CareDx, Inc. — FY2014 Form 10-K
Reporting period: Fiscal year ended December 31, 2014. The filing also presents unaudited quarterly results, including fourth-quarter 2014. CareDx is a commercial-stage diagnostics company whose revenue is primarily from AlloMap, a blood-based heart-transplant rejection surveillance test. It completed its IPO in July 2014 and acquired ImmuMetrix in June 2014 to add cell-free DNA (cfDNA) transplant diagnostic technology.
Financial performance and liquidity
| Metric | FY2014 | FY2013 |
|---|---|---|
| Total revenue | $27.306 million | $22.098 million |
| Testing revenue | $25.842 million | $21.672 million |
| Operating income (loss) | $1.250 million | $(0.857) million |
| Net income (loss) | $0.781 million | $(3.542) million |
| Net cash used in operating activities | $3.350 million | $0.546 million |
| Cash and cash equivalents, year-end | $36.431 million | $5.128 million |
| Working capital, year-end | $29.211 million | $0.578 million |
| Total debt, year-end | $11.412 million | $15.375 million |
- Testing revenue rose 19%, primarily on higher test volume and increased collections/revenue recognition. AlloMap results delivered increased about 18%, to 11,930 from 10,100.
- Cost of testing was $8.541 million, down from $9.078 million; calculated testing gross margin was approximately 67% versus 58% in 2013. Revenue and cost timing can differ because some test revenue is recognized only when cash is collected.
- Research and development expense increased 21% to $3.846 million; sales and marketing rose 10% to $6.472 million; general and administrative expense increased 75% to $8.436 million, reflecting acquisition, IPO, public-company compliance, legal, and staffing costs.
- Despite a $0.719 million pretax loss, CareDx reported $0.781 million net income, including a $1.5 million tax benefit related to the ImmuMetrix acquisition. The company reported a $159.375 million accumulated deficit.
- Operating cash outflow increased to $3.350 million, including a $2.8 million Roche royalty settlement payment. The IPO generated $35.5 million of net proceeds; financing activities provided $35.986 million overall.
- Fourth-quarter revenue was $7.952 million and net loss was $5,000. Quarterly results were uneven: first-quarter net loss was $1.304 million, followed by profits in the second and third quarters.
Material changes and unusual items
- Collaboration and license revenue rose to $1.464 million from $0.426 million, mainly due to the LabCorp agreement termination fee and recognition of deferred license revenue. LabCorp paid a $0.5 million termination fee; the agreement ended with no further royalties or milestone fees payable.
- The June 2014 ImmuMetrix acquisition added $6.7 million of in-process technology and $12.0 million of goodwill. A contingent payment of 227,845 shares is tied to completing 2,500 U.S. commercial cfDNA tests by June 2020; its year-end fair value was $1.074 million.
- AlloMap accounted for 95% of FY2014 revenue. Medicare represented approximately 51% of testing revenue; about 79% of results delivered in the twelve months ended June 30, 2014 had been reimbursed as of year-end.
- After year-end, on January 30, 2015, CareDx drew $16 million under a new secured loan facility and used it to repay approximately $11.3 million of existing term debt. It may draw a further $4 million subject to conditions. The new loan carries a floating interest rate and warrants were issued in connection with the first draw.
Outlook, risks, and contingencies
- No specific revenue or earnings guidance was provided. Management expected cash and projected AlloMap receipts to fund operations for at least 18 months, while warning that actual cash needs could be higher and development programs might require additional capital.
- Management planned continued investment in AlloMap studies and cfDNA heart and kidney programs; R&D and public-company costs were expected to increase. The filing describes cfDNA products as in development, not established commercial products.
- Key risks include dependence on AlloMap and Medicare reimbursement; uncertain collections and payer coverage; potential changes to FDA regulation of laboratory-developed tests; clinical-development and commercialization risk; competition; reliance on a single Brisbane testing laboratory and sole-source suppliers; and dependence on collaborators and access to clinical samples.
- A critical AlloMap reagent formulation had been discontinued, but CareDx reported validating a replacement and having sufficient stock through December 2015. Support for a key PCR instrument was expected through 2017, and alternative equipment was being validated.
- The company settled its Roche royalty dispute for $2.8 million and agreed to revised royalty terms through September 2017, subject to timely payments. It reported no material legal proceedings and no material off-balance-sheet arrangements.
- Management reported that a material weakness in acquisition-related financial controls had been remediated. The independent auditor did not audit internal control over financial reporting.
Most important facts for investors to verify
- Whether AlloMap test volume, reimbursement rates, and cash collections continue to grow, particularly given Medicare’s share of testing revenue and the lag in reimbursement.
- Whether reported profitability is sustainable without the one-time acquisition-related tax benefit and other unusual collaboration and fair-value items.
- Cash use, debt service, interest costs, and covenants following the January 2015 refinancing; the stated 18-month runway was a forward-looking estimate.
- Clinical validation, regulatory pathway, funding needs, and timeline for cfDNA products, including the ImmuMetrix milestone and Stanford license conditions.
- Resolution of sole-source supply and instrument dependencies, and continued effectiveness of financial reporting controls after the acquisition and IPO.