Castle Biosciences (CSTL) Q3 2026 earnings review
Castle Biosciences raises its sales outlook, but melanoma volumes shrink
Castle Biosciences, a maker of diagnostic tests for skin cancer and esophageal disease, grew revenue fast thanks to its esophagus test and better insurer payments, even as its main skin cancer test shrank. Revenue rose 24% to $103 million, well above what the company's own prior plan pointed to, and gross margin held steady at 75%. Chief executive Derek Maetzold raised the full-year revenue outlook by $20 million, which by our math leaves fourth-quarter revenue growing 15% from a year ago.
| Revenue | $102.9M +23.9% from a year ago |
|---|---|
| TissueCypher test volume | 15,574 +46.8% from a year ago |
| DecisionDx-Melanoma test volume | 10,177 -2.7% from a year ago |
| Full-year revenue outlook | Raised $20M middle of the range: $390M (+13.3%) |
⚖️ Verdict: 🟢 Bullish
The story got better because third-quarter revenue grew without the one-time accounting catch-ups that flattered the second quarter, proving that insurer payments on TissueCypher and skin tests are genuinely higher. One caution: flagship melanoma test volumes fell from a year ago, forcing Maetzold to trim the full-year melanoma volume plan, while Medicare rejected an advisory panel's pricing recommendation for the new eczema test.
The question now is whether Castle's dermatology division can return to volume growth or if the company is now a single-engine story dependent on TissueCypher. Either spring sales hires and new incentives lift fourth-quarter volumes across both divisions, or melanoma stays near 10,000 reports while the eczema test waits on Medicare pricing. Early December's final Medicare fee schedule and fourth-quarter test volumes will settle it.
🐂 Bull Case
TissueCypher Carries Growth, Even as It Concentrates Risk
TissueCypher, Castle's test for predicting esophageal cancer risk in patients with Barrett's esophagus, now drives almost all of the company's volume expansion. That rapid adoption also concentrates risk, because the test relies on a single Medicare payment rate of $4,950 that resets over time based on private insurer payments.
The diagnostics maker delivered 15,574 TissueCypher reports in the third quarter, up 46.8% from a year ago. Chief executive Derek Maetzold said the test is "around 15% penetrated on a run rate basis" among eligible endoscopy procedures, and he kept the full-year volume growth plan at 50% to 52%.
Sequential additions slowed to 586 reports this quarter from 3,243 in the second quarter because summer schedules and recent sales territory splits created temporary friction. Keeping the full-year target means fourth-quarter volume must jump by about 1,030 reports by our math, because new sales reps hired in the spring are now reaching full productivity.
What to watch: fourth-quarter TissueCypher report volume when full-year results arrive in February. Reaching at least 16,600 reports would meet the annual target and show that the spring sales force expansion is paying off.
Payer Collections Lifted Revenue Without One-Time Help
Last quarter, a $3.7 million accounting catch-up on tests from earlier periods inflated Castle's revenue, raising the concern that its average selling price would drop back in the second half. Meanwhile, the company's prior full-year outlook pointed to second-half revenue averaging $91.4 million per quarter by our math.
Third-quarter revenue reached $102.9 million, up 23.9% from a year ago, even though prior-period payment adjustments turned slightly negative at minus $0.9 million. Excluding those prior-period items, underlying revenue rose 2.1% from last quarter to $101.9 million, and management raised the full-year revenue forecast by $20 million.
"The drivers were primarily ASPs on our 2 lead products," Maetzold said, alongside higher-than-planned commercial collections on its squamous cell skin cancer test. Because revenue grew sequentially without accounting catch-ups and backed a $20 million outlook raise, the concern that second-quarter pricing was a one-time blip has eased.
What to watch: revenue excluding prior-period adjustments in the fourth quarter. Holding near the implied $99.9 million total revenue midpoint would confirm that private insurers are paying consistently higher rates for TissueCypher.
Lab Efficiencies Stopped the Gross Margin Slide
Rapid growth in TissueCypher, which costs more to process in the lab than skin cancer tests, pushed Castle's gross margin excluding one-offs down by 3.2 percentage points in the second quarter. Management had previously warned that this shift in test mix would keep squeezing margins into the low-to-mid 70% range.
In the third quarter, GAAP gross margin held steady from a year ago at 74.7%, and gross margin excluding one-offs dipped only 0.3 percentage points to 76.5%. Selling, general and administrative expenses — sales and overhead costs — fell by 5.3 percentage points of revenue to 62.0%, narrowing the GAAP operating loss to $2.7 million.
Better lab workflows and a steady share of unpaid tests offset the hiring of additional lab staff in Pittsburgh and Scottsdale, so the margin drag from TissueCypher is fading. What to watch: fourth-quarter gross margin excluding one-offs, where staying above 75% would show that higher test prices are absorbing the extra lab headcount.
🐻 Bear Case
Flagship Melanoma Volumes Shrank and Forced a Cut
DecisionDx-Melanoma, Castle's main skin cancer test that predicts whether a tumor will spread, is supposed to anchor the dermatology division while reps introduce two other skin tests. Maetzold said the company aligned sales incentives around the test and is "refining our outlook for full year 2026 DecisionDx-Melanoma test volume growth and now expect mid-single-digit year-over-year growth".
That lowers the target from last quarter's mid-to-high single-digit plan. In the third quarter, melanoma test reports fell 2.7% from a year ago and 1.0% from the second quarter to 10,177. Meanwhile, DecisionDx-SCC, its test for squamous cell skin cancer, dropped 7.3% from a year ago to 3,882 reports.
The drop cuts against management's claim that the three-product sales model is driving adoption across the skin portfolio, because reps are not pushing the new eczema test yet and flagship melanoma volumes still shrank. By our math, hitting 5% full-year growth requires 10,559 melanoma reports in the fourth quarter, a level Castle has never reached.
What to watch: fourth-quarter DecisionDx-Melanoma report volume. A reading below 10,559 would miss even the lowered full-year target and show that the flagship skin test has plateaued near 10,000 quarterly reports.
Medicare Sided Against the Eczema Test Pricing Panel
Castle's next major growth opportunity in dermatology rests on winning Medicare payment for AdvanceAD-Tx, its new test that helps doctors choose drugs for moderate-to-severe eczema, and restoring Medicare coverage for DecisionDx-SCC. An advisory panel had previously voted 21 to 0 to link AdvanceAD-Tx to an existing Medicare rate of $3,675.
In the third quarter, the Centers for Medicare and Medicaid Services set aside that panel vote and proposed pricing AdvanceAD-Tx through "gap-fill", a slower process where local Medicare contractors set rates from scratch. On DecisionDx-SCC, Maetzold said "we don't have in our 2027 revenue, any assumptions for recovering Medicare coverage in '27. So we put into our '28 plan right now."
Because Medicare rejected the faster pricing path, Castle is "not really putting a lot of force behind" selling AdvanceAD-Tx yet, delivering 1,109 reports this quarter while it appeals the decision. Simultaneously, pushing SCC coverage out to 2028 means the company will keep processing nearly 4,000 SCC tests a quarter without Medicare payment throughout next year.
What to watch: the final Medicare laboratory fee schedule decision in early December. If Medicare sticks with gap-fill pricing, AdvanceAD-Tx will contribute very little revenue in 2027.
New Lab and Equity Losses Kept Bottom Line Red
Even with 23.9% revenue growth and higher profit excluding one-offs, Castle remains unprofitable on a GAAP basis while expanding its physical footprint and share count. After finishing a $52 million headquarters in Texas earlier this year, the company opened a new 55,000-square-foot laboratory and office facility in Scottsdale, Arizona in September.
- GAAP net loss: $4.1 million, compared to a $0.5 million loss a year ago
- Loss on equity securities: $3.4 million, swinging from a $3.6 million gain a year ago
- Stock-based compensation: $11.2 million, driving diluted share count up 5.4% from a year ago to 30.6 million
- 2024 federal subpoena on Medicare claims: no update in the release; awaits the quarterly filing
Excluding the $3.4 million investment loss, the net loss narrowed to $0.7 million by our math, but ongoing lab hiring in Pittsburgh and Scottsdale and heavy stock grants keep true GAAP profit out of reach. What to watch: fourth-quarter operating expenses and the quarterly filing's legal footnote to see if facility costs or the federal investigation escalate.
👓 Other Themes
Esopredict Handles Backup Samples as Pipeline Advances
Castle disclosed volumes for Esopredict, a Barrett's esophagus test acquired last year, for the first time at 469 reports in the third quarter and 986 over nine months. Maetzold explained that the lab uses Esopredict when a patient's biopsy sample lacks enough tissue to run TissueCypher. Separately, the company ordered $0.6 million of portable pen devices and electrodes from partner SciBase to speed up clinical trials for an eczema flare-prediction tool.
💲 Other KPIs
By our math, third-quarter free cash flow — operating cash flow minus property and equipment purchases — reached $12.2 million, up 57.6% from $7.8 million a year ago. Operating cash flow was $19.7 million, recovering from a first-quarter bonus outflow, while third-quarter capital spending stepped down to $7.5 million as headquarters construction wound down.
Accounts receivable — bills owed by insurers and patients for delivered tests — rose 5.3% from a year ago and 7.8% from the second quarter to $52.1 million. Because receivables grew much slower than the 23.9% jump in third-quarter revenue, Castle collected cash faster from payers than it did a year ago.
Total cash and marketable investment securities climbed by $10.9 million from the second quarter to $277.7 million, reversing two straight quarters of cash decline earlier in the year. The balance still sits $21.8 million below year-end 2025 because of first-half bonus payouts and building construction, against $10.3 million of total debt.
🔮 Guidance
Raised. The middle of the full-year outlook moved up by $20 million to $390 million, or 13.3% growth for the year. By our math, that leaves $99.9 million for the fourth quarter — up 14.8% from a year ago, but down 2.9% from the third quarter due to December clinic holidays. It is the third raise this year: +$5M, +$20M, +$20M.
Unchanged. Management kept the full-year growth plan for its Barrett's esophagus test at 50% to 52%. By our math, hitting the 51% middle of the range requires 16,604 reports in the fourth quarter, which is 40.7% growth from a year ago and an addition of 1,030 reports over the third quarter.
Cut. The Diagnostics group trimmed the top end of its full-year melanoma volume plan after third-quarter reports shrank 2.7% from a year ago. By our math, achieving 5% growth for the year still requires 10,559 reports in the fourth quarter, up 5.4% from a year ago and 3.8% above the third quarter.
Unchanged. Castle still expects profit excluding interest, taxes, depreciation, stock compensation and equity losses to stay positive in the fourth quarter, for full-year 2026, and in 2027. With $20.0 million generated through nine months, the 2026 floor is already secure, and finance chief Frank Stokes reiterated that "absent a change in strategic direction, we also expect adjusted EBITDA for the full year 2027 to be positive".
❓ Key Questions
How much did price vs volume lift revenue?
Underlying revenue grew $21.4 million from a year ago while skin cancer test volumes fell. Management credited higher average selling prices on both TissueCypher and DecisionDx-Melanoma, plus squamous cell collections, but did not disclose product-level revenue or exact payment rates.
Why will melanoma volume jump to a record in Q4?
Hitting the 5% full-year growth outlook requires about 10,559 DecisionDx-Melanoma reports in the fourth quarter by our math. The test has stayed between 10,021 and 10,459 reports for five straight quarters, and management said fourth-quarter clinic schedules are usually slower.
What is the 2027 plan if Medicare keeps gap-fill pricing?
Medicare proposed gap-fill pricing for the AdvanceAD-Tx eczema test instead of the $3,675 panel rate, with a final ruling due in early December. Management has held back sales force effort on the test and has not said whether it will expand access in 2027 under gap-fill.
Has the 2024 federal Medicare subpoena progressed?
A Department of Health and Human Services subpoena reviewing Castle's federal healthcare claims back to 2015 has been open since February 2024. The press release and call did not mention it, leaving the quarterly filing as the only place to check for updates.