Veracyte, Inc. — Q1 2018 Form 10-Q
Reporting period: Three months ended March 31, 2018; comparative figures are for Q1 2017 unless stated otherwise. Veracyte is a genomic diagnostics company operating CLIA-certified laboratories. Revenue was derived substantially from its Afirma thyroid testing service; Percepta revenue was not significant, and the filing says no Envisia revenue had been recognized to date.
Financial performance and liquidity
| Metric | Q1 2018 | Q1 2017 / comparison |
|---|---|---|
| Revenue | $20.0 million | $16.4 million; up 22% |
| Reported genomic tests | 6,864 | 5,834; up 18% |
| Gross margin | Approximately 61% | Down about 1 percentage point |
| Operating expenses, excluding cost of revenue | $21.1 million | Up 20% |
| Loss from operations | $9.0 million | $7.5 million loss |
| Net loss | $9.2 million | $8.2 million loss |
| Basic and diluted loss per share | $0.27 | $0.24 |
| Cash used in operating activities | $7.4 million | $8.1 million |
| Cash burn, company-defined non-GAAP measure | $7.6 million | $8.3 million |
At March 31, 2018, cash and cash equivalents were $27.2 million ($27.8 million including $0.6 million restricted cash). Current assets were $47.0 million and current liabilities were $11.8 million. Accumulated deficit was $220.3 million. Management stated that existing cash, the available revolving line and expected revenue should meet anticipated cash requirements for at least the next 12 months, while warning that additional financing may be needed if revenue does not fund requirements.
Long-term debt was $25.0 million, with an additional $0.2 million net capital lease liability. The Silicon Valley Bank facility includes a $25.0 million term loan and an undrawn revolving line of credit of up to $10.0 million, subject to a borrowing base. The term loan matures in October 2022, carries a variable rate, and has a $1.2 million final payment obligation. The company reported covenant compliance at quarter-end. Operating lease minimum payments totaled $20.4 million.
Changes versus the prior comparable period
- Revenue growth reflected an 18% increase in reported test volume and an 11% increase in the average accrual rate, which management attributed to improved historical payer collections, coverage and contracts.
- Cost of revenue increased 25%, faster than revenue, partly because Veracyte was running both Afirma platforms during the transition to the next-generation GSC. Management expected to substantially complete the transition by June 30, 2018, subject to regulatory approvals in certain states.
- Selling and marketing expense rose 57%, primarily due to a 31% increase in average headcount and higher incentive compensation. Research and development expense declined 9%; general and administrative expense declined 6%.
- Interest expense fell 44%, reflecting a lower effective rate under the Silicon Valley Bank facility than under the prior debt agreement.
- Operating cash use improved, principally because Q1 2017 included a larger outflow from accrued liabilities and deferred rent.
Outlook, commentary and notable items
- No specific full-year revenue or earnings guidance was provided. Management expected continued operating losses and further investment in laboratory operations, research and development, selling and marketing, and infrastructure.
- Commercial highlights included transitioning approximately 70% of thyroid business to Afirma GSC ahead of plan, doubling institutions submitting Percepta samples versus Q4 2017, and signing an in-network contract with Anthem.
- Veracyte introduced the Afirma Xpression Atlas and entered a research collaboration with Loxo Oncology. These were development and collaboration updates, not quantified revenue guidance.
- Q1 revenue included an additional $0.7 million from revised estimates for certain tests delivered in 2017, as collections were higher than originally accrued. The company said this reduced operating loss by $0.7 million and loss per share by approximately $0.02.
- The company adopted ASC 606 on January 1, 2018; the cumulative adoption adjustment was not material. Revenue estimates depend on payer coverage, contracts, collection history and other judgments. The filing reports $159.3 million of cumulative billed amounts for tests not recognized as revenue and not collected or written off; collection timing and amount are uncertain.
- Key risks include continued losses, reliance on Afirma, payer reimbursement and concentration (Medicare and UnitedHealthcare represented 29% and 13% of Q1 revenue), successful Afirma GSC transition, supplier and TCP dependence, regulatory changes, and execution of product adoption. The loan is secured by substantially all assets other than intellectual property and includes restrictive covenants.
- Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter. The filing identifies no litigation believed likely to have a material adverse effect.
Important facts for investors to verify
- Whether test volume growth and improved payer reimbursement persist, and whether the $0.7 million estimate adjustment is nonrecurring.
- Progress and cost effects of completing the Afirma GSC transition, including any state regulatory approvals.
- Actual collections, denials and write-offs against accrued revenue, including the unrecognized billed balance and exposure to major payers.
- Cash runway, use and availability of the revolving line, debt service and covenant headroom; the filing gives different term-loan minimum interest rates in separate sections (5.34% and 5.43%).
- Whether Percepta and Envisia gain adoption and reimbursement sufficient to reduce dependence on Afirma, and whether planned investments can improve margins.