Q2 2023 CareDx Inc Earnings Call
During the presentation, all participants will be in a listen only mode.
Afterwards, we will conduct a question and answer session.
As a reminder, this conference is being recorded Tuesday August eight 2023.
It is now my pleasure to turn the conference over to Greg from the Gilmartin Group. Please go ahead.
Thank you Rocco and good afternoon, and thank you for joining us today earlier today <unk> released financial results for the quarter ending June 30th 2023.
The release is currently available on the company's website at Www Dot <unk> Dot com right.
<unk> Szeto, Chief Financial Officer, all of a sudden J Chief Financial Officer, and Robert Woodward Senior Vice President of R&D will host this afternoon's call.
Before we get started I would like to remind everyone that management will be making statements. During this call that include forward looking statements within the meaning of the federal Securities laws, which are made pursuant to the safe Harbor provisions of the private Securities Litigation Reform Act.
Of 1995.
Any statements contained in this call that are not statements of historical fact should be.
Aimed to be forward looking statements all forward looking statements, including without limitation, our examination of historical operating trends expectations regarding coverage decisions pricing enrollment matters and our financial expectations and results are based upon current estimates and various assumptions.
These statements involve material risks and uncertainties that could cause actual results to differ materially from those anticipated or implied by these forward looking statements.
Accordingly, you should not place undue reliance on these statements for.
For a list and description of the risks and uncertainties associated with our business. Please see our filings with the Securities and Exchange Commission.
The information provided in this conference call speaks only to the live broadcast today August eight 2023.
<unk> disclaims any intention or obligation, except as required by law to update or revise any information financial projections or forward looking statements, whether because of new information future events or otherwise.
This call will also include a discussion of certain financial measures that are not calculated in accordance with generally accepted accounting principles.
Reconciliations to the most directly comparable GAAP financial measure maybe found in today's earnings release filed with the SEC I will now turn the call over to rich.
Thanks, Greg Good afternoon, everyone and thank you for joining us <unk> second quarter 2023 earnings conference call.
Our second quarter was focused on the following one continued execution of our 23 2023 strategic plan with a 362 operational adjustments implemented as a result of the billing article and three maintaining our strong financial discipline and structure.
Overall, it was a successful operational quarter.
Firstly, we delivered against our 2023 plan across the three CS with key highlights since our last reporting being on coverage, we can send <unk> coverage with Hot Kid next.
Next on catalyst, we received Alice Shaw, along mold X approval next on collections, we collected 110% of Q2 testing services revenues.
Secondly in response to billing article we achieved our adoption target of 80% plus but completed tests requisition forms two quarters earlier than planned.
This was achieved in the month of June versus the end of Q4 target.
Thirdly, we kept a strong cash position at $283 million and debt free which has enabled us to continue strategic acquisitions and restarting the share buyback.
Given the above we were able to issue updated 2023 revenue guidance.
Now looking into the three CS in more detail, we made excellent progress.
On coverage with.
We're starting to build momentum and replicate what we've done with the Odyssey collections. Since Q1, we've added coverage across both Medicare and commercial plans.
We're excited for lung and heart patients with Medicare coverage of proof that both Alex short long and hard kit, we're especially pleased to see <unk> coverage consent.
As noted in our press release last week, we received specific coverage for <unk> use in the heart transplant surveillance setting.
As a reminder, HOKA was approved by <unk> in 2020, and the billing article came into effect March 31 of this year, which change coverage for two tests performed at the same and counsel.
The specific hotcake courage now establishes the path for multi modality reimbursement and is a major milestone in heart transplant care. In addition, it removes any doubts on this topic is multi modality.
I also want to share some more detail on our commercial payer coverage effort since the isolates what he guidelines and billing article were announced.
We have expanded and added regional coverage across all organs as examples in kidney. We've recently gained coverage from a national lab benefit manager as a result, we have added approximately 5 million covered lives in kidney in the second quarter in hot the focus has been unexciting Allomap heart commercial coverage from one year post transplant.
Earlier use starting at two months and early in Q3.
A national payer is uncovering a hot testing earlier in Q1 as a result, we've expanded coverage for Allomap heart and you won the 25 million covered lives.
Now on to pipeline catalysts.
One of the broadest pipeline portfolios in transplant.
We are proud to invested 100% in transplant innovation and to be the first and only mode X approval in lung the donor derived cell free night with Alice Shaw alone. We also submitted Allomap kidney and Europe , a standalone test and will latest amidst a multimodal testing once we have generated multimodal data as we did with hard cap.
We are particularly excited about your map, which offers a unique opportunity with a new modality yearend to provide insights into kidney transplant rejection. These approvals will take time, but as the leader in transplant innovation. We've introduced most of the current offerings in the market and understand the process to obtain approvals. As example, with mold X approvals we were.
The first and only to receive gene expression profiling approval for heart with Allomap. The first to receive the under ISO can take courage, the kidney with Dallas show kidney the first and only to receive multimodal coverage the hardcore through Alice Shaw Hot the first and only to received underwrite courage for along with Al show lung and again.
The only company to receive multimodal confirmation with hardship as a civic single testing serves as a combined two tests.
Lastly, now onto collections, we delivered our third consecutive quarter of testing serves as collections exceeding testing services revenues in the last three quarters. We've now collected an incremental $20 million since Q4, 2022 with a 110% of cash collected over testing services revenues, we had a plan we built.
And continue to implement and execute against this plan.
In addition to the success of the three CS we've made excellent progress with adjustments necessary due to the March billing articles I am pleased to report that the education and implementation efforts of a cross functional team has led to increase adoption of our new Trs during Q2.
We started in April at 50%, we ended made 70% and in June we ended at over 80%.
As a result, we delivered a Q4 target by two quarters in achieving a greater than 80% adoption rate with our new Trs.
Oh the forms are not complete we started the process of obtaining additional information.
Using the example that if more than 80% of Trs to completed another 20% or not.
The team has been able to successfully collect information on over 40% of these lab tests.
The net impact of these efforts and using one new forms and then two addressing incomplete forms is that we ended June with approximately 90% of all Medicare test submitted for reimbursement.
With that said I cannot be prouder of the organization, which is being faced with so many challenges since the start of March 2023, when the billing article has introduced the team has had to work nonstop across multiple work streams to implement these changes with the need to educate physicians incentives to make operational changes that I T systems and with the <unk>.
His response, given the financial impact of the billing article.
I continue to be impressed by the resilience of our people during this time of change.
Given the successful implementation of the original 2023 plan and by delivering on the operational Trs adjustments two quarters earlier than planned we now have more visibility with the testing services business and the issuing updated revenue guidance for 2023 with a range of $240 million to $260 million.
I'll briefly review the second quarter financial results, but <unk> will be providing more details on Q2 and guidance in his section.
So the second quarter, we recorded revenues of $70 3 million of which approximately $7 8 million was attributed to the March our show kidney test that was submitted to Medicare during the second quarter.
For the second quarter.
The GAAP loss of 25 million and a non-GAAP loss was $9 9 million and adjusted EBITDA loss of $10 4 million.
We ended the quarter with an excellent cash position of $283 million driven by our financial discipline and focus on collection.
Now back to the testing services revenue, which was $53 4 million for the quarter, John 14% sequentially and 20% year over year. This expected decrease was driven by the impact of the billing article where we expected a low point in testing services volume during Q2, the testing services volume appeared to be reaching an idea.
The issue is we need to continue the process of education, given the multiple updates that have come from <unk>.
Changes require internal and transcend set of updates the systems and processes as a reminder.
There was one building out of core lease March 2nd.
Our second on May 4th followed by a hard care approval update on August 2nd and.
Mac has not yet adopted either billing article from <unk>.
In parallel it should be noted that we have stated publicly the company believes the changes introduced to the billing article this year, our intimates will introduce changes to the existing and product coverage policies in prior public responses made by an iridium <unk>.
As previously stated we are concerned about the implications of these revisions to transplant patients.
While we have seen progress in hot movie the restrictions imposed on transplant surveillance monitoring for kidney transplant patients is worse than <unk>.
Surveillance biopsy protocols Twitch the use of noninvasive tests is tied are often not in place due to the invasive nature of biopsies and now show has a demonstrated ability to discriminate subclinical rejection that is early than it would've been otherwise identified.
Now moving to non testing services business, we saw strong contributions which accounted for approximately 30% of revenues. This quarter. Once we exclude the much tests submitted in Q2.
Our patient and testing outpatient and digital solutions business delivered strong growth for the quarter and our reported revenues of $9 million, representing a 33% increase year over year and a sequential increase of four 6%.
As a reminder, this business would build de novo from strategic acquisitions and subsequent organic growth over the last four years.
The recently announced acquisition of <unk> continues that strategy, we acquired the number one player in the OPO, Oregon tracking space with close to 40% of the organ procurement organizations under contract. This acquisition continues the strategic vision of being the leader in the transplant ecosystem. This is an exciting opportunity in time.
To start working with the Ipos, it's great linkages with transplant centers and to position a leading set of digital services.
This is an area undergoing rapid and real time change such as that unit and provides us a unique all but you need to be sitting as the space evolves and to capitalize on new opportunities.
Our products business represents a global strategy, there or sniff and ex U S opportunities that we can achieve from the products business, especially as we expand our product offerings, which were hampered as though lunch during COVID-19 for the quarter, we reported product revenues of $7 9 million, representing a 17% increase year over year.
And an increase of 15% sequentially.
Offsetting some of this launch growth is the reduction in the mature parts of the product portfolio, which declined quarter over quarter.
I believe a sustainable successful company has to have one a strong mission to a clear vision and three a well thought out strategy. The benefit of this approach has never been clearer as we faced a lot of change chaos and challenges during 2023 with the billing article.
We have always had a consistent strategy and with hard case, we throw a key validation of that strategy, which is to focus on delivering meaningful innovation to transplant patients.
As a summary of where we are and reflections with this approach.
One we had a 2023 plan and have kept with the strategic plan has been successfully executed and delivered on with the three CS. This plan continues into the second half of 2023 two.
We deal immediately with market events, the unplanned changes rising with the billing article where addressed with a cross functional leadership approach, including sharing talent from other parts of the organization to help adjust to this change.
We continue to build out the company strategy. The recent <unk> acquisition continues our stated vision to be the lead in the transplant ecosystem.
Paul.
We continue to execute on our two decade mission with a commitment to improve the long term outcomes of patients by providing innovative solutions along that patient journey.
The recent <unk> approvals for Hot Kit Nello show, a lung reflect that commitment.
There were times, when some investors and analysts us if we should exit long and exit multi modality.
Staying true to our mission.
We're now the only company to achieve these major motor milestones of lung and.
And multimodal hardcore approval, it's a high bar to be the first.
And five we are building a sustainable company mainly.
Maintaining a financially strong company that allows us the flexibility to build a long term strategy, we have a strong cash position and our long term golf are being adjusted EBITDA profitable has not changed as we operate with financial discipline.
In closing.
I believe the <unk> is now an even stronger and more determined company as a result of these challenges I want to thank patients.
Can't give us physicians and associations that expressed interest to support transplant innovation and access to care. During this time I also want to particularly thank the hotkey work stream team who provided the submission of <unk>, we always believe that HOKA represent a stepwise improvement for heart transplant patients now.
Now I'll turn it over to Akshay.
Thank you rich we are pleased to share the results from the second quarter I'll address quarterly financial results the impact of billings article implementation and close with an update on guidance.
We are pleased with our second quarter results.
Considering the work required on the operational implementation of the billing article.
Key highlights are number one maintained a solid cash position of $283 million using literally cash in operating activities number to continue to maintain our excellent momentum in collection that was over 110% will have reported testing services revenue for the third consecutive quarter our collection effort.
Have helped us generate over $20 million in incremental cash in the last three quarters.
Reported revenue of $70 3 million, a decrease of 13% year over year, and 9% as compared to the previous quarter due to the impact of billing article now.
<unk> achieved strong operational results and execution of the billing articles requirements new T. At a production rate climbed over 80%, but overall, yes, it could be above 85% in the month of June two quarters ahead of our initial target.
Number five continued strong growth in our non testing services business with revenues of $9 million for patient and digital solutions and $7 9 million for put up to presenting year over year growth of 33% and 17% respectively.
In addition in the beginning of the third quarter, we received Medicare coverage for <unk> and re establish Medicare coverage for Hardcopy. Let me provide details starting with testing services reported testing services revenue for the second quarter was $53 4 million down 14% as compared to last quarter testing.
<unk> revenue of $61 8 million.
If you recall in the first quarter of 'twenty three we did not submit claims for approximately 3200 initial kidney test for Medicare reimbursement and did not recognize revenue representing approximately $8 9 million, we referred to those tests as the impacted MOSFET as planned we submitted claims for.
For these impacted most test and receive payment and recognize revenue poorly.
Approximately $7 8 million in the second quarter of 23.
Our adjusted reported revenue in the first and the second quarter for deep impacted March test. The testing services revenue was $45 6 million in the second quarter of 'twenty, three as compared to $70 7 million in the first quarter of 'twenty three were down 36% sequentially.
The impact on our revenue was primarily driven by mix of two factors number one expected reduction in volume number two adoption rate of new T. On it and number three is Nokia is supplemented by the end of the quarter.
Firstly on reduction in volumes.
<unk> testing services volume for the second quarter was approximately 37500 tests down 25% as compared to the last quarter our.
Approximately 80% off the volume decline was from our kidney testing services.
Ah kidney testing, both more impacted due to billing article restrictions once the well is testing our hottest in services, we continue to bend Alicia hard test for reimbursement when used in conjunction with Allomap heart in line with the current coverage policy from Nordea.
In addition, multiple revisions in the billing article made it challenging for us and for the transplant centers to continually adapt and then update firms and these needed to be operationalized into our it systems. These multiple changes have resulted in confusion and in some cases clinician pausing their ordering of these tests.
Now turning to adoption of new tier and supplementation.
Previous earnings call. We had stated that we would not be Alicia kidney Medicare test. After a billing article effective date of March 31, 23, unless it has the necessary information as required by the billing article.
We also provided lead indicators on adoption of new tier four kidney.
We are pleased to report that new Tid production for a kidney testing services was over 70% in the second quarter and over 85% in the month of June . They are ahead of our initial target for claims requiring supplementation, we put together a dedicated team and our initial success rate has been.
Over 40% during the second quarter of 'twenty three.
Despite the herculean efforts of the team on achieving great success and implementation. There is still a portion of that is pending supplementation that we have not utilized in revenue in the second quarter, notably.
Have one year to obtain additional information on the spending tests and it provides an upside opportunity.
Turning to testing services gross margin.
GAAP testing services gross margin was 71% as compared to 75% in the last quarter.
Our non-GAAP testing services gross margin was 72% as compared to 77% in the last quarter.
If we were to exclude the $7 8 million revenue associated with margin impacted they are just testing services gross margin would be 68%. The drop in gross margin was driven by the drop in testing services volume and associated revenue and we plan to improve over in the coming quarters.
Now turning to our other businesses in the second quarter, our patient and just the solutions business revenue was $9 million or growth of 33% year over year, and our highest ever revenue for a given quarter. We believe that our investments in this strategy business area are paying off and helping drive our financial results and strengthened ardmore.
Good.
Our recent acquisition of medical.
And organ transplant supply chain and logistics company will further expand our digital footprint in the organ procurement organization market.
GAAP gross margin for our digital and patient solutions business was 26% in the second quarter as compared with 20% a year ago.
Our non-GAAP gross margin was 33% in the second quarter as compared to 29% in the same quarter a year ago.
non-GAAP gross margin improved by 400 basis points year over year.
Testament to our team's effort to improve margins by effectively integrating our acquisitions and driving growth by leveraging <unk> leadership position and capabilities in transplantation.
The products business delivered $7 9 million in revenue in the second quarter of <unk> 23, an increase of 17% as compared to the same quarter a year ago.
GAAP gross margin for our products business was 50% in the second quarter of <unk> as compared to 42% in the same quarter last year non.
non-GAAP product gross margin was 59% in the second quarter of 23 as compared to 54% in the same quarter last year, an improvement of 500 basis points.
As discussed in previous calls improving the gross margin for product business stays a core focus area for the company, we are consolidating our manufacturing sites and phasing out some of our <unk> products.
Turning to operating expenses and adjusted EBITDA non-GAAP operating expenses for the second quarter were $58 9 million down about $2 8 million sequentially from Q1 'twenty three the decrease in our non-GAAP operating expenses was driven by the actions that we took to mitigate the impact of divisions in the billing.
Article on our financials.
We completed a workforce reduction in Q2, and prioritize expenses on R&D and clinical study driving the expense reduction.
We expect to see the impact of these measures to carryover into third quarter for the full quarter impact.
Legal expenses, though increased further pushing G&A expenses higher quarter over quarter, driven by the various litigation matters and our response to the billing article Division.
Our current assessment is that the legal expenses will stay elevated during third quarter and will start to normalize during the fourth quarter of 2003 onwards.
For the second quarter of 2003, we recorded negative adjusted EBITDA of $10 4 million compared to negative adjusted EBITDA of $6 4 million in the previous quarter.
Turning to cash we continue to maintain a differentiated financial profile as emphasized by our robust balance sheet and cash cash equivalents and marketable securities of $283 million and no debt.
Net cash used in operating activities was less than $1 million for the quarter. Despite an adjusted EBITDA losses of over $10 million.
Our superior cash management continued to be driven by our focus on cash collections and working capital management for.
For the third quarter in a row, our collections came in at about 110% of our testing services revenue driven by continued increase in collections from our commercial customers.
We have now generated over $20 million incremental cash from collections in the last three quarters and this remains a key area of focus as we continue to work to more opportunities in this area.
I would like to also note that we earned $2 7 million in interest income in the second quarter of 'twenty three.
Turning to our second topic around the impact of the billing article revisions on our financials and mitigating plan.
In the second quarter of 23, our teams were primarily focused on operational implementation to being vertical division and we are very pleased with the progress we made on this front.
Let me provide some highlights starting with kidney testing services as discussed earlier to a combination of new T out of adoption and supplementation based on June trends, approximately 90% of Alicia kidney test now have the necessary information as required by the billing article divisions.
One reason for ordering thus limiting the downside risk.
As it relates to hard testing since there has been no material change in our billing practices. The re establish coverage of Hartford does not impact our revenues for second quarter of 'twenty. Three Moreover, as rich mentioned earlier. It is important to note that it clears the path for multi modality and remove the uncertainty around this.
Tom.
Turning to our response on the financial impact of the billing article first on adjusting our cost structure.
Discussed in our last earnings call I'm glad to let you know that we are on track to drive approximately $40 million to $50 million in annualized savings.
We have completed the workforce reduction exercise and achieved a 12% reduction in our head count as compared to what we had in the beginning of the year, excluding any back of acquisition.
We have re prioritized our projects in R&D spend and starting to see the impact on our expenses.
Reallocating resources in sort of adding resources to meet the additional administrative burden to meet the requirements of the billing occupancy.
And backed off the volume reduction.
Now reflected in our cost of testing services.
However, as stated earlier, our legal expenses due to multiple legal matters, including our response to the billing article is partially offsetting the savings from that action.
As stated earlier, we anticipate legal expenses will start to normalize to the fourth quarter of 2006 second as rich alluded earlier, we are focused on driving growth in our testing services business based on <unk> strategy, and specifically driving commercial coverage and advancing our pipeline catalysts.
Third and most specific to collections given our success. We are further expanding our efforts in areas such as Medicaid and overdue commercial payments to continue to drive collections I think the five revenue.
Finally, we are being thoughtful on the need to balance investments for long term growth and cost saving actions, we will continue to evaluate and we'll respond appropriately as we gain more clarity.
Our goal continues to be to minimize cash burn and become a registered EBITDA positive.
Finally, let me discuss our guidance for the year.
We had issuing updated revenue guidance for 2000 $3 million to $240 million to $260 million.
There has been considerable uncertainty due to the revision in the billing article and likely become clearer.
In the coming months.
Our guidance assumes the following.
Number one potential impact of the re established coverage of heart care limiting their skus post 12 months and four Cup.
Number two operational implementation of newly established coverage to ensure system that processes meet the requirement of the billing articles.
Number three uncertainty around the testing services volume as it is still settling post the revisions in the billing article.
Number four <unk> Medicare accomplish number five last but not the least the low end of our guidance assumes some impact from uncertain variables, including but not limited to a dysfunctional noted in to the divisions of the billing article.
We anticipate Q2 to be the potential low point for testing services revenue quarter in 'twenty three with a return to growth in subsequent quarters, but this is also partially dependent on when noted and adopt the billing article submissions and suddenly we have received Medicare coverage for <unk> re established.
You get coverage for heart kit and improved commercial coverage.
We had a great second quarter based on the strong operational implementation of the requirements of the billing article.
We have taken necessary steps toward just our cost structure and focusing on driving long term good cash.
Cash position stays strong with $280 million in cash and we do not see a need to raise cash and foreseeable future.
Cannot be more proud of the operational excellence and financial discipline demonstrated by the entire team and driving the organization forward with that I'll handle hand over to rich.
Okay.
Thanks, Avishai I think we will open the line for questions I'll hand over to the moderator.
Thank you.
To ask a question. Please press Star then one on your telephone keypad.
If you're using a speaker phone we ask that you. Please pick up your handset before pressing the keys.
To withdraw your question. Please press Star then two.
We will pause momentarily to assemble our roster.
And today's first question will come from Andrew Cooper Raymond James. Please go ahead.
Hey, guys. Thanks for the question I.
I guess maybe first.
Just thinking about the volume trajectory here you know I think the last quarter update you said down sort of mid teens. It turned it off a little bit worse than that and I think in a period, where we saw a market wide transplant volumes pick up a little bit, but just maybe a little bit more detail on sort of what youre seeing to the degree you can give us some color in terms of cadence through the quarter and into July and August .
Well that would be great.
Yeah, I'll make some comments Andrew thanks for all the questions and I'll hand over to Tom who will cover more detailed so firstly I think with the.
Overall transplant market volume as we had predicted and.
Over the last prior quarters. It was a nice rebound with the transplant volumes in sight, we think will be meaningful in the long term as we have the potential to double transplant volumes I believe and that sort of five plus periods, which we had sort of alluded to secondly, as we look at some of the.
Trajectory of the volume changes one thing that came clear is this operational execution. We've had multiple updates we required multiple revisions during this time.
As highlighted on the Trs goals was the time needed to get outside third party systems to implement these changes and that you were kind of on the waitlist.
And that was a big drag out Wi <unk> instead of faster so what changed on that front that let you get to 80, 85% of these.
Orders coming in on the new Trs.
And then I'll hop back in the queue. Thanks.
Yeah, no. Thanks, Andrew I mean, I think it was something where we're alluded that there was probably about 20%, which would take a longer time periods. So we knew that the initial capture was around that 80% Mark what I would say is that you know it really speaks to the persistence of the organization. The resilience organization plus also the willingness of the centers and physicians to help us with getting things operationalized.
We've had more than two decades with.
Helping to build this space and reflected with a commitment with some recent approvals both on the hot Karen alongside netting centers were just wanting to help out and I think what we sort of alluded to there were some that would take a longer time, which we'll still do so but I think what we've seen here is the team working extremely hard.
L. A relationships and also a reputation within these centers and physicians wanting to help out so all in all I mean everyone's been working pretty much nonstop to be candid, but at the same time really the reputation of <unk> and what we mean to transplant community is just really come through and through so I think that's all help with this process.
Great I'll stop there and jump back in the queue. Thank you.
Thanks again, thank you and our next question today comes from Brandon Couillard with Jefferies. Please go ahead.
Hey, Thanks, good afternoon.
That's a lot to digest here, maybe just starting with the guidance that you reported about 150 million revenue in the first half can you just help us understand the second half bridge off of that 70 million base in the second quarter or a $62 million adjusted revenue base and.
How long should we think about third quarter versus fourth quarter phasing in the context of what has been a lot of progress.
On the Trs.
Yes.
No. Thanks for the question Brendan and of course. This has been one of the things that I hate to put a lot of talk around given the fact that we are still kind of dealing with a lot of operational implementation related.
Oh complexities right.
Say this way that we wanted to provide a range to help the analysts and the investors.
To make sure what we have learned in the past few months. So that we can we can help.
To start to kind of provide the range or the boundaries here when I think about the guidance here and bring it to your point is our first half has been about 140 $748 million and then the top end of my range the $260 million that basically assumes the base revenue of your Q2, which you rightly pointed out.
If you multiply that by two would be closer to $120 million, we had basically baking in the limitations of the hard care coverage Tech cadre established.
Earlier, this month, which basically limits this use post one year and forecast.
If you were to basically take that piece out from that base plus the first half you will basically get to our top end of our guidance.
And then to come to the midpoint of our guidance basically baked in about a 10% buffer therefore any adjustments related to the operational implementation as well as any kind of volume or just.
If you were to make in Q3, so that basically gets you to the midpoint of the guidance and of course low point as I've said that.
I'm thinking in for repeat one uncertainty because we still have not seen nudity and adopt billing article and we still are kind of waiting for those things to clear up in the next few months.
Yeah, maybe maybe the one thing just to comment on because I think when band over the phasing I think we mentioned that we expect probably Q3 towards the low point and then Q4 to be more of the trajectory of moving forward with growth. So I do think that's an area if you'd look at the specific phasing, but I think what <unk> tried to be here at <unk>.
Thoughtful to get something out.
So that there is a form of guidance and we're going to learn a lot more in this Q3 right I mean, there's a lot of different variables.
We have been pretty action packed quarter I would say for sure but I think you know we certainly know that getting this back is important and then we can sort of like have further updates as we move through the quarter.
Okay. That's helpful and then on the heart care approval last week.
What are the implications of that for kidney care.
The feedback from more back some iridium yet.
Should we expect a decision in the next few months and secondarily.
It is the likelihood that commercial payers follow Medicare in terms of.
Coverage updates for heart here. Thank you.
Yeah, I'll make some initial comments I'll, let Robert talk in a bit more detail, but I think we've always believed in multi modality. That's the first thing I think the hod carrier as part of that strategy, it's been core for us.
Since we've developed our strategic approach and I think getting that approved was significant validation.
First in 2020 and again now.
And this last week. So I do think it's important that this provides a strategic platform for the company.
I think at the same time, we have started obviously studies along those ways.
As we've shared.
Sure in my script prepared remarks, we're going to look at initial Standalone submissions and then as more data is generated as part of their process. So I'll, let Robert comment a bit more on that Robert has been the architect of really every every major <unk> approval in the company I went through those series of first in first learnings and Robert has been core to all of those and he really knows.
How to get these approved so Robert.
Yeah, I don't know that.
Theres anything specific on kidney care Heartware, obviously, we're happy with that.
Us.
Understand the path with <unk> as we worked with them on that what's the path moving forward for multi modality.
<unk> other organs and different testing types of modalities. Obviously you know our initial goal is to obtain independent coverage for the test as we continue to generate data that would support a multi modality.
Coverage from.
From Medicare and I think the second part of the question you asked was.
Impact on commercial coverage and I think it's less about what.
Met what the Medicare decision may impact on that and more on <unk>.
I'm working with private payers the commercial payers based on the guidelines and the publications and the data in the literature, which is really what helps.
Helps move the needle forward with that.
Thank you.
Okay.
Thank you and our next question today comes from Mark Massaro with <unk>. Please go ahead.
Well this is maybe for Mike Thanks for taking the question.
I just wanted to touch base on the shore study.
Have a sense of the.
Timing of an interim readout.
And what do you think it can be pulled or Medicare to move to cover heart care beyond your winter testing.
Are there any other guideline bodies or data read out.
On the watch out for.
In addition to as H L T that might help move along commercial right.
Yeah. Thanks, Thanks, very much and I can.
At a high level, then I'll, let Robert speak in more detail, but.
Specifically.
Sure data as part of the short study I believe with.
Consistently I say tilting ADC beliefs different set of updates as part of that.
Process, which will continue doing robyn cover that in more detail as part of that I do think significant amount of body of evidence that we've generated.
As has allowed us to get this multimodal approval and as we've done previously we will plan to generate and submit additional data for.
Beyond that time period, as well, but for us it's.
We are leaders in this space.
Again, Robert has driven every single one.
One of our approvals through <unk> and so he really knows how to get these done so robyn.
Yeah, you asked first about about sure obviously thats, our Orange registry study in heart transplant and as that continues to progress will there be an interim publication and obviously.
Some data was presented in our symposium at ATC.
We'll be working towards publication.
Don't have a timeline yet on that.
A critical thing with all of these kinds of clinical studies is insuring.
Complete data monitoring and having a high quality publication to come out for that.
You also asked about beyond one year for heart care and I would say similarly, it's working with centers that either have validity and utility data and identifying where those data will support moving forward with requests for coverage beyond the one year.
Okay.
Thanks, so much for that.
Remind us.
One thing Chuck what are baked into the guide for lung contribution.
And us where penetration of commercial pay stand.
How we should think about buying back.
Yes, generally what we have shared in the past you probably would have thought.
A couple of quarters ago, we have been cheated the volume for the early show loan and journey about 25%.
Typically.
Volume is covered by the Medicare So that basically is the opportunity and generally what I would also suggest that this particular.
Our coverage, we have to see for bilateral lung transplant, so that becomes basic basically one of the limitations.
So that's how you'll be base case model.
The <unk> opportunity.
Thanks for taking the question.
Thank you and our next question today comes from Alex Nowak with Craig Hallum Capital. Please go ahead.
Hey, great. Good afternoon, everyone. I was just wondering what additional data do you plan to present here on kidney to ask but Medicare to reconsider just like what happened with our care. So like for example, what is the status of the K Oar study and other showed an improvement in graft survival back in 2021, just for other data you can submit to Medicare.
Yes.
Sure.
Sure you know we want to get to this this completed and so once the K Oar study this is about.
Surveillance and following patients long term and so it really.
Requires the completion of the K Oar study.
You know gathering of individual data points from individual patients for all the patients enrolled.
And then the data monitoring data cleanup and analysis.
So we're in the midst of all that process. So that we can get that out of course, that's a very important to us.
Okay and then it was mentioned that the low end of guidance assumes.
I guess it depends on the iridium <unk> to respond to the billing article so I'm little confused what wouldn't iridium say that would be necessarily new and represent a downside versus what we already know that palmetto headset.
Yeah. So again, we have been surprised a few times.
For the last few months right with all of the Division.
The division's coming out right and that probably is one of the reasons why we've kind of took a step back in the first quarter. We drove this.
Guidance.
And this is basically to make sure that.
There are any of the surprises we do not know.
That probably is the only reason why we have that.
Some kind of like a hedge.
Hedge baked in in the low end of our guidance.
Yes, Alex I think specifically just filling win meridian does accept that we will have to do it.
Reducing some of the full cost and greater than one year. So we had those numbers, which would then be part of that factor.
Okay understood and then just lastly, one more just in the 10-Q, there was mentioned about Fedex receiving in Q2, a record requests from the CMS recovery audit contract are not familiar with them had mentioned that there was a review is underway can you just expand on what this all means.
I caught the second half of that about the Upi see audit yeah. That's just that's another type of audit that we have responded to feel that we have a successful response not concerned.
Okay. Thank you.
Thank you and our next question today comes from Nathan <unk> with Stephens Inc. Please go ahead.
Hey, guys, sorry, if you've already answered this for jumping between a few calls tonight, but what percentage of the kidney tests with the necessary documentation.
<unk> have you actually gotten paid on since you've started submitting them.
So let me take this question Maisons, so as we were saying that.
Kidney volumes be 85% plus of the incoming tea honest in the months of June . They all came on the with the required information right and then of the remaining what <unk> been seeing that generally we are doing the supplementation after remaining test at about 40% of tax rate.
So from that standpoint to basically would say that now be unable to kind of submit almost 90% of our incoming couldnt be volumes as available.
So the remaining test would be about that 10% that required yet to be supplemented.
And this is only for Medicaid by the way just wanted to make sure that that's pretty clear.
Got it Okay. That's helpful and then when it comes to your cost initiatives I know that you've got some offsetting legal costs right now, but how much of that $40 million to $50 million started to flow through this quarter and what are your expectations for when that full quarterly run rate of cost savings will be recognized.
Acknowledging that that legal costs may be elevated near term and offset some of that.
Yes, sure. So if you look at operating spend.
It's down about 1 million bucks versus the last quarter and historically, our second quarter is generally pretty high for the face and marketing because of all the conferences that we have in the current quarter. So thats. The first part. So we are definitely on the right trajectory in the sales and marketing the second piece on the R&D again, I think the team has done a great job in terms of mix.
Show that we are working on to prioritize projects and.
They are able to kind of manner.
Manage the expenses and I think the number is down about $3 $5 million data scale. So I think we have made good progress in those two lines on the G&A of course because of the legal spend we were not able to see the impact that we wanted to basically see on that particular line.
Last but not the least of the cost of testing services.
You might see that cost of testing services is pretty similar to what we had in the last quarter, but last quarter I just wanted to highlight that we had the onetime Stanford.
<unk> royalty reversal and that basically had broader cost of testing services.
Down last quarter. So if you were to compare the cost of testing services for say.
Q4 of last year Q3, you probably will see that we have saved about $3 million to $4 million, both as a function of volume and some of the things that we are trying to do as a company. So in summary, I am basically what im suggesting is that we are making good progress on the $40 million to $50 million I still see that about 45% of this.
May come up in Q3, and the other 25% will start to show up in Q4 and beyond.
Got it okay. Thanks, that's helpful. I appreciate it guys.
Yeah.
Thank you and our next question comes from Heath, Terry with H C. Wainwright. Please go ahead.
Hey, everyone. Thanks for the question. This is Jake on behalf of your Chin.
And.
I believe you've just answered it but.
This is a question for appreciate any color on any future steps that are being taken to reduce.
Operational expenses.
In order to achieve the $50 million annual savings.
So what are those <unk>, we can actually put those actions in place already.
What I suggested last time that as part of those actions number one.
We'll basically basically just headcount structure most of those actions are already complete.
One was a prioritization of R&D projects.
It fits right in that particular book is already.
Got it.
The third piece of course, we've spoken about the cost of testing services that is a combination of the volume related reductions.
We see automatically but at the same time some of the other things that we're trying to do to make sure that we are able to kind of.
On the cost of testing services gross.
Gross margins of our testing.
So I will say that most of those actions already in place in August you would actions, but I would say that probably would not be more than 20% of the number a decade trying to target here.
More than the cost of.
More than including I would.
The cost saving actions.
Not taking our ISO base because there are some investments that we have to make for the long term growth has been so I just wanted to make sure that that's pretty clear because it might step back to talk about some of the piece that has happened recently.
Any clarity around the coverage decision for <unk>.
Thanks for helping us offset some of the impact on our top line.
Thank you and I'm, sorry, if you've already answered this question, but.
Any color on how long this impact of the billing article divisions could be seen on I'll assure kidney testing volumes.
Yes, I think thats a bit of a.
Long long question and so I think for US we believe the billing articles into missile I think we've had that in our prepared remarks. It's the first thing. The second thing is that we have seen some.
Changes.
In the first billing Idaho's second billing, Idaho, which.
Led to some improvements we've now seen the hot changes sort of come through so this is an ongoing process, where I think again, we do not believe that the billing out he was municipal under the coverage policies and with in working to.
See how that can be addressed so I think that process continues.
In parallel we are actually.
Address that by trying to adapt to this new environment and actually led to the operational implementation, which is what we've done and getting these forms up to the rate of close to 90%. Once you include new forms plus the additional information would be not to collect performs on fully complete so I think we're making excellent operational.
Execution I think we're also seeing some progress.
With the billing adequate the second billing article coming within 60 days and then also with some of these hot changes, but it's an ongoing process that we are continuing.
Thank you.
Youre welcome.
Thank you and ladies and gentlemen. This concludes our question and answer session. So I'd like to turn the conference back over to rich for any closing remarks.
Yeah. Thanks, very much I mean, it's been a really busy quarter and I think you all know that in full are different.
All stones and different operational execution.
Glad to have reissued guidance, we know that there'll be a lot of different learning. So we have in the next year.
During this next quarter.
I think at the end of the day, we're just proud of really bringing this innovation to transplant patients.
Not often easy being later, but you have to lay from upfront and you have to drive innovation and we've had a strategy, which we've had since the start of this should execute on the three CS they've gone really well during the course of the year and we've adjusted and adapted displaying article by having this operational focus and execution again I wanted to give a special call out to the organization.
Typically well thank the patients and.
Thank the physicians, but this particular quarter. In addition to those I want to give a special call out to the <unk>, just really incredible with the level of effort and enthusiasm and resilience of demonstrated as we've had to adapt and adjust to this situation. So again, everyone. Hope you have a great rest of the day and I look forward to catching up thank you.
Thank you ladies and gentlemen. This concludes today's conference call. We thank you all for attending today's presentation and you may now disconnect your lines and have a wonderful day.