Earnings call transcript: Castle Biosciences Q4 2024 sees strong earnings beat

Castle Biosciences Inc . (NASDAQ:CSTL) reported its fourth-quarter and full-year 2024 earnings, significantly surpassing analyst expectations with an EPS of $0.32 against a forecast of $0.01. The company’s revenue also exceeded projections, reaching $86.3 million compared to the anticipated $80.54 million. According to InvestingPro data, the company maintains impressive gross margins of 81.9% and shows strong financial health with an overall score of "GREAT." Despite this positive performance, Castle Biosciences’ stock experienced a decline of 2.92%, closing at $25.28 in after-hours trading.

Key Takeaways

• Castle Biosciences reported a substantial earnings beat with an EPS of $0.32, well above the $0.01 forecast.
• The company achieved a 31% year-over-year increase in Q4 revenue to $86.3 million.
• Despite strong earnings, the stock fell 2.92% in after-hours trading.
• Full-year 2024 revenue increased by 51% to $332.1 million.
• The company anticipates 2025 revenue between $280 million and $295 million.

Company Performance

Castle Biosciences demonstrated robust financial performance in 2024, with a full-year revenue increase of 51% to $332.1 million and a net income of $18.2 million, reversing a net loss of $57.5 million in 2023. InvestingPro analysis reveals the company maintains a strong balance sheet with more cash than debt and excellent liquidity, with a current ratio of 7.78. The company also reported a positive adjusted EBITDA of $75 million, a significant improvement from the previous year’s negative $4.4 million. This growth was driven by increased demand for its diagnostic tests, including DecisionDx Melanoma and TissueCypher. For deeper insights into Castle Biosciences’ financial health and growth prospects, investors can access the comprehensive Pro Research Report, available exclusively on InvestingPro.

Financial Highlights

• Revenue: $86.3 million in Q4 2024 (31% increase YoY)
• Full-year Revenue: $332.1 million (51% increase YoY)
• Earnings per share: $0.32 in Q4 2024 (significantly above forecast)
• Full-year EPS: $0.62 (compared to -$2.14 in 2023)
• Cash and Investments: $293.1 million (50% increase YoY)

Earnings vs. Forecast

Castle Biosciences exceeded expectations with an EPS of $0.32, compared to the forecasted $0.01, marking a significant earnings surprise. The revenue of $86.3 million also surpassed the expected $80.54 million. This marks a strong performance relative to previous quarters, indicating a positive trend in the company’s financial health.

Market Reaction

Despite the impressive earnings beat, Castle Biosciences’ stock fell by 2.92% in after-hours trading, closing at $25.28. Based on InvestingPro Fair Value analysis, the stock appears fairly valued at current levels. Notably, analyst targets range from $36 to $50, suggesting potential upside opportunity. This decline may reflect broader market trends or investor caution regarding future challenges, despite the company’s strong financial results. The stock remains within its 52-week range, which peaked at $35.84 and hit a low of $16.97.

Outlook & Guidance

Looking ahead, Castle Biosciences projects 2025 revenue between $280 million and $295 million, with gross margins expected in the low-to-mid 70% range. The company plans to continue investing in its current product lines and explore potential strategic mergers and acquisitions to drive growth. InvestingPro identifies multiple positive indicators, including expected net income growth and three analysts revising earnings upward for the upcoming period. These are just two of several ProTips available to InvestingPro subscribers, along with detailed financial metrics and expert analysis.

Executive Commentary

CEO Derek Masold remarked, "2024 was another exceptional year for Castle," highlighting the company’s strong financial and operational position entering 2025. CFO Frank Stokes added, "We continue to expect to deliver positive net cash flow from operations," underscoring the company’s commitment to maintaining financial stability.

Risks and Challenges

• Potential Medicare reimbursement challenges for the SCC test could impact revenue.
• Market penetration for melanoma and SCC tests remains moderate, posing growth challenges.
• The competitive landscape in diagnostic testing could pressure market share.
• Economic uncertainties may affect healthcare spending and demand for diagnostic tests.

Q&A

During the earnings call, analysts inquired about the company’s strategies to address Medicare reimbursement issues and potential sales force reallocations. Executives also discussed market expansion strategies and ongoing clinical validation efforts to strengthen their competitive position.

Full transcript - Castle Biosciences Inc (CSTL) Q4 2024:

Conference Operator: Good afternoon, and welcome to Castle Biosciences Fourth Quarter and Full Year twenty twenty four 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 Zickereux, Vice President of Investor Relations and Corporate Affairs. Please go ahead.

Camilla Zickereux, Vice President of Investor Relations and Corporate Affairs, Castle Biosciences: Thank you, operator. Good afternoon, everyone. Welcome to Castle Biosciences’ fourth quarter and full year twenty twenty four results conference call. Joining me today is Castle’s Founder, President and Chief Executive Officer, Derek Masold and Chief Financial Officer, Frank Stokes. Information recorded on this call speaks only as of today, 02/27/2025.

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 three 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, intended use populations 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 2025 total revenue, our expectations regarding reimbursement for our products, including with regard to our DecisionDx FCC (BME:FCC) test, opportunities for growth, impacts of seasonality and other trends, the size and structure of our commercial teams, the timing of targeted milestones and the impact of our investment in 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 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 annual report on Form 10 ks for the year ended 12/31/2024, 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 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 Masold, Founder, President and Chief Executive Officer, Castle Biosciences: Thank you, Camilla, and good afternoon, everyone. 2024 was another exceptional year for Castle and I’m extremely proud of the strong execution by our entire team. With fourth quarter revenue of $86,300,000 we grew revenue by 51% year over year to $332,100,000 for the full year 2024. Additionally, total test report volume grew by 36% in 2024 compared to 2023. Further, as of 12/31/2024, the company’s cash, cash equivalents and marketable investment securities totaled $293,100,000 a $50,000,000 increase over 12/31/2023, which we believe will enable us to continue executing on our growth initiatives.

Today, I will walk you through business highlights in the fourth quarter and full year 2024 and then Frank will provide additional financial highlights before we return to your questions. Starting with our core dermatology business, we delivered growth of 17% for combined DECISION DX melanoma and DECISION DX SCC over 2023. Our dermatologic commercial team supports the promotion of both of these tests. Therefore, we look at the growth of these tests combined as the appropriate litmus test for our dermatologic portfolio’s performance. For DECISION DX Melanoma specifically, we delivered 36,008 test reports in 2024, an 8% increase over 2023.

After correcting for under reporting, we believe the addressable market comprises approximately 130,000 patients, meaning that we exited 2024 with roughly 28% market penetration. We’re pleased with our volume growth for 2024 and I would like to provide some additional context specifically for our fourth quarter volume for PrecisionVX melanoma. We saw typical seasonality with the fourth quarter historically having the fewest working days compared to the other three quarters. Specifically in the fourth quarter twenty twenty four, we had two fewer working days than in the third quarter of twenty twenty four. Further, the overlap of Christmas and Hanukkah in December led to additional practice closures as compared to 2023.

As a reminder, our decision to estimate melanoma test results provide clinicians and patients with actionable results aiming at answering two questions. The first being, does this patient have a likelihood of a positive stemylith node that is below five percent? Five percent has been the traditional guideline threshold for avoiding versus offering a semilisto biopsy surgical procedure. We have in multiple prospective and retrospective studies, consistently shown that our Cision DX melanoma test is able to identify patients who have a less than five percent rate of a positive set in lymph node biopsy. We have also shown that patients who avoided a synapse biopsy sort of procedure have excellent long term outcomes.

This data consistency sets our DECISIONVX melanoma test apart. The second question our test results aim to answer is what is the five year likelihood of this patient having a recurrence? Again, we have shown in multiple prospective and retrospective studies that our decision to the x melanoma test is an independent predictor of recurrence, that conditions use our test results to assist with their decisions as to whether to escalate or deescalate treatment pathways and that clinically tested patients show improved survival compared to patients who did not receive our dysgeniax melanoma test as part of their clinical care. We continue to develop evidence to support our dysgeniax melanoma test and currently we have more than 3,000 patients enrolled in clinical studies. We believe that the fact that we have been able to consistently demonstrate that we are adding independent value to traditional staging factors sets our DECISION DX melanoma test apart.

These two uses of our tests impact patients across all stages of localized melanoma. And we believe we have significant room for further penetration across clinical stages. Further, HR twenty twenty four data for this test, our orders generally align with the SEER data of incidence by T stage for patients diagnosed with melanoma. Despite having launched CZVX melanoma several years back, we continue to see new clinicians ordering our tests for the very first time. Specifically in 2024, we had eighteen sixteen clinicians order CYSVX melanoma for the very first time.

This was similar to the number of first time order submissions in 2023. So while some existing customers may have settled in toward a see the sweet spot for our test, we continue to have strong interest in usage that we need to then turn into further adoption. We currently anticipate mid to high single digit volume growth for the full year 2025 or the 2024 with the first quarter twenty twenty five being flat or slightly down compared to fourth quarter twenty twenty four in line with typical seasonality and our expectations. Moving on to the Cisionix SCC test, we continue to see strong test report volume momentum with 16,348 test reports delivered in 2024, an increase of 43% compared to 2023. Further, we saw fifteen ten new ordering clinicians for our Cisigny X SCC test in 2024.

We believe that the addressable market of patients diagnosed with cutaneous squamous cell carcinoma and the presence of one or more clinical or pathologic risk factors is approximately two hundred thousand patients, meaning that we exited 2024 with roughly eight percent marker penetration. As a reminder, our decision the XSCC test provides two actual test results. The first is predicting the risk of metastasis and the second is predicting response to adjuvant radiation therapy. These uses are supported by 22 peer reviewed publications since the launch of the test, including six studies published in 2024, ’2 of which represent the largest and the second largest studies ever published that evaluate the effectiveness of adjuvant radiation therapy in patients with cutaneous squamous cell carcinoma. Now, let’s turn to reimbursement.

In January 2025, Novitas, the Medicare administered contract with jurisdiction of our laboratory in Pittsburgh finalized the local coverage determination or LCD that included the language signifying non coverage by Medicare for decision XSCC. The LCD effective date originally in 02/23/2025 was subsequently extended to 04/24/2025. To the LCD become effective as is, we would not anticipate receiving Medicare reimbursement for Cision EX SCC test performed on or after 04/24/2025. We will be disappointed with the impact on patient care if we lose Medicare coverage given the strength of the evidence in decision EXSCC’s ability to predict the risk of metastasis impacting treatment pathways and the ability to predict responsiveness to asthma radiation therapy. I will remind you that a cost effectiveness article that was published in January 2024 showed that using decision DXFCC to guide asthma radiation therapy physicians could result in substantial savings for the Medicare program of up to $972,000,000 per year.

Now, let’s turn to our tissue cycle test, our spatialomics test designed to determine a patient’s individual risk of progression from Barrett’s esophagus to high grade dysplasia or esophageal cancer. We have published multiple performance studies showing that tissue cipher consistently outperforms traditional clinical and pathologic factors, providing physicians with an actionable assessment of the likelihood of a patient’s five year risk of progression of hybrid dysplasia or esophageal cancer. As such, we are thrilled with the positive reception Tissue Cyper has received from the gastroenterology community. In fact, we delivered 20,956 tissue cipher test reports in 2024 compared to 9,100 in 2023, representing the 130% growth. And for the year ended December 2024, we had twelve thirty four new ordering clinicians for the TissueCyber test.

Importantly, TissueCyber achieved a significant milestone in 2024, surpassing 25,000 test reports delivered since we acquired the test at the end of twenty twenty one, suggesting more clinicians may be recognizing its value. I’d also remind you that in 2024, the American Gastroenterological Association or AGA released new clinical practice guidelines in endoscopic eradication therapy for Barrett’s esophagus, stating that it can be effectively treated with endoscopic procedures like ablation, but noting identifying high risk patients is crucial. Importantly, tissue cipher was highlighted as the first prognostic assay capable of identifying patients with Barrett’s esophagus at risk of progressing to high grade dysplasia or esophageal cancer. This recognition by the AGA reinforces tissue cypress role in providing personalized and clinically validated risk stratification, helping clinicians better manage patients with Barrett’s esophagus. As we look at 2025 and beyond, the gross drivers we expect for TissueCycle include one, the commercial team roughly doubling in size during the first half of twenty twenty four with continued expansion throughout the second half of twenty twenty four and the first few months of 2025.

Two, the unmet clinical need and value of our test being further accepted by clinicians. And three, a strong focus on education and awareness. We believe that the addressable market of patients diagnosed with Barrett’s esophagus with nondysplastic, indefinite or low grade dysplasia is approximately four hundred and fifteen thousand patients per year in The U. S, meaning that we exited 2024 with roughly five percent market penetration. We believe in our ability to maintain strong momentum for future growth and currently expect tissue cycle volume to be significant for the full year 2025 compared to 2024, although not as high as one hundred and thirty percent we delivered in 2024 compared to 2023.

Turning to our mental health business. Due to changes in the market and our focus on allocating resources efficiently on profitable growth, in late twenty twenty four, we revised our commercial strategy for iagenix test. Reallocating resources to inside sales and non personal promotions. In December 2024, we observed month to month decrease in iGenx test reports, which persisted throughout year end 2024. We continue to offer our IGX test and monitor performance.

However, in 2025, we expect test report volumes and net revenues will continue to decrease and the long term performance of those tests remains uncertain. And with that, I will now turn the call over to Frank.

Frank Stokes, Chief Financial Officer, Castle Biosciences: Thank you, Derek, and good afternoon, everyone. As Derek highlighted, we delivered strong 2024 results, continuing our track record of consistent execution and strong financial performance. In the fourth quarter of twenty twenty four, we delivered total revenue of $86,300,000 30 1 percent increase over the fourth quarter of twenty twenty three and delivered $332,100,000 for the full year 2024, a 51% increase over 2023 and exceeding our guidance range. The full year 2024 increase was driven predominantly by test volume growth for our dermatologic and non dermatologic tests as well as our tissue cipher test along with a higher ASP for our DECISION DXFCC test compared to 2023. Importantly, we’ve now grown total revenue at a 52% CAGR over the last five years.

Adjusted revenue, which excludes the effects of revenue adjustments in the current period related to tests delivered in prior periods, was $85,800,000 for the quarter and $333,800,000 for the full year 2024. For 2025, we anticipate generating total revenue of $280,000,000 to $295,000,000 which reflects decisions the FCC no longer being reimbursed by Medicare for services performed on and after 04/24/2025. Our gross margin during the fourth quarter was 76.2 compared to 77.8% in the fourth quarter of twenty twenty three and our gross margin for the full year was 78.5% compared to 75.4% in 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 81.1% for the quarter and 82% for the year compared to 82.379.9% for the same periods in 2023. With the anticipated loss of DecisionDx SCC coverage in late April, we currently expect gross margins in the low to mid 70% range and adjusted gross margin in the mid to high 70% range for all 2025.

Turning to expenses, our total operating expenses including cost of sales for the quarter were $82,300,000 compared to $71,800,000 for the prior year and were $323,400,000 for the full year 2024 compared to $287,800,000 for 2023. Sales and marketing expenses were $123,500,000 for the full year compared to $113,700,000 for 2023. The increase is mainly due to higher personnel costs, higher sales related travel expense and higher organizational and business development activities. Increases in personnel costs reflect a higher headcount as well as merit and annual inflationary and wage adjustments for existing employees. General and administrative expenses were $76,600,000 for the full year compared to $66,500,000 for 2023.

The increase is primarily attributable to higher personnel costs, professional fees and IT related costs and expenses. Increases in personnel costs reflect headcount expansions in our administrative support functions as well as merit and annual inflationary wage adjustment for existing employees. Cost of sales expenses were $60,200,000 for the full year compared to $45,000,000 for 2023, primarily due to higher personnel costs and higher expenses for supplies and depreciation. Increases in personnel costs reflect higher headcount to support business growth in response to growing test report volumes, commencement of operations at our new Pittsburgh laboratory in the second quarter of twenty twenty three as well as Merrick and annual inflationary wage adjustments for existing employees. R and D expenses were $52,000,000 for the full year compared to $53,600,000 for 2023, primarily due to lower clinical studies costs, lower organizational development costs and lower expense for laboratory supplies, partially offset by higher personnel costs.

Total (EPA:TTEF) non cash stock based compensation expense, which is allocated among cost of sales, R and D expense and SG and A expense was $50,300,000 for the full year, down slightly from $51,200,000 for 2023, despite an increase of 25% in total headcount over 2023. Interest income was $12,900,000 for the full year 2024 compared to $10,600,000 in 2023, primarily a result of higher balances held in marketable investment securities. Income tax expense was $3,300,000 for the full year 2024 compared to $100,000 in 2023 as we realized profitability and positive operating cash flows for the full year 2024, primarily a result of state income taxes and the realization of pre tax income in 2024. Our net income for the fourth quarter of twenty twenty four was $9,600,000 compared to a net loss of $2,600,000 for the fourth quarter of twenty twenty three. And our net income for the full year 2024 was $18,200,000 compared to a net loss of $57,500,000 for 2023.

Diluted earnings per share for the fourth quarter was $0.32 a share compared to a diluted loss per share of $0.1 in the fourth quarter of twenty twenty three. Diluted earnings per share for the full year 2024 was $0.62 per share compared to diluted loss per share of $2.14 for 2023. Adjusted EBITDA for the fourth quarter was $21,300,000 compared to $9,400,000 for the comparable period in 2023. For the full year 2024, adjusted EBITDA was $75,000,000 compared to a negative $4,400,000 in 2023. Net cash provided by operating activities was $24,400,000 for the fourth quarter of twenty twenty four and $64,900,000 for the year ended 12/31/2024.

Historically, in the first quarter of the year, we have seen net operating cash use due in part to annual cash bonus payments and certain healthcare benefit payments that do not recur during the remaining three quarters of the year. We expect 2025 to follow this historical trend. Importantly, we continue to expect to deliver positive net cash flow from operations for the full year of 2025. Net cash used in investing activities was $50,100,000 for the twelve months ended 12/31/2024 and consisted primarily of purchases of marketable investment securities of $205,700,000 and purchases of property and equipment of $28,300,000 partially offset by the maturity of marketable investment securities of $183,900,000 We ended the year with cash, cash equivalents and marketable securities of $293,100,000 which we believe will allow us to invest in the business for long term growth and to continue our efforts to drive stockholder value. In conclusion, we delivered strong financial results in 2024.

In an effort to ensure the company is positioned for success in 2025, we expect to remain focused on strong execution coupled with our sound capital allocation strategy, including strategic opportunities. I’ll now turn the call back

Derek Masold, Founder, President and Chief Executive Officer, Castle Biosciences: to Derek. Thank you, Frank. In summary, we believe we’ve entered in 2025 in a boost of financial and operational strength as a result of our long sentiment to a science driven approach to improve the lives of patients we serve. Our continued investment innovation along with excellent execution should enable us to deliver value to patients, clinicians and stockholders. Thank you for your continued interest in Castle.

Now, we will be happy to take your questions. Operator?

Conference Operator: Thank you. In order to allow everyone in the queue an opportunity to address the Castle management team, please limit your time on the call to one question and one follow-up. And if you have any questions, please return to the queue. Your first question comes from Subbu Nandi with Guggenheim. Please go ahead.

Subbu Nandi, Analyst, Guggenheim: Thank you for taking my question. In our checks, we have noticed that private terms usually prefer decision DX melanoma, but terms in academic center are still hesitant to order more broadly before guideline inclusion. One, do you agree the in the absence of guideline update, how should we think about the opportunity?

Derek Masold, Founder, President and Chief Executive Officer, Castle Biosciences: So I understood that Thomas, back from your interviews, I guess that that flies a little contrary to the, what, the 108 the 1,800 new first time ordering clinicians in 2024 that ordered the melanoma test. So while it could be that there are clinicians who have been common users and they have kind of fallen into what they view as a sweet spot, so maybe there’s not much expansion for some of those current customers, We did see substantial growth in new first time ordering clinicians last year as well as in 2023. From our perspective, outside of a few of the sort of NCCN centers, we don’t hear much feedback at all regarding NCCN guideline inclusion or lack thereof as driving any sort of a personal decision around treating individual patients, except for, again, a couple of the NCCN institutions who, I guess, feel obligated to follow guidelines as opposed to treating patients individually.

Subbu Nandi, Analyst, Guggenheim: Got it. Thank you for clarifying, Derek. I want to bring back to atopic dermatitis, gene expression profile test that I think is planned to launch by end of twenty twenty five if the validation study results come through. When should we expect reimbursement update for this product?

Derek Masold, Founder, President and Chief Executive Officer, Castle Biosciences: Reimbursement or launch updates?

Subbu Nandi, Analyst, Guggenheim: Launch and reimbursement?

Derek Masold, Founder, President and Chief Executive Officer, Castle Biosciences: Yes. So we don’t at this point in time, we believe assuming as you said that the rest of validation study finishes out successfully that we would be on target at this point in time to still launch in late twenty twenty five. And I think we discussed this earlier in January maybe with third quarter earnings. Once we see what our final profile looks like and the relative value to both clinicians and payers, then the team’s work in the next four, five, or six, seven months is to really work through that exact same question, which is to say, how do we want to make this test available clinically so that it’s doing, good for patient outcomes and CASEL’s getting fairly reimbursed, and there might be some nontraditional approaches. So I think one of the next several quarters of 2025 expect to have us provide some good clarity on that, I think.

But as I say, I think I want to see what the profile looks like so we can really focus in on what that reimbursement strategy will actually be post launch, assuming we’re successful, of course, in the R and D part of the business. Either way, though, I would say starting from volume of zero to some volume that’s higher than that, that I would not expect much material revenue, I guess, is the way to say it all. Probably until what, 2829 probably is the right time period to think about that, Sabu.

Conference Operator: Thank you. Your next question comes from Sung Ji Nam with Scotiabank (TSX:BNS). Please go ahead.

Sung Ji Nam, Analyst, Scotiabank: Hi. Thank you for taking the questions. On tissue cipher and getting the New York State Department of Health approval there, what percentage of the addressable market does New York State represent?

Derek Masold, Founder, President and Chief Executive Officer, Castle Biosciences: So that sounds like an AI Google (NASDAQ:GOOGL) question. I don’t know off the top of my cuff here. I’m assuming it’s going to be demographically, there will be nothing different to say it would not be similar to the population of New York as a percentage of the overall US population. I don’t think there’s any there’s no age difference or no health difference that I would think would make them a heavier or lighter player than just the average percentage of The U. S.

Population lives in New York.

Sung Ji Nam, Analyst, Scotiabank: Got you. And then just on the precision DX SCC, kind of what’s the commercial strategy while you’re continuing to, resolve the reimbursement issues. Just kind of curious if you will continue to offer the test to patients or clinicians that order the test and how we should think about that for the

Derek Masold, Founder, President and Chief Executive Officer, Castle Biosciences: That’s a great question. So should we lose coverage towards the April, which is the current expectation, one, from just a non council perspective, but more of a patient care perspective, it’ll be hugely disappointing to have Medicare beneficiaries be referred to and undergo adjuvant radiation therapy. We know, based upon our two large multicenter studies that were published last year, that roughly sixty percent of them will not respond to that intervention. The other patients will, which is fantastic, but you’re really overradiating people. And that will be disappointing if that continues to go on despite the fact that use of our tests in directing radiation therapy, we believe, extracts over $900,000,000 a year in excess of spend because you’re removing ART from the patients.

Now, that being said, as background, I think, how we would approach this today is to say if we believe there’s a reasonably short term approach to regaining, reimbursement for Medicare, then we would leave the test on as is, I think, so that patients can benefit in the interim period. If we think it’s a longer term challenge to regaining coverage through Medicare, then I think we have to balance out somewhat of the needs of the shareholders in terms of an impact on gross margins as well as the impact on Medicare pressure to go ahead and have that test covered. So right now, I don’t anticipate that we would make the choice of taking it off the marketplace completely. That seems quite harsh and not in the orientation of a patient focused company.

Sung Ji Nam, Analyst, Scotiabank: Great. Thank you for taking the questions.

Conference Operator: Thank you. We now have Thomas Flaten with Lake Street on the line.

Derek Masold, Founder, President and Chief Executive Officer, Castle Biosciences: Hey, good afternoon. Thanks for taking the questions. In the press release, you mentioned the potential for strategic opportunities with respect to capital allocation. Should we be thinking about existing verticals, new verticals, maybe both? Just help us out with that a little bit.

So I think we are always looking at taking our capital and saying, what can we do to invest in our current commercial efforts to drive appropriate volume and revenue on the top line, looking at what we can fund for internal pipeline and also external opportunities, as you noted there, Thomas. From just a pure profitability driver for Castle, it’s easier to model out and think about locating additional test services that fit in our current verticals because we already have an infrastructure there that we can go ahead and just diversify costs across. That being said, we were not in gastroenterology three years ago when we bought Sargnostics to acquire Tissue Cipher. So I think we are focused both on seeing what assets are there that can fit within our current portfolios, but are not averse to looking at another area if it makes good sense and we see good strong upside.

Thomas Flaten, Analyst, Lake Street: Got it. And then Frank one

Derek Masold, Founder, President and Chief Executive Officer, Castle Biosciences: for you with SCC most likely disappearing from the top line and keeping in mind you had a really strong adjusted EBITDA number

Thomas Flaten, Analyst, Lake Street: in 2024. Any help you can give us on how to think about adjusted EBITDA for 2025?

Frank Stokes, Chief Financial Officer, Castle Biosciences: Yes, Thomas. We just continue to reiterate, we expect to be adjusted EBITDA positive for the year. We haven’t given any scope or scale to that.

Derek Masold, Founder, President and Chief Executive Officer, Castle Biosciences: Got it. Appreciate it. Thanks guys.

Frank Stokes, Chief Financial Officer, Castle Biosciences: Yes. Thanks Thomas.

Conference Operator: Thank you. We have Paul Knight with KeyBanc on the line.

Paul Knight, Analyst, KeyBanc: Hi, Derek. Frank, question on SCC. Obviously, you’re assuming that that ends fairly quickly. But is there any residual from non Medicare payers and private pay on FCC?

Frank Stokes, Chief Financial Officer, Castle Biosciences: Not significant private not significant commercial payment there on SCC. Still very early.

Paul Knight, Analyst, KeyBanc: And then, strategically, what’s the M and A market in the world of diagnostics right now? Is it have you seen the pipeline mature and it’s possibly a great market because deal flow’s kind of been light, but, you know, research maybe has not slowed down. What’s your feeling about are you buying things that are, let’s call it, more mature in this world?

Derek Masold, Founder, President and Chief Executive Officer, Castle Biosciences: Frank?

Frank Stokes, Chief Financial Officer, Castle Biosciences: There’s certainly lots of assets in the diagnostic space, Paul, but our filter is pretty thin. And so, we certainly haven’t changed that view or haven’t had a sense that we’d loosen that filter. So, I think the same sort of discipline and approach is how we’re comfortable thinking about things.

Paul Knight, Analyst, KeyBanc: And then as we think about ’25, how should we model SG and A? Is the sales force expenditure and overhead increasing in 2025?

Frank Stokes, Chief Financial Officer, Castle Biosciences: We have made some expansions to the tissue side for sales force and that’s a good bit of that was reflected in the Q4 number. I think we’ll continue to get leverage in the P and L, but we don’t see any very sweeping large changes to the sales force, but we will continue to add and invest in that asset as we see continued penetration on our test menu.

Derek Masold, Founder, President and Chief Executive Officer, Castle Biosciences: Okay. Thank you.

Conference Operator: Thank you. We have Mason Carrico with Stephens. Please go ahead.

Ben, Analyst, Stephens: Hey guys, thanks for taking the questions. This is Ben on for Mason here. Wanted to start with the Q4 impacts from the hurricanes and holidays. Do you have a sense for these patients being able to be rescheduled in Q1 or potentially, I guess, late in Q4? And then how do these patients factor into your melanoma framework for the start of the year here in 2025?

Frank Stokes, Chief Financial Officer, Castle Biosciences: Frank? Yes. It’s hard to say when patients get caught up. Derns are pretty full. And we’ve spoken before and the best analogy is when an airline cancels a plane there aren’t 180 empty seats on the next plane to put them on.

So they got to find ways to move them around and docs have to do the same. So we don’t really have a good sense of when those patients flow through and how many of them are lost. We think Q1 is probably going to set up like normal for Q1 and you’ve got two very large physician meetings in the quarter. You’ve got patient resets patient deductibles resetting. So as we said in the release, we expect typical seasonality for Q1 that we’ve seen in past years.

Ben, Analyst, Stephens: Okay, great. Thank you for that. And then appreciate the gross margin color that you guys gave. Was just hoping that you’d be able to provide some additional detail as SEC rolls off starting in April, just how we should think about the cadence there as we move throughout the year? Thank you for taking the questions.

Frank Stokes, Chief Financial Officer, Castle Biosciences: Yes, sure. So yes, the adjustments we referenced and the expected adjustments or impact on gross margin would be at the time reimbursement is pulled back. So it wouldn’t be phased in. It would be right at the end of that coverage.

Conference Operator: Thank you. We have a question from Catherine Schulte with Baird.

Tom Peterson, Analyst, Baird: Hey, everyone. This is Tom Peterson on for Catherine. Thanks for taking our questions. I wonder if you could kind of walk through your latest thoughts on SEC promotional efforts following assumed non coverage here in late April. I guess specifically, how are you thinking about potential changes to the dermatology sales force incentive structure?

Is there any contemplation around shifting those more towards DX melanoma?

Derek Masold, Founder, President and Chief Executive Officer, Castle Biosciences: Yes is the answer. So depending on the what we see between now and the April, we will be shifting, if not 100%, very, very close to that towards the melanoma test only beginning probably May 1. And obviously, we’ll watch and see what plays out in the next, couple of months here if that’s the right call or not. The only element that might change a switchback to some kind of a shared compensation, not fiftyfifty dollars but something else that’s ninetyten, eightytwenty would be if we see a line of sight to having near term reimbursement regained or maintained, otherwise the expectation here is that we move back to being close to one hundred percent for melanoma.

Tom Peterson, Analyst, Baird: Got it. Thanks. And then I know you’ve got some questions and comments on the tissue diaper Salesforce (NYSE:CRM) expansion to end ’20 ’20 ’4. It sounds like maybe a couple of incremental adds here to start 2025. I guess, can you just give us some more color on where that sits today, what the expectation is for 2025?

And if you could remind us how you think about that Salesforce size long term?

Derek Masold, Founder, President and Chief Executive Officer, Castle Biosciences: So we think there’s, roughly 10,000 targetable gastroenterologists who perform upper endoscopies. In that group, there’s a small number who are really focused on upper endoscopies and, ablation procedures, etcetera, who are in that group there. We don’t quite know today, or maybe I’m not as confident as I should be, about how important or how unimportant the advanced practice participants are, nurse practitioners, physician’s assistants in maintaining clinical interaction with patients diagnosed with their esophagus. So if you just go ahead and assume that they aren’t managing those patients per se and it’s really just the gastroenterologist with the MD or DO degree behind their name, then sitting in kind of the low 60s is probably insufficient by maybe 15 to 25 sales representatives. So part of our expectation here is to kind of watch and see how this most recent increase in territory size matures during the second quarter and then probably make additional expansion opportunities third and fourth quarter as we sort of see the relationships building among our expanded territories with the current customers and new customers, so it don’t expand too fast to go ahead and cause more disruption, but expand at the right rate.

And at the end of the day, I guess we should come back here is, we are quite sure if in the 60 range is where we should be sitting and part of that’s looking at promotion responsiveness and territory sizes and travel time, but probably somewhere between 60s to 80s feels about right at full maturity.

Conference Operator: Thank you. We have Mark Marasso with BTIG.

Camilla Zickereux, Vice President of Investor Relations and Corporate Affairs, Castle Biosciences0: Hey, guys. This is Vivian on for Mark. Thanks for taking the questions. I’ll just keep it to one. So just on the Novitas non coverage of SCC, could you just remind us of the other pathways that are available to you in contesting that in either continuing discussions of Novitas, or potentially flexing to a different lab, such that you might be covered by a different Medicare contractor?

Thanks.

Derek Masold, Founder, President and Chief Executive Officer, Castle Biosciences: Yeah. So, there are in the, program integrity manual, there outline different processes and approaches one can take to, interacting when there is an LCD in place. One of those would be a reconsideration request, which we would expect to enter into with Novitas if this policy finalizes as is. We are aware of another laboratory that has filed a lawsuit against Novitas for this LCD, Pacific Edge, that went up against a week or two ago. That may have an impact on this on the policy timing of this LCD being effective, or it may not have an impact.

But at least there there there are there are seems to be other laboratories who are aware of similar kinds of issues. There, is also a, administrative law judge challenge, which would usually take a patient to work with you to do that. And then, that sort of is the are the main pathways within, with the Novitas directly. As you may recall, we do have a LCD opportunity with the MolDX group. And as we talked about last fall and they finalized that policy, they did not, due to the timing of our publications, review the adjuvant radiation therapy response data but dropped in a comment or two in the LCD being aware that they were aware of some promising early data.

So we take that as a indication that that is a very interesting or interested clinical use perspective. So, we would, we are and would pursue that approach as well for a positive LCU through the MOLDI X program. Those are the main avenues.

Camilla Zickereux, Vice President of Investor Relations and Corporate Affairs, Castle Biosciences0: Great. Thanks for taking the question.

Conference Operator: Thank you. We now have Kyle Mickelson with Canaccord.

Thomas Flaten, Analyst, Lake Street: Yes. Hey, guys. Thanks for the questions. Just based on consensus, most estimates did not include SEC. You assume like a quarter and a third of SEC guidance probably should have like touched or bracket $300,000,000 Could you just and then obviously, like you didn’t express that product.

Can you talk about the quarterly assumptions for SEC in 1Q and 2Q? Is that kind of like flat relative to like end of twenty four levels? And then the acceleration of decision development throughout the year, maybe that benefits from the roll off of SEC as the commercial team kind of like reallocate its efforts. Right.

Camilla Zickereux, Vice President of Investor Relations and Corporate Affairs, Castle Biosciences: Frank, I think you’re on mute if you’re still on.

Frank Stokes, Chief Financial Officer, Castle Biosciences: I am. Thank you. I said I’ll cover the guidance and let Derek answer the second part. The guidance assumes FCC coverage through the LCD effective date of April 24.

Derek Masold, Founder, President and Chief Executive Officer, Castle Biosciences: In terms of acceleration of melanoma volume as the back half of your question there, we went from being solely focused with the sales force more than less than half the current size we’re at, Kyle. I guess, it was summer of twenty twenty two, when we went to splitting sales force focus between melanoma and SCC, and we expanded quite a bit since that point in time. So we would expect some accelerated growth once we return to a fully focused melanoma sales team. But to be quite honest, don’t have any sort of recent history with this number of people in the field about what that might look like for Omenem. So I’d rather not over or under set expectations, to be honest, at this point in time until we kind of see how our customers respond in the second quarter.

Thomas Flaten, Analyst, Lake Street: Okay. That was great. And then, just second one, D. Could you kind of talk about the white space or greenfield opportunities for melanoma test, whether that’s in the kind of opportunity market or academics or regional, kind of differences, I guess. Is the penetration in the current practices on material growth driver?

Do you have to kind of look outside that maybe to adjacent areas?

Derek Masold, Founder, President and Chief Executive Officer, Castle Biosciences: Okay. Okay. Let me see if I can write it out briefly. So, we had, was it eighteen hundred? Eighteen hundred new ordering clinicians first time ever last year and that was close to what we saw in 2023 as well.

So, it’s surprising, interesting, I don’t know what you wanna call that. But after being on the marketplace for several years, there were still that many numbers of kind of dermatologic or surgical customers who are adopting our tests for the very first time ever. So there is still, I think, good growth in ’twenty five and beyond of attracting clinicians who maybe they were tough to see, maybe they were residents coming into practice, they weren’t here three or four or five years ago, maybe they were nurse practitioners or PAs that are fresh out of school and just learning about new technologies like ours. So I think that is one area of growth going forward that I don’t see necessarily slowing down a whole lot because of just the new clinicians going into dermatology and also just getting around to those who are either late adopters by style or maybe they are hard to go ahead and get a hold of and communicate to. In terms of current ordering customers, we analyze our data.

One of the things that we do look at is, is breast load thickness on the patients who are test is ordered in. And if we kind of look at the, the NCI SEER data, We can look at at least the reported melanoma cases in half the country relative to their Breslow’s thickness and what’s called their T stage or their tumor stage. And we can then marry against what kind of orders we’re seeing coming in from an individual clinician. If we find out that the only orders that clinician is giving us are first aid patients that are between, say, point eight millimeters thick and maybe call it 1.5 millimeters thick, and we’re getting almost nothing else from that physician or that nurse practitioner or PA, we would say that clinician has sort of found what they believe is the sweet spot of our test in our practice because nobody only has those patients. And so we have articles and performance studies and clinical use studies that the sales force knows how to use that would go back into that same clinician who has sort of limited use of our tests or certain patient population.

Hey, this is what I’m seeing and what you’re ordering. Can we kind of go through data over here in FINRA patients and see the value that some of your peers are getting? Would you agree to that? And in some cases, we aren’t successful. But in other cases, we are successful in seeing that clinician review the data, think about how they would apply clinically and expand use in these other customer ranges.

So that is an opportunity as well. And then we do see other customers who are current customers who looks like they’re ordering our test across the spectrum of patients that they’re diagnosed. That probably is close to eighty nine percent, one hundred percent penetration for that individual clinician’s practice. And obviously, that’s really more about maintaining and reinforcing that they are making good clinical decisions based upon the use of our test.

Subbu Nandi, Analyst, Guggenheim: This concludes.

Conference Operator: Thank you. I would now like to hand it back to Derek Forsen’s final closing comments.

Derek Masold, Founder, President and Chief Executive Officer, Castle Biosciences: Thank you, operator. This concludes our fourth quarter and full year twenty twenty four earnings call. Thank you again for joining us today and for your continued interest in Castle Biosciences.

Conference Operator: Thank you all for joining. I can confirm that does conclude today’s call. Please enjoy the rest of your day and you may now disconnect. Thank you for your participation.

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