.3 million for the third quarter, an increase of 42% over the third quarter of 2023.

Our gross margin during the third quarter was 79.2% compared to 77.9% in the third quarter of 2023. And our adjusted gross margin which excludes the effects of intangible asset amortization related to our acquisitions and excludes the effects of revenue adjustments in the current period associated with test reports delivered in prior periods was 81.9% for the quarter compared to 81.3% for the same period in 2023.

Turning to expenses, our total operating expenses including cost of sales for the quarter were $80.7 million compared to $71.1 million for the third quarter of 2023. Sales and marketing expenses were $29.8 million in the third quarter of 2024 compared to 28.5 million for the same period in 2023, the increase is mainly due to higher travel and transportation costs incurred through our business development activities as well as slightly higher marketing cost, while personnel costs were relatively consistent.

General and administrative expenses were $20.7 million in the third quarter of 2024, compared to $16.1 million for the same period in 2023. The increase is primarily attributable to higher personnel costs, higher professional fees, and higher information technology related costs. Higher personnel costs reflect head count expansions and our administrative support functions as well as merit and annual inflationary wage adjustments for existing employees.

Cost of sales expenses were $15.6 million in the third quarter of 2024 compared to $11.3 million in the third quarter of 2023 primarily due to higher personnel costs and higher expenses for supplies and lab services. Increases in personnel costs reflect a higher head count due to additions made to support business growth in response to growing test report volumes as well as merit and annual inflationary wage adjustments for existing employees.

Higher expense for supplies and lab services also reflects higher test report volumes.

Research and development expenses were $12.3 million compared to $12.9 million for the same period in 2023, primarily due to slightly lower expense for clinical studies and personnel costs.

Total non-cash stock-based compensation expense which is allocated among cost of sales research and development expense and selling, general, and administrative expense total $13 million for the third quarter in each of '24 and '23.

Interest income increased by $0.6 million for the third quarter of 2024 compared to the third quarter of 2023. The increase primarily reflects higher average balances of marketable investment securities and slightly higher interest rates.

For the third quarter of 2024. We had a $6 million income tax expense primarily driven by continued Medicare coverage for our DecisionDx-SCC test. Specifically due to the unpredictability coverage, we previously estimated our income tax provision for all of 2024 based on a pretax loss for the year. However, with updated information, we were able to re forecast to a position of generating net income resulting in an income tax expense for the third quarter of 2024. We expect to also incur a tax expense in the fourth quarter of 2024.

Our net income for the third quarter of 2024 was $2.3 million compared to a net loss of $6.9 million for the third quarter in 2023. Diluted earnings per share for the third quarter was ¢0.08 compared to a diluted loss per share of ¢0.26 in the third quarter of 2023.

Adjusted even after the third quarter was $21.6 million compared to $6.6 million for the comparable period. In 2023 an improvement of $15.1 million. The year over year improvement primarily reflects strong top line growth along with continued disciplined expense management.

Net cash provided by operating activities was $23.3 million for the third quarter of 2024 and $40.5 million for the nine months ended September 30, 2024.

Net cash provided by financing activities was $11.5 million for the nine months ended September 30, 2024, and consisted primarily of $10 million of proceeds from issuance of long-term debt, $2.3 million of proceeds from contributions to our 2019 employee stock purchase plan and $1.6 million of proceeds from the exercise of stock options partially offset by the $2.4 million payment of employee taxes attributable to the vesting of restricted stock units.

We ended the quarter with cash, cash equivalents and marketable securities of $279.8 million. We believe our strong balance sheet provides significant financial strength to continue to grow our business in the near and long term.

As Derek mentioned, we are raising our 2024 revenue guidance to $320 million to $330 million up from $275 million to $300 million.

In conclusion, I'm very proud of our third quarter, 2024 and year-to-date financial performance. We look forward to continued momentum in the fourth quarter to close out a strong 2024, which we expect will set the stage to drive both near and long-term shareholder value. I'll now turn the call back to Derek.

Thank you, Frank.

In summary, this is a very exciting time for Castle Biosciences.

Our team continues to execute at a high level, delivering strong third quarter and year-to-date results with the goal of positioning the company for the long-term growth and success.

Thank you for your continued interest in Castle.

We will now be happy to take your questions, operator.

Thank you, Derek. In order to allow everyone in the queue, an opportunity to address the Castle management team, please limit your time on the call to one question and only one follow up. If you have additional questions. Please return to the queue. Please stand by while we compile the question-and-answer roster.

We have the first question on the phone lines from [Carl Mixon], you may proceed.

Hey, guys, thanks for taking the questions. Congrats on the quarter. I guess like just based on how the dermatology revenue set down in three quarter from two, you can talk about how much of that step down was like kind of came from DecisionDx-SCC revenue. And if there is anything else you can share on the portion of claims processed by lab for that test would be helpful to understand what the impact from non-coverage by helping that as well. Potentially not with us. Thanks.

[Carl], are you talking about sequential volumes?

Yeah, from three Q, from two Q. Thanks.

Yeah. So, when you look in our documents, our management's discussion, and analysis, we put a chart in there every quarter that shows volume, you know, quarter to quarter and what you see is every year except COVID year. We have very predictable trends in terms of sequential volumes. And so based, we believe it is based on patient encounters, just reduced number of physician office days in through the year. And as you see, when you look at that chart, Q2 tends to be the biggest sequential uptake. But having said that of course, we are looking at things on a year over year basis and seeing good growth there. I'm not sure that, can you give me the second question again, something about SCC and were you asking about SCC volumes?

Yeah, that and that, you know, that's helpful Frank the just the non-coverage by [inaudible] during, you know, it happened earlier in the quarter, you know, could have seen some impact from that in three Q, like maybe just confirm that that happened. And if that's kind of evident based on the, the [inaudible] based on the numbers that we saw in three Q.

No, we did not see that impact on the business from the [inaudible] draft or the [inaudible] policy. No.

Yeah, exactly. Okay. Thanks for that. And then on the pipeline, the inflammatory disease test like Derek, can you just give us like a kind of primer of that market opportunity in the competitive landscape before this? You know, some data maybe in the, you know, in the next few months here. And what should we expect as it relates to that read out in terms of like timing and the path to validation for that test over the next year or so?

Yeah, so we are, so let me go back first to our earlier established milestones. We committed to providing a public update on our progress. You know, we were we able to discover a test, what is that test look like and when might we reconfirm launch? So, we are still on track to go ahead and have a public conversation about that call between now and the end of the year that remains on track. In terms of launch, we had guided previously, you know, sometime prior to the end of 2025 that still remains intact. So, I think we are on track for both those milestones. In terms of the, of the first part of your question there, the broader opportunity or the broader approach here. I will just take atopic dermatitis as an example here. But we have our large ongoing prospective multi center protocol enrolls patients who are initiating systemic biologic therapy or are switching. So, it is sort of this moderate to severe patient population for both atopic dermatitis as well as the other end of that spectrum being psoriasis. But if I just focus on one potential use, it would be having a patient have severe enough symptoms where they have decided I am going to step over from topicals to systemic either oral therapies or in the case of atopic derm. Really, it is predominantly injectables. And when they make that, that step over that, over that threshold to take systemic therapies, the question becomes do you as a patient, as a clinician want to sort of just do trial and error, So, you can see first therapy you would have normally used actually works well for your specific disease. Or do you want to use our test to go ahead identify a higher likelihood of getting a very solid response versus a lower likelihood? So, that is what we are driving towards in terms of the ongoing analysis. And we will discuss the outcome of that here sometime in the fourth quarter, obviously.

Okay. That was great. Thanks guys. I appreciate it.

Yes.

Your next question comes from Sung Ji Nam with Scotiabank.

Your line is open.

Hey, this is [Corey Rosenbaum]. I am for Sung Ji. Thanks for taking my questions. So, you won a Presidential Poster Award at the recent ACG conference related to TissueCypher. Would love to get a sense of the interest level or awareness for TissueCypher from the physicians at the conference. What kind of feedback did you receive? And if there was any push back, what's the biggest pushback you're getting at the moment?

Camilla, I missed the middle part of [Corey's] question.

He was saying unless Corey wouldn't repeat it, he was just saying, what is the reception or the feedback you're getting from physicians at this time? And if you're getting any feed and push back, what pushback are you receiving around TissueCypher.

Around TissueCypher specifically?

Yes, because you saw that we won an award at the conference and then that was the segment.

ACG post. Okay. So, I cannot comment on that. So, one push back in terms of resistance guess, I do not hear much resistance from our commercial team. I think we are still in the very early stages despite having been marketing this now for what, I guess, 21 months or so still in the introductory phases of physician awareness, we obviously have clinicians who have read through enough of literature that they appreciate our test and are using it on their appropriate patients. But I think we still are early on. So, I think resistance is quite low to adopt the test. I think it is more awareness and then beginning to incorporate our test into the workflow. So, it changes or impacts patient flow. And that I think is largely due to the fact that that pathology grading. I think almost all of our gastroenterologists realize that there was a lot left on the table to try and direct risk align care in patients with Barrett's esophagus disease. We also know where the average gastrologist knows that if I recommend esophageal eradication therapy, the most common form really is using metronic radio frequency ablation tool to eradicate the Barrett's lesion. I can essentially stop that Barrett's lesion from progressing to cancer. However, we can ablate everybody who has Barrett's esophagus disease. So, it ends up being that the majority of patients, I think 420,000 - 430,000 patients. If you just rely on pathology diagnosis alone or grading alone, those patients would go under just active surveillance being seen every five or seven or eight years or three years for a repeat endoscopy, hoping that you go ahead and catch those that are progressing early enough where you can still save them from progressing to esophageal cancer. So, they know that our eradication therapy works.

They also know that they, that we cannot as a system afford to kind of get all these patients treated with non-dysplastic Barrett's esophagus disease. And so, they use our test to really say, hey, I know there are bad actors in that large group of non-dysplastic patients. If I can find them, I will intervene with them and hopefully stop cancer progression. And that is essentially how our test is being thought about in terms of ruling in appropriate interventions. At the same time. They also can say, well, I probably have my patients come back too frequently for repeat endoscopies because I just do. And if I use the test and get a low risk TissueCypher test result, but I am pretty comfortable talking to a patient about relaxing the re endoscopic biopsy intervention to more align with current guidelines as opposed to being more frequent. So, it does both things well, finding patients have a higher likelihood of progressing and putting them into the course of having that Barrett's esophagus lesion essentially ablated or quote cured. And the other way which is to kind of de-escalating care. And because of that, of those fact patterns, I think our resistance that we would see is largely just data, ignorance, or lack of awareness of what you could do with our test. But of course, it confined limitations. So, I would say the resistance is predominantly still low awareness or early awareness. And our job is to really keep educating our customers about the use of the test, why it is important to consider and if they agree that they would adjust patient care, they should order the test for their patients.

Great. I really appreciate that insight. And on the hurricanes, obviously, there were a few recently that may have an impact on Q4. Can you elaborate on if there was any impact in Q3 and how any Q4 impact could be reflected in guidance? Thanks.

So, right now, let us see, I think Helene came what the latter part of September and then Milton was in October. So that was more of 1/4 quarter event with the lead time between a patient seeing a dermatologist. And I am talking predominantly about our dermatology business here with the lead time between a patient, seeing a dermatologist or an MP or PA for a possible mole or is this Melanoma or not doctor? You get a biopsy, it goes to pathology, it takes a few days a week for a diagnosis.

Our test is ordered after that. So, one, I don't know if we saw a meaningful impact in the third quarter as that hurricane, went through sort of the upper panhandle of Florida and up in the North Carolina, I do know that we still have customers though clinicians in some of the pathway there who are still not practicing full time because of lack of resources and utilities. And we certainly know that Milton knocked out part of Florida there for a period of time. So, I would expect we'd have some impact in terms of volumes in the fourth quarter only because the assumption would be that dermatology practices are pretty overbooked anyways and missing a few days to a week or two of practice, you can't necessarily fit those all into that exact same quarter. So, I would expect that we may see some volume impact in the fourth quarter at this point in time to be quite frank. We have not seen those work their way through. So, we do not put any kind of an estimate around there except to say here is our updated guidance for 2024 and that includes some assumptions here on fourth quarter volumes perhaps being impacted by the hurricanes.

Thank you. We now have Thomas Flaten with Lake Street. Please go ahead.

Thanks. I appreciate you taking the questions, Frank. I apologize if I missed this. But how much SCC contribution are you assuming in the guide?

We're assuming Thomas, it will have it through almost the whole quarter at this point.

Got it.

And then just a question on the TissueCypher for reps. I know you have probably had what, like three months - four months with the larger team, have you seen any positive impact from them? And I know you have said previously it takes about six months to become kind of fully productive, but just curious where they are on that pathway.

I think that I think we are, we're seeing good. That is okay. Sorry about that. Yes, we like what we are seeing. I think that they are tracking the way we would expect them to. So, you know, we will hopefully be seeing full contribution as we get into next year. But, very pleased with that April 1 class and how they are coming online.

Got it. Appreciate it. Thank you.

We now have Mason Carrico with Stephens. Your line is open.

Hey guys. Thanks for the questions. You are just continuing on that. Could you just remind us where the rep count stands for the GI team today? And then I think I heard you guys say a moderate expansion going forward. How many more reps do you plan on adding maybe over the next 6 months to 12 months?

Yeah, so we have expanded our territory. So, a number of territories. So, I think around 40-ish in the kind of April - May time period if you recall. And we have added to that over the course of this quarter will continue into 2025. The exact number we have not quite nailed down at this point in time. I think, we think they were around 10,000 practicing gastroenterologist that should be targetable customers. They do practice in larger groups than dermatologists do in general. So, we do not think sort of targeting 75 or 70 to 80 is the right number. We think probably ending up in the low 60s feels about right. But that will be data driven and based upon our ability to impact those 10,000 gastroenterologists in their individual practice setting. So, certainly I would expect us to go and go in the next year, kind of in the low to mid 60s will be our target, but we have not necessarily locked in on what that looks like right now.

Okay. And sorry if I missed this but the path forward for DecisionDx-SCC, where do you guys stand there? Obviously, it is still paid by Novitos right now. You guys have been publishing a lot of evidence supporting the value of that test. So, are you pursuing the reconsideration process with Palmetto? Have you had discussions with them any color you can share there?

Not a whole lot. So, we continue to be reimbursed by Medicare following our positive review in the first quarter of 2022. So, 2.5 years or so now, we do process our squamous cell carcinoma test out of our Pittsburgh laboratory in Pennsylvania. So, the [inaudible] really has no business bearing per se. Now, that being said there were a number of differences between the final [inaudible] and what we perceived it should be appropriate, I guess in our eyes. And plus is, as you probably noted when that was posted earlier this summer, that none of the seminal articles that came out following the fall of 2023 were included. Most importantly, probably was our two more recent articles, one of them [Erin] at all, the other one Ruiz at all, which represented the largest ever and the second largest ever studies published in the squamous cell carcinoma of the skin, evaluating the effectiveness of adjuvant radiation therapy. And with those two studies showing clear utility and being able to say, hey, you've got 100 people that are eligible for adjuvant radiation therapy who's going to benefit, who's going to respond and who will like to get a non-clinical benefit to be able to find that the majority of patients who are eligible could be pushed towards adjuvant radiation therapy actually won't receive a benefit is a tremendous impact on not only reduced complications for patients who don't need adjuvant therapy, but they can still hold it later on if they happen to recur because no test of course is perfect. And at the same time focusing on the minority of patients who will get a robust response. Both studies showed that patients who we were predicted to have a not only high risk of metastasis but also have a high benefit. Saw more than a 50% reduction in the incidence of metastasis compared to those who do not receive adequate radiation therapy. So great impact there, one would expect that not only the palmetto team but also the Novitos team will look at that data and say, wow, we have the opportunity here to really not create a new pathway but to arm clinicians and patients within a current pathway to make better, more informed decisions at the end of the day, reducing complications. And there was a study published earlier this year showing that if you just take direct cost, that is what we think is the median or the average cost of adjuvant radiation therapy, less the reimbursed cost of our test and that was used across the board of people who received radiation therapy a couple of years ago on the Medicare reimbursement numbers that Medicare might save upwards, I think it was $900 million a year in cost savings. That is real significant dollars that could be spent elsewhere in the Medicare system.

That's helpful. Thank you.

Thank you. We now have Puneet Souda with Leerink Partners. Please go ahead.

Yeah, hi there, Frank. Thanks for the questions here. Maybe a couple one, first one on the NCCN guidelines. Any update there for cutaneous melanoma? What is your expectation? And correct me if I am wrong. I mean, latest guidelines did not include cutaneous melanoma. And could you elaborate what is your expectation there and how would it affect the reimbursement strategy?

So, they have been pretty consistent in the last three years or four years, sort of post COVID. But in that they usually meet, I think they are in person meeting is in July where they consider sort of updating the non-FDA approved therapy, pathways, I guess. And they routinely publish updates in either December of that year or I think in the case of this in early 2024 they are not published in late '23. They published in January, early February 2024. So, I have got no reason to think they would do something this month in in November, it could be, we might see something print out in December or it is going to be a January cycle because that's a new, a new trend. So that is the timing of that. We do not have any inside information regarding what they might do to kind of modify update or include our test as part of the treatment pathways.

Okay. That is helpful.

And then on the pharmacogenomics, one of the peer diagnostic companies had a non-coverage decision from a commercial pair. Can you elaborate if there is any impact to ID genetics from that? And then, you know, can you talk a little bit about if there were further pressures from the, you know, managed care organizations and pairs in the diagnostic space, where do you think you have the most defensibility in your current reimbursement that you're getting paid, right?

Oh, sure. Yes. We did know that Puneet and it is a small impact for us. We are not under contract with that payer. So, our payments are less consistent. I would assume pure companies are so not a big impact on us right now. As it relates to strategies on reimbursement, you know, it is, we same strategy, we really just have done across the board here continuing to generate evidence and continuing to educate and show support for tests and show the clinical utility. And you know, that is the pharmacogenomic test has tremendous clinical utility. It is a bit unfortunate pit that the cost of a patient not being managed on an effective drug is not, is not borne by the payer. You know, the cost of somebody with depression not being on the right med is born by their family and their employer. Unfortunately. And so, one can suppose then that makes the insurance companies ambivalent as to the actual patient outcome. But for us, very minimal impact, and something we will just have to keep following and keep tracking.

Okay, just wanted to follow up on that. Do you expect commercial reimbursement for cutaneous melanoma? Where do you stand with that effort and any other test that where you are pursuing commercial beyond the Advanced Diagnostic Laboratory Test rates that you have?

Yeah, we are pursuing commercial coverage of all of our tests. Yes, that is correct. Certainly, continue to push on that and that's part of our data generation effort as well as our presentation and payer interaction strategy.

Thank you.

We have our next question on the line from Paul Knight with KeyBanc. Please go ahead.

Thanks Frank. Thanks Derek. Question, Frank on, you know, 39% revenue growth rate selling, general, and administrative expense only up 13% cost of goods sold kind of flat percentage of revenue, are we kind of plateauing now where you want to be with this selling, general, and administrative effort or roll out? I should say.

Yeah, I think, I think the way I've characterized in the past, we, I think we've grown into our profit and loss, you know, it's, we've worked hard to be prudent on expenses and we've worked hard to get to cash flow break even and profitability. The reality is it; you need a certain scale to do that. So, we are pleased with it. We have been able to do that with, with a smaller scale than, and have many other companies. So, we will continue to manage those expense categories carefully and work to continue to grow the top line. But, you know, to leverage that profit and loss and grow the expense categories at a lower rate than revenue would grow overall.

What's the rate that you see research and development having to grow? Derek or Frank? And same thing with selling, general, and administrative, is selling, general, and administrative going to be still kind of a double-digit type grower.

I think that, I think selling, general, and administrative, so where does research and development need to be? I do not know Paul, we would like to have, you know, in a common size profit and loss and a sort of a mature view of things. We, you know, we would like to have 10% or 15% available for research and development. Although, the limits are there is, you know, being able to deploy that, and it is not as simple as just going out and deciding we are going to do it. You know, there are hurdles there just in terms of resources internally from a personnel, and a capacity perspective. But I think double digit growth in selling, general, and administrative really depends on what we see with our sales force efforts there. And on the derm side, we are fairly close to right size. There's certainly room to take some territories and add territories here and there just as we see some territories getting kind of over full. But that is really where that growth comes, from a pure a part of, from a G and A part of that category. You know, certainly much lower growth. It is the S part where we have seen growth and it is the part that we think is important to continue to drive that attractive top line revenue growth.

Okay, thanks.

Thank you. We now have Subbu Nambi with Guggenheim Securities. Your line is open.

Good afternoon. This is Ricky on for Subbu at Guggenheim. Thanks for taking our question. Could you provide us with some color on what the competitive landscape looks like right now for DecisionDx-Melanoma. In light of the new data that has been presented by SkylineDx recently, especially given they have partnered with Quest and Tempus to sell the test. Thank you.

That's an excellent question. So just to provide context for the rest of the audience here, so Skyline has been marketing their test since I think what Frank maybe summer of 2020 I think is when they announced the commercial availability in the US. And well, we have always talked about competition. We expect that that is healthy for patient care. We have not seen traction over the last four years, that has been meaningful. As you mentioned, they, I guess there was announcement earlier this year that they had partnered with Tempus and Quest has some kind of a license for that. We do not hear much information in the field about that. Now, the recent study you talked about is interesting. That was a study that was designed to prove if the, if their test could achieve a less than 5% Sentinel lymph node positivity rate, which is important because for a number of years, I want to say two decades plus NCC and other guidelines have used the threshold of 5% to say, hey, if you have a likelihood of having more or less than a 5% chance you'll be sent a lymph node positive, which means you find even one Melanoma cell in that sentinel lymph node, then you probably should avoid that procedure. If you have a 5% to 10% risk, it sort of is in that discuss and consider range. And if you have more than 10% then we recommend that you consider doing it. So, the less than 5% is a very important public cup point. Their study that was presented, which was skipped over a little bit in the press is their low-risk group came in at 7.1%. So certainly, well above the 5% threshold. And so, from our perspective, that is not unexpected. In fact, there was a publication in late 2022 that I think evaluated both the published data for our test DecisionDx-Melanoma and their test. And what it, and what that study demonstrated was that based upon published data at that point in time, if you look at the majority Melanomas who are in that sort of 5% to 10% question range, which we would call T1 T2 Melanomas, our test was able to consistently identify patients that we said we were low risk below that 5% threshold, whereas the skyline test was right about that. So, they did not appear to offer anything more than AJCC staging based upon that paper.

And this study here that was presented a couple weeks ago that you were alluding to came in at 7.1%. So not necessarily very favorable from a patient care perspective in terms of what that means going forward, I guess we'll have to wait and see if clinicians are comfortable using an alternative test to DecisionDx-Melanoma that provides a 7.1% chance of node positivity in low-risk patients versus the Castle test, which studies show are below that 5% threshold.

Thank you.

We now have Catherine Schulte with Baird. Please go ahead when you are ready.

Hey, everyone. This is [Tom Peterson] on for Catherine. Apologies if I repeat something from earlier in the call, I was jumping between a few calls this afternoon, but I guess maybe just one question for me on IDgenetix, you know, independent of the private payer medical policy update last week, I guess. How are you thinking at a high level about the pace of investment in the IDgenetix business, you know, in the latter part of this year and into 2025.

Frank.

Thanks.

Thanks there. I appreciate that. Yes, we are continuing, we will continue to be very measured in terms of how we invest there. That is, as you are aware that the average selling price there are different than, than the rest of our portfolio. And so, we will be very cautious about how hard we hit the pedal there. It is as I noted earlier. Well, I am sorry. It sounds like you, you might have had to jump from another call. But as I noted earlier, we, it is an important test. It is a very important category. It is an important patient that needs the benefit of the test. And the commercial insurance companies at any rate are not valuing it as such and so very difficult on the reimbursement landscape. So, we will be measured, and we will be thoughtful, and we will make sure that we get the appropriate return on investment for the sales effort we put forward there.

Thanks, and maybe just one quick follow up there. You know, for the previously issued 2025 profitability guidance. Can you just remind us, you know, what should we be thinking about overall positive net cash flow from operating activities in 2025 on a four year basis? Or you just kind of expecting quarterly net cash flow in 2025 to be positive at some point? Thanks.

A full year basis. We have said we will be operating adjusted operating cash flow positive on the full year on a full year basis for 2025. And the primary adjustment there is non-cash stock-based compensation expense.

Got it. Thank you.

Of course.

Thank you.

We now have Mark Massaro with BTIG. Your line is open.

Hey, this is from [inaudible], thanks for taking the questions. I will just keep it to one actually. So just to know the test, I know we are sort of on an undetermined clock. Do you just have any color to share on timing? And your general sense of how they are prioritizing SCC review, whether we should be hearing from them in the front half or the back half of 2025. And I just wanted to confirm that in the absence of hearing from them, you will continue to get paid on SCC in the interim. Thanks.

So, I can fill up with that one here. So, maybe the most important question first, which is that Novitos did complete under a review in the second, first quarter of 2022 in which they indicated to us that this was a test that make me that met Medicare's reason was the necessity guidelines. And we have been a covered test since I think the first claim was submitted in April of 2022 and that continues through today. So, we are a cover test which is appropriate, given the evidence that was reviewed, and which has only gotten stronger since then, in terms of any updates on timing or thoughts. There is really not an opportunity for direct feedback. So, we can't update a whole lot there except to say that we did go ahead and update our guidance to reflect an assumption that we thought we would maintain payment of the SCC test through the end of this year.

But in terms of projecting, you know, early part of next year, late next year, I think we don't have any good way to rely on that, which is unfortunate, of course, for all of us. Right.

Right. Understood.

Thanks for taking the question.

Thank you. I would now like to hand it back to the founder, President, and Chief Executive Officer Derek for some final remarks.

This concludes our third quarter, 2024 earnings call.

Thank you again for joining us today and for your continued interest in Castle Biosciences.