Q1 2022 Castle Biosciences Inc Earnings Call
Good afternoon, and welcome to coffee Biosciences first 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 answer session I would now.
Alex.
Let's turn the call over to <unk>, Vice President Investor Relations and corporate Affairs. Please go ahead.
Thank you operator, good afternoon, everyone. Welcome to Castle Biosciences first quarter 2022 financial results Conference call. Joining me today is castle's founder President and Chief Executive Officer, Derek Mitchell and Chief Financial Officer, Frank Stokes.
Information recorded on this call speaks only as of today May nine 2022. Therefore, if you are listening to the replay or reading the transcript of the 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 1095. These forward looking statements include but are.
Not limited to statements about our financial outlook 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 impact 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.
And the company's quarterly report on Form 10-Q for the quarter ended March 31, 2022 under the heading risk.
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.
Addition, some of the information discussed today includes non-GAAP financial measures such as adjusted revenue adjusted gross margin 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 and assessing our revenue and cash flow 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 Companys website I will now turn the call over to Derek.
Thank you Camilla and good afternoon, everyone. Thank you for joining us.
Today I will take you through execution of that strategy highlights from the quarter and then Frank will provide financial highlights for the period.
And then we will take your questions.
As always I want to thank all of our castle employees for their hard work during the quarter and continued dedication to our mission of <unk>.
Proving health care innovative tests that guide patient care.
We had a strong quarter, which we believe will provide us with significant momentum for the rest of the year, we delivered almost 70% growth in total test volume over the first quarter of 2021 and two.
$26 $9 million in revenue, which we attribute to our continued focus on our strategy and strong operational performance.
We saw strong year over year growth in our core dermatology business and our combined dermatology test volume that is the comprehensive diagnostic offerings.
If dx melanoma, which groups.
69% over the.
The first quarter of 2021.
We continue to make careful investments.
Core dermatology business as well as investments in the two other pillars of our growth strategy.
Our pipeline initiatives and strategic opportunities I will highlight across each of these pillars, starting with our strong core dermatology business.
First an estimated end market.
Total addressable market or Tam.
<unk> $540 million.
Despite the Covid.
Covid headwinds.
Launches of both decision Dx SCC and <unk> melanoma test in the second half of 2020, we entered 2021 with an estimated end market U S. Tam.
Just under $2 billion.
And then as of April 2020, and market U S. Tam of just under $8 billion made possible by maintaining our focus on our three pillars of growth.
Jess reports for our flagship gene expression profile test decision Dx melanoma grew by 48%.
Present in the first quarter compared to the first quarter of 2021 with 6023 test reports delivered.
As we have discussed COVID-19 impacted diagnose the cutaneous melanoma during 2020 to pre COVID-19 levels. However.
For now two years later, we are considering these trends a new normal for now anyway.
We have made decisions that we believe will strengthen our resiliency and position our business for growth.
<unk> potential headwinds related to reduced diagnosis and we believe it.
Driven by strong execution on these growth initiatives for.
For instance, we doubled our dermatology facing representatives in 2021 for the mid sixties, where it stands now.
As we communicated to you in the first half of 2021.
The active decision to double our dermatology facing representatives by July 2021, so that we would enter 2022 with a commercial team that can take advantage of the promotional responsiveness that we see in this market.
So we feel good about the strong momentum we have seen so far in 2022.
As we discussed we will continue to assess the size of our commercial team a number of outside sales territories.
Our assessments will include evaluation of our mix of parent of.
Outside sales territories inside sales support.
Marketing and medical affairs, and will adjust our investment based upon these evaluations.
I noted earlier, we believe that our market is promotion responsive. So we anticipate that our sales force expansion efforts investments in R&D are peer to peer program.
Our interface with a leading dermatology electronic medical record system, modernizing medicine, Emma system, and our federal supply schedule contract with the VA, which was recently expanded to include all of our skin cancer tests.
Should position us well for growth across our suite of Dermatologic tests for the remainder of 2022.
Another significant dermatology highlighting was the presentation of our expanded National Cancer Institute collaboration with the senior program.
This expanded our real world data showed improved survival for patients who have the benefit of the decision Dx melanoma test.
<unk>, two traditional clinical and pathologic data.
Compared to untested patients, who only had access to traditional clinical pathologic factors determined their treatment follow up plan, specifically patients diagnosed with melanoma and who received the decision Dx melanoma test.
Had a 27% improvement in melanoma specific survival compared to untested patients.
Let me restate this number as it is important clinically when controlling for clinical and pathologic factors as well associated economic factors patients who have the benefit of having decision Dx melanoma test results. In addition to clinical and pathologic factors had a 27% improvement in melanoma.
Survival.
Looking now to decision Dx SCC, we have discussed potential timing got Medicare coverage for this test at this time, we remain uncertain on timing. However, we continue to plan for Medicare coverage prior to mid 2023.
You will recall with the technical dossier for this test was submitted to <unk> for review to Colorado in the second quarter of 2020, we expect to continue to offer this type of patients as we believe it is the right thing to do.
Our billing department continues to bill payers and as per our process. We expect to continue to receive some payments in 2022.
Now turning to our pipeline initiatives, we presented proof of concept data at the revolutionizing atopic dermatitis 2022 conference last month, which concluded that our noninvasive skin scraping technique produces sufficient RNA to assess reproducible gene expression for inflammatory skin disease pipeline test.
That's currently in development to predict therapy response.
Specifically data in the proof of concept portion of our ongoing development and validation study identified preliminary genes of interest.
Importantly study demonstrated strong technical reliability at inter operator, concordance skins, breaking technique. So we feel confident about our noninvasive skin sampling approach.
As you May recall in 2021, we initiated a 4800 patients prospective multicenter clinical study to develop and validate this pipeline tests. We believe we are on track to have initial validation and development data in 2023, and we expect to launch this pipeline test by the end of 2025, which would add.
Approximately $1 $9 billion to our estimated U S Tam.
As we move to our last growth pillar strategic opportunities. We are excited to discuss the ongoing progress of our tissue cycle of integration.
Well as our recent acquisition of <unk> and the <unk> X Pharmacogenomic test for mental health condition.
As I mentioned above the acquisition of these two laboratories expanded our end market estimated U S. Tam by approximately $6 billion.
Now approximately $8 billion.
As we mentioned on past calls, we believe strategic opportunities enable us to build franchises and two complementary markets with existing commercialized products that address a clear unmet clinical need and have already gained Medicare reimbursement as well as select commercial coverage.
We have made these acquisitions and further in some of our long term growth and value creation objectives.
For the near and mid term, we will focus assessment of other strategic opportunities.
Position of building, our three franchise markets.
Metrology, gastro neurology and mental health conditions.
As it relates to our tissue cipher Barrick's Massawa is test we are seeing the positive reception from clinicians that we identified during our market research in the second half of 2021.
In the first quarter CMS granted a DLP, our advanced diagnostic laboratory test status for the tissue side protest.
<unk> status requires that a clinical diagnostic laboratory test provide new clinical diagnostic information.
That cannot be obtained from any other test or combination of tests among other criteria.
Of significant business importance.
Is the fact that ADL status exempts tissue side from what is called the.
Of the 14 day rule, which simplifies the building process for Medicare patients.
We also announced in the first quarter and independent peer reviewed article published in the clinical Gastroenterology and Hepatology Journal.
Okay.
The study a pooled analysis of five previously published clinical validation studies of 550 to bear to solve because patients was led by Dr. Prasad ire, a recognized expert in the Mayo clinic, and the diagnosis and management of their <unk> <unk>.
The analysis reinforces the ability of tissue side were to significantly improve predictions, but progression to esophageal cancer or high grade dysplasia in patients with various esophagus compared to predictions based on clinical pathology variables alone.
<unk> for more than four these management decisions to occur.
Instance, one analysis evaluated the impact on tissue cycle in combination with clinical and pathologic factors that are known predictors of progression in patients with non dysplastic there to stop against disease. This patient group is particularly concerning as we believe they represent approximately 348000 endoscopies per year or <unk>.
91% of the intended use market for tissue cycle.
We continue to make progress on our Pittsburgh Laboratory enhancements and.
And we have signed a new lease to facilitate further progress for tissue diaper, which includes optimizing test turnaround time.
You may recall, our commercial team consists of 14 outside sales territories.
Hello, George Dermatology commercial team, we will continue to assess market response and determine what the appropriate commercial expansion will look like but based upon our initial market research as well as additional provider response.
We would expect to add approximately 10 to 15 additional outside sales territories sometime in the third quarter ending the year with approximately 25% to 30 outside sales territories.
Let's turn now to our recent closure.
<unk> Dx and the acquisition of the <unk> test in late April .
I want to reiterate our strategic focus and how this acquisition aligns well within this focus.
Casual aims to transform patient management by providing actual information and disease stage with high unmet clinical needs.
We accomplished this through four main factors.
Number one we identify high value clinical decision points that are poorly served by current subjective features.
Number two we focus on gold decision points with a diagnosing clinician is the treating clinician.
Number three we limit our investment to proprietary products and number four we unify subsequent disease states.
Nickel decision point at the same diagnosing treating clinician basis, thereby providing multiple high value test the same customer or leveraging our commercial desktop.
We believe <unk> aligns with our strategic focus. Additionally, as you may recall from our April 4th announcements.
Previously only had Medicare coverage for use in patients diagnosed with major depression.
As we enter into May Medicare coverage. The ICD multi gene test now include seven additional mental health conditions for a total of eight and as a reminder, a randomized controlled trial showed that patients diagnosed with depression, who are assessed with the IV Dex test share.
Is it greater than two five times improvement in remission.
Care to those patients who received the physician's choice without knowledge other pharmacodynamic information.
<unk> had a commercial team covering approximately 20 outside sales territories and all joined the Council family. We are excited about the potential IDEXX has to help patients diagnosed with mental health conditions, and we recently announced a collaboration with Camille Schreier missed.
<unk> America in 2020 for mental health awareness month to promote the potential genetic testing and the <unk> test to help improve treatment for mental health conditions.
Look forward to updating you in the near term our progress the IV jacks.
Now I'll turn the call over to Frank who will provide details relating to our financial results and updated 2022 revenue guidance.
Thank you Derek and good afternoon first quarter revenue was $26 $9 million, an increase of 18% over the first quarter of 2021 overall the increased revenues primarily reflects both higher report volumes for our decision Dx melanoma and decision Dx tests, partially offset by lower revenue adjustments related to <unk>.
Delivered in prior periods.
We believe the higher volumes are attributable to a combination of increased patient flows from the easing of COVID-19 restrictions and the effects of our dermatology sales force expansion last year.
Excluding the effects of revenue adjustments related to tests delivered in prior periods. Adjusted revenue was $26 3 million an increase of 50% over the first quarter of 2021.
For the three months ended March 31, 2022, and 2021, we recorded net positive revenue adjustments of $6 million and $5 3 million respectively related to test delivered in previous periods associated with changes in estimated variable consideration.
We are raising our full year 2022 revenue guidance and now anticipate generating revenue between $118 million and $123 million, which we believe will be driven by further consistent execution on our growth plans and in particular, the <unk> acquisition.
Gross margin during the first quarter was 71, 7% compared to 86, 7% in the first 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, 4% for the quarter compared to $82.
7% for the same period in 2021.
As you saw in the first quarter, we continue to expect our gross margin percentage to be negatively impacted in the near and mid term by increased spending on investments to facilitate and support anticipated growth to report volumes in advance of obtaining reimbursement coverage for several of our test. These investments may include additional laboratory personnel and related resources.
Additionally, as we have discussed our GAAP gross margin and they also continued to be negatively impacted by amortization of intangible assets associated with recent acquisitions for the remainder of 2022.
Our total operating expenses, including cost of sales for the quarter ended March 31, 2022 was $51 4 million compared to $27 1 million for the first quarter of 2021.
The largest driver of the increase was higher SG&A, which increased by $12 $3 million compared to 2021 attributable in large part to higher personnel associated with our increased head count which include expenses related to salaries bonuses benefits and stock based compensation.
Personnel costs were primarily attributable to the expansion of our sales and marketing teams as well as administrative support functions.
Further and are in connection with our acquisition of Genoptix, we higher than initial commercial team of 14 outside sales territories, along with to them through internal sales associates and medical science liaisons to support a launch in the tissue cycled bearish esophagus test.
Remainder of the increase in SG&A was primarily associated with training events meetings travel and other general increases.
R&D expense increased by $4 $9 million in the first quarter compared to the first quarter of 2021. It was primarily associated with increases in personnel costs, including increases in stock based comp attributable to additional headcount to manageable in our clinical studies and increases in other expenses associated with increased clinical study activity.
Total stock based compensation expense, which is allocated among cost of sales R&D and SG&A totaled $8 4 million for the first quarter compared to $4 9 million for the first quarter of 2021.
Operating expenses. This quarter also included a change in fair value of contingent consideration of $2 6 million or <unk> 10 per diluted share.
And as related to the Remeasurement of our liability for earn out payments in connection with our acquisition of Genoptix. This expense can vary from quarter to quarter, depending on any changes in assumptions and valuation results.
Further we had amortization of acquired intangible assets for the three months ended March 31, 2022, and $1 6 million.
Which is related to the developed technology, we acquired in May 2021, and December of 2021 attributable to the <unk> melanoma with tissue side for tests, respectively.
Our net loss for the first quarter of 2022 was $24 6 million.
Compared to net loss of $4 $3 million for the first quarter of 2021.
Basic and diluted loss per share for the first quarter was <unk> 97, compared to basic and diluted loss per share of <unk> 17 in the first quarter of 2021.
Adjusted EBITDA for the first quarter was negative $11 4 million compared to a positive $2 9 million for the comparable period in 2021.
Net cash used in operating activities was $21 4 million for the three months ended March 31, 2022. It was primarily attributable to the net loss of $24 $6 million accrued compensation.
<unk> of $6 9 million and increases in accounts receivables of $2 $7 million partially.
<unk> offset by stock based compensation expense of $8 $4 million and change in fair value of contingent consideration of $2 $6 million as well as depreciation and amortization of $2 2 million.
Finally, we had cash and cash equivalents at March 31, 2000, $20 million to $309 million and no debt.
I want to reiterate that we believe our strong balance sheet positions us well for continued growth and value creation I will now turn the call back over to Darren.
Thank you Frank in summary, we're off to a great start in 2022, delivering strong year over year growth in our dermatology business had a laser like focus on strategy execution.
We continue to make thoughtful investments to accelerate growth and we are seeing results of those investments I would like to conclude today by thanking our castle team.
Hi, Thank you for your continued interest in castle.
Now we are happy to take your questions operator.
Thank you. Thank you I would like to ask a question. Please do so now by pressing star followed by one I'm just trying to think APAC. If you change your mind I would like to withdraw your question from Nicky. Please press star followed by <unk>.
We must get when preparing to answer your question. Please ensure that your device Andrew microphone on mute could likely.
Our first question today comes from the line of <unk> from SVP Leerink.
Please go ahead.
Yes, Hi, Derek Frank Thanks for taking my questions so far.
First one is on guidance I just wanted to understand.
You delivered about.
And ahead of us and the and the consensus I believe as well.
And you were expecting $2 million.
Sure Alethia Dx, so given that that seems to account for.
The increase in the guide at the midpoint.
Binding those two elements. So I just wanted to understand given the momentum youre seeing in the market is there anything that.
Giving you a pause a little bit is it is it still COVID-19 sluggishness is there.
Rep access anything else that you would point to.
That is giving you.
Slide.
More confidence.
It appeared to me that you would have more confidence at this point in time, given where the current markets are and we are out of somewhat out of Covid at this point in time.
Hopefully.
That's a great question for me Derek I'll, maybe give some flavor and frankly correct me.
I think Pat one and this is only the first quarter and so you are right.
Exceeded last year with with with really really strong momentum.
Certainly our dermatology business.
We're early on in the launch of both tissue side for and of course, we only closed this quarter on our <unk>. So there certainly is some.
Conservative as I think in terms of thinking through the opportunities for the other other other new products I guess, we would say from a launch standpoint, but nothing where youre seeing reflect any kind of a pullback rec at rep aspects et cetera, et cetera, but you want to.
I would just remind you that the range.
The.
Revenue guide was $1 million to $3 million rather than in a single mid point and.
Hey.
Revised guidance reflects our enthusiasm and excitement about the tremendous execution in our core <unk> business that we continue to see.
Okay. That's helpful and then.
No.
Derek maybe taking a step back when you look at the agency guidelines overall, where decision Dx melanoma is today.
Momentum that you've had in the data generation that you've had over the last few years. The fact that decision Dx melanoma and correct me if I'm wrong, it's mid teens to high teens penetrated in the market.
What what point do you think you can approach the agency guidelines and potentially.
Can see.
Central for inclusion of this test longer term until the guidelines. Thank you.
Yes excellent question again, I would maybe separate out slightly so AJ cc really is about diagnostic workup only and I think it wasn't until the last version, which was probably what December 17 or January 2018, when you saw them.
Include even oncotype progressed in terms of the diagnostic workup guidelines, so I think I.
I think impacting Asia ACC.
<unk> criteria is a ways off but that's mainly because they are they trying to harmonize with the <unk> equivalent.
As it relates to NCC in guidelines, which I, maybe where your question was going.
We certainly believe that this recent national Cancer Institute Slash sphere, and collaborative study that we have ongoing with Mci is a very significant real world large prospective dataset that shows that when clinicians have an opportunity to incorporate the results of our test with.
The other standard of care information they get with them.
Clinical and pathologic features and that they are able to make.
Interpolating youre slightly better decisions that results from living longer and that's pretty significant and that given that it's not a castle study, but a third party large NCI study I think should their weight.
I certainly think we should expect the MCC and committees members to evaluate that data and they shouldn't be doing with over 5000 U S. Clinicians do which is to incorporate it and the use of their practice now that being said.
I think.
The diagnostic numbers as you know around melanoma kind of squishy.
Who do we think of kind of the Covid Cushing is but I think we expected that we exited last year at around 18%, 20% more like 20% is that right on a reduced number of diagnosis unreasonable diagnosis. So were already sort of testing last year one in five patients.
And doing some assessment work it looked to us like things like Oncotype Dx for breast cancer. For example didn't get incorporated into NCC and guidelines for breast cancer will hit around 30%. So we're going to just a year or two away from there. So I think that will be.
Around the corner is my expectations, because clinicians are using our test in record numbers to help treat their patients and.
Although we do recognize and CCM is being a laggard indicator of adoption that <unk> is coming pretty close from our perspective.
Our next question comes from the line of Catherine Schulte with Baird. Catherine. Please go ahead.
Hey, guys. Thanks for the question.
You mentioned melanoma diagnoses arent, yet back to pre Covid level, where we are I think for the quarter.
You mentioned youre, considering that the new norm.
Why don't you think that will rebound at pre COVID-19 levels and does that change how you think about the idea of ultimate size of your sales force.
Doug Murphy's Android wrap up that that's going to be different client program versus pre COVID-19.
Yes, no questions are Kathryn.
Sure.
Let's see.
First of all.
We don't believe we have accurate first quarter diagnoses numbers based upon the vendor that youre using.
We believe if there wasn't any pullback there is nothing to indicate from kind of a sales force access perspective, our knowledge of the marketplace in January or February of that <unk> had any material difference I think the question is is that.
We're in this about what seven quarters or so and we'll keep wondering when we get back to diagnosing around 130000 patients a year versus call. It 110 to 115 and I.
I guess I guess in the short term one I can't tell when they come back and Thats due to kind of a reduction in telehealth over time or if we should so we've just sort of we wanted to be as transparent as possible. Obviously just indicate that as of now.
Should probably view the normal patient flow as being what it is going to be.
Unfortunately, those patients who had delayed diagnosis, which I think is largely due to the implementation of telehealth medicine, which I think for.
Older patients certainly makes it much more difficult to get your phone around the back of your head or your back and say as at a melanoma doctor. So that's kind of concerning from a patient care standpoint, but I think until we sort of see that kind of primary care in person activity.
Returning we would expect a slow dribble of these patients coming back in as they self diagnose a melanoma that's bigger today than it would've been in a normal PCP interaction a year or two ago, but I think if people are modeling in.
And of a rush to a catch up of all these missing patients I think that's hard to predict from our standpoint, which you've always said, we're just trying to be a bit more opened north transparent this time.
Okay got it.
You bet.
All right.
So in terms of in terms of size of Salesforce question was buried there I don't think it impacts that we have such a large untapped medical need here in melanoma. As you know, we're just now scratching the surface for squamous cell carcinoma, and we also have our my path and <unk> Dx tests those are all largely at the same customers. So.
Few thousand less melanoma patients doesn't necessarily change the opportunity we have to really impact patient care.
Who have skin cancer, one one of our writers skin cancers in the dermatologist practice. So I think that's that doesn't impact our planning or our decision making process.
Okay got it.
First screen Lasalle any conference volumes dropped sequentially. So just curious if you could talk through what youre seeing with that test.
The seasonality there.
Nice to see that given it's so early in the launch and given the sales force expansion. So any color on what youre hearing from docs feedback would be great.
Yes, Catherine strength, the physician feedback is tremendous and.
It's the clinical utility of our squamous cell test.
Wind up being.
Even more compelling than the clinical utility of our melanoma test which is of course.
Well published and well validated.
Important to remember the reps our area managers are still.
Directed to focus most of their time on the on the melanoma test in.
Given where we are and the reimbursement journey.
We certainly don't want to have a melanoma.
Squamous.
Report at the expense of the melanoma now if a physician and many of them do what they want to talk about squamous the area managers are.
Well equipped well trained and they'll do it but.
We are guiding them.
Fairly heavily to focus.
The majority of their interactions on melanoma so.
We're quite happy with where the squamous.
Volume was this this quarter it may bounce around a little bit.
Think that the.
The real measure is going to be once we once we get the reimbursement puzzle.
Puzzled fix there I think youll see that that start tracking angles and trends like melanoma.
I wouldn't focus.
Any effort or concern around quarter over quarter, especially in this quarter.
Yes.
We haven't been in market and a.
Having launched the squamous cell test Oems sort of weighed on August 2020, we really don't have any non COVID-19 normal patient flow experience, assuming squamous cell tracks like melanoma does in terms of patient flow and we've seen pre COVID-19.
The number of patients diagnosed and report growth in first quarter over the fourth quarter being nothing to write home about and it's usually flattish or something like that so I think this is not a difficult from that standpoint.
And certainly we've heard.
I would say only positive impact in terms of the decisions, we're having our tests make in terms of patient care, assuming squamous cell tracks seasonality close to melanoma, which I don't think Theres a reason why shouldnt that all thing.
We would expect melanoma to have an increase in the rate of diagnosis and we'd expect a report growth to occur in the second quarter versus first quarter, we would see a little bit more in the third quarter versus second to them.
<unk> third or fourth in the fourth the first being kind of flattish. So thats an atypical I think reinforced now we're giving.
Around 10% effort to kind of a launch product, but thats just due to kind of where we are in reimbursement.
As a perfectly adequate place we want to be at today.
Okay got it thank you.
Our next question comes from Nathan Carrington with Stephens. Please.
Please go ahead.
Hey, guys. Thanks for taking the questions.
First could you walk through some of the growth dynamics in the quarter for your dermatology portfolio, specifically any color you can provide on growth youre seeing from a.
Growth in new clinicians adopting use of the tests versus increases in utilization.
Yes.
And we disclosed.
Yes.
Yes, sorry, sorry, Imation, we it was really twofold, we had a tremendous quarter in terms of new ordering physicians.
That's a that is a metric that we.
We not only track, but we drive.
Manager results are impacted heavily by that and the reason is because if we can convert a physician and have them.
Using the test on a handful of their patients we typically see as they review the data and see the benefit of the testicle expanded to a larger group so.
Great quarter in terms of new ordering physicians.
And then continued volume in uptake from from the Docs, we have as Derek said at this point.
I know you've heard US say, we we have a little bit of a tough time getting a real precise number on the total number of clinicians who are targeting <unk> in the country just given the the sub specializations that you see in dermatology, but somewhere around half the docs.
Are there targeted bill here use the test in the last year and Thats.
One attitude is pretty close to getting pretty close to standard of care. So I think that as.
As we continue to see the penetration levels grow.
Physicians will see their colleagues and youll see that their colleagues are using the test and benefiting from the test and also this quarter. We had one of the one of the most powerful.
Data.
Study data points, we've had yes, which was the the collaboration with NCI and the sheer data so working hard to get that published Thats a key goal of ours.
Then we will amplify the dialogue around that even more.
Got it thanks that's helpful.
On your IV genetic test.
In the sense that it incorporates drug to drug interaction I was wondering.
One.
Is that unique to IV genetics versus some competitor tests out there and also is there a general percentage of patients with major depressive disorder, who are on one or more medications.
So I'll ask Luke.
First one I'll come back to the second one in terms of clarity of Mason. So on the first one.
There have been.
Four clinical studies done.
With four different Pharmacogenomic tests.
In patients with depression.
Two were negative.
Both of those only do I'm, sorry, there's been five I guess.
Sure negative both of those only do drug interaction reporting.
Myriad gene side test had a positive.
<unk> studies, showing an improvement in terms of permission in response makes it if I recall correctly compared to physicians choice.
They only report drug gene interactions.
I'll see AVX is early scientists made.
Made the proactive choice that actually both components are important and the doctor should see sort of the summary.
Not only what the patient is on today, but also the.
The genomic impact of their own body on on processing. These kinds of therapies. So that we we saw obviously in the <unk> study a positive improvement in terms of both remission response rates now.
Hi.
I don't want to raise that or cut down the validity of inter study comparisons, but if you look at the gene side study. The robustness of responses was was more muted than it was in the <unk> study that could be a protocol design issue could be site selection it could be.
Timing of that study start or could be actually because you have one report that includes both drug gene and drug drug and one that does not so our perspective is that when we share an honest manner of the protocol design and the and the ease at which a clinician can order our <unk> test and the fact that we would give them one.
<unk>, which includes what they want as opposed to saying Hey, if you are interested in the other part of therapeutic response.
We're online and figure it out Doctor. We can help you I think that's an important advantage to us now that being said.
The main opportunity I think is not so much grabbing share. It really is helping these people. The vast majority of who have had not had access to pharmacogenomic testing to actually have better choices made the first time around so I think thats the real opportunity, but we do think we have a very nice strong competitive advantage, which is easy to communicate.
On the multiple medication issue.
My understanding is that yes, these patients and the patient for the other indications that we have approval for anxiety the extended approval with Medicare coverage, a week or two ago, which included.
Seven other indications that many of those patients are going to be multiple drugs. Unfortunately.
With Justin increases the value of our test the clinicians and our patients.
Perfect. Thanks, guys.
Absolutely. The next question comes from.
I'm Thomas Flaten with Lake Street Capital markets. Your line is open.
Hey, guys I appreciate you taking the question sticking with IV genetics.
From a rep productivity perspective, obviously, the guide is pretty pretty marginal at this point, but 20 feet on the street, what kind of productivity could you get out of that team without a significant expansion in the books.
Near to intermediate term.
Yes, Tom this is Frank so we would expect that we at some point, we will expand that group, we will do it as we grow volumes.
Medicare coverage in hand allows us to sort of scale that.
As appropriate as the as the volumes come forward. So.
I don't know I cant idea when we might expand it certainly.
I think it's clear that.
There are lots of.
Covered areas that we could still tap and so.
We will use our typical capital structure of a group of outside area managers, coupled with medical science liaisons and an inside sales associates.
To penetrate that space, it's too early for us to really see at what point a rep is doing so much business that we need to scale that territory down a little bit, but I would suspect it in.
Our behavioral health effort, we will.
Probably take the same approach we do on our others, which is we would like our area managers to be able to spend about half their time.
Converting new physicians and about half their time, providing information and service to physicians, who are using the test.
We'll give you more insight as we as we develop it here.
And out of curiosity are those territories built around high prescribers of certain basket of men's or anything you can share about how those territories are built for design.
So and with the with <unk>.
The millions of potential patients.
And only 20 years or so.
19 sales territories out there. They were originally designed based upon just massive geography. There are some expansions down earlier last year late last year earlier this year that we're targeting much more so they urge and responsiveness, but I think I think the opportunity here is to really.
Let us get past the next couple of months into the integration of the group and as Frank said.
Organizing our integrating the commercial team in the medical teams into castles approach and we will be able to go in March for their very strong towards the end of this year, which is also part of why we wanted to make sure. We were setting up modest expectations. So that we are having to make rapid choices for the wrong reasons, but let's make rapid choices.
<unk> reasons.
Got it I appreciate it guys. Thank you.
Thanks, Mike.
Yeah.
Our next question comes from Carl Mixon with Canaccord <unk>.
Your line is open.
Thanks, Hey, guys. Thanks for taking the questions on the sticking with the acquisitions. The current Tam of your of your legacy term business, it's grown quite a bit for these acquisitions has been the launch of all these products.
Sure.
But.
So the legacy business still below $2 billion in Pam and I know the pipeline offers upside for like August 1 billion, but you've added 1 billion from turn off it's been Bob Bill from <unk> I'm.
I'm sorry, those were big reasons for the acquisition I'm, just kind of wondering though like what gives you confidence you'll be able to successfully penetrate those incrementals hands on that you've added over the past year and I guess it would be helpful to kind of talk about that in the context of your objective to kind of achieve cash flow breakeven by 225 before we even launched from these pipeline tests on the group side as well thanks.
So.
Clarify what youre thinking about what the word incremental the incremental <unk> incremental to dermatology or incremental or in dermatology, even just want to make sure. We're answering the question correctly.
Sure Derik should be the 1 billion from <unk> six 5 billion from Alethia I mean, those are all kind of.
Relatively white space opportunities for castle right. So like what's going to give you. What gives you confidence that you can kind of penetrate those successfully on just given the kind of relatively nascent businesses I guess thanks.
Excellent question. So so our belief is we kind of went through the COVID-19 period undersea.
Understanding where we were going to.
Ensure strong growth in the mid to long term was do we only want to stay or should we only stay within dermatology.
Or when we think we've gotten size properly in terms of infrastructure support back office support do we think it makes sense as well so maybe go outside of dermatology.
If we can find areas that offer the same kind of.
Check box that we get with dermatology, which is to us.
Are there are there more than one areas of high unmet clinical need that could be solved potentially with advanced molecular diagnostics, yes, or no I E can we leverage a franchise investment through multiple products to was.
If we do it ourselves.
Pipeline development timeline, and then as we know it's a it's a it's a uncertainty elongated timelines are getting at least your first steps in our reimbursement peg impair them.
And do we see areas, where we can find things that would meet that we view as complimentary to castle strains and so I think going back to gas urology and our tissue side for tests for patients with various esophagus, there's a clear unmet clinical need as we talk to gas neurologists, who are concerned about.
Core predictive value.
Biology in terms of predicting which patients with Eric just off against actually will go on the FERC progress on which will knock that results in both the under treatment of people, who may be could be saved from advancing to adenocarcinoma of the esophagus as well as over management, which is really.
Repeat endoscopies every year every two years for the rest of one's life. When your chance of progressing is so low is that really the right thing to do and we felt that.
The opportunity embarrassed disease, the clinical data that <unk> had generated and published prior to the acquisition and then sort of as you put it wide open green space to really be able to walk in there and frame the opportunity for gas urologist kind of checked all of our boxes and by the way. They also had Medicare reimbursement as well.
Reimbursement for instance from some small commercial payers under foot. So we felt wow. We can walk in now will have to integrate obviously, the current employee base and higher new but the opportunity to really kind of move this through a growth system in 2023, $2425 26 and beyond looks like.
It had an awful lot of risk taken out due to Medicare coverage.
Due to the strong clinical publication track record and we believe there are other disease stage within the gas neurologist marketplace that we will be looking to build up so that by the time, we get to what 2025 and <unk> and say just like dermatology was in 2022, we have two or three years or three years.
For test now part of the same customer offering good value that should let us leverage our reinvestment. So that was kind of a gas neurology analysis when looking at the <unk> opportunity. So it is quite similar which was to say do we think we have a large unmet need here and do we think that the product profile is competitive.
That is not highly competitive and our answer was yes in both cases do we believe that this product could be a substantial growth driver in the next 345 years not really doing much in 'twenty two like tissue cyber isn't expected to but are really helping us move things forward.
In the middle of this decade and beyond and our answer was yes.
And having having kind of.
<unk> designed in are in designed drug drug and drug interactions to US was a very interesting smart choice that we think based upon our due diligence makes a difference in the case of prescribing doctors to make that easier and make it <unk>.
A mindless, but make it a much more easier choice everything in one report.
Clearly is attractive to our customer base and so it really is about execution for both.
The mental health business as well as for the GI business and we believe that that we've demonstrated that we're not alone could do well launching the melanoma test in 2015, I guess 13, 14, and 15 with a small sales force, but also launching our or squamous cell carcinoma test and our differentiated <unk> excess during COVID-19.
Being successful hopefully reduces outside concerns about execution risk, it's really just a matter of blocking and tackling and what's exciting is that we've we've had an opportunity here to really take some of the digital marketing enhances that all <unk> has been moving towards and really cross sell to those across our other business lines.
At the end of the day, we're going to hopefully not only have the sort of <unk> block and tackling that we do from a sales and marketing standpoint permeate both Gi mental health will also go ahead and take some of the learnings.
In terms of where we can actually make good strong digital marketing investments to help drive further growth in our other business lines. So I think it's a win win for both of those acquisitions.
<unk>.
We would have liked to have these spaced out a bit more timing wise, but you don't always get forced them out all the time. So I think we are quite excited about the integration.
Investment, we're making the next three or four months that's for certain.
And looking at looking forward to seeing the contribution of both these acquisitions and 23% 27 28.
Okay that was great. So thanks, so much awesome really thorough answer I'm, just thinking without the maybe the new indications for any genetics under the covers.
Coverage expansion I assume that it's going to be the kind of like $1500 rate is further question can you just talk about any off label use of the text in these newly reimbursed areas to date and.
Ultimately is there any material upside to the 22 revenue or maybe gross margin expectations.
Provided here today I don't think they are baked in.
And if you could quantify the milestone payment.
To pay debt.
Was that in connection with this recent catalysts would be helpful too. Thanks.
So I'll answer a couple of his question what I'm trying to have a couple.
In terms of the of the expanded indications.
Those are.
Our disease state that I believe also <unk> was reporting on prior to the expanded Medicare coverage. So it really was expand it wasn't so much the mall.
The X program, saying Gee, we think that you can now.
Add value to these patients right now reviewing data in patient with those indications the kind of overriding driver of sort of.
<unk> is really looking at what see Pink does CPI C, which is a quasi governmental body or NGO rather compose.
Composed of academics in pharma and pharmaceutical companies as well as as I think current Rx FDA or is it really looks around and says Gee of FDA approved drugs what.
What do we know about driving drug or a drug interaction, let's create a list that's evidenced based so that as clinicians.
Physicians treating patients can go to the <unk> web site and be able to see the various interactions that may be occurring on a drug drug are drawing dream perspective for different disease States. So see pick really is sort of the clearinghouse I would say for potential use of a test like <unk>.
Now that being said what I just described to you is not where doctors get paid to do they get paid to see patients and so the actual value of CP has not seen very well, but the opportunity to go ahead and look at saying Hey.
What are some areas of recognized drug gene or drug drug interactions that could be.
Added it added to future reports and the MSC pick.
Group happens to be one of the consortium that one can look at it and say does this make sense does it align with our current customer call base should we look at developing data that can demonstrate that we can actually measure drug drug or drug drug interactions in the same patients with those with those disease states.
Are those diagnostics dates and we kind of move forward from there. So I don't think I would characterize.
Any use of the <unk> test is off label, we really only report interactions that are relevant for patients with <unk>, which have certain state of disease are diagnoses today, how we can expand that over time of course with with additional data development.
Those kind of quite that part of the question differently entitled.
The milestone or contingent consideration of potential payments are based on.
Revenue growth and reimbursement performance.
Our next question comes from Mark Massaro from BTG.
Your line is open.
Hey, Derek and Frank good to hear from you and thanks for taking the questions.
I wanted to ask about gross margins. So Frank you talked about investments you will make and lab personnel and amortization of intangible assets from acquisitions.
Legacy Castle, you guys are quite unique with 80% gross margin. So can you just maybe help us at a high level think about your mid to long term gross margin trajectory and when you think you might be able to get back to those potential 80% gross margins or is this mid to high seventies.
Maybe the new normal.
Yes.
I will divide that mark from.
Our GAAP gross margin, which includes the amortization of intangible assets.
But were part of the acquisitions.
That's that's going to change based on that amortization right theres not anything is going to change there, but the adjusted gross margin if you take that out.
Sure.
When youre not appropriately paid for your service it has a negative effect on <unk>.
On gross margin.
<unk>.
When we when we do have the reimbursement.
Path.
Repaired or fix or correct I guess is the way to think about.
Then we would expect to get close to the gross margin that we had before.
<unk> genetics has also run on Quant studio so similar.
Similar throughput similar workflow there and so I think that it's a matter of getting reimbursement to catch up with volume.
Which is which is something we work very hard on.
And so for example, one exercise.
Okay.
Sorry continue.
It's Eric.
I wouldn't say I was going to say for example, one exercise them, we don't do in our in.
In our filings is just take the volume for the test that you believe have reasonable reimbursement such as.
The decision of the ex U M test our decision Dx melanoma test NR.
Or Mike have Alamo and testing just use those as your test report phenomenon.
Phenomenon and the buyback into the cost of goods and you'll see us sitting out where you expect it to go into these so I think I'd say, it's a matter of progress on the reimbursement that lets that volume that we're producing reports on today that arent being.
Reimburse appropriately.
That will move the needle right pickup as Frank said.
Okay. That's helpful. And then I think your R&D outlook for the year contemplate $65 million to $80 million.
And investments in 2022 can you give us a sense for the breakdown between term Gi and mental health and then you guys talked about how <unk> could sort of.
B or maybe a sort of a new area, where you could add additional indications over time.
How are you guys thinking about potentially adding those organically versus inorganically and can you give us a sense for what that.
Pipeline is that you acquired.
Yes, I think.
Your R&D number might be well hi, Mark.
We'll make sure we get that.
We get that cleared up for you we've now broken out how much is in which category.
I would tell you that we will continue to support our end market turn to us very aggressively we will continue to support tissue side for an IV genetics very aggressively as well.
We've been incredibly successful as a company and developing.
Signatures internally.
Our <unk> test was licensed as you know, but our our three.
Durham tests.
Taken apart those taken out the my path portion of our coverage diagnostic offering those are all developed in house and so we've got a tremendous amount of confidence in our R&D team and their ability to develop signatures are.
The trick the tricky part is just making sure that you are identifying a clinical question that physicians have and need an answer for.
So if we can do that work up we're confident that we can and by the way we have identified questions in Gi. So if we if we identify a question is this group of physicians has we're very confident we can develop a signature for it.
So we would like to add additional products to our GI offering we are working on several and perm as well.
And we'll keep doing that.
The opportunity within these groups of physicians as is quite significant and as we saw with our our twin Michelle quick uptake.
When you educate a group of physicians on the value of gene expression profile diagnostic testing.
We have new patients that you can help them, it's a much easier but to get them to accept to understand the value and the next group of physicians.
Okay. That's great. One last one for me you guys have a strong balance sheet with over $300 million of cash you have been acquisitive recently, you've got new channels, where you could plug additional assets into value.
Valuations have declined significantly in the last three months.
How do you look at the environment for potential tuck ins at this current time.
I think one is.
Of course, you can never say never anyways, I think that we have an opportunity here to really integrate it.
Chew and digest driving into three areas in terms of our current commercial opportunities in Gi and mental health and in dermatology.
We have laid out the fact that we believe dermatology is our significant near or midterm core revenue driver certainly and that one of our growth pillars with looking at external opportunities like tissue cipher. Unlike IV genetics.
That being said I think that that one of the leverage points that we like about dermatology is how do we how do we leverage gas urology and our sort of mental health call point. So I think from a acquisition perspective, there are certainly items that I'll look at all the time I think it's much more likely if we.
If we make additional moves are largely be focused in growing out our current call points, we can get greater leverage off those commercial investments you want to add anything.
This concludes our first quarter 2022 earnings call. Thank.
Thank you again for joining us today and for your continued interest in castle Biosciences.
Thank you everyone for joining us today. This concludes our call you may now disconnect your lines.
Okay.
Okay.
Okay.