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Castle Biosciences Buy of Cernostics Aligns With Goal to Diversify Portfolio

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NEW YORK – Through its planned $80 million acquisition of Cernostics, Castle Biosciences aims to accelerate sales and marketing for an assay to predict the progression from Barrett's esophagus to high-grade dysplasia or esophageal adenocarcinoma.

Additionally, the deal fits with Castle Bio's goal of diversifying its product portfolio by adding Cernostics' TissueCypher Barrett's Esophagus Assay, which uses spatial biology as well as artificial intelligence and image-based analysis of biomarkers in tissue biopsies, augmenting Castle's gene expression-based tests for diagnosing skin and eye cancer.

According to Castle CEO Derek Maetzold, the acquisition, expected to be completed by the end of this year, provides the company with a "very good strategic fit in a parallel category with an opportunity to build multiple tests." He added that Castle expects to start seeing material revenues from the acquisition beginning in 2023.

TissueCypher targets Barrett's esophagus, a gastroesophageal reflux disease that occurs when the cells lining the esophagus change because they've been exposed to stomach acid for years, increasing the risk for esophageal cancer.

Clinicians typically use endoscopy to diagnose and stage Barrett’s esophagus and pathologists examine tissue slides through a microscope to evaluate cell changes that could become cancerous.

"Right now, we are relying only on subjective pathological interpretation," said David Diehl, a clinical professor of medicine and pathology at Scranton, Pennsylvania-based Geisinger Commonwealth School of Medicine.

Geisinger collaborated with Cernostics in the development of clinical evidence to demonstrate the value of TissueCypher for risk stratification of patients with Barrett's esophagus.

Diehl and his colleagues recently published a study in Endoscopy International Open that evaluated the impact of TissueCypher on clinical decision-making in the management of Barrett's esophagus, and reported that the assay may enable physicians to target endoscopic eradication therapy for high-risk patients while reducing unnecessary procedures for low-risk patients.

Frequently, there are differences of opinion about the diagnosis of low-grade dysplasia even by expert pathologists, Diehl said, adding that TissueCypher provides him with another means of assessing a biopsy using multiplexed biomarkers.

"I have found that the TissueCypher test is useful in risk-stratifying patients with Barrett’s who have low-grade dysplasia, indeterminate dysplasia, and even without dysplasia," Diehl said. In some cases, the TissueCypher risk score is elevated, indicating a need for endoscopic eradication treatment, and in others, a low TissueCypher score can lengthen the interval between surveillance endoscopies.

"This is a major win for the patient and the health care payor in that unnecessary procedures are avoided," Diehl added.

TissueCypher has been available as a laboratory developed test since 2017 as an adjunct to conventional pathology, but a lack of new investment capital kept Cernostics from establishing a sales team necessary to push adoption, Maetzold said.

Castle's view of Cernostics "as a young Castle, with technology that has consistently shown high performance in multiple validation studies and a test that has obtained Medicare coverage," was motivation for the acquisition, Maetzold said.

In a research note, SVB Leerink analyst Puneet Souda said the Cernostics acquisition provides a foundation for Castle's entry into gastrointestinal testing. TissueCypher "has a robust data profile featuring six published validation and performance studies and [a negative predictive value] of 98 percent," he said, adding that the assay "demonstrates superior risk stratification" compared to standard of care procedures to diagnose Barrett's esophagus.

Around 13,000 gastrointestinal physicians and up to 2,000 groups of cardiothoracic surgeons represent the target market for the assay, Souda noted, adding, "Esophageal cancer has a five-year survival rate of 18 percent, and properly managing the treatment paradigm is critical to saving lives."

Diehl said he believes TissueCypher will eventually be included in gastroenterology society guidelines on best practices of Barrett’s management. "There is expanding use now, but with inclusion in the guidelines, it will become part of standard clinical practice in risk stratification for Barrett's esophagus," he said.

All told, the Cernostics buy could expand Castle's total addressable market by about $1 billion, Maetzold said, adding, "We believe that around 384,000 patients per year in the US could benefit from a TissueCypher test."

TissueCypher, which is performed at Cernostics' CLIA-certified laboratory in Pittsburgh, is reimbursed by Medicare at $2,513 per test. It has also been covered since January for members of Geisinger Health Plan, which is based in Danville, Pennsylvania, and the diagnostics company recently announced it is being covered as an in-network test for more than 550,000 of Geisinger Health Plan members in parts of that state.

Three of Castle's multigene expression profile tests have payor coverage, and the firm is pursuing reimbursement for a fourth assay, called DecisionDx-SCC, a test for squamous cell carcinoma.

Further, Maetzold noted, all of the tests offered by Castle Bio and Cernostics have been peer reviewed, and with clinical validation and an untapped commercial presence for TissueCypher, Castle saw a chance to not only enter a new market space but also acquire new technology.

Specifically, TissueCypher has been designed to predict future development of high-grade dysplasia and/or esophageal cancer in patients with Barrett's esophagus, and is indicated for patients with endoscopic biopsy-confirmed Barrett's esophagus which is graded non-dysplastic, indefinite for dysplasia, or low-grade dysplasia.

Though Castle expects minimal revenue from the deal in the near term, the firm "will start 2022 with a group of 13 to 15 new sales representatives, a medical affairs group, and internal sales support to also help bring [TissueCypher] to the marketplace," Maetzold said.

Since going public

Castle went public in 2019, but at the time its executives decided against building out an internal R&D team to address new disease indications. Instead, they wanted to accelerate revenue growth while reducing downside risk, Maetzold said, adding, "There were a couple of other areas in dermatology that we felt comfortable pursuing."

Most recently, it said it was developing a genomic test aimed at predicting systemic therapy response in patients with moderate to severe psoriasis, atopic dermatitis, and related conditions.

Castle also announced in April the acquisition of the Myriad myPath Melanoma laboratory and test from Myriad Genetics for $32.5 million. The test differentiates between benign and malignant melanocytic lesions of unknown potential based on the expression of 23 genes.

The total addressable market for all of its products including TissueCypher is now about $3 billion, Maetzold said, adding that with new tests in the pipeline that could expand to more than $5 billion by 2025.

Its cancer tests, run from a CAP-accredited, CLIA-certified laboratory in Phoenix, also include its gene expression-based DecisionDx-Melanoma test, which predicts an individual's risk of recurrence or metastasis in stages I, II, and III melanoma.

Meanwhile, Castle's DecisionDx DiffDx-Melanoma gene expression profile test is designed to aid dermatopathologists to characterize difficult-to-diagnose melanocytic lesions. It uses a neural network to differentiate benign from malignant melanocytic lesions of unknown potential based on the expression of 35 genes.

Further, the firm's DecisionDx-SCC test for squamous cell carcinoma evaluates the risk of metastasis in patients with one or more risk factors and complements traditional prognostic risk assessment factors, enabling informed choices about treatment and follow-up care.

And Castle's DecisionDx-UM gene expression profile test enables staging of five-year metastatic risk associated with uveal melanoma, an eye cancer with a strong tendency for metastasis.

In September, Castle announced that it has received approval from the New York State Department of Health for its DecisionDx DiffDx-Melanoma gene expression profile test. Castle has previously received approvals in New York for its other gene expression profile tests, including DecisionDx-Melanoma, DecisionDx-SCC, DecisionDx-UM, and DecisionDx-PRAME, as well as its next-generation sequencing panels, DecisionDx-CMSeq and DecisionDx-UMSeq.

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