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Exclusive: New CareDX CEO Reg Seeto Talks Transplantation Care Provider's Mission, Vision, Growth Drivers

Exclusive: New CareDX CEO Reg Seeto Talks Transplantation Care Provider's Mission, Vision, Growth Drivers

Benzinga recently spoke with CareDx Inc (NASDAQ: CDNA) CEO Reginald Seeto to discuss the diagnostics surveillance solution provider's business, financials, market opportunity, alliances and future focus areas.

Seeto, a pharma industry veteran, took over the reins in November from then-CEO Peter Maag, who transitioned to the role of executive chairman to the board.

The company is set to report fourth-quarter results after the close Wednesday.

BZ: Tell us what CareDx means for the transplant community and give a brief description about its major projects and other business lines.

Seeto: CareDx has been supporting transplant for more than 20 years. We are the largest dedicated transplant company in the U.S. and also in the world. It's 100% focus is on transplant. In terms of mission, it is how to improve outcomes, and our vision is to be the leader connecting the different parts of the ecosystem.

We play a very important role because transplant is an area, historically, where many companies have come in and out, and I think for us we're absolutely committed to this space and supporting that patient journey.

In terms of our product lines, we have what's called testing services, which includes AlloSure and AlloMap for heart and kidney patients, and we are expanding to other organs. We also have the products business, and the digital business, which comprises various pieces — the chief among them is the interface with MR centers. And the fourth business line is pharma partnerships.

BZ: How strong are CareDx's international operations?

Seeto: For strategic R&D and manufacturing, we have locations in Australia and Sweden.

Secondly, we have an [international] commercial presence. Ex-U.S., the largest commercial presence is in Europe, where we have a direct salesforce. We also have a presence in parts of Asia. More importantly, we also rely on distribution partnerships.

Overall, the dominant part of our businesses is in the U.S.

BZ: How do you explain CareDx's resilience in the wake of the pandemic?

Seeto: Our entire strategy moves forward by 18 months. Because we had transplant centers and transplant patients in the middle of COVID in March, we were looking for solutions and options as to how patients could continue monitoring their organ grafts and also how to do it in the way which was convenient and appropriate for them.

What we were able to do is establish a direct connection with the patient by offering the service called RemoTrac, which is a mobile phlebotomy service, an offering where testing could still be done, but at home. We also introduced other things for patients to connect with them, such as our outpatient app. It was all built around this connectivity with the patient, with the strong support of centers allowing us to do this.

BZ: With restrictions easing further, do you see an acceleration in testing volumes?

Seeto: Yes, we have multiple parts of our testing services that will continue to grow.

On the kidney side, we are essentially in more than 150 to 200 centers in the U.S., and we have more than 55 protocols, which continue to grow quarter-on-quarter. And one in three new patients start on Allosure. So, we have a very strong presence in the transplant center.

What we're seeing during the course of 2021 is that we are now moving into the community, and that will allow for further incremental growth.

In terms of the heart space, we're already in 90% of the centers and used in one in two heart transplant patients.

What we saw at the end of last year is our multimodality strategy being validated. Having more than one test will actually increase the clinical utility for physicians and patients.

Our donor-derived Allosure heart was reimbursed when used with our Allomap heart and so now, we had an increase in the pricing that was achieved through MolDx, which does the same thing as the CMS. So, essentially we will have increased testing volumes because we expect increased uptake.

And we expect increased usage in the kidney and the heart spaces, and in the future, we will be launching in the lungs space and then the liver space.

BZ: And if I'm right, Medicare accounted for 66% of testing services revenue. How this will pan out in the future, especially with how policy changes can impact these revenues?

Seeto: We've developed high value tests, and so we don't actually set the pricing. It is set by a group code. if you go through central coverage, it is by CMS and if you go through local coverage determination, it is by a group called MolDx. 

We really focus on generating high science and investing in clinical studies more like a Rx company. As a consequence, our AlloMap test and our AlloSure test received pricing that we have deemed as appropriate. Other tests are also getting approved as well at a similar price.
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BZ: Digital and product revenues now account for about 20% of the total revenues. How important will these two segments be going forward?

Seeto: There's no separate strategy in terms of testing, products and digital. It is really connecting the patient. The products business is pre-transplant and the testing services is post-transplant, and the digital is connecting both pieces.

These are all integrated, linked-in businesses because ultimately, they connect that patient journey from pre-transplant and post- transplant, so I would consider them intertwined.

What we have is the cell therapy pharma partnership business, which is sort of not directly linked to the solid organ space, but that's more for the cell therapy space.

BZ: Based on the preliminary guidance, fiscal year 2020 growth stands at around 51%, and the Street forecast for fiscal year 2021 calls for a deceleration to 32%. What is the mid- to long-term growth rate CareDx is shooting for? 

Seeto: I think what you're talking about is the 51% year-over-year growth guided for 2020, and that was our third consecutive year of growth, greater than 50%.

So, we're extremely proud, proud of not only what we do for patients but also that revenue growth has been so strong with our third consecutive year, greater than 50%.

If you look at it by quarter, fourth-quarter growth over the prior year quarter was 63%, and third-quarter growth versus the prior year quarter was 58%. So, we've seen not only strong growth but also continued acceleration.

We have barely penetrated the total addressable market, and so the way I would think about it is that we will continue to grow.

In 2021, I think there are three specific additional drivers. One is the expansion to community, which will be incremental; two is the recent reimbursement approval of AlloSure Heart through the MolDx process; and then the third is that we continue to drive patient through our strategic patient care managers

So these are all areas of continued sustained growth in 2021.

BZ: Does that mean the Street forecast is in for a rerating?

Seeto: I haven't commented on guidance. What I would say is that growth is strong and over the last three years, we have been seeing strong growth. We have a series of drivers that will continue to drive growth, which we're excited about.

BZ: How are the margins? The product testing solution apparently has a higher margin than the other two segments. Is there scope for a further expansion in margins, or an improvement in the product mix to prop up the overall margins?
Yes, the overall margin margins have been increasing, and I believe it is 70% from the third quarter results. Our long-term goal is probably to get to the 75% margin level on a blended basis.

BZ: CareDx has grown inorganically and through partnerships and collaborations. Are you contemplating any M&A down the line, or any alliances in the future?

Seeto: Doing externalization of business development and partnering is something that we've done, year in year out, throughout the course of our history.

We expect normally one to two acquisitions a year. We have actually completed one already at the start of 2021. In 2019, for example we acquired two companies — OTTR and Xyn Management — focused on supporting what we do in the transplant centers.

In 2020, we focused on what's called multi-modality innovation, so these were more partnerships. We did a partnership with Cornell on UroMap and we did a partnership with Veracyte on a product called HistoMap.

In 2021 it's been acquisitions, like the acquisition of a company called TransChart. And a further example of multi-modality partnership has been AlloID, an infectious disease testing solution that identifies more than 100 pathogens and drug resistance in viruses and bacteria specific to organ transplant donors and recipients.

I would say during the course of this year we would expect more sort of partnering externalization efforts around the patients and directed at patient efforts.

BZ: What is your cash burn rate currently and how adequate are your cash reserves for funding operations?

Seeto: We have non-GAAP positive adjusted EBITDA. So, we are one of the fairly unusual companies with high growth and also a focus on profitability.

Revenues will always exceed our operational expenses, and that's the way the company has been built and scaled up. For example, in the third quarter, we had a 10% EBITDA margin. A continued ability to grow and scale a company, but also to be sustainable, is important for us.

BZ: Following the capital raise in January, do you have plans to tap the markets yet again this year?

Seeto: The financing that we did recently was completed with threefold objectives. The first was to bring in a series of new shareholders.

I met with 130 investors during the course of November and December, when I took upon this role. There are many new investors to the story and it therefore provided an opportunity for new investors to come in.

The second is, as our market cap increased, we were below on a percent basis of cash versus our peers and so part of the raise was meant as an opportunity to get up there as well.

And the third thing is to scale other businesses. We have always been No. 1 in all the solid organ transplant opportunities, and now we're seeing opportunities in digital, in cell therapy. We don't need to raise money, and we're a profitable company. Part of the process was for those three things I just described.

BZ: What is your R&D setup like?

Reg Seeto: Our R&D is a significant area of investment for us. In 2021, we will have over $60 million committed to R&D. We're known for our innovation, having being the first to bring gene expression profiling into transplant, the first to bring donor derived cell-free DNA into transplant and the first when it comes to multi-modality, that is combination diagnostics in this space.

We continue to invest in innovation because it's important for us to be a leader. I don't think that's something everyone always has as part of their mantra. But for us, we need to and want to innovate.

No. 2 is, as you innovate, to bring new benefits to patients and the physician. So, R&D is a core part of our DNA and heritage.

Another example would be the recent launch of the cell therapy Allo Cell business. We were again first in this space of bringing a universal surveillance tool for patients that received Allo genetic cell therapy.

BZ: What will be your message to the investing community or people who are invested in your stock?

Seeto: CareDx is a growth company. CareDx is the largest dedicated transplant company in the U.S. and in the world. CareDx has a series of businesses that continue to scale and grow.

And lastly, I would say, you know our focus is on supporting the transplant patient. And that will always be the basis how we continue to grow and scale the company.

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