Baron Discovery Fund Believes CareDx (CDNA) Will Reward Investors for Patience

·5 min read

Baron Funds, an investment management company, released its “Baron Discovery Fund” fourth quarter 2022 investor letter. A copy of the same can be downloaded here. The fund’s performance was flat compared to the Russell 2000 Growth Index in the fourth quarter. The fund (institutional shares) returned 0.22% compared to the benchmark return of 4.13%. The fund (institutional shares) fell by 35.12% for the full year compared to a 26.36% decline for the benchmark. In addition, please check the fund’s top five holdings to know its best picks in 2022.

Baron Discovery Fund highlighted stocks like CareDx, Inc (NASDAQ:CDNA) in the Q4 2022 investor letter. Headquartered in South San Francisco, California, CareDx, Inc (NASDAQ:CDNA) focused on discovering, developing, and commercializing diagnostic solutions for transplant patients and caregivers. On February 24, 2023, CareDx, Inc (NASDAQ:CDNA) stock closed at $14.45 per share. One-month return of CareDx, Inc (NASDAQ:CDNA) was -1.37%, and its shares lost 62.35% of their value over the last 52 weeks. CareDx, Inc (NASDAQ:CDNA) has a market capitalization of $773.614 million.

Baron Discovery Fund made the following comment about CareDx, Inc (NASDAQ:CDNA) in its Q4 2022 investor letter:

CareDx, Inc (NASDAQ:CDNA) is a diagnostic company that facilitates organ donor matches pre-transplant and rejection monitoring post-transplant. Transplant rejection testing is recurring and can help ensure the right immunosuppressant treatment to avoid overdosage or organ loss. As was the case in the third quarter, shares also underperformed in the fourth quarter. The reimbursement headwinds seen in the third quarter have continued (some testing volume is moving beyond traditional Medicare and into Medicare Advantage as well as to commercial payers due to market shifts and an effort to seed new markets and products). In addition, the fourth quarter brought a bit of an unexpected curveball when one of the entities that regulates Medicare payments for the diagnostic industry held a meeting with a panel of experts to determine the usefulness and ideal frequency of testing for dd-cfDNA tests (donor derived, cell-free DNA – or looking at DNA from the donated organ to determine if an organ is being rejected). This is of significance to CareDx as well as its market competitors, particularly in the heart and kidney transplant markets. Our read after the meeting was that there was a strong belief that dd-cfDNA tests are useful and are actually moving toward becoming the gold standard in testing for rejection (displacing physical biopsies as the new first-line diagnostic). The issues that have yet to be determined are whether tests are being used too frequently (we don’t believe so) and whether all organ recipients should be eligible for testing or just the higher risk cohort (we believe all should be eligible as the tests can provide much better overall outcomes as measured by post-transplant survival years).

This is an extreme example of a company that is trading below intrinsic value. Were CareDx to collect for all of the tests it ran in 2022, it would have earned $180 million more revenue in 2022 than the $321 million it officially logged. So, it would be a $500 million revenue company, which at 20% cash flow margins equates to $100 million in cash flow just on existing testing volume. The company has no debt, has about $300 million in cash on its balance sheet and should be free-cash-flow breakeven or positive in 2023. We believe that the kidney testing market (the largest with a $2 billion opportunity) is barely penetrated (all competitors’ market share combined represent less than20% of the total opportunity), and CareDx is by far the dominant provider with enormous first mover and relationship advantages. On our current estimates, CareDx trades at under 1 times its 2023 enterprise value (market value plus net debt) to sales ratio (EV/Sales). Effectively, at a 25% mature cash-flow margin (reasonable for a company with 75% targeted gross margins) this would equate to 4 times cash flow. Because it will generate free-cash-flow going forward and will continue to grow as well, it’s actually trading at a negative EV/Sales ratio for 2027. Based on various positive and negative scenarios, we see limited downside with even the worst set of circumstances. We believe that the stock in a base case is nearly a triple, and in a bull case could be worth six times its current value! Perhaps this is why management announced a $50 million share repurchase program in early December 2022.

We added to our position in CareDx, Inc. for the reasons stated above. We believe the company is misunderstood, and given the valuation and the strength of the company’s balance sheet, Fund investors will be handsomely rewarded for their patience."


CareDx, Inc (NASDAQ:CDNA) is not on our list of 30 Most Popular Stocks Among Hedge Funds. As per our database, 16 hedge fund portfolios held CareDx, Inc (NASDAQ:CDNA) at the end of the fourth quarter which was 15 in the previous quarter.

We discussed CareDx, Inc (NASDAQ:CDNA) in another article and shared the list of best genomics stocks to buy. In addition, please check out our hedge fund investor letters Q4 2022 page for more investor letters from hedge funds and other leading investors.


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Disclosure: None. This article is originally published at Insider Monkey.