Castle Biosciences Inc (CSTL) Q1 2020 Earnings Call Transcript

Castle Biosciences Inc (CSTL 2.29%)
Q1 2020 Earnings Call
May 11, 2020, 4:30 p.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Good afternoon, and welcome to Castle Biosciences first-quarter 2020 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 Frank Stokes, chief financial officer.

Please go ahead.

Frank Stokes -- Chief Financial Officer

Thank you, Shannon. Good afternoon, everyone. Welcome to Castle Biosciences' first-quarter 2020 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, May 11, 2020. Therefore, if you're 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, including expectations and assumptions related to the impact of the COVID-19 pandemic and are made pursuant to the safe harbor provisions 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 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-K for the year ended December 31, 2019, 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 -- President and Chief Executive Officer

Thank you, Frank, and good afternoon, everyone. Thank you for joining us today. I hope, first of all, that you are safe and healthy, and our thoughts go out to those who have been impacted by the COVID-19 pandemic. As you would expect, today's call has a different structure than normal.

Before we discuss our 1Q results in detail, we'll talk about the actions we've taken to respond to the situation, the impact the COVID-19 pandemic is having on our business and what we are seeing in terms of clinician behavior and diagnosis of melanoma. And of course, unfortunately, the march of skin cancer does not stop. And that means that we need to focus on what is best in managing a patient's diagnosed with early stage skin cancer. At Castle, we are committed to our employees, to patients, customers and communities in this unprecedented, uncertain environment.

While we can't predict how things will turn out, as has been our practice, we will be transparent here about our assumptions and what we know today. We will continue to be forthcoming as the situation evolves, and we believe we will have more visibility in the coming months. Before I provide details around our response to the pandemic, I would like to point out that our team performed extremely well in the first quarter. As a reminder, we had significant momentum drivers in the second half of 2019, including additional evidence development, as well as commercial expansion that occurred on December 1.

These drivers were essential our first quarter 2020 year-over-year quarterly revenue growth of 100%, reflecting a mix of both growths in ASP, as well as the DecisionDx test report volume. Our business in the first quarter on track. And I'm excited to see our team regain momentum and perform as we move throughout the remainder of the second quarter and the end of the second half of the year. So let's spend a few minutes on COVID-19.

Starting March in response to government lines, we made adjustments to our laboratory operations to achieve two performance goals: keeping our employees safe and providing uninterrupted access to our proprietary DecisionDx-Melanoma test and DecisionDx-UM test. We achieved these goals in that we've been able to keep our labs fully operated and maintain our specimen receipts to laboratory report turnaround time at an average of less than five days. So that our clinician customers who rely upon our test results to make more informed treatment plan decisions did not have to make any adjustments to their normal decision-making process. In areas where COVID-19 impacts healthcare interactions, such as field-based sales and ECARS, we've been able to pivot visits, programs, and projects to be performed online and by telephone.

Additionally, based upon the analysis of the company's supply chain, we believe we have adequate reagent and consumable inventory levels and have not seen nor do we anticipate any impact on our ability to deliver test results due to supply channel concerns. Now let's turn to what we are seeing in terms of clinician behavior, diagnosis of melanoma and the impact to our business. As you know, the pandemic has caused significant disruptions to office visits, and we've regionally seen a corresponding reduction in clinician orders for our DecisionDx-Melanoma test as a result of COVID-19. We have, as you would expect, participated in and analyzed a number of dermatology practice-focused studies.

The most recent of these was a proprietary customer study that we conducted. We believe the reduction in DecisionDx-Melanoma test orders is due to the reduction in the number of patients seen by our clinician customers, the subsequent impact on reduced biopsies performed, with the end result being a reduction in the number of diagnosed melanomas. According to our studies, patient visits were reduced by about 60% for the week of April 20 compared to the week of February 24. We first observed the reduction in DecisionDx-Melanoma test orders beginning in the back half of March.

And for the period of April 1 to May 6, we saw an overall decrease of 43% in DecisionDx-Melanoma orders compared to the same period in 2019. We have seen a stabilization in the decline of orders beginning in the second week of April. While we can't predict what a return to normal will look like, we will best to outline our assumptions here. The first question we ask ourselves is what drives the diagnosis of melanoma.

We perform an analysis of seven U.S. peer-reviewed publications that shows that approximately 80% of diagnosed melanomas are initially identified as a concerning skin lesion by a patient, their spouse, a family member that is self-identified. While the remaining approximately 20% are diagnosed by clinicians, either during a planned skin check or incidental through a routine exam. We believe that the vast majority of the 80% of patients who self-identified concerning lesion will be seen by their clinicians at some point.

So now we have the remaining 20% of patients whose melanoma was not self-detected. We asked a series of questions in the proprietary study that I noted earlier. Our customers indicated that they plan to add an additional office day to their pre-COVID work routine for two to three months to be able to accommodate catching on the appointments that were postponed during the last seven to eight weeks. And furthermore, they intend to prioritize the scheduling of biopsies.

These uncertainties surrounding potential patient flow, and that's the rate of diagnosis of melanoma, is the rationale for suspending our previously announced 2020 revenue guidance at this time. Now I will provide some thoughts about our strategy for operating and growing the business so that we remain a business of strength as we continue to move through the current COVID-19 situation and lay a foundation for execution in the latter half of 2020 and 2021. We continue to invest in our business, and we are pleased that our strong balance sheet, coupled with our capital efficiency, enables us to do so. This includes filling key positions in our commercial and R&D groups and the initiation of clinical studies to drive additional evens development for DecisionDx-Melanoma, as well as support the commercial launch of our two pipeline tests.

Further, with the publication of three peer-reviewed articles in the last couple of weeks that document the clinical validity and impact of our DecisionDx-SCC test in patients diagnosed with high-risk cutaneous squamous cell carcinoma, we plan to launch our DecisionDx-SCC pipeline test in the third quarter of 2020. As you know, our proprietary tests are used to inform important treatment plan decisions in early stage cancers, and having the opportunity to expand our service to patients diagnosed with high-risk cutaneous squamous cell carcinoma is an important step, perhaps even more important relative to triage decisions being made due to COVID-19 concerns. Early clinician response to the expected clinical utility has been enthusiastic. And we are excited about the opportunity to offer this tool for their use in treating their patients.

You will recall that we have a second near-term pipeline test that is completing validation. This test is targeted at assisting dermatic pathologists to make a more informed diagnosis for suspicious pigmental lesions that can safely be ruled out as benign or rolled in as melanoma. We are wrapping up our prelaunch work on this program, and our plan launch remains on track for this pipeline test in the second half of 2020. In the midst of the COVID-19 pandemic, I would like to personally thank our employees for their dedication during these difficult times.

It is important to understand that we were and are able to meet the needs of the patients that we serve today, as well as those tomorrow due to the tremendous efforts of each and every one of our team members. As we make the appropriate decisions to continue building our business for long-term success and value creation, we are proud that our strong position has enabled us to continue to execute on our mission of serving all our stakeholders: our patients, our clinicians, our employees and, of course, our shareholders. Now turning to our first-quarter results. The Castle Biosciences team continued to perform at an exceptional level in the first quarter with continued significant growth in revenue and DecisionDx-Melanoma test report volume.

As noted earlier, in the first quarter of 2020, we reported revenue of $17.4 million, a 100% increase over the same period in 2019. We attribute this increase in part to the successful expansion of both our commercial teams in 2019 and continued evidence development. For our lead product, DecisionDx-Melanoma for use in patients diagnosed with invasive melanoma, we saw a 42% increase year over year in test record volume in the first quarter, delivering 4,574 test reports. Adoption with new clinicians for DecisionDx-Melanoma in the first quarter of 2020 was up 43% year over year.

Based on annual U.S. incidence of newly diagnosed invasive melanomas of approximately 130,000, we believe our first-quarter penetration to be about 14% of cases. Let me remind you that our DecisionDx-Melanoma test assesses the aggressiveness or likelihood to recur or metastasized based upon the biological signature of an individual patient's primary melanoma tumor. We have shown that our DecisionDx-Melanoma test predicts an individual patient's likelihood to recur or metastasize to the lymph node regionally, distally, and even depth from all.

Because the test is designed to predict multiple endpoints, our DecisionDx-Melanoma test can impact more than one decision point. Specifically, our trust currently guides two clinical decisions that are made near the time of diagnosis. The first intended clinical use of our test is to inform decisions on sentinel lymph node biopsy when the tumor thickness is less than or equal to 2 millimeters, and the second intended use is to guide subsequent treatment plan decision. We have consistent data from 23 publications to date with additional publications expected this year, supporting the validity and the utility of DecisionDx-Melanoma and supporting further clinician and commercial coverage penetration.

Turning to our DecisionDx-UM test for patients diagnosed with UV melanoma. We delivered 361 reports in the first quarter of 2020, which is consistent with the first quarter of 2019. You may recall that our DecisionDx-UM test has been the 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 UV melanoma. Therefore, our first-quarter report volume is in line with our expectations for this product.

As it relates to the impact of COVID-19 on our DecisionDx-UM test, monthly year-over-year comparisons are difficult to interpret due to the low incidence of UV melanoma. But we have seen what appears to be some softening since early April of weekly order flow in the range of 5% to 20%. Now I'd like to discuss several key accomplishments in the area of continued evidence development and with our late-stage pipeline products. For our commercially available tests, we saw two publications in the first quarter.

The first publication focused on data from a multicenter prospective study, demonstrating that DecisionDx-UM test results significantly impacted treatment plan recommendations for patients with UV melanoma. This was published in the peer-review journal Melanoma Management. The multicenter CLEAR 2 study was designed to prospectively evaluate patterns of physician referral and surveillance regimens for UV mono patients who were tested with DecisionDx-UM as part of their diagnostic workup and to compare management plans, which has seen DecisionDx-UM Low-Risk class one test results and those with high-risk class two test results. Medical oncology referrals were more common for patients with class two results than for those with low-risk class one results with a p-value of less than 0.001.

Importantly, the study is the fourth peer-reviewed publication that documented the clinical use of the DecisionDx-Melanoma test to impact patient care decisions in patients diagnosed with UV melanoma. All four studies have shown consistency of use. We find this to be exciting, given that we are in the business of providing information that will improve alignment of management plans with the patient's risk of metastasis. The second study was published in the Journal of the American Academy of Dermatology, or JAAD.

And this was data from a systematic review and made an analysis of four study cohorts, demonstrating that DecisionDx-Melanoma is an independent significant predictor of recurrence and metastatic risk in patients with invasive cutaneous melanoma, achieving the highest strength of recommendation, taxonomy or sort level for a biomarker, that is level one evidence. The study found that DecisionDx-Melanoma risk assessment is independent of the other traditional clinical and pathological factors of age, Breslow thickness, alert and sentinel lymph node status and improves risk assessment compared to staging factors alone. This is a significant publication given that the sorting system is used by the American Academy of Dermatology and other organizations to evaluate the quality, quantity, and consistency of evidence supporting tests such as DecisionDx-Melanoma. And a systematic review and meta-analysis achieve the highest level of evidence for prognostic tests such as ours.

Now turning to our pipeline products. We are excited about the progress that we have made in our DecisionDx-SCC test for use in patients with high-risk cutaneous squamous cell carcinoma. And as we discussed, based upon our progress, we plan to launch this test in the third quarter of 2020. The development and validation of DecisionDx-SCC were recently published in JAAD.

The results demonstrated that DecisionDx-SCC is not only an independent predictor metastatic risk but was shown to be the strongest predictor metastatic risk relative to current SCC staging systems and can complement clinical pathologic risk factors to better stratify the risk of metastasis and the subsequent treatment plan decisions in the patients with high-risk SCC. A second study supported the framework for integrated decision to SCC into risk appropriate management of patients with high-risk SCC as defined by NCCN. This study was recently published in Current Medical Research and Opinion, or CMRO, and has found combining DecisionDx-SCC class results with the AJCC T stage in a group of 300 NCCN high-risk patients identified group, 159 of them, with a rate of metastasis of 7.5%. Similarly, combining test results with the Brigham Women's Hospital staging system identified a group of 173 patients with a metastatic rate of 8.1%.

Rates in both groups approached the rate observed with a general SCC patient population. My comparison, Class 2b patients in the study, had rates of metastases surpassing 50%, regardless of the staging system with which it was combined, a rate that would warrant implementation of a high-intensity plan within the NCCN management recommendations. Incorporation of DecisionDx-SCC results with T stage for these patients, identified a group of more than 50% of patients that would have been recommended for a low-intensity management plan, while 34% to 39% will be recommended for a moderate intensity plan and only 8% for a high-intensity plan, all within the current NCCN management recommendation guidelines. The third study was also published as a companion article in CMRO, using the well-established pretest, posttest vignette methodology, 162 patients documented a treatment plan that they would employ for patients with high-risk SCC.

Treatment plan modalities included follow-up schedule, biopsy, sentinel lymph node biopsy, imaging, adjuvant radiation, adjuvant chemotherapy. These clinicians were then asked to determine the treatment plan with the addition of DecisionDx-SCC test results. The addition of a DecisionDx-SCC test result class one score or low risk resulted in more than a 60% reduction in the treatment plan modality intensity, while a DecisionDx-SCC Class IIb test score, high risk, resulted in a more than a 90% escalation treatment plan modality intensity. Importantly, more than 95% of the management recommendations were aligned in a risk-appropriate direction that masked the DecisionDx-SCC class results and importantly, all changes were within the broad established guidelines for patient management, meaning that the addition of DecisionDx-SCC did not create new treatment pathways but rather enabled significant risk-appropriate adjustments within the broad established guideline plans.

We are excited about the progress we have made for this test, these three recent publications, and about the commercial launch plan in the third quarter of 2020. Regarding our second late-stage pipeline product, our test suspicious pigmental lesions. We are completing our prelaunch work and remain on track for our planned commercial launch in the second half of 2020. We plan to report data from our clinical validation study in the second half of 2020 prior to launching this test.

We believe these two late-stage pipeline products, DecisionDx-SCC and our test for suspicious pigmental 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 details relating to our financial results.

Frank Stokes -- Chief Financial Officer

Thank you, Derek. As Derek shared earlier, we're confident that our business fundamentals are strong and the continued investments we are making in our business enable us to navigate the COVID-19-related uncertainties that lie ahead, as well as continue to position us for long-term growth. We're pleased with our strong execution and growth in the first quarter. We reported revenue of $17.4 million in the first quarter of 2020, a 100% increase from $8.7 million in the first quarter of 2019.

Our increased revenue was driven by a 42% increase in the first quarter in DecisionDx-Melanoma test reports compared to the first quarter of 2019 and higher revenue per test, or ASP. The first-quarter revenue includes $3.2 million of positive revenue adjustments, compared to positive adjustments of $0.6 million for the first quarter of 2019. The increase in positive revenue adjustments primarily relates to cash collections in the period on test reports delivered prior to the first quarter, in other words, in previous periods for which no revenue was recognized originally. No revenue was recognized originally in line with the requirements for revenue recognition under GAAP.

We believe, based on recent reimbursement activity, additional positive adjustments in future periods at some level are possible. Our gross margin during the first quarter was 86%, compared to 82% for the first-quarter 2019. The improvement in gross margin was primarily driven by operating leverage as a result of our strong volume growth and higher ASP. Our operating expenses for the quarter ended March 30, 2020, were $13.9 million, compared to $7.4 million for the same period last year.

This increase was primarily the result 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 $1.5 million in Q1 2020 compared to the same quarter in 2019. As we mentioned earlier, we expect our R&D expense to increase further as we continue to invest in activities that position us well for long-term growth and support our products. As a percentage of revenue, our SG&A expense was 63% for the first quarter of 2020, compared to 69% for the first quarter of 2019, with the improvement primarily attributable to the increase in operating leverage as a result of our revenue increase. Interest income increased by $0.3 million in the first-quarter 2020 due to higher balances of cash and cash equivalents, while interest expense decreased by $0.3 million to $0.8 million for the first-quarter 2020 compared to the first quarter of 2019, primarily driven by the convertible promissory notes that were outstanding in the first quarter of 2019.

These notes were converted into common stock in July 2019 in connection with the IPO. Our net income for the three months ended March 31, 2020, was $0.6 million or $0.03 earnings per diluted share, compared to the net loss of $1.4 million or $1.22 loss per diluted share for the three months ended March 31, 2019. Moving next to operating cash flow performance. For the first-quarter 2020, Castle's net cash used in operating activities was $0.3 million, compared to net cash provided by operating activities of $1.3 million in the prior-year period, with the decrease due mainly to the timing of certain cash receipts and disbursements.

Finally, we had cash and cash equivalents at March 31, 2020, of $98.7 million, largely unchanged from year end. On April 10, 2020, we received an automatic payment of $1.9 million from the U.S. Department of Health and Human Services for leaf funds allocated to Medicare providers under the CARES Act. On April 16, we received an advanced payment of $8.3 million from the Centers for Medicare and Medicaid services under its accelerated and advanced payment program, which was recently expanded to provide increased cash flow to service providers during the COVID-19 pandemic.

Beginning in August 2020 claims we submit for reimbursement will be applied against the balance of the advanced payment until it has been fully recouped. At April 30, 2020, our cash and cash equivalents position was approximately $110 million. We believe our current cash position, along with the cash generated from sales of our products, will be sufficient to fund our operating expenses for the foreseeable future. We believe this strong financial position allows us to continue to invest in our business and execute on our strategic growth plans.

I'll now turn the call back to Derek.

Derek Maetzold -- President and Chief Executive Officer

Thank you, Frank. In summary, we are extremely pleased with our team's first-quarter performance, including strong year-over-year growth in revenue and volume for our DecisionDx-Melanoma test. Although near-term uncertainties exist, we remain confident in our long-term outlook for the company and our ability to maintain our position as a leading skin cancer diagnostics company. Thank you for your continued interest in Castle.

This concludes our remarks. Operator, we are now ready for Q&A.

Questions & Answers:

Operator

[Operator instructions] Our first question comes from Max Masucci with Canaccord Genuity. Your line is open.

Max Masucci -- Canaccord Genuity -- Analyst

Hi. Thanks for taking the questions. So all right. So I guess as it relates to the delay between a patient's initial tissue biopsy and when that DecisionDx-Melanoma test is run, how should we be thinking about the timing of volume impacts, whether that's Q2, Q3 or beyond as we just look at the current state of elective procedures?

Derek Maetzold -- President and Chief Executive Officer

Thanks, Max. I think the evidence that we've gathered from both our proprietary studies, as well as data in the dermatological practice surveys overall, it appears that the vast majority of dermatological offices lease those that are medically oriented. I can't comment on cosmetics by any means, at least the medically oriented clinics are planning on opening up as soon as they can. They're planning on adding an extra day to practice to try and catch up will be delayed or canceled or rescheduled appointments, and they're estimating two to three months before they are sort of caught up.

So that's kind of our customers' expectations. I guess the sort of the larger question might be, do patients feel comfortable coming back in early May, early June, for example, as that's going to take another couple of months before they get comfortable coming into seeing their physicians. So that's the part we obviously don't have a handle on. And I guess our hope would be that individuals who are at risk to develop skin cancer had developed a pigmental lesion on their skin that they're seeing, does that cause a patient of Medicare age to wait an extra month or so before they come in? I think we have a hard time thinking given the sort of growth patterns of melanoma that you'd see a patient ignoring that growing melanoma or growing compete for melanoma on their skin for the entirety of 2020.

But again, that's the part we don't quite have a handle on is sort of what that patient fear factor balances against the patient's desire to actually have that lesion be looked at and hopefully confirm at it may not be melanoma as opposed it is melanoma. The other element, I think, which probably, I would say, moves in our favor necessarily, but certainly, if we go ahead and look at the difference of expectations between private practice dermatology opening up and institutional academic practices or tertiary care centers, it does seem that the tertiary care centers are moving a little bit slower from what we can gather across the U.S. than their counterparts in private practice that bodes a bit better for us. The vast majority of our orders and, certainly, our call patterns with our commercial groups are on private practice clinicians as opposed to institutional-based clinicians.

I don't know if that gets to the answer you were thinking about trying to get to.

Max Masucci -- Canaccord Genuity -- Analyst

Yes. That's great. And then great to see the two pipeline tests on track to launch in Q3 and later this year. Just within the current environment, can you just help us understand your expectations for the launches of DecisionDx-SCC in the early days? And then maybe any comment on cross-selling or the attachment rate to DecisionDx-Melanoma would be great.

Derek Maetzold -- President and Chief Executive Officer

Yes. That's an excellent question. So we've been evaluating the complexity that we're going to add into our field forces to launch both the DecisionDx-SCC test, as well as other pipeline tests for assisting in differential diagnosis of suspicious pigmental lesions. We have made, I guess, the following decisions.

One of them is that we will fully train our existing 32 sales representatives and their counterparts in the medical affairs or medical science liaison group on the cutaneous squamous cell carcinoma tests, and that those groups will sort of launch that test nationally. On a relative balance expectation, we would expect kind of the vast majority, call it, 90% of interactions to be continuing to educate our core customers and future customers on our cutaneous melanoma assay with a second call position, if you want to kind of call it first and second on the squamous cell carcinoma test, and we believe we have the people in place to be able to balance that properly. In terms of the suspicious pigmental lesion assay, we made the decision that when we launch that, we will launch that with a separate, dedicated expansion force that will be focused on sort of the dermatic pathology call point as opposed to the dermatology call point, which the other sales force will focus on, and that will be important I think that reduces the complexity of trying to have our representatives and our medical science liaisons balance two new products plus a recently new product, the DecisionDx-Melanoma test and by reducing that complexity by having, at least initially, a separate car route group and what that group focuses predominantly on the second pipeline test launch. And then we can see over time, if we believe it is in our benefit to keep that separate or to go ahead and pull that back in once we kind of see performance over time.

Max Masucci -- Canaccord Genuity -- Analyst

Great. And then maybe just a quick modeling question for Frank, as it relates to the $8.3 million Medicare payment. I guess, will that hit the balance sheet and then gradually convert to revenues over time? And we've seen some other specialty labs start getting paid expanded LCDs ahead of the finalization. So I'm just thinking in regards to the timing of any step-up in ASPs in our models.

And that's it for me, a nice quarter.

Frank Stokes -- Chief Financial Officer

It won't impact revenue. Revenue, of course, will be reflected as we ship test reports out. Obviously, it's cash and a liability, and that liability will sort of erode away as we file claims. And those claims are recouped against that advance.

Operator

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

Catherine Schulte -- Baird -- Analyst

Hey, guys. Thanks for the question. I guess just first, you talked about seeing a stabilization in the decline of orders beginning in the second week of April. Any color on what terms have looked like in recent weeks or how orders trended so far in May compared to last year, just to give us a sense of how activity levels might be coming back?

Derek Maetzold -- President and Chief Executive Officer

Good. We're pointing fingers to each other here, Catherine.

Frank Stokes -- Chief Financial Officer

So I think that's a finance question for Derek, Catherine, let me take a swipe at it. We saw the order rate drop as the shutdown sort of spread and then kind of there was a sort of bolus of shutdowns that came through. So we saw orders drop on a week-to-week basis in the early kind of middle part of April, and then that drop sort of tapered off and have kind of stabilized. And we're not far enough in yet, I think, to say that we're seeing things accelerate again yet.

But we are encouraged that the drop seems to have kind of found itself a bottom here.

Derek Maetzold -- President and Chief Executive Officer

And certainly, as you can expect, as you see different states and even different locales within a state different policies of sort of reopening for what we would view as essential medical commerce, we are hearing from our field-based groups that some places are sort of back up and running, I guess, you would say, as hard as they can to go ahead and try and catch these patients who had for delayed appointments. And other places are still saying, give us a couple of weeks or two, before we move forward. So I think during the course of the next, I'm assuming four to five weeks, we're going to kind of see geographical variations of what that looks like. So hopefully, by the time we enter the early parts, the middle of June, we'll have a much better handle on what patient flow looks like in the field of dermatology.

Catherine Schulte -- Baird -- Analyst

OK. And how receptive have derms been to virtual appointments with your reps? Have you been able to get new practices? Or is it primarily existing customers? And to that vein, what's been your typical mix of volume growth originating from new customers versus existing accounts?

Derek Maetzold -- President and Chief Executive Officer

Yes. So I'll answer the first part of that. I don't know if we've disclosed the volume by new or old customers through the quarter. So I think that the group has been very effective at converting appointments to either significant telephonic or email conversations, including web-based appointments.

We've pivoted all of our speaker programs certainly toward web-based seminars, have also been doing quite a lot of advisory board work to try and understand the marketplace and the kind of adjustments here better, too. And I think I have nothing but high compliments in terms of the output of those interactions. I don't have any quantitative data regarding our 90% of our interactions with better web-based, telephonic or web-based discussions with current customers versus kind of new customers. I know I can think anecdotally of discussions I had last week with our head of the commercial group where there have certainly been interactions with nonordering clinicians that are coming onboard.

So those are happening. But I would assume that the focus of the access point is probably very, very tilted toward individual clinicians who have reviewed our tests, decided to adopt it, and they're giving us time to understand how the latest publications and papers can help improve their use of the test clinically. And we probably are seeing a reduction in terms of new customer visits, so that would be my natural sense, but I would expect we'll see and we kind of trim the corner to analyze that data later on this quarter.

Catherine Schulte -- Baird -- Analyst

OK. And the last one for me. For the separate dedicated sales force to focus on selling the suspicious pigmental lesion test and the derm path lab call point, how large are you thinking that group will be?

Derek Maetzold -- President and Chief Executive Officer

I think that's under evaluation. We had indicated, I guess, earlier in the year that we were certainly budgeting at least sort of a nine to 10-person expand and weren't quite sure if we would hold that in or keep it separate. I don't know if we know that big, to be honest, but that's kind of what we're thinking about right now. We'll kind of scale down or scale up as we get through market research over the course of the summertime.

I think it's essentially kind of a single region. Now what that rep control looks like is the question we're wrestling well.

Operator

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

Sung Ji Nam -- BTIG -- Analyst

Hope everyone is staying safe and healthy. I was wondering, I don't know if this might be early, and there are a lot of moving pieces, but how is the value proposition for your test? Have they resonated the value proposition resonated better in the current COVID-19 pandemic environment given that the test could potentially eliminate other more invasive procedures?

Derek Maetzold -- President and Chief Executive Officer

So qualitatively, I would say yes. But if you ask me to point to a study, I would say I don't have that. Just as maybe a 30-second reminder for the others on the call here, so our cutaneous melanoma test is a DecisionDx-Melanoma test, of course, is able to predict spreading our metastasis, and that includes starting to the sentinel lymph node biopsy or the sentinel lymph node area. So it can affect that biopsy decision of the sentinel lymph node.

It also predicts recurrence to any part of the body beyond the sentinel lymph node, as well as system metastasis and depth of the melanoma. So the impact of being able to perhaps safely have a patient ruled out or safely triaged for a sentinel lymph node biopsy procedure and sort of this COVID-19 rebalancing and risk-benefit, I think, is very real, if that's what you're kind of getting at. I think that's a point we're going to continue to understand with our customers in a careful manner of what's best for the patient. In terms of the next series of decisions, do we have that patient come back to an ambulatory care center or to an institution for active surveillance with CT imaging, for example? Are we OK having that patient being seen only for clinical follow-up visits in a private practice setting? I think we can impact that kind of risk-benefit as well.

As we talked about maybe earlier, we do have data indicating that people who have stage three disease, so those patients who are sentinel lymph node-positive, we do, in fact, achieve a very, very nice, strong stratification in that overall group between people who actually have a low-risk of metastasizing and perhaps succumbing to melanoma from a high-risk. That data set is more limited than our data in earlier stage one and two patients have localized these earlier. But one can imagine as we sort of get back into the clinics here, do we see an increase in perceived utility because maybe we're helping make decisions on watchful waiting as being a much more appropriate way to go or at least clinically, watchful waiting versus kind of being aggressive either in the surgical procedure area or with sentinel lymph node biopsy procedures or even adjuvant therapy. Again, I don't have hard data to say that we've seen sort of a life for many customers.

We certainly hear those interactions today.

Sung Ji Nam -- BTIG -- Analyst

Great. That's helpful. And then you talked about the proprietary dermatology practice surveys, as well as other studies out there. Just curious, if there's any information around what the role of telemedicine is in the current environment and was curious given the urgency of some of these potential patients, do you think that could be a driver of the patient flow going forward in terms of creating more urgency for the patients to go see their dermatologist.

Derek Maetzold -- President and Chief Executive Officer

Yes. So, yes, we are aware of some data, including our own. We saw a shift. I think the last survey that we did, the one we just talked about on the earnings call was sort of field maybe a week and half ago.

And I believe that the data on that show that 90% of practices were practicing teledermatology in that week of April, April 28, that's a significantly greater number than we're practicing the dermatology in February, certainly. That being said, I think part of the concerns that we see in our customers is that the patient population that probably is most at risk of those over 55, those over 65 of developing melanoma. If you just look at -- this is my personal bias, but I'm assuming that if you look at who buys new Samsung and new iPhones, it's not the 75-year-old person who might have skin cancer. They might have an older phone with a poor photo opportunity there.

So I think there are concerns among our clinicians that the ones who we are most concerned about missing a melanoma probably have the poorest IT skills as a group and probably the lowest technology. And that's really concerning that they may be missing things. So my sense here is that they're going to hopefully try, and if they maintain a dermatology going forward after this near-term period, that that will be focused more on nonskin cancer concerns, unless they can get really, really comfortable that they're not missing early stage skin cancer because the patient isn't able to quite get the focus point ready to go. So I think that's quite a concerning aspect.

Now that being said, the fact that 80% of melanomas are sort of self-detected by patients, I think, is very comforting that at least the majority melanoma should be diagnosed in a fairly routine flow, although I think it's certainly been delayed here during the lockdown across the U.S. The other 20%, that's the question of how do you pick up incidental findings with high levels of confidence using teledermatology, and that's a question that we'll have to wait and see. And hopefully, from just a patient care perspective, we see a normalcy in terms of the routine diagnosis of melanoma and other skin cancers, so that we are perceiving we're going to see just a worsening of outcomes because the deeper and thicker these things go, the worse the prognosis is.

Sung Ji Nam -- BTIG -- Analyst

Great. That makes a lot of sense. And then just lastly, maybe one for Frank. How should we think about gross margins in the second quarter? You talked about roughly 40% behind on test volumes in the first month or so.

Just what could gross margins look like in that kind of environment?

Frank Stokes -- Chief Financial Officer

Yes. Sure, Sung Ji. So I don't want to guide to a number here, but as you know, the cost is a combination of space for the lab, people to run tests and consumables. So fewer tests, fewer consumables, but space and people are largely stable.

So I would expect gross margin to come down a bit. But as you know, we have a nice, healthy gross margin. So there's room there for us.

Sung Ji Nam -- BTIG -- Analyst

Great. Thank you so much.

Operator

Our next question comes from Puneet Souda with SVB Leerink. Your line is open.

Puneet Souda -- SVB Leerink -- Analyst

Hi, Derek, Frank. So the first question I have is -- I appreciate the 80% statistics where patients are self-referring themselves to the dermatologist. But given the progression of melanoma is multiyear, what's your expectation of the mix of dermatologists that are willing to push the clinical visit further for Medicare age patients and above, 65 and above, versus those that are likely to review it more sooner as the derm practices open across the country.

Derek Maetzold -- President and Chief Executive Officer

So I think I can answer that directly, but if I miss the answer, propose a little differently for you that. OK. So our sense is that from our surveys and studies and also individual clinician contact is that there is concern about taking individual who is compromised or at risk and not doing the wrong thing. That certainly is the case.

That being said, the individuals that are at greatest risk of dying from melanoma are those in the Medicare population. So you've got sort of a really hard balancing act here. And at least, the clinicians I've talked to directly, there is a real concern that we're going to be doing a great disservice by not diagnosing early these melanomas because we all know that as they grow bigger and thicker and their biology changes, the likelihood of that becoming a more aggressive melanoma increases day by day. And so there's a balance there that if they snip out over the phone, for example, or on a video teledermatology visit, that there's an inkling of potential skin cancer, our understanding is they're prioritizing those patients and encouraging them to come in ASAP.

And perhaps some of the office procedures that they're putting in place in terms of spacing out patients, and etc., to go reduce infection potential is going to have an impact where those older individuals will be more comfortable coming into the practice. Now the reality in terms of numbers of patients returning, I think that's going to be the one that we talked about earlier is the question we don't have a handle on. Certainly, dermatology clinicians are highly attuned to the downside impact of diagnosing melanoma and other skin cancers later rather than earlier. So I think they'll be encouraged to say that is the more important concerning issue.

That's going to be a matter of the patients being uncomfortable, either calling in the first place until they wait for another, what, cycle of time, I guess, or not. Did I get at the heart of your question there?

Puneet Souda -- SVB Leerink -- Analyst

Yes. That's helpful. And if I could ask in commercial payers, where do you stand currently? What are some of the efforts? It looks like you had a number of efforts sort of planned out. But where do you stand for commercial payers? And do you expect those efforts to be pushed out given the COVID impact here? Or are those still on track? And then one for Frank, on sales team additions, overall operating expenses, I appreciate you'll be expanding the commercial team.

But if you could give some numbers on that. For the second half of the year, are your expectations the same? And if you can provide us numbers on sales or adds for the second half of the year that you expect, too.

Derek Maetzold -- President and Chief Executive Officer

So as I was asked last quarter, the first question. Yes. Go ahead.

Frank Stokes -- Chief Financial Officer

Puneet, can you repeat the first part of the question? We're focused on the second part.

Puneet Souda -- SVB Leerink -- Analyst

Yes. And so the first part is on the commercial payers, where do you -- or yes.

Derek Maetzold -- President and Chief Executive Officer

Yes. So as a reminder, but we haven't probably discussed this probably at least last call from an earnings call standpoint. Most of the commercial payers that are reviewing melanoma tests or cutaneous melanoma test or melanoma, in general, seemed to fall into the first quarter and third quarter kind of triage. So our managed care group and our medical affairs group is working hard at impacting and providing the right information to allow individual plans and tech assessment groups to review the most up-to-date data.

And for those who are on the review cycle for the third quarter, we have expectations of seeing a number flipping from either nothing to positive or negative to positive well, more in early 2021, and more in later in 2021 as well. In speaking with our head of managed care, I'm only aware of maybe a couple of plans that have sort of said we're way too busy here. I think the reality of it is that most of the medical directors who are reviewing diagnostic tests, undoubtedly, has had some additional workload in terms of reviewing maybe which COVID-19 test to bring onboard and maybe other medical policy issues. But my understanding is that most of them are working against the normal cycle anyways.

Most of them already were working as off-site employees, so I think we're hearing minimal delays because of COVID disrupting kind of office flow or review flow, but we did hear a few in the late March, early April time period. So maybe there's an impact that one could see in the third quarter of 2020, but I don't think we'd be able to point to something and say, aha, the lack of a change to a positive policy was because of COVID and this payer, it seems to be much more minimalized in that. Any other questions?

Frank Stokes -- Chief Financial Officer

And then, Puneet, keep in mind, we've got a multi-arm marketing effort here. So with the next expansion, and we're not quite sure yet, we're still doing the market research work, but somewhere in the seven to nine or 10 range in terms of outside reps for the diff product. We'll certainly hire at least one more medical science liaison to complement that force. And then as you recall, we have a very important function of an internal sales associate that supports that field team.

And our current ratio would suggest we would probably add two of those. So it's a similar wave, if you will, or a similar expansion to what we did back in December and as well on February 1, kind of the same scope and scale. That's been very much by design. We sat there last year and said if we think we need to expand by x, should we just bring all these people on.

And we did it in a more measured fashion to make sure we weren't disrupting physician relationships, and we were continuing to generate quality opportunities for those salespeople and the folks in that effort.

Puneet Souda -- SVB Leerink -- Analyst

OK. Thank you.

Operator

I currently show no further questions at this time. I'd like to turn the call back over to Derek Maetzold for closing remarks.

Derek Maetzold -- President and Chief Executive Officer

Thank you, Shannon. This concludes our fourth-quarter 2020 earnings call. I want to thank you again for joining us today and for your continued interest in Castle Biosciences.

Operator

[Operator signoff]

Duration: 56 minutes

Call participants:

Frank Stokes -- Chief Financial Officer

Derek Maetzold -- President and Chief Executive Officer

Max Masucci -- Canaccord Genuity -- Analyst

Catherine Schulte -- Baird -- Analyst

Sung Ji Nam -- BTIG -- Analyst

Puneet Souda -- SVB Leerink -- Analyst

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