Caroline Corner - IR, Westwicke Partners Peter Maag - President and CEO Charles Constanti - CFO.

Bill Quirk - Piper Jaffray Pierre Osland - Craig-Hallum Capital Carolina Ibanez - Janney Neil Gagnon - Gagnon Securities.

Good day ladies and gentlemen and welcome to the CareDx 2016 Q3 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 follow at that time. [Operator Instructions] As a reminder, this conference is being recorded.

I’d like to introduce your host for today’s conference Caroline Corner from Westwicke Partners. Your may begin..

Thank you for participating in today’s call. Joining me from CareDx are Peter Maag, President and Chief Executive Officer; and Charles Constanti, Chief Financial Officer. Earlier today, CareDx released financial results for the quarter ended September 30, 2016. The release is currently available on the Company’s website, www.caredx.com.

Before we begin, I’d like to remind you that management will make statements during this call that include forward-looking statements within the meaning of 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 facts should be deemed to be forward-looking statements. All forward-looking statements, including without limitation, our examination of historical operating trends and our future financial expectations are based upon our current estimates and various assumptions.

These statements involve material risks and uncertainties that could cause actual results to materially differ from those anticipated or implied by these forward-looking statements. Accordingly, you should not place undue reliance on these statements.

For a list and descriptions of the risks and uncertainties associated with our business, please see our filings with the Securities and Exchange Commission.

CareDx disclaims any intention or obligation except as required by law to update or revise any financial projections or forward-looking statements whether because of new information, future events, or otherwise. This conference call contains time-sensitive information and is accurate only as of the live broadcast today, November 9, 2016.

In addition, on today’s call, we will refer to various non-GAAP financial measures in which we exclude certain items from our U.S. GAAP financial results.

We believe that in order to properly understand our short-term and long-term financial trends, investors may wish to review these measures as a supplement to financial performance measures determined in accordance with U.S. GAAP.

Please refer to today’s press release announcing our third quarter 2016 results for a reconciliation of these non-GAAP performance measures to our U.S. GAAP financial results. I’ll now turn the call over to Peter..

Thanks, Caroline. Good afternoon, everyone. I’d like to begin with a patient-focused story as we do on all of our calls. Last month, we Stacy Bingham and Derek Hughes in the office. Imagine of typical family with five children, except the two of the children have had heart transplant and another child is waiting for one.

They received the best care modern medicine can provide at Stanford Hospital, where unfortunately the three children were diagnosed with dilated myocardiopathy. What is amazing is that a genetic link has not been clearly identified.

CareDx is leading the way in genetic information and transplantation, and families like the Bingham reveal our still existing scientific limitation but also give us the impetus to continue bring next generation sequencing solution to the clinic to generate deeper insight.

For the Bingham children, Megan Cage and Jason, and then many more patients beyond. We have had a great quarter. As I look back over the last two years, I’m amazed that the enormous amount of progress we have made here transforming XDx with AlloMap into CareDx, a transplantation-focused multiproduct genomic information company.

We now have both, pre and post-transplant products and development programs that encompass the continuum of care for transplantation patients. We care for a very high-need patient population and partner with the leading medical institutions in the world.

By focusing on a specific therapeutic area, with the broad product portfolio, we generate deep insight into a complex disease area, which will be heavily impacted by the genomic revolution. As the transplanted organs constantly interact with the host immune system, we gather unique insights into the patient’s immune response.

We can leverage this to better serve patients as we seek to optimize medication and manage and prevent rejection. The long-term monitoring of transplantation that is necessary to ensure and maintain good outcome is of course also very commercially attractive to us as well.

Our strong progress this quarter demonstrates that we have scaled our company by building on the growth from our core products in addition to launching novel solutions. Just as a patient would benefit from our test before and after transplant, I’m now going to walk you through our pre-transplant efforts before moving to our post-transplant work.

After that I ask Charles to dive deeper into our third quarter financials. Following the financials, we look forward to your questions. The $12.5 million revenue in the quarter were achieved through strong AlloMap volume growth and the anticipated catch-up of collections. It also marks a record quarter with $3.8 million from the Olerup business line.

Allenex is integrated into CareDx and the Olerup products are contributing to our sales and fueling growing engine. We estimate that there are about 1,000 transplant centers in HLA labs worldwide. Olerup products are used in about 50 of them -- 50% of them.

In the pre-transplant Olerup product line, Olerup SSP, our best-in-class PCR-based HLA typing kit is doing well. Growth in our pre-transplant business will be driven by Olerup QTYPE. We launched Olerup QTYPE at ASHI in September and in October, we were thrilled to report our first commercial orders.

The test is completed within an hour and is a robust and easy to use alternative for rapid HLA typing, and we are pleased to see this early success from our launch. In Q4, we have lined up a series of demos in transplant at HLA centers in the U.S. and Europe.

You might recall that we listed this as a milestone on our last call and we have worked hard to deliver on this quickly. As Olerup QTYPE 11 is launched as an RUO and validated on a Roche LightCycler, upcoming milestones will be the CE marking and the validation of additional instruments that already have footprint in the various HLA labs.

Olerup QTYPE addresses the $30 million market opportunity and we think that a 30% market share for CareDx should be achievable within the three to five-year timeframe. The efforts around the launch of Olerup QTYPE is bringing individuals in our organizations together, which is exciting to see. We will keep you updated on our progress.

Moving to the pos-transplant side of our business, our commercial efforts this quarter demonstrate success in growing AlloMap with record volumes being recorded. AlloMap is our core revenue producing product in post-transplant, a gene expression-based heart transplant surveillance testing service.

With 8.6 million in AlloMap revenues, we have had a strong quarter. This was driven by the successful catch-up in collection and AlloMap U.S. volume growth of 6%. In the third quarter, we provided more than 3,600 AlloMap patients results in line with our expectations. Todd Whitson and his team are driving commercial excellence.

Our goal is to become a valued partner in transplant centers, partnering with caregivers and patients. We also continue to focus on the roll out of AlloMap Score Variability, a tool that allows clinicians to identify patients at risk up for long-term outcome. Charles and his team have done a great job of catching up with some of the revenue backlog.

This has been our best-ever quarter for revenue cash collection and we are pleased with the progress we have made. In addition to our solid base of centers with AlloMap protocol and web portals in place, we are excited to have 48 centers that are receiving AlloMap Variability Scores now, up from 46 centers in the previous quarter.

On our last earnings call, we provided some information about AlloMap and CMS. Today, I am actually calling you from Washington DC, where I am continuing to have conversations with politicians and thought leaders in support of our efforts to make sure AlloMap continues to be available to Medicare patients.

We expect CMS to publish a final Clinical Lab Fee scheduled in late November or early December 2016. CMS is using a process referred to as capsule. The capsule process includes a number of steps.

In June of this year, CMS announced the proposed capsule pricing for the MACs, for patients covered by Medicare, which proposed the reimbursement for AlloMap be reduced from the current rate of $2,821 to $732.

On September 30, 2016, CMS published a final capsule reimbursement rate termination from the MAC under which payment for the AlloMap test would be $1,921 up from $732, which has been a first proposal, a significant step into the right direction, but still unacceptable to us. We are now in the reconsideration period.

We submitted a request for reconsideration with CMS, which has sole decision-making authority now. And now, we are asking for maintaining the established AlloMap pricing of $2,821.

This reconsideration process at CMS is similar to what we went through in the last quarter of 2015, when we successfully demonstrated the rationale and basis for pricing AlloMap. Patients and clinicians speak out for AlloMap. I invite you to go on our website and listen to Dr.

Kobashigawa, who manages the largest heart transplant center in the world at Cedars-Sina in LA and Jeff Teuteberg, heading the Pittsburg Transplant Center and he is currently on the Board of the International Society of Heart and Lung Transplantation. And this 10-minute clip, you’ll also listen to two-patient testimony on AlloMap.

It is in situations like this, when strength of relationships are successfully tested at CareDx. With this level of support, we are confident that we will prevail. It is also important to note that with PAMA regulation established for 2018, the reimbursements will be based on commercial market pricing.

Based on this, we believe that on the PAMA, AlloMap 2018 reimbursement level will be similar to our current established pricing. Now shifting gears, as you follow our story, a key growth driver for the organization is AlloSure.

We are the Company that brings this fast growing diagnostic technology to the highest value patients in the healthcare system. Many are talking about liquid biopsy, with AlloSure, CareDx has a donor-derived cell-free DNA test validated and ready for patient use.

AlloSure is the clinical grade next generation sequencing test to detect transplanted organ injury. We are preparing AlloSure, which we consider as diagnostic blockbuster opportunity for launch. We believe AlloSure could revolutionize post transplant management. With AlloSure, our goal is to driver CareDx to $100 million top line business in 2019.

The potential market for AlloSure in kidney transplantation is over $1 billion and represents a six to tenfold increase in the total addressable market compared to our existing presence in heart transplant care.

With the American Molecular Pathology Congress in Charlotte, and the American Society of Nephrology Meeting in Chicago, we expect exciting news flow and data releases coming out this month.

We appreciate the positive recognition from the Journal of Molecular Diagnostics that featured AlloSure on the front page of its November issue, highlighting our successful effort in validating the assay. This is commonly referred to as a new biomarker.

Our team led by John Sninsky is doing a great job, leading the industry in many ways in bringing our next generation sequencing testing service to patient. Jim Yee and our clinical team have developed three areas, further building clinical evidence for AlloSure.

First, we are building on DART, our landmark clinical trial in kidney transplantation in 14 centers with 400 patients recruited. Second, we are about to start a clinical trial called TULIP [ph] which will build further evidence supporting the utility of the test.

We are now assembling key opinion leaders in the TULIP study, which we plan to start in the fourth quarter as discussed in the past.

Third, we are still committed to our long term outcome study called ROSE, which will highlight the opportunities in optimizing patient management at drug therapy, which will then impact pre-transplantation and onset of dialysis.

Looking back to DART, the DART study clearly indicates the opportunity to monitor kidney transplantations for active reaction with a simple blood test. We demonstrated that monitoring for rejection the [indiscernible] is not useful. We also show that biopsies are performed way too often. 80% of biopsies in DART are not showing meaningful results.

The data set is significant and provides a lot of opportunities for additional insight generation. We are laser sharp focused on achieving reimbursement for AlloSure in the most important patient population Medicare beneficiary. We believe we can provide significant cost savings and quality of life impact in these patients.

Our team is interacting with MolDX team at Palmetto. As we believe in providing good clinical science and demonstrating the significant economic value proposition of AlloSure, we are confident on progress with the team there. We are keeping the AlloSure part of this call intentional short.

As we execute on a number of milestones in the coming quarter, there will be a lot of more to talk about. Here at CareDx, we are thrilled to build a transplantation-centric organization.

While our commercial focus and performance metrics will continue to defend on patient results provided and test sold, we will advance on our vision to build a genomic information company in transplantation.

With Olerup QTYPE and AlloSure in launch mode, you will soon hear us talk more about how we think about utilizing big data in transplantation or as we refer to it building a transplant information ecosystem. In closing, looking ahead, we have four milestones that we are excited about and you should monitor.

First, we will be providing AlloSure data at AMP and ASM in November. Second, we expect AlloMap CMS news at the end of November, early December. Thirdly, we will be giving updates on Olerup QTYPE sales progress. And four, we will be revealing ongoing progress on AlloMap collection.

I’ll now turn the call over to Charles to review our financial highlights and guidance for the third quarter..

Thank you, Peter. Starting with the topline, revenue was $12.5 million in Q3, up from $7.2 million in the third quarter of 2015. The year-over-year increase in revenue reflects three drivers.

First, in Q3, we recognized $3.8 million of revenue from Olerup following acquisition of this business in April and accordingly Olerup did not contribute to CareDx’s revenue in 2015. Second, AlloMap U.S. test volumes grew 6% year-over-year, contributing to an increase in AlloMap revenue.

Third, in Q3 AlloMap revenue was $8.6 million, up from $7 million in the prior year or an increase $1.6 million. This increase in AlloMap revenue reflects the test volume growth and approximately 900,000 of catch-up in cash basis revenue. The revenue catch-up reflects the progress we are making toward our goal to improve collections.

Excluding the catch-up in cash basis revenue, the AlloMap revenue in Q3 was up approximately $7.7 million, up 10% compared with the prior year. Our consolidated non-GAAP gross margin for Q3 was 65%, up slightly from last year. The Olerup products as distributed diagnostics have generated lower gross margins compared with AlloMap.

Olerup gross margins should improve with sales of Olerup QTYPE, which was commercially launched in the third quarter. Sales of Olerup QTYPE should improve the leverage of overheard.

About the GAAP basis gross margin, it is noteworthy that the product gross margin is impacted by the amortization of inventory mark-to-market to fair value and purchase accounting, and that this amortization is expected to continue into the first quarter of 2017. Intangibles amortization on the other hand will continue for many years.

Both of these amounts are reflected on the GAAP to non-GAAP reconciliation. R&D expenses in Q3 were $2.9 million and includes our investment in AlloSure trials and reflects the consolidation of Olerup R&D expenses following the acquisition this year. The Olerup expenses reflect development of Olerup QTYPE.

Sales and marketing expenses on a non-GAAP basis in Q3 were $3.1 million and increase from last year reflects the consolidation of Olerup expenses following the acquisition. G&A expenses on a non-GAAP basis in Q3 were $4.5 million up from $3.2 million last year.

The $1.3 million increase reflects approximately $700,000 of Olerup G&A following the acquisition; the remaining $600,000 increase reflects fees from consulting, professional services and financial advice related to the first corporate consolidation of Allenex, reimbursement of AlloMap and other corporate activities.

Our non-GAAP results exclude impact of acquisition related costs and tax effects, remeasurement of contingent consideration and warrants and stock-based compensation, each of which had a significant impact on our results in the three and nine months ending September 30, 2016.

These excluded items are listed in the table titled reconciliation of GAAP to non-GAAP financial measures that was included as part of our earnings release and available at our website at www.caredx.com.

Turning to the balance sheet, at the end of the quarter, we had $22.3 million in cash and cash equivalents compared to $17.1 million as of June 30, 2016. At the end of September this year, we closed a common stock public offering and generated net proceeds of approximately $7.8 million.

This additional equity has allowed us to extend our estimated cash run way through Q1 of 2017 and has helped with conversations with creditors. The timing of access to new financing and equity has been impacted by the uncertainty about the amount of AlloMap’s Medicare reimbursement in 2017.

Once the CMS Clinical Lab Fee schedule for 2017 is published, the clarity will help with our financing discussions. The CareDx team is excited to execute on our growth plan, now that we have the first full quarter of consolidate financials available. Turning to guidance.

For 2016, we continue to expect revenue to grow by low to mid-single digits on a pro forma basis, assuming the Allenex acquisition closed at the beginning of 2016. Actual reported results will only include Olerup subsequent to the close of the acquisition that occurred on April 14th.

We are updating and narrowing guidance for reported revenue in 2016 to a range of $41 million to $42 million. I’ll turn the call back to Peter for closing comments. Thank you..

Thank you, Charles. We started off strong into the second half of the year based on continued execution against our plan. This quarter, we have seen record AlloMap volume growth, launched a new product in the pre-transplantation area and strengthened our balance sheet.

We have been recently been recognized by The Journal of Molecular Pathology Tool which we think a strong validation of our efforts. As we are building out CareDx as a genomic information company in transplantation, we will have a series of exciting milestones coming up.

Stay tuned for updates on AlloSure, Olerup QTYPE, AlloMap and our big data project. We appreciate you joining the call. We are now happy to address any questions..

[Operator Instruction] And our first question comes from the line of Bill Quirk with Piper Jaffray. Your line is now open..

So, I guess first question, Peter, I want to a little bit about QTYPE and just thinking about the competitive dynamics on -- looks like your principal competitor here is also offering their product under researches only. And as far as diligence, I don’t think they support Roche LightCycler.

So, can you talk a little bit about kind of the competitive setup here, and just kind of maybe the customers you will be targeting? Thank you..

Yes, thank you very much for the question. I think we have a very strong foothold through our Olerup brand in these HLA labs. The LightCycler validation of Olerup QTYPE really sparks an unmet need in these labs because of our fast turnaround time and the very accurate solution that we are doing.

We have already lined up a series of demos we were targeting until the yearend of 15 demos in HLA centers and both in the U.S. and Europe, and we are well advancing on these plans.

What’s amazing to see is that we have had great conversions from demo directly into sale of validation kits, which is the perfect signal that you would like to get in such a launch. I think this solution is extremely competitive when it comes to turnaround time.

We believe we have a huge edge on turnaround time and then also in terms of resolution, in terms of being able to detect the right alleles and the sub-groups of alleles. So, it’s very, very good solution. When we talk about the validation on various instruments, yes, LightCycler is available but it will be available for others as well.

So, you are kind of correct that competition has huge LightCycler as well. But then the next generation AVI machines will be very important because they have existing footprint in the HLA lab. So, we are planning to have more validations coming up to increase the footprint of QTYPE..

Very good. And then, I guess just last one from me, just thinking about potential CMS update. You mentioned Peter, it could come in late November, early December. How much if any kind of visibility do you have as it relates to CMS in terms of to your consultants or what not about that.

And obviously big picture, it would appear to be the worst case scenario kind of 2017 phenomenon, obviously the expectation is that the Medicare rates will jump back up in 2018, but just curious about visibility there. Thank you..

Yes, I think we have a very good ongoing dialog with CMS. Yes, we have a series of consultants. As you know, we have had the experience last year. So, we have had a dream team assembled and we just had to reassemble the dream team for this time around. But it has become key management task for us to interact with CMS.

And they have been very good in interacting on the very senior level with us. So, good progress. You’re absolutely right, this is truly only a 2017 phenomenon with PAMA kicking in. We are pretty certain that or we are certain that AlloMap pricing will go back to 28 to 21 level following the implementation of PAMA. So this would be 2017 phenomenon.

However, as I mentioned in the call, we are not accepting the $1,900 price range that CMS is currently proposing, because we think that it is undue to reduce AlloMap at a 34% rate in this capsule process.

Keep in mind that we are only in the situation, because we have done the right thing in applying for CPT code in the anticipation that PAMA law would be effect in January 1st of next year. So being penalized for doing the right thing, I think it would be their policy and I think we have open views at CMS for that..

Thank you. And the next question comes from the line of Pierre Osland from Craig-Hallum Capital. Your line is now open..

Thanks, good afternoon, guys. So, I was going to follow-up on those on question on QTYPE, if I could first. Just sort of wondering, you pointed that initial sale here couple of weeks ago, and I’m sort of curious sort of how does that sale process work.

I mean, the quote in the release calling out that first sale talked about the convincing demonstration and I guess I’m sort of curious as to sort of what goes into that? Number one.

And the number two, are you going into all the Olerup SSP centers first or you kind of can everybody with this?.

Great two questions there. I think the first thing is that clearly we are going for HLA labs where LightCyclers are already established, that’s the easiest. We have a validated system on the LightCycler.

And wherever we find an HLA lab with LightCycler which we have done market research before, this is an easy sale for making a demonstration and then converting that business into our solution. In terms of being able to provide Olerup QTYPE, this is really the nice aspect of this business, which we think is very complementary to what we are doing.

This is more or less we get an order and the cash cycle on this is much, much quicker because it is instantly that we will be reimbursed on from HLA labs. So in difference to our test lab serving business this is a much shorter revenue cycle business which is greatly complementary to what we are doing on the AlloMap and AlloSure side..

Excellent. Okay. And then, I had two I guess housekeeping questions here for Charles, if I can. So, I guess the first is you called out the catch-up in the quarter on the AlloMap -- of about $900,000.

And I’m just curious as to sort of what do you see as the number then that’s out there that’s remaining to be caught up? I should be able to go back and do math, but you can short circuit that for me, perhaps. And then, the second housekeeping question would be if you could just provide what the cash utilization was in the quarter? Thanks..

Yes. So, in terms of the available catch-up that’s out there, so it’s probably north of the amount that we collected in Q3, but will come over I think multiple the quarters. I think we made a lot of progress with low hanging fruit, and it will be a little more challenging gathering the rest, which we expect to achieve but it will take some time.

Cash usage in the quarter reflects primarily cash used in operations. We also are amortizing the East West Bank debt, which would be approximately $1.6 million. But those are really the two main drivers of cash use..

Thank you [Operator Instruction] And our next question comes from the line of Paul Knight from Janney. Your line is now open..

Hi, good afternoon. This is Carolina Ibanez on for Paul Knight. Peter, I understand that you wanted to keep the discussion on AlloSure short, given the number of milestones coming up.

But could you provide us some sense on the kind of data that are going to be presented at the AMP and ASM conferences? And when can we expect data coming from a larger number of patients that was presented last June?.

Thank you very much, great question. It gives me the opportunity to just shed a bit of light on AlloSure. I think the sources of data for AlloSure are really three components.

The first one would be the analytical validation which made the front page news of the Journal of Molecular Diagnostics and that will be presented at AMP actually this week in Charlotte. So, think of this journal being widely distributed. It’s great free advertisement for CareDx and AlloSure as a biomarker in kidney transplantation.

So that’s the one data set. The second data set is centered around DART. And the data set on DART is really structured in two components, the first one would be a reference data set, which basically establishes what the baseline for AlloSure levels in a healthy patient population.

This is prepared for publication in clinical chemistry and provides tremendous insight because it basically establishes what does the healthy patient’s cell-free DNA level look like.

The second component is what does this mean for a patient population that experiences rejection and that is derived from the DART samples where we capture this rejection and a very strong data set on biopsies correlated with AlloSure. And then, we will read that out at the American Society of Nephrology.

That data set has been accepted at the Journal of American Society of Nephrology, JASN, which is a landmark publication in nephrology, so very exciting milestones coming up for us in the next few weeks..

Thank you. And then also on AlloSure, when are you planning to apply for coverage under evidence development, and how long does the approval process take? Thank you..

Great question. We had our pre-approval -- our pre-submission meeting with the folks from Palmetto and MolDX and have a very good understanding what are the requirements for us to take the next step.

So, as we are going through that process, which is -- and in process most important is the good clinical data and the presentation of the economic impact that we will have with AlloSure and we are in the process of providing the team at Palmetto with this information.

So, as we progress, we will update you on the milestones, which we think is the submission of the dossier is a key next step for us..

Thank you. And our next question comes from the line of Neil Gagnon from Gagnon Securities. Your line is now open..

Thank you. Good afternoon, Peter and Charles.

I’d like indication of how much extra is the CMS analysis and what costing you and will that cost you a similar amount in the fourth quarter?.

Neil, thank you very much for that question. I think last year we have talked about in summary the CMS challenge cost us about $1 million, probably little bit shy of that. But that’s in the same neighborhood. And if you think about we learned in May about the challenge, June and this will last until December.

Probably, dimensionally having that same level associated with it, it’s probably little bit less than that. This time around we had some learnings, but think about that number as a dimension..

Okay. So, we can look forward to that going away, cost level going away..

Yes, and I think there is a lot of opportunity cost associated with the company and management being very much involved which obviously is not in that number..

Good. Peter, Charles, thank you..

Thank you. And at this time I’m showing no further questions. Thank you for your participation in today’s conference. This concludes the program. You may all disconnect. Everyone have a great day..