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CareDx Withdraws Full-Year Guidance on Test Reimbursement Uncertainty; Plans Layoffs


NEW YORK – A decision by Palmetto MolDx to change its reimbursement guidance for solid organ transplant rejection risk tests caused the company to miss revenue estimates for the first quarter and withdraw its financial guidance for the year while triggering significant operational changes at the company.

"Addressing these changes required significant management time and the reallocation of organizational resources," CEO Reg Seeto said in a call with investors on Wednesday following release of CareDx's Q1 earnings.

Seeto noted that the firm has had to update its internal IT system processes, test requisition forms, and workflows.

The Brisbane, California-based company finished the three months ending March 31 with $77.3 million in revenues compared to $79.4 million for the same quarter of 2022, a 3 percent year-over-year decline that fell shy of analysts' average estimate of $80.7 million.

It also withdrew its financial guidance for 2023, citing unknown variables related to Palmetto's updated billing article, and has updated its 2023 business plan to focus on implementing the article's requirements.

"This will require significant and ongoing effort throughout 2023," Seeto said, adding that CareDx would be realigning its cost structure to adapt to the "new and evolving landscape."

In addition, CareDx CFO Abhishek Jain said during the call that the company will restructure its workforce over the remainder of the year with the goal of reducing headcount by about 12 percent, as the company attempts to minimize cash burn and better understand the financial impacts related to the updated reimbursement decision.

Seeto said that Palmetto's decision had thrown considerable confusion into the transplant testing market and that CareDx believes that "the billing article were changes to the LCD and not merely a clarification of existing coverage."

This is in contrast to a statement the company made in March after discussions with MolDx. "It is now our understanding that MolDx does not plan to modify the foundational LCD but instead issued this billing article revision for clarification purposes," Seeto said at the time.

Commenting on his change of opinion on Wednesday's call, Seeto argued that MolDx had acknowledged the March billing article as a change, rather than a clarification, with respect to heart care. The updated guidance, for instance, limits reimbursement to one test per patient encounter, where previously, coverage had been provided when AlloSure was used in conjunction with AlloMap Heart.

The updated billing article also provides new coding to define surveillance and for-cause testing, redefines acceptable surveillance testing as compliant only for patients enrolled in centers that utilize surveillance protocols and would otherwise receive such testing, and will no longer reimburse for-cause tests unless used in place of a biopsy or to confirm biopsy results.

Seeto further noted that uncertainty surrounding whether and when Medicare Administrative Contractor Noridian will adopt and issue the billing articles added to the overall confusion.

"Out of an abundance of caution," he said, "we adopted a conservative approach and paused Medicare reimbursement submissions for AlloSure Kidney on March 7, 2023."

CFO Jain added that this will place a "significant operational burden" on CareDx, as there remains a large proportion of incoming tests that are either using the old forms or are incomplete.

The hold on Medicare billing resulted in withholding approximately 3,200 AlloSure Kidney tests from potential Medicare reimbursement over Q1. The company estimated that these withheld tests would have amounted to approximately $8.9 million more in revenue for the quarter. CareDx plans to submit these "impacted" tests in the next quarter.

"If we were to include the revenue associated with impacted tests, we would have delivered revenues of $86.2 million, or adjusted revenue representing a 5 percent increase as compared to the last quarter and 9 percent year over year," Jain said.

As an example, Seeto pointed to strong testing volumes, as well as gains in its patient and digital services business.

AlloMap and AlloSure volumes rose 17 percent year over year, with nearly 50,000 tests delivered, while revenues generated through the patient and digital services business rose 39 percent compared to Q1 2022.

Despite the complications presented by the updated billing article, CareDx reported making progress in implementing all required changes. The firm reported that by the end of April, approximately half of all test orders received are now on the new forms and contain the newly required information. Seeto cautioned, however, that this process would take time and that the firm expects to see between 80 and 85 percent of forms with the requisite information by the end of the year.

Also on the back of the billing article changes, CareDx withdrew its financial guidance for the year.

"Given the uncertainties between interpreting MolDx, the Noridian positions, and our operational implementation taking time, we believe it is prudent to withdraw guidance," Seeto said.

He added that the company would revisit the question of guidance in its second quarter earnings call, and assured investors that the company currently has enough cash on its balance sheet and does not anticipate needing to raise more in the future.

CareDx ended the quarter with approximately $74.7 million in cash and cash equivalents and approximately $211.3 million in marketable securities.

Additionally, the firm is reviewing its test volumes in areas where tests are not reimbursed, prioritizing its R&D spending to stay focused on areas most likely to improve test coverage and drive revenue, and reducing its legal and discretionary spending to the greatest extent possible.

The company's Q1 R&D spending rose 11 percent year over year to $24.4 million from $21.9 million, while its SG&A expenses rose 5 percent to $52.0 million from $49.7 million a year ago.

CareDx's net loss was $23.8 million, or $.44 per share, compared to $19.7 million, or $.37 per share, in the same quarter last year. Adjusted loss per share was $.11, on par with analysts' average estimate.