CareDx, Inc. — Q3 2015 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2015. Unaudited results; dollar amounts below are in millions unless otherwise noted. CareDx is a commercial-stage diagnostics company whose principal product is AlloMap, a blood test used to monitor heart-transplant recipients for rejection.
Financial performance and liquidity
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Revenue | $7.15 | $6.65 | $21.50 | $19.35 |
| Operating income (loss) | ($3.19) | $1.39 | ($7.47) | $0.82 |
| Net income (loss) | ($3.49) | $1.21 | ($8.95) | $0.79 |
| Net income (loss) per diluted share | ($0.29) | $0.12 | ($0.76) | $0.11 |
| Cash used in operating activities | Not provided for quarter | Not provided for quarter | $5.78 | $2.63 |
- Q3 revenue rose 7% year over year; nine-month revenue rose 11%. AlloMap results delivered increased 13% in Q3 to 3,423 and 11% for the nine months to 9,793.
- Calculated testing gross margin declined to approximately 64% in both Q3 and the first nine months, from approximately 73% and 67%, respectively, in the comparable 2014 periods. Operating margin was approximately -45% in Q3 and -35% year to date, versus approximately 21% and 4% in 2014.
- At September 30, cash and cash equivalents were $33.95; total debt, including current and long-term portions, was approximately $15.72. Current assets were $37.97 and current liabilities $10.45. Cash declined $2.48 from year-end 2014.
- For the nine months, investing activities used $1.12, principally for property and equipment; financing activities provided $4.42, reflecting new borrowing less debt repayments and other financing items.
Changes and notable items
- Operating expenses increased substantially: nine-month R&D rose 160% to $6.63, sales and marketing rose 33% to $6.45, and general and administrative expenses rose 41% to $8.55. Management attributed increases to staffing, cfDNA work, clinical studies, commercialization, billing operations, professional fees and public-company costs.
- Cost of testing rose 23% for the nine months, including higher headcount and the absence of a prior-year Roche settlement credit. Roche royalties were $0.76 for the nine months of 2015; the 2014 comparison included a one-time credit associated with the settlement.
- The company recorded a $0.6 loss on extinguishment of its prior term loan in 2015. A $0.46 reduction in the estimated fair value of contingent consideration was recorded as an operating expense benefit for the nine months.
- In January 2015, CareDx borrowed $16.0 under a secured loan facility, using proceeds in part to repay approximately $11.3 of prior term debt. A further $4.0 draw was available subject to conditions before December 31, 2015. Principal payments were scheduled to begin in January 2016, potentially delayed to July 2016 if specified revenue milestones were met. The company reported covenant compliance at quarter-end.
Outlook, risks and contingencies
- Management expected available cash and projected AlloMap receipts to fund operations for at least 18 months, but cautioned that actual cash use could differ and additional financing might be needed. The company had filed a shelf registration allowing up to $75 million of securities offerings and entered an ATM agreement permitting sales of up to $19 million per year, subject to the stated limits and terms.
- Major reimbursement risk: CMS proposed a 77% reduction in Medicare reimbursement for AlloMap effective January 1, 2016. The proposal was not final at filing. Management warned that adoption could make Medicare testing uneconomic or require its discontinuation, potentially reducing hospital use and threatening revenue and liquidity. Approximately 50% of testing revenue for the nine-month periods came from Medicare.
- AlloMap accounted for 98% of revenue in 2015. The company reported approximately 3,600 tests delivered and billed for which revenue had not been recognized because recognition criteria were unmet; collection timing and amount were uncertain. Management also noted that 33% of nine-month 2015 revenue was recognized when cash was received and payer reimbursement can take six months or longer.
- Management expected R&D, sales and marketing, G&A and capital expenditures to increase as it develops cfDNA and other transplant surveillance products. Product development, clinical validation, reimbursement, collections and reliance on AlloMap remain significant risks.
- The IMX acquisition included contingent consideration of 227,845 shares if 2,500 qualifying U.S. cfDNA commercial tests are completed by June 10, 2020; its recorded fair value was $0.62 at quarter-end. The filing reported no material legal proceedings and stated that disclosure controls were effective.
Important facts for investors to verify
- CMS’s final AlloMap reimbursement decision, effective date and resulting Medicare payment level.
- AlloMap test volumes, payer mix, realized collections, unrecognized billed tests and revenue-recognition estimates.
- Cash burn and the assumptions supporting management’s stated 18-month liquidity outlook.
- Loan covenants, repayment schedule, any additional draw, and whether revenue milestones permit delayed principal payments.
- Progress, clinical evidence, regulatory status and commercial prospects for cfDNA and other pipeline tests, as well as the IMX milestone conditions.