Castle Biosciences Inc (CSTL) 2021 Q3 法說會逐字稿

Good afternoon, and welcome to Castle Biosciences Third Quarter 2021 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 now like to turn the call over to Camilla Zuckero, Executive Director, Investor Relations and Corporate Communications. Please go ahead.

Thank you, operator. Good afternoon, everyone. Welcome to Castle Biosciences' Third Quarter 2021 Financial Results Conference Call. Joining me today is 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 8, 2021. 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 3 weeks.

Before we begin, I would like to remind you that some of the information discussed today may contain projections or other forward-looking statements regarding future events or the future financial performance of the company, including expectations and assumptions related to the impact of the COVID-19 pandemic and are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995.

Forward-looking statements are based upon current expectations and involve inherent risks and uncertainties, and there can be no assurances that the 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 quarterly report on Form 10-Q for the quarter ended September 30, 2021, and in the company's other documents and reports 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 financial metrics such as adjusted revenue and adjusted gross margin, which are non-GAAP financial measures. We believe these metrics provide useful supplemental information in assessing our revenue and cash flow performance. Reconciliations of these non-GAAP financial measures to the most directly comparable GAAP 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. Thank you for joining us today for Castle's Third Quarter 2021 Earnings Call. We are pleased to discuss with you this afternoon another strong quarter, including a 54% increase in revenue and a 71% increase in adjusted revenue year-over-year despite the lingering impacts of decreased cutaneous melanoma diagnoses of 16% compared to historical pre-COVID numbers in 2019.

In August, we raised our 2021 revenue guidance to $89 million to $93 million. We are pleased to say that we are on track to meet this increased range. As I just noted, third quarter 2021 cutaneous melanoma diagnoses were down 16% compared to the pre-COVID third quarter 2019, but it is too soon to know the impact on fourth quarter diagnoses.

We can tell you that October was solid, with trends similar to third quarter trends. But I would note that all else being equal, fourth quarter volume is typically flat to slightly lower than 3Q due to the holidays and fewer working days. However, we may see some positive offsets to these factors in the fourth quarter from successes in our growth initiatives, including our expanded commercial team and recent publications of evidence supporting our test. I'll discuss this in more detail in a moment.

You may recall from the onset of the pandemic, we made the strategic decision to accelerate investments in our growth initiatives, including expanding our commercial team as well as our R&D programs, both for our commercial and pipeline tests. We made these decisions as we believe they would ensure we remain in a position to impact patient care, ensure our resiliency and continue creating value for stockholders in the near and long term.

Further, we identified 2 additional areas of strategic growth that we believe complement our existing business and align with our focus of addressing indications with unmet clinical needs to improve patient care. The first was our acquisition of the Myriad MyPath Laboratory, LLC and the associated myPath Melanoma test. And more recently, the pending acquisition of Cernostics.

We are seeing excellent progress across these initiatives, which I will discuss today, followed by Frank providing additional detail on our financial results. As always, it is important to begin with a special thank you to the Castle team. I am proud of their commitment to patients and their consistent execution, which enabled us to deliver another strong quarter and further our position as the leader in dermatologic diagnostics.

We delivered 7,727 total gene expression profile test reports in the third quarter of 2021 compared to 4,779 in the same period of 2020. This includes 5,505 DecisionDx-Melanoma test reports delivered, 25% growth compared to 2020 and 33% growth compared to 2019. Despite cutaneous melanoma diagnoses remaining below historical 2019 levels by approximately 16% based upon our announced third-party data.

As we've discussed, we expanded our sales team to around 60 to 65 dermatology facing representatives in the second quarter of 2021, and they completed training and were on the ground beginning on July 1. With this expansion, each of our sales representatives is now promoting and educating on all 3 of our proprietary skin cancer test offerings, utilizing our existing sales channels and calling on dermatologists as their primary call point.

The team grew their experience and territory knowledge in the third quarter, and we expect them to continue toward optimal productivity, which we believe takes about 2 quarters.

During the quarter, approximately 90% of our sales calls were in person, which is consistent with what we saw in the second quarter of 2021. Importantly, we have significantly increased our in-person group peer-to-peer programs compared to the third quarter of 2020, and these continue to be widely attended. We believe this reinforces the high value that our tests provide to clinicians and their patients.

At the beginning of the pandemic, we actively searched for methods to increase our engagement with clinicians to counteract the limited in-person access to offices. We determined that accelerating our plans to integrate our ordering process with the electronic health record systems, our customers use would be beneficial for a variety of reasons, even once offices reopen.

We began integrating our ordering pros with electronic medical records platforms on an individual practice-by-practice basis earlier last year. And last week, we announced our agreement to establish an interface with Modernizing Medicine's electronic health record system, EMA. Our interface with this system is expected to streamline the ordering process. The EMA platform has been ranked #1 by dermatologists for the past 8 years by Black Book.

The interface is designed to enable dermatologic clinicians to order Castle's DecisionDx skin cancer tests and then receive and review results from directly within a patient's electronic medical record. We expect our interface with EMA to be complete by the end of this year.

As we look ahead, we have seen that our market is promotionally responsive. So we expect that our sales force expansion efforts along with our increasing expansive body of evidence supporting our tests, we have 33 peer-reviewed publications now for DecisionDx-Melanoma alone should position us well for growth across our suite of dermatologic tests in 2022.

Turning to our DecisionDx-SCC test for patients diagnosed with cutaneous squamous cell carcinoma and one or more risk factors, we delivered 934 reports in the third quarter of 2021. We first introduced this test to the market on August 31, 2020, and early adoption of this test continues to exceed our expectations.

We have discussed the value of leveraging our established dermatologic commercial channels for SCC as well as for our comprehensive diagnostic offering. And for the 9 months ended September 30, 2021, approximately 76% of clinicians who order DecisionDx-SCC also order DecisionDx-Melanoma during that same time period.

As we have previously discussed, the technical dossier for our DecisionDx-SCC test was submitted for MolDX review to Palmetto and Noridian in the second quarter of 2020, and we received confirmation of acceptance of the submission as being complete in the third quarter of 2020. As of today the Palmetto MolDX program has not posted a second open common period for 2021. Given the timing, we believe it's likely that the next open comment for MolDX LCDs will be in the first quarter of 2022.

Moving on to our comprehensive diagnostic offering for difficult-to-diagnose melanocytic lesions. We delivered 913 test reports for MyPath Melanoma and DecisionDx DiffDx Melanoma combined for the third quarter of 2021. You may recall that a few years ago, we began development of our DiffDx melanoma test to address this unmet medical need to provide improved clarity around difficult-to-diagnose lesions, in addition to developing a test with high sensitivity and specificity, our target product profile included the [criteria] of having both a low technical failure rate and a low intermediate test result rate.

That is being able to report out a clinically actionable, likely benign or likely malignant, test results on more than 95% of orders. We succeeded in achieved our target product profile. And as I said earlier, as part of our strategic growth plan, we identified 2 additional areas we believe complement our existing business and align with our focus of addressing indications with unmet clinical need with the acquisition of myPath Melanoma being the first.

We determined that housing both gene expression profile tests for use in difficult to diagnose lesions and providing structure to the ordering process could enable us to serve more patients with the strongest evidence and highest clinically actionable test results possible. So the question is, did we accomplish our objectives or not? And the answer is yes, and let me explain.

We presented data that I'll review here at the American Society of Dermatopathology Annual Meeting last month. This study reviewed clinical order data from June 3, 2021, through August 31, 2021. Essentially, the first 3 months that we were able to offer both myPath Melanoma and DiffDx Melanoma under the comprehensive diagnostic offering workflow.

In just this time period alone, we're able to increase the reporting of actionable test results of either likely benign or likely malignant, for 78% from myPath Melanoma alone to 99% when used in conjunction with DiffDx-Melanoma in a comprehensive diagnostic offering workflow, thus, enhancing diagnostic confidence and the delivery of clinically actionable results to health care providers and their patients.

In addition, we saw significant growth in our CDO volume during the third quarter. And with myPath being covered under existing MolDX LCD, we're able to significantly advance or pull forward reimbursement timing on our CDO business compared to DiffDx-Melanoma alone.

The second area of strategic growth we identified that complements our existing business and aligns with our focus of addressing indications of unmet clinical need is the pending acquisition of Cernostics and its TissueCypher platform, including the first-to-market TissueCypher Barrett's esophagus test.

We expect to close the deal before the end of 2021. We are excited about the potential our combined teams have to accelerate our impact on patient care and address the unmet clinical need in Barrett's esophagus. The TissueCypher test is designed to objectively and accurately predict progression from non-dysplastic indefinite for dysplasia and low-grade dysplasia in Barrett's esophagus, to high-grade dysplasia or esophageal cancer. This is critical as esophageal cancer carries a high mortality rate with 5-year survival rates under 20%.

Also because intervention in patients with Barrett's esophagus is esophageal eradication therapy, which includes ablation and other interventions, has been proven to reduce progression to cancer. But unfortunately, the instance of esophageal cancer is increasing at one of the fastest rates of all cancers in the U.S. So we need new clinical tools to reverse this growth trend in the diagnosis of esophageal cancer.

So what do we like about Cernostics and what are the factors that influenced our decision to acquire them at this time? TissueCypher for Barrett's esophagus serves an indication of high clinical need by improving risk stratification for patients that have been diagnosed with non-dysplastic, indefinite for dysplasia and low-grade dysplasia Barrett's esophagus.

In other words, it parallels the risk stratification solutions we offer with our DecisionDx-Melanoma, DecisionDx-SCC and DecisionDx-UM test. This is also a large market of patients that fall within the current intended use equating to 384,000 patients on an annual basis. And when assuming the current Medicare rate, the current TissueCypher intended use population alone expands our in-market estimated U.S. total addressable market by approximately $1 billion.

We also like the GI market in general. With approximately 13,000 or so targetable clinicians, this market is of similar size to the skin cancer dermatology-focused market. And we have demonstrated that we know how to effectively educate and promote to a customer base of this size.

And finally, we are adding another innovative technology platform to our R&D and clinical laboratory groups, expanding beyond multi-analyte gene expression profile tests to multi-analyte spatial biology tests. For our near term, we see TissueCypher and the GI market as a parallel to our experiences in the dermatology market.

Despite on having any fields team presence, Cernostics has been successful in generating interest and usage from a number of GIs. We expect to build an initial sales group of 13 to 15 representatives in addition to MSLs and internal sales associates.

Before I close, I am excited to share with you that we published our inaugural ESG report today. Castle was founded on the guiding principle of doing the right thing at the right time. Although we are still early in our journey as a public company, our focus on ESG factors began with our guiding principle in 2008.

We laid the cornerstones of integrity, transparency, collaboration and innovation. We believe building a strong ESG program that is relevant to our core business and our stakeholders is essential for success. The launch of this inaugural report marks an important milestone in our journey and demonstrates our desire to move cash-flow forward and progress our ESG goals.

Additionally, it reinforces our commitment to improve the lives of patients positively impact our communities and ensure Castle remains a great place for our valued employees to learn and grow.

I will now turn the call over to Frank, who will provide additional detail relating to our financial results. Frank?

Thank you, Derek, and good afternoon, everyone. With a strong third quarter, Castle continues to deliver on our stakeholder commitments and made considerable progress on our growth initiatives. In the third quarter of 2021, we delivered total revenue of $23.5 million, a 54% increase over the third quarter of 2020.

Overall, the increased revenues reflect higher report volumes for both DecisionDx-Melanoma and DecisionDx Uveal Melanoma and higher per unit rates, partially offset by positive revenue adjustments related to tests delivered in prior periods. The higher per unit rates reflect our expanded Medicare LCD for our DecisionDx-Melanoma test that went into effect in December of 2020, as well as a higher Medicare rate for DecisionDx Uveal Melanoma that went into effect at the beginning of this year.

Our adjusted revenue, excluding the effects of revenue adjustments related to tests delivered in prior periods was $23.6 million, a 71% increase over the third quarter of 2020.

Our gross margin during the third quarter was 78% compared to 84% in the third quarter of 2020. Our adjusted gross margin excluding effects of intangible asset amortization and revenue associated with test reports delivered in prior periods was 81% compared to the 82% for the same period of 2020.

Our total operating expenses, including cost of sales for the quarter ended September 30, 2021, were $35.3 million compared to $19.1 million for the same period last year. The largest driver of the increase was higher SG&A which increased by $10.9 million for the 3 months ended September 30, 2021, compared to the same period in 2020, attributable in large part to higher personnel costs associated with our increased headcount, which includes salaries, bonuses, benefits and stock maintain.

These higher personnel costs were primarily attributable to the expansion of our sales and marketing teams as well as administrative support functions. The remainder of the increase in SG&A was primarily associated with the return of in-person and hybrid conferences, in-person peer-to-peer promotional programs and training events as well as a partial return to more normalized travel costs.

R&D expense increased by $4.4 million in the third quarter of '21 compared to 2020 and was primarily associated with increases in personnel costs attributable to additional headcount to manage and run our clinical studies and increases in other expenses associated with increased clinical study activity. As we continue to support our commercial products as well as our pipeline initiatives, and continue to expand our body of evidence, we expect our R&D expenses to increase further.

Total noncash stock-based compensation expense, which is allocate on cost of sales, R&D and SG&A, totaled $5.2 million for the quarter ended September 30, 2021, compared to $2.1 million for the quarter ended September 30, 2020. We expect further increases in stock-based compensation expense in future periods reflecting both higher post-IPO stock option valuations as well as additional awards outstanding due to growth in our headcount.

Our net loss for the third quarter of 2021 was $11.8 million compared to a net loss of $4.6 million for the third quarter of 2020. Diluted loss per share attributable to common stockholders for the third quarter of 2021 was $0.47 compared to a loss of $0.23 for the third quarter of 2020.

Operating cash flow for the 9 months ended September 30, 2021, was negative $16.2 million compared to a positive $10.3 million for the same period in 2020 and was primarily attributable to the net loss as well as the recoupment of a portion of the Medicare advanced payment and increases in working capital requirements, partially offset by noncash charges.

You'll recall that the prior year operating cash flow benefited from the receipt of $8.3 million associated with the Medicare Advance payment. This year, beginning in April, recruitment of the advance payment began. As of September 30, 2021, $5.3 million has been applied to the balance in recruitment. Investing cash flows during the 9 months ended September 30, 2021, were primarily associated with $33 million payment for the acquisition of myPath Melanoma.

Finally, we had cash and cash equivalents at September 30, 2021, of $363 million and no debt.

I'll now turn the call back over to Derek.

Thank you, Frank. As always, none of our achievements are possible without the hard work and strong execution of the Castle team. whose dedication enables us to deliver on our commitments to our stakeholders and importantly, continue to impact patient care.

Our progress on our growth initiatives in the third quarter, including expansion of our dermatologic commercial team and our R&D programs, both for our commercial and pipeline tests positions us well for continued value creation.

This concludes our remarks. Thank you for your interest in Castle. Operator, we are now ready for Q&A.

(Operator Instructions) The first question comes from Sung Ji Nam with BTIG.

Maybe, Derek, could you talk about now -- it's been a year, right, since we've seen delays in terms of melanoma diagnosis. Are you hearing anything from the ground in terms of the potential impact that's been having as far as the stages of diagnosis or whatnot that you might be hearing?

I don't -- we have heard a number of informal comments that I think will be publicly available shortly about what offices are seeing around the U.S. I don't think we're going to see any kind of increase dramatically in terms of people diagnosed with melanoma that's already spread either regionally or distantly so-called Stage 3 or 4.

What we are seeing at -- in a couple of different meetings this fall is that things like the thickness of a tumor called Breslow thickness in melanoma appears to be creeping up, which to us says that patients are not being diagnosed necessarily ancillary to other health care visits by their primary care physicians, for example, but they're actually only going in because a mole has gotten big enough for their concern that could be melanoma. And I think that's where the risk of the patient population is.

So my summary, I think, is that since the impact of COVID pushed so many people to be comfortable with telehealth or just prescription renewals over the phone in the last 18 months is that it's those 20% of the patients that weren't being seen in person and having that mole on the back of their neck or their side of their ear be picked up, ancillary those are the ones that are being missed. And when they're coming in, our perception now is that they are coming in with a little more worsened a little more adverse melanoma in terms of thickness.

Now what does that mean for Castle. I think one is that, certainly, there are some patients who have very, very thin melanomas, like 0.1 millimeter, 0.2 millimeter stick where we have difficulty generating data showing that we actually add value in tumors that are that thin in terms of the use of our DecisionDx-Melanoma test. There are also patients that are coming in with invasive melanoma.

So a thickness of 0.1, 0.2, 0.3 or thicker who might have gotten diagnosed earlier with what we would call in situ or noninvasive melanoma, which is really just on the epidermal layer of the skin. We don't test those with our tests. So over time, it's our belief that as these patients begin to come back either to see their primary care doctor in person on a more routine basis or work their way into a dermatology practice, we'll be seeing more patients diagnosed who will actually hit the sweet spot of our test, but that hasn't happened at least yet. But it has to happen sometime because melanoma continues to go ahead and progress and evolve.

Got you. That's helpful. And then I just have one follow-up. Are there any updates in terms of your non-skin cancer programs that are underway, if there are any changes in terms of the time line of what you have discussed in the past?

No. We've seen -- I think we discussed this maybe at a conference here in the fall. So we have yet to disclose a couple of our other targets, but all of our programs right now are running ahead of our internal estimate forecast. I believe that what we're seeing is that most of our pipeline programs are being executed at more high research organizations that are community-based versus hospital based, and they seem to have sort of come out of COVID, ready to start new protocols, I guess, you would say, and they're seeing patients. So we don't see any delay in terms of time lines of our earlier estimates earlier this year.

The next question comes from Kyle Mikson with Canaccord.

So I wanted to start with the guidance. If I'm doing the math, it looks like a sequential decline in revenue and total revenue. And so I'm just wondering if you're assuming the same level of third quarter access, like the 90% in-person calls were the same type of melanoma diagnosis trends of 16% below baseline. And I'm just a little bit surprised given the upside the additional reps could provide. So could you talk about maybe some of the conservatism or tempered expectations that you're making in there?

Are you going first, or me?

Yes. Sure, Kyle. So I guess maybe the most important thing is that we begin seeing, I guess, recovery is a funny word. Nice changes in growth trends in sort of the May and June time period, and those carried over quite well for the third quarter and October finished out very strong.

We do know that in November, there are a few working days because of the Thanksgiving holiday as well as in December. I don't want to say we're being overly conservative, but maybe you could put in that respect. But typically speaking, in a non-COVID year, 2016, '17, '18, '19, you would typically see fourth quarter diagnosis of melanoma being flattish to third quarter as part of a normal seasonality.

Now that being said, I do agree with you that we are very pleased with the field force expansion that occurred on July 1 of this year, and it could be that we are being too conservative in hindsight, as you mentioned here. We certainly don't see any negative trends through October, that would cause concern, but we also felt that our guidance was adequate for the rest of the year.

Frank, do you want to comment here or...

I concur.

Okay. That's helpful. I understand. And I noticed in your, I guess, presentation deck that the potential effective LCD for SCC and DiffDx now officially 2023, not a huge surprise there. I'm just wondering if you could talk about the expectations for private payer and commercial payer coverage in '22 for the rest of your tests? And are there any products that are kind of better positioned to receive recoverage sooner than others and maybe just due to the growing portfolio of data or some of the guideline effects as well?

Yes, yes. So it's -- I'll try and tell it apart here a little bit here. One is that given it's already November 8, I think it's highly likely that we will see an open meeting posted by Palmetto and Noridian for the week of Christmas holidays or between Christmas and New Year. So I think the likelihood of obviously a 2021 open (inaudible) meeting analyses, visual that occurring before year-end is unlikely.

So our assumption here is that they must be working towards a first quarter 2022 posting a meeting set which would push by definition out about a year or so between then versus when they could have -- if they absolutely limit of time, churn a draft LCD to a final and formal one. It could have come earlier, certainly, but I think it's better to be upfront conservative than assuming a faster churn.

In terms of coverage on the commercial side of the basis, so we certainly are seeing some revenue coming in for our other newer launch tests, predominantly the DecisionDx-SCC test. And we expect that to go and continue in modest amounts during 2022. I don't think we could expect a guideline change or update in 2022 for squamous cell carcinoma. I think that group meets in the fall, I think, of every year. So I think that will be probably the earliest towards the end of 2022, we would see an update, which wouldn't have much effect on passing that through on the commercial payers.

On the sort of combined diagnostic or comprehensive diagnostic offering, this combined offering of myPath Melanoma and DiffDx melanoma, we did see earlier this year, earlier in 2021, a change in NCCN guidelines that recognize that gene expression profile test that assist in the diagnosis of a difficult-to-diagnose melanocytic lesion are included there.

So we would hope to see some forward movement with some of the payers in 2022 since a number of them put the an NCCN guideline inclusion as sort of the final litmus test to go and pull through from a normal reimbursement trend or coverage. So I think we have expectations for a number of things going forward in 2022 that will hopefully build on our revenue expectations throughout the year.

As it relates to the DecisionDx-Melanoma test, we did see some progress with smaller plans in the second and third quarter of 2021, we would expect that to go ahead and continue as we have additional evidence being published later this year and into next year as well.

Okay. That was very helpful. Let me just ask one quick question before I hop off. It was nice to see the EHR integration news. I was -- I had 2 questions about that. Basically, number one, could you talk about your current electronic ordering rate if you can kind of quantify that or maybe qualify that? And also, I mean, do you plan on expanding to the other kind of ambulatory EHRs like NextGen, Epic and Athena over time?

So you're talking about the integration with Modernizing Medicine and the EMA platform?

Correct. I think Modernizing Medicine has [well-consolidated] base, I'm just wondering about the reps.

Yes. Yes. So one is we haven't disclosed the online ordering in the past. I guess we'll look at that maybe [evident] in the future here. It's a small but important part of the business through our current online ordering portal with physicians who want it electronically. So that's been going on, but I would say that's a less than half of the volume because there are a number of customers who still value fax machines going over with laboratory reports, and that's just how they operate as a practice.

However, that being said, the opportunity to integrate both ordering processes for all of our tests by the way, as well as having reports received through EMA, I think, is very exciting. And throughout 2021, we did test with a number of practices an individual practice by practice solution. And when they were interested in that, we saw them kind of converting business from being facts-based EMA-based ordering. So we expect that over the course of 2022, we will see practices and it could be on a practice level, it could be on an individual clinician level, go from 0% to 100% online ordering through EMA and receive the results.

I believe that's going to reduce the number of times that we might miss appropriate patients because the doctor is kind of busy that day, it's a Friday afternoon. And by the time they go ahead and come back on Monday or Tuesday, they've forgotten, they ordered the test or not. This should make that much easier and smoother from a convenience standpoint. And the fact that we were able to load in all of our test offerings, I think we will expect to see nice lift throughout the year as that becomes more integrated into our customer solutions.

We certainly are entertaining talks with the other minority medical record companies who work with dermatologists, keeping in mind, of course, that we believe that about 90-plus percent of patients with melanoma are initially diagnosed and managed by community-based private practice individuals. So some of the services, I'm thinking about Epic and others who are really have a much more command than hospital-based systems don't really fall into our EMR interest per se. So we are looking forward to kind of seeing the sort of national rollout through Modernizing Medicine, see the impact it has in the business and then going from there.

The next question comes from Thomas Flaten with Lake Street.

I wanted to follow up on a comment both from the prepared remarks and also the press release with respect to the 2 quarters of time to get the sales reps to optimal productivity. I think you had put some caveats around that, Derek, in past calls that it might take longer because of access, et cetera. So are we -- have you seen an acceleration there? So can we expect that they're fully productive by year-end? Or do you think it's 2 quarters from now, so kind of into the first half of next year? I just wanted to clarify that.

Good question. No, I don't think it's going to take a year to have them get up and running. We've had good access, about 90% of our calls have been in person, both second and third quarter, we didn't see worsening through October. So I wouldn't count that as something there.

I do think in hindsight that we had earlier questions during the third quarter, are we sort of seeing an impact of Delta? If we were seeing it, I think it was covered up because of the effectiveness of our new sales force expansion. So my expectation is that we'll hit the ground running with sort of a fully effective expansion sales force at the beginning of the year.

Got it. And then speaking of commercial teams, I believe on the Cernostics call, you had talked about having a team ready to go for January 1. Is that still the plan to support that product commercially?

Yes. Yes. We -- I think interviews are being completed this week. We expect to have offer letters go out and people start during early December. And given the profile of the individuals that we believe will go ahead and come on board at Castle, they nearly all have a really nice structural gastroenterology experience set. So we would hope they hit the ground running post training in the early January time frame. So that remains on track.

And then just a quick one on the atopic dermatitis psoriasis program. You guys had put out the study design in a poster, I think it was a few weeks back. And it sounds like you've set it up as a treatment selection test. But given the noninvasive sampling platform, is there an opportunity to extend that into response monitoring as well? Or how are you guys thinking about combining those 2 opportunities if you are?

I guess you read the poster well, didn't you. I think the first objective is to really look at which biologic or which systemic therapy of patients highly likely to get clearance from. And by clearance, we don't mean partial. We're hoping we end up with that with nearly 100% clearance in our responders, and we expect just the opposite to go ahead and find therapies that this patient is going to have a modest minimal response. So a physician and a patient can really take 6 off the table and put 2 on.

However, as you noted in that poster, there are serial collections over time. And so by response monitoring, we may be able to pick up 3 months in advance, for example, before a patient begins to lose response. I think it's too early to comment on that, but that might be a great value for patient care. And obviously, it creates a better per patient annuity for the company going forward, if, in fact, we can demonstrate that.

The next question comes from Catherine Schulte with Baird.

I guess first just on the expanded sales force. Curious if we could get a little bit more granularity there. How much of the sequential growth came from your new cohort of rated how much more do you think that they could contribute in the fourth quarter?

We don't -- we haven't analyzed those at my level per se. And maybe importantly, is that we had no areas of the country, and we had only 2 dermatology facing representatives with wide out areas. We cover the whole U.S. with bodies. So when we went from 32 dermatology-focused people to rough to the mid-60s, that wasn't sort of covering areas that we hadn't covered before where you could say you had sales of 0 and you went to something. So I don't think we -- we can accurately answer that question with any integrity.

We were quite pleased with seeing the growth in terms of the productivity of the overall sales groups over the course of July, August, September and October. So as I mentioned earlier, too, I think it was Kyle's question. We didn't want to come out and be overly conservative on the fourth quarter here, but we are quite pleased with the triangulation that we were seeing in August, September and October with the expanded sales organization, and that should go and [bleed] just forward quite well in the '22.

Okay. Great. And then can you give us an update on the personalized study, how enrollment is going and when we could get early data there? And then any additional details on the DECIDE study you highlighted in your 10-Q on [S1B] decision-making and outcomes?

Sure. We've seen I don't -- we saw a little slower progress maybe in 2020 and early '21 in terms of centers coming on board. And I think that was largely due to COVID, to be honest, Catherine. Most of the early placements were at sort of academic centers and then of slowed down in terms of the our being contracting for observational studies of our sort. That's been a nice improvement over the last quarter or so.

So I expect to have to see some initial data probably by the -- maybe the end of next year, I think, but that might be aggressive with it. But I think that's a reasonable the number of patients that we could say, hey, here are patients who really benefited from the use of a PD-1 inhibitor who had Stage III disease and here are patients who didn't need it. That would be fantastic to help improve patient selections opposed to saying, "I'm going to wait and watch and nobody gets these therapies because the data is not that strong in terms of efficacy change or they're all going to get it despite a number of patients who wouldn't benefit. So that's our hopeful timing.

You may have seen there was data presented at ESMO, I think by Merck back in late September of this year, September 2021 with the KEYNOTE-716 study that was focused on Stage IIB and IIC patients. So those are people who are (inaudible), but a little thicker in uglier tumors and thinner patients. The data there, as you expect, showed a treatment effect, but it was quite modest.

We presented data at the same conference that Thomas talked about a couple of weeks ago, showing the value of our tests, especially our integrated model in Stage IIB and IIC and can identify people who'd really likely not benefit from PD-1 therapy because they have a very, very slow likelihood of metastasizing and we found those who were essentially train-wrecks going forward. So to me, those 2 elements that make it a quite positive story moving into 2022.

As it relates to DECIDE, that's enrolling quite well. I don't think we really had a slowdown in 2021 in terms of enrollment largely because we had centers up and running kind of in the earlier COVID period in 2020. So data on that study that, of course, is looking at patients who are electing to have our test guide a use of a [sentinel] biopsy procedure or not and then tracking those same patients long-term outcomes, which is similar to some other publications we had come out this spring. I mean this fall, we should also be able to see top line data, although it will be preliminary with shorter follow-up time later next year.

The next question comes from Puneet Souda with SVB Leerink.

The first one is really a -- I mean, this has been covered, I'm sure. But in terms of the derm practices, are you seeing anything different today? And let me ask it maybe differently, are you seeing any permanent change in their behavior, how they're interacting with the sales reps in terms of the time that they're allowing the sales rep interaction. Traditionally, that's been more longer in dermatology.

Any type of trend that you're seeing sort of post-COVID that gives you a little bit of pause in this market. I'm just looking in terms of the volumes and the impact that you saw here, we were expecting obviously a little bit stronger pickup -- And just if you could qualify what you're seeing in the market as of currently in November, that would be super helpful.

So on a macro basis, I have not heard of any sort of structural changes or trend changes. Certainly, on a practice-by-practice basis we are aware that as kind of Delta moved through that there were some practices in certain locations that's, you know what, let's go ahead and put off seeing you back in person for another month or 2 until we're comfortable, but that's expected, right, Puneet.

I think I look at sort of our data being able to have 90% of sales calls in person now for 2 quarters running second quarter and third quarter of this year to be interesting. When I compare that to, I guess, what I'm hearing some of our other microdiagnostic peers who were seeing 75%, 40% in-person calls, there's something different about, I think, about Castle and dermatology.

And I want to believe that the fact that we have 3 product offerings that are all highly clinical actionable to dermatologists who are diagnosing early-stage skin cancer, be it melanoma or squamous cell carcinoma is setting us something differently than there's other companies who have [blocker] diagnostic tests but are finding much more resistance towards getting back in person with customers.

So I don't know if I want to perceive that's a Castle difference in terms of the value of our tests and the level of educational value that our representatives bring to an office versus other companies, but it certainly is a dynamic, which is different. So I don't -- I can say from a cash flow standpoint, we aren't seeing some kind of long-term shifting that we're aware of on a macro or systemic basis. It might be happening on a practice-by-practice basis but nothing I can point to nationally and say, this is something to be concerned about going forward.

Got it. And then a question on the Medicare prior quarter adjustment, Frank, how should we think about that going forward? Just wanted to clarify. And in terms of data readouts, given the conference lineup Derek, could you just maybe lay out for us what are some of the things that we ought to watch out over the next couple of months?

Yes. So Puneet, the prior period relates to all payer categories, and we'll continue to see that. It will bounce around. We'll have some positive and some negative. It's -- I think what's important is we've gotten much better at accruing a rate per test that's closer to our actual collection experience. And so the same quarter last year was north of $1 million in this quarter, I think it was $90,000 difference on $24.5 million. So that's a nice improvement there.

But it'll -- as with -- and of course, you obviously see this in the other companies you cover, all the companies are going to have some prior period adjustments from time to time. And we're just -- also, as we said before, if squamous and DiffDx really grow quickly, eventually, we should see some benefit from the appeals process and that might tick up the prior period a little bit.

As it relates to sort of milestone timing in 2022. There are a couple of meetings in the January time period that have shorter abstract submission dates. So that might be something to look at in terms of the milestone of data presentation. AAD this year, I think, is in March, and they offer a late-breaking opportunity that we would hope to have some data go in there as well. So I think around the AAD time period is an area where you would expect to go and see some activity.

The next kind of spring meeting that of importance, so as target marker wise is The American College of Mohs Surgery, ACMS, and that's always kind of late April, early May. ASCO, as you know, was in June, but we really operate in early-stage skin cancer. So we might have activity there, but to be honest, that's not the customer base that we would care about. It's really dermatology for us as a company.

So those are the ones I would line up there earlier that we would expect to have some important data from a penetration driving perspective be presented.

The next question comes from Paul Knight with KeyBanc.

Derek, the Cernostics acquisition, I know you were expecting genetic test coding like today or soon? And anything else on an update with Cernostics?

Yes. What was the -- yes, so there is a draft LC that I think is finalized either today tomorrow, but they're already in the billing article there. So the Cernostics program overall, we really like the gastroenterology channel, I guess, you would say. We really like the TissueCypher test for Barrett's esophagus. As you know, it's -- we think there's around 384,000 patients who are getting endoscopies every year and could be eligible for a TissueCypher test. That's more than our melanoma and our squamous cell carcinoma test potential combined. So we like that from that standpoint.

We also think that over the next couple of years, we'll be able to either find or develop through Cernostics or through our current approach with RNA, some additional tests so that we can turn around in 25 maybe can say, gee, -- just like in dermatology, you went from having a foothold to having 3 or 4 tests and you're perceived by gastroenterologists as being the leader in this kind of GI space. So I think that's our vision to get there.

Now more practically in short term, Cernostics did complete their medical evaluation review with Novitas earlier this year and have been receiving routine payments on all their Medicare claims since that point in time. They do have an established list price on the clinical laboratory fee schedule of [2513].

So we feel like all of the check boxes are there to say, let's go out and help support appropriate use of a test that really has had no commercial effort so far. And if it makes a difference to patient care, we expect to have good solid ordering uptake next year. Although, as we mentioned, we announced the deal last month that our expectation here is that 22 is building revenue in '23 is when we see really accretive add, but we are going to see revenue next year, certainly.

And then Frank and Derek, on the gross margin, it was down a bit sequentially. Anything going on in supply chain and how the spring environment on the lab tech side?

No, Paul. Fortunately, none of our consumables are sitting on a barge off Long Beach right now. We -- most of our consumables come out of Waltham, Mass, and we've had no issues there. And the modest impact on gross margin is really just because of the -- honestly, the success of the 2 new products. We've got almost -- we had over 1,800 almost 1900 test that the majority of which we didn't accrue any revenue for, but we did obviously have to book the cost associated with it. So that's what we're seeing there is just the impact of the number of tests that we're not accruing revenue for.

There are no additional questions waiting at this time. So I'll pass the conference over to Derek Maetzold for closing remarks.

Thank you, operator. This concludes our third quarter 2021 earnings call. Thank you, again, for joining us today and for your continued interest in Castle Biosciences.