Castle Biosciences (NASDAQ:CSTL) Q4 2019 Earnings Call

0:01 Good afternoon and welcome to CASEL Biosciences' fourth quarter and year-end 2019 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 Frank Stokes, Chief Financial Officer. Please go ahead, sir.

0:22 Thank you, operator. Good afternoon, everyone. Welcome to CASEL Biosciences' fourth quarter and year-end 2019 financial results conference call. Joining me today is Castle's founder, president and chief executive officer, Derek Maetzold. Information recorded on this call speaks only as of today, March 10, 2020. 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 information discussed today may contain projections or other forward-looking statements regarding future events or the future financial performance of the company and are made pursuant to the safe harbor provision of the Private Securities Litigation Reform Act of 1995.

1:14 Forward-looking statements are based upon current expectations and involve inherent risks and uncertainties, and there could 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 final prospectus filed with the Securities and Exchange Commission on July 26, 2019 relating to our registration statements on Form S-1 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. I'll now turn the call over to Derek.

2:03 Thank you, Frank, and good afternoon, everyone. Thank you for joining us today. This afternoon, we will review fourth quarter and year-end financial results, key accomplishments and upcoming milestones, and discuss our 2020 revenue guidance and strategic priorities. The entire Castle Biosciences team did an excellent job throughout 2019. which was an incredibly strong year, strong in terms of growth in our gene expression profile test volume, strong in terms of growth in continued evidence development for our DecisionDx melanoma tests and our DecisionDx UM tests and progression of our pipeline products. During 2019, we successfully completed two commercial team expansions, one in the first quarter of 2019 and the second one in December 2019.

2:55 We went from 14 outside sales territories in December 2018 to 32 outside sales territories as of December 2019, which provides us confidence in our ability to execute our 2020 strategic growth priorities. In 2019, for the fourth quarter year ended, we reported revenue of $17.6 million and $51.9 million, respectively. The full year 2019 revenue of $51.9 million compares favorably to the $22.8 million reported for the full year 2018. As we look forward to our growth potential in 2020, we anticipate generating $61 to $64 million in revenue and plan to provide quarterly updates on this guidance.

3:49 In order to support our continued growth, we plan to further expand our commercial sales team, continue our evidence development and further ramp up our R&D efforts. We did announce report volume in January for both of our proprietary gene expression profile tests. For decision DX melanoma for use in patients diagnosed with invasive cutaneous or skin melanoma, we delivered 4,480 test reports in the fourth quarter and 15,529 test reports for the year, up 37% and 29% over prior periods in 2018, respectively. Adoption with new physicians for decision DX melanoma in 2019 was up 24% year-over-year and total ordering clinicians increased 32% year-over-year to just over 3,927, to be exact.

4:48 Based on an annual U.S. incidence of newly diagnosed invasive cutaneous melanoma patients of approximately 130,000 and approximately 11 to 15,000 clinicians who treat melanoma, we believe our annual 2019 penetration to be about 12% of patients and about 25 to 30% of clinicians. We believe the success of our commercial expansion in February 2019 contributed in part to the excellent growth we saw in DecisionDx melanoma as well as our continued evidence development which I will discuss further in a moment. We anticipate continued success with volume growth with our recent additional commercial expansion in December 2019 which resulted in a total of 32 outside sales territories with commensurate increases in associated commercial and medical affairs personnel.

5:44 All in, our customer facing teams more than doubled in size to over 50 people as of December 2019 compared to December 2018. As we have in the past, we are continuing to assess our commercial team needs as we prepare to launch our late-stage products and anticipate adding at least an additional 8 to 10 outside sales territories with commensurate increases in associated commercial and medical affairs personnel in the second half of 2020. Trained through our DecisionDx UM test for patients diagnosed with uveal melanoma, we delivered 434 reports in the fourth quarter, and 1,526 test reports for the full year 2019, a 13% and 8% increase year-over-year, respectively.

6:36 You may recall that our Decision DX UM test has been standard of care for a number of years, and we believe treating clinicians are ordering our tests for an estimated 85% of patients diagnosed with UV melanoma. Therefore, we are pleased with our year-over-year growth of 8% for a very mature product. Now I'd like to discuss several fourth quarter and recent key accomplishments with our continued evidence development and late stage pipeline products. Let me remind you that our DecisionDx melanoma test assesses the aggressiveness or likelihood to recur or metastasize based upon the biological signature of an individual patient's primary melanoma tumor. We have shown that our DecisionDx melanoma test Prediction Individual Patients' Likelihood to Recur or Metastasize to the Sentinel Lift Node, Regionally, Distantly, and Even Death for Melanoma. Because we can predict multiple endpoints, our DecisionDx melanoma test impacts more than one decision point.

7:41 Specifically, our test currently guides two clinical decisions that are made just after the time of diagnosis. The first use of our test is to inform decisions on sentinel lymph node biopsy when the tumor is two millimeters thick or less. And the second use is to guide subsequent treatment plan decisions. In November, data from two prospective multicenter studies supporting the clinical use of a decision DX melanoma test to guide discussions and recommendations regarding sentinel lymph node biopsy surgery were presented at the 16th International Congress of the Society for Melanoma Research. In the first prospective multicenter study, we reported that in sentinel lymph node biopsy assessed patients 65 years of age or older with T1 or T2 tumors and a low-risk capsule class 1A test result, sentinel lymph node positivity was 2.7%.

8:45 significantly less than patients with a CASL class 1B to 2A or CASL class 2B test result. And importantly, below the 5% threshold at which cancer treatment guidelines do not recommend the sentinelift node biopsy surgical procedure. T1, T2 tumors are melanomas that have a tumor depth that is 2 millimeters or less. As a point of reference, this group comprises 86%. of all patients that we test today. In the second study, this one also multicenter and prospective, looked to address the clinical question of are we doing patients harm if a patient with a T1 or T2 melanoma tumor and a DecisionDx melanoma class 1A test result avoided a sentinel to biopsy surgical procedure.

9:40 We previously addressed this question with an analysis from our long-term archival or retrospective study cohorts. In this study, we reported data on outcomes from a multicenter prospective study with a median follow-up time of 3.2 years in patients who did not experience a metastatic event. This study found that patients with a T1-T2 tumor and a Class Ia test result had a three-year overall survival rate of 99.4 percent, a distant metastasis-free survival rate of 98.7 percent, and a recurrence-free survival rate of 96.6 percent, adding further support that this T1, T2 Class Ia population can safely avoid the sentinel-lift-no-biopsy surgical procedure.

10:33 Also, regarding our decision-DX melanoma test, results from a study designed to establish the level of evidence were published in the December 2019 issue of the American Journal of Clinical Dermatology. Methodologically, the authors conducted a systematic review of the literature and established a level of evidence for decision DX melanoma gene expression profile tests based upon criteria used by the American Joint Committee on Cancer, or AJCC, the National Comprehensive Cancer Network, or NCCN, and the American Academy of Dermatology, or AAD, criteria respectively. The results show the DecisionDx melanoma test achieves a higher level of evidence than determined at that time by these organizations.

11:27 Specifically, the systematic review included evaluation of seven development and validation studies that led the authors to classify DecisionDx melanoma as a level one to two according to AJCC criteria, level 1 to 3B according to NCCN criteria, and level 2A according to AAD criteria. The authors' conclusions were higher than the official unrated status conferred by the AJCC and NCCN and the 2 to 3C rating designated by the AAD in the latest version of their melanoma guidelines, all of which were conducted prior to the study. The NCCN guidelines for cutaneous melanoma were updated in December 2019.

12:19 Although it appears that all of our 22 peer-reviewed publications were not reviewed, a positive shift in the inclusion language was made, indicating that the DecisionDx melanoma test may provide information that is an adjunct to AJCC staging with a Category 2a level of evidence. This level of evidence is consistent with the systematic review study just noted and also published in December 2019. Also in the fourth quarter, we received notification of the American Medical Association's CPT editorial panel accepted our application for a Category 1 multi-analyte assay with algorithmic analysis, or MA, CPT code for our decision DX melanoma test, This code will be effective on January 1, 2021.

13:12 In order to obtain a Category 1 MA CPT code, a test must meet certain levels of evidence requirements. For example, the clinical efficacy must be documented in the published literature. Additionally, it requires that test use be performed with a frequency consistent with the intended use, that this use is consistent with current medical practice, and that is performed by many physicians or other qualified healthcare professionals. The AMA's CPT editorial panel agreed that our DecisionDx melanoma test met all of these criteria. With this acceptance, both of our proprietary MA tests, DecisionDx UM and DecisionDx melanoma, have met the criteria required for Category 1 MA CPT code.

14:02 As a reminder, We have 22 peer-reviewed publications that support the two currently clinically actionable uses of the Decision DX melanoma test, and we anticipate additional publications in 2020. The conclusions in the December 2019 systematic review, the NCCN guideline update, and the AMA CPT editorial panel actions support our belief that evidence development matters. We will continue to invest in evidence development to support both patient penetration and coverage by commercial payers. As it relates to our intellectual property, last week, the first U.S. patent related to our decision to the ex-melanoma test was issued by the United States Patent and Trademark Office.

14:50 This patent covers methods of treating cutaneous melanoma in patients having high-risk cutaneous melanoma tumors. Now, turning to our pipeline products, We are excited about the progress that we've made regarding our DecisionDx SDC test for use in patients with one or more high-risk squamous cell carcinomas and our test for suspicious pigmental lesions. As you may recall, we reported data from the clinical validation study in October 2019. On January 20, 2020, we presented data on the use of the test in squamous cell carcinomas that were categorized as high-risk by the NCCN guidelines. This study demonstrated that the use of our tests in combination with AJCC staging enabled identifying approximately 50% of high-risk patients who had a metastatic rate that was similar to the general SCC population.

15:49 In other words, we could successfully rule out approximately 50% of high-risk patients from a high-risk treatment plan. As of today, we are excited about the opportunity to potentially commercialize Our DecisionDx SCC test with the hope that patients who were diagnosed with high-risk disease based upon NCCN criteria could make more informed decisions regarding the initiation of aggressive adjuvant therapies or watchful waiting. We look forward to providing with updates in the coming months. Of interest, we received notice that an abstract regarding our DecisionDx SCC test was accepted for an oral presentation as a late-breaking abstract during the Basic Science Cutaneous Oncology Pathology Session at the 2020 American Academy of Dermatology Annual Meeting being held in Denver, Colorado.

16:43 The presentation is scheduled to begin at 4.30 p.m. Mountain Daylight Time on Saturday, March 21st. Regarding our second late-stage pipeline product, our test for suspicious pigmental lesions, we believe that we remain on track for commercial launch in the second half of 2020. We plan to report data from a clinical validation study in the second half of the year prior to launching this test. We believe that these two late-stage pipeline products, DecisionDx STC and our test for suspicious pigmental lesions, will increase our estimated total addressable U.S. market by approximately $1.4 billion for a total U.S. TAM of approximately $2 billion.

17:28 Thank you, Derek. We are pleased with our strong execution and growth in the fourth quarter

17:31 and full year 2019. We reported revenue of $17.6 million in the fourth quarter and $51.9 million for the full year, an increase from $11.4 million and $22.8 million over the fourth quarter and full year 2018, respectively. As a reminder, Thank you for joining us. was not recognized until the fourth quarter of 2018 when the LCD became final and effective.

18:33 The amount of such revenue derived from decision DX melanoma test reports delivered in the first three quarters of 2018 but not recognized until the fourth quarter of 2018 was $5.2 million. Stated differently, if our fourth quarter 2018 revenue only included Medicare tests for decision DX melanoma that were performed in the fourth quarter of 2018, 2018 revenue would have been $6.2 million compared to fourth quarter 2019 revenue of $17.6 million. This is a non-GAAP measure. Please see our non-GAAP reconciliations at the end of our earnings release from this afternoon. Our year-over-year revenue was driven by a 29% increase in 2019 in decision DX melanoma test reports volume compared to 2018, as well as by higher revenue per test, or ASP.

19:26 As Derek discussed earlier, we anticipate generating revenue of $61 million to $64 million in 2020 and expect to give the first update on our progress in May when we report our first quarter 2020 financial results. The full year 2019 revenue of $51.9 million includes $2.5 million of positive revenue adjustments compared to positive revenue adjustments of $0.3 million for the full year 2018. The increase in positive revenue adjustments primarily relates to cash collections in 2019 on test reports delivered prior to 2019. In other words, previous periods for which no revenue was recognized originally. No revenue was recognized originally in alignment with the requirements for revenue recognition under GAAP. We believe, based on recent reimbursement activity, that additional positive adjustments in future periods at some level are possible for at least the next few quarters.

20:23 Our gross margin during the fourth quarter was 89% and was 86% for the full year 2019 compared to 77% for the full year 2018. This improvement in gross margin was primarily driven by operating leverage as a result of our strong volume growth. Our operating expenses for the year ended December 31, 2019 were $37.2 million compared to $21.3 million for the year ended December 31, 2018 An increase of 75%. This increase was primarily a result of higher personnel costs, particularly due to the expansion of our sales and marketing organization, but also due to the expansion of administrative support functions, as well as increases in administrative expenses associated with our growth and higher R&D expense, which increased by $2.5 million in 2019 compared to 2018.

21:17 We expect our R&D expense to increase further, as we continue to invest in activities related to enhancing our existing products and developing new products. As a percentage of revenue, our SG&A expense was 58% for the full year 2019 compared to 72% for 2018 with the improvement primarily attributable to the increase in operating leverage as a result of our revenue increase. Interest expense increased by $2.3 million to $4.6 million for the year ended December 31st, 2019 compared to the year ended December 31, 2018, primarily driven by the issuance of convertible promissory notes in the first quarter of 2019. These notes were converted into common stock in July 2019 in connection with our IPO.

22:06 The remainder of the increase is due to a combination of higher outstanding credit balances and higher interest rates on our banking credit facility. Our net income for the 12 months ended December 31, 2019 was $5.3 million, which includes the benefit of a one-time $5.2 million non-cash debt extinguishment gain. For 2019, we reported a 21 cents per share loss which under GAAP excludes the benefit of the debt extinguishment gain. For the year ended December 31st, 2018, we had a net loss of $6.4 million or $5.33 loss per diluted share. Moving next to our cash flow performance for the year into 2019, Castle generated $7 million in positive operating cash flows compared to negative operating cash flows of $12.3 million in the prior year. Finally, we had cash and cash equivalents at December 31, 2019 of $99 million, which we believe, along with cash generated from sales of our products, will be sufficient to fund our operating expenses for the foreseeable future.

23:14 Additionally, we believe we are positioned well to execute on our expansion plans and support our ongoing research and development activities. I'll now turn the call back over to Derek.

23:24 Thank you, Frank. In summary, we are extremely pleased with our team's performance in 2019, including strong year-over-year growth in volume for our decision DX melanoma test, two successful commercial expansions in our commercial medical affairs teams, and significant advances in evidence development. We look forward to another great year in 2020 and we thank you for your continued interest in CASEL. Operator, we are now ready for Q&A. Thank you. To ask a question, you will need to press star one on your telephone. To withdraw your question, press the pound key. Again, to ask a question, press star then the one key. Our first question comes from Puneet Sudha with SVB Lyric. Your line is open.

24:13 Yeah, hi, Derek, Frank. Thanks for the question. So the first question I have is on the guide. It was stronger than what we had expected and what Street, I believe, was modeling. Could you walk us through the contribution that you expect here from volume and contribution from ASP? And if you could provide also any – if you're expecting any contribution from SCC in that guideline?

24:43 Hi, Penny. Good to hear from you. I'll let Frank handle that question, I think.

24:48 Sure. So, Penny, we are not assuming any revenue contribution from new products which we anticipate launching this year. Based on GAAP accounting principles, we won't have enough experience with those products to record or accrue revenue at the time of product of report shipment. So, we will only reflect revenue on a cash basis or when we actually collect any cash from those tests. And just given the timing of the appeal cycle, we just don't see that being material or meaningful at all in 2020. So that guide doesn't include new product guide. And you can assume as we have that the uveal melanoma product is flat-ish in terms of both volumes and ASP. That's a fairly mature product, and as we've said in the past, we think we test a significant percentage of the patients, maybe 80%, 85% of the patients.

25:54 And so while we'll continue to support that test, and it's an important test for us, just given the penetration levels, we don't model too much additional volume there. So The growth in revenue is primarily driven by volumes and modest improvement in ASP on our cutaneous melanoma test, although, again, the reimbursement process and pathway is a long one, so we're primarily focused on volume growth there.

26:26 Okay. And then on the out-of-peer adjustments, you had $4.3 million this quarter, $3.2 million last quarter. This is now second quarter of large adjustment here. So how should we think about that going forward? And then is there any contribution from that or expected contribution that you expect in 2020 guidance from out-of-peer adjustments?

26:56 Yeah, so if you look at the total year out of period, it was $2.5 million. And so that will give you a sense of where those out of period reports are coming in. The lag appears to be quarter to quarter, maybe quarter plus a little bit to quarter. And so we will see some of that in 2020, although as we continue to mature both our reimbursement progress as well as our appeals progress, We should see that begin to converge toward accrued revenue.

27:30 Okay. And then if I could, Derek, if I could touch on the sales reps. Obviously, growth and volume is a key metric for you. As you look at the sort of somewhat expected disruption here in travel plans and the largely due to coronavirus. And do you expect any impact there on the sales rep territories? Are they largely local? And how should we think about the cadence for the year given the full year guide? How should we think about the cadence in the first half versus second half this year? And then the last one, if you could also elaborate, what's your expectation for sales rep expansion this year?

28:17 Sure. Excellent questions, Puneet. Thank you. So, maybe I'll start sort of towards the last, work myself forward. So, as you know from the releases in the past and today's release, we completed our second expansion in 2019 in December of 19 to go to 32 outside sales territories. and we also have extended groups around that. So we have an inside sales associate group as well as medical affairs personnel. All told, customer facing individuals at Castle was in the low 50s at the end of 2019 and that compared to being in the low 20s at the end of 2018. So more than a doubling in terms of customer facing personnel that are either here in Friendswood or on the ground across the U.S.

29:09 from a geography standpoint. We have certainly seen a couple of conferences that we would normally exhibit at and hold one-on-one meetings at be canceled here in the March time period. I don't know if organizations will continue to kind of roll those going forward through April and May or if we see an adjustment depending on the coronavirus, I guess, Newsflow Penetration, et cetera. So I think podium events at major meetings probably in the second quarter will be less than we had planned or scheduled for because those major meetings are being postponed or canceled. So far we haven't heard feedback from our representatives of the Medical Science Liaison Group in terms of local interactions being canceled or postponed.

30:03 Our belief is that the information that we're providing to physicians regarding hopefully improving the care of their patients with the use of our tests continues to be valued. What I don't know, which is maybe the question you hadn't asked, is are physicians, dermatology practices, surgical oncologists going to actually see a reduction in patient flow? Are people going to go into their positions less often because they are concerned about Thank you very much. Thank you. From a business perspective at Castle, we don't put in our model today some sort of a major adjustment shift because people who need care, I would expect they would still seek out care, I guess, in a reasonably timely manner.

31:14 In terms of sort of ramping up, as you know, we started out in the first quarter of 2019 with year-over-year report growth in our cutaneous melanoma tests, decision DX melanoma in the low 20s, I think, right? 21%, I think it was. And we ended the year in the fourth quarter of 19, over the fourth quarter of 2018 at 37% growth in reports year-over-year. So we think that was driven by two major elements. The first was the expansion of the customer-facing commercial medical affairs groups. and just demonstrated that we were substantially undersized, I guess you would say, in a promotionally responsive marketplace that was crying out for, I guess, educational efforts that we could deliver.

32:03 And the second, of course, was a very, very nice trail of evidence development over the course of the year, which I think helped us communicate better to our clinicians where to use our tests appropriately and where not to, for example. The expansion in December of 2019 to those 32 outside sales territories and more than 50 customer-focused individuals I think de-risks our growth opportunity throughout 2020, so that feels pretty comfortable to both Frank and I and the rest of the organization. and we do expect that that expansion group probably takes a quarter and a half to two quarters I think to become fully effective so our internal estimates were that we're starting off at a great point in December 2019 and that group hopefully becomes fully effective towards the midsummer to the third quarter of 2020 which all feels very strong in terms of being able to help educate clinicians to make an active decision on the use of our tests to improving patient care.

33:09 Anything else to add, Frank?

33:15 That's great. All right. Thanks, Derek. Thanks for all the details.

33:19 Absolutely. You're welcome. Thank you. And our next question comes from Sunji Nam with BTIG. Your line is open.

33:29 Hi, thanks for taking the questions. Maybe starting out with a question on gross margins for 2020. Frank, could you kind of help us think about the cadence potentially for the year? Obviously, you know, you saw very strong growth expansion last year. Should we kind of carry that over this year? If you could maybe also go over kind of the puts and takes in terms of how we should think about modeling that going forward.

33:58 Yeah, I think, Sanjeev, thanks for your question. I think that the gross margin performance we saw for the full year 2019 is probably durable until we launch our new products. And when we launch the new products, given my earlier comments, we'll have costs associated with those new test reports, but any revenue we actually receive will be deferred into later periods. So you could see the gross margin be impacted by that somewhat. But in terms of a normalized sort of steady state run rate gross margin, that middle 80% is about right for going forward this year, I think.

34:42 Great. Thank you. And then maybe on the commercial payer coverage side, you know, Derek, could you talk about kind of what the near-term strategy is in terms of What type of milestones we may be able to see in the near term over the next 12 to 18 months? Kind of, you know, what your strategies are there, you know, how the early conversations might be going.

35:07 Sure, sure. Thanks for the questions and good ear for you. So I'm going to assume that we're talking primarily about our DecisionDx melanoma test for cutaneous melanoma, but I'll spend a second here on the UV melanoma test. So on the UV melanoma test, which is DecisionDx UM We do enjoy broad coverage, both in terms of Medicare population, which is a reminder is about 45% of the patients that we test, and the majority of commercial plans across the U.S. do include that test as reasonable, necessary, and covered. We are targeting the few remaining plans to ensure that they see the data, interpret the fact that the major third party technical assessment groups all support the use of our test in clinical care as do national guidelines such as NCCN and they should be evaluating our test and the prospect of it does actually improve patient net health outcomes and they should be covering this test proactively because it is standard of care. So even gaining modest improvements in the few plans that we don't have positive policy for UV melanoma We expect some of those to go ahead and occur this year.

36:24 But in terms of revenue impact, I think you won't be able to see that on a revenue line. So turning to DecisionDx melanoma tests for cutaneous melanoma, we had anticipated or modeled a couple of years ago that we would not see commercial coverage shifting until Palmetto had completed their MoldDx review of our test. And as you know, we had our initial local coverage determination policy, or LCD, will be effective in December 2018. We had a expanded draft LCD post in August of 2019 and the comment period closed kind of mid-December 2019. So we do expect the draft LCD based upon LCDs ahead of us to post as a final LCD probably in the third or fourth quarter of 2020.

37:20 There's not any sort of statutory requirements of when they would do that, but our thinking based upon the LCDs that went from draft to final in earlier 2019 took about 11, 12 months. That seems to be maybe the right place to put a stake in the ground. We did see last fall in the third quarter when policies that were sort of being reviewed based in late second quarter then were being effective in third quarter. moved from negative to policy with a small number of plans. We do have additional commercial payers that are in also the mid-year cycle in 2020. Our managed care group is certainly engaged with them to let them appreciate the Moldy-X coverage decision by Palmetto. We also saw in December 2019 positive improvements in the language from NCCN as it relates to recognizing that our test may add value to current staging systems.

38:27 From what we can tell, they did not necessarily review all 22 of our peer-reviewed publications, so shifting from sort of a negative stance to a semi-positive stance I think is a good thing. That's where most of the molecular diagnostic tests sit, by the way, in terms of NCCN Reviews, so we feel we can take that and leverage that properly. And I would expect we would see some modest improvements or gains in coverage in the sort of second half of 2020 and more through the next year and a half to two years out. As you know, it's difficult to appreciate when a thorough review will be completed. Will that be dependent upon in-cycle, out-of-cycle? So we're a little careful on kind of assuming a fantastic change in ASP.

39:12 I think we expect some modest improvements over 2020 and 2021. That's probably the most conservative best-case approach to take today. Does that kind of answer the questions, Sanjeev?

39:22 Yes, absolutely. Thank you so much for that. And then just lastly from me, first of all, congratulations on getting accepted for an oral presentation at the American Academy of Dermatology meeting later this month. I was curious, do you anticipate peer-reviewed publications for both of your pipeline products before you launch commercially later this year, or do you think that poster presentations or other types of data readouts will be sufficient before your commercial launch?

39:52 Thank you. Thank you. I really like that question, but that's all right. I think from a sort of clinical adoption perspective, clinicians would always appreciate seeing peer-reviewed publications so they can make their own assessment on a written piece of work that's been reviewed by their peers, I guess. Our thinking is that assuming that manuscripts are reviewed in a fairly timely fashion, I'd like to have those published in print near or at or before the time that we launch our products. So I guess on the one hand, I would say we'd like to go ahead and see peer-reviewed publication in the literature base to add sort of more credibility weight, I guess, to acceptance or review a new product. That being said, we have conducted a number of interactions with potential customers, and based upon the feedback we're getting about clinical need to really impact better decisions, We may make the choice to go in advance of peer-reviewed publications to those that meet our timeline just so we can have an opportunity to really meet patient care needs.

41:09 But that's something we're kind of monitoring right now, and we'll make a decision as we get closer to timing and comfort about making these tests available for patient care. Great.

41:21 Thank you so much. Thank you. And our next question comes from Catherine Schulte with Baird. Your line is open.

41:30 Hey guys, congrats on the quarter and thanks for the questions. I guess first on the NCCN guideline update in December, heard your comments from the payer perspective, but what, if any kind of tailwind, do you think this update could provide in terms of driving volumes in 2020?

41:47 From an ordering standpoint, so quantitatively, I think it's too early to comment with data, Catherine. Qualitatively, we know that there are some clinicians, there are some institutions who have sort of taken the position that we'd like to have third-party endorsement, I guess, by NCCN before we would quote adopt or view those tests as being valid. So I do think we expect to see some clinician growth occur and maybe some institutional growth occur as the adjustment in language is put out there by our teams. That being said, I don't know if we could be able to discern that independently of the growth in our sales force in 23 to 32 sales reps in December.

42:36 So those, fortunately or not, came on top of each other. So do we see a very, very nice growth in the first quarter of 2020, for example, in report volume that's higher than our internal forecast? I don't know if I'll be able to tease apart in saying that's due to either the improvement in NCCN supportive language orbits due to the fact that we scaled our Salesforce up by a third again. Hopefully a combination of both. I think we'll be able to look at some individual select institutions where our information seems to confirm that they were waiting for one more brick to fall before they would go in and step out and use our tests clinically. Those we could probably track more comfortably as being an event related to NCCM. answered the question a bit there.

43:25 Yes, very helpful. And then on guidance, I might try to take another stab at Puneet's question, but how should we be thinking about underlying cutaneous volume growth in 2020? And then separately, based on your comments, I assume there isn't anything embedded into guidance for a final Medicare expansion. Is that correct?

43:48 Yeah. Your second point, Catherine, is correct. And We would suggest that we're coming off a larger base this year, and so we'll see some of the volume growth normalize out to where we think is a more durable three- to five-year rate, just coming off of the big growth from last year and larger numbers. But nothing in there, as I said, not too much improvement on the reimbursement side of it.

44:18 Okay, great. And then last one for me, just how should we think about CapEx this year? Any need to expand lab capacity or other major investments ahead?

44:27 Yeah, we are expanding in our footprint in both our headquarters and our lab. It's certainly fairly modest relative to the SG&A line and all kind of normal course just to accommodate our growth. So nothing significant. There will be some CapEx, but it's fairly modest.

44:53 I'll follow up slightly. So on the CapEx, I would concur with Frank's commentary. But what is exciting about the increase in our footprint in Phoenix is right now, I believe when we calculated last year, we thought we could do somewhere between 60,000 and 66,000 Gene Expression Profile tests clinically on an annual basis with a single shift working five days a week. So if we did not expand our facility footprint, we could certainly add a second shift potentially or work the weekends and comfortably improve our sort of maximum capacity. We made the decision last fall post-IPO that we wanted to get ahead of that commercial need as well as build out a stronger research wet lab facility in Phoenix.

45:46 And so part of our decision back in the fall to undertake essentially doubling our footprint was to enable us to, one, easily manage through our gene expression profile clinical tests as those continue to ramp and also hopefully accelerate some of our wet laboratory discovery efforts and development efforts for current and future pipeline products. That remains on track. The actual CapEx is quite modest to have us get there, which is good, I think, from an overall budgetary standpoint. And here in Houston or in Friendswood, we've maintained roughly the same size facility for about a year and a half, and things are tight here. We're giving up conference rooms right and left to make sure we can manage the employee expansion, and we expect to move into our new facility that should have several years' growth of it in the midsummer timeline, which, again, also only has modest CapEx implications for the company.

46:43 All right, great. And I might sneak one more in. I know you've talked about potentially initiating some R&D work on two additional pipeline tests sometime in the first half of this year. Any color on when we could learn what those new applications would be?

46:58 Yeah, so we are planning on initiating that in the second half of the year, but maybe you call it 2020, right? and I guess the question of what the initiation is that when the protocols first go through IRB or when we actually first analyze some data sets some broad door wiggle room there. I'm not sure we'll kind of disclose what those targets look like. I guess the first is a direct answer there. I think we would look at that probably in the second half of the year as we are kind of seeing some early data and see what that actually means. The cycle of time from development to clinical availability of a test, I figure we have part of 2020 to kind of think through what that might look like and either provide some early expectations in terms of what the marketplace might be, what the future TAM could be, but given it will still be a couple of years out, I think we probably would not discuss that until the first half of the year. Is that what you're thinking, Frank, too?

47:55 All right, great. Thank you. Thank you. Our next question comes from Max Masucci with Canaccord Genuity. Your line is open.

48:08 Hi. Good afternoon. Just to start, can you speak to trends in clinician reordering rates, sort of that same store sales growth metric and stickiness you're seeing with adopters?

48:23 Yeah. Hi, Max. Good to talk to you. Let's see, I don't have that updated in the 10K, so I'll talk about what we do have maybe, and maybe that's something we need to refresh and add next time we go through. So, we estimate that based upon the best available data that we have, that there's maybe a target clinician audience of maybe 11,000 to 15,000 physicians and nurse practitioners and Physician Assistants. That may be a little high, maybe a little low, but the data is a little tough to get your hands around that's accurate, but let's call it that range. We finished out last year with just over 3,900 ordering clinicians, so depending on how you want to analyze that, I guess that could be, what, 20%, 25% and 20% or 30% of targetable clinicians as we see them ordered our tests at least once last year. Now given our high growth, a number of those clinicians didn't order until the fourth quarter and a smaller number in the third quarter, so it's not like that was a stable annual growth of ordering doctors. So let's put that number aside and call it 25% just to make it even.

49:35 On the patient side, we believe based upon our analysis of both SEER data and the reporting of melanoma, that there's around 130,000 patients diagnosed each year with invasive cutaneous melanoma that's local or regional. So what does that mean? It's kind of stage one, two, or three disease and excludes stage four. Stage four are people who are diagnosed with distant metastasis which are, since that's one of the endpoints our test predicts, that would be a poor use of our test, inappropriate use of our test. So take 130,000 as your base denominator and we reported out last year 15,500 and change reports. That comes in kind of at an annual penetration rate of what 12, 13% maybe.

50:20 So we've got maybe call it 13% of patients tested last year by 25% of clinicians we think are seeing a reasonable number of melanoma patients. So I would say one is that there is an opportunity to I think increase sort of saying store sales to use that terminology and we do see when we look at the types of patients physicians are ordering our tests on that some physicians have sort of limited the use of our tests to certain patient populations based upon Breslau sickness, maybe AIDS sometimes, and that may all be appropriate in terms of how they think about risk without our tests. And some of the articles that we published last year essentially are looked at focusing a discussion around You know what, Dr. Max, I understand that you kind of use our tests predominantly for this kind of population of patients.

51:13 I'd like to have a conversation with you about maybe appropriate use of our tests in a broader population. So that kind of interaction is ongoing today. We did see some nice improvements in terms of physicians who had limited our use in terms of patients that they thought was appropriate to more appropriate use for their tests as valid against. in the latter half of 2019. So we've continued that expansion on SANE store sales over the course of the year. And of course, given that we only have about one quarter of the estimated ordering clinicians using our tests today, there's also a nice opportunity to really go in and impact with both publications and other evidence development as well as guideline improvements, et cetera, to be able to have a conversation about some of those fence fitters that we've talked to in the past, but also I think equally opportunistic are physicians who maybe we've only seen once in three or four years, not at all, and to be able to have them have an opportunity with their increased breadth in the field to really listen to and understand, appreciate, consider, and hopefully adopt our tests for the betterment of their patient care decisions.

52:22 That's very helpful. And then just circling back to the COVID-19 question, just to button that up, I guess just generally how do you view the resilience Your business from supply chain and user demand and then customer behavior standpoint?

52:38 Yeah, so on supply chain separately here, we reached out back in, I think, early January to confirm where our key reagents and the key sort of laboratory bottlenecks might be. and our suppliers or vendor partners indicated that none of the reagents that we use are focused on come from China. That sounded like limited exposure. They anticipated no supply chain issued from a material perspective. That being said, what we haven't seen but what I don't know how to gauge would be do we think that there's going to be a manufacturing plant that might close down or limit employee contact because they have some A small population or individual in their plant that would be diagnosed with coronavirus.

53:31 That part, I can't guesstimate right now, to be quite frank. We've checked in with our vendor partners here about once every two weeks, and they indicate they don't see any issues. We also maintain a very healthy supply of reagents anyways in the laboratory going out, so I don't think that'll be a concern that we see today. Is that fair, Frank? and then the question about sort of patient flow or maybe order flow or report flow. Again, outside of losing a couple of podium opportunities and engaging customers at major meetings, we aren't hearing any material change in terms of access to our physician base to be able to help appropriately educate them on newer data, appropriate use of our tests.

54:20 That could change, of course, over time here, but so far we haven't seen that bubble up as being a material impact that we should be concerned about, but that's as of March 10th today. So we don't see that being a larger issue for us. I think the thing which is hard to predict, as I said earlier, is are we going to see patients abstaining from going to their clinician for the diagnosis of melanoma. I guess my first comment would be is if you have a suspicious mole that you're concerned about, I think that patient likely makes themselves go into a dermatologist on a regular basis as opposed to delaying care. So we might see something on a week-to-week shift or month-to-month.

55:06 I would think a quarterly impact in terms of our reporting would be non-visible from a public standpoint. Seth, do you want to add any commentary there?

55:16 Great, thanks for taking the questions. Thank you, and I'm showing no other questions in the queue. I'd like to turn it back to Derek for closing comments.

55:27 Okay, thank you, operator. This concludes our fourth quarter and year-end 2019 earnings call. I want to thank you again for joining us today and for your continued interest in support of Castle Biosciences. Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect, everyone. Have a great day.