Greetings, and welcome to the CareDx Inc. Second Quarter Financial Results Conference Call. At this time, all participants are in a listen only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] Please note, this conference is being recorded. I would now like to turn the conference over to your host, Mr.

David Clair, Investor Relations. Thank you sir. You may begin..

Good afternoon, and thank you for joining us today. Earlier today CareDx released financial results for the quarter ended June 30, 2019. The release is currently available on the company's website at www.caredx.com. Peter Maag, Chief Executive Officer; 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 includes 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 fact, 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 and results are based upon current estimates and various assumptions.

These statements involved 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 description of the risks and uncertainties associated with our business, please see our filings with the Securities and Exchange Commission. The information provided in this conference call speaks only to the live broadcast today August 1, 2019.

CareDx disclaims any intention or obligation except as required by law to update or revise any information, financial projections or other forward-looking statements whether because of new information, future events or otherwise.

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..

Testing Services, Products and Digital. In Testing Services, this quarter's AlloSure patient result growth and unique patient-tested represent demonstrable proof that we continue to widen our first mover advantage as we strengthen our platform every day.

For the second quarter of 2019, total revenues were $31.5 million, increasing 76% compared to the year ago quarter. Growth in the quarter was broad-based with Testing Services revenue up 83%, Product revenue up 29% and Digital Revenue primarily coming from our recent OTTR acquisition contributing $1.2 million to the top line.

Turning to numbers on AlloSure, during the second quarter 117 centers provided AlloSure results to their transplant patients. We estimate these 117 centers account for approximately 65% of the transplant volume in the United States. CareDx provided 7,355 AlloSure results in the second quarter to approximately 5,548 kidney transplantations.

I repeat that number. 5,584 kidney transplant patients. Since launching AlloSure in October 2017, we have provided results to over 10,000 patients, which equates to approximately 5% of the total number of living kidney transplant patients in the U.S.

Demand for AlloSure remains broad and includes both patients who recently received a kidney transplant as well as patients that received their kidney allograft in previous years. We take great pride in providing the highest quality products and services and recognize the importance of quick turnaround time.

This patient focus drives everything we do from the ordering process to the blood draw, to providing the result. We recently set a new benchmark in turnaround time by providing a patient result in less than 20 hours from the time of the blood draw.

This is not only optimized for the needs of transplant patients, but we believe it is also best-in-class for sequencing based testing solutions. Combined with our phlebotomy network, at transplant centers and mobile draw partners, this represents another example of our competitive mode. Time to result will ultimately be a CareDx competitive advantage.

Our 20-year commitment to transplantation has given the company a better understanding of workflow in transplant centers than anyone in the industry. The CareDx team is committed to constantly push the boundaries, improve our products and services and make a difference in transplant patient lives.

We finished the second quarter of 2019 with 4,618 surveillance patients. We define surveillance patients as patients that are managed by CareDx on a predefined transplant center testing protocol. These 4,618 surveillance patients help build the recurring revenue effect of AlloSure.

Note, that in the second quarter 1,347 surveillance patients were added to the 3,644 surveillance patients that started the quarter. 337 -- 373, sorry, the right number 373 surveillance patients have standing orders that expired during the quarter and that had been not renewed by the end of the quarter.

We define this as attrition, which equates to 10% in the quarter. Overall reimbursement in the second quarter was also consistent with previous quarters with 70% to 80% of our AlloSure volume attributed to Medicare patients. Medicare reimbursement has been granted through the MolDx program at Palmetto.

We believe that AlloSure reimbursement will next be discussed with this group once we report the clinical study outcomes of the initial 1,000 K-OAR patients. These 1,000 patients will be followed for three years. Therefore, we expect this discussion will occur in approximately 2022.

We continue to make progress enrolling centers and patients in K-OAR, our kidney outcome AlloSure registry, having surpassed our initial 1,000 patient enrollment goal. As of the end of June 2019, 51 centers have been initiated as K-OAR study sites and 1,204 patients have been enrolled.

Recall that in the K-OAR study, we target 75% adherence to our AlloSure surveillance protocol. Multi-center studies like K-OAR deepen our engagement with the transplant ecosystem, as these studies provide us with additional touch points with transplant centers and keep up in direct dialogue with the key innovation hubs and opinion leaders.

These studies also drive compliance and adherence to standard protocols, which is a crucial element to our work in the transplant community. Now shifting to heart, second quarter 2019, AlloMap testing volume increased 11% year-over-year translating into 4,572 patient results.

The uptick in the underlying heart transplant volume growth and the adoption of HeartCare through the SHORE Registry study accelerated AlloMap volumes in the quarter. HeartCare combining AlloMap and AlloSure Heart continues to see increased adoption in the transplant community.

Caregivers appreciate the comprehensive view of the health of the heart allograft enabled by HeartCare. Our surveillance HeartCare outcomes registry or SHORE study continues to gain traction with transplant cardiologists and we have recruited 15 centers to date. Next, we turn attention to our transplant lab products.

Our HLA typing products are used in labs throughout the world to help determine, which organs or bone marrow are a transplantation match between the donor and the recipient. Our second quarter product revenue growth was 29% contributing $4.6 million to our revenue in the quarter. Growth was driven by continued traction of TruSight HLA and QTYPE.

We remain on track to fortify our product offerings with the introduction of new AlloSeq next generation sequencing products in 2019. AlloSeq TX for HLA typing AlloSeq cell-free DNA kits for solid organ transplants, and AlloSeq HCT for bone marrow transplantation. This quarter, we are reporting revenues for our digital business for the first time.

With the closing of the OTTR acquisition CareDx has broadened its footprint. The transaction closed in early May. With eight weeks under the CareDx umbrella generating $1.1 million in revenues for the quarter. Approximately 50% of our digital business is based on recurring revenues with the remainder being services and one-time license fees.

The non-recurring revenue can be a little bit lumpy on a quarter-by-quarter basis depending on the timing of implementation at transplant centers.

A highlight in our digital business this quarter was the go live at Dana-Farber Institute which will now manage the bone marrow transplant program with our OTTR patient management software, a shout out to the team in Omaha doing a great job.

The digital team will continue to focus on serving transplant centers with the OTTR suite of software solutions. In addition, we will enhance the workflow solutions for AlloMap and AlloSure in centers with other software. The team will also spearhead our efforts to create a patient engagement platform.

And finally, the team will bring our multi-modality testing solutions and machine-learning algorithm to the transplant clinic under the iTrack umbrella. Over the last 20 years, we have been a trailblazer in transplantation developing proprietary clinical biomarkers and successfully navigating the reimbursement landscape.

In this next phase of the company, we are setting the bar for multi-modality testing combining our know-how of gene expression and next-generation sequencing-based technologies. Our vision is to add smart analytics and machine learning to artificial intelligence in transplant care which we call iTrack.

iTrack will utilize the large clinical datasets collected through our registry studies to provide caregivers with point of care decision-making support tools that allow them to stratify their patient population. With a licensing agreement with Cibiltech and the relationship with Alex Loupy and his team.

CareDx has made a first step into providing prognostic information based on artificial intelligence solutions. The iBox information paired with our broad surveillance offering is a way to better stratify patients and the start of the development of Care Pathways and clinical decision-making tools.

Our vision to provide precision medicine tools alongside high value diagnostics to a complex and costly patient population is just in its beginning. I am extremely proud of the CareDx team and its accomplishments.

Novel and innovative technologies like these widen our competitive mode and position CareDx to expand its leadership position going forward. Consistent with our expectations you will note that, we have accelerated our operating expense levels this quarter.

This was driven firstly by our dedication to clinical research and development to accelerate the experience of transplant centers with our solutions and to make our solutions available to more patients.

On an adjusted annual run rate basis, we are now spending $25 million on transplant research and development, which we consider a tremendous signal of commitment to the field of transplantations. We see very few companies in our space, if any matching this commitment.

Secondly, we have increased the number of our field-based testing services personnel to 50. This increase will enable us to support transplant centers better than ever and means we are well positioned versus potential competition. We are excited about expanding our role. Mike, I'll hand the call over to you to discuss financials..

Thank you, Peter. Turning first to the income statement our second quarter 2019 testing services revenue increased 83% year-over-year to $25.7 million. The significant growth in Testing Services revenue was primarily driven by the 7,355 AlloSure patient results, we provided in the second quarter.

Growth also came from the 4,572 AlloMap patient results we provided which was an 11% increase compared to the prior year quarter. Our second quarter product revenue increased 29% year-over-year to $4.6 million. With the recent addition of OTTR, our patient engagement model is expanding.

Digital and other revenue for the quarter was $1.2 million and we continue to expect our digital business to deliver revenue of $4 million to $5 million in 2019. Total revenue for the second quarter of 2019, was $31.5 million representing a 76% increase compared to the prior year's $17.8 million. Our gross margins continued to improve year-over-year.

For the second quarter of 2019, the overall gross margin was 63%, compared to a gross margin of 60% in the same period of 2018. The non-GAAP gross margin for the quarter was 67%, compared to 63% in the prior year quarter.

It's worth highlighting that the non-GAAP gross margin for the testing services business for the three months ended June 30, 2019 has improved to 72% compared to 70% in the same period of 2018. For the second quarter of 2019, the net loss was $7.8 million compared to a net loss of $14.1 million in the same period of 2018.

Our net loss per share was $0.19 for the quarter, compared to a loss of $0.40 per share in the second quarter of 2018. Our second quarter 2019 net loss included a $5 million stock-based compensation expense and a $1.4 million loss from the change in estimated fair value of common stock warrant liabilities.

For the second quarter 2019, our non-GAAP net loss was $0.1 million, compared to a non-GAAP net loss of $1.3 million in the same period of 2018. Our non-GAAP net loss per share was $0.00 for the quarter compared to a non-GAAP net loss per share of $0.04 in the second quarter of 2018.

As a reminder, we define adjusted EBITDA as non-GAAP net income before interest income tax, depreciation, amortization and other expense. For the second quarter of 2019, adjusted EBITDA was a gain of $0.1 million compared to a loss of $0.8 million in the second quarter of 2018.

This marks our fourth consecutive quarter where we had positive adjusted EBITDA. As Peter mentioned earlier and as we indicated on the last earnings call, we increased our operating expenditures in the second quarter of 2019 to further enhance our leadership position in transplantation.

Operating expenses in the quarter reflect our fully expanded Testing Services field-based team, our significant presence at major trade conferences such as ATC and EFI, our continued investment in clinical studies such as K-OAR and SHORE and our new focus on digital through the acquisition of OTTR.

We expect our operating expenses will modestly increase in future quarters as we continue to build a platform for future growth. Cash and cash equivalents at June 30, 2019 were $43.5 million, compared to $57.4 million at the start of the quarter. The movement in cash in the quarter included $16 million for the OTTR acquisition.

Net operating cash flow was positive $3.6 million in the second quarter of 2019. We continue to expect positive operating cash flow for the full year 2019. Turning to guidance. We are updating our 2019 revenue expectations through the continued growth of our business and anticipate $123 million to $125 million for the year.

As a reminder, this includes $4 million to $5 million from the OTTR acquisition which closed in May of this year. With that, I will open the call for questions..

Thank you. At this time, we'll be conducting a question-and-answer session. [Operator Instructions] Your first question comes from Bill Quirk with Piper Jaffray. Please proceed with your question..

Great. Thank you and good afternoon everyone..

Good afternoon, Bill.

How are you doing?.

Good, good. So a couple of questions. First, could we start off on guidance? Mike, Peter made the comment that you were seeing some increased volumes coming out of ATC.

And certainly moving your guidance up above the beat as well as the addition of OTTR, certainly would suggest that you've seen a nice follow through on that strength here early in the third.

Is that kind of the right read through here?.

Yes Bill. We've seen a nice follow through and with the results of the second quarter we've increased our revenue guidance by $10 million compared with the previous guidance. So we're still guiding for continued growth sequentially through the rest of the year..

Perfect. And then, I guess a question for Peter. Peter, how should we think about timing on the KidneyCare data? Certainly, there was a lot of excitement at the recent conference, but I think some of the physicians admitted that obviously they want to see the data follow through.

And so, when should we be expecting that?.

Thank you very much. Excellent question, Bill. Obviously, KidneyCare comprises AlloSure on the other hand our cell-free DNA test. Then our AlloMap kidney which is a gene expression profiling technology. And then the third is this prognostic element of iBox.

As the company has always done, we are launching this through a clinical registry study or an observational drive, making sure that our customers and our clinicians that are working with the solution have a framework to engage patients and understand how to provide that information.

While AlloSure is a validated fuel lab test, then AlloMap kidney and iBox are still in a phase of rapid development as we gain more and more information. So we will really bring that and make that available probably in the second half of this year.

We're shooting for the third quarter and making that available through an OKRA study which will be another landmark trial that the company is engaging in..

Okay, got it. And then last question from me. As it relates to the recent activities by the current administration to increase both access to kidney transplant improved dialysis etcetera.

How should we be thinking about the practical implications and/or the timing? I mean it certainly strikes us that any and all efforts to try to get additional kidneys into the donation pool are obviously going to find recipients given the wait list.

But how close are you to some of those activities and how quickly do you think that's going to start to have a meaningful impact on the number of kidney transplants each year? Thank you..

Thanks for the question. It's seven years when I joined CareDx and we built this focus on transplantation. If one would have said that the President and the Head of Health and Human Services would be on the podium and announcing a strengthening of transplantation, nobody would've expected that.

So this focus on transplantation is completely in line what we've been seeing and the opportunity that we've been seeing. We see that this is an absolute confirmation about the medical need and then also the market potential that we see which we have been estimating at $2 billion and beyond.

So in that sense this will be a mid-to-long-term increase in transplantation. But we do hope that even next year, we are already see an acceleration of available organs by making sure that the for example the organ procurement organizations are being more effective in making sure to make organs available.

If we were to apply the rules that are happening, for example in France onto the American organ population we would be seeing an increase of about 3,000 organs which would be a 15% increase on our current organ availability.

So yes, there's very tangible things that we see happening and currently we're growing about mid-single-digit on our kidneys organ. I think that could be doubling by next year. So a 15% organ growth for next year is more than possible..

Very good. Thanks guys..

Our next question comes from Brandon Couillard with Jefferies. Proceed with your question..

Thanks, good afternoon. Peter appreciate all the detail around the attrition rate figures in the period. I think that pretty much puts that question to bed. I want to focus on the number of ordering, AlloSure centers in the period. You've kind of been flat lining the last few quarters at around 100 -- spiked up to 117 this period.

Can you sort of speak to the drivers of that?.

Brandon, thank you very much. And you know this follows exactly our strategy where we had said for this year, it's all about going deep into the individual center making sure that we are a part of the workflow. We do place the protocols and we are very strong in converting K-OAR centers into regular ordering centers.

So our goal was not to increase the 100 centers in the beginning of the year. Our goal was to go deep in these 100 centers. So 117, I think is testimony to the great reception we had at ATC. We see that as a nice increase.

But really the success that you see in our launch strategy is that, we're going deep and have more patients per center where we are existing present and going deep in these centers. It's very positive. So this number 117 is a great number because it's the number of ordering centers in the quarter.

That might notch up a little bit, but really what I'm focused on is how can we grow the high volume target centers that are within that 117..

More broadly could you sort of speak to some of the initiatives you're working on internally to improve the compliance and adherence rate for AlloSure patients?.

I think one of the most exciting elements that we have added to our field team is the patient care managers, where we are now engaging and supporting transplant centers in managing these patients longitudinally.

Initially, we helped these centers by just making sure that patients get their blood draw scheduled and are coming back to the center in their regular surveillance interval. And we have seen that this compliance and adherence is a key challenge in a center because tertiary care centers in the U.S.

are not well equipped to have this longitudinal patient care management. And CareDx can really make a significant contribution in that because this better surveillance will lead to better outcomes. So having patient care managers that directly interacting with these patients is very, very valuable.

And we believe that we can impact adherence and compliance. Today in a way this is low hanging fruit because compliance and adherence we talked about is probably 70% to 80% on our K-OAR patient population and only about in the 60% range in our surveillance patient population outside of the K-OAR.

So this could be a significant value driver also long-term as we continue to increase patient penetration..

Thanks and then 2-part question for Mike. The first one the guidance for the year. You put up double-digit growth for AlloMap through the first half of the year. Are you still thinking that's mid-single digits for the full year? And then secondly could you speak to the account receivable jump in the second quarter? Thanks..

Firstly, Brandon on AlloMap I think over the last two quarters now we've seen the AlloMap growth be in the sort of 10% 11% range and some of that increase is coming from the driver of SHORE being rolled out. So I think we're looking at the remainder of the year to probably continue around this 10% low double-digit growth for 2019.

With respect to the AR the biggest impact on that was that we added the OTTR acquisition. So that added something like about $2.5 million in accounts receivable. The rest of it is just coming from the growth on the Testing Services business as we ramp up the revenue. It's obviously increasingly AR..

Okay. Thank you..

Our next question comes from the line of Per Ostlund with Craig-Hallum Capital Group. Please proceed with your question..

Thanks. Good afternoon guys. Wanted to follow-up Peter on your answer to one of Bill's questions about KidneyCare and the upcoming rollout and launch.

And as you're thinking about building your registry, can you give us a little bit of a handle on what you're thinking in terms of size and scope of an OKRA study versus K-OAR? Are you thinking of a similar size patient cohort center count, et cetera? And how much can you piggyback seamlessly on the infrastructure of the K-OAR study in terms of IRBs and that sort of thing to really smooth the start of the trial?.

Well, thank you very much for the question. I think in terms of the details of the OKRA study, we'll be shortly announcing the details of the OKRA study. I think we as a company tend to speak about these trials when we have a first patient, first visit enrolled. That has been common practice at CareDx.

We always want to talk about things once we have them ready and launched. In the sense of how to think about in broad strokes, we think about it as an extension of K-OAR think about it as a K-OAR 2 in a way of the same type of magnitude of trials. So that should give you some kind of a data point.

It will be 1,000 or more patients and it will be three-year follow-up.

And it will be accompanied with all the toolsets that we have in the company to make sure that we have a data repository that allows us to do not only iBox and AlloMap and AlloSure, but also build a basis for iTrack where were are trying to go towards the next step of having smart analytical solution based on machine learning and artificial intelligence..

Okay. Very good. And since you mentioned OTTR as well, if we come back to that, it sounds like in terms of the revenue contribution that's very much tracking against expectations.

From the electronic medical record standpoint, how are you seeing that roll out and what should we be thinking of in terms of timelines for you being integrated with OTTR centers?.

The team is doing a fabulous job on this, but it is also a few weeks into the acquisition. So I think we have launched now the initiatives. The teams are working, I would say night and day.

And so I think we're on the next earnings call, we'll be able to update on how good we are on seeing not only the ability to integrate this into the OTTR system, but also provide the solutions at those centers where OTTR has been used even that are using the EPIC platform.

So I think we'll be able to probably in three months time to be able to talk about our electronic medical records. In general, being part of the electronic medical record will widen our moat and we see that as a possible opportunity for us to accelerate our remote building in transplantation..

Okay. Very good. Thank you, Peter..

Our next question comes from the line of John Hsu with Raymond James. Please proceed with your question..

Good afternoon..

Hey, John.

How are you doing?.

Doing well, thanks Peter. Good afternoon. If we could just go back to the guidance for a second, I just want to be clear. I believe the last time you provided guidance the $4 million to $5 million for OTTR Software was already included. So net-net the improvement is roughly $10 million.

So can you just help us think about maybe the different pieces that are driving that between AlloSure as well as transplant products and then also AlloMap?.

Yeah, John, it's Mike here. Yes, in the previous guidance which was $113 million to $115 million that included the $4 million to $5 million for OTTR. So that stays consistent in the revised guidance. Again, in the previous guidance, we'd been talking about product growth for the full year being around the 20% mark. And that stays the same.

So the difference in guidance is coming from AlloMap. And again, we've said the growth now we're seeing is this 10% to 11% and that's probably going to continue for the rest of the year. And then the remainder of the growth, obviously then coming from AlloSure and the continued traction there..

Okay. Great. Thanks for that. Then just looking at a couple metrics that you provided, it looks like surveillance patients seem to actually accelerate quarter-on-quarter. And yet the number of K-OAR patients actually decelerated. So, it would seem that even outside of K-OAR that you are actually driving acceleration in kidney.

So, can you just speak to just some of the trends that you're seeing there in terms of surveillance patients being added?.

Yeah. And John, I think you're really picking up on the most important number when we look at our metrics. The one number that we focus on is the surveillance patients. And you're mentioning it's slowing. There's still 200 K-OAR patients added, which is nice.

But really the 1,000 patients -- and so that would be 800 additional patients outside of K-OAR being added onto the quarter. That's really the excitement in the organization, because that is supporting our flywheel concept of patients that we care for longitudinally.

And we are able to potentially improve long-term outcome of these patients by better monitoring. So this 4618, I think is a phenomenal number for us. The team has done a great, great job, and I think it speaks testimony to that we have moved way beyond K-OAR already in patient adoption and clinician acceptance of the test.

Besides the 117 centers, which I think is strong the 4,618 surveillance patients is really the very exciting number on our metrics..

Okay, great. And then last one from me. Just thinking about -- you obviously have a lot of irons in the fire and great momentum in the current business.

But if we had to think about maybe timing on reimbursement pathways for maybe a couple products, and I'll just throw them out there for HeartCare if there is some potential incremental reimbursement down the line or for AlloSure in lung. If you could just provide us any update as far as your thoughts on how those might be progressing. Thank you..

No and I think we've been always talking about that we're progressing those on reimbursement. I think we have very strong validation data. We have publications for example on HeartCare that will drive the clinical validation of the combination of gene expression profiling and cell-free DNA.

I think in the past when talking about additional upsides, we always said we were actually happy if we continue to stay at the current AlloMap reimbursement rate. We do see an opportunity for potentially increasing the reimbursement size there as well.

So, we have not had in-depth discussions with MolDx that we would go through that route as well on these products. So I think as this will unfold, we will update you on the progression. But I think in terms of guidance, I would keep to the current reimbursement levels of these two products, and we spit out the 2020 tool for AlloSure.

So, I think it puts a marker on on how to think about our continuous reimbursement level..

Okay. Fair enough. Thank you so much..

Thank you, John..

[Operator Instructions] Our next question comes from Yi Chen with H.C. Wainwright. Please proceed with your question..

Thank you for taking my question.

Looking at the test volume of AlloSure developed by the kidney transplantation, the test per patient remains at 1.3 for first and second quarter, is there any chance that this number can go up during the remainder of 2019? Or this number will remain relatively static?.

Hi, Yi. This is Mike here.

I think at the moment with the trends we're seeing with respect to the patients that are on a surveillance protocol and the adherence rates for K-OAR and for the non-K-OAR surveillance patients, then probably this rate of 1.2, 1.3 is probably going to stay consistent for the remainder of the year unless that mix of surveillance patients to non-surveillance patients was to change..

Okay. Thanks. And also I noticed that for the second quarter, there was increasing R&D and sales and marketing expenses.

Do you think the increase in the test volume order the top line revenue is in proportion to the increase in these operating expenses?.

I think we did have an acceleration of operating expense this quarter. I talked about it earlier, being related to expanding the field and now we have 50 people, the studies that we're doing. We had expense related to the trade conferences and our sore of large presence at those conferences this quarter.

And then of course there was the addition of OTTR. And so, we did see a bump up. I think I mentioned, we'll continue to increase the operating expense, but it probably won't see a bump up like that for the remainder of the year. And so, I think the operating expense growth will slow down for the remainder of the 2019..

Thank you..

There are no further questions left in the queue. I would like to turn the call back over to management for any closing remarks..

Well, thank you very much for joining the call as we are building an exciting transplantation business. Thank you very much for your interest. Goodbye..

This concludes today's teleconference. You may now disconnect your lines at this time. Thank you for your participation, and have a wonderful day..