NEW YORK – Skin disease diagnostics company Castle Biosciences said on Tuesday that it has signed a definitive agreement to acquire Cernostics, a privately held firm that specializes in spatial biology and artificial intelligence-driven image analysis of tissue biopsies.
Under the terms of the agreement, Pittsburgh-based Cernostics will become a wholly owned subsidiary of Castle Biosciences. At closing, Castle will pay $30 million in initial consideration to Cernostics security holders, which may consist entirely of cash or $20 million in cash and $10 million in Castle common stock, at Castle's discretion. Further, up to an additional $50 million in cash and/or common stock may be payable in connection with the achievement of certain milestones based on Cernostics' 2022 performance.
The transaction is expected to close prior to the end of this year, subject to the delivery of certain financial statements to Castle, continued employment of certain Cernostics personnel, and satisfaction of other customary conditions to closing.
Upon finalization of the deal, Cernostics CEO Mike Hoerres, as well as the company's executive management team and other staff, are expected to stay with Castle. Cernostics' laboratory and operations will remain in Pittsburgh.
Cernostics applies spatial biology and biologically aware AI and machine learning to tissue diagnostics. The company's TissueCypher Barrett's Esophagus Assay is a laboratory-developed test that's been designed to predict future development of high-grade dysplasia (HGD) and/or esophageal cancer in patients with Barrett's esophagus. It's indicated for patients with endoscopic biopsy-confirmed BE that is graded non-dysplastic, indefinite for dysplasia, or low-grade dysplasia.
"Acquiring the TissueCypher platform is aligned with our commitment to utilizing innovative technology to provide clinically actionable information that guides disease management and improves patient outcomes," Castle CEO Derek Maetzold said in a statement. "The TissueCypher Barrett's Esophagus Assay addresses an unmet need in BE, as it is designed to objectively and accurately predict progression from non-dysplastic, indefinite for dysplasia and low-grade dysplasia BE to HGD or esophageal adenocarcinoma (EAC)."
EAC is highly lethal with five-year survival rates of less than 20 percent, he noted. Intervention in patients with BE has been proven to reduce progression to EAC.
In a note to investors, SVB Leerink analyst Puneet Souda said the acquisition "sets the stage" for Castle's expansion into the GI market.
The TissueCypher test is currently reimbursed by Medicare at $2,513, with potential for a higher ADLT reimbursement longer term, he said. Castle sees a $1 billion total addressable market for Cernostics BE assays with material revenue and volume contribution in 2023, and the company's management sees opportunities in GI that are similar to dermatology.
Souda noted that Castle expects to hire 13 to 15 GI sales reps to build support for the franchise in the 12,000 to 13,000 clinically active GI physicians and 1,000 to 2,000 small groups of cardiothoracic surgeons that would form the target market.
"We expect Castle to position GI as an additional disease area beyond skin cancer with classifier assays that help stratify risk for patients," he wrote.
Castle's shares rose more than 7 percent to $67.47 in morning trading on the Nasdaq.