Business context and reporting period
CareDx, Inc. is a transplant diagnostics company with post-transplant testing services, including AlloMap and AlloSure, and pre-transplant HLA-typing products marketed under the Olerup brands. This unaudited Form 10-Q covers the three months ended March 31, 2018; comparisons are with Q1 2017 unless otherwise noted. All financial figures below are in millions of dollars unless stated otherwise.
Financial performance and liquidity
| Metric | Q1 2018 | Q1 2017 / prior date |
|---|---|---|
| Total revenue | $14.1 | $11.6 |
| Testing revenue | $10.6 | $7.9 |
| Product revenue | $3.3 | $3.7 |
| Operating loss | $(5.2) | $(8.5) |
| Net loss attributable to CareDx | $(9.0) | $(5.6) |
| Net loss per share, basic and diluted | $(0.30) | $(0.26) |
| Cash used in operating activities | $(4.5) | $(6.7) |
| Cash and cash equivalents at period end | $18.7 | $16.9 at December 31, 2017 |
| Total debt at period end | $10.2 | $34.1 at December 31, 2017 |
Revenue increased 21%. Testing revenue rose 34%, while product revenue fell 10%. Gross profit, calculated as revenue less cost of testing and cost of product, was $7.7 million, or approximately 54.6% of revenue, versus $6.2 million, or approximately 53.5%, in Q1 2017. Operating loss improved by $3.3 million, but net loss widened by $3.4 million, principally reflecting higher interest expense and the JGB debt-conversion loss, as well as smaller fair-value gains on warrants and derivatives.
At March 31, current assets were $32.7 million and current liabilities $13.4 million. Total assets were $79.0 million and stockholders’ equity was $33.4 million, compared with a $6.0 million deficit at year-end. The equity improvement primarily reflects conversion of JGB debt into common shares. Cash, cash equivalents and restricted cash totaled $18.9 million; $9.4 million of previously restricted cash was released following the JGB conversion. Cash decreased $7.6 million during the quarter, including $0.8 million used in investing and $2.3 million used in financing activities.
Material changes and notable items
- AlloSure, launched in October 2017, contributed to testing growth: CareDx reported 1,051 AlloSure test results in Q1 2018. AlloMap results increased to 3,847 from 3,750. Management reported AlloSure use at 52 U.S. kidney transplant centers and 12 centers initiated in the K-OAR registry.
- Medicare accounted for approximately 42% of Q1 2018 revenue, compared with 28% in Q1 2017. The 2018 Medicare reimbursement rate was $3,240 for AlloMap and $2,841 for AlloSure. AlloSure had received case-by-case private-payer payments, but no positive private-payer coverage decisions had been made.
- In February and March, JGB converted the remaining $26.7 million of principal and accrued interest into 6,161,331 common shares. CareDx recorded a $2.8 million loss on the conversion. Common shares outstanding rose from 28.8 million at December 31, 2017 to 35.2 million at March 31, 2018.
- On April 17, 2018, after quarter-end, CareDx entered a Perceptive credit agreement for a $15.0 million initial term loan and used approximately $11.1 million to repay Danske and Allenex-related debt. An additional $10.0 million tranche is available subject to conditions and product revenue targets. The loan bears interest at 9% plus the greater of one-month LIBOR or 1.5%; scheduled principal payments begin in April 2021, with maturity in April 2023.
- On May 4, 2018, CareDx signed an Illumina license and commercialization agreement. It paid $5.0 million upfront, agreed to mid-single- to low-double-digit royalties on future commercialized products and minimum product and raw-material purchases through 2023. Worldwide distribution exclusivity for specified Illumina HLA products begins June 1, 2018; development and commercialization rights for future products are also included.
- CareDx adopted ASC 606 on January 1, 2018. Adoption added $2.9 million to accounts receivable and retained earnings; the reported Q1 revenue impact was $12,000. The company also acquired the remaining Allenex noncontrolling interest in March.
Outlook, risks and contingencies
Management stated that existing cash, the Perceptive refinancing proceeds and expected revenue should fund anticipated cash requirements for at least 12 months. The filing gives no specific revenue or earnings guidance. The company has a $274.1 million accumulated deficit and a history of operating losses and negative operating cash flow; it may need additional financing, with no assurance it can obtain funding on sufficient or favorable terms.
Key risks include dependence on reimbursement and payer coverage, especially given Medicare’s substantial share of revenue; adoption and commercial success of AlloSure and new products; execution of the Illumina agreement and its development, purchase and commercialization commitments; and Perceptive’s restrictive covenants and default provisions. CareDx disclosed it was not in compliance with certain Danske covenants at December 31, 2017 and March 31, 2018; the related debt was subsequently repaid using Perceptive proceeds. The filing reports no material change to previously disclosed risk factors other than the new Perceptive debt and Illumina agreement risks. The Oberland contract dispute had been settled in 2017; the company stated that ordinary-course legal matters are inherently uncertain. Management reported disclosure controls were effective and no material change in internal control over financial reporting.
Important facts for investors to verify
- Whether AlloSure test volumes, reimbursement collections and broader payer coverage develop as management expects.
- Whether testing revenue growth translates into improved operating performance, given higher testing and sales-and-marketing costs.
- Cash burn and financing needs after the $15.0 million Perceptive loan, including availability and conditions for the optional $10.0 million tranche.
- The dilution and potential future share issuance implications of debt conversions, outstanding warrants and equity awards.
- Execution of Illumina product development and commercialization milestones, minimum purchase commitments and associated royalty economics.
- The effect of Medicare concentration, foreign-exchange exposure and other disclosed operating risks on future results.