CareDx, Inc. — Q1 2023 Form 10-Q
Reporting period: Three months ended March 31, 2023. CareDx develops and sells transplant diagnostic testing, laboratory products, and patient and digital solutions. The filing was signed May 10, 2023; it includes the May 4 Medicare billing update and a May 2023 U.S. workforce reduction as subsequent developments.
Financial results and liquidity
| Metric | Q1 2023 | Q1 2022 | Change |
|---|---|---|---|
| Total revenue | $77.3 million | $79.4 million | Down 3% |
| Testing services revenue | $61.8 million | $66.4 million | Down 7% |
| Product revenue | $6.9 million | $6.8 million | Up 1% |
| Patient and digital solutions revenue | $8.6 million | $6.2 million | Up 39% |
| Operating loss | $(24.3) million | $(19.1) million | Loss widened |
| Net loss | $(23.7) million | $(19.6) million | Loss widened |
| Basic and diluted loss per share | $(0.44) | $(0.37) | Loss per share widened |
| Cash from operating activities | $0.7 million | $(21.5) million | Improved |
- Management reported approximately 49,900 AlloMap and AlloSure patient test results, up 17% year over year. Testing services revenue fell despite volume growth, principally because the company paused Medicare claims for certain AlloSure Kidney tests.
- CareDx did not recognize approximately $8.9 million for about 3,200 AlloSure Kidney tests from March 7–31. Including that amount, management said revenue would have been $86.2 million, with testing services revenue of $70.7 million. It plans to submit those claims in Q2, but warns they may be denied or later subject to forfeiture.
- Management reported a GAAP net loss of $23.7 million, non-GAAP net loss of $5.8 million and adjusted EBITDA loss of $6.4 million. It said adjusted EBITDA would have been positive $2.5 million including the unrecognized test revenue. These adjusted figures are non-GAAP measures.
- Cash and cash equivalents were $74.7 million and marketable securities were $211.3 million at quarter-end; management reported $285.9 million in cash, cash equivalents and marketable securities and no debt. Accumulated deficit was $484.9 million.
- Cash, cash equivalents and restricted cash declined $15.3 million in the quarter. Investing activities used $14.8 million, principally reflecting net purchases of marketable securities and $2.8 million of capital expenditures. The company said its available resources and expected cash from operations should cover anticipated needs for the next 12 months, while noting future financing may be needed.
- Medicare represented approximately 42% of total revenue in Q1 2023, down from 54% a year earlier. Management separately stated Medicare was 53% of testing services revenue.
Material changes and notable items
- Patient and digital solutions revenue grew $2.4 million, primarily from pharmacy and software revenue. Research and development expense rose $2.5 million; general and administrative expense rose $1.5 million. Stock-based compensation was $13.8 million, compared with $10.6 million a year earlier.
- CareDx acquired HLA Data Systems in January for $4.6 million in cash, with $1.3 million of contingent consideration recorded. The acquisition added software and interoperability capabilities; its pro forma impact was described as not material.
- In March, CareDx amended its Stanford license to reduce the maximum royalty rate retroactively to April 2022 and reversed excess royalty liability, contributing to lower testing-services costs. It also wrote off $1.0 million of an investment in a private company undergoing liquidation.
- The company repurchased 59,472 shares for $0.7 million in Q1 under its $50 million repurchase authorization; $48.7 million remained available at March 31. A separate at-the-market offering permits sales of up to $200 million of shares; its registration statement was due to expire June 9, 2023.
Outlook, risks and contingencies
- Medicare billing uncertainty: MolDX issued a revised billing article effective March 31, 2023, affecting AlloSure Kidney, AlloSure Heart and AlloMap Heart. Noridian had not adopted the articles as of the filing. CareDx disputes aspects of the guidance and paused AlloSure Kidney Medicare submissions beginning March 7. It warns that future Medicare revenue, including for heart tests, may be affected; it expects AlloSure Kidney revenue in 2023 to be materially lower due to the billing changes. No specific financial guidance for 2023 is provided in the filing text.
- Restructuring: A January plan includes closing the Fremantle, Australia operation, with completion expected in June 2024; Q1 restructuring charges were $0.06 million. In May 2023, the company announced a reduction in its U.S. workforce; the filing does not provide a charge estimate.
- Legal and regulatory matters: A jury awarded CareDx $44.9 million in its false-advertising case against Natera, but post-trial motions remained pending and the award was not recorded. Natera’s patent infringement claims against CareDx remain in discovery. The company also disclosed ongoing DOJ and SEC investigations into business practices and accounting/public reporting matters, a securities class action, derivative actions, and an insurance coverage dispute. CareDx has not recorded liabilities for the disclosed lawsuits and says outcomes are uncertain.
- Financial reporting controls: Management concluded disclosure controls were ineffective as of March 31, 2023 because previously identified material weaknesses remained. These include IT general controls, purchase-order approvals and aspects of the COSO control framework. Remediation is underway but was not complete.
- Other risks: The company has a history of losses and expects continued losses. It depends substantially on reimbursement and faces payer audits and claim-denial risk. It also cites litigation, intellectual-property, commercialization, acquisition-integration, foreign-exchange and market risks. Management estimated that a 100-basis-point interest-rate change would have an approximate $2.9 million impact; an unfavorable 10% foreign-exchange move would have a $0.4 million impact on financial results and $0.3 million on product revenue.
Important facts for investors to verify
- Whether and when the approximately $8.9 million of paused AlloSure Kidney claims are submitted, paid, denied or subject to forfeiture, and how the revised billing rules affect subsequent Medicare claims and test volume.
- Any changes in Noridian adoption or enforcement, required documentation and Z-code processes, and the impact on AlloMap Heart and AlloSure Heart reimbursement.
- Subsequent revenue, cash collections, operating cash flow and non-GAAP results, including reconciliation of management’s adjusted measures to GAAP.
- Progress and testing of controls remediation, including whether the material weaknesses are resolved and whether any financial reporting is delayed or revised.
- Developments in the DOJ and SEC investigations, Natera litigation and the unrecorded jury award, securities and derivative actions, and the insurance recovery claim.
- Costs, timing and realized savings from the Australia closure and U.S. workforce reduction, plus any use of the remaining repurchase authorization or at-the-market offering.