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Canaccord Genuity, SVB Leerink Initiate Coverage of Castle Biosciences

NEW YORK – Canaccord Genuity today initiated coverage of skin cancer test developer Castle Biosciences, with a Buy rating and a price target of $26 per share.

SVB Leerink also initiated coverage of the firm with an Outperform rating and provided a price target of $28 per share. 

In an investment note, Canaccord analyst Mark Massaro said that the rating was due to the firm's potential market penetration; impressive growth, reimbursement, and margin profile; successful publications; and strong pipeline of future assays. 

SVB Leerink analyst Puneet Souda said that Castle Bio is expected to deliver around a 40 percent CAGR through 2021 with its two commercial tests and two additional pipeline assays. He noted that the key to continued success for the firm remains in developing diagnostic tests that help improve staging for skin cancer. 

Believing that Castle Bio is a "fast-growing market leader in melanoma diagnostics," Massaro estimates that the firm has penetrated about two percent of the US melanoma diagnostic market and two percent of its total US opportunity of at least $1.8 billion. 

Friendswood, Texas-based Castle Biosciences offers its DecisionDx-Melanoma gene expression profile test to oncologists and dermatologists to manage a patient's cancer. Running on a real-time PCR platform, the firm's test is designed to identify the risk of recurrence or metastasis in Stage I, II, and III melanoma based on the biologic profile of 31 genes within a patient's tumor tissue. Earlier this month, the company closed its initial public offering of 4.6 million shares of its common stock with gross proceeds of $73.6 million. 

Massaro said that the Castle Bio's "wise investments" in early 2019 will likely add to its future growth, as the firm plans to expand to almost 35 territories by early 2020. He noted that recent publications have demonstrated DecisionDx's strong clinical validity, leading to the test's Medicare coverage decision in December 2018. 

Souda noted that "with strong Medicare reimbursement of $7,193 per test [Castle Biosciences] is poised to deliver significant upside as both tests volumes and [average selling prices] ramp higher." 

Massaro expects the firm to announce commercial coverage decisions and move in-network with health plans in the 2020-2021 time frame. 

Both analysts see a strong pipeline of assays in Castle Bio's future, with the firm aiming to launch two new laboratory-developed tests for on squamous cell carcinoma and suspicious pigmented skin lesions by the end of 2020. 

Massaro added that "given [Castle Bioscience's] leading position in melanoma and excellent data and publications, we think Castle could make for a logical tuck-in acquisition for a larger cancer lab company or operate as a fast-growing and profitable pure-play precision medicine lab company." 

In mid-morning trading on the Nasdaq, shares of Castle Biosciences were trading down at a fraction of a percent at $20.20.