Castle Biosciences, Inc. — FY 2023 Form 10-K
Reporting period: Fiscal year ended December 31, 2023; comparisons are with FY 2022. Castle Biosciences is a commercial-stage molecular diagnostics company whose tests support care decisions in dermatologic cancers, Barrett’s esophagus, uveal melanoma and mental health.
Financial and operating performance
| Metric | FY 2023 | FY 2022 |
|---|---|---|
| Net revenue | $219.8 million | $137.0 million |
| Gross margin | $165.8 million; 75.4% | $96.8 million; 70.6% |
| Operating loss | $68.0 million | $72.9 million |
| Net loss | $57.5 million; $2.14 per share | $67.1 million; $2.58 per share |
| Net cash used in operating activities | $5.6 million | $41.7 million |
| Cash and cash equivalents at year-end | $98.8 million | $122.9 million |
| Marketable investment securities at year-end | $144.3 million | $135.7 million |
- Revenue increased 60.4%. Dermatologic revenue rose to $183.4 million from $124.8 million; non-dermatologic revenue rose to $36.4 million from $12.2 million.
- Test reports increased 58.6%, to 70,429 from 44,419. DecisionDx-Melanoma reports rose 19.9%; DecisionDx-SCC reports rose 91.8%. TissueCypher and IDgenetix volumes also grew.
- Management attributed revenue growth mainly to greater report volumes, higher average selling prices for DecisionDx-SCC and TissueCypher, and the full-year contribution of IDgenetix. Net negative adjustments for prior-period test revenue were $4.5 million, versus $2.0 million in 2022.
- Operating expenses, net, rose 37.1% to $287.8 million, led by higher selling and marketing, research and development, staffing and laboratory costs. Stock-based compensation was $51.2 million, up from $36.3 million.
- Cash used in operations improved year over year, primarily due to higher customer collections. Investing cash outflow was $16.2 million, including $13.6 million of property and equipment purchases, largely for the Pittsburgh lab. Financing cash outflow was $2.3 million.
- Current assets were $295.6 million and current liabilities were $47.7 million. Total liabilities were $62.1 million, primarily operating lease obligations; the filing reports no material borrowings. Undiscounted future lease payments were approximately $24.4 million.
Material changes and business developments
- Revenue growth was accompanied by a 4.8 percentage-point increase in gross margin, to 75.4%. Net loss narrowed by $9.7 million, although the 2022 comparison benefited from an $18.3 million gain from remeasurement of contingent consideration; there was no comparable gain in 2023.
- Medicare represented 49% of revenue in 2023, down from 53% in 2022. One commercial payor represented 14% of 2023 revenue, underscoring payor concentration.
- DecisionDx-SCC’s Medicare coverage remains uncertain. A proposed Novitas policy recommended non-coverage; a final policy issued in June 2023 was suspended, and a substantially similar proposal followed. Separate draft policies from Palmetto and Noridian also recommended non-coverage. The filing does not establish the ultimate outcome.
- Medicare reimbursement for IDgenetix changed during 2023: the rate fell to $917 per test during a coding transition; a test-specific code was obtained, and the 2024 rate was set at $1,336. TissueCypher’s Medicare rate was $4,950 per test through 2024; DecisionDx-Melanoma’s 2024 rate was $7,193.
- Castle temporarily paused new TissueCypher orders in July 2023 to scale operations and clear its backlog. It resumed phased order intake in September and reported completing the existing backlog in October.
Outlook, risks and unusual items
- Management expects existing cash, marketable securities and anticipated product-sale cash flows to fund operations for at least 12 months after the financial statements were issued. The company also filed a shelf registration statement allowing up to $300 million of securities to be offered from time to time.
- Management expects continued investment in commercialization, clinical evidence, laboratory capacity and research and development, and anticipates expenses and losses may continue. A genomic test for inflammatory skin diseases is targeted for launch by the end of 2025, conditional on successful development and validation; more than 1,000 patients were enrolled in the study at year-end.
- On February 1, 2024, the company received a subpoena from the U.S. Department of Health and Human Services Office of Inspector General and said it was cooperating. The company could not estimate any potential loss or range of loss.
- The FDA proposed a four-year phaseout of its enforcement-discretion approach to laboratory-developed tests. If finalized as proposed, certain tests could require FDA clearance or approval by October 1, 2027, potentially involving added cost, studies or operational disruption.
- Revenue depends on variable estimates of reimbursement and collections, and may not track report volumes in the same period. KPMG identified measurement of test revenue, particularly estimates of collectible amounts from commercial payors and others, as a critical audit matter. The auditor gave unqualified opinions on the financial statements and internal control over financial reporting.
- Other key risks include reliance on a small number of payors, continued operating losses, reimbursement and regulatory changes, competition, supplier and laboratory continuity, and execution of product development and commercial growth. No goodwill impairment was recorded; year-end impairment testing showed reporting-unit fair value above carrying value.
Important facts for investors to verify
- Monitor the DecisionDx-SCC Medicare policy process and the resulting coverage, reimbursement and revenue effects.
- Track collections, receivables and future revenue adjustments against reported test volumes, particularly given payor concentration and estimation uncertainty.
- Follow the OIG inquiry for updates, potential claims, costs or disclosed outcomes.
- Assess progress on the FDA’s proposed LDT framework and any resulting compliance, clinical-study or commercialization requirements.
- Evaluate whether commercial growth and margin gains can offset operating costs, including stock-based compensation, and whether liquidity remains consistent with management’s stated runway.
- Verify TissueCypher’s sustained order-processing capacity and the clinical, regulatory and reimbursement milestones underlying the targeted 2025 inflammatory skin disease test launch.