Greetings, and welcome to the CareDx third quarter financial results conference call. At this time, all participants are in a listen-only mode. A brief question- and- answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. 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 the quarter ended September 30th, 2018. The release is currently available on the company's website at www.caredx.com. Peter Maag, 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 laws, which are made pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. Any statements contained in this call that are not statements of historical facts should be deemed to be forward-looking statements.
All forward-looking statements, 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 8th, 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 third quarter 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 $21.2 million, driven by 106% year-over-year increase in testing services revenue. Our third quarter adjusted EBITDA was + $0.2 million. The team achieved this one 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 third quarter, 96 centers had provided AlloSure results to their transplant patients since launch. These 96 centers represent just over 60% of the transplant volume in the United States. CareDx provided 3,708 AlloSure patient results in the third quarter to approximately 2,800 kidney transplant patients.
Overall reimbursement was consistent with previous quarters, with 70%-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 a 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 third quarter of 2018, 1,260 new standing order patients were added, which is up from 793 in the second quarter.
We define standing order patients as patients that will follow the surveillance protocol for at least one year, and our cumulative total of 2,736 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 KOAR. As a reminder, KOAR is included in our Medicare coverage, as we are committed to data development, as we follow patients longitudinally for three years. We are progressing well, having reached nearly 50% of our goal of enrolling 1,000 patients. As of the end of September 2018, 40 centers had been initiated as KOAR 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 KOAR create a competitive advantage for the company, as these studies provide us with additional touchpoints with transplant centers and keep us in direct dialogue with the key innovation hubs and opinion leaders. These studies also impact compliance and adherence to standard protocols, which is a crucial element to our work in the transplant community. In the KOAR study, we target 75% adherence to our AlloSure surveillance protocol. Our initial experience confirms that this is a good metric to monitor, as some centers have limited processes in place to influence adherence. Our CareDx 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 KOAR study, we are building a formidable moat around kidney transplant patient care.
Shifting to AlloMap. Third quarter 2018 test volume increased 6% year-over-year, translating into 4,080 patient results. We introduced our HeartCare 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 HeartCare launch, but we are pleased with the initial test traction to date. In September, we launched the Surveillance HeartCare 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 multi-center observational registry of patients receiving HeartCare surveillance. AlloMap remains a pillar of our forward-looking growth strategy, and we anticipate that SHORE, as well as the standardized routine surveillance established by HeartCare, will benefit growth going forward. Turning to our transplant lab products.
Our product revenue growth accelerated to 9% in the quarter, contributing $4.2 million to our revenue in the quarter. This is a step-up from the 5% growth experienced in the second quarter, with the acceleration driven by continued market traction for QTYPE and the first full quarter of QCyte HLA sales. In October, we announced the 2019 launch of three new next-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 invasive 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. We have reached our goals of profitable adjusted EBITDA along with positive operating cash flow a quarter ahead of plan. We are going to 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 and bolster the meaningful moat 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 third quarter 2018 testing revenue increased 106% year-over-year to $16.8 million. Our 2018 third quarter 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 - $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 third quarter product revenue increased 9% year-over-year to $4.2 million, and as such, total revenue in the third quarter of 2018 was $21.2 million, representing a 74% increase compared to the prior year's $12.2 million. For the third quarter of 2018, net loss was $20.0 million, compared to a net loss of $14.3 million in the same period of 2017.
Our net loss per share was $0.54 for the quarter, compared to $0.63 in the third quarter of 2017. Our third quarter net loss includes a $17.1 million charge for the change in our common stock warrant liability. This charge was incurred because warrants were exercised during the third quarter, and in addition, there was an increase in the estimated fair market value of warrants that were not exercised. For the third quarter 2018, our non-GAAP net loss was $0.6 million, compared to a non-GAAP net loss of $3.3 million in the same period of 2017. Our non-GAAP net loss per share in the third quarter of 2018 was $0.01, compared to $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 third quarter of 2018, adjusted EBITDA was a gain of $0.2 million, compared to a loss of $1.7 million in the third quarter 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 $0.4 million in the third quarter of 2018, and our cash and cash equivalents as of September the 30th, 2018 was $26.2 million. The increase in cash from $16.2 million at the start of the quarter was primarily due to the exercise of 2.5 million warrants in the period, which generated cash of $10.5 million.
As a result of the exercise of warrants and stock options in the quarter, the number of shares of common stock outstanding at September the 30th 2018 increased to $38.8 million. The number of fully diluted shares of common stock is approximately $43.0 million and includes 800,000 warrants and 3.4 million 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 million - $75 million for the year. We would note that the third quarter 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. If you would like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star two if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. Our first question comes from Bill Quirk with Piper Jaffray. Please go.
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. Thank you.
My pleasure. 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 looks kind of conservative. Mike, what are your longer-term thoughts here?
Well, Bill, thanks for raising this one again. We're still not providing 2019 guidance at the moment. I would say that our focus is still on the AlloSure commercialization. Based on our results to date, this aspirational $90 million- $100 million, I'd say we're very confident on our ability to hit that goal. Yeah, we're feeling confident on that.
Okay, fair enough. Peter, a couple 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. Maybe you could talk to us, I guess, two things. One is, when you're calling on these centers, has anyone rebuffed you or rebuffed the sales efforts? If so, I'd be curious as to why. 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.
Bill, thank you very much. Two very excellent questions. Given that we're 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 the 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, 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 KOAR registry is so important.
The number of 40 centers have adopted now a KOAR 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 one or two tests, then establish KOAR, and then from KOAR, expand a center into multi-use. Of the 96 centers, to be more specific, I think 10%-20% of these centers are really the higher frequency users. There is a substantial number of centers that are in the KOAR sites. That would be the 40 centers that I've been talking about. There is a tail of centers that are very early in adoption and very few that 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. Last one from me, and I guess it's back to Mike. Any update on the commercial side? I guess I wouldn't expect, still early in the launch, that we would see some positive medical policy decisions or anything like that. 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.
Yeah, Bill. We continue to get paid, I'd say, on an ad hoc basis by some of the commercial payers. 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. We'll be starting to do that in 2019. 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, nice quarter, guys.
Thank you very much, John.
Excellent. 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 on the AlloMap side of things from HeartCare?
I would say that the 6% volume growth in the third quarter is good volume growth, it's really not attributed to HeartCare rollout yet. We're 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 fourth quarter call. Take the 6% as our mid-single digit type of volume growth that we had anticipated for AlloMap, we continue to track against that. HeartCare 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. HeartCare should really help there.
Okay, great. 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 fourth quarter. Just want to make sure there's nothing that you're seeing that makes that any more likely.
Yeah, John, I think one thing that we just want to always point out is that third quarter, sorry, of the year is usually the highest volume in the transplant centers during the year. Traditionally Q4 would be lower than that for AlloMap, for example. There's holiday days, we'd just be mindful of the slight seasonality that we have on the quarters.
Okay, great. Just last one from me. I'm sure you saw one of the competitors who wants to make an entrance in the space. They just announced a pre-submission meeting with CMS. 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? Thank you.
John, thank you very much for highlighting that. I'm probably the second 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. We have had a good success with having interactions with the respective reimbursement authorities. 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 aggressive. Yeah, I'll let them talk about the timeline. On the other element, just forgive me, what was the second point that you were making?
Oh, just how do you think about maybe the moat or switching costs associated with AlloSure?
I think it's clear that for me, a switching cost of a standing order patient is extremely high. I think once you see a patient having a standardscript for a 12 months time or standing order for a 12 months time, switching would be extremely difficult. Once the transplant centers have 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. I would say that there is a significant value of having a first-mover advantage and being part of that mode. How to translate this into switching costs, I'm not sure to numerically do that. Our goal has been to penetrate very quickly and very swiftly in the sense that the number of 96 transplant centers within 12 months, I think, speaks for itself.
Excellent. Thank you very much.
Once again, if you would like to ask a question, please press star one on your telephone keypad. 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 question. 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 touch with volume higher than previous expectations? If you could give us a sense for how durable this trend might be going into 2019, that would be very helpful.
Yeah, 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. Yeah, that's the key driver. 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. 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 initial profitability. Thank you very much for joining this call. Thank you.
This concludes today's conference. Thank you for your participation.