Original Recommendation

CareDX

CareDX (CDNA)

our opinion

hold

current price

$29.50

target price

$40.00

market cap

$1.05B

div yield

0.00%

  • Quarterly revenues grew by 88% year-over-year. The company is anticipating full-year profits in 2019; a financial milestone for the company.
  • CareDX has exclusive licenses to patents developed by Stanford University. The company only has diagnostic tests for kidney and heart transplant patients, however, the patents cover liver, skin and many other transplant types. Expansion could generate explosive growth.

trade details

CareDX has been on our watch list for several months. We initially missed our entry point back in December 2018, but we didn’t chase the stock. We waited patiently for our next opportunity to buy shares. That time is now.

CareDX is a global transplant diagnostics company with product and service offerings for patients undergoing heart and kidney transplants. Their technology is licensed from Stanford University under two patents (we’ll explain their patents later in the article).

In 2019 the company is expected to reach a huge milestone – profitability! It’s so rare these days to find a promising biotechnology company that’s focused on profits, but I digress.

In the United States alone over 3,000 heart transplants were performed in 2018. CareDX’s penetration rate is remarkable. Out of 138 heart transplant centers in the U.S., 96% utilize CareDX diagnostic testing known as AlloMap. Since the launch of AlloMap in January 2005, CareDX has performed more than 123,000 commercial AlloMap tests, including 16,116 tests during 2018.

What’s astounding is the post-surgery survival rate for many of the heart transplant patients. For example, Yale’s heart transplant program performed a record-breaking 30 heart transplants in 2018, exceeding the previous high mark of 19 transplants in 1991. Their 30-day post-surgery survival rate was 100% in 2018. Diagnostic tests like AlloMap are a crucial step in providing a successful recovery.

Another key metric is insurance and Medicare coverage for these diagnostic tests. The 2018 Medicare reimbursement rate for AlloMap was $3,240, which represented a 14% increase over the 2017 reimbursement rate. AlloMap has also received positive coverage decisions for reimbursement from many of the largest U.S. private payers.

CareDX also services kidney transplant patients, and their patents cover numerous transplants including liver, pancreas, lung, skin, and any combination thereof. There are huge opportunities for expansion.

The success of their testing services has translated into growing revenue and profits. In their first quarter earnings report, revenue grew 85% year-over-year to $26.0 million. The company surprised shareholders by posting a profit of $0.05 per share, while most analysts expected a loss for the quarter. CareDX has also strengthened their balance sheet by retiring all outstanding debt. The company now sits on $57.4 million in cash and cash equivalents as of March 31, 2019.

In 2019 the company is forecasting its first year of profits. This is a huge milestone for the company. We anticipate significant profit growth in 2020 and beyond.

On a valuation basis, the company trades at 12.6 times 2019 revenue projections, and only 8.3 times 2020 projections. This is a fair valuation for any high-growth company with several untapped markets. Again, CareDX’s patents allow the company to cover a significantly larger pool of transplant patients in the future.

This all sounds great, right? So you’re probably asking why the share price has fallen over 34% from its 52-week high.

One of the biggest concerns we have is impending litigation around CareDX’s licensed patents. CareDX’s biggest competitor, Natera, is accused of infringing on two patents. A judge has yet to rule in either company’s favor, and this has weighed on shares of CareDX.

Let’s assume the worst-case scenario for CareDX. If a judge rules in the favor of Natera, we would expect many shareholders to abandon the stock. Nearly 87% of shares are currently held by institutions. Any negative outcome for CareDX in this litigation will surely result in a loss for all shareholders as institutions unwind their sizable positions. We’re willing to take that risk. While we don’t like to speculate on the outcome of legal proceedings, their patents clearly cover the diagnostic tests in which they perform.

Shares are trading at just under $30 at the time of this writing; nearly 34% lower than their 52-week high. We should note that shares reached their 52-week high in March 2019. We recommend buying shares up to $33.

We will keep readers abreast of any news on these lawsuits. Make CareDX a very small position in your portfolio – no more than 2 to 3 percent of your total portfolio value. For example, readers with a portfolio value of $100,000 should invest no more than $3,000 in this name.