Castle Biosciences, Inc. — Q3 2023 Form 10-Q
Reporting period: Three and nine months ended September 30, 2023; filed November 2, 2023. Castle is a commercial-stage diagnostics company whose revenue comes primarily from personalized testing services, especially DecisionDx-Melanoma. Financial statements are unaudited.
Financial performance and liquidity
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Net revenue | $61.5M | $37.0M | $153.7M | $98.7M |
| Gross margin | $47.9M; 77.9% | $25.8M; 69.8% | $114.4M; 74.4% | $70.2M; 71.1% |
| Operating loss | $(9.6)M | $(21.5)M | $(62.3)M | $(50.0)M |
| Net loss | $(6.9)M | $(20.2)M | $(54.9)M | $(46.5)M |
| Operating cash flow | Not provided for the quarter | $(24.2)M | $(35.7)M |
- Q3 revenue rose 66%; nine-month revenue rose 56%. Dermatologic revenue was $130.1M of nine-month sales; non-dermatologic revenue was $23.6M.
- Q3 gross margin improved mainly with higher revenue, test volumes and average selling prices. Nine-month net loss increased despite sales growth, reflecting higher operating expenses and the absence of a $18.0M contingent-consideration gain recorded in 2022.
- Cash and cash equivalents were $91.2M and marketable securities were $138.5M at September 30, 2023, totaling $229.8M; the securities are investment-grade U.S. government obligations with maturities of one year or less. Cash and securities totaled $258.6M at year-end 2022.
- No bank borrowings were reported; previously outstanding bank debt had been repaid. Undiscounted operating and finance lease payments totaled approximately $23.2M through 2033.
- Accounts receivable, current and long-term combined, was $38.3M, up from $24.6M at December 31, 2022. Medicare represented 49% of nine-month revenue.
Material changes and operating developments
- Test reports increased 52% in Q3 and 58% for the first nine months year over year. Nine-month dermatologic reports rose 30%, including DecisionDx-SCC reports up 92%; DecisionDx-Melanoma reports rose 21%.
- Higher DecisionDx-SCC reimbursement beginning July 2023 and a higher 2023 TissueCypher reimbursement rate contributed to revenue growth. IDgenetix’s Medicare rate fell from about $1,500 to $917 per multi-gene test after a billing-code change; a new PLA code took effect October 1, 2023, with a preliminary 2024 rate of $1,336 pending final rates.
- Castle temporarily paused new TissueCypher orders in July amid capacity constraints and backlog, resumed phased intake in September, and reported clearing the pre-existing backlog by mid-October. Q3 report volumes largely reflected backlog processing.
- Research and development expense rose 21% for the nine months; selling, general and administrative expense rose 30%. Stock-based compensation increased to $39.4M from $26.4M.
Outlook, risks and unusual items
- Management said existing cash, marketable securities and anticipated product-sale cash generation should fund operations through 2025, while noting that this depends on assumptions that may prove inaccurate. The filing also cites sufficient resources for at least the next 12 months.
- Management expects continued spending on commercialization, clinical evidence, product development, staffing and laboratory capacity; it expects cost of sales and research and development expense to increase. No specific revenue or earnings guidance was provided.
- Medicare coverage for DecisionDx-SCC remains a major uncertainty. A Novitas final noncoverage LCD was suspended, but a subsequent draft and separate Palmetto and Noridian drafts recommend noncoverage; finalization and timing are uncertain. DecisionDx-SCC’s ADLT status sets a rate and does not itself assure coverage.
- The FDA proposed phasing out its enforcement-discretion approach to laboratory-developed tests over four years. If finalized as proposed, certain tests could require premarket approval by October 1, 2027, potentially increasing costs or disrupting sales.
- AltheaDx contingent consideration had no recorded fair value or liability at September 30, but up to $57.5M could become payable for remaining 2023 and 2024 milestones. A possible $7.6M Friendswood land purchase remained subject to suitability diligence; closing was expected in late 2023.
- Castle has recurring losses and negative cash flows. Goodwill testing in June found fair value 13% above carrying value and no impairment; annual testing was underway. Management reported no litigation expected to have a material adverse effect and effective disclosure controls.
Investor verification priorities
- Track final Medicare coverage decisions for DecisionDx-SCC and resulting reimbursement, as well as the final 2024 IDgenetix rate.
- Assess whether TissueCypher capacity and turnaround times can support resumed orders and continued demand.
- Compare revenue growth with operating expenses, cash burn, receivables and the $229.8M cash-and-securities balance.
- Monitor the FDA’s final LDT rule and potential compliance, clinical-study and premarket-approval requirements.
- Verify any AltheaDx milestone payments, the Friendswood land transaction, and outcomes of ongoing goodwill impairment testing.