Castle Biosciences Inc

NASDAQ:CSTL

Earnings Call Analysis

Castle Biosciences Reports Strong Q2 2024 Results and Raises Full-Year Guidance

Castle Biosciences achieved remarkable financial results in Q2 2024, with revenue surging by 74% to $87 million and gross margin improving to 80.7%. Test volumes increased by 49% year-over-year, driven by growth in dermatologic and non-dermatologic tests. The company reported a net income of $8.9 million, reversing a net loss from the previous year. Based on strong H1 performance, Castle revised its 2024 revenue guidance upward to $275-300 million from $255-265 million, anticipating 25-36% year-over-year growth. This guidance reflects confidence in continuing robust execution and financial stability.

Strong Revenue Growth Fuels Optimism

Castle Biosciences achieved remarkable success in the second quarter of 2024, reporting a revenue of $87 million, marking a 74% increase compared to the previous year's quarter. This growth is attributed to rising average selling prices (ASPs) and an expansion in test volumes, particularly in dermatological and non-dermatological areas. Adjusted revenue stood at $86.6 million, a 72% year-on-year increase, reflecting solid demand for the company’s offerings.

Impressive Margin Expansion

The company reported a gross margin of 80.7% for the second quarter, up from 73.5% in the same period of 2023. When adjusted for intangible asset amortization, the gross margin climbed to 83.2%, an improvement of 520 basis points year-on-year. This margin enhancement showcases the effectiveness of Castle's operational efficiency and cost management strategies, further solidifying its profitability.

Control Over Operating Costs

Total operating expenses rose to $82 million from $71.3 million in the second quarter of 2023. The increase in expenses was mainly due to heightened sales and marketing costs, which reached $32.7 million. This reflects the strategic decision to invest in personnel and marketing efforts to support growth. While general and administrative expenses also rose, the overall increase was managed in relation to revenue growth.

Path to Profitability

Net income for Castle Biosciences was reported at $8.9 million, a substantial turnaround from a net loss of $18.8 million a year earlier, resulting in diluted earnings per share of $0.31 versus a loss of $0.70 for the previous year. This positive shift underscores the company's pathway to profitability, aided by increased test volumes and effective cost controls.

Revised Revenue Guidance: An Upward Adjustment

Castle has raised its revenue guidance for the year 2024 to a range of $275 million to $300 million, which is a notable increase from the previous guidance of $255 million to $265 million. This adjustment signals confidence in sustaining strong performance, reflecting a projected year-on-year growth between 25% to 36%. The company’s strategic investments and growth initiatives are expected to catalyze continued operational excellence.

Key Performance Indicators: Test Volume Growth

Overall test report volumes increased by 49% to 25,102 compared to the same quarter in the previous year. Notable contributors included the DecisionDx-Melanoma test, which reported 9,585 test reports, demonstrating both sequential and year-over-year growth. The strong test volume growth embodies the company’s robust market demand and its ability to penetrate various segments effectively.

Pipeline Development and Market Opportunities

Castle continues to innovate, evidenced by its expansion in the TissueCypher market, which has gained attention following new clinical guidelines. The TissueCypher test delivered 4,782 reports, illustrating an astonishing 230% increase year-on-year. This growth reflects a promising opportunity in the U.S. market, which is estimated to be worth $1 billion, underscoring the potential for sustained expansion within this vertical.

Balance Sheet Strength: Readiness for Growth

As of June 30, 2024, Castle Biosciences reported cash, cash equivalents, and marketable securities of $259.7 million. This robust balance sheet provides the financial flexibility necessary for planned investments in future growth opportunities while maintaining operational resilience.

Navigating Regulatory Challenges: SCC Coverage Concerns

There are ongoing discussions about the non-coverage status of the squamous cell carcinoma (SCC) test by Novitas. While Castle continues to be a covered service under Medicare, caution is warranted. Future revenue projections for SCC tests have been adjusted to reflect a prudent approach, and the company is exploring pathways to enhance coverage and compliance moving forward.

Commitment to Long-Term Growth

Castle remains focused on sustaining growth across its portfolio through strategic initiatives and enhanced clinical evidence generation. The management is optimistic about further test adoption driven by clinical values demonstrated in studies and ongoing expansion within its commercial teams. The company anticipates additional developments from its inflammatory skin disease pipeline towards the end of 2024, indicating an active commitment to innovation and market expansion.

Earnings Call Transcript 2024-Q2

[Operator]

Good afternoon, and welcome to Castle Biosciences Second Quarter 2024 Conference Call. As a remainder, today's call is being recorded [Operator Instructions]

I would like to turn the call over to Camilla Zuckero, Vice President, Investor Relations and Corporate Affairs. Please go ahead.

[Camilla Zuckero, executive]

Thank you, operator. Good afternoon, everyone. Welcome to Castle Biosciences' Second Quarter 2024 Financial Results Conference Call. Joining me today is Castle's Founder, President and Chief Executive Officer, Derek Maetzold; and Chief Financial Officer, Frank Stokes. Information recorded on this call speaks only as of today, August 5, 2024. 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 3 weeks following the conclusion of the call.

Before we begin, I would like to remind you that some of the statements made today will contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements include, but are not limited to, statements about our financial outlook, TAM and similar items referenced in our earnings release issued today and statements containing projections regarding future events or our future financial or operational performance, including our anticipated 2024 total revenue, our expectations regarding reimbursement for our products and targeted launch dates and the impact of our investments in growth initiatives and expanded commercial team.

Forward-looking statements are based upon current expectations and involve inherent risks and uncertainties. There can be no assurances that the results contemplated in these statements will be realized. A number of factors and risks could cause actual results to differ materially from those contained in these forward-looking statements. These factors and other risks and uncertainties are described in detail in the company's quarterly report on Form 10-Q for the quarter ended June 30, 2024, under the heading Risk Factors and in the company's other documents and reports filed or to be filed with the Securities and Exchange Commission.

These forward-looking statements speak only as of today, and we assume no obligation to update or revise these forward-looking statements as circumstances change. In addition, some of the information discussed today includes non-GAAP financial measures such as adjusted revenue, adjusted gross margin and adjusted EBITDA. We that have not been calculated in accordance with generally accepted accounting principles in the United States, or GAAP. These non-GAAP items should be used in addition to and not as a substitute for any GAAP results. We believe these metrics provide useful supplemental information in assessing our revenue and operating performance. Reconciliations of these non-GAAP financial measures to the most directly comparable GAAP financial measures are presented in the tables at the end of our earnings release issued earlier today, which has been posted on the Investor Relations page of the company's website.

I will now turn the call over to Derek.

[Derek Maetzold, executive]

Thank you, Camilla, and good afternoon, everyone. I am pleased to share that Castle Biosciences delivered yet another outstanding quarter, continuing our long-standing history of strong execution and performance excellence. Second quarter 2024 revenue grew by 74% to $87 million, and total test report volume grew by 49% to 25,102 compared to the second quarter of 2023. Our strong performance is driven by the team's success in developing a differentiated and innovative portfolio underpinned by robust business fundamentals.

Additionally, we believe there is significant room for growth across our portfolio, positioning us well for continued success. And we have a strong balance sheet to support our growth initiatives in alignment with our capital allocation strategy.

Our second quarter results highlight our disciplined execution of our strategic growth initiatives, including generating robust clinical evidence and the winning spirit of the entire Castle team. Based on our strong first half execution and confidence in our business, we are raising our full year 2024 revenue guidance to $275 million to $300 million, up from the previously reported guidance of $255 million to $265 million, reflecting year-over-year growth of somewhere between 25% to 36%.

Today, I will walk you through execution and strategy highlights from the second quarter, and then Frank will provide additional financial highlights before we turn to your questions.

Starting with our core dermatology business. For DecisionDx-Melanoma, we delivered 9,585 test reports in the second quarter, an 11% year-over-year increase and a 14% sequential increase. As you know, generating robust clinical evidence is a key component of our growth plans, and I'm exceptionally proud of the ongoing data development related to our DecisionDx-Melanoma. We believe our significant body of evidence is a key driver for test adoption and also distinguishes our test from the competition, further expanding our leadership position.

In fact, during the second quarter, we presented exciting new data at the American Society of Clinical Oncology Annual Meeting, or ASCO, demonstrating how DecisionDx-Melanoma identified patients with earlier stage melanoma who have a higher risk of central nervous system or CNS metastas within the first 3 years post diagnosis. This study shows that DecisionDx-Melanoma is particularly valuable as it can help pinpoint higher-risk patients who may benefit from more frequent imaging surveillance, leading to early detection of CNS metastasis and improved patient survival.

As background, cutaneous melanoma metastasis to the central nervous system generally has a poor prognosis. However, patients tend to experience better outcomes if CNS metastasis are detected and treated early while they are still asymptomatic. Currently, CNS imaging is not routinely recommended for patients with early-stage cutaneous melanoma, classified as Stage 1 or 2 by the American Joint Committee on Cancer, Eighth Edition. Despite this, approximately 14% of patients with Stage 2 melanoma will develop CNS metastasis. Our study demonstrated that patients with a high-risk Class IIb melanoma test result had significantly greater or higher rates of CNS metastasis, and lower 5-year recurrence free survival compared to those with a low-risk Class IA or an intermediate risk Class Ib/IIa test result.

Moreover, the study showed that a Class IIb DecisionDx-Melanoma test result was the only significant predictor of CNS metastasis under multivariate analysis. This is to say this is data that demonstrates the significant clinical value that DecisionDx-Melanoma brings to improving patient care decisions and outcomes.

Moving on to our DecisionDx-SCC test. We continue to see strong test report volume momentum, with 4,277 test reports delivered in the second quarter, an increase of 60% compared to the same period in 2023. DecisionDx-SCC continues to be supported by a robust and growing body of evidence, including several publications this year, demonstrating the test's clinical and economic value in guiding adjuvant radiation therapy, or ART, decisions in patients with high-risk cutaneous squamous cell carcinoma.

We are particularly excited about a recent study published in the American Society for Radiation Oncology's Flagship Journal, the International Journal of Radiation Oncology, Biology and Physics, also known as the Red Journal. This study demonstrated how DecisionDx-SCC had in applied patients who are eligible for consideration of adjuvant radiation therapy, and identify those patients who are unlikely to receive meaningful clinical benefit from ART and consider deferring radiation therapy.

On the flip side, the study also showed that our DecisionDx-SCC test can imply those patients who are expected to receive a significant clinical benefit from ART, with the result being a significant reduction in the likelihood of metastasis. Separately, we also shared new data supporting the use of our test for patients with cutaneous squamous cell carcinoma tumors on the head and neck, presented at the American College of Mohs Surgery Annual Meeting. The data show DecisionDx-SCC's ability to identify high-risk patients, enabling more appropriate surveillance or adjuvant treatments to reduce metastasis risk.

Specifically, DecisionDx-SCC testing before tumor removal significantly improve the prediction accuracy of metastatic events, both alone and when combined with NCCN guidelines, BWH staging, or AJCC version 8 staging, guiding better patient care decisions. Stated differently, this means that our test adds significant accuracy when used with these 3 staging systems, thus improving treatment pathway decision-making.

Now let's turn to our [indiscernible] franchise. In the second quarter of 2024, we delivered 4,782 TissueCypher test reports compared to 1,447 in the same period of 2023, and 3,429 in the first quarter of 2024. This represent a 230% year-over-year growth and 39% sequential over the first quarter growth. We recently released new practice guidelines in endoscopic eradication therapy for Barrett's esophagus. Stating that Barrett's esophagus can be treated effectively with endoscopic procedures like ablation by identifying high-risk patients is crucial.

Importantly, our TissueCypher test was highlighted as the first prognostic assay, capable of identifying Barrett's esophagus patients at risk of progressing to high-grade dysplasia or esophageal cancer. This recognition by the AGA reinforces TissueCypher's role in providing personalized and clinically validated risk stratification, helping patients better manage their patients with Barrett's esophagus disease. With our recent commercial team expansion, sufficient capacity in our Pittsburgh laboratory to meet accelerating demand at very early stages of market penetration in an estimated $1 billion U.S. TAM. We believe tissue cycle represents a significant long-term growth opportunity.

Turning to our Mental Health business. We delivered 4,903 IDgenetix test reports in the quarter compared with 2,681 in the second quarter of 2023, which is 83% year-over-year growth. IDgenetix was recently selected as the winner of the Best Overall Mental Health Solution award in the eighth Annual MedTech Breakthrough Awards program. The med tech breakthrough awards on our excellent and recognized innovation, hard work and success in a range of health and medical technology categories, attracting thousands of nominations from over 18 countries across the world.

To sum up our commercial test highlights, we are enthusiastic about the long-term prospects across our entire portfolio, with this proprietary tests available in the early innings, we see significant opportunities ahead. Lastly, moving on to our pipeline. We continue to make progress on our inflammatory skin disease pipeline initiative and expect to provide you with additional development updates before the end of 2024. As you recall, this pipeline genomic test is for patients with moderate to severe atopic dermatitis, psoriasis and related conditions, and is targeted to launch by the end of 2025, assuming a positive outcome of our discovery, development and validation efforts.

I'd now turn the call over to Frank, who will provide details relating to our financial results.

[Frank Stokes, executive]

Thank you, Derek, and good afternoon, everyone. Reiterating Derek's sentiment, we are proud to report excellent financial results for the second quarter of 2024. Revenue was $87 million, an increase of 74% over the second quarter of 2023. The increase was driven by higher ASPs and test volume growth for our dermatologic and nondermatologic tests. Adjusted revenue, which excludes the effects of revenue adjustments in the current period related to tests delivered in prior periods was $86.6 million for the second quarter, an increase of 72% over the second quarter of 2023.

Our gross margin during the second quarter was 80.7% compared to 73.5% in the second quarter of 2023. Our adjusted gross margin, which excludes the effects of intangible asset amortization related to our acquisitions and excludes the effects of revenue adjustments in the current period, associated with test reports delivered in prior periods was 83.2% for the quarter compared to 78% for the same period in 2023, an improvement of 520 basis points.

Turning to expenses. Our total operating expenses, including cost of sales for the quarter were $82 million compared to $71.3 million for the second quarter of 2023. Sales and marketing expenses were $32.7 million compared to $28.3 million for the same period in 2023. The increase is mainly due to higher personnel costs and marketing expenses associated with travel, training events and speaker conferences. General and administrative expenses were $18.4 million compared to $16.4 million for the same period in 2023. The increase is primarily attributable to higher personnel costs and, to a lesser extent, higher expenses for professional services, subscriptions and licensing.

Cost of sales expenses were $14.5 million in the second quarter compared to $11.1 million in the second quarter of 2023, primarily due to higher personnel costs and increased expenditures on supplies. The increase in personnel costs primarily consist of higher salaries and wages, bonuses, stock-based compensation and employee benefits, reflecting head count additions made to support business growth as well as merit [ of ] $3 million for the same period in 2023, primarily due to higher personnel costs and clinical studies. Total noncash stock-based compensation expense which is allocated among cost of sales, R&D expense and SG&A expense totaled $13.2 million for the second quarter compared to $12.8 million for the second quarter of 2023.

Interest income increased by [ $0.7 million ] for the quarter compared to the second quarter of 2023, and the increase primarily reflects higher average balances of marketable investment securities and slightly higher interest rates. Our net income for the second quarter of 2024 was $8.9 million compared to a net loss of $18.8 million for the second quarter of 2023. Diluted earnings per share for the second quarter was $0.31, compared to a diluted loss per share of $0.70 in the second quarter of 2023. Adjusted EBITDA for the second quarter was [ $21 million ] for the 6 months ended June 30, 2024, and consisted primarily of purchases and marketable investment securities of $113.2 million and purchases of property and equipment of $14.4 million, partially offset by the maturity of marketable investment securities of $86.5 million.

Net cash provided by financing activities was $10.7 million for the 6 months ended June 30, 2024, and consisted primarily of $10 million of proceeds from issuance of long-term debt and $1.7 million of proceeds from contributions to our 2019 employee stock purchase plan, partially offset by $1.1 million of employee taxes attributable to the vesting of restricted stock units. We ended the quarter with cash, cash equivalents and marketable securities of $259.7 million. We believe that with continued strong execution and financial stability, we have the flexibility to invest in future growth opportunities while maintaining a healthy balance sheet.

As Derek mentioned, we are raising our 2024 revenue guidance to $275 million to $300 million, up from $255 million to $265 million. In conclusion, I'm pleased with our execution through the first half of the year. We look forward to continuing to achieve the financial goals we set for 2024 and as our focus remains on driving both near- and long-term shareholder value.

I'll now turn the call back over to Derek.

[Derek Maetzold, executive]

Thank you, Frank. In summary, we are very proud of our second quarter results, which highlight the effectiveness of our innovative portfolio, commitment to ongoing robust clinical evidence and the winning spirit of our entire Castle team. We thank you for your continued interest in Castle Biosciences. We will now be happy to take your questions. Operator?

[Operator]

[Operator Instructions] We have the first question from Catherine Schulte with Baird.

[Catherine Ramsey, analyst]

Maybe just first on TissueCypher, big quarter here for you, volumes up almost 40% sequentially. What's driving the growth there? And how should we think about your expectations for sequential volume growth for the rest of the year? And any change to commercial investments you plan to make there, just given the strength you're seeing?

[Derek Maetzold, executive]

Yes. Good to hear your voice, Catherine. This is Derek here. From a TissueCypher perspective, maybe I'll say investments first. we had expanded the TissueCypher sales team, I guess it was April 1, May 1, early mid-second quarter. And that group of expanded area managers is, I think, just completing final training maybe in the next couple of weeks. And so we would expect them to be effective or fully effective probably in the early fourth quarter, mid-fourth quarter. So really driving -- hopefully additional appropriate use in 2025, maybe obviously, some impact now, but more so 3 or 4 months after now going forward.

From a demand perspective, I just think this shows us and maybe everybody the high clinical need out there for a population, I think we underestimated, we were doing diligence a couple of years ago. There are some data amounts suggesting that there should be a target market of probably over 400,000 endoscopic biopsies for [indiscernible] tissue base like that. And I think we're just seeing the efforts of our medical education programs to really educate gastro neurologists regarding the benefit that our test brings to identifying people who are -- who have Barrett's esophagus disease, you could have effective interventions at blocking or halting the progression to esophageal cancer and adopting it for appropriate use.

Frank, do you want to add anything?

[Frank Stokes, executive]

[indiscernible]

[Catherine Ramsey, analyst]

Great. And then can we get your response to the MolDX noncoverage decision for DecisionDx-SCC. Are there any studies you're running or plan to run to address some of the areas of pushback, be it around performance versus individual NCCN risk categories are generating outcomes data? And then have you had any follow-up conversations with MolDX to discuss their vision and next steps there?

[Derek Maetzold, executive]

Yes. I guess, first of all, as you know, the audience should hopefully know, we had a review completed in early 2022 from Novitas. And as of today, we remain covered by Medicare. So the Palmetto MolDX LCD doesn't impact our business in the medium term. That being said, what we did look at when we read through the final LCD was that none of the articles that have been published and that were actually developed as a result of the first -- of the initial draft LCD were reviewed or included in this final LCD.

So we believe there's an opportunity to work in a positive manner with Palmetto to say, hey, there's a really singularly focused benefit of our test to patients with high-risk SCC, which is really helping to rule out or rule in adjuvant radiation therapy. So our intention is to have dialogue with them and understand a path forward so that Medicare patients should we need backup laboratory systems in Phoenix are able to access our SCC test.

[Operator]

Your next question comes from Mason Carrico with Stephens Inc.

[Mason Carrico, analyst]

Frank or Derek, sorry if I missed this, but could you provide some detail behind what's baked into the guide specifically from the DecisionDx-SCC test standpoint? Is it -- are you assuming a full quarter, next quarter only a partial quarter? How should we think about that?

[Frank Stokes, executive]

We're assuming that it comes out of our -- that comes out of our numbers for the fourth quarter.

[Mason Carrico, analyst]

Got it. Okay. On your broader portfolio, you guys have published a lot of clinical evidence over the past year. Could you just give us your latest thoughts really on how you're thinking about the commercial coverage opportunity looking at TissueCypher as well as the melanoma test?

[Derek Maetzold, executive]

Yes, I can. I would concur with you that the team has done an excellent job of really driving what we see as impactful publications primarily to help establish the clinical outcome benefit of our test in patient care. We have seen, although we don't announce these in a public manner, a number of individual commercial carriers and even some laboratory benefit managers, switching from sort of a noncoverage or no statement to a positive coverage. Some of those policies rolled out, I think, July 1, that right, Frank? Effective data this year, and we'll see more, I think, early next year. So we are seeing progress there, Mason. We just don't call those out specifically at this point in time given our life cycle.

Frank, do you want to add anything?

[Frank Stokes, executive]

We're making progress, Mason. We would agree with you that there is clearly more than enough evidence published on all of our tests to demonstrate clinical utility and economic savings, economic benefit to the system. So the evidence is certainly sufficient to find coverage. It's a matter of just continuing to kind of push that rock up the hill.

[Operator]

We now have Thomas Flaten with Lake Street.

[Thomas Flaten, analyst]

On IDgenetix, I know it's still early innings, but are you seeing kind of a physician profile starting to emerge of who's adopting the test? And then maybe following on to that, are there specific patients for whom these doctors are using the test?

[Derek Maetzold, executive]

Comment I have a little detail, Thomas, our primary call points are a mixture of psychiatrists, obviously, who are interested in helping or having a pharmacogenetic test like ours, help improve their therapeutic decision-making processes as well as higher-volume primary care or first-line clinicians, both physicians and also MPs and PAs who are treating more of an elderly complex population and then some long-term care facilities thrown in there. And that's primarily because certainly those latter 2 customer groups are wrestling with concomitant drug-drug interactions and of course, with our report always having provided the drug gene plus a drug-drug and also, of course, an environmental factor, a reporting structure in the output of the report. It provides those clinicians with a streamlined way to interpret the drug gene combined with drug-drug and [ internal ] bodies. Beyond that, I'd be skating on thin ice.

[Thomas Flaten, analyst]

Got it. And then flipping to Novitas. Have you had any engagement with them following this delay or maybe even leading up to it? And are there other precedents we could be looking to understand how this might play out over the coming months?

[Derek Maetzold, executive]

We haven't gone back far to see about precedents per se. I think it's a reasonably unusual impact, if you look back and you want a time to look at MolDX time lines in the past years, like 3, 4, 5 years ago, you can see some LCDs that might post from draft to final that are appear to be 370 or 80 days. I don't know if those represented just time for the CMS website to update items or if that was actually a formal request that was granted. So I can give you no flavor on that.

We and others are seeking some inputs from both Novitas and CMS to try to understand what this might mean in terms of timing, in terms of, not necessarily precedent, but any information they give us. We have heard back no information at this point in time a share.

[Operator]

We now have Puneet Souda with Leerink Partners.

[Puneet Souda, analyst]

Derek, Frank, first one is you had a beat here, $18 million or so, guide raise is about 27.5, and just wondering, third quarter, you are including the SCC coverage, if I heard that correctly. So just wondering, shouldn't the guide raise be more than that to reflect if you are -- if I think Frank said, you will be covered in the fourth quarter as well. So I just want to understand sort of the dynamic of SCC volume growth and the ASP that we ought to be thinking about over the next 2 quarters with respect to the guide?

[Frank Stokes, executive]

So our new guide assumes that we don't have SCC coverage in the fourth quarter, and I wouldn't have any comment or any change to our ASP. We don't -- I don't think you'll see a change in ASP from now and then.

[Puneet Souda, analyst]

Okay. And then Derek, sort of stepping back and just looking at the MolDX, maintaining their noncoverage decision Novitas disclosing an extension now, which is unclear exactly when they will come back and cover this test. So the question here is should we assume, essentially first of all, should we assume no coverage for 2025, so that's -- I just wanted to clarify that. And I do hope that you get coverage here from Novitas benefit that wasn't going to happen, then what are the other avenues? And then ultimately, how do you bring this test to the commercial population? Just help us elaborate on the path forward for this test and the path for getting paid for this test?

[Derek Maetzold, executive]

A lot of questions back there, Puneet, to try and be brief and organized here. I think, first of all, we remain a covered test by Medicare, I guess, point number one. Point number two, in terms of forecasting SCC in your guide going forward, I would -- I think as Frank said, take it out October 1 going forward just because it's a prudent overhang there. So that would be our recommendation. That's how we're thinking about our business as well.

In terms of next steps, there are a number of approaches one could consider taking with Novitas as well as Palmetto, which would include reconsideration request if it was negative, which would include challenges to the LCD, other interactions with CMS as well as individual claim appeals. All of those are on the table. And as we see the outcome here, we can pull the triggers on what the appropriate approach should be, I guess, cover questions.

[Puneet Souda, analyst]

Okay. And then just maybe just briefly on EBITDA improvement was strong in the quarter. Frank, any thoughts on how should we think about that for the rest of the year and 2025, if you could elaborate?

[Frank Stokes, executive]

What improvement, Puneet?

[Puneet Souda, analyst]

Adjusted EBITDA came in strong versus our estimates. And just wanted to get a view on continued ramp there. Obviously, some of it is from SCC getting paid, but just...

[Frank Stokes, executive]

Yes, we continue to see us grow into the P&L, and we're seeing leverage across the P&L. As you see revenues growing more than expenses, and that obviously drives a better margin going forward, what that profile looks like depends on coverage for SCC among other things. So as we said before, we -- our long-term guidance, which we've reiterated for 2025 assumes no SCC coverage, but still hitting a positive adjusted operating cash flow.

[Operator]

Your next question comes from Kyle Mikson with Canaccord.

[Kyle Mikson, analyst]

Congrats on the quarter. Yes. Just sticking -- going back to SCC, I guess, if you -- that remains uncovered by both these [ MAX ] here and there's something you can do in the near term for that, what can you do in your dermatologic cancer side of the business to like keep growth and then kind of maintain margins as well? Like could you shift resources to marketing DecisionDx-Melanoma? Or is there something about the past practices that kind of prevent you from beefing up the melanoma marketing effort?

[Derek Maetzold, executive]

Excellent question, Kyle. Many of our programs today because it's a -- what we're primarily calling on interacting with medically oriented dermatologists who see patients with skin cancer is kind of the same kind of clinician you might say. I mean there might be a few less most surgeons who are seeing or applying most surgery to invasive melanoma, like it would be to squamous cell carcinoma. So I think that we feel like we're sized right from a field force standpoint.

There are certainly some other marketing and other educational activities that we would kind of redirect, I guess, you would call it our SCC dermatology spend and marketing and medical education over towards melanoma specifically so that it would have hopefully the intended expectation you have here, which is would we go ahead and be able to improve upon the sort of market penetration, adoption of appropriate patients for the melanoma test. I don't know what that would look like. Execution at the end of the day, but certainly, we're thinking about the same things.

[Kyle Mikson, analyst]

Okay. That was great things, Derek. And maybe just like 2 more questions. So first is the -- really interesting that the kind of the attach rate basically like the synergy rate between SCC and melanoma is 68% for the first half of the year. That compares to 55% in 1Q. What does that -- what benefits have you seen there? Look -- and again, as you think about this like flip possibly, maybe that's in fourth quarter or something like that. How does that really like kind of give you confidence for '25 growth basically? That's the first part of the question.

Just given your -- second part is going to be about your cash balances. How do you think about M&A going forward? Which side makes sense to bolster that dermatologic side or maybe [ office GI ] side that is super promising?

[Frank Stokes, executive]

Sure, Kyle. So starting with the cash here. I think that -- we're pleased to have the cash position we do. It's enabled us to run the company. We think the company needs to be run and to cautiously and carefully invest in continued growth. And so those are our first priorities is sales and marketing of our existing products. and then R&D to support those products as well as new products. M&A is further down the list. Obviously, we never say never, but we've got a tremendous opportunity in hand with the products that we currently have available.

Kyle, what was the first part of your question? Synergies, that was really our thesis in developing our SCC test is having more than 1 test to sell to the same physician and there's a balance there. You can have -- we only have conversations about so many things in a positioning counter. So because those tests are largely the same physician base, there's great opportunity and great leverage. And for a nonmedical person like me, it's a pretty simple thesis. Each of those tests answers a similar question just for a different group of patients. And so once a physician has been educated on the benefits of a test for melanoma, for example, it's an easy adjacency to say now you've got these other patients over here and we have a test that answers the same question with the same clinical utility.

So there's great synergy there, and it's a powerful leverage between the two. So that was part of our thesis originally when we set out to develop the SCC test. We heard from clinicians that they had a clinical question that needed to be answered, and it struck us that those are the same clinicians for whom we're answering a similar question in melanoma. So there's great leverage between the two.

[Operator]

Your next question comes from Sung Ji Nam Scotiabank.

[Sung Ji Nam, analyst]

Maybe starting with TissueCypher, congrats on getting that mentioned in the AGA publication. The same publication talked about forthcoming guidelines on surveillance in Barrett's esophagus. And was wondering if you have any insight into kind of the timing for that and whether you guys might be engaged with the AGA in terms of providing data and things like that.

[Derek Maetzold, executive]

Yes, their cadence of guidelines update is a little opaque, Sung Ji. I would think we're talking a couple of quarters out of lease. And certainly, our teams are working as they should to make sure that appropriate stakeholders are aware of the TissueCypher data, and hopefully how to consider it against sort of not using a TissueCypher test. But timing of that, I would think would be a couple of quarters away, but it's a little bit of a more opaque organization than, say, NCC and where you can have a history of updates and you see where the -- our meetings updates are coming out usually routine cadence.

[Sung Ji Nam, analyst]

Got it. And then maybe following up, Catherine's question earlier on the MolDx determination. Just kind of curious about it. It seems like they're pretty positive in terms of the use of -- this is in the SCC in patients for adjuvant radiation therapy. And so I was wondering if your -- if you guys have additional studies, what are your strategies in terms of potentially implementing additional studies around that? Are there ways to incorporate or kind of get involved in some of the larger scale studies that might be underway? Just kind of curious if you could touch on that.

[Derek Maetzold, executive]

Yes, excellent question. So we're always doing more studies. So how is that for [indiscernible] to be specifical to you. There -- when we first saw this data on ART, I guess, about 1 year, [ 1.25 ] years ago, we certainly said, okay, this is quite interesting. We will end publishing [indiscernible] May, of course, the most -- I guess, the best control article that we've seen out there evaluating the effective of ART, which is good. And so we began additional programs, look at highlighting that, replicating the data essentially. So we expect to see things coming out later on this year that would support that study that came out of May this year by [ Aaron ] at all as being confirmed from a performance standpoint.

[Operator]

We now have Subbu Nambi with Guggenheim.

[Subhalaxmi Nambi, analyst]

I don't think this is the case but I just want to make sure. From a risk perspective, given that Novitas is reviewing, is there any retrospective risk to the revenue from SCC? That's one. And I have a follow-up. To the revenue from the SCC.

[Derek Maetzold, executive]

Novitas reviewed us back in the first quarter of 2022, included us in a billing article, I think, in April or May of '22, indicating that we're covered test. We built specifically with our unique PLA code, which we received, I think, in April and March of 2022. So I don't think that's any kind of realistic expectation. There would be a clawback when they know exactly what they're paying for.

[Subhalaxmi Nambi, analyst]

Got it. That's helpful, Derek. It is good to see that this melanoma grow 14% sequentially, and it also alleviates the concern around volume growth moderating. Do you still anticipate growing double digit until you reach 50% market penetration?

[Frank Stokes, executive]

That was about CM, Subbu?

[Subhalaxmi Nambi, analyst]

That is DecisionDx [indiscernible].

[Frank Stokes, executive]

Yes. So Ever since the IPO, we have a -- there's a chart in our MD&A that shows the volumes for all of our tests. Obviously, at that point, it was just CM and UM. But -- and what you can see is with the exception of 2020, which was, if you recall, the year that we all let them convince us that some groups of physicians were not essential, and they closed their offices. But since that time, you see a real -- just a very, very clear seasonality pattern on our CM test or melanoma test.

And this year, I think, winds up exactly with what those other years are. So as we said earlier quarters, what we've seen is just really just the typical seasonality for the test. I do think at some point, our [indiscernible] cell test will become penetrated enough that you'll see similar seasonality there. And we believe the drivers are really related to the number of physician encounters around melanoma, which is related to practice days in offices. And Q2 just has the most office days of any of the quarters. Q1 has big physician meetings, 2 of them. Q3, you've got summer holidays, Q4, you've got the summer holidays. So Q2 has the most days of kind of physician encounters of any quarter, and that's what drives that very predictable, very regular seasonality.

So not much of a surprise to see the pattern this year. And yes, we think we'll continue to grow our melanoma test. Of course, it's on a bigger base. So the percentage is lower, but we'll continue to see that grow as we increase penetration.

[Operator]

We now have Mark Massaro with BTIG.

[Mark Massaro, analyst]

Yes. I guess my first one is on -- just maybe a question that you don't get very often in years perhaps is on the commercial payer side, you guys have still relatively immature commercial pay covered lives on -- even on your flagship core melanoma test. So can you just speak about the frequency with which you try to get in front of these commercial payers. Do you have meetings scheduled perhaps later this year? Or how are you thinking about getting in front of these? Because I see a potential for another leg higher in terms of recognizing revenue and pricing from payers that are giving you denials today. So how should we think about commercial pay, both for melanoma and for SEC?

[Frank Stokes, executive]

So Mark, the commercial payer environment is not much different for capsule than it is for other high-value molecular diagnostic testing companies. And the reality is the decision to cover tests significantly lags the development of clinical utility evidence. Said another way, there is ample evidence to support coverage long before that coverage comes. It would be supposition on my part to offer why that is. You can talk to payers or you can -- we can all think about it and probably come up with our own views. But that's pretty typical in the sector and across the industry.

What's changed in recent years is the growing number of payers who have outsourced their own technical assessments to lab benefit managers or technical third-party tech assessment groups. And so when that happens, you're unable to access medical directors and director teams at individual payers because they direct you to the LBMs, of third parties. And those groups tend to have fairly regular cycles of review and they follow them pretty clearly. There is occasionally the opportunity for off-cycle review with those groups. But if you just take it through, there's not much benefit to them to offer an off-cycle review.

And so even in the case of tests that have significant cost savings to the health care system, in many cases, the companies are already providing test results to patients whose payers are declining claims. And so if you think that through, you're going to a payer and saying, we think you should cover this test because it's going to save you 50% or 70% of the cycles of adjuvant radiation therapy, you would pay for otherwise. But they understand in many cases that they're already getting that benefit because we are providing the test report to patients anyway.

So it's a -- how we think about commercial coverage, we're in favor of it. We certainly agree it would be a positive. We were able to get to that view. And we spend a lot of time and a lot of money working on that process. But it is unfortunately fairly opaque and not necessarily one we can directly have significant influence over from a quarterly basis.

[Mark Massaro, analyst]

Okay. Got it. And you guys put up a really terrific quarter and so congrats on that. And you're baking in SCC Medicare revenue through the end of September. I guess questions we get from investors are, how should we handicap the extra time that Novitas might need to render their final decision. So you guys seem perhaps to have some visibility into the end of September. That's more visibility than I have, quite frankly. So just curious if you can give us a sense for -- is there any chance that they could be -- might need 6 months, 9 months, 12 months?

And then a second part of this question is not for Palmetto on your SCC directly, but generally speaking, because I don't see a ton of reconsideration request to Palmetto. What is the typical time line for reconsideration requests and claim appeals? Because I recognize that Palmetto did not include a lot of really solid evidence that you submitted to them. So I'm just curious if you have a sense, based on your conversations with consultants, what type of time line a reconsideration request or claim appeal is with Palmetto?

[Frank Stokes, executive]

Yes. So Mark, as it relates to the guide and first of October versus any other day, we have the same business -- you and I have the same visibility there. And that is, as we've said in other quarters, when we've updated our guidance, if a contractor follows Medicare's published policies when a new LCD is finalized, there's a 45-day period before it becomes effective. I am told that is to allow the computer programmers to make the changes that are necessary and to make the edits and the systems. I don't know if that's completely full story or not because I'm not an expert there.

And so as we said before, we are currently a covered test service following a full medical review that was performed in 2022. And so all I'm doing is saying, I'm taking 45 days from today, and I'm not trying to do it by the week. I'm just doing it by the month, and I get to October 1. So that's the visibility there, which has been the same as each quarter. On a reconsideration request, my understanding is the only time line that's required is to notify you if the reconsideration is going to be granted, I think, correct? And then there's no 1-year clock like from a draft LCD on a reconsideration.

To your point, there aren't a whole lot of precedence there, so it would be difficult to say here's a sample pool, and we can kind of get to a standard deviation of what we expect it to be. Given the other -- the cadence of other processes at Medicare, you feel like it's sort of a 1 year, maybe a 2-year process, but that would be -- again, it's not -- there's nothing in the manual that directs them there. So that's the -- I guess that's the negative, right? That's the negative of the [indiscernible] reprocess.

[Derek Maetzold, executive]

Yes. The only -- so yes, so the history is limited doesn't tell us what we can do, one would expect that if -- had certainly seen or read our submissions last summer, it would have seen the ART and prepublication form. And that should be -- and as you noted earlier, Mark, there's been significant, I think we're extremely clear publications in the last 4 to 5 or 6 months regarding the use of our tests in that matter for ART guidance. They know about our SCC test, because we just finalized the LCD. Does one think that if a reconsideration request goes in fairly soon because it's top of mind, they realized there was a lot of data that's come out of that was not included in the review because of timing periods from a Medicare standpoint. Does that say it should be reviewed quicker rate than later? I have no idea how to gauge that except that's an interesting possibility.

[Operator]

Thank you. I would now like to hand it back to Derek for some final closing remarks.

[Derek Maetzold, executive]

Thank you, operator. This concludes our second quarter 2024 earnings call. Thank you again for joining us today and for your continued interest in Castle Biosciences.

[Operator]

Thank you all for joining. I can confirm that does conclude the Castle Biosciences Second Quarter 2024 Conference Call. Please enjoy the rest of your day, and you may now disconnect from the call.