Greetings, ladies and gentlemen and welcome to CareDx Incorporated First Quarter 2019 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] It is now pleasure to introduce your host, David Clair. Thank you. You may begin.

Good afternoon, thank you for joining us today. Earlier today, CareDx released financial results for the quarter ended March 31, 2019. The release is currently available on the company’s website at www.caredx.com. Peter Maag, Chief Executive Officer; and Michael Bell, Chief Financial Officer, will host this afternoon’s call. Before we get started, I would like to remind everyone that management will be making statements during this call that includes forward-looking statements within the meaning of Federal Securities Laws which are made pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. Any statements contained in this call that are not statements of historical fact, should be deemed to be forward-looking statements. All forward-looking statements including without limitation, our examination of historical operating trends, expectations regarding coverage decisions, pricing and enrollment matters, and our future financial expectations and results are based upon current estimates and various assumptions. These statements involved material risks and uncertainties that could cause actual results to differ materially from those anticipated or implied by these forward-looking statements. Accordingly, you should not place undue reliance on these statements. For a list and description of the risks and uncertainties associated with our business, please see our filings with the Securities and Exchange Commission. CareDx disclaims any intention or obligation except as required by law to update or revise any financial projections or other forward-looking statements, whether because of new information, future events, or otherwise. This conference call contains sensitive information and is accurate only as of the live broadcast today, May 8, 2019. This call will also include a discussion of a financial measure that is not calculated in accordance with Generally Accepted Accounting Principles. Reconciliation to the most directly comparable GAAP financial measure may be found in today’s earnings release filed with the SEC. I will now turn the call over to Peter.

Thanks, David and good afternoon, everyone. We had another exciting quarter at CareDx as we continue to accelerate our leadership position in transplantation diagnostics. Our first mover advantage gives CareDx a considerable speed and we are strengthening our platform every day. In March, we announced a partnership with Cedars-Sinai to study the use of AlloSure to characterize the response to therapy with an Interleukin 6 agent tocilizumab as a treatment for patients with antibody mediated rejection. Also in March we announced a clinical validation of AlloSure use in heart transplantation, which was published in the American Journal of Transplantation. This study is the first large prospective multi-center clinical validation showing the ability of our AlloSure heart testing service to detect acute cell mediated and antibody mediated rejection in heart transplant recipients. In late April, we announced an agreement to acquire OTTR Complete Transplant Management; the leading provider of transplant patient tracking software which is currently used in over 60 of the leading solid organ transplant centers in the U.S. Importantly OTTR software will simplify the transplant center workflow for ordering AlloSure and AlloMap. The addition of the OTTR increases the CareDx value proposition to transplant centers enables the EMR integration of our surveillance solution and the ability to manage patients longitudinally. It also provides the backbone to build artificial intelligence tools for providing care pathways. I am pleased to confirm that the transaction closed yesterday and that we are excited to welcome the OTTR team to CareDx and we expect a seamless integration. Just last week we announced an exclusive in-licensing agreement with Alex Loopik [ph] and his Paris based team from Cibiltech. Alex is a leading transplant pathologist in the field of machine learning and artificial intelligence. We have built a strong relationship over the years with Cibiltech and…

Thank you, Peter. Turning first to the income statement, our first quarter 2019 Testing Services revenue increased 103% year-over-year to $21.5 million. The significant growth in testing services revenue was primarily driven by the 5,710 AlloSure patient results we provided in the first quarter. Growth also came from the 4,280 AlloMap patient results we provided which was an 11% increase compared to the prior year quarter. Our first quarter product revenue increased 34% year-over-year to $4.4 million and as such total revenue for the first quarter of 2019 was $26.0 million, representing an 85% increase compared to the prior year’s $14.1 million. For the first quarter of 2019, the net loss was $7.5 million compared to a net loss of $9 million in the same period of 2018. Our net loss per share was $0.18 for the quarter compared to $0.30 in the first quarter of 2018. Our first quarter 2019 net loss included a $6.1 million stock-based compensation expense and a $3.0 million loss from the change in estimated fair value of common stock warrant liabilities. For the first quarter 2019, our non-GAAP net income was $2.2 million compared to a non-GAAP net loss of $4.0 million in the same period of 2018. Our non-GAAP net income per share was $0.05 for the quarter, compared to a non-GAAP net loss per share of $0.14 in the first quarter of 2018. As a reminder we define adjusted EBITDA as non-GAAP net income before interest, income tax, depreciation, amortization, other expense and net loss attributable to non-controlling interest. For the first quarter of 2019, adjusted EBITDA was a gain of $1.8 million compared to a loss of $3.2 million in the first quarter of2018. While this marks the third consecutive quarter of positive adjusted EBITDA, we will be modestly further increasing our operating expenditures as 2019 progresses to further enhance our leadership position in transplantation. Cash and cash equivalents on March 31, 2019 was $57.4 million compared to $64.6 million at the start of the quarter. Net operating cash flow was negative $5.9 million in the first quarter of 2019. The operating cash outflow in the quarter was primarily related to annual incentive compensation payments for 2018 performance that were paid during the quarter. We continue to expect positive operating cash flow for the full year 2019. As Peter mentioned yesterday we completed the acquisition of OTTR Complete Transplant Management for $16 million. This transaction is being funded with cash on hand and we expect OTTR revenue for the full-year 2019 to be in the $6 million to $8 million range or $4 million to $5 million from May through December with net income anticipates to be breakeven. Turning to guidance, we're updating our 2019 revenue expectations to reflect the continued growth of AlloSure and anticipate $113 million to $115 million for the year,including $4 million to $5 million for the OTTR acquisition. With that, I will open the call for questions.

Thank you. [Operator Instructions] Our first question comes from the line of Bill Quirk with Piper Jaffray. Please proceed with your question.

Great, thanks, and good afternoon everyone.

Hi Bill.

Hi. So I guess first question is you know should we expect to see data on kidney care at the upcoming meeting here or when might this be released.

I you know I think we have very strong data packages obviously on AlloSure. So Predigraft data is readily available because Alexandre Loupy and the transplant team in Paris have actually published extensively on iBox as it was called before. And on AlloMap kidney I think there is a bit of a surprise waiting and we are very excited about it also applying gene expression profiling technology to the field of Transportation and this will be initially launched as a combination of the three and I launched out probably in what we always do in form of a clinical trial. Making that available to transplantation and clinicians on and on a trial basis

Understood. And Peter would you be seeking out any additional reimbursement for the combination of the three or how should we be thinking about that.

No I think we have been talking about AlloSure is really the driver for the company in the short term. I think we are building out strong mold in transplantation the reimbursement strategy has not been laid out as soon as we have laid out the strategy on the reimbursement side which will be predominantly again focused on Medicare reimbursement will be communicated to the street.

Okay great. And then just last one for me. It's just thinking a little bit about your strategy from earlier. I think you brought up in the fourth quarter call I want to get deeper with your existing accounts versus necessarily adding new accounts just for the sake of adding them. Does the new kidney care, is that change that strategy at all. You know maybe make it essentially combine model or are you going basically in both directions deeper as well as broader? Thanks.

Bill thank you very much, a good question and no I think you see that we are now in this quarter in 101 centers – 101 centers which is completely confirming our strategy, we also see our KidneyCare the same strategy play out it’s going deep into these transplant centers that we have an established presence and there is a lot of opportunity for us to converting these centers into surveillance testing. So I think our strategy continues to – to execute against the path that we laid out there is no change to the strategy, the strategy is working.

Okay got it. Thanks very much guys.

Thank you. Our next question comes from the line of Brandon Couillard with Jefferies. Please proceed with your question.

Hey thanks, good afternoon. Peter I would actually like to start with AlloMap the 11% volume growth – it’s been a while since we’ve seen that business do double-digit growth could you perhaps spike out or sort of quantify the impact from HeartCare and perhaps the breadth of users in terms of the docs or centers that have ordered and then does that change at all how you're thinking about AlloMap growth for the year relative to sort of the mid-single-digit assumption that you penciled in there for 2019.

Brandon that’s an excellent question. I think HeartCare is really changing the paradigm in heart transplantation and the excitement that we felt in the ISHLT Congress was palpable and this was great to see we – you actually see the number of centers that have adopted SHORE our registry study is exceeding our expectations and the primary driver for the growth in the first quarter however was actually a bit of a slow quarter of the previous year. So we had a few days outwit heavy, heavy storms in the northeast that were leading to a bit of a catch up in the second quarter last year. So we continue to be modeling AlloMap in this mid-single digit range. We obviously are happy about the double-digit volume growth for this quarter, but I think we continue to look for a mid-single digit volume growth for AlloMap.

Thanks. Then the couple on OTTR and iBox deals. First of OTTR, how long do you think it’ll take for you to sort of be able to build in direct ordering functionality for AlloSure and AlloMap? And then on iBox, is this something that would ultimately sort of require an FDA approval or is this sort of a feature or data – incremental data that you can just drop into the AlloSure test results?

Both excellent question. I think on the OTTR there obviously is easy drop-ins for a few centers but it will take quarters and quarters for us to adopt AlloSure testing or AlloSure functionality or AlloMap functionality hit by a simple mouse click. In some centers it will be quick. The team is actually right now sketching out the strategy and will be updating you as we are progressing on this. Having virtual options to OTTRs with AlloMap and AlloSure is really the low hanging fruit for us and that's the primary focus. Longer term I think it is great to monitor patients longitudinally to make sure that there is a adherence and compliance opportunities to increase that together with centers realizing that they’re actually skipping a lot of the surveillance opportunities for these patients. And then longer term there is the artificial intelligence option. But shifting over to the regulatory and the reimbursement strategy for kidney care, I think we'll be launching kidney care and test the excitement of the transplant community at the American Transplant Congress. And we'll be then informing about the reimbursement and regulatory strategy. That may include FDA; that may not include the FDA at this stage. I don't think we have detailed that out yet. Overall, I think it's a significant contribution to transplant patients having on the one hand cell-free DNA testing as an ongoing injury marker than having AlloMap kidney as an opportunity to measure immune activity. And then on the third leg would be allograft prediction in terms of how long does the allograft actually function which is very exciting with the eyeball. So this comprehensive concept multi-modality testing is very exciting for us.

It's helpful, then one more for Mike, just in terms of the outlook for the year. Should we expect, I guess how should we expect operating expenses to sort of trend sequentially from the first quarter over the balance of the year and these still expect positive EBITDA for the full-year and then I guess thirdly, how will orders would impact the gross margins and operating margins. Thanks.

Yeah. Brandon, on the operating expense, if I look at it from a non-GAAP viewpoint in Q1, the operating expense was about $60 million, I would say by the end of the year in Q4, that operating expense would be about $21 million. So probably going about $5 million, increase being driven by other expense about $1 million a quarter. And the rollout of show and the continued rollout of K-OAR and by the end of Q1, we would fill that our sales and marketing team as we’ve talked about previously. And so we'll be getting the full expense for those over the next couple of quarters. I think though, with our increased revenue guidance increased revenue guidance, we’re still targeting to be EBITDA positive for that – throughout the full –throughout the year and from up a – from a margin perspective, AlloSure is going to be a breakeven from an EBITDA perspective, so very, very small impact on gross margins and very small impact on EBITDA margin overall.

Okay. Thank you.

Thank you. Our next question comes from the line of Per Ostlund with Craig-Hallum Capital. Please proceed with your question.

Thanks. Good afternoon, everybody. And congratulations to Jim on his well-deserved retirement. I want to start out with AlloSeq DNA. So Peter, you guys are featuring this in some presentations at EFI this week. I assume that, that's a pretty, pretty good signal that you're very much on plan for the 2019 introduction. Have you started to sketch out, your go-to-market strategy, whether it's you know geographic areas of focus and that sort of thing and how much does the Allenex infrastructure from that acquisition help sort of grease the skids for you to get to market with that product?

Per, excellent question and thank you so much for setting light on the product business. So I'm actually today in Portugal at the EFI Congress and it's great to see to be together with our distributor network to be here with the team and see the excitement that AlloSeq cell-free DNA is bringing, obviously everybody is looking at our success then in the United States, and then what this could bring to the transplantations outside of the U.S. is about, as we are adopting cell-free DNA testing. We are actually launching two products, one would be the AlloSeq Tx 17, which is our HLA typing product, so that market is very exciting. And then the other one is theAlloSeq’s cell free DNA which we will launch the same strategy in a way that we have found in the U.S. We will make sure the transplant vendors get their hands on a clinical study that we are getting them acquainted with the product and how to use it in surveillance setting and then inform -- very important around reimbursement. We don't think that this will be revenue relevant this year and it'll take maybe into the middle of next year in order to be really revenue relevant but this is a long thought out strategy for us and we are very excited to be launching these products in -- very, very soon in this market.

Okay very good. Coming back to domestic AlloSure in the kidney market in terms of you know some of the competitive noise I guess we'll call it that that's out there have you - I guess 2019 I think you've well telegraphed as the year of building the competitive mountain and you've established yourself in 100 centers and 00:28:38 101 one ordered this quarter and the utilization seems to be ticking up very, very nicely. Is that is any competitive noise impacting ordering activity at current centers. Is it having any impact on the periphery of you know those centers that have yet to order AlloSure from you.

No I think the answer is No. I do think that there is growing excitement then having someone else talk about cell free DNA testing is not negative for CareDx as we are the predominant provider of these solutions at this stage. There are now a couple of companies out there that are making noise which is just supporting our efforts as we have the solutions that is here and now. I do think we have a first mover advantage and we are capitalizing on that first mover advantage somewhat right now I think this is the moment for us to continue to widen our mode in transplantation and we have a clear strategy and we're executing against it and this quarter really demonstrate that our execution is working really well.

Okay. Last question for me and it's kind of a follow up to bills actually related to kidney care. So looking forward to that launch here coming up in a few weeks. Peter did you suggest that that would probably see something a kidney version of SHORE essentially to get center adoption of the multimodality test?

If you have followed the company we are really science based and evidence based and if we are bringing out a new concept which is really an exciting concept of combining three very different approaches to surveillance of kidney patients, we would always do that in a responsible and scientific way and the right way to do that is to, to support the community with generating valuable clinical information with a multi-center prospective initiative. As K-OAR has been such a great success with more than 50 centers recruiting more than a 1,000 patients, I think there is something to build on from K-OAR and that allowed us to just continue to build scientific evidence how these novel biomarkers and novel digital biomarker in addition will potentially change how transplant clinicians and caregivers are caring for these patients.

Okay, excellent. Thank you very much, Peter.

Thank you. Our next question comes from the line of John Hsu with Raymond James. Please proceed with your question.

Good afternoon. If I could just start off with the guidance the increase it looks like with the $4 million to $5 million from OTTR that the raise was somewhere in the $3 million to $4 million range, I guess organically or ex-software. So maybe Mike or Peter if you could start with where you're seeing the strength in the business and what's really kind of driving the increase organically in the revenue guidance?

So I'll Mike talk to it, and he’s the closest to the number. Mike?

Yeah, John, I mean, I think, I think the growth on the guidance, yeah you're right. Roughly half of that comes from the acquisition of OTTR, the other is really, really being driven by our expectations on the continued AlloSure growth. I think again for the quarter, AlloSure slightly exceeded our expectations and so we increased the guidance to represent not so. So yes, it's just continued acceptance of AlloSure.

Got it. And then just, just turning to the K-OAR study, it looks like things are tracking pretty nicely there, but just based on the pace of patients that you've been adding, are you still targeting 1,500 patients because it seems like based on that, the pacing that would imply that you know it might, it might extend a little bit longer than the mid-2019?

You know we have originally talked about a 1,000 patients to be recruited by June this year and in a good fashion, I think we already exceeded against this in a quarter early, now at the end of March that we had exceeded that 1,000 patient recruitment target, you're right that you know there is probably the 1,500, they'll take some time. I think there will be some standards that are not fully recruiting. So if we were at 50 centers and maybe there see or there an additional vendor and there are recruiting of 30 patients, so it will be in this range between 1,400 and 1,500 patients and it will be go beyond June. And you know, we are in – in a way, continuously seeing these center being very excited about adopting the technology. Now there are some centers that actually do want to gain additional insight. So we will have a few centers where we’re actually increasing the recruitment from 30 patients to 50 patients or so and that's also an option. But we are extremely pleased with how K-OAR has really established the surveillance protocol in kidney transplantation, 50 transplant centers are now using 7+4+4 protocol which in itself is a key accomplishment for the forensic company.

Excellent and then I guess if we could just stay on enrollment. If we just fast forward a little bit on KidneyCare clearly you said that there will be some incremental enrollment. So again just thinking about the mode I know most high volume centers typically do call it 100 to 150 or so kidney transplants a year of which these centers are typically looking to enroll up to 30 patients right – the 50 centers on K-OAR. So is the right way to think about it that potentially you could reach another call it up to 30 patients in some of these centers. I'm sure there will be a lot of overlap once you rollout KidneyCare and the registry study associated with that.

Our strategy always has been that we get transplant centers accustomed with the surveillance protocols through the K-OAR study which a study that we have discussed with Medicare to make sure that we have coverage and the data development and now I think there is a broad based adoption in many centers that have used AlloSure beyond the surveillance protocol I think this next study [indiscernible] based on how can we accumulate information based on these three data points that we are providing or three markers that we’re providing. And so I think that that's up to be defined and we'll probably talk about it following ATP and give you more guidance on that. But our goal is to substantially penetrate a number of centers this year and go really deep in as many as possible and get a lion's share of these 100 to 200 in some centers even 300 kidney transplantations per year

Okay great. That's very helpful. And then last one for me just thinking about the surveillance patients added in the quarter. Clearly you gave a nice breakout last quarter of it's really just kind of a combination of KR [kidney replacement] patients plus first time patients plus maintenance patients and then a true-up for attrition. So I don't know if you could just ballpark help us think about that. Obviously the KR we can back into the math based on the patients added for KR specifically but can you just help us think about maybe the other three pieces associated with that number. Thank you.

Yeah John, I think what we saw in this first quarter of 2019 was very similar surveillance patient movements as a previous quarter so yeah the attrition the attrition rate was again in that sort of 10% ballpark. The split between newly transplanted patients and patients more than one year out was again similar segments as before which was roughly around sort of 60% in the first year. So yeah I mean that led to an addition of approximately 800 new surveillance patients in the quarter.

Okay, great. That's really helpful. And sorry just last one for me. Are we seeing any movement on the renal care front in terms of Secretary Azar made some comments and Peter you alluded to last quarter just around you know some movement from a legislative level. You know in terms of maybe starting to increase the availability of kidney organs?

I think, this is a very exciting development that there is broad based support off of kidney issues in the current HHS setting and as ours really spearheading at that, great momentum there. There hasn't come out something very specific yet but we do anticipate that something will come up within the next three months to six months. I actually spent last week in Washington, talking about the various issues around the contribution of transplantation, that we can do to the kidney field because it's clear that transplantation is actually cost effective versus dialysis. And so there is a lot of tailwind so to speak. I don't think that this will be relevant this year, but as we see transplantation gaining share and momentum, I think increasing that the donor population will be a long-term positives for us and these type of issues will be – will be helping the company going forward at transplantation and things – it is an exciting field.

Okay. Great. Thank you so much.

Thank you. [Operator Instructions] Our next question comes from the line of Yi Chen with H.C. Wainwright. Please proceed with your question.

Thank you for taking my question. My first question is, is the raised revenue guidance simply driven by the acquisition of OTTR, which has annual revenue of $6 million to $8 million or is it also driven by anticipated higher than prior – previous anticipated test volume?

Yi, thank you very much for the question. I’ll talk – I’ll hand it over to Mike for the guidance.

Yes, Yi. The increase is roughly half is coming from OTTR. So that some $6 million to $8 million is for the full year for OTTR, so probably for May through to December since the acquisition, we’re looking at something like $4 million to $5 million revenue coming from OTTR. So the delta for the increase in the guidance which is about $8 million at the midpoint is coming really from AlloSure and sort of continued expected growth of that.

Got it. Is iBox technology expected to add any revenue to the top line?

I think we haven't talked about the reimbursement and the regulatory path for the product right now. It is the concept, I would say kidney care really is encapsulating a concept similar to a heart care where we’re combining AlloMap and AlloSure here we don't expect right now for sure for this year contributions from Predigraft which is the iBox technology as a product for – as a contribution for this year.

Got it. And how much impact should we expect from the inclusion of AlloMap and some Blue Cross in the coming years?

I'll turn to Mike. I do think that – we see that as a very positive that rather than battling every AlloMap reimbursement and going back and reimbursement and going back and having negotiations and everything allow them up there that we are now in more than 80% under contract on AlloMap being in network with Anthem which sets us a key signal for transportation issues and high value diagnostics. And so we see the signaling effect of a very important impact. Mike if you want to add to that

Yeah Anthem for AlloMap represents just under sort of 5% of the AlloMap for you. We've had a positive coverage decision from Anthem on AlloMap for several years, so we have been getting. We have been getting paid. Of course we've been getting paid on out of network basis and it takes a longer time to get paid on the Anthem network basis so being in network it'll improve the speed at which we get paid and the simplicity. But I wouldn't expect much of a revenue impact on that because again we've been getting paid over the last few years regardless

Got it. And our final question is an update regarding the litigations against Natera.

Nothing specific we've - those litigations were roughly a month ago. Natera still has time throughout the rest of this month in order to respond. So there's been no response yet. So no movements on this.

Got it. Thank you.

Thank you. Ladies and gentlemen, at this time there are no further questions. I'd like to turn the floor back…

Thank you very much.

Thank you. Ladies and gentlemen this concludes today’s teleconference. You may disconnect your lines at this time. Thank you for your participation.