CareDx, Inc. — Q3 2019 Form 10-Q
Reporting period: Three and nine months ended September 30, 2019. Dollar amounts are in U.S. dollars; financial statement amounts are in millions unless noted. CareDx provides transplant diagnostic testing, products and transplant-management software.
Financial performance
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Revenue | $33.8 | $21.2 | $91.2 | $53.1 |
| Gross profit | $22.3 | $12.3 | $58.5 | $30.6 |
| Gross margin | 66.0% | 58.0% | 64.1% | 57.6% |
| Operating loss | $(6.7) | $(2.7) | $(19.0) | $(13.2) |
| Net loss | $(1.8) | $(20.0) | $(17.2) | $(43.0) |
| Net loss per share, diluted | $(0.04) | $(0.54) | $(0.41) | $(1.26) |
| Cash used in operating activities | — | $(1.7) | $(6.0) |
Q3 testing-services revenue rose 68% to $28.2 million, chiefly on higher AlloSure Kidney results (8,524 versus 3,708) and AlloMap Heart results (4,726 versus 4,080). Product revenue was essentially flat at $4.2 million; digital and other revenue increased to $1.4 million, principally reflecting the Ottr and XynManagement acquisitions. For the first nine months, testing-services revenue grew 82%, product revenue 19%, and digital and other revenue increased to $2.6 million.
Gross margin improved, which management attributed in part to laboratory operating efficiencies. However, operating expenses rose substantially: Q3 research and development was $8.5 million, sales and marketing $11.1 million, and general and administrative $9.5 million. The operating loss therefore widened despite higher revenue and gross profit.
Q3 net loss was lower than the prior-year quarter mainly because the company recorded a $4.3 million gain from remeasuring warrant liabilities, whereas Q3 2018 included a $17.1 million expense from warrant and derivative remeasurement. The nine-month comparison also reflects large noncash fair-value and debt-extinguishment charges in 2018. CareDx additionally reported Q3 non-GAAP net income of $0.9 million and positive adjusted EBITDA of $0.8 million; these are company-reported non-GAAP measures.
Financial position and liquidity
- At September 30, 2019, cash and cash equivalents were $40.9 million, down from $64.6 million at December 31, 2018; cash, cash equivalents and restricted cash totaled $41.2 million.
- Current assets were $68.1 million and current liabilities $31.0 million, implying a current ratio of approximately 2.2.
- Accounts receivable increased to $19.2 million from $9.8 million at year-end. Inventory was $5.9 million.
- The company reported no outstanding debt. Total liabilities were $47.3 million; these include $6.9 million of warrant liability and $5.1 million of deferred payments for intangible assets.
- Operating cash use was $1.7 million for the first nine months. Investing cash use was $21.2 million, including $18.1 million for acquisitions; financing cash use was $0.2 million. The resulting decrease in cash, cash equivalents and restricted cash was $23.6 million.
- Accumulated deficit was $329.0 million. Management said existing cash and expected revenue should meet anticipated cash requirements for at least the next 12 months, while noting that additional financing may be needed in the future and is not assured.
Material changes, outlook and risks
- CareDx acquired Ottr in May for total consideration of $16.1 million and XynManagement in August for $2.0 million cash plus contingent consideration. The businesses expand its transplant-management software and services; integration and realization of expected benefits remain risks.
- AlloSure Heart received a positive draft Medicare Local Coverage Determination in August. The company launched the OKRA registry study in September and launched AlloSeq Tx and AlloSeq cfDNA globally. These developments do not establish future coverage or revenue.
- AlloSure Kidney had Medicare reimbursement, but the filing stated that private-payer coverage decisions had not been made. No payer coverage applications had yet been made for AlloMap Kidney or KidneyCare iBox; AlloSure Lung was available through a compassionate-use program while undergoing further studies.
- Medicare represented approximately 54% of Q3 revenue and 39% of nine-month revenue. Testing revenue depends on test volumes, reimbursement decisions and collections, including case-by-case payer processes.
- Other risks include clinical-study outcomes, product commercialization, acquisition integration, dependence on suppliers and service providers, foreign-currency exposure, and ongoing operating losses. The filing reported no material changes to previously disclosed risk factors except for risks concerning the acquisitions and the Cibiltech agreement.
- The filing provided no specific financial forecast or revenue guidance. Management stated that operating results for the interim period are not necessarily indicative of full-year results.
- Controls and procedures were assessed as effective at the reasonable-assurance level; no material change in internal control over financial reporting was reported. The company said it knew of no pending legal matter expected to have a material adverse effect, while cautioning that legal outcomes remain uncertain.
Key facts for investors to verify
- Whether AlloSure Kidney test-volume growth translates into collections and broader private-payer coverage.
- Whether Medicare coverage for AlloSure Heart becomes final, and whether new tests and KidneyCare iBox obtain coverage and commercial adoption.
- Whether laboratory margin improvements continue as testing volumes grow and operating expenses increase.
- How quickly Ottr and XynManagement are integrated, and whether expected cross-selling and software growth materialize.
- Cash usage, receivables collection, acquisition-related obligations and the company’s stated 12-month liquidity outlook.
- The effect of noncash warrant remeasurement and stock-based compensation on reported earnings and share dilution.