Caroline Corner - IR, Westwicke Partners Peter Maag - President and CEO Michael Bell - CFO.

Kevin Ellich - Craig Hallum Nicholas Jansen - Raymond James.

Good day ladies and gentlemen and welcome to the CareDx 2017 Q1 Preliminary Financial Results Conference Call. At this time, all participants are in a listen-only mode. Following the management's prepared remarks, we'll host a question-and-answer session and our instructions will follow at that time.

[Operator Instructions] As a reminder, this conference is being recorded for replay purposes. It's now my pleasure to hand the conference over to Caroline Corner of Westwicke Partners. Ma'am you may begin..

Thank you for participating in today’s call. Joining me from CareDx are Peter Maag, President and Chief Executive Officer; and Michael Bell, Chief Financial Officer. Earlier today, CareDx released preliminary financial results for the quarter ended March 31, 2017. 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 on 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, May 22, 2017.

I will now turn the call over to Peter..

Thanks, Caroline. Good afternoon everyone and thank you for joining us. We've had a busy few months here at CareDx especially with the exciting progress on the AlloSure reimbursement fund.

Jim Gleason, President of TRIO, our patient organization dedicated to organ transplantation emphasized, the transplant community looks forward to having the AlloSure test available to support those long-term post-transplant life benefits. A great testimony to the immense patient need for better surveillance solutions for kidney transplantations.

Also as you may have, seen we've a new CFO on board. It's been great working with Mike over this last month with his expertise in both finances and in diagnostics we're working to streamline some of our financial procedures.

Mike has also brought in some of his friends from Deloitte to support our financial reporting team and to help and show we got every eye as we move ahead. I’ll have Mike go over our preliminary financial results, but I would like to first update you on the recent development.

Our strong revenue results this quarter reflect continuing growth of our flagship AlloMap test. You recall that AlloMap is a high-value diagnostic testing service that helps monitor heart transplant patients for the risk of rejection.

AlloMap revenues were in the range of 7.7 million to 7.9 million this quarter, which reflect a volume increase of 12% compared to the first quarter of 2016. We provided approximately 3,750 AlloMap patients results in the quarter. So, we are very pleased with our performance.

We continue to drive activities that increase the number of AlloMap per patient or the adherence to our surveillance protocol. As discussed before, many centers set their own protocols in adapting AlloMap in line with a standard follow up procedures.

We have gathered information through pilot studies in three centers that by supporting centers in organizing the AlloMap component of their surveillance protocol, we have significantly increased their adherence. We enrolled this program out to a total of 10 centers in the first half of this year.

But this program in full swing, we will continue to drive AlloMap underlying volume growth. With the efficiencies generated from this volume increase and the ROSE royalty payments ending after the third quarter, the roughly 65% gross margin in AlloMap will help to support our path to profitability.

Preliminary revenues for our pre-transplant Olerup business in the quarter were $3.7 million, which reflect a good quarter. As we have mentioned before our Olerup product, product offer the best-in-class HLA typing solutions for transplant lab that are matching organs to recipients.

You can find Olerup product in more than 50% of the roughly 1,000 HLA labs around the world. Last September, we launched Olerup QTYPE to drive further growth in our pre-transplant business. Reception to QTYPE continues to be very positive and we look forward to reporting back to you with a CE marking progress and validation of additional instruments.

So, we have solid revenues in our pre-and post-transplant co-product encompassing the continuum of care as we execute on our strategy to build the transplantation focus, multi-product genomic information company. We are very excited to be adding to our portfolio AlloSure and we have had some recent great news.

AlloSure, the first and only non-invasive test that uses donor-derived cell-free DNA to directly measure organ injury and identify the probability of active rejection. AlloSure is not only bringing transformational sequencing technology to the clinic, AlloSure is also a transformational product for CareDx.

With three major scientific publications, the relevant IPE through the [Indiscernible] acquisition, our best-in-class [KLF] and the commercial platform through AlloMap in place, we are extremely well positioned to execute on this opportunity.

Last month, we attained a draft local coverage determination LCD from Palmetto, no radian and other Medicare Administrative Contractor, MAC for AlloSure, the draft local coverage decision that issued following completion of the MolDX, the molecular diagnostic technical assessment process by Palmetto.

CMS has awarded Palmetto with the administration of the Molecular Diagnostics Program. During the technical assessment process, subject matter experts and the MolDX team determined, if an essay demonstrates clinical utility and fulfill the centers of Medicare and Medicaid services reasonable and necessary criteria.

For us, Medicare is so important that only because of the expertise of the team at MolDX in regards to high value diagnostic tests evaluation, but also because roughly 80% of all kidney transplantations are covered under Medicare.

This means our reimbursement efforts for others who are highly targeted especially compared with other diagnostic tests that need to go through lengthy negotiations with multiple payers.

As we laid out on our last call, there are three important phases of the MolDX process, the technical investment review, the local coverage decision and reimbursement pricing setting. We now have a draft LCD and we're moving towards the reimbursement in price setting phase. Subsequent to a positive final LCD, we will engage in pricing discussion.

We anticipate that we will have completed the reimbursement process in the second half of 2017 and are planning for full launch of AlloSure in October this year. We have shared with you previously that we continue to leverage our existing resources for product launch.

As 100 centers account for roughly 80% of the overall kidney transplant volume with a great overlap with our existing AlloMap offering, we are planning for a very efficient launch. On the clinical front, we presented AlloSure data at the 2017 American Transplantation Congress, which was very well received by transplant physicians.

Even more important for us where the many interactions that we had with investigators and key personnel from transplant centers who were eager to get their hands on the real life experience with AlloSure. With that excitement on great data and reimbursement underway, we feel very well positioned for the launch of AlloSure.

We are excited about AlloSure's market opportunity and we believe AlloSure has the potential to achieve more than $200 million in revenue. We hope to leverage our established expertise and commercial platform to make this a highly launch. How do we get there? I mentioned that transplant centers are highly concentrated group.

We will market AlloSure to the 200 kidney transplant centers in the U.S. starting with centers where CareDX hasn't established presence through AlloMap and the clinical trial presence through DART. Second, we focus on Medicare as a payer within its established relationship 80% of kidney transplantations are Medicare patients.

We have strong relationships with the MolDX program also based on our history with AlloMap. Repeat testing similar to AlloMap patients on AlloSure will follow our surveillance protocol, providing a recurring revenue opportunity with multiple tests provided.

And lastly, revolutionary technology targeted sequencing technology provides for fast turnaround time and competitive cost of testing. The approach of measuring cell-free DNA is already a proven game changer in oncology and prenatal testing.

Now, we look forward to updating you further on our launch strategy in providing some reimbursement updates on coming calls. Moving onto a quick update regarding our balance sheet, during the quarter we signed a debt agreement with JCB and we're in discussions to restructure our obligations with former majority shareholders in Sweden.

We believe these activities have the potential to increase our financial flexibility in front of our AlloSure launch. In closing, I'm very pleased that we received the draft LCD from Palmetto and hit that milestone as planned. But looking forward now, I'd like to remind you about our other milestones that we are excited about and you should monitor.

The potential restructuring of our obligations to the former majority shareholders of Allenex, the AlloSure pricing which is expected later this year and our launch in October, the Olerup QTYPE activities with CE mark expected later this year as well as continued growth on AlloMap as we rollout our AlloMap at home program.

I will now turn the call over to Mike to discuss our financials..

Thank you, Peter. Firstly, I'd like to say that I'm pleased to have joined the team at such a critical time and ahead of such large commercial opportunities.

While today we're reporting only preliminary results, I look forward to releasing final results in coming weeks and getting our financial protocols on track for more timely reporting in the future. Preliminary first quarter 2017 revenue is in the range of 11.4 million to 11.6 million, compared to 6.6 million in the first quarter of 2016.

The year-over-year increase in revenue reflects three drivers. First, Olerup contributed revenue of 3.7 million in Q1. Note that, we completed the acquisition of the Olerup business in April 2016. Second, AlloMap U.S. tests volume grew 12% in third quarter 2017. And third, we continue to improve our cash collection operations.

These two AlloMap-related drivers have resulted in AlloMap revenue in the range of 7.7 million to 7.9 million in Q1, up from 6.5 million in the prior year. For Q1, our preliminary net loss was in a range of 6.8 million to 5.8 million, compared to a net loss of 9.8 million in the same period of 2016.

I wanted to briefly comment on bringing our financial processes in order. The team here has faced some significant challenges because of the various acquisitions over the last 12 months. That together with the late filing of the 10-K impacted our ability to file the 10-Q on time.

We expect to file a 10-Q in the very near future and going forward we brought in Deloitte to work with the team to help us improve our financial close process and accounting controls. I'm already seeing the positive impact from this initiative and I'm confident that our future filings will be back on track for the next quarter.

You'll see from the strong revenue performance on AlloMap that the team has successfully enhanced the billing activities. I have two things we can continue to get better in that area. We've already upgraded a lot of the processes and activities, but based on my experience from previous companies, I see room to further improve.

In one of the upcoming calls, I'd be happy to update you on our thinking on how to further increase collections and reduce our DSOs. Turning to guidance, we've no change there. For 2017, we continue to expect revenue to be in the range of 45 million to 50 million.

Our guidance is based on AlloMap and Olerup revenue and excludes any potential revenue from AlloSure. I'll turn the call back to Peter for closing comments..

Thank you very much, Mike. We appreciate you joining the call. We're now happy to address any questions..

Thank you, sir. [Operator Instructions] Our first question will come from the line of Bill Quirk with Piper Jaffray. Please proceed..

I guess your first question here you reiterated guidance so, is it safe to assume given you're pretty far in 2Q at this point that volumes continue to track kind of according to your plan?.

Absolutely, AlloMap is doing very well. You see that the 12% growth in the first quarter has been a very good solid growth and we're tracking against our plans, absolutely..

And then maybe you could just kind of elaborate a little bit more on the AlloMap growth, obviously the 12% number was I think something higher than the street was looking for so maybe you can just elaborate on pockets of strength there? Is it sustainable maybe how should we be thinking about that metering itself over the balance of the year?.

Our activities to drive protocol adherence have bear or borne a number of fruits in key centers and they have been so positive that we're actually rolling this out in 10 more centers in the first half of this year.

We see on average Bill that roughly, if we look at the numbers patients experience about five to six AlloMaps over the lifetime after transplantation, and we think that based on these protocols it could be in the 10 to 12 AlloMaps range, if we activity involve all results in the process.

So translate that into 10 centers, there is going to be continued growth on AlloMap which is very exciting.

What we do here is we actually help these centers to schedule the AlloMap blood draw based on a predefined schedule, and by doing that, we ensure that they actually come to the center, gets the blood drawn and the AlloMap is in the Electronic Medical Record prior to the visit of the patient next time at the center.

So that has proven to be very exciting and important also medically for this patient to receive the AlloMap prior to the visit..

Okay great. And then I guess last question from me is just on AlloSure, I am thinking a few steps ahead here in terms of getting to the pricing decision by the MAC. How should we think about this, Peter, gap fill, crosswalk kind of any chatter that you can share at this point will be very helpful? Thank you..

I think there are really three important elements when thinking about these pricings and you've mentioned the couple. The first one would be a crosswalk type of methodology while MolDX is not using our crosswalk specifically here.

I think the really the analog products to be compared to is actually AlloMap is the post-transplant surveillance method on a slightly different technology gene expression profiling. But with the price of 3,600 list and 2,840, I think it sets a nice analog for as type of crosswalk methodology.

When we are thinking about considering the health economic impacts of AlloSure, clearly there is an easy comparison to alleviating the needs of biopsies in kidney transplantation and these biopsies are very invasive and obviously a big issue.

And then a bigger health economic impact even is the optimization of immunosuppressive therapy and the issues that are associated with immunosuppressive therapy over long periods of time.

And the third element clearly is what was the investment, what is the cost of producing the test that will come into an equation of an valuation on pricing of this product, and as there is underlying sequencing technology, you can probably appreciate that the experts on the MolDX side are very familiar with cost associated with on the one hand the evidence development, but then also with the cost of producing a result.

And we have a lot of experience with that, but I think these are the three major elements for pricing up AlloMap -- AlloSure, sorry..

Thank you. Our next question will come from line of Kevin Ellich with Craig Hallum. Please proceed..

So just following up on Bill's question on the strong AlloMap volume 4%, do you think you guys should be continue that type growth rate or you should be few more fluctuation as we the years goes on?.

I think if you look over the last few quarters, we have mentioned that we think of AlloMap growth somewhere between 5% and 10% range. This quarter has been a very strong quarter with 12% growth. I think it's a product that has really found its place as a standard of care in heart transplantation.

And what we saw actually last year that, there was a bit of an underlying uptick in organ availability, I think that has supported AlloMap growth, and Todd and the team are doing a very good job our Chief Commercial Officer, Todd Whitson who came over from prenatal diagnostics testing company and has really helped to shape our marketing and sales focus and drive volume growth.

So, yes, I think the 12% is a good growth and let's see what we can do in the second quarter..

And then just going back to AlloSure, and you know we understand you provided a lot of good detail on the process for the pathway for Medicare reimbursement and also you're looking for, you know and I know 80% of the kidney transplant patients are Medicare.

What about the commercial side? They're still 20%, would you expect commercial reimbursement to follow suit very quickly? And do you think it'll be in a same sort of range that you're looking at for Medicare?.

I think we've been very successful in the Company to not contract AlloMap below the Medicare rate, and in hindsight I think that has been proven to be a very wise decision, and so we continue to believe that that's the right way forward.

We do have relationships with payers that allow us to see the interest levels and there are few payers that I think are forward leaning and forward thinking about high value molecular diagnostic tests. I think we’re laser sharp focused right now on the Medicare reimbursement because it is 80% and we follow the 80-20 to 20 rule.

What you'll see actually in the draft local coverage decision what is very exciting is that there's not limitation on length of testing, so it actually AlloSure starts two weeks after transplantation and there's no limitation in terms of use.

And the second one is actually a relatively broad label where we think that we can actually provide a lot of AlloSure value to patients by monitoring these patients over a long period of time. So, I think that's we're very pleased with the outcome of the draft local coverage decision provided under Medicare..

Great and then on AlloMap, I think Mike mentioned 65% gross margin, I guess have you guys ever provided where do you think those margins can go? And then what should we expect once -- obviously we need to find out what the pricing will be for AlloSure, but you think we should see something similar in terms of gross margin on that product as well, that process as well?.

This is Mike. Yes, currently, the gross margin on AlloMap is between the 60% and 65% and absolutely as we launch AlloSure and that's about to take on some of the overhead related to AlloMap then, you know we're targeting around the 70% gross margin for AlloMap..

Okay and then Mike since I got you one quick one for you.

On the balance sheet, do you think you need to you know you mentioned you kind of wanted to structure the balance sheet a little bit? Can you give us any color you know what you bring over the last month since joining the Company? And also what do you want to do with the balance sheet? And where the cash burn lies right now?.

With respect to the cash burn, we're burning around 3 million a quarter on the operations; and with our current cash balance at the moment, that's going to get us well through the AlloSure launch. So, that's our first priority is to get us to that.

I think towards the end of the year, we want to strengthen the balance sheet further to allow us to you know to continue the commercialization into 2018. There's nothing specific we can share at the moment on that and when we can we will do..

Thank you. [Operator Instructions] Our next question will come from Nicholas Jansen with Raymond James. Please proceed..

First from me just on that last point Mike, I do believe from the Swedish shareholder perspective there's a deferred payment in July that you're hoping to push out.

Can you maybe just give some clarity on when that payment is due? How we should be thinking about the timeline for you guys to get rid of that or delay that?.

I think there're really two components for the Swedish shareholders. The one is the deferred acquisition payment, that's in the neighborhood of 6 million. And then the other one would be a loan agreement in the Allenex organization of roughly -- to make it -- they get to the $4 million. So, there's a total obligation to $10 million.

We've been in good relationship with the shareholders. They actually do own a significant portion of CareDx stock at this stage, so we've been in very good conversations, and we see them in the past having deferred some of these payments that we will be able to defer some of these payments going forward.

As we get closer to finalizing these agreements, we'll be sharing that news with you..

And then talking about the AlloSure commercialization I know you're going to be leveraging your sales force pretty aggressively given the overlap, but just wanted to get your thoughts on how we should be thinking about if there's any sort of incremental sales hires, any new incremental marketing programs and dollar spent on the upfront commercialization process as we kind of think about that $3 million per quarter of cash burn? Thanks..

Actually, we're going to launch this product with seven people in sales and four of the medical sales liaisons. So, 11 people in the field. We've upgraded our marketing team already in the first quarter, so don't expect large expenditures and then changes in terms of cash burn for the organization..

And then my last question would be, if PAMA was to kind of stick to its word in terms of using commercial rates as a benchmark for Medicare going forward.

How do we think about your existing AlloMap franchise, and I believe commercial is currently above what Medicare paid you at a time being, so how much incremental revenue or opportunity would that be, if that did get finalized as constructed?.

Thanks Nic for reminding me. We actually did mention that our calculation have led to a submission of 3,240 AlloMap pricing when we take the commercial contracted price. If we translate this into this roughly 15% sales increase to our overall volume on Medicare, we're talking about roughly 6% to 7% increase on same volume.

So, we see this as an upside opportunity. There's a lot of jitter in the market around the implementation of PAMA, but we see this as a key upside going into the next year..

Thank you. We have follow up questions from the line of Kevin Ellich with Craig-Hallum. Please proceed..

Peter just one follow-up for me, why does it take two weeks before you can start the AlloSure testing? Our understanding was that prednisone does not impact the testing capability like AlloMap?.

Kevin, I might not have understood your question.

Can you repeat it?.

Yes, I think in your prepared remarks you said that you can't expect AlloSure testing two weeks following the transplant, is that right?.

Yes, just after transplantation, when -- the procedure of transplanting an organ into an individual is causing a lot of damage of the cells and just to be on the safe side that really the cell-free DNA, so that the damage cells that we are measuring are really coming from a healthy and working organs.

There is a two weeks lapse after transplantation before we can perform the first AlloSure test..

Thank you. There are no further questions in the queue. For now, it is now pleasure to hand the conference back over to Mr.

Peter Maag, Chief Executive Officer for closing comments or remarks, sir?.

Well, this is a very quick. And thank you very much for attending the call. I am looking forward to updating you further on our further development. Thank you very much for joining..

Ladies and gentlemen, thank you for your participation on today's conference. This does conclude the program. You may all disconnect. Everybody have a wonderful day..