Castle Biosciences Inc (CSTL) Q4 2019 Earnings Call Transcript

Castle Biosciences Inc (CSTL 1.91%)
Q4 2019 Earnings Call
Mar 10, 2020, 4:30 p.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Good afternoon, and welcome to Castle Biosciences' fourth quarter and year-end 2019 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'd like to turn the call over to Frank Stokes, chief financial officer.

Please go ahead, sir.

Frank Stokes -- Chief Financial Officer

Thank you, operator, and good afternoon, everyone. Welcome to Castle Biosciences' fourth quarter and year-end 2019 financial results conference call. Joining me today is Castle's founder, president, and chief executive officer, Derek Maetzold. Information recorded on this call speaks only as of today, March 10, 2020.

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. Before we begin, I would like to remind you that some of the information discussed today may contain projections or other forward-looking statements regarding future events or the future financial performance of the company and are made pursuant to the safe harbor provision of the Private Securities Litigation Reform Act of 1995. Forward-looking statements are based upon current expectations and involve inherent risks and uncertainties, and there could 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 final prospectus filed with the Securities and Exchange Commission on July 26, 2019, relating to our registration statements on Form S-1 and in the company's other documents and reports 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. I'll now turn the call over to Derek.

Derek Maetzold -- Founder, President, and Chief Executive Officer

Thank you, Frank, and good afternoon, everyone. Thank you for joining us today. This afternoon, we will review fourth quarter and year-end financial results, key accomplishments and upcoming milestones and discuss our 2020 revenue guidance and strategic priorities. The entire Castle Biosciences team did an excellent job throughout 2019, which was an incredibly strong year, strong in terms of growth in our gene expression profile test volume, strong in terms of growth and continued evidence development for our DecisionDx-Melanoma test and DecisionDx-UM test and progression of our pipeline products.

During 2019, we successfully completed two commercial team expansions: one in the first quarter of 2019 and the second one in December 2019. We went from 14 outside sales territories in December 2018 to 32 outside sales territories as of December 2019, which provides us confidence in our ability to execute our 2020 strategic growth priorities. In 2019, for the fourth quarter and year ended, we reported revenue of $17.6 million and $51.9 million, respectively. The full-year 2019 revenue of $51.9 million compares favorably to the $22.8 million reported for the full-year 2018.

As we look forward to our growth potential in 2020, we anticipate generating $61 million to $64 million in revenue and plan to provide quarterly updates on this guidance. In order to support our continued growth, we plan to further expand our commercial sales team, continue our evidence development and further ramp up our R&D efforts. And we did announce report volume in January for both of our proprietary gene expression profile tests. For DecisionDx-Melanoma, for use in patients diagnosed with invasive cutaneous or skin melanoma, we delivered 4,480 test reports in the fourth quarter and 15,529 test reports for the year, up 37% and 29% over prior periods in 2018, respectively.

Adoption with new physicians for DecisionDx-Melanoma in 2019 was up 24% year over year and total ordering clinicians increased 32% year over year to just over 3,900, 3,927 to be exact. Based on an annual U.S. incidence of newly diagnosed invasive cutaneous melanoma patients of approximately 130,000 and approximately 11,000 to 15,000 clinicians who treat melanoma, we believe our annual 2019 penetration to be about 12% of patients and about 25% to 30% of clinicians. We believe the success of our commercial expansion in February 2019 contributed in part to the excellent growth we saw in DecisionDx-Melanoma as well as our continued evidence development, which I will discuss further in a moment.

We anticipate continued success with volume growth with our recent additional commercial expansion in December 2019, which resulted in a total of 32 outside sales territories with commensurate increases in associated commercial and medical affairs personnel. All in, our customer-facing teams more than doubled in size to over 50 people as of December 2019 compared to December 2018. As we have in the past, we are continuing to assess our commercial team needs as we prepare to launch our late-stage products and anticipate adding at least an additional eight to 10 outside sales territories with commensurate increases in associated commercial and medical affairs personnel in the second half of 2020. Turning to our DecisionDx-UM test for patients diagnosed with uveal melanoma.

We delivered 434 reports in the fourth quarter and 1,526 test reports for the full-year 2019, a 13% and 8% increase year over year, respectively. You may recall that our DecisionDx-UM test has been standard of care for a number of years, and we believe treating clinicians are ordering our tests for an estimated 85% of patients diagnosed with uveal melanoma. Therefore, we are pleased with our year-over-year growth of 8% for a very mature product. Now I'd like to discuss several fourth quarter and recent key accomplishments with our continued evidence development and late-stage pipeline products.

Let me remind you that our DecisionDx-Melanoma test assesses the aggressiveness or likelihood to recur or metastasize based upon the biological signature of an individual patient's primary melanoma tumor. We have shown that our DecisionDx-Melanoma test predicts an individual patients' likelihood to recur or metastasize to the sentinel lymph node, regionally, distantly and even death from melanoma. Because we can predict multiple endpoints, our DecisionDx-Melanoma test impacts more than one decision point. Specifically, our test currently guides two clinical decisions that are made just after the time of diagnosis.

The first use of our test is to form decisions on sentinel lymph node biopsy when the tumor is two millimeters thick or less. And the second use is to guide subsequent treatment plan decisions. In November, data from two prospective multicenter studies supporting the clinical use of DecisionDx-Melanoma test to guide discussions and recommendations regarding sentinel lymph node biopsy surgery were presented at the 16th International Congress of the Society for Melanoma Research. In the first prospective multicenter study, we reported that in sentinel lymph node biopsy assessed patients, 65 years of age or older with T1 or T2 tumors and a low-risk Castle Class 1A test result, sentinel lymph node positivity was 2.7%, significantly less than patients with a Castle Class 1B-2A or Castle Class 2B test result.

And importantly, below the 5% threshold at which the cancer treatment guidelines do not recommend the sentinel lymph node biopsy surgical procedure. T1-T2 tumors are melanomas that had a tumor depth that is two millimeters or less. As the point of reference, this group comprises 86% of all patients that we test today. In the second study, this one also multicenter and prospective, looked to address the clinical question of are we doing patients harm if a patient with a T1 or T2 melanoma tumor and the DecisionDx-Melanoma Class 1A test result avoided a sentinel lymph node biopsy surgical procedure.

We previously addressed this question with an analysis from our long-term archival or retrospective study cohorts. In this study, we reported data on outcomes from a multicenter prospective study with a median follow-up time of 3.2 years in patients who did not experience a metastatic event. This study found that patients with a T1-T2 tumor and a Class 1A test result had a 3-year overall survival rate of 99.4%, a distant metastasis-free survival rate of 98.7% and a recurrence-free survival rate of 96.6%, adding further support that this T1-T2 Class 1A population can safely avoid the sentinel lymph node biopsy surgical procedure. Also regarding our DecisionDx-Melanoma test, results from a study designed to establish the level of evidence were published in the December 2019 issue of the American Journal of Clinical Dermatology.

Methodologically, the authors conducted a systematic review of the literature and established a level of evidence for our DecisionDx-Melanoma gene expression profile test based upon criteria used by the American Joint Committee on Cancer, or AJCC, the National Comprehensive Cancer Network, or NCCN, and the American Academy of Dermatology, or AAD, criteria, respectively. The results show that DecisionDx-Melanoma test achieves a higher level of evidence than determined at that time by these organizations. Specifically, the systematic review included evaluation of seven development and validation studies that led the authors to classify DecisionDx-Melanoma as a level 1 to 2 according to AJCC criteria, level 1 to 3B according to NCCN criteria and level 2A according to AAD criteria. The authors' conclusions were higher than the official unrated status conferred by the AJCC and NCCN and the 2 to 3C rating designated by the AAD in latest version of their melanoma guidelines, all of which were conducted prior to the study.

The NCCN guidelines for cutaneous melanoma were updated in December 2019. Although it appears that all of our 22 peer-reviewed publications were not reviewed, a positive shift in the inclusion language was made, indicating that the DecisionDx-Melanoma test may provide information that is an adjunct to AJCC staging with a category 2A level of evidence. This level of evidence is consistent with the systematic review study just noted and also published in December 2019. Also in the fourth quarter, we received notification that the American Medical Association's CPT editorial panel accepted our application for a category 1 multi-analyte assay with algorithmic analysis, or MAAA, CPT code for our DecisionDx-Melanoma test.

This code will be effective on January 1, 2021. In order to obtain a category 1 MAAA CPT code, a test must meet certain levels of evidence requirements. For example, the clinical efficacy must be documented in the published literature. Additionally, it requires that test used to be performed with a frequency consistent with the intended use that this use is consistent with current medical practice and that is performed by many physicians or other qualified healthcare professionals.

The AMA's CPT editorial panel agreed that our DecisionDx-Melanoma test met all of these criteria. With this acceptance, both of our proprietary MAAA tests, DecisionDx-UM and DecisionDx-Melanoma, have met the criteria required for category 1 MAAA CPT code. As a reminder, we have 22 peer-reviewed publications that support the two currently clinically actionable uses of the DecisionDx-Melanoma test, and we anticipate additional publications in 2020. The conclusions in the December 2019 systematic review, the NCCN guideline update and the AMA CPT editorial panel actions support our belief that evidence development matters.

We will continue to invest in evidence development to support both patient penetration and coverage by commercial payers. As it relates to our intellectual property, last week, the first U.S. patent related to our DecisionDx-Melanoma test was issued by the United States Patent and Trademark Office. This patent covers methods of treating cutaneous melanoma in patients having high-risk cutaneous melanoma tumors.

Now turning to our pipeline products. We are excited about the progress that we have made regarding our DecisionDx-SCC test for use in patients with one or more high-risk squamous cell carcinomas and our test for suspicious pigmented lesions. As you may recall, we reported data from the clinical validation study in October 2019. On January 20, 2020, we presented data on the use of a test in squamous cell carcinomas that were categorized as high risk by the NCCN guidelines.

This study demonstrated that the use of our test in combination with AJCC staging enable identifying approximately 50% of high-risk patients who had a metastatic rate that was similar to the general SCC population. In other words, we could successfully rule out approximately 50% of high-risk patients from a high-risk treatment plan. As of today, we are excited about the opportunity to potentially commercialize our DecisionDx-SCC test with the hope that patients who are diagnosed with high-risk disease based upon NCCN criteria could make more informed decisions regarding the initiation of aggressive adjuvant therapies or watchful waiting. We look forward to providing with updates in the coming months.

Of interest, we received notice that an abstract regarding our DecisionDx-SCC test was accepted for an oral presentation as a late-breaking abstract during the Basic Science/Cutaneous Oncology/Pathology session at the 2020 American Academy of Dermatology annual meeting being held in Denver, Colorado. The presentation is scheduled to begin at 4:30 p.m. Mountain Daylight Time on Saturday, March 21. Regarding our second late-stage pipeline product, our test for suspicious pigmented lesions, we believe that we remain on track for commercial launch in the second half of 2020.

We plan to report data from a clinical validation study in the second half of the year prior to launching this test. We believe that these two late-stage pipeline products, DecisionDx-SCC and our test for suspicious pigmented lesions, will increase our estimated total addressable U.S. market by approximately $1.4 billion for a total U.S. TAM of approximately $2 billion.

I will now turn the call back over to Frank who will provide additional detail relating to our financial results.

Frank Stokes -- Chief Financial Officer

Thank you, Derek. We are pleased with our strong execution and growth in the fourth quarter and full-year 2019. We reported revenue of $17.6 million in the fourth quarter and $51.9 million for the full year, an increase from $11.4 million and $22.8 million over the fourth quarter and full-year 2018, respectively. As a reminder, quarterly year-over-year comparability of our revenue continues to be effective by the Medicare Local Coverage Determination, or LCD, for our DecisionDx-Melanoma test that was issued in the fourth quarter of 2018.

While the LCD covered reimbursement for test reports delivered prior to the fourth quarter of 2018, due to the timing of the issuance of the LCD and GAAP revenue recognition requirements, all 2018 DecisionDx-Melanoma Medicare revenue covered by the LCD was not recognized until the fourth quarter of 2018 when the LCD became final and effective. The amount of such revenue derived from DecisionDx-Melanoma test reports delivered in the first three quarters of 2018 but not recognized until the fourth quarter of 2018 was $5.2 million. Stated differently, if our fourth-quarter 2018 revenue only included Medicare tests for DecisionDx-Melanoma that were performed in the fourth quarter of 2018, then 2018 revenue would have been $6.2 million compared to fourth-quarter 2019 revenue of $17.6 million. This is a non-GAAP measure.

Please see our non-GAAP reconciliations at the end of our earnings release from this afternoon. Our year-over-year revenue was driven by a 29% increase in 2019 in DecisionDx-Melanoma test reports volume compared to 2018 as well as by higher revenue per test or ASP. As Derek discussed earlier, we anticipate generating revenue of $61 million to $64 million in 2020 and expect to give the first update on our progress in May when we report our first quarter 2020 financial results. The full-year 2019 revenue of $51.9 million includes $2.5 million of positive revenue adjustments compared to positive revenue adjustments of $0.3 million for the full-year 2018.

The increase in positive revenue adjustments primarily relates to cash collections in 2019 on test reports delivered prior to 2019. In other words, previous periods, for which no revenue was recognized originally. No revenue was recognized originally in alignment with the requirements for revenue recognition under GAAP. We believe, based on recent reimbursement activity, that additional positive adjustments in future periods at some level are possible for at least the next few quarters.

Our gross margin during the fourth quarter was 89% and was 86% for the full-year 2019 compared to 77% for the full-year 2018. This improvement in gross margin was primarily driven by operating leverage as a result of our strong volume growth. Our operating expenses for the year ended December 31, 2019, were $37.2 million compared to $21.3 million for the year ended December 31, 2018, an increase of 75%. This increase was primarily [indiscernible] of higher personnel costs, particularly due to the expansion of our sales and marketing organization, but also due to the expansion of administrative support functions as well as increases in administrative expenses associated with our growth and higher R&D expense, which increased by $2.5 million in 2019 compared to 2018.

We expect our R&D expense to increase further as we continue to invest in activities related to enhancing our existing products and developing new products. As a percentage of revenue, our SG&A expense was 58% for the full-year 2019 compared to 72% for 2018, with the improvement primarily attributable to the increase in operating leverage as a result of our revenue increase. Interest expense increased by $2.3 million to $4.6 million for the year ended December 31, 2019, compared to the year ended December 31, 2018, primarily driven by the issuance of convertible promissory notes in the first quarter of 2019. These notes were converted into common stock in July 2019 in connection with our IPO.

The remainder of the increase is due to a combination of higher outstanding credit balances and higher interest rates on our banking credit facility. Our net income for the 12 months ended December 31, 2019, was $5.3 million, which includes the benefit of a onetime $5.2 million noncash debt extinguishment gain. For 2019, we reported a $0.21 per share loss, which under GAAP excludes the benefit of the debt extinguishment gain. For the year ended December 31, 2018, we had a net loss of $6.4 million or $5.33 loss per diluted share.

Moving next to our cash flow performance for the year ended 2019. Castle generated $7 million in positive operating cash flows compared to negative operating cash flows of $12.3 million in the prior year. Finally, we had cash and cash equivalents at December 31, 2019, of $99 million, which we believe, along with cash generated from sales of our products, will be sufficient to fund our operating expenses for the foreseeable future. Additionally, we believe we are positioned well to execute on our expansion plans and support our ongoing research and development activities.

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

Derek Maetzold -- Founder, President, and Chief Executive Officer

Thank you, Frank. In summary, we are extremely pleased with our team's performance in 2019, including strong year-over-year growth in volume for our DecisionDx-Melanoma test, two successful commercial expansions in our commercial and medical affairs teams and significant advances in evidence development. We look forward to another great year in 2020, and we thank you for your continued interest in Castle. Operator, we are now ready for Q&A.

Questions & Answers:

Operator

Thank you. [Operator instructions] Our first question comes from Puneet Souda with SVB Leerink. Your line is open.

Puneet Souda -- SVB Leerink -- Analyst

Yes. Hi, Derek, Frank. Thanks for the question. The first question I have is on the guide.

It was stronger than what we had expected and what The Street, I believe, was modeling. Could you walk us through the contribution that you expect here from volume and contribution from ASP? And if you could provide also any if you expect any contribution from SCC in that guide?

Derek Maetzold -- Founder, President, and Chief Executive Officer

I'll let Frank handle that question, I think.

Frank Stokes -- Chief Financial Officer

Sure. So Puneet, we are not assuming any revenue contribution from new products, which we anticipate launching this year. Based on GAAP accounting principles, we won't have enough experience with those products to record or accrue revenue at the time of product of report shipments. So we will only reflect revenue on a cash basis when we actually collect any cash from those tests.

And just given the timing of the appeal cycle, we just don't see that being material or meaningful at all in 2020. So that guide doesn't include new product side. And you can assume as we have that the uveal melanoma product is flattish in terms of both volumes and ASP, that's a fairly mature product. And as we've said in the past, we think we test a significant percentage of the patients, maybe 80%, 85% of the patients.

And so while we'll continue to support that test and it's an important test for us, just given the penetration levels, we don't model too much additional volume there. So the growth in revenue is primarily driven by volumes and modest improvement in ASP on our cutaneous melanoma test. Although again, the reimbursement process and pathway is a long one. So we're primarily focused on volume growth there.

Puneet Souda -- SVB Leerink -- Analyst

OK. And then on the out-of-period adjustments, you had $4.3 million this quarter, $3.2 million last quarter. This is now second quarter of large adjustment here. So how should we think about that going forward? And then is there any contribution from that or expected contribution that you expect in 2020 guidance from out-of-period adjustments?

Frank Stokes -- Chief Financial Officer

Yes. So if you look at the total year at a period, it was $2.5 million. And so that will give you a sense of where those out-of-period reports are coming in. The lag sort of appears to be quarter to quarter, maybe a quarter plus a little bit to quarter.

And so we will see some of that in 2020. Although as we continue to mature both our reimbursement progress as well as our appeals progress, we should see that begin to converge toward accrued revenue.

Puneet Souda -- SVB Leerink -- Analyst

OK. And then if I could, Derek, if I could touch on the sales reps. Obviously, growth in volume is a key metric for you. As you look at the sort of somewhat expected disruption here in travel plans largely due to coronavirus, do you expect any impact there on the sales rep territories? Are they largely local? And how should we think about the cadence for the year, given the full-year guide? How should we think about the cadence in the first half versus second half of this year? And then the last one, if you could also elaborate what's your expectation for sales rep expansion this year?

Derek Maetzold -- Founder, President, and Chief Executive Officer

Sure. Excellent questions, Puneet. Thank you. So maybe I'll start sort of toward the last and work myself forward.

So as you know, from the releases in the past and today's release, we completed our second expansion in 2019, in December of '19 to go to 32 outside sales territories. And we also have expanded groups around that. So we have an inside sales associate group as well as medical affairs personnel. All told, customer-facing individuals at Castle was in the low 50s at the end of 2019, and that compared to being in the low 20s at the end of 2018.

So more than a doubling in terms of customer-facing personnel that are either here in Friendswood or on the ground across the U.S. from a geography standpoint. We have certainly seen a couple of conferences that we would normally exhibit at and hold one-on-one meetings at be canceled here in the March time period. I don't know if organizations will continue to kind of roll those going forward through April and May or if we see an adjustment depending on the coronavirus, I guess, news flow penetration, etc.

So I think podium events at major meetings probably in the second quarter will be less than we had planned or scheduled for because those major meetings are being postponed or canceled. So far, we haven't heard feedback from our representatives or the medical science liaison group in terms of local interactions being canceled or postponed. Our belief is that the information that we're providing to physicians regarding hopefully improving the care of their patients with the use of our test continues to be valued. What I don't know, which is maybe the question you haven't asked, is are physicians, dermatology practices, surgical oncologists can actually see a reduction in patient flow? Are people going to go in and their physician less often because they are concerned about coronavirus in the office of that doctor and avoid getting a skin cancer diagnosis or not? I would think that if we see something, it should be quite mild to moderate, but I guess, that sort of is the [indiscernible] national risk, I would say.

So at this point in time, we see nothing that would project sort of a slowdown of individual patients opting to forgo seeing their physicians when they're concerned about a skin cancer or an eye cancer event. So I think that from a business perspective at Castle, we don't put it in our model today some sort of a major adjustment shift because people who need care, I would expect they would still seek out care, I guess, in a reasonably timely manner. In terms of sort of ramping up, as you know, we started out in the first quarter of 2019 with year-over-year report growth in our cutaneous melanoma test, DecisionDx-Melanoma, in the low 20s, I think, right? 21%, I think it was. And we ended the year in the fourth-quarter '19 over the fourth quarter of 2018 at 37% growth in reports year over year.

So we think that was driven by two major elements. The first was the expansion of the customer-facing commercial and medical affairs groups and this demonstrated that we were substantially undersized, I guess, you would say, in a promotionally responsive marketplace that was crying out for, I guess, educational efforts that we could deliver. And the second, of course, was a very, very nice trail of evidence development over the course of the year, which I think helped us communicate better to our clinicians, where to use our test appropriately and where not to, for example. The expansion in December of 2019 to those 32 outside sales territories to more than 50 customer-focused individuals, I think, derisks our growth opportunity throughout 2020.

So that feels pretty comfortable to both Frank and I and the rest of the organization. And we do expect that, that expansion group probably takes 1.5 quarters to two quarters, I think, to become fully effective. So our internal estimates were that we're starting off at a great point in December 2019. And that group hopefully becomes fully effective toward the mid-summer to the third quarter of 2020, which still is very strong in terms of being able to help educate clinicians to make an active decision on the use of our test, improving patient care.

Anything else to add?

Puneet Souda -- SVB Leerink -- Analyst

That's great. All right. Thanks. Thanks, Derek.

Thanks for all the details.

Operator

Your next question comes from Sung Ji Nam with BTIG. Your line is open.

Sung Ji Nam -- BTIG -- Analyst

Hi. Thanks for taking the questions. Maybe starting out with a question on gross margin for 2020. Frank, could you kind of help us think about the cadence potentially for the year.

Obviously, you saw very strong growth expansion last year. Should we kind of carry that over this year? If you could maybe also go over kind of the puts and takes in terms of how we should think about modeling that going forward?

Frank Stokes -- Chief Financial Officer

Yes. Sung Ji, thanks for your question. I think that the gross margin performance we saw for the full-year 2019 is probably durable until we launch our new products. And when we launch the new products, given my earlier comments, we'll have costs associated with those new test reports but any revenue we actually receive will be deferred into later periods.

So you could see the gross margin be impacted by that somewhat. But in terms of a normalized, sort of, steady state run rate gross margin, that middle 80% is about right for going forward this year, I think.

Sung Ji Nam -- BTIG -- Analyst

Great. And then maybe on the commercial payer coverage side, Derek, could you talk about kind of what the near-term strategy is in terms of what type of milestones we may be able to see in the near term over the next 12 to 18 months? Kind of what your strategies are there? How the early conversations might be going?

Derek Maetzold -- Founder, President, and Chief Executive Officer

Sure. Sure. Thanks for the questions. So I'm going to assume that we're talking primarily about our DecisionDx-Melanoma test for cutaneous melanoma, but I'll spend a second here on the uveal melanoma test.

So on the uveal melanoma test, which is DecisionDx-UM, we do enjoy broad coverage both in terms of Medicare population, which, as a reminder, is about 45% of the patients that we test, and the majority of commercial plans across the U.S. do include that test as reasonable, necessary and covered. We are targeting the few remaining plans to ensure that they see the data, interpret the fact that the major third-party technical assessment groups all support the use of our test in clinical care as do national guidelines, such as NCCN, and they should be evaluating our test and the prospect of it does actually improve patient net health outcomes, and they should be covering this test proactively because it is standard of care. So even gaining modest improvements in the few plans that we don't have positive [indiscernible] uveal melanoma, we expect some of those to go ahead and occur this year.

But in terms of revenue impact, I think you won't be able to see that on a revenue line. So turning to DecisionDx-Melanoma test for cutaneous melanoma. We had anticipated our model a couple of years ago that we would not see commercial coverage shifting until Palmetto had completed their MolDX review of our test. And as you know, we had our initial Local Coverage Determination policy, or LCD, be effective in December 2018.

We had an expanded draft LCD post in August of 2019, and the comment period closed kind of mid-December 2019. So we do expect the draft LCD based upon LCDs ahead of us to post as a final LCD probably in the third or fourth quarter of 2020. There's not any sort of statutory requirements of when they would do that. But our thinking based upon the LCDs that went from draft to final in earlier 2019 took about 11, 12 months, that seems to be maybe the right place to put a stake in the ground.

We did see last fall in the third quarter when policies that were sort of being reviewed based in late second quarter than were being effective in the third quarter move from negative to policy with a small number of plans. We do have additional commercial payers that are in also the midyear cycle in 2020. Our managed care group has certainly engaged with them to let them appreciate the MolDX coverage decision by Palmetto. We also saw in December 2019 positive improvements in the language from NCCN as it relates to recognizing that our test may add value to current staging systems.

From what we can tell, they did not necessarily review all 22 of our peer-reviewed publications. So shifting from sort of a negative stance to a semi-positive stance, I think, is a good thing. That's where most of the microdiagnostic tests sit, by the way, in terms of NCCN reviews, so we feel we can take that and leverage that properly. And I would expect we would see some modest improvements or gains in coverage in the sort of second half of 2020 and more through the next year and a half to two years out.

As you know, it's difficult to appreciate when a thorough review will be completed? Will that be dependent upon in cycle or out of cycle? So we're a little careful on kind of assuming a fantastic change in ASP. I think we expect some modest improvements over 2020 and 2021. That's probably the most conservative best case approach to take today. So that kind of answered the questions, Sung Ji?

Sung Ji Nam -- BTIG -- Analyst

Yes. Absolutely. And then just lastly from me. First of all, congratulations on getting accepted for an oral presentation at the American Academy of Dermatology meeting later this month.

I was curious, do you anticipate peer-reviewed publications for both of your pipeline products before you launch commercially later this year? Or do you think that poster presentations or other types of data readouts will be sufficient before your commercial launch? Thanks.

Derek Maetzold -- Founder, President, and Chief Executive Officer

Thank you. I really like that question, but that's all right. I think from a sort of clinical adoption perspective, clinicians would always appreciate seeing peer-reviewed publications, so they can make their own assessment on a written piece of work that's been reviewed by their peers, I guess. Our thinking is that assuming that the manuscripts are reviewed in a fairly timely fashion, I'd like to have those published and in print near or at or before the time that we launch our products.

So I guess, on the one hand, I would say, we'd like to go ahead and see peer-reviewed publication in the literature base to add sort of more credibility weight, I guess, to acceptance or review a new product. That being said, we have conducted a number of interactions with potential customers. And based upon the feedback we're getting about clinical need to really impact better decisions, we may make the choice to go in advance a peer-reviewed publication. So those will meet our time line just so we can have an opportunity to really meet patient care needs.

But that's something we're kind of monitoring right now, and we'll make a decision as we get closer to timing and comfort about making these tests available for patient care.

Sung Ji Nam -- BTIG -- Analyst

Great. Thank you so much.

Operator

And our next question comes from Catherine Schulte with Baird. Your line is open.

Catherine Schulte -- Baird -- Analyst

Hey, guys. Congrats on the quarter, and thanks for the questions. I guess, first, on the NCCN guideline update in December, i heard your comments from the payer perspective. But what if any kind of tailwind do you think this update could provide in terms of driving volumes in 2020?

Derek Maetzold -- Founder, President, and Chief Executive Officer

From an ordering standpoint? So quantitatively, I think it's too early to comment with data, Catherine. Qualitatively, we know that there are some clinicians, there are some institutions who have sort of taken the position that we'd like to have third-party endorsement, I guess, by NCCN before we would adopt or view those tests as being valid. So I do think we expect to see some clinician growth occur and maybe some institutional growth occur as the adjustment in language is put out there by our teams. That being said, I don't know if we could be able to discern that independently of the growth in our sales force in 23 to 32 sales reps in December.

So those, fortunately or not, came on top of each other. So do we see a very, very nice growth in the first quarter of 2020, for example, in report volume that's higher than our internal forecast? I don't know if I'll be able to tease apart and saying that's due to either the improvement in NCCN supportive language or if it's due to the fact that we scaled our sales force up by a third, again. Hopefully, a combination of both. I think we'll be able to look at some individual select institutions where our information seems to confirm that they were waiting for one more brick to fall before they would go in and step out and use our test clinically.

Those would probably track more comfortably as being an event related to NCCN. That answered the question a bit there?

Catherine Schulte -- Baird -- Analyst

Yes. Very helpful. And then on guidance, I might try to take another step at Puneet's question, but how should we be thinking about underlying cutaneous volume growth in 2020? And then separately, based on your comments, I assume there isn't anything based embedded into guidance for a final Medicare expansion. Is that correct?

Frank Stokes -- Chief Financial Officer

Yes. Your second point, Catherine, is correct. And we would suggest that we're coming off of a larger base this year. And so we'll see some of the volume growth normalize out to where we think is a more durable three to five-year rate to just coming off of the big growth from last year and larger numbers.

But nothing in there. As I said, not too much improvement on the reimbursement side of it.

Catherine Schulte -- Baird -- Analyst

OK. Great. And then last one for me. Just how should we think about capex this year? Any need to expand lab capacity or other major investments ahead?

Frank Stokes -- Chief Financial Officer

Yes. We are expanding in our footprint in both our headquarters and our lab. It's certainly fairly modest relative to the SG&A line and all kind of normal course just to accommodate our growth. So nothing significant.

There will be some capex, but it's fairly modest.

Derek Maetzold -- Founder, President, and Chief Executive Officer

Yes. I'll follow-up slightly. So on the capex side, what I concur with Frank's commentary. But what is exciting about the increase in our footprint in Phoenix is, right now, I believe when we calculated last year, we thought we could do somewhere between 60,000 and 66,000 gene expression profile tests clinically on an annual basis with a single shift working five days a week.

So if we did not expand our facility footprint, we could certainly add a second ship potentially or work the weekends and comfortably improve our sort of maximum capacity. We made the decision last fall post-IPO that we wanted to get ahead of that commercial need as well as build-out a stronger research wet lab facility in Phoenix. And so part of our decision back in the fall to undertake essentially doubling our footprint was to enable us to, one, easily manage through our gene expression profile clinical tests as those continue to ramp and also hopefully accelerate some of our wet laboratory discovery efforts and development efforts for current and future pipeline products. That remains on track.

The actual capex is quite modest to have us get there, which is good, I think, from an overall budgetary standpoint. And here in Houston or in Friendswood, we've maintained roughly the same size facility for about 1.5 years, and things are tight here. We're giving up conferences right and left to make sure we can manage the employee expansion, and we expect to move into our new facility that should have several years growth of it in the mid-summer time line, which, again, also only has modest capex implications for the company.

Catherine Schulte -- Baird -- Analyst

All right. Great. And I might sneak one more in. I know you've talked about potentially initiating some R&D work on two additional pipeline tests some time in the first half of this year.

Any color on when we could learn what those new applications would be?

Derek Maetzold -- Founder, President, and Chief Executive Officer

Yes. So we are planning on initiating that in the second half of the year, but maybe call it 2020, right? And I guess, the question is what initiation is that when the protocols first go through IRB or when we actually first analyzing data sets some broad or wiggle room there. I'm not sure we can kind of disclose what those targets look like. I guess, the first is a direct answer there.

I think we would look at that probably in the second half of the year as we are kind of seeing some early data and see what that actually means. But given the cycle time from development to clinical availability to test, I figure we have part of 2020 to kind of think through what that might look like and either provide some early expectations in terms of what the marketplace might be, what the future TAM could be. But given it will still be a couple of years out, I think we probably would not discuss that until after the first half of the year. Is that what you're thinking, Frank, too?

Catherine Schulte -- Baird -- Analyst

Great. Thank you.

Operator

Our next question comes from Max Masucci with Canaccord Genuity. Your line is open.

Max Masucci -- Canaccord Genuity -- Analyst

Hi. Good afternoon. Just to start, can you speak to trends in clinician reordering rate, sort of that same-store sales growth metric and stickiness you're seeing with adopters?

Derek Maetzold -- Founder, President, and Chief Executive Officer

Let's see, I don't have that updated in the 10-K. So I'll talk to what we do have maybe and maybe that's something we need to refreshen next time we go through. So we estimate that based upon the best available data that we have that there's maybe a target clinician audience of maybe 11,000 to 15,000 physicians and nurse practitioners and physician assistants that may be a little high, maybe a little low, but the data is a little tough to get your hands around that's accurate. But let's call it that range.

We finished out last year with just over 3,900 ordering clinicians. So depending on how you want to analyze that, I guess, that could be what, 20%, 25% or 25%, 30% of targetable clinicians as we see them ordered our test at least once last year. Now given our high growth, a number of those clinicians didn't order until the fourth quarter and a smaller number in the third quarter. So it's not like that was a stable annual growth of ordering doctors.

So let's put that number aside and call it 25%, just to make it even. On the patient side, we believe, based upon our analysis of both SEER data and reporting of melanoma that there's around 130,000 patients diagnosed each year with invasive cutaneous melanoma that's local or regional. So what does that mean is kind of stage I, II or III disease and excludes stage IV. Stage IV are people who are diagnosed with distant metastasis since that's one of the endpoints our test predicts, that would be a poor use of our test, inappropriate use of our test.

So take 130,000 as your base denominator and we reported out last year 15,500 and change reports. That comes in kind of at an annual penetration rate of what, 12%, 13%, maybe. So we've got maybe call it 13% of patients tested last year by 25% of clinicians, we think, are seeing a reasonable number of melanoma patients. So I would say, one, is that there is an opportunity to, I think, increase sort of same-store sales to use that terminology.

And we do see, when we look at the types of patients, physicians are ordering our tests on that, some physicians have sort of limited the use of our test to certain patient populations based upon Breslow thickness, maybe age sometimes. And that may all be appropriate in terms of how they think about risk without our test. And some of the articles that we published last year essentially are looked at focusing a discussion around what Dr. Max, I understand that you kind of use our test predominantly for this kind of population of patients.

I'd like to have a conversation with you about maybe appropriate use of our test in a broader population. So that kind of interaction is ongoing today. We did see some nice improvements in terms of physicians who would limit our use in the terms of patients that they thought was appropriate to more appropriate use for our test [indiscernible] against in the latter half of 2019. So we'll continue that expansion on same-store sales over the course of the year.

And of course, given that we only have about a quarter of the estimated ordering clinicians using our test today, there's also a nice opportunity to really go in and impact with both publications and other evidence development as well as guideline improvements, etc., to be able to have a conversation about some of those [indiscernible] we've talked to in the past. But also, I think equally opportunistic are physicians who may, but; we've only seen once in three or four years or not at all, and to be able to have them have an opportunity with their increased breadth in the field to really listen to and understand, appreciate, consider and hopefully adopt our test for the betterment of their patient care decisions.

Max Masucci -- Canaccord Genuity -- Analyst

That's very helpful. And then just circling back with the COVID-19 question, just to button that up. I guess, just generally, how do you view the resilience of your business from supply chain end-user demand and then customer behavior standpoint?

Derek Maetzold -- Founder, President, and Chief Executive Officer

Yes. So supply chain separately here. We reached out back in, I think, early January to confirm where our key reagents and the key sort of laboratory bottlenecks might be. And our suppliers or vendor partners indicated that none of the reagents that we use are focused on come from China.

That sounds like limited exposure. They anticipated no supply chain issues from a material perspective. Now that being said, what we haven't seen, but what I don't know how to gauge would be, do we think that there's going to be a manufacturing plant that might sort of close down or limit employee contact because they have some small population or individual in their plant that will be diagnosed with coronavirus. That part I can't guestimate right now, to be quite frank.

We've checked in with our vendor partners here about once every two weeks, andvthey indicate they don't see any issues. We also maintain a very healthy supply of reagents, anyways, in laboratory going out. So I don't think that will be a concern that we see today. Is that fair, Frank? OK.

And then on the question about sort of patient flow or maybe order flow or report flow. Again, outside of losing a couple of podium opportunities and engaging customers at major meetings, we aren't hearing any material change in terms of access to our physician base to be able to help appropriately educate them on newer data and appropriate use of our test. That could change, of course, over time here. But so far, we haven't seen that bubble up as being a material impact that we should be concerned about, but that's as of March 10 today.

So we don't see that being a larger issue for us. I think the thing which is hard to predict, as I said earlier, is are we going to see patients abstaining from going to their clinician for the diagnosis of melanoma? I guess my first comment would be is if you have a suspicious mole that you're concerned about, I think that patient likely makes himself go into a dermatologist on a regular basis as opposed to delaying care. So we might see something on a week-to-week shift or month-to-month, I would think, a quarterly impact in terms of our reporting would be nonvisible from a public standpoint. So do you want to add any commentary there? Frank...

Max Masucci -- Canaccord Genuity -- Analyst

Great. Thanks for taking the question.

Operator

Thank you. And I'm showing no other questions in the queue. I'd like to turn it back to Derek for closing comments.

Derek Maetzold -- Founder, President, and Chief Executive Officer

OK. Thank you, operator. This concludes our fourth quarter and year-end 2019 earnings call. I want to thank you again for joining us today and for your continued interest and support of Castle Biosciences.

Operator

[Operator signoff]

Duration: 58 minutes

Call participants:

Frank Stokes -- Chief Financial Officer

Derek Maetzold -- Founder, President, and Chief Executive Officer

Puneet Souda -- SVB Leerink -- Analyst

Sung Ji Nam -- BTIG -- Analyst

Catherine Schulte -- Baird -- Analyst

Max Masucci -- Canaccord Genuity -- Analyst

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