Good day, and welcome to the CareDx, Inc. Second Quarter 2022 Earnings Call. Today’s conference is being recorded. At this time, I would 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 ended June 30th, 2022. The release is currently available on the Company’s website at www.caredx.com. Reg Seeto, Chief Executive Officer; and Abhishek Jain, Interim Chief Financial Officer, will host this afternoon’s call. Before we get started, I would like to remind everyone that management will be making statements during this call that include forward-looking statements within the meaning of federal securities laws, which are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Any statements contained in this call that are not statements of historical facts should be deemed to be forward-looking statements. All forward-looking statements, including, without limitation, 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 of 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, August 4th, 2022. CareDx disclaims any intention or obligation, except as required by law, to update or revise any information, financial projections or otherwise 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 second quarter 2022 earnings call. I’d like to begin by focusing on the following financial, operational and strategic highlights in Q2. Through strong execution discipline, I want to highlight, we have one, continued to maintain our excellent financial position with over $300 million in cash, no debt, industry-leading gross margins and with a demonstrated path to profitable growth; 2, return to sequential mid-single-digit testing services volume growth. Importantly, we have now passed the nadir in transplant volumes, which we saw in Q1; and 3, we scaled our collections infrastructure to more efficiently capture the revenue opportunity from the increase in mix of commercial and Medicare Advantage patients. Strategically, we’re delivering on our long-term mission and vision. Our vision is to be a leader in the transplant ecosystem and with a long-term goal of connecting 1 in 2 transplant patients. AlloCare, our patient app, is a perfect example of that progress, where there’s been now more than 50,000 downloads pre and post-transplant patients. And our mission is to improve transplant outcomes by bringing innovative intelligence solutions exemplified by our new artificial intelligence modalities with AiKidney and [AiHeart]. Now on to the first topic, our excellent financial profile. Our Board and management team believe that maintaining a strong balance sheet is important to CareDx’s success. You may recall that in Q1 of last year, we took advantage of a favorable market condition to bolster our cash position by raising $188 million through a public stock offering, ensuring that we can be self-funding for the foreseeable future. This is a competitive advantage for CareDx in the current market environment, particularly as we have a clear path to profitability. Unlike our peers, we will not have a near-term need to raise…

Thank you, Rich. We are pleased with the results from the second quarter, and I would like to echo the comments about our incredibly deep and efficient moat across the transplant centers and our ability to deliver on our vision of being the leader in the transplant ecosystem. I would like to highlight the following, strong cash position of $306 million, strong volume growth and impressive gross margin performance. Excluding sequestration, we improved our change in ASP versus Q1 from 4.9% to 3.7% through better collections. Our model for profitable growth, where we expect positive adjusted EBITDA by the first half of 2023, even including elevated legal expenses. I want to start by highlighting our financial strength. We ended the quarter with $306 million in cash, cash equivalents and marketable securities. As we return towards a breakeven adjusted EBITDA, we expect future uses of cash to be driven mainly by capital allocation, decisions focused on increasing shareholder value. We are confident that the business is self-funding into the foreseeable future. Moving to the quarter, in Q2, we recorded total revenues of $80.6 million, up 9% compared to $74.2 million in the second quarter of 2021. Testing services revenue grew by 3% to $67.1 million. Product revenues decreased 2% year-over-year to $6.7 million, and digital and patient solutions revenue increased 178% year-over-year to $6.8 million, driven by our recent acquisitions of The Transplant Pharmacy and MedActionPlan. Notably, our testing volumes grew by 20% to approximately 45,000 tests. A quick reminder that our strong testing volume growth came despite a tough comparison from Q2, ‘21, that was an all-time high quarter for transplant volumes. For the quarter, we saw solid sequential growth in all organs, particularly encouraging is the continued strong uptake of our AlloSure Lung, where the volumes grew to over…

[Operator Instructions] And our first question will come from Andrew Cooper with Raymond James.

Thanks for the questions. Maybe just first, I want to get a sense for can you just tell us where specifically on transplant volumes today, you think the mix is in terms of Medicare, Medicare Advantage and true commercial. And then to some degree, talk us through what your actual volumes look like on each of that, at least directionally? And then lastly, why has that been something that’s been difficult for you to predict. It sounds like the [guide] just really tied to that mix dynamic. And so I just want to understand what’s changed relative to your expectations prior? And maybe what have you learned since this time last year that informs sort of what the mix might look like going forward?

Yes. Thanks, Andrew. It’s Reg here. Thanks for the question. And we’re excited by this quarter, and we had a strong quarter in volume growth. And I think in terms of -- as we look at this volume progression and the mix, what’s clear is that we continue to see a significant increase in our commercial percent of total patient volume. And that’s because of the strategy we instituted bringing new launches such as AlloSure Lung, AlloSure Heart, and now expand in community nephrologist, where we added a series of patients, who historically have not started with reimbursement and where we’ve had to earn and build that coverage. And so if you look at the evolution of that, what you can see is that the greatest increase or change has been in our commercial percentage, which used to be under 50%, but now is above 50% in terms of the commercial patients. And we’re seeing this mix continue, where commercial continued to increase. So probably at the start of this time last year, it was around the 47% range, and now we’re about 53%. So we’ve got a 6% delta change that we’ve seen. On the Medicare side, we’re seeing that decline by about the same amount and the rest of that made up through Medicare Advantage, that’s a mix. So as you can see, quite a bit of a dynamic shift that’s taking place.

And then maybe kind of sticking to similar topics, but just conversations with payers and agencies continue to build the data sets out there, continue to build the clinical. So any updates you can give us on conversations with some of those commercial payers efforts to make sure you get paid on Medicare Advantage as well.

Yes. Absolutely. I mean, this is a process. And the good thing about -- that’s why I mentioned AlloMap Heart as the gold standard. I mean, there you have every national payer [are the 5]. And there, you have most of the major regionals as well, and you have coverage. We used 80% as reference, but it’s well in excess of 80%. So that standard was sent over a period of time, multi-stage process, which began with excellent studies and [indiscernible] being published in New England included long-term studies, include randomized control phase, included also getting into guidelines. And so as we have seen from our approach across these new offerings, we’ve done the same, right, which is doing excellent studies, multicenter prospective in excellent journals. The next thing is in the long-term studies. And now we’ve also started the randomized controlled studies, both in heart and kidney. And the goal ultimately is to get incorporating guidelines. As you can see from last quarter and also this quarter, we mentioned that the donor-derived cell-free DNA that is AlloSure is being considered as part of the next iteration of ISHLT. So it is a process. It’s one where for those who is new at the payer space, you have annual conversations with the majors, but you can also have ad hoc discussions, which we’re continuing to have as well. But really is a process, but it’s one that it’s precedented. This isn’t the mystery because we’ve seen this with AlloMap, and I think it’s a process now we’re applying into AlloSure Heart, into AlloSure Lung and obviously into AlloSure kidney.

We’ll take our next question from Alex Nowak with Craig-Hallum Capital Group.

I wanted to follow up on the ASP comments here and hope to clarify. There’s obviously the newer test out there in heart and lung, that has a higher mix of commercial when looking at year-on-year that obviously leads to less coverage there than Medicare. But then I’m curious why the ASP decline quarter-on-quarter. Shouldn’t you start to lap that amount here at some point, as if you look at test volumes from -- going from Q1 to Q2, do you think commercial test volumes is pretty consistent from those 2 quarters. So I guess I’m trying to figure out what specifically led to a sequential decline in price, let’s say, specifically for Q2.

Yes. I’ll give some comments, and I am going to let Abhishek [come] in more detail. I think, firstly, there was a new mandatory change, which is part of sequestration, which was the 1%, which I think was mentioned by Abhishek. And I think then we broke it up into what was commercial and Medicare. And what you can see is, there actually was a larger increase in the commercial mix of these patients between Q1 and Q2. So I don’t know, Abhishek, if you want to add some more commentary there.

No. Thank you, Reg. You have covered most part of it. But the key here is that when we start to look at the commercial side, so increased volume, most of that was driven by the payers and the test on the commercial side. And as I mentioned, it was about 75% of our ASP change, and it’s primarily driven by our strategy here because as we continue to move into community nephrology, so we are getting more volume in that space. And similarly on the AlloSure Lung since we actually provide that number separately, you can see the AlloSure Lung actually increased over 50%. So that -- those are the 2 factors that are driving almost like 3% of your ASP change. And then the rest comes from the Medicare sequestration and a small part is coming from the collections.

When we are thinking about the growth embedded into the new guidance, can you just remind us, first, how much acquisitions were added to sales in 2022? And then what does the guide assume here for growth in testing volumes? It looks like if you take the guidance and it almost implies a flat growth for the second half compared to the first half. So I’m just -- I’m trying to understand the volume trends in there?

Yes. Sure. So first of all, just to make sure that I get your questions fully right here. So when I look at the guidance, the guidance change is coming primarily as we look into our ASP, as of where we are today. So we are now assuming that this mix shift will continue in the second half of the year and that’s the reason we are revising the ASP assumptions that we had around the high single digits to the mid-teens now. And that is shifting the midpoint of the guidance from the previous $340 million to the new midpoint guidance of the $330 million. Now I would only add that there has not been any change in our assumptions, as it related to the volume and the other [Technical Difficulty] the high medium and low growth rate assumptions were the same. I think what we’re communicating here is the change in the [Technical Difficulty].

Okay. I think you guys broke up on my end, but we can follow up offline. Thanks.

So [Technical Difficulty] can you repeat the question? Hello? Did Alex drop out or is the [speaker out].

Alex, are you still on the line?

Yes. I’m getting a text message like the phone line is cut out. So I don’t know if you can hear us.

This is the operator. I am able to hear you on my end.

Okay. Great. Well, I don’t know if Alex dropped out, we couldn’t hear his question.

Alex, are you still on the line? Your line is still open.

Yes. Alex -- maybe we can come back to Alex, we don’t hear him. Maybe go to the next [indiscernible]. Yes. We can come back to Alex when he rejoins.

We’ll take our next question from Brandon Couillard with Jefferies.

Abhishek, just in terms of the phasing of the back half of the year, should we assume that ASPs step down sequentially in both the third quarter and fourth quarter. And I know this may be a little preliminary, but would it be your initial view that this mix shift begins to actually stabilize, as we move into ‘23? Or do you think it’s likely to continue, but perhaps at a slower rate.

Sure. So Brandon, this is a great question. So as I look into the second half of the year, my ASP assumptions are pretty much how we are seeing the trends as of right now. So what we are assuming that are the mix shift that we have seen so far, this will continue in the next half of the year. So that’s the first piece. The second piece is around the Medicare sequestration. So as you know, that Medicare sequestration cut will go up to 2% in Q3. So it will have the same impact the way it had in the current quarter, but it will go away in Q4. So that’s the second part. So those are the 2 pieces that we are assuming. And -- but other than that, it will continue at least from our midpoint assumption standpoint in the same way for the second half of the year.

And as far as…

Yes. And just Brandon -- just in terms of ‘23, we haven’t guided yet. But just -- I mean, in terms of that commentary, I think what you can see is that sequestration will go away. But also as we build more commercial, the largest [piece 3] quarters is coming from commercial. So as we work on commercial contracts, there is a little bit reimbursement in AlloSure Lung, causes were reversed and also when event multimodality, for example, comes through. So what this assumes is that progression, but what it doesn’t factor in is during this 2023 has been building in these additional contracts they come through and then also the improved collections. So I just wanted to add that as well. Although, we’re not guiding ‘23, just to show that there is -- there will be improvement.

Well, I mean, you kind of are talking about 2023 in terms of [22] positive adjusted EBITDA by the first half. I mean just in general, like why give that target right now? And what’s the key driver of that shift to profitability? Is it stronger top line growth or actually a moderation in OpEx spending, as you kind of indicated would be the case for the second half?

Yes. Brandon, we thought it was important to -- because we, again, spoke to our investors and our long-term investors, it’s understanding that we have a really good business model, but also this path to profitability, and I think using adjusted EBITDA as the proxy. And so as we’ve mentioned in the call, we had [12 of the 15] in the past. And what we incurred in the last few quarters is this incremental non-recurring spend, which will eventually go away, but say, for example, leak expenses. So if we assume that this year, that’s $5 million a quarter, $20 million, for example, we’ve had to absorb that. And so what we want to say is we go into the 2023 is that we had operational model including OpEx and including top line growth that will absorb that and then we’ll move back into this positive adjusted EBITDA. So that’s the 3 assurance we want to provide. And again, just as a reminder, we know our model well. And I think what we’re trying to do here is to say that we’ll return to that after absorbing these incremental non-recurring costs, for example, [legal].

And last question, just on KidneyCare, any chance you could be more specific as far as the time line for MolDx submission? And what are the next milestones towards commercializing that test?

Yes. No, I think we thought really good about AlloMap Kidney. We obviously completed our second independent validation study. We’ve completed our CLIA validation. I mean the process will, as we mentioned, in the second half year here will be with MolDx. And as part of that, the [CLIA] team have started part of their training, have started their process, this is good part of education before any major launch. But I think we feel good about the progress in AlloMap Kidney. We also mentioned UroMap, UroMap is also [yet] to start CLIA validation, as well in the second half of this year as well. So both exciting opportunities for the organization, particularly in the kidney space.

We will take our next question from Mason Carrico with Stephens.

It’s Jacob on for Mason. So on the Medicare to Medicare Advantage switch in patients, I know you guys talked on the call a little bit about building out the infrastructure for combating kind of this negative impact, that’s kind of been a big part of the ASP headwind. Just could you maybe talk about the infrastructure you guys are building out there and maybe any metrics you could point to that shows collection rates are going to start improving.

Yes. I can describe the infrastructure, but I think also with what obviously described as well with 75% being on the commercial and 25% being on the Medicare, Medicaid Advantage shift. That was obviously a much higher shift in Medicare, Medicaid Advantage in prior quarters. So you can see that actually, there has been some improvements on the collection side as well as part of that. And excluding sequestration, it was actually 3.7%, so an improvement versus Q1. That said, the infrastructure that we’ve put in place during the first half of the year in which we continue to [have] by now resolves around 3 things, one is people, the second is process, and the third is looking at third parties. And so as you heard during the call, we’ve now engaged third parties helping us during the process, and we’ve obviously increased the number of people. This is a point of verification for those on the phone. When you submit some Medicare, it’s so easy, you put the paperwork, submit in. When you go from Medicare Advantage or when you go for any commercial plans, it’s different, right? You have different initiative needs such as different medical information you provide. There’s often a prior [roth] required. There’s often like, for example, appeal process, et cetera. So again, this has required more people because it’s a longer process. It’s part of that. And then secondly, and thirdly, just building up the process that we have in the organization, as we shift more to commercial plans as well. So again, this process as a front end has mission process and a back end, and here we’re scaled up in people and also with third-party support.

And then moving on to next one, could you just maybe provide an update for us on the inclusion of donor-derived cell-free DNA in ISHLT guidelines. Maybe just talk about the impact, the inclusion would have from a time line perspective on expanding commercial coverage for AlloSure Heart.

Yes. We didn’t incorporate any national guidelines with the ISHLT is a pivotal moment. And in terms of the timing, we wouldn’t be able to comment on that because that’s developed by the committees and subcommittees and it was shared as part of the presentation is the draft guideline. So we assume that process is ongoing. So we’d love to comment on that, but we actually don’t because we don’t run those committees. But in terms of the impact, it would change part of the dialogue discussion that we would then have with the commercial payers because it is seen as a fairly good validation proof point as well we saw that with obviously, AlloMap, as well as those instrumental in helping us to engage payers as well in those discussions. So I’d say it’s a [indiscernible] important proof point and one that could be -- create a bit of an inflection point.

[Operator Instructions] We’ll take our next question from Chen with H.C. Wainwright.

In the prepared remarks, you mentioned that relatively low volume of transplant is a result of a shortage in staff. Could you comment on what created the shortage at staff?

Yes. The shortages that you’re seeing across the healthcare network is pretty well documented. I think during the process of COVID, there was a lot of staff, who were firstly leaving roles and going to other institutions [indiscernible] traveling nurse concept. And so there were staffing shortages, as a result of that. Secondly, there were people who were leaving nursing roles and other roles as part of that during the course of COVID and so left those roles permanently. Those 2 have been pretty significant pivotal creation to staffing shortages across the hospital landscape and is left to various institutions actually being short in this. Where this has really played a role, though, is when we saw during Q3 in 2020 during COVID that there were a lot of elective procedures being done on weekends, for example, play catch-up, as [part of the] living donor transplants. And so even if there is a desire to do more, for example, in transplant, you’re not seeing that same sort of willingness or availability, for example, to schedule ORs out of hours or to schedule on weekends, for example. So it has been something that it still exists. And living donors have not returned back to pre-COVID levels.

What evidence have you observed to make you believe that the situation could improve in the second half?

Yes. I think for staffing shortages, it’s harder for us to say that centers will be able to recover. But I think general [indiscernible] in what we’re seeing across the landscape is there has been an acceptance of COVID, there’s also been acceptance of people now trying to get back more to sense of normalcy. So on the first factor, the traveling nurses, you’ll see a bit of a trend shift there as well, where the actual payment rates and the desire to keep on moving around will probably change with payments coming down. So that -- that will be one difference. The second is, you’ll probably see less attrition of people wanting to retire because [indiscernible] that has already happened. So I think it’s now really dependent on more folks coming back into the -- into those situations, but also there being lower attrition. Yes. It’s harder for us to make a macro comment of the entire United States.

So the federal government just declared Monkeypox as a public health emergency, which aims to the speed of new vesting distribution. Do you think that could possibly creates another round of staff shortage?

Yes. I’m not sure -- too sure with that question. I think Monkeypox is an area that’s still fairly early. I think it’s one where I’d probably not the expert to comment on in that area. I don’t believe it’s airborne. But probably, again, if I relate back to thinking of staffing shortage that -- if that’s your primary question, it’s really about I think now you’ll see more of the return to the status quo, hopefully, for Q2 -- sorry, Q3 and Q4.

We go to our next question from E.V. Koslosky with Goldman Sachs.

So it’s great to see transplant volumes recovering sequentially. Could you give us a bit more color around trends you’ve been seeing so far in July?

Yes. The trends in July, and these are weekly versus monthly, so what we present only with the monthly days, which are more complete data sets. On the weekly trends in July, which are directionally seems to be very similar to what we saw in June [indiscernible] probably similar to mid-single digits.

And then despite being down -- or up sequentially, we’re still down versus last year, but obviously, you’ve proven for the last few quarters, you’ve been able to still grow testing volumes even when transplant volumes are down. Could you talk through what would happen if transplant volumes take longer to get back to last year’s levels?

Yes. I think for us, we’ve seen the nadir in Q1, and we predicted that. I think that’s played out in Q2 with a nice rebound in recovery sequentially, but also year-over-year. I think given the comparator of Q2, 2021 being the peak point, I think we’ll probably see year-over-year improvements in Q3 and Q4. I think sequentially, some of the drivers, which we may see improvement will be driven by the living donor population, which is still below where it was pre-COVID, helping to assess with transplant volumes. And let’s not forget on the heart side as well, we talked a bit about kidney, but there are other forms of drivers, which are leading to an increase in volumes. For example, we’ve seen the DCD versus DBD patient hearts being used as well. So overall, I think the ability of this market to come back long term is very strong. And I think we’ll hopefully see the start of that in the second half of the year.

There are no further questions at this time. I’ll turn the call back to Reg for any additional or closing remarks.

Actually well, look, I want to thank all the investors, analysts, shareholders being on today. It’s been a tough 6 months, I think, for many companies and operations and organizations. I think for us, we’re really excited by the momentum that’s come out of Q2, and I think what we can do in the second half of the year. And we just -- at the end of the day, thank each and [everybody] of you for supporting transplant. It’s such a unique space, and these patients really need support and we’re proud to be 100% focused on transplant. So thank you, again for your support and commitment. And we look forward to follow-up discussions with each and every one of you. Thank you.

[Technical Difficulty] today’s call. Thank you for your participation. You may now disconnect.