Greetings. Welcome to the CareDx first quarter 2018 earnings conference call. At this time, all participants are in listen-only mode. A question-and-answer session will follow 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. I would like to turn the conference over to your host, David Clair. Thank you. You may begin.
Good afternoon. Thank you for joining us today. Earlier today, CareDx released financial results for the quarter ended March 31st, 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 examination of historical operating trends, expectations regarding coverage decisions, pricing and enrollment matters, our future financial expectations 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 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, May 10th, 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 had an exciting first quarter. Most importantly, we gained significant traction on our transplant patient-focused initiatives. We recently welcomed the National Kidney Foundation CEO, Kevin Longino, to our headquarters at CareDx. We have tremendous respect for what Kevin and his team at the National Kidney Foundation are doing and would like to give a shout-out to them at the start of this call. This afternoon, I will provide an update on the recent achievements across our three key business drivers, AlloSure, AlloMap, and Pre-Transplant. I will also provide commentary on our recent agreement with Illumina, which we see as tremendous external validation from the technology leader in the industry of our strategy to build CareDx into the partner of choice in transplant care with respect to genomic information.
It also marks another highlight for CareDx in a string of positive news since the beginning of this year. After my update, Mike will provide additional financial details on our first quarter performance and discuss our 2018 guidance. It's great to see the acceleration of our top line with total revenues growing 21% year-over-year to $14.1 million, driven by a 34% year-over-year increase in testing revenue to $10.6 million. Firstly, AlloSure. We are delighted that in a short time since launch, AlloSure has made a big impact at many transplant centers as well as across the wider transplant community. Our approach to better kidney transplant surveillance is being embraced by patients and transplant centers. At the end of the first quarter, 52 centers had provided AlloSure results to their transplant patients since launch, which is more than our initial internal projections.
CareDx provided 1,051 patient results in the first quarter to 842 kidney transplant patients. We continue to see broad demand for AlloSure, both with patients who recently received a kidney transplant, as well as patients that received their kidney allograft in previous years. We remain focused on driving adherence to the AlloSure routine testing schedule and have seen multiple centers utilizing the recommended testing protocol. In the first quarter of 2018, 568 new standing order patients were added to the 115 standing order patients from the previous quarter. We define standing order patients as patients that will follow the surveillance protocol for at least one year. Tracking standing order patients is important as it represents the basis of our flywheel dynamic, which we use to describe the recurring revenue effect from patients adhering to our ARDS protocol.
An important element to establish this protocol is the rollout of our clinical trial, also known as our Kidney Outcome AlloSure Registry, or KOAR. As a reminder, KOAR is part of our Medicare coverage with data development commitment. KOAR follows patients longitudinally for three years. The study will enroll 1,000 patients across 35 transplant centers with the primary endpoint centered on observing patient outcomes at one, two, and three years post-transplantation. In addition to providing a wealth of clinical data, we estimate KOAR will generate more than 10,000 AlloSure testing opportunities over the next five years, representing incremental AlloSure volume. As of end of March 2018, 12 centers have been initiated as KOAR study sites and 63 patients have been enrolled, which is in line with our internal expectations. The team continues to execute well on all of our studies.
We see the in-house capability of running multi-center studies like KOAR as a strategic advantage for the company. Studies provide us with an additional touch point with large transplant centers and keep us in direct dialogue with the key innovation hub and opinion leaders. We also view world-class institutions participating in KOAR as a validation of the potential of this innovative technology. It also fits well with our theme of being the partner in transplant care, as these clinical research collaborations provide a great platform for scientific exchange. For example, we set ourselves a goal to support 10 or more investigator-initiated clinical trials by year-end. These trials provide learning opportunities and support the generation of important clinical data for the field of transplantation. We are currently preparing for the American Transplant Congress meeting in Seattle in June, which is clearly a highlight this year.
The company will showcase AlloSure's capability at a large symposium entitled Innovation in Allograft Health Surveillance, Clinical Implementation of AlloSure Testing for Kidney Transplantation. The symposium will include seven renowned physicians in kidney transplantation sharing their clinical experience with AlloSure. We are excited about the number of case studies that will demonstrate the utility of AlloSure. Following the symposium, CareDx will be hosting a press conference to highlight new AlloSure data and Dr. Daniel Brennan, the Medical Director of the Comprehensive Transplant Center at The Johns Hopkins Hospital, will be available for a question and answer session. Shifting to AlloMap. First quarter 2018 test volume increased 3% year-over-year, translating into 3,847 patient results. We would like to remind everyone of the inclement weather that impacted several territories in the U.S. during the first quarter of 2018.
We believe that the various weather issues in the Southeast, Central, and Eastern U.S. had a noticeable impact on volumes during the quarter. Notwithstanding this, the first quarter volume growth was still within our overall volume growth target range. We remain focused on our strategy to broaden patient adherence. With HeartCare, we are excited about building out our offering in heart transplant surveillance. The receptivity of the heart transplant community has been fantastic. HeartCare is a comprehensive solution for rejection surveillance as it combines our legacy gene expression-based AlloMap test with our donor-derived cell-free DNA-based AlloSure Heart test. This provides heart transplant patients with information on both their immune system activity as well as graft health.
HeartCare has recently launched at ISHLT, the International Society for Heart and Lung Transplantation, where it was great to hear that CareDx is viewed as a disruptor in the field of transplantation care, as we are starting to integrate multimodality testing under a common offering, HeartCare. With so much tailwind, we have increased our field and service team territories from seven to 10, which enables us to improve our coverage in major metropolitan areas like New York, L.A., and Chicago. We now have dedicated CareDx transplant account managers, medical science liaisons, clinical research associates, patient care managers, and draw site coordinators across the U.S. who provide a unique service offering to transplant centers. Turning to Pre-Transplant. Our Pre-Transplant revenues decreased 10% in the quarter to $3.3 million, reflecting a decline in our legacy Olerup SSP and Olerup SBT products and the delay last year of our Olerup QTYPE development efforts.
In April 2018, we announced that Olerup QTYPE had received CE mark approval and is now available on both Roche and Applied Biosystems platforms. We are now scaling up manufacturing to meet the market demand from U.S. and European customers. As a reminder, QType is a significant improvement in HLA typing, offering speed and precision for samples that require a fast turnaround time. Olerup QTYPE represents an important growth driver for CareDx, and its recent CE mark and availability on multiple platforms should help accelerate the company's path to profitability. This week, we announced that Illumina has chosen CareDx as the exclusive partner for its existing next-generation sequencing HLA transplantation business. This strategic licensing and commercialization agreement is another step for us in creating a global leader in data-driven transplantation solutions. As a result of the agreement, CareDx will be the sole distributor of Illumina's TruSight HLA solutions.
These products lead the market in the rapidly growing next-generation sequencing HLA typing segment and are currently sold globally. While Illumina will continue to sell their generic NGS products to competitors in the HLA field, CareDx will have the exclusive rights to finalize the development and commercialization of Illumina's new transplant-focused NGS products. Illumina had made significant progress on developing these clinical applications for NGS technology, and CareDx takes them over at an exciting pace as they are transferred into clinical practice. CareDx will be branding these NGS products under the umbrella of AlloSeq. I will now talk you through these various products, AlloSeq HLA, AlloSeq BMT, and AlloSeq cell-free DNA. Firstly, AlloSeq HLA will significantly improve existing NGS HLA product offerings by enhancing turnaround time and workflow to make this a best-in-class NGS HLA typing product.
The product will be an advancement to the hybrid capture technology that Illumina has been developing for various applications. CareDx will finalize the development of the technology for the field of transplantation, and we will add proprietary software to the offering. We anticipate AlloSeq HLA will be launched in the first half of 2019. With AlloSeq BMT, bone marrow transplant, CareDx will develop a next-generation sequencing solution to enter the bone marrow transplant market. This product will evaluate the level of donor versus recipient cells in post-transplant blood or bone marrow specimens in patients who have undergone allogeneic hematopoietic stem cell transplantation. Strategically, this is important as it allows us to expand from our focus on solid organ transplantation into an adjacent field. AlloSeq BMT will be made available in the beginning of 2019. Finally, with this agreement, CareDx gets a head start on developing a kitted cell-free DNA solution.
This will be important as we evaluate making cell-free DNA testing available in countries in which the diagnostics market is dominated by in vitro diagnostic offerings. AlloSeq cell-free DNA has been developed by Illumina to an alpha version. CareDx plans to advance the development and anticipates to commercialize this as a kitted cell-free DNA testing solution. As we are already serving a large percentage of transplant labs today with our Olerup product line, we potentially see AlloSeq cell-free DNA as an option to support better patient care in a distributed model. As we would like to evaluate customer expectations for this offering, we have not finalized our launch assumptions for AlloSeq cell-free DNA. Based on our financial projections, the new business generated from the Illumina agreement will add to our top line in 2018.
We will see distributor-like cross margins of 20%-30% on the existing TruSight business, and an OPEX increase of roughly $2 million-$3 million. Therefore, we do not anticipate the agreement to significantly impact our goal of achieving non-GAAP EBITDA profitability in the second half of this year. These new development and commercial activities will lead us to increase our planned headcount by approximately 10 to 15 in 2018. Specifically, we plan to fortify our pre-transplant team by adding several experts in the field of next-generation sequencing testing. I'm very pleased that David Sayer , a renowned expert in the field, has chosen to join CareDx. David has recently been with Illumina. He came to Illumina with their acquisition of Conexio, where David was the president and CEO. He and his team have significantly advanced HLA testing technologies for decades.
This strengthens CareDx considerably, and we are very pleased to welcome David and his team to CareDx. We are continuously delivering on our promise to bring next-generation sequencing solutions to the transplant clinic, and with these additions to our product portfolio, CareDx is uniquely positioned to provide genomic information to transplant patients. This will further enable personalized medicine in this high-need, high-cost patient population. Turning now to the financials. We recently announced the completion of our efforts to simplify our balance sheet by refinancing our remaining debt with a single-term loan with Perceptive Advisors. Mike and the team have done a great job in setting the company up for growth and providing us with the financial backbone and flexibility to support our growth. Mike, I'll hand the call over to you to discuss financials.
Thank you, Peter. Turning first to the income statement, our first quarter 2018 testing revenue increased 34% year-over-year to $10.6 million. Our 2018 first quarter testing revenue includes AlloSure volume of 1,051 tests, a 3% AlloMap volume increase to 3,847 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 in line with our initial expectations. Our pre-transplant revenue decreased 10% year-over-year to $3.3 million. As such, total revenue in the first quarter of 2018 was $14.1 million, representing a 21% increase compared to the prior year's $11.6 million. We adopted the new revenue recognition standard, ASC 606, from January 1, 2018. This had a very minor impact on our testing revenue and no impact on our product revenue.
Had we used the old ASC 605 revenue recognition standard, our total revenue in the first quarter of 2018 would have been $14.0 million. For the first quarter 2018, our non-GAAP net loss was $4 million compared to a non-GAAP net loss of $6.7 million in the same period of 2017. Our non-GAAP net loss per share in the first quarter of 2018 was $0.14, compared to $0.31 in the same period of 2017. Net cash used in operating activities in the first quarter 2018 was $4.5 million, which was in line with our expectations, and our cash and cash equivalents at March 31, 2018, was $18.7 million.
As Peter mentioned, we completed our debt refinancing mid-April and used some of the proceeds from our $15 million term loan with Perceptive Advisors to pay off our remaining debt of approximately $11 million owed to Danske Bank and the Allenex F ormer majority shareholders. Immediately following our refinancing in April, we had approximately $22 million in cash and $15 million in debt, which is a three-year interest-only period. With this liquidity, and with the option to draw an additional $10 million debt from Perceptive within the next 12 months, we feel we have the balance sheet to support our growth initiatives. Turning to guidance, we are increasing our 2018 revenue expectations to reflect the growth of AlloSure and the impact of our Illumina partnership and now anticipate $64 million-$66 million for the year. We remain focused on driving the company towards profitability.
Given our expectations for a ramp in AlloSure contribution as 2018 progresses, our partnership with Illumina, the positive Medicare price increase from AlloMap, and the growth of our Pre-Transplant revenues from Olerup QTYPE, we continue to anticipate reaching non-GAAP EBITDA profitability during the second half of 2018. With that, I will open the call for questions.
Thank you. At this time, we will be conducting a question-and-answer session. If you'd 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'd like to move your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment please while we poll for questions. Our first question is from Bill Quirk from Piper Jaffray. Please go ahead.
Thanks. Good afternoon, everyone. Nice quarter.
Thank you, Bill.
First question is, with respect to the new guidance, how much of that is from Illumina or from the newly acquired distributed products, that is?
Bill, excellent question. We are obviously very early in the integration process, and there is some handing over of customers as we are booking the sales as of June 1st. I'll actually direct the question over to Mike, which is intricately closer to the numbers. Mike?
Yeah. Hi, Bill. Yes, as Peter said, we'll be transferring the revenue from Illumina over to us over the next six months. We're looking at roughly at $22 million from that Illumina business in the second half of the year. That's some of the driver for the increase in guidance, the other being the increased ramp on AlloSure.
Very good. I guess just thinking about the aspirational guidance, Mike, that you gave a couple of quarters ago and overlaying that with this very nice AlloSure ramp and now the new Illumina deal that should start to potentially generate some additional revenue in 2019 with new product launches. I guess, what's your comfort level around that? Dare I say the aspirational goal doesn't sound so aspirational anymore.
Bill, we're still looking at that as an aspirational goal. I think we're focused on the revenue guidance, the revised revenue guidance for 2018. We'll give 2019 revenue guidance at the end of this year, start of next year. We're still looking at that as aspirational. The additional Illumina products are obviously going to help.
Makes sense. This last one from me, it's more of I guess just a housekeeping question. Can you give us the revenue split between AlloMap and AlloSure?
Bill, we're not breaking that out. We've not been breaking out the product revenue by product. We're doing the same with testing, just giving an overall testing number. We did disclose the volume, 1,051 AlloSure tests and 3,847 AlloMap tests in the quarter.
Got it. Thank you.
Our next question is from Per Ostlund from Craig-Hallum. Please go ahead. I'm sorry, your line is live.
Oh, sorry. Thanks, guys. Sorry about that. Congratulations on the progress here in the first quarter. Want to start with AlloSure. It sounds like, again, everything is tracking very much in line with your expectations. Peter, you alluded to this a little bit in your prepared remarks, but I wonder if you could come back to it a little bit and discuss the mix of patients that are being tested with AlloSure. Maybe similarly, curious as to the mix of centers that have adopted the test that were DART participants versus non-DART participants.
Terrific. Well, thank you so much, and first of all, congratulations to your promotion to senior analyst, and great to have you here following the company even closer. Diving into the AlloSure, I would say there are really two things. One is we are positively surprised about the 52 centers that we are now having seen cumulatively having used AlloSure. That's probably ahead of our expectations. The thousands of patient results is very much tracking against our expectation. Now, when you look into one of the things that we have learned, is that actually the average patient duration after transplantation is above 365. On average, these patients are actually older patients after transplantation than we had originally anticipated, because some centers are really finding the test very useful in patients that come back in and they have a high suspicion of rejection, and they put them on an AlloSure.
Actually, then many times on a multiple AlloSure protocol. We see these two things now happening. One, we're driving with KOAR early adoption of AlloSure in the first year post-transplant. We see many centers are actually using the test in the two and three years post-transplant, which is exciting for us because it demonstrates the utility of the test.
That's fantastic.
To your specific question on KOAR, we did share with you that there are 63 patients enrolled in the first quarter. If you think roughly the 63 patients having one AlloSure each in the first quarter, that gives you an approximation of the 1,051, probably around 60, 70 would be from patients enrolled in KOAR.
Okay. How about centers that participated in the DART study versus centers that did not? Is adoption being spread nicely across those two sets?
You know what is really confirming it, that on the 50 transplant centers that have started using the test, it really follows an 80/20 rule, where most of the volume is coming actually from 20% of the centers. I think that's what we had anticipated, and it really came true. Now, in terms of are all these DART centers, no, not necessarily. We have a good mix. DART trials were really 14 centers that were all high volume and high academic institutions. Some of them, you can imagine, especially in tertiary care centers that have a large academic presence, it actually takes even longer to get something into a routine testing protocol. I would say we're spread evenly distributed in these DART centers. We continue to have excellent relationships with these centers because they're so important and valuable academic institutions.
Very good. One more question on AlloSure, if I may. You mentioned the 80/20 rule, Peter, I know you've talked about having 100 centers doing the vast majority of kidney transplants. Realizing that you would've been targeting those centers front and center, the centers that haven't necessarily adopted the test yet, again, realizing it's very early, are there pushback points that are keeping any of the centers from kind of tipping into the adoption ledger at this point? If so, what are those push points?
Good question, Per. I actually have here with me, Robert Woodward, our Vice President of R&D, which might have an additional data point, as he's been talking a lot with these transplant centers over the years, and has additional insight. I think this is very general technology adoption in large tertiary care hospitals. There's nothing unusual about many clinicians wanting to see more clinical information. They believe that their patient population is different than our study population, and they'd like to see more data. It's very difficult. I think one of the key questions that we get is integration into their electronic medical records and making it easy for the centers to adopt the technology by just doing a mouse click. I think it's very typical and something that we had anticipated, which we know because of the AlloMap that we have done for years.
Maybe Robert, you have an additional interest point.
Thanks, Peter. In addition to just numerous things that are just the standard marketing and sales activities, on the research side, as Peter mentioned, they're often interested in how does this data compare to my center? Have you had a case that looks exactly like this? We saw a lot of interest at our symposium that we held at the SIOP meeting in February, where some saw cases that were presented by some of the initial users that really caused certain centers to say, "Hey, that looks like what I've seen.
I want to start using the test more." We expect that the strong program that we have for our program at ATC and a lunchtime symposium with an even larger audience and attendance at ATC will do some of the same, because we've got seven presenters with a variety of applications in how they've used AlloSure. That's going to really, I think, help a lot of centers to see a way that it was used that matches what their expectations are and what they're looking for.
Thank you. That's excellent color. Last question from me. On AlloMap, again, you did address this in the prepared remarks, Peter, on the volume growth there being potentially a little bit impacted by weather. I guess first part of the question would be, is there a way to roughly quantify what that impact might have been? Secondly, was there any lack of focus on AlloMap because of the genesis of the AlloSure launch? Then, I guess the last piece of it is, coming back to HeartCare, how do you envision HeartCare ultimately driving AlloMap adoption going forward? Thanks.
Well, thank you very much for the question. Per, we continue to believe that AlloMap is growing in this mid-single digit range. We feel comfortable with this volume growth range that we have targeted. HeartCare is very exciting, but it'll take some time to get traction. We'll roll it out through a clinical registry trial as well that's called SHORE. It'll take some time to come through. We are excited about the concept. In terms of the specific impact on the weather, we saw a little bit of a slower growth in the beginning of the quarter and then caught up in the second part of the quarter. As long as this is still within our growth volume corridor, we focus more on driving adherence going forward.
Excellent. Thank you, guys.
As a reminder, if you'd like to ask a question, it is star 1. Our next question is from Yi Chen from H.C. Wainwright. Please go ahead.
Hi, thank you for taking my question. Congratulations on the univoting ramp up for AlloSure test. I noticed that for your first quarter sales and marketing and G&A expenses, they are quite significantly higher than the previous quarters. I'm just wondering, was there any one-time expense or these are the kind of level expenses we should expect going forward? Or would they even increase in the future quarters once you start distributing Illumina products?
Well, excellent question, Yi Chen. Thank you very much. I'll actually divert that over to Mike Bell, who, again, has the details.
Yes. On the quarter itself, the sales and marketing expense pretty much reflects the fact that we've increased our sales and marketing territories, and we've added four territory account managers in the quarter. On the base business, we should expect that sales and marketing expense to stay reasonably flat now for the next foreseeable quarters. There was a one-time expense in Q1 as there always is in Q1 for us with our audit costs of about sort of $500,000-$700,000, which won't repeat itself in future quarters. We did mention that with this Illumina deal, in the second half of the year, our overall OPEX will increase by about $2 million-$3 million. If you're modeling out the numbers, adding that for the second half of the year should definitely be in there.
Got it. Thank you.
Thank you. We actually do have a follow-up question here from Bill Quirk from Piper Jaffray. Please go ahead.
Great. Thanks. Appreciate the follow-up. On HeartCare, is this a product that we should expect every AlloMap patient to get or is this going to continue to be used to try to incrementally increase adoption within AlloMap, particularly in some of those centers that have historically been resistant?
Excellent question. I think the answer to it will be different by center almost. What we continue to believe is that we have a lot of lack of adherence to the follow-up protocol. What HeartCare will allow us to roll out is the hearts protocol, which you might be familiar with the ARDS protocol in the kidney transplant setting. We, for hearts, we call it the hearts protocol, where we suggest to the centers that are signing up for the HeartCare to have a rigorous follow-up of these patients with multiple testings in the first year, and then also frequent testing in the second and the third and the fourth. With HeartCare, we're establishing what we learned from kidney into the heart modality. We anticipate that there will be a volume impact from HeartCare as centers are adopting HeartCare on AlloMap.
Understood. Certainly makes a lot of sense to me, Peter. I guess, flipping the question over to Mike, how should we think about this from a gross margin standpoint? Presumably you're just billing for AlloMap, but presumably you'd be adding in the additional cost of goods associated with AlloSure.
Yes. We'll be adding in the additional variable costs for AlloSure Heart. It shouldn't have a significant impact on gross margins this year, Bill, based on the sort of expected volume. We're still targeting 60%-65% gross margin throughout the year. There shouldn't be any significant impact on that.
Okay. Got it. Thank you.
Thank you. This concludes the question and answer session. I'd like to turn the floor back over to management for any closing comments.
Well, thank you very much. We are very excited of continuously building a business around genomic information and transplantation. Thank you very much for joining our call, and I'm looking forward to updating you as we are making progress at CareDx. Thank you so much.
This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.