CareDx, Inc. — Q2 2014 Form 10-Q
Reporting period: Three and six months ended June 30, 2014; unaudited. CareDx is a commercial-stage diagnostics company whose primary product is AlloMap, a blood test used to monitor heart-transplant recipients for acute cellular rejection.
Financial performance
| Metric | Q2 2014 | Q2 2013 | Six months 2014 | Six months 2013 |
|---|---|---|---|---|
| Total revenue | $6.776 million | $5.457 million | $12.700 million | $10.438 million |
| Operating loss | $0.345 million | $0.256 million | $0.572 million | $1.034 million |
| Net income (loss) | $0.877 million | $(0.802) million | $(0.427) million | $(2.150) million |
| Operating cash flow | Not separately provided | Not separately provided | $1.033 million | $(1.277) million |
- Revenue increased about 24% year over year in both Q2 and the first half. Testing revenue grew 26% in Q2 and 24% in the first half; collaboration and license revenue declined. Q2 AlloMap results delivered were 3,000, versus 2,500 a year earlier; the company reported approximately 5,800 tests for the first half.
- Cost of testing was $2.403 million in Q2 and $4.565 million in the first half. The implied testing margin (testing revenue less cost of testing, divided by testing revenue) was approximately 64% in Q2 and 64% for the first half, compared with approximately 60% and 58%, respectively, in 2013.
- Q2 net income included a $1.5 million tax benefit related to the ImmuMetrix acquisition; without it, the quarter remained loss-making before tax. Q2 other income of $0.366 million was also affected by fair-value remeasurements. Six-month net loss improved from 2013, while the company still reported an operating loss.
- Cash and cash equivalents were $7.872 million at June 30, versus $5.128 million at year-end 2013. Total debt was $18.772 million, including $10.434 million classified as current. Current liabilities were $21.214 million and current assets $13.530 million.
- First-half operating cash flow was positive, but reflected working-capital movements, including accrued liabilities and unpaid IPO costs; the company also suspended Roche royalty payments during the dispute. Investing cash outflow was $0.540 million and financing cash inflow $2.251 million.
Material changes and transactions
- CareDx acquired ImmuMetrix on June 10 for estimated consideration of $17.155 million, primarily preferred stock, plus $0.6 million cash. The purchase accounting recorded $6.650 million of in-process technology, $12.005 million goodwill, and a $2.313 million contingent-consideration liability. Additional shares are due if 2,500 qualifying commercial cfDNA tests are completed within six years.
- After quarter-end, CareDx completed its IPO, selling 4.0 million shares in July and a further 220,000 shares through a partial overallotment exercise in August. Net proceeds were approximately $35.5 million. The Illumina $5.0 million convertible note converted in connection with the IPO; pro forma June 30 cash was $44.327 million and pro forma debt was $13.977 million. These pro forma figures are not the quarter-end actual balances.
- AlloMap accounted for approximately 99% of Q2 and first-half revenue. Medicare represented about 49% of testing revenue for both periods; at June 30, approximately 72% of receivables were from Medicare.
Outlook, risks and unusual items
- Management expected cash, AlloMap receipts and IPO proceeds to fund operations for at least 18 months. No specific revenue or earnings guidance was provided. Management expected R&D and public-company G&A costs to increase; sales and marketing costs could rise as products and geographic reach expand.
- CareDx recognized revenue on a cash basis for 38% of revenue in both Q2 and the first half of 2014. Payer coverage, collection timing and appeals can make revenue uneven, and some tests may never be reimbursed. Management reported reimbursement for approximately 79% of AlloMap results delivered in the twelve months ended December 31, 2013, measured as of June 30, 2014.
- Roche is seeking unpaid royalties and interest in arbitration. CareDx disputed the royalty rate but reserved $3.526 million at June 30, 2014; the hearing was scheduled for early 2015. The company noted that withholding these payments supported operating cash flow.
- The acquisition’s in-process technology was treated as indefinite-lived until technological feasibility; commercial revenue was then estimated to begin around Q4 2015. That timing is an estimate, not a guarantee.
- Management disclosed a material weakness in internal controls over complex business-combination accounting, including purchase-price valuation, deferred taxes and goodwill. Remediation efforts were underway, but success was not assured.
Important facts for investors to verify
- Whether AlloMap test growth translates into durable collections, broader payer coverage and improved operating profitability.
- The result of the Roche arbitration, final royalty exposure and any effect on cash needs.
- Whether the ImmuMetrix cfDNA development program achieves commercial and technical milestones, including the 2,500-test threshold and estimated 2015 feasibility timing.
- Actual post-IPO cash use, debt repayment terms, and whether the stated 18-month funding outlook remains valid.
- Progress in remediating the material weakness and reliability of the acquisition accounting estimates.
- The Q2 reported diluted earnings per share of $0.13 reflects conversion of preferred securities and other potentially dilutive instruments; assess it alongside the $0.877 million net income and post-IPO share count.