Greetings and welcome to the CareDx, Inc. Third 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 will now turn the conference over to your host, Mr. Greg Chodaczek, with Gilmartin Group. Go ahead please.

Thank you. Good afternoon, and thank you for joining us today. Earlier today, CareDx released financial results for the quarter ended September 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 the 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 facts, should be deemed to be forward-looking statements. All forward-looking statements include 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 involve 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 in the Securities and Exchange Commission. The information provided in this conference call speaks only to the live broadcast today, October 31, 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, Greg and good afternoon everyone. We had another record quarter at CareDx, delivering strong growth across our portfolio and expanding our leadership position in transplantation precision medicine. During the quarter, we continued to increase our moat in transplantation with a further expansion of our surveillance testing services, the global launch of AlloSeq cell-free DNA, the acquisition of XynManagement and the addition of two new board members. For the third quarter of 2019, total revenues were $33.8 million increasing 60% compared to the year ago quarter. Growth in the quarter was primarily due to testing services revenues increasing 68% with digital revenue from our recent OTTR and XynManagement acquisitions contributing $1.4 million to the top line. In testing services, CareDx provided 8,524 AlloSure Kidney results to approximately 6,600 transplant patients in the third quarter. Since launching AlloSure Kidney in October, 2017 we have provided results to almost 14,000 patients, which equates to approximately 7% of the total number of living kidney transplant patients in the U.S. During the quarter, we continued to expand our kidney transplant surveillance services by announcing the enrollment of the first patient in the OKRA study, a multi-center prospective observational clinical trial. This landmark registry study is designed to measure outcomes of transplant recipients using KidneyCare, our next generation solution for kidney transplant patient surveillance. The combination of AlloSure’s donor derived cell-free DNA test AlloMap’s gene expression profiling, and iBox’s graft survival artificial intelligence algorithms will provide physicians with the most comprehensive option to manage kidney allograft health. Turning to numbers on AlloSure Kidney, during the third quarter 124 centers provided AlloSure results to their kidney transplant patients. We estimate that these 124 centers account for approximately 65% of the transplant volume in the United States. We finished the third quarter of 2019 with approximately 5,700…

Thank you, Peter. Turning first to the income statement. Our third quarter 2019 testing services revenue increased 68% year-over-year to $28.2 million. The significant growth in testing services revenue was primarily driven by the $8,524 AlloSure patient results we provided in the third quarter. Growth also came from the 4,726 AlloMap patient results we provided, which was a 16% increase compared to the prior year quarter. Our third quarter product revenue was $4.2 million and year-to-date product revenue growth of 19% continues to track to our expectations. Digital and other revenue for the quarter was $1.4 million and includes revenue from our acquisition of OTTR as well as from the XynManagement acquisition, which closed in late August. Total revenue in the third quarter of 2019 was $33.8 million, representing a 60% increase compared to the prior year's $21.2 million. Our gross margins continued to improve year-over-year. For the third quarter of 2019, the overall gross margin was 66% compared to a gross margin of 58% in the same period of 2018. The non-GAAP gross margin for the quarter was 69%, compared to 61% 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 September 30, 2019 has improved to 75% compared to 67% in the same period of 2018. For the third quarter of 2019, the net loss was $1.8 million compared to a net loss of $20.0 million in the same period of 2018. Our net loss per share was $0.04 for the quarter, compared to a loss of $0.54 per share in the third quarter of 2018. Our third quarter 2019 net loss included a $6.0 million stock-based compensation expense and a $4.3 million gain from the change in estimated fair value of common stock…

Thank you. At this time, we will be conducting a question-and-answer session. [Operator Instructions] Thank you. Your first question comes from Bill Quirk, Piper Jaffray. Go ahead, please.

Great, thank you. Good afternoon and once again a very nice quarter, gentleman.

Thank you very much, Bill.

So first question I had, Peter was the comment about attrition and obviously good to see that that is consistent from quarter-to-quarter. I have a question for you though, given that we have a number of patients that are currently undergoing AlloSure testing, but yet or not in year one where the protocol suggests that they may get four or fewer tests. And you've had some previous comments that suggest that the K-OAR patients are going to have about 75% adherence and maybe about 50% or so adherence for surveillance patients, is another term for attrition simply the testing interval by chance. In other words, if you had a patient who got tested in the first quarter, they may not necessarily be even up for a second test in the second quarter for example.

Yes. I think this attrition discussion has been lingering around. We see the dynamic as completely standard and industry straightforward, so Mike might be able to shed more light on that.

Yes, Bill, the way we define attrition is basically we have standing order patient where we have orders for a number of tests over 12-month period. We define attrition where that standing order has ended in the quarter and hasn't yet been renewed by the end of the quarter. So those standing order patients could come back because that order could get renewed. It's just not being renewed by the end of the quarter. So it's not quite the interval testing, exactly as you're describing it. But that could be an influencing factor.

Okay. Very good. Thank you. And then two additional ones for me. First is on AlloSeq or AlloSure rather outside of U.S. Can you help us think about, I guess the early stages of launch if you recall is very much a country-by-country focused, realizing that you don't want to give 2020 guidance, but maybe help us think a little bit about what we should be expecting in the first year there. And then secondly, just thinking about AlloMap, it continues to be a nice outperformer here, several quarters and then the HeartCare launch. How important would you say the addition of AlloSure is to convincing physicians either to stick with the product for a longer period of time or for that matter, bringing on some new physicians who had previously not been interested in using the single product, but rather interested in using the combined product. Thanks guys.

No. Well, thank you very much. And today you heard us the first time to talk about 800,000 patients as additional potential uses of an AlloSeq opportunity outside of the United States. So this cell-free DNA technology has received tremendous, tremendous interest from transplant centers all over the world. Now our beta sites where we are currently conducting our first initial user testing are very excited about getting cell-free DNA in their hands. I think you mentioned that probably reimbursement in molecular diagnostics in ex-U.S. market is really the key to success. I think we navigated this extremely well in the United States with our AlloSure, but that will be also the key to success in the ex-U.S. market. Now we haven't guided on the product revenue for next year. And probably by March next year we'll be in a position to give you a better answer, but really reimbursement is going to be key. I think in broad strokes it will be revenue relevant next year, but really the 2022 – and 2021 and 2022 will then be, will see the full kicking off of that product business. So we always said it's not relevant in 2019, maybe it becomes a bit relevant – revenue relevant in 2020, but then really the kicking off of additional revenues will come in the 2021 phase. And then on the HeartCare, we're very excited about HeartCare as the community has embraced this combination of AlloMap and AlloSure. And you see 16% growth on the AlloMap franchise has very, very strong growth from our perspective. The number of centers now embracing HeartCare, quite frankly I think it's very surprising to me that we've been so successful with everything that's ongoing in the company to actually engage so many transplant centers in the U.S. to start on the SHORE trial. And that really speaks volumes to the power of the combination of AlloMap and AlloSure. We are probably attributing roughly half of the growth of the HeartCare franchise with the SHORE trial excitement, or the other way to say it that half of the AlloMap process is probably associated with the HeartCare concept. So I think this is a strong growth driver for us in 2019 on the heart franchise.

Got it. Thank you very much, guys.

Thank you. Your next question comes from Brandon Couillard, Jefferies. Go ahead, please.

Hi, guys. This is Matt on for Brandon today. Thanks for taking my questions. First one, if we look at the implied 4Q guidance, it suggest around $33 million to $34 million of revenue, which would essentially be flat sequentially. Given the underlying momentum you're seeing on the kidney front and the strength on the heart side of the business, can you walk through some of the puts and takes that are informing your implied 4Q guidance? Thanks.

Yes. I know, and thank you so much. And we as previously in previous year have always talked about the fourth quarter being probably a less surveillance quarter for transplantation. So we just see less transplantation surveillance visits. Patients do not want to come in into the transplant center during the holidays or even during the Thanksgiving. So fourth quarter has always been a little bit of a seasonal effect for us. Overall, I think we are going into the fourth quarter with 5,738 surveillance patients, which is a very strong momentum build for us into the quarter. And we see – we saw in the third quarter a volume growth on the kidney side, but also want to make sure that you realize that the fourth quarter is always a bit of a fourth quarter dimension.

Thanks.

Maybe I'll just add on the guidance, we have – we did have – we had a strong third quarter. I think that's enabled us to raise the lower end of the guidance from $123 million to $124 million. So we’re now at $124 million to $125 million. So I think we say feeling confident with that guidance and still expecting, yes, some sequential growth coming from AlloSure.

Thanks. And then if we look at the net surveillance patient adds in the quarter, another nice quarter there, especially excluding those outside of the K-OAR study. Peter, can you just talk a little bit about what is underpinning the momentum you're seeing there in terms of the kind of acceleration there in the net adds?

Now if you look at our numbers, they're all I think pretty strong numbers. When you see total patient results, you look at also the dynamic of ordering centers have moved up from 117 to 124 in the quarter. And now these additional 1000 patients on the surveillance add, I think that's all pointing in the right direction. I would say that these new centers, they are embracing the arts schedule, which is the seven plus four plus four schedule. And I think that has now established through more than 50 centers through the K-OAR study, have embraced this art schedule and the protocol. And if you're asked as a new center coming on stream, how should I use this product? It's very obvious how to use AlloSure, it's seven plus four plus four. And so I think this is a really very successful in the context of 5,000 more than 5,700 patients now on a surveillance schedule. So I think we are very pleased with that.

Super. Thank you.

Thank you. Your next question comes from John Hsu, Raymond James. Go ahead, please.

Great, thank you. Peter, if we – Peter or Mike actually, if we could start going back on the guidance, I appreciate that there is typically some seasonality and seasonal decline in testing in the 4Q. But just to be clear, are you expecting any specific impact from competition or competitors enrolling in and competing research studies in the 4Q?

John, that's an excellent question. And I think we actually hadn't anticipated a fourth quarter impact of competition and sitting here right now at – we're in November and haven't had a news on reimbursement of any other significant tests other than the true graft offering. I think that speaks to us probably not having a lot of expectations on the fourth quarter in terms of impact on content and competitive testing.

Okay, great. Regarding the center penetration, you’ve ticked up again here in the 3Q, you've been making tremendous progress there on the kidney side. Maybe you could talk, Peter, a little bit about the progress and maybe where you are in terms of the centers that are going deep, where you have a written protocol. I would argue you probably have a deeper moat there. And then the second part of the question is the penetration of the remaining high volume centers, clearly you've talked about 100 centers having 80% of the volume. So I guess the holdouts at this point, what's the data that they need to be convinced? Is it – is the one your primary outcome data? And if so, when can we expect that?

No. Two excellent question. The first one is, yes, I mean, 124 centers in the United States is almost half of all transplant centers in the U.S. are now exposed to AlloSure and that's very exciting. But the really important component that you honed in on is, are they using – have they embraced beyond K-OAR protocol? And is there an AlloSure protocol established in these centers? And we started the year with about 10 centers having a protocol. And now we have passed more than 20 centers, have embraced in AlloSure protocol as a standard for their center, which is very strong for us and which is probably driving some of the surveillance patients increases that we see here. So, no, we're very pleased with going deep and you'll see the numbers speak for themselves here. We’re being quite successful in penetrating there.

Great. And sorry, just on the remaining high volume centers some of the holdouts, if we had to think about, maybe the 15% gap, if you will, of the remaining high volume centers based on the way you've kind of dissected the market. Is there any, I guess, one thing that they're waiting for in terms of data that they can maybe drive some greater adoption in, I guess, the remaining holdouts?

I think the one data that we are probably pretty excited about to generate relatively soon. Now we have such big patient data pool. And being clear, we call this about being comfortable with living in the gray because it's relatively clear if you have a very low AlloSure score, what it means, there is no active rejection. But if you have a very high AlloSure score, it's also clear, it's pretty clear that there is a rejection. I think what the data that we need and that experience will bring, what do you do with those patients that are in this 0.5% to 0.9% range? And generating more experience and more data, is this really a TCMR 1A rejection or is it actually a misread of a biopsy for example? I think that type of data will be very convincing to many opinion leaders. And we're in the midst of generating very exciting data on that and releasing that probably somewhere between ASN, ASTS and ATC next year.

Okay, great. Thank you for that. And then the last one from me, we've got an update here recently as far as there's some movement relating to the KidneyCare executive orders, specifically regarding the organ procurement organizations and living donor rules, there's some movement towards getting those finalized. Also, Fresenius recently announced, the universal living donor registry. So I guess the question is, clearly the rate of kidney transplants have been growing pretty nicely here over time. I think something around on the order of 5% per year over the last 30 years. But I guess, looking into next year, Peter, do you have a sense of any of these catalysts as potentially accelerating the pace above the normal rate for adoption in transplant?

No. And thank you so much for that question because I think that's one of the – in 2000 – in September CMS removed the outcome requirement for transplant centers preapproval. And I think that has very, very strong impact for the transplant community because this one year graft survival number has been now removed. And that does really do two things; one, it will increase the need, the ability for transplant centers to offer transplant marginal organ. And then secondly, it will also increase the need for transplant centers having better quality systems because they're now measured on long-term outcome qualities versus just this one year graft survival. So that plays exactly to what we are playing towards the KidneyCare initiative, which is very exciting for us. So you'll see an increase in kidney transplant next year based on this initiative. And secondly, you'll see an increase of need of transplant centers to have increased quality measures, which we, with our XynQAPI offering will be able to address.

Excellent. And maybe if I can sneak in one more just because you mentioned the need for better quality systems, you obviously did the OTTR and then Xyn acquisitions, you have iBox on board now and starting to collect data. Can you just give us an update broadly speaking on your software strategy and how you see that trending?

I think it's relatively short term. The software strategy is explained relatively simple. We want to drive adherence and compliance to our AlloSure schedule. I think longer term we want to be really sticky with transplant centers and offering them unique solutions that are along the patient journey, pre-transplant with a waitlist XynManagement, HLA typing and then the post-transplant surveillance options. In order to aggregate all that information and that data, you need to have a backbone which we have with OTTR and XynManagement now in place, but really only at the very early beginning. You see for this quarter of recording $1.4 million in revenue, that's only an early start, but what we're really building is a huge capability within the organization of being able to provide and interact with transplant centers on the long-term. But on the short term it's really the 75% adherence to K-OAR protocol or 65% adherence that we see outside of the KOAR, how can we increase AlloSure adoption by better software tools, compliance and adherence management with our patient care managers both pre-transplant and then post-transplant.

That's very helpful. Thank you so much.

Thank you. Your next question comes from Alex Nowak, Craig-Hallum Capital Group, go ahead please.

Hey, good afternoon everyone, this is Alex Nowak here. Just, actually a follow up to that last question there, just with the OTTR and the other digital solutions that you've acquired now. As a hospital becomes OTTR enabled and again this might be too early to see this just yet, do you see that AlloSure and AlloMap demand or the compliance change once hospital goes from not OTTR enabled to OTTR enabled?

Alex, this is super early and we're not even a full quarter into some of these acquisitions and combinations. I think what I can tell you is that I almost daily now get exciting pictures of CareDx employees that are visiting jointly different pockets of transplant centers and have additional insights, because being part of that workflow in the transplant centers is so important in understanding how these transplant centers interact and who is making, which decision is very critical for us in our business model. But now, I think it is very early. I think we do have the first centers that where we have the – we call it the AlloSure order button as part of the electronic medical record, which we always thought would be important, but I'd report in the future about the success of what that incrementally does to our revenue line. But I'm very excited about the tremendous capability and quite frankly also wonderful people that have joined the CareDx village, so at this stage it's very exciting what we're building.

Okay, understood. And understood that makes sense. And then we saw the potential decision here by CMS to once again change the data service policy from molecular test and kind of going back to the old status quo from a couple of years ago. I know this old policy was a hindrance just to AlloMap, but if the policy is reverted here back to the 2015, 2016 original policy, would there be any impact to AlloSure testing?

I think that's excellent. I think we have seen a little bit of an impact of AlloMap, but I think we've been extremely capable of navigating that rule with our AlloMap franchise. So I don't anticipate that would have significant impact, but it is always something that we'll be working on, just given the value that we are bringing to the transplant patients at this stage. I can’t see how we would be submitted under these tremendous changes. These transplant centers are caring for patients on a basis and so I think that's important that we remain within that framework.

Understood, completely agree. And then just Michael just a quick question, kind of going back to a previous one, you've been able to show some very nice sequential growth over the past seven quarters. Just looking at the 2020, do you think the business can still show sequential growth in all the quarters next year? Do you think seasonality and more of these one-time things will come more into play next year?

Alex, yes, I mean I think since AlloSure was launched two years ago, we've had sequential growth and we continue to see traction and we are continuing adding surveillance patients. So I think, our expectation is that could – should continue throughout 2020.

Okay. Understood, congrats on the great results.

Thank you.

Thank you. Your next question comes from Yi Chen, H.C. Wainwright & Co. Go ahead, please.

All right, thanks for taking the question. My first question is, could you clarify those – for those transplant centers who have already adopted the AlloSure test? Can they participate in other competing tests? Be it a study or they can only participate in study that’s using AlloSure?

No, these are very large academic medical centers and many of them have multiple researchers on staff and multiple clinicians that are doing research and development. And no, I don't think there is any exclusivity to any of our tests. I think it's actually, in a way we are embracing that diversity and the ability to compete with these tests also on a clinical level. We actually pride ourselves in a way of bringing these novel biomarkers to the market and have a first mover advantage. It has opened a bit of an avenue for many of these other tests and now embracing these very large registry studies. I don't think that anybody five years ago would have talked about a 3,000 to 4,000 patient registry study post-transplant. CareDx is really a first mover on this and we continue to move along in this field with the OKRA study, which will be a new landmark study in post-transplant surveillance in kidney patients. SHORE is a landmark study for heart transplantation. So I think we're really moving the needle here.

Thanks. my second question is, when you said that you expect the AlloSure test revenue to have sequential gross in 2020, is there a factor that growth is also driven by the AlloSure Heart test or it's only going to be primarily be driven by the AlloSure for kidney tests?

Yes, when I mentioned that I was talking specifically on AlloSure Kidney, so probably I should've just been very clear that AlloSure Kidney, we're expecting continued sequential growth. And when we talk about AlloSure Heart, separate tests and of course that's not reimbursed at the moment.

Do you expect AlloSure Heart to be reimbursed and provide meaningful contribution to the top line in 2020?

Well I think in 2020 we'll be guiding towards the 2020 number of that. I think the way that we have been interpreting the draft local coverage decision for AlloSure Heart, I think there – if a clinician chooses to use AlloMap and AlloSure Heart combined, one could interpret the way that this is now written that there probably will be an increase in reimbursement. I've been on the record that, that I think we do want to make sure that we are being responsible in the context, but first we need to get through the final local coverage decision and then there will be a pricing discussion on the product that we foresee to come maybe mid-next year to have then an AlloSure Heart reimbursement and we'll update the market as soon as we get these news.

Thank you.

Thank you. We have reached the end of the question–and-answer session and I will now turn the call back over to Peter for closing remarks.

Well thank you so much for joining the call today. I'm very much looking forward to talk to you soon. Thank you.

Thank you. This concludes today's conference and you may disconnect your lines at this time. Thank you for your participation.