CareDx, Inc. — FY2018 Form 10-K
Reporting period: Fiscal year ended December 31, 2018; filed March 6, 2019. The filing also reports fourth-quarter results. CareDx is a transplant diagnostics company offering AlloMap and AlloSure testing services and pre-transplant HLA-typing products.
Financial results and position
| Metric | FY2018 | FY2017 |
|---|---|---|
| Total revenue | $76.6 million | $48.3 million |
| Testing services revenue | $60.3 million | $33.1 million |
| Product revenue | $15.7 million | $14.6 million |
| Operating loss | $15.6 million | $20.3 million |
| Net loss attributable to CareDx | $46.8 million | $55.5 million |
| Net loss per share | $1.31 | $2.38 |
| Cash used in operating activities | $4.0 million | $14.3 million |
| Cash and cash equivalents at year-end | $64.6 million | $16.9 million |
| Working capital | $61.6 million | $(16.1) million |
| Total debt | None | $34.1 million |
Revenue increased 58% year over year, driven primarily by AlloSure growth. Testing services revenue rose 82%; product revenue rose 7%. Derived gross profit was approximately $43.6 million, or 56.9% of revenue, versus approximately $27.0 million, or 55.8%, in 2017, based on reported revenue less testing and product costs.
CareDx reported fourth-quarter revenue of $23.5 million, up 88% year over year, and a net loss of $3.8 million. Management reported positive adjusted EBITDA of $0.8 million and positive operating cash flow of $2.0 million for the quarter; these are management-presented quarterly figures, not annual GAAP results.
Year-end liquidity improved substantially, aided by financing. Financing cash flow was $50.3 million, including $52.9 million net proceeds from the November public offering and $11.0 million from warrant exercises, partly offset by debt repayments. Common shares outstanding increased from 28.8 million at year-end 2017 to 41.4 million at year-end 2018. Year-end liabilities included a $10.0 million common-stock warrant liability; this is distinct from debt.
Business developments and changes versus prior year
- AlloMap produced 16,116 commercial tests in 2018, versus 15,312 in 2017. It was used at 133 of approximately 138 U.S. heart-transplant centers. Medicare reimbursement was $3,240 per test, up 14% from 2017.
- AlloSure produced 11,634 commercial tests in 2018, compared with 282 after its 2017 launch. In Q4, 100 U.S. kidney-transplant centers provided 4,575 tests to approximately 3,400 patients. Medicare reimbursement was $2,841; the filing reports no positive private-payer coverage decisions by filing date.
- CareDx initiated the K-OAR kidney registry in 2018; 47 sites and 748 patients were enrolled by year-end. It also initiated the SHORE HeartCare registry. HeartCare combines AlloMap and AlloSure-Heart.
- Product sales benefited from the Illumina agreement: CareDx became exclusive worldwide distributor of TruSight HLA in June 2018 and received rights to develop and commercialize additional transplant NGS products. The agreement included a $5.0 million initial payment, royalties on future commercialized products, and minimum purchase commitments through 2023. CareDx intended to launch AlloSeq products in 2019.
- Operating loss narrowed by $4.7 million. Net loss improved by $8.7 million, although it remained large. Results included a $23.0 million noncash expense from changes in fair value of warrant and derivative liabilities and $5.8 million of debt-extinguishment expense; 2017 included a $29.6 million fair-value expense and $0.5 million debt-extinguishment expense.
- CareDx adopted ASC 606 in 2018. Adoption increased reported 2018 testing revenue by $1.6 million versus prior accounting and added $2.9 million to opening accounts receivable and accumulated deficit. Management recorded a further $0.5 million revenue estimate adjustment for prior-period tests.
Outlook, risks and other notable items
Management provided no specific quantified revenue or earnings guidance. It stated that cash on hand and expected revenue, together with proceeds potentially available through its effective shelf registration, were expected to fund anticipated needs for at least 12 months from issuance of the financial statements. The company cautioned that additional financing may be needed and is not assured.
- Medicare represented 62% of testing-services revenue in 2018. Changes to coverage, reimbursement rates, or Medicare contractor policies could materially affect results; private-payer coverage for AlloSure remained unestablished.
- CareDx continued to incur substantial losses, with an accumulated deficit of $311.8 million, and expected losses for several years. Testing growth, reimbursement, clinician adoption, clinical evidence and commercialization of pipeline products are key uncertainties.
- U.S. testing is performed at the Brisbane laboratory, with no redundant U.S. facility. The company also identified reliance on sole-source suppliers, shipping services, third parties and Illumina, as well as competitive, regulatory, intellectual-property and data-security risks.
- The Illumina agreement creates execution and purchase-commitment risk: failure to meet development or commercialization milestones could affect exclusivity, and future products carry royalties.
- Management reported effective disclosure controls and internal control over financial reporting as of year-end. The auditor did not attest to internal-control effectiveness under the company’s emerging-growth-company exemption. Deloitte audited the 2018 financial statements; Ernst & Young audited the prior periods. The 2018 audit opinion was unqualified.
- CareDx reported no pending litigation as of December 31, 2018 and no off-balance-sheet arrangements. It reported no fourth-quarter share repurchases.
Investor verification priorities
- Reconcile reported revenue growth with AlloSure volume, payer mix, collections and the $1.6 million ASC 606 impact; assess sustainability of the revenue estimates.
- Track AlloSure private-payer coverage, Medicare reimbursement and K-OAR enrollment and outcomes, including whether evidence supports broader adoption.
- Review cash burn, the stated 12-month liquidity outlook, future financing needs and dilution following the 2018 share issuance.
- Examine the composition and potential future earnings volatility of the $10.0 million warrant liability, and distinguish it from debt and cash obligations.
- Monitor Illumina milestones, minimum purchases through 2023, royalty terms and the timing and commercial prospects of planned AlloSeq launches.