Good afternoon and welcome to the Castle Biosciences Third Quarter 2020 Conference Call. As a reminder, today's call is being recorded. We will begin today's call with opening remarks and introductions, followed by a question-and-answer session. I would like to turn the call over to Frank Stokes, Chief Financial Officer. Please go ahead.

Thank you, operator. Good afternoon, everyone and welcome to Castle Biosciences' third quarter 2020 financial results conference call. Joining me today is Castle's Founder, President and Chief Executive Officer, Derek Maetzold. Information recorded on this call speaks only as of today, November 9 2020. Therefore, if you you're listening to the replay or reading the transcript of this call. Any time sensitive information may no longer be accurate. A recording of today's call will be available on the Investor Relations page of the company's website for approximately 3 weeks. So before we begin, I would like to remind you that some of the information discussed today may contain projections or other forward-looking statements regarding future events or the future financial performance of the company, including the expectations and assumptions related to the impact of the COVID-19 pandemic and are made pursuant to the Safe Harbor provision of the Private Securities Litigation Reform Act of 1995. Forward-looking statements are based upon current expectations and involve inherent risks and uncertainties and there can be no assurances that the results contemplated in these statements will be realized. A number of factors and risks could cause actual results to differ materially from those contained in these forward-looking statements. These factors and other risks and uncertainties are described in detail, in the company's Annual Report on Form 10-K for the year ended December 31 2019 and in the company's other documents and reports filed with the Securities and Exchange Commission. These forward-looking statements speak only as of today and we assume no obligation to update or revise these forward-looking statements as circumstances change. I'll now turn the call over to Derek.

Thank you, Frank and good afternoon, everyone. These are exciting times at Castle and I appreciate you taking the time to joining us today. As always, I would like to start today's call by thanking the Castle team for their hard work and dedication to improving the lives of patients with skin cancer. We successfully executed our strategic priorities in the quarter and remain optimistic about our growth initiatives ability to position us well for both near term and long-term value creation. This afternoon, I'll now discuss our performance for the quarter, along with recent developments, touch on what we believe the continued impacts of COVID-19 will be on our business and then turn it back to Frank, who will provide more detail on the third quarter results and our financial position. In the third quarter, we saw strong performance on multiple fronts. This includes increased year-over-year revenue, return to year-over-year increase in DecisionDx Melanoma reported volume and the successful execution on our commercial launch of DecisionDx-SCC. Our gene expression profile test for patients diagnosed with cutaneous squamous cell carcinoma, commonly referred to as SCC and with one or more high risk factors. In other words, patients that today's guidelines label as high risk. We estimate the high risk SCC, US only population to be 200,000 patients. To start, we are pleased that for the third quarter of 2020, we had an increase in total revenue to $15.2 million or 3% from $14.8 million in the third quarter of 2019. This includes prior period revenue for the third quarter of 2020 of $1.5 million compared to $3.2 million for the same period of 2019. I am pleased to report that report volume for DecisionDx-Melanoma, our current primary revenue driver return to year-over-year growth for the third quarter of 2020. As…

Thank you, Derek. To reiterate, we are pleased with the continued progress we made in our strategic growth initiatives in the third quarter, which we believe physicians will for near and long-term growth. In the third quarter of 2020, we reported revenue of $15.2 million, a 3% increase from $14.8 million in the third quarter of 2019, primarily due to higher per unit revenues and increased test volume, partially offset by reduced revenue adjustments related to prior periods. In addition to inferior test revenue, our third quarter revenue includes positive adjustments related to test delivered in prior periods of $1.5 million compared to $3.2 million in the third quarter of 2019. We are pleased with our ability to maintain strong gross margins. During the third quarter of 2020, our gross margin was 84% compared to 88% for the third quarter of 2019, reflecting the expansion of laboratory staff and preparation for both launches of DecisionDX- SCC and DiffDX-Melanoma as well as anticipated further volume growth for DecisionD-melanoma. Our operating expenses for the quarter ended September 30 2020 were $16.6 million compared to $8.6 million for the same period last year. The increase was driven primarily by higher SG&A, which increased by $4.6 million, partly attributable to higher personnel costs associated with our increased headcount and in particular, our expanded sales and marketing team and administrative support functions. Stock based compensation included in SG&A was $1.5 million for the third quarter of 2020 compared to $0.2 million in the same quarter of 2019. Reflecting both higher post IPO stock option valuations, as well as additional awards outstanding due to growth. R&D expense increased by $1.5 million and was primarily associated with increases in personnel costs attributable to additional headcount as well as higher expenses for professional fees associated with our recently…

Thank you, Frank. In summary, with our strong execution in the third quarter, we are pleased with our third quarter results. We are optimistic that our investments and our growth initiatives will continue to drive growth and position us well. Before we move on to Q&A, I want to express my gratitude to our employees. It is through their dedication to improving the lives of people diagnosed with skin cancer that we remain well positioned for near-term and long-term success. This concludes our remarks. Thank you for your continued interest in Castle. Operator, we are now ready for Q&A.

Thank you. [Operator Instructions] Our first question comes from the line of Max Masucci with Canaccord Genuity.

Hi. Thanks for taking the question. So it's nice to see DecisionDX-Melanoma volumes return to growth. Can you just give us a sense for what the recovery trends are that played out towards the end of Q3? And then how things are trending just with the recent COVID-19 resurge and says, our clinicians better equipped to deal with the pandemic at this time around. Just to sort of avoid the magnitude of declines that we observed back in April.

Yes, hi, Max. Thank you for joining and for the question. I'll maybe answer part of it, but probably our satisfaction maybe Frank can add some color. We haven't -- we do not do a sort of end of October, first think in November pulse the marketplace is kind of get a sense of what's happening with physician visits in terms of patients returning at any kind of trending post third quarter is to be honest. And our third-party data that we purchased from Symphony Health takes about a month to sort of fully return -- to sort of fully be accurate on the rate of diagnosis. So there are most accurate data really probably extends into the end of September or first week of October. Maybe I guess what that -- what the Symphony Health data appears to show, although it's need to mature out. Is that we weren't able to discern on a qualitative basis sort of any -- any sort of visible national retraction despite having COVID cases pop up in August and September, et cetera. So I think that hopefully will translate as we get further into the fourth quarter that physician practices were able to optimize where ever they could in the summer time and patient flow hasn't seemed to be negatively impacted. I guess the most concerning part, we had not about Castle's business, but about patient care really, is if we end up exiting 2020 without sort of a significant trend improvement in terms of the degrative diagnosis in these last couple of months of the year, there's a lot of patients out there who are going to be diagnosed with a more worrisome deeper, thicker and by very nature a more aggressive melanoma and that really is not good from a patient care perspective. Obviously, on the Castle side of the business, it means more-and-more of those lesions are actually more concerning and maybe it had some upside in test volume, once they get diagnosed that in terms of sort of post 3Q trends, I think it's too early for us to give you any sort of solid commentary today. Frank, you want to?

Yes, I think -- Hi, Max. I think it's -- I think we're still seeing sort of this dual impact of physicians. You're probably seeing fewer patients, some of that from the logistical concerns of terms or previously we're awfully happy to double book appointments and I don't know if you've ever been to the doctor and you look at the person next to him and say, I'm got a 10 o'clock appointment, when is yours? Well mine is 10 o'clock too. And that was something they can manage with multiple consultation rooms, et cetera. Now there is a real limit to that. And then finally, there are just a few -- there are some patients that are still concerned about getting out at all. In some cases and go into a medical facility. So we'll see that eventually begin to wane, but certainly the news through the fall of cases sort of stubbornly stay in. The COVID case rate stay in stubbornly high. I think it continue to impact people's mindsets.

Thank you. And our next question comes from the line of Catherine Schulte with Baird.

Hi guys, this is actually Tom [ph] on for Katherine. I appreciate the questions. So maybe just on the DiffDx launch, I mean, understand it's been a week since the official launch, a couple of weeks since you guys hosted the webinar. I was just curious, what's the qualitative feedback been from industry and the clinicians on the responded data that you guys presented. And how have conversations gone with docs, you've had them who previously ordered did the fourth -- the first to market test and how those gone and do you get a sense that they are open to making a switch. Do you guys have test?

On our DiffDx-Melanoma test, one too early I guess to really give anything that's going to be meaningful. We made the test available clinically on Monday of last week. So really only in market 5.5, 6 days today. I would say that, we did more market research ahead of launch for both our DiffDX-Melanoma test and our Squamous Cell Carcinoma tests than we ever did before and part of that's just maturing as a company, of course, having more resources. And I believe that the target product profile that we were guided towards pursuing a couple of years ago, when we started our program, which was can you get to a really high technical success rate? So that the majority, the vast majority of specimens you -- that we sent you actually come back with a result of some kind. And can you kind of reduce that sort of intermediate risk selling as narrow as possible so that most of the time, we get back an actual data of either saying the biology, it looks like it lines up with a benign lesion or the biology looks like it lines up as the malignant melanoma. And if you can achieve those things, would then we're in like Flynn. And I think as you saw from our investor call. I guess it was about 10, 12 days ago. I guess now we hit all those boxes, we were able to maintain and actually have a significant accuracy scores for both sensitivity and specificity, while maintaining a very narrow intermediate zone. And I think the market research that we conducted over the course of the summer time into the early fall, hit the mark there. Now what do we think it's going to happen in the marketplace. As we kind of move…

Sure. I appreciate the color. If I could add a follow-up here. I think you guys had maybe commented briefly there. I may have missed this specific number on new ordering physicians for DX-Melanoma in the quarter. How does that trend and related to the -- are there any additional updates from the sales force? They tried to make to increased reach given perhaps more limited access and are they still seeing limited access more broadly?

So on the sort of maybe a third quarter sales force trends compared to second quarter. So I think largely speaking across the US, every sales territory is back open. I guess I would say, whereas in the second quarter you had certain parts of the country where -- you're under strict orders, from a central business standpoint to not be out there, both as a field force and also as dermatologists seeing patients, so both things were shutdown in different spots in the country, at different times of the second quarter and bleeding in the July to a certain extent. I think as we closed out the third quarter of 2020. We did see all territories open for business, I guess you would say or doctors in all territories open for business. I think that we saw overall more clinician calls or sales calls being made in person then being made virtual or zoom calls or telephone calls. So I think those are very positive trends and that improved sort of from second quarter throughout the third quarter. So I'm looking forward, as we're seeing out fourth quarter opens back up. I think we are still believing with the sort of lower rates of melanoma diagnosis in third quarter '20 compared to third quarter '19 that we're still seeing clinicians having a difficult time. Either one, getting back to seeing the same number of patients in a given day, they used to see prior to COVID and that's probably just due to office space constraints and exam room cleansing techniques, et cetera and sort of the COVID era versus pre-COVID era. And then I also -- we've got some third-party data indicating that even in practices where you're getting close to back to 100%, the number of newly diagnosed skin cancer is not just melanoma, but also squamous cell and basis cell carcinoma are down compared to where they were during COVID and during the pre-COVID time period. So it seems that there is a sort of -- and maybe that's all related to a more elderly population being a little more sensitive or cautious about returning for a sort of bump on their skin versus saying this bump could be cancer. But again, I think we expect that to go ahead and improve as we go on. Certainly, melanoma doesn't go away. So if you're looking at something on your arm or your fore arm or your cap and you're even looking at it for a couple of months. They can weighing, do I go-in or do out weight. At some point in time that's going to get big enough and ugly enough or you going to make the call to go in. I just hope for the patient sake it occurs early rather than later. Frank, you want to?

Yes. And just to answer the question on clinicians. We had fewer new ordering clinicians this quarter, Q3 of 2020 than we did in Q3 of 2019. But just to be clear that doesn't mean we had fewer physicians ordering it. It just means the pool of new physicians was fewer than last year. But anecdotally, we had physicians who ordered for the first time in the quarter, despite only having virtual interactions with our field team, which we think is great. We much rather be live and in person, but I think it's a tribute to the outside folks that they are finding ways to pivot to virtual interactions that are in fact quite effective.

Great, very helpful. Thanks guys.

Thanks, Tom.

Thank you. And we have a follow-up from Max Masucci with Canaccord Genuity.

Hi, guys. I think I got boxed out there. So it's nice to see the early DecisionDX-SCC volume starting to come in. I guess what sort of early -- I know it's early, but are there any early adoption trends that you're seeing? And can you just give us a sense for how these sales interactions are going? Just given the cross-selling opportunity and maybe any differences and similarities compared to the early days of the DecisionDX-Melanoma launch?

Yes, thanks. That's a good question, Max. I can provide more color there than I can on the DiffDX-Melanoma test, because of the timing by the way. So I think, I don't want to get ahead of my enthusiasm here. I think launching new diagnostic tests is difficult to forecast for anybody. I think launching new diagnostic tests in the sort of -- not full access, not normal interaction period is difficult to forecast even on top of that. I can't tell you how pleased I am that we had for the first essentially two months on the marketplace, order flow coming in at what was a 284 orders out of a base of 193 doctors. I mean that is just fantastic, as far as I'm concerned. And if you map out that the sort of first two months compared to other diagnostic tests of similar market sizes, in terms of patients or even more. I don't think we've seen when -- we've kind of looked across the earnings of other companies that matches that. So I think it's become -- it's a very -- it's off to a very good start. Don't over promise a lot, but things off to a very good start. One of our key goals on the commercial side of the business was to make sure that we try to educate clinicians in a careful, thoughtful manner as we rolled out DecisionDX-SCC and with the most important measurement being the number of doctors that are ordering the test versus the number of tests that are being ordered. And those should go hand-in-hand. But I would far rather be in a position at the end of next year to turn around and say, we have X number of doctors, 1,000, 2,000, 3000 doctors who are --…

Absolutely. So you're getting paid for a portion of your DecisionDX-Melanoma volumes on an out-of-network basis with some commercial payers? Can you just give us a sense for -- if this is achievable for DecisionDX-SCC and DiffDX? Are there any unique factors that may influence your desire to seek out of network payments for your new pipeline test launches?

Yes, Max. So we are -- we won't be accruing revenue for those new tests. The two new tests we've referenced at the time we ship the report, will only reflect revenue when we actually collect some cash. And to your point, that'll be through the appeals process and commercial payers. We think we'll have some success there. We -- it is our policy as you know, we do bill for the test. We think we've the evidence is clear that the test adds value to the diagnosis. And so we bill at appeal and push that through. So I don't know how long it will take to get to where we are with our first two test, but we're going to work hard on that. And as I think you know, we've got a really strong reimbursement and claims, appeals team. So we're confident that eventually they'll begin to start knocking those over.

Great. Thanks for squeezing me back in.

Thanks, Max.

And our next question comes from the line of Sung Ji Nam with BTIG.

Hi, thanks for taking the question. Maybe another one for DecisionDX-SCC. Obviously good volume aggregate and was wondering, was there a backlog built into that ahead of the launch or should we anticipate continued growth in terms of volume from the 282? I know, obviously understanding that given the recent research and says, there might be some disruptions in terms of patient flow.

Great question. We did have a large or we do have a large number of collaborating centers in the US, I think over 50, 55, I think through the second quarter. Our investigators are clinicians who are involved in our DecisionDX-SCC test, we did not go out actively ahead of clinical availability, say, hey, this is available or it will be available about a month or two, so hold up your patients for example. So I think the 282 reflects just through normal ramp in an environment here of launching without sort of any people kind of holding or pent-up demand, per se. And I say that because the other part of the equation is that, as our -- as given that the sales force that sells DecisionDX Melanoma to dermatology and other skin cancer physicians like surgical oncologist is the one that's launching the DecisionDX-SCC test and because reimbursement is solid -- or solid or that's what is driving our revenue growth is the melanoma test. The commercial focus really is to say, every call during this launch period need to start out with DecisionDX Melanoma. And as you complete that and looked at how you've moved your doctor along the educational curve, then turn the corner and talk about the Decision-DX SCC. In my understanding is that the vast majority of physicians have been interested in complying with that order. There are some that say, hi, I saw your email request in this call, can we talk about SCC first and we certainly comply with that? But thankfully, most of them have been quite good. So I think as we move forward in the launch, here we didn't necessarily sort of have all 32 sales representatives on the inside the entire MSL and the inside sales group. Moving on DecisionDX SCC at the end of August and early September. They were there first moving on the melanoma test and then they're to introducing SCC. So I think that gave us a very gentle ramp through September and October.

Great, that's very helpful. And then just a clarification question for the DecisionDX-Melanoma study that you guys are doing for -- to determine the appropriateness of adjuvant therapies. Are you guys still looking at gene expression profiling or are there other biomarkers that you might consider incorporating?

So the protocol enables both, I guess, I would say. So we're looking at the ability of obviously the currently validated end market decision, the ex-melanoma test to identify which patients should be on adjuvant therapy. We also are including additional genomic analyzes and also including some liquid biopsy poles to make sure we can tackle all the questions properly at one time.

Great. And then lastly from me, and it's great to see that you're adding new physicians. Was curious, in terms of -- for your existing physicians, are there efforts underway to help them identify additional patients for the existing physicians that are currently using DiffDX melanoma?

Let me have you repeat that one time, I think I'm not --

I was just kind of trying to figure out kind of the same-store sales, if you will. Given that you are adding new physicians, but was wondering if there is still -- on this, I mean, there is still a lot of opportunities to help your existing physicians identify other patients that might benefit from?

Okay. I think you're talking about initiatives kind of help practice marketing activities, which we would like to help our dermatology, it's got much more productive skin cancer specialists, certainly. But that's not the question you asked. Yes, I think there is still plenty of room for same-store sales growth. So certainly any new ordering clinician in the third quarter or first time ordering doctor probably didn't start out July 1 with 10 patients. That's almost always a ramp as somebody evaluates and adopts our test. So our existing customers are usually more productive just because they are hopefully ordering during the whole quarter as opposed to -- at some time in the third quarter. We do see opportunities in our ordering doctors to expand the appropriate use of our tests. So for example, there are some dermatology practices or physicians where they may be initially or currently use our test for only people who are clearly in the sentinel lymph node biopsy, referral base. So somebody who has a melanoma that's 0.8 millimeters or thicker. That's not also rated, so we see a lot of dermatologists initially order our test, where they're thinking about referring out that invasive surgical procedure, because that's where they're concerned about risk they pick 0.8, 0.7, 0.9 their sort of threshold to start ordering our test and we see no orders from anybody diagnosed with the melanoma between 0.3 and call it 0.8 millimeters. They're seeing those patients, but they made the decision in their minds that the risk is low enough, I don't need to worry about it. But that being said, a significant number. A sentinel lymph node procedures occur in those patients with those thinner melanomas and there are certainly recurrences that occur and potentially death for melanoma. And so part of our of our commercial teams' efforts are to arm each individual sales representative with their own physician data. And if I look and see that Dr. Maetzold sold for example has -- is a pretty good user of our test. He seems to be incorporating in the Patient Care, but he only uses that on 0.8 millimeter or thicker than may would tailor their discussions or message to walk in there and say, hey, I think there's a lot of patients who could benefit from the value of our test in this sort of 0.3 to 0.8 millimeter range. Can we talk about that, please. And when that happens, well over a couple of effective conversations we do see, many times that the same store Doctor begins using our test in those thinner melanoma patients, which is fantastic for patient care.

Great, thank you so much for taking the questions.

You're welcome.

Our next question comes from the line of Puneet Souda with SV8 Leerink.

Yes. Hi Frank and Derek, a couple of quick questions here. The volume came in a little bit lower than our estimate in cutaneous melanoma. Just wanted to get a clear view on number one, some of the things that you talked about, but just to specifically, the sales rep access to dermatology facilities. Do you expect that to tick up in the fourth quarter or maintain sort of at the same levels? We're asking this, because obviously we are seeing some challenges from sales rep accessing the oncology clinics in the sort of the virtual setting and I mean doing more virtual versus in person. But obviously those are an immuno-compromised patients, whether [indiscernible] patients, a little bit different. And then the second question is, how should we think about volumes in the fourth quarter, given sort of what you're seeing here? And on top of it, the impact from holidays, if any?

Great questions here. So I'll try to answer that in my order of importance and then see if Frank can correct or you can double check what I missed any? Historically speaking, if we look at the last several years writing up to our IPO and certainly last year, we usually see that overall fourth quarter orders or the diagnosis of melanoma is usually similar to the third quarter of each year, kind of around the same ballpark. So we do see seasonality in a non-COVID environment, where typically speaking, the third quarter of a year or the fourth quarter of any given year, is kind of similar to the third quarter. The first quarter, similar to the fourth quarter and the second quarter is when do you see your growth in diagnoses and then it's sort of flat for the next three quarters, relatively speaking. So one is that we would not in a normal year, expect a significant rise in the rate of diagnosis of melanoma. In the fourth quarter, I mean, a third quarter. That being said, I think to go to the rep access question first. So we did see over the course of second quarter and certainly throughout the third quarter, improving trends in a month-to-month basis. And I think part of that was related to practices getting more comfortable. Part of it is, you can just see with national public data that, that across the board healthcare practices are returning to whatever their normal state is. And we certainly saw rep access to improve as well, third quarter compared to second quarter. So our modeling is that we would expect that to continue to improve over time. Now, how much stronger gets in the fourth quarter, I think it's tough to say relative to…

No. I agree, Puneet. It's a -- it will be interesting to see. I mean, we -- certainly the nationwide COVID case rate has gone up, but it looks like maybe the morbidity has gone down. And so maybe that helps people get comfortable and we are certainly were glad to see Pfizer's announcement today on their 90% effectiveness vaccine. Some of the early data points, we had heard where maybe the first vaccines would be 60% to 70% effective and gosh, if Pfizer can get to 90%. That's certainly I guess better than the bulls eye they put up when they started. So that was nice to see this morning.

Yes, I think the only other thing, I think I missed on your question there is. I don't know, if I view our rate of growth in third quarter 2020 relative to 2019 is soft in terms of the melanoma volume. I think if you take that and you take into consideration the nearly what 20% drop in the rate of new diagnoses. That's a pretty healthy jump over last year. And so we feel good about the overall strength of the business from that point going forward. And those -- and has reduced diagnoses are a temporary time [indiscernible] or phenomenon, because or we're going to see a lot of patients being diagnosed with stage IV disease, which I don't believe is going to happen. I think they will come back, the question sort of -- I think when and how.

Okay, that's helpful, thanks for the details there. The second and I'll try to wrap in another question. And as well, is number -- from a point of ASP, it came in again a little bit light versus our estimates sort of in -- about 250, 260 lower from Q2 to Q3. Just wondering, if there was anything to note there? Is it just reflective of the Medicare population that maybe is not accessing the clinics as much compared to the commercial population,, commercial payer population of patients. And then on the expanded LCD. Derek, this is, you said November 22 as the data and Noridian is December 6. So when should we start looking at the potential date for, when you can book revenue for these expanded cases? If you can elaborate on those two. Thank you.

So yes, Puneet, I don't see anything, there are nothing in the ASP trends for the quarter caused us concern. I think that number is going to move around a little bit quarter-to-quarter. It does seem that the patient base, who is most reluctant to get back into the flow is the older population who are by definition we're told the most vulnerable. So I suspect there is a modest amount of mix impact there that may have driven that. But generally, we'll see it move a little bit quarter-to-quarter, but nothing durable or persistent there that strikes us. And then you will talk about LCD?

On the LCD. So Medicare regulations. So number one, we certainly expect to have the expanded LCD and the associated billing and coverage article be effective for the full 12 months of 2021. Given the timing of November 22 and December 6 for both of those, MACs. In terms of the effective date, the most important thing really is the way Medicare calculates the date of service for a test like ours or any test like ours and that data of service is usually going to be the date of surgery or the date the biopsy was taken. And at least in our workflow that's a majority of the time. So what that would mean is, if somebody had -- I think the 22 is a Sunday, so somebody went into their dermatologists on Saturday and had a biopsy taken Saturday, even if a dermatologist or to the test on 23 November that Monday, it's going to be a test that we would be reporting with a date of service that was November 21. So I think what you're looking at here is, somewhere between probably 3 and 4 weeks of melanomas that are diagnosed mainly in December. So that would be eligible to be paid for under the expanded LCD. Certainly our laboratory group and billing group are going to make sure that all appropriate cases are submitted as covered under the LCD, as we always have. But I think that -- I think the amount that will be flushed into the fourth quarter. Maybe rather than having be a 3-month quarter for Medicare claims ends up being a 3.5 to 3 months and 3 weeks type of a thing, is probably the way to kind of think through that from a modeling standpoint.

Great, thank you.

Thank you. And now I will turn the call back over to President and CEO, Derek Maetzold, for any further remarks.

Thank you, Andrew. Now, this concludes our third quarter 2020 earnings call. I thank you again for joining us today, and for your continued interest in Castle Biosciences. Have a good day.

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program, and you may now disconnect.