Leigh Salvo - Westwicke Partners Peter Maag - Chief Executive Officer Ken Ludlum - Chief Financial Officer.

Bill Quirk - Piper Jaffray Dan Leonard - Leerink Nicholas Jansen - Raymond James Peter Lawson - Mizuho Securities.

Good day, ladies and gentlemen and welcome to the CareDx Third Quarter Financial Results Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will be given at that time. [Operator Instructions] As a reminder, today’s conference is being recorded.

I would now like to turn the call over to Leigh Salvo..

Thank you for participating in today’s call. Joining me from CareDx are Peter Maag, Chief Executive Officer and Ken Ludlum, Chief Financial Officer. Earlier today, CareDx released financial results for the quarter ended December 30, 2014. The release is currently available on the company’s website, www.caredxinc.com.

Before we begin, I would like to remind you that management will make statements during this call that includes forward-looking statements within the meaning of federal securities laws.

Forward-looking statements can often be identified by the use of terminology such as subject to, believe, anticipate, plan, expect, intend, estimate, project, may, will, should, would, could and can or the negatives thereof and similar expressions or by discussions of strategy.

All forward-looking statements, including without limitation, our examination of historical operating trends, our future financial expectations and statement about our test development and commercialization efforts are based upon our current estimates and various assumptions.

These statements involve material risks and uncertainties that could cause actual results or events to materially differ from those anticipated or implied by these forward-looking statements.

These risks include without limitation risks relating to our test development and commercialization, which is a long and complex process that may not be successful, regulatory requirements applicable to our current test and solutions under development, continued market acceptance and adoption of our AlloMap test, competition, risks relating to reimbursement and risks relating to our intellectual property.

For a complete list and description of those risks and uncertainties, please see the company’s filings with the SEC. I will now turn the call over to Peter Maag.

Peter?.

Thanks, Leigh. Good afternoon, everyone. As we did on the call last quarter, I’d like to begin my remarks by offering a quote from a patient benefiting from AlloMap, our molecular diagnostic surveillance solution for heart transplantation.

A couple of weeks ago, I was able to spend an evening with Pat Sullivan, one of the founders of the HeartBrothers Foundation in Boston, an organization that works with heart transplant recipients and patients with heart failure. Pat had his own heart transplant in 2012 and shared his opinion of AlloMap with me.

I did not have to think twice about having the AlloMap test versus worrying about which doctor’s hand would be doing the biopsy that day. AlloMap was a much, much easier experience compared to biopsy. This is another one of these many examples of the feedback we received from patients who are benefiting from our technology.

Now, turning to our third quarter performance, I would like to make some brief comments recapping our results during the quarter and then will highlight the key growth drivers and catalysts we see on the horizon for 2015 and beyond, including the important trials we have underway.

Ken Ludlum will then provide financial highlights and guidance for the year. And then we will invite you to ask your questions. Let me turn to recent highlights. Third quarter results demonstrated important progress across all aspects of our business, revenues of $6.7 million to 15% year-over-year, primarily from new and recurring demand of AlloMap.

Third quarter net income was $1.2 million driven in part by beneficial changes to our accounting estimates and one-time events, which Ken will detail in his later remarks.

Let me point out while these results are driven by one-time events, I see this positive number as the signal of the overall health of our business and our potential to generate positive returns with our core business in the future.

Other highlights of the third quarter included a 16% year-over-year increase in the use of AlloMap, which underscores our continued growth momentum in most transplant centers in the U.S., the successful resolution of our royalty arbitration with Roche Molecular Diagnostics, which provided upsize to our income statement in the quarter as well as for the future.

We also increased enrollment in the Outcomes AlloMap Registry Study or OAR which identifies opportunities in study centers with respect to protocol adherence and patient identification. We also made solid progress in developing our pipeline for cell free DNA tests for heart and kidney transplantations.

Our donor derived cell free DNA Outcomes AlloMap Registry or D-OAR clinical trial provides the research use only diagnostic tool to help clinicians and scientists investigate the use of cell free DNA technology for heart transplantation recipients with AlloMap.

And finally we have been able to bring on board additional talent to our strong team, who have the expertise and passion to drive our continued growth with the focus on patients.

I would like to take a few minutes to review these highlights and why I am confident in our opportunity to both grow our existing AlloMap business as well as significantly expand opportunities in the use of cell free DNA for heart and kidney transplantation.

I would also like to take the opportunity to talk you through what we perceived as the underlying trends in our business, which may provide context for understanding our strategy and objectives. One of these trends we see is that genomic information leads to new clinical insights and that gene sequencing moves into clinical application.

CareDx is well positioned not only through our gene expression technology, but also to our capability building in making sequencing information available to transplantations in the post transplant care. Another trend is the increasing need of Outcomes data for acceptance and reimbursement of payers.

We also anticipate capitation models for complex procedures in the future. Actionable clinical information is critical for these assessments and CareDx is focused on providing Outcomes data to clinicians and payers. With transplantations consuming a lot of healthcare services, we see this as a great business opportunity for us.

We also see patients and their loved ones increasingly involved in the clinical decision making and we see them ask for access to their own data. Obviously there is a trend for non-invasive testing solution and we at CareDx offer the reduction of biopsy as an example. In a recent discussion I had with Dr.

Mandeep Mehra one of the leading heart transplant cardiologist at Brigham and Women’s Hospital in Boston. He emphasized the trend of moving the focus in clinical decision making away from rejection monitoring to that of achieving better long-term outcomes.

Overall, we see the transplant community being very receptive to novel approaches and solutions offered by diagnostic companies like CareDx since there appears to be a limited focus from big pharma on bringing new therapeutic agents into the transplant field. CareDx with our focus on genomic information may fill this potential gap.

These are the points of trends and developments that I wanted to make. Now let me focus on how we translate these into tangible business opportunities. It is easy to understand what we do at CareDx, because we continued to execute against three strategic priorities that we set forth at the beginning of the year.

And these are, increase the utilization of AlloMap, launch donor derived cell free DNA tests in transplantation and develop and commercialize post transplant surveillance solutions through partnerships. Now let me talk you through each of them starting with AlloMap.

We have seen consistent year-over-year volume growth throughout the first nine months of the year resulting from the success of our sales and marketing activities that included programs to position AlloMap not just as an alternative to biopsy for heart transplant recipients, but with supporting data as the surveillance tool to determine a patient’s risk of acute cellular rejection in order to optimize immune suppressive regimens.

Our strategy to engage key heart transplant centers in the development of center specific protocols continues to make progress. Out of the 125 transplant hospitals in the U.S. AlloMap is being used in 105.

In fact as of the end of the third quarter there were 45 centers with established AlloMap protocols and an additional 28 centers which have a protocol or utilization policy in development.

We expect to build on this number as we view establishing formal protocols in transplant centers as a very important in confirming the use of AlloMap as the routine tool for the ongoing surveillance of heart transplantation. Our Outcomes AlloMap Registry Study, OAR continues to see growing enrollment.

This is an important initiative for us as it allows us to identify opportunities in centers with respect to protocol adherence and patient identification. Nearly 750 samples from approximately 300 enrolled patients were received as of September 30, 2014 and impressed this level in heart transplantation.

The long-term outcome data collected will continue to build clinical evidence about the benefits of using AlloMap as a surveillance solution in heart transplantations. As this is a long-term initiative with the opportunity for ongoing interim readouts, we anticipate to share some information at the 2015 ISHLT meeting in Nice, France next April.

In terms of territory growth, we are pursuing a center by center approach. Our sales reps truly understand the decision-making process and the treatment algorithms in each transplant center.

The number of centers adopting the technology through formal protocol development incorporating AlloMap in their practice is a strong indicator of our progress in this area. Now, turning to reimbursement, we have achieved reimbursement from the major carriers and accomplishments that few other diagnostic companies can claim.

As of September 30, 2014, we had been reimbursed for approximately 79% of AlloMap results delivered in the 12 months ended March 31, 2014. We expect this level to remain consistent going forward. Our second priority is the launch of donor-derived cell-free DNA tests in transplantation.

While we continue to expand the use of AlloMap, we are also pursuing the development of products for post-transplant monitoring that use next-generation sequencing to detect donor-derived cell-free DNA from the donor organ. We currently have a research use only donor-derived cell-free DNA-based solution for heart transplant recipients available.

We expect our scientific rationale and clinical understanding of donor-derived cell-free DNA to monitor rejection in heart, to strengthen our efforts to provide surveillance solutions for additional organs with an initial focus on using a similar donor-derived cell-free DNA technology for monitoring kidney transplant recipients.

The technology is based on the premise that higher levels of donor-derived cell-free DNA, is released from the organ cells in response to injury from rejection. The D-OAR study marks the first time that clinicians are using cell-free DNA as the surveillance tool together with our commercially available AlloMap test.

In the second quarter, we initiated this key study and have already started to add centers, enroll patients and receive samples. We are very early in this effort. We also anticipate that there will be further discussions at the previously mentioned ISHLT Congress that generate interest in this approach.

Turning to kidney, which is the key part of our future growth plans. Our strategy here is based on a mix of utilizing existing samples to gain insights into the biology of donor-derived cell-free DNA in kidney transplant and execute a clinical development plan that allows us to generate Outcomes data in this emerging field.

Our integration of ImmuMetrix, a development stage company focused on donor-derived cell-free DNA-based solution and transplantation that we acquired in June of this year is now complete.

ImmuMetrix adds to our expertise in applying donor-derived cell-free DNA technology to surveillance of transplantations and strengthens our IP position in the sector. Founder Stephen Quake from Stanford University continues to support the effort in an outstanding way.

Our third initiative is to develop and commercialize post-transplant surveillance solution through partnerships. There are a number of opportunities available to CareDx in making additional surveillance solutions available to patients.

We believe that through win-win relationships with commercial and academic partners, we can develop – we can help improve transplantation’s life. Our commercial channel, including our direct sales force and reimbursement expertise, can be readily engaged to support partner products we may acquire or license.

I will now turn the call over to Ken to review our financial highlights and to provide guidance for the year..

Thank you, Peter. I will start today by walking through our third quarter financial results and then provide our financial outlook for 2014. Revenue, our revenue of $6.7 million for the third quarter was up 15% year-over-year in the third quarter of last year.

Virtually all of our revenue in the third quarter was from AlloMap with only $50,000 from license revenue. As I indicated on our last call, in the second quarter of this year we did receive some delayed revenue from Q1 and one large early payment on the last day of June.

These two items added approximately $300,000 to our Q2 revenue, so I am viewing normalized revenue in the second quarter as more like $6.5 million. And another note for the nine months ended September 30, revenue was up 19% on a year-over-year basis from 2013.

Turning to cost of testing, cost of testing in the third quarter was affected by our settlement with Roche over past royalties. As a result cost of testing received a one-time benefit in Q3 of about $550,000 because the actual back royalties we wound up owing were less than what we had accrued for over the past three years.

So this was a direct offset to actual cost of testing. So while you could think of a nominal gross margin last quarter being 73% if you adjust it for the back royalties it would have been more like 65% on a normalized basis which is right on plan.

On the R&D side we spent $1 million in Q3 of 2014 compared to $668,000 in the year ago quarter and about $800,000 in the second quarter of this year.

As expected R&D expenses increased as our cell free DNA program moved beyond the initial validation stage and into enrollment in a cell free DNA heart study as well as towards more extensive kidney research and development. Sales and marketing expenses for the third quarter were right on plan at $1.8 million and pretty steady from the second quarter.

They were up only about $150,000. We don’t foresee large increases in sales and marketing going forward until we launch our kidney products some time later in 2015. And even then we expect spending increases here to be modest.

G&A expense was $2 million for the quarter, up from $1.5 million in the year ago quarter, but down from $2.3 million in the second quarter of this year. Expenses in the second quarter of this year were higher due to expenses related to getting systems setup to be a public company.

We expect to see current levels of spending in G&A increasing only marginally in Q4 and into 2015. One other new line item on our P&L this quarter is a label change and contingent consideration and this is owed to ImmuMetrix shareholders.

This is the accounting estimate of a future milestone payment associated with that acquisition that we made last June which brought DNA technology related IP and knowhow into CareDx.

This consideration is payable all in stock and if the stock price moves around quarter-to-quarter the accounting value of this changes and it is reevaluated every quarter. So the decrease in the stock price this quarter brought about a decrease in the accounting estimate of its value.

There is no cash effect and because it would distort operating expenses and we included it in G&A or R&D we have broken it out as separate item on the P&L and will continue to do so until it is paid.

So we are viewing net income, the two items I mentioned the beneficial effect of releasing the over accrual of the Roche royalties and the change in contingent consideration swung net income for the quarter into positive territory. But without these two one-time beneficial items, net loss would have been roughly $450,000.

Turning to the balance sheet at the end of the third quarter we had $39 million in cash and cash equivalents. Our IPO raised $35.5 million in net proceeds. Note that we started the year with $5 million in cash and during the year we raised the $35.5 million from the IPO and also raised $5 million from Alumina.

We also finished the quarter in September with $39 million in cash. So if you work through the math on that, our burn rate for the first nine months of this year was only about $6 million or $2 million a quarter. This illustrates how close we are to profitability on our base AlloMap business and the low burn rate nature of our business model.

We see only incremental increases in burn rate as we move towards product development of kidney and other products. Our share count for the quarter was 11.2 million shares, but because for part of the quarter we were still private, the count going forward should be more like $12 million.

As to guidance on revenue side for the full year 2014 we see no change here for the rest of the year and still expect revenue for the year to be in the range of $26 million to $26.5 million. This implies revenue in the next quarter of between $6.6 million and about $7 million for the quarter.

So, I will now turn this back to Peter for some closing comments..

Thank you very much, Ken. In closing, I want to leave you with four areas that help differentiate CareDx. First, we drive our business through clinical insights which we have clinician by clinician, center by center. Second, we have access to large and well annotated clinical samples.

Third, we have a good understanding of the transplant center’s workflow and their decision-making process. And finally, we include our customers, the clinicians from key transplant centers in the development of new products and the adoption of new technologies.

We, at CareDx, continue to make important progress in meeting all of these elements of success to deliver meaningful solutions to the transplantation market. I am confident we will finish 2014 strong and we will enter 2015 on a clear path towards building scale in donor-derived cell-free DNA.

Our plan includes the launch of additional tests and solutions, building out our services, and continued growth through expanding our commercial presence. In the next few months, we will be participating in the Piper Jaffray Healthcare Conference in New York and the ISI Conference in Boston as well as the Leerink Bus Tour here in the Bay Area.

We hope to see many of you during one of these events. With that, thank you for joining us today. We look forward to updating you on our progress in the future calls. We will now open it up to questions.

Operator?.

[Operator Instructions] The first question comes from Bill Quirk from Piper Jaffray..

Great, thanks. Good afternoon, everybody and well done in terms of the operational expense control even adjusting for the one-time items.

So, Peter, first question is I was hoping you have a little bit of feedback on the RUO cell-free DNA heart products, what are you hearing from some of the early participants with that test?.

Bill, thank you so much for your question and thank you very much for joining this call. The opportunity of cell-free DNA making that available to heart transplantations through our RUO model piggybacking on to our OAR study, which is already established in many centers in the U.S.

is really a key opportunity for us to learn and engage from clinicians in the field of transplantation. There is really a vacuum so to speak in the field of transplant for new technologies. And so we come at a time where there is a lot of enthusiasm about new transplant solutions.

It is very early in the process as I mentioned earlier, we are guiding towards readout of some of the data to the ISHLT in Nice. And as we are generating more and more data, that will become meaningful to engage the clinicians. So, we are very excited about it, Bill, but it is still very early in the process..

Understood.

And then maybe just thinking about AlloMap and the importance of getting into protocols within the facilities, Peter, do you have any data that you can perhaps share with us in terms of, I guess, the difference in AlloMap usage either on a per physician basis or perhaps you are thinking about what happens to some of these physicians that are not compliant, if they can meet a compliance, etcetera, when we actually get written into protocol as compared to say having a champion or two within an individual center?.

Bill, thank you so much. And this is really an excellent question. We are thinking about this business in terms of two broad strokes of different centers. The one center would be a center, where there is one individual at the top who is making decisions for the protocol that will be rolled out for the center.

We call them almost like an individual clinician setting the politics of the basis for that center. In these centers, it probably takes longer to establish our protocol, but once the protocol is established, you really have one point of contact that helps you to drive that protocol to come through.

Cedars-Sinai and Bailer in Dallas are excellent examples alongside with Kansas, where we see that momentum and really we have tremendous success in these centers. It is a little bit more difficult, where you have a multitude of cardiologists that are doing somewhat uncoordinated surveillance solutions for the patients.

And very often, AlloMap is actually the moment where these clinicians come together and form a joint opinion about surveillance solutions going forward. So we see AlloMap actually one of the opportunities for these centers to sit around the table and say how do we want to care for surveillance going forward.

The registry study is a wonderful tool for them that allows to make this discussion among clinicians and allow that – that also allows us just to have the transparency around the number of AlloMap surveillance opportunities that exist and how the protocol adherence is established.

We have – we are present in 105 centers, but you see it through our protocol guidance on 45 centers with formal and 28 with protocols in development that there is still ample room for us to grow in terms of penetrating the post transplant heart market..

Very good. Thank you, Peter..

Your next question comes from Dan Leonard from Leerink..

Thank you.

Did AlloMap test volume grow sequentially and can you speak to the expectations for test volume in the fourth quarter given some of the holiday dynamics?.

Dan, thank you very much for that question. We had significant growth year-over-year AlloMap growth which we guided with the 16% volume growth. So we look at this business at year-over-year growth which is substantial.

In terms of guidance going forward Dan, Ken continued to guide towards the sales number and that really is the guidance for us a company going forward. So we are very comfortable of the $26 million, $26.5 million guidance that we gave..

Okay that’s fine.

And Peter can you give us an update on where you are with the kidney product development, have you completed your proof of concept or is that still to come and then when could we expect some disclosure on the data?.

Dan, thank you very much for that question. I mean initially we are focused and I mentioned it we really are piggybacking currently the cell free DNA on our heart program and the kidney is still somewhat out.

We continue to guide on the KIDNA study which is our large outcome study in the middle of next year and that there – really nothing changed for the time being. But kidney program is somewhat staggered to the heart program and the heart program is moving along very nicely..

Okay. Thank you..

[Operator Instructions] The next question comes from Nicholas Jansen from Raymond James..

Hi Peter and Ken.

Two question for me, in terms of the centers that are considering formal adoption the 28th that you mentioned, how long does it usually take for them to necessarily kind of formally announce something which would result in perhaps higher utilization of those centers over a period of time?.

Excellent question Nick. I think it is really driven center by center and something that if I were to give you a generalized number it would broadly be injustice to the complexity of what we need to do at each centers.

What’s absolutely correct is that each of these centers have very different decision making modalities and sometimes having a protocol in development is as strong as having a protocol firmly written because it serves as a guidance to the center.

That has to do for example with modalities that a certain treatment guideline would need to go to internal improvement levels. But I think we are making good progress on this. This is a key initiative for us and we will continue to have the team laser sharp focused on establishing these protocols.

I can just re-emphasize the establishment of a registry which is somewhat like a form of protocol for a center because in this registry to engage with AlloMap the cardiologist sit down around the table and establish a formal protocol and very often that this will become the protocol that is established at the center..

That’s helpful. And then you can just remind us in terms of the thinking about the cash burn? Thanks for bringing up the comments Ken but how much money you guys plan on spending for the kind of the entire kidney clinical trail so that we can get a sense of when we should expect kind of that extra dollars to be kind of ending.

And then kind of thinking about the ramp of the cash flow going forward, so I just want to get a sense of it I think I remember it during the IPO somewhere around $11 million or so but I just want to kind of double check there? Thanks..

Yes. Nick the total cost would be more like $13 million to $15 million. And I mean that’s not all incremental spending from this point on. Some of that is already baked into our regular R&D, but we see the 2016 as being the pivotal year when we are probably going to start burning money and start generating cash..

Great. Nice quarter, guys..

Thanks..

The next question comes from Peter Lawson from Mizuho Securities..

Hi, Ken. Hi, Peter.

Just around AlloMap, I wonder if you could just talk through the seasonality in that business and do you think it grows in Q4 over Q3?.

Peter thank you so much and greetings to you as well.

The AlloMap business is really dependent on a quarter-by-quarter basis, because rightly what you said is we see surveillance opportunities happening with a certain rhythm with the first quarter, second quarter, third quarter and fourth quarter being largely driven by the number of available days in the office.

And these are driven we see that on a month-by-month basis by more or less driven by the number of holidays into one that are inside it. So, we see this as some kind of a dynamic that is recurring quarter-over-quarter. We have good quarter growth, third over fourth quarter last year and will continue to look for growth going forward.

So, we guide on the top line business, but there is continuous opportunity for us to drive AlloMap adoption in the United States..

Thank you.

And then just going back to the question around the trial costs, how much do you – as you look at next year, how much incremental trial costs could there be for ‘15?.

Yes, so probably about $5 million to $6 million incremental..

Got it. Thank you so much..

And just like maybe I had one comment to this, Peter, we see as the clinical outcome trial of KIDNA really as the key driver of our R&D expense and we would only engage into this R&D expense when we are comfortable to do so.

So, it’s really look at the cost ramp really starting with the costs that are associated to that clinical outcome trial, which then would be starting the R&D expense..

When would we see the first data for kidney and how many kidney tests have you done?.

We haven’t disclosed now yet on the kidney side. There is a number of academic studies out there on the kidney trial, which you will find on our website in terms of guiding on what’s out there in terms of publicly available information on kidney studies. But the – we will communicate around kidney data prior to engaging into the KIDNA study.

So, look for that in the first half next year in terms of communicating some results out on our initial validations on the kidney program..

Well, so really – sorry, I didn’t quite understand that.

So, we get the guidance in the first half about when we are seeing results or we will actually see some results?.

No, you would see some results because in order to move into the KIDNA trial, we would discuss with you the results of the preliminary validation. We would only make the decision to go into KIDNA if we have a solid foundation of making sure that cell-free DNA is a valid model in KIDNA – in kidney patients..

Got it. Thank you so much..

Yes. And just maybe to reemphasize, Ken whispered that to me is that right now we are relying on our initial validation studies on existing sample databases that are with CareDx and other academic centers.

So, we are in the process of profiling the biology of cell-free DNA with existing samples that’s currently happening on top of the prospective samples that we use through the cardiac program in our D-OAR study samples..

Thank you so much..

I am showing no further questions. I would now like to turn the call back over to Peter Maag for closing remarks..

Thank you very much. We look forward to updating you on our progress going forward and you have a great evening. Thank you very much for joining us on the call..

Ladies and gentlemen, that does conclude the conference for today. Again, thank you for your participation. You may all disconnect. Have a good day..