Good day and welcome to the CareDx Incorporated First Quarter Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions] After today’s presentation there will be an opportunity to ask questions. Please note, this event is being recorded. I would now like to turn the conference over to Greg Chodaczek. Please go ahead.

Thank you. Good afternoon and thank you for joining us today. Earlier today, CareDx released financial results for the quarter ending March 31, 2020. 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 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 decisions, pricing and enrollment matters, and our future financial expectation 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 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, April 30, 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. Peter?

Thanks, Greg, and good afternoon, everyone. I’m pleased to welcome you to the CareDx call to review our results for the first quarter of 2020. Before we discuss our results, I wanted to take a moment to thank all of the healthcare workers across the globe. CareDx is part of a community of essential healthcare businesses. We have the utmost respect for those working on the front line and do the best ourselves to support them wherever possible. Back in January, we chose Transplant Proud as our theme for 2020. And it could not be more – and I could not be more proud of how our team has come together in response to the COVID crisis. Now, turning to the results, in the first quarter of 2020, we reported revenue of $38.4 million, an increase of 48% compared with the first quarter of 2019. Growth primarily came from our testing services that we provided just over 15,000 patient results, an increase of 50% year-over-year. Product revenue for the quarter was $4.7 million and digital revenue added $2.2 million to the top line. For the seventh straight quarter, we posted a positive adjusted EBITDA. We have always focused on building a profitable, sustainable precision medicine business and believe that our robust platform has enabled us to quickly pivot and adjust in response of this unprecedented crisis. The arrival of COVID-19 in the U.S. has affected everyone and everything. The healthcare sector is no exception as hospitals have become the frontline of this battle. With hospitals increasingly caring for COVID-19 patients, hospital administrators have chosen to limit or even defer non-emergency visits and procedures. Immunosuppressed transplant patients either decided on their own or were asked to avoid transplant centers and caregiver visits. With transplant surveillance visits down, we did experience a…

Thank you, Peter. Turning first to the income statement, total revenue for the first quarter was $38.4 million, a year-over-year growth of 48%. The growth in revenue was primarily driven by AlloSure Kidney and AlloMap Heart as well as continued adoption and center penetration of AlloSure Kidney. AlloMap Heart has also experienced accelerated growth over the past few quarters due to increased interest in HeartCare by transplant centers. As a result of the strong performance of both AlloSure and AlloMap, testing services revenue in the first quarter increased 46% year-over-year to $31.4 million. Our first quarter product revenue increased 6% year-over-year to $4.7 million and our digital revenue was $2.2 million. Moving to our gross margins. For the first quarter of 2020, the gross margin was 68%, compared to a gross margin of 63% in the same period of 2019. On a sequential basis, gross margins were up approximately 300 basis points, compared to the fourth quarter of 2019. The non-GAAP gross margin for the quarter was 71% compared to 67% in the prior year quarter. We do expect to see some impacts on our future gross margins, because of the spend on RemoTraC as the cost of a mobile phlebotomy draw is approximately $100 more expensive than a lab draw, although the full impact of margins will ultimately depend on the mix between RemoTraC blood draws, and draws done at labs. For the first quarter of 2020, net loss was $5.8 million compared to a net loss of $7.5 million in the same period of 2019. Our net loss per share was $0.14 for the quarter, compared to a net loss per share of $0.18 in the first quarter of 2019. Non-GAAP net income was $0.2 million in the first quarter of 2020 compared to a non-GAAP net income…

Thank you, Mike. In closing, I want to thank all of our employees for their hard work and dedication during this unprecedented time. One of our most significant themes is that it takes a village. And throughout this challenging time, our CareDx village has come together to support each other, while remaining steadfast in our dedication and passion to transplant patient care. Thank you all for joining the call and I will open the call for questions.

We will now begin the question-and-answer session. [Operator Instructions] The first question comes from Brandon Couillard from Jefferies. Please go ahead.

Hey, good afternoon. Peter, maybe just starting with RemoTraC, I’m surprised to hear it’s already 50% of volumes. Is this just the new operating model for the business now? I mean, why go back to the old way? And as we think about the unit economics, are there some other positive offsets, spending avoidance that you might be able to realize such as lower requirements on your backend compliance and call centers that might help you offset some of the $100 added for the mobile phlebotomy?

Thank you, Brandon. Excellent question. I think there is really two types of feedbacks. One is patients absolutely love it. Patients don’t need to drive in for an hour or two, or maybe sometimes three, since they live remotely into the transplant center, then be in a waiting room, wait for their blood work. Have them maybe sometimes only 5 to 10 minute interactions with a nurse and everything is good, and then they travel back home. So, patients love the mobile phlebotomy, especially for those that are doing well. Clinicians I would say they’re probably half -half. They love to see patients face to face. And they think there is a significant value in having the patient in visiting the center. But they also – the other half is just completely convinced that telehealth is here to stay. What does that mean for RemoTraC, that I think we continue to be flexible. It’s very clear that in a COVID crisis center like New York, most of these patients are going mobile. While in other transplant centers, there might be a stronger mix. But what it tells me that CareDx is actually excellent prepared in order to answer to these individual solutions. As we have always applied a center by center strategy. Sometimes this is now a patient by patient strategy even. To your point about offsetting, I think one thing that will be very true is that RemoTraC allows us to have direct to patient communication that we have always been seeking and allows us to monitor and apply the surveillance schedule. You might recall that we have updated that, we’re losing sometimes a few surveillance visits on the go. And the closer we get to the patient, and the more interactions we have and the better we can actually help scheduling these visits, the more the fulfillment on their regular surveillance schedule will be true. So we see actually that there is a bit of an upside for us in terms of volume, making sure that these patients stick to their surveillance visit and get all their blood draws.

Maybe from a high level, as best you are aware, maybe just talk a little bit about what your sense is in terms of what transplant activity is today. How far off of normal it might be? It’s kind of what the timeline might look like and whether you would expect some lag effects from the delay and those new transplant procedures maybe show up in your business as a headwind maybe in a few months? What do you sort of think of that?

Excellent question, Brandon. I think first of all this is – we are still very early in the penetration of all patients. Maybe we are 5% penetrated against the overall opportunity. So there is not going to be a shortage of patients anywhere near in terms of our ability to convert into AlloSure patients. Secondly, yes, that might be short term. Especially living donations is down right now. If you have an organ from a friend or family member, these transplantations probably are not occurring in many transplant centers right now in the country. But maybe overall volume is down by 30% to 40%, in some centers by 50%. But I think that will swing back. We hear actually that the transplant centers, since they are a key driver for many of these – many of these medical centers also for profitability, that probably they will be one of the first units to open back up. And there are some that are actually anticipating a bit of a search in the moment that we are coming back to normal in these centers. My guess is that this will not happen all at once at all centers at the same time, but we will see regional differences. So I would see that, we are some months out to complete normal, but we will actually see a number of centers coming back on online relatively quickly.

Okay. Lastly, you did mention in your remarks, but curious if you could just maybe touch on the AlloCell product, which you disclosed a few weeks ago? Could you maybe just share with us little bit more about how your offering serves in that surveillance of patients who are receiving those therapies? And if you could maybe talk about who the biopharma partner is that you noted in the press release.

I think there’s a number of companies and partners that we talk to. And one came, we wanted to announce the first one, because I think that’s a meaningful step as our pharma services. The original model is truly to develop this, co-develop this and make it available through clinical trials, with pharma partners, establishing the concept. We see this as moving the company from a heart transplant focus to a kidney focused, now into a cell therapy. These engineered cell transplants are nothing else than a transplant. And we with our technology [are present] [ph] to detect these [non-own] [ph] cells. So in a way, you’ll hear us talk about Allo transplantation in the future a lot more. I think this is an exciting new opportunity. This is not going to be short term tremendously, revenue relevant from a testing service perspective, but more so from a relationship and pharma research and development perspective. So bear with me, we’ll be communicating more on that as we progress through the year.

Very good. Thank you.

The next question comes from Steven Mah from Piper Sandler. Please go ahead.

Hi, Peter. Hi, guys. How are you guys doing?

Steven, thank you very much. Welcome to the analysts team. So this must be the first time that we hear you in this capacity.

Yeah. That’s right. Yeah. You’re the first one, yeah. We appreciate the warm welcome.

Congratulations.

Yeah, yeah. Congratulations for your post-transplant volumes returning to normal. So that’s really great news. And, yeah, I wanted to get maybe a little bit more color on that and kind of square away your comments that you said earlier in your prepared remarks where you said that physicians and patients are either by choice or just as things are closed that they’re avoiding transplant centers. But I would expect that, the post-transplantation test to be seen more as an essential test rather than elective procedure. So maybe you can give us some sense on how doctors and patients are viewing post-transplant?

Yeah, I think, we had initially in the last couple of weeks of March, a bit of a shell-shock response from transplant centers, saying, well, every patient that’s doing well do not come in and don’t have your surveillance visit. And so that led to a drop in volume of surveillance visits in March. But you absolutely right that both patients and caregivers want to maintain surveillance visits of these patients, that’s why RemoTraC is so important. I did comment on that, we’re almost back to pre-COVID levels, which probably is, because of that, that is – it’s not elective after transplantation, you need to be constantly monitored for a rejection episode. And that’s why our value is, is now more seen than ever. It’s also true that, right now having this liquid biopsy concept that a simple blood test is giving you a lot of information and taking in the patient now for an invasive procedure like a biopsy and have them spend significant time at a transplant center. The balance is really tipping in our favor very, very clearly on this liquid biopsy. So in terms of our value proposition, it has never been stronger and clear articulated. So I would agree with you that we will see transplantations come back to transplant center very, very quickly again.

Okay, great. And just a follow-up question on RemoTraC. Do you think transplant centers are going to integrate it into their protocols given that COVID-19 is relatively uncertain? Yes . There’s going to be a second wave or every flu season. This is – we’re going to go through the same thing. Do you…

I like also Reg Seeto, who’s on the call, comment on that. But I would see that we will see probably flare-ups of COVID-19 in the country in different locations over the year. So I don’t think that this will be entirely going away. But then we will have very local and regional responses to COVID-19. So I would say, we will stay flexible and this will be a center by center approach, but maybe, Reg, over to you talking about RemoTraC and our ability to pivot?

Yeah, thanks, Peter I mean, we’ve seen more than 150 centers expressed interest in RemoTraC. And with that, we have a lot of protocols and surveillance patients being used. So, I think with RemoTraC being incorporated as part of that with the current offering, I think in the future, we’ll – as Peter mentioned, we’ll start seeing more of this adoption potentially even on a protocol basis.

Okay, great. That’s helpful. And real quick, if I have time, one for Mike. Can you give us a sense on the clinical trials? Do you expect enrollments and timing to slow down and how should we think about R&D expense this year?

Yeah, Steve, I think – yeah, obviously, patient enrollment on OKRA and SHORE are going to slow down in the near-term. And probably on OKRA as well as we’re ramping up the centers, that center enrollment is probably going to slow down. So I think, we will see a slight slowdown in that R&D expense until those volumes pick back up. In the remarks before, I mentioned that in Q2, we expect our operating expense to relatively in line with Q1, because there will be savings on travel costs, on the conference costs, and – yeah, the clinical study costs will also be one of those savings if you like in Q2.

But it also gives me – Steven, it gives me – like just our medical team has done a great job. We would probably report it – have reported a number of 25 OKRA sites up and running in the Q1, we chose not to stressed this in the prepared remarks, because I think, right now, many of these centers are not actively enrolling, because of that, but as soon as they’re opening up. We will anticipate that OKRA is going to full steam. And we’re actually pretty proud to have 25 up and running – 25 sites up and running on OKRA.

Great. All right. Thanks very much.

The next question comes from Alex Nowak from Craig-Hallum. Please go ahead.

Great. Good afternoon, everyone, and congrats on the Q1 in spite of COVID here. And congrats on seeing the testing levels return to the previous highs. I wanted to go back on a comment you made, Peter, about biopsy. I mean, biopsy is obviously the gold standard here. You recently hosted a conference – a virtual conference. And there’s a lot of talk about centers adjusting their protocols for social distancing guidelines and largely getting rid of biopsy. So I’ve got to imagine, this is a big boost for CareDx. But is there any way to quantify just how beneficial this shift away from biopsies almost completely could be the CareDx, both in the near- and long-term?

Well, I think, this would – I would say, this is organ specific a little bit on the heart, the opportunity is very significant. The heart transplant patients receive 12 to 18 biopsies in the first year – first 2 years after transplantation. So think about this as we’re right now rolling out HeartCare, there’s ample opportunity for us to grow on the heart franchise. On the kidney transplant site, there are many transplant centers that actually do not use kidney biopsies, because of the invasiveness and the risk reward ratios might not be as high. So we only see 25% of transplant centers doing routine protocol biopsies. And I would say those protocol biopsies right now, we would probably see many transplant centers replaced because this routine biopsy, where you’re basically just checking if everything is okay, has very, very low yields. We know about 10% to 15% of these biopsies are showing something to follow up on. So there, the risk reward ratio doesn’t seem to be strong. But I think on the heart side, significant opportunity. Kidney, maybe a little bit less, but still, also on the biopsy For cause, where we have a lot of – [assume creatine] [ph] goes up and then you do a biopsy, and then still you have no yield. Many transplant centers might now first do an AlloSure, before they have the patient come in and do a biopsy. So I think, clearly the value proposition is significant. We just see that as the total confirmation of our approach to blood-based testing.

Understood. And Peter, how are you positioning the sales force now to sell in this post-COVID world, where access to the transplant centers could be really limited? And on the flip side, do you think these restrictions will actually make your business even more sticky from potential competition?

Well, I will tell you that on our products business, right now, it’s probably not the best time to launch product. Access is limited. This is – right now minds are preoccupied. And so doing something new and different on your daily routine is probably not the best time to do. So yes, I think we have really another quarter where CareDx can build out its first mover advantage. So I think we are very extremely well positioned there. On the transplant account managers or the individuals that are out in the field, I think our business model has shifted, I mean, there’s not a day going by where we don’t have significant hours spend in front of video conference. And, also our team is pivoting, and we have a lot of video calls and video interactions. Our webinars are now substantial for distributing information and sharing education. So – right now, our office looks more like a virtual telemarketing type of office than a traditional diagnostics company. So it’s – we have been pivoting really quickly, and so as our field force. But let’s face it, I think for us right now, it’s all leaning in, making sure that every patient that needs AlloSure, AlloMap gets access to our technology. And there, I’d just applaud the entire field team of being on the ready.

Absolutely, understood. That’s good to hear. And then, Mike, can you just elaborate on the $20 million advance payment program with CMS? Just what is that program? And really, how does it work?

Yeah, Alex. The program is that companies – well, Medicare providers can request an advance of up to 3 months’ worth of expected payments from CMS. So that was provided to us. That amount is $20.5 million. And then CMS per their current projections, they would start to recoup that back around August – between August and November, during this year. So every time we would do a medical test in that period, they would not pay us and they would just recoup the money, the advance that they’ve paid us.

Got it. So I assume that sits on the balance sheet as a prepaid revenue item?

It won’t be as revenue, but it will just sit on the balance sheet as cash, and then that will just get sort of withdrawn down over time.

Got it. Okay, understood. Well, thank you again, and good luck to everyone here.

Thank you, Alex.

The next question comes from Andrew Cooper from Raymond James. Please go ahead.

Hey guys, thanks for the questions. A lot’s been covered, so I’ll keep them kind of quick. But I was wondering if maybe you could give a little bit of color on RemoTraC? Is it – is there any level of difference between kind of what patients are adopting it or whether it’s the folks that are in protocols or new transplant patients are more likely or anything like that? Is there any difference between who says, this is what I want to do versus not?

Yeah, I think, our response has been to many patients are worried. They’re worried about leaving the house. They’re worried about going into a transplant center. But I’d like to hand over to Reg Seeto to answer your question more specifically.

Yeah, thanks. I mean, we’ve seen the majority of patients from one segment being those on surveillance today, but we also seen a new segment of patients who are currently on surveillance, but where, as we’ve talked about, with the greater need to model these patients where they are now being brought into RemoTraC. So there’s been 2 specific segments.

Okay, that’s helpful. And then, maybe just kind of tying RemoTraC to something, you said, Peter, around telehealth. But given what you’ve done on sort of the digital side and started to do and what you’ve now added with RemoTraC in your comment that, some physicians still want to have the face to face conversation, is there an opportunity there to sort of tie in, whether it’s developed yourself or partnering with a telehealth provider to add to the capabilities from that perspective? And what would that opportunity potentially look like?

Well, I think the opportunity is relatively simple that the doctor, when he sees the patient also receives this information on AlloSure, plus the entire blood workup. And having that at his fingertips when he makes decisions about that patient continuum and that patient journey, I think that would be ideal. Unfortunately, what sounds relatively simple is incredibly difficult in terms of a workflow at a transplant center, to make sure that the patient – that the clinician actually has all that information at the time of decision making. That has to do with integration of diagnostics into the electronic medical record and that has to do with – even as simple as making sure that the patient can turn on the button on the [Zoom] [ph] video, right? So there is a lot of things in the workflow, but I think we really are in a new era. And this will become the standard. I think clinicians will have that information available. And maybe with our smart algorithms and predictive tools, we can even help clinicians to decide which patients they want to see on a televisit or which patients they are completely – they have to ask to come into the center. And maybe some patients will be seen only by the nurse and some other patients will really need to have the specialists attending. So I think we can – with our smart solutions, we started that with i-BOX and the integration into our OttrCare program. We can really support clinical decision-making down the line. We’re very early on this, but I think e-health has become a – has gotten a boost through COVID-19. And my guess is that this is here to stay. So having a more integrated approach the CareDx is offering, potentially offers a competitive advantage in the future, as we’re building our mode in transplantation.

Great, thanks. I’ll leave it there.

The next question…

Thank you.

Oops, sorry.

No, go on.

Next question comes from Yi Chen from HC Wainwright. Please go ahead.

Thank you for taking my question. First question is what is the volume capacity of testing RemoTraC in support if COVID-19 persists throughout the year?

That’s an excellent question. And I think we’re unlimited in the sense of being able to manage blood draws coming into our lab. I would say, we’re probably having more capacity doing blood draws than we would have the capacity on testing them. But we have always scaled our lab alongside volume. So don’t think of CareDx being capacity constrained in any form or fashion.

Okay. And then, what evidence do you need to have to reinstate revenue guidance?

That’s a really good question. And Yi Chen, I was anticipating that question, that’s why I gave a bit of how I’m thinking about it. First of all, who knows if there’s going to be a second wave? I personally anticipate that there will be second waves in different places in the United States. And it’s incredibly difficult to forecast where those will be. If they were to be in locations where there’s significant transplant volume CareDx would be more impacted than in others. The second one is really RemoTraC has been a phenomenal success in the first few weeks. And the team has done a phenomenal job, but the devil is in the detail, and how successful can we roll that out across the United States in all centers for all patients. That’s to be seen. And I’d be happy to update you on that. And the last one is really around, is there is there an opportunity for us to capture in the transplant centers that are going back to normal? I just heard yesterday that Cleveland Clinic is actually getting a transplant from Detroit and down from Michigan, where there are significant COVID. And they actually now are doing more transplants than before. So the question will be, how do individual transplant centers come back up on stream and when are we back to overall transplant volume? And that’s incredibly difficult to forecast. I think after all, saying that, I think it’s the prudent way for us to withdraw guidance right now. But we’ll let you know as soon as we can to think about guidance again.

Got it. Last question is, digital and other revenue had significant quarter over quarter growth in the first quarter. Could you provide more color on the potential of this revenue stream?

Well, Yi Chen, the reason why quarter-over-quarter is, because that revenue comes from the acquisitions that we made last year. So the OTTR acquisition was in May and the Xyn acquisition was in August. So there was no like-for-like revenue in the first quarter of…

No, I mean, compared to the fourth quarter of last year, not the first quarter.

Oh, the fourth quarter.

Fourth quarter, yeah.

Yeah. I mean, well, some of that’s coming from new contracts that we’re getting from both the OTTR business and the Xyn business. I think before the COVID crisis and when we had revenue guidance out there, we said – we expected revenue for the digital business to be around $8 million for the year. So the first quarter was in line with that. Whether or not in the remaining quarters there would be a slowdown of that, because maybe some centers get slower at making decisions to adopt to a new platform that could have an impact. So, first quarter was very good, and we were really pleased with that. But, yeah, we’ll have to see what happens for the remainder of the year.

Okay, got it. Thank you.

This concludes our question-and-answer session. I would like to turn the conference back over to Peter Maag for any closing remarks.

Well, thank you so much for joining us for the first quarter call. And I’m looking very much forward to continue to update you of our progress. I’ll end with a shout out to Transplant Proud. And thank you so much for being part of the community that allows us to do what we’re doing. We’re focusing on transplantations every day. Thank you very much and bye-bye.

The conference has now concluded. Thank you for attending today’s presentation. You may now disconnect.