Business context and reporting period
Castle Biosciences, Inc. is a commercial-stage diagnostics company whose laboratory-developed tests provide diagnostic and prognostic information, primarily for skin cancers, uveal melanoma and Barrett’s esophagus. This Form 10-K covers the fiscal year ended December 31, 2021; the financial comparisons below are full-year 2021 versus 2020, not standalone fourth-quarter results.
Revenue was led by DecisionDx-Melanoma. The company expanded its portfolio through the May 2021 acquisition of Myriad myPath Laboratory and the December 2021 acquisition of Cernostics, adding myPath Melanoma and TissueCypher, respectively. It also launched development of a test intended to predict response to systemic therapy for inflammatory skin diseases.
Financial results and liquidity
| Metric | 2021 | 2020 |
|---|---|---|
| Net revenue | $94.1 million | $62.6 million |
| Gross margin | $76.3 million; 81.1% | $53.0 million; 84.5% |
| Operating loss | $40.1 million | $6.5 million |
| Net loss | $31.3 million; $1.24 per share | $10.3 million; $0.54 per share |
| Cash from (used in) operations | $(19.0) million | $9.9 million |
| Cash and cash equivalents at year-end | $329.6 million | $409.9 million |
Revenue increased 50.2%. Total test reports rose to 28,118 from 18,185; DecisionDx-Melanoma reports increased 25.2%, and dermatologic test reports increased 57.8%. Dermatologic revenue was $85.8 million; other revenue, primarily DecisionDx-UM, was $8.3 million.
Gross-margin percentage declined 3.4 percentage points, reflecting acquired-intangible amortization and higher operating investment. Research and development expense increased 123.6% to $29.6 million; selling, general and administrative expense increased 80.2% to $86.7 million. Stock-based compensation rose to $21.7 million from $8.3 million.
Cash used in investing activities was $66.7 million, including $63.2 million for the two acquisitions and $3.5 million in property and equipment purchases. Cash provided by financing was $5.4 million. The company reported no term debt at year-end; its term loan was repaid in December 2020. Year-end current assets were $353.7 million and current liabilities $24.9 million. Total liabilities were $50.8 million, including lease liabilities and $18.3 million of contingent consideration.
Net loss included an $8.7 million income tax benefit, primarily from reducing the valuation allowance after the Cernostics acquisition. Revenue included $3.3 million of favorable adjustments for tests delivered in prior periods, versus $0.2 million in 2020. The company reported an accumulated deficit of $93.8 million.
Material changes, outlook and commentary
- 2021 revenue growth reflected higher DecisionDx-Melanoma volume and per-test revenue following expanded Medicare coverage, launches and acquisitions, and a higher Medicare rate for DecisionDx-UM.
- The company paid $32.5 million for Myriad myPath Laboratory and $30.7 million upfront for Cernostics. Cernostics consideration includes up to $50 million in additional cash or stock, at the company’s option, tied to 2022 commercial milestones; the recorded fair-value liability was $18.3 million at year-end.
- Management said existing cash and anticipated product revenue should fund operations for the next 12 months and into the foreseeable future, but noted estimates depend on assumptions and there is no committed external funding source. No specific financial revenue or earnings guidance is provided in the filing.
- Management expected to launch the inflammatory-skin-disease test by the end of 2025, subject to development and validation. A prospective, multicenter study was initiated, with 4,800 planned patients. The company also described plans to develop additional pipeline tests.
- COVID-19 disrupted patient visits, diagnoses and commercial outreach. DecisionDx-Melanoma reports rebounded in the second through fourth quarters of 2021 versus the corresponding 2020 quarters, but management said U.S. melanoma diagnoses remained about 11% below 2019 levels.
- Revenue remains concentrated in a small number of payors: Medicare represented 57%, Medicare Advantage 28%, and BlueCross BlueShield plans 7% of 2021 revenue. Reimbursement, collections and revenue estimates are uncertain; revenue recognition uses variable-consideration estimates and may fluctuate.
- An unresolved Medicare appeal concerns 2,698 DecisionDx-Melanoma claims from 2013 through spring 2017. An administrative decision denied payment; the company appealed and has recognized no revenue for those claims.
- Key risks include dependence on DecisionDx-Melanoma, limited or changing payor coverage, possible regulatory changes to oversight of laboratory-developed tests, COVID-19 effects, product adoption and clinical validation, acquisition integration, supplier concentration, and privacy, cybersecurity and laboratory-operational risks.
The company reported that management and its auditor concluded internal control over financial reporting was effective as of year-end; the auditor issued unqualified opinions on the financial statements and internal controls. The Cernostics acquisition was excluded from the internal-control assessment during its first year.
Important facts for investors to verify
- Whether test-report growth and reimbursement gains translate into sustainable revenue and improved operating cash flow, given the 2021 operating cash outflow and widening net loss.
- How much revenue and receivables depend on Medicare, Medicare Advantage and BlueCross BlueShield, and whether coverage or reimbursement policies change.
- The status and potential financial outcome of the appeal involving 2,698 historical Medicare claims, and the effect of future variable-consideration adjustments.
- Progress integrating the acquisitions, TissueCypher commercialization, and the Cernostics milestone terms, including any payment of up to $50 million.
- Whether the inflammatory-skin test meets study and validation milestones and remains on the stated end-of-2025 launch timetable.
- Whether cash resources remain adequate as research, sales, staffing and acquisition-related spending increase; also monitor dilution from equity awards and any future financing.