CareDx, Inc. — Q3 2020 Form 10-Q
Reporting period: Three and nine months ended September 30, 2020; comparisons are with the corresponding 2019 periods unless stated otherwise. CareDx provides transplant diagnostic testing, products and digital solutions. Financial amounts below are in U.S. dollars.
Financial performance
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Total revenue | $53.4m | $33.8m | $133.6m | $91.2m |
| Testing services revenue | $45.5m | $28.2m | $113.3m | $75.4m |
| Product revenue | $5.4m | $4.2m | $13.4m | $13.2m |
| Digital and other revenue | $2.5m | $1.4m | $6.9m | $2.6m |
| Gross margin | 68.5% | 66.0% | 66.9% | 64.1% |
| Operating loss | $(2.9)m | $(6.7)m | $(19.5)m | $(19.0)m |
| Net loss | $(2.8)m | $(1.8)m | $(15.2)m | $(17.2)m |
| Basic and diluted loss per share | $(0.06) | $(0.04) | $(0.33) | $(0.41) |
Q3 revenue grew 58%, led by a 61% increase in testing services, which management attributed mainly to more than 8,500 additional AlloSure Kidney and AlloMap Heart results. Product sales rose 28% in the quarter but were nearly flat for the nine-month period. Digital revenue increased substantially, reflecting new software implementations and the OttrCare and XynManagement acquisitions. Testing services represented 85% of revenue in both 2020 periods.
Gross margins are calculated from reported revenue less costs of testing, product, and digital and other. Operating expenses rose to $56.3m in Q3 and $153.0m for the nine months, including higher R&D, sales and marketing, and G&A. Nine-month operating loss widened slightly despite revenue growth. Q3 net loss increased year over year, in part because Q3 2019 included a larger warrant-liability remeasurement gain. The nine-month net loss improved, including a $4.8m CARES Act Provider Relief Fund payment recorded as other income.
Cash, liquidity and capital
- Cash and cash equivalents were $213.8m at September 30, 2020, versus $38.2m at December 31, 2019. Total current assets were $258.7m and current liabilities $62.4m.
- Operating cash flow was $26.3m for the first nine months, compared with cash used of $1.7m in 2019. The 2020 amount included a $20.5m CMS advance payment recorded as deferred revenue; it is repayable through Medicare payment recoupments or repayment on demand under the stated program terms.
- Investing cash use was $9.9m, primarily capital expenditures and intangible-asset payments. Financing cash provided was $159.2m, including $134.7m net from a June public offering and $23.5m net from an April at-the-market offering.
- The company reported no debt outstanding. It had $18.4m of operating lease liabilities ($1.9m current and $16.5m non-current), in addition to the CMS advance obligation and other liabilities.
- Shares outstanding increased from 42.5m at year-end 2019 to 49.1m at September 30, 2020. Stock-based compensation was $17.4m for the nine months.
Material developments, outlook and risks
- COVID-19: Testing volumes slowed in late March and April as transplant visits declined, then returned to pre-pandemic levels and were at or above those levels from May through Q3, according to management. RemoTraC, a home blood-draw service, was available through more than 150 transplant centers, with over 5,000 patients enrolled. Product sales prospects were affected by reduced in-person customer discussions and demonstrations. Supply-chain, clinical-study, staffing and facility disruptions remained risks.
- Coverage and products: In October 2020, after quarter-end, AlloSure Heart received a final positive Medicare coverage decision when used with AlloMap Heart, effective November 2020. AlloSure Lung coverage was under review; private-payer coverage applications for AlloSure Heart, AlloMap Kidney and KidneyCare iBox had not been made as described in the filing. AlloSeq HCT launched in June 2020, and AlloCare launched in September.
- Liquidity outlook: Management stated existing cash and expected revenues should cover anticipated cash requirements for the next 12 months. The filing gives no specific revenue or earnings guidance and notes that further financing may be needed in the future.
- Revenue and reimbursement exposure: Medicare accounted for 58% of Q3 revenue and 56% for the nine-month period. Revenue depends on test volume, payer coverage, reimbursement and collections; AlloSure Kidney private-payer reimbursement was often case by case.
- Litigation: Natera asserted false-advertising and patent-infringement claims concerning AlloSure and sought injunctive and monetary relief. CareDx said it would defend the matters, but outcomes were uncertain; no liabilities were recorded for these suits.
- Other risks: CareDx relies on a single U.S. testing laboratory and disclosed no redundant U.S. facility. It also cited potential COVID-related operating and clinical-study interruptions, competition, reimbursement changes, supplier reliance, foreign-currency exposure, and cybersecurity and privacy risks.
Most important facts to verify
- Whether elevated test volumes and revenue growth continued after Q3, and how much reflected recurring demand versus temporary conditions.
- Actual cash generation excluding the $20.5m CMS advance and other pandemic-related assistance, and the timing and effect of CMS recoupments.
- Whether Medicare and private-payer coverage decisions translate into sustained test utilization and collections, especially for AlloSure Heart and newer offerings.
- Progress, potential costs and outcomes of the Natera litigation, including any amended claims or changes to the company’s assessment.
- Future dilution and compensation costs following the 2020 equity offerings, higher share count and outstanding equity awards.
- How pandemic-related constraints affect product sales, clinical studies, supply continuity and the company’s ability to operate its single U.S. testing laboratory.