Castle Biosciences: A Fast-Growing Cancer Diagnostic Concern (NASDAQ:CSTL)

We admire the castles, as a result of we admire the safety!”― Mehmet Murat ildan

Immediately, we put Fortress Biosciences, Inc. (NASDAQ:CSTL) within the highlight for the primary time. The inventory has an enormous run-up on the again of the Covid pandemic which benefited sentiment on most diagnostic issues, however the shares have misplaced over 80% of their worth since their peak in early 2021. The corporate is seeing spectacular income progress and just lately raised full-year steerage after posting second quarter outcomes. That has not translated into profitability but, however the firm has a considerable amount of internet money on its steadiness sheet. As well as, the analyst neighborhood is sort of optimistic in regards to the firm’s longer-term prospects. Is it time to purchase the dip within the shares? An evaluation follows beneath.

Firm Overview:

Fortress Biosciences, Inc. is headquartered simply exterior of Houston, in Friendswood, TX. This small testing concern is targeted on offering diagnostic and prognostic testing companies for dermatological cancers. The inventory at present trades just below $12.50 a share and sports activities an approximate market cap of $330 million.

The corporate gives a wide range of most cancers detecting diagnostic exams together with DecisionDx-Melanoma, DecisionDx-SCC, MyPath® Melanoma, DecisionDx-UM, DecisionDx-UM, TissueCypher Barrett’s Esophagus test and IDgenetix test.

Second Quarter Outcomes:

The corporate posted its second quarter numbers on August 2nd. Fortress Biosciences had a GAAP lack of 70 cents a share, roughly 20 cents a share above expectations. Revenues rose 44% on a year-to-year foundation to $50.1 million, nearly $6 million over the consensus. General, the corporate delivered 16,820 exams within the quarter, up 52% in 2Q 2022. These broke down within the following method in response to the corporate’s earnings press launch:

• DecisionDx-Melanoma take a look at studies delivered within the quarter had been 8,597, in comparison with 7,125 within the second quarter of 2022, a rise of 21%.
• DecisionDx-SCC take a look at studies delivered within the quarter had been 2,681, in comparison with 1,344 within the second quarter of 2022, a rise of 99%.
• MyPath Melanoma take a look at studies delivered within the quarter had been 953, in comparison with 955 MyPath Melanoma and DiffDx-Melanoma mixture take a look at studies within the second quarter of 2022.
• DecisionDx-UM take a look at studies delivered within the quarter had been 461, in comparison with 431 within the second quarter of 2022, a rise of seven%.
• TissueCypher Barrett’s Esophagus take a look at studies delivered within the quarter had been 1,447, in comparison with 352 within the second quarter of 2022, a rise of 311%.
• IDgenetix take a look at studies delivered within the quarter had been 2,681, in comparison with 827 within the second quarter of 2022, a rise of 224%.

Administration lifted full yr income steerage for FY2023 to at ‘least‘ $180 million. This was above its earlier forecast of between $170 million and $180 million, and above the consensus projection by analysts of roughly $175 million on the time.

In early July, the corporate bought excellent news when it retained Medicare protection for its DecisionDx most cancers take a look at for squamous cell carcinoma (SCC) after regional Medicare administrative contractor Novitas determined to withdraw a draft coverage that might have contested the take a look at. The inventory surged by over a 3rd on the announcement. Nonetheless, the shares have given all of these momentary good points again in subsequent months.

Analyst Commentary & Steadiness Sheet:

Since early July, six analyst corporations together with Leerink Companions and KeyBanc have reissued Purchase/Outperform rankings on the inventory. Value targets proffered vary for $30 to $40 a share. Right here is BTIG’s ($32 value goal) take from early August:

We heard some fireworks on the Novitas Open Assembly final Friday, we’re feeling incrementally extra constructive on CSTL; reiterate Purchase, $32 PT WHAT YOU SHOULD KNOW: We’re feeling incrementally extra constructive on shares of CSTL after we attended Medicare contractor Novitas’ public assembly final Friday (and we imagine we had been among the many solely analysts or traders on the decision). Quite a few clinicians, and influential stakeholders from key advocacy teams in diagnostics, offered convincing proof, in our opinion, to assist constructive continuity of Medicare protection for CSTL’s squamous cell carcinoma take a look at. Final Friday’s assembly follows final month’s related open assembly from Palmetto, although we expect the Novitas assembly was much more convincing.”

Roughly 4 % of the excellent float within the shares are at present held quick. A number of insiders have been frequent (over 80 gross sales transactions) sellers of the inventory in 2023, promoting a number of million {dollars}’ value of fairness collectively thus far this yr. There have been no insider purchases thus far in 2023.

The corporate ended the primary half of the yr with roughly $225 million value of money and marketable securities on its steadiness sheet, after the corporate posted a internet lack of $48 million for the primary six months of 2023. This included $26.4 million in non-cash stock-based compensation expense. Money used to assist all operations within the first quarters of this yr was $29.2 million. Administration has acknowledged that its ‘money working runway will prolong by 2025‘. The corporate has no long-term debt.

Verdict:

Fortress Biosciences misplaced $2.58 a share on simply over $137 million in gross sales in FY2022. The present analyst agency consensus has the agency rising revenues by $50 million in FY2022, however the firm’s loss per share widening to $3.44. In FY2024, they see income progress within the mid-teens and losses being diminished to $2.95 a share.

Fortress Biosciences has a sturdy steadiness sheet, with internet money making up roughly 2/3’s of its market cap at present buying and selling ranges. The corporate is posting spectacular income progress and enjoys sturdy analyst agency assist. That mentioned, the corporate could be very unprofitable, and is more likely to stay so for a number of years. Unprofitable small cap issues are very out of favor on this excessive rate of interest setting. I additionally do not just like the frequent insider promoting within the inventory, in addition to the big quantity of non-cash stock-based compensation expense in comparison with the inventory’s market cap. Due to this fact, I’m passing on any funding advice round Fortress Biosciences right now.

We construct castles and tear down homes, we declare land and curse the ocean.”― Laura Chouette