Castle Biosciences Navigates Medicare Headwinds Amid Q1 Revenue Beat

Castle Biosciences (NASDAQ: CSTL) reported mixed first-quarter 2025 results, with revenue exceeding expectations but a notable miss on non-GAAP earnings per share (EPS). While the $87.99 million in revenue marked a 9% year-over-year increase and beat estimates by $7.61 million, the EPS came in at -$0.20—$0.13 worse than anticipated. The stock fell 7.3% in after-hours trading, reflecting investor concerns about the company’s profitability challenges and looming Medicare reimbursement cuts for its DecisionDx-SCC test.

The Medicare Coverage Crisis

The core issue plaguing Castle Biosciences is the loss of Medicare reimbursement for its DecisionDx-SCC test, effective April 2025. Medicare, a major payer for the test—which assesses metastatic risk in patients with squamous cell carcinoma—has denied coverage despite the company’s claims that the test saves Medicare $972 million annually by reducing unnecessary radiation therapy. This denial threatens revenue streams: DecisionDx-SCC accounted for ~15% of total test reports in 2024 and 43% volume growth that year.

The impact is already baked into guidance. For 2025, Castle now projects revenue of $280–295 million, down slightly from prior expectations, and gross margins are expected to fall to the low-to-mid 70% range (vs. 78.5% in 2024). Analysts have reduced 2026 revenue estimates by $5.8 million to $298 million, with EPS forecasts worsening to -$1.92.

Revenue Strength, But Profit Struggles

While revenue grew 9% year-over-year, the EPS miss underscores operational inefficiencies. The company’s net loss widened to $0.20 per share, far exceeding the -$0.08 estimate. This reflects rising costs, including investments in sales teams and R&D. Cash reserves remain robust, however, at $293 million as of December 2024, providing a buffer to navigate near-term headwinds.

The upside lies in Castle’s broader product portfolio. Its TissueCypher test for Barrett’s esophagus—a high-growth area—saw 130% volume growth in 2024 and now accounts for 20,956 test reports. DecisionDx-Melanoma, its flagship product with 28% market penetration, remains a cash cow, though its Q1 volumes were flat due to seasonality.

Analysts Split on Long-Term Outlook

Analysts are divided. Bulls point to Castle’s $38.89 average 12-month price target (implying a 101% upside from current levels) and its ability to leverage $293 million in cash reserves. They also highlight TissueCypher’s potential: its 5% market penetration suggests room for growth as it gains clinical endorsements.

Bears, however, cite the Medicare denial and 2026 guidance cuts as red flags. The loss of reimbursement could divert clinician adoption to alternative tests, while competition in diagnostics remains fierce.

Conclusion

Castle Biosciences faces a pivotal year. The Medicare denial for DecisionDx-SCC is a clear near-term risk, but its cash reserves and diversification into high-growth areas like TissueCypher offer hope. Investors should weigh the 50–100% upside potential against execution risks. Key metrics to watch include:
- 2025 revenue growth: Must stay within the $280–295 million range despite Medicare headwinds.
- Gross margin stabilization: A rebound to mid-70% could ease concerns.
- TissueCypher adoption: A 10% market penetration could offset DecisionDx-SCC losses.

While the Q1 results were uneven, Castle’s long-term prospects hinge on navigating reimbursement hurdles and capitalizing on untapped markets. For now, the stock’s 14% drop post-Q4 results—and similar volatility this quarter—suggests investors remain cautious. Only sustained revenue growth and margin stability will quiet skeptics.

Data as of May 2025. Past performance does not guarantee future results.