Monday, November 2, 2020

A Small Cap Equity holding: Castle Biosciences, Inc. (CSTL, $51.34): “Bright Future Ahead for this Kingdom” by: Adam Webb, AIM Student at Marquette University

  Castle Biosciences, Inc. (CSTL, $51.34): “Bright Future Ahead for this Kingdom”

By: Adam Webb, AIM Student at Marquette University

Disclosure: The AIM Equity Fund currently holds this position. This article was written by myself, and it expresses my own opinions. I am not receiving compensation for it and I have no business relationship with any company whose stock is mentioned in this article.


• Castle Biosciences, Inc. (CSTL, $51.34) is a commercial-stage dermatological cancer company, that offers proprietary multi-gene expression profile (GEP) tests that predict the risk of metastasis and the recurrence for patients with melanoma. 

• Decision Dx-Melanoma is still the only product offering a genomic based test for a niche amount of patients dealing with the most common and fast growing cancer in the US, Melanoma. 

• This year castle has an additional $81M cash on hand compared to FY19 and has doubled its research and development costs since FY19 working on new products and product improvement.  

• A release of CSTL’s third product by the end of the year, a GEP test on SCC and Lesion that is predicted to be used in 300,000 cases per year and generate $500M in revenue.

• Health care costs are projected to continually grow at 5.5% in future years.  

Key points: 

Dermatological cancer is the most common cancer diagnosed per year around 5.5 with close to 5 million cases per year. This number is larger than all other types of cancer combined. Assessing the patient’s risk of metastasis is a critical part of such diagnosis, and CSTL’s Decision Dx – Melanoma is still the only product in this critical step for some patients dealing with the disease. 

From sale of treasury stock, CSTL generated and additional $73 Million in funds since FY19. Not only a great testament to the current products CSTL offers, but a commitment to its future products. As CSTL is doubling its R&D expense from prior year, the company should have freedom to pursue its objectives with little credit restrictions. 

The next product CSTL plans to release is its unnamed test on suspicious pigmented lesions. The company gave a status report on the test on October 28th illustrating its great testing performance and the company’s expectations to make the test available for commercial use by the end of the year. In addition, the update also mentioned that the product will be sold to the same dermatologists it already calls on. 

Looking further long-term, health care costs have grown at a 7.7% CAGR since 1960 and are projected to continue to grow at a 5.5% rate through 2030. In addition, castle stated in its Q3 earnings call that it still has plenty of “runway” to operate in its niche market of testing components of melanoma to reaffirm the growth that CSTL could continue to see in the near future. 

What has the stock done lately?

Castle is currently on a resurgence from its pullback which occurred after it reached its all-time high on October 10, 2020 of $55.35. Since added to the small cap portfolio in March of this year at $27.45, it has created an annualized ROI of 189%. With its new product scheduled for release soon and its 50% revenue growth from last year for during the first 6 months of this year the stock should be poised for continued success. 

Past Year Performance: 

CSTL has increased 307.97% in the past year and the stock has reservations for nothing but higher prices as more mutual funds and institutional investors begin to create positions in the newly listed company. The 52 week H-L for CSTL is $16.56 - $55.31. The top ten institutional stakeholders - holding 30.24% of shares outstanding cumulatively - increased their positions in CSTL with purchases of an additional 1.971 million shares.

Source: FactSet

My Takeaway

Institutional confidence in the company, coupled with its vibrant growth in revenue, cash, and R&D over the year along with its additional products coming out are all green lights for CSTL. The 52 week high that was hit on October 10th should be retested if not broken through within a the upcoming year. This equity should remain as part of the AIM portfolio.

Source: FactSet