CareDx, Inc. — Q2 2015 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2015. Unaudited financial amounts below are in millions of dollars unless stated otherwise. CareDx develops transplant surveillance diagnostics; AlloMap, its commercialized heart-transplant test, generated nearly all revenue.
Financial performance
| Metric | Q2 2015 | Q2 2014 | Six months 2015 | Six months 2014 |
|---|---|---|---|---|
| AlloMap results delivered | 3,259 | 3,024 | 6,370 | 5,817 |
| Testing revenue | $7.044 | $6.710 | $14.139 | $12.544 |
| Total revenue | $7.129 | $6.776 | $14.344 | $12.700 |
| Operating expenses | $10.015 | $7.121 | $18.621 | $13.272 |
| Operating loss | $(2.886) | $(0.345) | $(4.277) | $(0.572) |
| Net loss (income) | $(3.185) | $0.877 | $(5.457) | $(0.427) |
| Net loss per share, diluted | $(0.27) | $0.13 | $(0.46) | $(0.42) |
- Revenue grew 5% in Q2 and 13% in the first half; delivered tests rose 8% and 10%, respectively. Testing revenue was about 98% of Q2 revenue and 99% of first-half revenue.
- Cost of testing was $2.508 million in Q2 and $5.218 million in the first half. Approximate gross margin after testing costs was 64.8% for Q2 and 63.6% for the first half, compared with 64.5% and 64.1% in 2014.
- R&D increased 217% in Q2 and 160% in the first half; sales and marketing rose 57% and 48%. Higher R&D reflected staffing, cfDNA work, clinical trials and other development activity; sales and marketing increases reflected hiring and expanded promotional programs.
- Cash and cash equivalents were $36.894 million at June 30, versus $36.431 million at year-end 2014. Total assets were $61.366 million; stockholders’ equity was $36.773 million.
- First-half operating cash flow was $(2.747) million, investing cash flow $(0.733) million, and financing cash flow $3.943 million. Cash increased $0.463 million.
- Balance-sheet debt was $15.769 million, including $2.380 million current and $13.389 million long-term; management reported $15.7 million of debt and capital lease obligations. A January 2015 refinancing replaced $11.3 million of prior debt with a $16 million draw under a facility permitting a further $4 million, subject to conditions. The loan matures December 2018; repayment begins January 2016, potentially deferred to July 2016 if milestones are met. The company was in covenant compliance.
Changes, outlook and notable items
- Despite higher revenue and test volume, operating losses widened substantially as operating expenses grew faster than revenue. Q2 2014 net income included a $1.5 million tax benefit related to the ImmuMetrix acquisition; there was no comparable benefit in 2015.
- First-half interest expense included a $0.6 million loss on extinguishment of prior debt. In Q2, contingent consideration remeasurement added $0.142 million of expense; for the first half, a $0.111 million remeasurement gain reduced expense.
- A change in revenue estimates for certain payers increased revenue by $79,000 in Q2 and $127,000 in the first half, and reduced loss per share by $0.01. Approximately 3,400 delivered and billed tests had not met revenue-recognition criteria at June 30; collection timing and amount are uncertain.
- Management expected cash and projected AlloMap receipts to fund operations for at least 18 months, but cautioned that forecasts may prove wrong and additional funding may be needed. It anticipated increased R&D, sales and marketing, and public-company costs; no formal revenue or earnings guidance was provided.
- Management reported more than 70,000 AlloMap tests performed since launch, use at 110 of approximately 129 U.S. heart-transplant centers in 2014, and available capacity to support substantial volume growth. Priorities include expanding AlloMap reimbursement and developing cfDNA surveillance solutions, including for heart and kidney transplants.
- On August 10, 2015, after quarter-end, CareDx filed a shelf registration permitting up to $75 million of securities offerings and entered into an at-the-market sales agreement. Sales are capped at $19 million per year under the agreement and $75 million under the shelf; the sales agent’s commission is 3% of gross proceeds. Future issuance could dilute shareholders.
- Roche royalties were reduced under a 2014 settlement; the company reported $0.509 million of Roche royalty expense for the first half of 2015. Subject to timely payment, no further royalties are payable after September 30, 2017. A separate ImmuMetrix milestone could require issuance of 227,845 shares if 2,500 qualifying cfDNA tests are completed by June 2020.
- Key risks include payer coverage and collections, revenue timing and collectability, dependence on AlloMap, successful development and commercialization of new tests, and access to future capital. Medicare represented approximately 50% of first-half testing revenue. Management reported no material change in previously disclosed risk factors and no material legal proceedings.
Important facts for investors to verify
- Whether AlloMap volume growth translates into durable revenue growth, improved reimbursement and cash collections, particularly for tests currently excluded from recognized revenue.
- Whether expense growth—especially R&D and commercialization spending—can be supported by revenue and available cash, and whether management’s stated 18-month liquidity outlook remains valid.
- The loan’s floating-rate terms, repayment timing and milestone conditions, covenant status, and any decision to draw the remaining $4 million.
- The terms and actual use of the $75 million shelf and ATM program, including potential dilution and commissions.
- Progress and costs for cfDNA and other pipeline programs, along with the likelihood of achieving the ImmuMetrix test-volume milestone.