00:05 Good afternoon and welcome to Castle Biosciences Fourth Quarter and Full-Year 2021 Conference Call. As a reminder, today's call is being recorded. We will begin today's call with opening remarks and introductions followed by a question-and-answer session. 00:19 I'd like to turn the call over to Camilla Zuckero, Executive Director of Investor Relations and Corporate Communications. Please go ahead.

00:27 Thank you, operator. Good afternoon, everyone. Welcome to Castle Biosciences fourth quarter and full-year 2021 financial results conference call. Joining me today is Castle's Founder, President and Chief Executive Officer, Derek Maetzold; and Chief Financial Officer, Frank Stokes. 00:45 Information recorded on this call speaks only as of today, February 28, 2022. 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. 01:08 Before we begin, I would like to remind you that some of the statements made today will contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements include but are not limited to statements about our financial outlook and other matters referenced in our earnings release issued today. And statements containing projections regarding future event or our future financial or operational performance, including our expectations and assumptions related to the impact of the COVID-19 pandemic. 01:41 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. 01:58 These factors and other risks and uncertainties are described in detail in the company's Annual Report on Form 10-K for the quarter ended December 31, 2021 under the heading risk factors, and in 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. 02:24 In addition, some of the information discussed today includes financial metrics such as adjusted revenue, adjusted gross margin, adjusted operating cash flow and adjusted EBITDA, which are non-GAAP financial measures that have not been calculated in accordance with Generally Accepted Accounting Principles in the United States or GAAP. 02:44 The non-GAAP items should be used in addition to and not as a substitute for any GAAP results. We believe these metrics provide useful supplemental information in assessing our revenue and cash flow performance. Reconciliations of these non-GAAP financial measures to the most directly comparable GAAP financial measures are presented in the tables at the end of our earnings release issued earlier today, which has been posted on the Investor Relations page of the company's website. 03:11 I will now turn the call over to Derek.

03:15 Thank you, Camilla and good afternoon, everyone. Thank you for joining us today for Castle's fourth quarter and full-year 2021 earnings call. Our comments today will cover our key accomplishments in 2021, as well as our plans to support continued growth in 2022 and beyond. 03:31 2021 was an exceptional year for Castle Biosciences and I am extremely proud of the strong execution on our growth plans by our team. We exceeded the goals we set out to accomplish and beat our revenue expectations, increasing our full-year 2021 revenue by 50% to $94.1 million and growing gene expression profile testing volumes by 55% to 28,118, compared to 2020. 04:02 We successfully doubled our dermatology facing commercial team and accelerated investments in R&D, significantly advancing our scientific evidence that further demonstrates the clinical value of our tests. We executed on two strategic opportunities, acquire and complementary areas that we believe enable long-term value creation, allow us to impact patient care in areas of unmet clinical needs. 04:25 We believe our success in 2021 allows us to enter 2022 with a momentum, a strong balance sheet, and the potential to further position the company as an industry leader. Looking ahead, we expect full-year 2022 revenue in the range of $115 million to $120 million, driven the continued focus our foundational patient centric strategy. 04:50 I will now discuss our dermatologic testing franchise. Our dermatologic testing franchise consists of three offerings: the first is DecisionDx-Melanoma. This test is used in patients diagnosed with invasive cutaneous melanoma to provide a personalized risk that allows clinicians and patients the ability to risk stratify decisions relating to both proceeding with a sentinellymph node biopsy surgical procedure, as well as subsequent treatment decisions, which may include frequency of follow-up, initiation of active surveillance with advanced imaging,…

17:09 Thank you, Derek and good afternoon everyone. I want to reiterate Derek’s thanks to the Castle team. Their consistent execution led to a strong 2021 that positions us well to continue creating value for patients, customers, and investors. 17:22 In the fourth quarter of 2021, we delivered total revenue of $25 million, a 45% increase over the fourth quarter of 2020, but we delivered $94.1 million for the full-year 2021, a 50% increase over 2020. 17:38 Overall, the increased revenues are primarily attributable to dermatologic test revenues, reflecting an increase in test report volume, and higher per unit revenues. Our 2021 per unit revenues benefited from having the expanded LTV for our DecisionDx-Melanoma test effective December of 2020, which resulted in a higher Medicare reimbursement rate for the test. 18:01 For 2022, our Medicare rate for DecisionDx-Melanoma is $7,193, also contributing to the revenue increase with a significantly higher Medicare rate for DecisionDx-UM of $7,776 that became effective January 1, 2021 and which will continue unchanged for 2022. 18:24 For the fourth quarter of 2021, we recorded net negative revenue adjustments of $0.8 million and for the year-ended December 31, 2021, we recorded net positive revenue adjustments of $3.3 million related to test delivered in previous periods. 18:42 I will remind you that these revenue adjustments result from key things. The first is revenue from tests that we recorded on a cash basis. For example, our newer tests, for which we don't have sufficiently reimbursement history or coverage. And second, other adjustments up or down from revenue we previously include, due to changes in estimates and final adjustments upon settlement of claims. 19:04 Revenue adjustments related to test delivered in prior periods will fluctuate from quarter-to-quarter and over time. Our adjusted revenue, excluding the effects of revenue adjustments related…

28:23 Thank you, Frank. I would like to conclude today by thanking our Castle team. Our excellent progress in 2021 is due to their accomplishments. We look forward to continuing this momentum in 2022. 28:35 This concludes our remarks. Thank you for your continued interest in Castle. Operator, we are now for Q&A.

28:46 Absolutely. [Operator Instructions] Our first question goes to Mason Carrico with Stephens. Mason, your line is open. You can go ahead.

29:31 Hi guys. This is Jacob on for Mason. Thanks for taking the questions. Just a quick one for us. For your GI sales force, how much of the [indiscernible] clinicians do you think you can reach with the 13 or 15 reps you currently have? I was wondering maybe there is a high volume subset that you've have identified and our targeting initially?

29:55 Yes, excellent question. They certainly have targeted list and of course, it's a wide open opportunity here since there really wasn't commercial effort at Cernostics before the acquisition. There are a sort of referral group within Gastroenterology, you could call them sort of [indiscernible] or clinicians who do more of the ablation work, which is kind of a limited sub-set, maybe 15%, 20%, maybe 10% of Gastroenterologist, they might represent a slightly higher patient throughput of seeing diagnosed patients with Barrett’s esophagus, but the majority of any Gastroenterologist who is not specializing in lower GI work will, kind of be a reasonable target for us. Hope that answered that question?

30:47 Yeah. That did. Thank you.

30:52 Thank you, Mason. Our next question goes to Catherine Schulte with Baird. Catherine, your line is open. You can go ahead.

31:01 Hey guys thanks for the questions. I guess first on the revenue guide, where are the assumptions in there for TissueCypher and for the core business, what does that assume in terms of trends and web access and a recovery in melanoma diagnoses?

31:19 Hey Catherine. Thanks. So, as you know, we give guidance based on conditions as they exist today. We're not in the business of predicting COVID trends or resurgence or [BA2] [ph] or whatever the new flavor is, but as we see it today, we've got good access. There's still a lag in diagnoses, but it feels like it's slowly closing the gap maybe. And we do have a little bit in there from TissueCypher, but we're not being too aggressive on that. 31:49 It's a great test and we're excited about the commercial team, but it's early days yet. So, we want to see how the conversions go before we get too much baked in for TissueCypher.

32:07 Okay, got it. And you talked about I think 90% of calls being in person in the fourth quarter, but how does the overall number of sales calls or maybe calls per rep just given your expansion, how does that compare to pre-COVID levels? I’d just be curious how much of a rebound do you think there’s still to be in terms of calls, pop volume from here?

32:30 Yes. So, I think back to pre-COVID, it almost seems like pre-historic, right. If you think back to pre-COVID levels, we had just expanded to 32 sales representatives in December 2019 and we were – went-up from 15 to 23 territories in February 2019 just before we went public. So, the 2019 comparison pre-COVID is probably off of the base of probably 23 FTEs for the course of the year. And as the listeners will recall, we went from 32 dermatology sales representatives to the mid-60s in the middle of 2022. 33:10 So, maybe the FTE was of the course of the year, probably 50-ish maybe just for the whole year. So, with that kind of, compares to mine, 23-ish to 50-ish we certainly had more calls than we've had in the fourth quarter of 2021 and the same with third quarter of 2021. 33:31 And we are seeing of course more than 90% being in-person in those two in the second half of 2021. We are still a little bit below our, sort of pre-COVID levels in terms of number of customer calls per day. I think we reported that around 20%. We were shy in the third quarter of this year. I didn't think we did release the fourth quarter, but it improved a bit there. 33:57 So, not quite back to pre-COVID levels there for say now. What I don't know is that a reflection of COVID or is that a reflection of having essentially 3x number of sales representatives across the U.S. marketplace and that just sort of reduced the opportunities for calls per day. 34:16 So, that I don't point out to answer. So, we feel that there probably is still room to improve. In 2022, the number of customers we're seeing per day, but it won't be that dramatic and the fact that we continue to see throughout the fourth quarter interest in our clinicians to see us in person, I think it's a mixture of having in this case, three different products or test solutions to [indiscernible] to a single customer. 34:44 And I think the way we look for our representatives to manage their territory, which is that you are the clinical expert when it comes to genomic testing for these conditions and they present viable information to our customers. I think that's why we have good access throughout 2021 certainly.

35:04 Alright, very helpful. Thank you.

35:08 Thank you, Catherine. Our next question goes to Puneet Souda with SVB Leerink. Puneet, your line is open. You can go ahead.

35:19 Yeah. Derek, Frank thanks for taking the question. So, I have two and I'm going to wrap that into sort one question, and get back into the queue. So first one, really it seems like based on what Frank has provided, this is going to be an investment year for you. So, maybe could you just update us your cash burn expectations overall for 2022 and wondering we should expect a moderation from that in 2023? And does this change your long-term sort of gross margin expectations and when thinking about profitability, I mean, do you see maybe DecisionDx-Melanoma being cash flow breakeven at some point? 36:00 And the last one, around the EMR system that you mentioned, maybe Derek at the high level if you could talk to what that means for ordering patterns among the dermatology practices and how broad is the use of this EMR for the Derm practices? Thanks for taking those questions guys.

36:20 So, I think I'll take the last one first and Frank can handle the cash [indiscernible]. Okay. Thanks Puneet. So, our understanding is that the largest EMR system in dermatology by market share is modernizing medicines MS System from an EMR perspective. And that's largely because I think it's a system built towards office based procedures and as we know, the vast majority of are dermatologists are office basis private practice individuals. So, that fits their model. 36:55 We have all of our dermatology cash flow to the end of system. The location certainly must take just DecisionDx-Melanoma as an example is that when a clinicians sees a patient who's then diagnosed with melanoma, one of the sort of dropdown down menus that you'd expect to go ahead and see in any EMR System is what you do next, i.e. what's the treatment plan options and one of those options that now pops up is the Castle Biosciences DecisionDx-Melanoma test. 37:24 So that's where it sits. It makes ordering easier. It's a couple of clicks to go ahead and say yes that want to order the Castle test on there’s patient and that kind of sends off to us, both a sign a physician form from that doctor, as well as the associated pathology reports. That's a smooth system. So, what does that mean in terms of potential upside? 37:47 I think we're just rolling that out now with the agreement being signed in December. So, it's too early to say, we have this impact, but our expectations would be, if we have a current customer who's using DecisionDx-Melanoma for appropriate patients in their practice, I would expect that we would see less, sort of loss customers might be seen on a Friday afternoon, for example. And so, we…

39:38 Yes, I will add and finish the question Puneet. So, you’re right. This will be an investment year and we did try to get some granularity to what we see as increases in the various categories down the P&A. You'll see volumes certainly – volume growth certainly exceed revenue growth due to the delay in the Medicare reimbursement cycle that Derek referenced earlier. 40:05 However, we still have, as I mentioned, very good line of sight on cash flow neutrality, and when you look at the volumes we report for squamous cell, for example, you can see what the impact would be to cash flow if we were getting paid by Medicare on that. 40:23 So, we're going to continue to deliver those reports. We think it's important to serve patients with them and we want to have that test offering be at a run – full run when we do have reimbursement appropriately in place. 40:36 And then on the gross margin, as you know, we have begun to break out an adjusted gross margin to take out the amortization. There's intangibles associated with both myPath and Cernostics and that flows through the COGS line. So, we've taken that out to offer a better view of how the business is performing. We will see the gross margin continue to be impacted by these tests we're delivering without reimbursement in place, but as we've said, I think this is the key. 41:07 All of our Derm tests, all three Derm tests run on exactly the same instrumentation with the same people and very, very similar consumables. So, the COGS difference for those three tests is really just a handful of dollars. And so, the gross margin for Melanoma is very durable. It gives what it was prior to our launch of our new tests. And will be – and the impact is nearly the test reports that we're providing without being – without accruing revenue brings that down. 41:44 Now, so that's a little bit of [money] [ph] in the water right now, but what's important to remember, I think is when we do get reimbursed on those tests, that cash drops all the way down to operating income, because we've already reflected the COGS for the test to deliver the tests, and we've already reflected the sales and marketing effort to generate the order that resulted in the report. 42:05 So, when we do have that reimbursement in place, that will drop all the way down and we'll have a big impact. And as we go through the year, I mean sort of proforma what it would look like if we were in a reimbursed environment on that test.

42:25 Thank you, Puneet. Our next question goes to Paul Knight with KeyBanc. Paul, your line is open. You can go ahead.

42:34 Hey guys. This is Harrison on for Paul. I was wondering if you guys could just kind of talk a high level as to how Omicron impacted your business in 4Q. It seems like we – there’s good momentum in terms of overall volumes and I think you called out growth in the call volume as well over 3Q. So, just kind of wondering how Omicron affected you guys in the quarter, kind of what you're seeing there so?

43:06 Yes. So let me have a thought out here. So, maybe sort of thinking that top down, so we did not see any sort reversal in sort of representative access or sort of number of calls per day that were achieved. So nothing on sort of a promotional responsiveness perspective from that perspective. 43:28 We did see overall, I think in 2021, we had about 11% reduction in the overall diagnoses rates of melanoma compared the 2019 and that was 9% below 2019 for the fourth quarter. So, we saw continued improvement in terms of return of diagnosed skin cancer patients in the fourth quarter, compared to the other three quarters in 2021, just by that 9% versus [indiscernible] ratio. 43:58 So, I don't know patient flow was impacted by Omicron I have to believe it probably was, because that had been 6% down or 3% down perhaps and it came in at 9% down that probably is the only tangible part I can see there Harrison in terms of the impact of Omicron in the fourth quarter.

44:19 Got it. And if I could just kind of follow-up as well. Just kind of following up on the overall headcount in trends that we're seeing here in OpEx, how do you guys think about the headcount increasing in the outer years and where OpEx might find a place to generally settle?

44:42 So, maybe I’ll cover salesforce area or commercial side, and you can cover the rest Frank. I think in terms of, sort of the sales and marketing investments, as Frank mentioned earlier, I think response to Stephen’s question, we think that we may end up peeking out in dermatology over time, It maybe 80 to 100 representatives. We’re kind of in the mid-60s right now. 45:15 Most dermatology companies have that range and when they sort of fully matures, that’s probably a number to think about in dermatology, if we have a single line of representatives there. 45:25 Gastroenterology is a little bit lighter it appears, and maybe part of that is because they're in a little bit larger groups overall. So, you can perhaps catch more customers at a single call point. It could be at a Gastroenterology over time ends of picking out. What do you think Frank between [16-18] [ph] is probably a reasonable number, but I think that's over time and over the number of products we have in our bag, that we can offer up. 45:49 So, those are sort of sales and you have associated medical science, the liaison support inside sales associate marketing personnel as the fraction of those multipliers. Can you comment on the rest of the organization.

46:02 Yes. So, what you see there, Harrison as most of the growth is in R&D and in marketing. In terms of the cost center part of the business or the non-revenue generating part of the business, the increases are much lower. So that's where most of that growth is, is in those drivers of the business that will drive revenue in [2023, 2024, 2025] [ph]. And I guess the last thing I would just say is, as we sit here today, we have a tremendous market opportunity and we're excited to keep expanding our penetration of each of these areas now, each of the three Derm tests and as we begin to penetrate on the GI side and the possibilities are certainly exciting and we're committed to that.

46:53 Thanks guys.

46:55 Thank you, Harrison. Our next question goes to Kyle Mikson with Canaccord. Kyle, your line is open. You can go ahead.

47:05 Thanks. Hey, guys, thanks for taking the questions, congrats on the quarter. And I just apologies in advance, if I touch on anything that was already covered, but had a few questions for you. So, again on Omicron, obviously it kind of hit hard in the first quarter or in the first quarter. So, in January, I was wondering if you could talk about like the percentage of Melanoma diagnoses, how far below based on, was that, like that [indiscernible] below the 4Q level? I think that was 9%. And then how do you think that baseline sort of relative thought process will come above all throughout the year? Thanks.

47:41 So, no, no, no is the short answer. So, we purchased our third quarter, a third party diagnostic data from Symphony Health. They run anywhere from 4 weeks to 6 weeks after close of a month before the sort of diagnoses in that month of interest are kind of sold out. So, we're nearing what it should look like, but to be honest, there's a little [indiscernible] still. So, I'm uncomfortable getting you a number in January. I don't think it be a worsening to be honest in terms of what we saw in the fourth quarter of 2021. 48:18 The only exception might be is, there were a couple of snow day issues, and you've got a couple of holiday issues in January, but if you average the fourth quarter maybe a little different there. So, we would have to do kind of diagnosis per day analysis. We typically see that first week of January is quite variable based to upon on the January 1, December 31 New Year's Day pops over. 48:42 So, when we don't have a data that we'd be able to cite this. I don't think personally that I’ve heard any sort of a patients weren't showing up, people were canceling in January because of Omicron for example. So, I think we would see nothing that would be sort of COVID related and probably more just to your typical mid-winter seasonality impacts.

49:06 Okay. Thanks, Derek, that was helpful. And you guys have 330 million on balance sheet and the [indiscernible] in 2021, which was great. And I heard the investments you are going to be picking up this year, I saw the guidance for the expenses, that will make sense, I guess. I'm just curious of what – if you're ready for the next deal, would you strengthen the Derm side, like you do with myPath or would you guys think about the GI side like you did with Cernostics? And obviously I noticed the, kind of [indiscernible] things like the kind of components of the slides earlier. So, I’m just curious like what you're thinking about in terms of like strategic capital deployment for this year and next year, going forward?

49:43 Yeah. So, maybe I’ll talk in terms of what we've been thinking about pre-IPO in the last couple of years, that's been a little not hampered, but impacted by COVID mind. So, we have a very strong balance sheet to, I think number one, as you pointed out earlier to make the right investments in 2022 without worry, about having us being a corner from a balance sheet perspective. So that's a great place to be in. 50:10 My hope, call it in 2025 is to put a time with [around staff] [ph], my hope in 2025 is that we have two or three of our dermatology pipeline programs come to successful completion and we're looking at five or six or six seven dermatology products or tests that we offer that dermatology commercial call point. Those could all be organic if they're only pipeline, it could be that refined additional assets like myPath to kind of fold-in to our current commercial investments. So, those are areas that we look at all the time. 50:44 In Gastroenterology, our interest in Gastroenterology wasn't just a one trick pony and Barrett’s esophagus, but it was really thinking through on a commercial call point perspective of do we believe there are a number of interesting call points in Gastroenterology that clinicians could be making better more informed decisions if they had access to advanced diagnosis like we offer in dermatology, and our conclusion was, yes. 51:13 And from there, the question became, well do you want to go and build this internal only or actually look for some interesting assets out there and that's where Cernostics came along. So, from my perspective, in 2025, I would – our expectation here is that we'll have hopefully not just one product, but will have two or three or three or four tests for use in Gastroenterology – in the Gastroenterology marketplace that will be well received by that customer base. Now, those might come from internal opportunities. They might come from acquisitions. So that's something that we're looking at. 51:46 And of course, the other question is that our interest in Gastroenterology was to say, do we feel comfortable there are other areas in the marketplace of diagnostics where we should acquire, we should build out organically a test or a business and yet we have dermatology, we believe Gastroenterology will reflect dermatology in a couple of years, is there another one that looks like that and those are certainly cards on table at this point in time.

52:18 Okay, great. And then I just want to confirm, using, kind of spatialomics platform from TissueCypher and Cernostics, going forward is that going to be the GI test are leveraging that or could you expand to, I mean oncology or dermatology, kind of using spatial stuff for that as well. I just want to be clear about that.

52:37 That's an excellent question. I should have answered that first time around. So, the other nice, I guess you will call it asset from Cernostics is that as a company, we focus predominantly on discovery using AI tools using gene expression profiling as our platform of interest. 52:56 I think we could all look ourselves in mirror and say we really had limited expertise or certainly limited experience looking at a spatialomics approach. So, I think one of the nice sort of pickups for free, you might call it, is that additional technology platform. I would not limit that just to Gastroenterology opportunities. We think there may be opportunities in dermatology space to potentially leverage that. 53:21 And as we go through with our additional pipeline programs internally, that certainly is one expertise area that we now kind of own and can make a pretty quick call saying, let's go ahead and think about both pathways, gene expression profiling, and let's look at spatialomics to answer this specific question and we'll take the right platform because we have the expertise in-house.

53:46 Great. Sounds promising. Thanks for the questions. Appreciate it.

53:51 Yes.

53:54 Thank you, Kyle. Our last question is to Thomas Flaten with Lake Street Capita. Thomas, your line is open. You can go ahead.

54:04 Hi, thanks Good afternoon guys. Just two quick questions. With respect to the SEER data, I know you in your prepared comments you mentioned that you're looking forward to a publication, would that be based on the data that's been run so far or are you going to hold off until you do additional linkage with more recent data? How should we think about that?

54:23 Excellent question. So, we purposely presented just an initial analysis of the SEER data at that dermatology in the earlier January looking at a subgroup of the overall dataset. So, our expectation here is that with the recent linkage updates is that we’ll have a fuller complete population analyses as part of the primary publications going out.

54:50 Got it. And then one on the DiffDx, myPath. So, if you guys run myPath initially and you get an indefinite result and you reflex to [DiffDx-Melanoma] [ph], is that blinded to the provider? Is it done kind of at your cost just to keep the results at that 99% level? I'm just trying to think of how you guys think about the economics of that and kind of the service level of it?

55:17 Yes. So, we do indicate – so in that situation where we processed myPath first, it came back with an intermediate score from myPath, and we run a subsequent, the same sample on the DiffDx-Melanoma on that report, we do alert the clinician that this with an intermediate result from myPath, so they have that perspective with them. 55:41 Now, while we could say that because you're issuing two results, you should go and yield for both test, we don't do that at this point in time, we don't think that's appropriate.

55:52 Got it. Appreciate the clarity. Thank you.

55:55 Thanks Thomas.

55:57 Thank you, Thomas. There are no further questions registered at this time. So, I will pass the conference back over to the management team for any closing remarks.

56:12 Thank you, operator. This concludes our fourth quarter and full-year 2021 earnings call. Thank you again for joining us today and for continued interest in Castle Biosciences.

56:28 That concludes today's call. Thank you for your participation. And you may disconnect your lines.