Veracyte, Inc. — Q2 2020 Form 10-Q
Reporting period: Three and six months ended June 30, 2020. Veracyte is a genomic diagnostics company with testing services, diagnostic products and biopharmaceutical partnerships. Financial figures below are in U.S. dollars; millions unless noted. Interim results are unaudited.
Key financial results
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Total revenue | $20.7 | $30.1 | $51.8 | $59.7 |
| Gross margin | 63% | Not stated | 62% | Not stated |
| Operating loss | $(11.1) | $(3.1) | $(23.3) | $(5.2) |
| Net loss | $(11.0) | $(2.5) | $(22.7) | $(4.4) |
| Net loss per share, basic and diluted | $(0.22) | $(0.05) | $(0.45) | $(0.10) |
| Cash used in operating activities | $(8.4) | Not stated | $(13.7) | $(3.5) |
Q2 revenue included $15.2 million testing, $1.7 million product, and $3.8 million biopharmaceutical revenue; there was no collaboration revenue. Q2 costs of revenue were $7.7 million, implying gross profit of approximately $13.0 million, consistent with the reported 63% gross margin. Six-month cash used in investing activities was $1.3 million; financing activities provided $3.2 million.
At June 30, 2020, cash and cash equivalents were $147.5 million ($148.1 million including restricted cash), current assets were $172.7 million and current liabilities were $13.1 million. Working capital was approximately $159.6 million. Total liabilities were $30.6 million. Debt principal outstanding was $0.1 million, with an additional $0.7 million end-of-term obligation; the $10 million revolving line was undrawn. The company reported compliance with debt covenants.
Material changes versus comparable periods
- Q2 revenue fell 31% year over year, primarily as testing revenue declined 43%; reported genomic classifier volume fell 44%. For the first half, revenue declined 13% and classifier volume declined 15%.
- Q2 net loss widened to $11.0 million from $2.5 million; six-month net loss widened to $22.7 million from $4.4 million.
- Q2 selling and marketing expense fell 23%, reflecting furloughs and lower marketing, travel and entertainment costs. Six-month selling and marketing expense rose 7%; R&D rose 27% and G&A rose 14%.
- Product revenue began after the December 2019 NanoString transaction and totaled $1.7 million in Q2 and $5.1 million for the first half. Intangible amortization rose substantially following the acquisition.
- Cash declined $11.9 million from year-end 2019. Operating cash use increased from the prior-year first half; 2019 financing cash flow had included $137.8 million of net public-offering proceeds.
Outlook, commentary and risks
- Management attributed the sharp Q2 testing decline to COVID-19 disruptions, including fewer samples as hospitals and physician practices reduced activity. Testing volume doubled from April to June as activity resumed.
- Management anticipated a U-shaped recovery, with a return to prior-year volume and revenue levels in Q1 or Q2 2021. This is an expectation, not formal financial guidance; the filing says the pandemic’s future effects remain uncertain.
- The company said existing cash, available credit and expected revenue should cover anticipated requirements for at least 12 months from the filing date. It also expected further losses in 2020 and potentially later years and may need additional financing if revenue or liquidity is insufficient.
- Cost actions included executive and certain employee pay reductions and a temporary furlough of approximately 60 employees. In July, Veracyte terminated more than 30 sales positions and returned the remaining 35 furloughed employees, mostly in sales, as business activity began to recover.
- Management remained on track to target four 2021 launches: a nasal lung-cancer swab test, Percepta Lung Cancer Atlas, Envisia on the nCounter platform, and LymphMark if FDA grants its De Novo request. Launch timing and regulatory outcomes are uncertain.
- Notable items included a $1.1 million first-half write-down of supplies for potential reagent expiration, attributed to anticipated COVID-related volume declines, and a $0.9 million Q2 increase in testing revenue from revised estimates of collections on prior-period tests. NanoString contingent consideration was remeasured to $5.9 million.
- Key risks include continued COVID-19 effects on test demand and supply chains; dependence on Afirma and payer reimbursement; reimbursement and coding changes; reliance on single-source suppliers and a specialist cytopathology provider; regulatory and product-development uncertainty; and execution and integration risks for NanoString assets and international expansion. No material pending legal proceeding was identified.
Important facts for investors to verify
- Whether testing volumes and revenue recover as management anticipated, and whether the recovery is sustained.
- Cash burn, liquidity runway, and the company’s ability to maintain debt-covenant compliance if revenue remains weak.
- Reimbursement coverage, collection experience and payment rates, including forthcoming CPT and Medicare payment determinations.
- Progress, regulatory status, launch timing and commercial uptake for the planned 2021 products and nCounter expansion.
- Whether supply constraints, reagent expiration, payer concentration or COVID-related disruptions materially affect margins and results in subsequent periods.