Castle Biosciences, Inc. (CSTL) on Q2 2023 Results - Earnings Call Transcript
Operator: Good afternoon, and welcome to Castle Biosciences Second Quarter 2023 Conference Call. As a reminder, today's call is being recorded. We will begin today's call with opening remarks and introductions, followed by a question-and-answer session. I would like to turn the call over to Camilla, Vice President, Investor Relations and Corporate Affairs.
Camilla Zuckero: Thank you, operator. Good afternoon everyone. Welcome to Castle Biosciences' second quarter 2023 financial results conference call. Joining me today is Castle's Founder, President and Chief Executive Officer, Derek Maetzold; and Chief Financial Officer, Frank Stokes. Information recorded on this call speaks only as of today, August 2, 2023. Therefore, if you are listening to the replay or reading the transcript of this call, any time-sensitive information may no longer be accurate. A recording of today's call will be available on the Investor Relations page of the Company's website for approximately three weeks. Before we begin, I would like to remind you that some of the statements made today will contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements include, but are not limited to, statements about our financial outlook, TAM, and similar items referenced in our earnings release issued today and statements containing projections regarding future events or our future financial or operational performance, including our anticipated 2023 total revenue and our 2023 to 2025 outlook, our expectations regarding reimbursement for our product, and the impact of our investments in growth initiatives and expanded commercial teams. Forward-looking statements are based upon current expectations and involve inherent risks and uncertainties, and there can be no assurances that the results contemplated in these statements will be realized. A number of factors and risks could cause actual results to differ materially from those contained in these forward-looking statements. These factors and other risks and uncertainties are described in detail in the Company's quarterly report on Form 10-Q for the year ended December 31, 2023, under the heading Risk Factors and in the Company's other documents and reports filed with the Securities and Exchange Commission. These forward-looking statements speak only as of today, and we assume no obligation to update or revise these forward-looking statements as circumstances change. In addition, some of the information discussed today includes non-GAAP financial measures such as adjusted revenue, adjusted gross margin, and adjusted EBITDA that have not been calculated in accordance with Generally Accepted Accounting Principles in the United States or GAAP. These non-GAAP items should be used in addition to and not as a substitute for any GAAP results. We believe these metrics provide useful supplemental information in assessing our revenue, cash flow, and operating performance. Reconciliations of these non-GAAP financial measures to the most directly comparable GAAP financial measures are presented in the tables at the end of our earnings release issued earlier today, which has been posted on the Investor Relations page of the Company's website. I will now turn the call over to Derek.
Derek Maetzold: Thank you, Camilla, and good afternoon, everyone. As you saw from our announcement a few minutes ago, Castle Bioscience has delivered yet another strong quarter growing revenue by 44% and total test report volume by 52% compared to the second quarter of 2022. Based on strong first half execution and confidence in our business, coupled with our expectations for the second half of 2023, we are raising our full year revenue guidance and currently expect to deliver at least $180 million, an increase of 31% over 2022. Before I get into the quarterly highlights, let me address some of the excitement around our DecisionDx-SCC test. First, let's talk about coverage. We were reviewed by the Medicare contractor Novitas in the first quarter of 2022 and received coverage since April of 2022. Separately, Novitas published on July 27, 2023 a proposed LCD entitled Genetic Testing for Oncology. This proposed LCD attempts to encompass genetic tests that are used in oncology and includes language that proposes non coverage for DecisionDx-SCC, among a number of other laboratory tests. The common period closes on September 9, 2023. Separately, on June 8, 2023, both Palmetto, Moldyx and Meridian posted proposed LCDs recommending non coverage for DecisionDx-SCC. The common period for these Medicare contractors for the proposed LCDs ended on July 22, 2023. 2nd, we were extremely pleased to see that the Division of New Technology of CMS completed its review of our application for Advanced Diagnostic Laboratory Test Status, also known as ADLT Status. As we expected, we were granted ADLT Status effective June 30, 2023. There are four criteria that need to be met to achieve ADLT status. One of the criteria means that we have proven that our DecisionDx-SCC test yields a test result that predicts the probability of the specific SCC patient developing metastasis, that is, our test works. Another criteria means that we've also proven that our DecisionDx-SCC test provides new clinical diagnostic information. That cannot be obtained from any other test or combination of tests. That is, our test is independent of all other clinical pathologic risk factors or any other test or combination of tests that predict metastasis. We view this incredible achievement as a mark of our mission to develop innovative tests that improve patient care and are looking at tests that have received status, Castle ADLT has five tests that have been designated as ADLTs. Stated differently, one third of all ADLTs are offered by us. Castle biosciences clearly demonstrating that we do develop innovative tests that improve patient care beyond what is clinically available. Now, I mentioned ADLT status because, while it is not used for the purposes of coverage through a local Medicare contractor, meeting these two criteria that I mentioned lays out some of the positions that we have and will be communicating as a release to the analyses contained in the two aforementioned proposed LCDs separately. As part of our comments to Moldyx and our upcoming comments on Novitas, we are very pleased to present results from our recently completed large multi center cohort study that included analyses into the value of our tests to identify patients who are eligible for Adjuvant radiation therapy under current NCCN guidelines. Specifically, our question was what value can we provide in ruling in or ruling out Adjuvant radiation therapy to this high risk population? I cannot emphasize enough the clinical importance of this question. There are three significant areas to think about. The first is from the perspective of the known accuracy limitations if one relies upon clinical and pathologic staging features alone in informing which eligible patients may benefit and which may not. The second is, does our test provide an indication of not just who may have a high enough risk of metastasis to warrant consideration of Adjuvant therapy, but can we find patients whose outcomes could be improved with Adjuvant radiation therapy? And finally, the healthcare cost impact of Adjuvant radiation therapy is enormous. In fact, our data shows that patients who receive adjuvant therapy with our highest risk Class 2B test result have a roughly 50% reduction in their five year metastasis rate compared to matched patients who did not receive aAsthma Radiation therapy, but also had a Class 2B test result in creating a weighted average cost using data from both Icuvia as well as published costs of treatment data. It looks like Adjuvant radiation therapy runs around $60,000 per patient, not to mention the potential long term complications if the patient was overtreated in the first place. This cost data is important when you recognize that the majority of tests results are Class 1 or Class 2A, and these patients did not see a treatment benefit from Adjuvant radiation therapy. We expect the study to be published in the near future and look forward to sharing the results in greater detail with our clinician customers, our Medicare contractors, and, of course, you. Well, there are clearly some current unknowns regarding future coverage. We identified a significant unmet clinical need. We were successful in developing and validating not only liquidity clinical validity and clinical utility for DecisionDx-SCC test, but can also now see outcome differences in patients who receive Adjuvant radiation therapy. Given that we believe there are roughly 200,000 patients diagnosed each year with high risk SCC and who are eligible for asthma radiation therapy per current NCC and guidelines, the potential impact on improved outcomes and reduced healthcare costs is tremendous. Now let me take you through the remaining execution and strategy highlights in the quarter, and then Frank will provide highlights for the period, including with your questions. Let's start with our core dermatology business for DecisionDx-Melanoma and DecisionDx-SCC Combined test volume was 11,278, growth of 33% year over year and 13% from the prior quarter. We continue to see new clinicians order our tests for the very first time, with approximately 567 new ordering clinicians and more than 2060 total ordering clinicians for all three dermatologic tests during the quarter. For DecisionDx-Melanoma, we delivered 8597 test reports in the second quarter, an increase of 21% over the second quarter of 2022. We continue to believe the most significant drivers of our strong growth are the clinical impact our tests can contribute to the management of Melanoma and strong evidence supporting our test, coupled with our prior commercial expansion investments intended to educate our customer base. For DecisionDx-SCC, we delivered 2681 test reports in the second quarter, an increase of 99% over the second quarter of 2022. As with our growth in Decision-Dx-Melanoma, we believe that our strong growth and volume for DecisionDx-SCC is due in large part to the combination of the high unmet clinical need for SCC coupled with the value our test provides clinicians and their patients. As you recall, a pillar of our growth strategy is a continued development of evidence to support clinical use of our tests, including impacting outcomes. Two key studies were published in the second quarter. I'm going to focus my remarks on just one of them. That is the study data related to our collaboration with the National Cancer Institute's SEER program registries published in JCO precision oncology we are very pleased with this large unselected patient population study and that the real world data showed testing with DecisionDx-Melanoma provided significant prognostic information regarding survival outcomes. Specifically, patients who were clinically tested with DecisionDx-Melanoma had an associated lower melanoma specific and overall mortality relative to those patients who did not have the benefit of DecisionDx-Melanoma testing. That is, they were in the untested group and that is they lived longer. In fact, DecisionDx-Melanoma testing was associated with a 29% lower melanoma specific mortality and a 17% lower overall mortality relative to patients who did not receive DecisionDx-Melanoma testing. As you would expect, we will be sharing the full publication with our clinician customers as well as providing them to the NCC and Melanin panel. Now, let's turn to our gastroenterology franchise. During the quarter, we delivered 1447 TissueCypher test reports, compared to 352 in the second quarter of 2022. We also announced during the quarter new data demonstrating the value of our TissueCypher test in providing objective, risk stratification information that can inform improve management decisions for patients with Barrett's Esophagus. Additionally, TissueCypher was selected as the winner of the Best Use of Artificial Intelligence and Healthcare Award. In the 7th Annual Medtech Breakthrough Awards Program. As you will recall, we acquired a TissueCypher from Sernostics in December 2021, giving us a leading risk stratification test designed to predict future development of esophageal cancer in patients with Barrett's Esophagus. Barrett's Esophagus is the only known risk factor for the development of esophageal cancer, one of the fastest growing answers in the US. With a five year survival rate of less than 20%. Since the acquisition, we have made considerable progress with our integration efforts and process improvements. We moved into our new laboratory in Pittsburgh during the second quarter of 2023 and have seen strong adoption from the gastroenterology community, so much so that our orders have outpaced our forecasts and current operational capacity. As such, we elected in July temporarily paused accepting additional clinical orders for the test in order to bring our process improvements and additional instrumentation and personnel online. We are currently working through these efforts and believe that we will be able to begin accepting new orders prior to the end of the third quarter. Despite this temporary pause in ordering, we expect report volume for the second half of 2023 to increase compared to the first half. Turning to our mental health franchise, we delivered 2681 ID GenX test reports in the second quarter of 2023, up from 827 a year ago and up 25% from the prior quarter. As a reminder, during the second quarter of 2022, Castle only delivered test reports from April 26, the date we acquired the test, through June 30. We continue to be pleased with the momentum we are seeing thus far. In fact, we recently announced real world study data demonstrating that the use of Ideogenics to guide medication management can significantly improve medication response and remission rates. In patients diagnosed with moderate to severe depression compared to current standard of care treatment. This data was consistent with our previously published randomized controlled trial. Additionally, ECRI, an independent nonprofit organization improving the safety, quality and cost effectiveness of care across all healthcare settings, recently concluded its genetic test assessment of Igenics with a four out of five rating. As commercial payers utilize equity valuations to assist them in making coverage decisions, we believe this is another important metric to encourage payers to recognize the benefits of our Igenics test. We believe our Ideogenics testing solution has the potential to accelerate our impact on patient care in an area of high unmet clinical need by offering incremental value to patients and clinicians over the standard trial and error approach. With this comprehensive genetic test analysis to help clinicians match patients with the right medication, including identification of drug drug interactions and drug gene interactions with lifestyle factors to improve medication response and admission rates, we feel Igenx offers a truly compelling and personalized benefit for mental health treatment. I will now turn the call over to Frank, who will provide details relating to our financial results and outlook.
Frank Stokes: Thank you, Derek. Good afternoon, everyone. Second quarter revenue was $50.1 million, an increase of 44% over the second quarter of 2022. Overall, the increase primarily reflects strong growth in revenues from DecisionDx-Melanoma and DecisionDx-SCC. Adjusted revenue, which excludes the effects of revenue adjustments related to tests delivered in prior periods, was $50.2 million, an increase of 47% over the second quarter of 2022. Our gross margin during the second quarter was 73.5%, compared to 71.9% in the second quarter of 2022. Our adjusted gross margin. Which excludes the effects of intangible asset amortization related to our acquisitions and revenue associated with test reports delivered in prior periods was 78% for the quarter, compared to 77.6% for the same period in 2022. Turning to expenses, our total operating expenses, including cost of sales for the quarter, were $71.3 million, compared to $38.8 million for the second quarter of 2082. Affecting comparability with the prior year was a $20.4 million benefit, or seventy eight cents per share, during the three months ended June 30, 2022, for the change in fair value of contingent consideration related to the Synopsis acquisition. It was no similar item in the current year. After considering that item, the largest driver of the increase in total operating expenses was SG&A expenses, which increased by $7.2 million compared to 2022, attributable in large part to higher personnel costs, including salaries and stock based compensation, primarily within the sales and marketing functions. Cost of sales expense increased by $3.4 million, primarily due to higher laboratory related costs associated with the higher test report volume. R&D expense increased by $1.4 million in the second quarter compared to the second quarter of 2022, which was attributable to higher personnel costs driven primarily by expansions in headcount in support of our growth and other costs associated with clinical studies. We plan to diligently manage expenses while also prudently investing to grow the business in the long term, such that our operating expenses would decrease as a percentage of revenue and over time increase at a lower rate than revenue. Total non-cash stock based compensation expense, which is allocated among cost of sales, R&D expense and SG and A expense, totaled $12.8 million for the second quarter, compared to $8.8 million for the second quarter of 2022. The increase was primarily attributable to our annual equity awards granted in December of 2022. The. Interest income increased by $2 million for the second quarter of 2023 compared to the second quarter of 2022, primarily as a result of higher interest rates and our purchases of marketable securities beginning in the third quarter of 2022. Our net loss for the second quarter of 2023 was $18.8 million, compared to a net loss of $1.6 million for the second quarter of 2022. Adjusted EBITDA for the second quarter was negative $5.3 million compared to negative $11.2 million for the comparable period in 2022, an improvement of $6 million. Net cash used in operating activities was $3.8 million for the second quarter of 2023 and $29.2 million for the six months ended June 30, 2023. As you recall, cash used during the first quarter of 2023 reflects the payout of employee annual cash bonuses as well as certain health care benefit payments totaling $17.7 million that are not expected to occur during the remainder of 2023. Net cash provided by investing activities was $1.2 million for the six months ended June 30, 2023, and consisted primarily of the maturity of marketable investment securities of $95 million, partially offset by purchases of marketable investment securities of $86.4 million and purchases of property and equipment of $7.4 million. Our balance sheet remains strong. We ended the quarter with cash, cash equivalents and marketable securities of $225.5 million and no debt. Together with anticipated cash generated from sales of our test, we expect that our cash operating runway will extend through 2025. As Derek mentioned, we are raising 2023 revenue guidance to at least $180 million. Additionally, we are reaffirming that we expect to achieve $255 million to $330 million in 2025. We expect to achieve this result by driving test report volume growth across our entire portfolio and further market penetration, reimbursement progress and to a lesser extent, ASP growth. Supporting our longer age targets for ASP improvements. We note that we had multiple successes for Castle's test with commercial health plans and expect to continue making progress over time. The combination of growing the top line and driving margin leverage should contribute to our reaching our 2025 target of net operating cash flow positivity. Further, we believe we have the ability to pull various operating levers primarily on discretionary spend in sales and marketing and R&D without materially impacting the long term growth prospects of the Company we continue to believe that our current growth initiatives and associated expenses are important to sustain top line growth and just as importantly, expand our competitive lead, create stickiness across all our current tests and renew our pipeline for long term success and value creation. In summary, our fundamentals remain strong. There is plenty of runway for growth across our entire test portfolio and we believe our ability to create value for shareholders in the near and long term remains intact. I'll now turn the call back over to Derek.
Derek Maetzold: Thank you Frank. In summary, our second quarter results were excellent. We delivered strong year over year growth in revenue and total test report volume driven by continued execution on our long term growth plans. I would like to conclude today by thanking our Castle team. We wouldn't be here without their dedication and commitment. Thank you for your continued interest in Castle. Now we will be happy to take your questions.Operator?
Operator: Thank you. [Operator instructions] You have our first question from Carl Nixon of Canacord. You may proceed.
Carl Nixon: Hey, guys. Thanks for taking the questions. Congrats on the great quarter. So, Derek, on the you know, it's been withdrawn and reposted already. Maybe just provide your view on the additional kind of steps you're aiming to take here going forward, what you can do, I guess, and then separate. You know, Neridian is another option, I guess. Possibly maybe talk about if you could have any luck getting reimbursement through Meridian for SCC and then also maybe know, going off that why is the process potentially different for Neridian and Novitas? Maybe that could kind of inject some confidence or optimism in this whole situation. Thanks.
Derek Maetzold: Yeah. Hi, Carl. Good to hear from you. I guess maybe top line here is that we did provide some, I think, rather extensive detail in our filing a few minutes ago, as well as in the remarks just five minutes ago or so. So I don't have anything specific around that to talk through with Novitas and stuff. From the Norridian question perspective, keep in mind that Meridian is under a joint operating agreement with Palmetto's Moldyx program. So that would go through the Moldyx program from a coverage perspective.
Carl Nixon: I mean, is there any chance that you could kind of because you have multiple labs across the country. I just wondering if you can kind of be more or less covered for SEC through that lab rather than the one in Pittsburgh?
Derek Maetzold: Yeah, I would maybe change the answer or answer a slightly different question, if that's okay. Carl, I think based upon the data that's been developed since we developed or validated the test in the first place. Data we presented over the course of the springtime. This benefit that we're now seeing in our test to help identify people who could really have a significant clinical benefit from adjuvant radiation therapy should all lead one, I would hope. If one does an evidence based review about the value of our test and really helping to improve not only treatment selection but outcomes in the Medicare beneficiary population. I would hope that as that data is being reviewed by whatever Medicare contractor is reviewing it, that would have an impact on saying, does covering our tests benefit Medicare patients? And if it does, you should cover it. And that's our expectation on an outcome at the end of the day.
Carl Nixon: Okay, that was great. And then if I could squeeze another one in on Melanoma for guidelines. I believe there was an NtCN panel in mid July. Can you just confirm, Derek, if you were able to submit each of your publications in time for that meeting, could those folks kind of see that data, basically? And what are the next steps in the timing going forward, potentially for an update from?
Derek Maetzold: So, yes, we did submit both the Dillon manuscript that was published in April by those three academic centers cleveland Clinic, Northwestern, and OHSU, and we did also submit the NCIC or publication. Of course, both of those show a nice association with if you use our test, people actually live longer compared to not using our test clinically. We would hope that wasn't part of an active discussion with the NCCN group. On a timing perspective, they've been pretty consistent the last four or five years, even through COVID, I wouldn't expect us to see anything posted publicly until kind of the December, January time period they usually about a five or six month cadence after they have their mid-year meeting is when they go ahead and post an update.
Operator: We now have Sung Ji Nam from Scotiabank
Sung Ji Nam: Hi, thanks for taking the questions. Just another question on the NCI SEER data. Congratulations on the publication. There was curious if there are additional studies that might be underway, what additional information you might be gathering there, or do you think you have sufficient data to kind of sway the decision makers for NCCN and other guidelines?
Derek Maetzold: You mean additional studies with the NCI and the SEER program or general?
Sung Ji Nam: Specifically with NCIR, but if there are other studies that could be also compelling.
Derek Maetzold: Okay, yeah, so our collaboration is ongoing. I think the NCI group of the SEER program kind of update the tumor registry files maybe once a year. They remerge up the next year's data. And so one of the expectations that we do have from this ongoing collaboration is to see multiple publications. And as the patient numbers and the matching grows and we have longer term outcomes, we'll be able to look at things like, I mean, for example, subgroups. Even though the first paper was able to go and look at groups of patients by staging up and down. How does this test perform form in terms of the Medicare patient population? For example, do you end up seeing a significant improvement in overall survival or melanoma civic survival in the Medicare age population who gets to use our test clinically versus those there are. Are analyses or manuscripts like that that I think we will continue to see rolling out an ongoing basis, hopefully the next couple of years. To be honest, we do have other studies that are ongoing and some that we're planning still. One of our core tenets, as you know, is that I don't think one has ever done proving time and time again the value of our test for patient care. One of the studies that was recently published here I can't remember was this first quarter last fall was our decide study, an early look at that data set, which looks at a prospective patients who are using our test initially to decide on going forward with a sentiment of the biopsy procedure or not. And then what happens on outcomes with those exact same patients. So we published an early analysis. I would call that probably analysis one, maybe six months ago or so, and you can bet there'd be further data coming out now. I think as we see those outcomes improvements, all that data NCI that's still in paper decide, other protocols we haven't discussed publicly should hopefully keep raising the bar that our tests make a difference in patient outcomes.
Sung Ji Nam: Great. Thank you. And then just a quick follow up on the inflammatory skin disease pipeline. Just kind of curious what the latest update is and what the next milestones might be. Thank you.
Derek Maetzold: Inflammatory skin disease? We hadn't planned on discussing elements of that here. I think back in the end of the first quarter, we discussed that that we have, but that we are very pleased with our enrollment so far. We have 57 committed sites, who are investigator sites, I think all within the US. That could be wrong about one or two overseas and enrolled just over 750 patients to date. And we are chewing through the initial discovery and development data now and expect to update the street here in the second half of this year. It's not going to be obviously today, but we are working through the analysis of that data and hopefully we can go and have a public discussion about that shortly, so prior to the end of 2023.
Operator: I guess, we now have Thomas Flatten of Lake Street Capital Markets. Please go ahead when you're ready, Thomas.
Thomas Flatten: Hey, thanks. Good afternoon. Congrats on the quarter. Frank, I was wondering if you could maybe walk through some of the thinking on the guide. At $180 million, that would be a second half slightly lower than the first half? So I'm curious if you could comment on some of the conservatism there or apparent conservative.
Frank Stokes: Yeah, no change there, Thomas. As we said back in June, we're not assuming SEC revenue and our guidance and forward looks here. So that continues to be the case.
Thomas Flatten: Got it. And then I was wondering if you could maybe share specific to Dx-Melanoma. Is this a depth or breadth play or both? I know you mentioned some new prescriber counts, but if we could narrow that down to Dx-Melanoma. I'm curious if this is coming more from new docs or increasing the depth within docs that are already on board?
Derek Maetzold: I think we're still seeing both. We are continuing to penetrate with new physicians, which is terrific, and we're continuing to have physicians order our tests for more and more of their patients. And the other thing that we always remind is that Melanomas, a community dermatologist, isn't seeing a Melanoma every day. So once you convert that doctor, there's sort of a lead time as their volume builds, just as their patient flows come through. So we're seeing I've called it. Same store growth and new store growth in the past, and we're still seeing both on Melanoma. And as I said in my conclusion, we still think we've got just a long runway there before we're through penetrating Melanoma, just a long way to go on it.
Thomas Flatten: And then just related to that, if you give us a sense of how many of your docs are ordering both Dx-Melanoma and SCC?
Derek Maetzold: I don't think we gave a specific number, but we have said that we continue to see a big overlap there, which was our thesis. That was a big part of our strategy was that we would be able to leverage this sales effort across both products very effectively. And when I look at the growth or I look at the volumes in melanoma for the quarter, that just confirms for us that we can grow our squamous cell product without losing momentum and melanoma without cannibalizing, if you will, that growth as well.
Thomas Flatten: Excellent. I appreciate you guys taking the questions.
Frank Stokes: Sorry, Derek, can we actually put it into the filing; its 70% of the clinicians ordering DecisionDx-SCC, are also customers of DecisionDx-Melanoma, and that's the current ratio that we're looking at there. We would never expect that to get maybe above 80%, because there are many, many mo surgeons who is a subspecialty of dermatology that do mo surgery, by definition, who don't really do work or don't do surgery on people with invasive melanoma. 70% as of today, I think, reflects a very high cross fertilization recognition of value across both cancer types.
Operator: We now have Puneet Souda of. [indiscernible] Partners.
Puneet Souda: Hey, Derek. Frank, thanks for taking the and first of know, congrats on the quarter and really on the ADLT payment. That's remarkable as one of the highest. You know, for a minute, leaving the coverage decisions and complexities aside, just talking about the ADLT payment, I think I heard Frank saying you're not expecting SDC payments in the second half. Wondering if you can talk about two things. Number one, did you receive any payment since July 1 when this was effective? And then how should we think about 2024 for the payments here for STC? And I know it's a little bit complex issue, given all the coverage and scenarios there, but whatever you can provide there would be helpful.
Frank Stokes: Yeah, just a clarification there. What I said is that our guide did not include any just to just to clarify that. As Derek said, the evidence is pretty overwhelming. And when you see the ability to correctly guide some of this treatment, like Adjuvant radiation therapy, it's a compelling benefit to patients. So we really believe the evidence is clear and that eventually this test will receive appropriate coverage, not necessarily for the benefit of Castle, but the benefit patients. This is something that the patient group needs.
Puneet Souda: Got it. And if I may, when you talk about further data generation, sort of, can you talk a little bit about. Level of data that is needed for this test in order to really highlight the clinical utility, so that a sophisticated mac such as Moldyx that has done rigorous reviews of clinical evidence can potentially cover this test down the road. Again, timing is tough to call out on that, but wondering if if that is part of the strategy longer term to generate that data and submit it to Moldyx for coverage.?
Derek Maetzold: So, regarding the proposed Moldyx LCD on SCC, when I read through that, it looks to me that there are core issues in terms of the knowledge of how squamous cell carcinoma is treated today. And that led to sort of not quite interpreting our published data so far, as well as I think, missing some core and key references. So, for example, the premise of the Moldyx team, I think, was that we don't think Adjuvant radiation therapy is actually useful in people with SCC. But Adjuvant radiation therapy is recommended for every high risk patient by every relevant guideline committee from AAD to NCCN to American College of Radiology to Astro. So it's a funny thing that the reviewers at Moldyx felt they could make a conclusion that Adjuvant radiation therapy is not useful and used in the Medicare population for SCC. So if you start with that argument, then you'd say, well, what's the use of your test. That part. The rest of it kind of flows together. So our perspective is that we would hope that with our submissions to Moldyx, we would hope that with the addition of several key publications, including our second validation cohort, including the adjuvant radiation therapy, including analysis, two of our prospective clinical utility study that there would be enough evidence during the course of the next year to have the Multi X group realize that maybe the evidence analysis could be refreshed and updated and lead to continued coverage. We believe we have the evidence needed to meet Medicare's requirements.
Operator: Thank you. We now have Mason Carrick from Stevens.
Mason Carrick: Hey guys, congrats on the quarter. A quick one on the Novitas LCD for me. Given the irregularities we've seen in that process, do you expect the draft to follow the standard twelve month timeline from draft to finalization?
Derek Maetzold: Is there a chance it could be finalized sooner? I don't know if we have any insight there, Mason. To add it would just be speculation.
Mason Carrick: Okay. And then on the TissueCypher operational constraint, how should we think about the capacity that will come online whenever you guys begin accepting in clinical orders again and how that'll trend or scale as we progress throughout the remainder of the year?
Derek Maetzold: Yeah, we believe that we'll get that. As Derek said, by the end of the cold quarter, we think we'll have. Kind of be back online, and I think we'll continue to see the nice growth we've seen there. We had interesting timing here with this quarter. We opened our Pittsburgh lab and had a move there, and so we just want to make sure that we are offering appropriate turnaround times for our customers and their patients. So I think we certainly expect to see the return to growth once we take those orders, start opening for orders again.
Operator: Thank you. We now have Catherine Schulte from Baird
Catherine Schulte: Hey, guys. Congrats on the quarter, and thanks for the questions. I guess first, just following up on that pause in order to TissueCypher, can you just talk about what investments need to be made to expand capacity there? How much of a revenue headwind is that, and is the disruption causing any frustration in your ordering base?
Derek Maetzold: I think, as we had said in the remarks there, and I think put into the filing, too, the primary item here was that the adoption of the test for patient care outran our forecast on the upside. And so the decision was that we should treat our customers honestly and directly and just say, hey, until we can have these post lab movie efficiencies be implemented and scale up properly, we should just tell you, let's kind of put it put on pause for a few weeks here, and we'll come back to you. In terms of the feedback from the field, I'm unaware of a single unhappy customer. In fact, most were. I can't believe you guys Actually did this upfront. We've never seen companies in the GI space that actually treat us honestly, so I don't think that'll be any kind of an issue for us to sort of say, hey, we're ready to go ahead and begin accepting orders, and we're at a turnaround time that we think maximizes patient care. What can we do? How do you want us to help you get restarted again? That I think will be a non issue, Catherine.
Catherine Schulte: Okay, got it. Then maybe just going back to Puneet. Understand that your guidance doesn't assume SEC reimbursement going forward, but can you just confirm that you're still getting paid by Novitas as of today? And is it your understanding that you'll most likely keep getting paid until a potential final LCD becomes effective?
Derek Maetzold: Yeah, we do have reimbursement for the test now, Catherine. And beyond that, we would be guessing if we made any other predictions.
Operator: Thank you. We now have Mark Masro with BTIG. Please go ahead when you're ready.
Mark Masro: Hey, guys, this is Mark. Thanks for taking the question. So, just circling back to third party guideline inclusion, could you just remind us where you stand in any dialogue you've had with the NIH and Memorial Sloan tettering in addition to NCCN, and you're thinking about likelihood of SEC inclusion and guidelines maybe perhaps ahead of [ph]BDM? Thanks.
Derek Maetzold: You're asking a question relative to the okay, so the NIH database and the Sloan Kettering database referenced in that proposed LCD only review do individual gene mutations. So individual gene analyses, they're more like Aggregating or Curating databases. They don't review RNA based tests, and certainly not multiple gene tests. That's those two groups would never review any of the sort of Moldyx reviewed kind of tests. Right. And gene expression profile tests on NCCN, I believe they met in late April or early May. We did submit a package, as you would expect us to go ahead and do. That's a relatively new committee. I mean, it was established maybe in 16-17,17-18, maybe three or four or five years ago. If we go back and track the time between their sort of spring meeting and the time they update guidelines, that varies quite a bit. Last year when they met in I think it was early May, they posted updates, I think earlier in the first quarter of this year. So that was kind of an eight or nine month cycle time compared to the Melanoma group, which is always about five or six months or so. So I don't know if we can predict or provide any factual kind of guidance about saying would we expect something in September versus December that would be based on any kind of analysis, to be honest.
Mark Masro: Okay, perfect. Thanks so much for that. And I guess as far as the assumptions based into the raised guidance, you talked about being able to meet the guide in the absence of SEC reimbursement, so I was just curious, as far as your long term guidance, what are the puts and takes there and what's contemplated for SEC long term? Thanks.
Derek Maetzold: Yeah, thank you. We did reiterate our 2025 long term targets and indicated we expect to be able to achieve those without SEC as part of part of our business. But having said that, again, we do think that the evidence is very strong, and so we would certainly hope to have a better outcome than that.
Operator: I can confirm, we have no further questions on the line, so I'd like to hand it back to Derek for any final remarks.
Derek Maetzold: Thank you, operator. This concludes our second quarter 2023 earnings call. We thank you again for joining us today and for your continued interest in Castle Biosciences. Have a great evening.
Operator: Thank you all for joining today's call. You may now go, connect your lines, and please enjoy the rest of your day.
