Good afternoon, and welcome to the Castle Biosciences Second Quarter 2022 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 Camilla Zuckero, Vice President, Investor Relations and Corporate Affairs. Please go ahead.

Thank you, operator. Good afternoon, everyone. Welcome to Castle Biosciences' second quarter 2022 financial results conference call. Joining me today is Castle's Founder, President and Chief Executive Officer, Derek Maetzold; and Chief Financial Officer, Frank Stokes. Information recorded on this call speaks only as of today, August 8, 2022. Therefore, if you are 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 three weeks. Before we begin, I would like to remind you that some of the statements made today will contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements include, but are not limited to, statements about our financial outlook, estimated U.S. total addressable market or TAM and similar items referenced in our earnings release issued today and statements containing projections regarding future events or our future financial or operational performance, including our expectations and assumptions related to the impacts of the COVID-19 pandemic. 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 quarterly reports on Form 10-Q for the quarter ended June 30, 2022, under the heading Risk Factors 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. In addition, some of the information discussed today includes non-GAAP financial measures such as adjusted revenue, adjusted gross margin, adjusted operating cash flow and adjusted EBITDA that have not been calculated in accordance with generally accepted accounting principles in the United States or GAAP. These non-GAAP items should be used in addition to and not as a substitute for any GAAP results. We believe these metrics provide useful supplemental information in assessing business and financial performance. Reconciliations of these non-GAAP financial measures to the most directly comparable GAAP financial measures are presented in the tables at the end of our earnings release issued earlier today, which has been posted on the Investor Relations page of the company's website. I will now turn the call over to Derek.

Thank you, Camilla, and good afternoon, everyone. Today, we are pleased to share that Castle Biosciences delivered another strong quarter, growing revenue by 53% and total test report volume by 57% when compared to the second quarter of 2021. Based on our results in the first half of the year and the momentum in our business, we've increased our full year 2022 revenue guidance to $130 million to $135 million, representing anticipated growth of at least 38% when compared to 2021. Before we discuss the quarter in more detail, I want to thank all of our Castle employees for their hard work during the quarter and continued dedication to our mission of improving health through innovative tests that guide patient care. Today, I will take you through execution and strategy highlights from the quarter, and then Frank will provide financial highlights for the period, and then we will take your questions. Let's start with our core dermatology business. For our skin cancer test combined, we delivered a 44% increase in test report volume in the second quarter when compared to the second quarter of 2021 and a 16% increase over the first quarter of 2022, delivering 9,424 test reports. And for the six months ended June 30, 2022, we saw approximately 1,200 new ordering clinicians and approximately 5,661 total ordering clinicians for dermatologic tests. For DecisionDx-Melanoma, we delivered 7,125 test reports in the second quarter, an increase of 39% over the second quarter of 2021. As we had discussed, 2022 is a year of thoughtful, strategic and tactical investments that we believe will drive both near-term growth with our current assets and continued growth in the midterm. And we believe this quarter of strong organic growth, which led to record test report volume is a result of the continued execution…

Thank you, Derek, and good afternoon, everyone. The disciplined execution of our strategy has enabled us to deliver another quarter of strong organic growth, and we have raised our outlook for anticipated total 2022 revenue to $130 million to $135 million from the previous guidance of $118 million to $123 million. Second quarter revenue was $34.8 million, an increase of 53% over the second quarter of 2021. Overall, the increased revenues primarily reflect higher revenue from dermatologic tests, primarily DecisionDx-Melanoma and DecisionDx-SCC. The increase in dermatologic revenue was primarily attributable to a 44% increase in test volumes with higher test reports delivered across each of our dermatologic offerings, which we believe was due to a combination of the effects of our dermatologic sales force expansion in mid-2021 and increased patient flow potentially attributable to the easing of COVID-19 restrictions. The higher revenues also reflect Medicare payments on DecisionDx-SCC, as Derek discussed earlier, and the effect of higher positive revenue adjustments related to tests delivered in previous periods associated with changes in estimated variable consideration, which were $0.6 million for the three months ended June 30, 2022, compared to a negative $0.2 million for the three months ended June 30, 2021. The increase in revenue from our other tests, non-dermatologic tests, was $0.6 million and was primarily attributable to our acquisitions of Cernostics and AltheaDx. Excluding the effects of revenue adjustments related to tests delivered in prior periods, adjusted revenue was $34.3 million, an increase of 49% over the second quarter of 2021. Our gross margin for the second quarter was 71.9% compared to 82.6% in the second quarter of 2021. Our adjusted gross margin, which excludes the effects of intangible asset amortization related to our acquisitions and revenue associated with test reports delivered in prior periods, was 77.6% for the…

Thank you, Frank. In summary, we delivered another strong quarter with record test volume and revenue, and we believe we're entering the second half of 2022 in a comfortable position. I would like to conclude today by thanking our Castle team, those who have been with us for many years as well as those who are newer to the team. We would not be where we are if it weren't for the individual and combined efforts of those individuals who call Castle home. I thank them for their commitment to improving the lives of the patients that we serve. Thank you again for your continued interest in Castle. Now we'll be happy to take your questions. Operator?

[Operator Instructions] The first question comes from Mason Carrico of Stephens, Inc. Please proceed.

Hey, guys. Thanks for taking the questions here. Just wanted to circle back on the SCC reimbursement commentary. Sorry for not catching it all, I'm bouncing between a few tonight. But could you just walk through that Novitas commentary again? It seems like they're paying for it. You gave a rate. But what percentage of tests are you currently getting paid on? And you also brought up the draft LCD. But is there a risk to this reimbursement going away or any high-level -- additional high-level commentary there would be really helpful?

Sure, Mason. This is Derek here. Good to hear you. I think I got your questions written down here. So from a payment perspective, we've got two kind of major categories with payers, right? We have Medicare and Medicare Advantage plans, which are really individuals over the age of 65, so make it kind of 65 or under 65 breakup. I think we'll be -- and we're obviously still growing quite rapidly in terms of the volumes for DecisionDx-SCC. So the ratio might change. I think we're running north of 55% of patients are more than 65 years of age. And that may end up setting it up a bit higher. But as background, the average age of squamous cell diagnoses in the U.S. is about 70, 71 years of age. So that feels about right. We don't have a good handle on -- based upon published data, just to be honest, is the individuals with high-risk squamous cell carcinoma tend to be younger or tend to be older. So that's the breakup. About 65% or greater in terms of being Medicare eligible from a vantage standpoint and the remaining being less than that, so a little higher than the melanoma test. Since we completed a favorable medical review with Novitas early in the second quarter, we've been paying for, I think, probably nearly all of our Medicare Advantage claims to date in the second quarter. So that's a fairly full quarter of activity. And we had previously -- as you know, we do bill commercial insurance because we have validated assets with clinical use. And we do get paid additionally occasionally from some private payers for people less than 65 years of age. So that's the number one we can accrue to and to -- or the early trends of reimbursement for that. Does that cover the questions over, Mason?

Yeah. That covers it. Thanks. I may have a few more, but I can follow up off-line. And maybe just one more follow-up here, expanding some outside sales territories. And again, I'm sorry if I missed it but initial thoughts on the size of the team supporting the CDO offering. And now that you are starting to get paid on the SCC test, are you expecting to start shifting some of the economics to incentivize your legacy derm team to start pushing the SCC test more?

Yeah. So we are -- we've announced two different expansions, I guess you would say. Haven't provided exact numbers because we're working through the details right now. As you may recall, when we launched our DiffDx-Melanoma test in November of 2020, we started out with a small, dedicated sales force of, I think, around 10 or 12 individuals focused really on introducing that test to dermatopathologists as a predominant customer base. And then in mid-2021, when we went from 32 dermatology sales focused individuals to the mid-60s, we folded that group back in. And while we have been quite pleased with the adoption uptake, what's clear to us is it's difficult to really have three different tests or three products within an individual sales bag. That just leaves one or two out of the three not getting reasonable educational and sales activity. So we are splitting back out a small, dedicated group that will focus predominantly on dermatopathology and predominantly on the combination of myPath Melanoma and the DiffDx-Melanoma test. We'll also, of course, be able to communicate on our DecisionDx-Melanoma and SCC test to that dermatopathology call point. But it's really predominantly on making sure we have appropriate and adequate support and presence for our myPath Melanoma and DiffDx test going forward. And that will occur, I think, sometime over the third quarter as we have hiring to look forward to. So we should begin to see the impact on that maybe in the second -- end of the first quarter next year is our thinking. On the -- and what that does for us and the rest of the dermatology team is it lets the dermatology team now focus 100% on a combination of the melanoma test and the squamous cell carcinoma test going forward. We'll obviously assess needs to expand out in a more structured fashion as we kind of see how the third and fourth quarter go forward. We are also expanding our gastroenterology sales team and medical science liaison team. We saw the kind of growth that we expected in the second quarter over the first quarter, although we're still quite early, of course. But based upon having the 14 day rule resolved by Medicare, with the granting of ADLT status, coupled with the momentum trends that we saw, plus the reported volume from the first quarter -- second quarter, we decided we would make that call, which is close to our plan to go ahead and expand that sales force as well.

Got it. That makes a lot of sense. Thanks guys.

Thank you.

Thank you. Next question comes from Catherine Schulte of Baird. Please proceed.

Yeah, hey guys. This is Tom Peterson on for Catherine. Joined a little bit late as well, so apologies if I repeat anything here. But maybe I want to stick to TissueCypher and just get an update on the commercialization there as you get a better look. Just what's kind of the feedback from providers? Momentum here seems to be pretty solid. But if you could give us any sort of feedback on what you're getting from these early adopters that would be great.

Sure. Qualitatively, qualitative only, of course, because I don't have any quantity to give you, so we started out with 14 territories in January, trained up the sales force, most of which had prior gastroenterology experience with other companies. So they kind of had some -- while they had a reasonable amount of GIs who they knew, I guess you could say, but new to TissueCypher certainly. We knew going in that the first quarter was to be a quarter of training, I think, largely speaking and sort of getting people oriented to educating physicians about a diagnostic test versus, say, a pharmaceutical or a device product. And that's a slightly different communication call point. We also knew going into the first quarter that we still had to work with CMS to address this old Medicare 14-day rule, which affects the Medicare billing practice policy with hospitals. And we were assuming that, that would be resolved by the end of the first quarter, which it was. So we were, on a planning standpoint, really looking forward to seeing what the trends will look like between second quarter or even on a month-on-month basis versus the first quarter. And we're very, very pleased with what we've seen so far. So in that backdrop, in terms of feedback, the marketplace for patients diagnosed with Barrett's esophagus is there are -- there's this sort of grading system of severity of Barrett's disease, goes from the sort of most benign group or the sort of less risky group called non-dysplastic Barrett's esophagus to indefinite, to low grade and to high grade. Then the high-grade, after that form of Barrett's usually is diagnosed as esophageal cancer. And the practice standard today in the U.S. is that all patients are -- generally, all patients with high-grade…

Okay. Great. That's good. Great. Thanks for the review. And then maybe on the balance sheet, Frank, it's good to hear reiteration of the operating cash flow neutrality by 2025 following a more acquisitive period over the last nine months to 12 months and the general focus around cash balances and a new higher interest rate environment. I guess how do you feel about the cash balance going forward? And how should we think about capital allocation priorities and spend going forward? I know 2022, more of an investment year, but just kind of trying to think more beyond '22. Thanks.

Yeah. Sure. So we're very comfortable with where we are from a balance sheet perspective. Our priorities for allocation of that capital remain supporting our on-market products and continuing to advance our pipeline products. I think from a strategic perspective, I think that's down the list of capital priorities. And so we're excited about what we have in the bag now and in the pipeline here at Castle. And that's where we're going to focus that capital is pushing those sales and advancing those programs.

Great. Thanks very much.

Thank you. The next question comes from Puneet Souda of SVB Securities. Please proceed.

Yeah. Hi, Derek, Frank. Thanks for taking the questions. The first one is really on the guide. I mean, good to see the guide raise. But can you outline what are you assuming for DecisionDx-Melanoma volume growth in that guide? And how much of the guide raise is -- can you quantify is for AltheaDx as well and for the full year?

Hey, Puneet. Hope you're doing well. We don't break out revenue by product. So the guide is really just inclusive of the portfolio. As Derek said in his opening remarks, we were very pleased with the traction we've seen in all three therapeutic areas. But as you expect, our dermatological portfolio and primarily our cutaneous melanoma product will be -- that will be the primary driver of revenue for this year. So we were very pleased with the volumes through the first half, and we're excited about the back half. But we aren't breaking out or guiding to volumes.

Okay. Fair. In terms of commercial payers, given where DecisionDx-Melanoma is today, what are some of the efforts that are ongoing? And how should we think about the ASP for that product given the significance of the volume for that product to your overall model and to your growth?

Yeah. As you know, Puneet, the commercial landscape continues to be challenging for all companies in our sector, in particular. But we do have a very good team that is -- we call it market access. They're a group that's focused with explaining the wealth of data that we have around our melanoma tests to the payer groups and managing the medical and technical reviews for those groups. So we continue to make progress quarter by quarter, certainly not a landslide-type progress. It's very -- unfortunately, it's very plodding and very much a head-to-head effort. But we're -- most of all, I think we believe that the body of evidence we have is overwhelming. And we talk to people and the questions we get is, with this much evidence, how does the doctor not use your test? How does the physician not come to the view that this is beneficial to care for their patients? And we tend to agree. And we are confident that in a matter of time, the payers will all see that as well. It's just -- unfortunately, it is a longer process. And we got a great team there. They work very hard, and they're at it every day.

Okay. Got it. And then just last one on SCC. I mean, what is your, ultimately, expectation there? I think you gave a number on the call for $3,873 per test. But sort of how should we think about potential for an ADLT or other avenues? And how should we think about ultimately for the ASP for this test? Thank you so much.

Sure. So I think that was -- $3,873 was the price determined by Novitas following the medical review that we requested. So I think from a modeling standpoint, that would be a safe price to put into a model, less 2% sequestration fees going forward in the near term. We do believe that our DecisionDx-SCC test will qualify for ADLT status under the CMS regulations. As you know, though, the granting of that is a -- or acknowledgment of that is a -- follows an evaluation by CMS, not Castle. So I wouldn't bake anything in for ADLT status in the short term. But you can bet that we're evaluating that as an opportunity, and we'll proceed as long as we feel that's the appropriate way to go. From a timing standpoint, we've seen different experiences across companies with ADLT kind of review timing. Some of them will occur as early as 90 days. For instance, we talked earlier this year about TissueCypher, and we submitted the application for ADLT status in January '22 and were awarded that status in March of -- at the end of March '22 in the first cycle turn. It took us a couple of cycles a few years ago with DecisionDx-UM, although maybe that was also made in the first year with the process in place. Maybe that was more having us understand the process better as well as the CMS review group. But that will at least take a quarter or two, I would think, going forward here. So I hope that covers the background.

Yeah. No, super helpful. Thanks again and congrats on the quarter.

Thank you. This concludes our second quarter 2022 earnings call. I want to thank you again for joining us today and for your continued interest in Castle Biosciences.

That concludes the conference call. Thank you for your participation. You may now disconnect your lines.