Greetings. Welcome to CareDx Fourth Quarter Financial Results Conference Call. At this time all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions] Please note that this conference is being recorded. I’ll now turn the conference over to David Clair. Thank you Mr. Clair, you may begin.

Good afternoon and thank you for joining us today. Earlier today CareDx has released financial results for the quarter-ended December 31, 2018. The release is currently available on the company's website at www.caredx.com. Peter Maag, Chief Executive Officer; and Michael Bell, Chief Financial Officer, will host this afternoon's call. Before we get started, I would like to remind everyone that management will be making statements during this call that include forward-looking statements within the meaning of federal securities laws, which are made pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. Any statements contained in this call that are not statements of historical facts should be deemed to be forward-looking statements. All forward-looking statements, including, without limitation, our examination of historical operating trends, expectations regarding coverage decisions, pricing and enrollment matters and our future financial expectations and results are based upon current estimates and various assumption. These statements involve material risks and uncertainties that could cause actual results to differ materially from those anticipated or implied by these forward-looking statements. Accordingly, you should not place undue reliance on these statements. For a list and descriptions of the risks and uncertainties associated with our business, please see our filings with the Securities and Exchange Commission. CareDx disclaims any intention or obligation except as required by law, to update or revise any financial projections or other forward-looking statements whether because of new information, future events or otherwise. This conference call contains sensitive information and is accurate only as of the live broadcast today, March 6, 2019. This call will also include a discussion of a financial measure that is not calculated in accordance with Generally Accepted Accounting Principles. Reconciliation to the most directly comparable GAAP financial measure may be found in today's earnings release filed with the SEC. I will now turn the call over to Peter.

Thanks, David, and good afternoon everyone. Thank you for joining us. 2018 was a breakout year for CareDx. We recently attended conferences at the ASTS, The American Society of Transplant Surgeons, and at CEoT, Cutting Edge of Transplantation that we heard participants referred to us at the Transplantation Company and express appreciation for our 100% dedication to this field. This recognition as the leader in transplantation has not happened overnight, but comes from building a partnership with the transplant community over 20 years. Just last week, we kicked off Honor the Gift campaign where CareDx is supporting efforts to extend Medicare coverage for medication for transplantation beyond the current three year limit. We believe this cross functional partnership with the support of leading patient and industry associations aligned with our mission to improve long-term patient outcomes. It makes no sense in any healthcare system to transplant patients and then restrict access to immune suppressive medication. Honor the Gift demonstrates our overall commitment to the field of transplant care. I encourage you all to visit honorthegift.org and sign the petition. With many initiatives ongoing, we continue to remain focused on bringing our offerings to patients. We are already the leader in heart and kidney transplant surveillance and with our recent announcement we also blend to be the leader in lung transplant surveillance. This leadership position enables us to achieve our financial goals ahead of schedule in 2018. Total revenues for the year grew 58% to $76.6 million AlloSure, AlloMap and our Products business all contributed to this growth. In the third quarter of 2018, we achieved both adjusted EBITDA profitability and positive operating cash flow a full quarter ahead of our plan. We also made tremendous strides strengthening our balance sheet in the fourth quarter, successfully completing a follow-on offering and…

Thank you, Peter. Turning first to the income statement. Our fourth quarter 2018 testing services revenue increased 119% year-over-year to $18.9 million. The significant growth in testing services revenue was primarily driven by the 4,575 AlloSure patient results we provided in the fourth quarter. Growth also came from the 4,057 AlloMap patient results we provided, which was a 6% increase compared to the prior year quarter and from the January 1 increase in the AlloMap Medicare reimbursement rate from 2,840 to 3,240. Our fourth quarter product revenue increased 24% year-over-year to $4.6 million and as such, total revenue in the fourth quarter of 2018 was $23.5 million, representing an 88% increase compared to the prior year's $12.5 million. For the fourth quarter of 2018, net loss was $3.8 million compared to a net loss of $31.7 million in the same period of 2017. Our net loss per share was $0.09 for the quarter compared to $1.13 in the fourth quarter of 2017. Our fourth quarter net loss included $3 million of expenses associated with the debt repayments in the quarter, partially offset by $1.6 million benefit from the change in estimated fair value of common stock warrants and derivative liabilities. For the fourth quarter 2018, our non-GAAP net income was $0.3 million compared to a non-GAAP net loss of $2.6 million in the same period of 2017. Our non-GAAP net income per share in the fourth quarter of 2018 was $0.01 compared to a loss of $0.09 in the same period of 2017. As a reminder, we defined adjusted EBITDA as non-GAAP net income before interest, income tax, depreciation, amortization, other expense and net income attributable to non-controlling interest. For the fourth quarter of 2018, adjusted EBITDA was a gain of $0.8 million compared to a loss of $2.0 million…

Thank you. At this time, we’ll now be conducting a question-and-answer session. [Operator Instructions] Thank you. Our first question is coming from the line of Bill Quirk with Piper Jaffray. Please proceed with your question.

Great. Thank you, and good afternoon, everybody.

Hi Bill, how are you doing?

Very well, thanks. Very well. So first question is, I guess, Mike certainly appreciate the guidance that you gave. You help us think a little bit about the breakdown between AlloSure, AlloMap as well as the combined HLA business.

Hi Bill. Yes, the guidance $105 million to $107 million revenue, which is a 37% to 40% growth. Basically the way to look at that, I would look at the product revenue of growing sort of 20% or over during the year. AlloMap volume growing mid-single digit and AlloSure more or less doubling in revenue for the year.

Okay, got It. And then yes, Peter, with respect to your comment about the total number of surveillance patients, can you help us think a little bit about obviously the surveillance patients that they sign on for one year or do we have any that that dropped off in a quarter? I guess what I’m asking is for basically the gross add in the quarter versus the end of the year number.

Bill, excellent question. I think we were early in the launch process, I think 3100 surveillance patients, that’s pretty awesome. Especially when we look into the division of these patients, they’re probably 750 patients that are the K-OAR patients in that surveillance patient group. And then there are probably 1200 or so patients that are first year patients and then another 1250 patients that are what we call the maintenance patients. And really these three segments we’ll see continuously growing in the next year with probably K-OAR adding another 250 to 500 patients on the K-OAR side. And then it’s really the question, what’s the mix between first year patient growth and then maintenance patient growth. I think we're still early in the launch, but you see these three different launched growth pockets that we will continue to pursue. And I think it will be exciting to see these three different buckets grow in the year 2019.

Okay. No, that's great color. Thanks very much, Peter. And then last one for me and I'll jump back in the queue. Just help us a little bit about lung, you have the press release recently initiating the study for that. How should we be thinking about timelines around enrollment, study completion, reimbursement, I guess formal, commercial launch of that et cetera.

Yes. When we're thinking about kidney transplantation being the $2 billion market opportunity, I think, the sizing of the opportunity in the $50 million to $100 million range. And I think you were similar to that. It's right for the lung transplant opportunity, but the medical need is very substantial because these patients are very sick. Now we are in the midst of clinical validation, which we'll do on the existing CareDx sample sets and including collaboration in the field. I think this having a reimbursed product within the two year timeframe is an adequate timeframe to think about.

Okay. That's perfect. Thanks, guys.

Next question is from the line of Brandon Couillard with Jefferies. Please proceed with your question.

Thanks. Good afternoon.

Hi, Brandon, welcome to the team.

Thanks. Peter, one of the things you mentioned in your prepared remarks in terms around building the mode around AlloSure was EHR and EMR integration. How much visibility do you have in terms of like the number of centers that have integrated you into – I guess their systems and what impact does that have in terms of ease of ordering?

Yes. And I think we very early still on the EMR integration. I think we can do a lot more in this field. We have started to talk about it as a key driver being part of the workflow and being actually in the electronic medical record, PC as a key opportunity, one on one hand to really have ease of use for the ordering. Secondly, then really driving adherence with the patients. And then thirdly also to just build what you mentioned, the competitive mode. So being part of these EMRs, I think this will be one of the areas of focus for us in 2019 and will continue to update you on this. Right now, I think we are – we have been talking in other settings, that about 10 senders are using us the way that we would like AlloSure to be used. So very early in the adoption curve. And, probably these 10 center types are where we are in the sense of having deep penetration into the workflow.

Helpful. And then K-OAR, when do you expect we might be able to see the first data readout from perhaps the year one cohorting, you think that's something you might be in a position to share with us some of your initial findings by the end of this year?

I think at the end of this year might be a little bit aggressive because we said that once we have concluded with the enrollment of the 1000 patients, so concluded with a 1000 patient enrollment and then follow-up by one year and then doing the data analysis that would probably puts us into the second half of next year to have a good readout. Maybe we get a sneak preview at the ATC next year, but that would be very aggressive. But you know, that's probably how we're thinking about a reporting out on the initial K-OAR.

A couple from Michael in terms of the 2019 guidance. Can you help us with the – what your expectations are for gross margins, both in terms of products and then testing services and then what we should be penciling in for a OpEx for the year?

Yes, Brandon. I think on the gross margin, it's probably going to grow a few percentage points on testing revenue, so roughly around 65%. On the product side, we've seen a bit of a reduction in the gross margins in the last half of this year. I'm sorry, 2018, because of the introduction of TruSight, which was – with a distributor margin. So I would expect the product margins to stay relatively constant in 2019. From the operating expense side, I mentioned on the call that we're really going to be increasing operating expense, because we're growing and where we're scaling the business. I think off a base of Q4 expense, probably on average we'll be adding about $4 million a quarter, which will be increasing throughout the year in 2019.

Super, I’ll jump again in the queue. Thank you.

The next question is from the line of Per Ostlund with Craig-Hallum. Please shoot your question.

Thanks. Good afternoon, guys. Maybe following up to Brandon's question a little bit. In terms of looking at 2019 and really developing the mote around AlloSure and you've talked a lot, you've talked at length about deeper penetration called transplant centers. What are the levers, I guess, that we should be thinking about that you have to pull to really drive that deeper penetration? Is it the EMR? Is it patient care coordinators or liaisons, mobile phlebotomy, is it things like that? And then maybe related to that how key might be at the eventual launch of kidney care, potentially be at really establishing that mote as well?

Well, thank you very much, Per. And you are kind of answering a lot of the – you mentioning, a lot of the things in your fashion. I think it’s all of the above. But what I would add to that is, it is actually going deep in 50 transplant centers in the U.S. this year. So what you’ve been mentioning, EMR integration, making sure they were part of the workflow, maybe adding mobile phlebotomy, having an additional focus on some of the clinical trials and interesting things that we do at transplant – at individual transplant centers. That's what we're going to do in 2019. And having this deep connection into these 50 centers, we'll build our relationship and we'll drive adherence and compliance and we’ll eventually lead to better outcome in these patients. Let's not forget, that we at CareDx to be focused on really driving better long term outcome for these patients. So being infrequently involved with these 50 centers, they'll actually make absolutely the difference for us in 2019.

Okay. That makes sense. And then what about kidney care will that launch in 2019?

I think, Per, this the – heart care concept has been established last year. We are very comfortable with the concept. I think AlloSure in itself has a very long way to go in terms of patient penetration. Adding something to AlloSure ultimately will be our goal. Because I think it will be multi-market modalities that make the difference in these long term outcome patients that we assure that we'll be communicating about our product launches with you in a timely fashion. Right now, our product launches as we mentioned are around AlloSure. Heart with the heart care concept, AlloSure lung, with the clinical validation study and then we have the exciting AlloSeq franchise. So you can probably appreciate that we're – that we were pretty busy and the team is firing on all cylinders.

That's very, very true. Okay, last question for me. K-OAR enrollment has obviously tracked very, very well, like you said, you were 75% of the way toward your original 1,000 patient goal. Now if I heard correctly in the presentation or the symposium at CEoT here a couple of weeks back. It sounded like maybe you were actually going to take that more towards the 1,300 patient level. So A, is that true? And then – and then B is the thinking there that there's just that much demand or is it almost a function of, Hey, let's make sure that we met a 1,000 patients when we account for the fact that – the follow through is, you know, kind of have that 75% level.

I think that's an excellent question and a good observation. I think Jim Yee is the recognized leader in the transplant biomarker field and has been masterminding our landmark clinical trials and publication. And what we've been able to do is, you know, launched with K-OAR, really a change – a sea change by having these centers adopting a standardized protocol in 30 centers and now we have this demand bottom up demand centers that want to join K-OAR, and we just talked about more than 50. Now if you do the 50 centers times, the 30 patient per center, you are probably closer to number that you were mentioning, which I recall. 1,300 I think. So, I think it's important that we continue to build that relationship and the clinical data will follow and these clinical data sets will be more valuable as there are more patients in them. So having 1,500 patients would be great. 1,300 patients is clearly better than a 1,000 and having these longitudinal data sets will be tremendously valuable going forward.

Makes perfect sense. Thank you. Appreciate it.

The next question is from the line of John Hsu with Raymond James. Please proceed with your question.

Good afternoon, Peter and Mike.

Hi, John

Hi, John

Just stay on guidance for a second. Can you talk about, you've obviously talked about a lot of efforts that you had to deepen the mode in 2019 with a potential competition coming, but specifically in that $105 million to $107 million, are you baking in anything specifically for competition that would probably be coming maybe, perhaps later in the year?

Excellent question, Johnny. I think we were coming off a year with 58% top line growth and now we're going into a year with somewhere between 35% and 40% growth. The growth dynamic is tremendous in the organization. Mike was mentioning that we are close in scaling mode. I think if there were to be competition we would probably see them really towards the later end of the year. The key we think to, it's the linchpin in molecular diagnostics. What's the linchpin, it's always reimbursement. And I think reimbursement will really determine the presence of competition, of meaningful competition in the field. And I think our expectations, if there were to be any successful reimbursement, it would probably come in the fourth quarter or so in this year. So, some time to go and for us ample opportunity to grow.

Okay, great.

Mike, do you want to take? Go ahead John.

Okay. So, target reimbursement with private payers, you’ve talked about getting to a critical mass, where you could start to have some discussions. I guess related to that, do you see – do you see any movement and potential benefit on reimbursement in 2019?

John, it’s Mike. We’ll start discussions with some of the key payers, I think in 2019, but it always takes – it always takes a long time to get this private payer reimbursement. So, our expectation in the revenue guidance doesn’t really include any additional contribution from private payers and if that was to come earlier than the end of the year, that would be – that would be an upside for us.

Okay, great. And then just on – can you talk about – it sounds like, gaining reimbursement within a couple of years. Can you just remind us of the steps and maybe incremental investment in 2019, they kind of start moving you – moving you towards that end?

Yes. I think the step would be analytical validation of the test, which I think we have achieved and demonstrated. The second one would be clinical validation and we would aim at lung transplantation given our internal data sets and external collaboration, relatively focused approach. There was recently a clinical validation paper by Valentine from NIH, which gives us confidence to make that available to patients. And maybe, a collaboration with different centers in the U.S. will accelerate some of the clinical validation study. Obviously, then the step for reimbursement, this would be a Medicare reimbursement focused strategy for us, where we would apply for a C-Code, and then would submit the clinical validation papers, that we – in our case will be peer reviewed and a high impact medical journal publications. And that would lead to the dossier that would probably be reviewed, if we’re positive thinking in 2020 and then that lead to reimbursement in 2020 or 2021. That’s kind of the strategy to be laid out on that one.

Great. Thanks for the question.

The next question is from the line of Yi Chen with H.C. Wainwright. Please proceed with your question.

Thank you for taking my questions. My first question is just to clarify. So, by the end of 2019, there will still be 100 transplant centers using AlloSure, but you will simply have a deeper penetration among those centers and have more patients using tests. is that correct?

Yes. What I would try – what I would say is that there is the tremendous buzz around AlloSure maybe, even more amplified by competition coming right now into the field and so there’s tremendous buzz out there. So, I would say there definitely will be more than 100 transplant centers. But even if we were to be at 130, I don’t think it’s critical for our launch success. What’s really critical for us, it’s going deep in the 50. So, while I think our strategy was getting the foot into the doors and as many transplant centers as possible, we then had, placing K-OAR as the next strategic initiative and execution K-OAR was flawless that was awesome. And now in K-OAR, now we go deep into these 50 centers plus other high volume centers and make us part of standard of care. And so I’m not so interested in how many centers are used AlloSure. I’m sure that it’ll continue to grow. That’s really how deeply I’ll be penetrating the 50 transplant centers that’s going to be the key metric of success for us that the organization this year.

Got it. So just to follow up, you mentioned that the 100 centers has 60% volume of the U.S. kidney transplant. So, for those 50 centers, what is the percentage of volume?

It’s a – it’s good, and I was preparing for that question here a little bit and I’m shying away, but I can tell you that one number that probably for our K-OAR site the 50 K-OAR sites that we were talking, this is in the neighborhood about 40% of all kidney transplants performed in these 50 transplant sites. So, the 50 target centers I will not further delve into, because that’s the K-OAR sites are clearly our sites that we focus, but there are other few high volume centers they’d go focusing on as well.

Got it. My final question is, does your 2019 revenue guidance include a consideration of the CMS plan to increase the access for kidney transplant or that could potentially bring additional impact to the top line?

That’s very observing, Yi Chen, I think the key to overall and as far as comment, yesterday and the day before from HHS supporting the increase in transplantation. To give you a bit of a number, there are probably 2000 kidney transplants discarded that could be used if we were to loosen up the burden on bureaucracy. So, these 2000 kidneys that are adherent now today would increase the transplantations about 10%. How much of this will be driven by availability of organs due to the opioid crisis? How much of this will be driven by the increase in living donors? And how much this will be driven by HHS efforts to increase the availability of organs? That’s hard for us to gauge, but it’s all positive, all positive with signs towards transplant increasing. That’s on the backdrop obviously, because a lot of – lot of patients in the U.S. do need continuously need a transplant and the needs, because of diabetes, and other end-stage renal disease drivers is ever increasing for kidney transplantation. So, all these vectors demonstrate that it’s positive for growth in the future and years ahead.

Okay. Thank you.

The next question is coming from the line of Bill Quirk with Piper Jaffray. Please proceed with your question.

Yes, great. Thanks for taking my follow-up. So Peter, I wanted to ask about the total new standing order patients was down sequentially from the third quarter. I’m assuming that was due to the holidays and there’s the seasonal effect. Is that a reasonable assumption and we should see some sort of rebound in the first half of next year?

When we were doing all the math, Bill, it is important to note that there will be patients dropping off after one year. There will be patients that actually are not showing up for their surveillance visits. And so just communicating the ads of new transplant surveillance patient wasn’t the right thing to do in the second and the third year of launch. And so we concentrate on the surveillance patients that we have currently on management, and this will be the number to continuously monitoring going forward. To answer your question more specifically, no, there’s absolutely no reason why we wouldn’t be growing K-OAR patients enrollment, growing first-year patients and then growing maintenance patients. Already, 15% of our volume is roughly attributed to the maintenance patient population that are five years after transplantation. So, we are penetrating this huge number of kidney transplant patients are 180,000 patients already within the first year after launch, which is very, very promising. So no – don’t expect us to slow down on the surveillance patients, but it will be a gradual growth and that's what the team is focused on. This is what we really believe in to change long-term outcomes because if they are surveillance patients we actually interact with them and we can impact their long-term outcome.

Got it. Appreciate all the color. Thanks Peter.

The next question is from the line of John Hsu with Raymond James. Please proceed with your question.

Great. Thanks for the follow-up. So I guess just going back to the – Peter, some of your comments. How do we think about, as you look out into 2019, how do you think about maybe the phasing of revenue in the first half versus the back half. Obviously there was a pretty big acceleration in the back half of last year. So just from a phasing standpoint how are you thinking about that?

Hey John, thank you so much for the question. I don't have a crystal ball. All I can tell you is that I'm coming off from the CEOT conference and it was an amazing task. I mean, it's unbelievable when you see what's currently happening with these opinion leaders. At the American Society of Transplant Surgeons meeting, that was the first time that CareDx really had a substantial presence at that conference and we were very encouraged about the interest of surgeons that traditionally really only focused at one year graft survival and their interest into long-term outcome and how we engage with them. I can't tell you why of all our growth trajectory is beyond the guidance that we provided with you because the team is in a way heads-down and executes on these 50 transplant centers and we'll report an update to you as the quarters progress but this is an exciting time for CareDx. There's a lot of momentum and a, the team is heads-down and continues to increase the mode in these transplant centers.

Great. And if I could sneak one more in. Just going back to Secretary Azar's comments, one other way of improving access, I think, was the study of KidneyX or a price for artificial kidneys. So obviously that would be not necessarily a tailwind for your business. So how do you think about potential timelines associated with that? I fully understand it's probably years away from now.

And John, thank you very much for the question. I would probably put this into the analog of LVAD where we have the heart pump, where there was a lot of promise and a lot of buzz. And then if you were to ask me today, which patient should get an LVAD which ones should be a transplant, I would always go for the transplant. I mean the ability for transplanting patients and the improvement on quality of life and the long-term survival it’s hard as any measure. LVAD stay in for two to three years, heart transplant has mid-term survival for 10 years, so until this technology is really still ready and embraceable I think we'll see a lot of dialysis and we'll see a lot of kidney transplantation. So we are talking about 10 to 15 maybe 20 years until this has a real impact. Now I really hope that there will be other modalities because transplantation is pretty invasive and pretty complex, but I think for us in the next 10 to 15 years, I don't see anything replacing kidney transplant.

Very good, thanks again.

Thank you. At this time I'll turn the floor back to Peter Maag for closing remarks.

Thank you very much all for joining the call. We look forward to updating everyone as we continue to commercialize AlloSure, grow AlloMap and our product business and build on our initial profitability. Thank you very much.

This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.