Good morning, everyone. Thanks for joining us on day three of the Raymond James Institutional Investor Conference. I'm Andrew Cooper. I cover diagnostics and life science tools here for Raymond James. Happy to have the CareDx team joining us today. A company with a track record of leading the way in transplant rejection diagnostics. They've built leadership in areas that wrap around the transplant patient as well. We're joined by CFO Abhishek Jain, President of Patient and Testing Services Alex Johnson. Together, two of the three members of the Office of the CEO, as well as Chief Scientific Officer Robert Woodward. Without any further ado, I'm gonna pass it to Alex for a quick presentation, and then we'll come back for some fireside chat Q&A after that.
Great. Super. Thanks a lot, Andrew, and thanks for inviting us here. So we have the usual safe harbor statement, so please read these carefully. We're thinking about growth long term, and our vision has not changed. Our strategy has really not changed. It's to help clinicians and patients extend long-term allograft survival. When we look at the model and our future growth prospects and our ability to help patients, it's about some of the highest cost patients in the U.S. healthcare system. And I'll point to a couple statistics that I think will help to color, I think, our framing of where we think the opportunity is. First, and no surprise, kidney, hearts, lungs, kidney, and livers fail way too soon, and the opportunity to continue these allografts will help the healthcare system reduce cost.
In fact, dialysis is about twice the amount for the U.S. government, on a yearly basis versus a Medicare transplant recipient. So you've got the ability now to think about this huge spend of the U.S. healthcare system, and CareDx has the ability to help close that gap as we close that gap of this significant supply and demand imbalance of transplant. We think about the market in a couple different ways. I'll focus more on testing services today in terms of... I think that's not just the bulwark of our business, but where the opportunity is going forward. We certainly look at a $4 billion opportunity, and it's roughly $2 billion in the kidney side and, about $2 billion when you combine the other organs as well.
So when you really think about the opportunity, our ability now to continue to innovate in this space will allow us to grow, and in a segment that is relatively high scale for us. You know, there's roughly half the transplant centers perform the majority of the transplants. It's actually closer to, like, 70/30 for some of the organs, and you start to see these economies of scale, and we certainly have the call point and the coverage, but also the ability to innovate at scale. Where's the growth coming from? I think this is the really interesting part, and I think many of you have seen the models here, where there's certainly a patient population of roughly 40,000 patients. You know, close to almost 30,000 of them are kidney transplanted every year.
But there's a large bolus population that now most of them have never had an AlloSure or an AlloMap. They've never been managed with molecular tools. And when you start to look at the number of patients whose kidneys fail every year, some of you may know this, 20% of kidney transplants are retransplants. I mean, so this is a big problem even for just existing patient population. And now, with the ability to expand the organ supply through better utilization, living donor expansion, which really ticked down quite a bit during the pandemic and is now starting to come back.
When you start to see the opportunities in perfusion, you start to see these growth engines, really, that can help the transplant market grow, and our ability to grow above that market growth is what we're aiming for, and we can do this by that penetration model. One of the interesting points around what the utilization is and the penetration is around using these more higher-risk organs. As these organ supply is, I think, used more wisely, right now, we see we transplant significantly fewer organs as a percent of donated organs than Europe. As you start to utilize these higher-risk organs, they need to be managed more carefully. They need to be watched more carefully, and many clinicians are looking to molecular tools to help them do that.
So as this organ supply increases, you're starting to see, yes, higher volumes of transplant, and that's important, but these are higher-risk patients and higher-risk transplants. And now you get into the longer-term model, and this is obviously... It has become very interesting over the last couple of years, looking at xeno and engineered organs. Now, our ability to continue to manage these patients not just exist, but can grow exponentially, and that's obviously the long-term plan. But even near term, we've got these nice tailwinds and I think these upsides for the market and our ability to execute in that market. Our strategy, I think, has been very clear for a long time, and where the focus may have changed, the strategy really has not. We want to be the partner of choice.
We have the ability to talk to centers, not just bread-and-butter transplant centers that are doing some. We're talking to the leaders in transplant. We're talking to the leaders of innovation, and when they want to do research, studies, and publications, more often than not, they turn to us. We're looking to continue to increase our current base of business, AlloSure and AlloMap. That's where the testing services primary business is, and we've now done this with more differentiation around data and heart care, and we're now, as you know, lung is our latest launch about a year and a half ago, and it's our has been our fastest launch ever. But really going back to kidney, you know, that's where the opportunity is. We'll certainly talk a little later in the presentation around the billing article and some of the changes.
That's obviously a big driver for our company and for patients. But regardless of how the billing article changes, you know, our ability to continue to innovate and show the opportunity to help improve transplant patient care hasn't changed. We've also focused now, if you look to the bottom left, around reimbursement and coverage. And this is a focus where we've now taken our data and evidence development, much of which has been used to further clinical use, to really reposition some of the analysis and the data, the publications, to make sure that it supports reimbursement and coverage. We've been very successful in AlloMap over the years with very high reimbursement and coverage rates from private payers, not just MolDX. We're now doing this across the board and making sure that the publications will support reimbursement.
You'll hear a little more about this as well. And finally, we're gonna continue to innovate. The ability to help these transplant patients and really extend long-term allograft survival for these very high-cost patients is something that we plan to continue to do. We plan to be wise about it and smart about our investments. We wanna make sure we incubate opportunities at the right level of scale and investment, and make sure we're there for the next level of innovation, and we're certainly doing that today. Many of you have heard about our pipeline already, UroMap, AlloMap Kidney, and HistoMap, which are just three of our pipeline offerings, and we've been working on these for many years. I'll focus today on UroMap a bit. It's not just about a urine marker, right, which is useful.
Certainly, it's better for patients from a pain perspective and an operational perspective than blood, in some regards. But we're looking at much more than just, is it a urine versus blood? It can be earlier, and BK is a huge problem for transplant patients, many of you are aware, and so getting to a differential diagnosis, is it injury? Is it infection? Is it something else? This is something where clinicians are very interested in. We've had a lot of interest, certainly in publications, independent publications around the value of UroMap, and we're excited to see that develop more in 2024.
I've talked a little about the ability for us to reposition our clinical studies, and what we've really done here, if you look at the slide, is looking at kidney, heart, and lung, and looking at how we're actually using our data to further clinical adoption and utility. Much of this can be used for the reimbursement and coverage as well. That's really, I think, the repositioning of a lot of our studies and data, and we've invested a lot. We have a significant research and development budget, and our ability now to use the significant amount of data we have, and Robert on my right is certainly leading all that. You're welcome to ask him questions as well later on.
That's a big part of our strategy in repositioning that investment and that focus to continue to increase coverage and reimbursement, as well as the clinical adoption. And you start to see these studies coming out. We've talked about KOAR and SHORE as kind of two of the headliners. We expect to publish both in 2024, at least the starting studies. There's a huge body of evidence and data that we can use, and we can mine for clinicians and for payers. Before I hand it to Abhishek, I'll end with some comments on the billing article.
A lot of churn over the last year and uncertainty, and I think, you know, we're here at this conference, and just about a year ago, the first billing article, at least the one of the modern era that you all are aware of, was issued by MolDX, adding lots of complexity over the last year. About a week ago, actually, a little bit less than a week ago, a new billing article was introduced, really cleansing the slate, in a way, but also at the same time, CMS issued a press release, a statement with a lot of commentary that added more complexity.
I think, you know, it's not clear for us, and certainly, you know, we've talked to many clinicians and others in the field, and it's very clear that the LCD that will be issued later this year, or is expected to issue later this year, will add more of that clarity. Right now, we're continuing to evaluate, and we're looking for signals on, is this a real change, where patients' surveillance without biopsy would be brought back, or is this a bit more confusion to put people off their backs for a while before the LCD is actually issued? Because as many of you know, the LCD that is drafted and proposed right now has many of, frankly, all of the same restrictions as the billing article that was issued last March.
So it's really a wait and see story, to see, and we'll not have to wait too long, certainly by the middle of the summer. The policy paradigm for issuing a new, either a draft or a final LCD, will need to be issued by the beginning of August. So in a five-month period, we'll have a better sense of certainty. In the meantime, we're continuing to execute on the story. We've got the ability to continue to move into transplant centers and bring back the kidney business, which I think we're certainly executing on. We've shown by our growth over the last couple of quarters in our testing service business. With that, I'll turn to Abhishek for more commentary on financial and operational.
Thank you, Alex. What a year 2023 has been. So that particular timeline on Alex's slide, that basically says it all. We started 2023 with the highest testing services volumes in Q1 with approximately 50,000 tests. And then came the billing article in the month of March 2023, and then we started to kind of spend the time in operationally implementing the billing article, resetting our entire company, and going through the changes. And what we were able to accomplish in the second half of 2023 was to reset the business, not only from the top-line standpoint, where we basically were able to set the baseline for the volumes, and we started to grow those volumes in Q3 and Q4, but also we reset our company from the cost structure standpoint.
We took a fairly sizable amount of cost out of our structure, setting the stage for the company to basically come up with a plan which we'll be able to kind of show a path to profitability and to return to cash flow positive with the lower base in revenues post the billing article implementation. So with that, let me quickly take you through some of the financial highlights of 2023. So of course, ending the year at $280 million, which came in at the high end of our updated guidance and the testing services volume, we basically grew the volume for the second consecutive quarter at about 4%, while setting the base there. The gross margin story stays intact with the testing services.
Sometimes we forget about, like, the testing services gross margin is still higher than 70%. And on the non-testing services, both of our products and the digital and patient solutions business, they have expanded the gross margin pretty remarkably because we have been working hard in taking the costs out from those two businesses and making them profitable. When I look at the balance sheet, of course, we have one of the pretty strong balance sheet in this particular space with $235 million in cash, and I would want to underscore that we used about $18 million of cash in 2023 from our operations.
So just wanted to basically provide that contrast here, the amount of cash balance that we carry and the amount of cash operations that we used in operations in 2023, just to provide that perspective there. We bought back shares because we were so confident in our ability, given the cash balance in Q4 that we have, that we felt comfortable that we will be able to buy back these shares in Q4. Collections stays one of the major focus area, as Alex was pointing out, that we are very focused now as a company to, number one, basically generate the evidence. Number two, basically get paid by getting the medical records and the prior authorizations to be able to collect more money and increase and improve our revenues by improving the coverage.
This, basically, the whole initiative is part of now the RCM initiative, as you will start to hear more from us. And of course, the profitability, I will not go into a lot of details there, but we have been making continuous progress quarter-over-quarter in 2023. Quickly looking at the revenue guidance, $200 million to $260 million to $274 million is the guide for 2024. And of course, I have spoken in a lot of details as to how we are resuming certain pieces, both on the volume side, as well as the gross margin.
One piece that I would want to kind of pick up in this guidance is the Adjusted EBITDA guidance that we are providing from $20 million-$30 million, but we are expecting that we will have continuous improvement in 2024 throughout the year, so that by the end of 2024, we have a fairly small, if at all, if we have the Adjusted EBITDA losses, probably a low single digit there. I'll basically end with this particular slide and hand it over to Andrew for his tough questions. But we are in a market which is which has a large stamp. The transplant volumes are growing. We have seen last year, they grew in high single digit.
In the last three-four years on a CAGR basis, they grew in the mid single digit. So there is an opportunity of a secular growth, as well as some of the other reasons that Alex kind of pointed out. And then, of course, from the business standpoint, we have reset the business, and there's a path to profitability and to return to positive cash once we go through in 2024, once we see as to how the LCD were to pan out. And once we get a couple of more quarters under our belt, we will be able to provide more color onto the timing, so on and so forth, from there on. With that, let me hand it over to Andrew.
Perfect. Thanks for the great presentation. You know, I am gonna start with maybe one of the harder questions, right? Or at least the one you're probably most tired of talking about for the last handful of days. It's funny, though, I look back at my prep from last year, and the exact words I had typed were: "So I feel like we need to start with the news last week around MolDX's billing and coding article." Feels funny, given that applies exactly today as well. Maybe just, you know, Alex, I think Abhishek said in the hallway, you were meeting with folks this week at centers. So what's the clinician feedback been to the noise that was, you know, kind of stirred up once more last week?
Sure. No, thanks. You know, we do spend a lot of time in the field. I personally do, and when we talk to clinicians, I think they want to see what's happening definitively. I think just like all of you and us, we want to see certainty. They want to understand where their practice and their patients can be managed long term. And if you think about it, five weeks from now, we're gonna have an LCD with a new billing article. And so I think while there's certainly optimism by some, I think there's also cynicism by others. So, you know, we're taking certainly a measured approach, and I think clinicians are supportive of that.
And I think, you know, they're, they are still able to manage their patients where there's medical necessity and where they want to order tests, and so they can continue to do that. But I think given they're all very aware of what's going on, it's actually, you know, it's actually very gratifying, actually, how engaged they are in terms of some of these billing aspects. I mean, clinicians really should not be wasting their time thinking about this. They should be thinking about how to manage patients better, but they are. And so I think they're certainly waiting for certainty as well, and they also are, you know, looking for continued improvement.
Because I think the current billing article, as it's drafted, will not provide the coverage without biopsy that many of the clinicians are certainly looking for and advocating for.
Perfect, and-
Just to clarify, you, I think you misspoke and said 5 weeks. You meant 5 months.
Five months.
Five months.
Yeah, in the beginning of August.
Thank you.
I think Robert saw me bend down and write five weeks, question mark, on my paper. You know, one thing I do want to just make sure, it's a question I've gotten from folks. You know, the most recent billing article really removed a lot of the restrictive language that was there. So just to make it crystal clear, do you intend to change how you bill between now and sort of LCD finalization, or is there any impact in the immediate term based on what happened last week?
Yeah. So let me take this one, Andrew. So, given the fact that LCD is still out there, and we do not get a very definitive answer from the CMS press release, so the idea is not to change anything in the interim. And we'll basically, you do have the time to be able to bill if the LCD were to pan out in a particular way, and of course, we could make that determination at that time.
Then just very quickly, I think I know the answer to this one, but I want to give you the chance to, to reiterate it out loud. In terms of the guidance, any change or any improvement here is, is purely upside, right? So can you give us a sense for, maybe just confirming that?
No, thank you, Andrew. This is another question. So basically, we have reset the company that basically can get back to being profitable and start to generate cash based on how the volumes are gonna pan out in the next year or two. We do not need some of these upsides to get back there based on how the Medicare coverage environment is as of right now. So some of these spaces would be an upside, and of course, we are not baking that in from that guidance standpoint. And of course, I would also want to underscore that the company's intention is also not... If we were to get some of these upsides, we're not planning to bring back a lot of our expenses where they used to be in the past.
We are going to be extremely thoughtful as to what are the expenses that we would want to be incurring, some of the expenses that we have taken off from our books. But now we are a very nimble, I would say, and very, efficient company, which is focusing on fewer areas that probably will be able to help us drive the, drive forward and move the needle in the right directions.
Perfect. And then, you know, your protocols call for seven tests the first year, four the second year, four the third for kidney. You know, looking back 13 months ago, before all this started, what was your average, let's call it, first-year utilization, and maybe where do we sit today after all of the noise that's happened over the last year?
Sure. So let me frame it a little bit. So the reason people talk about, you know, a 7-4-4 protocol is that that was a protocol that was used in some of our clinical studies. So centers decide to adopt protocols based on their clinical necessity and their medical decision-making. And certainly before the billing article a year ago, many centers had this protocol, and we're talking kidney here. Heart's a little bit different. What we've seen is, we ran some analysis, and we looked at, said, you know, "What are our testing, you know, utilization and frequencies?" And we've tracked this over the years, and we track. You know, we have a lot of data and track this very closely internally.
But we looked at it for this purpose, to look at this question around: what is utilization? Because there are some questions around, and certainly in, you know, CMS suggesting there was some overutilization, and we found that very surprising. When we looked at our data, we said, "What would be overutilization? Like, what would be the right level?" And so when you look at, you know, seven tests as kind of a standardized protocol for many, and then, you know, what would be more? Remember, these last few years, certainly before, you know, in 2019, 2020, and 2021, some of these years were right in the middle of the pandemic. So you have these centers that are trying to manage patients, in any way they can, frankly.
What we looked at is the data, and we looked at those three years, and we said, "What's the average utilization?" And the average utilization, you know, far from being, you know, 10, 12, 15, right? You know, it was four. Four tests per patient for kidney for the first year of transplant. Second year, it actually dropped down to three. And for the first year, which is the, the highest, the highest test frequencies, right? That's when most more events occur for these patients and, and more of the higher testing. 90% of patients, 90% had seven or fewer tests for AlloSure Kidneys, seven or fewer AlloSure Kidneys. And so when, and so when you think about, you know, utilization, 90% are seven or less, the average is four.
I mean, we're not-- we're thinking about this and saying, "You know, how do you bring back some of these patients?" Because the real challenge with the billing article is not that some of the utilization changed, which I don't think is-- I think many of you would look at this and, you know, look and say, "That's probably not, not extreme numbers here." It's the fact that these patients are no longer getting tested. They no longer have access because of this Medicare surveillance required with a biopsy nomenclature. And so what you're really seeing is it's not a question of so much the frequencies for some of these patients. If they have a cause, they're still getting tested. The challenge is now some of these patients, and many of these patients, were previously getting surveillance before, and now they are getting nothing.
That's really what has been the big change. It's these patient populations that no longer have access, and that's what we're hoping Medicare and MolDX and our system of reimbursement for these Medicare beneficiaries gets smart about and brings that back.
Perfect. That was, that was fantastic. Maybe just quickly, anything, you know, when you think about all the discussion, we've seen Wall Street Journal, journal articles, we've seen a lot more attention than I think there was prior-... Have conversations with the commercial side changed based on CMS and MolDX, you know, kind of iterations over the last year as well?
The conversations with the commercial side, interestingly, are very, very independent of Medicare. Often people think that they're just gonna follow what Medicare does, and we have found that to not be the case, and they're really wanting to see the data themselves. And so I don't think there's really been an impact either way on the commercial payers for everything that's happened on the Medicare side.
Okay. Oops, sorry.
No, I was just saying we, we, you know, we continue to pursue coverage for all of our tests on the private payers, and I think we, we mentioned in, you know, our follow-up for 2023 that we've added, I think it was 15 million lives, on AlloSure, on AlloSure testing, so we're continuing to make progress there.
Perfect, and I don't want to spend the entire time talking about the billing and coding articles. So maybe just thinking about the market at a high level. 2023 was actually a record number. I think it gets a little bit overshadowed, north of 28,000 transplants in the U.S. for kidney.
Mm-hmm.
What do you think is the biggest driver? I think you had a couple listed in the slides, but what's the biggest factor in driving that higher in a market that, you know, demand still outstrips supply?
Yeah, no, thanks. I think, you know, the underlying trends of more transplant is continues. You know, kidney transplant in 2023 in the US grew 7%. Heart transplant grew 11%. So you're starting to see some of this, I think, I don't know if it's reversion to the mean, but certainly coming back to pre-pandemic levels of growth. Where the utilization, I think, argument is impactful is certainly in the volumes. And what you're starting to see is these centers now are competing for organs in a way they weren't before. And so what many of you know is, last couple of years, the allocation systems have changed dramatically.
And so where transplant centers used to have one OPO, which is kind of their, you know, for the procurement of donated organs for deceased donors, now the geographic radius has expanded to almost 300 miles. And so what you now have is centers that previously had a very cozy relationship with their OPOs, no longer having that relationship. They're not able to turn down these organs anymore and just expect another one to pop in its place. If you're not gonna take the organ, if you're not gonna take the kidney, and it's a bit marginal, somebody else will. And the impact of that is volumes go down if you're not taking these kidneys and hearts and lungs and livers. And so clinicians are getting much more aggressive in taking these organs.
Europe has utilization of these donated organs significantly higher than the US, and this is well documented. There's, like, USA TODAY articles on it. I mean, it's really well known. And how do you solve that? Well, market forces actually are happening, and they're happening for the benefit of patients by expanding that donor pool and by expanding the utilization of these organs that might have been discarded before. And as a part of that utilization, you're now having these marginal organs used at higher frequencies, and if you have these organs that are maybe a little bit... They're called, you know, extended criteria organs, you know, they're more marginal. You've got to manage them more carefully because they're higher-risk organs.
Now, they're higher risk transplants, and you've got to figure out how to make sure these patients continue without having rejection or injury or other other comorbidities. And so you can use these you can use lots of tools, including molecular tools, to help manage these patients more closely. So it's not just a tailwind for the market growing for utilization, but it's actually it helps to have the utilization and uptake and adoption of some of these tools in a very natural way because clinicians need to manage their patients at scale for better outcomes, and they need to have new tools to be able to do that.
Perfect, and maybe moving a little bit to the pipeline. I'm gonna ask an opinion question, and Abhishek, I'll get a question for you in a minute, but maybe more from the clinical side from you, Alex, and then the scientific side from you, Robert. Just what in the pipeline has you most excited in terms of... You think about HistoMap, UroMap, iBox, AlloMap Kidney. I'd love sort of the two angles there of what's most interesting and exciting.
I think we're most excited about—I think Alex already talked about UroMap. I think it provides a new modality for the, you know, use of testing from urine, not from blood. It also, you know, provides information about BK viral nephropathy, which is something of importance to kidney transplant that isn't easily addressed by current means. And, you know, we've seen a lot of interest. We've done an early access program. We've seen initial research studies in pediatrics that were presented last year at American Transplant Congress. All of this while we're continuing to pursue Medicare coverage.
And then the other one that Alex didn't mention was AlloView, which is the AI-derived algorithm that includes AlloSure, and so it takes AlloSure, plus the other clinical factors to provide an even better prediction of the current status of rejection. And that is, you know, it, you know, adding on an AI on top of AlloSure, that includes AlloSure, you know, providing even more value for those clinicians that are using our tests. I don't know if you have anything to add from what you've heard from centers, Alex, but I think-
Yeah, I mean, I think that, you know, that there's a lot of excitement around innovation that's directed towards problems that they have, differentiating types of rejection, how to manage patients better. In a way, the question around: Is rejection happening or not? In a way, it has been, you know, roughly, you know, I think, approximated very well, using some of the tools. Now, not all the patients are having access, but there's this next level of: How do you manage patients for the long term, right? How do you change immunosuppression levels? How do you make sure that, that these patients are actually responding to therapy? Do you need to switch therapy, right?
How do you make sure you don't have malignancies, which are, you know, multiples of risk for transplant patients because of over immunosuppression? So it's this additional level of patient management. I think these tools speak some of these tools and many of our pipeline tools speak to this additional level of clinical value to these clinicians and for patients to keep these allografts survival extended for much longer than today.
Yeah, I think that's really a key point, is that physicians are finding new ways to use the tests we have, expanding the, you know, the amount of use they're gonna have for our existing tests. Things that we've probably seen in the future, as you know, use the information from this to adjust immunosuppression, is where they're going now with some of our tests.
Perfect, and Abhishek, I apologize. We're at the end of time, so I'll save the break-even bridge questions for the breakout downstairs in Amarante One. But thank you, everybody, for joining us. We really appreciate it.
Well, thank you very much, Andrew.
Thanks, Andrew.