CareDx, Inc (CDNA) Q1 2016 Earnings Report, Transcript and Summary

Welcome to the CareDx First Quarter 2016 Financial Results Conference Call. At this time, all participants are in a listen-only mode. Following management’s prepared remarks, we’ll hold a Q&A session to ask questions at that time. [Operator Instructions] As a reminder, this conference call is being recorded today May 6, 2016. I would now like to turn the conference call over to Mark Klausner, Investor Relations. Please go ahead.

Thank you for participating in today’s call. Joining me from CareDx are Peter Maag, President and Chief Executive Officer; and Charles Constanti, Chief Financial Officer. Earlier today, CareDx released financial statements for the quarter ended March 31, 2016. The release is currently available on the company’s website, 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 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 descriptions of the risks and uncertainties associated with our business, please see our filings with the Securities and Exchange Commission. CareDx disclaims any intention or obligation except as required by law to update or revise any financial projections or forward-looking statements whether because of new information, future events, or otherwise. This conference call contains time sensitive information and is accurate only as of the live broadcast today, May 6, 2016. In addition, on today’s call, we will refer to various non-GAAP financial measures in which we exclude certain items from our US GAAP financial results. We believe that in order to properly understand our short-term and long-term financial trends, investors may wish to review these measures as a supplement to financial performance measures determined in accordance with US GAAP. Please refer to today’s press release announcing our first quarter 2016 results for a reconciliation of these non-GAAP performance measures to our US GAAP financial results. I will now turn the call over to Peter.

Thanks, Mark. Good morning everyone. I would like to begin with a patient-focused snippet as we do on all of our calls. As we are expanding our reach into the pre-transplant arena, we can’t tell, but be sensitive to all information around the pre-to post-transplant continuum. The availability of donors continues to be the key challenge in transplantation. According to the National Kidney Foundation, in January this year, there are 122,000 people waiting for life-saving organ transplant in the US alone. Of these, 100,000 await kidney transplants. The median wait time for an individual’s first kidney transplant is 3.6 years. I think it goes out to everybody that agrees to be an organ donor. I am now going to provide a summary of our recent highlights, then update you on our clinical initiatives. I’ll then ask Charles to dive deeper into the financials for the first quarter and our guidance for 2016. And then we look forward to your questions. Along our vision to build a transplantation-focused diagnostic company, we drive our strategy through three objectives: buildout presence and expertise through our core product AlloMap and Olerup SSP; create growth momentum through our launch products AlloSure and QTYPE; and accelerate further through product menu expansions and innovative patient management initiatives. In the first quarter, we provided approximately 3,400 AlloMap patients’ results. North American AlloMap test patients results volume grew 10% quarter over the previous year and on a global basis, which includes the results from our Strasbourg Lab grew 8% over the prior year. Going forward, we intend to primarily report on North American volume growth. We continue to be pleased with the underlying trends in testing. Revenue of $6.6 million was flat versus the fourth quarter, reflecting a continued lag in collections. I am disappointed about the conversion of all the test to revenue, but we have identified the issues and have been putting plans in place to address them. Now, moving on to an exciting event that happened just after the quarter. On April 14, we have completed our acquisition Allenex, creating an international transplant focused diagnostic company. By combining our leading product portfolios, transplant expertise and infrastructure, we have increased our critical mass as a company and positioned ourselves as a leader across the pre-to post-transplant continuum. With CareDx and Allenex, we have put two organizations together that greatly complement each other. Together, we apply and master the important technologies in the molecular diagnostics field that impact clinical decision-making. Collectively, we have two platforms. We have a platform for continued innovation with our CLIA Lab and also a platform for providing distributed diagnostics. We will utilize the strength of both platforms in our partnerships with the roughly 500 key transplant centers around the world. Our combined organization will have a direct presence in the US and Europe, supported by a broad and well-established global distributor network. CareDx now has two substantial core products that are leaders in the respective field. CareDx AlloMap is a gene expression based heart transplant surveillance testing service. Out of the roughly 130 heart transplant centers in the US, AlloMap was used in a 121 during the last 12 months. As of the end of the first quarter, there were 64 centers with established AlloMap protocols consistent with the previous quarter. We are excited to have 41 centers that are receiving AlloMap variability scores and we have now our web portal established at 63 centers, which provides the first platform of interaction and is potentially a bridgehead for future data exchange. Our second core product is Olerup SSP. Olerup SSP can be described as a best in class TCR-based HLA typing kit. About 60% of the roughly 500 labs globally that perform HLA testing use Olerup HLA testing kit. As we continue to build our presence in the market, we intend to standardize on Olerup global brand name for all of our pre-transplant product. AlloMap and Olerup SSP are both leaders in their respective fields and will provide baseline revenue for the organization going forward. In addition to these core products, we also have two products nearing launch that we are very excited about. Our focal point as an organization is working towards the commercialization of AlloSure, our donor-derived cell-free DNA surveillance solution to be clinically validated for kidney transplant initially. AlloSure is a clinical grade next-generation sequencing tests to a certain organ injury and focuses on post-transplant management. In our pre-transplant franchise Olerup, we will commercialize Q-type in the second half of this year. Q-type is a robust and easy-to-use alternative for rapid HLA typing via real-time PCR. With Q-type, we link the outstanding reputation and quality of Olerup SSP with an enhanced resolution and quick turnaround time demanded by our labs. Next week we will get additional customer input at the European Immunogenetics and Histocompatibility Conference. We are excited to have a speaker from a leading US organ procurement organization Gift of Hope present compelling data using our Q-type 11 kits on the Roche LightCycler platform. As this instrument is readily available in many transplant centers, it is a good springboard for wide adoption. We will also continue to drive forward with our partnership with HIMSS to develop Q-type of proprietary QPCR platform. This is in line with our broader strategy to partner with leading instrument manufacturers as we are focused on being a solution provider that improves patient outcome. Now I'll move on to discuss the growing body of clinical data in support of our products. Last week we had a significant presence at the annual meeting of The International Society for Heart & Lung Transplantation in Washington DC. A total of eight clinical abstracts featuring CareDx technology were presented including the initial analysis of cell-free DNA from the Outcomes AlloMap Registry, the OAR study in heart transplantations undergoing surveillance for each action. Additional data from the OAR, AlloMap Registry was presented by clinicians showing that infections and cancers are more often than rejection in long-term surveillance and that increases in AlloMap scores may indicate onset of a new episode of CMD infection. This new information generates further interest in opportunities for clinician to interpret and analyze AlloMap in patient management including patient stratification. For example, how to identify patients for which immune suppressive therapy can be further minimized or who are at the risk of CMV infection. We sponsored a launch symposium on the current and future application of genomics and transplantation that was very well attended. The symposium was chaired by Dr. Jon Kobashigawa of Cedars-Sinai and Dr. Kiran Khush of the Stanford University Medical Center. It was great to see that CareDx is positioned as the leader with AlloMap in the field of currently available biomarkers and a leader in new a promising cell-free DNA applications and transplantation. Now further onto our clinical activities, we continue to enroll patients in the DART trial and observational study designed to demonstrate both the clinical validity of cell-free DNA in detecting rejection in kidney allograft recipients and see correlation of cell-free DNA through renal function estimated from serum creatinine. There were 360 patients enrolled as of March 31, up from 200 at the fourth quarter in 14 transplantation centers, up from 12 reported in the fourth quarter. To date, these centers have already collected over 1,000 samples and associated clinical data. We continue to plan to deliver a first analysis of DART in the first half of this year and to begin a clinical trial for ROSE in the second half of this year. The focus of ROSE will be to demonstrate clinical utility and support reimbursement in the Medicare population. Medicare reimbursement is important since 90% of kidney transplantations are covered by Medicare for at least three year post-transplant. Enrollment continues to grow in the Outcomes AlloMap Registry study or OAR at the end of the first quarter, we had obtained almost 3,800 samples, up from 3,000 at the end of the fourth quarter from 950 patients, up from about 800 last quarter at 24 centers. We added four more centers in Q1 for a total of 28 OAR centers. Of the 28 OAR centers, 22 are also participating in DOAR associated AlloSure study. At the end of the first quarter, we had obtained almost 1,400 samples, up from 900 at the end of the fourth quarter from 460 patients, up from about 340 last quarter. We added four more centers in Q1 in addition to the 18 centers in the fourth quarter. The long-term outcome data collected will continue to build clinical evidence for the use of AlloMap and the role of AlloSure. As for AlloMap reimbursement, we continue to have positive coverage decisions for most major carriers. As of March 31, 2016, we had been reimbursed for approximately 76% of all AlloMap results delivered in the 12 months ended September 31, 2015. This results from the delay in collections which will be discussed by Charles shortly. AlloMap continues to be broadly reimbursed in comparison to other high-value molecular diagnostic offerings. I will now turn the call over to Charles to review our financial highlights and guidance for the year.

Thank you Peter, we completed the acquisition of Allenex on April 14. In Q2, we will consolidate and include Allenex from that date going forward. The Q1 2016 results that we are discussing today are CareDx on its own. Starting with revenue, in the first quarter, revenue was $6.6 million, down 9% from the first quarter of 2015. AlloMap test volumes grew 8% year over year, while test volume was up to related AlloMap revenue is down year over year and sequentially from the fourth quarter of 2015. This is a similar trend to the results we reported in Q4, 2015. A continued delay in collections has impacted Q1 revenue recognized on a cash basis. This slowdown in collection momentum came about when we transitioned collections in-house from an outsourced model in the second half of last year. We have also seen some slowdown in collections from commercial payers related to the transition from a miscellaneous code to our CPT code. To increase collections momentum, we are in the process of bringing in a team of trained temporary collections people. We are also adding new hires to the collection team. Collections are top priority. Cost of testing in the first quarter was $2.8 million, compared to $2.7 million in the first quarter of 2015, an increase of 2.3%. R&D expense was $3.2 million in the first quarter, compared to $1.4 million in the first quarter of 2015. Higher R&D expenses were expected as we continue to develop our cell-free DNA program that ramped up last year. Sales and marketing expenses for the first quarter were $1.7 million, compared to $2 million in the prior year and the decrease reflects a reduction in discretionary marketing spending. G&A expenses were $5.7 million in the quarter, an increase of $3 million from $2.7 million last year. This includes $2.3 million of costs for the acquisition of Allenex that was completed in April. The remainder of the increase reflects an increase in costs for legal, consultants and personnel. Other expense was $2.9 million, up from $54,000 in Q1 last year, and includes financing charges connected with a debt arrangement. A loan was not made under this arrangement. Our first quarter 2016 net loss was $9.8 million, compared to a net loss of $2.3 million for the same quarter of 2015. Earnings per share was a loss of $0.81 in Q1 of 2016, compared with a loss of $0.19 for Q1 last year. We have begun to use non-GAAP financial measures internally and in reporting to you as well. Please see the GAAP to non-GAAP reconciliation included in our earnings release for Q1. Our non-GAAP measures exclude the impact of stock-based compensation, changes in estimated fair value of contingent consideration, costs involved with completing the Allenex acquisition and certain financing charges. In Q2, we expect to further exclude the impacts of purchase accounting adjustments, related tax effects, and the mark-to-market of warrants. We believe that this will help with our discussions of our core operating performance. The non-GAAP net loss for the first quarter was $4.4 million or a loss of $0.37 per share, compared with a non-GAAP net loss of $2.2 million or $0.19 per share last year. The increase in the non-GAAP net loss reflects higher R&D expenses for the development of our cell-free DNA program. Turning to the balance sheet, at the end of the quarter, we had $23.8 million in cash and cash equivalents, compared to $29.9 million as of December 31, 2015. The use of cash reflects the net loss for the quarter, which included acquisition related costs. For those of you who've been following Allenex, today Allenex publicly reported its first quarter 2016 results in Sweden. The Allenex results were reported in Swedish krona, using international financial accounting standards. We expect to file combined Q1 pro forma results, including Allenex results converted to US dollars and based on US GAAP towards the end of May. Turning to guidance, for the full year 2016, we expect revenue to grow by low to mid-single digits on a pro forma basis, assuming that the Allenex acquisition closed at the beginning of 2016. However, reported results will only include Allenex results subsequent to the close of the acquisition that occurred on April 14. We expect reported revenue for 2016 to be in the range of 40 million to 42 million. I'll turn the call back to Peter for closing comments.

In the beginning of 2016, we've built a lot of momentum at CareDx. We are now a combined company and organization that’s brought together great talent, great products and great ideas. We believe that with the clinical application of genomic information and the focus on a patient centric longitudinal view on outcomes, we will make a significant contribution to a medical field with continued great unmet need. With that, we’d now like to open the call up to questions. Operator?

[Operator Instructions] And our first question comes from the line of Bill Quirk from Piper Jaffray. Your line is now open.

Great. Thanks and good morning, everyone. I guess first question is just help us think a little bit about some of the changes that you have put in place with respect to the internal collections department, Peter, thank you for detailing some of the changes there. Do you have a timeline for when we might start to see your reported revenue kind of more closely follow the overall volume for AlloMap?

Bill, thank you so much for the question. Collections is a top priority and I’m very glad that Charles has come on board and make that a priority for the organization. This will take some time. This is not going to be happening within a quarter or so. I think we will see working through that backlog all the way up to until the end of the year. Charles, did you want to give more color?

Yes. So I would say two principal areas where we will focus and we are focusing directly and that’s, one is having the group appropriately staffed and we do need, I’m going to say, an immediate ramp at least for some period of time in order to really gain momentum on the catch-up of collections and secondarily go deeper and I want to say the 80-20 rule of being very focused on those accounts where they are going to generate the most cash quickly and bring focus to more rapid delivery. As Peter mentioned, it will take some time to clear all the backlog or catch up with the collections, but I feel confident that we haven’t seen things that are indicative that these are uncollectible amounts, so it’s a matter of now really getting down and delivering and collecting on the cash.

Okay, understood. And then presumably one of the longer term reasons for bringing your billings department in-house is that you have some leverage here over time, although obviously you have some incremental cost here in the near term, so can you help us just think about kind of the yin and the yang here of what the additional spend might be versus what some of the longer term P&L benefits would be.

Yes, there is a year-over-year impact of bringing it in-house. The cost of the group is several hundred thousand or so dollars. The cost of the hedge are not really particularly high cost per person cost, so they will all see some short term increment in the cost, but I don’t think it will be particularly significant to our results.

And long term strategically, Bill, that’s absolutely correct that we believe with the launch of AlloSure and having other products coming down the pipeline to have control over that billing and collection process links together with the reimbursement process with the Managed Care contracting providers is absolutely a strategic component in being a successful molecular diagnostic test. I would consider this right now the ripples of a handover which has been going on for way too long, but with Charles being onboard now and the focus of the organization making collection is a top priority. I feel good about our plans going forward.

Okay, very good. And then just a competitive question, if I may. How are you thinking about the competitive dynamic within kidney? Obviously there is another molecular company out there, it looks like they have had a little bit of success in terms of getting some of the transplant centers into kind of beta user-ship or clinical trial user-ship and so just maybe help us think a little bit about the competitive dynamics. Thank you.

Bill, I welcome competition. I think this is one of the problems of AlloMap always has been that we are the single and sole product. So I think let the best solution win. I think we have an amazing clinical trial ongoing with the DART study in 14 leading kidney transplant centers. We are collecting samples and events that is hard to replicate. This will build the foundation for the organization of having clinical samples together, having blood samples together with clinical results, well annotated sample sets. So we can use this basis for providing future surveillance solution. But this field is attractive and it will attract others to be operating in that field which we see just a confirmation of our strategy of focusing on the highest cost patient in the healthcare system and providing surveillance solutions that is driving better outcomes. So I think this is just a confirmation of our strategy that we see other companies also thinking about entering the field.

Got it. Thanks guys.

Thank you. Our next question comes from the line of Dan Leonard from Leerink Partners. Your line is now open.

Thank you. Peter, could you give us any update on your discussions with Medicare on AlloSure and whether or not you still think there might be any path for you to get paid for AlloSure under some sort of a coverage with evidence development program prior to the Roche results reading out?

Dan, thank you very much. I think that’s an excellent question. We have an amazing foundation of data already today based on the heart data, based on the initial kidney data, but the reimbursement discussion with Palmetto will be really centered around the initial first analysis of DART. I think that is very critical for us to achieve a conversation with them around coverage and the data development. We think that this coverage under data development program is well suited for AllSure because it is somewhat defined patient population with a long term focus on improvement of outcomes which really aligns the objective of the coverage under data development program together with the objectives of the company. So I am very positive that we have an open ear here. On the other hand it will focus on the quality of the clinical results of the first analysis on DART and I think as soon as we have that we will further engage with Palmetto.

Okay, got it. And then my follow-up question, can you talk about the growth rates between those 41 centers that have adapted to the AlloMap variability score. Are they meaningfully different in terms of AlloMap volume growth versus those who haven’t? Is there any distinction to be noticed there and anything to learning from that?

Dan, that’s a great question. I think what we are is that having that established and keep in mind that we only launched this in October and so the patients that are under the AlloMap variability score will typically since they are one to two years post-transplant will have received one or two AlloMap scores or AlloMap variability scores. So we are still early in the adoption. What we have learned in these 41 centers that protocol adherence is absolutely the key for driving further AlloMap utilization and AlloMap variability gives us this opportunity to go back into the center and engage with them and saying why do you not get AlloMap variability scores because you haven’t adhered to the frequency in order to get the variability score. So this is a great engagement tool. We do see a slight uptick in the centers, but I don’t think that commenting on it yet would be - it’s just too early for us to really make a correlation.

Okay, understood. Thank you.

That concludes our question-and-answer session. Now I will turn the call back over to Peter Maag for closing remarks.

Well, thank you very much for joining us today. I very much appreciate your time and having a good Friday. Thank you.