CareDx, Inc. — Q3 2014 Form 10-Q
Reporting period: Three and nine months ended September 30, 2014. CareDx is a commercial-stage diagnostics company whose principal product is AlloMap, a blood test used to monitor heart transplant recipients for acute cellular rejection. Unless otherwise stated, financial amounts below are in U.S. dollars.
Financial performance
| Metric | Q3 2014 | Q3 2013 | Nine months 2014 | Nine months 2013 |
|---|---|---|---|---|
| Revenue | $6.65 million | $5.81 million | $19.35 million | $16.24 million |
| Operating income (loss) | $1.39 million | ($0.33 million) | $0.82 million | ($1.37 million) |
| Net income (loss) | $1.21 million | ($0.83 million) | $0.79 million | ($2.98 million) |
| Operating cash flow | Not separately provided | Not separately provided | ($2.63 million) | $0.37 million |
- Testing revenue was $6.60 million in Q3 and $19.15 million for the nine months; collaboration and license revenue was comparatively small.
- AlloMap test results delivered rose 15% in Q3 to approximately 3,000, and 21% for the nine months to approximately 8,800.
- Cost of testing was $1.77 million in Q3 and $6.34 million for the nine months. Gross margin, calculated as revenue less cost of testing, was approximately 73% and 67%, respectively; both periods benefited from a Roche royalty settlement credit.
- Q3 operating income included a $1.276 million credit from a decrease in the estimated fair value of contingent consideration related to the ImmuMetrix acquisition. Nine-month net income included a $1.5 million noncash tax benefit tied to that acquisition.
- At September 30, cash and cash equivalents were $39.05 million, versus $5.13 million at year-end 2013. Current assets were $42.01 million and current liabilities $11.12 million. Total debt was approximately $12.73 million, including current and long-term debt; management reported $12.9 million including capital lease obligations.
Material changes and notable events
- Revenue increased 15% in Q3 and 19% for the nine-month period year over year, primarily from higher AlloMap test volume and collections. Collaboration and license revenue declined.
- CareDx completed its IPO in July 2014 and a partial underwriters’ over-allotment in August, receiving $35.5 million in net proceeds. Preferred stock and a $5 million subordinated convertible note converted into common stock.
- CareDx acquired ImmuMetrix in June 2014 for an estimated purchase price of $17.2 million, primarily in preferred stock, plus $0.6 million cash. The deal added cell-free DNA (cfDNA) transplant-diagnostics technology and related intellectual property. Up to 227,845 additional shares are contingent on completing 2,500 qualifying commercial tests by June 2020.
- In September, CareDx settled its royalty dispute with Roche and paid $2.827 million for past royalties through June 2014. The agreement reduced the royalty-bearing percentage through September 2017; subject to timely payments, no further royalties are due after September 30, 2017.
- CareDx and LabCorp terminated their lupus-test collaboration. On delivery of specified samples and data, LabCorp is to pay $500,000; the company expected to recognize that fee and $611,000 of deferred license revenue in Q4 2014.
Liquidity, outlook, risks, and controls
- Management expected cash, cash equivalents, and projected AlloMap receipts to fund operations for at least the next 18 months. The estimate is forward-looking and may prove inaccurate. IPO proceeds are intended for research and development, commercial activities, working capital, and general corporate purposes; no specific acquisition commitment was reported.
- Management expects research and development spending to rise as it develops transplant surveillance tests, including cfDNA applications, and conducts clinical studies. Public-company and business-growth costs may also increase. No quantified revenue or earnings guidance was provided.
- Revenue and collections depend on payer coverage, reimbursement decisions, appeals, and collection history. The filing states that a significant share of revenue is recognized when cash is received; some claims may take over a year to generate revenue, or may never be collected. Medicare represented 50% of nine-month revenue and 63% of accounts receivable at quarter-end.
- Debt covenants were reported as satisfied. The company disclosed no off-balance-sheet arrangements and no material changes to previously disclosed risk factors.
- Management concluded disclosure controls were effective, but disclosed a material weakness in internal controls over financial reporting related to complex acquisition accounting for ImmuMetrix. Remediation steps were underway; successful remediation was not assured.
Important facts for investors to verify
- Whether AlloMap volume growth translates into sustained reimbursement, collections, and revenue growth, particularly given payer concentration and cash-basis revenue recognition.
- The recurring cost of Roche royalties after the settlement period and the effect of its revised royalty terms on testing margins.
- Progress, development costs, regulatory and clinical milestones, and commercial prospects for the acquired cfDNA technology; the contingent share issuance depends on qualifying test volume.
- Whether the company’s stated cash runway remains achievable as operating cash use, research spending, debt service, and commercialization needs evolve.
- Remediation and independent verification of the material weakness in acquisition-accounting controls.