Castle Biosciences Inc

NASDAQ:CSTL

Earnings Call Transcript 2024-Q3

[Operator]

Good afternoon, and welcome to Castle Biosciences Third Quarter 2024 Conference Call. As a reminder, today's call is being recorded. We will begin today's call with opening remarks and introductions, followed by a question-and-answer session.

I would like to turn the call over to 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' Third Quarter 2024 Financial Results Conference Call.

Joining me today are 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, November 4, 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 results and performance, including our anticipated 2024 total revenue, our expectations regarding reimbursement for our products and targeted launch dates and other milestones, and the impact of our investments and growth initiatives, including our ability to achieve long-term growth and drive stockholder value.

Forward-looking statements are based upon current expectations and involve inherent risks and uncertainties, and there can be no assurances that 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 Annual Report on Form 10-K for the year ended December 31, 2023, and its quarterly report on Form 10-Q for the quarter ended September 30, 2024, in each case 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 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'm pleased to share that Castle Biosciences delivered another strong quarter, growing revenue by 39% and total test report volume by 41% over the third quarter of 2023. Our excellent performance continues to be supported by the strength of our innovative tests and the winning spirit of our entire team.

We achieved positive cash flow and earnings, highlighting the operating leverage in our business model that has continued to drive the frigid financial performance. Additionally, we have substantial balance sheet capacity, allowing to invest in the business for long-term growth and to continue our efforts to drive shareholder value. Given our outstanding year-to-date results and confidence in our business momentum, we are raising our full year 2024 revenue guidance range to between $320 million and $330 million, reflecting year-over-year growth of 45% to 50%. This change reflects an increase from our previously reported guidance range of $275 million to $300 million.

Now, I will walk you through execution and strategy highlights from the third 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 9,367 test reports in the third quarter, a 9% year-over-year increase, despite reflecting normal third quarter seasonality. From a patient perspective, we estimate that we achieved approximately 30% market penetration. And looking ahead, we see considerable growth opportunity, as we believe DecisionDx-Melanoma has the potential to continue increasing market penetration in the coming years. Our compelling body of evidence reinforces continued adoption, including more than 50 peer-reviewed publications supporting the clinical use of the test.

You will recall that our DecisionDx-Melanoma test assists clinicians with answers to 2 related but separate questions in the post-diagnostic time period. The first is, what is the genomic or biologic risk of a patient having a positive sentinel lymph node, which impacts the decision to perform or not perform a sentinel lymph node biopsy surgical procedure, or SLNB. And the second is, is the patient likely going to have a low risk of recurrence or metastasis in the next 5 years or a high risk of metastasis. The second question drives much of the post-diagnostic treatment pathway. To this end, we saw yet another independent study published in the third quarter. This study, by Kriza et al., focused on the predictive accuracy of the DecisionDx-Melanoma test for SLNB positivity.

You may recall that several years ago, once we had an adequate base of research samples with long-term follow-up, we challenged ourselves with 2 questions. The first question was, was the algorithm that we developed in 2012 still the best algorithm for evaluating the accuracy of our 31 genes. The second question was, if this remains the best algorithm, then could the performance of our DecisionDx-Melanoma test for predicting both SLNB positivity as well as risk of recurrence be improved if we added clinical and/or pathologic factors. We did not identify a better algorithm regarding the assessment of our 31 genes, so we retained the initial algorithm and cut points that were established in 2012. But we did find that we could improve the accuracy of our patient report by incorporating different pathological factors for each use of our test.

To aid clinicians in understanding these additional results that they receive, we termed the integration of these clinical pathologic factors as i31-GEP SLNB for SLNB positivity and i31-GEP ROR for risk of recurrence. This was a great discovery because one could have assumed that the clinical pathologic factors for predicting a recurrence or metastasis to the sentinel lymph node would be the exact same as those needed for predicting recurrence that did not occur within the sentinel lymph node. I mention this background because this is the science-driven approach that I believe we have always strived for here at Castle. Rather than assuming that these clinical pathologic factors would be the same for both uses and that we understood the biology of melanoma than the melanoma itself, we instead intentionally evaluated each factor for each clinical use.

Now back to Dr. Kriza and the [ COLLEAGUE ] study. This study focused on the clinical performance of our i31-GEP SLNB test results. What they found was that for patients predicted to have less than a 5% likelihood of a positive SLNB, the actual positivity rate was 0%. In contrast, patients predicted to have a greater than 10% rate had an actual positivity rate of 31.9%, which was a highly statistically significant difference. These results are just one example of the clinical value of our DecisionDx-Melanoma in enabling more precise and personalized management of melanoma patients, improving patient selection for the SLNB surgical procedure, and helping to reduce unnecessary procedures and their associated healthcare costs.

The data provided evidence that DecisionDx-Melanoma can identify patients with a low risk of positivity who may safely forgo SLNB, as well as those with a higher risk who may want to consider the surgery. To conclude, this is yet another publication demonstrating the impact that our test can have toward improving patient outcomes.

Moving on to our DecisionDx-SCC test. We continue to see strong test report volume momentum, with 4,195 test reports delivered in the third quarter of 2024, an increase of 49% compared to the same period in 2023. Helping drive test adoption are the more than 20 peer-reviewed publications since the launch of the test. We were especially pleased with the recent publication of a new study by Dr. Emily Ruiz of the Brigham Women's Hospital and colleagues, further supporting the use of our DecisionDx-SCC test in guiding patient selection and decision-making related to the use of adjuvant radiation therapy, or ART, in patients with high-risk cutaneous squamous cell carcinoma, or SCC. The study reinforces the ability of our test to identify patients likely to benefit from adjuvant radiation treatment, as well as the majority of ART-eligible patients who would be predicted to receive no clinically discernible benefit.

Importantly, this is the second study published this year that demonstrates the ability of DecisionDx-SCC to identify patients who are more or less likely to benefit from adjuvant radiation therapy. The first study was by Dr. Aaron and colleagues and was published in the American Society for Radiation Oncology's prestigious Red Journal in May. Comparing the 2 studies, it's important to note that both demonstrated that patients with DecisionDx-SCC Class 2B test results, which indicate the highest metastatic risk potential, saw a 50% reduction in disease progression when treated with adjuvant radiation therapy, and significantly slowing the spread compared to those who did not receive adjuvant radiation therapy.

For patients with DecisionDx-SCC Class I test results, which represent the lowest metastatic risk, the studies found no difference in disease progression between those treated with adjuvant radiation therapy and those who remained untreated. This study shows that Class I patients who make up the majority of SCC patients can be counseled to consider safely deferring ART, underscoring DecisionDx-SCC's value in ruling out unnecessary treatment. Finally, this marks the sixth study since the start of 2024, demonstrating the value of DecisionDx-SCC test results in improving risk-aligned patient care through precise tumor biology-based risk stratification.

Now, let's turn to our TissueCypher test, which is used to assess the individualized risk of esophageal cancer progression in patients diagnosed with Barrett's esophagus disease. As a reminder, Barrett's esophagus is the only known risk factor for the development of esophageal cancer, one of the fastest-growing cancers in the U.S. with a dismal 5-year survival rate of less than 20%. We are pleased with how well TissueCypher has been received by the gastroenterology community. In the third quarter of 2024, we delivered 6,073 TissueCypher test reports compared to 2,829 reports in the same period of 2023, representing a year-over-year growth of 115%. I'd remind you that in July 2023, we temporarily paused accepting TissueCypher orders and resumed accepting new orders in a phased approach beginning in September 2023, which made for a slightly more favorable year-over-year comparison for the third quarter of 2024. Having said that, we are nonetheless extremely pleased with our third quarter 2024 results and year-to-date 2024 test report volume performance.

With the recent expansion of our commercial team earlier this year, plans for continued modest expansion through the end of 2024, sufficient capacity in our Pittsburgh laboratory to meet demand momentum, and very early stages of market penetration in an estimated $1 billion U.S. TAM, we believe we are well positioned for continued momentum with a significant runway for future growth.

Turning to our mental health business. We delivered 5,045 IDgenetix test reports in the quarter, compared with 2,791 in the third quarter of 2023, which is 81% year-over-year growth.

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

[Frank Stokes, executive]

Thank you, Derek. Good afternoon, everyone. As Derek highlighted, we are proud to report excellent financial results for the third quarter of 2024. Revenue was $85.8 million, an increase of 39% over the third quarter of 2023. The increase was driven predominantly by test volume growth for our dermatologic and nondermatologic tests and higher ASPs for our DecisionDx-SCC test compared to the third quarter of 2023. I'd remind you that our DecisionDx-SCC test was granted Advanced Diagnostic Laboratory Test, or ADLT, status effective June 30, 2023. This designation resulted in an increase in our DecisionDx-SCC test ASP starting in the third quarter of 2023, so the impact of that improvement in ASP has now been integrated into our results for a full 4 quarters.

Adjusted revenue, which excludes the effects of revenue adjustments in the current period related to tests delivered in prior periods, was $86.3 million for the third quarter, an increase of 42% over the third quarter of 2023. Our gross margin during the third quarter was 79.2% compared to 77.9% in the third quarter of 2023. And 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 81.9% for the quarter compared to 81.3% for the same period in 2023.

Turning to expenses. Our total operating expenses, including cost of sales for the quarter, were $80.7 million, compared to $71.1 million for the third quarter of 2023. Sales and marketing expenses were $29.8 million in the third quarter of 2024 compared to $28.5 million for the same period in 2023. The increase is mainly due to higher travel and transportation costs incurred through our business development activities, as well as slightly higher marketing costs, while personnel costs were relatively consistent.

General and administrative expenses were $20.7 million in the third quarter of 2024 compared to $16.1 million for the same period in 2023. The increase is primarily attributable to higher personnel costs, higher professional fees, and higher information technology-related costs. Higher personnel costs reflect headcount expansions in our administrative support functions, as well as merit and annual inflationary wage adjustments for existing employees.

Cost of sales expenses were $15.6 million in the third quarter of 2024 compared to $11.3 million in the third quarter of 2023, primarily due to higher personnel costs and higher expenses for supplies and lab services. Increases in personnel costs reflect a higher headcount due to additions made to support business growth in response to growing test report volumes, as well as merit and annual inflationary wage adjustments for existing employees. Higher expense for supplies and lab services also reflects higher test report volumes.

R&D expenses were $12.3 million compared to $12.9 million for the same period in 2023, primarily due to slightly lower expense for clinical studies and personnel costs. Total noncash stock-based compensation expense, which is allocated among cost of sales, R&D expense, and SG&A expense, totaled $13 million for the third quarter in each of '24 and '23.

Interest income increased by $0.6 million for the third quarter of 2024 compared to the third quarter of 2023. The increase primarily reflects higher average balances of marketable investment securities and slightly higher interest rates. For the third quarter of 2024, we had a $6 million income tax expense, primarily driven by continued Medicare coverage for our DecisionDx-SCC test. Specifically, due to the unpredictability in coverage, we previously estimated our income tax provision for all of 2024 based on a pretax loss for the year. However, with updated information, we were able to reforecast to a position of generating net income, resulting in an income tax expense for the third quarter of 2024. We expect to also incur a tax expense in the fourth quarter of 2024.

Our net income for the third quarter of 2024 was $2.3 million, compared to a net loss of $6.9 million for the third quarter in 2023. Diluted earnings per share for the third quarter was $0.08 compared to a diluted loss per share of $0.26 in the third quarter of 2023. Adjusted EBITDA for the third quarter was $21.6 million compared to $6.6 million for the comparable period in 2023, an improvement of $15.1 million. The year-over-year improvement primarily reflects strong top line growth, along with continued disciplined expense management.

Net cash provided by operating activities was $23.3 million for the third quarter of 2024 and $40.5 million for the 9 months ended September 30, 2024. Net cash provided by financing activities was $11.5 million for the 9 months ended September 30, 2024, and consisted primarily of $10 million of proceeds from issuance of long-term debt, $2.3 million of proceeds from contributions to our 2019 employee stock purchase plan, and $1.6 million of proceeds from the exercise of stock options, partially offset by the $2.4 million payment of employee taxes attributable to the vesting of restricted stock units.

We ended the quarter with cash, cash equivalents, and marketable securities of $279.8 million. We believe our strong balance sheet provides significant financial strength to continue to grow our business in the near and long term. As Derek mentioned, we are raising our 2024 revenue guidance to $320 million to $330 million, up from $275 million to $300 million.

In conclusion, I'm very proud of our third quarter 2024 and year-to-date financial performance. We look forward to continued momentum in the fourth quarter to close out a strong 2024, which we expect will set the stage to drive both near- and long-term shareholder value.

I'll now turn the call back to Derek.

[Derek Maetzold, executive]

Thank you, Frank. In summary, this is a very exciting time for Castle Biosciences. Our team continues to execute at a high level, delivering strong third quarter and year-to-date results with the goal of positioning the company for long-term growth and success.

Thank you for your continued interest in Castle. We will now be happy to take your questions. Operator?

[Operator]

[Operator Instructions] We have the first question on the phone lines from Kyle Mikson with Canaccord.

[Kyle Mikson, analyst]

I guess just based on how the derm revenue stepped down in 3Q from 2Q, can you talk about how much of that stepdown was came from DecisionDx-SCC revenue? And if there's anything else you can share on the portion of claims processed by lab for that test, it would be helpful to understand the impact from noncoverage by Palmetto as well as potentially Novitas.

[Frank Stokes, executive]

Kyle, are you talking about sequential volumes?

[Kyle Mikson, analyst]

Yes, from 3Q from 2Q.

[Frank Stokes, executive]

Yes. So when you look in our documents, our MD&A, we put a chart in there every quarter that shows volume quarter to quarter. And what you see is every year, except COVID year, we have very predictable trends in terms of sequential volumes. And so we believe it's based on patient encounters, just reduced number of physician office days through the year. And as you see when you look at that chart, Q2 tends to be the biggest sequential uptake. But having said that, of course, we're looking at things on a year-over-year basis and seeing good growth there. I'm not sure that -- can you give me the second question again? Something about SCC and -- were you asking about SCC volumes?

[Kyle Mikson, analyst]

Yes. Frank, just the noncoverage by Palmetto during that happened earlier in the quarter, could have seen some impact from that in 3Q? Maybe just confirm if that happened and if that's evident based on the P&L, based on the numbers that we saw in 3Q.

[Frank Stokes, executive]

No, we didn't see that impact on the business from the Palmetto policy. No.

[Kyle Mikson, analyst]

And then on the pipeline, the inflammatory disease test, Derek, can you just give us like a primer of that market opportunity and the competitive landscape before this some data maybe in the next few months here? And what should we expect as it relates to that readout in terms of like timing and the path to validation for that test over the next year or so?

[Derek Maetzold, executive]

Yes. So let me go back first to our earlier established milestones. We committed to providing a public update on our progress, were we able to discover a test, what does that test look like, and when might we reconfirm launch. So we are still on track to go ahead and have a public conversation about that, Kyle, between now and the end of the year. So that remains on track.

In terms of launch, we had guided previously sometime prior to the end of 2025. That still remains intact. So I think we're on track for both those milestones. In terms of the first part of your question there, the broader opportunity or the broader approach here, I'll just take atopic dermatitis as an example here. But our large ongoing prospective multicenter protocol enrolls patients who are initiating systemic biologic therapy or are switching. So it's this moderate to severe patient population for both atopic dermatitis as well as the other end of that spectrum being psoriasis. But if I just focus on one potential use, it would be having a patient have severe enough symptoms where they have decided, I'm going to step over from topicals to systemics, either oral therapies or in the case of atopic derm, really, it's predominantly injectables.

And when they make that -- step over that threshold to take systemic therapies, the question becomes, do you as a patient and as a clinician want to just do trial and error, so you can [Technical Difficulty] first therapy you would have normally used actually works well for your specific disease? Or do you want to use our test to go ahead and identify a higher likelihood of getting a very, very solid response versus a lower likelihood? So that's what we're driving towards in terms of the ongoing analysis, and we'll discuss the outcome of that here sometime in the fourth quarter, obviously.

[Operator]

Your next question comes from Sung Ji Nam with Scotiabank.

[Corey Rosenbaum, analyst]

This is Corey Rosenbaum on for Sung Ji. So you won a Presidential Poster Award at the recent ACG Conference related to TissueCypher. Would love to get a sense of the interest level or awareness for TissueCypher from the physicians at the conference. What feedback did you receive? And if there was any pushback, what's the biggest pushback you're getting at the moment?

[Derek Maetzold, executive]

Camilla, I missed the middle part of Corey's question.

[Camilla Zuckero, executive]

He was saying, unless, Corey, you want to repeat it, he was just saying, what is the reception or the feedback you're getting from physicians at this time? And if you're getting any pushback, what pushback are you receiving around TissueCypher?

[Derek Maetzold, executive]

Around TissueCypher specifically from just attendance at the conference?

[Camilla Zuckero, executive]

Yes, TissueCypher. There was an award-winning poster at the conference. Yes, he was just basing off that we won an award at the conference, and then that was the segue.

[Derek Maetzold, executive]

ACG's poster. Okay. So I can't comment on -- so one, pushback in terms of resistance, I guess. I don't hear much resistance from our commercial team. I think we are still in the very, very early stages, despite having been marketing this now for what, I guess, 21 months or so. Still in the introductory phases of physician awareness. We obviously have clinicians who have read through enough of literature that they appreciate our tests and are using it on their appropriate patients, but I think we still are early on. So I think resistance is quite low to adopting the test. I think it's more awareness and then beginning to incorporate our tests into the workflow, so it changes or impacts patient flow.

And that, I think, is largely due to the fact that pathology grading, I think almost all of our gastroenterologists realize that there was a lot left on the table to try and direct risk-aligned care in patients with Barrett's esophagus disease. We also know, or the average gastroenterologist knows, that if I recommend esophageal eradication therapy, the most common form really is using Medtronic's radiofrequency ablation tool to eradicate the Barrett's lesion, I can essentially stop that Barrett's lesion from progressing to cancer. However, we can't ablate everybody who has Barrett's esophagus disease. So it ends up being that the majority of patients, I think, 420,000, 430,000 patients, if you just rely on pathology diagnoses alone or grading alone, those patients would go under just active surveillance, being seen every 5 or 7 or 8 years or 3 years for a repeat endoscopy, hoping that you go ahead and catch those that are progressing early enough where you can still save them from progressing to esophageal cancer.

So they know that RFA and eradication therapy works. They also know that we can't, as a system, afford to get all these patients treated with non-dysplastic and Barrett's esophagus disease. And so they use our test to really say, hey, I know there are bad actors in that large group of non-dysplastic patients. If I can find them, I will intervene with them and hopefully stop cancer progression. And that's essentially how our test is being thought about in terms of ruling in appropriate interventions. At the same time, they also can say, well, I probably have my patients come back too frequently for repeat endoscopies because I just do. And if I use the test and get a low-risk TissueCypher test result, then I'm pretty comfortable talking to a patient about relaxing the reendoscopic biopsy intervention to more align with current guidelines as opposed to being more frequent.

So it does both things well, finding patients who have a higher likelihood of progressing and putting them into the course of having that Barrett's esophagus lesion essentially ablated or "cured." And the other way, which is to deescalating care. And because of those fact patterns, I think our resistance that we would see is largely just data ignorance or lack of awareness of what you can do with our test. But then, of course, there's confined limitations. So I would say the resistance is predominantly still low awareness or early awareness. And our job is to really keep educating our customers about the use of the test, why it's important to consider. And if they agree that they would adjust patient care, they should order the test for their patients.

[Corey Rosenbaum, analyst]

Great. Really appreciate that insight. And on the hurricanes, obviously, there were a few recently that may have an impact on Q4. Can you elaborate on if there was any impact in Q3 and how any Q4 impact could be reflected in guidance?

[Derek Maetzold, executive]

So right now, let's see, I think Helene came, what, the latter part of September, and then Milton was in October, so that was more of a fourth quarter event. With the lead time between a patient seeing a dermatologist, and I'm talking predominantly about our dermatology business here. With the lead time between a patient seeing a dermatologist or an NP or PA for a possible mole or is this melanoma or not, doctor, you get a biopsy, it goes to pathology, it takes a few days, a week for a diagnosis, our test is ordered after that. So one, I don't know if we saw a meaningful impact in the third quarter as that hurricane went through the upper panhandle of Florida and up in the North Carolina. I do know that we still have customers, though, clinicians in some of the pathway there who are still not practicing full-time because of lack of resources and utilities. And we certainly know that Milton knocked out part of Florida there for a period of time.

So I would expect we'd have some impact in terms of volumes in the fourth quarter, only because the assumption would be that dermatology practices are pretty overbooked anyways and missing a few days to a week or 2 of practice, you can't necessarily fit those all into that exact same quarter. So I would expect that we may see some volume impact in the fourth quarter. At this point in time, to be quite frank, we haven't seen those work their way through, so we're not putting any an estimate around there, except to say here's our updated guidance for 2024, and that includes some assumptions here on fourth quarter volumes perhaps being impacted by the hurricanes.

[Operator]

We now have Thomas Flaten with Lake Street.

[Thomas Flaten, analyst]

Frank, I apologize if I missed this, but how much SCC contribution are you assuming in the guide?

[Frank Stokes, executive]

We are assuming, Thomas, that we'll have it through almost the whole quarter at this point.

[Thomas Flaten, analyst]

And then just a question on the TissueCypher reps. I know you've probably had, what, like 3, 4 months with the larger team. Have you seen any positive impact from them? And I know you've said previously, it takes about 6 months to become fully productive, but just curious where they are on that pathway.

[Frank Stokes, executive]

I think that we're...

[Derek Maetzold, executive]

We would the...

[Frank Stokes, executive]

Sorry about that. We like what we're seeing. I think that they're tracking the way we would expect them to. So we'll hopefully be seeing full contribution as we get into next year, but very pleased with that April 1 class and how they're coming online.

[Operator]

We now have Mason Carrico with Stephens.

[Mason Carrico, analyst]

Just continuing on that. Could you just remind us where the rep count stands for the GI team today? And then I think I heard you guys say a moderate expansion going forward. How many more reps do you plan on adding, maybe over the next 6 to 12 months?

[Derek Maetzold, executive]

Yes. So we have expanded our territory -- number of territories, I think, around 40-ish in the April, May time period, if you recall. And we have added to that over the course of this quarter, we'll continue into 2025. The exact number we haven't quite nailed down at this point in time. I think we think they were around 10,000 practicing gastroenterologists that should be targetable customers. They do practice in larger groups than dermatologists do in general. So we don't think targeting 75 or 70 to 80 is the right number. We think probably ending up in the low 60s feels about right, but that'll be data-driven and based upon our ability to impact those 10,000 gastroenterologists in their individual practice settings. So certainly, I would expect us to go and go in the next year in the low- to mid-60s would be our target, but we haven't necessarily locked in on what that looks like right now.

[Mason Carrico, analyst]

Okay. And sorry if I missed this, but the path forward for DecisionDx-SCC, where do you guys stand there? Obviously, it's still paid by Novitas right now. You guys have been publishing a lot of evidence supporting the value of that test. So are you pursuing the reconsideration process with Palmetto? Have you had discussions with them? Any color you can share there?

[Derek Maetzold, executive]

Not a whole lot. So we continue to be reimbursed by Medicare following our positive review in the first quarter of 2022, so 2.5 years or so now. We do process our squamous cell carcinoma test out of our Pittsburgh laboratory in Pennsylvania. So the MolDX LCD really has no business bearing per se.

Now that being said, there were a number of differences between the final LCD and what [ we've received ] that should be appropriate, I guess, in our eyes. And plus, as you probably noted when that was posted earlier this summer, that none of the seminal articles that came out following the fall of 2023 were included. Most importantly probably was our 2 more recent articles, one of them, Aaron et al., the other one, Ruiz et al., which represented the largest ever and the second-largest ever studies published in squamous cell carcinoma of the skin, evaluating the effectiveness of adjuvant radiation therapy.

And with those 2 studies showing clear utility and being able to say, hey, you've got 100 people that are eligible for ART who's going to benefit, who's going to respond, who will likely get a nonclinical benefit. To be able to find that the majority of patients who are eligible and could be pushed towards ART actually won't receive a benefit is a tremendous impact on not only reduced complications for patients who don't need adjuvant therapy, but they can still hold it later on if they happen to recur because no test, of course, is perfect, and at the same time, focusing on the minority of patients who will get a robust response.

Both studies showed that patients who we were predicted to have a not only high risk of metastasis, but also have a high benefit, saw more than a 50% reduction in the incidence of metastasis compared to those who did not receive ART therapy. So great impact there. One would expect that not only the Palmetto team, but also the Novitas team will look at that data and say, wow, we have the opportunity here to really not create a new pathway, but to arm clinicians and patients within a current pathway to make better, more informed decisions, at the end of the day, reducing complications.

And there was a study published earlier this year showing that if you just take direct cost, that is what we think is the median or the average cost of adjuvant radiation therapy, less the reimbursed cost of our test, and that was used across the board of people who received radiation therapy a couple of years ago on the Medicare reimbursement numbers, that Medicare might save upwards of I think it was $900 million a year in cost savings. That is real significant dollars that could be spent elsewhere in the Medicare system.

[Operator]

We now have Puneet Souda with Leerink Partners.

[Puneet Souda, analyst]

Maybe a couple. First one on the NCCN guidelines. Any update there for cutaneous melanoma? What's your expectation? And correct me if I'm wrong, latest guidelines did not include cutaneous melanoma. And could you elaborate what's your expectation there, and how would it affect the reimbursement strategy?

[Derek Maetzold, executive]

So they've been pretty consistent in the last 3 or 4 years post-COVID, Puneet, in that they usually meet -- I think their in-person meeting is in July where they consider updating the non-FDA-approved therapy pathways, I guess. And they routinely publish updates in either December of that year, or I think in the case of this, in early 2024, they did not publish in late '23. They published in January or early February 2024. So I've got no reason to think they would do something this month in November. It could be we might see something print out in December, or it's going to be a January cycle, because that's a new trend. So that's the timing of that. We don't have any inside information regarding what they might do to modify, update, or include our tests as part of treatment pathways.

[Puneet Souda, analyst]

And then on the pharmacogenomics, one of the peer diagnostic companies had a noncoverage decision from a commercial payer. Can you elaborate if there is any impact to IDgenetix from that? And then can you talk a little bit about if there were further pressures from the managed care organizations and payers in the diagnostics space, where do you think you have the most [ indefensibility ] in your current reimbursement that you're getting paid?

[Derek Maetzold, executive]

Frank?

[Frank Stokes, executive]

Sure. Yes. We did know that, Puneet. And it's a small impact for us. We're not under contract with that payer. So our payments are less consistent than I would assume peer companies are. So not a big impact on us right now. As it relates to strategies on reimbursement, it's the same strategy we really just have done across the board here, continuing to generate evidence and continuing to educate and show support for tests and show the clinical utility. And the pharmacogenomic test has tremendous clinical utility. It's a bit unfortunate, Puneet, that the cost of a patient not being managed on an effective drug isn't borne by the payer. The cost of somebody with depression not being on the right med is borne by their family and their employer, unfortunately. And so one can suppose, then, that makes the insurance companies ambivalent as to the actual patient outcome. But for us, very minimal impact and something we'll just have to keep following and keep tracking.

[Puneet Souda, analyst]

And just wanted to follow up on that. Do you expect commercial reimbursement for cutaneous melanoma? Where do you stand with that effort? And any other tests where you are pursuing commercial beyond the ADLT rates that you have?

[Frank Stokes, executive]

Yes. We are pursuing commercial coverage with all of our tests. Yes, that's correct. Certainly continue to push on that, and that's part of our data generation effort, as well as our presentation and payer interaction strategy.

[Operator]

We have our next question on the line from Paul Knight with KeyBanc.

[Paul Knight, analyst]

Question, Frank, on 39% revenue growth rate, SG&A only up 13%, COGS flat percentage of revenue. Are we plateauing now where you want to be with this SG&A effort, or rollout, I should say?

[Frank Stokes, executive]

Yes, I think the way I've characterized in the past, I think we've grown into our P&L. We've worked hard to be prudent on expenses, and we've worked hard to get to cash flow breakeven and profitability. The reality is, you need a certain scale to do that. So we're pleased that we've been able to do that with a smaller scale than have many other companies. So we'll continue to manage those expense categories carefully and work to continue to grow the top line, but to leverage that P&L and grow the expense categories at a lower rate than revenue would grow overall.

[Paul Knight, analyst]

What's the rate that you see R&D having to grow, Derek or Frank? And same thing with SG&A. Is SG&A going to be still a double-digit-type grower?

[Frank Stokes, executive]

I think SG&A -- so where does R&D need to be? I don't know, Paul. We would like to have, in a common-sized P&L, a mature view of things. We'd like to have 10% or 15% available for R&D, although the limiter there is being able to deploy that. And it's not as simple as just going out and deciding we're going to do it. There are hurdles there, just in terms of resources internally from a personnel and a capacity perspective. But I think double-digit growth in SG&A really depends on what we see with our sales force efforts there. And on the derm side, we're fairly close to right size. There's certainly room to take some territories and add territories here and there, just as we see some territories getting over full. But that's really where that growth comes from a pure A part of -- from a G&A part of that category, certainly much lower growth. It's the S part where we've seen growth, and it's the S part that we think is important to continue to drive that attractive top line revenue growth.

[Operator]

We now have Subbu Nambi with Guggenheim Securities.

[Ricki Levitus, analyst]

This is Ricki on for Subbu at Guggenheim. Could you provide us with some color on what the competitive landscape looks like right now for DecisionDx-Melanoma in light of the new data that's been presented by SkylineDx recently, especially given they've partnered with Quest and Tempus to sell the test?

[Derek Maetzold, executive]

That's an excellent question. So just to provide context for the rest of the audience here. So Skyline has been marketing their test since, I think, what, Frank, maybe summer of 2020, I think, is when they announced the commercial availability in the U.S. And while we have always talked about competition, we expect that that's healthy for patient care, we haven't seen traction over the last 4 years that's been meaningful. As you mentioned, I guess there was an announcement earlier this year that they had partnered with Tempus and Quest had some a license for that. We don't hear much information in the field about that.

Now, the recent study you talked about is interesting. That was a study that was designed to prove if their test could achieve a less than 5% sentinel lymph node positivity rate, which is important because for a number of years, I want to say, 2 decades plus, NCCN and other guidelines have used the threshold of 5% to say, hey, if you have a likelihood of having more or less than a 5% chance, you'll be sentinel lymph node positive, which means you find even 1 melanoma cell in that sentinel lymph node, then you probably should avoid that procedure. If you have a 5% to 10% risk, it is in that discuss and consider range. And if you have more than 10%, then we recommend that you consider doing it.

So the less than 5% is a very, very important public cut point. Their study that was presented, which was skipped over a little bit in the press, is their low-risk group came in at 7.1%. So certainly well above the 5% threshold. And so from our perspective, that's not unexpected. In fact, there was a publication in late 2022 that I think evaluated both the published data for our test, DecisionDx-Melanoma and their test, and what that study demonstrated was that based upon published data at that point in time, if you looked at the majority of melanomas who are in that 5% to 10% question range, which we would call T1, T2 melanomas, our test was able to consistently identify patients that we said were low risk below that 5% threshold, whereas the Skyline test was right about that.

So they didn't appear to offer anything more than AJCC staging based upon that paper. And this study here that was presented a couple of weeks ago that you're alluding to came in at 7.1%. So not necessarily very favorable from a patient care perspective. In terms of what that means going forward, I guess we'll have to wait and see if clinicians are comfortable using an alternative test to DecisionDx-Melanoma that provides a 7.1% chance of node positivity in low-risk patients versus the Castle test, which studies show are below that 5% threshold.

[Operator]

We now have Catherine Schultz with Baird.

[Thomas Peterson, analyst]

This is Tom Peterson on for Catherine. Apologies if I repeat something from earlier in the call. I was jumping between a few calls this afternoon. But I guess maybe just one question for me on IDgenetix. Independent of the private payer medical policy update last week, I guess, how are you thinking at a high level about the pace of investment in the IDgenetix business in the latter part of this year and into 2025?

[Derek Maetzold, executive]

Frank?

[Frank Stokes, executive]

Thanks, there. Appreciate that. Yes, we will continue to be very measured in terms of how we invest there. As you're aware, the ASPs there are different than the rest of our portfolio. And so we'll be very cautious about how hard we hit the pedal there. As I noted earlier -- sorry, sounds like you might have had to jump from another call. But as I noted earlier, it's an important test. It's a very important category. It's an important patient that needs the benefit of the test, and the commercial insurance companies, at any rate, aren't valuing it as such. And so very difficult on the reimbursement landscape. So we'll be measured, and we'll be thoughtful, and we'll make sure that we get the appropriate return on investment for the sales effort we put forward there.

[Thomas Peterson, analyst]

And maybe just one quick follow-up there. For the previously issued 2025 profitability guidance, can you just remind us, should we be thinking about overall positive net cash flow from operating activities in 2025 on a full year basis? Or are you just expecting quarterly net cash flow in 2025 to be positive at some point?

[Frank Stokes, executive]

Full year basis. We've said we'll be adjusted operating cash flow positive on a full year basis for 2025, and the primary adjustment there is noncash stock-based compensation expense.

[Operator]

We now have Mark Massaro with BTIG.

[Vidyun Bais, analyst]

This is Vidyun on for Mark. I'll just keep it to one, actually. So just on Novitas, I know it's sort of on an undetermined clock. Do you just have any color to share on timing and your general sense of how they're prioritizing SCC review? Whether we should be hearing from them in the front half or the back half of 2025? And I just wanted to confirm that in the absence of hearing from them, you'll continue to get paid on SCC in the interim.

[Derek Maetzold, executive]

I can fill up on that one here. So maybe the most important question first, which is that Novitas did complete a [ review ] in the first quarter of 2022, in which they indicated to us that this was a test that met Medicare's reasonable and necessity guidelines, and we have been a covered test since I think the first claim was submitted in April 2022, and that continues through today. So we are a covered test, which is appropriate given the evidence that was reviewed and which has only gotten stronger since then.

In terms of any updates on timing or thoughts, there is really not an opportunity for direct feedback, so we can't update a whole lot there, except to say that we did go ahead and update our guidance to reflect an assumption that we thought we would maintain payment of the SCC test through the end of this year. But in terms of projecting early part of next year, late next year, I think we don't have any good data to rely on that, which is unfortunate, of course, for all of us, right?

[Operator]

I would now like to hand it back to the Founder, President, and Chief Executive Officer, Derek, for some final remarks.

[Derek Maetzold, executive]

This concludes our third 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 the Castle Biosciences Third Quarter 2024 Conference Call. I can confirm today's call has now concluded. Please enjoy the rest of your day, and you may now disconnect from the call.