Castle Biosciences, Inc. — Q3 2022 Form 10-Q
Reporting period: Three and nine months ended September 30, 2022; unaudited. Castle is a commercial-stage diagnostics company whose revenue is primarily from dermatologic testing, particularly DecisionDx-Melanoma. It expanded its portfolio through the April 2022 acquisition of AltheaDx, which markets the IDgenetix mental-health pharmacogenomic test.
Financial results
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Revenue | $37.0 million | $23.5 million | $98.7 million | $69.0 million |
| Gross margin | 69.8% | 77.9% | 71.1% | 82.4% |
| Operating loss | $21.5 million | $11.8 million | $50.0 million | $24.9 million |
| Net loss | $20.2 million | $11.8 million | $46.5 million | $24.9 million |
| Loss per share, diluted | $0.77 | $0.47 | $1.79 | $0.99 |
| Operating cash used | Not provided for quarter | Not provided for quarter | $35.7 million | $16.2 million |
- Q3 revenue increased 57.7% year over year; nine-month revenue increased 42.9%. Dermatologic revenue was $33.9 million in Q3 and $90.2 million for the nine months.
- Dermatologic test reports rose 33.6% in Q3 and 46.4% for the nine-month period year over year. Management attributed growth mainly to DecisionDx-Melanoma and DecisionDx-SCC volumes, expanded commercial activity, and improved patient flow.
- Gross margin fell as costs of sales and acquired-intangible amortization grew faster than revenue. Management cited laboratory hiring and pay, supplies and services, and acquisition-related amortization.
- Operating expenses included $9.2 million of stock-based compensation in Q3 and $26.4 million for the nine months. Nine-month results also included a $18.0 million gain from reduced contingent consideration fair value; this noncash gain offset expenses.
Financial position and liquidity
- At September 30, 2022, cash and cash equivalents were $134.2 million and marketable securities were $131.8 million, versus cash of $329.6 million and no marketable securities at December 31, 2021. The securities were investment-grade U.S. government obligations with maturities of one year or less.
- Current assets were $299.4 million and current liabilities $31.9 million. Total liabilities were $46.4 million; the filing reports no outstanding term debt, noting the prior credit facility was repaid in 2020.
- Nine-month cash used in investing activities was $162.1 million, primarily purchases of marketable securities, the AltheaDx acquisition, and capital expenditures. Cash declined by $195.5 million to $134.2 million over the period.
- Management said available cash, marketable securities, and expected product cash generation should fund operations for at least the next 12 months. The company has no committed external funding source. Operating lease payment obligations totaled approximately $23.6 million through 2033.
Material changes, outlook, and risks
- AltheaDx was acquired for approximately $49.1 million in cash, stock, and contingent consideration. Its post-acquisition revenue was not material, and it contributed an approximately $8.2 million loss. Up to $75 million of additional earnout consideration may be payable, subject to milestones. The acquisition also resulted in stock issuance and higher intangible assets and amortization.
- Revenue remains dependent on third-party reimbursement and concentrated payors: Medicare represented 52% and Medicare Advantage plans 33% of nine-month 2022 revenue. Revenue estimates can change with collections, coverage decisions, and appeals.
- Management expects near-term gross margin to remain lower than prior periods as it expands laboratory capacity and staff ahead of anticipated test growth. It expects continued investment in commercialization, clinical evidence, research and development, and new products; no specific revenue or earnings guidance is provided.
- Reimbursement uncertainties include pending coverage decisions for DiffDx-Melanoma and DecisionDx-SCC, and draft 2023 reimbursement rates for both tests that would crosswalk to the MyPath Melanoma rate. A proposed Novitas oncology biomarker policy could exclude DecisionDx-SCC if finalized as proposed. Management anticipated a final 2023 DecisionDx-SCC rate determination in Q4 2022 and expected a DiffDx-Melanoma coverage decision by Q2 2023; these were expectations, not guarantees.
- Management was assessing Hurricane Ian’s potential impact on Florida test volumes and Q4 results. It also cited inflation, labor costs, macroeconomic uncertainty, COVID-19 disruptions, and possible supply constraints as risks.
- Other material risks include continuing losses, uncertain path to profitability, dependence on DecisionDx-Melanoma, regulatory changes affecting laboratory-developed tests, clinical-development uncertainty, and potential need for additional capital. The AltheaDx acquisition involved related-party interests; the filing says an independent special committee recommended the transaction.
Important facts for investors to verify
- Whether test-report growth converts into collected revenue and cash, given variable consideration and reimbursement delays.
- Final Medicare coverage and payment outcomes for DecisionDx-SCC and DiffDx-Melanoma, including the impact of proposed policies and rates.
- Progress integrating and commercializing AltheaDx and TissueCypher, associated operating losses, and potential earnout payments.
- Cash burn, future spending and gross-margin trends against management’s stated liquidity runway.
- Potential dilution from equity compensation and acquisition earnouts; shares outstanding were 26.35 million at September 30, 2022.