Executive Summary / Key Takeaways

• Castle Biosciences ($CSTL) is strategically evolving from a specialized dermatological diagnostics provider to a diversified precision medicine company, leveraging its proprietary gene expression profile (GEP) and spatial omics technologies to address significant unmet clinical needs.
• Despite a near-term revenue impact from the loss of Medicare coverage for DecisionDx-SCC, the company is projecting robust 2025 revenue between $327 million and $335 million, driven by strong growth in TissueCypher and sustained performance in DecisionDx-Melanoma.
• Technological innovation, including the recent launch of AdvanceAD-Tx for atopic dermatitis and strategic acquisitions like Previse, is expanding Castle's addressable markets and enhancing its competitive moat, with long-term potential for improved patient outcomes and diversified revenue streams.
• The company maintains a strong liquidity position with $287.5 million in cash and marketable securities as of September 30, 2025, and expects positive net cash flow from operations and adjusted EBITDA for the full year 2025, underscoring financial discipline.
• Key risks include ongoing reimbursement challenges, particularly for DecisionDx-SCC, and macroeconomic uncertainties, but Castle's commitment to clinical evidence and strategic market expansion positions it for sustained long-term value creation.

The Precision Play: Castle Biosciences' Strategic Evolution

Castle Biosciences, Inc. is a molecular diagnostics company dedicated to transforming disease management through innovative tests that guide patient care. Founded in 2007, Castle has carved out a specialized niche in dermatological cancers, leveraging its proprietary gene expression profile (GEP) technology to provide personalized, clinically actionable information. The company's overarching strategy centers on developing and commercializing high-value diagnostic tests that address significant unmet clinical needs, supported by robust clinical evidence and a disciplined approach to market expansion. This strategy has seen Castle evolve from its initial focus to a more diversified precision medicine entity, strategically expanding into gastroenterology and, most recently, atopic dermatitis.

The diagnostics industry is characterized by high barriers to entry, including stringent regulatory approvals and substantial research and development (R&D) costs. These barriers inherently favor established players with proven technologies and clinical validation, such as Castle Biosciences. The company's foundational strength lies in its differentiated GEP and spatial omics technologies, which provide a competitive edge in specialized diagnostic areas.

Castle's core GEP technology underpins its flagship DecisionDx-Melanoma and DecisionDx-SCC tests. DecisionDx-Melanoma, for instance, is designed to predict the risk of metastasis or recurrence and sentinel lymph node (SLN) positivity for patients with invasive cutaneous melanoma. In a prospective multicenter study (DECIDE), patients identified by DecisionDx-Melanoma with a predicted risk of less than 5% for SLN positivity had an actual SLN positivity rate of 0% when they elected to undergo the procedure. Furthermore, a large NCI SEER study involving 13,560 patients demonstrated that the clinical use of DecisionDx-Melanoma was associated with a 32% reduction in mortality risk compared to untested patients. This quantifiable benefit in patient outcomes underscores the test's clinical value and contributes to its strong customer loyalty.

Similarly, DecisionDx-SCC, a GEP test for high-risk cutaneous squamous cell carcinoma, not only predicts the risk of metastasis but also responsiveness to adjuvant radiation therapy (ART). New evidence indicates that DecisionDx-SCC significantly outperformed traditional staging systems, such as the American Joint Committee on Cancer (AJCC) and Brigham and Women's Hospital (BWH) staging, in stratifying risk for local recurrence and metastasis in high-risk patients. A cost-effectiveness analysis further highlighted its potential to generate substantial savings for Medicare, estimated at up to $972 million per year, by guiding appropriate ART decisions. These specific performance metrics illustrate the tangible benefits of Castle's technology over conventional diagnostic methods.

In gastroenterology, Castle's TissueCypher test, a spatial omics platform, predicts the risk of progression from Barrett's esophagus (BE) to high-grade dysplasia or esophageal cancer. This technology consistently outperforms traditional clinical and pathologic factors. A real-world study revealed that TissueCypher identified 15% of non-dysplastic BE patients as intermediate or high risk for progression, a risk level comparable to or exceeding that associated with low-grade dysplasia, which typically triggers escalated care. This capability provides individualized risk stratification, enabling more personalized care strategies and potentially earlier intervention for high-risk patients.

Castle's commitment to innovation extends to its robust R&D pipeline and strategic partnerships. The company recently launched AdvanceAD-Tx in November 2025, a first-in-class GEP test for moderate-to-severe atopic dermatitis (AD). This test evaluates 487 genes across 12 immune, inflammatory, and skin-related pathways to identify patients with a Janus Kinase (JAK) inhibitor responder profile. Study data showed these patients were significantly more likely to achieve a 90% improvement in baseline disease severity (EASI-90), complete clearance, no itch, and remain flare-free by three months when treated with a JAK inhibitor, compared to those on Th2-targeted therapy. This represents a significant step towards precision medicine in AD, aiming for stronger responses and reduced healthcare costs. The estimated U.S. total addressable market (TAM) for AdvanceAD-Tx is approximately $33 billion, encompassing 13.2 million individuals aged 12 and older with moderate-to-severe AD.

Strategic acquisitions further bolster Castle's technological roadmap. The May 2025 acquisition of Previse Capsulomics brought methylation technology and pipeline opportunities, including a non-endoscopic sample collection device. This acquisition aims to enhance the TissueCypher franchise by potentially combining spatial omics with methylation for a more accurate multi-omics approach in Barrett's esophagus. Additionally, a June 2025 collaboration with SciBase Holding AB, utilizing Electrical Impedance Spectroscopy (EIS) technology, targets the development of a diagnostic test to predict flares in atopic dermatitis patients, complementing Castle's internal AD test by focusing on different aspects of disease management. These initiatives demonstrate Castle's proactive approach to expanding its technological capabilities and market reach.

Financial Performance and Strategic Responses

Castle Biosciences has demonstrated a compelling growth trajectory, with total revenue growing at a 52% CAGR over the last five years, reaching $332.1 million for the full year 2024. The company achieved net income of $18.2 million and positive adjusted EBITDA of $75 million in 2024, a significant turnaround from a net loss of $57.5 million and negative adjusted EBITDA in 2023. This performance underscores the company's ability to translate its innovative test offerings into meaningful financial results.

For the nine months ended September 30, 2025, Castle reported net revenues of $257.2 million, an increase of 4.7% compared to the same period in 2024. However, the third quarter of 2025 saw a slight decrease in net revenues to $83 million, down 3.2% year-over-year. This quarterly decline was primarily driven by a $16.5 million decrease in dermatologic test revenue, largely attributable to a lower realized average selling price (ASP) for DecisionDx-SCC following the loss of Medicare LCD coverage in April 2025. This was partially offset by a robust $13.8 million increase in non-dermatologic test revenue, predominantly from the TissueCypher test.

The impact of the DecisionDx-SCC reimbursement change is evident in the company's gross margin. For the nine months ended September 30, 2025, the GAAP gross margin decreased to 66.8% from 79.3% in the prior year. The adjusted gross margin for the third quarter of 2025 was 76.8%, compared to 81.9% in the same period of 2024. This decrease was also influenced by higher amortization expenses related to the discontinuation of the IDgenetix test and increased personnel and lab-related costs.

Despite these headwinds, Castle Biosciences maintains a strong liquidity position. As of September 30, 2025, the company held $85.6 million in cash and cash equivalents and $202 million in marketable investment securities, totaling $287.5 million. Management is confident that these resources, combined with anticipated revenue, will be sufficient to meet cash requirements for at least the next 12 months.

Net cash provided by operating activities for the nine months ended September 30, 2025, was $37.4 million, reflecting ongoing operational efficiency, though slightly down from $40.5 million in the prior year due to increased operating expenditures. The company also incurred $20.8 million in capital expenditures for its new corporate headquarters during this period, part of a larger $44.2 million project.

Competitive Landscape and Market Positioning

Castle Biosciences operates in a highly competitive molecular diagnostics market, where its specialized focus on dermatological cancers and, increasingly, gastroenterology, positions it as a niche leader. Compared to broader oncology diagnostics players like Myriad Genetics (MYGN), NeoGenomics (NEO), and Exact Sciences (EXAS), Castle differentiates itself through its proprietary GEP and spatial omics technologies, which offer superior risk stratification for specific conditions.

Myriad Genetics, with its broad portfolio of hereditary cancer tests, and NeoGenomics, specializing in comprehensive oncology testing, represent larger-scale competitors. While these companies benefit from established brand recognition and extensive distribution networks, Castle's targeted GEP tests, such as DecisionDx-Melanoma, provide a more granular and potentially more accurate prognostic assessment for specific dermatological cancers. For instance, the demonstrated 32% reduction in mortality risk associated with DecisionDx-Melanoma underscores a tangible clinical advantage that can foster stronger customer loyalty in its niche.

Exact Sciences, known for its Cologuard screening test, primarily focuses on mass-market screening, a different strategic approach than Castle's high-value, physician-driven diagnostics. Castle's specialized tests, like DecisionDx-UM for uveal melanoma, offer prognostic insights that are deeper than broad screening tools. This allows Castle to capture market share in specialized oncology settings where its tumor-specific GEP tests can enable faster adoption.

Castle's competitive advantages, or "moats," are primarily its proprietary GEP technology and the robust clinical evidence supporting its tests. This technology translates into tangible benefits such as accurate risk prediction, which can lead to superior margins and recurring revenue. The company's focus on tumor biology enables high efficiency in prognosis, fostering rapid innovation cycles. Furthermore, regulatory designations, such as the Breakthrough Device designation for DecisionDx-Melanoma, can provide a pathway to cost leadership in approved areas, potentially enhancing profitability through exclusive opportunities.

However, Castle also faces competitive vulnerabilities, particularly its smaller scale compared to industry giants. This can lead to higher operating costs and potentially reduced profitability. The company's dependency on reimbursement policies, as highlighted by the DecisionDx-SCC situation, exposes it to threats from competitors with more diversified revenue streams, making it challenging to compete solely on pricing.

Outlook, Guidance, and Risks

Castle Biosciences has provided an optimistic outlook for 2025, raising its full-year revenue guidance to $327 million to $335 million. This revised guidance reflects the anticipated non-reimbursement of DecisionDx-SCC by Medicare for services performed after April 24, 2025, yet still indicates strong underlying growth in other segments.

The company expects high single-digit volume growth for DecisionDx-Melanoma for the full year 2025. This growth is anticipated to be driven by continued market penetration, including attracting new ordering clinicians and deepening engagement within existing practices. The dermatology sales force is strategically shifting to a near 100% focus on DecisionDx-Melanoma starting May 1, 2025, following the SCC reimbursement changes, which management expects to generate "some lift" or "accelerated growth".

TissueCypher is projected to deliver "significant" volume growth in 2025, albeit at a lower percentage rate than the exceptional 130% growth seen in 2024, as the test matures and its market penetration deepens. The company views TissueCypher as "very underpenetrated" in its addressable market, suggesting substantial long-term upside. The newly launched AdvanceAD-Tx test, while targeting a massive $33 billion TAM, is expected to have an "immaterial" revenue contribution in 2026 as the company focuses on building reimbursement pathways from the ground up.

Despite the reimbursement challenges for DecisionDx-SCC, Castle Biosciences remains committed to offering the test, emphasizing its clinical value and the ethical imperative to provide patient care. The company has submitted reconsideration requests for the Novitas and MolDx LCDs, citing new clinical evidence not reviewed in the initial determinations. While the outcome and timing of these requests are uncertain, management believes the test's ability to predict ART response and generate Medicare savings provides a strong case for coverage.

From a profitability standpoint, the company anticipates gross margins in the mid-70s range and adjusted gross margins in the mid-to-high 70% range for the remaining quarters of 2025, reflecting the impact of the SCC non-coverage. Management expects to deliver positive net cash flow from operations and positive adjusted EBITDA for the full year 2025.

However, several risks warrant investor attention. The ongoing uncertainty surrounding Medicare reimbursement for DecisionDx-SCC poses a significant threat to future revenues and cash flows. While the FDA's LDT final rule was vacated, the regulatory landscape for laboratory-developed tests remains fluid, and future changes could subject Castle's tests to extensive requirements, potentially impacting commercial sales. Macroeconomic conditions, including inflation and geopolitical conflicts, could also adversely affect business operations and financial performance. Furthermore, the successful integration of recent acquisitions, such as Previse, carries inherent operational and financial risks. The company is also responding to a subpoena from the Department of Health and Human Services, Office of Inspector General, the outcome of which is unpredictable and could lead to significant liability.

Conclusion

Castle Biosciences stands at a pivotal juncture, demonstrating resilience and strategic foresight in a dynamic diagnostics market. The company's core investment thesis is rooted in its ability to leverage proprietary GEP and spatial omics technologies to deliver highly differentiated, clinically actionable tests that improve patient outcomes across dermatological and gastrointestinal diseases. Despite the near-term financial impact of the DecisionDx-SCC Medicare non-coverage, Castle's diversified portfolio, robust pipeline, and disciplined financial management position it for long-term profitable growth.

The strategic launch of AdvanceAD-Tx into the substantial atopic dermatitis market, coupled with the integration of Previse's methylation technology to enhance its gastroenterology offerings, underscores Castle's commitment to innovation and market expansion. The company's strong liquidity and consistent expectation of positive operating cash flow and adjusted EBITDA for 2025 provide a solid financial foundation. While reimbursement challenges and regulatory uncertainties remain key considerations, Castle's unwavering focus on generating compelling clinical evidence and strategically expanding its market presence, particularly through its technological leadership, suggests a compelling outlook for investors seeking exposure to a growing precision diagnostics leader.