Castle Biosciences, Inc. — Q3 2021 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2021. The interim financial statements are unaudited. Castle is a commercial-stage molecular diagnostics company focused on dermatologic cancers; most revenue is generated by DecisionDx-Melanoma and DecisionDx-UM.
Financial highlights
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Revenue | $23.5 million | $15.2 million | $69.0 million | $45.4 million |
| Operating loss | $11.8 million | $3.9 million | $24.9 million | $3.5 million |
| Net loss | $11.8 million | $4.6 million | $24.9 million | $5.4 million |
| Loss per share, basic and diluted | $0.47 | $0.23 | $0.99 | $0.29 |
- Revenue increased 54.3% in Q3 and 52.3% for the nine-month period year over year. Management attributed growth principally to higher report volumes and per-test revenue for DecisionDx-Melanoma and DecisionDx-UM, sales-force expansion, expanded Medicare coverage for DecisionDx-Melanoma, and the higher 2021 Medicare rate for DecisionDx-UM. Nine-month revenue also included $4.1 million of positive adjustments for prior-period tests, versus $0.2 million in 2020; Q3 included a $0.1 million negative adjustment versus a $1.5 million positive adjustment in Q3 2020.
- Operating expenses rose 84.6% in Q3 and 92.3% for the nine months, outpacing revenue growth. Higher personnel, commercial, clinical-study and supply costs were significant contributors. Stock-based compensation was $5.2 million in Q3 and $14.9 million for the nine months. The filing does not present gross margin in its current format; cost of sales is included in operating expenses.
- For the nine months, operating cash flow was negative $16.2 million, investing cash flow was negative $35.8 million and financing cash flow was positive $5.3 million. Investing outflows included $33.2 million for the myPath acquisition. Cash and cash equivalents declined to $363.2 million from $409.9 million at December 31, 2020.
- At September 30, cash and cash equivalents were $363.2 million; current assets were $389.6 million and current liabilities $21.0 million. Total liabilities were $22.0 million, including a $3.0 million current Medicare advance-payment balance. The company reported no term debt outstanding; prior term debt was repaid in December 2020.
Material changes and business developments
- Castle acquired Myriad myPath Laboratory on May 28, 2021 for $32.5 million in cash, becoming the sole provider of myPath Melanoma. The acquisition was accounted for as an asset acquisition; $33.1 million was allocated to developed technology, amortized over 12 years.
- For the nine months, Castle delivered 19,876 reports across its listed tests, compared with 13,028 a year earlier. DecisionDx-Melanoma and DecisionDx-UM reports together increased 22.4%. Dermatologic sales territories expanded to the mid-60s; new dermatologic ordering clinicians were approximately 1,408 versus 1,047.
- On October 18, 2021, Castle signed an agreement to acquire Cernostics, subject to closing conditions. Consideration includes approximately $30 million upfront and up to $50 million in additional cash or stock tied to 2022 commercial milestones. The company expected closing before year-end 2021, but it was not assured.
- The company initiated a 4,800-patient study for a potential test intended to predict systemic therapy response in psoriasis and atopic dermatitis, with a targeted launch by the end of 2025, subject to development and validation.
Outlook, risks and unusual items
- Management said available cash and anticipated product-sale cash generation should fund operations for the foreseeable future, while cautioning that assumptions may prove wrong. It expects expenses to increase with commercialization, research and development, hiring, public-company requirements and potential acquisitions. No numerical revenue or earnings guidance is provided.
- COVID-19 continued to affect patient visits and test demand. Management reported improving report trends in Q2 and Q3 2021, but third-party data indicated melanoma diagnoses remained about 16% below 2019 levels in Q3. Future effects, including from variants and restrictions, were uncertain.
- Reimbursement and revenue timing are material risks. Medicare accounted for 57% of nine-month 2021 revenue; Medicare Advantage plans and BlueCross BlueShield plans also represented significant revenue or receivable concentrations. Revenue includes estimates of variable consideration and may fluctuate with collections, appeals and coverage decisions.
- OMHA denied payment on 2,698 historical DecisionDx-Melanoma claims in March 2020. Castle appealed, has recognized no revenue for those claims, and reported no ruling on the appeal as of the filing.
- Draft revised Medicare coverage policies for DecisionDx-Melanoma were under review; management could not predict the outcome. Coverage reviews for newer tests were also pending, and the timing of draft or final policies was uncertain.
- The $8.3 million CMS advance payment received in 2020 was being recouped from Medicare payments; $5.4 million had been applied through September 30, 2021. The company also disclosed no litigation expected to have a material adverse effect.
- Castle expected to cease being an emerging growth company on December 31, 2021, triggering additional accounting-standard and auditor-attestation requirements. Management concluded disclosure controls were effective as of September 30, 2021.
Most important facts for investors to verify
- Whether revenue growth and delivered-test growth persist, and how much reported revenue depends on prior-period adjustments and collections.
- Whether Medicare and commercial coverage, reimbursement rates, and the pending historical-claims appeal change; review concentration by payor.
- Whether expense growth, including stock-based compensation and expansion costs, moderates enough to improve operating losses and cash burn.
- Cash use and integration outcomes for myPath, and the closing, funding mix, milestone terms and commercial performance of the Cernostics transaction.
- Progress and evidence from clinical studies and new products, alongside continuing COVID-19 effects and regulatory risks for laboratory-developed tests.