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

Bill Quirk - Piper Jaffray John Hsu - Raymond James

Good afternoon and thank you for joining us today. CareDx has released financial results for the quarter ended September 30, 2018.

The release is currently available on the company's website at www.caredx.com. Peter Maag, Chief Executive Officer and President; and Michael Bell, Chief Financial Officer, will host this afternoon's call.

Before we get started, I would like to remind everyone that management will be making statements during this call that include forward-looking statements within the meaning of federal securities laws, which are made pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1999. Any statements contained in this call that are not statements of historical facts should be deemed to be forward-looking statements.

All forward-looking statements, including, without limitation, our 2018 financial guidance and 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 involve material risks and uncertainties that could cause actual results to differ materially from those anticipated or implied by these forward-looking statements.

Accordingly, you should not place undue reliance on these statements. For a list and descriptions of the risks and uncertainties associated with our business, please see our filings with the Securities and Exchange Commission.

CareDx disclaims any intention or obligation except as required by law, to update or revise any financial projections or other forward-looking statements whether because of new information, future events or otherwise. This conference call contains sensitive information and is accurate only as of the live broadcast today, November 8, 2018.

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

I will now turn the call over to Peter.

Thanks, David, and good afternoon, everyone. Thank you for joining us.

We hear at CareDx, had another exciting quarter. In the last 12 months, we have provided 2% of kidney transplant patients in the U.S.

with an AlloSure results. This quarter, we also achieved a significant financial milestone.

We have reached our goal of positive adjusted EBITDA, a quarter ahead of plan. And the team achieved positive operating cash flow.

Our strategy to bring high value diagnostic solutions to transplant patients is only beginning to bear financial fruit, and we anticipate continued progress on both of these measures in coming quarters. This afternoon, I will provide an update on the recent achievements across our businesses, Mike will then provide additional financial details on our third quarter performance and discuss our 2018 guidance.

It's great to see the acceleration of our top line. With total revenues growing 74% year-over-year to $21.2 million driven by 106% year-over-year increase in testing services revenue.

Our third quarter adjusted EBITDA was positive at $0.2 million. The team achieved this one quarter ahead of plan.

AlloSure remains the biggest contributor to our robust growth. Penetration of transplant centers is ahead of plan and standing order patient levels are phenomenal.

AlloSure's positioning and market acceptance continues to improve and should enable us to deliver continued growth in the quarters and years ahead. At the end of the third quarter, 96 centers had provided AlloSure results to their transplant patients since launch.

These 96 centers represent just over 60% of the transplant volume in the United States. CareDx provided 3,708 AlloSure patient results in the third quarter to approximately 2,800 kidney transplant patients.

Overall, reimbursement was consistent with previous quarters, with 70% to 80% of our AlloSure volume attributed to Medicare patients. Demand for AlloSure continues to be broad and includes both patients who recently received a kidney transplant as well as patients that received the kidney allograft in previous years.

Driving adherence to the AlloSure routine testing schedule is integral to our strategy as our assistance in providing care to patients further embeds us in transplant center workflows. Multiple centers are utilizing the recommended testing protocol for their kidney transplant patients and through our K-OAR registry; we are starting to see wide adoptions of protocols in routine use.

In third quarter of 2018, 1,260 new standing order patients were added, which is up from 793 in the second quarter. We defined standing order patients as patients that will follow the surveillance protocol for at least one year and our cumulative total of 2,736 standing order patients is a key driver for recurring revenue.

As I just mentioned, an important element to establish this protocol is the rollout of our clinical trial, also known as, Kidney Outcome AlloSure Registry, or K-OAR. As a reminder, K-OAR is included in our Medicare coverage as we are committed to data development as we follow patients longitudinally for three years.

We are progressing well, having reached nearly 50% of our goal of enrolling 1,000 patients. As of the end of September of 2018, 40 centers had been initiated as K-OAR study sites and 480 patients had been enrolled.

We anticipate that the number of centers will continue to increase to about 50, as we have seen keen interest by many centers to participate in this study. Multicenter studies, like K-OAR create a competitive advantage for the company as these studies provide us with additional touch points with transplant centers and keep us in direct dialogue with the key innovation hubs and opinion leaders.

These studies also impact compliance and adherence to standard protocol, which is a crucial element to our work in the transplant community. In the K-OAR study we target 75% adherence to our AlloSure surveillance protocol.

Our initial experience confirms that this is a good metric to monitor, as some centers have limited processes in place to influence adherence. Our CareDx transplant patient care managers can be very helpful.

We will update you on our progress as we gain additional data points. With our increasing number of transplant center partnerships, our unrivaled peer-review publications, our protocol adherence initiatives, and the ongoing K-OAR study, we are building a formidable mode around kidney transplant patient care.

Now shifting to AlloMap. Third quarter 2018 test volume increased 6% year-over-year translating into 4,080 patient results.

We introduced our HeartCare concept in April. This novel heart transplant surveillance solution combines both AlloMap and AlloSure-Heart, providing physicians and patients with a comprehensive view into the health of the heart allograft.

It remains early in the HeartCare launch, but we are pleased with the initial test direction to date. In September, we launched the Surveillance HeartCare outcome registry or SHORE during the 22nd Annual Scientific Meeting of the Heart Failure Society of America, which was now received by transplant cardiologist.

SHORE is a prospective multicenter observational registry of patients receiving HeartCare surveillance. AlloMap remains the pillow of our forward-looking growth strategy and we anticipate SHORE as well as the standardized routine surveillance established by HeartCare will benefit growth going forward.

Now turning to our transplant lab products. Our product revenue growth accelerated to 9% in the quarter, contributing $4.2 million to our revenue in the quarter.

This is a step up from the 5% growth experienced in the second quarter with the acceleration driven by continued market direction for QTYPE and the first full quarter of TruSight HLA sales. In October, we announced the 2019 launch of three new next-generation sequencing products, AlloSeq HLA will significantly improve existing NGS HLA product offering by enhancing turnaround time and workflow to make this the best-in-class NGS HLA typing product.

AlloSeq Cell-free DNA kit will enable us across the globe to assess transplant graft health in a quantitative manner and improve care by reducing the need for unnecessary invasive procedures. AlloSeq BMT is a next-generation sequencing solution, which enables CareDx to enter the global bone marrow transplantation market.

AlloSure is enjoying an exceptional reception from the transplant community and we have reached our growth of profitable adjusted EBITDA, along with positive operating cash flow a quarter ahead of our plan. As such, we are going to modestly increase our operating expense with the focus on marketing and sales expenditures.

This is to build on the momentum of the AlloSure adoption, which is fueling our growth, and which will further fortify our position in both the meaningful mode we are developing in transplantation diagnostics. CareDx is uniquely positioned to provide genomic information to transplant patients and has established its market leadership with close ties to the clinical community.

We believe, we are swiftly becoming the leader in transplant patient care. Our focus goes beyond providing test results; we focus on impacting long-term patient outcome.

To do that, we foster direct-to-patient interactions. Today, we care for approximately 2% of the U.S.

kidney transplant patient population. This is a great start, but this is still just the beginning as we estimate that there are more than 700,000 transplant patients worldwide and the need for organ transplantation is ever increasing.

Mike, I'll hand the call over to you to discuss financials.

Thank you, Peter. Turning first to the income statement.

Our third quarter 2018 testing revenue increased 106% year-over-year to $16.8 million. Our 2018 third quarter testing revenue includes AlloSure volume of 3,708 tests, a 6% AlloMap volume increase from the prior year quarter to 4,080 tests and January 1, increase in the AlloMap Medicare reimbursement rate from $2,840 to $3,240.

We continue to be very pleased with the revenue and the momentum of AlloSure following the launch, with test trajectory remaining ahead of our initial plan. Our third quarter product revenue increased 9% year-over-year to $4.2 million and as such, total revenue in the third quarter 2018, was $21.2 million, representing a 74% increase compared to the prior year's $12.2 million.

For the third quarter of 2018, net loss was $20.0 million compared to a net loss of $14.3 million in the same period of 2017. Our net loss per share was $0.54 for the quarter compared to $0.63 in the third quarter of 2017.

Our third quarter net loss includes the $17.1 million charge for the change in our current stock warrant liability. This charge was incurred because warrants were excised during the third quarter and in addition, there was an increase in the estimated fair market value of warrants that were not exercised.

For the third quarter 2018, our non-GAAP net loss was $0.6 million compared to a non-GAAP net loss of $3.3 million in the same period of 2017. Our non-GAAP net loss per share in the third quarter of 2018 was $0.01, compared to $0.15 in the same period of 2017.

As a reminder, we defined adjusted EBITDA as non-GAAP net loss before interest, income tax, depreciation, amortization, other expense and net loss attributable to non-controlling interests. For the third quarter of 2018, adjusted EBITDA was a gain of $0.2 million compared to a loss of $1.7 million in the third quarter of 2017.

While we continue to target positive adjusted EBITDA for the remainder of 2018, as Peter mentioned earlier, we will not be modestly increasing our marketing and sales expenditures to field with continued growth of AlloSure. Net operating cash flow was positive, $0.4 million in the third quarter of 2018 and our cash and cash equivalents at September 30, 2018, was $26.2 million.

The increase in cash from $16.2 million at the start of the quarter was primarily due to the exercise of $2.5 million warrants in the period, which generated cash of $10.5 million. As a result of the exercise of warrants and stock options in the quarter, the number of shares of common stock outstanding at September 30, 2018, increased to $38.8 million.

The number of fully diluted shares of common stock is approximately $43.0 million and includes 800,000 warrants and $3.4 million stock options and restricted stock units. Turning to guidance.

We are increasing our 2018 revenue expectations to reflect the continued growth of AlloSure and now anticipate $74 million to $75 million for the year. We would note that the third quarter of the calendar year has historically been the highest number of clinic visits to transplant centers and is the function of non-holiday weekdays.

With that, I will open the call for questions.

Congratulations on just an outstanding quarter guys.

Thank you very much, Bill. You following the company for years that our comments has been similar to us.

Thank you.

My pleasure. So first off, I'd like to start the question that I actually pose to Mike last quarter.

And it concerns the 2019 guidance, which at that time was called aspirational, albeit very early in the launch, and now you’re into it, it quite candidly looks kind of conservative. So Mike, what are your kind of longer-term thoughts here?

Well, though thanks for raising this one again. We're still not providing 2019 guidance at the moment.

But I would say that our focus is still on the AlloSure commercialization. And based on our results to date this aspirational $90 million to $100 million, I'd say we're very confident on our ability to hit that goal.

So yes, we're feeling confident on that.

Okay. Fair enough.

And then, Peter, couple of questions for you. One, very nice to see continued centered growth.

It looks, if I'm doing the math right here that you’re probably on about 83 or so of the top 100 centers. Have you -- maybe can you talk to us like there's two things; one, is when you’re calling in these centers, has anyone rebuffed you or rebuffed the sales efforts so I’d be curious as to why?

And then secondly, can you talk a little bit about some of the test usage for patients that are outside of the standing order group, or are we seeing a lot of dabbling by physicians or are we seeing some patterns emerge even though they're not efficiently in the standing order count? Thank you.

Bill, thank you very much. And two very excellent questions.

Given that we're 12 months in, I think we have started to see some patterns in transplant centers. That we are happy to be sharing with you, but it's still somewhat early in the launch.

Of the 96 centers that they have been using the AlloSure since the beginning, yes, there are some centers that have used AlloSure a couple of times and have not reordered. That is just very natural.

You call them dabblers and we call them dabblers as well. These are the clinicians that would like to be ordering the test and see what it does.

We continue to be very focused on the standard use of AlloSure in a significant portion of the patients. And that’s why the K-OAR registry is so important.

The number of 40 centers have adopted now K-OAR protocol is really indicative of the value that this can bring to the community. Our strategy has been, get the foot in the door with one or two tests, then establish K-OAR and then from K-OAR, expand the center into multiuse.

So of the 96 centers to be more specific, I think 10% to 20% of these centers are really the higher frequency users. And then, there as a substantial number of centers that are in the K-OAR sites, that would be the 40 centers that I've been talking about.

And then, there is a tail of centers, that are very, very early in adoption and very few that are -- have just ordered a couple. I don’t think there is a pattern that I would be able to point towards that if they discontinue, they have discontinued for some kind of a reason.

It's very individual reasons.

Okay. Got it.

And then, last one for me, and I guess, it's back to Mike. Any update on the commercial side?

I wouldn’t -- I guess, I wouldn’t expect still early in the launch that we would see some positive medical policy decisions or anything like that? But just curious to see if you're getting paid by any commercial payers?

Are you having discussions with any? This is something -- maybe on the other hand that we should just not be considering as we're adjusting our models?

Thank you.

Yes, Bill. We continue to get paid, I’d say on a ad-hoc basis by some of the commercial payers.

And we don't have any coverage decisions from any of those payers yet. We’ve still not opened up any dialogue with any of the payers because even now, the level of volume that we got with any one particular payer probably isn't enough to open that dialogue.

So we'll be starting to do that in 2019. And so I would continue to include a model of very conservative reimbursement for commercial payers.

Perfect. Thanks a lot guys.

Congrats again.

Thanks.

Good afternoon and nice quarter, guys.

Thank you very much, John.

Excellent. I guess, if we could just start with HeartCare.

I know it's still early on, but are you seeing any positive signals in terms of the AlloMap side of things from HeartCare?

I would say that the 6% volume growth in the third quarter is good volume growth. But it's really not attributed to HeartCare roll out yet.

It's -- we are very early. We have a few centers that are signed up now into the SHORE registry study.

We'll be communicating on that in the fourth quarter call. But take the 6% as our mid-single digit type of volume growth that we had anticipated for AlloMap and we continue to track against that, and HeartCare will continue to drive that mid-single digit volume growth going forward, which is basically driven by an increase in utilization and adoption of our routine surveillance protocol as one of our problems -- or there's been an AlloMap that we have a good penetration in a number of centers and good penetration for patients.

But not as frequent use of AlloMap per patient. And so HeartCare should really help there.

Okay, great. Then, just a quick one on the guidance.

It looks like at the low end, it does imply that you would actually decelerate from a revenue standpoint in the fourth quarter. So just want to make sure there is nothing that you're that makes that any more likely?

Yes. John, I think one thing that we just wanted to always point out is that, third year is usually -- third quarter sorry, of the year is usually the highest volume in the transplant centers during the year.

And so, traditionally, Q4 would be a lower than that for AlloMap for example, and there's holiday days. So we'll just be mindful of the slight seasonality that we have on the quarters.

Okay, great. And then, just last one for me, I'm sure you saw one of the competitors who is -- wants to make an entrance in the space, they just announced pre-submission meeting with CMS.

So any thoughts on when they can get reimbursement? I guess, maybe the second part of the question is, regarding your early comments on kind of building a mole [ph].

How do we think about maybe switching costs from either a protocol or other standpoint between you and potentially another cell-free DNA technology? Thank you.

Well John, thank you very much for highlighting that. I am probably the second best to comment about the reimbursement efforts.

I think in historical, it has taken molecular diagnostics, a significant amount of time to go through the reimbursement process. And we have had a good success with having interactions on the -- with the respective reimbursement authorities.

So I think, I will let other companies to point out on their reimbursement timelines, which in the past when I -- when I heard others talking about, it might have been very, very aggressive. And so, I'll let them talk about the time length.

On the other element -- just forgive me, what was the second point that you were making?

Just, how do you think about maybe the motor switching costs associated with AlloSure?

I think it's clear that, for me, a switching cost of a standing order patient is extremely high. So I think once we -- you see a patient having a standard script for a 12 months' time or standing order for 12 months' time, switching would be extremely difficult.

Once the transplant centers have adopted the new technology, and I'm speaking there from experience in pharmaceuticals, it's incredibly difficult to display, albeit in other product in that center. So I would say that, there is a significant value of having a first mover advantage in being part of that mode.

And how to translate this into switching costs. I'm not sure to numerically do that but our goal has been to penetrate very quickly and very specifically in those and that the number of 96 transplant centers within 12 months, I think speaks for itself.

Excellent. Thank you very much.

This is Julian on for Yi. Thanks for taking my question.

I'm sorry, if I missed it, but can you talk about what is driving the higher than previously guided 2018 revenue? Maybe more specifically, was there a test with volume higher than previous expectations?

And if you could give us a sense of how durable this trend might be going into 2019, that will be very helpful?

Yes, this is Mike. I think the main driver for the increase in the revenue guidance is AlloSure.

It continues to exceed expectations each quarter. And so that’s the key driver.

And so now again, we’ve set revenue guidance for the remainder of the year based on how we see the business at the moment and what we think will be at the end of the year.

Okay. Great.

And my last question, I was just curious, how should we be thinking about operating expenses in 2019. Are you able to give any guidance on that at this time?

No, we’re not giving any guidance on that at this moment.

Okay. Thanks very much.

Well, thank you very much for joining the call. We look forward to updating everyone as we continue to commercialize AlloSure, grow AlloMap and our transplant product business and building our initial profitability.

Thank you very much for joining this call. Thank you.