Veracyte, Inc. — Q2 2017 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2017. Financial statements are unaudited. Veracyte is a genomic diagnostics company operating in one segment. Although it had commercialized Afirma, Percepta and Envisia, all revenue through June 30, 2017 came from Afirma testing services.
Financial performance
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Revenue | $18.4 million | $14.7 million | $34.8 million | $28.2 million |
| Cost of revenue | $7.0 million | $6.3 million | $13.3 million | $12.6 million |
| Gross margin | 62.2% | 57.1% | 61.9% | 55.4% |
| Operating expenses | $25.0 million | $25.2 million | $49.0 million | $48.5 million |
| Operating loss | $(6.6) million | $(10.5) million | $(14.1) million | $(20.2) million |
| Net loss | $(7.3) million | $(11.2) million | $(15.5) million | $(21.3) million |
| Net loss per share, diluted | $(0.22) | $(0.40) | $(0.46) | $(0.77) |
- Q2 revenue increased 25%; first-half revenue increased 23%. Afirma genomic classifier volume rose 11% in Q2 and 10% in the first half.
- Q2 operating expenses declined 1%; first-half expenses increased 1%. Cost of revenue grew faster than revenue in Q2, though gross margin improved year over year.
- Q2 selling and marketing expense declined 3%, reflecting the end of Genzyme U.S. co-promotion costs, partly offset by greater internal sales staffing and marketing. First-half selling and marketing expense was essentially flat.
- Cash and cash equivalents were $46.5 million at June 30, 2017, down from $59.2 million at year-end 2016. First-half operating cash use was $13.0 million; investing cash use was $0.3 million; financing provided $0.5 million. Management reported Q2 cash burn, defined as operating cash use plus net capital expenditures, of $5.0 million, down 41% year over year.
- Debt principal was $25.4 million; the balance-sheet net debt obligation was $25.0 million. Current liabilities were $10.8 million and current assets were $62.9 million. Accumulated deficit was $195.6 million.
Material changes and operating developments
- Revenue growth reflected higher Afirma adoption and additional payers meeting the company’s criteria to recognize revenue on an accrual basis. Accrual-basis revenue represented 96% of Q2 revenue, versus 64% a year earlier; for the first half it was 94%, versus 62%.
- In Q2, Veracyte added $1.0 million of revenue based on updated cash-collection estimates for tests performed in the second half of 2016. Revenue estimates are judgmental and may be revised as collections develop.
- The company began transitioning customers to the next-generation Afirma Genomic Sequencing Classifier (GSC). It also initiated access through Quest/Ameripath and received its first commercial Percepta orders. Management anticipated beginning to recognize Percepta revenue in the second half of 2017; no Percepta revenue had been recognized through June 30.
- Coverage progress included Anthem and additional Blue Cross plans. The filing reports approximately 163 million contracted lives for Afirma and coverage for more than 269 million people in the United States.
- The U.S. Genzyme co-promotion agreement had ended in September 2016; the separate ex-U.S. agreement was terminated effective July 6, 2017.
Outlook, risks and contingencies
- Management expected additional losses for the remainder of 2017 and at least through 2018, and cautioned that the company may never achieve profitability. It believed cash on hand and expected revenue would cover anticipated requirements for at least 12 months from June 30, 2017. No numerical revenue or earnings guidance was provided.
- The $25.0 million term loan bears a fixed 12% annual rate, is interest-only through March 31, 2020, and matures March 31, 2022. Principal repayment is scheduled in eight equal installments over the final two years. The loan is secured by substantially all assets; the company reported covenant compliance. The additional $15 million loan option expired undrawn. Early repayment may trigger a substantial premium.
- Revenue depends on test volume, payer coverage and reimbursement, collections, and estimates of amounts ultimately realizable. Medicare and UnitedHealthcare together accounted for 41% of Q2 revenue and 40% of first-half revenue. At June 30, cumulative list-price billings for tests not recognized as revenue and not collected or written off were approximately $159.8 million; the company gave no assurance about when or how much would be collected.
- Key risks include reliance on Afirma for revenue; payer denials, rate reductions or delayed collections; successful adoption and reimbursement of GSC, Percepta and Envisia; supplier concentration; dependence on Thyroid Cytopathology Partners for cytopathology services; regulatory uncertainty, including possible FDA oversight of laboratory-developed tests; and the need for additional capital if cash generation is insufficient.
- Future minimum operating lease payments totaled $19.2 million. The company stated that no pending litigation was expected to have a material adverse effect and that it had no off-balance-sheet arrangements.
- Disclosure controls and procedures were assessed as effective at the reasonable-assurance level; no material change in internal control over financial reporting was reported for the quarter.
Investor verification points
- Track cash burn, cash runway and the timing of the loan’s principal payments, alongside the 12% interest cost and prepayment terms.
- Assess cash collections against accrued revenue, including the $1.0 million estimate adjustment and the large pool of unrecognized billed tests; verify whether subsequent collections support reported estimates.
- Monitor Afirma volume, reimbursement rates and payer concentration, and confirm that GSC transition does not disrupt test volume, reimbursement or margins.
- Verify whether Percepta and Envisia obtain clinical evidence, payer coverage and meaningful commercial revenue, reducing reliance on Afirma.
- Follow supply continuity, laboratory capacity, TCP service arrangements, and regulatory developments that could affect the ability to perform or sell tests.