Good day, everyone, and welcome to today's CareDx Inc. Third Quarter 2023 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, you will have the opportunity to ask questions during the question-and-answer session. [Operator Instructions] Please note this call is being recorded. I’ll be standing by if you should need any assistance. It is now my pleasure to turn the call over to Greg Chodaczek, Managing Director. Please go ahead.

Good afternoon and thank you for joining us today. Earlier today, CareDx released financial results for the quarter ended September 30, 2023. The release is currently available on the Company's website at www.caredx.com. Joining the call today is Alex Johnson, President of CareDx's Patient and Testing Services; Abhishek Jain, Chief Financial Officer; and Robert Woodward, Chief Scientific Officer. Also joining on the call today is Michael Goldberg, Chairperson of the Board. 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 the federal securities laws which are made pursuant to 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, our examination of historical operating trends, expectations regarding coverage decisions, pricing and enrollment matters, and our 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, November 8, 2023. CareDx disclaims any intention or obligation, except 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 with the SEC. I will now turn the call over to Alex.

Thank you, Greg. Good afternoon, everyone, and thank you for joining today's call. I'm Alex Johnson, President of CareDx's Patient and Testing Services, a member of the newly formed office of the CEO, along with Michael Goldberg, Chairperson of the Board; and Abishek Jain, CFO. I'd like to begin today's call by briefly covering the CEO transition we announced last week. Michael, Abhishek and I are aligned on the importance of executing against CareDx's strategic priorities and increasing shareholder returns, while the Board conducts its search for a new CEO. We have strong confidence in our leadership team and in the entire CareDx team to move the Company forward. For those of you whom I've not yet met, I have managed CareDx's largest business, the testing services business for the past two years. Prior to that, I had have responsibility for our lab products business as well as for business development. I have been incredibly fortunate to have worked with Michael on CareDx's IPO nearly a decade ago and with Abhishek for the past two years. I've also been privileged to work with Peter Maag, who many of you know as our former longtime CEO and current Board member for the better part of 15 years, dating from our time together at Novartis. On behalf of CareDx, we thank Reg for contributions to advanced transplant care during his tenure. We have a strong foundation for future growth, and we wish him the very best. Moving on to our third quarter performance. Today, I'm going to discuss our third quarter performance and results, discuss our decision to raise full year 2023 revenue guidance and finally, I will provide additional context around the transplant market environment and our patient advocacy efforts. In Q3, CareDx reported revenue of $67.2 million, an increase of…

Thank you, Alex. In my remarks today, I will provide some additional detail on quarterly financial results, residual impact of the billing vertical revisions on our financials and close with an update on guidance. Unless otherwise noted, my remarks will focus on non-GAAP results. Also, my comparisons with Q2 '23 results will exclude the financial impact of $7.8 million related to Medicare tests that were held over from the first quarter of '23 and recognized in Q2 revenue and refer to as normalized second quarter. Please refer to GAAP to non-GAAP reconciliations for detailed information. Key highlights of Q3 results were: number one, reported revenue of $67.2 million, our testing services revenue at $47.8 million increased approximately 5% as compared to normalized second quarter revenue of $45.6 million. Patient testing services volume appears to be stabilizing as it increased 2% as compared to the last quarter. Number two, our products as well as patient and digital solution businesses delivered another strong performance with each business growing over 30% year-over-year. Number three, adjusted EBITDA losses were paid down to $10.9 million as compared to $18.1 million in the normalized second quarter. Number four, collections were 103% of our reported test and services revenue, making it the fourth consecutive quarter of net positive cash collection. Number five, we maintained a strong cash position of $268.2 million. And last but not the least, SEC concluded its inquiry and does not intend to demand an enforcement action against the Company. Given the strong results in the third quarter of '23, we are raising our revenue guidance for the full year '23 to $274 million to $278 million from our previously announced guidance of $240 million to $260 million. Moving to the details. reported testing services revenue for the third quarter was $47.8 million, up…

[Operator Instructions] Our first question comes from Andrew Cooper, Raymond James.

Maybe first, just want to make sure I caught you right, probably check on the gross margin dynamics. So can you just give us maybe a dollar amount for the onetime MA settlement just so we can sort of adjust for that? And then, as we think about the trajectory from there does 3Q really feel like the stable place in terms of what the cost of goods on testing services can look like? Is there more room to improve on that front? Or is it purely sort of a reimbursement calculus to continue to see the gross margin rise?

Yes. Andrew, good to talk to you, and on the gross margin side for the testing services, the 74% is slightly higher because of the couple of onetime events that I called out. And those couple of events, as I called out also in my guidance, they were about $4 million. So if you were to kind of think about the gross margin going forward, I'll take you back to Q2 normalized gross margin, which was about 68%. Now having said that, we have made more progress on our gross margin in Q3, so modeling at 70% may not be a bad idea, number one; and number two, of course, we continue to look for more operating leverage come in as the revenue were to grow and as we move forward, but more to come on that as we go forward and probably in the next call.

Okay. Helpful. And then I appreciate you sizing the heart surveillance headwind in 4Q. Just curious in terms of what may be on the docket to trying to fight for expansion of that beyond that 12-month window? Do you need incremental studies? Do you feel like there's a way to take what you already have and maybe repackaged in a way that can move the needle there? Just how should we think about the trajectory there on heart care and potentially expanding beyond 12 months for surveillance?

Yes, this is Robert. Thanks for the question. We do see opportunities in various studies and publications that we anticipate coming up, both from CareDx and from some of our customers, key accounts that are using these tests and publishing independently. So, we'll be tracking those and looking for those to make a difference sometime in 2024.

Okay. Great. And maybe just one last one quickly with the closing of the SEC issue without any decision to move forward from the body. Anything else you can provide in terms of DOJ or the UPIC audit in terms of progress? Has there been ongoing conversations? Or just what's the time frame we should think about potentially hearing some amount of closure on the remaining outstanding inquiries.

Yes, sure, Andrew. In fact, the whole SEC inquiry that we previously disclosed in the month of September that they sent us the letter and they are not taking any kind of enforcement action. And we are extremely pleased with this outcome. And of course, we were looking into the matters similar to the civil investigative demand that we had received from the DOJ. So having this letter and the conclusion from SEC is a good outcome for us. As far as the DOJ is concerned, probably I'll be speculating if I were to kind of provide more color there, but I just want to say that we are cooperating -- this matter has been out there for a couple of years. And we'll see as to how soon this matter would be resolving, but nothing more to say on the DOJ side. Robert, do you want to talk about the UPIC side.

Yes. I could mention just the UPIC that there was some movement on that in the quarter and they haven't requested any additional claims or taking other actions. And obviously, like any of these audits, we'll intend -- we intend to appeal them. There's always an ongoing appeal process and eventually get to an indefinite review at some point.

Our next question comes from Matt Sukes, Goldman Sachs.

This is Prashad on for Matt. Just wanted to get your thoughts on what you're looking for in the search for a new CEO and what the duration of your search looks like?

Sure. This is Michael. I'll take that one. We're looking for somebody who can continue to execute the strategic plan that we are currently on, improve performance and deliver long-term profitable growth to our investors. In my experience, it generally takes six to nine months to install, that's to identify, but to install a new CEO. So, the Board is entirely confident of executive leadership team in place today to be able to put the plan together that they will be solely responsible for executing in 2024.

Our next question comes from Brandon Couillard, Jefferies.

This is Matt on for Brandon. I appreciate the color around kind of volumes stabilizing and then the number of initiatives underway to get to adjusted EBITDA and cash flow positive goals. Any more clarity you can provide in terms of timing on those now that you feel a bit more comfortable with both the cost actions and kind of stabilization of volumes? How should we think about when you could hit those targets?

Yes. I'll probably take like a step back here that last year in Q3, we put a stake in the ground that they're going to be profitable in the first half of this year. And had we not been impacted by the billing article, we would have been profitable in the Q1 itself of this year. Then we were hit by the billing article. And if you recall in the second quarter, our testing services dropped by almost like $25 million on an apple-to-apple basis that I called out in my last script. So you are looking at about $100 million of GAAP to bridge there. And if you look at the adjusted EBITDA now, which is at about $11 million for the current quarter, I think we are extremely proud and pleased with the progress that we have made on this particular goal of returning to operating cash flow positive and adjusted EBITDA positive. On specific timing, I will provide more color in our next call because we have multiple levers, as I was kind of alluding to that we have probably secular growth in the transplant volume market and in our testing services volume. And then, of course, how we are able to kind of get paid on some of the tests that we are not getting paid because there is a renewed focus on the coverage and everything. And of course, if we need to be more thoughtful on operating structure and being more efficient and effective there, that is definitely on the table, too. So there are multiple levers, and we have made good progress. We feel comfortable where we are, but in terms of the specific time lines, we'll wait for the next quarter call that we have a little bit more information as to how things are stabilizing in Q4.

Our next question comes from Mark Massaro, BTIG.

This is [Cindy] on for Mark. So last quarter, you discussed clinic hesitation around ordering kidney surround testing. It appears like this dynamic might be behind us. So can you just discuss what factors or headwinds sort of rolled off for you to drive these volumes here in Q3. And can you just remind us of any onetime benefit or prior period collections that happened here in Q3? I know you spoke about the Medicare one-timer, but just any other one-timers that we should be backing out?

Thanks. And I think we're really pleased with some of the progress that we've seen over the last six months. One of the effects of having six months to do this is a lot of the transplant centers now have had time to update their systems, their procedures, the education. So where I think there was a lack of understanding of not just how to do things, but to do. Now clinicians have had enough time to absorb this and really institutionalize what they're thinking. So we're very much looking ahead and feel very good that these centers have a very good understanding of where their ordering is today and opportunities for the future.

Sure. And let me take the second part of your question around the one-timers in Q3. I called out a couple of those pieces. The first one is after the Noridian adopted the billing article on the heart care, we are not recognizing that revenue of post that adoption. So that means going into Q4, the revenue that we recognize for those heart care tests prior to the Noridian adoption, that will not be available into Q4. And the second event is this onetime claim settlement and the number is about $4 million for these two events. So that's the piece that I would call out on the onetime. But other than that, there isn't a material that would need to be modeled from the numbers standpoint.

Okay. Perfect. Understood. And then I guess, any updates to provide on when we might see a readout on the Sure study. Can you just remind us what studies we've completed or underway that support these of heart care and just how you're thinking about additional evidence generation on that front?

Sure. We're actively in analysis on the Sure data, including data monitoring. This is an ongoing study but we're looking at an interim readout and so working on putting that together with the goal of getting some publication -- one or two publications out in 2024. And just a reminder that AlloSure Heart and AlloMap Heart are both already covered without restriction on time. The question earlier about extending beyond 12 months is only for the combined heart care results. And in many cases, when docs have a specific need and resend desire for the best management of patients to order heart care will work with them to submit for payments for those from Medicare and to appeal any demands.

Our next question comes from Alex Nowak, Craig-Hallum Capital Group.

I want to go back around the CEO transition. Maybe just expand on the departure of Reg. There's obviously a lot of moving parts here with the story. I think the Company needs a leader out there to navigate through all of those moving parts. Why the departure now? And just how important is to the Board to name this successor fairly quickly here to guide the Company during the challenging time?

Yes. Alex, this is Michael. These are complex situations and there's elements of it that are personal in nature. So I'm not going to provide much more on that other than to say it was mutual and the time was right. In part, the time was right because the Company at Board wanted to set themselves up for success in 2024, and we're into the planning process for establishing that budget and operating plan now. So, we wanted to make sure that extraordinarily capable group of senior leaders that Reg had cultivated. We're in a position to be 100% responsible for constructing that plan because they're going to be 100% responsible for its execution. Now we think that the executive team here is stable. We think there extraordinarily capable and well qualified and experienced in this business. And by virtue of the structure that we've set up an office of the CEO with Abhishek, Alex and myself, we meet on a daily basis. There is no missed beats or decisions deferred we're operating the business as a functional CEO. So we're prepared to operate in that fashion until the Board is comfortable that we've got a CEO identified and installed. So I wouldn't worry. In fact, I would be cautiously excited.

Okay. Understood. I appreciate all the information there. And then again, on the revenue and the cash burn, we can kind of go into little pieces there. But just to kind of level set us, if we take the revenue from this quarter, call it, $270 million on an annualized basis, is that going to be a floor that we can then grow off of for 2024? And then same thing on the cash burn, if you just look at the cash change, about $60 million of cash burn annualized this quarter. I assume that's got to be the low point here, and we're only going to get better on the go forward. Is that all correct?

Yes, Alex, maybe a couple of changes there in those assumptions. But firstly, on the cash, for example, so the overall reduction of about $14.5 million, that includes your investing activities we called out the acquisitions there. If you look at our operating cash, that's about $10 million. So that probably would be the first piece that I will call out. And maybe the second piece that I would suggest on the cash burn to have a look because we were impacted by the billing articles in Q2. So look at the testing services impact of the billing article in the last two quarters and how much cash burn did we really have on the operating side in the last two quarters. So to give you some sense as to the cash burn would probably be in that range going forward without company taking any actions. And then I called out that, okay, how do I reduce that cash burn. So the reduction in the cash burn, again, comes from the multiple levers that we are currently assessing. We brought down the impact of the billing article from, say, $100 million to now the adjusted EBITDA losses of, say, $11 million in the current quarter. Now we need to bridge this remaining gap. And revenue growth, the secular growth that could be out there in the market, the transplant volume market has been growing in the high single digits and how we continue to kind of grow our testing services volume alongside that. That would be our first lever. The second lever, of course, is going to be that how do we continue to work with our commercial payers to improve the coverage and continue to expand our collection program to be able to get paid, how we have been paid in the last few quarters to reduce the cash burn. And of course, the third lever that is definitely on the table is looking into our cost structure, specifically all the legal expenses. If you were to pay down the SG&A, be it the G&A spend back to the levels where we were in the second half of last year prior to the billing article impact that will give you another sense as to how much higher the G&A spend has been because of the billing article. So, we have the levers here to be able to reduce that cash burn. I'll basically make certain assumptions, so that I'm in the ballpark. And I'll provide more color on most of these in our next earnings call. But the $15 million is not the cash burn in my mind for third quarter.

Excellent. Very helpful. And then just a final question here. I was looking through the 10-Q during the prepared remarks and I know reimbursement is always was a tricky item. And I'm just trying to understand the interpretation on some of the heart care language in the 10-Q, the 10-Q talks about letters being submitted to Noridian claiming why heart care should be covered. And so the question is really, is Noridian actually reimbursing for heart care right now and the Company is getting paid for that? Or is more CareDx interpretation that Noridian should be getting paid for heart care?

So Andrew, this has been a year where things have been so very complicated, and we want to be more transparent in our 10-Q, and we have provided the disclosures in a lot more detail. But let me unravel that for you. On the heart care basically after the Noridian adoption, which was 816, post that, we have not revenue recognized any test on the heart care, which is, say, not for surveillance and greater than one year. So that's completely out. So that's exactly what it says, nothing more than that are in compliance with what Noridian adopted on 816 is as simple as that. So the baseline has already been set based on everything which is out there from the billing article standpoint and what we've been asked to do on the coverage standpoint.

Our next question comes from Mason Carrico, Stephens.

This is Jacob Krahenbuhl on for Mason. I appreciate the color around volumes funding like a more stabilized level this quarter actually increased slightly sequentially. But just wondering, given you found a stabilized level, given the multiple iterations to the building article and the LCD as well as the recent coverage room with heart care. Could you maybe give us some color whether qualitatively or quantitatively on growth across organ type, specifically heart and kidney?

Yes. Sure. I can -- this is Alex. I can give a little bit of context on that, Jake. I think for the growth in volumes and test and service volumes this past quarter. We saw growth from all three organs. And so we felt very good that this is -- this baseline now has really created the stabilization that we can grow from.

Our final question comes from Dipesh Patel, H.C. Weinright.

This is Dipesh on for Yi. Could you perhaps clarify if you expect to see any further updates from MolDX regarding the coverage of molecular transplant tests as part of routine monitoring care to detect organ rejection?

I think where we're at right now is that after a couple of iterations of a bill article and the perspective of the community, and those are changes to coverage. And they then propose a draft LCD that is now open for comment. And so it was the open comment period for two of the max has already passed two more are in process. And then we would expect them to move forward and based on the draft and the comments they've received produce a final coverage policy from that. And so that's, I think, what we would expect to happen. We've been surprised in the past, different from our expectations, but that's the normal process. And the timing around that is something we're often asked, and that's sometimes before August of next year, if there's a rule that has to be finished before the original draft was released.

Got it. That's very helpful. And then lastly, how might you expect the testing volume to grow sequentially going forward?

Look, I think we're certainly in this quarter, certainly, there's nothing that would make us change from the guidance and the thinking that we've seen so far. So I think now that we've seen a baseline being set I think there's growth ahead of us, and we'll have to see how the quarter plays out, certainly in terms of weather and winter storms and such. But we're feeling like we've certainly hit some stabilization in a baseline that we can grow from.

We have no further questions in the queue at this time. I would now like to turn the call back over to today's speakers.

Great. Thank you. We wish you the very best this afternoon. Thank you all.

This does conclude today's program. Thank you for your participation. You may disconnect at any time.