Greetings and welcome to CareDx Incorporated Fourth Quarter Financial Results Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] Please note this conference call is being recorded. I would now like to turn the conference over to your host, Greg Chodaczek, Managing Director. Thank you. You may begin.

Good afternoon and thank you for joining us today. Earlier today, CareDx released financial results for the quarter and year ended December 31, 2019. 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 the call that include forward-looking statements within the meaning of the 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 fact should be deemed to be forward-looking statements. All forward-looking statements including without limitation, our examination of historical operating trends, expectations regarding coverage decision, pricing and enrollment matters and our future financial expectations and results are based upon current estimates and various assumptions. 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 of the risks and uncertainties associated with our business, please see our filings with the Securities and Exchange Commission. The information provided in this conference call speaks only to the live broadcast today, February 27, 2020. CareDx disclaims any intention or obligation except as required by law to update or revise any information, financial projections or other forward-looking statements whether because of new information, future events or otherwise. This call will also include a discussion of certain financial measures that are not calculated in the 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, Greg, and good afternoon, everyone. I'm pleased to welcome you to the CareDx call reviewing our results for the fourth quarter and full year 2019. Before we dive into the results, I wanted to highlight Robert Montgomery. Many of you may have seen the news flow on Rob, a kidney transplant surgeon who recently received a heart transplant himself. Rob is not only using AlloMap and AlloSure for his heart transplant surveillance, but he will also be speaking at the upcoming CIAD conference and introduce our immune optimization study called Kira [ph]. It is for patients and clinicians like Rob that we at CareDx are coming to work every day. Together with the transplant community, we have built a tremendous platform in transplantation over the last 20 years. Now turning to results. 2019 was a very exciting year for CareDx as continued momentum for our high-value healthcare solutions for transplant patients and caregivers drove robust revenue growth. Our full-year revenue was $127.1 million, representing 66% growth over the prior year and clearly exceeded our most recent guidance range of $124 million to $125 million. For the fourth quarter of 2019, total revenue was $35.8 million, increasing 52% compared to the year-ago quarter. The majority of the growth in the quarter came from our Testing Services revenue, which increased 55%. Product revenue for the quarter was $5.1 million and digital revenue added $1.6 million to the top line. With us again posting positive adjusted EBITDA in the fourth quarter, we feel very comfortable about the execution of our plan to build a powerful platform in transplantation. CareDx has never been stronger. Digging deeper into our Testing Services for the fourth quarter, CareDx provided 14,055 AlloSure kidney and AlloMap heart results to transplant patients in the quarter, growing 63% from the…

Thank you, Peter. Turning first to the income statement. Our fourth quarter of 2019, Testing Services revenue increased 55% year-over-year to $29.1 million. The growth in the fourth quarter Testing Services revenue was primarily driven by AlloSure Kidney patient results, although we did experience a lift in AlloMap Heart testing partly due to transplant centers excitement over HeartCare and the use of surveillance protocols. Our fourth quarter product revenue increased 10% year-over-year to $5.1 million and our digital revenue was $1.6 million. Our gross margins continue to improve year-over-year. For the fourth quarter of 2019, the gross margin was 65% compared to a gross margin of 55% in the same period of 2018. On a sequential basis, the gross margin was down slightly from the third quarter due to fluctuations in our estimated reimbursement rates for AlloSure and AlloMap, which move slightly up or down each quarter. The non-GAAP gross margin for the quarter was 68% compared to 59% in the prior-year quarter. It's worth highlighting that the non-GAAP gross margin for the Testing Services business for the three months ended December 31, 2019 has improved to 76% compared to 66% in the same period of 2018. For the fourth quarter of 2019, net loss was $4.8 million compared to a net loss of $3.8 million in the same period of 2018. Our net loss per share was $0.11 for the quarter compared to a net loss per share of $0.09 in the fourth quarter of 2018. For the fourth quarter of 2019, our non-GAAP net income was $1.6 million compared to a non-GAAP net income of $0.3 million in the same period of 2018. Our non-GAAP net income per share in the fourth quarter of 2019 was $0.04 compared to a non-GAAP net income of $0.01 in the same period of 2018. As a reminder, we define adjusted EBITDA as non-GAAP net income before interest, income tax, depreciation, amortization and other expense. For the fourth quarter of 2019, we recorded our sixth consecutive quarter of positive adjusted EBITDA with a gain of $1.5 million compared to an adjusted EBITDA gain of 0.8 million in the fourth quarter of 2018. Cash and cash equivalents at December 31, 2019 was $38.2 million. We continue to hover around the breakeven mark for net cash used in operating activities using only $1.1 million of operating cash in the fourth quarter. Turning to guidance, we are providing our initial 2020 revenue expectations to reflect the continued growth of our SHOR as well as the other growth drivers outlined by Peter, and as such anticipate $165 million to $168 million revenue for the year. Our guidance doesn't anticipate increased competition and AlloSure, but balances that with the expectation that additional market entrants will accelerate overall patient penetration. We feel very well positioned to continue to lead the field in bringing novel solutions to the transplant clinic. With that, I will open the call for questions.

Thank you. At this time, we'll be conducting a question-and-answer session. [Operator Instructions] Our first question comes from Bill Quirk with Piper Sandler. Please proceed with your question.

Great, thank you and good afternoon, everyone.

Afternoon, Bill, how are you?

Good. First question from me, I guess, with respect to the 30 transplant centers who have incorporated AlloSure Kidney into protocol, can you give us a rough estimate in terms of what they represent with respect to the total market?

So, yes, it's Mike here. Roughly we've focused it down our targets on those centers in the top 100 performing centers, I'd say that 30 it's representing about 20% of the total.

All right, perfect. Thanks, Mike. And then a couple of additional questions here. Mike, I guess, first off, say stay with you. And that is, philosophically thank you for the revenue guidance, but help us think a little bit about some of the puts and takes with respect to operating expenses. Should we expect this to be another big ramp up year given the clinical trials and obviously the entrants of competition? Just help us better understand how to think about the pacing over the course of the year.

Yes, Bill, I would say, last year we had a big ramp-up in sales and marketing expense, particularly in the first half of last year, and we feel on the sales and marketing side now you know where we're pretty much fully fleshed out with the sales force. We'll continue to add to that, but we won't see the huge growth in sales and marketing expense in 2020. So maybe that's increasing something like $1 million a quarter. You're right. On the research and development side, that's probably the area of most investment for us in 2020 and we should see that research and development expense continue to grow throughout the year, similar to how it grew in the last two quarters of 2019.

Okay, got it. And then last one for me and I'll let somebody else jump on. Can you talk a little -- maybe can you expand on your comments with respect to private payers? We certainly caught the Blue Cross Blue Shield of South Carolina decision. How active are you talking to other private payers? And then also, does the guidance or model assume any expansion of coverage? Thank you.

Thank you very much, Bill, for the question. I think the team is focused on engaging private payers. Just as a reminder, 70% to 80% of our patient population are Medicare patients and so private payers are really upside We don't see any -- we don't have modeled into our guidance any significant upside in this year. But the team is continuously working on that, they are doing a great job and we have established relationships with AlloMap, our Heart transplant solution. So there should be some level of uplift on the AlloSure side this year. But we're still thinking that this is very early in the process, about only 5% penetration, we have ample ways to go and only a few centers we have now critical mass to engage with private payers to make sure that they're also covering kidney transplant patients for their surveillance. So our current guidance is not including maybe a little bit of an upside due to private payers and both.

Very good. Thanks, Peter. Thanks, Mike.

Thank you, Bill.

Our next question comes from Brandon Couillard with Jefferies. Please proceed with your question.

Hey, thanks. Good afternoon. Peter, Mike, maybe a bit of a follow-up on Bill's question there. Just talk to us about philosophically how you approached setting guidance for the year in the context of competition and the degree to which the guide handicaps for that dynamic and any numbers you can help us with to understand the approach?

Well, Brandon, thank you very much. I think our guidance continues to be following our AlloSure adoption, that's our key lead for growth in the Company. And here we have seen some linear growth adoption in Transplantation, which we see also if you benchmark us to specialty pharma or other Transplantation products that there is linear adoptions that the solutions are adopted in various transplant centers. We actually started extremely strong into 2020 and we'll be updating guidance as we report on the first quarter again. So as we're thinking into 2020, yes, we have the uncertainty around competition entering the field, but we just only recently learned that probably their commercial launches are delayed to our previous expectations, which is not reflected in our guidance this year again. So no, and there is a balance of competition coming, but also maybe competition expanding our market and increasing the opportunity for accelerated growth in in-patient adoption of surveillance tools for Cell-free DNA and especially AlloSure.

Okay, and I understand that you're consolidating AlloMap and AlloSure volumes on how charge you report now. But just thinking about the Heart business in 2020, would you expect AlloMap to return to that more normalized to mid-single-digit type growth level or do you think AlloMap Heart and or excuse me AlloSure heart and some of the surveillance efforts you're making can maybe push that up a little bit for the year?

I'll let Mike speak to it, but our Heart sizes working who have been working extremely well based on the great combination of AlloMap, our gene expression profiling tool together with our Cell-free DNA testing AlloSure. The short trial is really adopting extremely rapidly. There's so many vendors in the US excited about joining the call. So the Heart franchise has been a bit of a surprise in 2019 and we are starting 2020 with great momentum. Mike, did you want to make a comment?

Yes, thanks, Peter. Yes, Brandon, I'd say more specifically, we still expect the uptake of the surveillance protocols on AlloMap that's been driven by HeartCare. So probably our guidance is expecting low double-digit growth for AlloMap, so higher than the past where we're at this low single digit. So yes, low double-digit growth.

Very good. And then last from me, do you expect any major data readouts for the K-OAR study this year, perhaps at ATC? And any impact on as far as volumes that might be contemplated from that? Thanks.

Brandon, that gives me just put in a black in for the American Journal presentation Publication on ambiguous rejection, which is really pairing the existing K-OAR initial data set of more than 7,000 samples received on K-OAR together with our insight that AlloSure is helpful in the stratification of ambiguous rejection which is incredibly exciting for us because it helps us to not only [indiscernible] our patients, but also put it into context of what we learned on the TCMR the low grade rejection. And so, yep, there will continue to be read out and there is a tremendous wealth of abstract that will be presented at the American Transplant Congress, I think Cell-free DNA and especially AlloSure has been at the forefront of innovation in kidney transplantation and CareDx being the leader, you'll see a lot of outflow of great clinical data not coming -- not only out of care, but also out of all the other clinical studies that we currently have ongoing. So a very exciting year for us on K-OAR.

Very good. Thank you.

Our next question comes from Alex Nowak with Craig-Hallum. Please proceed with your question.

Great. Good afternoon, everyone. Peter, you highlighted a number of studies under consideration at the Analyst Day in January. I'm just curious, have you finalized any of these? Which ones in particular should we be watching? And what is incorporated in the guide for new clinical studies?

Yes and thank you very much. I think the two studies to watch and see us execute against this year are really OKRA, which is the combination of AlloMap and AlloSure together with the iBox solution, which we call KidneyCare and this is a similar effort undergoing combining the K-OAR study now with the OKRA study where we'll have 4,000 patients. We call it the ultimate kidney transplant registry recruiting in more than 50 centers in the United States. We're well advancing on the recruitment on OKRA, and we'll be updating on OKRA in the first quarter call because this is really for us a pivotal clinical trial in the KidneyCare combination. The second one is Kira. I had started the call today, highlighting our efforts in immune suppressive optimization with kidney transplantation. This is a trial which is very exciting. If you think about it, AlloSure is very, very well established already as a rejection monitoring tool, but maybe Kira is pushing us towards immune optimization of kidney transplantation and is demonstrating this in a large-scale study with multi-center engagement will be extremely exciting for the field. And demonstrates CareDx's cutting edge and pushing the envelope because this is the Holy Grail in kidney presentation and CareDx at the forefront. So to just summarize, offline Kira will be at the center, but then you will see SHOR as our heart transplant clinical trial and then ROAR [ph] which is our international trial for Cell-free DNA adoption as tertiary important. Now, I will also put in that we are doing clinical studies on cellular therapies or stem cell, our AlloGene product is extremely promising and we're very excited about that pipeline product and that will be detailed for clinical trials as well.

Okay, great. Understood. And just want to come back on competition and just follow up on Brandon's question. Are you hearing anything from the physicians you work with specifically around either switching or wanting to join your competitors Reggie trial? Just anything that you're hearing that made you want to include competition into the guide at this point. Is there any way to quantify what you're assuming from competition too?

Like I said, I think actually competition has increased the awareness of novel biomarkers in the field of kidney transplantation. So in a way, this is trying -- CareDx has been trailblazing the field and now there are other entrants. And so I think this is raising awareness and I actually think that this will be leading to much bigger market adoption forward. In terms of their very specific comment in individual vendors, yes, we hear other competitors blazing their registries. But we haven't seen any substantial clinical adoption of being real patients without being provided in a clinical setting. So I would say that there is maybe noise out there, but it's incredibly difficult to quantify at this stage, but we feel extremely well positioned with our service offerings on AlloSure and actually being a complete service provider for these transplant centers. So we feel very well positioned.

No, understood. And actually just a follow-up on that last piece there. You did ramp up the patient management team over the past 12 months. I'm just curious, are you seeing any change in patient compliance and how is this benefiting AlloSure, people staying on the AlloSure protocol?

Very good question. No, there are some vendors where we have 99% compliance rate 98% compliance rate; so I think this is a center which is absolutely meeting. And then, we see some compliance rates with 55% which is a huge opportunity, if we are combining that with our patient care management tool. Now overlaying this with maybe our software tool, but with our other offering where it's very convenient to engage patients into a longitudinal clinical trial. I think that would be -- that's very beneficial to CareDx and a huge growth opportunity going forward. So the patient care managers, where we have direct interactions that have by and large experience in managing transplant patients over a long period of time are going to be a pivotal tool of increasing compliance and adherence, not only to the AlloSure regimen and protocol but maybe even for supporting a longitudinal patient management for transplant patients going forward.

Okay, got it. And just last quick question from me. We saw a lung study get published on clinical trials like GOV [ph]. Just where you are you at from developing an AlloSure in lung testing going through the reimbursement process? Thank you.

No. Thank you very much. We'll see submission of lung data is this year into the MolDX program. I think we've not been setting timelines in terms of when lung will be reimbursed. It is somewhat a guarded opportunity but lung AlloSure is available today on a compassionate use program and as these clinical trials read out we'll be submitting to MolDx. This is probably more in terms of our reimbursement a 2021 discussion than relevant for revenues in 2020.

Okay, understood. Thank you. Appreciate it.

Thank you.

Next question comes from Yi Chen with HC Wainwright. Please proceed with your question.

Thank you for taking my question. Just to clarify, the most recent publication AlloSure's ability to differentiate rejection is based on the original AlloSure but not AlloSure 3.0, is that correct?

It is based on AlloSure available at that stage. So it is combined at AlloSure and AlloSure 3.0 depending on which patient was recruited at what stage. I don't think that AlloSure 1.0, 2,0, or 3.0 would have any substantial impact on the level of measurement on donor derived Cell-free DNA.

Okay. So we can assume that the new patients enrolled in the OKRA study will have the AlloSure 3.0 because it's available now?

Yes, no, I think going forward, any patient that's currently tested on AlloSure would receive the latest AlloSure 3.0.

Okay. So we shouldn't expect any significant differences in terms of further improvements of the result by using AlloSure 3.0, right?

Well, the clinical result on the level of donor-derived cell-free DNA level would probably not change, no. I think we are talking here about marginal improvements, but more importantly actually improvements in terms of how we service patient and the patient experience and the center experience with the lowest level of detection and the ability to differentiate TCMR 1A based on the data that we have.

Got it. Regarding AlloSeq cfDNA kit that sold outside the US. Does that revenue get recorded on the Testing line or the Product revenue line?

Hi Yi, it's Mike. Yes, that's the kit, and it will be outside the US. And so yes, when we have revenue for that we'll start including that in our Product line. So the Product line will be both pre- and post-transplant and it will be for the kit business not the US Testing Service business.

Got it. Do you expect any significant growth for sales outside of unit -- outside the US?

Well, a lot of our strategy on the Product side and the launch of these products is to enable us to expand outside the US. I think when we look at our Product business last year in 2019, the growth was overall 10% and in our guidance we are looking at the growth now for the product business of around 20%. So that's coming from the new product launches. And again, most of the AlloSeq Cell-free DNA is outside the US. So some of that growth coming from out of the US.

Got it. Thank you.

We have reached the end of the question-and-answer session. At this time, I'd like to turn the call back over to Peter Maag for closing comments.

Well, I'll keep this short. Thank you very much for joining this call and I'm looking very much forward to soon update you about our first quarter results. So thank you very much. Talk to you soon.

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