CareDx, Inc (CDNA) Q2 2015 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen. And welcome to today’s Second Quarter Financial Results Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. [Operator Instructions] As a reminder, this conference is being recorded. I would like to introduce your host for today’s conference, Ms. Lynn Pieper with Investor Relations. Ma’am, you may begin.

Thank you. Thank you for participating in today’s call. Joining me from CareDx are Peter Maag, President and Chief Executive Officer; and Ken Ludlum, Chief Financial Officer. Earlier today, CareDx released financial results for the quarter ended June 30, 2015. The release is currently available on the company’s website at www.caredx.com. Before we begin, I’d like to remind you that management will make statements during this call that include forward-looking statements within the meaning of federal securities laws, which are made pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. Any statements contained in this call that are not statements of historical facts should be deemed to be forward-looking statements. All forward-looking statements, including without limitation, our examination of historical operating trends and our future financial expectations are based upon our current estimates and various assumptions. These statements involve material risks and uncertainties that could cause actual results or events to materially differ from those anticipated or implied by these forward-looking statements. Accordingly, you should not place undue reliance on these statements. For a list and description of the risks and uncertainties associated with our business, please see our filings with the Securities and Exchange Commission. CareDx disclaims any intention or obligation except as required by law to update or revise any financial projections or forward-looking statements whether because of new information, future events, or otherwise. This conference call contains time-sensitive information and is accurate only as of the live broadcast today, August 10, 2015. With that, I’ll turn the call over to Peter Maag. Peter?

Thanks, Lynn. Good afternoon, everyone. As we have done our previous quarterly calls, I’d like to start this update with a patient story. Many of you may have seen recent news on the double-hand transplantation, eight year-old, Zion Harvey. Zion was an ideal candidate for a hand transplant due to his previous kidney transplant. I encourage you to look up Zion’s story and watch the videos about his experience online. Zion’s care is provided by the transplant program at Children’s Hospital of Philadelphia. It is for patients like Zion, that we at CareDx come to work every day. This call marks one-year since we completed our IPO, we are proud of the progress that we are making towards our milestones. In particular, we are advancing the utility of cell free-DNA as a biomarker in organ transplantation, and moving cell free-DNA more and more to the center of our attention. Accordingly, I would like to start this call by covering the recent highlights in our cell free-DNA pipeline and clinical development. I’ll next cover the updates in our AlloMap business, where our focus continues to be increasing patient access to AlloMap as a surveillance tool in heart transplantation. Ken will cover the financials for the second quarter and our guidance for 2015. And then, we look forward to your questions. Before we go into those specific updates, I’d like to reiterate our three strategic objectives for the year. Number one, develop cell free-DNA tests in transplantation; number two, increase the utilization of AlloMap; and three, add momentum through realizing inorganic growth opportunities. Before moving to the pipeline, let me touch on our second quarter financials. Total revenue was $7.1 million in the second quarter of 2015. AlloMap test volume reached a record-level in the quarter and continues to be a strong foundation for our business. In the quarter, we increased R&D and clinical expenses according to the previously outlined objective to develop new transplant surveillance solutions. These additional expenses were mainly driven by planned increases to our headcount, which now include 84 full-time employees versus 55 at the IPO, and secondarily by anticipated clinical trial costs, as we ramp-up our cell free-DNA program. I’m pleased to the progress we have made towards the milestones we set for the development of our cell free-DNA program. Earlier this year, we executed against our objective that we had outlined during the IPO road-show. We were able to leverage our existing sample database in heart to establish the proof-of-concept of cell free-DNA in transplantation and demonstrate the correlation with organ rejection. This data highlighted at symposia during ISHLT and ATC, reconfirmed cell free-DNA as a biomarker for rejection. We are now moving ahead with the development of an analytically-validated assay available through our CLIA lab. We have set year-end 2015, as our target for delivery and the team is executing well against that milestone. We have also made good progress our DART trial. As a reminder, this is an observational study designed to demonstrate the clinical performance characteristic of cell free-DNA in detecting clinical and sub-clinical rejection in kidney allograft recipients. The study is also designed to demonstrate the correlation of circulating cell free-DNA to renal function using both serum creatinine levels and estimated GFR. In the first phase of the DART study we expect to enroll 200 patients in 6 to 10 centers, and collect patient blood samples over a period of 18 months. As planned, we are proud to share that we have conducted side initiation visits at six transplant centers as of June 30, 2015. The participating centers and key opinion leaders are some of the leading doctors and transplant institutions in the country. They include Dr. Poejo [ph] at Cleveland Clinic, Dr. Bromberg at University of Maryland, Dr. Hariharan at University of Pittsburgh Medical Center, Dr. Bloom at University of Pennsylvania, Dr. Matas at University of Minnesota, and Dr. Fischbach at Dallas Nephrology. As is our practice with all clinical activities, we plan to provide updates on center and patient numbers on future calls. We are on track to deliver an interim readout in the first-half of next year with the timing primarily driven by the number of patient samples that are associated with clinical events, especially rejection. Following the interim analysis of DART 1 study, we plan to begin the second phase DART 2, a clinical utility trial in the second-half of 2016. These milestones are consistent with previous communications and we continue to be on track. With the size of the kidney transplant surveillance market estimated at $1 billion. We are obviously very excited about the potential for a cell free-DNA kidney transplant surveillance testing solution. As we are developing cell free-DNA solutions, we are also building capabilities that allow us to significantly impact the management of patients. It takes a village, not only at the transplant centers, but also for us as a company to provide novel surveillance solutions. In this context, you will hear us and especially our CSO, John Sninsky, talking about shaping an ecosystem. As a first example, let me talk about our patient test results portal. We began communicating clinical information via secure and HIPAA compliant internet connections through the CareDx web portal for client institution. Being in some of the top hundred leading medical institutions in the U.S. and building communication links that allow for instant interaction is valuable for future patient management activities. The success of this tool has encouraged us to further expand our Internet portal in the future. The Department of Health and Human Service decision last year to amend the CLIA regulation enables laboratories to provide direct patient access to completed laboratory test reports. As a small dedicated company, we see this as an opportunity to innovate and be part of improvements in the overall healthcare delivery system. As a second example to the ecosystem, we recently announced a new relationship with DNAnexus, a leader in cloud-based genome informatics and data management. This collaboration will enable us to stay at the forefront of the evolving molecular data revolution in clinical diagnostics. The volume of data derived from next-generation sequencing technology is immense. In addition, the demands of analyzing, storing, retrieving and presenting that data, necessitates high-quality scalable computing platforms. We believe that the collaboration with DNAnexus will put CareDx in a unique position, because it will allow our bioinformatics team to develop solutions that deliver patient results in an effective and cost efficient manner. The third example to the ecosystem, we also began a collaboration with Horizon Discovery Group, which is important since it help us to define reference standards in the evolving field of cell-free DNA. We have learnt from the noninvasive prenatal testing companies that there are difficulties when describing performance characteristics of diagnostic tests. This is also true in the field of transplantation. There are tests in transportation that make uniform interpretation difficult, because they greatly differ from one lab to the other. With Horizon, we will have an approach available through a reference standard that allows comparability. Our Internet portal and recently announced relationships with DNAnexus and Horizon highlight our approach to develop a best-in-class transplant diagnostics information ecosystem. And there’s more to come. Our investment in digital capabilities and high quality information will remain a cornerstone of our corporate innovation strategy. Apart from DART, we have two more clinical studies underway, our Outcomes AlloMap Registry study or OAR, and our cell-free DNA Outcomes AlloMap Registry or D-OAR. Starting with OAR, we continue to see growing enrollment. More than 1,700 samples from 548 patients enrolled in the study were received from 20 centers as of June 30. This is up from 1,300 samples at the end of first quarter of 2015. The long-term outcome data collected will continue to build clinical evidence for the use of AlloMap. We see this not only as a long-term commitment to the field, but also an invaluable source for future scientific insight generation. We continue to make cell-free DNA available for heart clinicians as a research-use only test in combination with AlloMap through our D-OAR registry. D-OAR has been launched in 13 centers for the 135 patients enrolled and 252 samples collected as of June 30. Both the number of samples collected and the patients enrolled nearly doubled in the quarter. This effort continues to support the evidence generation of cell-free DNA in transplantation. Now, turning to AlloMap, our surveillance solution for heart transplant recipients, we continue to see good volume growth in the second quarter. AlloMap was used for heart transplantations more than 3,250 times a record-level, representing an increase of 8% over the second quarter of 2014. Our focus is on increasing AlloMap adoption, which provides the foundation for growth for our business. Out of the 130 heart transplant centers in the U.S., AlloMap was used in 115 during the last 12 months. As of the end of the second quarter, there were 60 centers with established AlloMap protocols up from 58 in the previous quarter. I am upbeat by the early progress we are making with our new commercial strategy which coordinates AlloMap patient customer engagement, drive the establishment and adherence to protocols and supports transplant centers in optimizing their workflow. Following the appointment of Josh DeFonzo in the commercial leadership role, we have divided the territories in the - into East and West, and have hired two experienced managers to direct the surround sound system selling process in transplant centers. We are making this progress through several new initiatives. The first is stakeholder engagement. This encompasses patient and healthcare professional engagement. Tactics include patient advisory boards and a newly formed visiting clinician program. Also we focus on protocol development, the main focus here is to continue to expand the utility of AlloMap and how it is used in post-transplant surveillance. The next growth driver relates to improving workflow. Earlier, we mentioned the web portal which is a great way to digitize user experience and improve the ease with which clinicians order, patients undergo, and patient results are received. Another important initiative centers around clinical data and education. With continued efforts like OAR, D-OAR and Investigator-Initiated Research, we will continue to increase supporting clinical data on AlloMap. Last, but not least, we have targeted product development. Now, this is exciting. Our team is preparing for the release of AlloMap variability as an additional tool for heart transplant clinician. This is a particularly exciting area for patients that are in the years two to five years post-transplant. AlloMap variability which is available from four AlloMap test results within a 24-month period will help clinicians with patient risk stratification. Early data suggests that patients with higher score variability tend to have poorer outcome. We believe that this will further enhance our heart transplant surveillance offering. As you know, we believe the total addressable market for AlloMap in the U.S. is approximately $100 million. Patients in the two to five year segment represent about $40 million U.S. of the market, a segment that we are serving at approximately 30% thus far. We will be introducing this concept to interested centers at the Heart Failure Society of America meeting in National Harbor, Maryland this September. As we have always said, we believe a center-by-center approach is necessary to make material changes in the way transplant centers monitor and support their patients. With the organization that we are building in the field, and application of the right initiative at each center, I’m confident that we have the commercial infrastructure to drive future growth in heart transplantation. The third quarter represented a good start. On the reimbursement front, we continue to have positive coverage decisions from all the major carriers. As of June 30, 2015, we had been reimbursed for approximately 80% of all AlloMap results delivered in the 12-month ended December 31, 2014. AlloMap continues to be broadly reimbursed in comparison to other high value molecular diagnostic offerings. We expect reimbursement to remain in this range going forward. As you may recall, we announced earlier this year that the American Medical Association included AlloMap in its recommendation for a test-specific Category I CPT code, demonstrating that an additional independent organization has reviewed AlloMap and has deemed an unique CPT code is warranted. The effective date for the CPT 1 code should be either January 2016 or January 2017 depending on how CMS interprets the anticipated PAMA regulations that are not yet finalized. We share the expectation of industry experts, that a change in Medicare reimbursement from current levels in either crosswalk or gap tool scenarios is unlikely. We recently resumed marketing responsibility for AlloMap in Canada from LifeLabs, and were approved by the Ontario Ministry of Health for reimbursement coverage of AlloMap at $3,600 million, under the out-of-country reimbursement program. While, this is a positive outcome, as more patients now have access to AlloMap, we continue to expect only modest contribution of ex-U.S. sales in 2015. Let me summarize my part today with our upcoming milestones. Our first milestone rollout of AlloMap variability September 2015, second milestone being the cell-free DNA availability through CareDx CLIA lab at December 2015, and the interim analysis of the DART 1 study in the first-half of 2016. I will now turn the call over to Ken to review our financial highlights and to provide guidance for the year.

Thanks Peter. Hi everybody, as you heard, revenue in the second quarter was $7.1 million up 5% from the second quarter of 2014. As Peter noted, we had record AlloMap volume in the quarter. However, revenues grew slower than AlloMap volume. This is a result of a few quarterly fluctuating factors. Last quarter, we had the opposite scenario where revenue growth exceeded volume growth for the quarter. In the second quarter, there was a dip in the mix of Medicare versus non-Medicare test volume. We expect that the higher AlloMap volume overall in Q2 will turn into revenue in the second-half of 2015, with our high reimbursement rates, but quarter fluctuations may continue. On July 1, we brought the reimbursement billing process in-house here at CareDx. We expect this to reduce the overall cost of our reimbursement effort and should increase effectiveness, as we will now have direct ownership of and direct control over the reimbursement process ourselves. As we build out CareDx, we see this reimbursement capability as core for a leading molecular diagnostics company. Cost of testing in the second quarter was $2.5 million, compared to $2.4 million in the second quarter of last year. This was up 4%, so the increase was generally in line with the higher AlloMap volume. R&D expense was $2.5 million in the second quarter, compared to $800,000 in the second quarter of 2014. This increase was primarily due to the headcount related expenses, cell-free DNA expenses, and increased clinical trial expense during the quarter. Sales and marketing expenses in the second quarter were also $2.5 million, compared to $1.6 million in the second quarter of last year. This is related to increased headcount in consulting expenses and increase in the marketing program, such as physician forums, speaker programs, and advertising and other marketing expenses. G&A expenses were $2.3 million essentially flat compared to Q2 of 2014 and lower than last quarter’s expenses, as we get over the start-up cost of being public and also year-end audit and legal fees. In the second quarter of 2015, our net loss was $3.2 million, compared to a profit of 900,000 for the same quarter in 2014. Basic and diluted loss per share, up $0.27 in the quarter, compared with positive earnings per share in the year ago quarter. Remember, in the second quarter of 2014, we acquired ImmuMetrix, which resulted in a one-time tax benefit of $1.5 million, which swung earnings into positive territory. Shares outstanding for the year’s quarter were 11.8 million. Turning to balance sheet, at the end of the second quarter, we had $36.9 million in cash and cash equivalents versus $39 million at March 30, 2015. The decline in cash of $2 million on the balance sheet is in line with our cash projections in our P&L. We filed an S3 shelf filing this morning, which is standard practice one-year after going public. We continue to expect our full-year 2015 revenue to be in the same range of $20 million to $30 million, as we announced at the end - at the beginning of the year. Peter?

I’m delighted by the progress we made throughout the first-half of this year, as we moved towards advancing our mission to improve patient outcomes in transplant care. We look forward to updating you on our progress. With that, I’d now like to open the call up to questions. Operator?

[Operator Instructions] One moment for our first question. Our first question comes from Mr. Bill Quirk with Piper Jaffray.

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

.:

Okay, all right. That’s very helpful. And then just to expand maybe a little bit upon the AlloMap variability product, and then, I know you certainly talked about this in the past in terms of the predictive power that multiple results can give. Just that we have our notes correctly, was that - did you say forecast over, was that 12 or 18 months?

Forecast over 24 month.

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

Yes. We’ll do that in September, yes, we have ongoing efforts gathering input from key opinion leaders and talking about variability with these centers. Really the formal launch will be, so to speak, will be in September at the Heart Failure Society of America Meeting. Think of us as right now doing this in a one-on-one kind of conversation setting, while in September, we think of this as a more formal established process.

Okay. Very good. Thanks, guys.

Thank you. Our next question comes from Mr. Dan Leonard with Leerink.

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

No. I’m very upbeat about putting a team in place that builds the plan and the processes going forward. We communicated in the past 15% to 20% AlloMap growth rate and with the right team and the right processes in place, we believe that this is achievable going forward. There is still a lot of untapped potential. And so think of us as getting back to these growth rates in a relatively short order, if we have the right team and the process in place.

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

Yes. The AlloMap score in itself is an FDA regulated and clear to test. So the variability is, we provide as part of a clinical consultation alongside an AlloMap test as centers one to two opt-in into that process. And so for those centers that will be opting into the process will receive a second sheet, where we detailed the AlloMap score alongside of AlloMap variability. So it’s really the secondary process, because centers will need to opt in. But once that is opted in, you’ll see the AlloMap score and the multiple AlloMap score over time matched with the variability score for the last four scores, which give you a standard deviation of these scores, which will be indicative, if you compare that to publications that are provided on variability in terms of space and stratification.

Okay.

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

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

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

Got it. Thank you.

Thank you. Our next question comes from Nicholas Jansen with Raymond James.

Hi, guys. This is Bilal [ph] in for Nick.

Hi, Bilal.

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

Yes. I think, we highlighted a few times this bioinformatics area for the company as really the core in the future. If you see the - what comes out of the sequencing analyzers and then to get translated into patient result, really, but it’s very important is that you have a strong bioinformatics machine. But think of us as also partnering with institutions that allow us to have direct-to-patient communication in the midterm. That’s what we reported on the patient portal. And there are numerous associations out there. For example, we partner with the Heart Brothers Foundation in Boston, a patient organization that is focused on heart transplantations that allows us to communicate. So really, think of this is a very broad ecosystem that we are trying to build and we continue to have collaborations alongside.

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

Absolutely. I think that has been always our plan to have DART 1 centers role into DART 2 centers, reducing the timeline to recruitment. And you’ll see actually DART 1 centers continue to increase from the 6 to the 10, because we see that as a unique entry point into collaborating with these centers.

Great. Thanks, guys.

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

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