2023-10-15 08:05:05 ET
Summary
- Castle Biosciences, Inc. has seen a significant decline in its stock value since early 2021, despite impressive revenue growth and a solid balance sheet.
- The company offers diagnostic and prognostic testing services for dermatological cancers, and analyst firms are very optimistic about Castle's longer-term future.
- However, the stock's unprofitability and insider selling do raise some concerns.
- An analysis on Castle Biosciences follows in the paragraphs below.
We admire the castles, because we admire the security !"? Mehmet Murat ildan
Today, we put Castle Biosciences, Inc. ( CSTL ) in the spotlight for the first time. The stock has a huge run-up on the back of the Covid pandemic which benefited sentiment on most diagnostic concerns, but the shares have lost over 80% of their value since their peak in early 2021. The company is seeing impressive revenue growth and recently raised full-year guidance after posting second quarter results. That has not translated into profitability yet, but the company has a large amount of net cash on its balance sheet. In addition, the analyst community is quite optimistic about the company's longer-term prospects. Is it time to buy the dip in the shares? An analysis follows below.
Company Overview:
Castle Biosciences, Inc. is headquartered just outside of Houston, in Friendswood, TX. This small testing concern is focused on providing diagnostic and prognostic testing services for dermatological cancers. The stock currently trades just under $12.50 a share and sports an approximate market cap of $330 million.
May Company Presentation
The company offers a variety of cancer detecting diagnostic tests including DecisionDx-Melanoma , DecisionDx-SCC , MyPath® Melanoma , DecisionDx-UM , DecisionDx-UM, TissueCypher Barrett's Esophagus test and IDgenetix test .
May Company Presentation
Second Quarter Results:
The company posted its second quarter numbers on August 2nd. Castle Biosciences had a GAAP loss of 70 cents a share, approximately 20 cents a share above expectations. Revenues rose 44% on a year-to-year basis to $50.1 million, almost $6 million over the consensus. Overall, the company delivered 16,820 tests in the quarter, up 52% in 2Q 2022. These broke down in the following way according to the company's earnings press release:
- DecisionDx-Melanoma test reports delivered in the quarter were 8,597, compared to 7,125 in the second quarter of 2022, an increase of 21%.
- DecisionDx-SCC test reports delivered in the quarter were 2,681, compared to 1,344 in the second quarter of 2022, an increase of 99%.
- MyPath Melanoma test reports delivered in the quarter were 953, compared to 955 MyPath Melanoma and DiffDx-Melanoma aggregate test reports in the second quarter of 2022.
- DecisionDx-UM test reports delivered in the quarter were 461, compared to 431 in the second quarter of 2022, an increase of 7%.
- TissueCypher Barrett's Esophagus test reports delivered in the quarter were 1,447, compared to 352 in the second quarter of 2022, an increase of 311%.
- IDgenetix test reports delivered in the quarter were 2,681, compared to 827 in the second quarter of 2022, an increase of 224%.
Management lifted full year revenue guidance for FY2023 to at ' least ' $180 million. This was above its previous forecast of between $170 million and $180 million, and above the consensus projection by analysts of approximately $175 million at the time.
In early July, the company got good news when it retained Medicare coverage for its DecisionDx cancer test for squamous cell carcinoma ((SCC)) after regional Medicare administrative contractor Novitas decided to withdraw a draft policy that would have contested the test. The stock surged by over a third on the announcement. However, the shares have given all of those temporary gains back in subsequent months.
Analyst Commentary & Balance Sheet:
Since early July, six analyst firms including Leerink Partners and KeyBanc have reissued Buy/Outperform ratings on the stock. Price targets proffered range for $30 to $40 a share. Here is BTIG's ($32 price target) take from early August:
We heard some fireworks at the Novitas Open Meeting last Friday, we are feeling incrementally more positive on CSTL; reiterate Buy, $32 PT WHAT YOU SHOULD KNOW: We are feeling incrementally more positive on shares of CSTL after we attended Medicare contractor Novitas' public meeting last Friday (and we believe we were among the only analysts or investors on the call). Numerous clinicians, and influential stakeholders from key advocacy groups in diagnostics, provided convincing evidence, in our opinion, to support positive continuity of Medicare coverage for CSTL's squamous cell carcinoma test. Last Friday's meeting follows last month's similar open meeting from Palmetto, though we think the Novitas meeting was even more convincing ."
Approximately four percent of the outstanding float in the shares are currently held short. Several insiders have been frequent (over 80 sales transactions) sellers of the stock in 2023, selling several million dollars' worth of equity collectively so far this year. There have been no insider purchases so far in 2023.
The company ended the first half of the year with approximately $225 million worth of cash and marketable securities on its balance sheet, after the company posted a net loss of $48 million for the first six months of 2023. This included $26.4 million in non-cash stock-based compensation expense. Cash used to support all operations in the first quarters of this year was $29.2 million. Management has stated that its ' cash operating runway will extend through 2025 '. The company has no long-term debt.
Verdict:
Castle Biosciences lost $2.58 a share on just over $137 million in sales in FY2022. The current analyst firm consensus has the firm increasing revenues by $50 million in FY2022, but the company's loss per share widening to $3.44. In FY2024, they see revenue growth in the mid-teens and losses being reduced to $2.95 a share.
Castle Biosciences has a robust balance sheet, with net cash making up approximately 2/3's of its market cap at current trading levels. The company is posting impressive revenue growth and enjoys strong analyst firm support. That said, the company is very unprofitable, and is likely to remain so for several years. Unprofitable small cap concerns are very out of favor in this high interest rate environment. I also don't like the frequent insider selling in the stock, as well as the large amount of non-cash stock-based compensation expense compared to the stock's market cap. Therefore, I am passing on any investment recommendation around Castle Biosciences at this time.
We build castles and tear down houses, we claim land and curse the sea ."? Laura Chouette
For further details see:
Castle Biosciences: A Fast-Growing Cancer Diagnostic Concern