Good afternoon, and welcome to Castle Biosciences First Quarter 2024 Conference Call. As a remainder, 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 Zuckero, Vice President, Investor Relations and Corporate Affairs. Please go ahead.

Thank you, operator. Good afternoon, everyone. Welcome to Castle Biosciences' First Quarter 2024 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, May 2, 2024. 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 following the conclusion of the call. 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 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 2024 total revenue and our 2025 outlook, our expectations regarding reimbursement for our products and the impact of our investments in growth initiatives and expanded commercial team. 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 quarter ended March 31, 2024, under the heading Risk Factors, and in the company's other documents and reports filed or to be 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 and operating performance. Reconciliations of these non-GAAP financial measures to the most directly comparable GAAP financial measures are presented in the table 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. Building on our strength and momentum from 2023, I'm pleased to share that Castle delivered a strong start to the year, growing first quarter revenue by 74% and total test volume by 40% compared to the first quarter of 2023. With our team's consistent execution and successful track record of building a differentiated portfolio of tests across our therapeutic areas, we remain confident in our business and are raising our full year 2024 revenue guidance to $255 million to $265 million, up from the previously reported guidance of $235 million to $240 million. Now let me take you through to execute some strategy highlights in the first quarter, and then Frank will provide additional financing highlights before we turn to your questions. Starting with our core dermatology business. For DecisionDx-Melanoma and DecisionDx-SCC combined, test reported volume was 11,961 for the first quarter of 2024, a 20% increase over the same period in 2023. We believe our core dermatology offerings continue to present a long-term growth opportunity for us. Studies have shown that these 2 tests can positively impact patient outcomes and help reduce health care costs. For DecisionDx-Melanoma, we delivered 8,384 test reports in the first quarter, an 11% year-over-year increase. As we've discussed, driving test adoption through robust clinical evidence remains a priority for us, this quarter was no exception. As you know, our DecisionDx-Melanoma test has 2 clinical uses. Ruling out a sentinel lymph node biopsy surgical procedure and predicting risk of recurrence, so that patients can have their treatment pathways adjusted to be more aligned with our biological risk of progression. While 1 could view these 2 uses as separate in parallel, the use of our test to rule out a sentinel lymph node biopsy surgical procedure must be accompanied…

Thank you, Derek, and good afternoon, everyone. As Derek highlighted, we delivered excellent financial results to start the year. Revenue was $73 million for the first quarter of 2024, an increase of 74% over the first quarter of 2023. The increase was driven by higher ASPs and test volume growth. I'd note that first quarter 2024 volume reflects our historical quarter-over-quarter seasonality that is flat over the fourth quarter, further impacting our first quarter 2024 volume is the timing of our national sales meeting, which occurred in the first quarter this year compared to the third quarter in previous years. Historically, the second quarter sees growth sequentially over the first quarter and we expect the second quarter 2024 to follow our typical second quarter volume trend. Adjusted revenue, which excludes the effects of revenue adjustments in the current period related to tests delivered in prior periods was $71.3 million for the first quarter of 2024, an increase of 64% over the first quarter of 2023. Our gross margin during the first quarter of 2024 was 77.9% compared to 70.5% in the first quarter of 2023, and our adjusted gross margin, which excludes the effects of intangible asset amortization related to our acquisitions, and excludes the effects of revenue adjustments in the current period associated with test reports delivered in prior periods was 80.5% in the quarter compared to 76.5% for the same period in 2023, an improvement of 400 basis points. Turning to expenses. Our total operating expenses, including cost of sales for the first quarter of 2024 were $78.4 million compared to $73.6 million for the first quarter of 2023. Sales and marketing expenses were $30.5 million compared to $29.9 million for the same period in 2023. The increase is mainly due to higher expense for training events and…

Thank you, Frank. In summary, the first quarter marked an excellent start to the year with strong execution across the company. I'd like to conclude today by thanking our Castle team. Thank you for your continued interest in Castle. Now we will be happy to take your questions. Operator?

[Operator Instructions] First question comes from Subbu Nambi with Guggenheim.

Could you provide initial thoughts on how should we think about Q2 across the different products, the typical seasonality for derm, but how should we think about TissueCypher, IDgenetix? And we should still assume no revenue for SCC, right?

Yes. Subbu. We -- the guide only has SCC through this month, through May. And we're still early in TC and IDgenetix. So I'm not sure that we're feeling seasonality yet in those 2 products. But -- in the case of TissueCypher, we probably need maybe 1 more quarter to be able to be a little bit more accurate in our modeling there just because we -- as you recall, we had the pause in orders in the second -- third quarter last year. So we're probably seeing that just beginning to normalize. So we're liking what we're seeing. I don't -- there may be seasonality there, but we're probably not able to model that in just yet.

Got it. And then on LTT final rule, I think we all have clarity, but just any additional thoughts given that all your current marketed proprietary tests are all approved under New York [indiscernible]. Could you provide any additional color just specifically on TissueCypher, which has conditional approval? And my understanding is it still is under coverage, but any thoughts there?

Yes. So our Pittsburgh laboratory, which is where TissueCypher is run out of past, I guess, that's the New York City inspection as a permanent laboratory. The conditional approval for TissueCypher is a timing process with New York State as I understand that. So given the FDA language of New York State Department Health approval -- of initial approval, I think all of our marketed proprietary tests are in good shape.

Our next question comes from Kyle Mikson with Canaccord Genuity.

Congrats on the quarter. I guess, Frank, why the decision to exclude SCC past May? Why is May the right month, I guess, in June to think about that? And then maybe for Derek, does the recent publication and the guidelines for SCC make difference with reimbursement over time, like maybe like post this like any aftermath of the decision?

Sure. I'll go first, Kyle, we could pick any month, right? We just -- we know where we are now. And so that's the -- we've got visibility on May. And so that's given the uncertainty in timing, that's where we pick to put the pin in it.

Regarding the [indiscernible] discussed on the call earlier, Kyle, so we actually had 4 -- or we saw 4 different publications come out around SCC, either primary publications or 1 was an expert panel/consensus review recommendation on clinical use of the test. On the -- what I highlighted on the call, which was really the 1 focusing on the use of our test to predict therapy response to adjuvant radiation therapy. That's a pretty significant manuscript because more than 98% of the patients that we test clinically today are eligible for adjuvant radiation therapy under 1 or more of the society guidelines out there, including NCCN. So that is our population that we're testing and the ability to rule out a substantial number of patients, the majority actually who we would predict would not receive a clinically discernible benefit really has a great impact on patient care in terms of reducing complications through unnecessary procedure, and also has a great savings to the Medicare Trust Fund since these are mainly Medicare-based patients. So I think from a coverage perspective, if this article -- in these articles -- other 3 articles are not include in the reviews of any final LCD, these would certainly be clinically relevant articles to reopen up or challenge or initiate a reconsideration process, at least in our eyes.

Okay. That was great guys. Just a quick one. The dermatologic ASP increased 40% year-over-year. I think that makes sense given I think recent SCC ASP trends were pretty good, but it's also a 13% sequential increase from the fourth quarter. So what's driving some of these movement? And can we see similar double-digit increases quarter-over-quarter going forward?

I wouldn't model that level of increase going forward. We had some good progress on collections, and we did have some earlier claims, prior period claims that we collected at a higher rate than we had anticipated, which accounted for some of the out-of-period or prior period revenue. But we're continuing to make progress, but I -- my expectation is it's slow and steady rather than accelerating.

We now turn to Sung Ji Nam with Scotiabank.

This is Corey Rosenbaum on for Sung Ji. So regarding the final rule on the FDA's LDT regulations, I recognize your existing products are not affected. Obviously, the rule will take multiple years to be phased in and make base hurdles along the way. But does this change your strategy or the time line for your development pipeline, specifically for the inflammatory skin disease products? I know it might be too early to tell, but any insight here would be great.

That's an excellent question, Corey. So our guidance so far has been that we believe we are on track or remain on track to launch the initial version of our tests for inflammatory skin disease therapy response prediction by the end of 2025. There are a number of things of areas within the final rule that the FDA indicates they're going to be clarifying in the next period of time. I'm not sure if that means 2 months or 2 days or 6 months. We certainly plan to had discussions around what this means for future marketed test since there's no way that will be launched by May 6 of this year. But as of right now, I would say that we're so far out between now and 2025 that I wouldn't have -- we wouldn't be positioned to go in and say that the timing should change at this point. But obviously, as we work through the final rule and understand how we want to -- how we could have newer tests managed, we can provide clarity in future quarters.

Great. That's great insight. Appreciate it. And also, you previously mentioned potential expanded market opportunity for uveal melanoma in the early detection of the disease. Are there any updates in terms of the development time line there and we might be able to get some updates on that initiative?

Not on this call here, but that's a good question there. So I can't recall the internal milestones that provide clarity on that, but let's get back to you guys in the summertime.

Our next question comes from Thomas Flaten with Lake Street.

On the fourth quarter call, you mentioned that in early 2Q, you would be evaluating a sales force expansion for TissueCypher. Do you have any updates for us on that?

Yes. So we've actually expanded our sales force for TissueCypher. The majority of the expansion territories were filled, I think, effective April 1st, and there's a couple that have come in, in the last week or 2. So the initial expansion efforts in 2Q are essentially done. We do plan on kind of watching the expand the territories once we have the representatives trained up in the field full time, see how the response in this is, and may look to do an additional expansion here in the second half of 2024, depending on what we're seeing in terms of territory productivity growth. But otherwise, though, that expansion, you could say was largely completed by now. So you're really talking about sort of beginning to see, I think, an impact of that, we estimate 5 to 6 months from the date of higher to when we begin to see good productivity coming out of a new area manager. So I would think towards the end of the third quarter, fourth quarter, we should be able to see publicly a nice impact kind of expansion.

Got it. And then, Frank, the updated 2024 guidance is within the range of your 2025 original long-term plan -- like how should we think about 2025 in the context of having increased the guidance to this level for 2024?

We'll recall that our guide, Thomas, assumes that we -- even though the evidence is, in our view, even to the lay person clear that our SCC test has great clinical utility. We are assuming that, that comes out of our revenue in the back half of this year in '25. So we would have that headwind there. But you're right, we're close to there as we sit here today.

We now turn to Paul Knight with KeyBanc.

Derek, a question on the TissueCypher and IDgenetix, you're seeing obviously big growth there. Are you kind of pull through? Or are you really putting in a focused marketing effort on those 2 tests?

We -- Paul, thanks for the question. We definitely market all of our tests in a very thoughtful and deliberate way. So we do see great demand for those tests, but the hurdle to achieve that or to recognize that demand is physician education, and that's really what our marketing effort is focused around as physician education, making sure that the target -- targeted health care providers understand the benefit to their patients of using our test. So with both of those tests, once the health care practitioner understands that benefit, then there's really good pull-through. They get it and they become adopters in many cases, pretty quickly. But to get them there, we have to educate. So these are still fairly pinpoint use here on these tests. It's not -- it's a very distinct subset of patients. And so we need to first illustrate to the physician, which subset of his patients will benefit and then to help them understand what that benefit is. And then for many of them, then they want to say, okay, I get it. I get which patient. I get how it can help now, now walk me through your data, and let me get comfortable that you're going to do what we think we're going to do here. So, we have a very -- I mean, it's very detailed, very in depth. The team has done an incredible job. Our physician-facing materials are incredibly well developed. We've got a large team of very smart people that work very hard to put that together and it's very effective, but you still have to get in front of the physicians so that, that tip of the spear interaction is still very important.

On SCC, are physicians ordering that test? Are they also ordering more and more Dx-Melanoma test as well? Is there a halo effect of having them see better utility for both disease states you mean?

We do think there's a nice halo or pen action there. The clinical utility for the 2 tests is very similar. So once you illustrate to a health care practitioner the benefits of the SCC test to that group of patients, it's a fairly easy adjacency to demonstrate the benefit to melanoma patients and our melanoma test. So it's very similar clinical utility just for 2 different distinct groups of patients and your instinct is right. That's a short step to the adjacency there.

Our next question comes from Mason Carrico with Stephens.

I'll actually just keep it to 1 here. There's been a lot of questions in past quarters on how you guys will shift around resources if DecisionDx-SCC happens to lose coverage. I want to ask about the capital allocation strategy if coverage were to remain in place and cash generation was to remain elevated. How would you rank order your priorities in terms of organic investments if that was to play out? How would you think about sales team additions across the franchise? And what other investments would you prioritize if that happens to play out?

Now, I'll start with that here and Frank can add just. So I think we have plans that assume SCC coverage is maintained, but once the sort of cloud is lifted then we can execute those with higher level of confidence based upon what you just pointed out, which is cash generation opportunity, right? So I think that we're probably close to where we should be in terms of our skin cancer dermatology-focused sales team. We -- even with this most recent expansion going on in the mid-30s, I guess, with TissueCypher, we probably are 60% [indiscernible] at the end of the day. So we would certainly look at pulling forward some of those territory expansions. Although again, we also want to balance that against breaking too many relationships at the same point in time between existing customers with having them deal with new area managers as hires versus the ones that we're dealing with. So that's a balancing act there. We have certainly also held back on scaling our IgX sales team and marketing team as well, do again kind of waiting and watching and also getting our peak comfortable with where we're targeting our efforts and making sure that we're getting the kind of response that we expect. So there are a number of areas there. I could see us to pull in capital in terms of just improving the rate of penetration of our existing tests without much of a change in the core DecisionDx-Melanoma, and SCC dermatology teams. I think below that level, there are probably some additional internal R&D activities that we'd be comfortable moving a little more quicker on that we haven't talked about publicly, so we could see some deployment around internally developed pipeline test, although 1 could say part of that might…

Our next question comes from Catherine Schulte with Baird.

First, for MolDX, I think we're coming up on the 1-year mark from the squamous cell draft LCD at the beginning of next month. Have you had any additional conversations with them? And what do you think the likelihood is that they could reverse their decision in the final LCD?

So we have ongoing interactions with the MolDx medical records as well as the other Medicare contractors as well, which I think we have always done that -- we tried to anyway, I would say. So they are certainly aware of these newer publications that have come out that support the clinical use of our test obviously, from a standpoint of risk stratification as well as predicting response [indiscernible] adjuvant radiation therapy. Even our risk stratification table has more than doubled in terms of the number of patients under study and published studies. So hopefully, those kinds of published elements make an impact on them. I think the pumpkin date according to the Medicare [indiscernible] manual is 365 days and they just being posted. I've seen in the past where there were times when MolDx has taken a month or 2 long, which I guess they're asking for a grace period on that. So we think kind of the June, July time period is the right time here to still think about it, I think, in general. Now in terms of likelihood of them -- [indiscernible] funny word. I would say medical records at MolDx, I think, have been fairly consistent publicly and also with us that they're going to try and review the literature, do the right thing from an evidence-based perspective. And if they miss things, they are very appropriately look to take in public comments and say, we kind of missed something here, we should go and make a change as opposed to kind of digging in their heels and saying, well, we said this a year ago, and we had nothing to go ahead and put on your comments for us. So I think the most relevant recent example that we have talked about last fall was sort of the Cypher LCD, which sort of went from a foundational noncoverage LCD to a foundational covered LCD between draft and final posting, I think there are parallel elements between the Cypher data development and SCC. But of course, that's an [indiscernible] not necessarily the [indiscernible] MolDx [indiscernible] . So I'm quite hopeful that once they see the significantly newer and greater data, certain publications that we're answering directly, some of the questions they had about our test as well as this new ART response data provides an element of knowledge that we aren't creating new treatment pathways. Our test is having a tremendous impact in improving appropriate care with an existing treatment pathways for patients based upon both risk ratification information as well as this newer data regarding the adjuvant radiation therapy response.

Okay. Great. And then on TissueCypher, just with volumes flat sequentially here. You mentioned you're still figuring out that seasonality. So do you think that was seasonality? Or were there other dynamics going on there beyond that in the national sales meeting?

Yes. I think there's probably some seasonality there and maybe there could be a little bit of kind of pull forward, I guess, pull through. There may have been some patients who were seeing when we were in a pause on taking orders and those orders came through in the fourth quarter, which might have shifted them from -- they might have been third quarter orders and got shifted to the fourth. And unfortunately, we don't know for sure. So that's a bit of a -- bit of a position there. So I think after this quarter, we'll probably be able to see what a normalized kind of cadence looks like, and be a little bit more able to see where we are in the penetration pathway there.

Our final question today comes from Mark Massaro with BTIG.

This is [indiscernible] on for Mark. I apologize if this has been covered already, I had some technical difficulties. But so I think in recent months, we started to see a pickup in opportunistic M&A. You have a very strong balance sheet. So I was just wondering how you're thinking about deploying that balance sheet just in light of recent competitor valuations and potentially adding to the bag here specifically for derm?

Yes. Sure. So you're right. The assets are challenged in valuation in many cases. We certainly look at other opportunities. I think inorganic growth is down the priority as we think about. One, the value of what we have [indiscernible] and two our own capabilities. And so we're always -- we always look at things. We always evaluate things and give them an objective view. But I think for now, external growth is still further down the list of priorities.

This concludes our Q&A. I'll now hand back to Derek Maetzold for closing remarks.

Thank you, operator. This concludes our first quarter 2024 earnings call. Again, I thank you for joining us today and for your continued interest in Castle Biosciences.

Ladies and gentlemen, today's call has now concluded. We'd like to thank you for your participation. You may now disconnect your lines.