CareDx, Inc. — Q3 2022 Form 10-Q
Reporting period: Three and nine months ended September 30, 2022. CareDx develops and sells transplant-focused testing services, products, and patient and digital solutions. Financial statements are unaudited.
Financial performance
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Revenue | $79.4 million | $75.6 million | $239.4 million | $217.2 million |
| Operating loss | $17.3 million | $8.7 million | $58.1 million | $14.3 million |
| Net loss | $16.9 million | $11.9 million | $58.3 million | $14.5 million |
| Basic and diluted loss per share | $0.32 | $0.23 | $1.09 | $0.28 |
| Cash used in operating activities | Not provided for the quarter | $32.4 million | $23.5 million |
Q3 revenue grew 5% year over year, while operating expenses rose 15% to $96.7 million. Q3 direct costs of testing, product, and patient/digital services imply an overall gross margin of approximately 64%, compared with approximately 67% a year earlier. Management reported testing-services GAAP gross margin of 73%.
Q3 revenue by category: testing services $64.8 million, down 3%; products $7.2 million, up 10%; and patient and digital solutions $7.4 million, up 185%. Nine-month revenue rose 10%; testing services increased 4%, products 8%, and patient/digital solutions 176%.
Balance sheet and liquidity
- At September 30, 2022, cash and cash equivalents were $83.0 million and marketable securities were reported at $208.3 million on the balance sheet. Management cited total cash, cash equivalents and marketable securities of $291.3 million.
- No debt was outstanding. Total assets were $544.5 million, total liabilities $107.8 million, and stockholders’ equity $436.7 million. Accumulated deficit was $441.5 million.
- Nine-month investing cash outflow was $231.0 million, primarily from purchases of marketable securities; financing cash outflow was $2.2 million. Cash, cash equivalents and restricted cash decreased $265.5 million, largely reflecting the shift into marketable securities.
- Management said existing liquidity and expected cash from operations and agreements should cover anticipated cash requirements for the next 12 months, while noting potential future financing needs. A $200 million at-the-market equity offering facility is available; sales could dilute shareholders.
Material changes and management commentary
- Q3 testing-services revenue declined despite management reporting 46,500 patient test results, up 15% year over year. The company attributed the revenue decline to more tests not yet covered, Medicare sequestration reinstatement, and payer mix.
- Nine-month testing-services revenue growth reflected more than 23,000 additional patient results versus 2021. Patient/digital revenue growth largely reflected the fourth-quarter 2021 acquisitions of MedActionPlan and The Transplant Pharmacy.
- Operating losses widened as expenses increased. Nine-month general and administrative expense rose 51%, primarily due to higher legal expense, stock-based compensation, consultants, and software. Research and development and sales and marketing expenses also rose, reflecting investment in personnel and commercial and product development.
- CareDx reported serving its 100,000th transplant patient. It has no debt, but continues to incur losses and negative operating cash flows; profitability guidance was not provided.
Outlook, risks, contingencies, and unusual items
- The filing provides no numerical revenue, earnings, or margin guidance. Management expects continued investment in research, clinical studies, commercialization, and operating capacity.
- Medicare accounted for approximately 53% of total Q3 revenue and 54% for the first nine months; the company also said Medicare represented 64% of Q3 testing-services revenue. Coverage, reimbursement rates, payer mix, and collection outcomes are material business risks.
- DOJ and SEC investigations, along with a state regulatory information request, concern business practices related to kidney testing and phlebotomy and, for the SEC, certain accounting and public-reporting practices. The company is cooperating and says outcomes cannot be predicted.
- In litigation with Natera, a jury awarded CareDx $44.9 million in March 2022; post-trial motions remained pending, and the company had not recorded the award. The Federal Circuit affirmed dismissal of CareDx’s patent infringement suit in July 2022. Natera’s separate patent claims against CareDx remain, as do securities class-action and derivative cases. CareDx recorded no liabilities for these suits.
- The company recorded a $0.5 million impairment of corporate debt securities in Q3. COVID-19-related disruption to transplant volumes, clinical studies, staffing, and supplies remains a risk. CareDx also relies on a single U.S. testing laboratory and certain sole-source suppliers.
- Operating lease liabilities were $39.9 million at quarter end. New or expanded office leases contributed to higher right-of-use assets and lease obligations.
Most important facts for investors to verify
- Whether test-result growth translates into revenue growth, particularly given uncovered testing, reimbursement uncertainty, sequestration, and payer mix.
- Progress toward controlling operating expenses and narrowing losses and operating cash outflows.
- Liquidity composition, marketable-security maturities and credit exposure, and any use of the $200 million ATM facility.
- Developments and potential financial consequences from DOJ/SEC inquiries and the Natera, securities class-action, and derivative litigation; the $44.9 million jury award is not recognized as income.
- Commercial adoption and reimbursement for newer testing, product, and digital offerings, as well as execution and costs associated with acquisitions and leases.