Castle Biosciences(CSTL) - 2023 Q1 - Quarterly Report

PART I. FINANCIAL INFORMATION Item 1. Financial Statements Presents unaudited condensed consolidated financial statements, offering a snapshot of the company's financial health and performance Condensed Consolidated Balance Sheets Total assets decreased from $447.3 million to $426.9 million, driven by reduced marketable securities and cash, with total liabilities also decreasing Condensed Consolidated Balance Sheets | Metric | March 31, 2023 (in thousands) | December 31, 2022 (in thousands) | | :-------------------------- | :---------------------------- | :------------------------------- | | Cash and cash equivalents | $114,821 | $122,948 | | Marketable investment securities | $117,234 | $135,677 | | Total current assets | $271,100 | $292,288 | | Total assets | $426,891 | $447,329 | | Accrued compensation | $12,796 | $24,358 | | Total current liabilities | $30,143 | $36,128 | | Total liabilities | $41,742 | $48,179 | | Total stockholders' equity | $385,149 | $399,150 | Unaudited Condensed Consolidated Statements of Operations Net revenues grew 56.6% to $42.0 million, but rising operating expenses resulted in increased operating and net losses Unaudited Condensed Consolidated Statements of Operations | Metric | Three Months Ended March 31, 2023 (in thousands) | Three Months Ended March 31, 2022 (in thousands) | | :-------------------------- | :----------------------------------------------- | :----------------------------------------------- | | Net revenues | $42,037 | $26,852 | | Cost of sales (exclusive of amortization) | $10,182 | $5,944 | | Research and development | $14,393 | $10,761 | | Selling, general and administrative | $46,762 | $30,453 | | Amortization of acquired intangible assets | $2,222 | $1,648 | | Change in fair value of contingent consideration | $0 | $2,562 | | Total operating expenses, net | $73,559 | $51,368 | | Operating loss | $(31,522) | $(24,516) | | Interest income | $2,336 | $30 | | Interest expense | $(4) | $(3) | | Loss before income taxes | $(29,190) | $(24,489) | | Income tax expense | $14 | $134 | | Net loss | $(29,204) | $(24,623) | | Loss per share, basic and diluted | $(1.10) | $(0.97) | Unaudited Condensed Consolidated Statements of Comprehensive Loss Comprehensive loss was $(28.96) million for Q1 2023, including a $0.245 million unrealized gain, compared to $(24.62) million in Q1 2022 Unaudited Condensed Consolidated Statements of Comprehensive Loss | Metric | Three Months Ended March 31, 2023 (in thousands) | Three Months Ended March 31, 2022 (in thousands) | | :-------------------------- | :----------------------------------------------- | :----------------------------------------------- | | Net loss | $(29,204) | $(24,623) | | Net unrealized gain on marketable investment securities | $245 | $0 | | Comprehensive loss | $(28,959) | $(24,623) | Unaudited Condensed Consolidated Statements of Stockholders' Equity Stockholders' equity decreased from $399.15 million to $385.15 million, mainly due to net loss, partially offset by stock-based compensation Unaudited Condensed Consolidated Statements of Stockholders' Equity | Metric | January 1, 2023 (in thousands) | March 31, 2023 (in thousands) | | :-------------------------- | :----------------------------- | :---------------------------- | | Total Stockholders' Equity | $399,150 | $385,149 | | Stock-based compensation expense | $13,525 | | | Net loss | $(29,204) | | | Issuance of common stock under ESPP | $1,652 | | Unaudited Condensed Consolidated Statements of Cash Flows Net cash used in operating activities increased to $(25.4) million for Q1 2023, while investing activities provided $16.6 million and financing activities provided $0.7 million Unaudited Condensed Consolidated Statements of Cash Flows | Cash Flow Activity | Three Months Ended March 31, 2023 (in thousands) | Three Months Ended March 31, 2022 (in thousands) | | :-------------------------- | :----------------------------------------------- | :----------------------------------------------- | | Net cash used in operating activities | $(25,439) | $(21,430) | | Net cash provided by (used in) investing activities | $16,584 | $(402) | | Net cash provided by financing activities | $728 | $1,216 | | Net change in cash and cash equivalents | $(8,127) | $(20,616) | | Cash and cash equivalents, end of period | $114,821 | $309,017 | Notes to the Unaudited Condensed Consolidated Financial Statements Provides detailed explanations of accounting policies, estimates, and financial statement line items, including revenue recognition, acquisitions, and stock-based compensation Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses the company's financial condition, operations, business developments, test portfolio, and reimbursement landscape for Q1 2023 versus Q1 2022 Overview Castle Biosciences is a commercial-stage diagnostics company providing personalized, clinically actionable information for treatment decisions - Castle Biosciences is a commercial-stage diagnostics company providing personalized, clinically actionable information to inform treatment decisions and improve health outcomes[246][367] - The company offers five proprietary MAAA tests in dermatologic, ocular, and gastroenterology fields, and a PGx test (IDgenetix) for mental health conditions, acquired in April 2022[338] Our Test Portfolio Offers a portfolio of diagnostic tests across dermatology, ocular oncology, gastroenterology, and mental health, addressing significant unmet clinical needs Key Diagnostic Tests and Estimated U.S. TAM | Test Name | Indication | Estimated U.S. TAM | | :------------------------------ | :--------------------------------------------- | :----------------- | | DecisionDx-Melanoma | Invasive cutaneous melanoma (risk of metastasis/recurrence) | ~$540 million | | DecisionDx-SCC | Cutaneous squamous cell carcinoma (high-risk) | ~$820 million | | MyPath Melanoma / DiffDx-Melanoma | Difficult-to-diagnose melanocytic lesions | ~$600 million | | DecisionDx-UM | Uveal melanoma (risk of metastasis) | ~$10 million | | TissueCypher Barrett's Esophagus Test | Barrett's esophagus (predict HGD/esophageal cancer) | ~$1 billion | | IDgenetix | Depression, anxiety, other mental health conditions | ~$5 billion | - The company suspended the clinical offering of DiffDx-Melanoma in February 2023 after an internal assessment showed MyPath Melanoma's comparable technical performance[22] Commercial Expansion Efforts Expanded commercial teams through the AltheaDx acquisition and additional territories for TissueCypher, with dermatologic teams focusing on core tests - Acquired AltheaDx in late April 2022, adding approximately 20 outside sales territories[341] - Added additional outside territories for TissueCypher Barrett's Esophagus Test and established a new commercial sales team dedicated to Diagnostic GEP offering in September 2022[341] - The dermatologic commercial team shifted focus primarily to DecisionDx-Melanoma and DecisionDx-SCC[341] Reimbursement Reimbursement from third-party payors is the primary revenue source, with Medicare coverage for key tests and recent rate updates for TissueCypher, DecisionDx-SCC, and IDgenetix - Primary revenue source is reimbursement from third-party payors (government and commercial)[24] - Medicare coverage obtained for DecisionDx-Melanoma, DecisionDx-SCC, MyPath Melanoma, DecisionDx-UM, TissueCypher, and IDgenetix, covering approximately 60 million lives[24] Medicare Reimbursement Rates and Status Updates | Test Name | 2023 Medicare Rate / Status | Previous Rate / Status | | :-------------------- | :-------------------------- | :--------------------- | | DecisionDx-Melanoma | $7,193 per test | $7,193 per test (2022) | | MyPath Melanoma | $1,755 per test | $1,950 per test (2022) | | DiffDx-Melanoma | Preliminary gapfill rate of $1,950 per test (subject to change) | PLA code obtained in Q2 2022, gapfill pricing in 2023 | | TissueCypher | $4,950 per test (effective Jan 1, 2023, through Dec 31, 2024) | $2,513 (2022 CLFS rate), $2,350 (initial period rate Apr-Dec 2022) | | DecisionDx-SCC | Preliminary gapfill rate of $3,159 per test (expected final rate Jan 1, 2024) | $3,873 per test (Novitas reimbursement) | | IDgenetix | Contractor priced at $917 (new CPT code, gapfill pricing in 2023) | ~$1,500 per test (prior to new CPT code) | Delivered Test Reports Total test reports delivered increased 72.9% to 14,916 in Q1 2023, driven by growth in both dermatologic and non-dermatologic tests Test Reports Delivered (Q1 2023 vs. Q1 2022) | Test Category | Q1 2023 | Q1 2022 | Change (%) | | :---------------------- | :------ | :------ | :--------- | | Dermatologic Total | 10,974 | 8,115 | 35.2% | | DecisionDx-Melanoma | 7,583 | 6,023 | 25.9% | | DecisionDx-SCC | 2,411 | 1,142 | 111.1% | | Diagnostic GEP offering | 980 | 950 | 3.2% | | Non-Dermatologic Total | 3,942 | 512 | 670.0% | | DecisionDx-UM | 409 | 456 | -10.3% | | TissueCypher | 1,383 | 56 | 2369.6% | | IDgenetix | 2,150 | 0 | N/A | | Grand Total | 14,916 | 8,627 | 72.9% | - Dermatologic test report volume increased by 35.2% YoY, primarily from DecisionDx-Melanoma (25.9% increase) and DecisionDx-SCC (111.1% increase)[47] - Non-dermatologic tests, particularly TissueCypher and IDgenetix, significantly contributed to the overall increase in test reports[47] Information About Certain Metrics Tracks new and total ordering clinicians for dermatologic tests to assess sales effectiveness and adoption growth - New ordering clinicians for dermatologic tests: 539 in Q1 2023 vs. 592 in Q1 2022[47] - Total ordering clinicians for dermatologic tests: 4,525 in Q1 2023 vs. 3,629 in Q1 2022[47] - Approximately 56% of clinicians ordering DecisionDx-SCC also ordered DecisionDx-Melanoma in Q1 2023, demonstrating leverage across dermatologic tests[47] Impact of Macroeconomic Conditions Macroeconomic conditions, including inflation and global conflicts, continue to impact business operations and financial performance, with uncertain future effects - Macroeconomic conditions (COVID-19, Ukraine-Russia conflict, economic slowdowns, inflation, rising interest rates) continue to have direct and indirect impacts on the business[381] - The extent of future impacts is uncertain and could negatively affect operational performance and financial condition[381] Our Financial Results Financial results are influenced by test volume, reimbursement, gross margin, sales force expansion, acquisitions, and new product development, with expected fluctuations in net loss - Report volume: Key indicator of adoption and affects revenue and costs - Reimbursement: Expanding reimbursement is crucial for product value and financial success - Gross margin: Important indicator of operating performance, reflecting average selling price and laboratory efficiency - Sales force and marketing programs: Expansion is expected to significantly impact performance - Integrating acquisitions: Affects revenue growth, operational results, and business strategy - New product development: Investment in R&D is critical for new products and favorable payor coverage decisions - Net loss may fluctuate significantly due to timing of development activities, sales and marketing growth, and revenue recognition under ASC 606[410] Components of the Results of Operations Details the various components contributing to financial results, including revenues, cost of sales, R&D, SG&A, amortization, contingent consideration, and interest Results of Operations - Comparison of the Three Months Ended March 31, 2023 and 2022 Net revenues increased 56.6% to $42.0 million, but rising operating expenses led to a larger net loss, and gross margin percentage slightly decreased Net Revenues by Type (Q1 2023 vs. Q1 2022) | Revenue Type | Q1 2023 (in thousands) | Q1 2022 (in thousands) | Change (in thousands) | Change (%) | | :-------------------- | :--------------------- | :--------------------- | :-------------------- | :--------- | | Dermatologic | $35,911 | $24,339 | $11,572 | 47.5% | | Non-Dermatologic | $6,126 | $2,513 | $3,613 | 143.8% | | Total Net Revenues | $42,037 | $26,852 | $15,185 | 56.6% | - Cost of sales (exclusive of amortization) increased by $4.2 million (71.3%) due to higher personnel costs, supplies, and third-party services, partly from the AltheaDx acquisition[61][64] - Gross margin percentage decreased from 71.7% in Q1 2022 to 70.5% in Q1 2023, primarily due to higher personnel costs and amortization expense[65] - Research and development expenses increased by $3.6 million (33.8%), mainly due to higher personnel costs and clinical study expenses[66] - Selling, general and administrative expenses increased by $16.3 million (53.6%), with sales and marketing up $11.7 million (64.3%) and general and administrative up $4.6 million (37.5%), largely driven by headcount expansion and higher compensation[67][200][215] - Amortization of acquired intangible assets increased by $0.6 million due to the AltheaDx acquisition[76] - Interest income increased by $2.3 million due to higher interest rates and marketable investment securities purchases[100] - Stock-based compensation expense totaled $13.5 million in Q1 2023, up from $8.4 million in Q1 2022, reflecting annual grant awards and increased headcount[61] Liquidity and Capital Resources Liquidity sources total $232.0 million as of March 31, 2023, with management expecting sufficient capital for operations despite historical net losses - Principal sources of liquidity are cash and cash equivalents ($114.8 million) and marketable investment securities ($117.2 million) as of March 31, 2023[101] - The company had a net loss of $29.2 million for Q1 2023 and an accumulated deficit of $190.1 million as of March 31, 2023[78] - Management believes existing liquidity and anticipated cash from sales will be sufficient for operations for at least the next 12 months and the foreseeable future[101][103] - Primary uses of capital include compensation, R&D, laboratory operations, equipment, legal/regulatory expenses, and general administrative costs - Contingent consideration of up to $57.5 million remains for the AltheaDx acquisition, based on 2023 and 2024 commercial milestones[78][216] - Total undiscounted future minimum payment obligations under operating and finance leases are approximately $23.1 million, with an expected increase of $1.7 million from a new Phoenix lab lease[204] Item 3. Quantitative and Qualitative Disclosures About Market Risk As a smaller reporting company, the company is exempt from providing quantitative and qualitative disclosures about market risk - As a smaller reporting company, the company is exempt from providing quantitative and qualitative disclosures about market risk[112] Item 4. Controls and Procedures Management concluded disclosure controls and procedures were effective as of March 31, 2023, with no material changes in internal control over financial reporting - Disclosure controls and procedures were evaluated as effective at the reasonable assurance level as of March 31, 2023[113] - No material changes in internal control over financial reporting occurred during Q1 2023[87] PART II. OTHER INFORMATION Item 1. Legal Proceedings No pending or threatened litigation is expected to materially adversely affect the company's financial position, results of operations, or cash flows - No pending or threatened litigation is expected to have a material adverse effect on financial position, results of operations, or cash flows[88][355] Item 1A. Risk Factors Outlines various risks that could materially affect the company's business, financial condition, results of operations, and growth prospects - The company faces risks related to its financial condition, business operations, reimbursement and government regulation, intellectual property, employee matters, and common stock ownership[92][115] - New or changed risk factors are highlighted with an asterisk, indicating updates since the last annual report[92] Risks Related to our Financial Condition Financial risks include reliance on DecisionDx-Melanoma, economic conditions, billing complexities, historical losses, and the need for additional capital - Revenue primarily depends on DecisionDx-Melanoma and other dermatologic tests - Unfavorable U.S. and global economic conditions, including inflation and bank failures, could adversely affect business - Billing for products is complex, time-consuming, and requires substantial resources, leading to potential collection issues - The company has incurred significant losses since inception and may not achieve profitability - Quarterly and annual revenues may not reflect underlying business due to revenue recognition policies (ASC 606) and variable consideration - There is a need to raise additional capital to fund existing operations, commercialize new products, or expand operations Risks Related to Our Business Business risks include public health crises, reliance on third parties, database depletion, facility damage, market acceptance, new product development, and intense competition - Public health crises (e.g., pandemics) could adversely impact business operations, test demand, and sales activities - Reliance on third parties for sample collection, preparation, and delivery introduces risks of errors or delays - Depletion or loss of the sample database could significantly harm product development and improvement efforts - Damage or inoperability of primary clinical laboratory facilities could jeopardize testing and R&D efforts - Products may not achieve or maintain significant commercial market acceptance due to reliance on traditional methods or lack of guideline inclusion - New product development is lengthy, complex, and high-risk, with no assurance of successful commercialization or reimbursement - Reliance on limited or sole suppliers for reagents and materials could lead to supply disruptions and higher costs - The diagnostic testing industry is subject to rapid change, potentially making current or future products obsolete - Competition from other companies and academic institutions could prevent the company from increasing revenue or achieving profitability Risks Related to Reimbursement and Government Regulation Reimbursement and regulatory risks involve limited coverage, industry regulation, potential FDA changes for LDTs, healthcare policy shifts, and fraud and abuse laws - Limited reimbursement coverage and inadequate rates from third-party payors (government and commercial) could negatively affect commercial success and revenue - The company operates in a heavily regulated industry, requiring compliance with federal, state, and foreign laboratory licensing requirements (e.g., CLIA, FDA) - Changes in FDA enforcement discretion for LDTs could subject products to extensive regulatory requirements, including premarket review and clinical trials, increasing costs and delaying commercialization - Interim and preliminary clinical study data may change, impacting reputation and marketing efforts - Changes in healthcare policy, statutes, or regulations (e.g., ACA, PAMA, IRA) could increase costs, decrease revenues, and limit reimbursement - Arrangements with healthcare providers and payors are subject to fraud and abuse laws (AKS, Stark Law, FCA, EKRA, HIPAA), with potential for substantial penalties for non-compliance - Stringent and changing data privacy and security laws (e.g., HIPAA, CCPA, GDPR) pose risks of regulatory investigations, litigation, fines, and business disruptions Risks Related to Intellectual Property IP risks include challenges in obtaining and maintaining patent protection, validity issues, changes in patent law, and potential infringement claims from third parties - Inability to obtain and maintain sufficient intellectual property protection (patents, trademarks, trade secrets) could impair commercialization and competitive advantage - Issued patents may be found invalid or unenforceable if challenged, leading to increased competition - Changes in patent law (e.g., AIA, Supreme Court rulings) could diminish patent value and increase prosecution/enforcement costs - In-licensed intellectual property from government-funded programs may be subject to federal regulations like 'march-in' rights and U.S.-based manufacturing preferences - Commercial success depends on operating without infringing third-party intellectual property rights, with risks of litigation, substantial liabilities, and business disruption - Reliance on third-party information technology systems and software licenses means failure or loss of these could significantly harm business operations - Loss of third-party licenses or inability to obtain new ones on reasonable terms could prevent commercialization of existing or new diagnostic tests - Failure to protect the confidentiality of trade secrets could materially adversely affect technology value and business - Claims challenging the inventorship of patents and other intellectual property could lead to loss of rights or costly litigation - Non-compliance with patent maintenance procedures could result in loss of patent protection - Patent terms may be inadequate to protect competitive position for a sufficient amount of time Risks Related to Employee Matters and Managing Growth and Other Risks Related to Our Business Risks include dependence on key personnel, managing growth, acquisition disruptions, NOL limitations, tax law changes, cybersecurity threats, and product liability - High dependence on key personnel, including the President and CEO, with risks related to retention and competition for skilled staff - Inability to manage future growth effectively could lead to operational inefficiencies, increased costs, and damage to reputation - Strategic transactions (e.g., acquisitions) can be disruptive, divert management attention, and impact liquidity and financial results - Ability to use net operating loss carryforwards (NOLs) and other tax attributes may be limited by ownership changes (Section 382) - Changes in tax laws or regulations could adversely affect business operations and financial performance - Compromised information technology systems or data (including those of third parties) could lead to regulatory actions, litigation, fines, and business disruptions - Product or professional liability lawsuits could result in substantial liabilities, decreased demand, and reputational harm - International expansion exposes the company to business, regulatory, political, operational, financial, and economic risks - Requirements associated with being a public company increase costs and divert management attention - Failure to comply with environmental, health, and safety laws could result in fines or penalties Risks Related to Ownership of Our Common Stock Risks include stock price volatility, substantial sales by stockholders, discretion in capital use, no dividends, concentrated ownership, and anti-takeover provisions - The price of common stock may be volatile or decline regardless of operating performance due to numerous factors, including macroeconomic conditions, trading activity, and analyst coverage - Substantial sales of common stock, particularly by directors, executive officers, and significant stockholders, could cause the stock price to decline - Broad discretion in the use of working capital may not lead to effective use or increased share price - The company does not intend to pay dividends for the foreseeable future, requiring stockholders to rely on stock price appreciation for gains - Concentration of stock ownership (executive officers, directors, and >5% holders owning ~32%) limits other stockholders' ability to influence corporate matters - Delaware law and provisions in the company's certificate of incorporation and bylaws could make mergers, tender offers, or proxy contests difficult, potentially depressing the stock price - Exclusive forum provisions in the certificate of incorporation could limit stockholders' ability to obtain a favorable judicial forum for disputes Item 2. Unregistered Sales of Equity Securities and Use of Proceeds No net proceeds from the IPO have been used since the registration statement's effective date, with remaining funds invested in liquid securities - No net proceeds from the IPO have been used since the registration statement's effective date through March 31, 2023[464] - Remaining IPO proceeds are invested in cash and cash equivalent securities or highly liquid investment securities[464] Item 3. Defaults Upon Senior Securities There were no defaults upon senior securities during the reporting period - No defaults upon senior securities[464] Item 4. Mine Safety Disclosures This item is not applicable to the company - Not applicable[464] Item 5. Other Information There is no other information to report under this item - None[464] Item 6. Exhibits Lists all exhibits filed with the Quarterly Report on Form 10-Q, including corporate documents, compensation policies, and certifications - Exhibits include Amended and Restated Certificate of Incorporation and Bylaws, Non-Employee Director Compensation Policy, Retirement Policy, lease amendments, and officer certifications[495]