I thought to create a dedicated thread for this company after we had some interesting discussion of Castle Biosciences (CSTL) in ryshab’s portfolio review.
The company makes diagnostic tests for doctors to screen patients for certain conditions. Their primary business line is in dermatology where their top two products detect the severity of melonoma and SCC (Squamous cell carcinoma). Once the doctor has the results they can then decide if a specific surgery is needed, and in the past the doctors were often over aggressive on surgeries, and later finding out from the lab biopsies that surgery may not have been needed.
What has me excited about this company is their expansion into fields unrelated to dermatology. They had a product in GI health for detecting Barrett’s esophagus condition, a leading factor for cancer of the throat. That product called TissueCypher has test volumes up 230% yoy, and 39% qoq. This past quarter did 4,782 tests out of about ~25,000 total tests done in the quarter for all categories. Additionally, there is a test called IDGenetix for depression diagnosis which is up 83% yoy on test volumes and makes up also about ~20% of total test volume for the company.
For whatever reasons, both analysts and the company themselves project sequential declines in revenue which I see creating an opportunity for investors to capitalize on here. On the latest call full year 2024 guidance was raised from 255-265M to 275-300M. However, quarters Q1 and Q2 came in at 73M and 87M implying if they hit the top end of their guidance range that the next two quarters would average 70M.
Borrowing some information posted in other thread, the company is showing a quite nice step up in revenue and profitability, which lines up with these increasing test volumes they mention on the call,
Revenue
62M → 66M → 73M → 87M
Net income
-6.9M → -2.6M → -2.5M → 8.9M
These graphs show a big step up on the non-derm diagnostic tests, along with the strong sequential jump in overall testing volumes by product.
The biggest known question mark around the company seems to be how Medicare will be dealing with these diagnostic tests. A third party Medicare approver rejected coverage on the SCC test they have. While the SCC test is stated be 60% yoy growth, I’ve been having trouble tracking down if this test was previously approved by Medicare or not. Also I’m wondering what percentage of volume of sales was through Medicare. Overall, I see the market being way too pessimistic about the chances of growth for this company, and I seriously doubt that revenue is going to be sequentially declining in the remainder of the year.
Another potential concern I have is that some of their tests where purchased where they bought the rights and others produced in house. I’d ideally like to see more of newer tests created in house as this would indicate to me they are an innovation engine, and not a company which is just opportunistically acquiring other testing rights.
Reviewing their last earnings call on August 5 some highlights included,
- second quarter revenue grew 74% to 87M
- total test volume grew 49% to 25,102 (nice to see revenue growing faster, sounds like each test is earning more on average)
- raised guide from 255-265M to 275-300M which would be 25-36% yoy growth (would like to see a higher number here, but I believe they are sandbagging)
- DecisionDx Melanoma did 9,585 tests up 11% yoy, 14% qoq
- DecisionDx-SCC 4,277 tests up 60% yoy
- GI franchise did 4,782 TissueCypher tests up 230% yoy, 39% sequentially
- IDgenetix mental health did 4,903 tests, up 83% yoy
- gross margin of 80.7% compared to 73.5% last year
- total operating expenses were 82M compared to 72M last year (revenue was up 74% yoy, so revenue is rising dramatically faster than expenses)
- sales and marketing 32.7M vs 28.3M last year
- general and administrative was 18.4M vs 16.4M last year
- net income of 8.9M vs net loss of 18.8M last year
- cash of 260M, debt of 25M
- new guide assumes there is no SCC coverage in the fourth quarter from Medicare
- “seeing leverage across the P&L”
- “revenues growing more than expenses, and that obviously drives a better margin going forward”
Have some notes from their conference at Baird Global Healthcare on September 11, and the Canaccord Genuity conference from August 13,
- company goal is to find high clinical pain points
- if advanced diagnostic testing could help a patient scenario will look to develop or acquire a test for it
- focus on building robust clinical evidence via publications to create track record, this helps with adoption by customers, leads to reimbursement success, and then penetration by payers and clinicians to come full circle
- three primary areas of growth: dermatology, GI and mental health
- DecisionDx Melanoma answers two questions, can the patient avoid biopsy, and how to manage the patient
- TissueCyper has 415k patient base, product was acquired a few years ago (big question I have is why is growth ramping suddenly only now)
- IDGenetix mental health diagnostic test combines gene interactions, drugs, and lifestyle factors to determine
- estimated 8B TAM for the US market
- operating cash flow of 24M
- adj EBITDA 21.5M
- adj cash flow “up quite a bit from Q1 2024”
- DX Melanoma penetrated up to 30%, can see getting up to 60%
- gave example of other diagnostic test from another company for breast cancer which as 85-90% and represents an upper limit
- sometimes dealing with low awareness of testing possibilities from doctor offices
- people who have had tests live longer according to their studies because care can be escalated in severe cases
- 75 different sales territories for derm products
- marginal COGS on tests are pretty low
- 75% of doctors who ordered SCC also order the Melanoma test
- “SCC had been running 70% Medicare physicians”, want to make sure they need need radiation treatment (this is the question mark I have if this meant that 70% of volume was through Medicare physicians previously)
- TissueCypher is FDA cleared, able to focus on sweet spot for Barrett’s diagnosis, finding patients who benefit from intervention
- GI practices less academic and larger practices than derm, more top down and more protocols in place, will work to educate via research
- “every bit of business is ahead of the guide recently, over achieved across the board”
- non-derm will grow larger as a percentage of the company, will add to EBITDA, “very pleased with how it’s going”
- building robust clinical DB of results, will help with further sales and adoption
- have three tests in derm, one in GI, one in mental health
- melonoma is 130k patients per year in the US
- SCC test was developed internally
- studies and retrospectives on patient can save people from unnecessary surgery
Overall this company looks really interesting to me in that they are growing test volume quickly while expanding in new markets. The market cap is about 800M and the expectations seem low for them. However, I believe they will be able to beat their own guidance quite easily given what they are saying.
