You know those pop TV shows that ask burning questions like, “Where are they now?” Usually the episode will pick some child star who flamed out early, spending the better part of their youth burning through rerun royalties with drugs and alcohol. Today, little Johnny Boy is three years sober and doing a podcast interviewing former cast members from his hit comedy show of two decades ago. In this article, we’re going to do something similar by revisiting a company that we wrote about in 2014 just before and shortly after it IPO’d. Eight years and one pandemic later, CareDx (CDNA) has grown annual revenues to $300 million for its portfolio of diagnostic tests for organ transplant patients. It has also been enmeshed in licensing disagreements, defamation lawsuits, and accusations of patent infringements along the way – as both plaintiff and defendant.
That in itself is usually enough for risk-averse retail investors like ourselves to head in the other direction. But CareDx is showing significant growth as a leading player in molecular testing techniques, particularly in an area that leverages cell-free DNA (cfDNA), which has applications beyond organ transplant testing, such as prenatal screening for Down’s syndrome and similar genetic diseases. A few questions emerge: Is this a theme worth investing in? Is CareDx the pure-play leader in cfDNA diagnostics? Is this a theme worth investing in? Is little Johnny Boy headed for a relapse?
About CareDx Stock
Before we tackle these questions, let’s re-familiarize ourselves a little with CareDx stock. Founded way back in 1998 as XDx in the San Francisco area, CareDx changed its name in 2014 shortly before it went public. As a startup, the company had raised about $126 million from a pretty legit set of names, including Kleiner Perkins, Intel, Bristol-Myers Squibb, and GE. At the time, CareDx had but one product – a gene-expression assay to measure immune response in heart patients called AlloMap. It had nearly $22 million in revenue and debuted with a market cap of about $115 million.
The Roche Settlement
It was also in the middle of a dust-up with Roche over nearly $3 million in royalties allegedly owed to the Swiss pharma giant for its patented polymerase chain reaction (PCR) technology. PCR tests became all the rage during the Rona because of their ability to detect the virus that caused covid-19. However, PCR is a lab technique used for other applications, such as diagnosing genetic disorders. In the case of Allomap, it helps measure the expression level of multiple genes associated with acute cellular rejection that can occur with heart transplants. The test is a non-invasive blood draw compared to the standard endomyocardial biopsy. CareDx and Roche settled the case through arbitration before the end of 2014. The former coughed up the cash and agreed to pay future royalties until 2017.
A Growing Portfolio
In its most recent fiscal year, CareDx had $296 million in revenue and sports a market cap of just under $700 million. Its portfolio of diagnostic testing for organ transplants has grown to include kidney, heart, and lung, as well as for the emerging field of cellular therapies. In addition to Allomap, the company developed Allosure, which uses next-generation sequencing (NGS) to detect cfDNA from the organ donor in the blood of the recipient. Basically, the more donor DNA found, the higher likelihood of organ rejection. Its HeartCare and KidneyCare solutions combine both Allomap and Allosure.
Aside from these various tests, CareDx also sells different hardware and software products related to PCR and NGS, including some exclusive licensing agreements with Illumina (ILMN), the leading provider of NGS tech that has been on a significant slide of late. And, since 2019, the company has added a bunch of patient and digital services to its portfolio, mainly through acquisitions, related to monitoring and medications. That had led to a pretty diverse revenue stream, mostly concentrated in the United States:
However, the company’s bread-and-butter is still its diagnostic tests for organ transplants, accounting for 87% of revenues last year. That’s actually up 2% from the year before, even as the company develops a number of ancillary products and services, including a transplant-focused pharmacy. Regardless of where the money is coming from, CareDx is clearly laser focused on the organ transplant market.
How Big is the Organ Transplant Diagnostics Market?
That begs the obvious question: How big is the organ transplant market? And an even more obvious question: How big is the organ transplant diagnostics market?
As usual, there are a number of random market reports online, with widely varying estimates that are as worthless as the press releases pumped out by overseas content farms. We turned to the venerable consulting and actuarial firm Milliman, which specializes in healthcare and insurance, to see if we could come up with a ballpark figure. We focused on CareDx’s three key tests – kidney, heart, and lung – and came up with a total addressable market (TAM) of $20 billion for organ transplants in the United States, where a majority of the company’s revenues are currently generated. The number is based on the total number of operations and estimated cost of each procedure, according to the big brains at Milliman.
Here’s how the average kidney transplant breaks down, as an example:
The other question – how big is the organ transplant diagnostics market – is a bit trickier to calculate, but we should be pretty confident it won’t be close to $20 billion. CareDx receives a significant portion of its revenue through Medicare reimbursement, and the company is kind enough to tell us how much it gets per patient. For example, the Medicare reimbursement rate for AlloMap Heart is currently $3,240 and for Allosure Heart is $2,753. That’s about $6,000 for the company’s combined HeartCare solution X 3,500 heart transplants = $21 million. While that doesn’t sound like much, we’re not quite done yet. A patient must be regularly tested, because organ rejection is so common (between 20% and 40% for heart transplants). Based on clinical trials, CareDx outlines the following schedule:
So, based on a first-year patient schedule, post-heart transplant testing could be worth up to $252 million ($21 million X 12 tests). Similar back-of-the-napkin math for the company’s Allosure Kidney test gives us a total annual market of about $437.5 million ($2,841 Medicare reimbursement X 22,000 procedures X seven tests in the first year post-transplant). Allosure Lung is still in the early stages of commercialization, so that market remains relatively immature for CareDx. Our crude calculations don’t take into account the compounding number of tests that surviving patients would need to take year after year to monitor the health of their spiffy new organs. For example, the company recorded 46,500 tests in Q3-2022 alone, which is double the amount of kidney transplant surgeries performed in one year.
One study back in 2013 estimated that diagnostic testing “probably” accounts for more than 10% of all healthcare costs. Let’s fudge that to 20% for inflation and the passage of time, giving us a TAM of $4 billion for organ transplant diagnostic testing based on a $20 billion organ transplant market – at least for those three tests in the United States. That doesn’t seem too far off considering CareDx’s revenues and already extensive market penetration.
The market penetration reflects CareDx’s first-mover status. But that may be changing, especially after its technology advantage took a big hit this year when a key competitor emerged victorious in a battle of patents.
CareDx Competitors and Lawsuits
The dispute over cfDNA for organ transplant diagnostics echoes a much bigger patent battle over CRISPR, the gene-editing technology that several high-profile institutions have claimed to invent. Each of the major players in the fight started their own companies to commercialize the technology, and all three are now publicly traded. Earlier this year, the Broad Institute of MIT and Harvard appeared to gain the upper hand after a U.S. tribunal overseeing patent disputes ruled in its favor. That’s good news for companies like Editas (EDIT), Beam Therapeutics (BEAM), and Prime Medicine (PRME), which all have licensing agreements with the Broad Institute. Not so good for companies like Intellia Therapeutics (NTLA) and CRISPR Therapeutics (CRSP), whose founders originally invented the gene-editing technique (and won Nobel prizes for it) but failed to secure the patent for the specific application at stake.
In the case of CareDx vs Natera, another company that also specializes in genetics testing using the cfDNA technique, a panel of federal judges recently invalidated the former’s patents that claimed exclusive rights to cfDNA testing. A National Law Review article pretty much lambasts the attempt by CareDx to patent the processes for correlating heightened cfDNA levels and transplant health, quoting one of the judges as saying, “none of which was inventive.” Ouch. As a consolation prize, CareDx won $45 million against Natera for false advertising.
About Natera Stock
Founded in 2004, Austin,Texas-based Natera () is a nearly $4 billion company with about $625 million in 2021 revenue. Its cfDNA technology platform, which combines novel molecular biology techniques with bioinformatics software and AI, offers non-invasive prenatal tests, cancer screenings, and organ transplant rejection assessments. About 90% of the company’s revenue is based on its two flagship products for women’s health. Panorama helps assess the risk of fetal genetic abnormalities by screening for fetal chromosomal abnormalities like Down syndrome. Horizon helps determine if prospective parents are carriers of genetic variations that cause certain genetic conditions. It calls its organ transplant cfDNA test Prospera.
However, the company is rapidly adding new cancer and organ transplant screenings. The oncology tests, for example, leverage a type of cell-free DNA called circulating tumor DNA (ctDNA), a fragment of tumor DNA that can be detected in the blood. It’s the same sort of technique used by companies like Guardant Health (GH), another genetics company quickly growing revenues and losses.
More Lawsuits and Competitors
In addition to its legal scuffles with CareDx, Natera has found itself in various disputes and lawsuits. One with Illumina over non-invasive prenatal screenings was eventually settled in 2020. In 2018, the company paid the U.S. government $11.4 million to settle allegations of improper billing (admitting no wrong while still writing the check). For even more intrigue involving cfDNA technology, you can read this surprisingly well done article in TechCrunch, including a years-long battle between Guardant and Foundation Medicine, a cancer genomics company we first covered way back in 2013 that was later acquired by Roche for $2.4 billion.
In addition to Natera, CareDx also faces competition from Viracor, a subsidiary of Eurofins (ERF.PA), a $12 billion analytics and lab testing superpower with some 200,000 testing methods in its portfolio. Eurofin-Viractor also lists organ transplant diagnostics among its testing protocols. As far as we know, no one is currently suing Eurofins or Eurofins-Viracor over cfDNA. And, of course, there are other types of diagnostics tests, such as tissue biopsies, as well as ways to measure organ function, such as levels of serum creatinine in the kidneys. These are all competition for CareDx and its cfDNA technology.
Should You Buy CareDx Stock?
We would expect that the drama around cfDNA technology to be finally settling down, particularly with the clarity resulting from the CareDx vs Natera case over patent infringement. So where does all that leave us with CareDx stock?
For starters, we know that the company won’t be repeating its 65% year-over-year revenue growth. In its Q3-2022 report, it downgraded its annual outlook to fall between $320 million and $325 million, which would represent less than 10% revenue growth even at the high end. Testing revenues have been relatively flat, with patient and digital services making the biggest gains. In Q3-2022, revenue jumped $7.4 million from $2.6 million a year ago. Most of those gains were through acquisitions and new partnerships.
The company currently sits below our $1 billion market cap threshold, but it’s unlikely we would add it anytime soon regardless. While we remain bullish on the theme of genetics testing, it’s not clear that cfDNA technology is worth a stand-alone investment. In fact, we’re already indirectly exposed through a couple of other investments in our portfolio. In addition, even if cfDNA was worth an investment, CareDx has restricted itself to just the organ transplant market, which we don’t think has a very high TAM ceiling, even in xenotransplantation becomes a thing. A potentially more attractive buy would be Natera, which is positioned to compete concurrently in several markets, including oncology and women’s health. Fans of Cathie Wood’s Ark Invest’s ETFs may note that the firm is bullish on CareDx, and has accumulated a 12.5% stake in the company – and we’re still not buying.
Genetics testing is a rapidly growing and evolving market. It’s also a pretty complex science, which is why we try to keep it simple by finding the market leaders in these emerging technologies. CareDx appears to earn the title of being the market leader in cfDNA testing for organ transplants, but we think the market is too niche. Not every pure play is worth playing.
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