Veracyte, Inc. — Form 10-Q Summary
Reporting period: Quarter and six months ended June 30, 2018; financial statements are unaudited. Veracyte is a genomic diagnostics company operating one business segment. Afirma generated substantially all revenue; Percepta and Envisia were earlier-stage commercial products.
Financial performance
| Metric | Q2 2018 | Q2 2017 | First half 2018 | First half 2017 |
|---|---|---|---|---|
| Revenue | $22.8 million | $18.4 million | $42.8 million | $34.8 million |
| Genomic classifiers reported | 7,686 | 6,506 | 14,550 | 12,340 |
| Gross margin | 64% | 62% | 62% | 62% |
| Operating expenses, excluding cost of revenue | $20.4 million | $18.1 million | $41.6 million | $35.7 million |
| Operating loss | $5.9 million | $6.6 million | $14.9 million | $14.1 million |
| Net loss | $6.2 million | $7.3 million | $15.4 million | $15.5 million |
| Net loss per share, diluted | $0.18 | $0.22 | $0.45 | $0.46 |
Revenue rose 24% in Q2 and 23% in the first half, primarily reflecting 18% higher test volume and improved Afirma accrual rates. Q2 included $0.5 million of biopharmaceutical services revenue and $0.4 million of Percepta revenue; first-half Percepta revenue was $0.6 million. Operating expenses increased 15% in Q2 and 18% in the first half. Selling and marketing was a major contributor to the increase, reflecting sales-force growth and related costs. Q2 net loss improved 14%; first-half net loss improved 1%, while first-half operating loss widened.
Cash, debt and liquidity
- Cash and cash equivalents were $23.8 million at June 30, 2018, down from $33.9 million at year-end 2017; restricted cash was an additional $0.6 million.
- First-half operating cash use was $10.5 million. Company-defined cash burn, including property and equipment purchases, was $11.3 million, versus $13.3 million in the first half of 2017.
- Long-term debt was $25.1 million net carrying value, with $25.0 million principal outstanding. The $10.0 million revolving credit facility was undrawn. The term loan matures in October 2022, bears variable interest, and is secured by substantially all assets other than intellectual property. The company reported covenant compliance at quarter-end.
- Current assets were $41.6 million and current liabilities $10.4 million. Management believed cash, the available revolver and expected revenue would fund anticipated needs for at least 12 months.
- Accumulated deficit was $226.5 million. The company reported no income tax provision or benefit and maintained a full valuation allowance against deferred tax assets.
Material changes, outlook and risks
- Afirma transition: Veracyte received final New York regulatory approval to move all Afirma testing to its next-generation GSC and expected the transition to be substantially complete by September 30, 2018. Running parallel platforms raised laboratory costs during the transition.
- Commercial and product developments: Percepta revenue tripled from Q1 to Q2, while ordering physicians increased by more than 50% during that comparison. Veracyte launched Afirma Xpression Atlas and began an Envisia Early Access Program, with broader Envisia commercialization preparation for 2019. Envisia Medicare coverage was not assured.
- Management outlook: The company expected further losses and continued investment in research and development, sales and marketing, and infrastructure. It gave no specific revenue or earnings guidance in the supplied filing text. It expected to adopt the new lease standard in 2019, with a material balance-sheet impact but no material impact expected on operating results or cash flows.
- Revenue estimation and collections: Revenue depends on estimates of amounts ultimately collectible and may be adjusted as claims are paid. Higher collections on prior-period tests added $0.5 million to Q2 revenue and $1.2 million to first-half revenue. Approximately $159.3 million of cumulative list-price billings for tests not recognized as revenue remained uncollected or unwritten off; the company reported no material collections on these amounts in the first half and could not predict if or when they would be collected.
- Concentration and reimbursement: Medicare accounted for 28% and UnitedHealthcare 12% of first-half revenue. Payer coverage, reimbursement rates, claims denials, appeals, and payer cost-control measures could affect revenue and cash collections. Afirma remained the principal revenue source; Percepta revenue was not significant to date and Envisia had not generated revenue to date.
- Other material risks: The filing highlights ongoing losses and potential need for financing; variable-rate debt and restrictive covenants; reliance on single-source suppliers and Thyroid Cytopathology Partners for cytopathology services; clinical adoption, product-development and regulatory risks; and possible changes to payer or government reimbursement rules. No material litigation was reported as pending, and there were no material interim changes in contractual obligations or off-balance-sheet arrangements.
Key facts for investors to verify
- Whether Afirma GSC transition was completed as expected and whether related laboratory costs and margins improved.
- Actual cash collections and later revenue adjustments relative to estimated reimbursement, including the uncollected $159.3 million of billings.
- Cash runway, operating cash use, access to the borrowing-base-limited revolver, and continued compliance with loan covenants.
- Progress in diversifying revenue beyond Afirma, including Percepta adoption and Envisia coverage and commercialization.
- Changes in Medicare, UnitedHealthcare or other payer coverage and reimbursement rates, and any resulting effect on test volumes or collections.