CareDx, Inc. — Q2 2018 Form 10-Q
Reporting period: Three and six months ended June 30, 2018; unaudited. CareDx develops transplant diagnostics, including AlloMap and AlloSure testing services and pre-transplant products. Unless otherwise noted, amounts are in millions of dollars.
Financial results
| Metric | Q2 2018 | Q2 2017 | First half 2018 | First half 2017 |
|---|---|---|---|---|
| Revenue | $17.8 | $12.0 | $31.9 | $23.6 |
| Operating loss | $(5.2) | $(3.6) | $(10.4) | $(12.1) |
| Net loss attributable to CareDx | $(14.1) | $(4.0) | $(23.0) | $(9.5) |
| Basic and diluted loss per share | $(0.40) | $(0.19) | $(0.71) | $(0.45) |
| Cash used in operating activities | Not separately stated | Not separately stated | $(6.4) | $(9.9) |
Q2 revenue increased 48% year over year. Testing-services revenue rose 66% to $14.0 million, while product revenue increased 5% to $3.6 million. License and other revenue was $0.3 million. Calculated gross margin—revenue less testing and product costs—was approximately 59.6% in Q2 2018 versus 56.9% in Q2 2017, and 57.4% for the first half versus 55.3% a year earlier.
Q2 operating expenses were $23.0 million, up from $15.6 million. Sales and marketing rose to $5.9 million, primarily reflecting additional personnel and event costs; general and administrative expense was $5.6 million. The operating loss widened despite higher revenue. First-half operating loss narrowed, but net loss increased substantially, mainly reflecting fair-value remeasurement charges and the JGB debt conversion loss.
Balance sheet, debt and liquidity
- At June 30, cash and cash equivalents were $16.2 million, restricted cash was $0.2 million, and total assets were $79.9 million. Cash, cash equivalents and restricted cash together declined $10.1 million from year-end 2017.
- Current assets were $30.6 million and current liabilities $14.2 million; no debt was classified as current. Stockholders’ equity was $29.0 million, compared with a $6.0 million deficit at December 31, 2017.
- Debt carrying value, net of discount, was $13.3 million; contractual principal was $15.0 million, with maturities in 2021–2023. The Perceptive loan bears interest at 9% plus the greater of one-month LIBOR or 1.5%, with interest-only payments until 2021. It is secured by substantially all company assets and has financial and restrictive covenants. CareDx reported compliance at quarter-end.
- First-half investing cash outflow was $6.4 million, including $5.2 million for Illumina-related acquired intangibles and $0.7 million to acquire Allenex minority interests. Financing provided $2.8 million.
Material developments and comparisons
- AlloSure, launched in October 2017, drove much of the testing-services growth. In Q2, CareDx reported 2,300 AlloSure and 4,132 AlloMap test results; first-half volumes were 3,351 and 7,979, respectively. By June 30, AlloSure had been ordered by 76 U.S. kidney transplant centers.
- Medicare reimbursement for AlloMap increased 14% to $3,240 in 2018. AlloSure had a Medicare reimbursement rate of $2,841; the filing reported private-payer payments case by case, with no positive coverage decisions at the time.
- On April 17, CareDx obtained a $15.0 million Perceptive term loan, with an optional additional $10.0 million tranche subject to conditions, and repaid the Danske and Allenex-related debt. JGB’s remaining debt and accrued interest converted into 6.16 million common shares in the first quarter; the conversion generated a $2.8 million loss.
- CareDx’s May Illumina agreement granted worldwide distribution, development and commercialization rights for transplant NGS products. The company paid $5.0 million initially and accepted royalty obligations and minimum purchase commitments through 2023. It became exclusive worldwide distributor of TruSight HLA products in June.
- CareDx adopted ASC 606 on January 1, 2018. The adoption added $2.9 million to opening accounts receivable and retained earnings; reported first-half revenue included a $0.5 million favorable impact versus the prior method.
Outlook, risks and unusual items
Management stated that existing cash and expected revenues should meet anticipated cash requirements for at least the next 12 months, while noting that additional financing may be needed and cannot be assured on favorable terms or at all. No specific revenue or earnings guidance was provided.
- CareDx has a history of significant losses and negative operating cash flows, and an accumulated deficit of $288.1 million at June 30.
- Q2 net loss included an $8.8 million expense from changes in fair value of warrant and derivative liabilities. These Level 3 valuations depend on assumptions, including share price and volatility; such noncash remeasurement can make reported earnings volatile.
- Medicare represented approximately 45% of first-half revenue, up from 28% in the comparable 2017 period. Revenue therefore remains exposed to reimbursement policy, collections and payer coverage decisions.
- The Illumina agreement carries development and commercialization obligations, potential loss of exclusivity if milestones are missed, royalties, and minimum purchase commitments. The Perceptive agreement also restricts certain corporate and financing actions.
- Management reported no material change to previously disclosed risk factors other than the newly described Perceptive covenant and Illumina agreement risks. It stated disclosure controls were effective and that no material litigation was pending, while acknowledging legal outcomes are uncertain.
Investor facts to verify
- AlloSure test growth, reimbursement realization, collections and progress toward broader private-payer coverage.
- Whether operating cash use and revenue growth support management’s stated 12-month liquidity expectation.
- Perceptive covenant compliance, interest burden, maturity schedule and conditions for drawing the optional $10.0 million tranche.
- Illumina product commercialization progress, milestone performance, royalties and purchase commitments.
- Effects of warrant-liability remeasurement, stock-based compensation and share issuance on reported losses and dilution; 35.98 million shares were outstanding at June 30 and 36.35 million at August 6, 2018.