CareDx, Inc. — Q3 2018 Form 10-Q
Reporting period: Three and nine months ended September 30, 2018. Financial statements are unaudited. CareDx is a transplant diagnostics company selling AlloMap and AlloSure testing services and pre-transplant HLA products.
Financial performance
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Revenue | $21.2m | $12.2m | $53.1m | $35.8m |
| Operating loss | $2.7m | $3.9m | $13.2m | $16.0m |
| Net loss attributable to CareDx | $20.0m | $14.3m | $43.0m | $23.8m |
| Net loss per share, basic and diluted | $0.54 | $0.63 | $1.26 | $1.09 |
- Q3 revenue rose 74% year over year; nine-month revenue rose 48%. Testing services drove growth: Q3 testing revenue was $16.8m, up 106%, and nine-month testing revenue was $41.4m, up 69%. Product revenue was $4.2m in Q3 and $11.1m year to date.
- Management attributed testing growth principally to AlloSure, launched in October 2017, increased AlloMap test volume, and the higher 2018 Medicare reimbursement rate for AlloMap. Q3 included $0.3m of testing revenue from collections exceeding the opening ASC 606 adjustment; the nine-month ASC 606 revenue benefit was $0.8m.
- Calculated gross margin across testing and product revenue was approximately 57.5% in Q3 2018 versus 57.0% in Q3 2017, and 57.6% for the first nine months of 2018 versus 56.0% in 2017. Operating losses narrowed, but net losses increased, principally because of warrant and derivative fair-value charges.
- Q3 warrant and derivative revaluation expense was $17.1m; the nine-month charge was $24.5m. These noncash valuation changes materially affected reported net loss. Nine-month other expense also included a $2.8m loss on conversion of JGB debt.
Cash, debt and liquidity
- At September 30, 2018, cash and cash equivalents were $26.2m, total assets $91.4m, and stockholders’ equity $44.4m. Working capital was approximately $26.1m, based on reported current assets and current liabilities.
- For the first nine months, operating cash use was $6.0m, investing cash use $7.0m, and financing cash provided $13.0m. Cash, cash equivalents and restricted cash totaled $26.4m at period end, down $0.1m from year-end 2017.
- Debt had a net carrying value of $13.4m, all long-term; scheduled principal maturities total $15.0m, with the bulk due in 2023. The Perceptive loan bears interest at 9% plus the greater of one-month LIBOR or 1.5%; principal payments begin in April 2021. CareDx was in compliance with its financial covenants at quarter-end. An additional $10m tranche was available subject to conditions.
- The company said existing cash and expected revenue should fund anticipated cash needs for at least 12 months, while noting that additional financing may be needed and is not assured. It reported an accumulated deficit of $308.1m.
Material changes and business developments
- CareDx repaid prior lender and Allenex-related obligations in April and JGB debt converted into 6.16m common shares during Q1. Common shares outstanding rose to 38.8m at September 30 from 28.8m at December 31, 2017; 38.9m were outstanding as of November 5.
- Warrant exercises generated $11.0m of cash in the first nine months. Liability-classified warrants and their fair-value changes remain a source of earnings volatility.
- Under its May 2018 Illumina agreement, CareDx became exclusive worldwide distributor of TruSight HLA and obtained rights to develop and commercialize additional transplant NGS products. The agreement includes minimum product and raw-material purchase commitments through 2023, royalties on future commercialized products, and development and commercialization obligations.
- CareDx reorganized in Q3 and now reports as a single operating segment. It also initiated the SHORE heart-transplant registry; 40 centers had been initiated in the K-OAR kidney study by September 30.
Outlook, risks and contingencies
- No specific revenue or earnings guidance was provided. Management highlighted ongoing investment in commercial expansion, clinical studies, and product development. AlloSure had been ordered by 96 U.S. kidney transplant centers since launch; Q3 testing results included 3,708 AlloSure and 4,080 AlloMap results.
- Medicare represented approximately 47% of revenue for the first nine months of 2018, up from 27% in the prior-year period. AlloSure had Medicare reimbursement, but the filing reported no positive private-payer coverage decisions for it; coverage and collections remain important uncertainties.
- Key risks include continued operating losses, the possibility of needing additional capital, dilution from equity issuance, restrictive debt covenants, and execution of the Illumina agreement and its purchase commitments. The company disclosed no material change to its previously reported risk factors apart from the updates described in the filing.
- Management reported effective disclosure controls at the reasonable-assurance level and no material changes in internal control over financial reporting. It reported no material pending legal proceeding and no off-balance-sheet arrangements.
Important facts for investors to verify
- Whether AlloSure test volumes, reimbursement collections, and payer coverage continue to support testing-revenue growth; also verify the effect of ASC 606 estimates and collection timing.
- Cash burn, the stated 12-month liquidity outlook, Perceptive covenant compliance, interest costs, and the conditions for accessing the optional $10m tranche.
- The remaining warrant liability and its potential noncash earnings impact, alongside dilution from warrants, options, and share issuance.
- Progress toward Illumina product development and commercialization milestones, and the financial impact of minimum purchase commitments through 2023.
- Revenue concentration in Medicare and continued reimbursement rates for AlloMap and AlloSure.