Greetings, and welcome to CareDx Incorporated 4th Quarter Financial Results Conference Call. At this time, all participants are in a listen only mode. A question and answer session will follow the formal presentation. Please note this conference call is being recorded. I would now like to turn the conference over to your host, Greg Chodacek, Managing Director.
Thank you. You may begin.
Good afternoon and thank you for joining us today. Earlier today, CareDx released financial results for the quarter year ended December 31, 2019. The release is currently available on the company's website at www.caredx.com. Peter Maude, 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 the 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 fact should be deemed to be forward looking statements. All forward looking statements, including without limitation, our examination of historical operating trends, expectations regarding coverage decision, pricing and enrollment matters and our future financial expectations 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 description of the risks and uncertainties associated with our business, please see our filings with the Securities and Exchange Commission.
The information provided in this conference call speaks only to the live broadcast today, February 27, 2020. 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 certain financial measures that are 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.
Thanks, Greg, and good afternoon, everyone. I am pleased to welcome you to the CareDx call reviewing our results for the Q4 and full year 2019. Before we dive into the results, I wanted to highlight Robert Montgomery. Many of you may have seen the news flow on Rob, a kidney transplant surgeon who recently received a heart transplant himself. Rob is not only using AlloMap and AlloSure for his heart transplant surveillance, but he will also be speaking at the upcoming CIAD conference and introduce our immune optimization study called Kira.
It is for patients and clinicians like Rob that we at CareDx are coming to work every day. Together with the transplant community, we have built a tremendous platform in transplantation over the last 20 years. Now turning to results, 2019 was a very exciting year for CareDx as continued momentum for our high value healthcare solutions for transplant patients and caregivers drove robust revenue growth. Our full year revenue was $127,100,000 representing 66% growth over the prior year and clearly exceeded our most recent guidance range of $124,000,000 to $125,000,000 For the Q4 of 2019, total revenue was $35,800,000 increasing 52% compared to the year ago quarter. The majority of the growth in the quarter came from our testing services revenue which increased 55%.
Product revenue for the quarter was $5,100,000 and digital revenue added $1,600,000 to the top line. With us again posting positive adjusted EBITDA in the 4th quarter, we feel very comfortable about the execution of our plan to build a powerful platform in transplantation. CareDx has never been stronger. Digging deeper into our testing services for the 4th quarter, CareDx provided 14,055 AlloSure kidney and AlloMap Heart results to transplant patients in the quarter, growing 63% from the 8,632 results in Q4, 2018. Since launch in October, 2018, over 150 centers have provided AlloSure results to their kidney transplant patients.
By end of 2019, over 30 transplant centers in the United States had adopted an AlloSure testing protocol into their standard of care. We are pleased to announce that enrollment in our kidney allograft outcomes AlloSure Registry or K OAR study is nearly completed. We have a total of 55 centers in the study. The study called for 1500 patients to be monitored using our AlloSure protocol of 15 tests over 3 years. So for the next 3 years, the study centers will continue to observe transplant patients for kidney allograft issues and patient data will continue to be mined for vital insights driving the field forward.
Just recently we announced that the American Journal of Transplantation accepted for publication of paper titled high levels of donorized cell free DNA identifies patients with T cell mediated rejection 1a and borderline allograft rejection at elevated risk of graft injury. Based on the data presented in this paper, which shows AlloSure's ability to discriminate the clinical relevance of T cell mediated rejection or borderline biopsies, we believe AlloSure will ultimately change how clinicians care for transplant patients who have ambiguous rejection based on biopsy rate. This study may help define the term liquid biopsy for transplant medicine. Turning to our OCCRA study, OCCRA stands for outcomes of kidney care in renal allograft. We began enrolling patients in September 2019 and enrollment continues to ramp nicely.
As a reminder, this multicenter prospective observational clinical trial is designed to measure outcomes of kidney transplant recipient managed with kidney care. The combination of donor derived cell free DNA using AlloSure, gene expression profiling using AlloMap and prognostic graft assessment using Ibox. The OCRA study is designed to ultimately include 4,000 patients adding in our previous multicenter prospective study. This gives us an extensive and in-depth set of patient outcomes. Over the next 5 years, we expect significant data and findings from K OAR and OCCRA.
These findings will not only be published in peer reviewed journals, but will ultimately lead to changes in the way patients are medically cared for after transplantation. For example, based on the analysis and data of the first 7,000 ks OR samples and the recently published TCMR data, we were able to identify clinical relevance of AlloSure between the 0.2% 1% level, which is very exciting since these new insights can directly impact clinical decision making. Now shifting to heart, AlloMap testing volume grew solidly in the 4th quarter. Heart care, the combination of AlloMap and AlloSure Heart gained great traction in the cardiac transplant community. This traction might be driven by our ongoing surveillance heart care outcomes registry or SHORE.
As of December 31, 2019 we had recruited 39 centers into the SHORE study. In the Q4 product revenue increased 10% compared to the year ago quarter. We expect our 2 recently launched products AlloSeq cell free DNA and AlloSeq TX which created a lot of enthusiasm at our global beta site to start to generate revenue in 2020 and to help drive growth and global expansion this year and beyond. Revenue from our digital solutions was $1,600,000 for the quarter. This revenue was generated from our software solutions which are used in 84 transplant centers in the U.
S, many of which have also adopted AlloSure, AlloMap or both. Over the next year, we will continue to expand our digital offerings including further embedding our AlloSure protocol into transplant center EMR platform. I want to take a few minutes to briefly summarize 2019 and offer some thoughts about 2020 and beyond. I'm very proud of the numerous successes our team has had over the past 12 months. As we continue to advance CareDx as a true transplant company and as an essential partner to transplant patients and caregivers.
In 2019, our clinical and marketing teams were very busy attending and presenting data at 8 industry conferences. At the American Transplant Congress in June, we showcased 12 abstracts and hosted an incredibly well attended lunch symposium, which included presentations from 7 prominent leaders in transplantation. During the lunch symposium, we formally announced KidneyCare, the combination of our clinically validated AlloSure testing with AlloMap Kidney and iBox, which will deliver personalized and prognostic solutions for transplant patients. According to many of the clinicians that attended our symposium, they not only see value in identifying when there might be an issue with a transplant patient, but also the possibility of optimizing immune suppression in a subset of patients. As many of you know, the side effects of immune suppressants are not trivial.
For example, they carry the severe risk of infection. We strongly believe that the ability to personalize the approach to immunosuppressant will lead to better outcome and quality of life for transplant patients. With this approach CareDx promises to bring precision medicine to the transplant clinic. This past November, we had a significant presence at the American Society of Nephrology Kidney Week, where 3 abstracts were presented on the utility of AlloSure as a surveillance tool and as a marker of allograft injury. As with all of the conferences we attended participant turnout at our booth, podium presentations and symposium was exceptional.
2019 was also a productive year for our regulatory and reimbursement teams as we received regulatory approvals and reimbursement wins for both AlloSure and AlloSure. In February 2019 AlloSure became available under a compassionate use program for lung transplant patients. In May, Anthem Blue Cross of California and 10 of its affiliated health plans designated AlloMap Heart as a contracted service. With this change, approximately 80% of all insured lives in the U. S.
Are now covered for AlloMap. In August, AlloSure received a positive draft local coverage determination for a Medicare coverage in heart transplant patients, demonstrating the value AlloSure can bring to transplant patient care. We expect MolDX will make a final coverage decision about AlloSure Heart in the Q2 followed by pricing in the second half of twenty twenty. In October 2019, Blue Cross Blue Shield South Carolina became the 1st private payer to issue a positive coverage decision on AlloSure Kidney and we will continue to work hard to expand coverage to even more patients in 2020. Finally, in November, we further advanced transplant patient care with the launch of AlloSure 3.0, our next iteration in continued transplant patient focused improvement.
This latest version of AlloSure provides better care with only one tube of blood required, better science with the lowest limit of detection now at 0.12% and better insights by stratifying patients with T cell mediated rejection. On the business development front, we furthered our commitment to the transplant community by acquiring Otter, a leading provider of organ transplant patient tracking software and Xind Management, a supplier of solutions to simplify transplant quality tracking and waitlist management. We also entered into a partnership with CibileTech for its iVox technology, a data analysis tool that provides an early prediction of an individual risk of allograft rejection and transplant loss. We believe these transactions will not only expand our direct patient reach, but they will also deliver vital analytics to those providing care to transplant patients. Last but certainly not least, in September, our commercial team launched AlloSeq cell free DNA, our kit based donor derived cell free DNA surveillance test and AlloSeq TX, the first of its kind next generation sequencing HLA typing solution utilizing hybrid capture technology.
Now looking ahead, 2020 should be even more exciting as our pipeline is full, our clinical studies are enrolling quickly and providing robust data and we continue to enhance our digital offering. In 2020, we have several opportunities to continue our rapid growth. 1st and foremost is the continued adoption of AlloSure Kidney with only 4% penetration of this very large and growing market, we are still at the early stages of adoption. With heart, we anticipate continued adoption of surveillance protocols for heart care and expect Medicare coverage of AlloSure Heart later in the year. With our products business, we are excited about our newly launched AlloSeq TX and AlloSeq cell free DNA products and our ability to accelerate our business overseas.
2020 will also see CareDx expand into stem cell and cellular therapies with our Elohim and AlloSeq HCT offering. Finally, we plan to expand our digital offerings by launching AlloCare, our tool for kidney transplant patients which will be aimed at improving and enhancing patient engagement. Everything we do at CareDx has one focus and that is to be the leading partner for transplant patients and the transplant eco Overall, we continue to receive positive news from HHS and the Overall, we continue to receive positive news from HHS and the Kidney Health Initiative. It is great to see transplantation being the news and even being singled out in the presidential addresses and maybe more importantly healthcare budget. Community nephrologists, large dialysis providers and the transplant community are coming together to increase the number of kidney transplants.
It has never been a better time for CareDx to be a transplant focused company. With that, I will turn the call over to Mike to discuss our financials and 2020 guidance.
Thank you, Peter. Turning first to the income statement, our Q4 of 2019 testing services revenue increased 55% year over year to $29,100,000 The growth in the 4th quarter testing services revenue was primarily driven by AlloSure kidney patient results although we did experience a lift in AlloMap heart testing partly due to transplant sensors excitement over heart care and the use of surveillance protocols. Our 4th quarter product revenue increased 10% year over year to 5,100,000 dollars and our digital revenue was $1,600,000 Our gross margins continue to improve year over year. For the Q4 of 2019, the gross margin was 65% compared to a gross margin of 55% in the same period of 2018. On a sequential basis, the gross margin was down slightly from the Q3 due to fluctuations in our estimated reimbursement rates for aluciranalumab which moves slightly apart down each quarter.
The non GAAP gross margin for the quarter was 68% compared to 59% 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 December 31, 2019 has improved to 76% compared to 60% in the same period of 2018. For the Q4 of 2019, net loss was $4,800,000 compared to a net loss of $3,800,000 in the same period of 2018. Our net loss per share was $0.11 for the quarter compared to a net loss per share of $0.09 in the Q4 of 2018. For the Q4 of 2019, our non GAAP net income was $1,600,000 compared to a non GAAP net income of $300,000 in the same period of 2018.
Our non GAAP net income per share in the Q4 of 2019 was 0 point 0 $4 compared to a non GAAP net income of $0.01 in the same period 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 Q4 of 2019, we recorded our 6th consecutive quarter of positive adjusted EBITDA with a gain of $1,500,000 dollars compared to an adjusted EBITDA gain of $800,000 in the Q4 of 2018. Cash and cash equivalents at December 31, 2019 was $38,200,000 We continue to hover around the breakeven mark for net cash used in operating activities using only $1,100,000 of operating cash in the Q4. Turning to guidance, we are providing our initial 2020 revenue expectations to reflect the continued growth of AlloSure as well as the other growth drivers outlined by Peter and as such anticipate 165 $1,000,000 to $168,000,000 revenue for the year.
Our guidance does anticipate increased competition on AlloSure but balances that with the expectation that additional market entrants will accelerate overall patient penetration. We feel very well positioned to continue to lead the field in bringing novel solutions to the transplant clinic. With that, I will open the call for questions.
Thank you. At this time, we'll be conducting a question and answer Our first question comes from Bill Quirk with Piper Sandler. Please proceed with your question.
Great. Thank you and good afternoon everyone.
Good morning, Bill.
Good. First question from me, I guess with respect to the 30 transplant centers who've incorporated AlloSure, kidney into protocol, can you give us a rough estimate in terms of what they represent with respect to the total market?
Bill, yes, it's Mike here. I mean roughly we've focused our targets on those centers in the top 100 performing centers. I'd say that 30, it's representing about 20% of the total.
All right, perfect. Thanks, Mike. And then a couple of additional questions here. Mike, I guess, first off, stay with you. And that is, philosophically, thank you for the revenue guidance, but help us think a little bit about some of the puts and takes with respect to operating expenses.
Should we expect this to be another big ramp up here given the clinical trials and obviously the entrance of competition, just help us better understand how to think about the pacing over the course of the year?
Yes, Bill. I would say last year we had a big ramp up in sales and marketing expense, particularly in the first half of last year. And we feel on the sales and marketing inside now, we're pretty much fully fleshed out with the sales force. We'll continue
to add to that, but we
won't see the huge growth in sales and marketing expense in 2020. So maybe that's increasing something like $1,000,000 a quarter. You're right, on the research and development side, that's probably the area of most investment for us in 2020. And we should see that research and development expense continue to grow throughout the year similar to how it grew in the last two quarters of 2019.
Okay, got it. And then last one for me and I'll let somebody else jump on. Can you talk a little maybe can you expand on your comments with respect to private payers? We certainly caught Blue Cross Blue Shield a South Carolina decision. How active are you talking to other private payers?
And then also, does the guidance or model assume any expansion of coverage? Thank you.
Well, thank you very much, Bill for the question. I think the team is focused on engaging private payers. Just as a reminder, 70% to 80% of our patient population, our Medicare patients. And so private payers are really upside. No, we don't see any we don't have modeled into our guidance any significant upside in this year, but the team is continuously working on that, doing a great job.
And we have established relationships with AlloMap, our heart transplant solution. So there should be some level of uplift on the AlloSure side this year. But we're still thinking that this is very early in the process without only 5 percent penetration we have ample ways to go and only a few centers we have now critical mass to engage with private payers to make sure that they're also covering kidney transplantations for their surveillance. So our current guidance is not including maybe a little bit of an upside through to private payers on both.
Very good. Thanks, Peter. Thanks, Mike.
Thank you, Bill. Our next question comes from Brandon Couillard with Jefferies. Please proceed with your question. Hey, thanks. Good afternoon.
Hi, Brandon.
Peter or Mike, maybe a bit of a
follow-up on Bill's question there. Could you just talk to us about philosophically how you approach setting guidance for the year in the context of competition, the degree to which the guide kind of handicaps for that dynamic and any numbers you can help us with to sort of understand the approach?
Well, Ben, and thank you very much. I think our guidance continues to be following our AlloSure adoption as our key lead for growth in the company. And here we have seen some linear growth adoption in transplantation, which we see also if you benchmark us to specialty pharma or other transplantation products that there is linear adoption that the solutions are adopted in various transplant centers. We have started extremely strong into 2020 and we'll be updating guidance as we report on the Q1 Again, so as we are thinking into 2020, yes, we have the uncertainty around competition entering the field, But we just only recently learned that probably their commercial launches are delayed to our previous expectations, which is not reflected in our guidance this year again. So no, there is a balance of competition coming, but also maybe competition patient adoption of surveillance tools for cell free DNA and especially AlloSure.
Okay. And I understand
that you're kind of consolidating AlloMap and AlloSure volumes in charge you report now. But just sort of think about the heart business in 2020, would you expect AlloMap to kind of return to that more normalized to mid single digit type growth level or do you think AlloMap Heart and excuse me, AlloSure Heart and some of the surveillance efforts you're making can maybe push that up a little bit for the year?
I'll let Mike speak to it, but our heart franchise is working extremely well based on the great combination of AlloMap, our gene expression profiling tool together with our cell cDNA testing AlloSure. The SHORE trial is really adopting extremely rapidly. There are so many centers in
the U. S. Excited about joining the call. So the Thanks, Peter. Yes, Brandon, I'd say more specifically, we still expect the uptake of the surveillance protocols on AlloMap that's been driven by HADCA.
So probably our guidance is expecting low double digit growth for AlloMap. So higher than the pass were at this low single digit. So yes, low double digit growth.
Perfect. Good. And then last for me, do you expect any major data readouts for the K OAR study this year, perhaps at ATC and any impact on as far as volumes that might be contemplated from that? Thanks.
Brandon, that gives me just in a plug in for the American Journal of Transplantation publication on ambiguous rejection, which is really pairing the existing K OAR initial data set of more than 7,000 samples received on K OAR together with our insight that AlloSure is helpful in the stratification of ambiguous rejection which is incredibly exciting for us because it helps us to not only data mine care our patients, but also put it into context of what we learned on the TCMR, the low grade rejection. And so yes, there will continue to be readout and there's a tremendous wealth of abstracts that will be presented at the American Draft Plan Congress. I think Cell 3 DNA and especially AlloSure has been at the forefront of innovation in kidney transplantation and CareDx being the leader, you'll see a lot of outflow of great clinical data not coming not only out of care, but also out of all the other clinical studies that we currently have ongoing. So a very exciting year for us on KR.
Very good. Thank you.
Our next question comes from Alex Nowak with Craig Hallum. Please proceed with your question.
Great. Good afternoon, everyone. Peter, you highlighted a number of studies under consideration at the Analyst Day in January. I'm just curious, have you finalized any of these? Which ones in particular should we be watching?
And what is incorporated in the guide for new clinical studies?
Yes. And thank you very much. I think the 2 studies to watch and see us execute against this year are really Okra, which is the combination of AlloMap and AlloSure together with the iVAC solution, which we call KidneyCare. And this is a similar effort undergoing combining K OAR study now with the ORCA study where we have 4,000 patients, we call it the ultimate kidney transplant registry recruiting in more than 50 centers in the United States. We are well advancing on the recruitment on Okra and we'll be updating on Okra in the first quarter call because this is really for us a pivotal clinical trial in the kidney care combination.
The second one is Keyera. I had started the call today highlighting our efforts in immune suppressive optimization with kidney transplantation. This is a trial which is very exciting. If you think about it, AlloSure is very, very well established already as a rejection monitoring tool. But maybe Keyera is pushing us towards immune optimization of kidney transplant patients and demonstrating this in a large scale study with multicenter engagement will be extremely exciting for the field and demonstrates CareDxS cutting edge and pushing the end mill because this is the Holy Grail in kidney transplantation and CareDxS at the fulcrum.
So to just summarize, Okra and Tiara will be at the center. But then you see SHORE as our heart transplant clinical trial and then ROAR, which is our international trial for cell free DNA adoption as tertiary important. Now I will also put in that we are doing clinical studies on cellular therapies or stem cell. Our Allogene product is extremely promising and we're very excited about that pipeline product and that will be detailed with clinical trials as well.
Okay, great. Understood. And just want to come back on competition and just follow-up on Brand's question. Are you hearing anything from the physicians you work with specifically around either switching or wanting to join your competitors REGID trial? Just anything that you're hearing that made you want to include competition into the guide at this point?
Is there any way to quantify what you're assuming from competition
to? As said, I think actually competition has increased the awareness of novel biomarkers in the field of kidney transplantation. So in a way this is TRYbeCAIRDEX has been trailblazing the field and now there are other entrants. So I think this is creating awareness and I actually think that this will be leading to much bigger market adoption going forward. In terms of very specific comments in individual centers, yes, we hear other competitors placing their registries, but we haven't seen any substantial clinical adoption of seeing real patients without being provided in a clinical setting.
So I would say that there is maybe noise out there, but it's incredibly difficult to quantify at this stage. But we feel extremely well positioned with our service offerings on AlloSure and actually being a complete service provider for these transplant centers. So we feel very well
positioned. No, understood. And actually just a follow-up on that last piece there. You did ramp up the patient management team over the past 12 months. I'm just curious, are you seeing any change in patient compliance?
And how is this benefiting AlloSure, people staying on the AlloSure protocol?
Very good question. No, there are some centers where we have 99% compliance rate, 98% compliance rate. I think this is a center which is absolutely leading. And then we see some compliance rates with 55%, which is a huge opportunity if we are combining that with our patient care management tool. Now overlaying this with maybe our software tool, but with auto offering where it's very convenient to engage patients into longitudinal clinical trial.
I think that would be that's very beneficial compared to X and a huge growth opportunity going forward. So the patient care managers where we have direct interactions that have by and large experience in managing transplant patients over a long period of time are going to be a pivotal tool of increasing compliance and adherence not only to the AlloSure regimen and protocol, but maybe even for supporting a longitudinal patient management for transplantations going forward.
Okay, got it. And just last quick question from me. We saw a lung study get published on clinicaltrials.gov. Just where are you at from developing an AlloSure lung testing going through the reimbursement process? Thank you.
No, thank you very much. We'll see submission of lung data this year into the MolDX program. I think we've not been setting timelines in terms of when lung will be reimbursed. It is somewhat a guarded opportunity, but lung AlloSure is available today on a compassionate use program. And as these clinical trials readout, we'll be submitting to MolDEX.
This is probably more in terms of our reimbursement at 2021 discussion than relevant for revenues in 2020.
Okay, understood. Thank you. Appreciate it.
Our next question comes from Yi Chen with H. C. Wainwright. Please proceed with your question.
Thank you for taking my question. Just to clarify, the most recent publication on AlloSure's ability to differentiate rejection is based on the original AlloSure, but not AlloSure 3.0, is that correct?
It is based on AlloSure available at that stage. So it is combined at AlloSure and AlloSure 3.0 depending on which patient was recruited at what stage. I don't think that AlloSure 1.02.03.0 would have any substantial impact on the level of measurement on donor derived cell CDNA.
Okay. So we can assume that the new patients enrolled in the ACRA study will have the AlloSure 3.0 because it's available now?
Yes. No, I think going forward any patient that's currently tested on AlloSure would receive the updated AlloSure 3.0.
Okay. So we shouldn't expect any significant differences in terms of further improvements of the results by using AlloSure 3.0, right?
Well, the clinical result on the level of donor right cell free DNA level would probably not change. No, I think we are talking here about marginal improvement, but more importantly actually improvements in terms of how we service patients and the patient experience and the sensory experience with the lowest level of detection and the ability to differentiate TCM101a based on the data that we have.
Got it. Regarding AlloSeq CF DNA kit that's sold outside the U. S, does that revenue get recorded on the testing line or the product revenue line?
Hi, Yi. It's Mike. Yes, that's a kit and it will be outside the U. S. And so, yes, when we have revenue for that, we'll start including that in our product line.
So the product line will be both pre and post transplant and it will be for the kit business not the U. S. Testing service business.
Got it. Do you expect any significant growth for sales outside the unit outside the U. S?
Well, a lot of our strategy on the product side and the launch of these products is to enable us to expand outside the U. S. I think when we look at our product business last year in 2019, the growth was overall 10%. And in our guidance, we're looking at the growth now for the product business of around 20%. So that's coming from the new product launches.
And again, most of the Alacyte cell free DNA is outside the U. S. So some of that growth coming from out of the U. S.
Got it. Thank you.
We have reached the end of the question and answer session. At this time, I'd like to turn the call back over to Peter Mogg for closing comments.
Well, I will keep you short. Thank you very much for joining this call and I'm looking very much forward to soon update you about our Q1 results. So thank you very much. Talk to you soon.
This concludes today's conference. You may disconnect your lines at this time. And we thank