Hello everyone. I'm Subbu Nambi. I lead the Life Sciences Tools and Diagnostics team at Guggenheim Securities. Thank you for joining us for our inaugural Healthcare Innovation Conference. It's my pleasure to be hosting the team from Castle Biosciences. Joining us are Derek, CEO, and Frank, CFO, and Camilla, VP IR and Corporate Communications. Thank you for being here, guys. We'll start with a presentation from the Castle team and then move on to Q&A.
Thank you, Subbu, and thank you to Guggenheim Securities for the invitation to present here today at your inaugural meeting. Okay, we put together just a couple of slides to orient the audience towards where Castle is today, and then we can go from there.
Absolutely.
So I would encourage everybody to review the forward-looking statements and disclaimers here and also on our website. Let's see here. Trademark, registered trademarks are there. We'll talk through a few of those today. So there are different ways of organizing how one conducts business, I guess. We believe the way to describe Castle fits on this slide here, which is to say, first of all, can we focus on finding high unmet clinical needs where we can be first in class or perhaps best in class in terms of meeting those needs with our clinicians? And if we can do that either internally or externally, either pipeline development internally or acquisitions, then we try and focus continued investment, I guess I would say, on R&D and evidence development to really develop a robust evidence pathway.
And that should hopefully lead us to having an ongoing flow of data to present to our clinician customers to hopefully have them evaluate our test and see where there's expanded intended use populations that are appropriate for testing, as well as move payers, whether that be private payers or governmental payers along that pathway. And so it's a cycle that we think we've done fairly well since inception over the last, my goodness, it's almost been 15, 16, 17 years, and we'll continue to go ahead and focus in this kind of a manner. So what's that lead us to? We currently have, I guess you would call it, three sort of commercial verticals that don't really overlap a whole lot. We have three currently commercialized tests in the dermatology market, I would call that.
Two of them are risk stratification tests for DecisionDx-Melanoma and our DecisionDx-SCC test. More recently, we also published two different independent studies this early spring and early late summer that also demonstrated that our squamous cell carcinoma test also is able to predict responsiveness to adjuvant radiation therapy, which is the core adjuvant therapy to manage high-risk patients with high-risk squamous cell carcinoma of the skin. We also have a lead product in the gastroenterology group. This is a product that is branded TissueCypher. This came to us through an acquisition with Cernostics. TissueCypher is quite interesting. That is roughly, we think, a $1 billion marketplace. And how do we get to there? We get to there by looking at what this test does for patient care. It's also a risk stratification or prognostic test.
It was designed to really take patients with Barrett's esophagus disease, which is the only known precursor, by the way, to esophageal adenocarcinoma. And traditionally, before TissueCypher was available on the market, gastroenterologists and patients only really had available to them what the pathology can see with their eyes, which is essentially to say, yes, you have Barrett's disease. Thank goodness you don't have esophageal cancer yet. And then they grade as opposed to stage that specimen. And they grade it as either non-dysplastic Barrett's esophagus disease, indefinite low-grade or high-grade dysplasia. And that's important because today we have not only FDA-approved devices, but also surgical approaches that are highly effective in removing Barrett's esophagus lesions and therefore stopping progression to cancer. The issue, though, with medicine, of course, is we can't go ahead and intervene with all patients with Barrett's esophagus disease.
So we use this grading system by pathologists to decide who do we push forward and intervene with today and try and get rid of that Barrett's disease from progressing. And then who do we want to put on sort of a repeat surveillance pathways? What does that mean in this disease? It means going in every, according to the guidelines, it would be every three to five years, going under general anesthesia, again, having an upper GI, pinching off some of the tissue again and seeing if it's perhaps gotten worse. So that's kind of the standard of care.
You either have patients who have a high enough risk of progression that you intervene and essentially ablate or remove that Barrett's esophagus to stop progression to cancer, or they're placed in this lower risk bucket, which is typically this non-dysplastic disease bucket, which is where about 95% of the patients sit. And you're essentially asked to come back every three or five years, sometimes earlier, sometimes later. The fact that we don't intervene with the non-dysplastic Barrett's esophagus patients, however, means that the largest group that actually goes on to develop cancer is in that low-risk group. And so what the TissueCypher does from a gastroenterology standpoint, a patient perspective, is we can take the residual biopsy tissue from that initial endoscopic biopsy and through the use of spatial omics, identify a high biological risk or a low biological risk of progression.
It so happens that a high biological risk is equal to or greater than the risk profile that patients receive interventions with, such as radiofrequency ablation, so we're able to find patients in that low-risk group who have a higher risk biologically than a more adverse patient on pathology, and as such, what we are finding is our gastroenterologists are taking those patients, recommending that they consider getting ablated so again, we can stop progression to esophageal cancer and hopefully slow that incidence rate down quite a bit, but the other ones who get a low-risk TissueCypher test can feel a bit more comfortable, even though no test is perfect, a bit more comfortable that maybe three to five years repeat endoscopy seems like the safest appropriate course, so very, very exciting to us.
That's a patient population, which is not on this slide here, actually is, which we think is around 415,000 patients diagnosed per year with Barrett's esophagus disease that we can address from a TAM standpoint, which makes it, from a tissue-based perspective, the largest single product that we have in the marketplace.
And then we also brought in a couple of years ago as well, IDgenetix, which is a pharmacogenomic test which combines both drug-gene interaction, drug-drug interaction, and some lifestyle factors to again enable the treating clinician and his or her patient to assess their mental health disease state today and use perhaps not only drug gene, which typical or traditional pharmacogenomic tests do, but also drug-drug and some lifestyle factors to get to a better answer quicker about actually it looks like based upon your metabolic profile, the other drugs you're on, drug B is probably better than my standard first-line care, which is drug A. So three areas that are quite exciting for us going forward. Now, let's look at third-quarter results because this is really, I guess, the output of the input of our data set, right?
Number one, we had an opportunity based upon third-quarter performance to raise our year-end guidance to $320 million-$330 million in revenue, up from $275 million-$300 million. We expect to exit the year quite strong. We also saw in the third quarter a very nice, strong quarter year-over-year growth, 41% I think in volume and 39% in revenue. Again, right around 40% growth, depending on what metric you want to focus on over third quarter of 2023, which is nicely in line and slightly ahead of our internal expectations a year ago. Gross margin, we continue to go ahead and operate our laboratory function very conservatively and very appropriately, we think, with adjusted gross margin coming in around 82% for the third quarter of this year. We expect that to be around 80%-85% going forward.
I don't think one expects improvement much above that, Frank, is that correct?
Correct.
Yeah. From a cash perspective, we were able to go ahead and generate net cash from operations of around $23 million in the third quarter of this year. We also had a similar amount in the second quarter of 2024. So again, we're adding to our balance sheet, which exited out at the end of the third quarter at $280 million in cash, cash equivalents, and marketable securities. So again, nice strong balance sheet, good revenue and volume growth sets us up very, very well for a 2025 and 2026 opportunity here. We also continue, as I said, to build robust evidence. In fact, we had five peer-reviewed publications accepted and published in the third quarter of this year.
One of our initial co-founders, Kristen Oelschlager, who lives and runs the operations in Phoenix and other areas of the company, was actually named the Jon McGarity Arizona Bioscience Leader of the Year. That was an award that was presented to her back in September of this year. Very nice recognition of the value of one of our co-founders at Castle Biosciences. What about this robust evidence I talked about? I'll take a couple of slides here and talk about our DecisionDx-Melanoma test. We have over 50 articles that have been published on our test. Now, a couple of those are meta-analysis with systematic reviews. A couple of them are review articles, but most of them are actually original research, either clinical validity or performance or clinical utility. Do doctors actually use our test? And if so, how do they do with that?
We initiated a couple of years ago, I want to say even during COVID, a prospective study called CONNECTION here in the U.S., which essentially is enrolling a large swath of clinically tested patients so we can track outcomes in this real-world database of patients, and this was the first presentation at the ASDS meeting back in the third quarter of this year. This part of the presentation focused really on sentinel lymph node biopsy positivity rates in patients with what's called a T1 melanoma. Now, why is that important? T1 melanomas refer to thin melanomas, so they are invasive, but they are thin. You have T2 melanomas, which are a little bit thicker, but still thin, and then T3 and T4 that are really a bit thicker.
The sweet spot for using our test and helping to guide, can a physician actually avoid a sentinel lymph node biopsy surgical procedure in a patient who might fit criteria based upon pathology factors? Can they use the biology from our test and actually consider avoiding that procedure? This is data presented, as I mentioned, last month. What this shows you here is that in patients with T1 tumors, which is the largest group of patients, by the way, with melanomas, if we predicted a less than 5% chance of having a sentinel lymph node positivity rate, it came in at 1.6%, which represents around a 64% reduction in surgical procedures had these patients actually had their care guided at that point in time by our test. These patients clearly were not because these physicians ordered our tests concurrent with the biopsy procedure.
And so we're able to go and generate real-world actual data saying, "Hey, we predict low risk as being less than 5%. It comes in at 1.6%. Pretty healthy. Wouldn't you agree to, doctor?" And similarly, if we predict a higher risk, it comes in at 5.7%. So again, reaffirming surgical consultations with the patient. Why is that important? A 5% threshold of positivity happens to be the positivity rate that's been established by the various guideline groups over the last 15, 20, 25 years. So comfortably staying below 5%, if you say a patient's low risk is very important from a patient care perspective. And likewise, if we say that they should be above 5%, can we get there as well, especially in these T1 melanomas that are right around that cusp area of 5%-10%? So good, positive, real-world data.
Now, the other question we ask ourselves, though, is that if you actually have physicians who are adopting our test to avoid this unnecessary surgical procedure, are we putting patients at harm? So just because they have a low risk of having a sentinel lymph node metastasis, a melanoma cell or more in one of their sentinel lymph nodes, the closest node to the primary tumor, how does that patient fare otherwise? So are we avoiding a surgical procedure that has an adverse effect on outcome? So the other part of the presentation at the same meeting focused on outcomes in the same study. So the benefits of having a large real-world study is you're able to go ahead and see physicians who use our test clinically and some of those who are a bit on the later adopter side of intervening.
In this analysis here from the same prospective study and the same presentation, ASDS, what we're able to show you here is that in patients who were predicted to have a low risk of a sentinel lymph node biopsy positivity rate, below 5%, and their clinicians avoided that surgical procedure based primarily on our test result, we believe, how those patients fare. And what you can see here over the course of this time period of three years of follow-up, we had a three-year recurrence-free survival rate of 99.5%. It's not 100%, but nothing's 100% ever in terms of this kind of science. And a recurrence rate on the flip of that of 0.5%, showing us that, again, from a patient standpoint, using the biology that our test helps interrogate can have you avoid a surgical procedure should you want that.
You do very, very well if you avoid that procedure, in fact, extremely well compared to normal baseline patient population. So that is exciting data. We look forward to having that push-through peer-reviewed publication process, getting it in the hands of our clinicians because it shows you both ends of the equation. For those doctors and patients who didn't use our test clinically to avoid that procedure, 1.6% positivity rate if we said they were low. And for those patients who actually had their sentinel node biopsy surgical procedure informed or guided by our test result, extremely strong clinical outcomes. Hardly anybody recurred, two out of 367 patients. That's a fantastically low-risk patient population. Whoopsie. So the final slide here is worth talking about here is DecisionDx-SCC. This is a test that we launched a few years ago, developed internally. It's a 40 gene expression profile test.
And our initial focus was to say, can we use this test on top of guidelines or staging systems and help inform a more risk-aligned management choice on the part of the doctor and the patient? And we demonstrated, yes, we can do that, by the way. The next question now was looking at the journey of the squamous cell patient population who has high-risk features. And as I mentioned earlier, the initial intervention which is used today in patients which have a high-risk squamous cell carcinoma is the use of adjuvant radiation therapy. Squamous cell carcinoma of the skin happens to be one of those tumors that's nicely responsive in some patients with this disease state. There are other tumors that don't respond well to ART, by the way. This happens to be a nice responsive one.
But the challenge has always been is that there are so many patients who are diagnosed with high-risk squamous cell carcinoma based upon using staging systems to classify patients in that manner. How do we figure out which patient actually benefits from ART and which patient does not benefit? Well, one answer might be, what's their overall rate of recurrence? What's their overall risk when you add on the biological information that we give to our doctors in addition to their pathological and clinical factors? And we've shown that, again, we provide great separation of these high-risk patients into a very high-risk group and to a very, very low-risk group. But the other thing which is important is looking on the right-hand side of that slide is you see Arron et al. and Ruiz et al. These were two publications.
Arron published in May of this year, Ruiz published in August of this year, which were independent studies, multi-center in nature, demonstrating that when you look at the value of our test in predicting responsiveness to adjuvant radiation therapy using propensity-based matching so you can control for clinical and pathological factors, what you find is that our test not only provides a risk stratification value, risk of metastasis being low or high, it also found the majority of patients who were eligible for ART under current guidelines who received no clinically discernible benefit, so over 50% of the patients who could have been eligible and considered for ART, if you use our test, they come out with a low-risk class one test result, and we see no difference between those patients in terms of their risk of recurrence when they receive adjuvant radiation therapy or they forego it.
Again, very, very strong data taken to our exact same clinicians saying, "Hey, you can risk stratify our patients and send all the high-risk ones on to radiation oncologists," or you can use the second bit of data now published in two back-to-back papers, which, by the way, represent the single largest ever study evaluating the effectiveness of adjuvant radiation therapy in this population, and the second largest study being Ruiz et al., and help that to also inform a learned conversation with your patients to help make the right choice. Should we hold off on adjuvant radiation therapy and save it in case we're wrong? Or do we go forward if you're high risk because you have a 50% or greater chance of a reduction in the rate of metastasis when you receive radiation therapy?
So again, examples of develop or acquire a test, build robust evidence that will help drive not only appropriate adoption from the clinicians, but also hopefully maintain reimbursement going forward. And with that, I'll stop talking soon.
Thank you for that overview, Derek. In the interest of time, maybe I ask one question per product. So on DecisionDx-Melanoma, you've been growing double-digit. Is this driven by more tests that is ordered per physician or new ordering physicians? And do you expect the same driver to continue to sustain this double-digit growth going forward towards your 60% market share target?
So, excellent question there. So, we still see a meaningful number of new ordering clinicians, which we define as first-time ordering doctors, quarter over quarter over quarter, which I would think after this long, we should have achieved a high enough level of awareness and trial usage that they would have adopted the test. And, it's still a surprise to me that between dermatologists, their nurse practitioners or PAs, surgical oncologists, we still go out there and find customers that have a low awareness because maybe they were a closed-door office. And once they see the data or they have a colleague say, "Hey, I'm using the Castle test clinically," and they say, "What Castle test?" So, that is still an important driver of growth going forward.
Within individual practices, because we're receiving the pathology report when we receive an order, we're able to look at that pathology report and say, "Gee, this clinician, Derek Maetzold, for example, he really only orders a test in patients with a certain thickness of melanoma. Why has he chosen to niche me, I guess, niche our test in other patients who are more appropriate?" So our sales team and our medical affairs team can go in there and say, "Hey, I've noticed a trend here. Looks like you're really ordering our test in this kind of slice of population.
Is that correct?" "Well, yes, that's where I see the value on." "Well, can I sit down with you and take part of our 50+ publications and focus on the areas where your patients aren't benefiting and see if that might expand your clinical use of our test clinically?" and that's the other effective way to kind of grow same-store sales and also new-store sales, and both of those are occurring with melanoma, even though it's been out there eight, nine, 10 years, I guess.
For a few years. And do you anticipate the same level of growth over the coming years?
I think we'll continue to add a similar number of tests year to year. The percentage gets smaller as the base gets bigger.
Okay. On TissueCypher, excellent quarter. Really beat even our upside case. Still in early innings of volume growth. Given it's early, it seems like probably growth is coming from new ordering physicians. How should we think about ordering ramp for these physicians? Have you seen a cadence where, for example, after a month or two, they start to ramp their order volumes?
So, one, we're still very early in TissueCypher. We think there's around 10,000 gastroenterologists that should be targetable customers. Now, within the gastroenterology community, you have a small subset of gastroenterologists who do most of the intervention and most of the ablations I talked about earlier in the presentation. So those clinicians are kind of a referral base in a practice. We think most of the ordering GIs that will be the general, I guess, gastroenterologists who are doing upper endoscopies and colonoscopies right and left. So we have a lot of growth to go still in terms of new physician adoptions just because we're only about a year and a half, two years into that, so that's expected.
In terms of same-store sales, we do find that if we have a gastroenterologist who has heard information on the test from an educational standpoint, dabbled in it, and six months later, they're still ordering our test, then they're ordering around, what, three, 3.5, 3.4 tests per month is the average. Now, I don't know if that means we should go to five or six, or if about three patients diagnosed per month is about the average for the average gastroenterologist, but we're seeing both same-store stores getting up to a good level of routine ordering, and we're seeing many, many new physicians ordering for the first time.
Got it. That's amazing. IDgenetix, obviously, this was a focus even on the 3Q call because of UnitedHealthcare's decision of pulling the coverage decision for GeneSight or any pharmacogenomic testing that is testing for more genes.
Panels.
Yeah, panels of genes. You did say that you're going to be measured about your investments on the P&L. What does this mean? If you could just bookend it, what does this mean in terms of expanding the sales force or going behind it, given it's a low ASP product?
Sure. So what we did say is that the UnitedHealthcare decision wasn't material to us financially from a revenue perspective. We're out of network with UnitedHealthcare, and so we aren't paid as regularly as we would be if we were in network, and I think being measured just means we've got to be disciplined with a lower ASP product, and the example you gave with TissueCypher, TissueCypher rep can cover their cost pretty quickly, pretty small number of tests. On IDgenetix, it's a larger volume number to cover an outside salesperson, so we measured in how we support it, and it's an important test. It's a disappointing decision from UnitedHealthcare because there is so much data and there's so much clinical experience with PGX testing and how it changes patient care. So disappointing, but not inconsistent with other payer decisions as it relates to diagnostics.
That is a nice segue to my next question, which I'm sure you're tired of answering. What are the latest developments for DecisionDx- SCC reimbursement?
No latest developments is a short answer. As you may recall, we requested review of our DecisionDx-SCC test back in the first quarter of 2022. Novitas' s medical team came back to us and said, "You've got adequate data that meets or exceeds Medicare's definition for medical reasons and necessity, and you're covered." Beginning April, I think 2022, we've had all clean claims being paid by Medicare, which is good. You've seen, of course, the approvals follow behind that Medicare Advantage and some commercial payers as well. As of today, we remain a covered service. As you may know, you have that funny little extension going on, which is very unusual that Novitas requested and received back in the summertime.
In terms of what that means going forward, we don't have a crystal ball to go on what the outcome might look like.
And then would you be giving the Arron et al. and Ruiz et al. to MolDX to reconsider the DecisionDx- SCC decision?
Yeah. So I think if you just look at that slide there, you've got six articles year-to-date alone that, in the case of both MolDX, which did not review anything past the summer of 2023, so they missed all of the radiation therapy data. And that's okay. That's part of the regulations they can follow. And as you may recall, inside of that LCD, they didn't indicate that that looks promising information. So they only had data that we had pushed to them in the summer of 2023, pre-published on the Arron study. We didn't have the Ruiz study done by that point in time. So I think the fact we've got two peer-reviewed studies, which again are now the largest ever and the second largest ever studies looking at ART effectiveness in DecisionDx- SCC patients, that shows tremendous clinical utility from a Medicare standpoint.
There was a publication that came out earlier this year demonstrating that if clinicians use our squamous cell test for directing adjuvant radiation therapy, and you look at the one-year use of ART Medicare a couple of years ago, it would save nearly, what, $907 million annually in reduced radiation costs. That's a tremendous benefit to remove a complication of an intervention that doesn't work in that patient or has no discernible benefit and a huge cost savings for the Medicare program.
Perfect. That's a great spot to end the webinar. Thank you so much.
Thank you.
Thank you for.