Castle Biosciences, Inc. — Q1 2023 Form 10-Q
Business context and reporting period. Commercial-stage diagnostics company reporting the three months ended March 31, 2023, compared with Q1 2022. Revenue is primarily generated by dermatologic tests, particularly DecisionDx-Melanoma. Q1 2023 includes IDgenetix, acquired with AltheaDx in April 2022; it was not included in Q1 2022 reported results.
Key financial metrics
| Metric | Q1 2023 | Q1 2022 |
|---|---|---|
| Net revenue | $42.0 million | $26.9 million |
| Gross margin | $29.6 million; 70.5% | $19.3 million; 71.7% |
| Operating loss | $31.5 million | $24.5 million |
| Net loss | $29.2 million | $24.6 million |
| Loss per share, diluted | $1.10 | $0.97 |
| Cash used in operating activities | $25.4 million | $21.4 million |
At March 31, 2023, cash and cash equivalents were $114.8 million and marketable securities were $117.2 million, totaling $232.1 million in these liquid resources, versus $258.6 million at year-end 2022. Current assets were $271.1 million and current liabilities $30.1 million. The company reported no bank debt; it has lease liabilities and finance-lease obligations. Stockholders’ equity was $385.1 million, and accumulated deficit was $190.1 million.
Material changes versus Q1 2022
- Revenue increased 56.6% to $42.0 million. Dermatologic revenue rose to $35.9 million from $24.3 million; non-dermatologic revenue rose to $6.1 million from $2.5 million.
- Total test reports delivered increased 72.9% to 14,916. Dermatologic report volume rose 35.2%; growth reflected DecisionDx-Melanoma and DecisionDx-SCC, increased TissueCypher activity, and IDgenetix.
- Operating expenses increased 43.2% to $73.6 million, including SG&A up 53.6% to $46.8 million and R&D up 33.8% to $14.4 million. Stock-based compensation rose to $13.5 million from $8.4 million.
- Gross margin percentage declined 1.2 percentage points to 70.5%, which management attributed to higher laboratory personnel costs, increased acquired-intangible amortization and prior-period revenue adjustments.
- Net loss widened by $4.6 million. Higher interest income, $2.3 million versus $0.03 million, partly offset increased operating costs. Q1 2023 included $1.3 million of net negative prior-period revenue adjustments, compared with $0.6 million of net positive adjustments in Q1 2022.
Outlook, commentary and risks
- Management expects existing cash, marketable securities and anticipated product-sale cash generation to fund operations for at least 12 months following issuance of the financial statements. This depends on assumptions that may not prove accurate; no committed external funding source is in place.
- The company expects expenses to increase as it expands commercialization, laboratory capacity and R&D. A new expanded Pittsburgh laboratory was expected to begin operations in Q2 2023. Management also expects material future stock-based compensation expense.
- Q1 operating cash use included $17.7 million of annual bonus and certain healthcare-benefit payments, which management said were not expected to recur during the remainder of 2023. Investing cash inflow of $16.6 million primarily reflected net maturities of marketable securities.
- Reimbursement is a key uncertainty: Medicare accounted for 49% of Q1 2023 revenue. CMS’s April 2023 preliminary gapfill rates were $1,950 per DiffDx-Melanoma test and $3,159 per DecisionDx-SCC test; final rates remained uncertain. Management had suspended the DiffDx-Melanoma clinical offering in February 2023.
- IDgenetix Medicare billing shifted in March 2023 to a different generic CPT code, contractor-priced at $917 while undergoing gapfill pricing, versus approximately $1,500 previously. The company disputes that the new code appropriately describes the test.
- AltheaDx’s 2022 commercial milestones were not met. Up to $57.5 million of potential 2023–2024 earnout payments remained possible, including a 2023 catch-up component; the contingent-consideration fair value was zero at March 31, 2023, and no amount was then due based on milestones achieved to date.
- Other notable risks include continued losses and negative operating cash flow; dependence on a limited number of payors and dermatologic products; reimbursement, coverage and revenue-estimation uncertainty; regulatory changes affecting laboratory-developed tests; clinical and product-development execution; supply, staffing and macroeconomic pressures; and risks to laboratory operations and sensitive data. Management reported no litigation expected to have a material adverse effect and concluded disclosure controls were effective.
Important facts for investors to verify
- Whether test-report growth converts into collected revenue, particularly given variable consideration and payer concentration.
- Final CMS gapfill rates and coverage developments for DecisionDx-SCC and DiffDx-Melanoma, and the financial effect of IDgenetix’s CPT-code change.
- Progress in expanding laboratory and commercial capacity, associated operating costs, and whether gross margins stabilize or improve.
- Cash-burn trajectory, management’s liquidity assumptions, and any changes to potential AltheaDx earnout obligations or lease commitments.
- Clinical evidence, adoption and reimbursement progress for current tests and pipeline programs, including the IDENTITY study.