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Kerrisdale Capital’s Short Thesis About CareDx, Inc.

New York-based investment management firm Kerrisdale Capital recently released a short thesis about CareDx, Inc. – a copy of which can be downloaded below. The firm, which was founded by Sahm Adrangi in 2009, focuses on investing in public securities. As Founder and Chief Investment Officer, Adrangi is involved in all aspects of the company’s development. His specializations include public research and short selling. He became well-known when he exposed fraudulent Chinese companies between 2010 and 2011. Adrangi is also a speaker and had taken an activist role in various investments. He worked with several investment companies, such as Deutsche Bank and Longacre Management, and holds a bachelor’s degree from Yale University.

In its new thesis, Kerrisdale Capital released a negative report on California-based molecular diagnostics firm CareDx, Inc. and explained its short position in the said company.

“We are short shares of CareDx, a $1.7bn diagnostics company whose share price has increased by 30x over just the last two years and now trades at over 18x sales. The meteoric rise and generous valuation have come in the wake of excitement over the commercialization of AlloSure, a blood test intended to identify organ rejection in kidney transplant recipients. Transplant nephrologists have long used measures of kidney function to assess the probability of rejection, with a tissue biopsy providing a definitive diagnosis. To hear CareDx tell it, AlloSure is the long sought-after silver bullet for rejection diagnosis, with the potential to “revolutionize the treatment of kidney transplant patients.” It can help physicians “detect rejection of a donated organ earlier and more accurately” than traditional blood-based measures of kidney function and “reduce the use of invasive biopsies.” [emphasis added]

But alas, as hard as CareDx has tried to finesse the numbers into telling a good story, it’s difficult to escape the simple fact that AlloSure is mostly useless, and potentially dangerous if used improperly. It should be obvious that a diagnostic test for transplant rejection that misses about 40% of rejections compared to the current standard of care has little place in clinical practice. But the stars have fortuitously aligned for CareDx: under the financial cover of broad (but provisional) Medicare coverage, the company has enlisted dozens of influential transplant researchers in the country’s largest clinics to conduct numerous large-scale studies evaluating AlloSure. The hope is to conclusively proclaim its status as a diagnostic panacea.

The data coming out of those studies, though, is exceptionally poor, even as AlloSure revenues are overwhelmingly comprised of utilization in those studies. That leaves CareDx in a precarious position, particularly as physicians wise up to the futility of AlloSure. We calculate that CareDx has faced a quarterly attrition rate on AlloSure’s surveillance patient population of 20-30%. That’s staggering for a diagnostic test with a captive patient population, particularly one that’s paid for almost entirely by Medicare. It’s perhaps less surprising when viewed in the context of the continuous trickle of papers and data revealing AlloSure’s futility in identifying the most common types of kidney rejection. That data will present an even bigger obstacle for CareDx when Medicare reconsiders its coverage parameters, which are conditional on the results of a large clinical trial under way. It’s already clear, in our view, that AlloSure won’t be able to serve as a diagnostic tool in the way it was originally envisioned, which would jeopardize Medicare coverage. It’s therefore unsurprising to see that, in an attempt to stay relevant, recent AlloSure research sponsored by CareDx has been pivoting hard, aiming to prove AlloSure’s worth in a subset of the overall kidney transplant market. The problem, as we shall see, is that the subset being targeted is a fraction of the $2 billion that CareDx has declared its addressable market.

To make matters worse, several competing rejection diagnostic tests are slated to hit the market in the next few months, fresh off their own provisional Medicare coverage approvals. Some have similar mechanisms of action as AlloSure but promise to be more accurate and potentially cheaper. Others have novel mechanisms based on genomic markers and are backed by impressive clinical evidence. They will now get the chance to vie for their own place in clinical studies, and we expect them to hasten the unraveling of AlloSure that’s already under way. CareDx, reliant on a single ineffective test, will soon confront its own terminal diagnosis.”

You can download a copy of Kerrisdale Capital’s Short Thesis About CareDx, Inc. here:

Kerrisdale Capital’s Short Thesis About CareDx, Inc.

You can also see the list of our 2019 Q2 investor letters and download them on this page.

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