Castle Biosciences, Inc. — Q2 2023 Form 10-Q
Business context and period. Castle Biosciences is a commercial-stage diagnostics company whose revenue comes primarily from genomic and related testing services. This unaudited report covers the three and six months ended June 30, 2023; comparisons are with the corresponding 2022 periods.
Key financial metrics
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Net revenue | $50.1m | $34.8m | $92.2m | $61.7m |
| Gross margin | $36.8m; 73.5% | $25.1m; 71.9% | $66.5m; 72.1% | $44.3m; 71.8% |
| Operating loss | $21.2m | $4.0m | $52.7m | $28.5m |
| Net loss | $18.8m | $1.6m | $48.0m | $26.3m |
| Operating cash flow | Not separately provided for quarter | Not separately provided for quarter | $(29.2)m | $(30.4)m |
Q2 revenue rose 43.9%; first-half revenue rose 49.4%. Dermatologic tests generated $43.0m of Q2 revenue and $78.9m for the first half. At June 30, cash and cash equivalents were $95.9m and marketable securities were $129.6m, or $225.5m combined, versus $258.6m at year-end 2022. Current assets were $269.1m and current liabilities $33.7m. Total liabilities were $46.6m, including operating lease liabilities; the filing reports no material conventional borrowings. Accumulated deficit was $208.9m.
Material changes and operating performance
- Test reports delivered increased 52.4% in Q2 and 61.4% in the first half year over year, to 16,820 and 31,736, respectively. Management attributed growth to dermatologic tests and increased TissueCypher and IDgenetix activity.
- DecisionDx-Melanoma and DecisionDx-SCC volumes drove dermatologic growth. Non-dermatologic revenue benefited from TissueCypher volume and its higher Medicare reimbursement rate, as well as IDgenetix.
- Operating expenses rose substantially: first-half SG&A increased 34.6%, R&D 22.1%, and cost of sales 55.8%. Stock-based compensation was $26.4m for the first half, up from $17.2m.
- Prior-year comparisons benefited from a $20.4m Q2 and $17.8m first-half gain from remeasuring acquisition contingent consideration; there was no comparable 2023 gain. The 2022 periods also included an approximately $1.8m income tax benefit related to the AltheaDx acquisition.
Cash, outlook, risks, and unusual items
- First-half cash used in operations was $29.2m. Investing activities provided $1.2m, including net proceeds from marketable-security maturities and purchases; capital expenditures were $7.4m. Cash and cash equivalents declined by $27.1m in the period.
- Management says existing cash, marketable securities, and anticipated product revenue are expected to fund operations through 2025, while also cautioning that estimates depend on assumptions and capital could be depleted sooner. The notes separately state resources are expected to cover at least the 12 months following issuance.
- DecisionDx-SCC faces material Medicare coverage uncertainty. Novitas suspended a final noncoverage determination and issued a substantially similar proposed policy; Palmetto and Noridian also proposed noncoverage. The company cannot predict the final outcome or timing. DecisionDx-SCC received new ADLT status, but the filing cautions that status does not establish Medicare coverage.
- In July 2023, strong demand led Castle to temporarily pause accepting new TissueCypher orders while adding process improvements, equipment, and staff. Management expected to resume orders before the end of Q3, but gave no assurance its efforts would succeed.
- IDgenetix’s Medicare rate fell from approximately $1,500 to $917 per multi-gene test following a billing-code change; a test-specific code became effective October 1, 2023, with pricing still in process. DiffDx-Melanoma’s preliminary gapfill rate was $1,950, subject to final determination.
- Goodwill testing, triggered in part by the DecisionDx-SCC coverage event and share-price decline, found reporting-unit fair value exceeded carrying value by 13%; no impairment was recorded. The company cited coverage and reimbursement changes, competition, macroeconomic conditions, and stock-price declines as potential impairment risks.
- Potential AltheaDx earnout payments were valued at zero at June 30, 2023, but up to $57.5m could become payable for remaining 2023 and 2024 milestones. A proposed Friendswood land purchase for $7.6m is subject to a termination option and diligence. Future minimum lease payments were approximately $23.7m.
- The company reported recurring losses and negative cash flows and expects continued investment in commercialization, research, and development. It reported no material litigation; management concluded disclosure controls were effective.
Important facts for investors to verify
- Final Medicare coverage decisions and reimbursement outcomes for DecisionDx-SCC, and the resulting effect on orders, revenue, and goodwill valuation.
- Whether TissueCypher order intake resumed as planned and whether laboratory capacity can meet demand without delaying turnaround times or increasing costs materially.
- Actual collections, revenue adjustments, and receivables quality: first-half revenue included $1.7m of net negative adjustments for prior-period tests, and Medicare represented 49% of first-half revenue.
- Progress toward the stated funding horizon, given $29.2m of first-half operating cash use, expected spending growth, and substantial stock-based compensation.
- Final IDgenetix and DiffDx-Melanoma Medicare pricing, and whether AltheaDx milestones trigger any earnout payments.