Full Press Release Details
Frank Stokes Castle Biosciences CFO
Derek Maetzold Castle Biosciences President CEO
Catherine Schulte Robert W. Baird Co. Senior Research Analyst, VP
Sung Ji Nam BTIG Research Analyst
Puneet Souda SVB Leerink Analyst
Mark Massaro Canaccord Genuity, LLC Managing Director
Operator Good afternoon and welcome to Castle Biosciences' Third Quarter 2019 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, sir.
Frank Stokes Thank you, Katherine . Good afternoon everyone and welcome to Castle Biosciences Third Quarter 2019 Financial Results conference call. Joining me today is Castle's president chief executive officer, Derek Maetzold.
Information recorded on this call speaks only as of today, November 11, 2019. Therefore, if you were listening to the reply 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 information discussed today may contain projections or other forward-looking statements regarding future events for the future financial performance of the company and are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995.
Forward-looking statements are based upon current expectations and involve inherent risk 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 others risks and uncertainties are described in detail in the company's final prospectus filed with the Securities and Exchange Commission on July 26, 2019 relating to our registration statements on Form S-1 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.
Derek Maetzold Thank you, Frank. Good afternoon everyone. Thank you for joining us today. We are pleased to report strong third quarter performance, which includes increases in year over year revenue, volume and gross margin.
For the third quarter we reported revenue of $14.8 million, an increase of $11.1 million from the third quarter of 2018. Our primary growth driver, our DecisionDx-melanoma test. We provided 4,126 test reports in the third quarter of 2019, compared with 3,136 reports during third quarter of 2018, representing growth of 32%.
Additionally, we continue to demonstrate growth in new ordering clinicians at 26% for the third quarter of '19 compared to the third quarter of 2018. For further comparison of our growth in new ordering in clinicians, note that we saw a 5% growth in the third quarter of 2018 compared to the third quarter of 2017.
So a jump to 26% is substantial. Overall, we delivered 4,482 proprietary gene expression profile test reports for DecisionDx-melanoma and DecisionDx-UM during the third quarter of 2019, representing overall growth of 30% compared to the -- to the third quarter of 2018.
As you can see from our DecisionDx-melanoma test volume increase, we continue to see excellent growth following both our first quarter 2019 commercial expansion and our ongoing development of evidence.
You may recall that in the first quarter of 2019, we increased the number of outside sales territories from 14 to 23, along with associated head count for our commercial and medical affairs personnel.
As a result of the acceleration of our growth in the second quarter and third quarter this year, we've decided to execute our commercial expansion plans in December 2019 and plan to add nine additional outside sales territories and hire additional commercial and medical affairs staff accordingly.
With these additional nine, we will now have 32 outside sales territories. Turning to our DecisionDx-UM test, we delivered 356 test reports for uveal melanoma patients during the third quarter of 2019, a 10% increase in the same period last year.
For the first nine months, end of September 2019, uveal melanoma test report volumes were up 6% compared to the same period of 2018. As a reminder, our DecisionDx-UM test is standard of care for patients diagnosed with uveal melanoma and we currently test more than 80% of the estimated newly diagnosed patients in the U.S.
Now, I would like to turn it to several significant highlights from our third quarter. First, as it relates to our new pipeline products. We remain on track for commercial launch of our two pipeline products for the second half of 2020.
DecisionDx-SCC, for patients diagnosed with localized high risk cutaneous squamous cell carcinoma and our test for suspicious pigment lesions. We believe these two late stage pipeline products will increase our estimated total addressable U.S. market by approximately $1.4 billion.
Regarding DecisionDx-SCC, during October's annual meeting of the American Society for Dermatologic Surgery, we reported data from the clinical validation study for this test for use in patients diagnosed with localized high risk cutaneous squamous cell carcinoma, also called SCC.
We estimate that approximately 1 million patients are diagnosed with high risk SCC -- with SCC overall, in the U.S. each year. And the incidence is growing. SCC has historically been viewed as lower risk skin cancer relative to melanoma.
However, due to the higher incidence rate, it is estimated that approximately 15,000 patients will die from SCC this year, more than will die from cutaneous melanoma. So the historically benign low risk disease, today, contributes more deaths than the most aggressive form of skin cancer.
Our cutaneous squamous cell carcinoma is currently focused on the approximate 200,000 patients who were identified as having one or more high risk or pathologic features. We belief appropriate use should be focused on a patient with one or more clinical or pathologic high-risk features.
Now let's talk about the differences in treatment plans between low and high-risk patients and where we believe our test can impact treatment plan decisions. Currently national cancer guidelines define two different treatment plans for patients with localized cutaneous squamous cell carcinoma based upon low-risk versus high-risk categorizations.
Low risk is defined as having no high-risk clinical or pathologic features while high risk is defined as having one or more of these same features. Treatment plan differences include approaches to normal staging the use of adjuvant radiation, the use of adjuvant chemotherapy, the use of active surveillance and clinical trial enrollment recommendations.
The clinical issue facing physicians and their patients is positive predictive value or PPV of available staging systems is low. That is to say that the majority of patients identifying as having high risk disease do not actually go on to metastasisize.
This means that the majority of high-risk patients may be undergoing aggressive treatment plans (inaudible) they do not need and therefore will not benefit from. Our development goal is to identify a gene expression profile test that would -- that would enable a rule out de-escalation approach in these high-risk patients.
I'm pleased to say that our R D team with the assistance of 23 active clinical study centers in the U.S. were able to develop a training cohort, lock the gene set and algorithm based upon this training cohort and then complete validation in an independent cohort of 321 patients.
Importantly, 93% of all validation cohort patients were high risk by the National Comprehensive Cancer Network or NCCN risk criteria. So our validation cohort mirrors the population, so we believe meet the appropriate use criteria four our DecisionDx-SCC test.
The data presented at the American Society for Dermatologic Surgery, showed a negative predictive value or NPV for the DecisionDx-SCC class one test result of 91.1%. The result in PPV from the highest risk DecisionDx-SCC class 2B test result was 60%.
This compared to a 35.3% PPV for the Brigham Women's Hospital staging system, 20.9% for the American Joint Committee on Cancer staging system, and 16.7% for NCCN's risk criteria. Regarding the potential clinical impact of our DecisionDx SCC test, 61% of patients who had a tumor with a class one or the lowest risk test result, meaning a clinician could consider deescalating care in approximately 60% of high-risk patients.
And the highest risk class 2B test result provides the clinician with objective data to confidently proceed forward with implementing a high-risk treatment plan that may include adjuvant radiation, chemotherapy and clinical trial recommendations, as noted earlier.
We have engaged, through late last month, a total of 56 US centers who are working with us on both this initial validation study and ongoing performance studies for the DecisionDx SCC test, including a prospective study. The DecisionDx SCC test is the second skin cancer test discovered, developed and validated by Castle Biosciences. Validation studies are underway for our third skin cancer test. This one targeted for the patients with a suspicious pigmented lesion.
We do not have a data update at this time. However, we continue to believe that pending successful validation, both the DecisionDx SCC test and the suspicious pigmented lesion test are in position to launch in the second half of 2020. Lastly from the third quarter, we saw a continued publication of evidence to support appropriate use of our DecisionDx melanoma test and coverage by commercial payers.
One of these peer-reviewed studies was published in the American Journal of Clinical Dermatology by Danielle Dubin and colleagues, entitled Level of Evidence for a Gene Expression Profile Test for Cutaneous Melanoma. The objective of the study was to review peer-reviewed published literature and establish the level of evidence for DecisionDX-melanoma.
A review of seven development and validation studies for DecisionDx-melanoma was conducted. The respective strengths, weaknesses of each study were applied to the level of evidence criteria from major organizations that publish guidelines for melanoma management, including the American Joint Committee on Cancer, the National Comprehensive Cancer Network, or NCCN, and the American Academy of Dermatology.
This manuscript shows that based upon evaluation of all the published evidence, the DecisionDx-melanoma test achieves a higher level of evidence than the one determined by each of these groups.
Of note is that the level of evidence achieved in Dr. Dubin's manuscript was due to the timing of the analysis without the inclusion or benefit of three prospective studies published between February and May of 2019.
This study brings the total number of peer-reviewed publications to 22 that support one or both of the current two clinically actionable uses of a DecisionDx-melanoma test. The first clinical use of our test is to inform decisions on sentinel lymph node biopsy in patients when the tumor thickness is less than or equal to two millimeters.
And the second use is to guide subsequent treatment plan decisions. As previously stated, we believe our continued investment in evidence development is key to supporting both patient penetration and coverage by commercial payers. We recently received notification that the American Medical Association CPT Editorial Panel accepted our application for a category one MAAA CPT code for our DecisionDx-melanoma test.
The code will be effective on January 1, 2021. Attaining a category one MAAA CPT code means that we have met certain levels of evidence requirements. For example, the clinical efficacy needed to be documented in the literature, hence our focus on evidence development.
Additionally, it requires that the test use be performed with a frequency consistent with the intended use, that this use is consistent with current medical practice and that it is performed by many clinicians or other qualified healthcare professionals. Our DecisionDx-melanoma test was viewed as meeting all of these criteria, which we agree with.
The acceptance now means that both of our proprietary MAAA test DecisionDX-UM and DecisionDx-melanoma have met the criteria required for category one MAAA CPT code.
I will now turn the call back over to Frank, who will provide additional detail relating to our financial results.
Frank Stokes Thank you, Derek. We're pleased with the strong growth we delivered in the third quarter of 2019. We reported $14.8 million in revenue, an increase of $11.1 million over the third quarter of 2018.
This was driven by a 32% increase year over year in our cutaneous melanoma test reports volume and higher revenue per test. As a reminder, the year over year comparability of our revenue is affected by the Medicare local coverage determination, or LCD for our DecisionDx-melanoma test that was issued in the fourth quarter of 2018.
While the LCD covered reimbursement for test reports delivered prior to the fourth quarter of 2018, due to the timing of the issuance of the LCD and GAAP revenue recognition requirements, all 2018 DecisionDx-melanoma Medicare revenue was only recognized in the fourth quarter of 2018, when the LCD became final and effective.
The amount of such revenue derived from DecisionDx-melanoma test reports delivered in the third quarter of 2018 but not recognized until the fourth quarter of 2018 was $2.2 million. Additionally in the third quarter of 2019, favorable revenue adjustments related to test reports delivered in prior periods impacted revenue. The third quarter of 2019 includes $3.2 million of positive revenue adjustments compared to negative adjustments of $1.2 million for the third quarter of 2018.
The increase in positive revenue adjustments primarily relates to cash collections in the current period on test reports delivered in prior periods for which no revenue was recognized in those periods. No revenue was recognized originally in alignment with the requirements for revenue recognition under GAAP.
We believe, based on recent reimbursement activity, that additional positive adjustments in future periods at some level are possible for at least the next few quarters. Our gross margin during the quarter increased to 88% compared to 64% during the third quarter of 2018. This improvement was primarily driven by operating leverage as a result of our strong volume growth. Our operating expenses during the third quarter were $8.6 million compared to $5.2 million during the same quarter in 2018, an increase of 66%.
This increase was primarily the result of higher personnel cost, particularly due to the expansion of our expanded sales and marketing organization, but also within our administrative support functions, as well as increases in administrative expenses associated with growth and public Company preparedness, and higher R D expense, which increased by $0.2 million in the third quarter of 2019 as compared to the same period in 2018.
In future quarters, we expect our R D expense to increase as we continue to invest in activities related to enhancing our existing products and developing new products.
As a percentage of revenue, our SG A expense was 48% for the third quarter of 2019 compared to 106% in the same period of 2018. Interest expense for the third quarter of 2019 was $1.1 million compared to $0.6 million in 2018. Driven by the issuance of convertible promissory notes in the first quarter of 2019.
These notes were converted into common stock in July 2019 in connection with the IPO. The remainder of the increase is primarily due to higher average outstanding balances under our credit facility.
For the 2019 third quarter we reported a one-time non-cash debt extinguishment gain totaling $5.2 million. This extinguishment gain is associated with the convertible notes originally issued in the first quarter of 2019 and relates to the final conversion of these notes in the
(technical difficulty)
Operator Okay, you may resume.
Frank Stokes Okay, apologies everyone. We -- whether weather or what, we had a internet outage here at Friendswood and we use voice over internet phones. So, we dropped from the call. I'm going to stop where I pick the call up. If I'm repeating some for some of you I apologize, but we'll -- we'll go through the financial section and update again and if it's -- if you're hearing it twice, you'll just know it very well.
We are pleased with the strong growth we delivered in third quarter of 2019. We reported $14.8 million in revenue, an increase of $11.1 million over the third quarter of 2018. This was driven by a 32% increase year-over-year in cutaneous melanoma test report volume and higher revenue per test. As a reminder, the year-over-year comparability of our revenue is affected by the Medicare local coverage determination, or LCD, for our Decision Dx-Melanoma test that was issued in the fourth quarter of 2018.
While the LCD covered reimbursement for test reports delivered prior to the fourth quarter of 2018, due to the timing of the issuance of the LCD and GAAP revenue recognition requirements, all 2018 Decision Dx-Melanoma Medicare revenue was only recognized in the fourth quarter of 2018, when the LCD became final and effective.
The amount of such revenue derived from Decision Dx-Melanoma test reports delivered in the third quarter of 2018, but not recognized until the fourth quarter of 2018, was $2.2 million.
Additionally, in the third quarter of 2019, favorable revenue adjustments related to test reports delivered in prior periods impacted revenue. The third quarter of 2019 includes $3.2 million of positive revenue adjustment compared to negative adjustment of $1.2 million for the third quarter of 2018. The increase in positive revenue adjustment
primarily relates to cash collection in the current period on test reports delivered in prior periods, for which no revenue was recognized when those reports were originally delivered.
No revenue was recognized originally in alignment with the requirements for revenue recognition under GAAP. We believe, based on recent reimbursement activity, that additional positive adjustments in future periods at some level are possible for at least the next few quarters.
Our gross margin during the quarter increased to 88%, compared to 64% during the third quarter of 2018. This improvement was primarily driven by operating leverage as a result of our strong volume growth. Our operating expenses during the third quarter were $8.6 million, compared to $5.2 million during the same quarter in 2018, an increase of 66%.
This increase was primarily the result of higher personnel cost, particularly due to the expansion of our sales and marketing organization, but also within our administrative support functions, as well as increases in administrative expenses associated with growth and public company preparedness as well as higher R D expense, which increased by $0.2 million in the third quarter of 2019 compared to the same period 2018.
In future quarters, we expect our R D expense to increase as we continue to invest in activities related to enhancing our existing products and developing new products. As a percentage of revenue, our SG A expense was 48% for the 2019 third quarter compared to 106% in the same period of 2018.
Interest expense for the third quarter of 2019 was $1.1 million compared to $0.6 million in 2018, driven by the issuance of convertible promissory notes in the first quarter of 2019. These notes were converted into common stock in July 2019 in connection with the IPO. The remainder of the increase is primarily due to higher average outstanding balances under our credit facility.
For the 2019 third quarter, we reported a one-time non-cash debt extinguishment gain totaling $5.2 million. This extinguishment gain is associated with the convertible notes originally issued in the first quarter of 2019 and relates to the final conversion of these notes into common stock in connection with the IPO in late July.
Partially offsetting this gain was a mark-to-market loss of $2.1 million related to a separate $10 million convertible note we issued in July 2019. Like the other convertible notes, this note was also converted into common stock in connection with the IPO in late July.
Our net income for the 2019 third quarter was $5.8 million for $0.05 diluted earnings per share, compared to the net loss of $3.5 million or $2.33 loss per diluted share for the third quarter of 2018.
Moving next to our cash flow performance, for the third quarter of 2019, Castle generated $0.8 million in positive operating cash flows compared to negative operating cash flows of $1.9 million in the prior year quarter and generated positive operating cash flows of $2.5 million for the nine months ended September 30, 2019, compared to negative operating cash flows of $9.1 million for the same period in 2018.
Finally, we had cash and cash equivalents at September 30, 2019 of $94.5 million, which we believe, along with cash generated from sales of our products, will be sufficient to fund our operating expenses for the foreseeable future. Additionally, we believe our balance sheet positions us well to execute on our expansion plans and support our ongoing research and development activities. I'll now turn the call back over to Derek.
Derek Maetzold Thank you Frank. In summary, we are extremely pleased with our third quarter performance across the entire company. Our commercial execution coupled with continued evidence development enabled us to drive strong year-over-year test report and revenue growth, led by our Decision Dx-Melanoma tests. With second quarter and third quarter gains, we decided to execute our commercial expansion plans in December 2019.
Finally, we are pleased to announce positive top line data from our clinical validation study for our Decision Dx-SCC test. Both of our pipeline tests, the Decision Dx-SCC test and the Suspicious Pigmented Lesions test continue to progress on time, and assuming successful validation, remain on track for commercial launch in the second half of 2020.
Operator, we are now ready for Q A.
Operator Thank you. (Operator Instructions). And our first question comes from Catherine Schulte with Baird. Your line is open.
Catherine Schulte Congrats on a nice quarter. And first for me on the -- on the sales force expansion to add another nine sales territories, is your goal to have the hiring complete by the end of December or is that when you're planning to start And then, are these new territories splits of existing regions or are -- will these be completely new.
Derek Maetzold Excellent questions, Catherine. We are currently targeting start dates for December 1, 2019, and believe we will achieve full employment for the expanded territories of that -- on or by December 1. These are territories which are being split among existing geographies, so our territories will be one territory per given zip code, so 32 across the country as opposed to layered.
Catherine Schulte Okay, and then I know you aren't specifically giving guidance, but as we head into the fourth quarter, anything from a seasonality perspective we should think about when it comes to volumes
Derek Maetzold No, that's a good comment. As you can -- may not have it in front of you, we do see seasonality over the course of the year, we presume part of it could be driven by deductibles, but I think more of it's also driven by behavior, people who have brown moles and probably are not going in a physician's office on a regular basis, so we do see slower growth in the fourth quarter, in terms of newly diagnosed patients compared to the third quarter for example.
We also know that with the winter vacations and plus winter holidays, we have less physicians in the offices and we have less patients going to offices for a biopsy as well. So, we do expect the fourth quarter to be lower from a growth standpoint, in terms of overall diagnosis from the 3Q to 2Q -- 4Q to 3Q should be slightly lower from a growth quarter-to-quarter.
Catherine Schulte All right and last one for me, and I'll jump back in the queue, but I believe your collection period for the cutaneous tests goes through the end of this month. Based on your collections to date, to you remain confident that that should have at least stable pricing once the rate goes to the private payer median
Frank Stokes Yes we do, Catherine.
Operator Thank you. And our next question comes from Sung Ji Nam with BTIG. Your line is open.
Sung Ji Nam Congrats on the quarter as well, just a couple of quick ones. The AMA Category 1 CPC code, that's actually happening much sooner than I had anticipated. Could you talk about maybe what are some of the potential positive implications of that in terms of the sustainability of the ADLT pricing as well as your discussions with private payers in terms of coverage.
Derek Maetzold Yes. So, I don't think it's -- one, as it relates to ADLT status, I don't think it will have an impact on pricing per se on the Medicare side. Now that being said, one of the requirements for obtaining or being granted I guess you would say ADLT status in May of 2019 was that we would seek a unique CPT code.
As you may know, most of the tests, MAAA tests in the marketplace today are going for the PLA code route, which requires no evidence you just need to submit the form and they'll give you a PLA code the next quarter as you are aware.
So our decision to seek a Category 1 code was to look at it more long-term versus short-term with the expectation that if the AMA editorial panel believe that we have submitted enough evidence, that would be seen as a positive benefit from a commercial payer
perspective versus a negative benefit that we see in the marketplace with PLA codes and coverage. That answer the question
Sung Ji Nam Okay. And then on just on the private payer side, are there any potential implications there
Derek Maetzold We think over time this is one more positive I guess spend in our cap regarding having yet another external agency, in this case, the AMA review our application literature behind that and agreeing that at least the Category 1 requirements, which is a fairly high hurdle in terms of achieving clinical validity or documentation of that in literature.
But equally as important is, is the test being used consistently for medical practice and by a large number of clinicians, be it physicians and or other ancillary healthcare providers, nurse practitioners, and PAs. So, we think it's a positive overall trend for us. Now how fast would that change to positive policy I'll leave you to predict that because I don't have a good history in that.
Sung Ji Nam Okay. And then lastly from me, we'd love to hear any feedback on the squamous cell carcinoma pipeline product that you're getting on the pulmonary data -- on the actual validation data that you presented. And also I don't know if it's too early to talk about it, but what's the kind of the go-to-market strategy there Are you going to be leveraging the 50 plus centers that are currently involved in the validation study as potential early customers Thank you.
Derek Maetzold Let me take that part of it, Sung Ji. We are -- we have -- we are going to be going out and testing the reaction to our clinical validation data confirming our messaging and positioning over the next couple of months. I'd rather hold that information back maybe until we can talk with some solid data behind us that's based upon the facts of the tests itself.