Good day, everyone, and welcome to today's CareDx, Inc. Third Quarter 2024 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, you will have the opportunity to ask questions during the question-and-answer session. Please note today's call will be recorded and I will be standing by should you need any assistance. It is now my pleasure to turn the conference over to Greg Chodaczek, Managing Director. Please go ahead, sir.

Thank you, Chloe, and good afternoon. Thank you for joining us today. Earlier today, CareDx released financial results for the quarter ending September 30, 2024. The release is currently available on the company's website at www.caredx.com. John Hanna, President and Chief Executive Officer; and Abhishek Jain, Chief Financial Officer will host this afternoon's call. Before we get started, I would like to remind everyone that management will be making statements during this call that include forward-looking statements within the meaning of the Federal Securities Laws, which are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Any statements contained in this call that are not statements of historical 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 of our 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, November 4, 2024. CareDx disclaims any intention or obligation, except 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 direct comparable GAAP financial measure may be found in today's earnings release filed with the SEC. I will now turn the call over to John.

Thank you, Greg, and thank you to all who are listening to today's call. CareDx had another strong quarter with year-over-year growth across our business. We reported revenue of $82.9 million, representing 23% year-over-year growth. We expanded our gross margins and managed our expenses well, leading to positive adjusted EBITDA of $6.9 million above our guide of being EBITDA neutral. We generated $12.5 million in cash from operations and ended the quarter with a strong balance sheet of $241 million in cash and cash equivalents and no debt. We believe CareDx has turned the corner toward long-term profitable growth. In my prepared remarks, I will provide commentary on Q3, an insight into Q4, and our revised guidance. Then I will turn the call over to Abhishek, who will review our finances and guidance assumptions in further detail. In Testing Services, we delivered approximately 44,600 tests, up 16% from the prior year. This represents the fifth consecutive quarter of sequential growth in Testing Services volumes. Testing Services revenue was $60.8 million, up 27% year-over-year, including $1.2 million in revenue from tests performed in prior periods. We have begun to execute the strategy we laid out at our 2024 Investor Day that will unlock profitable growth at CareDx by engaging transplant centers with solutions that include a synergistic portfolio of testing, digital, and lab products and are seeing early successes with this strategy. The first step was to reorganize our go-to-market team into a structure that places our customers at the center of everything we do. To capture the testing services growth opportunities ahead of us, we have already added 15 of a planned 30 sales and marketing team members to promote and sell our leading transplant solutions. In addition, we are adding 20 team members to our billing organization, of which…

Thank you, John. In my remarks today, I will discuss our third quarter results before turning to revised 2024 guidance. Unless otherwise noted, my remarks will focus on non-GAAP results. For further information, please refer to GAAP to non-GAAP reconciliations in our press release, earnings presentation, and recent SEC filings. Let me start with the key financial highlights. Reported total revenue of $82.9 million for the third quarter, up 23% year-over-year. Delivered approximately 44,600 test results, up 16% year-over-year, and 2% as compared to the last quarter, representing the fifth consecutive quarter of sequential Testing Services volume growth. Reported Testing Services revenue of $60.8 million, up 27% year-over-year, including $1.2 million associated with tests performed in the prior periods. Reported Patient and Digital Solutions revenue of $11.9 million, up 20% year-over-year, and Products revenue of $10.2 million, up 7% year-over-year. Reported an adjusted EBITDA gain of $6.9 million compared to a $10.9 million loss in the same quarter of last year. Finally, generated cash of $12.5 million from operations and ended the quarter with $241 million in cash, cash equivalents, and marketable securities. Moving to the details, starting with gross margin. Our non-GAAP gross margin for the third quarter was 69%, up 240 basis points as compared to non-GAAP gross margin of 66.6% in the same quarter last year. Our non-GAAP Testing Services gross margin was 79% in the third quarter compared to 74% in the third quarter of 2023. The improvement in Testing Services gross margin was driven by volume growth, ASP expansion as well as continued efficiencies in managing our Lab Operations. $1.2 million in revenue associated with tests performed in the prior period also added about 40 basis points to the non-GAAP gross margin. Our Patient and Digital Solutions non-GAAP gross margin for the third quarter was…

Thank you, Abhishek. I want to reiterate how excited I am about CareDx's future and the journey ahead. We have the right team in place, addressing the right market with the right products to deliver profitable growth. I want to thank the entire global CareDx team for their strong execution in the third quarter. And with that, I'd like to ask the operator to open the line for questions. Chloe, are you there?

Yes, I did announce Bill Bonello with Craig-Hallum. Your line is open.

Hey, thanks. Hoping you guys are all there after that storm -- so thank you.

Yes. We can hear you, Bill.

Okay. Good. Thank you so much for all of that information. I -- a couple of questions. Just on the Q4 guide, I guess, I've sort of thought in normalized circumstances as Q4 being maybe a stronger quarter than Q3. Now I get that you had a little bit of prior-period revenue this quarter. But even if you take that out, it seems like you're projecting revenue to be pretty flat. Sequentially, is there anything you've seen in October in terms of trends that would make you a little more cautious than normal? Or how should we think about that?

So Bill, in the Q4 guidance, you're right that the revenue for Q4 is more or less in line with the Q3. And it's primarily driven by a couple of factors. One, the prior-period items that I called out, the $1.2 million in the Testing Services business and about $1 million that I called out in our Patient and Digital Solutions business. So if you actually exclude these two items, then the Q4 revenue actually grows as compared to the Q3. And in our Testing Services business, for example, we are baking in volume growth from Q3 to Q4, in line with how we have seen the volume growth in the last year. So there is volume growth in the Testing Services business as well as the revenue growth.

Okay. That's helpful. I wasn't thinking about the million on the patient because I think if you back out the $1.2 million, you're still pretty flat. But maybe with the $1 million, you get a little bit of growth. And then I guess, I'm just trying to wrap my head around the comment on the ramping of the growth and maybe being at low-teens of revenue growth for next year. And I absolutely understand what you're saying about the pacing of surveillance testing coming back and how that will take some -- it certainly takes some time. But I mean, you just reported a quarter where you had 23.5% growth. And even if you take out the unusual items, I think it's 20% plus growth and you had a -- that kind of growth, if not better last quarter as well. And I think the implication for next quarter is sort of -- you have 25%-ish kind of year-over-year growth. So what happens that we just fall off all the way down to low-teens from sort of, low '20s to mid '20s?

I can quickly make one comment and I'll give this back to John. So at the midpoint of our guide, year-over-year growth is about 17% is what we have called out, Bill, right? And if you were to take those one-timers out, which is about $14 million, then you're back to about 12% to 13% growth, which is pretty much in line with what John basically mentioned from the pacing of the revenue growth in 2025. And of course, as we start to invest in the commercial team and the billing operations, we will scale the growth at a higher number in the outer years of our 2027 plan.

Yes. I think that's right.

I mean, Q1 was a bad quarter. So somewhere along the line, we should probably factor in another bad quarter or how do we -- I mean, Q1 was an -- it was sort of leftover in how you had been growing before. So I guess that explanation kind of doesn't -- I'm not tracking.

I thought that in Q1, Bill, we grew like 6% on our Testing Services volume growth. So I thought that Q1 was like the growth was pretty decent. Maybe you might be kind of thinking from Q4 to Q1 and that could be more seasonal because of our products business.

Yes. Okay. Well, I can follow up more offline, but it doesn't make a heck of a lot of sense to me. But thanks.

[Operator Instructions] We'll move next to Tycho Peterson with Jefferies. Your line is open.

Hey, good evening. This is [Jack] (ph) on for Tycho. I just had one question on Testing mix. It looks like surveillance mix increased nicely in September through October. Could you put a finer point on the magnitude of this and maybe speak to the upper limit of surveillance mix versus new transplants?

Thanks, Jack. We haven't provided any detail on the proportional mix rate. I think directionally though, what we said is we have seen a modest shift in that mix and we are seeing centers adopt protocols for surveillance testing, and that we anticipate two quarters to three quarters for that to return.

Okay. That's fair. And then quickly on capital allocation. You're making nice progress on the P&L, have over $230 million in cash. I guess, how are you thinking about capital allocation if deals aren't on the table? Should we assume any for buybacks in the near future? Thanks.

Thanks, Jack. I think that for us, primarily, we're thinking about growth and profitable growth long term. And then from there, we're going to look at ways to invest into the core business to grow more rapidly before moving into share buybacks. And so that's our prioritization set.

Okay. Thank you.

We'll take our next question from Mark Massaro with BTIG. Your line is open.

Hey, guys. Thank you for taking the questions. Congrats on the solid beat and raise. It's good to see the feedback about the surveillance picking back up in the second half of September and continued through October. You guys talked about how -- and it makes sense to me that it may take two quarters to three quarters for transplant centers to establish surveillance protocols. But given that you saw a little bit of bounce-back in September and October, I just want to make sure that doesn't preclude some degree of recovery relative to, say, the first half of '24, sort of continuing into '25 even before these protocols are established.

Thanks, Mark, appreciate your question. No, we think this is additive on top of what we saw as we grew through the first half of '24, right? A lot of the growth we've seen in the five quarters since the change in the coverage kind of reset the volume was really focused on the four cause area of indication and then growth in our heart care product.

Okay. I also wanted to ask -- it seems like we are waiting for, I think it's Palmetto GBA to finalize the LCD for transplant testing. Do you have any sense for when this might hit? And is it your understanding or impression that the LCD might be restored back to what it was originally? Just give us a sense for what your expectations are heading in.

Thanks for the question, Mark. Yes, we don't have a specific timeline from the agency where from Palmetto as to when a new draft LCD would be released. Currently, the active LCD is the 2021 LCD that was originally published covering this indication broadly. And we anticipate that any future LCD would include an update to the literature, which has progressed significantly since 2021 to include some of the more, I would say, foundational studies like the Nature and Medicine publication I talked to in my prepared remarks.

Okay. I have one final two-parter. Should we expand [Technical Difficulty] on Q4 from Hurricane Milton? And then the second part, which is completely unrelated, how are you thinking about potential expansion of commercial payer lives in 2025? I saw you hired -- you made a new hire on the commercial access team. Just give us a sense for what the order -- what the objectives are in '25? Obviously, '24 was a good year of new payer coverage.

It was. Yes, thanks for the questions, Mark. On your first question related to Milton, yes, we have seen a 1% volume impact in the fourth quarter. And we have not yet gained that volume back. And thus, Abhishek called that out in his prepared remarks as being incorporated into our guide for the fourth -- for the full year of 2024. And then as it relates to payer expansion, yes, we absolutely believe that 2025 should be a significant year for covered lives expansion, particularly in AlloSure Heart and AlloSure Kidney. We have in Heart additional publications that we anticipate from the Sure study to come out in Kidney, we are awaiting the publication of the K-OAR study, which we think will be significant to drive-in coverage for AlloSure Kidney on top of the Nature Medicine publication, which only has been out for about a quarter, and we continue to talk with payers about that data and the significance of that data.

Okay. Thanks for taking my questions.

Thanks, Mark.

We'll move next to Brandon Couillard with Wells Fargo. Your line is open.

Hey, thanks. Good afternoon. John, great if you could just talk about the 30 planned new heads in the commercial organization. How much of an increase in terms of percentage is that relative to the prior base where we kind of allocate to those people in terms of scope of focus? And then, A.J., is kind of $8 billion to $10 billion the right ballpark for incremental spend from that build-out?

Yes. Great. Thanks, Brandon. Appreciate the question. The commercial heads are allocated between field sales and marketing. If you recall back in 2023, the Company cut pretty significantly across the organization to control our spend and maintain our cash balance, and so we drew down across the board. And so this is a reinvestment in the commercial organization that includes probably about one-third in marketing and two-thirds in field sales that will be customer-facing revenue-generating team members.

And I can take the quick -- the second part. And your number is in the ballpark, Brandon, roughly $10 million for the hedge that we basically kind of mentioned here.

Okay. So this would basically get you back to where you were before the CMS spilling article. Is that the right way to think about it then?

That's kind of the way we're thinking about it. We have been incredibly efficient as a commercial organization over the past five quarters in driving growth. And in order to continue to drive that growth and accelerate it over the next several years, we're starting with this 30 headcount and we'll provide additional updates if we decide to add more in the field to capture that volume opportunity that we have.

Okay. That's helpful. And then as far as -- I don't know if you agree to what you're willing to go into as much detail, but I'll give it a shot. So relative to the low-teens kind of growth you pointed to next year, first, AJ, is the fourth quarter ASP a good jump-off assumption for next year assuming you will -- should continue to benefit from expanded commercial coverage? And should we expect that the second half of next year to be stronger than the first half given your comments about the lag it will take for those surveillance protocols to come back online? Thanks.

No, you're thinking it the right way, Brandon, because the ASP of $1,335 that will be the point of the 2025 numbers as you will start to think about it. And of course, the low-teens guide for 2025 we'll provide more color in our earnings call, but that's where you should start to kind of think from the modeling standpoint, the 2025. And the last piece of your question around the second half being a little bit more stronger, you're again thinking it the right way because as we build our commercial organization as well as the billing organization, typically it takes about one to two quarters before they become fully effective and therefore you might be kind of think a little bit more growth in the second half of the year.

Very good. Thank you.

Thanks, Brandon.

We'll take our next question from Yi Chen with H.C. Wainwright. Your line is open.

Thank you for taking my question. Could you comment on the general trend and expect to occur regarding the number of transplant or transplantation procedures in 2025? And what are the factors driving this trend? Thank you.

Hi, Yi Chen. For 2025, in our Investor Day, we talked about mid-single-digit secular growth of the transplant market as being the baseline that we built our plan of off.

Do you think there is any reason that we should believe there should be more fewer numbers or number of transplant procedures in 2025?

We don't have any catalysts to point to right now in terms of more procedures. The -- I think that the introduction of perfusion technologies has accelerated the growth to where it is today across the full market. We're seeing heart and lung grow at a faster pace than kidney, obviously, of a smaller end sample size. And I think the only changes that could really accelerate this further would be government intervention -- of government programs. Recently, it was announced that the IOTA model for kidney transplant was going to be delayed in its implementation. And so, we're awaiting further guidance from the agency regarding that program and its impact that it will have on the market.

Got it. Thank you.

We'll take our next question from Mason Carrico with Stephens Inc. Your line is open.

Hey, guys. Sorry if this has been asked, jumping between a few calls tonight. But how should we be thinking about the framework for the surveillance opportunity going forward? There are 25,000 or so kidney transplants a year. There are obviously a lot more patients living with a transplant right now. Is the opportunity at least near-term really more about rolling those newly transplanted patients into surveillance after that first year? Is there a plan to go out and expand patients who maybe are years out from transplant just more than 12 months? Could you give us some color on how you're thinking about it?

Thanks, Mason. I appreciate the question. Yes. I think you're thinking about it correctly. We're really targeting the first year post-transplant for an implementation of a protocol to perform surveillance testing. That's where I believe the medical necessity is the greatest, right? The vast majority of rejection occurs in that first year, and thus, as centers think about implementing protocols and reinitiating surveillance testing, they're going to do so on newly transplanted patients, not on those that are three to five years out from transplant. We think in that group, there continues to be interest, particularly in for-cause testing as we think about reducing immunosuppression in those patients. And then recently, there's been a number of articles and studies -- peer-reviewed studies looking at antibody-mediated rejection, including new therapeutics for antibody-mediated rejection and the impact of those therapeutics when that condition is detected earlier. And we know that AlloSure, in particular, has demonstrated the ability to detect antibody-mediated rejection before biopsy-proven rejection. And so we think as that market grows and more therapeutics come to market for that indication that there'll be a greater demand in the out years for surveillance testing to detect those events and treat and elongate graft survival.

Got it. I'll keep it there. Thanks. That was helpful.

Thanks, Mason.

We'll move next to Thomas DeBourcy with Nephron Research. Your line is open.

Hi, guys. Can you hear me?

We can.

Okay, great. So my question just I guess maybe goes back to a few years ago, maybe earlier the launch where there was a focus on a number of transplant centers, you know, I guess, discussion at that point, you know, approximately 100 centers, 125 centers account for most of the volume. And I guess, just kind of wondering with all that has transpired, I guess what has been your set of retention over the last few years? And then also, not that there is a generalization, but in terms of implementing new protocols around surveillance, would you expect us to take you know on average two, three quarters longer? And I know there's maybe a dispersion, but just kind of any thoughts you have there just related to kind of the blocking attack league around transplant centers?

Yes. Thanks so much for the question, Thomas. To your first question around retention, I mean, yes, we've seen a high level of retention and our products tend to be sticky with our customers because of the large solution set that we offer them across Digital, HLA Typing, and Testing Services. And then as it relates to protocols, there is a varying degree of readiness to implement. So as I shared in my prepared remarks, we have 10 centers across the country that have already drafted and implemented to varying degrees new protocols since September 1st. Many of the clinicians at these centers recognize that the care of their patients has been impacted by turning off surveillance. And so, they're eager to get going again. And we are staffing up to support that effort by adding more commercial team members so that we're prepared to support them in the logistics and workflow for implementing AlloSure testing to get back to the high level of care and outcomes they expect for their patients.

Great. That was all I had. Appreciate it.

Thank you.

And this does conclude the question-and-answer portion of the call. Thank you, ladies and gentlemen, for joining. You may disconnect at this time and have a wonderful evening.