A picks-and-shovels precision medicine play that doesn't tend to grab headlines, CareDx (CDNA -5.26%) describes itself as "focused on better outcomes through personalized transplant surveillance." Its suite of offerings encompasses the spectrum of transplant medicine: Waitlist management for patients, high-resolution donor matching, AI analysis for risk of transplant rejection, and diagnostic blood and urine testing for transplant failure and/or rejection.
And the company is dominating its field, thanks to its demonstrated ability to create and expand an entire ecosystem of testing and management systems across multiple transplant lines -- kidney, lung, heart, and soon, stem cells. Investors intrigued by larger peers such as Guardant Health (GH -5.19%) may want to consider CareDx as a better healthcare bargain at a fraction of the price.
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From here to there in safety
As mentioned, CareDx provides tests at every stage of the transplant process: Waitlist management before a transplant, blood testing to assess the risk of injury to the organ at any given time post-transplant, AI software to assess risk of rejection, and post-transplant surveillance testing for continued monitoring of potential rejection. Not only that, but patient results are easily integrated into Cerner and Epic, the two big players in electronic medical records, which alleviates a common pain point for clinicians.
CareDx's exceptional commitment to its patients can be seen in its response to the coronavirus. Mere days into the pandemic, CareDx added RemoTrac to its product offerings.
RemoTrac is an at-home program for kidney and heart transplant patients that allows regularly scheduled labs to be drawn in the home, so that these patients (many of whom are on immunosuppression therapy after their transplants) need not be potentially exposed to COVID out in public. Within the year, more than 150 of the 250 transplant centers in the U.S. reported using RemoTrac with more than 6,000 patients.
According to last month's investor presentation, management believes the total addressable market for its solutions for heart, lung, and kidney transplants to be north of $12 billion. Additionally, this year CareDx is rolling out testing for stem cell transplants, a total addressable market estimated to be valued at $5.5 billion.
Dominating the competition
Simply put, CareDx dominates its market. More than 70% of kidney transplant centers in the U.S. use its non-invasive testing to monitor the health of transplanted kidneys, and that number goes up to more than 90% for heart transplant centers. CareDx already has deep market penetration, but that doesn't mean there's no room for expansion thanks to its constantly improving and expanding suite of products.
Financially, in fourth-quarter 2020 (which ended Dec. 31), CareDx announced a GAAP net loss of $3.5 million, with positive adjusted EBITDA of $4.9 million. Its spending on research and development (R&D) was $13.3 million in Q4 and $48.9 million for all of 2020, meaning CareDx could easily be profitable if it backed off its R&D. Admittedly, given its history of innovation and its eyes on the stem cell transplant market, I do not expect CareDx to decrease its R&D spending.
For the quarter, CareDx boasted 70% non-GAAP gross margins against a long-term target of 75%. Revenue was $77 million in fiscal 2018, $127 million in 2019, and $192 million in 2020, with a target of between $255 million and $265 million for full-year 2021. While revenue growth is slowing, that is still 35% year-over-year expansion -- with a lot of levers left to pull.
CareDx sports a $4 billion market cap with a current price-to-sales (P/S) ratio of 21. It's growing at more than 30% year over year, it dominates the transplant diagnostics market, and it's approaching profitability.
For comparison, another precision diagnostics company, Guardant Health, which provides noninvasive blood tests for cancer, sports a $14.8 billion market cap; it posted nearly $287 million in full-year 2020 revenue, for 34% revenue growth year over year. All this gives Guardant a current P/S ratio of 51.6 and gross margins of 64%.
While Guardant still has room for market penetration in the $6 billion therapy selection market (blood testing to help oncologists select the optimal therapy for the individual cancer patient), this is a fragmented and hyper-competitive field. Most recently, Guardant launched GuardantReveal for recurrence monitoring in colorectal cancer in first-quarter 2021; the entire recurrence monitoring field across all cancers is estimated to be a $15 billion market.
Long term, Guardant is also researching blood tests for early cancer screening, which is estimated to be a $50 billion to $70 billion market, though the study is not likely to be completed until January 2024.
While Guardant may look like the home run swing, CareDx has better margins, little competition, and equally impressive -- yet steady -- growth. Cautious investors looking for healthcare exposure without a hefty price tag may want to consider adding CareDx to their portfolios.
