Good afternoon, and welcome to Castle Biosciences' Fourth Quarter and Year End 2019 Conference Call. As a reminder today's call is being recorded. We will begin today's call with opening remarks and introduction followed by a question-and-answer session. I would like to turn the call over to Frank Stokes, Chief Financial Officer. Please go ahead, sir.

Thank you, Operator. Good afternoon everyone. Welcome to Castle Biosciences fourth quarter and year end 2019 financial results conference call. Joining me today is Castle's Founder, President and Chief Executive Officer Derek Maetzold. Information recorded on this call speaks only as of today, March 10, 2020. Therefore, if you are listening to the replay or reading the transcript of this call, any time sensitive information may no longer be accurate. A recording of today's call will be available on the Investor Relations page of the company's website for approximately three weeks. Before we begin, I would like to remind you that some of the information discussed today may contain projections or other forward-looking statements regarding future events or the future financial performance of the company and are made pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements are based upon current expectations and involve inherent risks and uncertainties, and there can be no assurances that the results contemplated in these statements will be realized. A number of factors and risks could cause actual results to differ materially from those contained in these forward-looking statements. These factors and other risks and uncertainties are described in detail in the company's final prospectus filed with the Securities and Exchange Commission on July 26, 2019, relating to our registration statements on Form S-1 and then the company's other documents and reports filed with the Securities and Exchange Commission. These forward-looking statements speak only as of today, and we assume no obligation to update or revise these forward-looking statements as circumstances change. I'll now turn the call over to Derek Maetzold.

Thank you, Frank, and good afternoon everyone. Thank you for joining us today. This afternoon we will review fourth quarter and year-end financial results, key accomplishments and upcoming milestones, and discuss our 2020 revenue guidance and strategic priorities. The entire Castle Biosciences team did an excellent job throughout 2019, which was an incredibly strong year, strong in terms of growth in our gene expression profile test volume, strong in terms of growth and continued evidence development for our DecisionDx-Melanoma test, and our DecisionDx-UM test and progression of our pipeline products. During 2019, we successfully completed two commercial team expansions; one in the first quarter of 2019 and the second one in December 2019. We went from 14 outside sales territories in December 2018 to 32 outside sales territories as of December 2019, which provides us confidence in our ability to execute our 2020 strategic growth priorities. In 2019, for the fourth quarter and year ended, we reported revenue of $17.6 million and $51.9 million respectively. The full-year 2019 revenue, $51.9 million compares favorably to the $22.8 million reported for the full year 2018. As we look forward to our growth potential in 2020, we anticipate generating $61 million to $64 million in revenue and plan to provide quarterly updates on this guidance. In order to support our continued growth, we plan to further expand our commercial sales team, continue our evidence development, and further ramp up our R&D efforts. We did announce report volume in January for both of our proprietary gene expression profile tests. For DecisionDx-Melanoma, for use in patients diagnosed with invasive cutaneous or skin melanoma, we delivered 4,480 test reports in the fourth quarter and 15,529 test reports for the year, up 37% and 29% over prior periods in 2018 respectively. Adoption with new physicians for DecisionDx-Melanoma…

Thank you, Derek. We are pleased with our strong execution and growth in the fourth quarter and full year 2019. We reported revenue of $17.6 million in the fourth quarter and $51.9 million for the full year, an increase from $11.4 million and $22.8 million over the fourth quarter and full year 2018 respectively. As a reminder, quarterly year-over-year comparability of our revenue continues to be affected by the Medicare local coverage determination or LCD for our DecisionDx-Melanoma test that was issued in the fourth quarter of 2018. While the LCD covered reimbursement for test reports delivered prior to the fourth quarter of 2018 due to the timing of the issuance of the LCD and GAAP revenue recognition requirements, all 2018 DecisionDx-Melanoma Medicare revenue covered by the LCD was not recognized until the fourth quarter of 2018, when the LCD became final and effective. The amount of such revenue derived from DecisionDx-Melanoma test reports delivered in the first three quarters of 2018, but not recognized until the fourth quarter of 2018 was $5.2 million. Stated differently, if our fourth quarter 2018 revenue only included Medicare tests for DecisionDx-Melanoma that were performed in the fourth quarter of 2018, then 2018 revenue would have been $6.2 million compared to fourth quarter 2019 revenue of $17.6 million. This is a non-GAAP measure, please see our non-GAAP reconciliations at the end of our earnings release from this afternoon. Our year-over-year revenue was driven by a 29% increase in 2019 in DecisionDx-Melanoma test reports volume compared to 2018 as well as by higher revenue per test or ASP. As Derek discussed earlier, we anticipate generating revenue of $61 million to $64 million in 2020 and expect to give the first update on our progress in May when we report our first quarter 2020 financial results.…

Thank you, Frank. In summary, we are extremely pleased with our team's performance in 2019 including strong year-over-year growth in volume for DecisionDx-Melanoma test, two successful commercial expansions in our commercial medical affairs teams and significant advances in the evidence development. We look forward to another great year in 2020. We thank you for your continued interest in Castle. Operator, we are now ready for Q&A.

So, the first question I have is on the guide, it was stronger than what we had expected and what I believe was modeling. Could you walk us through the contribution that you expect here from volume and contribution from ASP? And if you could provide also any, if you're expecting any contribution from STC in that guide?

Hi, Puneet. Good to hear from you. I'll let Frank handle that question, I think.

Sure. So Puneet, we are not assuming any revenue contribution from new products, which we anticipate launching this year. Based on GAAP accounting principles, we won’t have enough experience with those products to record or accrue revenue at the time of product -- of report shipments. So, we will only reflect revenue on a cash basis or when we actually collect any cash from those tests. And just given the timing of the appeal cycle, we just don't see that being material or meaningful at all in 2020. So that, guide doesn't include new product guide. And you can assume as we have that the uveal melanoma product is flattish in terms of both volumes in ASP, that's a fairly mature product and as we've said in the past, we think we test a significant percentage of the patients, maybe 80%, 85% of the patients. And so, while we'll continue to support that test and it's an important test for us just given the penetration levels, we don't model too much additional volume there. So, the growth in revenue is primarily driven by volumes and modest improvement in ASP on our cutaneous melanoma test, although again, the reimbursement process and pathway is a long one. So, we're primarily focused on volume growth there.

Okay. And then, on the out-of-period adjustments, you had 4.3 million this quarter, 3.2 million last quarter, and now second quarter of large adjustments here. So how should we think about that going forward? And then, is there any contribution from that or expected contribution that you expect in 2020 guidance from out of period adjustments?

Yes. If you look at the total year out of period, it was $2.5 million. And so that'll give you a sense of where those out of period reports are coming in. The lag is sort of appears to be quarter-to-quarter or maybe quarter plus a little bit to quarter. And so, we will see some of that in 2020, although as we continue to mature both our reimbursement progress as well as our appeals progress, we should see that begin to converge toward accrued revenue.

Okay. And then, if I could, Derek, if I could touch on the sales reps, obviously growth in volume is a key metric for you. As you look at this sort of somewhat expected disruption here in travel plans largely due to coronavirus, and do you expect any impact there on the sales rep territory? Are they largely local? And how should we think about the cadence for the year given, the full year guide, how should we think about the cadence in the first half versus second half of this year? And then, the last one, if you could also elaborate, what's your expectation for sales rep expansion this year?

Sure. Excellent questions, Puneet. Thank you. So maybe I'll start sort towards the last, work myself forward. So, as you know from the releases in the past and today's release, we completed our second expansion in 2019 -- in December of '19 to go to 32 outside sales territories. And we also have extended groups around that. So, we have an inside sales associate group as well as medical affairs personnel. All told, customer facing individuals at Castle within the low 50s at the end of 2019, and that compared to being in the low 20s at the end of 2018. So, more than a doubling in terms of customer facing personnel that are either here in Friendswood or on the ground across the U.S. from a geography standpoint. We have certainly seen a couple of conferences that we would normally exhibit at and hold one on one meetings at that be canceled here in the March time period. I don't know, if organizations will continue to kind of roll those going forward through April and May or if we see an adjustment depending on the coronavirus, I guess news flow penetration, et cetera. So, I think podium events at major meetings probably in the second quarter will be less than we had planned or scheduled for because those major meetings are being postponed or canceled. So far, we haven't heard feedback from our representatives or the medical science liaison group in terms of local interactions being canceled or postponed. Our belief is that the information that we're providing to physicians regarding hopefully improving the care of their patients with use of our test continues to be valued. What I don't know, which is maybe the question you haven't asked is, our physicians’ dermatology practices, surgical oncologists can actually see…

Thank you. And our next question comes from Sung Ji Nam with BTIG. Your line is open.

Hi. Thanks for taking the question. Maybe starting out with a question on gross margin for 2020. Frank, could you kind of help us think about the cadence potentially for the year. Obviously, you saw very strong growth expansion last year. Should we kind of carry that over this year? If you could maybe also go over kind of the puts and takes in terms of how we should think about modeling that going forward?

Yes. Sung Ji, thanks for your question. I think that the gross margin performance we saw for the full year 2019 is probably durable until we launch our new products. And when we launched the new products, given my earlier comments, we'll have costs associated with those new test reports, but any revenue we actually receive will be deferred into later periods. So you could see the gross margin be impacted by that somewhat. But in terms of a normalized sort of steady state run rate gross margin, that that middle [eighties percent] [ph] is about right for going forward this year, I think.

Great. Thank you. And then maybe on the commercial payer coverage side, Derek, could you talk about kind of what the near term strategy is in terms of what type of milestones we may be able to see in the near term over the next 12 to 18 months kind of what your strategies are there. How the early conversations might be going.

Sure, sure. Thanks for the questions and good to hear you. So I'm going to assume that we're talking primarily about our DecisionDx-Melanoma test for cutaneous melanoma, but I'll spend a second here on the UV melanoma tests. So, on the UV melanoma test, which is DecisionDx-UM, we do enjoy broad coverage both in terms of Medicare population, which is a reminder about 45% of the patients that we test. And the majority of commercial plans across the U.S. do include that test as reasonable, necessary and covered. We are targeting the few remaining plans to ensure that they see the data, interpret the fact that the major third-party technical assessment groups all support the use of our tests and clinical care as to national guidelines such as NCCN. And they should be evaluating our test and the prospect of it, does actually improve patient net health outcomes and they should be covering this test proactively because it is standard of care. So even gaining modest improvements in the few plans that are -- that we don't have positive policy for using melanoma, we expect some of those to go ahead and occur this year. But in terms of revenue impact, I think you won't be able to see that on a revenue line. So turning to DecisionDx-Melanoma test for cutaneous melanoma, we had anticipated or modeled a couple of years ago that we would not see a commercial coverage shifting until Palmetto had completed their MolDx review of our tests. And as you know, we had our initial local coverage determination policy or LCD be effective in December 2018, we had a expanded draft LCD posts in August of 2019 and the common period closed kind of mid-December, 2019. So we do expect the draft LCD based upon LCDs…

Yes, absolutely. Thank you so much for that. And then just lastly from me, first of all, congratulations on getting accepted for an oral presentation at the American Academy of Dermatology meeting later this month. I was curious do you anticipate peer reviewed publications for both of your pipeline products before you launch commercially later this year? Or do you think that poster presentations or other types of data readouts will be sufficient before your commercial launch? Thank you.

Thank you. Probably, I really like that question, but that's all right. I think from a sort of clinical adoption perspective clinicians would always appreciate seeing peer reviewed publications so they can make their own assessment on a written piece of work that's been reviewed by their peers, I guess. Our thinking is that assuming that manuscripts are reviewed in a fairly timely fashion, I'd like to have those published and imprint near or at or before the time that we launch our products. So I guess on the one hand I would say we'd like to go ahead and see peer reviewed publication in the literature base to add sort of more credibility, weight, I guess to acceptance or review a new product. That being said, we have conducted a number of interactions with potential customers and based upon the feedback we're getting about clinical need to really impact better decisions, we may make the choice to go in advance a peer review publication should those meet our timeline just so we can have an opportunity to really meet patient care needs. But that's something we're kind of monitoring right now and we'll make a decision as we get closer to timing and comfort about measuring these tests available for patient care.

Thank you. And our next question comes from Catherine Schulte with Baird. Your line is open.

Hey guys, congrats on the quarter and thanks for the questions. I guess first on the NCCN guideline update in December, heard your comments from the payer perspective, but what is any kind of tailwind do you think this update could provide in terms of driving volumes in 2020?

From an ordering standpoint? So quantitatively I think it's too early to comment with data Catherine. Qualitatively we know that there are some clinicians, there are some institutions who have sort of taken the position that we'd like to have third-party endorsement, I guess by NCCN before we would adopt or view those tests as being valid. So I do think we expect to see some clinician growth occur and maybe some institutional growth occur as the adjustment in languages is put out there by our teams. That being said, I don't know if we could be able to discern that independently of the growth in our sales force in 23 to 32 sales reps in December. So those fortunately are not came on top of each other. So do we see a very, very nice growth in the first quarter of 2020, for example, in a report volume that's higher than our internal forecast. I'm going to -- I don't know if they'll be able to tease apart and saying that's due to either the improvement in NCCN supportive language or if it's due to the fact that we scaled our sales force up by a third again. Hopefully combination of both. I think we'll be able to look at some individual select institutions where our information seems to confirm that they were waiting for one more brick to fall before they would go in and step out and use our test clinically. Those who could probably track more comfortably as being an event way to NCCN. Does that answer the question a bit there or?

Yes, very, very helpful. And then on guidance, I might try to take another stab at Puneet's question, but how should we be thinking about underlying cutaneous volume growth in 2020? And then separately based on your comments, I assume there isn't anything based embedded into guidance for a final Medicare expansion. Is that correct?

Your second point Catherine is correct and we would suggest that, we're coming off of a larger base this year and so we'll see some of the volume growth normalize out where we think is a more durable three to five year rate. Just coming off of the big growth from last year in larger numbers, but nothing in there, as I said, not too much improvement on the reimbursement side of it.

Okay. Great. And then last one for me, just how should we think about CapEx this year? Any need to expand lab capacity or other major investments ahead?

Yes. We are expanding in our footprint in both our headquarters and our lab. It's certainly fairly modest relative to the SG&A line and all kinds of normal course just to accommodate our growth, so nothing significant there. There'll be some CapEx, but it's fairly modest.

All right. I'll follow up slightly. So, on the CapEx side, I would concur with Frank's commentary. But what is exciting about the increase in our footprint in Phoenix is, is right now I believe when we calculated last year, we thought we could do somewhere between 60,000 and 66,000 gene expression profile tests clinically on an annual basis with a single shift working five days a week. So if we did not expand our facility footprint, we could certainly add a second shift potentially or work the weekends and comfortably improve our sort of maximum capacity. We made the decision last fall post IPO that we wanted to get ahead of that commercial need as well as build out a stronger research wet lab facility in Phoenix. And so part of our decision back in the fall to undertake essentially doubling our footprint was to enable us to one easily manage through our gene expression profile clinical tests as those continue to ramp and also hopefully accelerate some of our what laboratory discovery efforts and development efforts for current and future pipeline products that remains on track. The actual CapEx is quite modest to have us get there, which is good. I think from an overall budgetary standpoint. And here in Houston, or in Friendswood, we've maintained roughly the same size facility for about a year and a half and things are tight here. We're giving up conference rooms right and left to make sure we can manage the employee expansion and we expect to move into our new facility that should have several years growth of it in the mid summer timeline, which again, also only has modest CapEx implications for the company.

All right, great. And I might sneak one more in. I know you've talked about potentially initiating some R&D work on two additional pipeline tests sometime in the first half of this year. Any color on when we could learn what those new applications would be?

Yes. So, we are planning on initiating that in the second half of the year but maybe you call it 2020, right? And I guess, the question what's initiation is that when the protocols first go through IRB or when we actually first analyzing datasets, some broad door wiggle room there. I'm not sure, we kind of disclose what those targets look like, I guess is the first is a direct answer there. I think we would look at that probably in the second half of the year as we are kind of seeing some early data and see what that actually means. But given the cycle times from development to clinical availability to test, I figure we have part of 2020 to kind of picture what that might look like and either provide some early expectations in terms of what the marketplace might be, what the future TAM could be. But given it will still be a couple of years out, I think we probably would not discuss that until the -- after the first half of the year. Is that what you're thinking, Frank too?

Thank you. Our next question comes from Max Masucci with Canaccord Genuity. Your line is open.

Just to start, can you speak to trends in clinician reordering rates, sort of that same-store sales growth metric and stickiness you're seeing with doctors?

Yes. Hi, Max. Good to hear. Good to talk to you. Let's see, I don't have that updated in the 10-K, so I'll talk, we do have maybe that something we need to refresh and add next time we go through. So we estimate that that based upon the best available data that we have, that there's maybe a target clinician audience of maybe 11,000 to 15,000 physicians and nurse practitioners and physician assistants that may be a little high, maybe a little low, but the data is a little tough to get your hands around this accurate. But let's call it that range. We finished out last year with just over 3,900 ordering clinicians. So, depending on how you want to analyze that, I guess that could be what, 20%, 25% or 20% to 30% of targetable commissions as we see them for, to our test at least once last year. Now given our high growth, a number of those clinicians didn't order until the fourth quarter and a smaller number in the third quarter. So it's not like that was a stable annual growth of ordering doctors. So let's put that number aside and call it 25% just to make it even. On the patient side, we believe based upon our analysis of both see your data and the reporting of melanoma, that there's around 130,000 patients diagnosed each year with invasive cutaneous melanoma that's local or regional. So what does that mean? It's kind of stage one, two or three disease and exclude stage four; stage four people who are diagnosed with distant metastasis, which are, since that's one of the end points, our test predicts that would be a poor use of our tests, inappropriate use of our tests. So take 130,000 as your base denominator.…

That's very helpful. And then just circling back with COVID-19 questions to button that up. I guess just generally, how do you view the resilience of your business from supply chain end user is going to have and then customer behavior standpoint?

Yes. So on supply chain separately here, we reached out back in early January to confirm there are key reagents and the key sort of laboratory bottlenecks might be. And our suppliers or vendor partners indicated that none of the reagents that we use are focused on come from China. That sounded like limited exposure. They anticipated no supply chain issued from a material perspective. Now, that being said what we haven't seen, but when, I don't know how to gauge would be, do we think that there's going to be a manufacturing plant that might sort of close down or limit employee contact because they have some -- a small population or individual in their plant that might -- that would be diagnosed with coronavirus. That part I can't guesstimate right now to be quite frank. We've checked in with our vendor partners here and about once every two weeks. And they indicate they don't see any issues. We also maintain a very healthy supply of reagents anyways. It'll average our going out. So I don't think that'll be a concern that we see today is that fair Frank?.

Okay.

And then, on the question about sort of patient flow or maybe order flow or report flow. Again, outside of losing a couple of podium opportunities and engaging customers at major meetings, we aren't hearing any material change in terms of access to our physician base to be able to help appropriately educate them on newer date and appropriate use of our chest. That could change a course over time here. But so far we haven't seen that bubble up as being a material impact that we should be concerned about, but that's as of March 10th today. So we don't see that being a larger issue for us. I think the thing which is hard to predict as I said earlier is, are we going to see patients abstaining from going to their clinician for the diagnosis of melanoma. I guess my first comment would be is if you have a suspicious mole that you're concerned about, I think that patient likely makes themselves go into a dermatologist on a regular basis as opposed to delay in care. So we might see something on a week to week shift or month to month. I would think a quarterly impact terms of our reporting would be non-visible from a public standpoint. Frank, you want to add any comment here?

Thanks for taking the questions.

Thank you. And I'm showing no other questions in the queue. I'd like to turn it back to Derek for closing comments.

Okay. Thank you, operator. This concludes our fourth quarter and year-end 2019 earnings call. I want to thank you again for joining us today and for your continued interest in support of Castle Biosciences.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect. Everyone, have a great day.