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Edited Transcript of CDNA earnings conference call or presentation 31-Oct-19 8:30pm GMT

Q3 2019 CareDx Inc Earnings Call

Brisbane Nov 6, 2019 (Thomson StreetEvents) -- Edited Transcript of CareDx Inc earnings conference call or presentation Thursday, October 31, 2019 at 8:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Michael Bell

CareDx, Inc - CFO

* Peter Maag

CareDx, Inc - CEO & Director

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Conference Call Participants

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* Alexander David Nowak

Craig-Hallum Capital Group LLC, Research Division - Senior Research Analyst

* John Hsu

Raymond James & Associates, Inc., Research Division - Research Analyst

* William Robert Quirk

Piper Jaffray Companies, Research Division - MD and Senior Research Analyst

* Yi Chen

H.C. Wainwright & Co, LLC, Research Division - MD of Equity Research & Senior Healthcare Analyst

* Gregory Peter Chodaczek

Gilmartin Group LLC - MD

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Presentation

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Operator [1]

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Greetings. Welcome to CareDx, Inc third quarter financial results conference call. (Operator Instructions) Please note, this conference is being recorded.

I will now turn the conference over to your host, Greg Chodaczek with Gilmartin Group. Go ahead, please.

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Gregory Peter Chodaczek, Gilmartin Group LLC - MD [2]

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Thank you. Good afternoon and thank you for joining us today. Earlier today, CareDx released financial results for the quarter ended September 30, 2019. The release is currently available on the company's website at www.caredx.com. Peter Maag, Chief Executive Officer; and Michael Bell, Chief Financial Officer, will host this afternoon's call.

Before we get started, I would like to remind everyone that management will be making statements during this call that include forward-looking statements within the meaning of the Federal Securities Laws, which are made pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. Any statements contained in this call that are not statements of historical facts should be deemed to be forward-looking statements. All forward-looking statements include without limitation our examination of historical operating trends, expectations regarding coverage decisions, pricing and enrollment matters and our future financial expectation and results are based upon current estimates and various assumptions. These statements involve material risks and uncertainties that could cause actual results to differ materially from those anticipated or implied by these forward-looking statements. Accordingly, you should not place undue reliance on these statements. For a list and descriptions of the risks and uncertainties associated with our business, please see our filings in the Securities and Exchange Commission.

The information provided in this conference call speaks only to the live broadcast today, October 31, 2019. CareDx disclaims any intention or obligation, except as required by law, to update or revise any information, financial projections or other forward-looking statements, whether because of new information, future events or otherwise.

This call will also include a discussion of a financial measure that is not calculated in accordance with Generally Accepted Accounting Principles. Reconciliation to the most directly comparable GAAP financial measure may be found in today's earnings release filed with the SEC.

I will now turn the call over to Peter.

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Peter Maag, CareDx, Inc - CEO & Director [3]

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Thanks, Greg, and good afternoon, everyone. We had another record quarter at CareDx, delivering strong growth across our portfolio and expanding our leadership position in transplantation precision medicine.

During the quarter, we continued to increase our moat in transplantation with the further expansion of our surveillance testing services, the global launch of AlloSeq Cell-free DNA, the acquisition of XynManagement and the addition of 2 new Board members.

For the third quarter of 2019, total revenues were $33.8 million, increasing 60% compared to the year-ago quarter. Growth in the quarter was primarily due to testing services revenues increasing 68% with digital revenue from our recent OTTR and XynManagement acquisitions contributing $1.4 million to the top line.

In testing services, CareDx provided 8,524 AlloSure Kidney results to approximately 6,600 transplant patients in the third quarter. Since launching AlloSure Kidney in October 2017, we have provided results to almost 14,000 patients, which equates to approximately 7% of the total number of living kidney transplant patients in the U.S.

During the quarter, we continued to expand our kidney transplant surveillance services by announcing the enrollment of the first patient in the OKRA study, a multicenter, prospective, observational clinical trial. This landmark registry study is designed to measure outcomes of transplant recipients using KidneyCare, our next-generation solution for kidney transplant patient surveillance. The combination of AlloSure's donor-derived cell-free DNA test, AlloMap's gene expression profiling and iBox's graft survival artificial intelligence algorithm will provide physicians with the most comprehensive option to manage kidney allograft health.

Turning to numbers on AlloSure Kidney. During the third quarter, 124 centers provided AlloSure results to their kidney transplant patients. We estimate that these 124 centers account for approximately 65% of the transplant volume in the United States.

We finished the third quarter of 2019 with approximately 5,700 surveillance patients. We define surveillance patients as patients that are managed by CareDx on a predefined transplant center testing protocol. These 5,700 surveillance patients helped build the recurring revenue effects of AlloSure Kidney. The surveillance attrition rate in Q3 was consistent with previous quarters. As indicated on the last quarter call, we consider these dynamics as being in line with industry standards.

Overall reimbursement in the third quarter was also consistent with previous quarters, with 70% to 80% of our AlloSure Kidney volume attributed to Medicare patients. Medicare reimbursement for AlloSure Kidney was granted 2 years ago through the MolDx program at Palmetto. At that time, MolDx requested that we develop additional clinical data through the K-OAR study with the understanding that the readout of the end of the study would determine the level of clinical utility of AlloSure and potentially lead to a review of reimbursement levels. This was known as Coverage under Data Development.

However, in August 2019, when MolDx issued the draft local coverage determination for AlloSure-Heart, they also took the opportunity to remove the data development requirement for AlloSure Kidney, which, in effect, confirms our belief that the currently available clinical data for AlloSure is sufficient for ongoing Medicare reimbursement coverage. This increases reimbursement certainty as the final local coverage determination will remove the need for reassessment at the end of the K-OAR study.

Although multicenter studies like K-OAR and OKRA will no longer be required by Medicare when the draft LCD is finalized, they continue to be critical for us as they generate incredibly important clinical data as well as providing additional touchpoints with the key innovation hubs and opinion leaders. These studies also help drive compliance and adherence to standard protocol, which is a crucial element to our work in the transplant community.

We continue to make progress enrolling centers and patients in K-OAR. As of the end of September 2019, 53 centers had been initiated as K-OAR study sites and 1,390 patients had been enrolled. We expect to complete K-OAR enrollment in early 2020. We expect to complete K-OAR enrollment in early 2020.

Now shifting to heart. Third quarter 2019, AlloMap Heart testing volume increased 16% year-over-year, translating into 4,726 patient results. HeartCare, the combination of AlloMap and AlloSure-Heart, continues to see increased adoption in the transplant community. Our surveillance HeartCare Outcomes Registry, or SHORE study, is gaining traction with transplant cardiologists, and we have recruited already 31 centers into SHORE to date.

As I mentioned earlier, AlloSure-Heart received a positive draft local coverage determination from MolDx this quarter. Approximately 35% of heart transplant patients are covered by Medicare, and the MolDx draft coverage underscores the value we bring to the transplant patient care.

Towards the end of the quarter, we announced the strategic partnership with NanoString to develop HistoMap, a gene expression profiling solution to identify allograft rejection in transplant biopsy tissue. This partnership with NanoString will further enhance the development of precision medicine tools in transplantation and help to improve transplant diagnostics.

Now moving to our product business. This quarter, we expanded our market-leading portfolio of transplantation products with the global launch of AlloSeq Cell-free DNA at the ESOT Conference in Copenhagen. We estimate this launch will enable access to our cell-free DNA surveillance technology to an additional 800,000 patients outside the United States.

We also introduced AlloSeq Tx 17 at the ASHI/BANFF Conference in Pittsburgh. AlloSeq Tx 17 is the first of its kind next-generation sequencing HLA typing solution utilizing hybrid capture technology. This best-in-class technology enables the most comprehensive sequencing available, covering more of the HLA genes than current solutions and adding coverage of non-HLA genes that may impact transplant patient matching and patient management. The initial feedback to AlloSeq Cell-free DNA and AlloSeq Tx 17 was very encouraging.

Our HLA typing products are used in labs throughout the world to help determine which organs or bone marrow are a transplantation match between the donor and the recipient.

Our third quarter product revenue contributed $4.2 million to top line, and year-to-date product revenue growth is 19%, driven by continued traction of TruSight HLA and QTYPE.

Now focusing on our digital business. Our digital revenue was $1.4 million this quarter. This is the second quarter that we have reported digital revenue following our recent acquisitions. In May, we acquired OTTR. And most recently in August, we strengthened our growing portfolio of transplant software solutions with the acquisition of XynManagement, the leading provider of solutions with simplified transplant quality tracking and waitlist management.

XynManagement provides 2 unique solutions, XynQAPI and waitlist management. XynQAPI is currently used in 28 centers and simplifies transplant quality tracking and reporting, while waitlist management includes a team of care managers who maintain regular contact with approximately 6,000 patients on the waitlist to help them prepare for their transplant and maintain eligibility.

Going forward, the CareDx team will strive to bring our multi-modality testing solutions and machine learning algorithms to the transplant clinic under our iTrack umbrella. A highlight in our digital businesses this quarter was the publication of a clinical validation study of KidneyCare's iBox technology in the British Medical Journal or BMJ.

The BMJ study assessed the performance of the iBox risk prediction score in 7,500 kidney patient recipients with a median follow-up time of 7 years across 10 academic medical centers in the United States and Europe. The iBox risk prediction score combines allograft function, histological and immunological parameters with HLA donor-specific antibody profile to accurately predict the risk of long-term kidney allograft failure as well as to identify significant changes at the end of -- at the time of therapeutic intervention. The iBox risk prediction score may help guide patient monitoring and further improve the design and development of a valid and early surrogate endpoint for clinical trials.

Last, but not least, we were pleased to welcome 2 new members to the CareDx Board of Directors during the quarter: Grace Colón and Chris Cournoyer. Dr. Colón joined the Board in July. Since 2013, she has served as President, Chief Executive Officer and Director of InCarda Therapeutics, a clinical stage company developing therapeutics for cardiovascular conditions. In addition to her role at InCarda, she is Executive Chairperson of ProterixBio and is a member of the Board of Cocoon Biotech.

Chris Cournoyer joined the Board in August and was previously the Chairperson and Chief Executive Officer of N-of-One, which is a leader in cancer precision medicine. Chris brings deep experience in technology, and her multiple experiences with digital health solutions will be invaluable to CareDx as we build out our digital offerings.

In summary, our 20-year commitment to transplantation has given CareDx an unparalleled understanding of workflows at transplant centers and the unique needs of these patients. The CareDx team is committed to constantly expanding technological boundaries to improve our services and products and make a difference in the lives of transplant patients.

Before I hand over to Mike to discuss the financials, I would like to remind everyone that we will be hosting our Annual Investor Lunch Meeting at our South San Francisco office on the last day of the JPMorgan Conference on Thursday, January 16. Many make the CareDx office the last stop on the way to the airport. Invitations will be sent out in the near future by Greg from the Gilmartin Group, our new IR firm. Please let us know if you're able to attend.

Now Mike, over to you.

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Michael Bell, CareDx, Inc - CFO [4]

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Thank you, Peter. Turning first to the income statement. Our third quarter 2019 testing services revenue increased 68% year-over-year to $28.2 million. The significant growth in testing services revenue was primarily driven by the 8,524 AlloSure patient results we provided in the third quarter. Growth also came from the 4,726 AlloMap patient results we provided, which was a 16% increase compared to the prior year quarter.

Our third quarter product revenue was $4.2 million, and year-to-date product revenue growth of 19% continues to track to our expectations.

Digital and other revenue for the quarter was $1.4 million, an increased revenue from our acquisition of OTTR as well as from the XynManagement acquisition, which closed in late August. Total revenue in the third quarter of 2019 was $33.8 million, representing a 60% increase compared to the prior year's $21.2 million.

Our gross margins continue to improve year-over-year. For the third quarter of 2019, the overall gross margin was 66% compared to a gross margin of 58% in the same period of 2018. The non-GAAP gross margin for the quarter was 69% compared to 61% in the prior year quarter. It's worth highlighting that the non-GAAP gross margin for the testing services business for the 3 months ended September 30, 2019, has improved to 75% compared to 67% in the same period of 2018.

For the third quarter of 2019, the net loss was $1.8 million compared to a net loss of $20.0 million in the same period of 2018. Our net loss per share was $0.04 for the quarter compared to a loss of $0.54 per share in the third quarter of 2018. Our third quarter 2019 net loss included a $6.0 million stock-based compensation expense and a $4.3 million gain from the change in estimated fair value of common stock warrant liabilities.

For the third quarter 2019, our non-GAAP net income was $0.9 million compared to a non-GAAP net loss of $0.6 million in the same period of 2018. Our non-GAAP net income per share was $0.02 for the quarter compared to a non-GAAP net loss per share of $0.01 in the third quarter of 2018. As a reminder, we define adjusted EBITDA as non-GAAP net income before interest, income tax, depreciation, amortization and other expense. For the third quarter of 2019, adjusted EBITDA was a gain of $0.8 million compared to a gain of $0.2 million in the third quarter of 2018. This marks our fifth consecutive quarter of positive adjusted EBITDA. As we indicated on the last earnings call, we increased our operating expenditures in the third quarter of 2019 to further enhance our leadership position in transplantation.

Operating expenses in the quarter reflect our fully expanded testing services field based team; our significant presence at major trade conferences such ASHI and ESOT; our continued investment in clinical studies such as K-OAR, SHORE and OKRA; as well as our burgeoning focus on digital. We expect our operating expenses will modestly increase in future quarters as we continue to build a platform for future growth.

Cash and cash equivalents at September 30, 2019, were $40.9 million compared to $43.5 million at the start of the quarter. Net operating cash flow was positive $0.6 million in the third quarter 2019, with the movement in cash in the quarter primarily reflecting our investments in XynManagement and Cibiltech.

Turning to guidance. We are increasing the lower end of our 2019 revenue expectations to reflect our performance in the third quarter and now anticipate $124 million to $125 million for the year.

With that, I will open the call for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Your first question comes from Bill Quirk, Piper Jaffray.

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William Robert Quirk, Piper Jaffray Companies, Research Division - MD and Senior Research Analyst [2]

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So first question I had, Peter, was the comment about attrition. And obviously, good to see that, that is consistent from quarter-to-quarter. I have a question for you, though. Given that we have a number of patients that are currently undergoing AlloSure testing but yet are not in year 1, where the protocol suggests that they may get 4 or fewer tests, and you've had some previous comments that suggest that the K-OAR patients are going to have about 75% adherence and maybe about 50% or so adherence for surveillance patients. Is another term for attrition simply the testing interval, by chance? In other words, if you had a patient who got tested in the first quarter, they may not necessarily be even up for the second test in the second quarter, for example.

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Peter Maag, CareDx, Inc - CEO & Director [3]

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Yes. I think this attrition discussion has been lingering around. We see the dynamic as completely standard and industry straightforward. So Mike might be able to shed more light on that.

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Michael Bell, CareDx, Inc - CFO [4]

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Yes. Bill, the way we define attrition is basically we have a standing order patient where we have orders for a number of tests over a 12-month period. We define attrition where that standing order has ended in the quarter and hasn't yet been renewed by the end of the quarter. So those standing order patients could come back because that order could get renewed. It's just not been renewed by the end of the quarter. So it's not quite the interval in testing exactly as you're describing it, but that could be an influencing factor.

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William Robert Quirk, Piper Jaffray Companies, Research Division - MD and Senior Research Analyst [5]

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Okay, very good. And then 2 additional ones for me. First is on AlloSeq -- or AlloSure rather outside of the U.S. Can you help us think about, I guess, the early stages of the launch, I seem to recall this is very much a country by country focus. Realizing that you don't want to give '20 guidance, but maybe help us think a little bit about what we should be expecting in the first year there.

And then secondly, just thinking about AlloMap. It continues to be a nice outperformer here several quarters into the HeartCare launch. How important would you say the addition of AlloSure is to convincing physicians either to stick with the product for a longer period of time or for that matter, bringing on some new physicians who had previously not been interested in using the single product but rather interested in using the combined product?

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Peter Maag, CareDx, Inc - CEO & Director [6]

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Well, thank you very much. And today, you heard us the first time to talk about 800,000 patients as additional potential users of an AlloSeq opportunity outside of the United States. So this cell-free DNA technology has received tremendous, tremendous interest from transplant centers all over the world. Now our beta sites where we're currently conducting our first initial user testings is -- are very excited about getting cell-free DNA in their hands.

I think you mentioned that probably reimbursement in molecular diagnostics in ex U.S. market is really the key to success. I think we navigated this extremely well in the United States with our AlloSure, but that will be also the key to success in the ex U.S. market.

Now we haven't guided on the product revenue for next year. And probably by March next year, we'll be in a position to give you a better answer. But really, reimbursement is going to be key. I think in broad strokes, it will be revenue-relevant next year. But really, the 2022 -- 2021 and '22 will then be -- you'll see the full kick-in of that product business. So we always said it's not relevant in 2019. Maybe it becomes a bit relevant -- revenue-relevant in 2020. But then really, the kick-in of additional revenues will come in the 2021 phase.

And then on the HeartCare, we're very excited about HeartCare as the community has embraced this combination of AlloMap and AlloSure, and you see 16% growth on the AlloMap franchise as very, very strong growth from our perspective. The number of centers now embracing HeartCare, quite frankly, I think it's very surprising to me that we've been so successful with everything that's ongoing in the company to actually engage so many transplant centers in the U.S. to start on the SHORE trial. And that really speaks volume to the power of the combination of AlloMap and AlloSure. We're probably attributing roughly half of the growth of the HeartCare franchise with the SHORE trial excitement. Or the other way to say is that half of the AlloMap growth is probably associated with the HeartCare concept. So I think this is a strong growth driver for us in 2019 on the heart franchise.

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Operator [7]

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Your next question comes from Brandon Couillard, Jefferies.

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Unidentified Analyst, [8]

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This is [Matt] on for Brandon today. First one, if we look at the implied 4Q guidance, it suggests around $33 million to $34 million of revenue, which would essentially be flat sequentially. Given the underlying momentum you're seeing on the kidney front and the strengths on the heart side of the business, can you walk through some of the puts and takes that are informing your implied 4Q guidance?

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Peter Maag, CareDx, Inc - CEO & Director [9]

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Yes. No. And thank you so much. And we as previously in previous year have always talked about the fourth quarter being probably a less surveillance quarter for transplantation. So we just see less transplantation surveillance visits. Patients do not want to come in into the transplant center during the holidays or even during Thanksgiving. So the fourth quarter has always been a little bit of a seasonal effect for us.

Overall, I think we are going into the fourth quarter with 5,738 surveillance patients, which is a very strong momentum build for us into the quarter. And we see -- we saw in the third quarter volume growth on the kidney side, but also want to make sure that you realize that the fourth quarter is always a bit of a fourth quarter dimension.

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Michael Bell, CareDx, Inc - CFO [10]

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I'll just add on the guidance. We did have -- we had a strong third quarter. I think that's enabled us to raise the lower end of the guidance from $123 million to $124 million. So we're now at $124 million to $125 million. So I think we sit here feeling confident with that guidance and still expecting, yes, some sequential growth coming from AlloSure.

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Unidentified Analyst, [11]

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And then if we look at the net surveillance patient adds in the quarter, another nice quarter there, especially excluding those outside of the K-OAR study. Can you just talk a little bit about what is underpinning the momentum you're seeing there in terms of the kind of acceleration there in the net adds?

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Peter Maag, CareDx, Inc - CEO & Director [12]

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No. If you look at our numbers, they're all I think pretty strong numbers. When you see our total patient results, you look at also the dynamic of ordering centers have moved up from $117 million to $124 million in the quarter. And now these additional 1,000 patients on the surveillance add, I think that's all pointing to the right direction.

I would say that these new centers, they are embracing the ART schedule, which is the 7 plus 4 plus 4 schedule. And I think that is now established through more than 50 centers through the K-OAR study, have embraced this ART schedule and the protocol. And if you ask as a new center coming onstream, how should I use this product, it's very obvious how to use AlloSure. It's 7 plus 4 plus 4. And so I think this is really very successful in the context of 5,000 -- more than 5,700 patients now on a surveillance schedule. So I think we're very pleased with that.

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Operator [13]

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Your next question comes from John Hsu, Raymond James.

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John Hsu, Raymond James & Associates, Inc., Research Division - Research Analyst [14]

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Peter if we -- Peter or Mike actually. If we could start going back on the guidance, I appreciate that there is typically some seasonality and seasonal decline in testing in the 4Q. But just to be clear, are you expecting any specific impact from competition or competitors enrolling and competing research studies in the 4Q?

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Peter Maag, CareDx, Inc - CEO & Director [15]

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John, that's an excellent question. And I think we actually hadn't anticipated a fourth quarter impact of competition. And sitting here right now, we're in November and haven't had news on reimbursement of any other significant test other than the TruGraft offering. I think that speaks to us probably not having a lot of expectations on the fourth quarter in terms of impact on competitive testing.

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John Hsu, Raymond James & Associates, Inc., Research Division - Research Analyst [16]

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Okay. Great. Regarding the center penetration, it ticked up again here in the 3Q. You've been making tremendous progress there on the kidney side. Maybe you could talk, Peter, a little bit about the progress and maybe where you are in terms of the centers that are going deeper. You have a written protocol. I would argue you probably have a deeper moat there.

And then the second part of the question is the penetration of the remaining high-volume centers, clearly you've talked about 100 centers having 80% of the volume. So I guess the holdouts at this point, what's the data that they need to be convinced? Is it the 1 year primary outcome data? And if so, when can we expect that?

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Peter Maag, CareDx, Inc - CEO & Director [17]

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No. Two excellent questions. The first one is, yes, I mean, 124 centers in the United States, that's almost half of all transplant centers in the U.S., are now exposed to an AlloSure, and that's very exciting. But the really important component that you honed in on is, are they using -- have they embraced beyond K-OAR protocol? And is there an AlloSure protocol established in these centers? And we started the year with about 10 centers having a protocol and now we have passed more than 20 centers having embraced an AlloSure protocol as a standard for their center, which is very strong for us and which is probably driving some of the surveillance patient increases that we see here. So no, we're very pleased with going deep and you'll see the numbers speak for themselves here, where we're being quite successful in penetrating there.

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John Hsu, Raymond James & Associates, Inc., Research Division - Research Analyst [18]

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Great. And sorry, just on the remaining high-volume centers, some of the holdouts, if we had to think about maybe the 15% gap, if you will, of the remaining high-volume centers based on the way you've kind of dissected the market. Is there any, I guess, one thing that they're waiting for in terms of data that can maybe drive some greater adoption in, I guess, the remaining holdouts?

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Peter Maag, CareDx, Inc - CEO & Director [19]

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I think the one data that we are probably pretty excited about to generate relatively soon, we have such big patient data pool. And being clear, we call this about being comfortable with living in the gray because it's relatively clear, if you have a very low AlloSure score, what it means, there's no active rejection. But if you have a very high AlloSure score, it's also clear -- it's pretty clear that there is a rejection. I think what the data that we need and that experience will bring, what do you do with those patients that are in this 0.5% to 0.9% range. And generating more experience and more data, is this really a TCMR IA rejection? Or is it actually a misread of a biopsy, for example? I think that type of data will be very convincing to many opinion leaders, and we're in the midst of generating very exciting data on that and releasing that probably somewhere between ASN, ASTS and ATC next year.

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John Hsu, Raymond James & Associates, Inc., Research Division - Research Analyst [20]

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Okay. Great. And then the last one for me, we've got an update here recently as far as there's some movement relating to the KidneyCare executive order, specifically regarding the organ procurement organizations and living donor rules. There's some movement towards getting those finalized. Also, Fresenius recently announced the universal living donor registry. So I guess the question is, clearly, the rate of kidney transplants have been growing pretty nicely here over time, I think something around -- on the order of 5% per year over the last 30 years. But I guess, looking into next year, Peter, do you have a sense if any of these catalysts as potentially accelerating the pace above the normal rate for adoption in transplant.

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Peter Maag, CareDx, Inc - CEO & Director [21]

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No. And thank you so much for that question because I think that's one of the -- in September, CMS removed the outcome requirement for transplant centers' preapproval. And I think that has a very, very strong impact for the transplant community because this 1 year graft survival number has been now removed. That does really do 2 things. One, it will increase the need -- the ability for transplant centers to also transplant marginal organs. And then secondly, it will also increase the need for transplant centers having better quality systems because they're now measured on long-term outcome qualities versus just this 1 year graft survival. So that plays exactly to what we are playing towards, the KidneyCare initiative, which is very exciting for us. So you'll see an increase in kidney transplants next year based on those initiatives. And secondly, you'll see an increase of need of transplant centers to have increased quality measures, which we, with our XynQAPI offering, will be able to address.

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John Hsu, Raymond James & Associates, Inc., Research Division - Research Analyst [22]

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Excellent. And maybe if I can sneak in one more just because you mentioned the need for better quality systems. You obviously did the OTTR and then Xyn acquisitions. You have iBox on board now and starting to collect data. Can you just give us an update, broadly speaking, on your software strategy and how you see that trending?

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Peter Maag, CareDx, Inc - CEO & Director [23]

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I think it's relatively short term. The software strategy is explained relatively simple. We want to drive adherence and compliance to our AlloSure ART schedule. I think longer term, we want to be really sticky with transplant centers and offering them unique solutions that are along the patient journey, pre-transplant for the waitlist management, HLA typing and then the post-transplant surveillance option. In order to aggregate all that information and that data, you need to have a backbone which we have with OTTR and XynManagement now in place, but really only at the very early beginning. You see, for this quarter, recording $1.4 million in revenue, that's only an early start. But what we're really building is a huge capability within the organization of being able to provide and interact with transplant centers on the long term.

But on the short term, it's really the 75% adherence to the K-OAR protocol or 65% adherence that we see outside of K-OAR. How can we increase AlloSure adoption? By better software tools, compliance and adherence management with our patient care managers both pre-transplant and then post-transplant.

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Operator [24]

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Your next question comes from Alex Nowak, Craig-Hallum Capital Group.

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Alexander David Nowak, Craig-Hallum Capital Group LLC, Research Division - Senior Research Analyst [25]

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It's Alex Nowak here. Just actually a follow-up to that last question there just with the OTTR and the other digital solutions that you've acquired now. I mean as a hospital becomes OTTR-enabled, and again this might be too early to see this just yet, do you see that AlloSure and the AlloMap demand or the compliance change once a hospital goes from not OTTR-enabled to OTTR-enabled?

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Peter Maag, CareDx, Inc - CEO & Director [26]

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Alex, this is super early and we're not even a full quarter into some of these acquisitions and combinations. I think what I can tell you is that I almost daily now get exciting pictures of CareDx employees that are visiting jointly different pockets of transplant centers and have additional insights because being part of that workflow in a transplant center is so important. And understanding how these transplant centers interact and who's making which decision is very critical for us in our business model. But no, I think it is very early. I think we do have the first centers that -- where we have the -- we call it the AlloSure order button as part of the electronic medical record, which we always thought would be important. But I'll report in the future about the success of what that incrementally does to our revenue line. But I'm very excited about a tremendous capability and quite frankly also, wonderful people that have joined the CareDx village. So at this stage, it's very exciting what we're building.

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Alexander David Nowak, Craig-Hallum Capital Group LLC, Research Division - Senior Research Analyst [27]

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Okay. Understood. Understood, that makes sense. And then we saw the potential decision here by Siemens to once again change that data service policy for molecular tests and kind of going back to the old status quo from a couple of years ago. I know this old policy was a hindrance just to AlloMap. But if the policy is reverted here back to the 2015, 2016 original policy, would there be any impact to AlloSure testing?

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Peter Maag, CareDx, Inc - CEO & Director [28]

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I think that's excellent. I think we have seen a little bit of an impact of AlloMap, but I think we've been extremely capable of navigating that rule with our AlloMap franchise. So I don't anticipate that, that would have a significant impact, but it is always something that we'll be working on. Just given the value that we're bringing to these transplant patients at this stage, I can't see how we would be submitted under these tremendous changes. These transplant centers are caring for patients on a basis and so I think that's important that we remain within that framework.

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Alexander David Nowak, Craig-Hallum Capital Group LLC, Research Division - Senior Research Analyst [29]

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No, understood. Completely agree. And then just, Michael, just a quick question kind of going back to a previous one. You've been able to show some very nice sequential growth over the past 7 quarters. Just looking out to 2020, do you think the business can still show sequential growth in all the quarters next year? Do you think seasonality and more of these onetime things will come more into play next year?

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Michael Bell, CareDx, Inc - CFO [30]

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Alex, yes. I mean I think since AlloSure was launched 2 years ago, we've had sequential growth and we continue to see traction and we're continuing adding surveillance patients. So I think our expectation is that could -- should continue throughout 2020.

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Operator [31]

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Your next question comes from Yi Chen, H.C. Wainwright & Co.

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Yi Chen, H.C. Wainwright & Co, LLC, Research Division - MD of Equity Research & Senior Healthcare Analyst [32]

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My first question is, could you clarify those -- for those transplant centers who have already adopted the AlloSure test, can they participate in other competing tests via a study? Or they can only participate in a study using AlloSure?

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Peter Maag, CareDx, Inc - CEO & Director [33]

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No. These are very large academic medical centers, and many of them have multiple researchers on staff and multiple clinicians that are doing research and development. And no, I don't think there is any exclusivity to any of our tests. I think it's actually, in a way, we are embracing that diversity and the ability to compete with these tests also on a clinical level. We actually pride ourselves in a way of bringing these novel biomarkers to the market and have a first-mover advantage. It has opened a bit of an avenue for many of these other tests to now embracing these very large registry studies. I don't think that anybody 5 years ago would have talked about a 3,000, 4,000-patient registry study in post-transplant. So CareDx is really a first mover on this. And we continue to move the -- along in this field with the OKRA study, which will be a new landmark study in post-transplant surveillance in kidney patients. SHORE is a landmark study for heart transplant patients. So I think we're really moving the needle here.

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Yi Chen, H.C. Wainwright & Co, LLC, Research Division - MD of Equity Research & Senior Healthcare Analyst [34]

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My second question is when you said that you expect the AlloSure test revenue to have sequential growth in 2020, is there a factor that growth is also driven by the AlloSure-Heart test? Or it's only going to be -- primarily be driven by the AlloSure for kidney test?

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Michael Bell, CareDx, Inc - CFO [35]

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Yes. When I mentioned that, I was talking specifically on AlloSure Kidney so probably I should have just been very clear that, yes, AlloSure Kidney, we're expecting continued sequential growth. And when we talk about AlloSure-Heart, yes, separate tests. And of course, that's not reimbursed at the moment.

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Yi Chen, H.C. Wainwright & Co, LLC, Research Division - MD of Equity Research & Senior Healthcare Analyst [36]

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Do you expect AlloSure-Heart to be reimbursed and provide meaningful contribution to the top line in 2020?

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Peter Maag, CareDx, Inc - CEO & Director [37]

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Well, I think in 2020, we'll be guiding towards the 2020 number. But I think the way that we have been interpreting the draft local coverage decision for AlloSure-Heart, I think if a clinician chooses to use AlloMap and AlloSure-Heart combined, one could interpret the way that this is now written, that there probably will be an increase of -- in reimbursement.

I've been on the records that I think we do want to make sure that we are being responsible in the context. But first, we need to get through the final local coverage decision, and then there will be a pricing discussion on the product that we foresee to come maybe mid-next year to have then an AlloSure-Heart reimbursement. And we'll update the market as soon as we get these news.

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Operator [38]

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We have reached the end of the question-and-answer session, and I will now turn the call back over to Peter for closing remarks.

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Peter Maag, CareDx, Inc - CEO & Director [39]

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Well, thank you so much for joining the call today. I'm very much looking forward to talk to you soon. Thank you.

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Operator [40]

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Thank you. This concludes today's conference, and you may disconnect your lines at this time. Thank you for your participation.