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Summary

  • CDNA is a commercial stage company that develops, markets and delivers a diagnostic surveillance solution for heart transplant recipients to help clinicians make personalized treatment decisions throughout a patient’s lifetime.
  • CDNA is a money-losing diagnostics testing company that showed a 19% increase in revenue for Q1 '14 vs. Q1 '13 -- which is not enough growth to get excited about.
  • The rating on CDNA is neutral and it is worth following.

Based in Brisbane, CA, CareDx (Pending:CDNA) scheduled a $50 million IPO on the Nasdaq with a market capitalization of $168 million at a price range midpoint of $16 for Friday, July 18, 2014.

The full IPO calendar is available at IPOpremium

SEC Documents

Manager, Co-Managers: Piper Jaffray, Leerink Partners

Joint Managers: Raymond James, Mizuho Securities

End of lockup (180 days): Wednesday, January 14, 2015

End of 25-day quiet period: Tuesday, August 12, 2014

Summary

CDNA is a commercial stage company that develops, markets and delivers a diagnostic surveillance solution for heart transplant recipients to help clinicians make personalized treatment decisions throughout a patient's lifetime.

Valuation

Glossary

Valuation Ratios

Mrkt Cap (MM)

Price /Sls

Price /Erngs

Price /BkVlue

Price /TanBV

% offered in IPO

AnnualizingQ1 '14

CareDx

$168

7.1

-32.3

3.3

5.5

30%

Conclusion

CDNA is a money-losing diagnostics testing company that showed a 19% increase in revenue for Q1 '14 vs. Q1 '13 -- which is not enough growth to get excited about.

The rating on CDNA is neutral.

To put the conclusions and observations in context, the following is reorganized, edited and summarized from the full S-1 referenced above.

Business

CDNA is a commercial stage company that develops, markets and delivers a diagnostic surveillance solution for heart transplant recipients to help clinicians make personalized treatment decisions throughout a patient's lifetime.

CDNA's first commercialized testing solution, the AlloMap heart transplant molecular test, or AlloMap, is a blood-based test used to monitor heart transplant recipients for acute cellular rejection. CDNA believes the use of AlloMap, in conjunction with other clinical indicators, can help healthcare providers and their patients better manage long-term care following a heart transplant.

In particular, CDNA believes AlloMap can improve patient care by helping healthcare providers to avoid the use of unnecessary, invasive surveillance biopsies and to determine the appropriate dosage levels of immunosuppressants.

Commercial tests

Since the launch of AlloMap in January 2005 CDNA has performed more than 55,000 commercial AlloMap tests, including approximately 10,100 tests in 2013 and approximately 2,800 tests in first quarter of 2014, in the Brisbane, California laboratory.

In 2013, the test was used in 105 of the approximately 126 U.S. heart transplant management centers in the U.S.

CDNA believes that there is a meaningful opportunity for AlloMap outside of the U.S. and through recent partnerships CDNA expanded the AlloMap offering to Europe and Canada.

CDNA believes that it is not currently capacity constrained and that our current facility can support a substantial increase in testing volume.

Reimbursement

Reimbursement for AlloMap tests comes primarily from Medicare, private third party payers such as insurance companies and managed care organizations, hospitals and state Medicaid programs.

Tests performed on patients covered by Medicare represented 40% and 39% of all AlloMap tests in 2012 and 2013, respectively.

Tests performed on patients covered by Medicare represented 40% and 36% of all AlloMap tests in the quarters ended March 31, 2013 and 2014, respectively.

A number of payers have adopted coverage policies approving AlloMap tests for reimbursement. Such policies often approve reimbursement for tests performed from six-months or one year post-transplant through five years post-transplant.

Unmet need

CDNA believes there is a significant unmet need for non-invasive post-transplant surveillance solutions and is applying its expertise in transplantation towards the development of additional solutions for organ transplant recipients, including recipients of heart and kidney transplants.

Transplant recipients are among the highest cost patients in the healthcare system as they require significant healthcare services immediately before, during and after transplantation.

Transplant recipients face lifelong risks of illness and death from organ rejection and/or organ failure, and these risks vary significantly among transplant recipients. In order to reduce the risk of organ rejection, drug therapy is used to suppress the recipient's immune system response to the transplanted organ.

This immunosuppression therapy can have serious side-effects including infections, cancers, kidney failure and new onset diabetes.

Current solutions for the surveillance of organ transplant recipients provide only limited and infrequent information on the presence or absence of rejection.

As a result, clinicians tend to administer a relatively high levels of immunosuppression therapy to control rejection risk, which may be more than required for an individual recipient.

Due in part to this long-term high level of immunosuppression therapy, illness and mortality rates among transplant recipients remain well above those of the general population.

Long-term survival rates for heart and kidney transplant recipients did not improve significantly between 1997 and 2007, and mortality rates for heart transplant and kidney recipients within the first ten years post-transplant remain at approximately 44% and 32%, respectively.

Dividend Policy
No dividends

Intellectual Property

CDNA's core patent position for AlloMap is based on issued patents and patent applications disclosing identification of genes differentially expressed between activated and resting leukocytes and demonstration of correlation between gene expression patterns and specific clinical states and outcomes.

CDNA's strategy is to continue to broaden its intellectual property estate for AlloMap through the discovery and protection of gene expression patterns and their correlation with specific clinical states and outcomes, as well as the algorithms needed for clinical assessment.

As of March 31, 2014, has 16 issued United States patents, one pending United States patent application, and three pending patent applications outside the United States related to transplant rejection and autoimmunity.

CDNA has five issued United States patents covering methods of diagnosing transplant rejection using 9 of the 11 informative genes measured in AlloMap.

The expiration dates of these patents range from 2021 to 2024, has six issued United States patents covering a method of diagnosing or monitoring an autoimmune or chronic inflammatory diseases, such as lupus, by detecting specific genes.

The patent with the longest term expires in 2029. While CDNA has clinical samples and patents covering lupus diagnostics, does not intend to actively pursue the lupus test opportunity.

In the area of cell-free DNA-based transplant diagnostics, CDNA has filed a provisional patent application to cover some of its initial research and development work in this field. In connection with its acquisition of ImmuMetrix, CDNA expects to succeed to an exclusive license from Stanford University to a patent relating to the diagnosis of rejection in organ transplant recipients using cfDNA.

Competition

CDNA's AlloMap solution for heart transplant recipients competes against existing diagnostic tests utilized by pathologists, which, in the case of heart transplant rejection, generally involve evaluating biopsy samples to determine the presence or absence of rejection.

This practice has been the standard of care in the United States for many years, and will need to continue to educate clinicians, transplant recipients and payers about the various benefits of its test in order to change clinical practice.

Competition for kidney surveillance diagnostics can also come from biopsies.

However, because of the risks and discomforts of the invasive kidney biopsy procedure, as well as the expense and relatively low rate of finding moderate to severe grade rejection, biopsy is not a standard practice for surveillance of transplanted kidneys.

Additional competition for kidney surveillance diagnostics currently comes from general, non-specific clinical chemistry tests such as serum creatinine, urine protein, complete blood count, lipid profile and others that are widely ordered by physician offices and routinely performed in clinical reference labs and hospital labs.

CDNA expects the competition for post-transplant surveillance to increase as there are numerous established and early-stage companies in the process of developing novel products and services for the transplant market which may directly or indirectly compete with AlloMap or its development pipeline.

In addition to companies focused on pre-transplantation such as Thermo Fisher Scientific Inc.'s One Lambda and Immucor, Inc.'s LIFECODES businesses, companies who have not historically focused on transplantation, but have knowledge of technology, have indicated they are considering this market.

Many transplant centers are located within hospitals that have their own laboratory facilities and have capacity to conduct various tests.

If CDNA is unable to keep pace with diagnostic developments in areas for which has developed solutions or if hospitals are able to conduct alternate tests more cost-effectively in their own laboratories, hospitals may choose to rely on internally developed and/or internally performed surveillance and diagnostic tests.

5% stockholders

KPCB Holdings, Inc. 14.9%

Entities affiliated with TPG Biotechnology Partners, L.P. 14.4%

Entities affiliated with Sprout Capital IX, L.P. 9.7%

Entities affiliated with Intel Capital Corporation 8.9%

Entities affiliated with Burrill Life Sciences Capital Fund, L.P. 8.2%

Entities affiliated with DAG Ventures QP, L.P. 6.4%

Mattias Westman 5.9%

Brook Byers 14.9%

Use of proceeds

CDNA expects to net $44 million from its IPO. Proceeds are allocated as follows:

$20.2 million for research and development, including research aimed at expanding the clinical utility of AlloMap and the development of new solutions for the surveillance of heart and kidney transplant recipients;

$13.3 million for sales and marketing activities, including expansion of its sales force to support the ongoing commercialization of its products; and

the remainder for general and administrative expenses (including personnel related costs and the costs of operating as a public company), and for working capital and other general corporate purposes.

Disclaimer: This CDNA IPO report is based on a reading and analysis of CDNA's S-1 filing, which can be found here, and a separate, independent analysis by IPOdesktop.com. There are no unattributed direct quotes in this article.

Source: IPO Preview: CareDx