Castle Biosciences, Inc. — Q2 2021 Form 10-Q
Reporting period: Three and six months ended June 30, 2021. Unaudited results; amounts below are in millions unless stated otherwise. Castle is a commercial-stage dermatological cancer diagnostics company. Revenue is primarily generated by DecisionDx-Melanoma and DecisionDx-UM.
Financial performance and liquidity
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Revenue | $22.8 | $12.7 | $45.6 | $30.1 |
| Operating income (loss) | $(8.8) | $(0.6) | $(13.1) | $0.4 |
| Net income (loss) | $(8.8) | $(1.4) | $(13.1) | $(0.8) |
| Basic and diluted loss per share | $(0.35) | $(0.08) | $(0.52) | $(0.05) |
| Operating cash flow | Not separately reported | Not separately reported | $(10.1) | $13.3 |
Cost of sales was $3.7 million for Q2 and $6.7 million for the first half. The filing no longer presents gross margin. Cash and cash equivalents were $368.3 million at June 30, versus $409.9 million at year-end 2020; total current liabilities were $18.7 million. Six-month investing cash use was $34.8 million, mainly the myPath acquisition; financing provided $3.4 million. The company reported no outstanding debt, having repaid its term debt in December 2020.
Material changes and operating developments
- Q2 revenue rose 79.0% year over year; first-half revenue rose 51.2%. Management attributed growth to higher test volumes and per-test revenue, including expanded Medicare coverage for DecisionDx-Melanoma and a higher 2021 Medicare rate for DecisionDx-UM.
- DecisionDx-Melanoma and DecisionDx-UM report volumes together increased 68.9% in Q2 and 21.1% in the first half versus the comparable 2020 periods. Q2 DecisionDx-Melanoma reports increased 70.5% year over year after declining 11.2% in Q1.
- First-half revenue included $5.1 million of positive adjustments for prior-period tests, versus $1.0 million a year earlier; Q2 included a $0.2 million negative adjustment, versus $2.3 million positive in Q2 2020. Management linked the first-half increase primarily to settlement and collection of certain older receivables.
- Operating expenses increased substantially: first-half R&D rose 126.1% and selling, general and administrative expense rose 81.6%. Headcount reached 292, from 201 at December 31, 2020. Stock-based compensation was $9.7 million for the first half, with $55.2 million of unrecognized compensation cost.
- In May 2021, Castle acquired Myriad myPath Laboratory for $32.5 million cash. The acquired developed technology was recorded at $33.1 million and will be amortized over 12 years. The company also began offering myPath Melanoma.
Outlook, risks and unusual items
- No specific financial guidance was provided. Management said cash and anticipated product-sale cash generation should fund operations for the foreseeable future, while cautioning that assumptions may prove incorrect. It expects expenses to increase as it expands commercialization, R&D and operations.
- Castle initiated a 4,800-patient study for a planned genomic test to predict systemic-therapy response in psoriasis, atopic dermatitis and related conditions; management expects launch by the end of 2025, subject to development and validation.
- COVID-19 continued to affect patient visits and diagnostic volume. Management reported Q2 recovery in test reports and sales calls, but estimated melanoma diagnoses remained about 12% below 2019 levels. Future effects, including from virus variants and renewed restrictions, remain uncertain.
- Reimbursement and collection are significant risks. Medicare represented 57% of first-half revenue; Medicare, Medicare Advantage and BlueCross BlueShield together represented 89%. Revenue estimates can shift with variable-consideration adjustments. A Medicare appeal involving 2,698 older DecisionDx-Melanoma claims was denied in 2020 and appealed; no appeal ruling had been issued, and no revenue for those claims was recognized.
- Draft revised Medicare coverage language for DecisionDx-Melanoma was posted in Q2 2021; the company submitted comments and said it could not predict the outcome. Draft coverage decisions for newer tests were also pending.
- The $1.9 million of HHS CARES Act relief income benefited the 2020 comparison period and did not recur in 2021. Recoupment of the $8.3 million CMS advance began in April 2021; $2.2 million had been applied by June 30, leaving $6.2 million current.
- Management reported no pending or threatened litigation it believed could materially harm the company. After quarter-end, the Chief Business Officer notified the company of an intended December 31, 2021 resignation, and a director resigned effective August 5, 2021; neither departure was attributed to disagreement.
- Castle expected to cease being an emerging growth company on December 31, 2021, triggering additional reporting and accounting-standard requirements, including auditor attestation of internal controls.
Important facts for investors to verify
- Whether revenue growth and test-report gains continue without reliance on sizable prior-period reimbursement adjustments.
- Progress and outcomes of Medicare coverage reviews, including the DecisionDx-Melanoma draft LCD and the appeal of the consolidated claims denial.
- Payor mix, collection trends, accounts receivable aging, and the ongoing recoupment of the CMS advance.
- Execution and commercial contribution of myPath Melanoma, alongside rising operating costs and stock-based compensation.
- Whether cash burn remains consistent with management’s liquidity expectations, particularly as clinical programs and commercialization expand.
- Impact of COVID-19 on diagnoses, physician access, test volumes and reimbursement; and the timing of regulatory and reimbursement decisions for newer tests.