Veracyte, Inc. — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020. Veracyte is a genomic diagnostics company operating in one segment, with tests in thyroid, lung, IPF and breast cancer. Results are unaudited.
Financial performance
| Metric | Q1 2020 | Q1 2019 | Change |
|---|---|---|---|
| Total revenue | $31.1 million | $29.5 million | Up 5% |
| Testing revenue | $27.0 million | $25.4 million | Up 6% |
| Product revenue | $3.4 million | None | New, primarily Prosigna |
| Biopharmaceutical revenue | $0.7 million | $4.1 million | Down 83% |
| Gross margin | 61% | Not stated in the filing text | Includes $1.1 million supplies write-down |
| Operating expenses | $43.3 million | $31.6 million | Up 37% |
| Operating loss | $(12.2) million | $(2.1) million | Loss widened |
| Net loss | $(11.7) million | $(1.9) million | Loss widened |
| Net loss per share, diluted | $(0.24) | $(0.05) | — |
| Cash used in operations | $5.3 million | $1.0 million | Use increased |
Testing and product revenue together were $30.4 million, up 20%, supported by 15% growth in reported Afirma, Percepta and Envisia classifier volume to 10,559 tests and initial Prosigna sales. Lower biopharmaceutical revenue mainly reflected prior-year Johnson & Johnson data-sequencing work that did not recur. Operating expenses excluding cost of revenue were $31.1 million, up 35%; selling and marketing expense rose 41% and research and development rose 28%.
Financial position and liquidity
- At March 31, 2020, cash and cash equivalents were $153.1 million; including $0.6 million restricted cash, total cash, cash equivalents and restricted cash were $153.7 million. Cash and cash equivalents were $159.3 million at year-end 2019.
- Total assets were $267.1 million and stockholders’ equity was $230.4 million. Current assets were $181.4 million against current liabilities of $19.2 million.
- Debt principal outstanding was $0.1 million; the reported net debt obligation, including the accreting end-of-term obligation, was $0.7 million. A $1.3 million principal and end-of-term payment is due in 2022. The $10 million revolving facility was undrawn, subject to its borrowing base.
- Operating cash use was $5.3 million; investing cash use was $0.7 million and financing cash use was $0.2 million. The operating cash outflow included working-capital movements, notably a $5.5 million increase in accounts payable and a $3.7 million decrease in accrued liabilities.
Management said existing cash, the available revolving line and expected revenue should fund anticipated requirements for at least the next 12 months. It also expects additional losses for the rest of 2020 and potentially future years. The company reported compliance with debt covenants at quarter-end.
Material changes, outlook and risks
- COVID-19: Veracyte reported a significant decline in sample volumes and revenue beginning in the second half of March and continuing through the filing date; duration and financial impact remained uncertain. It wrote down $1.1 million of supplies for potential reagent expiration in anticipation of lower volumes.
- Cost actions: The company said its board, executive team, including the CEO, and certain employees took temporary pay reductions; approximately 60 employees were furloughed, a small number were terminated, and a temporary hiring freeze was instituted.
- Growth and integration: The company is integrating NanoString assets acquired in December 2019, including the nCounter FLEX platform and Prosigna assay. The transaction included $40 million cash, $10 million in stock and up to $10 million additional contingent cash consideration; the contingent liability was valued at $5.6 million at quarter-end. Management cited global expansion and broader test offerings as strategic aims.
- Pipeline and commercial updates: The expanded Afirma Xpression Atlas launched in April 2020. The filing also describes licensing and collaboration work in IPF monitoring, non-invasive lung cancer detection and lymphoma research.
- Key risks: COVID-related declines in testing demand and operational disruption; dependence on Afirma and reimbursement decisions; payer concentration (Medicare accounted for 25% of Q1 revenue and UnitedHealthcare 11%); single-source suppliers; execution and integration risks; regulatory and reimbursement changes; and continued losses. Management cautioned that the pandemic’s effects may materially affect future operations and liquidity.
- Other items: The company recognized no income tax provision or benefit and maintained a full valuation allowance on deferred tax assets. It reported no material pending legal proceeding and no off-balance-sheet arrangements. Disclosure controls were concluded effective at the reasonable-assurance level.
Important facts for investors to verify
- How sample volumes, test volumes and revenue changed after the reported late-March COVID-19 decline, and whether cost-reduction measures were sufficient to preserve liquidity.
- Whether the 61% gross margin is sustainable as test volumes change, given the supplies write-down and the fixed costs of laboratory operations.
- Progress on NanoString integration, Prosigna sales and international distribution, and any further contingent consideration or impairment implications.
- Future payer coverage, reimbursement rates and collections, particularly for Afirma and other tests; the filing notes that revenue estimates involve significant judgment.
- Availability and terms of the revolving facility, compliance with debt covenants, and cash runway if losses or pandemic-related disruption persist.
- Achievement of Johnson & Johnson collaboration milestones: the filing states $9.0 million of potential revenue remained tied to development and commercialization milestones.