Good afternoon and welcome to Castle Biosciences Third Quarter 2022 Conference Call. [Operator Instructions] I would like to turn the call over to Camilla Zuckero, Vice President, Investor Relations and Corporate Affairs. Please go ahead.

Thank you, operator. Good afternoon everyone. Welcome to Castle Biosciences third quarter 2022 financial results conference call. Joining me today is Castle’s Founder, President and Chief Executive Officer, Derek Maetzold; and Chief Financial Officer, Frank Stokes. Information recorded on this call speaks only as of today, November 2, 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 3 weeks. 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, TAM and similar items referenced in our earnings release issued today and statements containing projections regarding future events or our future financial or operational performance, including our range of anticipated total revenue in 2025 and expected operating cash flow positivity by 2025 and our expectations and assumptions related to the impact of the COVID pandemic, macro conditions, inflation and of Hurricane Ian. 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 also 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 quarterly report on Form 10-Q for the quarter ended September 30th, 2022, 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. In addition, some of the information discussed today includes non-GAAP financial measures such as adjusted revenue, adjusted gross margin and adjusted EBITDA. And that have not been calculated in accordance with generally accepted accounting principles in the United States or GAAP. These 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, cash flow and operating 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. I will now turn the call over to Derek.

Thank you, Camilla, and good afternoon, everyone. Today, we are pleased to share that Castle Biosciences delivered another strong quarter, growing revenue by 58% and total test report volume by 57% over the third quarter of 2021. Based upon our year-to-date results and the momentum in our business, we have increased our full year 2022 guidance to between $132 million and $137 million, representing anticipated growth of at least 40% from 2021 total revenue. Before I discuss the quarter in greater detail, I’d like to reiterate a few key points from our Investor Day that we held in September. In terms of our corporate strategy, we will follow our three guideposts to achieve what we believe is exceptional execution. The guidepost, exceptional employees, continuous evolution and improvement, and customer and solution-centric are grounded in Castle’s mission, vision, and values and are foundational to how we operate our business. As it relates to this first guidepost, exceptional employees, it’s important that I express my gratitude to those who make Castle what it is and to acknowledge that we wouldn’t be where we are if we weren’t for those of you who call Castle home. So, to all Castle employees, thank you for your dedication, your efforts, and your productivity. As it relates to the remainder of this call, I will review highlights in the quarter. I will then turn the call over to Frank who will provide financial highlights for the period and we will finish up by responding to any questions that you may have. Let me now begin with our core dermatology business. For our skin cancer test combined, we delivered 9,824 test reports, a 34% increase over the third quarter of 2021 and a 4% increase over the second quarter of 2022. Overall, our skin cancer test combined,…

Thank you, Derek and good afternoon everyone. Before I begin with our third quarter results, I would like to state that we may see impacts to our fourth quarter results due to Hurricane Ian. Historically, a significant number of orders for our skin cancer tests of clinicians based in Florida. But at this time, we are still assessing the potential impact that Hurricane Ian could have on our test volumes and financial results for the fourth quarter of 2022, which will depend on future developments that cannot be predicted at this time. As such, we are unable to predict the extent to which our future test report volumes and our results of operations, financial condition and cash flows will ultimately be impacted by Hurricane Ian. Now, turning to the third quarter of 2022, we developed another strong quarter of top line growth and we have raised our outlook for anticipated total 2022 revenue to $132 million to $137 million from $130 million to $135 million. In the third quarter 2022, revenue was $37 million, an increase of 58% over the third quarter of 2021 tracking closely to our overall test report volume growth. Once again, higher revenues were largely driven by our dermatologic test, primarily DecisionDx-Melanoma and DecisionDx-SCC. The higher revenues also reflect Medicare reimbursements for DecisionDx-SCC as Derek discussed earlier, partially offset by the effect of higher negative revenue adjustments related to test delivered in previous periods, which were negative $0.3 million for the 3 months ended September 30, 2022 compared to negative $0.1 million for the 3 months ended September 30, 2021. Excluding the effects of revenue adjustments related to tests delivered in prior periods, adjusted revenue was $37.3 million, an increase of 58% over the third quarter of 2021. Our gross margin for the third quarter was…

Thank you, Frank. In summary, we delivered another strong quarter with an increase in revenue of 58% over last year, with total test report volumes trending closely at 57% growth, are executing well on our growth plans, and expect to finish the year in a position of strength with accelerated momentum going into 2023. I would like to conclude today by thanking our Castle team and all of you for your continued interest in Castle. Now, we will be happy to take your questions. Operator?

Thank you. [Operator Instructions] And our first question today goes to Catherine Schulte of Baird. Catherine, please go ahead. Your line is open.

Hey, guys. Thanks for the questions. I guess first on Hurricane, Ian, so you are still assessing the impact there. Can you just give us a sense of what the impact was in October and how that’s recovered so far? And what’s assumed in guidance?

Hey, Catherine. Yes. We – if you recall back to some of the analysis we did way back at the beginning of the bid, there is a reasonable lag between when a patient is biopsied and when a DecisionDx-Melanoma order is placed. And it’s in the 2 to 3-week range. And so we really would not have started to see that until recently. So, so far things appear not to be too disruptive, but we just wanted to highlight that because of that lag, we don’t yet have our arms around what the full impact could be and that’s why we were just noting that for everybody to keep in mind here.

Got it. But is there something in guidance assumes that there will be some sort of impact there?

Our view on what that impact is, is included in what we have what we raised to.

Okay, got it. And then maybe for SEC, you talked about [Technical Difficulty] the final determinations to come out, any update on potential pathway for ADLT status and an application for that test?

You broke up at the beginning of that, you were – can you repeat the first part of the question again, Catherine?

Yes. As you said for SEC, I heard your comments on Medicare I am waiting for the final determination around the payment for the new code, but is there any update on potential ADLT status or submitting an application for that test?

Yes. So we certainly believe in our assessment that the SEC test should qualify for ADLT status. And we are evaluating our approach there. We will update you shortly as we sort of move forward.

Got it. Thank you.

Thank you. And the next question goes to Kyle Mikson of Canaccord. Kyle, please go ahead. Your line is open.

Hello. This is Alex [indiscernible] on the line for Kyle Mikson. Great quarter. I just wanted to cover really briefly. So you discussed that in 3Q, you had the new dedicated sales team for MyPath Melanoma and DiffDx Melanoma. Can you go into that more and just characterize for the length of this team has been? It sounds like it’s been a quarter since this has been underway. And then then I have one more after that. Thank you.

Yes. So, good question here. I should clarify that. We began interviewing and I think the hiring date for the group was probably, what, Frank, mid-September, I think. So we are still completing training now. So I would say they were new employees doing at-home training during September. So, there would have been no impact from the third quarter per se. That being said, we also had sort of refocused our dermatology facing group more closely aligned with the cutaneous melanoma test and the STC test. So, if we – if the – if history is a predictor of the future for kind of sales effectiveness, I would expect – obviously we would expect to see some modest improvement here in the fourth quarter in terms of as they come out of training and get in the field more often. But we would be really looking towards first quarter performance to kind of do or do a recheck and are resized correctly do we want to make some adjustments here in the second quarter of 2023?

Got it. Thank you. Good color. I appreciate it. One more question if that’s alright. So, I was wondering if you could provide, I guess, some more qualitative color on early adoption of TissueCypher? Thanks.

Yes. Okay. So, let’s take a step back. So, one is that they had no commercial-facing effort until we acquired the company in December ‘21. So the Chief Executive Officer was the only sort of sales person. I think he fits in every other Friday in the afternoon type thing, because we had CEO to do to run the company. So I would kind of call we are starting from a very low base of awareness and certainly a very, very low user base in – when we acquired the company in December ‘21. We ended up staffing up an initial sales force of, I think, 14 outside sales territories effective January 2 of this year. They spend most the first quarter in training are part of it in training partner field. We made the subsequent second staffing up also in kind of a mid-September time period and that additional group of 9 people I think bring us at 24 – 20 to 24 territories total is moving through training as we speak. So that’s sort of is the commercial background in terms of sales rep investments. So qualitative adoption, if you look at the sort of market assessment of the – of how Barrett’s esophagus breaks out from a dysplasia grading perspective, we believe about 90%, so 9 in 10 patients probably is diagnosed with a Barrett’s esophagus lesion, but the pathologist can’t see any dysplasia. So, we would call that non-dysplastic Barrett’s esophagus. And of the remaining 10% is kind of split roughly between patients who have low grade dysplasia in patients with what we would call indefinite dysplasia. So it’s kind of in the middle of – it’s kind of a warm dysplasia, I guess, if you want to view as an on pathologist. So in that…

Got it. Thank you very much.

You are welcome.

Thank you. And the next question goes to Puneet Souda of SVB Securities. Puneet, please go ahead. Your line is open.

Yes. Hi, guys. Thanks, Derek. Thanks for taking the question. So maybe just on SEC, just given that that’s an important point for the fourth quarter. If you could walk through maybe potential scenarios. Obviously, there is an ADLT side of things. But then on the other side, you could potentially apply to other math. And so maybe just walk us through if the coverage was lost, what is the timeline to revenue impact, first of all? Secondly, are you able to pursue it through another jurisdiction? And if ADLT or another jurisdiction was – was the route, when do you think you can sort of address this? Obviously, a couple of questions there, so thanks for covering those.

Yes, absolutely, Puneet. Good to hear you. So as we talked about, I guess, at the second quarter call and a bit less so today, we requested a medical review through Novitas in earlier this year. And we were setting up that test to be processed out of our Pittsburgh, Pennsylvania laboratory, which Novitas overseas, Pennsylvania for Medicare. And we had very positive interactions and came out of that with a thumbs up in our perspective. We were asked to submit a pricing dossier, which we did in late March. I think it was or mid-March ahead of our first reports being issued, which happened in April. And as you know, Novitas price is at $300 and change, which is the – which I think what they did was they basically crosswalked us over to Oncotype for breast, Oncotype for prostate cancer. So that all lined up pretty well. And then as you alluded to, I think in June of this year, Novitas published a broad – essentially a biomarkers in oncology draft LCD, looking to try and offload a medical review from their responsibility, that’s maybe a little harsh to say, but to try and reduce work and be more efficient to one of three databases. And so if you’re included in those databases, then they assume that you’d be covered. And if you weren’t included, they assume that you would not be covered. That was the lay of the land for background. And as the audience may know here, usually for draft LCDs, there is a 45-day public comment period, we believe, due to a significant number of people wanting to comment that was actually doubled to 90 days and closed out in early September of this year. Our consultants believe and I guess we’re aligned to believe…

Got it. Super helpful. Thanks for all those details. And on – you’re obviously raising the full year guide here and appreciate the prior comments on the 2025 guide, Derek and Frank, how should we think about 2023 growth here, just given the sales rep increases that you’ve had DiffDx is getting reimbursed. There is potential for some change on the SEC coverage here, but DecisionDx continues to have solid momentum. So maybe just talk to us about how should we think about given where we stand today 2023? Thank you.

Frank, do you want to cover that?

Yes. I think it’s the setup is great, Puneet. We’ve got really good salespeople out there. We’ve got a lot of data coming. I think that the volume validates the clinical utility of each of our tests here, and we still are well positioned competitively. So I think the setup is terrific for ‘23, and we’re excited about it and think that the data is demonstrating our careful investments are paying off.

Got it. And then just last one, if I could ask on TissueCypher? Is there any – you’ve submitted the medium tier rates already? Is there any reason why TissueCypher should dramatically differ from the ADLC rate, which was, I believe, slightly lower versus initial rates that was assigned to it, but you shouldn’t say in the same ballpark? Thanks.

Well, let’s see here. So one is that the – once ADLT status was attained as a new ADLT on March 28 of this year, the next 9 months were the price was set at the original list price, which was at $23.15 or $23.50 rate way back when. So I wouldn’t necessarily call that the first ADLT rate, I would call that the original list price during the collection period. So we’ve obviously collected data during the first 6 months, that would end September,] and we will have our first ADLT rate post toward the end of this year. So I had a hard time seeing that rate going lower. But again, that’s Medicare calculating the median private payer rate.

Thank you. And the next question goes to Thomas Flaten of Lake Street. Please go ahead. Your line is open.

Hey, Derek, I was wondering if you might be able to provide some color on how you guys are integrating the SEER data into both the reimbursement side of the business as well as in the commercial messaging.

Okay. So from a commercial messaging perspective, we certainly have trained up and outfitted the field team. So the sales group, the medical science liaison group, the other the medical directors in terms of the data as it’s been presented in abstract and poster form. So they are educating clinicians on the value that we’re seeing there. Now an abstract is not the same level of evidence or review as a publication. But that’s what we are working with right now. And that message that we’ve talked about before has been well received by clinicians, especially those who might be doubting of what does this really do for me? What it does for is it gives you more accurate information to make a more informed decision and that when you make those decisions, outcomes should improve, and this data seems to show that linkage between tested, untested patients similar to Oncotype for breast cancer. That I mean Oncotype for breast cancer as a comparator, is really focused on removing unnecessary long-term taxane therapy, I guess, as opposed to somehow improving survival. So similar kinds of withdrawal of unnecessary procedures or treatments, but the reality of it is that people who are picked up as having more aggressive disease are being funneled to where they should be funneled. That’s how we see the data. So that’s been released to the field probably during the second quarter of this year. Again, that was not as strong as the publication. So we will have another more important way as we see a publication come out into the public domain. From a commercial payer perspective, we have, I guess, I would say, tested the water slightly, but the reality of that is until that’s in a peer-reviewed publication that’s going to be put aside is that’s very interesting come back when I can pull up on pubmed or Google Scholar myself. So I don’t think the impact on that one, is I think the impact is zero today on the commercial payer landscape; and two, that’s a great question to get back in touch with us a quarter or so after the publication gets out of the door.

Got it. And on the derm sales team, I know they have been in the field and the expanded size for a while now. How would you maybe quantify or qualify them being on the ramp to full productivity?

Dermatology. I think the dermatology sales team hit full stride probably late first quarter, second quarter, Frank, is that right? Now we did have, I think, a couple of dermatology representatives move over the TissueCypher earlier this year and a couple of move into the dermatopathology group, right just one, I can’t remember. So there is some backfilling as you’d expect anyways right in typical organization. So I think one, third-quarter volume, second-quarter volume penetration probably reflects everybody being fully effective, knowing you’ve got just some background normal noise.

Thank you. And the next question goes to Mark Massaro of BTIG. Mark, please go ahead. Your line is open.

Hey, guys. Thanks for the questions. And congrats on the strong beat and raise. I know there is been a lot of detail covered on the squamous cell carcinoma tests, but I think a little bit of clarity could be helpful here. So I know that Novitas priced it at 38, 73 earlier this year. I guess, were you expecting – it sounds like you were not expecting a crosswalk to the MyPath Melanoma test. And instead, you were expecting a crosswalk to DecisionDx-Melanoma. I guess I’m trying to put this in perspective. Is there any risk that you don’t get paid here in Q4? And I know that there are a lot of moving parts to 2023, but I’m just wondering if you expect to get similar payment for SEC in Q4 as you did in Q3.

So the preliminary determinations – so the short answer is yes. The preliminary determinations turned final whenever they post them, but they are effective January 1st, 2023. So I would not expect any influence up or down in the fourth quarter, that would just – that would be unprecedented. In terms of our expectations, I think given that Novitas and of course, CMS Central is under no restrictions to follow their approach. But I think if we look across the land, risk stratification tests like our SCC tests have historically been crosswalked over to Oncotype for prostate or Oncotype for breast cancer. We would have expected that to be the normal approach to be honest, or they could have taken a position that there is another risk stratification test run by the same company. for another skin cancer and crosswalk up to DecisionDx-Melanoma, that would be less likely than more lastly, more likely would be acute breast. We certainly, as I mentioned, had some interactions with the Central Medicare group at Baltimore last month. And I believe that one, this is a good group of people that we dealt with over the years, and they try to do the right thing for patient care and for companies. My hope is that they understand the difference now between the level of resources needed to both develop and produce a diagnostic support test like MyPath versus a risk ratification test like our SCC test, will act accordingly. But of course, that’s their call not mine, but no impact in the fourth quarter. I think that shouldn’t be expected.

Okay, perfect. So sorry, to clarify, do you think it’s now more likely if there is a change that it would go to the Oncotype breast at $38, $73 rather than your MyPath Melanoma? And just also to clarify, do you think there may be an update from CMS later in calendar Q4 ‘22?

Yes. COVID has thrown off the normal posting period. You may recall that precut if we can think back that far. Typically, I think they usually got out the next year’s updated rate schedule like the Friday after Thanksgiving or 2 Fridays afterwards. That shifted a bit the last couple of years. But sometime in December is when I would expect to have the final rates, not just for the new – for the test with new codes, but all codes will be posted in the final determination. Now I think there are a potential for staying the same at 38, 73, I guess, potential to be cross blocked on the MyPath, potentially be crosswalk up to the DecisionDx-Melanoma. And there is a fourth option, which is that they could go ahead and throw back and have the MAX move forward from a gap-fill process and that would go into effect in 2024 with the current rate staying throughout 2023. That would be a typical process. So there is a fourth potential outcome.

Thank you. And the final question goes to Mason Carrico of Stephens, Inc. Mason, please go ahead. Your line is open.

Hey, guys. Thanks for taking the questions. Most of mine have been answered, so maybe just one quick one here for me. Thinking about the ramp for DecisionDx-SCC in 2023 in terms of test volumes, how have conversations differed with docs when it comes to the early adoption of that test versus DecisionDx-Melanoma when that test was early in the adoption curve? Have you guys seen a lot of leverage in the work you’ve done already in terms of educating derms on these types of tests or any color on maybe the overlap of who’s ordering?

Yes. So there is a – so last first, there is a significant overlap between clinicians who are current or had already adopted the DecisionDx-Melanoma test, and those who are now adopting the squamous cell carcinoma test, and I think that’s probably due to two factors. One of them is that we’ve obviously sat and had conversations about the additional value that one receives in managing melanoma when you have our test results in hand along with the clinical and pathologic factors versus not having our test results in hand. So they are already thinking through and appreciate and have integrated that concept in the practice reality. So when we walk into that same clinician the next day and talk about we see a gap here in people with high-risk squamous cell carcinoma. Here’s how we see the world. Do you agree with that, you can generally get head nodding, of course, and then they would follow along and saying, well, so what I really need to think through is am I going to make changes in how I manage these patients with your result. Once they get there, then I think they become initial customers that might dabble a bit and test our test and begin adopting it. So I think that’s quicker than it was when we introduced the melanoma test a few years ago when there was nobody doing risk stratification in anything in dermatology like this. So certainly, that was helpful. I think the other element, of course, is – and even though we made the test available before 2015, it was really 2015, we went to 14 sales representatives across the U.S. and then that was – maybe it was the first real launch, but we were at 14 people then we’re in the mid-60s right now. So that’s a nice significant increase in terms of the visibility in the marketplace. So I don’t quite know if it’s a more aware clinician and that’s leading to quicker adoption, if it’s having us being around those same clinicians for 3 or 4 or 5 years now and they are easier to have a conversation with and accept the message or if it’s also just promotional size of the company, that’s a driving factor. But all of those, I think, are part of the mix of saying, certainly, we’re seeing more rapid adoption with the squamous cell carcinoma testing with melanoma, but as all of those features, I think, together.

Got it. That’s makes sense. Thanks, guys.

Thank you. We have no further questions. I’ll now hand back to Derek for closing remarks. End of Q&A:

Thank you, Nadia. So this concludes our third quarter 2022 earnings call. I want to thank you again on behalf of the Castle team for joining us today and for your continued interest in Castle Biosciences.

Thank you. This concludes today’s call. Thank you all for joining. You may now disconnect your lines.