CareDx, Inc (CDNA) Q4 2021 Earnings Report, Transcript and Summary

Thank you for standing by. This is the conference operator. Welcome to the CareDx, Inc. Fourth Quarter 2021 Earnings Conference Call. [Operator Instructions] I would now like to turn the conference over to Ian Cooney Vice President of Investor Relations. Please go ahead.

Good afternoon and thank you for joining us today. Earlier today CareDx released financial results for the quarter and year ended December 31, 2021. The release is currently available on the company's website at www.caredx.com. Reg Seeto, President and CEO; and Ankur Dhingra, CFO 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 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, February 24, 2022. 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 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 Reg.

Thanks, Ian. Good afternoon, everyone and thank you for joining us for CareDx's Fourth Quarter and Full Year 2021 Earnings Conference Call. Before I start, I want to thank the transplant community for all the efforts during COVID over the last two years. It's been a tough two years treating and looking after this vulnerable patient group but your tireless efforts have made a difference of transplant patients. We are proud to have also played our role with the transplant community consistent with our vision of being the leader in the transplant ecosystem and delivering on our mission of providing innovative solutions to make a difference in patient outcomes during the transplant patient journey. At CareDx, we do not just measure success in revenues but Q4 was another record quarter, where we delivered revenues of $79.2 million, representing a growth of 35% over the prior year quarter. For the full year 2021, we reported revenues of $296.4 million, representing a growth of 54%. Notably, our record fourth quarter testing services volume of 41,900 tests, represented a 67% year-over-year growth and led to our full year volume growth of 94% versus 2020. This result was achieved, despite Q4 being the second straight quarter of sequential decline in transplant volumes, as Q4 saw the initial impact of the Omicron surge with kidney transplants down 4% and heart down 2% sequentially versus Q3. Over the longer term however, we believe the number of organ transplants could increase nearly. For example in kidney, this could double through living donors, improvements in transportation, logistics, increased use of high-risk organs, new government initiatives and xenotransplants. On the top of xenotransplantation, this is an exciting field and we've recently built out a xenotransplant team. This team is proud to be working with the University of Maryland team, who completed the first successful human xenotransplant with a pig heart. We achieved Q4 year-over-year revenue growth of 36% and 29% in the Testing Services and Products business respectively and we delivered revenues of $68.6 million and $7.7 million respectively and digital and other revenues contributed $2.9 million to the top line. Adjusted EBITDA for the fourth quarter and full year were negative $1.4 million and positive $17.8 million respectively. Our profitability in Q4 was impacted by an increase in legal spend. During Q4, we continued on our strategic plan, focused on three goals. The first, further deepening the competitive moat around transplant centers; two, resetting and raising the innovation bar to stay years ahead of our competitors; and three, digitally connecting the patient which was the 2021 theme. On goal one with a competitive mode we further deepened our presence around transplant centers reflected by the commercial success across kidney, heart and lung. In kidney we saw continued strength of adoption of AlloSure with now 75 AlloSure kidney protocols in commercial use. The ability to bring in new standards to improve outcomes and to have AlloSure's standard now in one in three centers is a real testament to the innovation we have brought. AlloSure is the only underived cell-free DNA test with publications covering use in both for cause and surveillance settings with prospective long-term outcome data. This has been our recent ADMIRAL publication the largest conducted multicenter real-world study with over 1,000 patients. I will share more about these exciting results from ADMIRAL in a moment. Further extending our leading kidney was the completion of OKRA enrollment. With 1500 patients generating real-world multimodal evidence we're excited to show how Kidney Care can further support improvements in clinical utility. Now to heart. In heart, we saw the incredible response to hard care the first and only multimodal diagnostic test approved by MolDX. The greater than 90% attachment rate reflects the value of improved clinical utility. At CareDx, we are proud of our scientific standards. For example with AlloMap, it's been extensively published in leading journals including the New England Journal of Medicine has been FDA-cleared incorporating the international guidelines and is more than 80% pay coverage. Contrast that with the competitor's recent slate of press releases with no publications or support to substantiate their claims. We have built and earned the trust of the transplant community and patients in gene to do so by the right way by showing published data that has been generated from real-world evidence using a multicenter prospective approach. Now to lung. We were thrilled to launch AlloSure Lung to support a significant unmet clinical need. Although smaller than the heart market, bringing AlloSure to lung patients has been a paramount objective for the team at CareDx, especially when you think one in two lung allograft patients will still fall within five years. Achieving a 40% commercial penetration in transplant centers within three months and 700 patient test results was a true testament of the need for this innovation with AlloSure Lung, as well as to the trust that we have built and established within the transplant community over the last two decades. Importantly, we're not a repurposed NIPT don't derive cell-free DNA test. AlloSure was designed and developed for transplant use and for transplant-specific patients. Moreover, our test was designed to cover all somatic chromosomes whereas some competitors cover less than 20% of chromosomes. Now, on to goal 2. CareDx during 2021 has continued set and raised the innovation bar to remain ahead of competition, particularly with real-world data. We are proving through improved clinical utility that multimodality is the future of transplant organs balance and investing in strong signs that our test can be relied upon to perform as expected when the health of real-world patients is at stake. We've already moved our testing services portfolio to this next wave of multimodal innovation across heart and now we're following with kidney liver and lung. In Q4, we were excited to achieve the clear validation for AlloMap Kidney and publish clinical validation data. As a reminder, AlloMap Kidney is our blood-based gene expression test that identifies immunoquiescence, a vital biomarker needed to comprehensively assess the immunological risk rejection and allograft health. Data provided by AlloMap Kidney and AlloSure Kidney offers a more comprehensive assessment of kidney health than the current standard of care and the need to test alone. We also mentioned earlier that we had reset the scientific bar and kidney through ADMIRAL. This multicenter real-world study showed AlloSure is the first underived cell-free DNA test which demonstrated long-term utility in both surveillance and for cause. ADMIRAL was demonstrated in over standard of care in more than 1,092 kidney transplant patients from seven leading transplant centers and followed up for up to three years. Based on this incredible publication, the following was seen with AlloSure. AlloSure demonstrated a 62% relative improvement over serum creatinine and ability to differentiate subclinical and clinical rejection. Number two, elevated AlloSure donor-derived cell-free DNA strongly correlated with clinical and subclinical allograft rejection injury at two different thresholds was associated with a 271% increased risk of de novo DSA antibody formation. Thirdly persistent elevated AlloSure levels correlated with a greater than 25% decline in eGFR over three years, eGFR being a monitoring of kidney function. And then four persistent low levels of AlloSure identified allograft quiescence in addition to the absolute score. We believe these data are a game changer for kidney transplant patients and clinicians and the only test that has shown in these results and in the long-term setting. Notably in ADMIRAL demonstrated a greater than 60% improvement over creatinine in the accuracy of identifying rejection. By contrast the improvement over serum creatinine was less than 20% with an NIPT test repurposed for transplant in a single-center retrospective buy-bank study on which are compared to base its clinical validation. At CareDx we are known for this incredible strength of innovation and is who we've built the standards around AlloSure that others now need to demonstrate we have further moved the needle with multimodalty and we will further again with our new digital offerings under the AI banner. Now on to lung. We also raised the scientific barn lung through the recently published multicenter prospective alarm study done with the NIH during the curved pandemic. This NIH-led study was designed to demonstrate the ability of also lung to deck the signs of organ rejection infection in asymptomatic lung transplant recipients in a real-world home-based surveillance setting. This real-world use of AlloSure demonstrated and documented an 83% reduction in surveillance biopsies as compared to a protocol dependent on surveillance biopsies. I'll just repeat that again, 83% reduction. AlloSure also identified subclinical graph entering 7% of surveillance tests performed. These were early detections that can now enable treatment before lung function is compromised. These tests to find a clear utility for noninvasive surveillance with AlloSure as lung transplant patients. We are the only company with publications using donor sulfate in lung transplantation. Again we're the only company with publications using donor-derived sulfate lung transplantation and the only company developing a multimodal solution with our first patient already enrolled the ALAMO study. And our third goal it was to connect patients and we made significant progress during 2021. We're the only company that's focused on the transplant patient journey and our ultimate goal and our long-term goal is to connect one in two transplant patients. I would like to highlight two things from 2021. There are many highlights but these are the two that I'd like to share today. The first is through our acquisition of TxAccess we built a new group aimed at connecting dialysis patients and the clinics with transplant centers. I'm pleased to report at the end of 2021 we have more than 44000 dialysis patients referred to more than 70 transplant centers and over 1000 dialysis practices now have the ability to use TxAccess. Secondly during Q4 we accelerated our strategy of connecting the transplant patients and ended the year with more than 14000 patients on our AlloCare app. Notably over 6000 of the 14000 AlloCare patients were added in Q4 alone. In addition we have more than 11000 patients who have direct access to RemoTraC. While on the topic of digital and given the multiple digital acquisitions we've renamed the digital business to be patient and digital solutions patient and digital solutions. We are really pleased with the progress we delivered in 2021. And in 2022 revenue in this segment will benefit from our recent medication management acquisitions as we continue to build towards our goal of improving outcomes and ultimately managing one in two award transplant patients. Our suite of digital offerings now covers broad applications utilized throughout the continuum of care for all transplant patients. Our two most recent acquisitions of Med Action Plan and the Transplant Pharmacy moves us in a very meaningful way into the business of medication adherence which is the third leading cause of graft loss after infection or rejection. As we continue to execute our vision of being the leading partner of the transplant ecosystem is the focus on adding value at all stages of their patient journey that propels us forward towards our goal of improving long-term outcomes of transplant patients. Now moving to the products business. Q4 and indeed 2021 was a successful quarter and a year for the product team. For the fourth quarter and full year respectively product revenue increased 29% and 39% year-over-year respectively. And we are pleased to now say that over 55% of this revenue comes from AlloSeq growth franchise versus auto technologies. We're excited about the progress in this business after COVID interrupted 2020 and are looking forward to further product launches and geographic expansion in 2022, as we continue to drive this business to a meaningful scale. Gathering less of the spotlight, with equally important to transplant patients has been the pharma partnering business, including AlloSeq as part of our Cellular Transplant and Therapy business otherwise known as CTT. Although the commercial revenues are longer term, we continue to make progress and initiated multiple new pharma partnerships during 2021. We look forward to building more partnerships during the course of this year. Now as we reflect on 2021, we are pleased by delivering another record revenue quarter and year, but we're even more pleased, by how CareDx continues to extend its leadership and transplant. As shared during our Investor Day, our goal is to connect one in two transplant patients. With that in mind, this is a multiyear journey and the next 12 months will be another catalyst-rich year including, the coverage of AlloSure Lung by CMS, the submission of AlloMap Kidney, the launch of Allovue and UroMap, the publication of KL1000 and the readout of SHORE data at ISHLT and OKRA data ATC. As a reminder, SHORE and OKRA are both multimodal studies in heart and kidney, respectively. 2022 will be an exciting year to capture the growth opportunity with this rich set of catalysts to execute as we have demonstrated in our five-year plan and to continue to innovate and generate real world evidence that sets us up part and to extend our leadership by connecting that patient journey. Before turning over the call to Ankur to discuss the financials, I'd like to spend a moment on equity in transplant. Equity and transplant is an issue we care deeply about. And in many parts of the study minorities at high-risk and in the need of transplant or pre-transplant services often have a harder time receiving adequate and accretable care. CareDx recently announced a partnership with MOTTEP, The Minority Organ/Tissue. Transplant Education Program founded by Dr. Clive Calder. We're thrilled to be working with MOTTEP and thrilled to be working with Dr. Velma Scantlebury who is one of the Board members, but also America's first African-American female transplant surgeon. It's a real honor and thrill be working with her. We're also honored to be working with Dr. Hannah Valantine, who recently joined our Board of Directors and who is the Head of the Diversity at the NIH. Both Dr. Valentine and Dr. Scantlebury provide a wealth of expertise in helping us make it meaningful and lasting impact as we work on our mission to improving equity and transplant. Now, I handing over to Ankur.

Thank you, Reg. We are very pleased with the performance of our business, the progress we are making in connecting the transplant patient journey and the financial results for the fourth quarter and fiscal year 2021. The first year of our five-year growth plan exceeded our expectations, thanks to broad-based growth across our businesses, strong adoption of our tests and meaningful acquisitions in adding new offerings to our portfolio. I'll give you some details about our financial results, our proven business model and then guidance for next year. For 2021, we recorded total revenues of $296 million up 54% compared to $192 million in 2020 with strong contributions across the portfolio. Testing Services, revenues grew 58% year-over-year to $259 million as our testing volumes grew year-over-year by 94% to approximately 153,000 tests. We saw very strong adoption for our core kidney and heart tests as well as the newly launched AlloSure Heart test, with attach rates increasing throughout the year to 90% plus by the end of the year. AlloSure Lung was launched in Q4 for an excellent demand. Product revenues grew 39% to approximately $27 million as our NGS-based typing solutions achieved market-leading position. Patient and Digital Solutions revenues were above $10 million an increase of 11% compared to 2020. Our Medication Adherence acquisitions Med Action Plan and the Transplant Pharmacy contributed about $0.7 million in revenue in Q4. This strong revenue performance was achieved despite impact from COVID multiple times during the year and is reflective of the strength of our offerings and strong execution by CareDx team. This also sets us up very well with an excellent start to our five-year plan. The non-GAAP gross margins for the quarter were 68.4%, compared to 70.3% last year Q4 2020. Non-GAAP gross margins declined due to various factors with strong adoption of new tests, our volume growth has far exceeded our revenue growth. We're also expanding capacity in our Brisbane Laboratory. And in our patient and digital patient solutions portfolio we added the transplant pharmacy business, which has lower gross margins. We feel good about the margin profile of our core testing services solutions. Each organ when scaled derives very healthy gross margins as we have demonstrated with our AlloMap Heart and AlloSure Kidney tests. We intend to apply the same playbook to our newly launched tests of AlloSure Heart and AlloSure Lung. Non-GAAP operating expenses for the fourth quarter were $56.4 million, up over $7.5 million sequentially from Q3 2021. This increase in expenses was driven by investments we are making to scale our capabilities and also by increases in legal spending of approximately $5 million. Non-GAAP operating expenses for 2021 were $191 million, up 49% compared to 2020. During the year, we invested to expand our portfolio of services started new clinical trials as we build our portfolio, expanded our commercial reach and also invested in scaling our infrastructure, all aimed at building this business for sustained long-term growth. For the fourth quarter of 2021 we recorded negative adjusted EBITDA of $1.4 million, compared to adjusted EBITDA of $4.9 million in the fourth quarter of 2020. We remain disciplined in our investments. And as Reg mentioned, our profitability was impacted by increased legal spend. For full year 2021, we recorded adjusted EBITDA of $17.8 million compared to adjusted EBITDA of $8 million in 2020. We've also generated $4 billion of operating cash flows during the quarter ending the year with cash, cash equivalents and marketing marketable securities of over $348 million. With our strong balance sheet, our cash deployment focus remains on adding portfolio of products and services across the transplant patient journey. During 2021 we invested in acquisitions of TransChart, Med Action Plan and the Transplant Pharmacy business. We invested in Xenotransplantation through Mirametrix and invested in partnerships to develop artificial intelligence for our multi-modal testing services. All these investments strengthen our position in supporting patients through their transplant journey as we continue to execute on our multiyear growth plan. Now I would like to address a couple of topics that have been top of mind for investors since our Q3 call. The first is ongoing dynamics affecting a realized price per test or ASP. The amazing success of AlloSure Heart combined with higher growth of commercial versus Medicaid volumes in 2021 resulted in very strong volume growth that materially outpaced our revenue growth. In addition in kidney testing we saw patients shift from Medicare to Medicare Advantage plans for the changes introduced with the CARES Act last year. We expect some of these trends to persist in 2022 but at a lower rate. AlloSure Heart launch was annualized in Q4 2021 and hence should not be a headwind for go-forward average prices. We expect growth in commercial business to continue to remain higher and more patients to continue to shift into Medicare Advantage plans, albeit at a lower rate seen in 2021. Strong adoption of our testing services has created a very significant commercial coverage opportunity for us. With our increased focus on contracting with both commercial payers and Medicare Advantage plans across our range of tests. Our goal is to turn this into a tailwind as we work through this in 2022 going into 2023. The second is the information request from government agencies that we disclosed in 2021. We are cooperating and moving expeditiously in responding to these requests. Beyond that as I'm sure you can understand, we are limited in what we can say. We remain confident in the quality, clinical utility and innovation that our products and services bring to the market and our management team remains focused on running the business. Now on to guidance for the year 2022. For the full year 2022, we expect revenues in the range of $330 million to $350 million. We annualized the launch of AlloSure Heart last quarter. Our guidance is built on double-digit growth in our core kidney and heart franchise using our winning formula of adding centers and protocols and expanding into nephrology. This guidance does not assume revenue contribution from AlloMap Kidney. Our low end of the guidance assumes continued COVID-related impact on transplant procedure volumes as well as impact on testing volumes. As a reminder, we saw transplant procedure volumes decline in second half of 2021. This decline has continued into early 2022 as well which led to January having lowest number of transplants in a month since the beginning of COVID. We've seen some rebound in later part of February, but overall procedure volumes still remain down. The high end assumes a recovery in demand from weak transplant volumes and resumption of strong long-term growth trends in transplants which we formally believe in. The guidance assumes high single-digit declines in realized prices as we expect commercial testing volumes to continue to grow at a faster rate. Regarding investments we intend to maintain our disciplined approach as we continue to invest for growth. As the only company focused on connecting transplant patient journey and with our market position, we have a tremendous opportunity in front of us to significantly grow our businesses. We remain focused on realizing that opportunity. 2021 has been a fantastic year for CareDx. We saw strong adoption of our products and services published, excellent data demonstrating clinical utility of our kidney and lung test and made several acquisitions strengthening our portfolio. With several upcoming catalysts, we're very excited about 2022. With that I'll open the call for questions.

We will now begin the question-and-answer session. [Operator Instructions] The first question comes from Alex Nowak from Craig-Hallum Capital Group. Please go ahead.

Great. Good afternoon, everyone. Just to stay there on the guidance appreciate given all the color that was included what's not included. But just curious what are you assuming for lung reimbursement in there? Are you assuming that comes in. I think we understand the transplant volumes, but also what are you assuming as far as competition?

Yes I'll just -- I mean AlloSure Lung for us we had a phenomenal sort of launch I think with the SIM need as I mentioned and with over 700 tests completed in Q4 we're really excited about the opportunity here. I just might let Ankur now talk about what's including guidance.

Yes. Specifically your question on lung we have assumed very minimal contribution from our lung test like in the range of 1% growth or something coming from lung to fairly minimal.

Okay. And then what about competition there? And then I've got another follow-up on competition.

Sorry, Alex competition on the lung side or just overall?

Just no composition overall and what you're assuming in the guidance if competition is a factor not a factor in the guidance.

Yes. No we're assuming we maintain with our assumptions as we maintain our share. I think the biggest impact we've seen which Ankur mentioned was really what's been happening in the hospital system in January was just put in reflection 1698 tests the last time in kidney and lost heart. The last time we saw that was in March 2020 then you have to go back ways beyond that. So there was a significant impact I think for the start of the year that we're seeing across transplant centers and that's been sort of also reflected in calls around the nation trying to understand what's been happening. So that has been the biggest impact and a driver of our assumptions.

Okay. That makes sense. And then it looks like Natera on their call that's actually going on right now. It looks like they broke out their kidney volume looks like cost volume came in at about 20% of where you're at but it is on a strong upward trajectory. So maybe just comment broadly on the competitive environment. It seems like you're not seeing an impact, but certainly Natera seeing some strong volume. So just thoughts on that? And then any thoughts on the year end deal between Biotech and Thermo Fisher just what that means around your UroMap product?

Yes. I think with the breakout, I think, it's good to have done that. I think typically what you'll see is a lot of that is their initial registry studies they've done, which are the 1,500 patients. I think that's probably what you want to refer back to -- again it's -- I defer you to raise those questions, but I'd separate out what is true commercial volume. A reminder of what we've seen is we've added protocols every quarter. We have a model that continues to have a recurring patient base, but more importantly that is driven by the ability to generate protocols center-by-center. And now with over 75 protocols, we feel really good with this model. We've built in addition to adding new centers. So I think for us it's the strength of the competitive moat that we've built, Alex, which is most impressive. This continues to help us sustain our growth and continuing every quarter, because it's such a strong moat that we've developed and built. And I think the addition of ad protocols quarter-on-quarter is quite impressive from our side as well. If you think of overall competition, we think it's good that not only Natera, but others come in the space, because what it's been able to do is help grow the overall market share for us, so we've been capturing market share. But on top of that it's enabled to also drive market growth. I think obviously with COVID being sort of an offset to that this current time point just given what we're seeing in the overall volume numbers. But pre-COVID we've been seeing an increase in overall market growth as well. The other key thing about competition is it really allowed us to accelerate our overall strategy. So as you heard what we're doing on the digital side adding the number of patients we just described was link that we couldn't actually do before. But by building our core business, we've now been able to expand in really connect what's really unique in this space which is that patient journey. No one else is really focused on it and no one also don't think about it, but we have been able to do that. So I think that's really key as well. Also as we described previously, there are three sets of competitors. There are those which will follow the market leader and try to bring some innovation. We see one company moving on the multimodal route investing in side. So that's where I think others are seeing whether the real opportunity is to drive innovation. I think there are others you mentioned the urine tests, where you see more of not wanting to compete in the space how do we license this out. That's the bio technique example. And you think there are others than opportunistic trying to take shortcuts to get in the marketplace. So that's sort of the segmentation we've given in terms of the different competitors.

Okay. No, extremely helpful. And then just lastly just when you look at the price per test being paid now. You look at those tests that aren't being paid by commercial, but certainly could be. And you add all of those up, how much revenue is sitting out there? And I just want to make it clear in the guidance you're not assuming any of that revenue does come in.

Yes. That's right. So certainly a fairly significant opportunity if we were to get fully reimbursed for every test out there even where we don't have coverage could be about I think 60% to 70% higher in revenues. But as of now in my guidance for next year I'm not assuming any improvement in ASPs.

Okay. Understood. Appreciate the update. Thank you.

The next question comes from Matt Sykes with Goldman Sachs. Please go ahead.

Hey, this is Nick on for Matt. So you mentioned the headwind to the volumes that you're seeing so far from Omicron in the first quarter. Are you expecting those -- that headwind to abate as the year goes on and maybe volumes kind of pick up to normal levels, or are you baking in a certain amount of conservatives into that?

Yes. I'll talk and I'll let Ankur talk about what's putting guidance. I mean, I think for us it was just so remarked with less than 1,700 kidney test for example being done in January. It was the lowest since March of 2020. And a lot of this had to do with the ability of hospitals to staffing shortages, the beds that were available. And as we spoke about probably 80 to 90 centers during that period what was really interesting is a lot of centers in the past had sort of -- and including IPOs, it really held out during the Delta search for example. But then swaths of people are actually being infected and had to be taken out of the system and couldn't be part of the support network in the transplant community. So really the staff shortage is a real and then also the acuteness of needing beds during that time. And I think you remember the like was like 1.5 million patients that were getting infections during this time in the country during January. So there really was a significant pressure. So what we saw was real at least for the month of January. The good thing is what we're seeing in February is sort an improvement in the transplant volumes and we hope that continues as well. So, I'll hand over to Ankur.

Yes. Thanks Reg. And I think, Matt, as Reg outlined, we -- the lower end of the guidance assumes a continued weakness. And of course, at the midpoint at the high end, given our belief in the overall transplant volumes and the various actions that Reg was outlining that the market will return to its long-term strong growth profile during this year. So, that's how we're thinking about it right now.

Okay. Got it. Thank you. And then on AlloSure Lung, I know you said the overall growth contribution this year probably isn't going to be too big. But just how are you guys thinking about growth cadence? And how are you excited about the increased penetration you guys can see as the year goes on?

Sorry can you just repeat that? The AlloSure Lung--

Yes. Just how are you seeing that sort of that growth cadence pick up as the year goes on? And how are you looking to see the penetration -- center penetration increase similarly as the year goes on?

Yes. I mean I think we've shared that this 40% in the first three months. And is such a huge unmet need that we've really seen also we shared 700 tees take place in Q4 of last year. I think as we look at that penetration, we expect to continue to seed increase. I mean if we look at steady-state for example in hard as an analogue it's at 95 -- 90%, 95% and that was built over 15 years. And if you think of what you see on the kidney side, it's at 75% plus and that was built over three and a half years. And so if you think in three months getting 40%, we have a pretty good benchmark that we're really exceeding everything. So, I think that we continue the trajectory I think hopefully we'll get to that next bar which will be what the kidney penetration is.

Thank you.

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

Hey everybody. Thanks for the questions. Maybe first just -- I don't want to spend too much time on it, but in terms of the ASP the commentary around high single-digit decline, can you give a little bit more flavor for the breakout of what you're assuming is driven by lung versus sort of the apples-to-apples year-over-year dynamics that you're expecting in kidney and heart?

Yes, I would -- so Andrew roughly about I would say mid-single-digits or so comes from the core heart and kidney franchise where the growth in the commercial business is expected to be higher as we've seen that trend in 2020 and 2021. And then for lung, given that it is a relatively smaller market and we'll continue to intend to provide visibility into the testing volumes for the next few quarters, you'll be able to kind of parse that out, but that should be a smaller contributor.

Okay, perfect. That's exactly what I wanted. And then just in terms of the latest and greatest as you think about MolDx in terms of AlloMap kidney submission? And then also lung still kind of sitting there with Palmetto? Has there been some back and forth? Is there anything more you can add as to what they're asking for or what they're looking for before you can get -- sorry Medicare coverage?

Okay. Yes, I'll start with lung and then transition to kidney as well. In case of lung, all of our dossier and the information including some of the additional data that we published all of that is with MolDx. It's in their hands and we're providing all the information that they're looking for. We'll certainly let everyone know when the decision or the approval comes through and we're waiting for it as well. In case of AlloMap Kidney, continued to make good progress there as we had said earlier. We published earlier that the CLIA validation for that test is complete. The work ongoing around the New York State approval is happening. And then in parallel we're working on our dossier for MolDx at this point in time. Given that we've been very excited the team has been -- has stayed on their timeline in case of AlloMap Kidney and the progress there is quite good.

Okay, great. And maybe just one more for me. As we think about that legal spend that you called out, can you give a flavor is this DOJ related? Is there some other moving parts going on? I know there's some lawsuits as well, but just kind of what the driver is here and if there's anything to think going forward on that front?

Yes. Yes, several factors there, right? As you know we do have a few litigations especially on the False Claims Act and so the IP-related work that has been going on we actually have a trial coming up here shortly for our False Claims act. So, that is part of the contribution in that spend, but also the work we are doing with the government requests and expeditiously providing all the information that was required in that. That's part of the as well.

Okay, great. I’ll stop there. Thanks for the time.

The next question comes from Mark Massaro with BTIG. Please go ahead.

Hey, guys. This is Vivian on for Mark. Thanks for taking the questions. So considering the lower sequential transplant volume procedures during the quarter, could you just speak to how you might see any recovery trending over the next year? Any measures you might take to offset that decline in transplant volume? Thanks.

Yes. No. Thanks Vivian. I mean, again just to reinforce how dramatic levels in January we talked about 1,698, or under 1,700 transplants are done. The last time you had to get a low was in -- we mentioned was in March of 2020. And if you go back even further in history the last time, that was in February 2019 was when you had something this slow. And basically if you go back a couple of years that, the trend we saw then was back in 2017, where you had volumes around -- transplant volumes around 1,700 a month. So really January was a big hit to the transplant community. Now that said January is beginning to -- February is beginning to recover. So we do see improvements in the transplant volumes that are being done. And a lot of this recovery will happen, as we saw last time with the rebound, back when this hit in the previous wave was around the living donors. So there are a couple of areas where you'll get some natural points of increase, but living donors in the kidding side would be the biggest delta of increase that you have there. And I think, also the other gating step is return of the staff to hospitals. There has been staffing shortages across the U.S., but I think you'll start seeing more of that happen now as part of the recovery process as well. So it's sort of twofold that you'll start seeing that. But we expect, we'll have more data as we continue through the quarter, but certainly February looked a bit more promising than it had in January.

Okay, great. And just one quick follow-up. Given that you completed two acquisitions over the quarter, could you maybe discuss your appetite or what additional areas you're looking at for potential acquisitions or partnerships?

Yes, acquisitions is a core part of what we do. I mean, we do like two or three every year. Last year we probably did five, so a bit more than what we've normally done in our run rate. But it's always good around a thematic. And so, I think, for us, 2019 was built about the direct to center approach and how do we actually look at improving the workflow there which is why we did the acquisitions with Zen and order. And then in 2020 is really the direct to multimodality, how do we drive innovation and we did partnerships on bringing in UroMap and also with HistoMap and then later on LOID. And then last year was really about the direct to patient connection, which is why you saw us bringing the connection with dialysis patients to transplant centers for example, with TxAccess and then how do we further progress that with patient acquisition through the app with TxHero. And then more recently with the medication adherence with both the transplant pharmacy as well as MedActionPlan which is number one sort of discharge form for transplant patients, both on paper and also electronically. So, really, it's all part of an integrated strategy. Thematic for 2022 is direct-to-patient management. And so, I think you'll see more offerings around that sort of area as well. But again, it's really, part of -- we have like a plan that's thought out a couple of years ahead. So we're just executing on a plan that was developed a few years ago.

Okay, great. Thanks for taking the questions.

Before we go to the next question there's a correction I would like to make in responding to Andrew's question about the legal spend. I mistakenly said litigation about false claims, Andrew, I meant to say false advertising. This is the litigation we have going on with one of our competitors.

[Operator Instructions] The next question comes from Dipesh Patel from H.C. Wainwright. Please go ahead.

Hi, everyone. Thank you for the update. My name is Dipesh Patel just standing in for Yi Chen, H.C. Wainwright. In extension to the transplant question but the volumes of kidney and heart transplant stable in recent months? And do you anticipate any change going forward?

Sorry can you repeat the question transplant volumes. Can you repeat the question?

Do you – I guess the volumes of kidney and heart transplant are they stable in recent months? And do you anticipate any change going forward?

We just spent a couple of the last questions answering that January was the worst month since March of 2020, when COVID first hit. And then the last time you found a number as low as January was back in February of 2019. And the last time you've done numbers that were probably around the baseline, which we saw in January was about five years ago in 2017. So there has been a cyclical nature in terms of the impact on transplant volume. However, the last three quarters we've seen sequential declines in Q3 from Q2 and Q4 from Q3 and we've also seen that continue on in Q1. However, the point here is that we do think as we've seen in past cycles a rebound will take place as well as particularly on the living donor side.

Great. And then my last question is do you expect the total operating expenses to continue to increase throughout 2022?.

Yes. As mentioned, we are investing for growth. And as we anticipate – as we look at the market opportunity in front of us our intent is to keep investing both in R&D as well as in our commercial capabilities as we scale this company for sustainable growth.

Perfect. Thank you so much.

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

Yes. Thanks very much for all the analysts and investors tend today's call. I mean for us it's a real mission for us as we think of the transplant space and transplant convenient. February is really an incredible month, it's not only hot month and African-American month that's also donate life was on February 14. So as we think of all the different calls you may be listening to just continue to know that our focus on the transplant patient and hopefully, you continue to invest within this space as well. So have a great day. Thank you again now.

This concludes today's conference call. You may disconnect your lines. Thank you for participating and have a pleasant day.