Veracyte, Inc. — Q3 2013 Form 10-Q
Business context and reporting period. This unaudited filing covers the three and nine months ended September 30, 2013, with comparisons to the same 2012 periods. Veracyte is a molecular diagnostics company; all reported revenue came from its Afirma thyroid testing solution.
Financial performance
Amounts below are in millions, except per-share data. Balance-sheet comparisons are September 30, 2013 versus December 31, 2012.
| Metric | Q3 2013 | Q3 2012 | Nine months 2013 | Nine months 2012 |
|---|---|---|---|---|
| Revenue | $5.594 | $3.224 | $15.046 | $7.171 |
| Cost of revenue | $3.132 | $1.984 | $9.136 | $4.984 |
| Gross profit / margin | $2.462 / 44.0% | $1.240 / 38.5% | $5.910 / 39.3% | $2.187 / 30.5% |
| Operating loss | $(6.101) | $(4.939) | $(17.411) | $(13.813) |
| Net loss | $(6.303) | $(4.938) | $(19.688) | $(13.812) |
| Net loss per common share, basic and diluted | $(6.59) | $(7.49) | $(22.87) | $(21.40) |
- Revenue grew 74% in Q3 and 110% for the nine months. Management attributed growth to greater commercial-payer reimbursement and collections and increased Medicare adoption. FNA samples received rose to 12,417 in Q3 from 7,052, and to 35,611 for nine months from 16,587.
- Nine-month operating expenses increased 55% to $32.457 million. Selling and marketing rose 60%, partly reflecting Genzyme co-promotion costs; general and administrative rose 53%, including IPO-related professional fees; research and development rose 22%.
- Other expense was $2.146 million for nine months, primarily reflecting a $2.070 million fair-value charge on the preferred-stock tranche liability and a $0.077 million warrant-liability charge. The tranche liability was settled when additional preferred shares were issued in June.
Cash, debt and liquidity
- At September 30, cash and cash equivalents were $15.426 million; current assets were $20.470 million and current liabilities $12.520 million. Total assets were $23.571 million.
- The company had $5.0 million of debt principal outstanding under a June 2013 loan; carrying value, net of discount, was $4.863 million. The loan bears 6.06% interest, is secured by substantially all assets other than intellectual property and certain assets, and has no financial covenants. A further loan of up to $5.0 million could be requested by March 31, 2014.
- For the nine months, operating cash use was $15.861 million, investing cash use $1.011 million, and financing cash provided $18.296 million. Financing included $12.945 million net proceeds from preferred-stock sales and $4.877 million net debt proceeds. Cash increased $1.424 million from year-end 2012.
- After quarter-end, the November 4 IPO raised approximately $57.9 million net from 5.0 million shares sold at $13 per share. Management said existing cash, IPO proceeds and Afirma revenue were expected to fund anticipated requirements for at least 24 months; the filing also cautions that losses are expected to continue and additional financing may be needed.
Material changes, outlook and risks
- Revenue growth outpaced cost-of-revenue growth, improving gross margin, but operating and net losses widened as expenses rose. Nine-month operating cash use also increased substantially from $3.279 million in 2012.
- Revenue recognition and collections remain uncertain: much revenue is recognized only upon payer payment notification or cash receipt. At September 30, $38.0 million of cumulative billed tests had not met revenue-recognition criteria and remained unpaid or without payment notification; collection timing and amount were uncertain, and some amounts may never be collected.
- Management expected selling and marketing, research and development, and general and administrative expenses to increase. Planned investment included broader Afirma adoption and reimbursement, the Afirma Malignant GEC, and a lung-disease program. The filing discussed anticipated product-development timelines but did not provide formal revenue or earnings guidance.
- Afirma depended on a limited payer base: Medicare represented 33% of nine-month revenue, UnitedHealthcare 17%, and Aetna 8%. The company noted payer coverage, reimbursement rates, claim denials and collection delays as material uncertainties; Medicare claims processing had recently transitioned to Noridian.
- Other significant risks include dependence on Genzyme for co-promotion and TCP for cytopathology services; single-source suppliers; potential FDA oversight of laboratory-developed tests; regulatory and reimbursement changes; competition; and the company’s continuing losses. The Genzyme cash-receipts fee was 40% in 2013 and scheduled to decline to 32% in March 2014.
- Subsequent events included an October 9 four-for-one reverse stock split and the IPO, which converted preferred stock into common stock. The statements do not reflect the IPO conversion. Management reported disclosure controls were effective at the reasonable-assurance level.
Most important facts for investors to verify
- Whether payer coverage and collections improve, especially for the large pool of previously billed but unrecognized tests, and how this affects cash flow.
- Whether Afirma volume growth and gross-margin improvement persist as test costs, reimbursement and Genzyme fees evolve.
- Post-IPO cash, share count and dilution, alongside the debt’s repayment terms and any decision to draw the additional loan.
- Progress, validation and commercial timing for the Afirma Malignant GEC and lung program, and any regulatory developments affecting laboratory-developed tests.
- Continuity of key relationships and operations, including Genzyme, TCP and single-source suppliers, and the effect of payer concentration or Medicare processing changes.