Veracyte, Inc. — FY 2016 Form 10-K
Reporting period: Fiscal year ended December 31, 2016. This is an annual filing; it also reports fourth-quarter results. Veracyte develops genomic diagnostic tests. FY 2016 revenue was derived entirely from its Afirma thyroid testing solution; Percepta and Envisia were earlier-stage commercial launches.
Financial performance
| Metric | FY 2016 | FY 2015 | Change |
|---|---|---|---|
| Revenue | $65.1 million | $49.5 million | +31% |
| Cost of revenue | $25.5 million | $21.5 million | +18% |
| Gross profit / margin | $39.6 million / 60.9% | $28.0 million / 56.6% | Margin increased |
| Operating expenses | $93.9 million | $83.0 million | +13% |
| Operating loss | $(28.8) million | $(33.5) million | Loss narrowed |
| Net loss | $(31.4) million | $(33.7) million | Loss narrowed 7% |
| Net loss per share, diluted | $(1.09) | $(1.30) | Improved |
| Afirma GEC reported volume | 23,237 | 19,421 | +20% |
FY 2016 operating expenses included $15.3 million in research and development, $28.2 million in selling and marketing, and $23.8 million in general and administrative expenses. Interest expense rose to $2.8 million from $0.4 million, primarily due to the 2016 credit agreement. The company remained loss-making, with an accumulated deficit of $180.1 million.
Fourth quarter: Revenue was $18.3 million, up 30% from $14.0 million in Q4 2015. Net loss was $4.4 million, versus $8.0 million; diluted loss per share was $0.14, versus $0.29. Afirma GEC volume was 6,313, up 13% year over year. Operating expenses were $21.9 million, reported as essentially flat year over year.
Cash flow, liquidity and debt
- Cash and cash equivalents were $59.2 million at year-end, up from $39.1 million. Working capital was $62.1 million; total assets were $101.0 million.
- Cash used in operating activities was $28.0 million, compared with $27.0 million in 2015. Capital expenditures were $4.2 million; management-defined cash burn (operating cash use plus property and equipment purchases) was $32.2 million, a 3% improvement.
- Financing cash flow was $52.3 million. The company received $31.9 million net from a November public offering and drew a $25.0 million term loan, using $5.0 million to repay prior debt.
- Year-end long-term debt was $24.9 million net of issuance costs ($25.4 million principal). The loan bears 12% fixed interest, matures March 2022, has an interest-only period through March 2020, and is secured by substantially all company assets. The company reported compliance with covenants at year-end.
- Management said cash, cash equivalents and expected revenue would cover anticipated cash needs for at least 12 months following March 1, 2017. It also expects further losses and may need additional financing over time.
Material changes and business developments
- Afirma GEC volume and revenue increased as adoption grew. Revenue recognized on an accrual basis rose to $47.1 million (72% of revenue) from $27.0 million (55%); the shift reflects additional payers meeting the company’s criteria for estimating reimbursement.
- Management recognized $4.1 million of incremental FY 2016 revenue because additional payers met those accrual criteria. The filing says $161.2 million of cumulative list-price billings for tests had not been recognized as revenue and had not been collected or written off at year-end; collection and ultimate realizable amounts are uncertain.
- Afirma’s reported average reimbursement per GEC was approximately $2,300 in Q4 2016, versus $2,200 in Q4 2015. Medicare accounted for 27% of FY 2016 revenue; UnitedHealthcare, 12%; and Aetna, 8%.
- Veracyte terminated its U.S. Genzyme co-promotion agreement effective September 2016 and expanded its internal sales team. It had 45 field salespeople at year-end and expected to add 15–20 during 2017.
- Percepta received final Medicare coverage policies from two regional contractors, expected to take effect in March 2017; further coverage and commercial uptake remained prospective. Envisia launched in October 2016 with controlled availability while the company built clinical evidence.
- The company expanded Afirma coverage and contracting. As of February 28, 2017, it reported nearly 225 million covered lives and more than 155 million contracted lives; these are post-year-end figures.
Outlook, risks and contingencies
Management expected continued investment in sales, marketing, research and development, and evidence generation for Afirma, Percepta and Envisia. It anticipated additional losses in 2017 and beyond; the filing provides no specific revenue or earnings guidance. A next-generation Afirma was planned for introduction in 2017, while Envisia Medicare coverage was expected by management in 2018.
- Reimbursement and collections: Revenue depends on payer coverage, contract terms, appeals and collection outcomes. Estimates used for accrual revenue may be revised, and collection timing is uncertain.
- Concentration and product dependence: All revenue to date came from Afirma, and a small number of payers represented a material share. Newer products had not yet diversified revenue meaningfully.
- Regulatory and clinical evidence: The tests are laboratory-developed tests; potential future FDA oversight could increase costs, delay launches or require additional review. New products also need clinical evidence and payer coverage.
- Execution and costs: Growth depends on physician adoption, successful transition from Genzyme, sales-force expansion, laboratory capacity, and continued development of clinical evidence. The company also relies on sole-source suppliers and TCP for thyroid cytopathology services.
- Financing and fixed commitments: Ongoing losses, debt covenants and interest costs, a long-term facilities lease, and potential future capital needs could constrain operations or lead to dilution.
- The company reported no material pending legal proceedings and no off-balance-sheet arrangements. The independent auditor issued an unqualified opinion on the financial statements; it did not attest to internal control effectiveness because of the company’s emerging-growth-company exemption.
Important facts for investors to verify
- Whether Afirma volume growth and reimbursement translate into cash collections, and how the large balance of unrecognized billings evolves.
- Whether the higher share of accrual-based revenue reflects durable payer payment experience and whether estimates require later adjustment.
- Percepta’s actual paid volume and reimbursement after coverage policies became effective, and progress toward Envisia evidence and coverage.
- Cash burn, liquidity runway, covenant compliance, and the cost and repayment terms of the Visium debt, including any decision to draw the additional facility.
- Sales-force productivity and operating expense growth following the Genzyme transition, alongside the company’s path toward profitability.