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Castle Biosciences Q3 Revenues Rise 54 Percent

NEW YORK – Castle Biosciences reported after the close of the market on Monday that its third quarter revenues rose 54 percent year over year, thanks to a 62 percent increase in the number of tests delivered during the quarter.

For the three months ended Sept. 30, the dermatological diseases diagnostics company reported revenues of $23.5 million, up from $15.2 million a year earlier and beating the average Wall Street estimate of $23.0 million.

Included in revenues for the quarter were revenue adjustments related to tests delivered in prior periods, the company said. These adjustments lowered Q3 revenues by $100,000 compared to an addition of $1.5 million to revenues for the same period in 2020. Adjusted revenues, which exclude the effects of these revenue adjustments, were $23.6 million, a 71 percent increase from $13.8 million for the same period in 2020.

Castle said it delivered 7,727 total gene expression profile test reports in the third quarter compared to 4,779 tests it delivered in Q3 2020.

By test type, it delivered 5,505 DecisionDx-Melanoma test reports, a 25 percent increase from 4,404 reports in Q3 2020; 375 DecisionDx-UM test reports, up 18 percent from 318 reports delivered a year ago; 934 DecisionDx-SCC test results, up from 57 in the prior-year quarter (DecisionDx-SCC became commercially available on Aug. 31); and 913 myPath Melanoma and DecisionDx DiffDx-Melanoma (Castle's comprehensive diagnostic offering) aggregate test reports.

"The Castle team achieved another quarter of strong growth in revenue and test report volume, despite the diagnoses of cutaneous melanoma being down by approximately 16 percent compared to historical pre-COVID third quarter 2019 levels," Castle CEO Derek Maetzold said in a statement. "From the onset of the pandemic, we made the strategic decision to accelerate investments in our growth initiatives, including the expansion of our commercial team and our R&D programs — both for our commercial and pipeline tests. And as a result, we have seen excellent progress across our key priorities."

Maetzold also highlighted the company's recent decision to acquire Cernostics, a privately held firm that specializes in spatial biology and artificial intelligence-driven image analysis of tissue biopsies, for $80 million. Maetzold said the deal would complement and diversify Castle's existing business and align with the company's focus of addressing indications with unmet clinical need.

"We believe Cernostics' first-to-market TissueCypher Barrett's esophagus test addresses an unmet clinical need in BE, as it is designed to support improved risk-stratification treatment plans by objectively and accurately predicting progression from non-dysplastic, indefinite for dysplasia and low-grade dysplasia BE to high-grade dysplasia or esophageal adenocarcinoma," he added. "The TissueCypher platform also has the potential to answer clinical problems in additional gastroenterology areas and other diseases."

On a conference call with analysts following the release of the earnings, Maetzold said there are about 384,000 patients a year that fall within the current intended use for TissueCypher. When assuming the current Medicare rate, the current intended-use population for the test expands Castle's in-market estimated US total addressable market by approximately $1 billion.

"We also liked the GI market in general with approximately 13,000 or so targetable clinicians," he added. "This market is of similar size to the skin cancer dermatology-focused market, and we have demonstrated that we know how to effectively educate and promote to a customer base of this size."

Maetzold also said the company expanded its sales team to about 60 to 65 dermatology-facing representatives in the second quarter, and these reps completed training and began working on July 1. With this expansion, each of the sales reps is now promoting all three of Castle's skin cancer tests through the company's existing sales channels, he added, and the firm expects the sales reps to reach optimal productivity in about two quarters.

"During the quarter, approximately 90 percent of our sales calls were in-person, which is consistent with what we saw in the second quarter of 2021," Maetzold added.

Further, he said, the company began searching at the beginning of the pandemic for ways to increase its engagement with clinicians in order to counteract the limited in-person access to offices. Castle determined that the best way to do this would be to accelerate its plans to integrate its ordering process with electronic health records systems and began integrating its ordering process with electronic medical records platforms at individual medical practices early last year. Last week, Maetzold said, the company agreed to create an interface using EMA, the electronic health record system from software company Modernizing Medicine.

"Our interface with this system is expected to streamline the ordering process," he said. "The interface is designed to enable dermatologic clinicians to order Castle's DecisionDx skin cancer tests, and then receive and review results from directly within a patient's electronic medical record. We expect our interface with EMA to be complete by the end of this year."

The firm's Q3 net loss widened to $11.8 million, or $.47 per share, from $4.6 million, or $.23 per share, a year earlier. Wall Street analysts had estimated a loss per share of $.40 for Q3.

Castle's Q3 R&D expenses rose 142 percent to $7.5 million from $3.1 million a year earlier, and its SG&A costs rose 93 percent to $22.6 million from $11.7 million.

Castle CFO Frank Stokes said the increase in SG&A costs was largely attributable to higher personnel costs associated with the company's expansion of its sales and marketing teams, which included salaries, bonuses, benefits, and stock-based compensation. The remainder of the increase in SG&A was primarily associated with the return of in-person and hybrid conferences, in-person peer-to-peer promotional programs and training events, as well as a partial return to more normalized travel costs. The increase in R&D expenses for the quarter was primarily due to additional personnel needed to manage and run the firm's clinical studies and increases in other expenses associated with increased clinical study activity, Stokes added.

The company had cash and cash equivalents of $363.2 million at the end of the quarter.

Castle maintained its guidance for the year for revenues of $89 million to $93 million. Analysts are expecting revenues of $91.9 million for the year.

On the call Maetzold said that the company is confident it can achieve its revenue guidance, but he also noted that it's too soon to know what the impact of the COVID-19 pandemic will be on diagnoses of cutaneous melanoma in the fourth quarter.

"We can tell you that October was solid with trends similar to third quarter trends," he said. "But I would note that all else being equal, fourth quarter volume is typically flat to slightly lower than Q3 due to the holidays and fewer working days. However, we may see some positive offsets to these factors in the fourth quarter from successes in our growth initiatives, including our expanded commercial team and recent publications of evidence supporting our tests."

Castle's shares dipped nearly 2 percent to $60.52 in early Tuesday morning trading on the Nasdaq.