CareDx, Inc. — FY2015 Form 10-K
Reporting period: Fiscal year ended December 31, 2015. This annual filing also reports selected fourth-quarter results and subsequent developments through March 28, 2016. CareDx is a molecular diagnostics company whose revenue was overwhelmingly generated by AlloMap, a heart-transplant rejection surveillance test.
Financial performance
| Metric | FY2015 | FY2014 | Change |
|---|---|---|---|
| Total revenue | $28.1 million | $27.3 million | Up 3% |
| Testing revenue | $27.9 million | $25.8 million | Up 8% |
| Operating expenses | $40.1 million | $26.1 million | Up $14.0 million |
| Operating income (loss) | $(11.9) million | $1.3 million | Down $13.2 million |
| Net income (loss) | $(13.7) million | $0.8 million | Down $14.5 million |
| Net loss per share | $(1.16) | — | FY2014 reported diluted EPS of $0.10 |
| Cash used in operating activities | $9.8 million | $3.4 million | Use increased $6.4 million |
| Cash and cash equivalents at year-end | $29.9 million | $36.4 million | Down $6.5 million |
| Total debt at year-end | $15.8 million | $11.4 million | Up $4.3 million |
| Working capital | $24.2 million | $29.2 million | Down $5.0 million |
Testing gross margin was approximately 63% in 2015, compared with 67% in 2014, based on testing revenue less cost of testing. The company delivered 13,059 AlloMap results, up 9% from 11,930 in 2014; revenue growth also reflected more payers qualifying for accrual-basis revenue recognition. Medicare represented 50% of testing revenue, compared with 51% in 2014. The filing reports that approximately 79% of AlloMap results delivered in the 12 months ended June 30, 2015 had been reimbursed as of December 31, 2015.
Fourth-quarter 2015 revenue was $6.6 million, versus $8.0 million in fourth-quarter 2014. Fourth-quarter net loss was $4.8 million, versus approximately break-even results in the prior-year quarter.
Material changes and operating developments
- Research and development expense rose 143% to $9.3 million, primarily from added personnel and spending on dd-cfDNA clinical trials. Sales and marketing rose 29% to $8.3 million; general and administrative expense rose 45% to $12.2 million.
- Collaboration and license revenue fell 82% to $0.3 million, primarily because the LabCorp collaboration terminated in 2014.
- AlloMap was used at 120 of approximately 130 U.S. heart-transplant centers. CareDx reported more than 81,000 commercial tests performed since launch.
- The DART kidney-transplant study had enrolled more than 200 patients at 13 centers by year-end. CareDx reported completion of analytical validation for AlloSure and release of a clinically validated laboratory-developed test in December 2015; commercial testing was limited and did not yet generate material testing revenue.
- CareDx entered agreements in December 2015 to acquire approximately 78% of Allenex, with a tender offer for the remaining shares launched in March 2016. The proposed total purchase price was approximately $35 million. The acquisition was pending at the filing date.
Liquidity, debt and outlook
CareDx stated that existing cash, projected receipts and its existing term loan would not fund operations for at least the next 12 months. Assuming the Allenex acquisition and proposed bridge financing, management projected that cash would be exhausted in July 2016 without additional funding or substantial cost and operating reductions. The filing and auditor’s report state that these conditions raise substantial doubt about the company’s ability to continue as a going concern.
The proposed Oberland Capital bridge loan was $18 million for six months, at 20% annual interest, secured by substantially all company assets, with estimated fees of approximately $2.0 million and prepayment premiums. About $16 million was intended to repay the existing East West Bank loan. CareDx said it would need additional financing for working capital and to refinance the bridge loan within six months. It was pursuing debt and equity financing; sales under its Form S-3 were not available until mid-2016.
Management provided no specific revenue or earnings guidance. It expected continued investment in AlloSure and other development programs, and higher research and development costs. The company also noted that AlloMap reimbursement and revenue recognition depend on payer coverage and collection; some tests are recognized only when cash is received.
Risks, contingencies and unusual items
- Funding and going concern: Failure to obtain financing could require significant reductions or cessation of operations. The proposed acquisition adds cash needs and refinancing risk; failure to close could expose CareDx to Swedish regulatory fines and shareholder claims.
- Reimbursement concentration: Medicare accounted for half of testing revenue. CMS had proposed a 77% AlloMap rate reduction in 2015, then reversed the proposal and retained a $2,821 rate for 2016; formal Category 1 CPT pricing was deferred until 2017.
- Product and regulatory risk: AlloMap remained the principal source of revenue. AlloSure and kidney applications were still being validated, and possible FDA regulation of laboratory-developed tests could require additional trials and clearance or approval.
- Supplier and facility reliance: The U.S. testing operation depended on a single Brisbane laboratory and sole-source suppliers for certain instruments and reagents. The company noted that a key PCR instrument was no longer in production, with service support committed through 2017.
- Acquisition and debt exposure: Allenex integration, financing, dilution, additional debt costs, and possible impairment of acquired intangibles or goodwill were material risks. The proposed bridge loan’s 20% interest rate and asset security were significant terms.
- Other items: The 2015 net loss followed 2014 net income that included a $1.5 million tax benefit related to the ImmuMetrix acquisition. The 2015 accounts also included $1.3 million in share-based compensation. No material legal proceedings were reported. Management assessed disclosure controls and internal control over financial reporting as effective at year-end.
Important facts for investors to verify
- Whether Allenex’s tender offer closed, the final cash and share consideration, and the actual integration and financing costs.
- Whether CareDx secured sufficient financing, refinanced the bridge loan, and avoided the forecast July 2016 cash shortfall.
- Subsequent cash balances, operating cash use, debt terms, covenant compliance, and any equity issuance or dilution.
- AlloMap reimbursement rates, Medicare policy and coding decisions, payer collection rates, and the trend in delivered tests versus tests for which revenue is recognized.
- DART study results, AlloSure clinical validation and commercialization progress, and any resulting regulatory or reimbursement requirements.