CareDx Inc

NASDAQ:CDNA

Earnings Call Transcript 2023-Q2

[Operator]

Greetings, and welcome to the CareDx, Incorporated Second Quarter 2023 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded, Tuesday, August 8, 2023.

It is now my pleasure to turn the conference over to Greg from the Gilmartin Group. Please go ahead.

[Greg Chodaczek, Gilmartin Group, IR]

Thank you, Rocco. Good afternoon, and thank you for joining us today. Earlier today, CareDx released financial results for the quarter ending June 30, 2023. The release is currently available on the company's website at www.caredx.com. Reg Seeto, Chief Executive Officer; Abhishek Jain, Chief Financial Officer; and Robert Woodward, Senior Vice President of R&D, 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 the federal securities laws, which are made pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995.

Any statements contained in this call that are not statements of historical facts should be deemed to be forward-looking statements. All forward-looking statements, including, without limitation, our examination of historical operating trends, expectations regarding coverage decisions, pricing enrollment matters and our 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 description of the risks and uncertainties associated with our business, please see our filings with the Securities and Exchange Commission. The information provided in this conference call speaks only to the live broadcast today, August 8, 2023. CareDx disclaims any intention or obligation, except as required by law, to update or revise any information, financial projections or forward-looking statements, whether because of new information, future events or otherwise.

This call will also include a discussion of certain financial measures that are 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 Reg.

[Reg Seeto, President, CEO]

Thanks, Greg. Good afternoon, everyone, and thank you for joining us for CareDx's second quarter 2023 earnings conference call. Our second quarter was focused on the following. One, continued execution of our 2023 strategic plan with the 3 Cs. 2, operational adjustments implemented as a result of the Billing Article and 3, maintaining our strong financial discipline and structure.

Overall, it was a successful operational quarter. Firstly, we delivered against our 2023 plan across the 3 Cs, with key highlights since our last reporting being on coverage, we confirmed MolDX coverage with HeartCare. Next, on catalyst, we received AlloSure Lung MolDX approval. Next, on collections, we collected 110% of Q2 testing services revenues.

Secondly, in response to the Billing Article, we achieved our adoption target of 80% plus for completed Test Requisition Form 2 quarters earlier than planned. This was achieved in the month of June versus the end of Q4 target.

Thirdly, we kept a strong cash position at $283 million in debt free, which has enabled us to continue strategic acquisitions and restarting the share buyback. Given the above, we were able to issue updated 2023 revenue guidance.

Now, looking into the 3 Cs in more detail, we made excellent progress. On coverage, we're starting to build momentum and replicate what we've done with the other C, collections. Since Q1, we've added coverage across both Medicare and commercial plans. We're excited for lung and heart patients, with Medicare coverage approved for both AlloSure Lung and HeartCare.

We're especially pleased to see HeartCare, MolDX coverage confirmed. As noted in a press release last week, we received specific coverage for HeartCare use in the heart transplant surveillance setting. As a reminder, HeartCare was approved by MolDX in 2020, and the Billing Article came into effect March 31st of this year, which changed coverage for 2 tests performed at the same encounter. This specific HeartCare coverage now establishes the path for multimodality reimbursement and is a major milestone in heart transplant care.

In addition, it removes any doubt on this topic of multimodality. I also want to share some more detail on our commercial payer coverage efforts since the ISHLT guidelines and Billing Article were announced. We've expanded and added regional coverage across all organs.

As examples, in kidney, we've recently gained coverage from a national lab benefit manager. As a result, we have added approximately 5 million covered lives in kidney in the second quarter. In Heart, the focus has been on expanding AlloMap Heart commercial coverage from 1 year post transplant to earlier use starting at 2 months and early in Q3. Our national payer has begun covering our Heart testing earlier in year 1. As a result, we've expanded coverage for AlloMap Heart in year 1 for 25 million covered lives.

Now onto pipeline Catalysts, we have 1 of the broadest pipeline portfolios in transplant. We're proud to invest at 100% in transplant innovation and to be the first and only MolDX approval in lung to donor-derived sulfonamide with AlloSure Lung.

We also submitted AlloMap kidney and UroMap as standalone tests and will later submit for multimodal testing once we have generated multimodal data, as we did with HeartCare. We are particularly excited about UroMap, which offers a unique opportunity with a new modality in urine to provide insights into kidney transplant rejection.

These approvals will take time, but as the leader in transplant innovation, we have introduced most of the current offerings in the market and understand the process to obtain approvals.

As an example with MolDX approvals, we were the first and only to receive gene expression profiling approval for Heart with AlloMap, the first to receive donor-derived sulfonamide coverage for kidney with AlloSure Kidney, the first and only to receive multimodal coverage for HeartCare through AlloSure Heart, the first and only to receive donor-derived sulfonamide coverage for Lung with AlloSure Lung, and again, the only company to receive multimodal confirmation with HeartCare as a specific single testing service that combines 2 tests.

Lastly, now onto collections. We delivered our third consecutive quarter of testing services collections exceeding testing services revenues. In the last 3 quarters, we have now collected an incremental $20 million since Q4 2022 with 110% of cash collected over testing services revenues. We had a plan, we built it, and continue to implement and execute against this plan. In addition to the success of the 3 Cs, we have made excellent progress with adjustments necessary due to the March Billing Article.

I am pleased to report that, the education and implementation efforts of a cross-functional team have led to increased adoption of our new TRFs during Q2. We started in April at 50%, we ended May at 70%, and in June we ended at over 80%. As a result, we delivered our Q4 target earlier by 2 quarters in achieving a greater than 80% adoption rate with our new TRFs.

Of the forms that are not complete, we started the process of obtaining additional information. Using the example that, if more than 80% of TRFs are completed, then under 20% are not, the team has been able to successfully collect information on over 40% of these latter tests. The net impact of these efforts on using, 1, new forms, and then 2, addressing incomplete forms, is that we ended June with approximately 90% of all Medicare tests submitted for reimbursement.

With that said, I could not be prouder of the organization, which has been faced with so many challenges since the start of March 2023, when the Billing Article was introduced. The team has had to work non-stop across multiple work streams to implement these changes with the need to educate physicians and centers to make operational changes with IT systems, and with the business response given the financial impact of the Billing Article.

I continue to be impressed by the resilience of our people during this time of change. Given the successful implementation of the original 2023 plan, and by delivering on the operational TRF adjustments 2 quarters earlier than planned, we now have more visibility with the testing services business and are issuing updated revenue guidance for 2023, with a range of $240 million to $260 million.

I'll briefly review the second quarter financial results, but Abhishek will be providing more details on Q2 and guidance in this section. For the second quarter, we recorded revenues of $70.3 million, of which approximately $7.8 million was attributed to the March AlloSure Kidney Test that was submitted to Medicare during the second quarter.

For the second quarter, we reported a GAAP loss of $25 million and a non GAAP loss of $9.9 million, and adjusted EBITDA loss of $10.4 million. We ended the quarter with an excellent cash position of $283 million, driven by our financial discipline and focus on collections.

Now, back to the Testing Services revenue, which was $53.4 million for the quarter, down 14% sequentially and 20% year-over-year. This expected decrease was driven by the impact of the billing article, where we expected a low point in testing services volume during Q2. The testing services volume appeared to be reaching an 8-year. The issue is we need to continue the process of education, given the multiple updates that have come from MolDx.

Changes require internal and transplant center updates to systems and processes. As a reminder, there was a billing article release March 2, a second on May 4th, followed by a HeartCare approval update on August 2nd, and our MAC has not yet adopted either billing article from MolDx.

In parallel, it should be noted that we have stated publicly the company believes the changes introduced in the billing article this year are impermissible and introduced changes to the existing and prior coverage policies and prior public responses made by Noridian and MolDx.

As previously stated, we are concerned about the implications of these revisions to transplant patients. While we have seen progress in heart, we believe the restrictions imposed on transplant surveillance monitoring for kidney transplant patients is worrisome.

Surveillance biopsy protocols to which the use of non-invasive tests is tied are often not in place due to the invasive nature of biopsies, and AlloSure has a demonstrated ability to discriminate sub-clinical rejection that is earlier than it would have been otherwise identified.

Now moving to non-testing services business, we saw strong contributions which accounted for approximately 30% of revenues this quarter once we exclude the March test submitted in Q2. Our patient and testing -- our Patient and Digital Solutions business delivered strong growth for the quarter and reported revenues of $9 million, representing a 33% increase year-over-year and a sequential increase of 4.6%.

As a reminder, this business was built de novo from strategic acquisitions and subsequent organic growth over the last 4 years. The recently announced acquisition of MediGO continues that strategy. We acquired the #1 player in the OPO, organ tracking space with close to 40% of the organ procurement organizations under contract. This acquisition continues the strategic vision of being the leader in the transplant ecosystem. This is an exciting opportunity in time to start working with the OPOs to create linkages with transplant centers and to position our leading set of digital services.

This is an area undergoing rapid and real-time change such as at UNOS and provides us a unique opportunity to be sitting as this space evolves and to capitalize on new opportunities.

Our products business represents our global strategy. There are significant ex-U.S. opportunities that we can achieve from the products business, especially as we expand our product offerings, which were hampered as they were launched during COVID.

For the quarter, we reported product revenues of $7.9 million, representing a 17% increase year-over-year and an increase of 15% sequentially. Offsetting some of this launch growth is the reduction in the mature parts of the products portfolio, which declined quarter-over-quarter.

I believe a sustainable, successful company has to have 1, a strong mission; 2, a clear vision; and 3, a well-thought-out strategy. The benefit of this approach has never been clearer, as we faced a lot of change, chaos and challenges during 2023 with the billing article. We have always had a consistent strategy and with HeartCare, we saw a key validation of that strategy, which is the focus on delivering meaningful innovation to transplant patients.

As a summary of where we are and reflections with this approach, 1, we have a 2023 plan and have kept to it. The strategic plan has been successfully executed and delivered on with the 3Cs. This plan continues into the second half of 2023.

2, we deal immediately with market events. The unplanned changes rising with the billing article were addressed with a cross-functional leadership approach, including sharing talent from other parts of the organization to help adjust to this change.

3, we continue to build out the company strategy. The recent MediGO acquisition continues our stated vision to be the lead in the transplant ecosystem.

4, we continue to execute on our 2-decade mission with a commitment to improve the long-term outcomes of patients by providing innovative solutions along that patient journey. The recent MolDx approvals for HeartCare, now AlloSure Lung reflect that commitment.

There were times when some investors and analysts asked if we should exit lung and exit multimodality. Staying true to our mission, we're now the only company to achieve these major MolDx milestones of lung and multimodal HeartCare approval. It's a high bar to be the first.

And 5, we're building a sustainable company, maintaining a financially strong company that allows us the flexibility to build our long-term strategy. We have a strong cash position and our long-term goal for being adjusted EBITDA profitable has not changed, as we operate with financial discipline.

In closing, I believe that CareDx is now an even stronger, more determined company as a result of these challenges. I want to thank patients, caregivers, physicians, and associations that expressed interest to support transplant innovation and access to care during this time. I also want to particularly thank the HeartCare work stream team, who provided the submission to MolDx. We always believe that HeartCare represents a stepwise improvement for heart transplant patients.

Now turning it over to Abhishek.

[Abhishek Jain, CFO]

Thank you, Reg. We are pleased to share the results from the second quarter. I'll address quarterly financial results, the impact of billing article implementation, and close with an update on guidance.

We are pleased with our second quarter results. Considering the work required on the operational implementation of the billing article, key highlights are, number one, maintain the solid cash position of $283 million using little cash in operating activities. Number two, continue to maintain our excellent momentum in collections that was over 110% of our reported testing services revenue for a third consecutive quarter. Our collection efforts have helped us generate over $20 million in incremental cash in the last 3 quarters.

Reported revenue of $70.3 million, a decrease of 13% year-over-year, and 9% as compared to the previous quarter due to the impact of billing article. Number four, achieved strong operation results in execution of the billing article requirements. New TRF adoption rate climbed over 80% for overall test and kidney above 85% in the month of June, 2 quarters ahead of our initial target. Number five, continue strong growth in our non-testing services business with revenues of $9 million for Patient and Digital Solutions and $7.9 million for products, representing year-over-year growth of 33% and 17% respectively.

In addition, in the beginning of the third quarter, we received Medicare coverage for AlloSure Lung and reestablished Medicare coverage for HeartCare. Let me provide details, starting with testing services. Reported testing services revenue for the second quarter was $53.4 million, down 14% as compared to last quarter's testing services revenue of $61.8 million.

If you recall, in the first quarter of '23, we did not submit claims for approximately 3,200

AlloSure kidney tests for Medicare reimbursement and did not recognize revenue representing approximately $8.9 million. We refer to those tests as the impacted March test.

As planned, we submitted claims for reimbursement for these impacted March tests and received payment and recognized revenue totaling approximately $7.8 million in the second quarter of '23. Adjusting reported revenue in the first and the second quarter for these impacted March tests, the testing services revenue was $45.6 million in the second quarter of '23, as compared to $70.7 million in the first quarter of '23, or down 36% sequentially.

The impact on our revenue was primarily driven by a mix of 3 factors. Number one, expected reduction in volume. Number two, adoption rate of new TRFs. And number three, tests not yet supplemented by the end of the quarter.

Firstly, on reduction in volumes, reported testing services volume for the second quarter was approximately 37,500 tests, down 25% as compared to the last quarter. Approximately 80% of the volume declined was from our kidney testing services.

Our kidney testing was more impacted due to billing article restrictions on surveillance testing. Our heart testing services, we continue to bill AlloSure Heart Test for reimbursement when used in conjunction with AlloMap Heart in line with the current coverage policy from Noridian.

In addition, multiple revisions in the billing article made it challenging for us and for the transplant centers to continually adapt and then update forms, and these needed to be operationalized into IT systems. These multiple changes have resulted in confusion and in some cases, clinicians pausing their ordering of these tests.

Now turning to adoption of new TRF and supplementation. In our previous earnings call, we had stated that we would not bill AlloSure Kidney Medicare Test after billing article effective date of March 31, '23, unless it has the necessary information as required by the billing article.

We also provided lead indicators on adoption of new TRF for kidney. We are pleased to report that new TRF adoption for our kidney testing services was over 70% in the second quarter and over 85% in the month of June, way ahead of our initial target.

For claims, requiring supplementation, we put together a dedicated team and our initial success rate has been over 40% during the second quarter of '23. Despite the herculean efforts of the team on achieving great success in implementation, there's still a portion of tests that is pending supplementation that we have not recognized in revenue in the second quarter. Notably, we have 1 year to obtain this additional information on these pending tests and it provides an upside opportunity.

Turning to Testing Services gross margins. Our GAAP testing services gross margin was 71% as compared to 75% in the last quarter. Our non-GAAP testing services gross margin was 73%, as compared to 77% in the last quarter. If we were to exclude the $7.8 million revenue associated with March impacted tests, the adjusted testing services gross margin would be 68%. The drop in gross margin was driven by the drop in testing services volume and associated revenues, and we plan to improve over in the coming quarters.

Now turning to our other businesses. In the second quarter, our Patient and Digital Solutions business revenue was $9 million, a growth of 33% year-over-year and our highest ever revenue for a given quarter. We believe that our investments in the strategic business area are paying off and helping drive our financial results and strengthen our moat.

Our recent acquisition of MediGO, an organ transplant supply chain and logistics company will further expand our digital footprint in the organ procurement organization market. GAAP gross margin for our Digital and Patient Solutions business was 26% in the second quarter, as compared to 20% a year ago.

Our non-GAAP gross margin was 33% in the second quarter, as compared to 29% in the same quarter a year ago. Non-GAAP gross margin improved by 400 basis points year-over-year, a testament to our team's effort to improve margins by effectively integrating our acquisitions and driving growth by leveraging CareDx's leadership position

and capabilities in transplantation.

Products business delivered $7.9 million in revenue in the second quarter of '23, an increase of 17%, as compared to the same quarter a year ago. GAAP gross margin for our products business was 50% in the second quarter of '23, as compared to 42% in the same quarter last year. Non-GAAP products gross margin was 59% in the second quarter of '23, as compared to 54% in the same quarter last year, an improvement of 500 basis points.

As discussed in previous calls, improving the gross margin for products business stays a core focus area for the company. We are consolidating our manufacturing size and phasing out some of our aging products.

Turning to operating expenses and our adjusted EBITDA. Non-GAAP operating expenses for the second quarter were $58.9 million, down about $2.8 million sequentially from Q1 '23. The decrease in our non-GAAP operating expenses was driven by the actions that we took to mitigate the impact of revisions in the billing article on our financials.

We completed our workforce reduction in Q2 and prioritized expenses on R&D and clinical studies, driving the expense reduction. We expect to see the impact of these measures to carry over in the third quarter for the full quarter impact.

Our legal expenses, though, increased further, pushing G&A expenses higher quarter-over-quarter, driven by the various litigation matters and our response to the billing article revision. Our current assessment is that the legal expenses will stay elevated during third quarter and will start to normalize during the fourth quarter of '23 onwards.

For the second quarter of '23, we recorded negative adjusted EBITDA of $10.4 million, compared to negative adjusted EBITDA of $6.4 million in the previous quarter.

Turning to cash. We continue to maintain a differentiated financial profile, as emphasized by a robust balance sheet and cash, cash equivalents and marketable securities of $283 million and no debt. Net cash used in operating activities was less than $1 million for the quarter despite an adjusted EBITDA losses of over $10 million.

Our superior cash management continued to be driven by our focus on cash collections and working capital management. For the third quarter in a row, our collections came in at above 110% of our testing services revenue, driven by continued increase in collections from our commercial customers.

We have now generated over $20 million in incremental cash from collections in the last 3 quarters, and this remains a key area of focus, as we continue to work through more opportunities in this area. I would like to also note that we earned $2.7 million in interest income in the second quarter of '23.

Turning to our second topic around the impact of the billing article revisions on our financial and mitigating plans. In the second quarter of '23, our teams were primarily focused on operational implementation of the billing article revisions, and we are very pleased with the progress we made on this front.

Let me provide some colors, starting with kidney testing services. As discussed earlier, through a combination of new TRF adoption and supplementation based on June trends, approximately 90% of AlloSure Kidney tests now have the necessary information as required by the billing article revisions for reasons for ordering, thus limiting the downside risks.

As it relates to heart testing, since there has been no material change in our billing practices, the reestablished coverage of HeartCare does not impact our revenues for second quarter of '23. Moreover, as Reg mentioned earlier, it is important to note that it clears the path for multimodality and removes the uncertainty around this topic.

Turning to our response on the financial impact of the billing article. First on adjusting our cost structure. As discussed in our last earnings call, I'm glad to let you know that we are on track to drive approximately $40 million to $50 million in annualized savings. We have completed the workforce reduction and achieved a 12% reduction in our headcount, as compared to what we had in the beginning of the year, excluding any impact of acquisitions.

We have reprioritized our projects and R&D spend and started to see the impact on our expenses. We are reallocating resources instead of adding resources to meet the additional administrative burden to meet the requirements of the billing article. Impact of the volume reduction is now reflected in our cost of testing services.

However, as stated earlier, our legal expenses due to multiple legal matters, including our response to the billing article is partially offsetting the savings from our actions. As stated earlier, we anticipate legal expenses will start to normalize during fourth quarter of '23.

Second, as Reg alluded earlier, we are focused on driving growth in our testing services business based on 3C's strategy and specifically driving commercial coverage and advancing our pipeline calculus.

Third, and more specific to collections, given our success, we are further expanding our efforts in areas such as Medicaid and overdue commercial payments to continue to drive collections ahead of our revenues. Finally, we are being thoughtful on the need to balance investments for long-term growth and cost-saving action.

We'll continue to evaluate and will respond appropriately as we gain more clarity. Our goal continues to be to minimize cash burn and become adjusted EBITDA positive.

Finally, let me discuss our guidance for the year. We are issuing updated revenue guidance for '23 to $240 million to $260 million. There has been considerable uncertainty due to the revisions in the billing article and likely become clearer in the coming months. Our guidance assumes the following. Number one, potential impact of the re-established coverage of HeartCare, limiting its use post 12 months and for costs.

Number two, operational implementation of newly established coverage to ensure systems and processes meet the requirement of the billing article.

Number three, uncertainty around the testing services volume as it is still settling post the revisions in the billing article. Number four, AlloSure Lung Medicare coverage. #5, last but not the least, the low end of our guidance assumes some impact from uncertain variables, including but not limited to a response from Noridian to the revisions of the billing article.

We anticipate Q3 to be the potential low point for testing services revenue quarter in '23 with a return to growth in subsequent quarters. But this is also partially dependent on when Noridian adopts the billing article revision.

In summary, we have received Medicare coverage for AlloSure Lung, re-established Medicare coverage for HeartCare, and improved commercial coverage. We had a great second quarter based on the strong operational implementation of the requirements of the billing article. We have taken necessary steps to adjust our cost structure and focusing on driving long-term growth.

Our cash position stays strong with $280 million in cash, and we do not see a need to raise cash in foreseeable future. I cannot be more proud of the operational excellence and the financial discipline demonstrated by the entire team in driving the organization forward.

With that, I'll hand over to Reg.

[Reg Seeto, President, CEO]

Thanks, Abhishek. I think we'll open the line for questions. I'm going to hand over to the moderator.

[Operator]

And today's first question comes from Andrew Cooper at Raymond James. Please go ahead.

[Andrew Cooper, Raymond James]

I guess maybe first, just thinking about the volume trajectory here, I think the last quarter update you said down sort of mid-teens, it trended off a little bit worse than that, and I think in a period where we saw market-wide transplant volumes pick up a little bit. So just maybe a little bit more detail on sort of what you're seeing to the degree you can give us some color in terms of cadence through the quarter and into July and August as well.

[Reg Seeto, President, CEO]

Yes, I'll make some comments, Andrew. And I'll hand over to Abhishek with a couple more details. So, firstly, I think with the overall transplant market volume, as we'd predicted over the last prior quarters, it was a nice rebound with the transplant volumes in fact, we think will be meaningful in the long-term as we have the potential to double transplant volumes, I believe, in that sort of 5-year plus period, which we had sort of alluded to.

Secondly, as we look at some of the trajectory of the volume changes, one thing that came clear is this operational execution. We've had multiple updates. We required multiple revisions during this time.

As a reminder, we had 2 billing articles within a 60-day period, which is sort of unprecedented. We've had further updates with new approvals. So part of it has been this ongoing education as part of that process, but I'll let Abhishek add any more commentary.

[Abhishek Jain, CFO]

No, I think, Reg, you have covered pretty much everything. Nothing further to add to that one. It's just I would want to underscore what Reg was saying, that you had the first billing article in the month of March, and then we were -- we had another revision to the billing article in the beginning of May.

And when you actually receive these revisions, it becomes extremely difficult, not only for us to actually make the changes in our processes and making the changes to our IT system, but also then going back to the transplant centers and having them to update their processes and their ordering system, right? And then, of course, they will make the changes, and accordingly then we will have to make the changes to our billing processes and the rev-rec processes.

So it's kind of a fairly disruptive process from that standpoint. So that's what I would want to highlight there.

[Andrew Cooper, Raymond James]

And maybe just one kind of on that front. If I think back to last quarter, the other thing you highlighted on the TRF goals was the time needed to get outside third-party systems to implement these changes and that you were kind of on the wait list, and that was a big drag as to why 4Q instead of faster. So what changed on that front that let you get to 80%, 85% of these orders coming in on the new TRF? And then I'll hop back into the queue.

[Reg Seeto, President, CEO]

Yes. I mean, I think it was something where we alluded that there was probably about 20% which would take a longer time period, so we knew that the initial capture was around that 80% mark.

What I would say is that it really speaks to the persistence of the organization, the resilience of the organization, plus also the willingness of the centers and physicians to help us with getting things operationalized. We've had more than 2 decades with helping to build this space and reflected with our commitment with some recent approvals both on the HeartCare and lung side.

And I think centers were just wanting to help out, and I think what we sort of alluded to, there were some that would take a longer time which will still do so, but I think what we're seeing here is the team working extremely hard, our relationships, and also our reputation within these centers and physicians wanting to help out.

So all-in-all, I mean, everyone's been working pretty much non-stop to be candid, but at the same time, really, the reputation of CareDx and what we mean to the Transplant Community has just really come through and through. So I think that's all helped with this process.

[Operator]

And our next question today comes from Brandon Couillard with Jefferies. Please go ahead.

[Brandon Couillard, Jefferies]

That's a lot to digest here, maybe just, AJ, starting with the guidance. I mean, you reported about $150 million in the first half. Can you just help us understand the second half bridge off of that $70 million base in the second quarter, or a $62 million adjusted revenue base?

And how should we think about third quarter versus fourth quarter phasing in the context of what has been a lot of progress ahead of plan on the TRFs?

[Abhishek Jain, CFO]

And, of course, this has been one of the things that I had to put a lot of thought around, given the fact that we are still kind of dealing with a lot of operational implementation related complexities, right?

Let me say this way that we wanted to provide a range to help the analysts and the investors to make sure what we have learned in the past few months, so that we can help to start to kind of provide the range or the boundaries here.

When I think about the guidance here, Brandon, to your point, yes, our first half has been about $147 million -- $148 million. And then the top end of my range, the $260 million, that basically assumes the base revenue of your Q2, which you rightly pointed out. If you multiply that by 2, it would be closer to $120 million.

We are basically baking in the limitations of the HeartCare coverage that got reestablished earlier this month, which basically limits its use post 1 year and for a cause. So if you were to basically take that piece out from that base plus the first half, you will basically get to our top end of our guidance.

And then to come to the midpoint of our guidance, basically I've baked in about a 10% buffer there for any adjustments related to the operational implementation, as well as any kind of volume adjustments if you were to make in Q3. So that basically gets you to the midpoint of the guidance.

And, of course, low point, as I've said, that I am baking in for a bit more uncertainties, because we still have not seen already an adopted Billing Article and we still are kind of waiting for those things to clear up in the next few months.

[Reg Seeto, President, CEO]

Yes. Maybe the one thing just to comment on, because I think when Brandon talked about the phasing, I think you mentioned that we expect probably Q3 towards the lower point and then Q4 to be more of the trajectory of moving forwards with growth. So I do think that's an area if you look at the specific phasing. But I think what Abhishek's tried to be here is be very thoughtful to get something out so that there is a form of guide. And we're going to learn a lot more in this Q3, right? I mean, there's a lot of different variables. We've been pretty action-packed quarter, I would say, for sure. But I think we certainly know that getting this back is important, and then we can sort of like have further updates as we move through the quarter.

[Brandon Couillard, Jefferies]

Okay. That's helpful. And then on the HearCare approval last week, what are the implications of that for kidney care? Have you had any feedback from MolDX or Meridian yet? And should we expect a decision in the next few months? And secondarily, what is the likelihood that commercial payers follow Medicare in terms of coverage updates for HeartCare?

[Reg Seeto, President, CEO]

Yes, I'll make some initial comments. I'll let Robert talk in a bit more detail. But I think we've always believed in multimodality. That's the first thing. I think the HeartCare is part of that strategy. It's been core for us since we've developed our strategic approach. And I think getting that approved was significant validation first in 2020 and again now as recent as last week. So I do think it's important that this provides a strategic platform for the company.

I think at the same time, we have started obviously studies along those ways and as we've sort of shared in my script or prepared remarks, we're going to look at initial standalone submissions and then as more data is generated as part of that process.

So I'll let Robert comment a bit more on this. Robert's been the architect of really every major MolDX approval in the company. I went through those series of first and first nominees and Robert has been core to all those and he really knows how to get these approved. So Robert?

[Robert Woodward, SVP, R&D]

Yes I don't know that, there's anything specific on kidney care. Heart care obviously we're happy with and that helps us understand the path with MolDX as we worked with them on that. What's the path moving forward for multimodality across other organs and different testing types and modalities? Obviously, our initial goal is to obtain independent coverage for the tests as we continue to generate data that would support a multimodality coverage from Medicare.

And I think the second part of the question you asked was impact on commercial coverage. And I think it's less about what the Medicare decision may impact on that and more on we've been working with the private payers, the commercial payers, based on the guidelines and the publications and the data and the literature, which is really what helps move the needle forward with that.

[Operator]

And our next question today comes from Mark Massaro with BTIG. Please go ahead.

[Unidentified Analyst]

This is Vivian on for Mark. Thanks for taking the question. So I just wanted to touch base on the SHORE study. If you have a sense of the timing of an interim SHORE readout and what do you think it's going to take for Medicare to move to cover HeartCare beyond year 1 of testing? Are there any other guideline bodies or data readouts to be on the watch out for in addition to ISHLT that might help move along commercially? Thanks.

[Reg Seeto, President, CEO]

Yes, no. And, I can cover a high level and I'll let Robert speak in more detail. But specifically, the SHORE data is part of the SHORE study. I believe we've consistently at ISHLT and ATC released different sort of updates as part of that process, which we'll continue doing. Robert can cover that in a bit more detail as part of that. I do think the significant amount of body of evidence that we've generated has allowed us to get this multimodal approval. And as we've done previously, we will plan to, generate and submit additional data for beyond that time period as well.

But for us, it's -- we are leaders in this space. Again, Robert has driven every single one of our approvals through MolDX. And so, he really knows how to get these done. So, Robert?

[Robert Woodward, SVP, R&D]

Yes. You asked first about SHORE. Obviously, that's our large registry study in heart transplant. And as that continues to progress, will there be an interim publication? And obviously, some data was presented in our symposium at ATC and we'll be working towards publication. Don't have a timeline yet on that. A critical thing with all of these kinds of clinical studies is ensuring, complete data monitoring and having a high-quality publication to come out from that. You also asked about, beyond 1 year for HeartCare. And I would say, similarly, it's working with centers that either have validity or utility data and identifying where those data will support moving forward with requests for coverage beyond the 1 year.

[Unidentified Analyst]

Awesome. Can you just remind us, 1 for Abhishek, what's baked into the Guide for Lung Contribution? Remind us of where penetration of commercial pay stands there and just how we should think about volume risk?

[Abhishek Jain, CFO]

Yes. Generally, what we have shared in the past, you probably would have from a couple of quarts ago, we have been sharing the volume for the AlloSure Lung. And generally about 25% of typically that volume is covered by the Medicare. So that basically is the opportunity. And generally, what I would also suggest, that this particular coverage we have received for bilateral lung transplant, so that becomes basically one of the limitations. So that's how you would basically model the AlloSure Lung opportunity there.

[Unidentified Analyst]

Okay, awesome.

[Operator]

And our next question today comes from Alex Nowak with Craig-Hallum Capital. Please go ahead.

[Alex Nowak, Craig-Hallum Capital]

I was just wondering what additional data you plan to present here on kidney to ask Medicare to reconsider, just like what happened with HeartCare. So, like, for example, what's the status of the KOAR study? I know that showed an improvement in graft survival back in 2021. Just what other data do you get to submit to Medicare?

[Reg Seeto, President, CEO]

As I was sure, we want to get this completed. And so once the KOAR study, this is about surveillance and following patients long-term. And so really it requires the completion of the KOAR study, gathering of individual data points from individual patients, for all the patients enrolled, and then the data monitoring, data cleanup, and analysis. So we're in the midst of all that process so that we can get that out. Of course, that's very important to us.

[Alex Nowak, Craig-Hallum Capital]

Okay. And then it was mentioned that the low-end guidance assumes, or I guess depends on how Noridian would respond to the Billing Article. So I'm a little confused. What would Noridian say that would be necessarily new and represent a downside versus what we already know that Home Meadow has said?

[Abhishek Jain, CFO]

Yes. So, again, we have been surprised a few times, Alex, in the last few months, right, with all of these revisions coming out, right? And that probably is one of the reasons why we kind of took a step back in the first quarter and we withdrew our guidance. And this is basically to make sure that, if there are any other surprises, we do not know, that probably is the only reason why we have that, some kind of, like, hedge baked in, in the low-end of our guidance.

[Reg Seeto, President, CEO]

Yes, Alex, I think specifically just dealing when Noridian does accept that we'll have to deal with, reducing some of the full calls in greater than 1 year. So we have those numbers, which would then be part of that factor.

[Abhishek Jain, CFO]

Okay, understood. And then just lastly, one more. Just in the 10-Q, there was a mention about Caretics receiving in Q2 a record request from the CMS Recovery Audit Contractor, UPIC. I'm not familiar with them. They mentioned that there was a review is underway. Can you just expand on what this all means?

[Reg Seeto, President, CEO]

I caught the second half of that about the UPIC audit. Yes that's just another type of audit that we have responded to, feel that we have a successful response, not concerned.

[Operator]

And our next question today comes from Mason Carrico with Stephens Inc. Please go ahead.

[Mason Carrico, Stephens Inc.]

Hey, guys. Sorry, if you've already answered this. We're jumping between a few calls tonight. But what percentage of the kidney tests with the necessary documentation or TRFs have you actually gotten paid on since you started submitting them?

[Abhishek Jain, CFO]

So let me take this question, Mason. So as we were saying that the kidney volumes, the 85%-plus of the incoming TRFs in the month of June, they all came with the required information, right? And then of the remaining, what we have been saying that generally we are doing the supplementation of the remaining test at about 40% of that rate. So from that standpoint, you basically would say that now we are able to kind of submit almost 90% of our incoming kidney volumes as billable.

So the remaining test would be about that 10% that required yet to be supplemented. And this is only for Medicare, by the way. Just want to make sure that that's pretty clear.

[Mason Carrico, Stephens Inc.]

Got it. And then when it comes to your cost initiatives, I know that you've got some offsetting legal costs right now. But how much of that $40 million to $50 million started to flow through this quarter? And what are your expectations for when that full quarterly run rate of cost savings will be recognized, acknowledging that legal costs may be elevated near-term and offset some of that?

[Abhishek Jain, CFO]

Yes, sure. So if you look at our operating spend, the S&M is down about a million bucks versus the last quarter. And historically, our second quarter is generally pretty high for the sales and marketing because of all the conferences that we have in the current quarter. So that's the first part. So we are definitely on the right trajectory in the sales and marketing.

The second piece on the R&D, again, I think the team has done a great job in terms of making sure that we are working on the prioritized projects. And they're able to kind of manage the expenses. And I think the number is down about $3.5 to $4 million there as well. So I think we've made good progress in those 2 lines.

On the G&A, of course, because of the legal spend, we were not able to see the impact that we wanted to basically see on that particular line. The last but not the least is the cost of testing services. You might see that cost of testing services is pretty similar to what we had in the last quarter. But last quarter, I just want to highlight that we had the one-time Stanford -- accrual royalty reversal. And that basically had brought our cost of testing services down last quarter.

So if you were to compare the cost of testing services for, say, Q4 of last year or Q3, you probably will see that we have saved about, like, $3 to $4 million, both as a function of volume and some of the things that we are trying to do as a company.

So in summary, basically what I'm suggesting here is that, we are making good progress on the $40 to $50 million. I still see that, about 25% of this may come up in Q3, and the other 25% will start to show up in Q4 and beyond.

[Operator]

And our next question comes from Yi Chen with H.C. Wainwright. Please go ahead.

[Unidentified Analyst]

This is Chetan on behalf of Yi Chen. And I believe you've just answered it, but this is a question for Abhishek. Any color on any future steps that are being taken to reduce operational expenses in order to achieve those $50 million annual savings?

[Abhishek Jain, CFO]

So what I was actually suggesting, Chetan, is that we have actually put most of those actions in place already because what I suggested last time, that as part of those actions, #1, we will basically adjust our headcount structure and most of those actions are already complete. The second one was prioritization of the R&D project, et cetera, and that particular work is already in progress. The third piece, of course, we had spoken about the cost of testing services. Now, that is a combination of the volume-related reduction that we definitely see automatically, but at the same time, some of the other things that we are trying to do to make sure that we are able to kind of improve on the cost of testing services to preserve the gross margins of our testing services business.

So I would say that, most of those actions are already in place. There are a few more actions, but I would say that, probably would not be more than 20% of the number that we are trying to target. But more than the cost of -- more than including, I would say, the cost of the actions, we are not taking our eyes away, because there are some investments that we have to make for the long-term goals as well.

So I just wanted to make sure that that's pretty clear because in my script, I do talk about some of the things that have happened recently, more particularly around the coverage decision. So that is also helping us offset some of the impacts that we are seeing on our top line.

[Unidentified Analyst]

And I'm sorry, if you've already answered this question, but any color on how long this impact of the Billing Article revisions could be seen on AlloSure Kidney testing volumes?

[Reg Seeto, President, CEO]

Yes, I think that's a bit of a long question in some ways, but I think for us, we believe the Billing Article is impermissible. I think we've had that in prepared remarks. That's the first thing. The second thing is that, we've seen some changes in the first Billing Article, second Billing Article, which led to some improvements. We've now seen the heart changes sort of come through. So this is an ongoing process where I think, again, we do not believe that the Billing Article is permissible under the coverage policies, and we're working to see how that can be addressed. So I think that process continues.

In parallel, we've actually addressed that by trying to adapt to this new environment and actually led to the operational implementation, which is what we've done, and getting these forms up to the rate of close to 90% once you include new forms, plus the additional information that we've been asked to collect where forms aren't fully complete.

So I think we're making excellent operational execution. I think we're also seeing some progress with the Billing Article -- with the second Billing Article coming within 60 days and then also with some of these heart changes, but it's an ongoing process that we're continuing.

[Operator]

And ladies and gentlemen, this concludes our question-and-answer session. I'd like to turn the conference back over to Reg Seeto for any closing remarks.

[Reg Seeto, President, CEO]

Yes. Thanks very much. I mean, it's been a really busy quarter, and I think you all know that, and full of different milestones and different operational execution. We're glad to have reissued guidance. We know that there'll be a lot of different learning's that we have during this next quarter, and I think at the end of the day, we're just proud of really bringing this innovation to transplant patients. It's not often easy being a leader, but you have to lead from up front and you have to drive innovation, and we've had a strategy, which we've had since the start of this year, to execute on the 3 Cs. They've gone really well during the course of the year, and we've adjusted and adapted this Billing Article by having this operational focus and execution.

Again, I want to give a special call out to the organization. Typically, we'll thank the patients and thank the physicians, but this particular quarter, in addition to those, I want to give a special call out to the CareDx team. Just really incredible with the level of effort and enthusiasm and resilience they've demonstrated as we've had to adapt and adjust to this situation.

So, again, everyone, I hope you have a great rest of the day and I look forward to catching up. Thank you.

[Operator]

Thank you. Ladies and gentlemen, this concludes today's conference call. We thank you all for attending today's presentation. You may now disconnect your lines and have a wonderful day.