Good day, ladies and gentlemen, and welcome to the CareDx third quarter 2017 earnings call. Today's conference is being recorded. At this time, I'd like to turn the floor over to David Clair, ICR investor relations. Please go ahead.
Good afternoon. Thank you for joining us today. Earlier today, CareDx released financial results for the quarter ended September 30th, 2017. The release is currently available on the company's website at www.caredx.com. Peter Maag, Chief Executive Officer and President, 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, November 9th, 2017. I'll now turn the call over to Peter.
Well, thanks, David. Good afternoon, everyone. Thank you for joining us. We had an exciting third quarter. This afternoon, I'll be providing an update on our recent achievements and performance, as well as commentary on CareDx's pathway to profitability. Mike will provide additional financial details on the quarter. We have just come back from the American Society of Nephrology meeting in New Orleans. It was exciting to see the interest in AlloSure, our new solution for rejection surveillance for kidney transplant patients. CareDx is increasingly recognized as a company making great strides in providing the latest technology to the field of transplantation, with a clear focus on improving long-term outcomes for patients. During the third quarter, the CareDx team achieved several important milestones with respect to AlloSure. As a reminder, AlloSure measures donor-derived cell-free DNA to detect active organ rejection.
AlloSure represents CareDx entry into the large kidney transplant surveillance diagnostic market. In the U.S. alone, there are more than 18,000 kidney transplants annually and an estimated 200,000 patients currently living with a transplanted kidney. There are approximately 10 times the number of patients living with kidney transplants compared to those living with heart transplants, translating into an addressable market opportunity of greater than $2 billion annually. On August 24th, Palmetto GBA, the Medicare administrator responsible for the molecular diagnostic technical assessment program, commonly referred to as MOLDX, announced AlloSure qualifies for Medicare coverage effective October 9th, 2017. On September 26th, CareDx announced AlloSure Medicare reimbursement will be $2,840 per test. This reimbursement rate recognizes the clinical utility and validity of our offering. Following the Medicare decision, an estimated 80% of kidney transplant patients have AlloSure reimbursement coverage upon launch of the test.
In our industry, it typically takes several quarters, sometimes even years, and negotiations with multiple payers to achieve 80% reimbursement coverage. Additionally, 80% of all U.S. kidney transplants take place in only 100 transplant centers, creating a very concentrated group of centers for our initial focus. CareDx already has a presence in 70% of these high-volume transplant centers with AlloMap. AlloSure represents a transformational opportunity for CareDx, given the favorable reimbursement rate, the high percentage of kidney transplant patients with Medicare coverage, and our existing relationships with the top kidney transplant centers, we are well positioned to penetrate this $2 billion market opportunity. I would like to provide some details on the initial AlloSure commercialization efforts. We officially launched AlloSure on October 9th and are very pleased with the initial interest from key opinion leaders, targeted transplant centers, and patients.
In October, we had 14 transplant centers order AlloSure. We view the initial interest and traction as indicators of a successful AlloSure launch. I am also very pleased to share with you that last week we started to receive payments from Noridian for tests that have been performed on Medicare patients since the launch on October 9th. Note that we do not expect material revenues on AlloSure in the fourth quarter, as it will take time for centers to make AlloSure part of their regular surveillance protocols going forward. As a reminder, based on our prospective DART study, we developed AlloSure routine testing schedule as the recommended testing protocol to meet the surveillance needs of kidney transplant patients. The AlloSure recommended testing protocol includes seven tests during the first year, followed by quarterly testing in the second year and beyond.
The recommended testing protocol establishes standardized use across transplant centers and enables easier workflow through the use of standing orders, as well as providing a recurring revenue opportunity for CareDx. In addition to our commercial efforts, we are finalizing the details of our Medicare coverage with data development, or CDD study. This is our Kidney Allograft Outcomes AlloSure Registry, known as K-OR, which is a three-year study enrolling 1,000 patients across 35 transplant centers, with the primary endpoint centered on observing post-transplant patient outcomes and the reduction of the total number of renal biopsies performed. Besides providing a wealth of clinical data, we estimate K-OR will include approximately 10,000 reimbursed AlloSure tests over the next three years, thus representing incremental AlloSure volume as well as another revenue driver going forward. We remain on track to enroll our first K-OR patient in January and will update you as milestones are achieved.
We view registry study as an important component of our genomic information strategy. We launched our AlloMap registry in 2013 and currently have over 1,800 patients enrolled across 36 centers. Through these ongoing studies, CareDx is building a large database of genomic data in transplantation, annotated with clinical information, creating potential partnership opportunities with academic centers, transplant information technology companies, and biopharma. Longer term, we believe data science insights generated from these studies will provide actionable real-world evidence for clinicians and patients. Now turning to AlloMap. AlloMap is currently used in 90% of U.S. heart transplant centers, and about 50% of new heart transplant patients receive AlloMap testing today. We are positioned to replicate the success in the kidney market with AlloSure, which over time would make AlloSure a high-value diagnostic with at least $200 million in annual revenue.
Shifting to AlloMap with the third quarter 2017 test volume increased 7% year-over-year, translating into approximately 3,860 patient results with associated revenue of $8.2 million. Recall that in the third quarter of 2016, CareDx recognized revenue of approximately $900,000 in AlloMap catch-up payments because of billing issues that occurred earlier in 2016. Adjusting for this, AlloMap revenue increased broadly in line with volume growth in the quarter. We have now concluded the in-housing of our billing and reimbursement function and have returned to a steady state where volume and revenue growth should be more or less moving in parallel. Our efforts to increase AlloMap adherence will remain a key component of our growth strategy going forward. Protocol adherence continues to positively impact our AlloMap franchise, with more than 70 transplant centers currently with an AlloMap protocol in place.
Our home phlebotomy service has made it easier for patients to engage with CareDx and adhere to their testing protocols. Going forward, we anticipate these ongoing efforts will drive AlloMap volume growth rates in the mid-single digit range. In addition, last week, CMS announced a change to its date of service policy known as the 14-Day Rule, which means that starting January 1st, 2018, CareDx will be able to bill Medicare directly for AlloMap and AlloSure tests drawn in the hospital on the day of the patient's clinic visit. This change in policy will allow for much easier patient access to both AlloMap and AlloSure and will likely improve patient adherence to transplant center testing protocols. Being able to draw AlloSure and AlloMap alongside other blood work is great news for patients and great news for all parties involved in the workflow.
Consistent with prior communications following PAMA implementation, the AlloMap Medicare reimbursement rate is set to increase by 14% to $3,240 on January 1st, 2018. As a reminder, Medicare patients currently make up approximately 40% of our AlloMap revenue. We anticipate this reimbursement increase combined with the expiration of the Roche royalty on October 1st, 2017, to increase AlloMap gross margins to at least 65%, representing an important contributor to our future profitability. Our AlloRead pre-transplantation business increased 3% in the quarter to $3.9 million, reflecting continued traction with our best-in-class HLA typing products. We estimate that our AlloSeq products are used in approximately 50% of the estimated 1,000 transplant labs worldwide. Our next generation QTYPE product represented a step function improvement in HLA typing, offering a faster turnaround time with high precision compared to current methods.
By the end of the third quarter, we have demoed the solution in 51 centers worldwide since our launch last year. We have received valuable input from these demos and are currently incorporating the feedback into the final development of the product, both for the QTYPE validation on the Roche LightCycler and on the ABI instrument. QTYPE represents an important growth driver for CareDx and should accelerate the company's path to profitability. QTYPE also provides a platform to further establish CareDx as a transplantation-focused company with solutions along the patient journey and to facilitate the use of pre-transplant information for post-transplant patient management. Mike will touch on our outlook for the remainder of 2017 during his comments, but I wanted to take some time to update everyone on our efforts to clean up our balance sheet and our path to profitability.
CareDx recently closed a very successful follow-on offering, raising approximately $18.3 million in net proceeds, strengthening our cash balance and positioning CareDx to capitalize on the significant opportunities in front of the company. We have executed well on our strategy to strengthen our balance sheet and building on the momentum following the recent AlloSure and AlloMap Medicare reimbursement news. We anticipate CareDx to become EBITDA positive in the second half of 2018. Additionally, we have an aspirational goal of achieving $90 million-$100 million in revenue in 2019. AlloSure represents a transformational product launch opportunity for CareDx. Launching AlloSure and building a transplantation-focused genomic information business has created development opportunities for our existing teams and driven our success in attracting exceptional talent to the organization. In addition to strengthening the finance team, we have attracted key individuals for our commercialization effort.
For example, with the additions to our customer care team, we can drive positive patient experience and adherence to the testing regimen. I am excited about the progress we are making here, as improving patient outcome is what it is ultimately all about. With this, we look forward to updating investors in the coming months as we reach key milestones, mainly focused on AlloSure commercialization. I will now pass the call to Mike to discuss the financials. Mike?
Thank you, Peter. I have to say that I'm incredibly pleased with the progress the company has made since I came on board six months ago. In addition to the launch of AlloSure, we've made good progress on our key financial objectives, which were to clean up the balance sheet, set out a path to profitability, and improve our financial reporting and controls. We started the cleanup of the balance sheet at the beginning of the third quarter, when we announced the restructuring of our obligations related to the Allenex acquisition. As Peter mentioned, we recently strengthened our balance sheet with an upsized public offering, which was completed in October. The offering raised $18.3 million in net proceeds and resulted in us having a pro forma cash balance at close of approximately $24 million, which excludes restricted cash of $9.6 million.
This has enabled us to remove the going concern doubt from our financial statements, as we believe our current cash balance will be sufficient for at least the next 12 months. We continue to focus on driving the company towards profitability. This drive resulted in us lowering our cash used in operations to $2.2 million in the third quarter, a further improvement compared to the second quarter's $3.2 million rate. As Peter mentioned, given the recent AlloSure launch and AlloMap reimbursement news, we now have a path to reaching EBITDA profitability in the second half of 2018. We're also making steady progress in improving the finance and accounting function.
In addition to bringing on new hires in the last quarter, we're working hard to remediate the material weaknesses that the company identified during 2016, I hope to be able to provide further positive updates regarding this on future earnings calls. Turning to the P&L, third quarter 2017 AlloMap revenue decreased 5% year-over-year to $8.2 million. As Peter referenced, adjusting for the $900,000 catch-up payments that we recognized in the third quarter of 2016, AlloMap revenue increased 6% in the third quarter 2017 from the prior year, which is in line with the 7% increase in test volume in the quarter. Our Allenex business increased 3% year-over-year to $3.9 million. As such, total revenue in the third quarter of 2017 was $12.2 million, representing a 2% decrease compared to the prior year's $12.5 million.
Adjusting for the $900,000 in the third quarter 2016 catch-up payments, total revenue increased 5% from the prior year quarter. For the third quarter 2017, our non-GAAP net loss was $3.3 million, compared to a non-GAAP net loss of $2.9 million in the same period of 2016. Turning to guidance, we are tightening our revenue expectations and now anticipate full year 2017 revenue to be in the range of $47 million-$49 million. As a reminder, our revenue guidance only includes AlloMap and AlloSure revenue and doesn't include any contribution from AlloSure. With that, I'll open up the call for questions.
Ladies and gentlemen, if you would like to join the queue for questions, please do so by pressing *1 on your telephone keypad. If you're using a speakerphone, just make sure your mute function is turned on to allow us to receive your signal. That is *1 for any questions at this time. First from Piper Jaffray, we have Bill Quirk.
hi. Thanks. Good afternoon.
Good afternoon, Bill. How are you doing?
Very well, thank you. Very well. First question. Sorry, I must have missed it, did you say $90 million-$100 million in 2019? Did I catch that correctly?
Yes, Bill, I think that we said we have an aspirational target of revenue of $90 million-$100 million in 2019.
Okay. Very good. Thank you. Just a couple of questions, Peter. First off, the 14 transplant centers that have ordered AlloSure, can you speak to whether or not multiple physicians within those have ordered AlloSure? Or is this just perhaps the initial champion within those organizations trialing out the product?
Thank you very much for this excellent question. I think we're early in the launch. We're right tracking towards where we wanted to be with AlloSure. I think 14 centers is slightly ahead of where we wanted to be, we feel good. You can probably appreciate that some centers we have multiple clinicians ordering, and in many centers, we actually have the key opinion leader ordering AlloSure. Yes, I think most centers would have started using the test with our key opinion leaders using the test.
Excellent. Thank you. Just a couple of housekeeping questions, if I may. Mike, with some of the new accounting standards coming up, presumably between the publicly issued price point for AlloMap and AlloSure, and albeit a short history of collections on AlloSure, we shouldn't have any issues with respect to accrual versus cash accounting and some of the changes that are coming into place for January 2018, correct?
Correct. The changes should make it a lot more linear with respect to what we recognize being in line with volume. On AlloMap, we've got a very good history of payments, so that should be relatively straightforward. On AlloSure, because the payments will be by Medicare, again, that should make that relatively straightforward for us. I'm not foreseeing any issues with the changes.
Okay, very good. Just last housekeeping question from me. I think I know the answer to this, but Peter or Mike, there obviously continues to be some scuttlebutt around potential adjustments to PAMA pricing. While certainly some prices for some routine tests appear to be calculated incorrectly, I would imagine that you don't anticipate any changes with respect to the AlloMap numbers that have come out from CMS in the preliminary document.
No, our team has been very thoughtful in providing the analysis and the information that was requested from CMS for the PAMA pricing. We see actually the pricing that came out completely in line with what we had submitted. Bar any additional information which we are not aware of, we think that the PAMA implementation will be on the 3,240 that we've been communicating.
Excellent. Okay, thank you very much. Nice quarter, certainly best of luck with the new AlloSure launch.
Thank you very much, Bill. No, AlloSure is truly a transformational opportunity for us.
Moving on from Craig-Hallum, we have Kevin Ellich.
Good afternoon. Thanks for taking my questions. Peter, just wanted to go back to the AlloSure launch. You have 14 centers, a little bit better than we expected as well. Where do you expect to end the year at in terms of the number of transplant centers, and what's the initial reception been like? You guys said you were down in New Orleans at ASN. I guess, what takeaways did you guys come away with?
I actually had the opportunity to go down there and over lunch, invite a couple of opinion leaders, and by the evening, we had a significant group of the who is who on kidney transplantation sitting around the room and sharing our story on AlloSure. This is a transformational product for the community that has been waiting for a new tool to improve patient surveillance. I think we're coming at a time where everybody's looking at these new technologies and what do they mean for transplantation is really what CareDx brings. In terms of the 14 centers, I think we are right where we want to be, and a bit of the outlook I think we had shared previously in our last financing where we said this will be largely driven by 35 centers adopting KOAR next year.
If we were to end of next year with 40 centers having adopted AlloSure, I think that would be a great success. Where we going to be ending up this year, I can tell you it's more than 14, but I think anything else would be a bit too early for me to share. We are four weeks in, and we are very excited about the progress that we are making.
Great. I think in your prepared remarks, you said that you've actually started to receive reimbursement from Medicare for some of the AlloSure tests ordered. Is that correct?
No, I think the team has worked extremely well and we were in close contact with Noridian, and it was great to report that we have the first AlloSures reimbursed. Mike, did you want to add?
No, it's just that we received the first payment last week, since then, we're getting paid for the tests that we've billed to Noridian.
Okay. Sounds like that payment came in in a timely manner. That's great.
Yeah.
I guess, wanted to go back to the 14-Day Rule comment, Peter, and the change that Medicare made to lab data service. Can you provide a little bit more color as to what that means? I think a lot of people don't really understand that there's under arrangements that go through the hospitals, but why will that help with adoption and compliance, and what does it mean for both AlloMap and AlloSure?
Yeah. The 14-Day Rule basically says that now CareDx can bill Medicare directly, even on tests that are drawn from hospitals during the day of other services being provided to the patient. In the past, what we have established is in the vicinity or around the hospitals draw sites that were drawing the AlloMap blood draw alongside days that patients were visiting the center, but in a different location. This is now not necessary anymore, and patients can actually be drawn for an AlloMap and an AlloSure alongside the regular blood work that they're getting at the center. Imagine now for our kidney transplant patients, whenever they are being drawn a serum creatinine, we have the opportunity to also receive an AlloSure blood draw. Since they're in many centers, serum creatinines are performed 25 times in the first year post-transplant.
There are multiple opportunities where an AlloSure can be drawn alongside all the other blood work. This is a very substantial change to workflow. With AlloMap, we successfully have been mitigating that with other structures, but now it's become so much easier, and it's great for patients that they have direct access to blood draws at the hospital, which makes it so much more convenient.
Sure. I guess, do you know or is there a way to think about how much of a factor it was with AlloMap adoption when this was an issue before? Were doctors not ordering AlloMap or not adopting it because they would have to send patients off to a different draw station?
Anecdotally, we know that it has been an issue, but with very few exceptions. AlloMap is a very high-value test, the inconvenience factor of having to go to a different draw site might have been less of an issue. It has been an issue, and of course, if you have to drive two miles in snow and ice up in the northeast of the U.S., that had been anecdotally an issue. Now it's so much easier. I don't think it's extremely hard for us to quantify the volume impact, but for sure, it's a huge patient convenience factor.
Great. That's helpful. My last question is, I guess thinking about, I know we have the domestic launch of AlloSure to focus on, could you maybe talk about the pipeline in terms of thinking about the next test you guys want to work on with cell-free DNA, and also maybe even expanding AlloSure into the international markets?
Yeah, I don't think we have detailed the strategy here yet, clearly cell-free DNA is a 10-organ opportunity. Cell-free DNA can be tested in other organ systems. We have had some academic efforts ongoing in other transplant systems. Really, rolling out cell-free DNA for other organs will be a focus for the company. AlloSure ex-U.S. will be a significant opportunity because there are more kidney transplants performed outside of the U.S. than in the U.S., we haven't detailed that strategy. I think that probably will have to do with kitting off the product one day and then providing it through our Allenex channels. I think we haven't talked about and detailed that strategy yet. We right now, we're laser sharp focused on the AlloSure launch. The kidney transplant opportunity is the biggest opportunity, and that's what we are focusing on.
Got you. Thanks so much.
Moving on, we have Nicholas Jansen with Raymond James.
Hey, guys. Congrats on another good quarter. My first question will just be on the targeted profitability discussion that you had. Just wanted to kind of get a sense of how quickly or what costs that need to be added to the model to deliver on the AlloSure ramp. If you do hit that aspirational $90 million-$100 million revenue target in 2019, what's the margin profile on EBITDA look like under those scenarios?
You're moving us way into next year and then beyond, Nick. Thank you so much. Great question. Obviously, this is all centered around AlloSure launch and how quickly AlloSure can ramp. I think we're pleased with the progress that we are making on AlloSure, I think then the next stage will be what's the volume looking like for AlloSure. I'll turn that a bit to Mike. Mike, do you have any thoughts?
Yeah, Nick, I think one of the questions that you asked was how much additional costs we need to add, I think we've been consistently saying that we've got the existing infrastructure for AlloSure, both in the lab and also on the commercial side. Our incremental costs for AlloSure are going to be relatively minimal. Therefore, we've been saying that if you're modeling gross margins initially on AlloSure of 60%, then that gross profit should be dropping down to the bottom line. I think you asked about the EBITDA margin in 2019 if we get to $100 million revenue. That would be around the 20% mark.
That's very helpful. Then just in terms of the timing of the KOAR registry trial, how quickly do we think we can start seeing some centers ordering under that and kind of what's the expectation of that in terms of the timeline, in terms of how many tests in 2018 associated with that trial?
Nick, thank you. Great question. We are online to have a first patient first visit in January, next year in the first quarter. The 35 centers, we have an aspirational goal of including all 35 centers throughout the year 2018, then the recruitment of these patients happening within a six months timeframe. To build that model out is in December, you would have the 35th center recruiting the first patient, then another six months recruiting these patients in the last center. Does that make sense?
Absolutely. Then my last question, just in on the Allenex side of the house, that piece of the business actually kind of beat our expectations a little bit in the quarter. Just wanted to kind of get your broader thoughts on where that fits into the strategic organization of CareDx going forward and the timeline on QType. Thanks.
We are super excited about building a pre/post-transplant patient journey business because the pre-transplantation information is sometimes lost in the post-transplantation management. I think we are the company well positioned in order to change that. I think short term, we are really focused on launching QType. This is a transformation opportunity for the pre-transplant business because it provides this rapid turnaround typing. I think we've been tripping up on a couple of validation efforts, especially on the ABI machine, the team seems to have that under control now, we're looking forward to roll that solution out. I think 51 demos is a very strong number, so we feel good about the number of demonstrations that we had. I think QType is really, for next year, a growth driver for the business, which should revitalize our pre-transplantation business.
Great. Just one quick one from Mike in terms of what's the pro forma cash and share count as we think about exiting 2017? Thanks.
The pro forma cash as you're exiting 2017 will be around $18 million-$20 million. From a share count perspective, after the offering, we had 27.5 million shares outstanding. That's where we are now.
Congrats, guys. I'll hop back in queue.
All right. We'll move back to Bill Quirk with follow-up with Piper Jaffray.
Great, thanks. Sorry, one quick follow-up question. Peter, going back to the 14 centers that have ordered AlloSure, can you explain or elaborate on that? How many of those were clinical trial sites versus non-clinical trial sites, people that have heard about AlloSure and clearly excited and wanted to be some of the first movers?
Actually, surprisingly, we have a mixed bag of these 14 centers. Not all of them have been DART centers. As we roll through the launch, we have found a number of centers that were very excited to be in the first wave. As I mentioned, I think in a previous call, I think we have focused on 70 centers in the initial launch period or pre-launch period, and have been able to convert 14 of those into testing centers. Of the 70 centers, obviously all DART centers had been part of the focus, but we moved beyond DART in order to have the 14 centers tested.
Presumably, all the DART centers are, if they haven't ordered already, they are presumably going to be here in the extended first wave, if you will?
Yeah, no, I think I would say that those centers that we have built close relationships with are destined to be part of AlloSure. What is probably true is in some centers we had more research-oriented clinicians joining the DART trial, and now we are moving on to the clinicians that are really doing patient management on a daily basis, that see patients in the clinic. We have now added centers on the core focus that see many, many patients, rather than being in the initial phase of DART, where we focused on key opinion leaders with a big scientific reputation. We're now shifting the team focus to which are the centers that are high-volume transplant centers.
Very good. Thank you.
All right, and ladies and gentlemen, that does conclude our question and answer session. I'd like to turn the floor back to Peter Ma for any additional or closing remarks.
Thank you all for joining the call. We look forward to updating everyone as we continue to commercialize AlloSure, grow our core transplantation business, and progress towards profitability. Thanks again.
Ladies and gentlemen, that does conclude today's conference. We appreciate your participation. You may now disconnect.