Good afternoon, and welcome to Castle Biosciences Second Quarter 2023 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. I would like to turn the call over to Camilla, Vice President, Investor Relations and Corporate Affairs.

Thank you, operator. Good afternoon everyone. Welcome to Castle Biosciences' second quarter 2023 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, August 2, 2023. 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 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 anticipated 2023 total revenue and our 2023 to 2025 outlook, our expectations regarding reimbursement for our product, and the impact of our investments in growth initiatives and expanded commercial teams. 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 quarterly report on Form 10-Q for the year ended December 31, 2023, 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 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. As you saw from our announcement a few minutes ago, Castle Bioscience has delivered yet another strong quarter growing revenue by 44% and total test report volume by 52% compared to the second quarter of 2022. Based on strong first half execution and confidence in our business, coupled with our expectations for the second half of 2023, we are raising our full year revenue guidance and currently expect to deliver at least $180 million, an increase of 31% over 2022. Before I get into the quarterly highlights, let me address some of the excitement around our DecisionDx-SCC test. First, let's talk about coverage. We were reviewed by the Medicare contractor Novitas in the first quarter of 2022 and received coverage since April of 2022. Separately, Novitas published on July 27, 2023 a proposed LCD entitled Genetic Testing for Oncology. This proposed LCD attempts to encompass genetic tests that are used in oncology and includes language that proposes non coverage for DecisionDx-SCC, among a number of other laboratory tests. The common period closes on September 9, 2023. Separately, on June 8, 2023, both Palmetto, Moldyx and Meridian posted proposed LCDs recommending non coverage for DecisionDx-SCC. The common period for these Medicare contractors for the proposed LCDs ended on July 22, 2023. 2nd, we were extremely pleased to see that the Division of New Technology of CMS completed its review of our application for Advanced Diagnostic Laboratory Test Status, also known as ADLT Status. As we expected, we were granted ADLT Status effective June 30, 2023. There are four criteria that need to be met to achieve ADLT status. One of the criteria means that we have proven that our DecisionDx-SCC test yields a test result that predicts the probability of the specific SCC patient…

Thank you, Derek. Good afternoon, everyone. Second quarter revenue was $50.1 million, an increase of 44% over the second quarter of 2022. Overall, the increase primarily reflects strong growth in revenues from DecisionDx-Melanoma and DecisionDx-SCC. Adjusted revenue, which excludes the effects of revenue adjustments related to tests delivered in prior periods, was $50.2 million, an increase of 47% over the second quarter of 2022. Our gross margin during the second quarter was 73.5%, compared to 71.9% in the second quarter of 2022. Our adjusted gross margin. Which excludes the effects of intangible asset amortization related to our acquisitions and revenue associated with test reports delivered in prior periods was 78% for the quarter, compared to 77.6% for the same period in 2022. Turning to expenses, our total operating expenses, including cost of sales for the quarter, were $71.3 million, compared to $38.8 million for the second quarter of 2082. Affecting comparability with the prior year was a $20.4 million benefit, or seventy eight cents per share, during the three months ended June 30, 2022, for the change in fair value of contingent consideration related to the Synopsis acquisition. It was no similar item in the current year. After considering that item, the largest driver of the increase in total operating expenses was SG&A expenses, which increased by $7.2 million compared to 2022, attributable in large part to higher personnel costs, including salaries and stock based compensation, primarily within the sales and marketing functions. Cost of sales expense increased by $3.4 million, primarily due to higher laboratory related costs associated with the higher test report volume. R&D expense increased by $1.4 million in the second quarter compared to the second quarter of 2022, which was attributable to higher personnel costs driven primarily by expansions in headcount in support of our growth…

Thank you Frank. In summary, our second quarter results were excellent. We delivered strong year over year growth in revenue and total test report volume driven by continued execution on our long term growth plans. I would like to conclude today by thanking our Castle team. We wouldn't be here without their dedication and commitment. Thank you for your continued interest in Castle. Now we will be happy to take your questions.Operator?

Thank you. [Operator instructions] You have our first question from Carl Nixon of Canacord. You may proceed.

Hey, guys. Thanks for taking the questions. Congrats on the great quarter. So, Derek, on the you know, it's been withdrawn and reposted already. Maybe just provide your view on the additional kind of steps you're aiming to take here going forward, what you can do, I guess, and then separate. You know, Neridian is another option, I guess. Possibly maybe talk about if you could have any luck getting reimbursement through Meridian for SCC and then also maybe know, going off that why is the process potentially different for Neridian and Novitas? Maybe that could kind of inject some confidence or optimism in this whole situation. Thanks.

Yeah. Hi, Carl. Good to hear from you. I guess maybe top line here is that we did provide some, I think, rather extensive detail in our filing a few minutes ago, as well as in the remarks just five minutes ago or so. So I don't have anything specific around that to talk through with Novitas and stuff. From the Norridian question perspective, keep in mind that Meridian is under a joint operating agreement with Palmetto's Moldyx program. So that would go through the Moldyx program from a coverage perspective.

I mean, is there any chance that you could kind of because you have multiple labs across the country. I just wondering if you can kind of be more or less covered for SEC through that lab rather than the one in Pittsburgh?

Yeah, I would maybe change the answer or answer a slightly different question, if that's okay. Carl, I think based upon the data that's been developed since we developed or validated the test in the first place. Data we presented over the course of the springtime. This benefit that we're now seeing in our test to help identify people who could really have a significant clinical benefit from adjuvant radiation therapy should all lead one, I would hope. If one does an evidence based review about the value of our test and really helping to improve not only treatment selection but outcomes in the Medicare beneficiary population. I would hope that as that data is being reviewed by whatever Medicare contractor is reviewing it, that would have an impact on saying, does covering our tests benefit Medicare patients? And if it does, you should cover it. And that's our expectation on an outcome at the end of the day.

Okay, that was great. And then if I could squeeze another one in on Melanoma for guidelines. I believe there was an NtCN panel in mid July. Can you just confirm, Derek, if you were able to submit each of your publications in time for that meeting, could those folks kind of see that data, basically? And what are the next steps in the timing going forward, potentially for an update from?

So, yes, we did submit both the Dillon manuscript that was published in April by those three academic centers cleveland Clinic, Northwestern, and OHSU, and we did also submit the NCIC or publication. Of course, both of those show a nice association with if you use our test, people actually live longer compared to not using our test clinically. We would hope that wasn't part of an active discussion with the NCCN group. On a timing perspective, they've been pretty consistent the last four or five years, even through COVID, I wouldn't expect us to see anything posted publicly until kind of the December, January time period they usually about a five or six month cadence after they have their mid-year meeting is when they go ahead and post an update.

We now have Sung Ji Nam from Scotiabank

Hi, thanks for taking the questions. Just another question on the NCI SEER data. Congratulations on the publication. There was curious if there are additional studies that might be underway, what additional information you might be gathering there, or do you think you have sufficient data to kind of sway the decision makers for NCCN and other guidelines?

You mean additional studies with the NCI and the SEER program or general?

Specifically with NCIR, but if there are other studies that could be also compelling.

Okay, yeah, so our collaboration is ongoing. I think the NCI group of the SEER program kind of update the tumor registry files maybe once a year. They remerge up the next year's data. And so one of the expectations that we do have from this ongoing collaboration is to see multiple publications. And as the patient numbers and the matching grows and we have longer term outcomes, we'll be able to look at things like, I mean, for example, subgroups. Even though the first paper was able to go and look at groups of patients by staging up and down. How does this test perform form in terms of the Medicare patient population? For example, do you end up seeing a significant improvement in overall survival or melanoma civic survival in the Medicare age population who gets to use our test clinically versus those there are. Are analyses or manuscripts like that that I think we will continue to see rolling out an ongoing basis, hopefully the next couple of years. To be honest, we do have other studies that are ongoing and some that we're planning still. One of our core tenets, as you know, is that I don't think one has ever done proving time and time again the value of our test for patient care. One of the studies that was recently published here I can't remember was this first quarter last fall was our decide study, an early look at that data set, which looks at a prospective patients who are using our test initially to decide on going forward with a sentiment of the biopsy procedure or not. And then what happens on outcomes with those exact same patients. So we published an early analysis. I would call that probably analysis one, maybe six months ago or so, and you can bet there'd be further data coming out now. I think as we see those outcomes improvements, all that data NCI that's still in paper decide, other protocols we haven't discussed publicly should hopefully keep raising the bar that our tests make a difference in patient outcomes.

Great. Thank you. And then just a quick follow up on the inflammatory skin disease pipeline. Just kind of curious what the latest update is and what the next milestones might be. Thank you.

Inflammatory skin disease? We hadn't planned on discussing elements of that here. I think back in the end of the first quarter, we discussed that that we have, but that we are very pleased with our enrollment so far. We have 57 committed sites, who are investigator sites, I think all within the US. That could be wrong about one or two overseas and enrolled just over 750 patients to date. And we are chewing through the initial discovery and development data now and expect to update the street here in the second half of this year. It's not going to be obviously today, but we are working through the analysis of that data and hopefully we can go and have a public discussion about that shortly, so prior to the end of 2023.

I guess, we now have Thomas Flatten of Lake Street Capital Markets. Please go ahead when you're ready, Thomas.

Hey, thanks. Good afternoon. Congrats on the quarter. Frank, I was wondering if you could maybe walk through some of the thinking on the guide. At $180 million, that would be a second half slightly lower than the first half? So I'm curious if you could comment on some of the conservatism there or apparent conservative.

Yeah, no change there, Thomas. As we said back in June, we're not assuming SEC revenue and our guidance and forward looks here. So that continues to be the case.

Got it. And then I was wondering if you could maybe share specific to Dx-Melanoma. Is this a depth or breadth play or both? I know you mentioned some new prescriber counts, but if we could narrow that down to Dx-Melanoma. I'm curious if this is coming more from new docs or increasing the depth within docs that are already on board?

I think we're still seeing both. We are continuing to penetrate with new physicians, which is terrific, and we're continuing to have physicians order our tests for more and more of their patients. And the other thing that we always remind is that Melanomas, a community dermatologist, isn't seeing a Melanoma every day. So once you convert that doctor, there's sort of a lead time as their volume builds, just as their patient flows come through. So we're seeing I've called it. Same store growth and new store growth in the past, and we're still seeing both on Melanoma. And as I said in my conclusion, we still think we've got just a long runway there before we're through penetrating Melanoma, just a long way to go on it.

And then just related to that, if you give us a sense of how many of your docs are ordering both Dx-Melanoma and SCC?

I don't think we gave a specific number, but we have said that we continue to see a big overlap there, which was our thesis. That was a big part of our strategy was that we would be able to leverage this sales effort across both products very effectively. And when I look at the growth or I look at the volumes in melanoma for the quarter, that just confirms for us that we can grow our squamous cell product without losing momentum and melanoma without cannibalizing, if you will, that growth as well.

Excellent. I appreciate you guys taking the questions.

Sorry, Derek, can we actually put it into the filing; its 70% of the clinicians ordering DecisionDx-SCC, are also customers of DecisionDx-Melanoma, and that's the current ratio that we're looking at there. We would never expect that to get maybe above 80%, because there are many, many mo surgeons who is a subspecialty of dermatology that do mo surgery, by definition, who don't really do work or don't do surgery on people with invasive melanoma. 70% as of today, I think, reflects a very high cross fertilization recognition of value across both cancer types.

We now have Puneet Souda of. [indiscernible] Partners.

Hey, Derek. Frank, thanks for taking the and first of know, congrats on the quarter and really on the ADLT payment. That's remarkable as one of the highest. You know, for a minute, leaving the coverage decisions and complexities aside, just talking about the ADLT payment, I think I heard Frank saying you're not expecting SDC payments in the second half. Wondering if you can talk about two things. Number one, did you receive any payment since July 1 when this was effective? And then how should we think about 2024 for the payments here for STC? And I know it's a little bit complex issue, given all the coverage and scenarios there, but whatever you can provide there would be helpful.

Yeah, just a clarification there. What I said is that our guide did not include any just to just to clarify that. As Derek said, the evidence is pretty overwhelming. And when you see the ability to correctly guide some of this treatment, like Adjuvant radiation therapy, it's a compelling benefit to patients. So we really believe the evidence is clear and that eventually this test will receive appropriate coverage, not necessarily for the benefit of Castle, but the benefit patients. This is something that the patient group needs.

Got it. And if I may, when you talk about further data generation, sort of, can you talk a little bit about. Level of data that is needed for this test in order to really highlight the clinical utility, so that a sophisticated mac such as Moldyx that has done rigorous reviews of clinical evidence can potentially cover this test down the road. Again, timing is tough to call out on that, but wondering if if that is part of the strategy longer term to generate that data and submit it to Moldyx for coverage.?

So, regarding the proposed Moldyx LCD on SCC, when I read through that, it looks to me that there are core issues in terms of the knowledge of how squamous cell carcinoma is treated today. And that led to sort of not quite interpreting our published data so far, as well as I think, missing some core and key references. So, for example, the premise of the Moldyx team, I think, was that we don't think Adjuvant radiation therapy is actually useful in people with SCC. But Adjuvant radiation therapy is recommended for every high risk patient by every relevant guideline committee from AAD to NCCN to American College of Radiology to Astro. So it's a funny thing that the reviewers at Moldyx felt they could make a conclusion that Adjuvant radiation therapy is not useful and used in the Medicare population for SCC. So if you start with that argument, then you'd say, well, what's the use of your test. That part. The rest of it kind of flows together. So our perspective is that we would hope that with our submissions to Moldyx, we would hope that with the addition of several key publications, including our second validation cohort, including the adjuvant radiation therapy, including analysis, two of our prospective clinical utility study that there would be enough evidence during the course of the next year to have the Multi X group realize that maybe the evidence analysis could be refreshed and updated and lead to continued coverage. We believe we have the evidence needed to meet Medicare's requirements.

Thank you. We now have Mason Carrick from Stevens.

Hey guys, congrats on the quarter. A quick one on the Novitas LCD for me. Given the irregularities we've seen in that process, do you expect the draft to follow the standard twelve month timeline from draft to finalization?

Is there a chance it could be finalized sooner? I don't know if we have any insight there, Mason. To add it would just be speculation.

Okay. And then on the TissueCypher operational constraint, how should we think about the capacity that will come online whenever you guys begin accepting in clinical orders again and how that'll trend or scale as we progress throughout the remainder of the year?

Yeah, we believe that we'll get that. As Derek said, by the end of the cold quarter, we think we'll have. Kind of be back online, and I think we'll continue to see the nice growth we've seen there. We had interesting timing here with this quarter. We opened our Pittsburgh lab and had a move there, and so we just want to make sure that we are offering appropriate turnaround times for our customers and their patients. So I think we certainly expect to see the return to growth once we take those orders, start opening for orders again.

Thank you. We now have Catherine Schulte from Baird

Hey, guys. Congrats on the quarter, and thanks for the questions. I guess first, just following up on that pause in order to TissueCypher, can you just talk about what investments need to be made to expand capacity there? How much of a revenue headwind is that, and is the disruption causing any frustration in your ordering base?

I think, as we had said in the remarks there, and I think put into the filing, too, the primary item here was that the adoption of the test for patient care outran our forecast on the upside. And so the decision was that we should treat our customers honestly and directly and just say, hey, until we can have these post lab movie efficiencies be implemented and scale up properly, we should just tell you, let's kind of put it put on pause for a few weeks here, and we'll come back to you. In terms of the feedback from the field, I'm unaware of a single unhappy customer. In fact, most were. I can't believe you guys Actually did this upfront. We've never seen companies in the GI space that actually treat us honestly, so I don't think that'll be any kind of an issue for us to sort of say, hey, we're ready to go ahead and begin accepting orders, and we're at a turnaround time that we think maximizes patient care. What can we do? How do you want us to help you get restarted again? That I think will be a non issue, Catherine.

Okay, got it. Then maybe just going back to Puneet. Understand that your guidance doesn't assume SEC reimbursement going forward, but can you just confirm that you're still getting paid by Novitas as of today? And is it your understanding that you'll most likely keep getting paid until a potential final LCD becomes effective?

Yeah, we do have reimbursement for the test now, Catherine. And beyond that, we would be guessing if we made any other predictions.

Thank you. We now have Mark Masro with BTIG. Please go ahead when you're ready.

Hey, guys, this is Mark. Thanks for taking the question. So, just circling back to third party guideline inclusion, could you just remind us where you stand in any dialogue you've had with the NIH and Memorial Sloan tettering in addition to NCCN, and you're thinking about likelihood of SEC inclusion and guidelines maybe perhaps ahead of [ph]BDM? Thanks.

You're asking a question relative to the okay, so the NIH database and the Sloan Kettering database referenced in that proposed LCD only review do individual gene mutations. So individual gene analyses, they're more like Aggregating or Curating databases. They don't review RNA based tests, and certainly not multiple gene tests. That's those two groups would never review any of the sort of Moldyx reviewed kind of tests. Right. And gene expression profile tests on NCCN, I believe they met in late April or early May. We did submit a package, as you would expect us to go ahead and do. That's a relatively new committee. I mean, it was established maybe in 16-17,17-18, maybe three or four or five years ago. If we go back and track the time between their sort of spring meeting and the time they update guidelines, that varies quite a bit. Last year when they met in I think it was early May, they posted updates, I think earlier in the first quarter of this year. So that was kind of an eight or nine month cycle time compared to the Melanoma group, which is always about five or six months or so. So I don't know if we can predict or provide any factual kind of guidance about saying would we expect something in September versus December that would be based on any kind of analysis, to be honest.

Okay, perfect. Thanks so much for that. And I guess as far as the assumptions based into the raised guidance, you talked about being able to meet the guide in the absence of SEC reimbursement, so I was just curious, as far as your long term guidance, what are the puts and takes there and what's contemplated for SEC long term? Thanks.

Yeah, thank you. We did reiterate our 2025 long term targets and indicated we expect to be able to achieve those without SEC as part of part of our business. But having said that, again, we do think that the evidence is very strong, and so we would certainly hope to have a better outcome than that.

I can confirm, we have no further questions on the line, so I'd like to hand it back to Derek for any final remarks.

Thank you, operator. This concludes our second quarter 2023 earnings call. We thank you again for joining us today and for your continued interest in Castle Biosciences. Have a great evening.

Thank you all for joining today's call. You may now go, connect your lines, and please enjoy the rest of your day.