Veracyte, Inc. — Q3 2014 Form 10-Q
Reporting period: Three and nine months ended September 30, 2014. Financial amounts below are in U.S. dollars; financial statement amounts are in millions unless noted. The interim financial statements are unaudited.
Business context
Veracyte develops molecular diagnostic tests. Its commercial revenue came from Afirma, a thyroid nodule diagnostic solution. In September 2014, Veracyte acquired Allegro Diagnostics to expand into lung diagnostics. The acquisition’s operating results were included from September 16; the filing says acquired-business results were not separately identifiable after integration.
Financial performance and liquidity
| Metric | Q3 2014 | Q3 2013 | Nine months 2014 | Nine months 2013 |
|---|---|---|---|---|
| Revenue | $9.84 | $5.59 | $25.99 | $15.05 |
| Gross profit | $5.67 | $2.46 | $14.25 | $5.91 |
| Gross margin | 57.6% | 44.1% | 54.8% | 39.3% |
| Operating loss | $(7.81) | $(6.10) | $(20.95) | $(17.41) |
| Net loss | $(7.90) | $(6.30) | $(21.23) | $(19.69) |
| Net loss per share | $(0.37) | $(6.59) | $(0.99) | $(22.87) |
- Revenue rose 76% in Q3 and 73% year to date, attributed primarily to higher collections and reimbursement rates, as well as increased Afirma adoption. FNA samples received increased 35% in Q3 and 34% year to date.
- Operating expenses rose 51% in Q3 and 45% year to date. Selling and marketing increased with sales-force growth and Genzyme fees; general and administrative expense rose partly from Allegro transaction-related costs and public-company expenses.
- Cash used in operations was $19.20 million for the nine months, versus $15.86 million a year earlier. Investing used $8.48 million, including $6.89 million net cash for Allegro and $1.49 million of property and equipment purchases. Financing provided $0.46 million.
- Cash and cash equivalents were $44.00 million at September 30, down from $71.22 million at year-end 2013. Current assets were $50.67 million and current liabilities $18.01 million. Net debt carrying value was $5.01 million, including $1.42 million current and $3.59 million long term; the loan bears 6.06% interest and is secured by substantially all assets, with specified exclusions.
- Management stated that cash and expected Afirma revenue should fund anticipated requirements for at least the next 12 months. The company had an accumulated deficit of $106.9 million and expected further losses.
Material changes and unusual items
- Allegro acquisition: Consideration totaled $17.09 million, comprising $10.08 million in Veracyte shares, $2.73 million cash, and $4.29 million to settle Allegro debt. The preliminary allocation included $16.0 million of in-process research and development and $1.06 million goodwill. Veracyte recorded approximately $0.5 million of acquisition costs and $1.2 million of transaction bonuses and severance in general and administrative expense.
- Genzyme agreement: An amendment signed November 7, 2014, after quarter-end, reduces Genzyme’s share of U.S. cash receipts from 32% to 15% beginning January 1, 2015. The earliest convenience termination date is June 30, 2016. Veracyte expects to assume more sales and marketing responsibilities.
- Net loss per share comparisons are affected by the substantially different weighted-average share counts following Veracyte’s 2013 IPO.
Outlook, risks and contingencies
- Management planned a lung cancer test launch in the second half of 2015, subject to completing analytical verification and laboratory transfer. It planned an interstitial lung disease test for 2016. R&D and total selling and marketing expenses were expected to rise; management expected Afirma selling and marketing expense to remain approximately flat over the following year, with lower Genzyme fees offsetting increased internal responsibilities.
- Revenue recognition and collections remain uncertain: much revenue is recognized only upon payer notification or cash receipt. Cumulative billed amounts not recognized as revenue because collection criteria were unmet totaled $75.1 million at September 30, 2014; the company cautioned that collection timing and amounts were uncertain. This is not reported as accounts receivable.
- Medicare, Aetna, and UnitedHealthcare represented 26%, 11%, and 17% of nine-month revenue, respectively. Risks include payer coverage and reimbursement changes, claim denials and collection delays, dependence on single-source suppliers and a specialized pathology provider, and the possibility of FDA regulation of laboratory-developed tests following draft guidance issued in October 2014.
- The filing reported no litigation believed likely to have a material adverse effect and no material changes to contractual obligations during the nine months. Management concluded disclosure controls were effective; no material change in internal control over financial reporting was reported.
Important facts for investors to verify
- Whether Afirma volume growth translates into sustained payer collections, contracted reimbursement, and improved operating leverage.
- The collectability and potential revenue impact of the $75.1 million in cumulative billed, unrecognized tests.
- Allegro integration, final purchase-price allocation, and progress toward the stated lung-test launch timetable.
- Implementation and economics of the amended Genzyme agreement, including added internal sales costs and the 2015 fee reduction.
- Cash burn and financing needs relative to management’s stated 12-month liquidity expectation, given continuing losses and planned investment.
- Changes in payer concentration, reimbursement policy, FDA/LDT requirements, and supply or laboratory-provider continuity.