Veracyte, Inc. — Q1 2014 Form 10-Q
Reporting period: Three months ended March 31, 2014; comparisons are with Q1 2013 unless otherwise noted. Veracyte is a molecular diagnostics company whose revenue at this time came entirely from its Afirma thyroid-testing solution.
Financial results and liquidity
| Metric | Q1 2014 | Q1 2013 |
|---|---|---|
| Revenue | $7.476 million | $4.384 million |
| Gross profit and gross margin | $3.869 million; 51.8% | $1.611 million; 36.8% |
| Operating expenses | $14.051 million | $10.277 million |
| Operating loss | $(6.575) million | $(5.893) million |
| Net loss | $(6.674) million | $(6.895) million |
| Operating cash flow | $(6.757) million | $(6.619) million |
Revenue grew 71%, while net loss narrowed by $0.221 million. Basic and diluted loss per share was $0.32 versus $9.04; the prior-year weighted-average share count was much lower, so per-share figures are not directly comparable. Afirma sample volume increased 34%, to 14,373 samples.
At March 31, cash and cash equivalents were $64.237 million, down from $71.220 million at year-end. Total assets were $72.454 million, total liabilities $22.164 million, and stockholders’ equity $50.290 million. Debt was approximately $4.9 million, including $467,000 current and $4.467 million long-term; it bears 6.06% interest, is secured by substantially all assets except intellectual property and certain other assets, and is due in full in June 2017. The company had no financial covenants under the loan agreement.
Material changes and drivers
- Revenue growth reflected increased commercial-payer revenue and collections (up $2.4 million) and Medicare revenue (up $0.7 million). The GEC list price increased from $4,275 to $4,875 in January 2014.
- Cost of revenue rose 30%, slower than sample growth, with management citing testing-process refinements and scale efficiencies. Selling and marketing expense rose 60%, largely from Genzyme co-promotion costs and increased personnel; general and administrative expense rose 43%, including public-company and professional costs.
- Genzyme’s share of Afirma cash receipts fell from 40% to 32% beginning March 2014. Q1 co-promotion expense was $2.8 million, partly offset by $625,000 quarterly amortization of the upfront fee.
- Accounts receivable was $1.191 million. Cumulative billed amounts for tests not recognized as revenue and not yet paid or written off reached $48.5 million at March 31, versus $40.9 million at December 31; $2.7 million was collected during Q1 from the prior-period balance. These amounts are not assured future revenue.
Outlook, risks, and unusual items
- Management expected existing cash and Afirma revenue to cover anticipated cash requirements for at least 12 months. It also expected further losses and increases in selling and marketing, R&D, and general and administrative expenses.
- The Afirma Malignancy Classifiers were expected to launch in Q2 2014; the company was also developing a lung-disease program. No quantified revenue or earnings guidance was provided.
- Revenue is recognized on an accrual basis only for payers with contracted rates or a predictable collection history; otherwise, it is generally recognized upon payment notification or cash receipt. Management warned that this can make quarterly revenue volatile and collection timing uncertain.
- Key exposures include dependence on Afirma and a limited number of payers (Medicare, UnitedHealthcare, and Aetna represented 29%, 17%, and 10% of Q1 revenue), reimbursement denials or delays, and dependence on Genzyme, the specialized pathology provider TCP, and single-source suppliers. The filing also highlights potential FDA oversight of laboratory-developed tests, regulatory and billing compliance, product development, and competition risks.
- The company reported no litigation believed likely to have a material adverse effect, no off-balance-sheet arrangements, and no material change in contractual obligations during the quarter. Q1 adoption of a tax-accounting update had no material impact. The company maintained a full valuation allowance on deferred tax assets.
Important facts for investors to verify
- Whether payer coverage, contracted reimbursement, and collections improve—and how much of the $48.5 million unpaid billed balance is ultimately collected.
- Whether sample-volume growth converts into recognized revenue and better gross margins, given the company’s revenue-recognition policy and testing costs.
- Cash burn and the stated 12-month liquidity outlook, alongside debt repayment terms and the lender’s security interest.
- Execution and commercial adoption of the planned Afirma Malignancy Classifiers launch, and progress and spending on the lung program.
- Genzyme’s co-promotion economics and the company’s reliance on TCP and single-source suppliers.