Veracyte, Inc. — Q1 2015 Form 10-Q
Reporting period: Three months ended March 31, 2015; filed May 15, 2015. Veracyte is a molecular diagnostics company. Q1 revenue was entirely from its Afirma thyroid testing solution; the Percepta lung cancer classifier launched in April 2015, after quarter-end.
Financial results and liquidity
Amounts are in millions of dollars, except per-share data, percentages and test volumes. Period comparisons are Q1 2015 versus Q1 2014.
| Metric | Q1 2015 | Q1 2014 / prior date |
|---|---|---|
| Revenue | $11.218 | $7.476; up 50% |
| Cost of revenue | $4.566 | $3.607 |
| Gross profit and gross margin | $6.652; 59.3% | $3.869; 51.7% |
| Operating expenses | $18.771 | $14.051 |
| Loss from operations | $(7.553) | $(6.575) |
| Net loss; loss per share | $(7.610); $(0.34) | $(6.674); $(0.32) |
| Cash used in operating activities | $(8.867) | $(6.757) |
| Cash used in investing activities | $(0.441) | $(0.124) |
| Cash and cash equivalents at period-end | $25.798 | $35.014 at Dec. 31, 2014 |
| Long-term debt, net carrying amount | $4.949 | $4.923 at Dec. 31, 2014 |
| Working capital | $19.544 | $26.203 at Dec. 31, 2014 |
- Revenue growth reflected increased Afirma adoption, more payers qualifying for accrual revenue recognition, and higher collections. GEC tests processed increased 30% to 4,020; FNA samples received increased 20% to 17,315.
- Revenue recognized on an accrual basis was $5.4 million, versus $2.4 million; revenue recognized when cash was received was $5.8 million, versus $5.1 million. At March 31, $13.2 million of recent billed amounts had not met revenue recognition criteria and had not been collected, paid or written off. Collection and ultimate revenue are uncertain.
- Operating expenses rose 34%. R&D increased 31% to $2.787 million, selling and marketing rose 30% to $5.620 million, and G&A increased 46% to $5.798 million. Stock-based compensation was $1.223 million, up from $0.492 million.
- Cash declined by $9.216 million during the quarter. Cash and cash equivalents included $23.9 million in money-market funds; restricted cash was $0.118 million. Cash-flow pressure included the net loss and payment timing, particularly payments to Genzyme.
- Debt carries a 5% stated interest rate, is due in December 2018, and is secured by substantially all assets other than intellectual property and certain other assets. The company was in compliance with its financial covenants at quarter-end. Additional $5 million loan tranches were available subject to timing and, for the third tranche, a revenue milestone.
Material changes and subsequent events
- Genzyme’s U.S. co-promotion fee rate on Afirma cash receipts fell from 32% to 15% effective January 1, 2015. Q1 net co-promotion expense declined to $1.210 million from $2.151 million, while Veracyte expanded its own sales and marketing activity.
- On April 28, 2015, Veracyte completed a private placement of 4,907,975 shares at $8.15 per share, generating $40.0 million gross and approximately $37.3 million net proceeds. The company said proceeds would support R&D, commercialization, working capital and general corporate purposes. The financing occurred after quarter-end.
- Percepta launched in April 2015; amortization of the acquired $16.0 million in-process R&D asset began that month over an estimated 15-year useful life. Veracyte said it planned to introduce an interstitial lung disease test, including for IPF, in 2016.
- A new South San Francisco headquarters and laboratory lease was signed April 29, 2015, running June 2015 through March 2026. Disclosed minimum operating lease payments, including the new lease, totaled $22.880 million; a $0.603 million letter of credit secured the lease.
Outlook, commentary and risks
- Management expected the company’s March 31 cash, Afirma revenue over the next 12 months and April financing proceeds to meet anticipated cash requirements for at least 12 months. It also expected additional losses in 2015 and future years; no specific revenue or earnings guidance was provided.
- Management expected R&D and G&A expenses to increase in 2015. It expected Afirma selling and marketing expense to remain relatively flat, but total selling and marketing expense to rise with investment in lung products. Cost per test may decline over time with scale, though new tests may initially raise costs.
- Results remain dependent on Afirma and reimbursement. Medicare, Aetna, Cigna and UnitedHealthcare together represented 62% of Q1 revenue. Payer coverage, reimbursement rates, denials, collections and revenue estimates can materially affect reported results and cash flow; quarterly revenue is subject to fluctuations and seasonality.
- Other stated risks include continuing losses, product development and commercialization uncertainty, competition and possible FDA or other regulatory changes affecting laboratory-developed tests, reliance on single-source suppliers and Thyroid Cytopathology Partners, and the operational demands of scaling and moving laboratory facilities. The company reported no pending litigation it believed would have a material adverse effect.
- The company reported effective disclosure controls at the reasonable-assurance level and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether Afirma test volume, payer coverage and contracted reimbursement continue to grow, and whether accrued revenue converts to cash without significant reversals or write-offs.
- How much cash the April private placement added and how quickly the proceeds are used, in light of quarterly operating cash use of $8.9 million.
- Percepta’s commercial adoption, reimbursement, clinical utility evidence and costs, alongside progress and timing for the planned IPF test.
- Compliance with the loan’s liquidity or revenue covenant and the availability and conditions of the remaining loan tranches.
- The financial and operational effects of the new long-term facility lease, including the laboratory move and any required recertification.