Castle Biosciences, Inc. (NASDAQ:CSTL) Q2 2025 Earnings Call Transcript

Castle Biosciences, Inc. (NASDAQ:CSTL) Q2 2025 Earnings Call Transcript August 4, 2025

Castle Biosciences, Inc. beats earnings expectations. Reported EPS is $0.15, expectations were $-0.51.

Operator: Good afternoon all, and thank you for joining us for the Castle Biosciences’ Q2 2025 Earnings Call. As a reminder, this call is being recorded. We will begin today’s call with opening remarks and introductions, followed by a question-and-answer session. I’d now like to turn the call over to Camilla Zuckero, Vice President, Investor Relations and Corporate Affairs. Camilla, when you’re ready.

Camilla Zuckero: Thank you, operator. Good afternoon, everyone. Welcome to Castle Biosciences’ second quarter 2025 results conference call. Joining me today are Castle’s Founder, President and Chief Executive Officer, Derek Maetzold; and Chief Financial Officer, Frank Stokes. Information recorded on this call speaks only as of today, August 4, 2025. Therefore, if you are listening to the replay or reading the transcript of this call, any time-sensitive information may no longer be accurate. A recording of today’s call will be available on the Investor Relations page of the company’s website for approximately 3 weeks following the conclusion of the call. Before we begin, I would like to remind you that some of the statements made today will contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.

These forward-looking statements include, but are not limited to, statements about our financial outlook, TAM, intended use populations and similar items referenced in our earnings release issued today and statements containing projections regarding future events or our future financial or operational results and performance, including our anticipated 2025 total revenue, our expectations regarding reimbursement for our products, opportunities for growth, the clinical value of our tests, impacts of seasonality and other trends, the timing of targeted milestones, our M&A strategy, our ability to capitalize on strategic opportunities, including our recent SciBase and Previse transactions and the impact of our investments in growth initiatives, including our ability to achieve long-term growth and drive stockholder value.

Forward-looking statements are based upon current expectations and involve inherent risks and uncertainties, and there can be no assurances that the results contemplated in these statements will be realized. A number of factors and risks could cause actual results to differ materially from those contained in these forward-looking statements. These factors and other risks and uncertainties are described in detail in the company’s annual report on Form 10-K for the year ended December 31, 2024, and its quarterly report on Form 10-Q for the quarter ended June 30, 2025, under the heading Risk Factors and in the company’s other documents and reports filed or to be filed with the Securities and Exchange Commission. These forward-looking statements speak only as of today, and we assume no obligation to update or revise these forward-looking statements as circumstances change.

In addition, some of the information discussed today includes non-GAAP financial measures such as adjusted revenue, adjusted gross margin and adjusted EBITDA that have not been calculated in accordance with generally accepted accounting principles in the United States or GAAP. These non-GAAP items should be used in addition to and not as a substitute for any GAAP results. We believe these metrics provide useful supplemental information in assessing our revenue and operating performance. Reconciliations of these non- GAAP financial measures to the most directly comparable GAAP financial measures are presented in the tables at the end of our earnings release issued earlier today, which has been posted on the Investor Relations page of the company’s website.

I will now turn the call over to Derek.

Derek J. Maetzold: Thank you, Camilla, and good afternoon, everyone. Following a strong first quarter, our team closed out a very successful second quarter that was ahead of our expectations. We believe this strength reflects the clinical value our tests provide to clinicians and their patients. Thanks to the strong execution by the entire Castle team, we delivered revenue of $86.2 million and total test report volume of 26,574, with tests for our core revenue drivers growing 33% year-over-year compared to the second quarter of 2024. Additionally, we are pleased to have maintained strong gross margins and a healthy balance sheet, ending the quarter with $275.9 million in cash, cash equivalents and marketable securities. This financial strength positions us well to continue investing in our near- term growth initiatives, including expanding our body of clinical evidence and commercial team optimization efforts, along with strategic investments and pipeline developments to support longer-term growth.

Today, I will walk you through business highlights from the second quarter, and then Frank will provide additional financial highlights before we turn to your questions. On to our quarterly highlights. For DecisionDx-Melanoma, we delivered 9,981 test reports during the quarter, which resulted in a sequential increase of approximately 16% compared to the first quarter of 2025 and a year-over-year increase of approximately 4% compared to the second quarter of 2024. On an absolute number basis, this is the largest second quarter over first quarter sequential increase in volume for DecisionDx-Melanoma we have seen since our IPO in 2019. We expect continued solid growth in the second half of the year. And as a result, we are reiterating our expectations for high single- digit volume growth for DecisionDx-Melanoma for the full year 2025 compared to the full year 2024.

Castle has invested in generating a substantial body of evidence to support the clinical performance and use of our DecisionDx- Melanoma test. We’re particularly proud of our ongoing collaboration with the National Cancer Institute’s Surveillance, Epidemiology and End Results Program Registries, or NCI SEER for short, which was initiated back in 2021 and continues to evolve. Prior studies have shown that clinicians use DecisionDx-Melanoma to inform both avoiding sentinel lymph node biopsy surgical procedures in low-risk patients and initiation of surveillance imaging and referrals to medical oncology in high-risk patients, which enables early detection of recurrences and earlier initiation of therapy. Early detection has been shown to improve outcomes to a greater extent when therapy is initiated with a smaller metastatic tumor burden, which improves net health outcomes.

In fact, during the second quarter, we presented novel research aimed at enhancing the clinical management of patients with cutaneous melanoma at the 2025 American Society of Clinical Oncology Annual Meeting. This NCI SEER study presented an updated matching of patients who received DecisionDx-Melanoma as part of their clinical care to those who did not. This large real-world cohort included 13,560 patients with cutaneous melanoma whose treatment plan was managed with the results of our DecisionDx-Melanoma test. This represents the largest real-world study of gene expression profile testing to date. The clinical use of DecisionDx-Melanoma was associated with a 32% reduction in mortality risk compared to untested patients, meaning patients whose treatment plan did not include the use of our DecisionDx-Melanoma test.

These results provide further evidence of our test association with improved patient survival. Moving on to our DecisionDx-SCC test. We are very pleased with our volume performance, delivering 4,762 test reports in the second quarter of 2025. As a reminder, DecisionDx-SCC reimbursement for the second quarter reflects a Novitas Local Coverage Determination policy, or LCD, that went into effect for dates of service on or after April 24, 2025, and included noncoverage language for our DecisionDx-SCC test. That said, early in the third quarter, we submitted our DecisionDx-SCC reconsideration request for both the Novitas and MolDx LCDs. Under CMS guidelines, MACs have up to 60 days to accept or reject a reconsideration request. Importantly, we have already received notification from Novitas that based upon CMS guidelines, our reconsideration request was determined to be a valid request and was accepted as such.

We are still awaiting notification from MolDX. While this is not an indication of the likelihood of coverage, it is a step forward in the process. It’s important to note that as is the case for development of a new LCD, there is no specified time line for a final reconsideration decision. We expect to keep you informed of updates as appropriate. Now let’s turn to our gastroenterology franchise. TissueCypher continued its strong momentum in the second quarter, delivering 9,170 test reports compared to 4,782 in the same period of 2024. This represents a 92% year-over-year growth compared to the second quarter of 2024. We continue to believe the growth drivers for TissueCypher in 2025 and beyond include, first and foremost, a recognition of the unmet clinical need; and two, continued commercial optimization, which includes a strong focus on education and awareness.

Lastly, moving on to our pipeline initiatives. In June, we entered into an exciting collaboration and license agreement with SciBase, a Swedish-based public company that focuses on advanced electrical impedance spectroscopy or EIS technology, which includes both desktop and point-of-care instruments. The initial goal of the collaboration is to advance the development of a diagnostic test that predicts flares in patients diagnosed with atopic dermatitis, a U.S. market with an estimated patient population of up to 24 million people. We expect that should our development program be successful, this test will enable us to meet another significant unmet clinical need for many of the clinicians who have already adopted our DecisionDx-Melanoma and SCC test for use in skin cancers.

Staying with this atopic dermatitis theme, I’m pleased to provide an update regarding our internally developed pipeline test. As we have talked about in the past, we have a program underway to see if our novel specimen collection technique, coupled with gene expression profiling would be successful in identifying a genomic signature that could predict treatment responses to patients who are diagnosed with moderate to severe atopic dermatitis and eligible for or seeking systemic therapy, be it an injectable biologic or an oral therapy. Based upon our analysis to date, we believe that our development program has been successful. Specifically, we’ve identified a signature, which has been validated in an independent patient cohort that identifies patients who are likely to have strong relief from the atopic dermatitis symptoms, specifically in their response as measured by 3 core indexes: first is an improvement in their eczema area and severity index, or EASI score, as is known; second is improvement in itch symptoms; and third is a reduction in flares.

Assuming continued success with our validation assessments, we expect to launch this pipeline test by the end of 2025. Lastly, our Previse acquisition brings a robust technology pipeline, which has the potential to increase our current GI offerings. Specifically, we believe there is an opportunity to create a multi-omics approach for improved test value in Barrett’s esophagus as well as a non-endoscopic sample collection device for pipeline opportunities to potentially expand screening and diagnostic support for patients with Barrett’s esophagus and other GI diseases. And with that, I will now turn the call over to Frank.

Frank Stokes: Thank you, Derek, and good afternoon, everyone. Reiterating Derek’s sentiment, we are pleased to report strong second quarter financial results. Net revenues for the 3 months ended June 30, 2025, decreased by $0.8 million or 1% to $86.2 million compared to the 3 months ended June 30, 2024, due to a $12.5 million decrease in revenue from our dermatological tests, offset by an $11.7 million increase in revenue from our non-derm tests. The $12.5 million decrease in net revenue for our dermatological test was primarily attributable to our DecisionDx-SCC test and the $11.7 million increase in net revenues from our non-derm test was largely attributable to our TissueCypher test. While we do not typically disclose revenue by test, we estimate that revenue from DecisionDx-SCC for the second quarter of 2025 was just above $15 million.

If you exclude DecisionDx-SCC revenue from both the second quarter of 2025 and 2024, our normalized revenue growth for the second quarter of 2025 would be approximately 23%. We are providing this information for this quarter due to the specific circumstances regarding DecisionDx-SCC noncoverage decision, which went into effect during the second quarter of 2025. Adjusted revenue, which excludes the effects of revenue adjustments in the current period related to tests delivered in prior periods, was $86.2 million for the second quarter of 2025, a decrease of 1% compared to the second quarter of 2024. For total revenue for 2025, we are raising our revenue guidance to $310 million to $320 million, up from the previously provided range of $287 million to $297 million, which reflects the DecisionDx-SCC LCD with a date of service effective date of April 24, 2025.

Again, we do not disclose revenue by test, but for an apples-to-apples comparison for 2025 revenue growth, if you exclude DecisionDx-SCC revenue from both our ’24 and ’25 totals, our normalized revenue growth range in 2025 would be approximately 21% to 26%. Our gross margin during the second quarter of 2025 was 77.3% compared to 80.7% in the second quarter of 2024. Our adjusted gross margin, which excludes the effects of intangible asset amortization related to our acquisitions and excludes the effects of revenue adjustments in the current period associated with test reports delivered in prior periods, was 79.5% for the quarter compared to 83.2% for the same period in 2024. Turning to expenses. Our total operating expenses, including cost of sales for the second quarter of 2025 were $90.4 million compared to $82 million for the second quarter of 2024.

Sales and marketing expenses for the quarter were $35.1 million compared to $32.7 million for the same period in 2024. The increase is mainly due to higher organizational and business development activities costs and higher sales-related travel expenses. General and administrative expenses were $22.9 million for the quarter compared to $18.4 million for the same period in 2024. The increase is primarily attributable to higher personnel costs and higher information technology-related costs. Higher personnel costs reflect headcount expansions in our administrative support functions as well as merit and annual inflationary wage adjustment for existing employees. Cost of sales expenses were $17.6 million in the second quarter of 2025 compared to $14.5 million in the second quarter of 2024, primarily due to higher personnel costs, higher lab services costs and higher expenses for lab supplies.

Increases in personnel costs reflect a higher headcount due to additions made to support business growth in response to growing test report volumes as well as merit and annual inflationary wage adjustments for existing employees. Higher expenses for lab services and lab supplies also reflects higher test report volumes. R&D expenses were $12.8 million for the quarter compared to $14.1 million for the same period in 2024, primarily due to lower expenses for clinical trials. Total noncash stock-based compensation expense, which is allocated among cost of sales, R&D and SG&A, was $11.2 million for the second quarter of 2025, down from $13.2 million in the second quarter of 2024. Our net income for the second quarter of 2025 was $4.5 million compared to net income of $8.9 million for the second quarter of 2024.

Diluted earnings per share was $0.15 compared to diluted earnings per share of $0.31 in the second quarter of 2024. Adjusted EBITDA for the second quarter was $10.4 million compared to $21.5 million for the comparable period in 2025. Net cash provided by operating activities was $20.8 million for the second quarter of 2025 and $14.8 million for the 6 months ended June 30, 2025. We continue to expect to deliver positive net cash flow from operations for 2025. Net cash used in investing activities was $50.8 million for the 6 months ended June 30, 2025, and consisted primarily of purchases of marketable investment securities of $92.8 million, our asset acquisition of Previse, purchases of property and equipment and purchases of debt securities classified as held to market, partially offset by the maturity of marketable investment securities.

As of June 30, 2025, we had cash, cash equivalents and marketable securities of $275.9 million. As we look beyond prebuys and the license agreement with SciBase, we look to put the strength of our balance sheet to work through a disciplined and strategic approach to capital deployment, focusing on investing our capital for stockholder value. As it relates to M&A, our strategy is centered on complementing our existing portfolio to drive mid- to long-term value creation. In today’s dynamic reimbursement environment, we consider diversification, expanding both our test portfolio and payer mix while also maintaining a disciplined approach with an aim to ensure any transaction supports near and midterm profitable growth. Our key M&A priorities at this time include: one, pursuing opportunities where our test is already on the market and has established reimbursement; two, favoring tests that complement our current portfolio and/or offer high clinical value in adjacent therapeutic areas; finally, exploring areas where we can develop pipeline tests that enhance the value we deliver to existing customers.

In conclusion, I’m pleased with our excellent financial results in the second quarter, continuing our long-standing history of strong execution and performance excellence. I’ll now turn the call back over to Derek.

Derek J. Maetzold: Thank you, Frank. In summary, we delivered another strong quarter and furthered our position as a leader in both our dermatologic and gastrointestinal testing franchises. We are excited about our performance in the first half of the year and believe our ability to create value for our stockholders in the near and long term remains intact. Thank you for your continued interest in Castle Biosciences. Now we will be happy to take your questions. Operator?

Q&A Session

Operator: [Operator Instructions] Our first question comes from Thomas Flaten from Lake Street.

Thomas Flaten: Congrats on a great quarter. Just first, with the breakthrough designation you got for Dx-Melanoma just a few weeks ago, anything you can share with us on your plans to seek FDA approval studies, et cetera, just lay out kind of the bigger strategic thinking there?

Derek J. Maetzold: Thanks, Thomas. Derek here. Yes, with the breakthrough designation device status approved or authorized, we are marching our efforts to go ahead and push forward towards an FDA submission. Timing of that, I don’t think we need to make public at this point in time, but that’s part of our expected outcome for that — for seeking BDD in the first place.

Thomas Flaten: Got it. And then, Frank, with the numbers that you kindly shared around SCC, it seems that kind of on an ASP basis, you may have gotten more than just kind of a 2/3, 1/3 split throughout the quarter. Are you getting paid on any of the volume that isn’t Medicare at this point?

Frank Stokes: We get paid episodically on commercial claims, yes, not in significant percentages, but we do get some payments.

Thomas Flaten: But remove that from our thinking going forward as consistent with prior guidance?

Frank Stokes: There will be some. It — one of the challenges you have is just timing, Thomas. A lot of times that comes out of period. So sometimes you’ll see that show up in prior period revenue. But yes, we’ll have some modest payments. But again, it’s not a significant percentage.

Operator: Our next question comes from Mason Carrico from Stephens.

Mason Owen Carrico: I think you’ve historically talked about 6 months for a sales rep to reach average productivity. Could you give us some insight into how many GI reps had reached that level of tenure maybe at the start of Q2 as well as how many have now hit that threshold as of today?

Derek J. Maetzold: I think we scaled to the current level of territories, I think, just before year-end. So they would have been certainly in training in the first quarter. So I would think as we’re exiting into the third quarter now, and you would assume if our modeling was correct about 6 months to KPI will be up to full speed, we should be hitting that with a fully mature, I guess, you call that sales team in the third and fourth quarter of this year.

Mason Owen Carrico: Okay. And now that — well, I guess I’m assuming that the derm sales force is refocused on melanoma. Could you just give us some insight into kind of what you saw in terms of utilization trends once that shift happened and how that’s progressed since?

Derek J. Maetzold: I actually don’t think I can from a data standpoint. As you know, with the LCD being effective April 24, however, there are some laboratory orders coming in and reports that were going out with the data service before April 24. So we didn’t really make a hard shift until the end of the quarter anyways from sort of a compensation focus standpoint. And also the SCC test is important to our clinicians as well. So I think going forward, we can go ahead and see what the third and fourth quarter looks like from sort of a future modeling standpoint if they’re solely focused on the melanoma test.

Operator: Our next question comes from Mark Massaro from BTIG.

Mark Anthony Massaro: Congrats on a good quarter, the beat and the raise. I wanted to start with your internal developed product for atopic dermatitis. It’s nice to see that the program has reached sort of your internal hurdles. So now that you’re planning or still on track to launch it by year-end 2025, can you just give us a sense for what the reimbursement outlook is for atopic dermatitis? Is this something where you’re going to pursue an LCD? Or are there reimbursement mechanisms in place that you could benefit from?

Derek J. Maetzold: So one is we are on track still and believe we’ll have this test available clinically as appropriate on a limited launch basis by the end of the year so that I guess, when do we set that expectation, September 21, ’22? Yes. So we’re on track for that aspect. Reimbursement perspective, we have 3 or 4 areas we’re pursuing in parallel. Not sure which will end up being the ones that will be the largest revenue drivers in reality, I’d rather not go into the detail right now until we see a couple of those mature out. But suffice it to say, we think there is substantial clinical value to a patient going from sort of a standard of care approach, which is trial and error sounds negative. It’s basically trial and trial to saying, hey, if your symptoms are severe enough where you are looking at going from topicals only and taking that step across the transit to systemic therapies, why wouldn’t you want to, given the cost of those therapies in the case of Dupixent, the need for injection versus oral, why wouldn’t you want to understand when you make that significant upstep in terms of therapeutic efficacy as well as side effects as well as cost, want to have your patients understand that they can select test — they can use our test to go and figure out that this patient is more likely to be a very, very strong responder to JAK inhibitors versus not.

So that’s quite exciting from our standpoint. But because of that, I think reimbursement has a couple of options there to go forward. From a modeling standpoint, I would say starting out at the end of this year, I think revenue driving impact is immaterial for 2026 because it’s just launching. So this is more, I think, smooth the ’27, ’28, ’29 as we see how ’26 matures.

Mark Anthony Massaro: Okay. Great. And my second question, your squamous cell carcinoma volume certainly exceeded my expectations. And I recognize that the noncoverage decision went live in April. So I think on the last earnings call, you talked about how you plan to continue to offer the test. And so recognizing that you’ve submitted your reconsideration request for Novitas and MolDX, should we continue to expect you to continue to offer it perhaps until a time that you hear back from the reconsideration request? Is that the right way to think about it?

Derek J. Maetzold: Yes. So we are — we certainly expect over the next couple of quarters to have volume moderate down as we aren’t focusing educational sales efforts on that test specifically. We aren’t looking to remove the test from the marketplace. I think we built Castle Biosciences to be, first and foremost, focused on developing innovative tests that make a significant clinical difference in the lives of our patients or the patients that our doctors are treating. And this is no exception. I think this LCD process that we’ve talked about in the past is quite disappointing from a patient care perspective, given that Novitas was quite quick in their turnaround is accepting our reconsideration submission as valid. I think that gives us expectations here to move forward, even though, of course, that’s a beginning of a reconsideration process.

So I wouldn’t see us removing SCC from marketplace in any time in the short-term. I think it’s the right patient care decision to keep it available. That will have some moderating impact on COGS, I guess, you would say, gross margin perhaps, but that’s — I think at the end of the day, what we think is right for patients, which means it’s right for Castle.

Mark Anthony Massaro: Okay. If I can sneak one last one in. One for you, Frank. It looks like you beat consensus by about $15 million in Q2 on revenue. You raised, I think, the midpoint of the guide by $23 million. Can you just give me a sense for the drivers in the back half of the year and perhaps remind us about any seasonality between Q3 and Q4?

Frank Stokes: Yes. So on melanoma, as we’ve said, each quarter, we see seasonal flatness typically from Q2 to Q3 and Q3 to Q4. And so that’s been the historical trend, and that data is in our MD&A that you can see there. But other than that, we’re seeing good strong drivers across the business and accordingly, we raised our guidance accordingly.

Operator: [Operator Instructions] Our next question comes from Puneet Souda from Leerink Partners.

Puneet Souda: First one on TissueCypher. Strong growth there in the quarter. Just wondering how we ought to think about the cadence of volume growth here, third quarter, fourth quarter. And wondering if you’re willing to provide anything in terms of 2026 for that.

Derek J. Maetzold: We’re not going to — maybe last first.

Frank Stokes: Not yet. We haven’t provided any insight into ’26 yet. But yes, we agree, good continued growth in that test volume trends.

Puneet Souda: Okay. Just — but in terms of the overall guide for this year, any context you can provide there in terms of the volume growth we ought to think about? [ Purchase appraisal… ]

Frank Stokes: I’ll give a try, Puneet. We — our guide does assume continued growth in volumes in TC. We expect at some point to hit seasonality with that test. But right now, we’re still just very underpenetrated. And so we don’t yet see seasonality in it.

Puneet Souda: Got it. Okay. And then I appreciate the details on the reconsideration request, the 60 days. Could you elaborate when do you expect exactly to hear back from MolDX? And what was submitted this time around in the reconsideration request package? It seems that you have an expectation of positive outcome. Please remind me, I mean, if I’m incorrect on that. But — and tell us how you’re thinking about the sort of the overall timing for MolDX. And then if it was, again, the reconsideration request was turned down, what would be the other avenues at this point in time?

Derek J. Maetzold: So I’ll maybe take a step up and answer the question here. So one is that we submitted a reconsideration request to both Novitas and the MolDX group. Novitas was quite speedy in terms of turning around an acknowledgment or statement that they accepted the reconsideration submission as valid under CMS guidelines, which we expected, by the way. The Palmetto request went in at the same time, I think, maybe the same day, the next day of April, something like that earlier in July. Under CMS guidelines, MACs have up to 60 days to take to acknowledge receipt as being valid or not valid. We haven’t heard back anything yet, which is I think what we signaled maybe on the script. So I’d expect to hear back towards sort of within by Labor Day time period, I think, would be the right timing of that.

So that’s my expectation. In terms of the package that went in, we certainly aren’t going to post it I think the actual package. But if you go and dial back, you may recall that when those draft LCDs posted in the summer of 2023 once the open comment period closed for both Novitas and for Palmetto, neither one of them were under any obligation to cite any published evidence or literature that had a publication date after the close of open comment period. I think it was maybe August and then maybe early September 2023, respectively. So since that time period, we had, I think, 8 or 9 or 7 or 8 peer-reviewed publications come to fruition. I think one set or a couple of them essentially dealt directly with questions or comments that MolDX had asked us about in the draft LCD.

So those are — those were published in the interim. We did send those to MolDX, but they were not reviewed because they don’t have to review things after the close of comment period. We also published 2 studies that were multicenter in nature, demonstrating that our DecisionDx-SCC test can predict responses to patients who are receiving adjuvant radiation therapy. And to our knowledge, there was no other biomarker that has been demonstrated in squamous cell carcinoma to predict adjuvant radiation therapy response. Those 2 publications represented the largest single study ever performed in the FCC population and the other one was the second largest study ever performed. So we think with the robustness of that data and the use of our test that was demonstrated after the comment periods were closed to actually identify patients that will get a response from radiation therapy versus those that will not is an important and significant clinical use, which is the, I guess, you call it the verbalized feedback we’ve gotten not only from clinicians but also from our Medicare contractors.

So I think within that basket of 8 or 9 publications, there is significant new evidence that goes beyond the LCD and by the CMS program integrity manual, both MACs should go ahead and accept our submissions as valid. I think that covers it maybe.

Puneet Souda: And just — yes, I just wanted to clarify, again, if we — if — I mean, if there’s a decision that was negative, what are the avenues that are left at this point? Or if…

Derek J. Maetzold: We already have a positive from Novitas.

Camilla Zuckero: No, I think he means the reconsideration.

Puneet Souda: Reconsideration, yes.

Derek J. Maetzold: That’s a good question. I guess if MolDX comes back and says, we don’t think your submission is valid, we would request and I don’t think it’s a posted information, but we would certainly want to understand exactly why they believe that’s the case. I would have a very hard time to understand how from a medical regulatory standpoint, they could make such a case, but we would work with both MolDX as well as with central CMS to understand what we would believe would be an incorrect conclusion. I don’t know about timing, et cetera, but that’s just the MolDx avenue. The Novitas avenues moving forward.

Operator: Our next question comes from Kyle Mikson from Canaccord Genuity.

Kyle Alexander Mikson: Great quarter. So just on the gross margin in the quarter, beat our model, beat the Street. Could you talk about the impact from the SEC reimbursement kind of roll off in the quarter? It seems like that was much better than we had feared. So could you talk about that? And maybe going forward, what that looks like kind of the next few quarters into ’26?

Frank Stokes: Yes, we did — it wasn’t as low as a normalized gross margin will be because we did have payments for part of the quarter. So I would expect the back half of the year adjusted gross margin doesn’t look quite as good as it did Q2. Having said that, it’s still one of the better gross margins in the sector, and we work hard to maintain that through disciplined spending in facilities, et cetera.

Kyle Alexander Mikson: It would be — Frank, would the mid-70s make sense for adjusted gross margin for like a 4Q, for example?

Frank Stokes: Yes. I think we said low to mid-70s, Kyle. I think that’s what we said in the past. [ Ajudted gross, yes. ]

Kyle Alexander Mikson: Yes, of course. And then, Frank, the cash flow from operations positive for the full year. But when you think about the first half of the year, I think it was like $15 million or so from ops. If you take out SEC, I mean, it seems like it would be just a little bit better than breakeven maybe. When you look at the 2026 outlook, just excluding SEC from the top-line, of course, what’s the kind of cash flow progression as you think about TissueCypher kind of ramping, melanoma returning rebounding? Could you be positive next year as well?

Frank Stokes: We have not guided for operating cash flow for ’26, but those trends are — I concur with your view of those trends. And we don’t have significant spending increases that might change that. So I think we would be on trend from the fourth quarter into ’26.

Kyle Alexander Mikson: All right. And then, Derek, last one for you. On the kind of the GI business, is there any — there’s no cross-selling going on today with the 2 — with the our test and TissueCypher. But do you anticipate that like the conversations with GIs, for example, is going to be a little more streamlined and could accelerate the growth of that segment, let’s say? Or is it just like not the most complementary at this point?

Derek J. Maetzold: I think where we see the most significant value out of the Previse acquisition is not sort of saying you can pick one or the other doctor. Our TissueCypher test with the work that did is clearly the most validated test that’s available today and the accuracy metrics are extremely good, although everything can be better. So it would be a complementary test, I guess, you would say, is probably the way to position that today. But the exciting part of what we see is the potential ability to combine spatialomics with genomics, either be it methylation islands like we have from the Previse acquisition or if it’s going to be next-gen sequencing. But if we can get to sort of a spatialomics plus something, which could be methylation technology or sequencing add-ons, we believe that we will be able to get to a more accurate test by using more than one modality or platform versus one alone.

So that’s the sort of first large focus we have. And clearly, the work coming out of Hopkins coming out of provides will assist us in accelerating how to get there. And then the next opportunity that we see here is to really take the capsule sponge work that they’ve spent a few years working on and see how we can accelerate that development as a potential future test, again, mainly for use in gastroenterology offices.

Kyle Alexander Mikson: Okay. And just to clarify, you’re not expecting any material revenue from Esopredict?

Derek J. Maetzold: No.

Frank Stokes: No, not discrete revenue. No.

Operator: Our next question comes from [ Susie Neman ] from Guggenheim.

Subhalaxmi T. Nambi: This is Subu Nambi from Guggenheim. For DecisionDx-Melanoma, will you need any further studies to support FDA approval?

Derek J. Maetzold: We don’t believe that will be the case. I think the easy conversation that was had with the FDA regulators regarding our BDD application, I would think that we have plenty of data that would support that approval as is. We won’t know that, of course, until we go into that process, but we would have taken it through the breakthrough designation device status if we hadn’t felt comfortable with that, Subu. So I think we’re — we feel confident that the level of data that we have out there now would support FDA authorization clearance approval depending on the approach they would take.

Subhalaxmi T. Nambi: And then, Derek, how are you prioritizing internal resources between the assets acquired in the Previse acquisition, the SciBase collaboration and the atopic dermatitis assets that you’re developing internally?

Derek J. Maetzold: How are we prioritizing them?

Subhalaxmi T. Nambi: Yes.

Camilla Zuckero: Yes, prioritizing internal resources with all of our initiatives.

Derek J. Maetzold: So the — I guess starting with Previse first and maybe repeating a bit talked about with Kyle there. We believe that the ability to go from a single platform spatialomics test to a multi-platform multi-omics approach will yield a more clinically valuable test at the end of the day. So to be quite frank, we have ongoing R&D investments in TissueCypher and folding in an extra platform is actually not adding much resources and just expanding the protocol slightly to capture both opportunities. So that’s not really a prioritization issue or that. I think the — we’ve been looking for opportunities to look down the road to expand in the future our value to our gastroenterology customers. We believe that the capsule sponge technology that Previse had developed will be one of those sources to get there.

So that is an additional R&D project. But again, it fits in within the current TissueCypher budget anyways, largely speaking today and tomorrow. On the SciBase opportunity, as we talked about, I think we — on the earnings call plus added a slide to our corporate presentation deck on the data that we see today, our internal test really was focused on or is currently being focused on patients who are taking that step from topicals only, most likely have moderate to severe atopic dermatitis that are taking the step over the transom to get to a systemic therapy. That’s really where that test is focused, whereas the initial studies that we’re focusing on for SciBase technology are really taking people across the spectrum who are being medically treated with topicals and with systemic therapies to be able to say, if you have an atopic dermatitis condition, you’re on a therapy of some sort, but you continue to have flares, which are you could call as breakthroughs, I guess, in symptoms.

We hope that our technology will be able to demonstrate that you can use our test or our tool every couple of days, every day, every 3 to 4 days and predict a flare in the future, near-term future, adjust your therapy so that you hopefully either reduce the severity of that flare up, which is a significant burden on patients, that also translates to reduced itch flare- ups as well or you may be able to bid it all together And so to me, they’re quite complementary to the exact same medical dermatologist who is interested in eczema skin management, and it turns out that the majority of those physicians are dermatologists are the same customers treating skin cancer. So we have another opportunity for really a strong overlap and the same customer who hopefully knows about casual skin cancer test uses them.

And then we’ve introduced both our internal atopic dermatitis test for predicting therapy response as well as later on the probe that we have from SciBase, it’s a very, very nice way to kind of walk into the same offices that are medically oriented and help them solve more patient problems from the same one company. Does that kind of get to the question?

Subhalaxmi T. Nambi: One quick one, a follow-up to Kyle’s question on the margins. Based on the current TissueCypher trajectory, do you expect the mix shift to pull downward on your margins this year just because TissueCypher is a lower-margin test? Or have you made some improvements to not really affect that?

Frank Stokes: Yes. We have improved the cost structure on TissueCypher a good bit. It is still lower gross margin than GEP testing though. So depending on how volumes grow there, it could be a bit of a dilutive to gross margin. But again, it would be — we would still have one of the better gross margin in the second [ Audio Gap] still hit those targets we ought to hit.

Operator: Our next question comes from Catherine Schulte from Baird.

Catherine Walden Ramsey Schulte: Maybe first, just as we think about your guide for high single-digit DecisionDx-Melanoma volume growth for the year, and that would imply low double-digit growth in the back half. So as we think about going forward, is that back half growth rate the right go-forward assumption? Or do you think high single digit would be a better baseline?

Frank Stokes: We’ve said high single digit for the full year, Catherine. So we continue to have that expectation.

Catherine Walden Ramsey Schulte: Yes, as a jumping off point for next year was the question.

Frank Stokes: Is a jumping off point for next year? I don’t have guidance yet for next year on the product. But as we said before, we still think that the test has plenty of room to grow and continue to penetrate that patient base.

Catherine Walden Ramsey Schulte: Okay. And then maybe on TissueCypher, how should we think about how much growth is being driven by adding new clinicians versus further penetrating your ordering base? And maybe just talk to what kind of trends you see in terms of order rate ramps as providers mature?

Derek J. Maetzold: I don’t know if we disclosed that information publicly yet, Catherine, although something we couldn’t have in the future. We are so early on in penetration. I can’t off the top of my head, to be honest, give you a — are we seeing more growth from existing customers who are seeing better penetration in their practice? Are we seeing more from new customers? Both are happening. I think in the past, we sort of talked about potential — the GI office practice brings some different challenges compared to dermatology, where in dermatology, the biopsy for a melanoma or squamous cell carcinoma is being done in the office setting. So you’ve got the same staff, the same dermatologists or NPPA in the same facility, whereas in gastroenterology, the actual endoscopy is being done in the ambulatory care center, which is typically not brick-and-mortar associated with the actual GI clinics.

So there’s a different personnel swap over. So my sense is that what we’re seeing here is that we are getting solid growth from new first-time ordering customers because we’re still early in the game. And once we get somebody on board who buys in a TissueCypher, then after the first couple of orders, the question really becomes how do you make sure that the endoscopy work going on in the ambulatory care center gets transferred the right personnel in the actual GI clinic so that the test is ordered appropriately at the right time. So both will be ongoing strong for a while is my expectation.

Operator: Our next question comes from Sung Ji Nam from Scotiabank.

Sung Ji Nam: Maybe on the DecisionDx-Melanoma, I was curious if you could talk about the progress you’re making with the private payers there. And given the NCI, the real-world study, the largest of such kind, do you think that’s a big enough impetus for you to gain further traction with the commercial payers going forward?

Frank Stokes: Yes, Sung Ji, thanks. I think like most high-value molecular diagnostic tests, we see a lot of resistance from the payer community on the private side. And that resistance is driven less from data or lack of data and more just from self-interest, frankly. And so we continue to generate data. We continue to generate impressive data. More than half the physicians are using our melanoma test. And so I think the payer community is kind of getting to the point of having a red face test problem. I mean how do they go and say this test is experimental and investigational when 55%, 60% of the doctors are using it regularly in their practice. That doesn’t sound investigational or experimental to me, unless you think 2/3 of the physicians are unqualified to practice medicine.

And if they want to make that assertion, we would be happy to have that debate with them as well. So I think we continue to see penetration there. Very, very slow progress. The other challenge we’ve talked with you about before is the need to work through the lab benefit managers, the third-party lab benefit managers and technical assessment groups and their cycles tend to be — well, they tend to be long and drawn out, but they also tend to be somewhat regular. And so even when you accomplish a change in policy, that policy may not be rolled out until next year. And then each of the member plans, they have their own time lines. And so there’s sort of a long kind of a cascade, if you will, of seeing a policy change actually be — result in change in coverage policy.

So we think we’ve got more than ample evidence. It’s sort of beyond clear, but there’s just — there’s a self-interest and a resistance on the part of the commercial payers across the board, as you’ve seen in all categories of testing in your universe.

Sung Ji Nam: Got it. That’s super helpful. And then just on, the SciBase collaboration, and apologies if you guys have discussed this previously, but they seem to have a product for melanoma as well. And was curious if there are opportunities for collaboration for melanoma going forward or if that’s part of the partnership that you guys have announced earlier in the quarter.

Derek J. Maetzold: Okay. Thank you, Sung Ji. I think we discussed back when we announced the SciBase collaboration, was that a month ago? A month ago. A couple of areas. One is that SciBase developed 2, I guess, platforms or boxes, you could call it, for the electrical impedance spectroscopy technology. One of them is a sort of a desktop-based unit with a probe that’s attached to a flexible wand. The other one is a small pen device. Our focus is really on developing the small portable pen device that would be used by a patient, for example, as opposed to being an office where that desktop unit sits and focusing more on newer indications like atopic dermatitis, flare, et cetera. So we do not fold in the current desktop melanoma test into this initial collaboration, but it’s certainly something as we go forward that we’ll be jointly evaluating and saying if there is the right time for that to have Castle collaborate with that in the U.S., that’s great.

If not, we can let it go along from a parallel structure standpoint.

Operator: We currently have no further questions. So I’d just like to hand back to Derek for any further remarks.

Derek J. Maetzold: This concludes our second quarter 2025 earnings call. Thank you again for joining us today and for your continued interest in Castle Biosciences.

Operator: As we conclude today’s call, we’d like to thank everyone for joining. You may now disconnect your lines.