NEW YORK (GenomeWeb) – Investment bank Jefferies today initiated coverage of the stock of transplant diagnostics firm CareDx with a Buy rating and a price target of $35.
In a note to investors, Jefferies analyst Brandon Couillard said that the company is well positioned as a leader in the transplant diagnostics market — which he estimated at more than $2 billion — with two tests on the market that serve an unmet need for non-invasive detection of heart and kidney post-transplant rejection.
Couillard also noted that the market is underappreciating the potential for continued growth of the kidney diagnostic, AlloSure, which has a strong first-mover advantage in the market. "By most measures, the initial launch has been one of the best we've seen, with about 100 of the top US centers that perform 60 to 70 percent of transplants already using it," he wrote in his note. "Yet adoption remains in the early innings (only 3 percent penetrated)."
Over time, Jefferies believes that AlloSure can match the penetration of CareDx's heart transplant diagnostic test AlloMap, which has about 30 percent market share — this would translate to about $600 million in annual revenue.
The bank is also forecasting about $365 million in revenues for CareDx in 2022 based on rising AlloSure adoption, which would put the company on a path to earnings of $2.50 per share in that year. "This assumes it captures 50 percent of new kidney transplants (similar to AlloMap) and 75 percent compliance with protocols post year-one, as well as about 10 percent penetration of the existing prevalence market," Couillard said. "With minimal spend needed to ramp AlloSure (same sales channel as AlloMap), the model is highly scalable."
Further, he added, CareDx has a "unique business model" in diagnostics, similar to the one Exact Sciences has in colorectal cancer screening, in terms of having direct communication with a captive base of transplant patients that require active surveillance and repeat testing to monitor for rejection.
"This creates a recurring revenue opportunity from testing patients multiple times over a multi-year period," Couillard wrote. Like Exact Sciences, CareDx "has a strong compliance engine to drive high adherence to testing protocols," he noted, adding "a valuation premium is justified."
He also said that CareDx's stock "materially outperformed last year on the back of a very strong initial AlloSure roll-out, we see more upside ahead as the launch plays out." The firm's shares rose more than 240 percent in 2018, giving it the top spot for the year in the GenomeWeb Index.
CareDx announced in January that its preliminary fourth quarter revenues rose 85 percent to 88 percent year over year, thanks to an increase of about 115 percent in testing revenues during the quarter. For the three months ended Dec. 31, 2018, the company expects revenues of $23.2 million to $23.5 million, compared with $12.5 million in the fourth quarter of 2017.
Testing revenues for Q4 are expected to be $18.5 million to $18.8 million, up from $8.6 million in the year-ago period. Product revenues are expected to be $4.6 million, up 24 percent from $3.7 million in the same period in 2017.
CareDx's shares rose more than 7 percent to $25.70 in Friday morning trading on the Nasdaq.