Veracyte, Inc. — Q3 2018 Form 10-Q
Reporting period: Three and nine months ended September 30, 2018. Veracyte is a genomic diagnostics company; substantially all revenue continued to come from Afirma testing. Financial statements are unaudited.
Key financial results
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Revenue | $23.5 million | $17.5 million | $66.3 million | $52.4 million |
| Gross margin | 65% | 59% | 63% | 61% |
| Operating loss | $4.3 million | $6.4 million | $19.2 million | $20.5 million |
| Net loss | $4.5 million | $7.0 million | $19.9 million | $22.6 million |
| Net loss per share, basic and diluted | $0.12 | $0.21 | $0.56 | $0.67 |
| Genomic classifiers reported | 8,006 | 6,533 | 22,556 | 18,873 |
Revenue increased 34% in Q3 and 27% year to date, driven primarily by higher test volume and increased Afirma accrual rates. Classifier volume rose 23% and 20%, respectively. Selling and marketing expense grew 28% in Q3 and 35% year to date, largely reflecting expanded sales headcount and related costs. The company completed its transition from Afirma GEC to GSC in Q3; lower license fees were offset by laboratory costs.
- Cash and liquidity: Cash and cash equivalents were $77.8 million at September 30, 2018, versus $33.9 million at December 31, 2017. Including restricted cash, the balance was $78.4 million. Management said available cash, the revolving facility and expected revenue should fund anticipated needs for at least 12 months.
- Cash flow: Nine-month operating cash use was $12.3 million, compared with $18.1 million a year earlier. Capital expenditures were $1.4 million. Company-defined cash burn, operating cash use plus capital expenditures, was $13.7 million for the nine months, down from $19.1 million.
- Debt: Net debt carrying value was $25.2 million; principal outstanding was $25.0 million. The $10 million revolving line was undrawn. Term debt carried an 8.05% effective rate at quarter-end, matures in October 2022, and is secured by substantially all assets except intellectual property. Veracyte reported compliance with covenants.
- Equity financing: The July public offering of 5.75 million shares at $10.25 per share generated approximately $55.0 million net proceeds. Shares outstanding were 40.5 million at September 30, up from 34.2 million at year-end 2017.
Developments, outlook and risks
- Veracyte received draft Medicare coverage for Envisia through the MolDX program and expected a final policy in early 2019; final coverage and commercial adoption were not assured. Percepta ordering physicians increased to nearly 200 across 140 institutions, and 15 sites had submitted samples through the Envisia early-access program.
- The company provided no specific revenue or earnings guidance. It expected continued operating losses and investment in research and development, sales and marketing, infrastructure and product adoption. It stated it may need additional financing if revenue does not fund future cash requirements.
- Revenue estimates involve significant judgment and may change as payer collections are received. Veracyte recorded $1.7 million of additional revenue in the first nine months from changes in estimates for previously delivered tests, including $0.5 million in Q3. Approximately $159.3 million of cumulative list-price billings for tests not recognized as revenue remained uncollected or unwritten off; no amounts were collected on this balance during the first nine months of 2018.
- Key risks include dependence on Afirma and a concentrated payer base (Medicare and UnitedHealthcare represented 40% of nine-month revenue), uncertain reimbursement and collections, payer utilization controls, reliance on single-source suppliers and Thyroid Cytopathology Partners, regulatory changes affecting laboratory-developed tests, and continued losses. The company reported no litigation expected to have a material adverse effect and no material changes in contractual obligations.
- Management reported disclosure controls were effective at the reasonable-assurance level and no material change in internal control over financial reporting during the quarter. Adoption of the new lease standard in 2019 was expected to materially affect assets and liabilities, but not results of operations or cash flows.
Important facts for investors to verify
- Whether Afirma GSC adoption, test-volume growth and gross-margin improvement continue after the GEC transition.
- Whether Envisia receives final Medicare coverage and whether Percepta and other products gain broader reimbursement and commercial traction.
- How payer collections compare with revenue accrual estimates, including subsequent collection or write-off outcomes for the $159.3 million unrecognized billed balance.
- Cash consumption, financing needs, and compliance with debt covenants as the company continues to incur losses.
- The final balance-sheet effect of lease-standard adoption and any changes in reimbursement rates, payer concentration or supplier availability.