All right. All right. Good afternoon, everyone. Thank you for being here. I'm David Westenberg, the life science tools and diagnostics analyst here at Piper. Joining me is CareDx. I am happy to present CEO John Hanna and the COO, Keith Kennedy. Thank you both for being here. We're gonna jump right into Q and A. So let's start off with a Q3 recap. You kicked off the call by saying your strategy is working. Walk us through what that means and what you'd highlight on the core as proof points of the strategy working.
Yeah. Absolutely. And thanks again, David, so much for having us here. We really appreciate being a part of the conference this week. We had a really great third quarter, as demonstrated by growth across all of our businesses and in all organ segments. Testing Services was up nearly 19% year over year. But also, our Patient and Digital Services grew by 30%, and Lab Products was up 22%. And our strategy of solution selling and supporting our customers from matching deceased donors to organ recipients through to digital and patient solutions that help transplant centers operate more efficiently, and then post-transplant monitoring for rejection with our testing is all growing in concert. And so we're really pleased with the execution of our commercial team, and that we're offering the right set of services to these customers, to help them function more efficiently as transplant programs.
Testing services revenue is growing at a high-teens rate all year. Can you walk us through the drivers of that growth and give us a sense on how to think about growth next year? I don't believe you've given 2026 guidance, so, I mean, maybe you can give that qualitatively.
Yeah. Absolutely. So, for 2025, a lot of our growth was focused on launching in new indications to make sure we're servicing the entire market, and publishing data and evidence to support our products, and so we talked earlier in the year about the launch of AlloSure Heart in pediatric patients where we validated the test for patients all the way down to age zero that have a heart transplant. We also validated AlloSure in patients that had a simultaneous pancreas and kidney transplant, which is an increasing procedure for patients that are type two insulin diabetics and need a kidney transplant, so they replace both the pancreas and the kidney for those patients.
In the second half of the year, we've launched products like HistoMap, which we launched recently, at the Oshii Conference, and then AlloSure Plus, which is an enhancement on AlloSure Kidney where we have an AI-derived classifier that allows clinicians to understand the trajectory of these patients looking at their AlloSure score plus other variables like proteinuria, serum creatinine, age, etc., to really give them greater insight into what's gonna happen with those patients going forward. We've had a very strong year for evidence generation. The AlloSure 2 manuscript was published showing that AlloSure Heart differentiates patients that have antibody-mediated rejection.
And just last week, we announced the publication of AlloSure 3, which shows that patients that have a dual positive HeartCare result, their risk of graft dysfunction and for CV-related death was significantly increased compared to patients that had either an AlloSure positive result or AlloMap positive result alone or a dual negative. And so that evidence generation has enabled us to continue to drive adoption of our products in the market and increase volume throughout the year. We think we're set up really well for 2026. We started 2025 by increasing our field force and making sure we had the right commercial infrastructure. And then from a revenue perspective, we've done exceptionally well in operational excellence, which Keith has led, which entails both collecting cash on the claims we're submitting from an RCM perspective, but then also implementing Epic Aura.
We just went live with our first center, Boston Children's, around the time of our call. And then this week, we went live with our second Epic Aura site at AdventHealth down in Orlando. And we're getting great feedback from our customers on that implementation and the ease of use in ordering our products and getting the results back. And so we think that sets us up really nicely for 2026, both in volume growth and ASP appreciation on the RCM side.
Gotcha. Revenue man-management, sorry. Revenue cycle management is an important initiative, and you've been executing on it. In Q3, you achieved record cash collections and drove down DSO significantly. How much work is gonna be left to be done, and will you continue to execute in 2026?
Yeah. We're really proud of the team running revenue cycle management at CareDx, and we've put a lot of time and workflow and engineering around automation, and as all investors in diagnostics know, we're insurance companies or our payers, and we're billing insurance companies, not providers, that you have to have a right to win, and you have to follow workflows in order to be successful at that business, so John and I have been doing this for quite a while, and John has a background in market access and insurance business, so he's been a great thought partner along the way to really invest in this team, and as you saw, you know, when we rebuilt the team starting in the first quarter, by the third quarter, we had over 120% of our revenue was in cash, we're collecting more cash than our revenue.
That really reflects the success we've had in revenue cycle management, and we think by the middle of 2026, sort of see stability. We talk a lot with the investors. They wanna know price times quantity gets me to revenue. We look at $1,400 of tests at the floor. This is about a 10% increase in the year or so that I've been here. You know, we internally talk about, you know, the team targeting getting to $1,000 blended revenue per test. That's what we're trying to do. So I think in the Q4 call, we'll come out and talk to investors next year about the pacing of this relative to our original guide of 3% ASP, so it's super exciting for us.
Yeah. That's a great job. So your first Epic Aura in EMR integration went live this quarter. How did the implementation go? What is the target number of Epic Aura integrations for 2026? How would you expect that to impact 2026 and beyond?
That's a great question. A lot of people who've had experience investing in this space realize the value that Epic brings by the expansive coverage they have. They have 270 million patients inside their EMR, and they do a really good job of building a network. So you sign an agreement that allows you all the participants in the network at the heart of what they call the rules of the road. So we're very excited about that and what that's able to do in terms of revenue cycle management to get to the provider. You'll hear us, Natera, Exact, Guardant, others in the industry talk about, we all believe it should be easy to access your test and easy to order your test. Epic is a central player in that role. So we have about 150 discussions ongoing. We've gone live with two.
We'll probably go live with three by the end, three more by the end of the year, so that'd be five. We'll be at about 5% of our volume, and we expect to build this up to about 10 implementations per quarter, and as John mentioned before, in Boston Children's, we saw a 20% improvement in the turnaround time and a 60% reduction in what we call holds. That means when the physician orders a test, subsequently the team, the transplant coordinators, there's a lot of paperwork that needs to happen on the collection of that test. Holds occur because it's missed, so by automating a lot of these things, what you're doing is you're missing the amount of opportunities where you'd be missing information cause a disruption in the turnaround times, so all of us wanna reduce that. We're super excited about that.
The whole way will be 5% at the end of the year, to get to the point of your question, and 50% by the end of next year.
Gotcha. Wow. Great. That's great. So you repurchased 9% of the shares outstanding this year.
9%.
9%. Yep. What is the capital allocation strategy for 2026? How do you balance share purchases versus investments in the overall business versus even potential M&A, tuck-in M&A?
We generated $35 million in cash last quarter. And even though we bought back $75 million of our stock, you know, we were in a very favorable position of being generating cash. And so we look at inorganic opportunities as well as organic opportunities. And I think investors in diagnostics appreciate a company that's disciplined in how they spend and scale the business. So we are looking at improving, say, OPEX as a percentage of revenue. So last year, you saw that go from our OPEX was 70% of revenue in the prior year, and it went down to 63%. So that's a good thing. We also look at our gross profit dollars and the generation of those gross profit dollars and the percentage of those dollars that drop to the investors.
So we'd like to target and talk internally with our employees around if we're running a well-run shop, 50% of all gross profit dollars, incremental dollars, should drop to the investor. So that's how, that's how we think about that. And then on the long-range plan, we're thinking about getting a 20% EBITDA margin.
Mm-hmm.
So that's a goal of ours. So we are going to look at organic, inorganic, and capital, you know, reducing share count versus doing, say, a dividend. I think our preference right now is our stock is significantly undervalued, and we think there's long-term appreciation for buying that back. So one of the things John and I did was we took the share count outstanding when John started April 15th of 2024, and we're looking at, hey, we want to reduce that share count below what he's doing, and then we wanna be diligent about our burn rate. So when you look at our proxy statement, you'll see John spends a lot of time talking about our burn rate and how we're diligently not diluting shareholders, you know, or enriching employees at the expense of shareholders. So that's how, that's how we think about it.
Got it. In heart, we've seen several publications come out of the AlloSure registry this year. Last week, I believe you announced the publication of AlloSure 3. Can you walk us through the three AlloSure studies and explain how the evidence can influence adoption of HeartCare?
Absolutely. AlloSure is a landmark study, where these three analyses that have come out to date have really challenged the paradigm that biopsy is the gold standard for assessing allograft injury. And we say that because each publication has built on the other in demonstrating this. The first AlloSure publication showed that, as clinicians utilize HeartCare throughout the course of the study, they utilize biopsy less frequently when it was not informed by HeartCare. The second publication showed that, AlloSure Heart in particular is able to detect AMR or antibody-mediated rejection. And as the severity of AMR increased, the AlloSure test result got higher, so it was sensitive to severity. And then the third study from last week showed that HeartCare is prognostic for outcome.
And so this, these data have allowed us to differentiate our solution set in the market from competitors because we have today the only combined GMP and cell-free DNA product to offer to customers and the only solution set that is demonstrated to be prognostic for outcome, which leads to differentiated treatment of patients. And so we're really excited about what AlloSure has generated, and we believe there are more publications to come from this data set.
Got it. Can you talk about the data, differentiating you competitively?
Yeah. Absolutely. I think that, you know, when these data started to be presented showing that differentiation in prognostic outcome is really when clinicians started to see, hey, if I'm not offering this solution to my patients, then I'm not managing them optimally 'cause I'm not gonna know who is at risk for a worse outcome. If I have cell-free DNA alone, I'm not able to distinguish what's gonna happen with my patient. Do they really need a biopsy? Do they need to go on steroidal treatment? What is gonna be the outcome here? And so we've doubled down on that from a competitive messaging perspective, and we think it's really resonating in the marketplace, and we're continuing to expand our lead in heart transplant.
Got it. We can switch to kidney. The first core paper was published earlier this year. What's the significance of that data, and can you talk about the reception from clinicians and payers?
Yeah. There's been strong reception to the KORA registry. You know, I think first and foremost, this study demonstrated that when you biopsy a patient and that biopsy is informed by an elevated AlloSure Kidney result, there was a six-fold increase in the rate of rejection that was detected at biopsy. So clearly, the test is an early signal of rejection and allows clinicians to proceed forward with an invasive procedure that they otherwise don't wanna do on these patients because kidneys are very, those are smaller organs, right? Inflammation drives that rejection process, so you don't wanna biopsy the patient unnecessarily. In addition, that data showed that you can detect rejection and, in particular, AMR up to four months ahead of finding those clinical signs and symptoms or the finding of rejection on pathology.
This gets to the underlying natural history of disease, which is really important in determining the frequency with which you should test patients. So we have, currently comments in on a draft LCD related to our coverage that suggested testing patients only biannually in year two and beyond. These data suggest that if you don't test patients as frequently as quarterly, you're gonna miss a lot of rejection. So I think that data was really important, to ensure that it got in front of the evidence review group and that they consider it in making that final determination.
Got it. No. That's, that's great. What further clinical studies or data presentation are planned for next year, to expand the evidence base for transplant testing in Allo, in the three major organs of heart, kidney, and lung?
Yeah. Absolutely, so the primary one is additional publications on AlloSure and HeartCare, but then beyond that, in lung, we have wrapped up the enrollment and are doing follow-up in our Alamo trial, so this is 500 patients who have undergone testing for lung transplantation and are being followed and monitored as you utilize AlloSure Lung to manage those patients. And we expect the first manuscript out of that study will come out in 2026. In addition, beyond solid organ transplant, our testing in stem cell transplantation for patients with AML and MDS that have undergone an allogeneic stem cell transplant, our Acrobat trial completed last patient, last visit this quarter, and so we'll be reading out that full data set in the first quarter of 2026 and looking forward to seeing that in manuscript, in calendar year 2026, so it's very exciting ahead of launching into that market.
All right. I wanna talk about the CareDx solution selling strategy. What does that mean, and how does that set you apart from other testing providers? I mean, don't they all sell a solution?
Yes and no, you know. Having been in this market for almost 20 years now in molecular diagnostics and run sales teams and marketing teams, you know, if you go and talk to a sales rep, they'll say, like, there's only so many times I can walk into a clinician office and rep the same product in the publication.
Mm-hmm.
Right? Now, obviously, we're building more evidence, but the difference here and, and really how CareDx has innovated this go-to-market strategy is offering a solution set of software products, staff augmentation services, pharmacy services, IVD kits for matching organs to recipients. We have organ tracking software. We have remote patient monitoring software that's particularly utilized in lung transplantation where we partnered with Zephyr to do respiratory monitoring of these patients. And so these solutions we're offering allow us to walk into a clinical practice, a transplant center, and say, "Tell us what your goals are for 2026, and how can we help you achieve what your goals for your transplant center are versus walking in and just trying to sell a test?
Mm-hmm.
Right? And I think that's what differentiates us in this marketplace and why we are known as the transplant company.
Mm-hmm.
And why we focused on repositioning and branding the company as being together in transplant.
Yep.
Because we're here to support the clinicians and the patients in the space in any way that we can.
Very helpful. So the draft LCD proposal came out in July, and I mean, should we expect it to be finalized in early 2026? Can you walk us through the two scenarios that you outlined in the Q2 call and probability weight the two of them?
Yeah. Absolutely. So the draft LCD came out in July 15th, and first and foremost, we were very pleased to see that the Medicare contractor had taken into account our feedback on prior LCDs and affirmed coverage for surveillance testing in this policy, not tied to a biopsy per se. And I think several folks overlooked that when this policy came out, really the significance of that language and that determination, and so we're very pleased with that. Now, there are some limitations in the policy. Particularly, it creates bundled payments and creates a scenario where in kidney, the testing is four times in the first year, and then in all other organs, it's two times in every subsequent year, so year two and beyond for surveillance testing.
In that policy, we laid out two scenarios on our call saying that if the policy is finalized as it's written, we think it'll create about a $15 million headwind to revenue in on a full-year basis if those restrictions or those caps are held as they are today. And I've said I think we're gonna have a greater likelihood of making progress moving the cap from two in year two and beyond up to four because of some of the data I described earlier saying you should test these patients at least quarterly to make sure you pick up all of the rejection. Then I think we'll make progress in year one moving from four up to seven because it's a bigger lift from an evidence, evidence perspective, and there really is no published trial comparatively looking at seven time points versus four in the marketplace.
So I give the probability of scenario one to be the most likely scenario to see the LCD published similar to the way it's drafted today, but with some minor modifications to some of the limits in the policy, to ensure that the testing is done at a frequency that's reasonable and necessary for Medicare beneficiaries. Scenario two, we laid out, to answer some questions that had come around AlloMap testing and HeartCare and what would be the outcome if HeartCare was not paid for as it is today as the combined AlloMap and AlloSure test. I assign a lower probability to that scenario number two because I think the evidence around HeartCare is very strong, including the AlloSure publication that came out last week demonstrating the prognostic value of a dual positive HeartCare result.
And so we continue to provide that evidence to the Medicare contractor to review. They're gonna go through their process of evaluating all the comments and feedback that they've received, and then we anticipate sometime in the first half of 2026 that this policy will be finalized and we'll move on from this and continue to promote our products in the marketplace.
Gotcha. I wanted to turn to the pipeline. You announced the interim data on the pipeline product, AlloHome, back in February. How's the trial going? What do you expect the results? When do you expect to see it come to market? And I just want maybe to add, you know, how does this fit in with the overall solution selling strategy?
Yeah. Absolutely. You know, I think it was a bit misunderstood when we started talking about AlloHome that patients that have a blood-based malignancy that undergo a stem cell transplant get treated at the same centers that do solid organ transplant. So it's the same customer that we work with today. It's just rather than being in the kidney or heart or lung department, they're in the bone marrow transplant department. And so we view this as a natural adjacency to our current offerings to move into this hematology-oncology space where patients are getting stem cell transplantation, and AlloHome is monitoring for recurrence of that malignancy, looking at patients that really need an intensive monitoring regimen because you can have a recurrence, and then the mortality rate is very rapid after that recurrence occurs. And so having that feed to knowledge is very important for clinicians.
Today, the only tool they have is bone marrow biopsy and flow cytometry to look at recurrence in these patients. So we're very excited about the AlloHome product. Like I said earlier, we completed last patient visit from the trial, and the full trial will be read out in the first quarter, and we anticipate launching that commercially in the back half of 2026 or early 2027.
Gotcha. When will you begin commercialization of HistoMap Kidney in 2026? I'll just ask that.
Yeah. Yeah.
You only have one minute.
Yeah. So just to wrap up on HistoMap, like, we're really excited about HistoMap. This allows us to kind of bookend our offering in transplantation, which is a gene expression test for patients that have undergone a tissue biopsy and allows the clinician to understand what the subtype of rejection is molecularly in that sample versus just a pathologist looking at it under the microscope because sometimes it's unclear. And so this product, I think, is a great offering for us. We're gonna launch in early 2026 in a registry study and a study with clinicians, and then later in the year, we'll begin billing commercially for the product. And there's been a lot of interest in this over the past couple of years.
The company just has had other priorities and hasn't launched this, and now we're ready to get going in a material way by promoting it in the marketplace.
Gotcha. That's all the time we have for today, but I do appreciate you coming up.
Thanks so much for having us.
Thank you.
Appreciate it.