Hi, yeah, this is Paul Knight, the life science analyst at KeyBank. It's a pleasure to have today the team from Castle Biosciences, Derek Maetzold, the CEO, and Frank Stokes, Chief Financial Officer, and Camilla Zuckero, the Head of Investor Relations as well. The format will be a slide presentation and then some Q&A. Also, you can contact through this format. You can shoot questions, raise your hand, I'll see the question on the screen. I can communicate that to management or just email me, I'm at paul.r.knight@key.com. So with that, thank you for taking the time here, Derek, Frank, and Camilla, and I'll let you begin.
Absolutely, Paul. I just want to start out by saying thank you personally and thank you, KeyBank, for organizing this conference, inviting Castle to be part of this day on March 19th, equinox night, I think. I'll begin here. So Castle Biosciences is a molecular diagnostic company focusing on three key areas from a disease state diagnostic perspective, which we'll get into, but our end goal as a business is to really look into empowering people. That's our patients, that's our clinicians, so that they can make more informed care decisions. I would encourage you to review our forward-looking statements on slide 2 as well as our GAAP-adjusted revenue on slide 3 here and also on our website prior to any other trading choices. You can go to slide number 4, Camilla. So click one more.
We started Castle out a number of years ago to really focus on improving health through innovative tests that are used to guide patient care decisions. By doing so, we hope to realize our vision, which is that we'll end up having patients be managed more efficiently, more accurately, and improving long-term outcomes, either net health outcomes or long-term survival. I think we've succeeded so far in our short lifespan of getting there. Slide 5. One way to think about the approach we take to our business is encapsulated maybe in three kind of buckets of areas. I think the first thing that we try and do is to really focus on identifying clinical questions within the disease states we want to play in that have a high unmet clinical need and make a significant healthcare difference in patients or clinicians or even payers.
We also want to focus on being more innovative versus being more laggard-oriented by developing assets or acquiring assets or tests that actually are best in class or first in class so that we can be in a position of helping to serve our patients and our clinicians the best possible. We then look to build the most robust clinical evidence as possible, which is usually serial-based performance studies, serial-based outcome studies, serial-based clinical use studies, so we can demonstrate not only to clinicians but also to payers the value that our tests bring to patient care today. That, we believe, is an ongoing investment opportunity and need to go and generate more publications over the course of the lifecycle of our products.
And if we do those things correctly, finding best-in-class tests that meet a high unmet clinical need, and developing robust clinical evidence, then we believe that that will help us improve our penetration in both adoption by clinicians, so volume penetration, as well as hopefully payer reimbursement strategies and maintaining healthy value-based ASP number sets. Next slide. So as of today, we believe that we have commercialized a series of tests that address roughly a $8 billion U.S. total addressable, which I would also say total serviceable marketplace today, with our commercially available assets. You can bucket them in three broad areas. One of them is in dermatology, where we have three test offerings of our proprietary testing services. The most mature product is our DecisionDx-Melanoma test. We believe that that test offers about a $540 million U.S. TAM opportunity.
This is a test which was developed to help clinicians and patients make a decision around, "Do I undergo a sentinel lymph node biopsy surgical procedure?" So we predict sentinel lymph node biopsy or SLNB positivity risk, as well as the risk of subsequent metastatic events. Both those are important elements in early care decision-making as relates to what a patient undergoes following diagnosis of melanoma. That marketplace, we think, comprises in the US around 130,000 patients which are diagnosed as either having stage I, II, which are localized disease, or stage III, which is regional disease only. Our DecisionDx-SCC test has a similar kind of value to patients in the squamous cell carcinoma world as melanoma, in that it helps to predict the risk of metastasis of patients who have what we would call high-risk features. What do I mean by that?
We believe there are anywhere from 1.5-2 million patients diagnosed each year with squamous cell carcinoma of the skin. Thankfully, most patients are diagnosed with low-risk disease, meaning they've got a very, very small squamous cell carcinoma tumor. It's easily cured by just removing that tumor using a variety of common techniques in the dermatologic office. We don't need to test those patients. Those patients have such a small likelihood of progressing that that testing is inappropriate. Rather, we developed our test to focus predominantly on roughly a 200,000 patient population who are diagnosed with having one or more high-risk features, either clinically or pathologically, which put them into a higher risk category of progressing.
And that's important because under all guidelines, including NCCN guidelines today, the treatment plan decisions around those patients include, "Do we go ahead and consider offering or performing adjuvant radiation therapy treatment? Do we go ahead and consider offering or performing sentinel node biopsy procedures or other nodal imaging processes to go ahead and see if we missed a regional nodal metastasis event already?" And our test is used in those patient populations to help guide decisions like that. Despite being high-risk by clinical or pathologic features, does my patient today look like they'll benefit from radiation therapy or not? That's an important question to ask. And our test can help answer that question on top of what the doctor already sees with the clinical or pathologic features available in that patient. We think that's, again, a roughly 200,000 patient population with roughly an $820 million U.S. TAM opportunity.
And then finally, to round out our dermatological franchise, we have a test called MyPath Melanoma, which is a test which is used in a patient population who has had a biopsy taken to rule out or rule in melanoma. So it's usually a pigmented lesion of some sort which a patient is concerned about or a clinician is concerned about and is concerned enough where they go ahead and biopsy that pigmented lesion to say, "Hey, Mr. or Mrs.
Dermatopathologist, please tell me if we're facing melanoma here, in which case we'll do certain things, or if we're not, in which case we might just go ahead and leave it or go ahead and excise it with really small margins." Our test is used in the patient population, which we think is around 300,000 people today, who have a biopsy taken, and the dermatologist and dermatopathologist are kind of scratching their head. I can't really tell if this is truly melanoma or truly just a benign lesion. We're helping to go ahead and help clarify that differential diagnosis. We made the decision a couple of years ago to move into the gastroenterology marketplace, and we acquired a company called Cernostics, which had developed and validated a test called TissueCypher for Barrett's esophagus disease. What is this disease state? These are patients who are long-time GERD sufferers.
Maybe they're chomping a lot of Tums, a lot of Pepcid therapy at home, and still have a tremendous amount of acid reflux. They end up working their way eventually into a gastroenterologist who says, "Your symptom presentation is strong enough that I think we should put you under general anesthesia, perform an upper endoscopy, an upper GI procedure, look at what we see in your esophageal area, and if we see any kind of a lesion or abnormality, we'll do a pinch biopsy to have our pathologist confirm if we're looking at Barrett's esophagus or hopefully not esophageal adenocarcinoma tumor." Where our test comes into play is that the majority of patients who are diagnosed with Barrett's esophagus have what's called nondysplastic dysplasia. And those patients, under guidelines, are typically followed. That is, they're rescoped, undergo a repeat endoscopy procedure every three to five years under guidelines.
The reality of it, I think, when we pull third-party data, it's about every year, 1.5 years, 1.8 years of rescoping patients, seeing if that nondysplastic disease has progressed. If you happen to have low-grade dysplasia or high-grade dysplasia but not cancer yet, then those patients usually are intervened to go ahead and try and wipe out that Barrett's esophagus lesion so it doesn't progress. And most commonly today, those patients undergo radiofrequency ablation, which is a tool that goes down multiple times in the esophagus and essentially looks to kill off that Barrett's lesion so it cannot progress to cancer. So in the Barrett's esophagus patient population, we have over 90% who have nondysplastic disease who we watch and wait because their population-based chance of progressing is low enough where we think that's the population answer.
In people who have low-grade or high-grade dysplasia, we actually intervene with the majority of those to stop the progression. Our test comes in because if you take the TissueCypher test in those nondysplastic patients and it comes back high-risk by the TissueCypher test result, your chance of progressing to cancer or high-grade dysplasia is actually greater than those diagnosed with low-grade dysplasia. Meaning, if you ignore the pathology signals, you would likely want to ablate those people who we call high-risk TissueCypher test results, and maybe even the immediate patients. We think that marketplace overall of nondysplastic patients is around 415,000 patients per year from an eligible or serviceable standpoint, bringing that to roughly a $1 billion TAM based upon fully reimbursed assumptions for ASP rates. And finally, our most recent acquisition was based upon a mental health therapy selection test called IDgenetix.
The indications for this really are looking at major depressive disorder, anxiety, and several other mental health conditions. We have completed a randomized controlled trial showing that the use of our test, which is a combination of drug gene, drug, drug, and lifestyle factors, actually results in greater remission and greater relapse control in people with major depressive disorder and anxiety than if you just use Doctor's Choice of drug therapy selection. So again, very nice opportunity to improve getting patients with mental health disorders onto a drug that will react best within their system of their drug gene interaction potential, drug-drug potential, and other lifestyle factors. And represents, we think, roughly a $5 billion US TAM opportunity. Next slide. Just highlighting a little bit of what I just went through here, but in a little more detail from an evidence development or building evidence perspective.
DecisionDx-Melanoma, exciting information in the last 12 months. We had two publications, one from our collaboration with the National Cancer Institute SEER program and one that was an independent publication from three academic centers in the U.S., which demonstrated that the use of our test in patient care of people with melanoma, so using our DecisionDx-Melanoma test compared to patients who did not receive our test clinically, so an untested population, the patients who lived longer were those who had their care guided by the DecisionDx-Melanoma test.
That is really a nice ultimate way to get to the end of the day is to say, "Hey, we can eliminate unnecessary procedures, and that's important from an economic and complication standpoint, but maybe more important to a patient is to be able to use our test to guide care and have, at the end of the day, those patients living longer than patients who didn't get tested clinically." What a great place to start out in 2024 is to have a full year of having those publications be discussed and educating our customer base about the value of testing with our test versus not testing at all. Our DecisionDx-Melanoma SCC test, rather, we recently announced that we have had a publication accepted.
We did present data last summer on this topic, which indicates that the use of DecisionDx-SCC not only risk stratifies patients, so it helps take people at high risk for progression and find those who are at a low risk for progression, allowing perhaps a de-escalation or more of a watch-and-waiting approach, but also a very high chance of progressing to be put in different care pathways. But we also have data now in an accepted manuscript, which hopefully will come out shortly from an online print standpoint, that the use of our SCC test actually identifies people in this high-risk category that are eligible for adjuvant radiation therapy who actually receive minimal to no benefit versus a proportion of patients who receive a benefit from ART therapy. Talk about a very, very impactful way to go ahead and move patient care forward.
So you take 100 people who are eligible and considering adjuvant radiation therapy. We can find many of those patients who have not only a low risk of metastasizing but no evidence of a response from adjuvant radiation therapy, take them off that train, put them in a watchful waiting category should they want to do that. And we can find the few people who actually get a great benefit from radiation therapy.
What this means at the end of the day is that based upon a publication evaluation, a financial impact model published in January of this year, if you just take the Medicare population and take 12 months of patients who are projected to have undergone adjuvant radiation therapy in the U.S. marketplace, using our test to rule out and rule in adjuvant radiation therapy in eligible patients who actually received ART ends up extracting over $900 million in Medicare costs in a single year's time. That's a tremendous impact, not only reducing complications, unnecessary intervention, but also huge healthcare savings to our Medicare Trust Fund here in the U.S. Our TissueCypher test, I went through this earlier. No reason to repeat that. The same comment with our IDgenetix PGX testing test. Next slide. So maybe diving just a little bit here on what I alluded to earlier.
So our DecisionDx-Melanoma test provides answers to two clinical questions that are asked during the interim after diagnoses. One is, does this patient have a risk of SLNB positivity such that we should go forward and recommend they undergo a sentinel node biopsy surgical procedure or not? And then secondly, after that question's answered, does this patient have enough of a risk of progression relative to NCCN thresholds that we should do what? Comfortable de-escalating care to watch them only from a clinical perspective because they have a low risk of progression, which means from today's standpoint of care perspective, we should be comfortable seeing them in a dermatological clinic looking mainly for new skin cancers developing?
Or are they at a high enough risk of metastasizing out that we should actually maybe be referring them out to medical oncology and initiating imaging, which typically in melanoma would be pelvis, the neck, CAT scans 3 or 4 times a year, and brain MRIs 2 or 3 times a year depending on local protocols. Those are the two uses of our test. Now, as I mentioned earlier, what's exciting here is that if you look at the top study on the right-hand side there, this is our National Cancer Institute program. Again, we saw at 3 years post-diagnosis was a 29% lower 3-year melanoma-specific mortality rate in people who had their care guided by DecisionDx-Melanoma compared to those who did not.
In the other study, which comprised three academic centers, Cleveland Clinic, Northwestern Medicine, Oregon Health & Science University, in the bottom part of the right-hand part of this panel here, we saw here was that patients who had imaging added to their care pattern because of a higher risk DecisionDx-Melanoma test result did detect their recurrences earlier than those who were just seen for clinical visits only. They are more likely to start immunotherapy. And at the end of the study, they had an improvement in overall survival outcomes. Again, two studies showing very consistent changes in terms of if you use our test, you end up living longer if you follow the results from a clinical standpoint. Next slide. Coming around in terms of advancing penetration of our test with clinicians and payers. What do we see here?
I mentioned the expert consensus and guidelines that we have to support our test here in the last couple of years, especially 2023 and 2022, being important areas where we can churn to our clinicians and payers for that matter and say, "Hey, you have had your peers or multidisciplinary experts review the evidence behind our tests or tests and come to a conclusion that there are certain uses that we would recommend you look at incorporating the melanoma test, the SCC test, or the TissueCypher test going forward." From a reimbursement strategy standpoint, as I mentioned at the outset, we focus on not only finding high unmet clinical needs but also being either first in class and/or first and best in class.
That has resulted in us having obtained approval for five of our tests as being designated by CMS as advanced diagnostic laboratory tests, meaning, among other things, that we were the first test to work on a question and that the question that we're answering is independent of all available features and factors. That shows the innovativeness of our test processes. We also were able to demonstrate an improvement or an increase, I guess you would say, in the CLFS payment rate for 2024 and four of our tests compared to prior years through the CLFS and PAMA process. We also have been successful in securing positive medical policies across all three of our therapeutic areas in the last period of time: dermatology, gastroenterology, and mental health.
And finally, from a playbook perspective, we look to constantly optimize our commercial team by providing additional provider education and really managing our clinicians well because, by the way, they're treating our patients too. The result of these efforts, I think you can see on the right-hand side here, is it's accompanied overall nice, solid growth in report volume, growing from 28,000 and change in 2021 to 44,000 and change in 2022 to just over 70,000 tests reported out in 2023. So again, the adoption of our tests by the marketplace, I think, is truly a result of these three elements here combined with the fact that we go after high unmet clinical needs with best-in-class or first-in-class tests. Next slide. So what do we see for 2024 here?
We will expect to see the first full-year impact of those two outcomes today, as I mentioned earlier, for our melanoma test. We will continue to see our commercial expansion align with our principles and servant leadership culture. We, as I mentioned earlier, have seen an acceptance of our initial adjuvant radiation therapy publication, which hopefully will be available publicly in the near term based upon our 2023 study data. We will be providing you, by the end of the year, additional updates on our inflammatory skin disease pipeline program in the second half of 2024. Next slide. Or two slides in. So financially, you can read these slides quite well. This is essentially our principles from a financial management standpoint. Next slide.
So we have seen very nice, strong growth in both test volume by quarter shown on the right-hand side of this page as well as total revenue as well, growing from $38.3 million in the fourth quarter of 2022 to $66.1 million in revenue in the fourth quarter of 2023, over a four-quarter time period there. Next slide. We also have a principle of looking at maintaining strong adjusted gross margins. You can see here that we believe we can maintain or achieve an 80% ± adjusted gross margin over time. As you can see on the right-hand slide here in terms of operating expenses by quarter, we do usually see an increase in operating expenses in the first quarter of each year. And then that usually stays relatively flat in the last few years, quarter-over-quarter. Next slide.
In 2023, we were able to generate operating cash flow in both the third and fourth quarter. And as you can see, our EBITDA was also improved in the third and fourth quarter compared to the fourth quarter, certainly of 2022. So we're trending in the exact right direction, and we are entering in 2024 with a very strong cash flow of $243 million relative to our cash-year expectations. Next slide. From an allocation perspective in 2024, we expect to continue how we did last year, which is to really look at optimizing our commercial teams, focused R&D efforts to build evidentiary support and develop new tests that make a difference to patient care, and to adoption and to reimbursement, and to lesser priority strategic opportunities in our current therapeutic areas are our three pillars for 2024 going forward.
In summary, in the last slide here, I hope that in this brief presentation, you've had an opportunity to realize that we do focus on developing or acquiring best and first-in-class tests that address high unmet clinical needs and represent significant market opportunities that we do invest in and build robust and clinically significant evidence, and that that allows us to go ahead and penetrate markets well in terms of by providers as well as by payer improvement. With that, Paul, turn over to Q&A.
Derek, thanks very much. I mean, it's a very impressive portfolio. I mean, starting with a few emerging products, I look at IDgenetix in the fourth quarter of 2022, $1.9 million in sales, and then in the fourth quarter of 2023, it's $7.3 million, one part of the portfolio. I'll touch on a few of these tests, but can you talk to IDgenetix? Is it getting more sales attention? What's the customer uptake? I think we could just touch on some of this portfolio that's been getting much more broad for you.
Yep. Yep. So it's a great question. One, of course, is we are very pleased with the momentum that we saw in 2023 with IDgenetix compared to acquiring that test asset in the middle of the second quarter of 2022. We spent most of 2022 and the early part of 2023 understanding how we wanted to approach this marketplace for maximizing the opportunity this presents us with. And I think that's resulted in this great growth of 200+% in volume year-over-year. What we see is not sort of one large mental health marketplace, but rather a series of very large markets that we're entering into, I think, in a very carefully structured fashion place here. And the combination of our tests, not only providing drug-gene interaction, but combining the report drug-drug interaction lifestyle factors, presents a unique value proposition, I would say, to all customers.
The reality was that more benefit than others do. For instance, the older American population who typically has concomitant diseases, they're on polypharmacy medications, will benefit by having the results of not only drug-drug but also drug-gene interactions incorporated in the same report so that the clinician and patient can make the most fully informed decision the first time around as opposed to having somebody guess what kind of a drug-drug interaction may be going on. I think that kind of focused opportunity, Paul, is what we see here in terms of commercial traction this year.
It seems like obviously, most tests that you have are unmet needs. But what's the payer on IDgenetix? Is it private? Is it commercial? Is it CMS? What is it?
That's a good question there. I think we'll end up seeing this settle out probably would be maybe around one-third or so, maybe 40% would be Medicare age eligible based upon, again, our unique differentiation factor of combining drug-gene and drug-drug with remaining 60%-70% or so being commercial payers below the age of 65 years of age.
Okay. And then TissueCypher, yet again, we've seen a TissueCypher, $1.6 million Q2 2022 ending with $5.5 million in Q2 2023. Again, tremendous uptake. What's driving this? Obviously, my guess, unmet need and then payer profile there as well.
Yeah. So payer profile first. So we're still early in terms of volume traction. But I would say at the end of the day, I would expect 45%-50% of the patients that would be tested by TissueCypher being a Medicare age, so 65 years of age and older, and 50%-55% being just below that number. That probably ends up being where we settle out as volume gets larger over time is my bet. In terms of what's driving the volume, I think the high unmet clinical need clearly is there because, as I mentioned during the presentation, there is a known intervention or tool in the case of radiofrequency ablation, which is already FDA-approved and covered by most entities, that is standard of care in people with a higher risk of progressing to cancer than not.
And we just basically find people who they think do not have a higher risk who actually do. So it's a very easy clinical conversation to say, "We're all in this to go ahead and stop cancer, right, doctor?" Absolutely. We can help you get there with patients who you're missing right now. I think the other end of it, which was, I guess, an underestimate when we were conducting diligence, is that we were believing two years ago that the marketplace opportunity on an annual basis was probably in the low 200,000s of patients. And based upon more recent data from last fall, including third-party databases as well as publications, it looks like the number of patients who may be addressable or serviceable by TissueCypher in any given year probably runs around 250, I'm sorry, 415,000 patients.
A much larger marketplace than we were first calculating and anticipating, which leads us to basically make sure that we're right-sizing our commercial team so that we can save more patients from progressing to esophageal cancer.
Obviously, the question has been regarding SCC. You had a recent publication about adjuvant radiation therapy benefit, obviously, an uptick in what could be more evidence for the upcoming decision. How do you feel about this paper and your outlook on SCC?
Yeah. Yeah. So we looked at the evidence that we had published through last summer and looked at sort of the proposed LCDs out there on squamous cell carcinoma and said, "Is there additional data that we should be publishing maybe differently, maybe data we hadn't published yet that would allow a Medicare contract to directly walk from questions they had about our data actually showing we had the data?" And so there are four publications that came out between January of this year and the next week or two that we think address the heart of those questions or queries. One of them was the radiation response data we talked about earlier. Adjuvant radiation therapy is used in people with high risk or very high-risk NCCN factors.
It turns out that 99% of the patients that we tested in the last couple of years fall into an adjuvant radiation-eligible patient population. That is who we test. The paper that has been accepted but not quite online yet will clearly demonstrate that when you compare patients who benefit from radiation therapy from those who do not, that patients with their highest risk class 2B test result have a significant reduction in metastasis rates when they undergo radiation versus not, but most of the others don't get any benefit at all. That's a tremendous rule-out opportunity in what is a standard of care procedure today to help slow down metastasis. That has tremendous benefits.
We published the benefits of that from a cost standpoint in January of this year, which was to say, if you apply the use of our test in patients who received radiation therapy in a 12-month period ending June 2022, I think it was, you can extract over $970 million in Medicare costs just by taking the cost of radiation minus the cost of our test but ignoring any savings or costs related to complications. That's over $900 million in savings in the course of 12 months. What a tremendous ability to impact not only getting patients in radiation therapy who need it but reducing costs. And then we have two more studies, one that came out this morning and one that came out a couple of weeks ago, which we think also address those sort of raised questions in the LCD.
Now, my hope would be that those studies, when read through by the Medicare contractor, result in them saying, "Okay, we had certain questions on certain data points. These have now been answered in peer-reviewed literature. Let's get it right the first time around." Hopefully, that will result in appropriate change in their coverage recommendations.
Last question in our time remaining, Derek, would be for Frank: is the company has been generating positive operating cash flow last two quarters. You're at $240 million. What are your goals with cash and cash flow here over the next couple of years?
Yeah. So I think in the near term, meaning probably this year, that we will largely allocate capital towards really improving our commercial efficiency and production and supporting our clinical research needs. We will continue to go ahead and look for other opportunities to build out our pipeline or our test portfolio in our dermatological, gastroenterological, and mental health areas. But I think acquiring from the outside looking in is very, very low on the priority short term. As we enter into 2025 and see what the opportunities look like, we might make a change in capital allocation. But certainly in 2024, it'll be really improving our commercial efficiency, supporting our R&D efforts, and down the road there would be considering any kind of strategic opportunities that might be transformational.
Well, thank you and congratulations on a good 2023, and look forward to 2024.
Thank you. Good seeing you again.
Thanks. Bye-bye.