Castle Biosciences, Inc. — Q1 2021 Form 10-Q
Reporting period: Three months ended March 31, 2021; comparison is with Q1 2020. Castle Biosciences is a commercial-stage dermatological cancer diagnostics company. Its revenue primarily comes from DecisionDx-Melanoma and DecisionDx-UM; DecisionDx-SCC and DecisionDx DiffDx-Melanoma were recently launched.
Key financial metrics
| Metric | Q1 2021 | Q1 2020 | Change |
|---|---|---|---|
| Revenue | $22.813 million | $17.418 million | +31.0% |
| Gross margin | $19.785 million; 86.7% | $15.027 million; 86.3% | +31.7% in dollars |
| Research and development expense | $5.908 million | $2.913 million | +102.8% |
| Selling, general and administrative expense | $18.161 million | $11.078 million | +63.9% |
| Operating income (loss) | ($4.284 million) | $1.036 million | Declined $5.320 million |
| Net income (loss) | ($4.280 million) | $0.570 million | Declined $4.850 million |
| Operating cash flow | ($3.631 million) | ($0.251 million) | Higher cash use |
| Cash and cash equivalents, period end | $406.981 million | $409.852 million at Dec. 31, 2020 | Down $2.871 million |
At March 31, 2021, total assets were $437.332 million, total liabilities $18.745 million, and stockholders’ equity $418.587 million. The filing reports no outstanding debt; the company repaid its debt in December 2020. A CMS Medicare advance payment remained recorded as a liability: $8.350 million in total, comprising $8.178 million current and $0.172 million noncurrent. Current assets were $426.670 million versus current liabilities of $17.578 million.
Changes versus the prior comparable period
- Revenue increased despite fewer reports for the two principal established tests: DecisionDx-Melanoma reports declined 11.2% year over year, and combined DecisionDx-Melanoma and DecisionDx-UM reports declined 10.9%. Total reports across the four tests were 5,142 versus 4,935, including contributions from the two tests launched in 2020.
- Management attributed revenue growth primarily to higher positive adjustments for prior-period tests and higher per-test revenue, including the expanded Medicare coverage policy for DecisionDx-Melanoma and the higher 2021 Medicare rate for DecisionDx-UM. Positive prior-period revenue adjustments were $5.335 million, compared with $3.160 million.
- Operating expenses grew substantially, reflecting increased headcount, clinical-study activity, commercial expansion, and higher stock-based compensation. Stock-based compensation rose to $4.913 million from $1.577 million.
- Interest expense fell to zero from $0.764 million following repayment of debt; interest income declined to $0.004 million from $0.298 million, primarily due to lower interest rates.
Outlook, commentary, and risks
- Liquidity and spending: Management believes cash, cash equivalents, and anticipated product-sale cash generation will fund operations for the foreseeable future. It expects expenses to increase as it expands commercialization, research and development, clinical studies, and public-company operations. No specific revenue or earnings guidance was provided.
- COVID-19: The company reported uninterrupted laboratory operations and normal report turnaround times, but said delayed or canceled patient visits and reduced physician access had weighed on testing volume. DecisionDx-Melanoma orders increased about 30% in March versus January 2021 and continued rising in April; management cautioned that future effects remain uncertain.
- Reimbursement and revenue variability: Medicare and a small number of other payors are significant revenue sources. Revenue estimates include variable consideration and can be affected by collections, coverage decisions, appeals, reimbursement rates, and adjustments relating to prior periods. Newer tests were being recognized based on cash collections pending reimbursement experience.
- Claims and contingencies: OMHA denied payment on a consolidated group of 2,698 DecisionDx-Melanoma claims in March 2020. Castle appealed and had recognized no revenue for those claims pending the outcome. Management stated that no pending or threatened litigation was expected to have a material adverse effect.
- Acquisition: After quarter-end, Castle agreed to acquire Myriad myPath Laboratory for $32.5 million in cash, with closing expected in late May 2021 subject to customary conditions. The acquisition was not completed as of the filing date.
- Development plans: In May 2021, the company announced a pipeline initiative for a test intended to predict systemic-therapy response in certain inflammatory skin conditions. It had begun a 4,800-patient study and expected to launch the test by the end of 2025, subject to development and validation.
Important facts for investors to verify
- Whether growth in orders and newly launched tests translates into delivered reports, durable revenue growth, and improved profitability, given the decline in established-test volumes.
- How much future revenue depends on prior-period collection adjustments, and whether those adjustments are repeatable or volatile.
- Progress on commercial and Medicare coverage for DecisionDx-SCC and DecisionDx DiffDx-Melanoma, and the effect of reimbursement changes for existing tests.
- The outcome and potential financial impact of the appeal involving the 2,698 denied Medicare claims, and the timing and cash-flow effects of CMS recouping the Medicare advance payment.
- Whether the $32.5 million Myriad myPath acquisition closes as expected and can be integrated and commercialized effectively.
- The pace and costs of hiring, clinical studies, stock-based compensation, and other investment, compared with available cash and management’s “foreseeable future” liquidity assessment.