David Clair - IR Peter Maag - President and CEO Michael Bell - CFO.

Kevin Ellich - Craig-Hallum Bill Quirk - Piper Jaffray Nicholas Jansen - Raymond James.

Greetings, and welcome to the CareDx Fourth Quarter 2017 Earnings Conference Call. [Operator instructions] As a reminder, this conference is being recorded. I’d now like to turn the conference over to your host, David Clair. Thank you. You may begin..

Good afternoon, and thank you for joining us today. Earlier today, CareDx released financial results for the quarter ended December 31, 2017. The release is currently available on the Company’s website at www.caredx.com. Peter Maag, Chief Executive Officer and President; and Michael Bell, Chief Financial Officer, 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 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, expectations regarding coverage decisions, pricing and enrollment matters and our future financial expectations 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 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 sensitive information and is accurate only as of the live broadcast today, March 22, 2018.

This call will also include a discussion of a financial measure that is not calculated in accordance with Generally Accepted Accounting Principles. Reconciliation to the most directly comparable GAAP financial measure may be found in today’s earnings release, filed with the SEC. I will now turn the call over to Peter..

Clinical Implementation of Cell-Free DNA Testing for Transplant Patients. This well-attended symposium included presentations by several key opinion leaders in the kidney and heart transplantation fields. Interest from CEoT attendees in AlloSure was strong. We believe this represents a positive indicator for future adoption.

We are currently preparing for the American Transplant Congress meeting in Seattle in June, which will be one of our key highlights this year. 2017 was a banner year for CareDx. We achieved total revenues of $48.3 million, a year-over-year growth of 19%. We also secured Medicare reimbursement for AlloSure and launched in the fourth quarter.

Following this favorable Medicare reimbursement decision, an estimated 80% of newly transplanted patients have AlloSure Medicare reimbursement coverage. AlloSure represents a transformational opportunity for CareDx and addresses a significant unmet need, enabling better management of kidney transplant patients.

Just a few months into the launch, AlloSure is already making a positive impact on kidney transplant patients’ lives. During the initial quarter of the AlloSure launch, 32 centers began offering the test and CareDx provided 282 AlloSure test results to kidney transplant patients, representing $0.5 million in revenue.

We are very excited that this initial AlloSure momentum has carried over into 2018 with 47 U.S. transplant centers providing AlloSure testing to patients as of February 28th.

Importantly, the initial AlloSure update includes both patients that have recently received a kidney transplant and patients that have received their kidney allograft in previous years.

The AlloSure launch trajectory is in line with our projection and positions CareDx to deliver accelerated growth in 2018 and profitability during the second half of the year.

We developed the AlloSure routine testing schedule based on our prospective DART study as the recommended testing protocol to meet the surveillance needs of kidney transplant patients. The AlloSure recommended testing protocol includes seven tests during the first year followed by quarterly testing in the second year and beyond.

The recommended testing protocol established as standardized use across transplant centers and enables easier workflow through the use of standing orders as well as providing a recurring revenue opportunity for CareDx.

We are focused on driving adherence to the AlloSure routine testing schedule and have seen multiple centers utilizing the recommended testing protocol for their kidney transplant patients. We had mentioned in January that the number of standing order patients by end of December was 150 of the 250 patients that receive an AlloSure.

We define standing order patients as patients that will follow the surveillance protocol for at least one-year. As we make progress in our launch efforts, the number of standing order patients will be a key metric to follow.

In addition to our commercial efforts, we begin enrolling patients in our renal transplant registry as part of our Medicare coverage with data development.

As a reminder, our kidney Outcome AlloSure Registry effort, KOAR is a three-year study enrolling a 1,000 patients across 35 transplant centers with a primary endpoint centered on observing patient outcome at 1, 2 and 3 years, post transplantation and the total number of renal biopsies performed.

In addition to providing a wealth of clinical data, we estimate KOAR represents more than 1,000 AlloSure testing opportunities over the next five years, representing incremental AlloSure volume as well as another revenue driver going forward.

Consistent with our plans, the first KOAR patient was enrolled at the end of January and patients have continued to be enrolled in this innovative study. As of the end of February 2018, nine centers have been initiated as registry study sites, which was in line with our plan.

We will recognize a lot of the initial KOAR centers as key medical institutions in the United States including Brigham and Women’s Hospital, Tampa General Hospital, Baylor Scott & White, Saint Barnabas Medical Center, Washington University, John Hopkins, Medical University of South Carolina, University of Kansas Medical Center and the University of Colorado.

The clinical team is executing very well on all of our studies. We see in-house capability of running multi-center studies like KOAR as a strategic capability for the Company. It provides us with an additional touch point with a large transplant centers across the country and keeps us in direct dialogue with the key innovation hubs.

Now, shifting to AlloMap. Fourth quarter 2017 test volume increased 8% year-over-year, translating into 3,840 patient results. With associated revenue also increasing 11% to $8.1 million. Our efforts to increase AlloMap adherence will remain a key component of our growth strategy going forward.

But the focus of the team understandingly having shifted a little to AlloSure, we have identified 30 transplant centers where we believe patients would benefit from additional AlloMap usage.

We are also in progress to increase our field team by four individuals, which will allow us to reduce our number of territories and realize data coverage in major metropolitan areas like New York, LA and Chicago.

Additionally, recall that CMS recently implemented a change to its Date of Service policy, known as the 14 Day Rule, which became effective January 1, 2018. This change now allows CareDx to bill Medicare directly for AlloMap and AlloSure tests drawn in the hospital on the day of the patient’s clinic visit.

Previously, in addition to their normal blood work that was done at the hospital, patients would get blood drawn at a patient service center or at their home in order to receive an AlloSure or AlloMap test. As we are dealing with large medical institutions, it will take a while to implement this new workflow for AlloMap.

However, we believe this will ultimately have a positive impact on patient access to both AlloMap and AlloSure and will likely improve patient adherence to transplant center testing protocols. Also, effective on January 1, 2018, the AlloMap Medicare reimbursement rate increased by 14% to 3,240.

As a reminder, Medicare reimbursement has historically represented approximately 40% of our AlloMap revenue. We anticipate this reimbursement increase combined with the fourth quarter 2017 expiration of the Roche royalty to increase AlloMap gross margins to at least 65%, representing an important contributor to our future profitability.

Our pre-transplantation business with the Olerup product lines increased 7% in the quarter to $3.7 million, reflecting continued traction with our best-in-class, HLA typing products. We estimate that our Olerup products are used in more than 50% of the estimated 1,000 transplant labs worldwide.

We continue to make progress on our next generation HLA typing product Olerup QTYPE. As a reminder QTYPE offers significant improvement in HLA typing compared to legacy methods, offering a faster turnaround time compared to current methods.

By the end of February, we have performed demonstrations in 46 centers worldwide since our launch last year, actually 13 centers are using Olerup QTYPE on a regular basis today, which is testimony to the demand and the great customer relationships that we have.

I am pleased to announce that Olerup QTYPE is validated on both the Roche Lifecycle and the ABI instruments. And we anticipate CE marking as well as revenues on both of these platforms in the first half of this year. Olerup QTYPE represents an important growth driver for CareDx and should accelerate the Company’s path to profitability.

QTYPE also provides a differentiated platform to further establish CareDx as a transplant focused company with solutions along the patient journey and to facilitate the use of pre-transplant information for post-transplant patient management.

Now, I would like to make some comments on the progress we have made on another key priority, upgrading our financials. What a difference a year makes. This year, we are timely filers, have simplified our balance sheet and have clear sights to profitability.

Mike Bell, sitting across the table here, has done a terrific job since joining the team a year ago. We have made great strides in not only upgrading our finance team, but also in improving and simplifying our balance sheet.

We recently announced the signing of a binding commitment letter with Perceptive Advisors, which will enable us to consolidate all of our outstanding debt into a single term loan on the closing date of April 13, 2018.

I’m also pleased to stay that we have fully remediated the material weaknesses that were reported in our 2016 10-K, and that Mike and his team have put in place the necessary processes to allow us to consistently file our SEC documents in a timely fashion. I would now like to turn the call over to Mike to discuss the financials.

Mike?.

Thank you, Peter. I have to say that I’m incredibly excited by the progress the Company has made since I came aboard a year ago.

In addition to the launch of AlloSure, the team continues to make significant progress on our key finance and accounting objectives, which were to strengthen and simplify the balance sheet, to improve our financial reporting and controls and to set out a path to profitability.

As we’ve made tremendous progress in all these fonts, I’ll now be able to look forward and help build CareDx into a great transplantation focused company with global reach.

As Peter mentioned, we recently simplified our balance sheet with the signing of a binding commitment letter with Perceptive Advisors, which will provide a term loan of between $15 million and $35 million.

At the funding date of April 13th, we’ll use the new term loan to immediately payoff the remaining balance our JGB convertible debt, as well as the approximate $11 million owed to Danske Bank and the Allenex former majority shareholders.

As a reminder, our JGB debt includes the option for JGB to convert the March 1, debt balance of $26.6 million into CareDx common shares at a conversion price of $4.33 per share. If JGB elected to fully convert the outstanding principal, this would represent approximately 6.1 million shares.

For the JGB debt agreement, CareDx is required to give them a 30-trading-day notice period of our intention to prepay the debt, which we did on March the 1st. As of this time, JGB has given us formal notices of conversion for $20.7 million of the outstanding principal, which equates to 4.8 common shares.

The end of the 30-day notice period is April 13th, at which time we’ll draw over $15 million or $25 million from the new Perceptive Advisors term loan. We’ll also have the option to draw an additional $10 million tranche within the next 12 months.

Having the flexibility on what we initially and ultimately draw was very important to us, as it allows us to optimize our level of debt based on our needs. Our strengthened finance team also made significant strides remediating the material weakness that the Company identified during 2016.

As Peter mentioned, we were able to remediate all of those weaknesses for the 2017 10-K filing. Obviously, the Company went through a steep learning curve, but it was great to see the team rise to the challenge. Now, turning to the P&L. As mentioned, fourth quarter AlloSure revenue was $0.5 million.

We’re very pleased with the initial revenue and the momentum of AlloSure following the launch with the test trajectory in line with our initial expectations. Fourth quarter 2017, AlloMap revenue increased 11% year-on-year to $8.1 million. Our pre-transplant revenue increased 7% year-over-year to $3.7 million.

And as such total revenue in the fourth quarter of 2017 was $12.5 million, representing a 15% increase compared to the prior year’s $10.9 million. In addition, CareDx achieved revenue of $48.3 million for the full year 2017, which represents a year-over-year growth of 19%.

For the fourth quarter 2017, our non-GAAP net loss was $2.6 million, compared to a non-GAAP net loss of $2.7 million in the same period of 2016.

Cash used in operations in the fourth quarter was $2.1 million, which was in line with our expectations and our total cash at December 31, 2017 was $26.5 million, which consisted of $16.9 million in cash and cash equivalents and $9.6 million in restricted cash. Now, the $9.4 million of the restricted cash was related to our JGB agreement.

So that will become available for use when we refinance our debt in April. Turning to guidance. Our initial 2018 revenue expectation is in the range of $61 million to $63 million. We’re focused on driving the Company towards profitability.

And given our expectations for ramping AlloSure contribution as 2018 progresses, the positive Medicare price increase for AlloMap and growth of our pre-transplant revenues from Olerup QTYPE, we continue to anticipate reaching EBITDA profitability during the second half of 2018. With that, I’ll pass back to Peter..

Thank you, Mike. With our strengthened and simplified balance sheet, CareDx’s is positioned to solely focus on executing on the huge opportunity in front of the Company. I’m very proud of the team’s accomplishment in 2017, and I’m looking forward to another record year in 2018.

Before I open up the call for questions, I wanted to highlight the key elements and key events and full schedule we have for the remainder of the first half of 2018. On April 11th at the ISHLT congress in France, we will hold an AlloMap symposium introducing the concept combining AlloMap and AlloSure for heart transplant patients.

On April 13th, we anticipate to close our refinancing with Perceptive. That’s the next step in simplifying our balance sheet. In early May, we will report our Q1 financials and the progress we’re making on the AlloSure launch. Then, on May 11th, we will further accelerate customer interest at our Olerup QTYPE meeting during the EFI congress in Italy.

And finally on June 5th, during the AST conference in Seattle, we will hold an AlloSure symposium with a subsequent press conference on the same day. With that, I will open the call for questions..

Thank you. [Operator instructions] Our first question is from Kevin Ellich from Craig-Hallum. Please go ahead..

Good afternoon and thanks for taking the questions.

I guess, starting off with the guidance, Peter of $61 million to $63 million, could you give us any color as to how much you expect AlloSure to contribute to the guidance?.

That’s a good question. Well, thank you so much, Kevin. And I think, we are giving all this guidance on the total revenues to be expected. We’re not breaking it down on individual product level.

But, what we can say historically is that we have set our pre-transplant business to be growing in the mid single digit type and then AlloMap is growing in the mid-single digit volume wise and we’ll get a little bit bump on pricing. So, if you take that into consideration, the remainder would come out of the AlloSure franchise..

That makes a lot of sense. And then, thanks for the detail on how many centers you have in KOAR study.

How many patients have actually been enrolled?.

We’ll be updating you on the first quarter call on the specific enrollment numbers. We thought that for this call, the number of centers is really indicative on the ability for us as a company to execute. But think of business being early in the process and a very steep ramp, because once these centers are up and running, enrollment is going to start.

And we have given ourselves as a target for overall enrollment to be concluded at June next year. So, the last patient of the 1,000 patients roughly being enrolled in June 2019. And I think we are still tracking towards that target..

And then, switching over to Mike. I think you made the -- you gave the comment about JGB has provided formal notices.

Did you it was 20.8 million or 4.8 million common shares?.

I said $20.7 million of the principal had been converted, which is 4.8 million shares..

And that was as of today or March 1?.

As of today..

Okay, great.

Any way you could give us -- we have the December 31 cash and debt balances, any way you could give us the current balance as of today as well?.

Well, I think we will report the Q1 cash balance when we report the Q1 numbers. And of course, the current debt is a moving target. And we’ll be able to report on our sort of new debt number and where we are on April the 13th when we’ve completed the Perceptive term loan..

Our next question is from Yi Chen H. C. Wainwright. Please go ahead. .

Hello. This is Mitchell on for Yi Chen. Thank you for taking our questions.

So, our first question is how confident are you at meeting the 28% revenue growth guidance for 2018, given the number of 62 -- about 62 million?.

Well, I think, we are firing on all cylinders at the Company. You can see that AlloMap price increase has been a positive on the base business. You can see that Olerup type is really providing us a lot of tailwind in the pre-transplantation franchise. And then, AlloSure is, like I mentioned, the transformational opportunity.

47 centers starting to use the test in the first few months into the launch. So, I think a great number and indicative of the unmet medical need. So, we feel quite good about the big items. And it’s early in the year. But, we thought that this is a good guidance to provide and it is alongside what we’ve been targeting for as a company.

So, it’s a good number..

And then, do you have any plans to accelerate revenue growth potentially past that guidance?.

Well, obviously, we have all of our growth drivers firing away and all of them growing. So, I think right now, the guidance is the best we can do. And we will be updating you in our quarterly calls as we’re progressing and updating you versus guidance..

And then, do you foresee AlloSure revenue surpassing AlloMap by about 2019 or could it potentially be later than that?.

I think, we’re very early in the launch. As I mentioned, we are a few months into the launch. But given that AlloSure is a 10 times bigger market opportunity than AlloMap, I think this is well within the cart. Remember that AlloSure has 80% reimbursed right out of the launch gate.

So, it has taken the Company a very long time to get to the 80% reimbursement level. And we see that with AlloSure really one of the key elements for the success of this high-value molecular diagnostic test is the reimbursement rate right out of the October 9th launch date.

So, yes, there is a lot of dynamics that play positively towards the AlloSure launch..

Our next question is from Bill Quirk from Piper Jaffray. Please go ahead. .

Hi. So, I guess, first question is just thinking about the aspirational guidance on 2019 that you talked about in the last conference call. And it certainly seems to me given that your center expansion is running ahead of schedule, your KOAR trial enrollment is on schedule.

Is it -- can we move to the point where it’s not so much aspirational any longer and it’s becoming more concrete? Just curious how you’re -- what you’re thinking about right there..

Somehow, Bill, I’m not surprised that you are asking this question and we have been well rehearsing this question because obviously we’re giving guidance for 2018. But, nothing has changed in the Company in terms of our plans and our trajectory. If anything, I think, we’re seeing AlloSure tracking in many centers.

As you know that we wanted to be in 20 centers against last year and we superseded that goal. And then, in the first quarter, we’re already at 47 centers, which is a little bit ahead where we originally thought in our launch projections. So, we’re well on our plan.

I do think that we want to focus on the 2018 guidance and execute well against that number that we set our self. It does give me the opportunity to comment a little bit on the flywheel concept that we discussed earlier where the AlloSure ramp will be largely driven by standing order patients.

And so, think about the first quarter being significantly superseded in the fourth quarter where we have standing orders, adding to standing orders and the repeat testing really swings in. So, fourth quarter dynamic will be very indicative of 2019 total sales, because we’ll see the trajectory and growth rates in the fourth quarter really..

Fair point there. And actually just kind of thinking about the flywheel there. It looks like, and to be fair, we have all of one quarter here to assess this, but it looks like roughly half the AlloSure patients are on standing order.

Does that ratio kind of continue into the first quarter as well? I’m just trying to get a sense as to should we expect that the standing order percentage of patients, not volume, but patients will increase or stay roughly at the 50-50 range on a go-forward basis..

Yes. And I think that’s a good thing to monitor. I think, the standing order patients will grow rapidly because the KOAR registry will feed the pool of the standing order patients. So, in a way, the KOAR patients are really towards -- skew towards the standing order patients.

I have said in the past that I’m -- we were positively surprised about the number of patients that are in the year two, three and four that are coming into AlloSure. And these are not necessarily standing order patients, but these are patients that are tested once and twice. So, think of this as an interesting dynamic.

I think overall what’s very important is that the total number of standing order patients is growing. And we anticipate a steady growth of these standing order patients because that will mean the flywheel is continue to be set so to speak and is increasing..

Our next question is from Nicholas Jansen from Raymond James. Please go ahead. .

Hey, guys. Good afternoon. I just wanted to dive a little bit deeper into maybe reorder rates. And I’m sure -- certainly sure that of the 47 centers that are alive, there are some that are heavier utilizers than others.

But maybe just talk about the early experience from the October adopters and has no -- have they been more -- have you seen the October group improve and then the November group improve and the December group improve? Just trying to get a sense of how kind of the segmentation of the adopters have been so far..

Nick, great question. Think of us as having rehearsed very well with the AlloMap launch is always this protocol adherence. So, adhering to this protocol is absolutely critical.

And once the patient is placed on standing order, we do have our team in place that is myopically focused on making sure when is the next testing opportunity and how can I schedule this patient and make sure that he gets the AlloSure at the right time.

So, I would say that -- I mentioned 150 standing order patients, this is well within our capability of managing 150 patients. And we are really driving adherence on these patients. In terms of the percentage of adherence, it’s very high right now. So, we feel very good about it.

It will never be a 100%, but this adherence north of 70% that we’re aiming for in the KOAR study, seems well within reach. But keep in mind that the first adherence is going to be significantly easier since these patients are mostly still treated in the hospitals versus adherence in year two and three and the protocol will be a little bit tougher.

But, no, we are driving adherence on AlloSure very, very tightly..

And then, my second question would just be on, as you think about the sales force, I believe you said you’re going to be adding four people.

Just curious, your thoughts on kind of the realignment and where those bodies are being added? And how do we think about, if it’s necessary to even add more bodies to be organization given the size of the opportunity ahead of you?.

What we have learned in the first few weeks that in these metropolitan areas, it really pays for having close interaction with the transplant centers. And these large transplant centers well justify individual and personal attention.

Probably also true, we learned in the last three months with all the weather that flying from even from major airports wasn’t that easy. So, cutting the territories into 10 territories across the U.S. seem to be the right thing for us to do at this stage.

And we think that adding four to our existing field force is not dramatically expanding it but that gives us good size. So, don’t think of us as now every quarter adding in additional territories. I think, we feel very comfortable to be able to cover the universe..

And then, my last question for you, Mike, maybe in terms of just -- if everything plays out as you expect in terms of the debt conversion, what’s the fully diluted share count including options that we should be thinking about, exiting let’s call it 2Q?.

Well, Nick, there is -- prior to giving JGB the conversion notice on the March 1st, we had 29 million outstanding. They can convert 6 million. And then on top of that with warrants and options there is another 6 million. So, it’s around 41 million shares..

This concludes the question-and-answer session. I’d like to turn the floor back over to Mr. Maag for any closing comments..

Well, thank you very much for joining the call. We look forward to updating everyone as we continue to commercialize AlloSure, grow AlloMap and our pre-transplant business, and progress towards profitability. Thank you very much..

This concludes today’s teleconference. Thank you for your participation. You may disconnect your lines at this time..