Biotech firm Cernostics is taken public via acquisition, with capital to expand its team in Pittsburgh

As momentum builds for Pittsburgh life sciences, a new acquisition will take a local biotech company public.

Earlier this week, Castle Biosciences announced a $30 million acquisition of Harmar-based Cernostics — a biotech firm that uses artificial intelligence and spatial biology on its proprietary TissueCypher platform to identify the presence or development of esophageal cancer or relevant dysplasia in tissue biopsies.

The deal initially includes $20 million in cash and $10 million of common stock in Castle Biosciences, or $30 million in cash alone. But that deal could include an additional $50 million should Cernostics hit designated performance milestones by 2022. The initial transaction is expected to close before the end of the year.

The acquisition will take Cernostics public as part of Castle Biosciences, which trades on the Nasdaq as CSTL, and will be yet another contribution to the momentum of public offerings Pittsburgh companies have seen in the last few months. In the life sciences sector specifically, Cernostics will follow the successful IPO of Cognition Therapeutics, which raised over $45 million on its first day earlier this month.

Castle Biosciences — which is headquartered in Friendswood, Texas — specializes in molecular diagnostics for dermatological cancers like melanoma. The company went public in 2019, and then CEO Derek Maetzold, who is also Castle Biosciences’ founder and president, said it started looking outside the company for potential diagnostics product expansion for other unmet clinical needs. That’s when he and his team came across Cernostics.

Cernostics reminds us of what Castle was like in 2011 or 2012 — developing its own clinical tests, having found important unmet clinical needs, driving to do evidence development.

“As a company, Cernostics reminds us of what Castle was like in 2011 or 2012 — developing its own clinical tests, having found important unmet clinical needs, driving to do evidence development,” Maetzold told Technical.ly, referencing the exciting early growth stages of his now-public company. And the business opportunity of Cernostics’ product, which he said has an estimated total addressable market of $1 billion, was hard to say no to.

This deal will help Cernostics attract the kind of capital needed to achieve that same success. Though the company attracted some investment (including a $6 million raise in the third quarter), Maetzold knows that the commercialization and marketing needs for a life sciences company are extremely capital-intensive, and this acquisition will help meet those needs. He mentioned that both Cernostics and Castle Biosciences hope to expand the use of TissueCypher to indications beyond Barrett’s Esophagus — a frequent precursor to esophageal cancer — and that this acquisition will provide support for those efforts as well.

“We are excited about joining forces with Castle, a leader in the precision diagnostics space with a strong history of commercial success,” said Cernostics CEO Mike Hoerres in a press release. “We believe the TissueCypher Barrett’s Esophagus Assay is a valuable tool for improving prevention of esophageal cancer, particularly, to help physicians and patients make more informed management decisions based on the unique biology of an individual patient’s esophageal biopsy.”

Beyond providing new capital and resources, this deal will also keep Cernostics operations, management team, laboratory and other staff in Pittsburgh, with plans to grow its presence here even more: “The talent that’s currently at Cernostics, even though small, was important to us in contemplating this acquisition,” Maetzold said. Mentioning the medical expertise of institutions like the University of Pittsburgh and healthcare systems like UPMC, he added that he sees a wealth of talent and experience in Pittsburgh that can contribute to growing Cernostics’, and now Castle Bioscience’s, business here.

“The opportunity to kind of take an existing group of talented people, and then grow, makes it an easy build-out conversation,” Maetzold said. Team expansion in Pittsburgh will likely involve roles in client services, research and development and support of clinical needs, though the CEO doesn’t yet have an estimation of how many jobs the company hopes to add in Pittsburgh.

While this acquisition means Cernostics will no longer seek out venture capital raises to support its business growth, it could help attract more funding to other growing life sciences companies in the area — a common problem that industry experts point to as one factor that’s stymied local progress in the field. The deal could also help Pittsburgh identify an area to specialize in, analogous to its autonomous vehicle expertise within robotics. The application of artificial intelligence that Cernostics employs in its TissueCypher could be the perfect way to merge the medical talent coming out of Pitt with the computer science one of Carnegie Mellon University.

Sophie Burkholder is a 2021-2022 corps member for Report for America, an initiative of The Groundtruth Project that pairs young journalists with local newsrooms. This position is supported by the Heinz Endowments.