CareDx, Inc. — Q2 2023 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2023. Unaudited results; amounts below are in millions unless noted.
Business context
CareDx provides transplant diagnostic testing, products and patient and digital solutions. Testing services include AlloSure and AlloMap assays. Medicare billing-policy changes affecting key tests were the principal driver of lower testing revenue and total revenue in the quarter.
Financial results and liquidity
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Total revenue | $70.3 | $80.6 | $147.6 | $160.1 |
| Testing services revenue | $53.4 | $67.1 | $115.2 | $133.6 |
| Product revenue | $7.9 | $6.7 | $14.7 | $13.5 |
| Patient and digital solutions revenue | $9.0 | $6.8 | $17.6 | $13.0 |
| Operating loss | ($27.6) | ($21.7) | ($51.9) | ($40.8) |
| Net loss | ($25.0) | ($21.7) | ($48.7) | ($41.3) |
| Net loss per share | ($0.46) | ($0.41) | ($0.91) | ($0.78) |
- Q2 total revenue declined 13% year over year; testing services fell 20%, while product revenue rose 17% and patient and digital solutions revenue rose 33%.
- Using reported revenue less the three reported cost-of-revenue categories, gross margin was approximately 63% in Q2 2023 versus 66% in Q2 2022, and approximately 65% versus 66% for the six-month periods.
- Operating expenses were $97.9 million in Q2, down from $102.4 million. Lower R&D and sales and marketing costs were offset in part by higher G&A expense and $0.8 million of restructuring costs.
- Six-month operating cash flow was positive $0.2 million, compared with $25.3 million used in the prior-year period. Investing activities provided $0.6 million; financing activities used $2.7 million. Cash, cash equivalents and restricted cash declined $2.1 million during the period.
- At June 30, cash and cash equivalents were $87.8 million and marketable securities were $194.9 million. The company reported $282.7 million of cash, cash equivalents and marketable securities and no debt. Current assets were $360.8 million versus current liabilities of $74.5 million.
- Accumulated deficit was $509.9 million. The company states existing cash and expected operating cash flows should meet anticipated requirements for the next 12 months, while noting it may need financing in the future.
Material changes and operating developments
- Revised MolDX billing requirements disrupted Medicare submissions and AlloSure Kidney volumes. CareDx paused submissions for certain kidney tests in March, initially withholding recognition of approximately $8.9 million for about 3,200 tests. After submitting claims, it received payment and recognized approximately $7.8 million in Q2 for about 2,800 tests.
- Some AlloSure Kidney claims with service dates after March 31 remained unbilled pending additional ordering-physician information. Management said eligible tests would be billed and revenue recognized when supplementation is complete.
- CareDx reported approximately 37,500 AlloMap and AlloSure patient test results in Q2, down about 17% year over year. It said adoption of updated test requisition forms exceeded 80% by the end of June.
- Medicare accounted for approximately 44% of Q2 revenue, versus 54% a year earlier; for the six-month periods, the shares were 43% and 54%. The filing separately states Medicare represented 58% of Q2 testing-services revenue for AlloMap Heart, AlloSure Kidney and AlloSure Heart.
- CareDx received Medicare coverage for HeartCare effective April 1, 2023, subject to limitations, and for AlloSure Lung effective May 9, 2023. The company also acquired HLA Data Systems in January 2023.
Outlook, risks and unusual items
- The filing does not provide a current numerical 2023 revenue or earnings forecast. It refers to the company’s prior decision to withdraw fiscal 2023 revenue guidance. Management expects AlloSure Kidney revenue in 2023 to be materially lower than in prior periods due to billing changes.
- CareDx disputes its interpretation of MolDX’s billing articles and says Noridian had not adopted them as of the filing. The company cautions that Medicare claims submitted for certain tests may be denied or subject to repayment, and that future coverage, reimbursement rates and audit outcomes could materially affect revenue and cash flow. A UPIC review was underway.
- The company reported ongoing DOJ and SEC investigations concerning business practices and accounting/public reporting, and additional state regulatory inquiries. It said it was cooperating and could not predict the outcomes.
- In litigation with Natera, a court in July 2023 upheld the jury’s false-advertising verdict for CareDx but did not uphold the jury’s $44.9 million damages award; CareDx said it intended to appeal. An injunction against Natera was issued in August 2023. Separate Natera patent claims against CareDx remained in discovery.
- A securities class action and consolidated derivative actions remained pending; the derivative actions were stayed. CareDx reported no liabilities for these suits. It also had a separate dispute with its D&O insurers over coverage of investigatory-response costs.
- Disclosure controls and procedures were deemed ineffective as of June 30, 2023 because of previously identified material weaknesses involving IT general controls, purchase-order approvals and the COSO control framework. Remediation was ongoing; management said the weaknesses were not yet remediated.
- In January 2023, CareDx announced restructuring that includes closing its Fremantle, Australia operations, expected by June 2024. In May, it announced a U.S. workforce reduction. Q2 restructuring expense was $0.8 million.
- Subsequent events included a July 2023 settlement of the Cibiltech obligation and an investment in a private entity continuing Cibiltech’s iBox activity. CareDx also acquired MediGO in July; purchase-price allocation was not yet complete.
- A $50 million share-repurchase program remained in place, with $48.6 million available at June 30. The company also filed a universal shelf registration statement in May that permits potential future securities offerings.
Important facts for investors to verify
- Whether Noridian adopts or clarifies the revised billing requirements, and the resulting effect on test eligibility, volumes, claims collections and Medicare revenue.
- How much of the approximately $8.9 million of previously withheld March-test revenue was ultimately collected, and the status and collectability of later unbilled claims.
- Results of the UPIC review, DOJ and SEC investigations, and outstanding securities, patent and insurance litigation.
- Progress in remediating internal-control material weaknesses and whether controls are tested and found effective.
- Cash use, operating-loss trends, financing needs and integration costs or performance related to acquisitions, including MediGO.