Greetings, and welcome to the CareDx Inc. Second Quarter Financial Results 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] Please note, this conference is being recorded. I would now like to turn the conference over to your host, Mr. David Clair, Investor Relations. Thank you sir. You may begin.

Good afternoon, and thank you for joining us today. Earlier today CareDx released financial results for the quarter ended June 30, 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. The information provided in this conference call speaks only to the live broadcast today August 1, 2019. CareDx disclaims any intention or obligation except as required by law to update or revise any information, financial projections or other forward-looking statements whether because of new information, future events or otherwise. 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 yet another exciting quarter at CareDx, as we continue to enhance our leadership position in transplantation precision medicine while delivering our fourth consecutive quarter of positive adjusted EBITDA. This quarter we saw additional proof that our 20-year long dedication to the field is translating into success on multiple fronts. Firstly, we would like to applaud the efforts of the White House and Department of Health and Human Services Secretary, Alex Azar for bringing much needed reform to America's, kidney health systems. Proposals to improve organ procurement organizations removed this incentive to living kidney donation, ensure patients receive the best dialysis care available and increase the number of available organs for transplantation all represent significant improvements to the current paradigm. As a patient centric organization, CareDx is excited about the direction the field is moving in. The administration is clearly aligned with CareDx and its mission to improve the long-term outcome of kidney transplantations. At the recent American Transplant Congress or ATC, the presence of CareDx together with a body of evidence on AlloSure and the buzz created by patients, caregivers and our employees was a fantastic experience. We have become a leader in transplant care with some attendees referring to CareDx as the transplant company. At ATC, CareDx officially announced its next generation kidney transplant surveillance solution, KidneyCare. This multi-modality solution combines next generation sequencing and gene expression technologies with smart analytical tools to enable precision medicine in transplant clinic. The reception from ATC attendees to CareDx, AlloSure and KidneyCare was incredibly strong and we saw a noticeable uptick in AlloSure volumes following the event. Before turning to our results for the quarter, I'd like to remind investors of some important metrics regarding AlloSure. Today we will also provide some information that…

Thank you, Peter. Turning first to the income statement our second quarter 2019 testing services revenue increased 83% year-over-year to $25.7 million. The significant growth in Testing Services revenue was primarily driven by the 7,355 AlloSure patient results, we provided in the second quarter. Growth also came from the 4,572 AlloMap patient results we provided which was an 11% increase compared to the prior year quarter. Our second quarter product revenue increased 29% year-over-year to $4.6 million. With the recent addition of OTTR, our patient engagement model is expanding. Digital and other revenue for the quarter was $1.2 million and we continue to expect our digital business to deliver revenue of $4 million to $5 million in 2019. Total revenue for the second quarter of 2019, was $31.5 million representing a 76% increase compared to the prior year's $17.8 million. Our gross margins continued to improve year-over-year. For the second quarter of 2019, the overall gross margin was 63%, compared to a gross margin of 60% in the same period of 2018. The non-GAAP gross margin for the quarter was 67%, compared to 63% in the prior year quarter. It's worth highlighting that the non-GAAP gross margin for the testing services business for the three months ended June 30, 2019 has improved to 72% compared to 70% in the same period of 2018. For the second quarter of 2019, the net loss was $7.8 million compared to a net loss of $14.1 million in the same period of 2018. Our net loss per share was $0.19 for the quarter, compared to a loss of $0.40 per share in the second quarter of 2018. Our second quarter 2019 net loss included a $5 million stock-based compensation expense and a $1.4 million loss from the change in estimated fair value of common…

Thank you. At this time, we'll be conducting a question-and-answer session. [Operator Instructions] Your first question comes from Bill Quirk with Piper Jaffray. Please proceed with your question.

Great. Thank you and good afternoon everyone.

Good afternoon, Bill. How are you doing?

Good, good. So a couple of questions. First, could we start off on guidance? Mike, Peter made the comment that you were seeing some increased volumes coming out of ATC. And certainly moving your guidance up above the beat as well as the addition of OTTR, certainly would suggest that you've seen a nice follow through on that strength here early in the third. Is that kind of the right read through here?

Yes Bill. We've seen a nice follow through and with the results of the second quarter we've increased our revenue guidance by $10 million compared with the previous guidance. So we're still guiding for continued growth sequentially through the rest of the year.

Perfect. And then, I guess a question for Peter. Peter, how should we think about timing on the KidneyCare data? Certainly, there was a lot of excitement at the recent conference, but I think some of the physicians admitted that obviously they want to see the data follow through. And so, when should we be expecting that?

Thank you very much. Excellent question, Bill. Obviously, KidneyCare comprises AlloSure on the other hand our cell-free DNA test. Then our AlloMap kidney which is a gene expression profiling technology. And then the third is this prognostic element of iBox. As the company has always done, we are launching this through a clinical registry study or an observational drive, making sure that our customers and our clinicians that are working with the solution have a framework to engage patients and understand how to provide that information. While AlloSure is a validated fuel lab test, then AlloMap kidney and iBox are still in a phase of rapid development as we gain more and more information. So we will really bring that and make that available probably in the second half of this year. We're shooting for the third quarter and making that available through an OKRA study which will be another landmark trial that the company is engaging in.

Okay, got it. And then last question from me. As it relates to the recent activities by the current administration to increase both access to kidney transplant improved dialysis etcetera. How should we be thinking about the practical implications and/or the timing? I mean it certainly strikes us that any and all efforts to try to get additional kidneys into the donation pool are obviously going to find recipients given the wait list. But how close are you to some of those activities and how quickly do you think that's going to start to have a meaningful impact on the number of kidney transplants each year? Thank you.

Thanks for the question. It's seven years when I joined CareDx and we built this focus on transplantation. If one would have said that the President and the Head of Health and Human Services would be on the podium and announcing a strengthening of transplantation, nobody would've expected that. So this focus on transplantation is completely in line what we've been seeing and the opportunity that we've been seeing. We see that this is an absolute confirmation about the medical need and then also the market potential that we see which we have been estimating at $2 billion and beyond. So in that sense this will be a mid-to-long-term increase in transplantation. But we do hope that even next year, we are already see an acceleration of available organs by making sure that the for example the organ procurement organizations are being more effective in making sure to make organs available. If we were to apply the rules that are happening, for example in France onto the American organ population we would be seeing an increase of about 3,000 organs which would be a 15% increase on our current organ availability. So yes, there's very tangible things that we see happening and currently we're growing about mid-single-digit on our kidneys organ. I think that could be doubling by next year. So a 15% organ growth for next year is more than possible.

Very good. Thanks guys.

Our next question comes from Brandon Couillard with Jefferies. Proceed with your question.

Thanks, good afternoon. Peter appreciate all the detail around the attrition rate figures in the period. I think that pretty much puts that question to bed. I want to focus on the number of ordering, AlloSure centers in the period. You've kind of been flat lining the last few quarters at around 100 -- spiked up to 117 this period. Can you sort of speak to the drivers of that?

Brandon, thank you very much. And you know this follows exactly our strategy where we had said for this year, it's all about going deep into the individual center making sure that we are a part of the workflow. We do place the protocols and we are very strong in converting K-OAR centers into regular ordering centers. So our goal was not to increase the 100 centers in the beginning of the year. Our goal was to go deep in these 100 centers. So 117, I think is testimony to the great reception we had at ATC. We see that as a nice increase. But really the success that you see in our launch strategy is that, we're going deep and have more patients per center where we are existing present and going deep in these centers. It's very positive. So this number 117 is a great number because it's the number of ordering centers in the quarter. That might notch up a little bit, but really what I'm focused on is how can we grow the high volume target centers that are within that 117.

More broadly could you sort of speak to some of the initiatives you're working on internally to improve the compliance and adherence rate for AlloSure patients?

I think one of the most exciting elements that we have added to our field team is the patient care managers, where we are now engaging and supporting transplant centers in managing these patients longitudinally. Initially, we helped these centers by just making sure that patients get their blood draw scheduled and are coming back to the center in their regular surveillance interval. And we have seen that this compliance and adherence is a key challenge in a center because tertiary care centers in the U.S. are not well equipped to have this longitudinal patient care management. And CareDx can really make a significant contribution in that because this better surveillance will lead to better outcomes. So having patient care managers that directly interacting with these patients is very, very valuable. And we believe that we can impact adherence and compliance. Today in a way this is low hanging fruit because compliance and adherence we talked about is probably 70% to 80% on our K-OAR patient population and only about in the 60% range in our surveillance patient population outside of the K-OAR. So this could be a significant value driver also long-term as we continue to increase patient penetration.

Thanks and then 2-part question for Mike. The first one the guidance for the year. You put up double-digit growth for AlloMap through the first half of the year. Are you still thinking that's mid-single digits for the full year? And then secondly could you speak to the account receivable jump in the second quarter? Thanks.

Firstly, Brandon on AlloMap I think over the last two quarters now we've seen the AlloMap growth be in the sort of 10% 11% range and some of that increase is coming from the driver of SHORE being rolled out. So I think we're looking at the remainder of the year to probably continue around this 10% low double-digit growth for 2019. With respect to the AR the biggest impact on that was that we added the OTTR acquisition. So that added something like about $2.5 million in accounts receivable. The rest of it is just coming from the growth on the Testing Services business as we ramp up the revenue. It's obviously increasingly AR.

Okay. Thank you.

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

Thanks. Good afternoon guys. Wanted to follow-up Peter on your answer to one of Bill's questions about KidneyCare and the upcoming rollout and launch. And as you're thinking about building your registry, can you give us a little bit of a handle on what you're thinking in terms of size and scope of an OKRA study versus K-OAR? Are you thinking of a similar size patient cohort center count, et cetera? And how much can you piggyback seamlessly on the infrastructure of the K-OAR study in terms of IRBs and that sort of thing to really smooth the start of the trial?

Well, thank you very much for the question. I think in terms of the details of the OKRA study, we'll be shortly announcing the details of the OKRA study. I think we as a company tend to speak about these trials when we have a first patient, first visit enrolled. That has been common practice at CareDx. We always want to talk about things once we have them ready and launched. In the sense of how to think about in broad strokes, we think about it as an extension of K-OAR think about it as a K-OAR 2 in a way of the same type of magnitude of trials. So that should give you some kind of a data point. It will be 1,000 or more patients and it will be three-year follow-up. And it will be accompanied with all the toolsets that we have in the company to make sure that we have a data repository that allows us to do not only iBox and AlloMap and AlloSure, but also build a basis for iTrack where were are trying to go towards the next step of having smart analytical solution based on machine learning and artificial intelligence.

Okay. Very good. And since you mentioned OTTR as well, if we come back to that, it sounds like in terms of the revenue contribution that's very much tracking against expectations. From the electronic medical record standpoint, how are you seeing that roll out and what should we be thinking of in terms of timelines for you being integrated with OTTR centers?

The team is doing a fabulous job on this, but it is also a few weeks into the acquisition. So I think we have launched now the initiatives. The teams are working, I would say night and day. And so I think we're on the next earnings call, we'll be able to update on how good we are on seeing not only the ability to integrate this into the OTTR system, but also provide the solutions at those centers where OTTR has been used even that are using the EPIC platform. So I think we'll be able to probably in three months time to be able to talk about our electronic medical records. In general, being part of the electronic medical record will widen our moat and we see that as a possible opportunity for us to accelerate our remote building in transplantation.

Okay. Very good. Thank you, Peter.

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

Good afternoon.

Hey, John. How are you doing?

Doing well, thanks Peter. Good afternoon. If we could just go back to the guidance for a second, I just want to be clear. I believe the last time you provided guidance the $4 million to $5 million for OTTR Software was already included. So net-net the improvement is roughly $10 million. So can you just help us think about maybe the different pieces that are driving that between AlloSure as well as transplant products and then also AlloMap?

Yeah, John, it's Mike here. Yes, in the previous guidance which was $113 million to $115 million that included the $4 million to $5 million for OTTR. So that stays consistent in the revised guidance. Again, in the previous guidance, we'd been talking about product growth for the full year being around the 20% mark. And that stays the same. So the difference in guidance is coming from AlloMap. And again, we've said the growth now we're seeing is this 10% to 11% and that's probably going to continue for the rest of the year. And then the remainder of the growth, obviously then coming from AlloSure and the continued traction there.

Okay. Great. Thanks for that. Then just looking at a couple metrics that you provided, it looks like surveillance patients seem to actually accelerate quarter-on-quarter. And yet the number of K-OAR patients actually decelerated. So, it would seem that even outside of K-OAR that you are actually driving acceleration in kidney. So, can you just speak to just some of the trends that you're seeing there in terms of surveillance patients being added?

Yeah. And John, I think you're really picking up on the most important number when we look at our metrics. The one number that we focus on is the surveillance patients. And you're mentioning it's slowing. There's still 200 K-OAR patients added, which is nice. But really the 1,000 patients -- and so that would be 800 additional patients outside of K-OAR being added onto the quarter. That's really the excitement in the organization, because that is supporting our flywheel concept of patients that we care for longitudinally. And we are able to potentially improve long-term outcome of these patients by better monitoring. So this 4618, I think is a phenomenal number for us. The team has done a great, great job, and I think it speaks testimony to that we have moved way beyond K-OAR already in patient adoption and clinician acceptance of the test. Besides the 117 centers, which I think is strong the 4,618 surveillance patients is really the very exciting number on our metrics.

Okay, great. And then last one from me. Just thinking about -- you obviously have a lot of irons in the fire and great momentum in the current business. But if we had to think about maybe timing on reimbursement pathways for maybe a couple products, and I'll just throw them out there for HeartCare if there is some potential incremental reimbursement down the line or for AlloSure in lung. If you could just provide us any update as far as your thoughts on how those might be progressing. Thank you.

No and I think we've been always talking about that we're progressing those on reimbursement. I think we have very strong validation data. We have publications for example on HeartCare that will drive the clinical validation of the combination of gene expression profiling and cell-free DNA. I think in the past when talking about additional upsides, we always said we were actually happy if we continue to stay at the current AlloMap reimbursement rate. We do see an opportunity for potentially increasing the reimbursement size there as well. So, we have not had in-depth discussions with MolDx that we would go through that route as well on these products. So I think as this will unfold, we will update you on the progression. But I think in terms of guidance, I would keep to the current reimbursement levels of these two products, and we spit out the 2020 tool for AlloSure. So, I think it puts a marker on on how to think about our continuous reimbursement level.

Okay. Fair enough. Thank you so much.

Thank you, John.

[Operator Instructions] Our next question comes from Yi Chen with H.C. Wainwright. Please proceed with your question.

Thank you for taking my question. Looking at the test volume of AlloSure developed by the kidney transplantation, the test per patient remains at 1.3 for first and second quarter, is there any chance that this number can go up during the remainder of 2019? Or this number will remain relatively static?

Hi, Yi. This is Mike here. I think at the moment with the trends we're seeing with respect to the patients that are on a surveillance protocol and the adherence rates for K-OAR and for the non-K-OAR surveillance patients, then probably this rate of 1.2, 1.3 is probably going to stay consistent for the remainder of the year unless that mix of surveillance patients to non-surveillance patients was to change.

Okay. Thanks. And also I noticed that for the second quarter, there was increasing R&D and sales and marketing expenses. Do you think the increase in the test volume order the top line revenue is in proportion to the increase in these operating expenses?

I think we did have an acceleration of operating expense this quarter. I talked about it earlier, being related to expanding the field and now we have 50 people, the studies that we're doing. We had expense related to the trade conferences and our sore of large presence at those conferences this quarter. And then of course there was the addition of OTTR. And so, we did see a bump up. I think I mentioned, we'll continue to increase the operating expense, but it probably won't see a bump up like that for the remainder of the year. And so, I think the operating expense growth will slow down for the remainder of the 2019.

Thank you.

There are no further questions left in the queue. I would like to turn the call back over to management for any closing remarks.

Well, thank you very much for joining the call as we are building an exciting transplantation business. Thank you very much for your interest. Goodbye.

This concludes today's teleconference. You may now disconnect your lines at this time. Thank you for your participation, and have a wonderful day.