CareDx, Inc. — Q1 2015 Form 10-Q
Reporting period: Three months ended March 31, 2015. CareDx is a commercial-stage diagnostics company whose principal product is AlloMap, a blood test used to monitor heart-transplant recipients for rejection.
Financial performance and position
| Metric | Q1 2015 | Q1 2014 / prior date |
|---|---|---|
| Total revenue | $7.216 million | $5.924 million; up 22% |
| Testing revenue | $7.096 million | $5.834 million; up 22% |
| AlloMap results delivered | 3,111 | 2,793; up 11% |
| Gross profit / gross margin | $4.505 million / 62.4% | $3.762 million / 63.5% |
| Operating loss | $1.391 million | $0.227 million |
| Net loss | $2.272 million | $1.304 million |
| Net loss per share | $0.19 | $1.29 |
| Operating cash flow | $(1.014) million | $0.180 million |
| Cash and cash equivalents | $38.985 million | $36.431 million at Dec. 31, 2014 |
| Total debt, including current portion | $15.665 million | $11.412 million at Dec. 31, 2014 |
| Current assets / current liabilities | $42.301 million / $6.275 million | $40.346 million / $11.135 million at Dec. 31, 2014 |
Amounts are reported in U.S. dollars; balance-sheet amounts are as of the stated dates. Lower loss per share versus 2014 primarily reflects the much larger weighted-average share count following the 2014 IPO and reverse stock split, not a lower net loss.
Changes and notable items
- Revenue growth reflected higher recognized AlloMap volume, including approximately $0.8 million of additional Medicare-related revenue, and approximately $0.2 million of incremental cash collections from Medicaid and other cash payers.
- Operating expenses rose to $8.607 million from $6.151 million. R&D increased 98% to $1.421 million, sales and marketing increased 37% to $2.023 million, and general and administrative increased 51% to $2.705 million.
- Q1 2015 included a $0.6 million loss on extinguishment of prior debt within interest expense. Interest expense, net was $0.827 million, versus $0.548 million in Q1 2014.
- A $0.253 million noncash gain from remeasurement of ImmuMetrix contingent consideration partly offset operating expenses. The liability was $0.821 million at quarter-end, tied to a milestone of 2,500 U.S. commercial cfDNA tests by June 2020.
- Management changed two payers from cash-basis to accrual-basis revenue recognition based on reimbursement history. The change increased Q1 revenue by $0.1 million and changed reported loss per share from $0.20 to $0.19.
Cash, debt, outlook, and risks
Operating activities used $1.014 million; investing activities used $0.364 million, primarily for equipment; and financing activities provided $3.932 million. In January 2015, CareDx borrowed $16 million under a secured East West Bank facility, using proceeds to repay $11.3 million of prior term debt. The facility permits a further $4 million draw subject to conditions. Its floating rate is 2% plus the greater of 3.25% or the lender’s prime rate; maturity is December 1, 2018. Principal amortization begins in January 2016, with potential deferral to July 2016 if specified revenue milestones are met. CareDx reported compliance with covenants at March 31, 2015.
Management said cash and projected AlloMap receipts were expected to fund operations for at least the next 12 months, while cautioning that estimates may prove inaccurate and development programs may require additional funding. No specific revenue or earnings guidance was provided. Management expects increased R&D investment, including cfDNA work and clinical studies, and expects sales and marketing and public-company administrative costs to rise.
- AlloMap generated approximately 98% of revenue; reimbursement coverage, collection timing, payer appeals, and adoption remain important uncertainties. Medicare represented 52% of testing revenue in Q1 2015.
- Approximately 3,400 billed tests had not met revenue-recognition criteria at March 31, 2015; CareDx said timing and ultimate collection were uncertain.
- CareDx depends heavily on AlloMap while developing additional transplant-surveillance products, including cfDNA applications. Development, clinical validation, reimbursement, and commercialization may not succeed.
- The bank loan is secured by company assets other than intellectual property, has a floating interest rate, and includes financial covenants and default provisions.
- The Roche royalty arrangement includes a reduced combination-services percentage through September 30, 2017; subject to timely payment, no further royalties are payable for periods after that date.
- Management reported effective disclosure controls, no material changes in internal control, and no material legal proceedings or material changes to previously disclosed risk factors.
Investor verification checklist
- Track AlloMap test volume, reimbursement coverage, cash collections, and the number and aging of billed tests not yet recognized as revenue.
- Assess whether revenue growth can outpace testing costs and rising R&D, sales and marketing, and administrative expenses.
- Review operating cash burn against management’s 12-month liquidity estimate, debt service, covenant compliance, and eligibility for the potential $4 million draw.
- Monitor clinical and commercial progress of cfDNA programs and the ImmuMetrix milestone, as well as payer and regulatory developments.
- Confirm the effects of the payer revenue-recognition estimate change and the quarter’s debt-extinguishment charge when comparing results across periods.