Q3 2022 Castle Biosciences Inc Earnings Call
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Thank you for your patience that'd be one that the castle Biosciences third quarter 2022 conference call will begin shortly if you would like to ask a question at the end of the presentation. Please press star followed by one of your telephone keypad.
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Thank you for your patience that'd be one that the castle Biosciences third quarter 2022 conference call will begin shortly if you would like to ask a question at the end of the presentation. Please press star one if I want your telephone keypad.
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Good afternoon, and welcome to Castle Biosciences third quarter 2022 Conference calls as a reminder, today's call is being recorded we will begin today's call with opening remarks and introductions, but I've got a question and answer session I would like to tell a cool I bet to Camilla Zucker by Vice Pres.
In Investor Relations and corporate Affairs. Please go ahead.
Thank you operator, good afternoon, everyone welcome to Castle Biosciences third quarter 2022 financial results Conference call. Joining me today is castle's founder President and Chief Executive Officer, Derek Muscled, and Chief Financial Officer, Frank Stokes.
Information recorded on this call speaks only as of today November <unk> 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 Tam and similar items referenced in our earnings release.
<unk> issued today and statements containing projections regarding future events or our future financial or operational performance, including a range of anticipated total revenue in 2025 and expected operating cash flow positivity by 2025, and our expectations and assumptions related to the impact of the COVID-19.
N demick macro conditions inflation and of Hurricane Ian.
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 also cause actual results to differ materially from those contained in these forward looking statements. These factors and other risks and uncertainties.
These are described in detail in the company's quarterly report on Form 10-Q for the quarter ended September 32022 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 include 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 <unk>.
Substitute for any GAAP results. We believe these metrics provide useful supplemental information and assessing our revenue cash flow and operating 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.
I will now turn the call over to Derek Thank.
Thank you Camilla Hey, good afternoon, everyone. Today, we are pleased to share the castle Biosciences delivered another strong quarter growing revenue by 58% and total test report volume by 57% over the third quarter of 2021.
Based upon our year to date results and the momentum in our business, we've increased our full year 2022 guidance.
Two between 132 and $137 million representing.
Anticipated growth of at least 40% from 2021 total revenue.
Before I discuss the quarter in greater detail I'd like to reiterate a few key points from our Investor day that we held in September .
In terms of our corporate strategy, we will follow our three guideposts to achieve what we believe is exceptional execution.
The guidepost exceptional employees.
Continuous evolution and improvement.
Customer and solution centric are grounded in castles mission vision and values and our foundational to how we operate our business.
As it relates to this first guide post exceptional employees. It is important that I Express my gratitude to those who May castle, what it is and to acknowledge that we wouldn't be where we are.
For those of you who call Castle Hall, so to all cash employees.
Thank you for your dedication your F.
And your productivity.
As it relates to the remainder of this call.
I will review highlights from the quarter.
I will then turn the call over to Frank who will provide financial highlights for the period.
I will finish up by responding to any questions that you may have let.
Let me now begin with our core dermatology business.
For our skin cancer test combined we delivered 9000 802004 test reports.
34% increase over the third quarter of 2021.
A 4% increase over the second quarter of 2022.
Overall, our skin cancer tests combined we estimate that our third quarter 2022 test report volume represents market penetration of approximately 4%.
And for the nine months ended September 32022, we saw approximately 1801, new ordering clinicians and approximately 6763 total ordering clinicians for Dermatologic tests combined.
For Decisioning Dx melanoma, we delivered 7354 test reports, an increase of 34% over the third quarter of 2021.
We believe the most significant drivers of our strong growth clinical.
Clinical impact our test can contribute to the management of melanoma, coupled with our prior commercial expansion investments intended to educate our customer base.
As it relates to the clinical impact.
Spanned at real World data from our collaboration with the National Cancer Institute showed improved survival for patients who had the benefit of a decision Dx melanoma test. In addition to traditional clinical and pathologic data compared to untested patients, who only had access to traditional clinical or pathologic factors to determine their treatment.
Follow up plans specifically.
Specifically patients diagnosed with melanoma and tested with decision Dx melanoma had a 27% improvement in melanoma specific survival compared to untested patients.
And as a reminder, the melanoma specific survival at three years was more than double of what was seen when NCI collaborated with genomic health and their Oncotype Dx breast cancer test a couple of years earlier.
A key study published in the third quarter and the journal of the American Academy of Dermatology show the decision Dx melanoma with integrated algorithms that combined clinical and pathologic factors with the decision Dx melanoma continuous score result provides more personalized and accurate survival prognosis and clinical pathway.
Factors alone, which can help guide risk aligned patient management.
Further the study show that using decision Dx melanoma test results in conjunction with current staging guidelines can help refine patient risk reduce unnecessary procedures and ultimately improve patient care.
As the national comprehensive cancer network, or MCC and guidelines recommend risk, allowing decisions for individual patients. The use of decision Dx melanoma test results could aid identifying patients with more or less aggressive cases of melanoma.
<unk> treatment decisions more accurately with patient risk and help ensure a more appropriate allocation of health care resources.
We believe the continued growth in evidence such as the NCI collaborations and the publication in the journal of the American Academy of Dermatology I. Just discussed continues to demonstrate the impact that our tests can have toward improving patient outcomes.
We believe this march and data coupled with our commercial expansion efforts are key factors that drove the accelerated market penetration this quarter.
From a seasonal perspective, the third quarter has historically been flat or down sequentially as well as the fourth quarter.
Despite this typical seasonality of our dermatology business, we established another record in test volume, which you feel as a result of continued strong execution and careful investments in our growth initiatives.
Now, let's turn to our diagnostic gene expression profile or D. <unk> offering which includes both my path melanoma.
<unk> melanoma test for use in supporting diagnosis of melanoma or benign lesions in patients with difficult to diagnose more artistic lesion the <unk>.
Our call point for these tests as the dramatic I apologize for the general pathologist.
As we discussed during our second quarter call, we reestablished a dedicated sales team to focus on our diagnostic offering.
We have just more than 65 dermatology outside sales territories that are now focusing exclusively on our dermatology call point supporting both decision Dx melanoma and decision Dx SCC and we have a small team focusing on our diagnostic GDP offering.
We believe this adjustment to our sales teams will allow for the focus of our diagnostic GDP test offering any matter that will support its growth appropriately.
We also believe this realignment of our commercial sales team to contribute to improved reach and frequency for all of our cancer tests.
And historically, we've seen that our target market is promotional responsive. So we believe this change will contribute to continued momentum as we move into 2023.
Historically, it takes about two quarters for our dermatology sales reps to reach a level of optimal productivity.
We expect to evaluate the impact of our diagnostic GDP commercial team investments in our second quarter 2023 review.
As it relates to reimbursement.
You'll recall that one of our motivations to acquire my path melanoma in 2021 was to pull forward reimbursement for our diagnostic GDP business as my path melanoma was covered under an existing LCD.
In the second quarter of 2020 to Palmetto posted a draft LCD that would expand coverage to include <unk> melanoma as well.
With Mitek melanoma already covered by Medicare This would ultimately give both tests Medicare coverage.
Benchmarking against historical timing patterns, we believe the <unk> LCD should be finalized by the end of the second quarter of 2023.
Now, let's turn to our decision Dx SCC test.
We continued to see strong test report volume momentum in the third quarter of 2022 with volumes up 75% from the year ago period.
As with our growth in decision Dx melanoma, we believe our strong growth in volume for our decision Dx SCC test is due in large part to the combination of the high clinical need.
Coupled with the value of our test provides further we are pleased to see the growth of visiting the FCC volume has come in conjunction with our strong growth in decision Dx melanoma volume not at the expense of it.
As it relates to reimbursement we discussed on our second quarter earnings call <unk>, the Medicare contractor that managers claims related to our Pittsburgh, Pennsylvania Laboratory completed the medical review of our decision Dx SCC test in the first quarter of this year.
And they subsequently priced our test at a rate of three $873 per test the usual and customary rate for risk stratification of our prognostic gene expression profile test such as those used in patients diagnosed with breast prostate and other cancers.
Also recall that <unk> posted a broad attract LCD entitled D. L. 393 hundred 65 genetic testing for oncology back in May <unk> that extend the commentary by an additional 45 days and this comment period ended on September six 2022, we do not have additional updates at this.
Time.
In late September CMS released the draft 2023 clinical laboratory fee schedule or CLS as pricing update for test with new codes.
Both our decision Dx SCC and if Dx melanoma test or signed new PLL codes earlier this year and were included in the draft 2023.
LFS.
This dx melanoma, whereas quass rock to my path melanoma, which is what we recommended and what we believe is appropriate for a diagnostic support tests like <unk> Dx melanoma.
CMS proposed cross walking or prognostic risk stratification decision Dx SCC test to my path melanoma as well.
This was against the majority and the minority recommendation from the clinical diagnostic Laboratory test Advisory panel.
Also known as the <unk> advisory panel as well as against our recommendation. The majority recommendation of the <unk> Advisory panel was for decision Dx SCC to be crosswalk to decision Dx melanoma.
We have met with CMS and submitted comments to point out that the function of resources for risk stratification test.
Are significantly different from those require for diagnostic support tests.
We expect CMS to communicate a final determination on our 2023 rate late in the fourth quarter of 2022.
Now, let's turn to our Gastroenterology franchise.
We delivered 690 <unk> tissue side for test reports in the third quarter nearly doubling the number of test reports delivered in the second quarter. We believe the momentum that we're seeing will continue based upon several key factors first.
CMS granted advanced diagnostic laboratory test status or <unk> status for the test earlier in the year, which exempts tissue side for from what is called the 14 day rule simplifying the billing process for Medicare patients.
Second the American Gastro logical association or <unk> published its clinical practice update on new technology innovation for surveillance and screening embarrass esophagus and the best practice advised statements stated thats a tissue cipher test may be beneficial for risk stratification of patients with non dysplastic bear.
<unk>, which we believe represents on the low end approximately 348000 endoscopies per year or approximately 90% of the intended use market for tissue ciber.
This clinical practice update provides guidance to clinicians on advanced as the innovation regarding the screening and surveillance of <unk>. So it represents an important development and helping us drive greater product awareness and penetration.
Third given the momentum we saw in the first half of the year. We added additional outside sales territories late in the third quarter of 2022, we also updated our sales too and marketing materials for the third quarter. So we are finishing the year and going into 2023 with refined messaging and more impactful materials that we believe will better.
Inform and educate gastroenterologists and drive greater levels of product adoption.
We've been training these personnel and bringing them up to speed, which we believe will put us in a strong position of growth going into 2023.
On the reimbursement front recall that Medicare granted <unk> status the tissue cipher late in the first quarter as part of the <unk> process. The original list price was set up the reimbursement rate through the end of 2022 this rate as 2000 and $350.
Beginning January one 2023 and going through December 31, 2024, So a two year time period, the reimbursement for tissue cycle will be determined based upon the median private payer allowable rate that was received between April one 2022 and April and August 31 2002.
To date.
Data from his time period has been submitted to Medicare and we expect the rate for 2023 to 2024 to be published in December 2022, or early January 2023.
To summarize we are pleased with the results to date of our Gastrology business keep in mind that our acquisition of this business as well as our mental health business was intended to build a stronger profitable revenue growth trajectory for us with material revenue contribution beginning in 2020 for 2025 and beyond.
Our primary filters for decision focus on estimated total addressable markets that were larger than any individual end market dermatology test.
Which we anticipated could drive material revenue for the long term.
Products that were on the market, but not necessarily generating material revenue.
That were first in class or best in class with proprietary algorithms.
I had already succeeded in achieving some percentage of positive reimbursement coverage, we believe tissue side for met these criteria.
Finally, we are entering the next phase of integration for tissue cipher, it handset and optimization of processes and workflows, which we expect to complete by the end of the second quarter of 2023 or around 15 to 18 months post acquisition.
Now, let's turn our attention to our mental health franchise, we delivered 1208 hydrogen X test reports in the third quarter of 2022 up 46% from the 827 test reports and the limited period during the second quarter of 2022 from April 26 forward when the acquisition.
Was final.
We believe the integration is progressing nicely and we are pleased with the progress we've seen so far however, as with our gastro neurology acquisition, we have a 15 to 18 months phased integration plan and are still early in the process.
We believe <unk> also met our acquisition filters of an estimated total addressable market that was larger than any individual end market dermatology tests, which we anticipated again could drive material revenue for the longer term.
That was on market, but not necessarily generating material revenue that was first in class or best in class with proprietary algorithms and had already succeeded in achieving some percentage of positive reimbursement coverage.
Our integration efforts will be critical to fully leverage the patient value of our mental health franchise. We believe the pharmacogenomic mental health opportunity won't just be a matter of a single large market, but it could be an opportunity to enter a series of very large markets. One of our integration objectives are focused on those market segments, where we expect the value of.
<unk> will be easily seen by clinicians and their patients for example on the <unk>.
Older patient population represents not just a large market, but one with a very high unmet clinical need. These patients often have complex medical histories and conditions and can be a multiple medications for their conditions.
Your next test provides that drug gene interactions.
Rug drug interactions and lifestyle factors into a single test report.
We believe that this proactive and early decision by the developers of IGN is why the results from a randomized control trial in 2018 showed that patients with severe and moderate to severe depression, who retreated with <unk> guided therapy selection versus trial and error experienced higher response and remission rates.
In fact as I mentioned earlier, we came to believe during diligence that <unk> was was a best in class farmers genomic tests because of this prospective inclusion of drug gene drug drawn and lifestyle factors that are built into the bio informatics our algorithm analysis.
In fact, a systematic review and meta analysis was just published online in clinical in the pharmacology and therapeutics.
Evaluating the pharmacogenomics test that had published clinical trials in patients with major depressive disorder.
Their analysis confirmed what we came to believe during our diligence that the one pharmacogenomic test the displays the most significant impact in the randomized controlled trial was the IGD IDEXX test with a risk ratio of 246% compared to the overall risk ratio ceiling in randomized controlled trials of 146.
Thanks.
We believe that the overall mental health market represents a $5 billion estimated U S Tam opportunity and in our view is lightly penetrated.
We believe that our plan will enable us to gain share and make substantial inroads in the coming years.
I will now turn the call over to Frank who will provide details relating to our financial results and guidance.
Thank you Derek and good afternoon, everyone before I begin with our third quarter results I would like to state that we may see impacts to our fourth quarter results due to hurricane historically, a significant number of orders for our skin cancer test some come from clinicians based in Florida.
But at this time, we're still assessing the potential impact that hurricane Ian can have on our test volumes.
Actual results for the fourth quarter, 2022, which will depend on future developments that cannot be predicted at this time.
We are unable to predict the extent to which our future test report volumes and our results of operations financial condition and cash flows.
Currently be impacted by Hurricane Dorian.
Now turning to the third quarter of 2022, we developed another strong quarter of topline growth and we've raised our outlook for anticipated total 2020 revenue to $132 million to $137 million and $130 million to $135 million.
In the third quarter 2022 revenue was $37 million, an increase of 58% over the third quarter of 2021 tracking closely to our overall test report volume growth.
Once again higher revenues were largely driven by our Dermatologic test primarily decision Dx melanoma and decision Dx SCC.
The higher revenues also reflect Medicare reimbursements for decision Dx SCC as Derek discussed earlier.
The offset by the expected higher negative revenue adjustments related to test delivered in previous periods.
Which were negative <unk> 3 million.
For the three months ended September 32022, compared to negative $1 million for the three months ended September 32021.
Excluding the effects of revenue adjustments related to tests delivered in prior periods. Adjusted revenue was $37 3 million an increase of 58% in third quarter of 2021.
Our gross margin for the third quarter was 69, 8% compared to 77, 9% in the third 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 76, 2% for the quarter compared to 89% same period in 2021.
As we previously discussed our GAAP gross margin will continue to be negatively impacted by the amortization of intangible assets associated with recent acquisitions.
Total operating expenses, including cost of sales for the quarter ended September 32022 were $58 $5 million.
Compared to $35 $3 million for the third quarter of 2021.
Sales and marketing expenses increased by $9 1 million.
For the three months ended September 32022, compared to the three months ended September 32021.
Attributable to higher personnel costs, including salaries bonuses and stock based compensation.
Personnel costs, an increase to the expansion of our dermatology facing commercial team head count in 2021 and through our acquisition of certain aspects in December 2021, and <unk> in April 2022.
As well as increases in personnel cost for existing employees.
The remainder of the increase in sales and marketing expense was primarily associated with travel training.
Meetings and other general increases.
General and administrative expenses increased by $4 9 million.
In the third quarter of 2022 compared to the third quarter 2021.
The increase was primarily attributable to higher personnel costs, including salaries bonuses and stock based compensation.
The higher personnel costs reflect expanded head count at our administrative support functions, including related to the acquisitions that should gnostics announced the idms.
R&D expense increased by $3 4 million in the third quarter compared to the third quarter of 2021 attributable to higher personnel costs, primarily due to expansions in head count in support of our growth higher pay rates and higher stock based compensation expense and also due to higher costs for clinical studies.
Cost of sales exclusive of amortization of acquired intangible assets for the three months ended September 32022 increased by $4 $4 million compared to the three months ended September 32021.
Early due to higher personnel costs attributable to additional headcount in our laboratory testing operations, including increased headcount attributable to the addition of <unk> as well as higher pay rates.
We also saw increases in the cost of supplies and services, reflecting the higher activity levels and increases in places in.
Inflation has been stubborn for us it is impacting us most in terms of personnel costs, given we believe the macro conditions remain challenging we expect future impacts due to inflation.
Total stock based compensation expense, which is allocated among cost of sales R&D and SG&A totaled $9 $2 million for the third quarter compared to $5 2 million for the third quarter 2021.
We expect material increases in stock based compensation expense in future periods, reflecting mainly higher rewards outstanding due to growth in our head count.
As of September 32022, we had 517 employees compared to 311 as of September 32021.
As of September 32022.
The total unrecognized stock based compensation costs related to outstanding Awards was $94 $4 million with respect to be recognized on a straight line basis over a weighted average period of two eight years.
We expect to continue granting stock based compensation awards, which we expect to further contribute increases in stock based compensation expense in future periods.
Operating expenses. This quarter also included change in fair value of contingent consideration of <unk> 2 million net gain is primarily related to the remeasurement of the liability for earn out payments in connection with our acquisition of about via DFS and reflects changes in managements projections regarding attainment of certain commercial milestones there was no such active.
During the three months ended September 30 of 2021.
The contingent consideration 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 September 32022 of $2 3 million.
Which is related to the developed technology, we acquired from the myriad My path lab, So gnostics MLP AVX in mid to late 2021 and April 2022, respectively.
Our net loss for the third quarter of 2022 was $20 2 million compared.
Compared to a net loss of $11 8 million for the third quarter of 2021.
And diluted loss per share for the third quarter was 77.
Compared to basic and diluted loss per share of <unk> 47 in the third quarter of 2021.
Adjusted EBITDA for the third quarter was negative $8 3 million compared to negative $5 5 million in comparable period in 2020.
Net cash used in operating activities was $35 $7 million for the nine months ended September 32022, and was primarily attributable to the net loss of $46 5 million.
The change in fair value of contingent consideration of $18 million increases in <unk>.
$5 7 million.
We offset by noncash stock compensation expense of $26 $4 million depreciation.
Depreciation and amortization of $7 7 million.
And the increase in accrued compensation of $3 $7 million.
Finally, we had cash and cash equivalents at September 32022.
$134 million. Additionally.
Additionally, the company held $132 million short term investments, which we purchased in order to take advantage of higher interest rates and help offset inflationary impacts.
These investments are classified as available for sale. Therefore carried at fair value are not considered part of our cash holdings that are reported separately as marketable investment securities.
Also unrealized gains and losses from these securities will be reported on the balance sheet under accumulated other comprehensive income or loss and not as part of net income.
As we outlined in September at our Investor Day, we anticipate achieving total revenue in the range of $255 million to $330 million for the year ending December 31 2025.
Combining our expectations for strong topline growth and gross margins along with a continued disciplined approach to capital allocation. We expect our net operating cash flow to be positive by 2025, I'll now turn the call back over to Derek.
Thank you Frank.
In summary, we delivered another strong quarter with an increase in revenue of 58% over last year with total cash report volumes trending closely at 57% growth.
We are executing well on our growth plans and expect to finish the year in a position of strength with accelerated momentum going into 2023.
I'd like to conclude today by thanking our castle team and all of you for your continued interest in castle.
Now we will have to take your questions operator.
Thank you if you would like to ask a question today. Please press star followed by one on no telephone keypad in order to allow everyone in the queue and opportunity to address the cost of a management team. Please limit your time on the call to one question and only one follow up if you have any additional questions. Please return to the queue. Please standby.
We compile the Q&A roster.
And now SaaS question today, Catherine Schulte of Baird. Catherine. Please go ahead. Your line is open.
Okay. Thanks for your question.
I guess first on Hurricane Sandy.
Assessing the impact there can you just give us a sense of what that impact was in October how that youre covered so far and what's assumed in guidance.
Hey, Kevin.
Yes.
If you recall back to some of the analysis, we did way way back at the beginning of the of the bid there is a reasonable lag between when a patient is biopsied and when a decision Dx melanoma order is placed and it's.
It's in the two to three week range and so.
We really would not have started to see that until you really.
Recently, so so far things appear not to be too disruptive, but we just wanted to highlight that because of that lag. We don't yet have our arms around what the full impact could be in.
That's why we were we're just noting that for everybody.
Keep in mind here.
Got it but is there something in guidance assumes that there will be some sort of impact there.
Our our view on what that impact is included in what we've what we raised too.
Okay got it and then maybe for MCC talked about.
And the final determination to come out any update on potential conference for <unk> got it in an application for that test.
You broke up at the beginning of that Europe can you repeat the first question again Kathryn.
Yeah as you said.
And I heard your comments on Medicare I'm waiting for the final determination around the payment for the new card, but is there any update on potential <unk> or opening an application for that for that Pat.
Yes, so we certainly believe in our assessments at the.
That the FCC tests should qualify for MLP status and we're evaluating our approach there won't we'll update.
New shortly as we sort of move forward.
Okay. Thank you.
Thank you and the next question goes to Kyle Mixon of Canaccord. Kyle. Please go ahead. Your line is open.
Hello, Alex take Harrison on the line for <unk>.
Great quarter.
I wanted to cover really briefly.
Thank you.
Can you discuss that in <unk> you had the new dedicated sales team for my personal number in the DSO number can you go into that Loren just characterized for the rest of this team has been since it sounds like it's been roughly a quarter. Since this has been underway and have one more after that thank you.
Yes. So good question here I should clarify that.
We began interviewing and I think the hiring date for the group was probably what.
Frank mid September I think so there is still completing training now.
So I would say they were new employees doing at home.
Training during September so there would've been no impact from the third quarter per se.
That being said, we also had sort of refocused our dermatology facing group more more more closely align with the cutaneous melanoma test and the STC test. So if we if the.
If history is a predictor of the future for kind of sales effectiveness I would expect obviously, we would expect to see some modest improvement here in the fourth quarter in terms of as they come out of training and getting the field more often but we'd be really looking towards first quarter performance to kind of do or do a re chicken or resize.
Correctly do we want to make some adjustments here in the second quarter of 2023.
Got it thank you for that color I appreciate it.
More questions. If that's all right. So I was wondering if you could provide.
Some more qualitative color on early adoption of tissue cipher.
Thanks.
Yeah. So.
Yes.
Okay. So so.
Let's take a step back so what is that.
They had no commercial facing effort until we acquired the company in December 'twenty, one so the Chief Executive Officer was the only sort of a sales person I think he could.
<unk> and every other Friday in the afternoon type thing because he had CEO duties to do to run the company. So I would just I would kind of call where you're starting from a very low base of awareness and.
Certainly a very very low user base in when we acquired the company in December 'twenty one.
We ended up staffing up and initial sales force of I think 14 outside sales territories effective January <unk> of this year. They spend most of the first quarter and training are part of it and training partner field.
We we may be subsequent second staffing up and also in kind of the mid September time period and that additional group of nine people I think brings us a 'twenty four 'twenty to 'twenty four territories total.
As we move into trading as we speak so that's sort of as a commercial background in terms of sales rep investments.
So qualitative adoption.
If you look at the sort of market assessment.
Of how bear to <unk> breaks out from a dysplasia grading perspective.
We believe about 90% to 9% and 10 patients probably is diagnosed with a with a bare to <unk> lesion.
But the pathologist can't see any any dysplasia. So we would call that non dysplastic there to <unk> and.
And of the remaining 10% is kind of split roughly between patients who have low grade dysplasia and patients with what we would call indefinite dysplasia. So it's kind of in the middle of it as kind of a have a warm displeasure I guess, if you want to view as a non pathologists. So that background, we believe that the most important element or the use of.
Our tests, most likely would be adoption in that large 90% Tao group, which we think is at least 348000 patients diagnosed per year with non dysplastic bearish disease. Now why is that it turns out that a significant proportion of patients that end up progressing to either high grade dysplasia.
Or esophageal cancer are hiding out in that non dysplastic <unk> group.
So from a patient perspective, and certainly the Gastroenterologists perspective, the utility of our test is pretty clear to say, Hey, I know my pathologist sees sort of no dysplasia.
No they have the disease there to <unk>.
I use your test then based upon your I think seven clinical validation studies, including the pooled analysis of the Mayo clinic back in April of this year I'm going to be able to find a significant number of those patients who have a high risk tissue Cyprus test score and if I look at that from a standpoint of what does that mean for my patients it turns out that <unk>.
It does take repetition three four or five sales calls to have a gastroenterologist go from being unaware of our test, which is almost all of them by the way to being aware to being interested to try it and to begin to incorporate into their practice. So we are quite pleased in seeing this sort of growth in the second quarter and third.
This year relative to the to the quarter versus quarter change because the feedback that we're getting is right in line with our expectations.
Got it thank you very much.
Youre welcome.
Thank you.
And the next question guys keep any seed out of FCB Securities. Please go ahead. Your line is open.
Yes, hi, guys.
Thanks, Eric Thanks for taking the question so maybe just on.
FCC just give.
That's an important point for the fourth quarter.
If you could walk through maybe sort of potential scenarios.
Obviously, theres, an ABL fee side of things, but then on the other side.
You could potentially apply through other macs and so maybe just walk us through if the coverage.
Was loss what is the timeline to revenue impact first of all secondly.
<unk>.
Are you able to pursue it through another jurisdiction.
And if a DLT or another jurisdiction was too was the route when do you think you can sort of address this obviously.
Couple of questions there so.
Thanks for thanks for covering those.
Yes, absolutely and good to hear you.
So as we've talked about I guess at the second quarter call and a bit less so today.
We requested a medical review through Nova toss in earlier this year. When we were setting up that test to be processed out of our Pittsburgh, Pennsylvania Laboratory, which Noah talks overseas, Pennsylvania for Medicare.
And we were we.
<unk> had.
<unk> had very positive interactions and came out of that with a thumbs up in our perspective, we are asked to submit a pricing dossier, which you did in late March I think it was a mid March ahead of our first reports being issue, which happened in April and as you know <unk> prices are at 38, 100, and change which is the which I think what they did was a basic.
Crosswalk us over to Oncotype for breast oncotype prostate cancer, so that all kind of lined up pretty well and then as you alluded to I think in June of this year <unk> published abroad.
Essentially of Biomarkers in oncology draft LCD looked.
We're looking to try and and offload a medical review from their responsibility, that's maybe a little hard to say, but to try and reduce where it can be more efficient to to one of three databases and so if you were included in those databases than they assume that you'd be covered and if you werent included they assume that you would not be covered that was.
The lay of the land for background are.
And as you and as the audience May know here usually for draft LCD is theres, a 45 day public common period.
We believe due to a significant number of people wanting to comment that was actually doubled to 90 days and close that in early September of this year.
Our consultants believe and I guess, we're aligned to believe with our consultants that that there is a high likelihood that that LCD would not finalized as is and it might be modified to include <unk>.
Fourth pathways, such as if you arent already reviewed and covered by one of these other three databases will go ahead and do the medical review that we're supposed to under a Medicare contract anyways.
That probably is the most likely scenario, but that being said you are saying or what happens if they finalize the LCD as is and.
And you aren't in MCC and at that point in time, what does that mean.
Our benchmarking, which suggests that the earliest maybe Nova task might issue a final LCD sometime in the middle late first quarter, but thats based upon limited historical data to be honest.
They would have to issue a finalized LCD by I think the date they posted a draft so that would occur.
By June of 2023.
Have a typical 45 day implementation period of notice period. So maybe if those date ranges are accurate you might have a gap in coverage maybe between sort of April through may be July depending on which states accurate.
So that's that part in.
In the meantime.
As you would expect we are working with other groups, including <unk> for reviews, and so that may come along at some point in time in the interim between now and then we also as you may recall from.
I guess 2020 or 2021 earnings calls we did submit back in the summer of 2020.
A technical dossier or technical assessment, and a request to Palmetto for medical review.
For the FCC tests, we know we got cut off in the middle of Covid as you would expect and so things haven't been running as fast as I used to run at Palmetto pre COVID-19.
That that potential outcome can be known anytime next quarter first quarter of next year that would take a.
If it goes through a standard review cycle that would take we would assume if it worked out posted say January 2nd of 2023, we wouldn't plan for coverage model for cover since January 2024 about a 12 month cycle period. There. So I think the gap could be.
<unk> six months nine months potentially under the current scenarios there.
But again, our current belief is that.
Nothing is 100% of certain anyways, we think theres a high likelihood that that LCD gets modified from nowhere tops, but again, we're not the ones on the inside evaluating what kind of comments they received.
Got it Super helpful. Thanks for all those details.
And on.
You're obviously raising the full year guide here in <unk>.
Appreciate the prior.
Comments on the 2025 guide.
Derek Frank.
Should we think about sort of 2023 growth here just given the sales rep increases that you've had this dx is getting reimbursed.
Potential for some change on the FCC coverage here, but.
Vision Dx continues to have solid momentum. So maybe just talk to us about sort of how should we think about given sort of where we stand today 2020. Thank you.
Frankly, we cover that yeah. We're I think I think the setup is great. We've got.
Really good sales people out there we've got a lot of data coming.
I think that the volume validates the clinical utility of each of our tests here.
And we still are well positioned competitively. So I think the setup is terrific for 'twenty three and we're excited about it and think that the data is demonstrating our careful investments are paying off.
Got it and then just last one if I could ask on tissue diaper.
Is there any you've submitted the median payout rates already.
Any reason why tissue site version dramatically.
<unk> differ from the <unk> rate, which was I believe.
Slightly lower versus the initial rates that was assigned to it.
Sure.
In the same ballpark.
Thanks, so much.
Yes.
Yes.
So let's see here. So one is that the one <unk> status was attained as a new <unk> on.
On March 28 of this year the next nine months, where.
The price was set up the original list price, which was at 23, 5% or 250 right.
Way back when.
So I wouldn't necessarily call out the first <unk> rate I would call that the original list price during the collection period. So we obviously collected data.
During the first six months that went in September and we'll sort of have our first ADL T rate posted towards the end of this year. So I'd have a hard time seeing that rate going lower but again thats Medicare calculating the median private payer rate.
Thank you and the next question guys, Hey, Thomas Layton of Lake Street. Thomas. Please go ahead. Your line is open.
Hey, Eric I was wondering if you might be able to provide some color on how you guys are integrating the seer data into both the reimbursement side of the business as well as in the commercial messaging.
Okay.
So from a commercial messaging perspective.
We certainly have.
Trained up and outfitted.
The field team so the sales group the medical Science liaison group the other medical directors in terms of the of the data has been presented an abstract and poster form. So there they are educating clinicians on the value that we're seeing there now.
Abstract is not the same level of evidence of review is a publication.
But thats, what we are working with right now on that message that we've talked about before has been well received by clinicians, especially those who might be eligible doubting of.
What does it really do for me what it does for US. It gives it gives you more accurate information to make it more informed decision and that when you make those decisions outcome should improve in this data seems to show that linkage between tested untested patients similar to oncotype for breast cancer right.
Hi.
For breast cancer as a comparator is really focused on removing unnecessary long term taxane therapy, I guess as opposed to somehow improving survival. So similar kinds of withdrawal of unnecessary procedures or treatments, but the reality of it is that people, who who are who are picked up as having more aggressive disease.
Are being funneled to where they should be funnel, that's how we see the data so that's been.
Been released to the field probably during the second quarter of this year again that was not as strong as our publications. So we will have.
Another.
More important wave as we will see a publication come out.
The end of the.
Public domain from a commercial payer perspective.
We have.
I guess I would say tested the waters slightly but the reality of that is until that's in a peer reviewed publication that's going to be put aside as thats very interesting come back when we can I can I can pull up on pubmed or Google scholar myself.
So I don't think the impact on that.
One is.
The impact is zero today on the commercial payer landscape in too.
That's a great question to get back in touch with us.
So after the publication gets out and goes out the door.
Yeah.
Got it.
On the the derm.
<unk> sales team I know they have been in the field and the expanded size for a while now how would you maybe quantify or qualify them being on the ramp to full productivity.
Yes.
Dermatology.
I think the dermatology sales team hit full stride.
Probably.
Late first quarter second quarter, Frank is that right now.
We did have I think a couple of dermatology representatives move over the tissue cipher early this year in a couple of move into the <unk>.
Dramatica apology group just one I can't remember so so there is some back filling as you'd expect any ways right and typical organization. So so I think one third quarter volume second quarter volume penetration probably reflects.
Everybody being fully effective knowing <unk> got just some background normal noise.
Thank you and the next question goes to Matt <unk>. Please go ahead. Your line is open.
Hey, guys. Thanks for the questions and congrats on the strong beat and raise.
I know theres been a lot of detail covered on the squamous cell carcinoma test.
I think a little bit of clarity could be helpful. Here.
So I know that <unk> price at $38 73 earlier this year.
Guess what.
Are you expecting.
It sounds like you were not expecting a crosswalk.
Two the <unk> melanoma test.
And then.
<unk> said you were expecting a crosswalk to decision Dx melanoma.
I guess I'm trying to put this in perspective is there.
Any risk that you don't get paid here in Q4.
And I know that there are a lot of moving parts to 2023, but I'm just wondering.
If you expect to get similar payment for FCC in Q4 as you did in Q3.
So the preliminary determinations. So short answer is yes, the preliminary.
Determinations churn final whenever they post them, but they are effective January one 2023, so I would not expect any influence up or down in the fourth quarter that would just that would be unprecedented.
In terms of our expectations.
I think given that that Nova task of course, CMS Central's under no.
No restrictions to follow with their approach, but I think if we look across the land risk stratification tests like our FCC tests have historically been crosswalk over to oncotype prostate or oncotype for breast cancer, we would have expected that to be the normal approach to be honest or they.
Could have taken a position that that there is another risk stratification test run by the same company.
For another skin cancer, and crosswalk up to decision Dx melanoma that would be.
Less likely than more likely more likely would be oncotype breast, we certainly as I mentioned had some interactions with with the Central Medicare Group had a Baltimore last month.
And I believe that one this is a good group of people that we've dealt with over the years and they try to do the right thing for patient care and for companies.
My hope is that they understand the difference now between the level of resources needed to both develop and produce a diagnostic support test like my path versus a risk stratification test like our SCC test and will act accordingly, but of course, that's their their call not mine, but no impact in the fourth quarter.
I think that shouldnt be expected.
Okay perfect. So sorry to clarify you think it's now more likely.
If there is a change that it would go to the oncotype breast at $38 73, rather than yours.
My top melanoma.
And just also to clarify you think there may be an update from CMS later in calendar Q4 2002.
Yes.
Covid has thrown off sort of a normal posting periods you may recall that pre COVID-19. If we can think back that far.
Typically I think they usually gone out.
The next year's updated rate schedule like the Friday after Thanksgiving, our two Fridays afterwards.
That shifted a bit the last couple of years, but sometime in December when I would expect to have a final rates not just for the new for the test with new codes, but all codes will be will be posted in the final determination.
I think there are there are.
A potential for its staying the same at $38 73, I guess potential to be crosswalk down to my path potentially be crosswalk up the decisioning ex melanoma and there's a fourth option, which is that they could go ahead and throw back and have the Max.
Move forward from a gap fill process and that would go into effect in 2024 with the current rates staying throughout 2023 that would be the typical process. So there is a fourth potential outcome.
Thank you and the final question guys, Jim Nathan <unk> of Stephens, Inc. Nathan. Please go ahead. Your line is open.
Hey, guys. Thanks for taking the questions. Most of mine have been answered. So maybe just one quick one here for me.
Thinking about the ramp for decision Dx SCC in 2023 in terms of test volumes.
Conversations deferred with docs when it comes to the early adoption of that test versus decision Dx melanoma when that test was early in the adoption curve.
<unk> seen a lot of leverage in the work you've done already.
In terms of educating terms on these types of tests or any color on maybe the overlap of food ordering.
Yes. So there is a so last first there is a significant overlap between <unk>.
Clinicians who are current or had already adopted the decision Dx melanoma test and those who are now adopting the squamous cell carcinoma test.
I think thats, probably due to two factors one of them is that we've obviously sat and had conversations about the additional value that one receives in managing melanoma when you have a.
Our test results in hand, along with the clinical and pathologic factors versus not having our test results in hand, so they're already kind of thinking through and appreciate and have integrated that concept into practice reality. So when we walk into that same clinician.
The next day and talk about we see a gap here in people with high risk squamous cell carcinoma, Here's how we see the world do you agree with that you can generally get head nodding of course, and then they would follow along and saying well so what I really need to think through as am I going to make changes in how I manage these patients with your resolved once they.
Get there, but I think they've become.
Initial customers that might dabble, a bit and test. Our test then begin adopting it so I think thats quicker than it was when we introduced the <unk> melanoma test a few years ago when there was nobody.
Doing risk stratification and anything in dermatology like this so certainly that was helpful. I think the.
The other element of course is even though we made the test available before 2015. It was really 2015, we went to 14 sales representatives across the U S. And then that was sort of may.
Maybe it was the first real launch, but what we were at 14 people than we are in the mid <unk> right. Now so that's a a nice significant increase in terms of the visibility in the marketplace. So I don't quite know.
If it's a if it's a more aware clinician and thats, leading to quicker adoption, if it's having us being around those same clinicians for three or four or five years, now and they're easier to kind of have a conversation with and accept the message or if it's also just promotional size of the company that is kind of a driving factor, but all of those.
I think our part of the mix of saying certainly we're seeing more rapid adoption with a squamous cell carcinoma testing with melanoma, but as all of those features I think together.
Got it that makes sense thanks, guys.
Yeah.
Thank you we have no further questions I will now hand back to David for closing remarks.
Thank you. This concludes our third quarter 2022 earnings call.
Thank you again on behalf of the castle team for joining us today and for your continued interest in castle Biosciences.
Thank you. This concludes today's call. Thank you for joining you may now disconnect your lines.
Okay.
Okay.