Q3 2023 Castle Biosciences Inc Earnings Call
Participants
Camilla Zuckero; VP of IR & Corporate Affairs; Castle Biosciences, Inc.
Derek J. Maetzold; Founder, CEO, President & Director; Castle Biosciences, Inc.
Frank Stokes; CFO & Treasurer; Castle Biosciences, Inc.
Catherine Walden Ramsey Schulte; Senior Research Analyst ; Robert W. Baird & Co. Incorporated, Research Division
Mark Anthony Massaro; MD & Life Science & Diagnostic Tools Analyst; BTIG, LLC, Research Division
Mason Owen Carrico; Research Analyst; Stephens Inc., Research Division
Puneet Souda; Senior MD of Life Science Tools and Diagnostics & Senior Research Analyst; Leerink Partners LLC, Research Division
Thomas Flaten; Senior Research Analyst; Lake Street Capital Markets, LLC, Research Division
Unidentified Analyst
Presentation
Operator
Good afternoon, and welcome to Castle Biosciences Third 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 Zuckero, Vice President, Investor Relations and Corporate Affairs. Please go ahead.
Camilla Zuckero
Thank you, operator. Good afternoon, everyone. Welcome to Castle Biosciences Third 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, November 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 3 weeks.
Before we begin, I would like to remind you that some of the statements made today will contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements include, but are not limited to, statements about our financial outlook, TAM and similar items referenced in our earnings release issued today and statements containing projections regarding future events or our future financial or operational performance, including our anticipated 2023 total revenue and our full year 2023 to 2025 outlook; our expectations regarding reimbursement for our products; 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 annual report on Form 10-K for the year ended December 31, 2022, under the heading Risk Factors and in the company's other documents and reports filed with the Securities and Exchange Commission. These forward-looking statements speak only as of today, and we assume no obligation to update or revise these forward-looking statements as circumstances change.
In addition, some of the information discussed today includes non-GAAP financial measures such as adjusted revenue, adjusted gross margin and adjusted EBITDA 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 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.
Derek J. Maetzold
Thank you, Camilla, and good afternoon, everyone. As you saw from our announcement a few minutes ago, Castle delivered yet another outstanding quarter, continuing our track record of strong execution. Revenue grew by 66% to $61.4 million, and total test report volume grew by 52% compared to the third quarter of 2022. We achieved these strong results while generating $5 million in cash flow from operations and $6.6 million in adjusted EBITDA.
Given our consistent performance throughout the year and our confidence in the business, we are again raising our full year 2023 revenue guidance and now anticipate achieving at least $200 million in revenue, an increase of at least 45% over 2022. I attribute our continued strong performance in no small part to the culture we built at Castle. And the foundation of this culture is the people who call Castle home. I cannot thank them enough for their decision to join Castle, lean in and help drive our success.
Now, let me take you through execution and strategy highlights from the quarter, and then Frank will provide additional financial highlights for the period before we turn to your questions. Let's start with our core dermatology business, which continues to perform extremely well. For DecisionDx-Melanoma and DecisionDx-SCC combined, test volume was 11,379, growth of 27% year-over-year. For the trailing 12 months as of September 30, 2023, the combined test volume growth was 33% when compared to the preceding 4-quarter period. We are very pleased with our third quarter and trailing 12 months volume performance.
For the 3 months ended September 30, we had approximately 500 new ordering clinicians, that is clinicians ordering our tests for the very first time, and approximately 5,000 total ordering clinicians across all 3 dermatologic tests. As a reminder, there is significant overlap between clinicians who order our DecisionDx-Melanoma test and those who are now adopting our DecisionDx-SCC test. In fact, during the 9 months ended September 30, 2023, approximately 75% of all clinicians ordering DecisionDx-SCC had also ordered our DecisionDx-Melanoma test during that same period. We believe this is a result of the high unmet clinical need that our tests are designed to address, coupled with the decision-making value that is acted upon by dermatological providers and the leveraging of our sales efforts across growth products effectively.
As it relates to the impact on decision making, I remind you of the results of a multi-center study published in the second quarter of this year from Cleveland Clinic, Northwestern University and Oregon Health & Sciences Center that showed a direct benefit in outcomes, that is, survival in patients whose early stage melanoma treatment plans were guided by the DecisionDx-Melanoma test results compared to those patients managed at the exact same institutions whose treatment plans did not include the knowledge of our decision DecisionDx-Melanoma test results, that is, untested patients.
For DecisionDx-Melanoma, we delivered 8,559 test reports in the third quarter, a 16% year-over-year increase and roughly flat compared against 2Q, reflecting normal third quarter seasonality. We are pleased by this performance. From a patient standpoint, we estimate that we have reached about 25% market penetration, and we believe substantial growth opportunities are still ahead of us. We believe the most significant drivers of growth are the documented clinical impact our test has on improving outcomes in patients diagnosed with early stage melanoma, coupled with our prior commercial expansion investments intended to educate our customer base.
One of our evidence development goals is to continue to compare the value of our test to other tools or other tests for patients diagnosed with melanoma, primarily for reimbursement purposes but also as proactive competitive purposes with our customers. In the past, this meant focusing on comparing the independence of our DecisionDx-Melanoma test to the American Joint Committee on Cancer, or AJCC, staging factors or the National Comprehensive Cancer Network's risk criteria.
In addition to these 2 risk assessment tools, there is also the existence of nomograms. During the third quarter, we announced a new study demonstrating DecisionDx-Melanoma outperformed a nomogram that was developed at the Memorial Sloan Kettering Cancer Center in predicting the risk of sentinel lymph node positivity in patients with cutaneous melanoma. This study provides further evidence that using DecisionDx-Melanoma to help guide decisions regarding sentinel lymph node biopsy procedures improves patient selection, potentially reducing unnecessary surgical procedures and ultimately improving the care of patients with melanoma.
Similar to DecisionDx-Melanoma, we continue to see strong report volume momentum for our DecisionDx-SCC test in the third quarter of 2023, with volumes up 72% year-over-year. As with our growth in DecisionDx-Melanoma, we believe that our strong growth and volume for the DecisionDx-SCC test is due in large part to the combination of the high clinical need for SCC, coupled with the value that our test provides. We continue to expand the body evidence surrounding the test. This quarter, for example, we shared new data demonstrating the ability of our DecisionDx-SCC test to identify patients with localized but high-risk cutaneous squamous cell carcinoma who may benefit as well as those who may not benefit from adjuvant radiation therapy.
Now let's shift our focus to our gastroenterology franchise and our TissueCypher test that was designed to predict the development of high-grade dysplasia or esophageal cancer in patients diagnosed with non-dysplastic indefinite or low-grade dysplasia Barrett's esophagus disease. During the third quarter, we delivered 2,829 TissueCypher reports compared to 690 in the third quarter of 2022. As with our DecisionDx-Melanoma and DecisionDx-SCC test, I'm pleased to share that during the third quarter, we had multiple data announcements demonstrating the significant clinical utility of TissueCypher in guiding risk-aligned care for patients.
Turning to our mental health franchise. We delivered 2,791 IDgenetix test reports during the third quarter of 2023, up from 1,208 in the third quarter of 2022. We are extremely pleased with the momentum thus far, including 2 consecutive quarters of triple digit year-over-year volume growth. We believe our success is due to a differentiated test, including identifying drug-drug and drug-gene interactions with lifestyle factors, to help improve medication response and remission rates in a mental health market which we believe offers significant opportunity for growth.
In fact, recent data from a study showed the addition of drug-drug interactions and lifestyle factors to drug-gene interactions provided by our IDgenetix test significantly impacted a number of drug recommendations and contributed to improved remission rates for patients with moderate to severe depression. Specifically, patients whose medication management was guided by our IDgenetix test were 2.65x more likely to achieve remission of depressive symptoms compared to patients whose medication was guided by standard of care trial-and-error approach. That is a clinically meaningful improvement to patients suffering from moderate to severe depression.
Moving to our longer-term growth initiatives. I'm excited to share some early discovery data on our inflammatory skin disease pipeline program. As you may recall, we launched the program with the goal of developing a genomic test aimed at guiding systemic therapy selection for patients with moderate to severe atopic dermatitis, psoriasis and related conditions. We are pleased with the early discovery data, which we presented in October at the Fall Clinical Dermatology Conference. For instance, the data demonstrated that in patients with moderate to severe atopic dermatitis, we were able to show that using our non-invasive method of tissue sampling, coupled with gene expression profiling, can separate out responders from non-responders.
Furthermore, our inflammatory skin disease pipeline test could help distinguish atopic dermatitis, psoriasis and mycosis fungoides skin lesions to ensure proper selection based upon an individual patient's molecular profile. This test has the potential to represent a significant advancement in the care of patients grappling with these debilitating skin conditions. Importantly, it could empower clinicians to tailor therapy choices by considering their molecular profiles, potentially sparing patients undergoing numerous ineffective and costly medication trials before discovering an effective treatment to manage their specific symptoms. We are encouraged by the data we have generated to date and look forward to providing you with additional development updates in 2024 with the test launch targeted for the end of 2025.
Now, shifting our focus to development related to uveal melanoma. Discovery data on a potential complementary test is being presented this weekend at the American Academy of Ophthalmology. As you know, uveal melanoma is a rare disease with approximately 2,000 patients diagnosed annually in the U.S. Our DecisionDx-UM test is standard of care for newly diagnosed patients, and we believe we test about 85% of such patients. In our ongoing dedication to this patient population, we're currently conducting a study to explore the potential of developing a test that will be tailored for individuals presenting with very small suspicious lesions with uncertain malignant potential.
The current approach in deciding whether to intervene and treat these suspicious lesions is based on a watch-and-wait approach, where some change in the clinical characteristics of the lesion prompts the decision to definitively treat it and perform a prognostic biopsy. However, the decision to intervene is highly subjective and can lead to both undertreatment or delayed treatment of aggressive lesions and overtreatment of lesions that would probably have been fine to follow without any intervention.
We are looking for a simple, minimally invasive and objective signal that can identify aggressive biology earlier than the current clinical standards in order to allow for potentially earlier interventions. We see this potential test as a complementary test to our prognostic DecisionDx-UM test. Our data is still in the early stages of discovery, but we expect additional data in 2024, indicating whether development of this type of complementary test may be possible.
Lastly, I am honored to share that Castle Biosciences has recently been awarded a Top Workplaces National Industry Award, securing the third position among 84 top workplaces in the healthcare sector. People come first at Castle, and our unique culture reflects that mindset. Our success is not possible without the entire Castle team, and I would like to express my sincere appreciation for their contributions.
I will now turn the call over to Frank, who will provide details relating to our financial results and outlook.
Frank Stokes
Thank you, Derek. Good afternoon, everyone.
Third quarter revenue was $61.5 million, an increase of 66% over the third quarter of 2022. Overall, the increase primarily reflects significant growth in revenue from DecisionDx-SCC and DecisionDx-Melanoma driven by ASP growth and strong test adoption through robust clinical evidence. Adjusted revenue, which excludes the effects of revenue adjustments related to tests delivered in prior periods, was $60.6 million, an increase of 63% over the third quarter of 2022.
Our gross margin during the third quarter was 77.9% compared to 69.8% in the third 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 81.3% for the quarter compared to 76.2% for the same period in 2022.
Turning to expenses. Our total operating expenses, including cost of sales for the quarter were $71.1 million. This compares to $58.5 million for the third quarter of 2022 and $71.3 million for the second quarter of 2023. The largest driver of the year-over-year increase in total operating expenses was SG&A expenses, which increased by $8 million compared to 2022, attributable in large part to higher personnel costs, including bonuses, stock-based compensation, salaries primarily within the sales and marketing functions.
Cost of sales expense increased by $2.5 million, primarily due to increased expenditures on supplies and higher personnel costs associated with the growth in test volume. R&D expense increased by $2 million in the third quarter of 2023 compared to 2022, which was attributable to higher personnel costs driven primarily by expansions in headcount in support of our growth and other costs associated with clinical studies.
Total non-cash stock-based compensation expense, which is allocated among cost of sales, R&D expense and SG&A expense, totaled $13 million for the third quarter of 2023 compared to $9.2 million for the third quarter of 2022. The increase was primarily attributable to our annual equity awards granted in December of 2022.
Interest income increased by $1.5 million for the third quarter of 2023 compared to the third quarter of 2022, primarily a result of higher interest rates and our purchases of marketable investment securities beginning in the third quarter of 2022.
Our net loss for the third quarter of 2023 was $6.9 million compared to a net loss of $20.2 million for the third quarter of 2022. Diluted loss per share for the third quarter was $0.26 compared to diluted loss per share of $0.77 in the third quarter of 2022.
Adjusted EBITDA for the third quarter was $6.6 million compared to negative $9.6 million for the comparable period in 2022, an improvement of $16.2 million. The substantial year-over-year improvement reflects strong top line growth, along with continued disciplined expense management.
Net cash provided by operating activities was $5 million for the third quarter, and net cash used in operating activities was $24.2 million for the 9 months ended September 30, 2023. Net cash used in investing activities was $8.5 million for the 9 months ended September 30, 2023, and consisted primarily of purchases of marketable investment securities of $136.7 million and purchases of property and equipment of $9.8 million, partially offset by the maturity of marketable investment securities of $138 million.
Our balance sheet remains very strong. We increased our cash position by more than $4 million in the third quarter of 2023 compared to the second quarter of 2023, ending the quarter with cash, cash equivalents and marketable securities of $229.8 million. Together with the anticipated cash generated from sales of our tests, we expect that our cash operating runway will extend through 2025, at which time we expect operating cash flow positivity.
As Derek mentioned, we are increasing 2023 revenue guidance to at least $200 million, up from at least $180 million. Importantly, this updated guidance represents an increase of at least $25 million compared to the midpoint of our expectations at the beginning of this year. Supporting our long-range targets for ASP improvements, we continue to make progress for Castle's tests with commercial and state health plans and expect that to continue over time.
Furthermore, there's been a growing trend of states implementing biomarker state laws with about 14 states with existing laws that will go into effect over the next 14 months. While implementation and the impact of biomarker laws are still in the initial stages, we see these developments as a strong statement on the value of biomarkers in directing treatment plans and applaud the state legislatures and governors in supporting improvements in patient treatment plan decisions as a result of biomarker test results.
In conclusion, we had a great quarter from a financial perspective, highlighted by strong revenue and test volume growth, positive operating cash flow and adjusted EBITDA, and a substantial upward revision of our full year expectations.
I'll now turn the call back over to Derek.
Derek J. Maetzold
Thank you, Frank. In summary, Q3 was an exceptional quarter with continued strong execution. Additionally, we're making progress across our pipeline initiatives. We're excited about our performance through the first 3 quarters of the year and believe our ability to create value for our stockholders in the near and long term remains intact. I would like to conclude today by again thanking our Castle team.
Now we will happy to take your questions. Operator?
Question and Answer Session
Operator
(Operator Instructions) Our first question today comes from the line of Thomas Flaten with Lake Street.
Thomas Flaten
I was wondering if you could provide us with an update on the Pittsburgh facility in TissueCypher and whether or not that had anything to do with essentially doubling of volumes from the second quarter to third quarter.
Derek J. Maetzold
I think we announced at a conference in mid-September that we had completed our scaling expectations that we thought would be completed by the end of the quarter a little early. And we're beginning to accept new orders from current customers, and as of now, that everything is sort of back to normal there. So I think that the generation demand that we began seeing in the second quarter is certainly -- that backlog is reported now and things are running as normal. Does that answer the question, Thomas?
Thomas Flaten
Yes. No, that's great. And then if I might, the 500 new docs that you brought in are prescribers to the derm business. Was there kind of an even distribution of which product they were coming in for? Or was it more heavily weighted towards Dx-Melanoma?
Derek J. Maetzold
I didn't look at that breakdown. Did you, Frank? I don't think so.
Frank Stokes
I didn't look at it that way, Thomas.
Derek J. Maetzold
My assumption is we've been running at -- if you think about the earlier commentary there, that about -- of physicians who have been ordering DecisionDx-SCC, 75% of them also order the melanoma test. I assume that ratio is pretty consistent in the third quarter.
Operator
The next question comes from the line of Puneet Souda with Leerink Partners.
Puneet Souda
Congrats on a strong quarter here. Maybe this is maybe Frank or Derek. If you could parse out what you received in the quarter as the ASP for SCC. And I recall last quarter, you were expecting -- you had eliminated that from the second half. Sort of how should we think about SCC growth in the first half or any payments that could come in the first half of 2024?
Frank Stokes
We don't know if coverage will be in place in the first half of 2024, Puneet. So that's still to be determined. But yes, correct. We did have coverage in place for the third quarter, and so we were appropriately reimbursed for the value of that test during the quarter.
Puneet Souda
Okay. And then maybe just a broader question for Derek. I mean, I'm sure you had some time to think about the FDA regulation and their attempt to regulate the LDT market. Maybe just walk us through what tests that you think you can go easily -- more easily through the process versus where you need to produce more data or in order to -- if that process was implemented.
Derek J. Maetzold
That's a good question, Puneet. Yes. I think one, we all have to wait for a little more clarity and specifics from the FDA on their proposed rule. It's a little nebulous from my perspective. That being said, we have in the past looked at sort of the level of evidence and the FDA's approach when they were clearing or approving similar kinds of diagnostic tests. In many instances, they deferred to New York State Department of Health laboratory permitting and test approvals. Both of our laboratories and I think all of our tests but TissueCypher are approved through New York State Department of Health. TissueCypher's just a timing thing in terms of when they get around to reviewing it.
So our perspective has been, we believe that we have more than adequate data that once one understands if the FDA will, in fact, regulate the laboratory developed test industry, and we were required to or submitted a PMA application that we have, that each one of our tests has adequate data behind it already published in the public domain. And certainly, the laboratories in both Phoenix and Pittsburgh already are New York State permitted. So I think we feel pretty comfortable that what we have will be more than adequate to go ahead and make it a smooth process for all of the tests.
Operator
Our next question comes from Catherine Schulte with Baird.
Catherine Walden Ramsey Schulte
I guess first, just can you clarify what guidance assumes regarding squamous cell reimbursement in the fourth quarter? Can you confirm you're continuing to receive payments from Novitas as of today? And then you raised guidance by $20 million, but as Puneet mentioned earlier, I don't think the prior guide included any SCC revenue in the back half. So was there any guidance raised on the non-SCC portfolio, or was it mostly upside from SCC in the third quarter?
Frank Stokes
Catherine, thanks for the question. We don't break out guidance by product. We just give total revenue guidance. And as we said, we were reimbursed appropriately for the value of the test in the third quarter. And given the feedback we've gotten, we have taken that out for our guidance going forward. So we're not assuming SCC revenue forward-looking from here.
Catherine Walden Ramsey Schulte
Okay. Got it. And then I know you're still waiting for the final LCD for Novitas on DecisionDx-SCC. But if it turns out it's unchanged versus the draft, would that change at all your thoughts on the appropriate sales force side for your derm portfolio? And would you scale back investments until you had better line of sight to reimbursement?
Derek J. Maetzold
Yes, I'll handle that one, Catherine. Derek here. We believe that our current sales force, which is sitting at around 65, 70 people today, is appropriately sized for the dermatology marketplace as of today. So even if we only had one test versus two tests in the area managers' bags, that wouldn't change sizing at all from our perspective. I think that's the question, right? Yes.
Operator
Our next question comes from Mason Carrico with Stephens.
Mason Owen Carrico
Congrats on the quarter. So on the strong TissueCypher volumes, could you give some color on maybe where capacity stands today and how that compares to your expectation of where TissueCypher volumes could be next year?
Frank Stokes
Mason, thanks. Yes. Today, capacity for TissueCypher exceeds what we're running. And our expectation and plan is to make sure that that capacity exceeds what we're running all through next year. So we've got good targets on what we want to accomplish there, and we're ahead of where we need to be to be able to run -- to satisfy demand for the test.
Mason Owen Carrico
Okay. Great. And given the demand you guys have seen there, any updated thoughts on the commercial team and how many reps you potentially want to add to that team over the next 12 months or so?
Frank Stokes
Yes. On TissueCypher, we do think there's an opportunity to expand the sales effort there given the strong demand for the test. I think that as we discussed before, the reception by physicians has been as positive as we expected it to be when we were in the diligence process. And so now that we've got some improvement in the capacity of the lab and we've got an option to expand that lab as well, so we feel good about some modest investment in an expanded sales force. Probably first half of next year is when I would target that and get those reps online and beginning to be productive. It's a great test, and the current sales team is doing a great job in explaining the clinical value to physicians, and they're obviously embracing that value. So we'll be cautious and we'll be judicious, but we do believe there will be an opportunity to add more resources to the marketing effort in our GI franchise.
Operator
Our next question comes from Kyle Mikson with Canaccord Genuity.
Unidentified Analyst
This is [Alex Dukasin]. I'm on for Kyle Mikson. Great update, guys. Congrats on the performance. Just kind of getting back to DecisionDx-SCC and the reimbursement. So obviously, we organized the comment period. I know the talks ended roughly September 9. I was just curious regarding if you were able to simply reenter any data that you previously used with perhaps new context or any new data prior to the ending of that comment period.
Derek J. Maetzold
I think --
Frank Stokes
The question is can we add more data since the comment period has ended?
Unidentified Analyst
Essentially, before the comment period ended, I guess, and since the last update. Yes.
Derek J. Maetzold
So we did submit new data with our comments in early September that was presented to Novitas in the, I guess, earlier part of August. So new data was submitted, including I think the most important data set or 2 data sets. One of them is the benefit that we have now seen in our SCC test, being able to discern patients who are likely to have no benefit or no response to adjuvant radiation therapy and find those who may or who are likely to get a nice response to adjuvant radiation therapy. That's an important advance in the marketplace that nobody has right now for which patients, even though they might be eligible for radiation therapy, actually will receive a benefit.
The other element that we also presented during the open comment meeting and submitted similarly is data from a large 920 patient population study to examine within various subgroups, subgroups of patients, different risk factors -- different groups of risk factor patients, how our tests performed. And it basically adds value to every one of those subgroups or substages of patients, which I think was also important clinical information to help the medical reviewers understand, appreciate the appropriate use of our tests in people with one or more risk factors.
Unidentified Analyst
And one other kind of high level question here. So you discussed how you feel the market's roughly 25% penetrated currently. I was curious how you feel that this level of market penetration will evolve over 2024, like at what level you could see it increasing to over time?
Derek J. Maetzold
Yes. So I think in the last couple of years, we've seen, what, about 3.5% to 4% growth in penetration kind of every 12 or 13, 14 months or so, is that right? Maybe maybe 3.5% to 4%, not 4.5% to 5%. We see no reason why that kind of progress won't continue until maybe we hit 50%, 60%, 65% market penetration. So I think we've got a good runway ramp there.
Now what might cause that to go higher or grow more rapidly next year, I guess is the question that we should think about, right? I believe that the more recent data that was published in the late second quarter, both from the NCI SEER paper as well as the paper from Dillon, et al., that I talked about in the prepared script, are 2 elements where you can say, hey, when your peers doctor adopted the use of our tests, their patients live longer than when they didn't test them. Now I would ask you if that's something that you would want your patients to receive a benefit from as well. So I think that kind of data, which will take time to work into top of mind for our dermatology and surgical customers or colleagues, that might help accelerate that a bit higher than previous trends. But I think that would be what we've seen in the past couple of years is to me what we would expect in the next year.
Operator
Our next question comes from Mark Massaro with BTIG.
Mark Anthony Massaro
Congrats on a terrific quarter. I wanted to ask about -- obviously, there's been a lot of interesting discussions from multiple Medicare contractors -- WPS, Palmetto and Novitas. I guess it would be helpful if maybe you provided just what your expectations are on timing for -- especially on Palmetto and Novitas, what are the next steps? And when do you think we can get an update on any potential changes to the current policies on SCC?
Derek J. Maetzold
So based upon historical trends with Palmetto, we have infrequently or very rarely seen reviews go faster than what would be required by the Medicare rules. And the Medicare rules are you need to finalize and post a final LCD 365 days after it's posted or it kind of retires or just goes away. So in most cases, Palmetto, if you just track the data, a LCD is proposed and the data is finalized, that roughly is about a year. So that would mean kind of May of next year is probably the right timing for that. They could go faster, but that's out of character of how they usually have operated in the past.
Novitas, they don't have a history of really updating or developing new LCDs that's nearly as robust as Palmetto. So that's harder to get a handle around that. If you just take what they had proposed a year ago with the initial proposed LCD, that was about 11 months, 10.5 months as well. Would they follow the same kind of pathway? That's potentially the outside number there, Mark.
Mark Anthony Massaro
Okay. That's super helpful. And then I think you indicated that you -- in your guidance, you're not expecting squamous cell revenue from here. I guess, what informs that thought process?
Frank Stokes
We got significant feedback from a number of folks, Mark, some analysts and some investors as well that given the uncertainty around the LCD processes that are underway, that the most conservative approach would be to take that out of our guide. And so we've taken that advice.
Mark Anthony Massaro
Makes perfect sense. Last question for me. You guys are really doing a great job with TissueCypher. What is it -- I mean this is 300%-plus growth. What are some of the drivers here? Can you maybe just talk about, in your view, what you think is driving this? And do you see a path to similar strong trends going forward?
Derek J. Maetzold
So I would maybe break it down into 3 or 4 elements, Mark. One is that it's a large population of patients who are being seen, either newly diagnosed or rescoped every year. We think that's over 400,000 patients. When we're doing diligence, the numbers we had out of medical claim data was showing more like 300,000. So one, I just think it's a large, underserved patient group that is seeing gastroenterologists on a regular basis. So patients are in the, either the endoscopy suite or in the office being seen for their Barrett's esophagus, either newly diagnosed or coming back for repeat surveillance. So I think the patient flow is there.
I think number two is that you do have FDA-approved devices, ablation tools. The most important one or most -- I think the highest market share one is a tool called Barrx, B-A-R-X-X, that Medtronic markets and manufactures. That has been shown in its own clinical trials to be highly effective at sort of killing off Barrett's esophagus lesions. And when you do that, then they don't progress to cancer, which is the goal.
Now historically, even though they have FDA approval for all grades of dysplasia, the sort of society guidelines have over the last 10 years sort of say, well, maybe we should kind of limit it to the really, really risky group, which includes people with high-grade dysplasia and even now low-grade dysplasia. The TissueCypher test is able to take people who have non-dysplastic disease, which is the lowest population risk going forward, and find people who actually have a disease progression risk that's higher than low-grade dysplasia. So it's a fairly easy linkage for a gastroenterologist who says I have patients in my own practice where I just was so surprised that their non-dysplastic Barrett's esophagus lesion progressed to cancer in between visits. It just kills me. So they all recognize there's a need there to find those patients in that large non-dysplastic group which makes up about 95% of the overall patient population and most of the people who progress to cancer now because they're the ones who aren't getting treated and say, but I have on my other hand an effective tool to eradicate the chance of that progressing. So it's an easy sort of high unmet clinical need that they've all seen and experienced train racks that they'd like to catch. And they have a tool already available that can go ahead and meet the needs of their patients. So that's the second element.
In terms of timing, I think if we dial back to third quarter of last year, you'll recall that we hired up initially in January of 2022, the first sales team for this product. They were largely in training in the first quarter. We were also looking at obtaining ADLT status for variety of purposes. And so we think it takes around 6 months for our sales team to kind of go to be fully effective. That would have been right at the third quarter of last year. We also expanded from 14 to 24 sales reps in the fall of 2022. And so the 690 was I think very, very solid volume for essentially a team that was just starting and getting its feet going. And the reports this quarter just reflects just good engine and good demand from a test going forward.
Mark Anthony Massaro
Excellent. I appreciate all the color.
Operator
We have no further questions. I'll turn the call back to Derek for closing remarks.
Derek J. Maetzold
Thank you, operator. This concludes our third quarter 2023 earnings call. Thank you again for joining us today and for your continued interest in Castle Biosciences.
Operator
Thank you, everyone, for joining us today. This concludes our call, and you may now disconnect your lines.
