Good day, ladies and gentlemen, and welcome to the CareDx, Incorporated Fourth Quarter 2022 Earnings Conference Call. Today’s conference is being recorded. At this time, I would like to turn the conference over to Greg Chodaczek. Please go ahead.

Good afternoon and thank you for joining us today. Earlier today, CareDx released financial results for the quarter ended December 31st, 2022. The release is currently available on the Company’s website at www.caredx.com. Reg Seeto, Chief Executive Officer; and Abhishek Jain, 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 include 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 facts should be deemed to be forward-looking statements. All forward-looking statements, including, without limitation, are 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 of descriptions 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, February 27th, 2023. 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 certain financial measures that are 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 Reg.

Thanks, Greg. Good afternoon, everyone. And thank you for joining us. Welcome to CareDx’s fourth quarter and full year 2022 earnings conference call. During 2022 the company made significant progress towards our vision of being the leader in the transplant ecosystem, while delivering on our mission to bring innovation across the transplant patient journey. The focus of today’s call will be on the execution and progress in three key areas. The first is the path to profitability as we share CareDx’s differentiated financial profile versus our peers. The second is the focus on the 3Cs; catalysts, collections and coverage, where we hit an inflection point with collections during the fourth quarter of 2022. And the third is building leadership in the transplant ecosystem, especially with the development of our digital ecosystem. Turning to the first topic on our financial profile. The economic environment during the past year, with high inflation and the threat of recession has further emphasized the importance of companies to maintain a strong financial position. Given this, we’re focused on maintaining a robust balance sheet with a plan to achieve profitable adjusted EBITDA in the first half of 2023. The following support this commitment. First, the company announced an authorized share buyback program in December of 2022 of upto $50 million over two years, demonstrating the board of directors and management's conference in the business, cash position and long-term growth opportunities. As of the end of 2022, we repurchase 0.6 million of shares and have continued executing our program in early 2023. We – secondly we ended 2022 with $293 million in cash and cash equivalents and marketable securities on the balance sheet and have no debt. Our solid cash performance was driven by improved cash collections infrastructure that we invested in significantly during 2022, which led…

Thank you, Reg. We are pleased with the results from the fourth quarter and are excited about our leadership position across the transplant ecosystem and our ability to support patients and deliver life-saving services. I’ll focus on the following in my prepared remarks, Q4 and 2022 financial results, coverage, collections and guidance for FY 2023. I'll start with CareDx’s differentiated financial profile versus our peers. We ended the quarter with $293 million in cash, cash equivalents and marketable securities. It is a $2 million increase as compared to the previous quarter, which included stock repurchases of 600K in the quarter. I would also like to highlight net cash provided by operating activities was $7 million in the quarter, driven by solid cash collections. We saw an inflection point in Q4 in collections as a result of our investments in improving processes and scaling infrastructure in this key area. In Q4, we had our highest ever cash collections quarter, collecting 110% of our testing services revenue. This higher collection is particularly important as we recognize revenues for the present quarter based on the historical collections per test. Therefore, higher collections in a given quarter will become a positive for revenue recognition in upcoming quarters. We look forward to continuing this momentum in 2023. As we move towards profitability and breakeven adjusted EBITDA in the first half of 2023, we are confident that the business is self-funding into the foreseeable future. Moving to revenues. In Q4, we recorded total revenues of $82.4 million, up 4% year-over-year and as compared to last quarter. For the full year 2022, we recorded total revenues of $321.8 million, up 9% year-over-year. Testing Services revenue for the fourth quarter declined by 5% year-over-year to $65.4 million and was up 1% as compared to last quarter. For the…

Thank you. [Operator Instructions] Our first question is from Andrew Cooper with Raymond James. Please proceed.

Thanks for the time. Maybe just first, I want to talk about gross margins a little bit. I think it's been really impressive over the course of the last, really, couple of years that you've been able to hold those testing services margins where you have, I guess, Thinking about the ASP dynamics you just laid out that don't assume any improvements from some of the catalysts, etcetera. How much can you continue to absorb that, call it, low double-digit price decrease without having a bigger impact on the testing services gross margin because it's been really impressive what you've done so far. So I just want to get a sense for what efficiencies are left to find?

Yes, Andrew, firstly, thanks for the quality feedback there. The team has worked extremely hard with the efficiencies around the gross margins. There are multiple levers across that in the testing service. We look at automation where there's increased volume, where there's payer reimbursement and where we've had multimodality. So there's a series of levers that we continue to add on, and it's something that's built into our plan. I think as we look at also the ASP dynamics, there has been improvement through the collections. And part of the plan is also work obviously on our coverage now overall as part of this plan. But I'll let Abhishek to provide any additional commentary.

Yes, sure. Rich, thanks for adding those -- that color there. Andrew, in my mind, there are so many levers in our COGS bucket, right? Because in the lab, you can automate a lot of pieces of stuff. There are pieces in our shipping and the freight charges that there are opportunities there. And of course, I'm so proud of the team there, both on the lab operations side and on the supply chain side, the way they were they will engage with the vendors to negotiate and make sure that we are not impacted by the inflationary pressures that we are seeing in the market. So I would say a lot of things that the team has done in the past. But how much can they really absorb going forward? I'm really hopeful that they will continue to proceed the way they have done it in the past, and we'll continue to find the efficiencies going forward as well.

Yes, one other thing I'll say is that if you look at gross margins, it's not just with the testing services as noted during the call, I mean, with the products business. We're actually looking at improving the gross margins there, as we've shared with some of the site consolidation we’re doing across the organization. So as a company, particularly in this environment, we do think gross margins is important. It’s not just in testing services where we’ve had that established, but also now looking at the products business and taking some efficiency opportunities there as well.

Okay. Great. And maybe just 1 more kind of combo question still kind of linked to the P&L. I guess, one, can you give us a sense for in that ASP that you’re including in the guide? How much benefit from some of the accruals of that 110% you just collected in the fourth quarter, should we start to see sort of flow-through through the year and maybe the pacing of that? And then secondly, just a little bit more color on some of the R&D spend in 4Q that you’re calling out as onetime. Just what exactly it is and why it’s going to fall off in 1Q and beyond as well would be great. And then I’ll let others jump in.

Sure. So there are two pieces of your question, Andrew, the first 1 around the collection improvements and how that is going to help us bridge the gap between the headwind that we see on the payer mix and of course, the benefit of the volume. So the way I’ve guided this time, so our ASP was mid-teens decline last year. But this time, we are assuming low double digit or probably at somewhere around 10% decline. So the 5% is what I’m assuming based on the improved collection efforts, right? And that is basically what I'm baking in throughout the year as we move along. As our collections of 110% that we have seen in the quarter -- last quarter, if we continue to collect more, then, of course, this is going to help us going forward as a positive. On your second part of the question around the R&D. So the R&D expenses, there were a couple of things going on this quarter. The first one was the milestone payment. So of course, we had these agreements with some of the partners in the past where we basically pay them while achieving certain milestones. And one of those contracts basically required us to pay for the milestone, and that’s where that payment came in, that was a onetime one. And the second one, of course, is -- the clinical study payments, as you would know that the startup cost would always stay a little bit more bumpy. And we paid some start-up costs in Q4 that basically increase the R&D plan. One thing quickly, -- and just to lay out the expectations well some of the for this year, at least, that metric of looking at collections versus testing service revenue line that we anticipate to keep on sharing in a positive way as well. So I think that should be just to set the cadence as well. But thank you again for the questions.

Thanks. I’ll jump back in the queue.

Our next question is from Matt Sykes with Goldman Sachs. Please proceed.

Hi, good afternoon. Thanks for taking my questions. Maybe my first one, you had mentioned Reg, that post the ISHLT guidelines that you had had some conversations further conversations with payers. We’d love to know kind of what the feedback is from those conversations in terms of are these guys that they’re waiting for? And do you think you can achieve some momentum from that that you’re obviously not baking to your guide that we could see in 2023 from a coverage standpoint?

Yes. I see Matt. We were thrilled to get the ISHLT guidelines and what was shared at the end of last year is one of the areas we thought would be important for the organization, particularly as we look at LP coverage. I think I’d break it out to twofold. The first is on AlloMap, I think firstly, AlloMap is our FDA cleared test gene expression profiling, sort of published in New England. And what was clear to us in the guidelines is there should be earlier coverage starting at month two. And there are some commercial payers today that don’t cover us that early. And so this has led us to actually initiate several discussions already with some national and regional payers already this quarter to start those discussions. So there has been, firstly, receptivity to have those discussions, secondly, to allow us to present the information and then allow us to present some further rationale behind that earlier start, particularly because it’s given in the guidelines and names specifically. So I think it’s an on-going process, but one we’re particularly pleased with. The second is, if you look at HeartCare itself, this is an area which has now allowed us to actually trigger some of those discussions. As a reminder, previously, we weren’t necessarily getting those discussions on an ad hoc basis or even a routine basis with with AlloSure part. But now there’s guidelines coming through, particularly with the recommended testing and also looking at some of the settings such as during COVID has now allowed us to initiate those ad hoc discussions that is off cycle and allow those to take place as well. So that's how I’d bifurcate it. I think the first one is probably more readily sort of on a cadence perspective to capture. And I think the other one is now based on now initiating those discussions. But certainly, from a company perspective, happy to have had that come through.

Got it. Thanks for that Reg. And then just Abishek, just a little more details on that additional disclosure in the 10-K and the material weaknesses. Is there sort of a time line for remediation that we should be thinking about? And is there going to be any additional costs incurred as a result of maybe further investment in technology stack or other types of costs that would be involved in the remediation efforts?

Yes, Matt. So we basically recently identified this. And then -- it does not have any impact on the financial statements. I just wanted to call that out very specifically here. And the second piece is that you need to actually remediate these weaknesses over a period of time and then you need to test and prove it out before you can actually fully call it out remediated. So it will take a few quarters before we are able to kind of fully remediate and then also disclose at that base. That’s the first part. And the second part to your point is that I think we as a company has grown quite rapidly in the last few years, and then we are trying to catch up on our infrastructure in some of our infrastructural areas. And this is a piece where we some investments, but we are already having those things in our plan.

Got it. Thank you.

Our next question is from Mason Carrico with Stephens. Please proceed.

Hey guys. Maybe a couple here on the adjusted EBITDA goal. Sorry if I missed this, but do you anticipate maintaining positive adjusted EBITDA going forward once you achieve that milestone in the first half?

Yes, I’ll take that question. And yes, absolutely. That is what the goal is, Mason. And I’m hoping that we will be using our operating leverage after the Q2 to be able to kind of stay positive. But at the same time, I just want to also make a mention that we will be evaluating our investment opportunities as they come up in the second half and going forward. And we will let you guys know if something were to happen there.

Okay. Got it. And then two other quick ones here. One, I guess, if we were to take a step back and say, look how level, what do you view, I guess, is the biggest risk to either not being able to achieve that net positive adjusted EBITDA in the first half or maybe it flipping back negative? What's the biggest risk there? And then the second part of the question is, what are you expecting stock comp to be in the upcoming year?

So on the adjusted EBITDA; I think the biggest risk that I foresee is around the market volume growth. So if something were to go wrong there, that probably is the only thing that I can think of. We are trying to do as a company, a lot of stuff to manage our expenses and stay prudent there. So that is the risk that I foresee to hit our goal there. And the second question -- second part of your question was around -- what was the second question, Mason, can you say that once again.

Stock comp, how we should be thinking about stock comp in the upcoming year?

Yes. I would basically assume a very similar trajectory of the stock comp going forward as well. I wouldn’t be thinking of too many changes there.

Got it. Thanks guys.

Our next question is from Alex Nowak with Craig-Hallum Capital Group. Please proceed.

Okay great, good afternoon everyone. Just first of all, how much revenue does the HLA digital systems add that acquisition? How much does that add in 2023?

Not material, Alex. So I wouldn’t call it out as one of the reconciling items to the guidance.

Okay. And then I just want to understand the testing volume growth that you’re expecting in 2023. So 2% to 5% top line growth, digital products are growing, call it, mid-teens, so that’s going to push the testing piece down a little bit. The market is indicating down to start the year on the testing volume side. So do you expect, I guess, at the end of the day, testing volumes to decline in 2023? Or how do we think about that growth in that business when you strip out all the ASP dynamics?

Yes. So I still feel there will be a positive growth because when I build the guide, I’m looking at mid-teens volume growth, right? And yes, of course, the start of the quarter has been relatively slow, but I expect that the market growth will pick up. And at least it will play out very similar to how it has played out last year. So that’s the first part. And the second part is that when I talk about the payer mix change, our ASPs are going to be better as compared to how it failed last year by about five percentage points, the mid-single digit is what I’m calling because of our collection efforts. And the delta between those two will basically provide us the increase in the testing services revenue growth. That's how I see it.

Okay. That is helpful. And then kind of a 2-part question here kind of on the regulatory side. Just any update from the multi-CAC meeting, any discussions with Medicare KOLs when should we expect the conclusion there? And then the second part is the inquiry that was settled. Was that with the DOJ or the SEC inquiry? Or was that a state inquiry? And then if it’s just the state, what’s the status of the DOJ, SEC of the state inquiries? Thanks.

Yes. I think with the recent CAC meetings, and these are things that are initiated for a regular review. And I think there hasn’t been any recent or further updates from that. I think as we’ve talked in the past like in terms of benchmark tiling was that happens typically around a 15-month past sort of time line includes a period of public comments as well as part of that. I think we’ve received extensive support across all organs from KOLs that we’ve talked about, the different biomarkers we have brought to the space and what they represent in terms of clinical practice across kidney, heart and lung. So for us, it’s even as recent as this weekend at the importance of what we do as an organization in bringing this breakthrough innovation is this something that all KOLs to have spoken about. So we really feel thrilled about that level of support. It’s important for us. And again, we have this obligation is to innovate in the space to continue to drive that innovation and it’s gratifying to see that consistency come across from KOLs. It’s also; I think the timing of that meeting had just preceded the guidelines as well, which should come out from ISHLT. So it’s always good to get that reinforcement from an international organization.

Sure. And let me take the second part of your question on the state regulatory update that I provided this time around. So it wasn’t the DOJ SEC matter. This was basically a state regulatory agency. So that’s the first part. And the second part of your question was if there is any other update that whole CID DOJ investigation. And the answer is that there are no material updates to report on that particular matter. We continue to cooperate with the request that we are receiving from these guys. And of course, there hasn’t been any questions raised around the safety, efficacy of our products.

And the other end quarter that happened late 2022, that was related to the DOJPs [Ph], just so I’m clear?

No. This was a completely different inquiry. I think we should have some.

Yes. Any comment, I guess, around -- if it’s a separate one, then any comment around that, just to make sure we’re all clear.

So I didn’t quite get the question, but I think in October 2021, we disclosed what was in the filings of time point, and this is one that’s been finished and completed from the feedback receipt.

Yes. -- it just looks like late 2022, it looked like in the 10-Q, there’s another in quarter that came, but we can talk about it later, yes.

Late 2022, there was another state in query that we have received. This is basically recent fund, yes, and it’s an isolated case state from a single vendor in a state. That’s what we have disclosed. We are a single vendor in a state that we have disclosed.

Okay. Understood. Thank you.

Our next question is from Mark Massaro with BTIG. Please proceed.

Hey guys. Thank you for taking the question. Just kind of parsing through the guidance. I appreciate all the color, low teens volume growth in test services low double-digit decline in ASPs. That kind of nets me out at around 3% or so, call it, low to mid-single on testing services revenue, but for the full year, you’re guiding 2% to 5%. When I look at last year, and I add up the buckets for products, digital and products, I think you grew about 7% last year. It represented 18% to 20% of revenue. So really strong growth in products last year, but I’m not seeing a really strong outlook for products in 2023. And -- so can you just give me a sense if there are any one-timers in 2022 that aren't likely to repeat just to give us a sense for what the different scenarios are with respect to the range?

Sure, Mark. I think the 1 piece on the non-testing services side that I’ve been calling out is around the digital and patient solutions because that business grew like 180% year-over-year and that was primarily because of our acquisition of the Transplant Pharmacy. So that's not going to happen again in 2023. So that is a bit that probably you need to bake in.

That's super helpful. I guess, can you give us a sense for what the underlying growth of the transplant pharmacy is?

Instead of transplant pharmacy, let me provide you color on the testing services and let me call the other two businesses as the non-testing services. I’m expecting the testing services revenue growth to be very similar to what you called out from the low single digit to the mid-single digit, and our non-testing services would be high single digit, pretty similar to what you have seen last year.

Yes, I think the question that Mark was asking, what is the transplant. So the transplant farm is essentially a white glove service business that we have and it essentially serves transplant centers in patients. And so it’s really built a reputation on this white glove service. And focused on just on transplant patients, pretty similar with our mission and our vision to lead the transplant ecosystem. So that’s one area that has grown or had grown through that acquisition last year.

Okay. Great. And then, Reg, maybe just to clarify, did I hear you say that the underlying volume growth in transplant is, call it, around negative 3% here in Q1? And I know that you’ve called out a number of drivers to the challenging end market, things like staffing shortages, living donor transplant changes. I think a lot of the items that you call as potential benefits to the volumes. Many of those appear to be kind of multiyear drivers over time. I’m just curious if you see any short-term potential changes with respect to staffing shortages, for instance, is maybe one, but what are something that you guys can actively do to manage this in the near term?

It’s really interesting this whole market dynamic. And I think we -- as you can see in the prepared slides as part of the webcast, I mean you’d seen this increase in Q2 of last year of going to 6% and 4%, then 2% sequential. But then year-to-date on 7 quarters, 7 weekly data, minus 3 across the total, but each organ group has had a decline. So that hasn’t gone the way that we had expected. But that said, I do think the drivers and all the [Indiscernible] are there I meet with transplant centers every week, Mark, and I asked him the same question to see what’s happening as well from their viewpoint. And there’s been various answers, but some of the consistent ones are definitely the living donors is not rebounded and staffing shortages means that they can’t always do procedures as they’d like to. And this is line that’s seen across all groups as well. We do have seen an increase in the C stone [Ph] as though, for example, on the kidney side. So I think at the end of the day, some of the different areas that you described, they will happen faster than later in terms of the drivers. So if you talk about the transportation or perfusion devices, for example, that expands the pool patients. So for example, in heart, strifly [ph], it’s been what you call DVD or brain-dead donors, but now you’ve expanded the pool by adding the C stone, which is triple hadn’t been there. And even recently as CEO on the weekend, I talked to one center, which has increased the number of transplant they plan to do on the hard side, for example, by using this alternative approach of using ceased organ. So I do think that there will be changes that you start seeing hopefully sooner rather than later. I do think living donors, however, is the biggest beta. The biggest driver of delta that 1 could achieve during that time period. And I do think the government initiatives will put in actually enforce that donation, transplantation rate and really forces the whole ecosystem to play together. So I do think those unifying factors will play a role. But you’re right, it will be a different cadence, probably the -- expanding the donor pool is the first one. Then over time, I think some of those government initiatives will kick in quite nicely.

Excellent. If I can sneak in one final two parter. How are you guys doing with respect to RemoTraC? I know that you used to hover around 40% of your volumes. And then finally, you guys have $293 million of cash. Historically you’ve done a great job of bolting on tuck-ins, sort of differentiating the product suite across your portfolio. You recently acquired HLA Data Systems. So how should we think about and you’re about to achieve adjusted EBITDA positivity. How should we think about M&A funnel? And what sorts of things are you potentially looking at?

Yes. No, Mark, it’s a great question. I mean, historically, we’ve always done anywhere from 1 to 3 acquisitions a year, that’s -- these are small bolt-ons consistent with our HLA data systems. We have a unique ability to find smaller opportunities that really can add either to the moat or add such in the case of Transplant Pharmacy to some of the top line. So we feel good about these opportunities because every one of them, people have come to us. It hasn’t been one where we’ve had to slice it out. I mean we get so many inbounds, but it’s really finding those that can drive leadership mark. So those are going to be one and two. It doesn’t really make sense to get in where it’s still nascent or one where it’s not going to be in a leadership position. So that’s probably one of the key things I think always one is to look across the board for opportunities, but also which makes sense for us as an organization. I mean, we’re committed to the transplant space. So I think there’s a fine number of opportunities. And again, we get these on a very routine basis. And we assess them with a lot of rigor. So again, we’re excited by the year ahead, greatly being this financial position and able to deploy our capital in the appropriate ways we have done historically.

Okay. And then any update on RemoTraC or mobile phlebotomy?

No, nothing significant change there, Mark.

Okay, guys thanks for all the questions.

Thank you again.

Our next question is from Yi Chen with H.C. Wainright. Please proceed.

Thank you for taking my question. My first question is, is there additional room for cash collection improvement?

Yes. As we mentioned, this is an area that we’ll start sharing quarterly pace of chain. And I think what we’ve signaled is that we expect the cash collections to exceed the testing services revenues as we now play a bit of catch-up with, for example, some of the delayed processes and collections of past such as Medicare Advantage and also as we also add more commercial pay coverage on a regional basis. So there’s certainly the opportunity and we’ll compare this year-over-year for you and provide that metric.

Yes. Okay. And when do you expect to generate meaningful revenue from cell therapy monitoring?

Yes, it’s an excellent question. I mean I think for us, we’ve always signaled that our cell therapy franchise, whether AlloSure or talking about some of the other -- some other offerings we have, it's something probably more on the greater the 5-year horizon. The reason we say that is because it’s really predicated on having the actual cell therapies make it to market, and as a date in the U.S., none of the allogeneic cell therapies have made it to market. So there’s a lot of activity, preclinical Phase I, Phase II, -- but unfortunately, no one’s got over the line yet. And so we look forward to those in the future. And now our goal now is to be very early in that process to develop those research and clinical partnerships so that we can be there once this transformative type of opportunity makes it to critical scale and mass. So similar to what we’ve done with our approach in the solid organ space.

Got it. And lastly, maybe you touched upon this before. What evidence have you observed that make you feel confident the number of living donors will actually rebound in the coming quarters or years?

I think living donors is such a huge area as an opportunity. And I think I’ll share a real example for you, Yi Chen. I think how we think of behavior in the community and one of our team members actually his wife was actually needing a transplant and actually put out a post to get an organ and our touristic sense. And during that week, there were probably more than a dozen plus -- donors that stepped up and offered to help out during that time. So I do think there is that opportunity. I do think addressing staffing shortages, I think making sure there’s data time. I think now seeing the decline in some of the infectious diseases, which were quite high during Q4 last quarter go away, will be important. But I do think just knowing at least on the artistic side, not including directed donor, that there's always an incredible opportunity of human behavior that we’re seeing where people are willing to help out in this critical organ space, and we’ve seen it real time in our organization.

Okay. Thank you.

We have reached the end of our question-and-answer session. I would like to turn the conference back over to management for closing comments.

Yes. Thanks very much. And we really -- 2022 was a year that was difficult. I think 2023 is one where we want to build on the catalyst that we have to build the organization to continue increasing collections as part of the infrastructure we built last year and also to focus on coverage of the 3Cs, as we call them. We think we have an incredible role to play as an organization in the transplant ecosystem. And we certainly thought that obligation not only from physicians, but patients and associations. Everyone looks at CareDx to really play that role and it’s a role that we’ve gladly taken as to be a leader in this space. So I think if you think of anything involving transplant, then we’ll be involved in it. So I want to thank again the CareDx team for working so hard during 2022. And I also want to thank you the to the analysts for the great questions and also to any shareholders or investors who may be listening in and hopefully supporting this space. It’s such a critical one, and it's a great one to be in. Thank you again, and have a wonderful evening or afternoon, depending where you are. Thank you.

Thank you. This does conclude today’s conference. You may disconnect your lines at this time and thank you for your participation.