Hi, welcome to the Canaccord Genuity Growth Conference. I'm Kyle Mixon . I cover lifestyle, tools, and diagnostics for Canaccord. Pleased to welcome you to this fireside chat with Castle Biosciences. Castle offers a broad range of dermatology cancer tests as well as GI cancer tests. We'll learn more about that today. With the company, we have Derek Maetzold, CEO, and Frank Stokes, CFO. Thanks to you for joining us today. Appreciate it. Maybe you guys could just walk through the second quarter results. You announced those, I think it was last week. Very, very strong. Just kind of go over how the broad-based performance in the business.
Sure. Thank you, Kyle, for the invitation to come and chat here at Canaccord Genuity's conference. It's nice to be the boss of the day. I'd remind people to look at our website for a forward-looking statement commentary. Regarding the second quarter, we experienced another excellent, I think, performance from a team standpoint. Volume grew 33% year over year and revenue 23%, which is excellent. Ended up with $276 million in the bank at the end of the quarter and generated operating cash flow of just under $21 million. I think a very, very nice strong performance having us finish out the first half of the year.
Did I add any commentary?
No, I think so.
Perfect. Now, we're really focused on, you know, two-year tests. We call them the core tests now. So the DecisionDx-Melanoma as well as TissueCypher for GI cancer. Let's start with TissueCypher. That one really did well. I think it was almost 100% year over year growth in volume. Can you talk about the market penetration for that test currently? Where is their upside? How should investors get comfortable with this, like, you know, outsized growth, like kind of continuing going forward?
Cover that.
Yeah, sure. We urge people not to model 100% growth going forward, not for any fundamental reason other than it's just an aggressive target. I think at the end of the quarter, on a run rate basis, we're about 10% penetrated on the patients that are appropriate for TissueCypher testing, probably a bit more than that on the physician side. We've got some room on the physician side to increase penetration within physicians' practices and within the group's practices. I think the reason we're seeing such strong momentum there is just the clear clinical utility. We are able to help a physician understand. Taking a step back, similar to our melanoma test, physicians understand that on a population basis, a non-dysplastic or low dysplastic patient has a low risk of progressing to esophageal cancer on a population basis.
They also appreciate that most esophageal cancers come out of those groups, and that's because those groups are not treated. If a patient is highly dysplastic or even moderately dysplastic, most of the time the physician will have them ablated. Ablation is, you know, probably not 100%, but high 99% effective in preventing progression to esophageal cancer. They're not ablating those lower risk patients, and they're just bringing them back for surveillance. It's a conundrum for a doctor. They understand that this patient on a population basis has a low chance of progressing, but they also understand that my progressors are going to come from this group. It's somebody in this group. You'll hear physicians who are steeped in the space, you'll hear them call it the Barrett's conundrum. How do I manage these patients knowing what I know?
With TissueCypher, they're able to accurately re-stratify which of the patients they should go ahead and ablate and get very frequent surveillance and increase surveillance. They can understand which of their patients they can reduce surveillance on, which is a positive for the patient, of course, if you've ever had an endoscopy. It's not the best day of your life, but it's also good for physicians. A full Seattle protocol, which is standard of care for Barrett surveillance, takes an average of about 50 minutes. That's a pretty big burden on a practice, particularly when a colonoscopy takes 10, 12 minutes. It's a bigger burden on the practice. They not only give better care to their patient and focus on the patients who will benefit, but it's also more efficient for the practice. I think that clear clinical utility is what's driving the uptake. We don't really see resistance.
I think the biggest resistance we have for increased penetration right now is just awareness. There's still lots of physicians who aren't aware of the test.
Perfect. Maybe on that point, I think that you kind of expanded the sales force for that GI business. It was, like, you know, late last year, let's say, they're all full speed. Do you have any plans to, you know, expand that team going forward to continue the growth? Do you think there's still kind of like white space where the education, you know, there's some more marketing and education that these reps could do?
I think we exited last year scaling up to kind of the low mid-sixties, I guess, from a GI perspective. We think there's maybe 10,000 actionable customers, gastroenterologists who are doing upper endoscopies, seeing Barrett's patients, follow them. That could be off a bit here or there. That probably is still understaffed a bit, Kyle. I anticipate that as we let this last group season in, we'll look to saying what's the right time to kind of expand and get closer to serving our customers better. That should help keep growth accelerating, at least growth growing as it has been in the past from a volume quarter-to-quarter standpoint.
Got it. This GI cancer business is becoming more and more important too. You did an acquisition a couple of months ago for Previse. They offer a test that's complementary to TissueCypher. It's called Esopredict. Maybe just talk about the vision with that test and how you're going to eventually offer like a multi-omics offering for GI esophageal cancer.
Sure. I was going to step back and say it's more about the assets they had versus the tests they had in the marketplace. In our evaluating other opportunities in both dermatology and gastroenterology, part of the question becomes where else can we leverage what we believe is a good reputation, a good customer call point in gastroenterology? One of the areas we were looking into was to say TissueCypher, we believe, is the most validated, most accurate biomarker out there that's been developed for predicting progression or prognosis to esophageal adenocarcinoma. That's based predominantly on the underlying spatial omics technology that Cernostics really built and developed prior to that acquisition. That being said, I think that we continue to say how do we serve our customers better?
I would jump to the middle test potential first, which is to say we believe that while there undoubtedly is some biological overlap between spatial omics and what it detects biologically versus methylation versus maybe even sequencing data, we also believe there's not a 100% overlap. Our hope would be going forward, can we rapidly develop a multi-omics platform, to use that word, which integrates both spatial omics, perhaps methylation markers, perhaps sequencing markers to go and get to a more accurate test and serve our customers and our patients better? That was really the primary near-term acceleration opportunity. The second part of that acquisition also included acquiring the development work they've done on a capsule sponge technology per se.
There is data that will be coming out over the course of the next little while about what they've developed in the last couple of years with their Johns Hopkins relationships. Essentially, we believe there's an opportunity to both participate in potentially upstream diagnoses of Barrett's esophagus disease, as well as look to go ahead and see if these sponge-based technologies where you go ahead and capsule a string, swallow a capsule on a string which has a sponge inside the capsule, it dissolves, expands out, and you pull that back up and see what you can see. Our hope at the end of the day, more midterm, is to say, can we go ahead and take TissueCypher, enhance the value to customers by making it better? I guess I would say better value, finding more of the higher risk patients and put them into a higher risk category.
Two is to go and move forward with a sponge-based technology to see about participating in the Barrett's esophagus diagnosis arena.
Okay. Just thinking about this, I mean, do you see that ultimately like this company can be like 50/50, you know, GI cancer and derm cancer, which is obviously like a step away from what people think of Castle as, but it just sounds like you're really focused on GI and really what the potential holds.
From a balancing a revenue standpoint?
Yeah, from revenue.
Yeah, I think that we view them both as very attractive. I think we'll be, you know, volumes are getting pretty close on the two tests, and they're both nice franchises. We value both of them. We have a pipeline in dermatology as well. I think we're going to continue to expand the offering there. We're happy to see the growth in both businesses. Both are good for patients and both have a high level of clinical utility and value.
All right, perfect. On that note on the pipeline, you have an atopic dermatitis effort ongoing. You have an internal test. We'll talk about that first. I think it was kind of more or less validated recently. Just remind me like the plans for that one going forward. I think you want to launch that test in 2025. What would you do about, you know, sales force and Medicare reimbursement with that for that asset?
We've been working for several years on a test in the eczema space, I guess, to predict response to systemic therapies. Our focus in the last, maybe year and a half, two years, has focused predominantly in the atopic dermatitis part of the eczema marketplace, the other side being psoriasis. Our belief is if you look at the atopic dermatitis marketplace, there's around 24 million people we estimate diagnosed with atopic dermatitis in the U.S. today. That's kind of the three years and older age group. I think it's 27 million total. Of that group, you have patients falling into kind of the mild category where maybe their disease is currently being managed with topicals only today. Then you have sort of this moderate to severe category where it's people who have moderate to severe atopic dermatitis. Some of them may be on systemic therapy.
Some of them are seeking perhaps systemic therapy. We estimate the moderate to severe category around 7.4 million patients, give or take a couple hundred thousand. Clearly a step up in terms of opportunity for Castl What these patients face in this moderate to severe category is they clearly aren't being managed, or at least they have a high, a heavy symptomatic burden on top of those only. When they step over the threshold and say, I'll go ahead and accept going on a systemic therapy, be it an oral tablet, which more recently has been JAK inhibitors, or be it Regeneron or Dupixent therapy, which is an injectable biologic. Those agents work better, are more effective than topicals only, but they carry risks and benefits.
What we saw in the marketplace here is to say the sort of grandfather of this newer therapy section is Dupixent from Regeneron and Sanofi, and it works well in some patients. In some patients, about 40% of the patients, if you go through literature, they aren't getting the relief on that initial therapy that they could potentially be. We still have a heavy symptomatic burden. Before time goes too far, three months or six months, we see those patients going on to either switching to other systemic therapies or adding other therapies back onto it to try and again get control of their symptoms.
Our goal was to say, can we develop an immune signature or a class therapy signature, or maybe it's a cytokine signature, depending on the words you want to use, that would say, hey, let us take part of that individual patient's atopic dermatitis lesion, scraping it, putting it into our buffer, analyzing that, and see if we can identify a test or a series of tests that could say, you made the decision to have greater symptom control occur by stepping into the threshold of systemic therapy, rather than have you go through sort of a trial and error standard of care approach. Can we use the immune signature of your own atopic dermatitis to see if selecting a therapy based upon your disease symptoms gets you better result quicker?
What we discussed in our Cinquan earnings call last week also put a new slide into our corporate presentation slide deck with some of our top line data. Our belief in terms of thinking about the value of a biomarker-based test in identifying therapeutic response in atopic dermatitis was to say there were sort of three or four major symptoms that we see. The FDA registration trials use a score called EASI. FDA sets, or at least the classical expectation has been to see if you can achieve an EASI 75% score, which roughly means a 75% reduction in your lesion load and the burden of the disease state on your skin as a sort of a threshold, and then compare that to placebo.
When we were looking at the marketplace, our perspective was we will have newer classes of agents coming out potentially in the next year or two or three. We don't need a test to go in and say, you'll just do average. We set our bar at saying we'd like to go ahead and find people who can achieve an EASI 90% score, which means 90% clearance, roughly speaking. We also know that itch is a heavy burden for these patients. Although it's captured somewhat in the EASI scale, it's also a separate validated score. We said, can we improve itch prediction as well based upon therapeutic response? Finally, there's an area of flares. Flares are kind of breakthrough of symptomatology. You might say difficult to get under control, another indication of really uncontrolled disease. What we were able to develop and validate today is a couple of signatures.
The most exciting part of that would be to go ahead and take patients who have a signature, which I will say today appears to be a JAK inhibitor response class test, which would be to say if you want to use our assay when people are starting systemics or they're starting Dupixent, maybe they're not getting the response they want, and you want to know, do I add this new class of oral therapies or do I not?
What we've been able to go and demonstrate is a gene expression profile test, which says if you're a JAK responder, we can find a population, a pretty good sized population, which will achieve a 90% or greater EASI score improvement within the first three months of therapy, dramatic reduction in itch, and dramatic reduction in flares compared to the group that we would say does not respond to JAK inhibitors, which has a very, very small chance of any benefit.
All right, perfect. That was great. Again, more of a like 2020, like beyond 2026.
We're on track to having this test available clinically later this year. I would not bake in revenue assumptions for 2026. I think we're still early on in a targeted limited launch perspective, but we should be able to go ahead and track our progress in volume and ASP growth over the course of 2026 and go ahead and identify what the value could be in 2027, 2029. Very, very exciting times in terms of launching another novel test in the high unmet need in clinical dermatology.
Yeah, exciting. On the kind of core business, the longest standing, like, you know, primary test at this point that generates a lot of revenue is DecisionDx-Melanoma. I think the guidance for volume this year is growth of high single digits still. As you think about, like, you know, basically third quarter and beyond, no reimbursement for DecisionDx-SCC for Medicare, you know, how are the incentives on the sales team kind of, you know, shifting more focus towards melanoma? Is that actually, you know, generating volume growth or is that maybe like a future dynamic we'll see?
We did reiterate last week our expectations for kind of coming in at high single digits from a volume growth year-over-year perspective. In the second quarter, we were up 4% year-over-year or 60% 2Q to 1Q. We're on that track. With what I would call a temporary adjustment to our Medicare coverage for the SCC test, we did go ahead and switch the bonus plan, as you would expect, to be fully focused on cutaneous melanoma. That's part of the rationale, having us go from roughly a 50-50 split to a 100% zero split on melanoma versus SCC to help drive that single-digit expectation of year-end performance.
Got it. Okay. Anything else on the melanoma side that, you know, should give us confidence that that can be a pretty healthy, you know, high single-digit grower for the next couple of years?
I think your second quarter results were very, very strong for us. We also continue to see seminal publications coming out that make a difference. For instance, one of the publications that came out earlier this year was an ongoing prospective study looking at actual clinical use of our test to rule out asymptomatic biopsy procedure, which is one of the covered uses under Medicare's LCD. That's important to us because if physicians are going to use our test to take a procedure off the table, they undoubtedly might miss some patients who might have melanoma cells in their sentinel lymph nodes because they aren't doing that procedure. The question we said was, if they're going to use our test clinically, how do those patients do over time in terms of recurrences or lack thereof?
The data that came out earlier this year, I think with a median two-year follow-up in terms of recurrences of people who avoided that surgical procedure, we had no recurrences to date. That's going to change because 100% lack of recurrence doesn't really happen in cancer progression. It does show you that when physicians use our test clinically to help rule out what ends up being an unnecessary surgical procedure, they have a very, very high strong outcome that's at least recurrence-free in our current study to date.
All right, great. DecisionDx-Melanoma received the FDA breakthrough device designation recently. You know, the plan is like to submit that to the FDA at some point. Could you do that as early as, you know, the second half of the year this year?
Yes, we could.
Do you think that would be a material lift to volume, going forward, if that gets approved?
I think in terms of achieving FDA authorization as a class two device, I would think that we would see a couple of potential business improvements. One of them is to say we now see this rolling through of state biomarker laws. Although they have been very disappointing to the industry in terms of the lack of teeth in enforcing reimbursement from commercial payers in those states, we do see movement going forward that within a couple of years, one of the hopes would be that you would begin to see state biomarker laws being complied with by commercial payers versus not complied with. One of the core underlying areas there would be to say FDA-approved tests get a little more likely to preferential coverage.
A benefit to us we would see midterm would be to say gain FDA authorization as a class two device and see if we can float behind improvements in commercial ASP in sort of the latter part of this decade. The second element, which we don't have any experience on right now, and there's not much to point to, would be to say, do we see guidelines changing? NCCN, AAD, other guidelines where you could say, you questioned whether or not this test was actually doing what we say it does. You now have the highest regulatory body in the nation actually confirming what we've said all along. That change in impact there, if it does, we would see improvements also in ASP from those plans that follow guideline inclusion as well as perhaps volume lift over time.
Yeah, okay, perfect. Now on DecisionDx-SCC. That was doing over $30 million or so a quarter. Medicare reimbursement has been essentially removed temporarily, like you said, Derek, by the MAC Novitas. MOLDx also sort of isn't covering it. Obviously, you submitted reconsideration requests to both of these MACs, both programs. I think Novitas has accepted that. You're waiting until, I think it sounds like early September for MOLDx to accept it. What's the next steps with SCC and how likely is it that MOLDx accepts or doesn't accept?
I'd be surprised if they don't accept it. We had a good dialogue with MOLDx to understand and appreciate what it was they were looking for to have a valid, complete reconsideration request. I think we've gotten it, and it would be surprising if they have a different view. I do think they'll wait for the full 60 days to notify us, but that's frankly what we would expect.
On the MAC Novitas side, I think now you're able to really provide more data, like publications and data that maybe they were looking for in the original LCD and the draft and all that. I mean, how much more confidence do you have now than you had a year ago or two years ago?
Confidence on?
You'll obtain coverage.
I think based upon the acceptance of our reconsideration request as valid, that doesn't guarantee coverage by any means. It just says that there's enough evidence here that would force a reopening of the draft LCD. I would have a hard time thinking why one puts effort into that if you weren't going to go ahead and consider some sort of coverage criteria for this test, but that remains to be seen. From our perspective and the interactions that we've had with both contractors, there seems to be an acknowledgement that there is a substantial amount of new evidence that was not considered in the original request. That's a valid reconsideration request. Keep in mind that both drafts, both LCD drafts came around the summer of 2023.
An important step up in the value of our test to patient care was the mid-2024 publication of two multicenter studies, which the first identified the fact that our DecisionDx-SCC test not only risk stratifies patients, but also predicts who will be likely to respond or not respond to adjuvant radiation therapy, which is one of the few interventions one can take in localized squamous cell carcinoma today to make a difference in outcomes. The second study replicated the first study results. Those represent the largest study and the second largest study ever performed in SCC in adjuvant radiation therapy responsiveness. Neither one of the MAC Novitas had that data available to consider that. That use alone to me is a significant improvement in utility value to the Medicare patient population.
Okay, just forgetting about MOLDx for a second, on MAC Novitas, if that route, you know, was successful for you and they reopened the LCD, are you going to get paid on SCC claims in that kind of lame duck period?
I think that remains to be seen. Historically, when we've had LCDs in draft form and then finalized out, and those are some of our peers that we've talked to, the Medicare contractors in our experience have acknowledged that, okay, there's a draft LCD, all the evidence was reviewed to go and support coverage. It took us a while to finalize coverage. Therefore, the tests that were produced in those interims should be valid tests to go ahead and pay for. That's been our experience so far. There's no guarantee of that, but that could be an expectation in the future.
All right, great. Now finally, we just talked about SCC. That seems like you got that under control. You're handling it. There could be, you know, we're optimistic. Melanoma, you're accelerating that. It's rebounding. You know, that's what we all want to see. With TissueCypher, that's another big growth driver as well. That looks like that's pretty sustainable. I guess maybe not triple digits, but it's going to be pretty strong. What are investors missing or underappreciating for Castle right now?
I think the squamous cell carcinoma LCD has certainly been an unfortunate saga for the last three years. I think what investors have missed over time is we went public in July of 2019, just ahead of that COVID thing. If you look at our five-year CAGR through the end of 2024, it's 52%. That's a nice performing diagnostic company. We went from burning a little bit of cash pre-IPO to being judicious about our cash use to generating the second quarter of this year, nearly $21 million in operating cash flow. We're in a very healthy position to go and drive value forward in the near term and also midterm.
If you look at our TissueCypher test or our melanoma test, this atopic dermatitis test, which will be early in launch, we've set ourselves up to be a very, very strong company from a near-term growth standpoint and also a midterm growth standpoint.
Perfect. Okay, let's leave it there. Thanks, guys, for joining. This was great. Appreciate it.