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Castle Biosciences Q2 Revenues Up 168 Percent

NEW YORK – Castle Biosciences reported after the close of the market on Tuesday that its second quarter revenues rose 168 percent year over year, thanks largely to strong growth in its melanoma and uveal melanoma test volumes.

For the three months ended June 30, the skin cancer test developer reported total revenues of $10.7 million, up from $4.0 million during the same period a year earlier, and beating the average Wall Street analyst estimate of $7.5 million.

The company delivered 4,067 total DecisionDx-Melanoma and DecisionDx-UM proprietary test reports, an increase of 24 percent over the 3,281 tests delivered in Q2 2018. DecisionDx-Melanoma test reports alone grew 27 percent year over year, with the company providing 3,691 test reports in Q2 2019, compared to 2,899 reports during Q2 2018. Castle also provided 376 DecisionDx-UM test reports during the second quarter, which was relatively consistent with the same period last year.

DecisionDx-Melanoma — Castle's gene expression profile (GEP) test to identify the risk of recurrence or metastasis in Stage I, II, and III melanoma — is based on the biologic profile of 31 genes within patients' tumor tissue. DecisionDx-UM is a prognostic test that determines the metastatic risk associated with ocular melanoma tumors of the eye by assessing the GEP of a subset of genes which are differentially expressed in primary tumor cells compared to cells that have undergone metastasis.

Castle said that Medicare Administrative Contractor Palmetto GBA posted a draft Medicare local coverage determination (LCD) on Aug. 22 that would result in expanded Medicare coverage for DecisionDx-Melanoma if finalized. The company expects Palmetto to finalize and implement the draft LCD after a public comment period that closes on Nov. 21.

The firm also noted that the issuance of the LCD for DecisionDx-Melanoma, effective Dec. 3, 2018, as well as confirmation of the Medicare contractor rate for DecisionDx-Melanoma, affected the year-over-year revenue comparison. As a result, all 2018 Medicare claims covered under the LCD were recognized as revenue in the fourth quarter of 2018. Medicare revenues for DecisionDx-Melanoma associated with test reports delivered in the three months ended June 30, 2018, but not recorded until the fourth quarter of 2018, were $2.2 million. Also, included in revenues for the quarter ended June 30, 2019 and 2018 were revenue adjustments related to tests delivered in prior periods of $3.3 million and a loss of $800,000, respectively.

"We are pleased with our strong second quarter performance, including our 27 percent year-over-year growth in DecisionDx-Melanoma test report volume, which we believe was largely driven by our successful first quarter 2019 commercial expansion," Castle President and CEO Derek Maetzold said in a statement. "We are also encouraged by the success of our recently completed initial public offering and the strong level of interest from our investors. We believe the proceeds from our initial public offering, combined with our existing working capital, position us to execute upon our expansion plans and fund research and development activities."

In late July, the firm closed its initial public offering of 4.6 million shares of common stock, including 600,000 shares sold to the offering's underwriters when they exercised their option to purchase additional shares, at $16 per share. Gross proceeds from the IPO were $73.6 million, and the firm said it netted $66.0 million after deducting underwriting discounts and commissions and other offering expenses.

On a conference call with analysts following the release of the earnings, Maetzold said the company expanded its sales team in Q1 to cover 23 territories from the previous 14, and that Q2 represented the first full quarter since the expansion.

"Our performance during this quarter is a reflection of this expansion, which drove both continued penetration within our base of existing physicians, as well as accelerated conversion of new prescribing physicians," he added, noting that growth in new ordering clinicians for DecisionDx-Melanoma was 34 percent during the quarter.

Maetzold also noted that the company's data indicates that it tests approximately 75 percent of the patients diagnosed with uveal melanoma in the US each year with its DecisionDx-UM test.

In discussing Castle's pipeline, Maetzold said the company presented data in May from an ongoing development study of its cutaneous squamous cell carcinoma prognostic test at the American College of Mohs Surgery Annual Meeting.

"That data showed continued progress towards validation of this prognostic test, and we have additional archival studies and a prospective validation study for DecisionDx-SCC underway," he added. "We also initiated the initial development of validation studies for our suspicious pigmented lesions test." There is no early data as of yet for this second pipeline product, however.

The firm's Q2 net loss attributable to its common shareholders narrowed to $2.3 million, or $1.05 per share, from $4.1 million, or $2.15 per share, in Q2 2018, beating the analysts' average expectation for a loss of $1.36 per share.

Castle's Q2 R&D costs rose 8 percent to $1.3 million from $1.2 million in the year-ago quarter, and its SG&A expenses rose 62 percent to $6.8 million from $4.2 million.

The company ended the quarter with $17.5 million in cash and cash equivalents.

On the call, Maetzold noted that it's too late in the year for the company to provide guidance for the rest of 2019. Castle is currently formulating its expectations and internal plans for 2020 and may provide guidance for next year, if appropriate.

In a note to investors, SVB Leerink analyst Puneet Souda said he sees Castle as a leading skin cancer diagnostics company serving an estimated $2 billion market. The company also has very limited competition, he added, positioning it for strong revenue growth in the next few years.

Canaccord Genuity analyst Mark Massaro called the Palmetto draft LCD a "positive surprise" that could increase Castle's total volume and revenue by about 15 percent in the first year after the decision turns final.

Castle's shares fell nearly 2 percent to $27.44 in Wednesday morning trading on the Nasdaq.

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