Good day, and welcome to the CareDx First Quarter 2022 Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Ian Cooney, Vice President, Investor Relations. Please go ahead.

Good afternoon, and thank you for joining us today. Earlier today CareDx released financial results for the quarter ended March 31, 2022. The release is currently available on the Company's website at www.caredx.com. Reg Seeto, Chief Executive Officer; and Ankur Dhingra, Chief Financial Officer, will host this afternoon's call. Before we get started, I would like to remind everyone that management will be making statements during this call that include forward-looking statements within the meaning of Federal Securities Laws, which are made pursuant to the Safe Harbor Provisions of the Private Securities Litigation Reform Act of 1995. Any statements contained in this call that are not statements of historical facts should be deemed to be forward-looking statements. All forward-looking statements, included without limitation are 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, May 5, 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 the 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 first quarter 2022 earnings call. The first quarter was a tale to contrast, where January was the lowest month in transplant volumes since April 2020, while March was our highest ever month in patient test results in Testing Services. With that in mind, I'd like to provide the following highlights for the quarter. Number one, delivery of a strong revenue quarter achieved in spite of the slow start to the year for the testing services and the products business line. Number two, accelerating performance in patient and digital solutions, driven by our recent acquisitions. Number three, extending our scientific leadership with real-world multicenter prospective and long-term data generation. Four, help ensure that the transplant community receives accurate information about our tests after a jury found that Natera is a superiority claims with false and awarded CareDx $44.9 million in damages. And five, leading with innovation in artificial intelligence and Xenotransplantation and taking responsibility as a transplant company to increase equity in transplant. Now on to performance. We recorded our highest ever revenue quarter in spite of a slow start. Q1 marked the third consecutive quarter of flat to negative sequential transplant volumes with January and early February, most notably impacted by Omicron, followed by a strong rebound in March. With no sequential transplant volume growth for three straight quarters, we hope transplant volume declines have hit an idea. And the Q2 will reverse this volume trend. Note, our transplant volume numbers are based on the full month of Xeno's data versus weekly data, which is directional into the full month of data becomes available. Now for Kidney Testing Services, we continued our winning formula of adding AlloSure named protocols, adding new centers, and expanding further into kidney…

Thank you, Reg. Hello, everyone. We are pleased to deliver another strong business and financial performance, despite the backdrop of continued difficult market conditions during the first half of Q1 2022. Let me provide you the details. We recorded total revenues of $79.4 million, up 18% compared to $67.4 million in the first quarter of 2021. Testing Services revenue increased 12% year-over-year to $66.4 million. Testing volumes grew by 29% to approximately 42,600 tests, including approximately 900 lung tests. We saw sequential declines in testing volumes in January and early parts of February, before strongly rebounding in March. The March was our highest month ever for testing volumes for heart and kidney. We continue to see strong adoption of our newly launched tests, AlloSure Lung and AlloSure Heart, with HeartCare at greater than 95% attachment rate and AlloSure Lung approaching use in one in two transplant centers in less than six months of launch. Our Testing Services volume growth has and will continue to exceed our revenue growth. As we are in the process of new launches with AlloSure Heart and AlloSure Lung. We are in the process of increasing the coverage to levels we have achieved in AlloMap and AlloSure Kidney. This provides a significant opportunity for future revenue upside, as we build out our commercial coverage in these new launches. Today AlloSure Lung is only at less than 5% coverage and AlloSure Heart at approximately 25% coverage. Although we look at AS by test offering, we understand some investors may look at revenues, divided by total tests. This aggregate average price, declined by about 4.9% versus last quarter of 2021. This decline came from three factors. Higher growth in patients with commercial insurance across all organs, where we have lower coverage today. Changing volume mix between organs with…

[Operator Instructions] The first question comes from Brandon Couillard with Jefferies. Please go ahead.

This is Matt on for Brandon. Thanks for taking the question. I guess, first I want to appreciate the comments in the prepared remarks, but has been a little over a month, since you won the false advertising lawsuit against one of your key competitors. Curious if you could just expand a little bit on any shift in dialog since then, what's kind of been the response there in the market? And if you're seeing any shifts from a commercial perspective? Thanks.

Yes, I think for us, we've built an excellent reputation with the transplant community over the last two decades, which is built on really excellent scientific data, and how we work with different centers. And I think when this jury verdict came out, I think it was really a reaffirmation of what we represent as an organization to the transplant community. And I think that the damages themselves speak to, I think the implications. And so I think it was pretty clear-cut from that perspective.

Great. And then you commented on the March trends been the highest for both heart and kidney. Any comments you can give as we move through April here? And I guess, what kind of gets transplant volumes back to normal after three straight quarters here of flat to down growth, now that hopefully, the COVID waves are behind us?

Yes, I think it has been tough three sequential quarters, and I think we were -- that was good to see some improvements. And we hope, it's the idea of what we've seen in the transplant space. And I think for the first four weeks is still relatively early, but I think clearly given how low January was if you compared to January, it's much better than January. If you look at the month of April. But we continue to mind this trend, but what we can say is that March, certainly was out strongest month on record for both heart and kidney.

Great. And then last one. Just a smaller pieces of the business, but the Digital Solutions $6 million or so in here in 1Q. If I can annualize out to get to $25 million. What's the right number, we should be penciling in for that business for 2022 with some of the newer acquisitions being layered? And thank you.

Yes. We're excited over the last three years, we've built a De Novo business pretty much from scratch and it's been, one where it's been very strategic for Darden. We've seen progressive traction, I think we've had some good numbers this quarter by the Patient Digital Solutions. I think we'll continue to see how that progresses during the course of the year. I don't know if there is any comments that you want to make, Ankur?

Yes, we were super pleased about the performance here, and we just want to see it sustain over a period of time before we can give you color on what to guide.

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

Good afternoon, everyone. It was another big deterioration in price this quarter. We know there's going to be some major advantages, changes ahead of flush through, but I would say that a pretty change quarter-over-quarter. So, what particularly new happened in Q1 to reduce that accruals for tests? And I guess, when do we reaching a point where the ASP declines are going to stabilize and we can start to see them reverse?

Yes, I'll make some comments, Alex, and I'll pass it to Ankur. I think as we look at this shift in pay mix, I mean there are a couple of areas that we see versus the highest increasing number now commercial patients across the organs has been the change for us. The second is obviously the new launches, thinking now Lung coming on board as well. And the third, we've talked a bit about the MA shift, which Ankur go a bit more in details, but these have been the three primary drivers with the change. I'll hand over to Ankur.

Yes. So, Reg summarized the three main drivers there, right, as we've seen in the latter part of last year, and also in this part now. The thinking in general, Alex, there is, as we had said during our previous earnings call at the end of the year, is that we are anticipating this decline to continue through this year, specifically more acute in the first half, as more and more patients continue to shift. There are secular changes are happening both in the market, as well as, our business with more and more patients are shifting towards either commercial or MA plans. In terms of our go-forward plan, there are two changes to it, right. One is, continue to work with the private payers on commercial coverage, very pleased with some of the upcoming discussions, say potential with ISHLT. And then we continue to build infrastructure of improving the collection rates with our -- with the Medicare Advantage plans. Our thinking is what will take us this year to work through this infrastructure. And want to see some results until the latter part of the year, specifically for the Medicare Advantage plans. You may have also noticed the more recent public news, and on the Medicare Advantage plans and the challenges that the industry is facing. So, we're working through that in building our piece of the infrastructure there.

And I just want to make it clear when you are getting paid, you are still getting paid a similar rate as you would have last year or the year before on the volume. And I guess with the Company ever provide a volume number of tests that are currently being paid, just so we can have a more apples-to-apples comparison?

Yes. When we sign agreements with our -- when we sign contracts, we do sign those contracts and to see payments for, at or above what our agreements are. So, just to be spitted the question, we don't discount our pricing. We always sign contracts at or above the Medicare rates. I mean in terms of second part of your question. Yes, we've considered some information we had shared during our Investor Day. And we'll give more color around the mix stuff, how the mix of our commercial volume has been increasing over the last few years. I'll give you more color on that.

Okay, that's helpful. And then the Company has always had -- I would say, very strong earnings leverage potential, given the focus on the -- just to enter to the transplant centers or so and then plus the community piece, but we haven't necessarily seen it turning to a profit. We've been closed, but never quite got there. So, I'm curious, when do we get to that point, where we turn the switch and start to let some of those -- let some of the volume turn its profit? And why -- I guess why won't the legal spend actually rolled down now the jury trial is finished?

So, I might just make a quick comment on the profitable piece. I think as we've -- if we stay just with AlloSure Kidney or with AlloMap, I think we have really strong margins greater than 75%, we've operating margins in the 20 high range there as well as we had previously talked about when we're at scale. I think the difference here is now we've moved into other organs where we have lower coverages. And also that's part of investing and growing. I mean I think, we are not just focused on one area, we need to be a Company that expands and has future scale moving into Lung, moving to Liver, and then also as we think of the future pipeline, particularly in areas of disruptive innovation, such as Xeno are looking into cell therapy. But I will move out Ankur to answer the rest of the questions.

Yes, I think that's from a business model perspective, that's the main thing that the test that have scale that business model is nicely profitable. We continue to build on our strong market position to keep expanding into the other organs. And you see that in our increased R&D spend, you increase that in continued investment in the commercial side. Now, certainly, commercial coverage will drive a very strong operating leverage and we'll certainly have that. In terms of second part of your question around the legal spend, we still do have several matters, even though the trial has completed, there's still several matters of various kind that will continue to remain open for the year. So, at least for the current year, and we don't guide for future years, yet, but for '22 anticipating that this will remain at elevated level.

Okay, and then just lastly, what was the acquisition benefit for revenue in the quarter?

As we mentioned, if you look at our patient, our digital business, which was up 164%, a big part of that contribution came from the acquisitions.

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

Sorry, left myself on mute there for a second. I appreciate the questions. Maybe first, just one on the P&L, we talk about the pricing dynamics. We talk about not necessarily having a scale in some of these organs yet. When we look at the testing services gross margin and actually ticked up about 100 bps sequentially. So, just maybe give me a sense for what you're doing there to help offset some of these things, especially in a market where it feels like everybody else is talking about labor headwinds and cost of goods headwinds what's working for you on the gross margin front?

Yes, thanks for noticing that, Andrew, even though the headline gross margin number could be the other way. The testing services improved because we have two things that are going on there. On one side, we are adding into capacity, we had a new facility will go live potentially here in Q2, but we have strong operating effectiveness programs in place for a laboratory where we've been working on automating our laboratory production and movement of our test services, which has been driving very good operating leverage within the lab. Both in terms of our current volumes and also in preparation for the newer test like lung, as well as potentially AlloMap kidney. We've been investing in some of the automation procedures there. That has helped us at least counter some of the inflationary pressures and be able to hitting the healthy margin profile of that business.

Okay, great. And then, just on the current business, can you give a sense for when we think about Omicron, what the impacts were obviously to the transplant volumes we can see that, but also to kind of more recent transplant recipients coming in versus maybe folks who were further removed from their transplant. Was there any discrepancies you could see on kind of who is showing up to clinics? And how we think about that recovery hopefully as overall volumes of transplants are coming back as well?

Yes, probably, I think it's for -- first, it was Omicron impact, the first is on the transplant volumes and that I think has been quite evident with the lowest in January since the start of COVID peak. The second is actually the labor shortage across centers actually has almost we've spoken to the centers in the United States and they all had sort of issues with staffing which sort of impacted some of the areas where they could support us as well. And in terms of patient access, we've always been around which the study about 40% for the mobile phlebotomy. So, I think we've had good access there as well for during this time of Omicron and its peak. So, I think as we see this recovery probably the biggest disproportionate piece will be living donors on the kidney side. So, as you know, 25% to 30% of the kidney volume is living donors and I think during the peak, and when we've had these ebbs and flows, that's a group that gets impacted the most particularly with them having to donor chains, et cetera. So, and being deemed on electric procedures. So, there, I think you can see more of an uptick and as staff, I think we mentioned previously, as staff come back then there'll be a replica of what was done in the past where people may work in the weekends to do some of these procedures. But currently, that hasn't been the case because you're still making up from the staffing shortages which were existed.

Great. Okay, helpful. And then maybe just to sneak one last one in. Even though it's not exactly a small question, but just what's the latest we saw the validation data you announced earlier this morning. So, what's the latest timeline you can give us for AlloMap Kidney potentially getting to MolDX and for consideration for coverage?

Yes, I'll make some comments. I'll see what Ankur want to say. So, I mean we're really thrilled with AlloMap Kidney. As you know we've established this multimodal approach firstly with heart and we're the only company with multimodal approval and that's sort of demonstrating the increased clinical utility and I think that we starting down the hot side as we look at Kidney has been not just adding AlloMap kidney, but also looking at iBox, literally call this combination multimodality, which is something we're excited about. And so, with AlloMap kidney, I think it's been generating what we call these clinical validation papers has been an important part of that process. So, I think we're making good headway in late development. I don't know if Ankur wants to weigh in anything additional?

No that's good color. So, well covered there. Right.

Great. I'll stop there. Thanks again.

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

Hi, this is Nick on for Matt. Maybe just kind of a follow-up to last question. Any commentary on payer feedback receptivity to some of the recent data. Some of the OKRA datasets, you guys have published?

Yeh, I think that when you talk about the recent data, you're talking, I don't think we've the -- that will cover ATC we've published on the kidney side the ADMIRAL data and we talked about the cable data, which is our long-term data on the kidney side and onshore what we just recently talked about was the long-term data for sure in both these long-term study showed the increased outcome of survival versus those using unit statistics. So, I think you're referring to those two sets of data right versus OKRA.

Yes, yes. Thank you.

Yes. Okay. So, I think for us, I think, particularly if we take firstly, the hot side, what we've seen is I think Ankur may have alluded to it and also myself is, we have AlloMap on the international guidelines and we were just ISHLT last week and I think with the data we are generating and reducing working with obviously extensive centers in KLOs, there is consideration now AlloSure for example to underwrite. So, if you need to be incorporated into the guidelines and again this is for consideration. So, for us, it could be another important milestone as we look at payer coverage in this space. And certainly, the team has made progress, we've seen that out of the gates through a couple of key accounts sign up on the hot side like Geisinger et cetera, but I think with the potential guidelines for AlloSure is really exciting. On the kidney side, our team has I mean built out under Ankur. And I think what we've seen here is the utility of the ADMIRAL is being well received and also I care which is long-term data. So, these are the types of data, which I think the payers request, which is long-term utility and also how it influences decision making. So, we're really excited by the data it's been generated. And I think the team, really pleased to be the only company that has sort of data to go out towards payers as well, particularly long-term piece.

Got it. Thank you. And then you guys have talked about some of the investments you're making, whether it's in AI or some other related fields. Could you just maybe comment a bit more on the SG&A ramp that we're seeing? What are the impacts that you guys are having from that investment?

Yes. I might make some comments, and I'll hand over to Ankur. So, I mean I think as we scale and build as an organization, you need to have an innovation hub, which is the R&D piece. And as you look at the commercial execution is the SG&A piece. So, investment is a core part of what we need to do as an organization, we could always decide not to do it, but I think to be remiss in this type of environment, not to continue to grow as the company dedicated transplant. So, in terms of the SG&A side, what we've been doing particularly in commercial side is we've actually split that out our field team to be in a dedicated above the diaphragm blood diaphragm so -- crossing abdominal teams. And on the R&D side we continue to invest in developing this pipeline and some of the areas you mentioned such as in AI a bit is critical. These are being licensed, but there are other areas such as AlloMap Kidney other organs such as AlloSure Lung, and UroMap on kidney. So, we have a pretty extensive pipeline, this is really building for the future. I think it's easy to just focus on one successful offering, two successful offerings, three successful offerings but in terms of -- if you look at AlloSure, AlloMap, and HeartCare but for us as a company, it's really important to sustain ourselves but continue to drive a pipeline one that's building innovation. So, AI will form a core part of that. I know you called it out specifically. But I may have Ankur just comment on the specifics in terms of changes spend that might be...

That's -- yes. That's well covered. Now in terms of G&A, that's between SG&A, I think the sales side, Reg has covered well. On the G&A side, the two components, one, of course, is very large increase in the legal spend that we've talked about it remains elevated, but -- and the second part is that we do -- we are scaling the core infrastructure of the company in making sure we have the right systems and the procedures that are well suited for the company, both for our size and where we could be over the next two, three years or so.

The next question comes from Yi Chen with HC Wainwright. Please go ahead.

And this is [Chate] on behalf of Yi Chen. You guys have answered all of our questions. So maybe I was wondering if you could summarize all the upcoming catalysts for this year? And any specific event that we should keep an eye out for? And the second question is on AlloCell and AlloHeme, any specific plans for this year along with your Digital Solutions offerings? Thank you.

Yes. Got you. I think if I understood, I think you said, any upcoming tell us what was just, I didn't catch the full second question, it was?

Particularly on AlloCell and AlloHeme, as well as, your Digital Solutions any short-term, long-term plans that we should keep an eye out for?

Got you. All right. Yes, I mean, I'll take the latter first. I mean certainly with building disruptive innovation, whether it's looking at AlloCell and AlloHeme, I'd encourage you look at the full presentation. We just delivered the Tandem Meetings representing ASPCT and CIBMTR. And there we had both clinical validation should AlloCell, as well as, for AlloHeme. And these areas, which we are investing for the future. And so I think we've also actively been enrolling in the study, which is also shared at the presentation for the Acrobat study, and that's AlloHeme. So, I think as you look at continued progress here, it's about partnerships, where we can publicly disclose in addition to discontinue enrollment on Acrobat. And will provide additional commentary on that, because enrollment is going extremely well. In terms of looking at some other catalyst we've talked about, I think once we've talked about is, having UroMap and AlloMap on kidney side has been the areas to watch stream the course of this year as we provide updates. If you think a specific scientific milestones, we just completed show presentation ISHLT, in terms of ATC, which comes up in June, we'll be talking about the over we got as well. So, these again the long-term studies looking at multi-modality. This really is the way the future I think generating long-term study data, which is from a multi-center prospective, dataset is what we do. And that allows us to continue to drive innovation, but stay ahead of others, because about clinical bar is being raised as well. So, I think these are couple of areas that you want to keep an eye on. We'll also share a bit more now Artificial Intelligence, I think this is really in some ways the future of what the industry is moving towards, not necessary I've seen on the Diagnostic side, but certainly as we look at the macro space right, AI such a core part of what can make a difference in many different industries and sectors. So, I think our investment in artificial intelligence is core. And so we'll provide more of an update on that. We may actually do a Potential Innovation Day, as well as part of that. Typically, we talk about disruptive innovation such as we did the Xenotransplantation Day earlier on this quarter. So, maybe more to watch out for on the AI side as well. Exciting future.

The next question comes from Mason Carrico with Stephens Inc. Please go ahead.

Maybe just two quick ones for me here. I know AlloMap Kidney as a ways off, but in terms of thinking about the initial attachment rate for that test. What are some key differences that should be taken into account? And for maybe, why it would be different than where AlloSure Heart attachment rate currently sits?

I think that's about clinical utility. So, I think when you look at the tax rates, we believe that as long as you demonstrate clinical utility, then there'll be uptick. I don't think you'll find any other proxy or any other benchmark, which is shown what HeartCare has done, and given what we saw in HeartCare what we've done in KidneyCare is actually pretty similar right in terms of the technology, in terms of designs, in terms of trying to understand, what really matters to the physicians. And on top of that, we've also included iBox, which is a prognostic algorithm as part of that. So, I think the end of day, what's really important things for this myself is, demonstrating utility, if it's not useful then you really won't get that type of attachment. So, I think that sort of speaks for itself. And that's why we have moved on to other organs, as well and developed LungCare and LiverCare, as part of that sort of development process as well. This is one final point Mason, I mean, we developed this approach without knowing if that would be a reimbursement pathway, because we believe is in a day, the way you help clinicians is adding clinical utility and helping them in the decision making.

Got it. And then any updated thoughts on potential commercial payer wins for AlloSure Kidney, maybe this year and in 2023? Do you have the studies and evidence that you need to begin pushing on these payers, specifically for AlloSure Kidney?

Yes, I'll make a comment and I'll hand over to Ankur as well. I think some of -- one of the questions as came up earlier, and what's the impact of some of these studies you're doing? I think firstly long term studies are important, because it goes beyond some of these short-term studies done. We are the Company that has that long-term day generation within the harder on the kidney side. And I think to give the ADMIRAL study was really helpful as we look at demonstration of benefit with both full calls, and also for surveillance as well. And so if I think of -- what we think is critical, generating the right datasets is important. And on the heart side, as we saw, having for example, guideline changes can also be a sign because incrementally beneficial as well. I'll hand over to Ankur to make any additional comments.

Yes. And we've been having very good discussions with a lot of peers around, especially with the ADMIRAL data, which provides the first long-term data on AlloSure Kidney. We have a plan with a large list of payers that we're meeting with, for the remainder of the year as well as going into early 2023. Certainly, a front-end center focus there.

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

Yes, thanks very much. I mean at CareDx we're building a really special Company one that 100% focused on the transplant patient. We've doing it more than two decades. And for us it's really this unique ability to really be front in this space and it's brought us attention. Not only as the transplant community, but I think in patients and what we do with them day in, day out. So, again for all the investors on the line, thank you for your interest in this space. It really makes a difference to the transplant community knowing that this scenario focus for them. Thank you and have a great day.

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