Veracyte, Inc. — Q1 2017 Form 10-Q
Business context and reporting period. This unaudited filing covers the three months ended March 31, 2017, compared with Q1 2016. Veracyte operates genomic diagnostic testing laboratories and reports one segment. All revenue to date came from Afirma, its thyroid diagnostic solution; Percepta and Envisia had been launched but were not yet contributing reported revenue.
Financial performance and liquidity
| Metric | Q1 2017 | Q1 2016 | Change |
|---|---|---|---|
| Revenue | $16.4 million | $13.6 million | +21% |
| Cost of revenue | $6.3 million | $6.3 million | Less than 1% higher |
| Gross margin | 61.7% | 53.7% | Improved |
| Operating expenses | $23.9 million | $23.3 million | +3% |
| Operating loss | $7.5 million | $9.8 million | Improved by $2.2 million |
| Interest expense | $0.8 million | $0.4 million | +118% |
| Net loss | $8.2 million | $10.1 million | Improved by 18% |
| Net loss per share, diluted | $0.24 | $0.36 | Improved |
| GEC tests reported | 5,834 | 5,352 | +9% |
Cash flow and balance sheet. Cash and cash equivalents were $51.5 million at March 31, 2017, down $7.7 million from year-end 2016. Operating cash use was $8.1 million; net cash used for property and equipment purchases after sale proceeds was $0.2 million. Management-defined cash burn, operating cash use plus net capital expenditures, was $8.3 million, 28% lower than the comparable period. Current assets were $66.3 million and current liabilities $9.4 million, or working capital of $56.9 million. Total assets were $92.6 million, total liabilities $39.3 million, and accumulated deficit $188.3 million.
Long-term debt was $24.9 million net of issuance costs; principal was $25.4 million. The secured loan bears 12% fixed interest, with principal payments deferred through March 2020 and maturity in March 2022. The company was in compliance with loan covenants. The $15 million second loan facility was available through June 30, 2017, but management did not expect to draw it.
Material changes and business developments
- Revenue growth reflected increased Afirma adoption and additional payers meeting accrual-revenue criteria. GEC volume increased 9%.
- Revenue recognized on an accrual basis rose to $15.1 million (92% of revenue), from $8.2 million (61%) in Q1 2016; cash-basis revenue fell to $1.3 million from $5.3 million. This reflects a change initiated in Q3 2016 as payment history supported accrual estimates for substantially all billed GEC volume.
- Average reimbursement collected for GEC tests approximately one year old was about $2,300, versus $2,100 a year earlier. The company accrued an average $2,300–$2,400 for eligible Q1 tests, representing 90%–95% of reported GEC volume.
- Afirma coverage expanded, with nearly 230 million covered lives reported in recent business highlights, including more than 75 million through Blues plans. Quest Diagnostics began offering Afirma through its AmeriPath business. Medicare finalized Percepta coverage and pricing in line with management’s expectations and similar to Afirma’s Medicare price.
- The pivotal study of the next-generation Afirma classifier met its stated endpoint, identifying 30% more benign patients than the current GEC, according to the company; study data were scheduled for presentation in May 2017.
Outlook, risks and contingencies
Management expected further losses for the remainder of 2017 and at least through 2018, and cautioned that profitability may never be achieved. It stated that cash on hand, available term-loan capacity and expected revenue should meet anticipated cash requirements for at least the next 12 months. No formal revenue or earnings guidance was provided. Management expected continued investment in sales and marketing, research and development, and new products.
Key risks include dependence on Afirma and on a limited number of payers; uncertainty around coverage, reimbursement, claims collection and revenue estimates; payer denials, appeals and possible recoupments; and sole-source supply and reliance on Thyroid Cytopathology Partners for cytopathology services. Medicare and UnitedHealthcare represented 26% and 13% of Q1 2017 revenue, respectively. The company reported approximately $160.6 million of cumulative billed list-price amounts for tests not recognized as revenue and not collected or written off; collection timing and ultimate recovery are uncertain.
Other risks include continued operating losses and possible need for additional capital, restrictive secured-debt covenants and high interest costs, competition and execution risk for newer tests, potential regulatory changes affecting laboratory-developed tests, and operational, billing, clinical, intellectual-property and data-security risks. The filing notes $19.8 million of future minimum operating lease payments and approximately $1.2 million of non-cancelable supply purchase commitments. Management reported no litigation expected to have a material adverse effect and no off-balance-sheet arrangements. Disclosure controls were assessed as effective; no material internal-control changes were reported for the quarter.
Important facts for investors to verify
- Whether Afirma growth and expanded payer coverage translate into sustained cash collections, and whether reimbursement estimates remain accurate.
- The collectability and eventual realization of the $160.6 million of billed but unrecognized and uncollected amounts.
- Progress toward meaningful revenue and reimbursement for Percepta and Envisia, and the commercial and clinical results of the next-generation Afirma classifier.
- Cash runway relative to ongoing losses, the 12% debt cost, covenant requirements and future principal repayments.
- Whether payer concentration, supply and laboratory dependencies, and potential regulatory changes affect test volumes, reimbursement or operating continuity.