Greetings, and welcome to the CareDx Third Quarter Financial Results Conference Call. At this time, all participants are As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, David Clair with Investor Relations. Please go ahead.
Good afternoon, and thank you for joining us today. CareDx has released financial results for quarter ended September 30, 2018. The release is currently available on the company's website at www.caredx.com. Peter Maude, Chief Executive Officer and President and Michael Bell, Chief Financial Officer will host this afternoon's call. Before we get started, I would like to remind everyone that management will be making statements during this call that include forward looking statements within the meaning of federal securities which are made pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995.
Any statements contained in this call that are not statements of historical facts should be deemed to be forward looking statements. All forward looking statements, including without limitation, our 2018 financial guidance and our examination of historical operating trends, expectations regarding coverage decisions, 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 descriptions of the risks and uncertainties associated with our business, please see our filings with the Securities and Exchange Commission.
CareDx disclaims any intention or obligation, except as required by law, to update or revise any financial projections or other forward looking statements, whether because of new information, future events or otherwise. This conference call contains sensitive information and is accurate only as of the live broadcast today, November 8, 2018. This call will also include a discussion of a financial measure that is not calculated in accordance with generally accepted accounting principles. Reconciliation to the most directly comparable GAAP financial measure may be found in today's earnings release filed with the SEC. I will now turn the call over to Peter.
Thanks, David, and good afternoon, everyone. Thank you for joining us. We here at CareDx had another exciting quarter. In the last 12 months, we have provided 2% of kidney transplant patients in the U. S.
With an AlloSure result. This quarter, we also achieved a significant financial milestone. We have reached our goal of positive adjusted EBITDA a quarter ahead of plan and the team achieved positive operating cash flow. Our strategy to bring high value diagnostic solutions to transplant patients is only beginning to bear financial fruit and we anticipate continued progress on both of these measures in coming quarters. This afternoon, I will provide an update on the recent achievements across our businesses.
Mike will then provide additional financial details on our Q3 performance and discuss our 2018 guidance. It's great to see the acceleration of our top line with total revenues growing 74% year over year to CHF 21,200,000 dollars driven by 106% year over year increase in testing services revenue. Our 3rd quarter adjusted EBITDA was positive 200,000 dollars The team achieved this 1 quarter ahead of plan. AlloSure remains the biggest contributor to our robust growth. Penetration of transplant centers is ahead of plan and standing order patient levels are phenomenal.
AlloSure's positioning and market acceptance continues to improve and should enable us to deliver continued growth in the quarters and years ahead. At the end of the Q3, 96 centers have provided AlloSure results to their transplant patients since launch. These 96 centers represent just over percent of the transplant volume in the United States. CureDx provided 3,708 AlloSure patient results in the 3rd quarter to approximately 2,800 kidney transplant patients. Overall reimbursement was consistent with previous quarters with 70% to 80% of our AlloSure volume attributed to Medicare patients.
Demand for AlloSure continues to be broad and includes both patients who recently received a kidney transplant as well as patients that received the kidney allograft in previous years. Driving adherence to the AlloSure routine testing schedule is integral to our strategy as our assistance in providing care to patients further embeds us in transplant center workflows. Multiple centers are utilizing the recommended testing protocol for their kidney transplant patients and through our KO registry, we are starting to see wider adoptions of protocols in routine use. In the Q3 of 2018, 1260 new standing order patients were added, which is up from 793 in the 2nd quarter. We define standing order patients as patients that will follow the surveillance protocol for at least 1 year and our cumulative total of 2,000 736 standing order patients is a key driver for recurring revenue.
As I just mentioned, an important element to establish this protocol is the rollout of our clinical trial also known as Kidney Outcome AlloSure Registry or K OAR. As a reminder, K OAR is included in our Medicare coverage as we are committed to data development as we follow patients longitudinally for 3 years. We are progressing well having reached nearly 50% of our goal of enrolling a 1,000 patients. As of the end of September 2018, 40 centers had been initiated as K OAR study sites and 480 patients had been enrolled. We anticipate that the number of centers will continue to increase to about 50 as we have seen keen interest by many centers to participate in the study.
Multi center studies like K OAR create a competitive advantage for the company as these studies provide us with additional touch points with transplant centers and keep us in direct dialogue with the key innovation hubs and opinion leaders. These studies also impact to In the K OAR study, we target 75% adherence to our AlloSure surveillance protocol. Our initial experience confirmed that this is a good metric to monitor as some centers have limited processes in place to influence adherence. Our CureDx transplant patient care managers can be very helpful. We will update you on our progress as we gain additional data points.
With our increasing number of transplant center partnerships, our unrivaled peer reviewed publications, our protocol adherence initiatives and the ongoing K OAR study, we are building a formidable mode around kidney transplant patient care. Now shifting to AlloMap, Q3 2018 test volume increased 6% year over year, translating into 4,080 patient results. We introduced our heart care concept in April. This novel heart transplant surveillance solution combines both AlloMap and AlloSure Heart, providing physicians and patients with a comprehensive view into the health of the heart allograft. It remains early in the heart care launch, but we are pleased with the initial test reaction to date.
In September, we launched the Surveillance Heart Care Outcome Registry or SHORE during the 22nd Annual Scientific Meeting of the Heart Failure Society of America, which was well received by transplant cardiologists. SHORE is a prospective multicenter observational registry of patients receiving established by heart care will benefit growth going forward. Now turning to our transplant lab product. Our product revenue growth accelerated to 9% in the quarter, contributing 4 point $2,000,000 to our revenue in the quarter. This is a step up from the 5% growth experienced in the 2nd quarter with the acceleration driven by continued market generation sequencing products.
AlloSeq HLA will significantly improve existing NGS HLA product offerings by enhancing turnaround time and workflow to make this the best in class NGS HLA typing product. AlloSeq cell free DNA kits will enable labs across the globe to assess transplant graft health in a quantitative manner and improve care by reducing the need for unnecessary procedures. AlloSeq BMT is a next generation sequencing solution, which enable CareDx to enter the global bone marrow transplantation market. AlloSure is enjoying an exceptional reception from the transplant community and we have reached our goals of profitable adjusted EBITDA along with positive operating cash flow a quarter ahead of plan. As such, we are going modestly increase our operating spend with a focus on marketing and sales expenditures.
This is to build on the momentum of the AlloSure adoption, which is fueling our growth and which will further fortify our position in both the meaningful mode we are developing in transplantation diagnostics. CareDx is uniquely positioned to provide genomic information to transplant patients and has established its market leadership with close ties to the clinical community. We believe we are swiftly becoming the leader in transplant patient care. Our focus goes beyond providing test results. We focus on impacting long term patient outcomes.
To do that, we foster direct to patient interactions. Today, we care for approximately 2% of the U. S. Kidney transplant patient population. This is a great start.
But this is still just the beginning as we estimate that there are more than 700,000 transplant patients worldwide and the need for organ transplantation is ever increasing. Mike, I'll hand the call over to you to discuss financials.
Thank you, Peter. Turning first to the income statement. Our Q3 2018 testing revenue increased 106% year over year to 16,800,000 dollars Our 2018 Q3 testing revenue includes AlloSure volume of 3,708 tests, a 6% AlloMap volume increase from the prior year quarter to 4,080 tests and the January 1 increase in the AlloMap Medicare reimbursement rate from 2,840 to $3,240 We continue to be very pleased with the revenue and the momentum of AlloSure following the launch, with test trajectory remaining ahead of our initial plan. Our 3rd quarter product revenue increased 9% year over year to 4,200,000 and as such, total revenue in the Q3 of 2018 was CHF 21,200,000 representing a 74% increase compared to the prior year's CHF 12,200,000 For the Q3 of 2018, net loss was CHF 20,000,000 compared to a net loss of CHF 14,300,000 in the same period of 2017. Our net loss per share was CHF 0.54 for the quarter compared to $0.63 in the Q3 of 2017.
Our 3rd quarter net loss includes a $17,100,000 charge for the change in our common stock warrant liability. This charge was incurred because warrants were exercised during the Q3. And in addition, there was an increase in the estimated fair market value of warrants that were not exercised. For the Q3 2018, our non GAAP net loss was £600,000 compared to a non GAAP net loss of £3,300,000 in the same period of 2017. Our non GAAP net loss per share in the Q3 of 2018 was CHF 0.01 compared to CHF 0.15 in the same period of 2017.
As a reminder, we define adjusted EBITDA as non GAAP net loss before interest, income tax, depreciation, amortization, other expense and net loss attributable to non controlling interest. For the Q3 of 2018, adjusted EBITDA was a gain of £200,000 compared to a loss of £1,700,000 in the Q3 of 2017. While we continue to target positive adjusted EBITDA for the remainder of 2018, as Peter mentioned earlier, we will be modestly increasing our marketing and sales expenditures to fuel the continued growth of AlloSure. Net operating cash flow was positive 0 €400,000 in the Q3 of 2018, and our cash and cash equivalents at September 30, 2018 was €26,200,000 The increase in cash from CHF 16,200,000 at the start of the quarter was primarily due to the exercise of CHF 2,500,000 warrants in the period, which generated cash of 10,500,000. As a result of the exercise of warrants and stock options in the quarter, the number of shares of common stock outstanding at September 30, 2018, increased to 38,800,000.
The number of fully diluted shares of common stock is approximately 43,000,000 and includes 800,000 warrants and 3,400,000 stock options and restricted stock units. Turning to guidance. We are increasing our 2018 revenue expectations to reflect the continued growth of AlloSure and now anticipate £74,000,000 to £75,000,000 for the year. We would note that the Q3 of the calendar years has historically been the highest number of clinic visits to transplant centers and is a function of non holiday weekdays. With that, I will open the call for questions.
Thank you. We will now be conducting a question and answer session. Our first question comes from Bill Quirk with Piper Jaffray. Please go ahead.
Great. Thanks. Congratulations on just an outstanding quarter, guys.
Thank you very much, Bill. You following the company for years, that comment means a lot to us.
My pleasure. So first off, I'd like to start with a question that I actually posed to Mike last quarter. And it concerns the 2019 guidance, which at the time was called aspirational, albeit very early in the launch and now a year into it, quite candidly, it looks kind of conservative. So Mike, what are your kind of longer term thoughts here?
Well, Bill, thanks for raising this one again. We're still not providing 2019 guidance at the moment. But I would say that our focus is still on the AlloSure commercialization. And based on our results to date, this aspirational 90,000,000 to 100,000,000 dollars I'd say we're very confident on our ability to hit that goal. So yes, we're feeling confident on that.
Okay, fair enough. And then Peter, a couple of questions for you. One, very nice to see continued center growth. It looks, if I'm doing the math right here, that you're probably in about 83 or so of the top 100 centers. Have you maybe you could talk to us, I guess, 2 things.
1 is when you're calling on these centers, has anyone rebuffed you or rebuffed the sales efforts? And if so, I'd be curious as to why? And then secondly, can you talk a little bit about some of the test usage for patients that are outside of the standing order group? Are we seeing a lot of dabbling by physicians? Or are we seeing some patterns emerge even though they're not officially in the standing order count?
Thank you.
Well, thank you very much and 2 very excellent questions. And given that we are 12 months in, I think we have started to see some patterns in transplant centers that we are happy to be sharing with you, but it's still somewhat early in the launch. Of the 96 centers that have been using AlloSure since the beginning, yes, there are some centers that have used AlloSure a couple of times and have not reordered. That is just very natural. You call them dabblers and we call them dabblers as well.
These are the clinicians that would like to be ordering the test and see what it does. We continue to be very focused on the standard use of AlloSure in a significant portion of the patients. And that's why the K OAR registry is so important. The number of 40, 40 centers have adopted now a K OAR protocol is really indicative of the value that this can bring to the community. Our strategy has been get the foot in the door with 1 or 2 tests, then establish K OAR and then from K OAR expand a center into multi use.
So of the 96 centers to be more specific, I think 10% to 20 percent of these centers are really the higher frequency users. And then there is a substantial number of centers that are in the K OAR sites, That would be the 40 centers that I've been talking about. And then there is a tale of centers that are very, very early in adoption and very few that are have just ordered a couple. I don't think there is a pattern that I would be able to point towards that if they discontinued, they have discontinued for some kind of a reason. It's very individual reasons.
Okay, got it. And then last one for me, and I guess it's back to Mike. Any update on the commercial side? I wouldn't I guess I wouldn't expect still early in the launch that we would see some positive medical policy decisions or anything like that. But just curious to see if you're getting paid by any commercial payers, you're having discussions with any.
Is this something maybe on the other hand that we should just not be considering as we're adjusting our models?
Thank you. Yes, Bill. We continue to get paid, I'd say, on an ad hoc basis by some of the commercial payers. And we don't have any coverage decisions from any of those payers yet. We've still not opened up any dialogue with any of the payers because even now, the level of volume that we've got with any one particular payer probably isn't enough to open that dialogue.
So we'll be starting to do that in 2019. And so I would continue to include in your model a very conservative reimbursement for commercial payers.
Perfect. Thanks a lot, guys. Congrats again.
Thanks.
Our next question comes from John Hsu with Raymond James. Please go ahead.
Good afternoon and nice quarter I guess if we could just start with HeartCare. I know it's still early on, but are you seeing any positive signals in terms of the on the AlloMap side of things from HeartCare?
I would say that the 6% volume growth in the Q3 is good volume growth, but it's really not attributed to Heart Care rollout yet. It's very early. We have a few centers that are signed up now into the SHORE registry study. We'll be communicating on that in the Q4 call. But take the 6% as our mid single digit type of volume growth that we had anticipated for AlloMap and we continue to track against that.
And Heart Care will continue to drive that mid single digit volume growth going forward, which is basically driven by an increase in utilization and adoption of a routine surveillance protocol. As one of our problems always has been on AlloMap that we have a good penetration in the number of centers and good penetration number of patients, but not as frequent use of AlloMap per patient. And so a heart care should really help there.
Okay, great. Then just a quick one on the guidance. It looks like at the low end, it does imply that you would actually decelerate from a revenue standpoint in the Q4. So just want to make sure there's nothing that you're seeing that makes that any more likely.
Yes, John, I think one thing that we just want to always point out is that 3rd year is usually Q3, sorry, of the year is usually the highest volume in the transplant centers during the year. And so traditionally, Q4 would be lower than that for AlloMap, for example, and there's holiday days. So we're just being mindful of the slight seasonality that we have on the quarters.
Okay, great. And then just last one for me. I'm sure you saw one of the competitors who is wants to make an entrance into the space. They just announced a pre submission meeting with CMS. So any thoughts on when they could get reimbursement?
I guess maybe the second part of the question is regarding your early comments on kind of building a moat, how do we think about maybe switching costs from either a protocol or other standpoint between you and potentially another cell free DNA technology?
Well, and John, thank you very much for highlighting that. I'm probably the 2nd best to comment about the reimbursement efforts. I think in historical, it has taken Molecular Diagnostics a significant amount of time to go through the reimbursement process. And we have had a good success with having interactions on this with the respective reimbursement authority. So I think I'll let other companies to point out on their reimbursement timelines, which in the past when I heard others talking about it might have been very, very aggressive.
And so I'll let them talk about the timeline. On the other element, just forgive me, what was the second point that you were making?
Just how do you think about maybe the mode or switching costs associated with AlloSure?
And I think it's clear that for me a switching cost of a standing order patient is extremely high. So I think once you see a patient having a standard script for a 12 months' time or standing order for a 12 months' time, switching would be extremely difficult. Once the transplant centers has adopted a new technology, and I'm speaking there from experience in pharmaceuticals, it's incredibly difficult to displace or be another product in that center. So I would say that there is a significant value of having a first mover advantage and being part of that mode. And how to translate this into switching costs, I'm not sure to do that, but our goal has been to penetrate very quickly and very swiftly in this and the number of 96 transplant centers within 12 months, I think speaks for itself.
Excellent. Thank you very much.
Our next question comes from Yi Chen with H. C. Wainwright. Please go ahead.
Hi, this is Julian on for Yi. Thanks for taking my questions. I'm sorry if I missed this, but can you talk about what is driving the higher than previously guided 2018 revenue? Maybe more specifically, was there a test volume higher than previous expectations? And if you could give us a sense for how durable this trend might be going into 2019, that would be very helpful.
Yes. This is Mike. I think the main driver for the increase in the revenue guidance is AlloSure. It continues to exceed our expectations each quarter. And so yes, that's the key driver.
And so now again, we've set revenue guidance for the remainder of the year based on how we see the business at the moment and where we think we'll be at the end of the year.
Okay, great. And for my last question, I was just curious how should we be thinking about operating expenses in 2019? Are you able to give any guidance on that at this time?
No, we're not giving any guidance on that at this moment.
Okay. Thanks very much.
There are no further questions. I would like to turn the floor over to Peter for closing comments.
Well, thank you very much for joining the call. We look forward to updating everyone as we continue to commercialize AlloSure, grow AlloMap and our transplant product business and build on our profitability. Thank you very much for joining this call. Thank you.
This concludes today's conference. Thank you for your participation.