Castle Biosciences (CSTL) Q3 2025: DecisionDx Melanoma Surpasses 10,000 Quarterly Reports, Fueling Guidance Raise
Castle Biosciences advanced its leadership in dermatologic diagnostics, launching ADVANCE-AD-TX and setting new volume records in core franchises, while raising full-year revenue guidance. Commercial execution and product innovation remain central, but margin compression and reimbursement uncertainty signal a complex path ahead. Investors should track the operational leverage from focused sales efforts and the pace of payer adoption for new tests into 2026.
Summary
- Dermatology Franchise Momentum: DecisionDx melanoma and TissueCypher both exceeded 10,000 test reports in the quarter, marking key adoption milestones.
- Product Expansion: Launch of ADVANCE-AD-TX opens a $33 billion addressable atopic dermatitis market, with limited near-term revenue impact as reimbursement pathways are built.
- Margin and Scale Dynamics: Operating leverage from volume growth is offset by rising personnel and lab costs, pressuring gross margin as the company invests for scale.
Performance Analysis
Castle Biosciences delivered another quarter of robust top-line expansion, with revenue reaching $83 million and total test report volume up sharply year-over-year. Core franchises—DecisionDx melanoma and TissueCypher—each broke the 10,000 quarterly test threshold for the first time, signaling deepening adoption and validating the company’s targeted commercial model. DecisionDx melanoma volumes rose 12% YoY, and TissueCypher surged 75% YoY, reflecting both increased clinician penetration and higher utilization per practice. The company’s SCC (squamous cell carcinoma) test maintained stable volumes despite minimal proactive marketing, indicating entrenched clinical value even amid reimbursement ambiguity.
However, gross margin contracted to 74.7% (adjusted 76.8%) versus 79.2% (adjusted 81.9%) a year ago, as higher personnel, lab supply, and service costs scaled with test volume and inflationary pressures. Operating expenses rose across sales, marketing, and R&D, with headcount expansion and merit increases cited as primary drivers. Net loss for the quarter was $0.5 million, a swing from net income last year, and adjusted EBITDA fell to $9.2 million from $21.6 million. Still, operating cash flow remained positive, underpinned by strong collections and disciplined working capital management.
- Volume-Driven Growth: Test report volumes for core franchises reached new highs, supporting revenue expansion and validating commercial focus.
- Margin Compression: Gross margin declined as higher variable costs outpaced pricing and scale benefits, reflecting the cost of growth and inflationary wage adjustments.
- Cash Flow Resilience: Operating cash flow stayed positive, providing a buffer as the company invests in new product launches and commercial expansion.
The combination of high test volumes and positive cash flow signals operational resilience, but margin headwinds and near-term losses highlight the need for ongoing efficiency and payer progress.
Executive Commentary
"The launch of Advanced ADTX marks another important milestone in expanding our commitment to, as well as expanding the value that we bring to our dermatological customers."
Derrick Matfield, Founder, President, and Chief Executive Officer
"Our consistent top-line performance, strong margin profile, and disciplined expense management all contribute to our healthy cash position."
Frank Stokes, Chief Financial Officer
Strategic Positioning
1. Core Franchise Focus and Commercial Realignment
Castle has refocused its dermatology sales force almost entirely on DecisionDx melanoma, with the shift to 95-100% focus beginning in July. This operational pivot drove both new clinician conversions and deeper penetration within existing practices, underpinning the quarter’s volume milestone. SCC test marketing has been de-emphasized, with sales efforts now servicing rather than actively promoting the product, reflecting a resource allocation strategy that prioritizes the highest-impact revenue drivers.
2. Pipeline Expansion and Market Creation
The launch of ADVANCE-AD-TX targets a $33 billion addressable U.S. market in moderate to severe atopic dermatitis, leveraging Castle’s established infrastructure and relationships. Early clinician feedback is strong, with 80% expressing intent to use the test. However, revenue contribution is expected to be immaterial in 2026 as payer coverage is developed, highlighting the typical lag between test launch and commercial inflection in diagnostics.
3. Evidence Generation and Reimbursement Strategy
Castle continues to invest in peer-reviewed studies and real-world evidence, particularly for DecisionDx SCC and TissueCypher, to support clinical utility and drive payer adoption. LCD reconsideration requests for SCC were accepted by both Novitas and Palmetto MolDx, validating the presence of new clinical data, though timing for final coverage remains uncertain. For melanoma, the company is pursuing FDA approval to align with emerging state biomarker laws, aiming to unlock broader commercial reimbursement in the long term.
4. Operational Scale and Margin Management
Test volume growth is driving up variable and fixed costs, including lab supplies, personnel, and IT infrastructure. While this supports future scalability, the near-term impact is gross margin compression and a swing to net loss. Management maintains discipline in expense management but signals that investment in commercial and R&D resources will remain elevated as new products are brought to market.
Key Considerations
This quarter’s results reflect a company balancing aggressive commercial growth with the realities of scaling a diagnostics platform in a complex reimbursement environment.
Key Considerations:
- Sales Force Realignment: Refocusing dermatology reps on melanoma test drove record volumes, but may limit SCC growth until reimbursement clarity improves.
- Pipeline Monetization Lag: ADVANCE-AD-TX launch addresses a large market, but meaningful revenue is contingent on payer adoption, likely beyond 2026.
- Reimbursement Uncertainty: LCD reconsideration acceptance for SCC is a positive signal, but the lack of a defined Medicare timeline introduces risk for future revenue streams.
- Margin Pressure: Expansion in headcount and lab costs, while necessary for growth, is diluting gross margin and profitability in the near term.
- Cash Position Strength: Nearly $288 million in cash and marketable securities provides a runway to invest in commercial expansion and evidence generation.
Risks
Key risks include the uncertain pace of payer adoption for new and existing tests, especially as LCD reconsideration processes lack clear timelines and commercial payers may be slow to align with emerging clinical evidence. Margin compression from rising personnel and lab costs may persist if pricing power or reimbursement rates do not improve. Regulatory and competitive dynamics, particularly in atopic dermatitis and Barrett’s esophagus, could alter growth trajectories if guideline updates or new entrants shift market behavior.
Forward Outlook
For Q4 2025, Castle expects:
- Seasonally flattish to slightly down DecisionDx melanoma volumes, consistent with historical holiday trends.
- Continued modest SCC revenue, with conservative assumptions for further commercial claims.
For full-year 2025, management raised revenue guidance to:
- $327 to $335 million (from $310 to $320 million previously)
Management highlighted several factors that will shape the outlook:
- Commercial team focus will remain on melanoma, with SCC and new launches scaling gradually.
- Operating expenses will stay elevated as Castle invests in sales, R&D, and evidence generation to support long-term growth.
Takeaways
Castle’s Q3 2025 results demonstrate strong execution in core franchises and a willingness to invest ahead of revenue in pipeline expansion.
- Volume Milestones Signal Adoption: Breaking 10,000 reports for both melanoma and TissueCypher validates the commercial model and underpins the guidance raise.
- Margin Compression Is a Watchpoint: Gross margin declines highlight the cost of growth and the importance of payer progress to restore operating leverage.
- Long-Term Upside Hinges on Reimbursement: Investor focus should remain on the pace of payer acceptance for new and existing tests, especially as ADVANCE-AD-TX scales and SCC coverage is reconsidered.
Conclusion
Castle Biosciences delivered a quarter of record core test volumes and pipeline progress, but faces near-term pressure on margins and profitability as it invests for future scale. The company’s ability to convert clinical adoption into durable reimbursement and operating leverage will determine its long-term value creation trajectory.
Industry Read-Through
Castle’s performance underscores the power of focused commercial execution and evidence generation in driving adoption of complex diagnostics. The lag between clinical adoption and payer reimbursement remains a structural challenge for the sector, reinforcing the need for robust data and diversified revenue streams. Margin compression tied to scale-up and inflation is likely to persist across specialty diagnostics, with cash-rich platforms best positioned to weather reimbursement delays. The launch of large-market tests like ADVANCE-AD-TX signals intensifying competition in precision dermatology, while the SCC and Barrett’s esophagus experiences highlight the critical importance of payer engagement and clinical utility evidence for unlocking full market potential.