Veracyte, Inc. — Q2 2021 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2021. Veracyte is a genomic diagnostics company; results include Decipher Biosciences from its March 12, 2021 acquisition date. Unless noted otherwise, amounts are in millions of dollars.
Financial performance
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Revenue | $55.1 | $20.7 | $91.8 | $51.8 |
| Testing revenue | $50.8 | $15.2 | $83.9 | $42.2 |
| Product revenue | $2.7 | $1.7 | $5.7 | $5.1 |
| Biopharmaceutical revenue | $1.6 | $3.8 | $2.2 | $4.5 |
| Net loss | $(9.0) | $(11.0) | $(50.9) | $(22.7) |
| Net loss per share, diluted | $(0.13) | $(0.22) | $(0.78) | $(0.45) |
| Operating cash flow | Not presented quarterly | $(38.7) | $(13.7) |
Margins: Gross profit, calculated as revenue less testing, product and biopharmaceutical costs, was $37.6 million in Q2 2021 (about 68% of revenue), versus $13.0 million (about 63%) a year earlier. For the first half, calculated gross margin was about 67%, versus about 62%. Operating losses were $7.5 million in Q2 and $52.9 million for the first half.
Liquidity and debt: At June 30, cash and cash equivalents were $327.5 million, and cash, cash equivalents and restricted cash totaled $328.3 million. Current assets were $371.3 million and current liabilities $36.1 million. Long-term debt obligations were $0.9 million; principal outstanding was reported as $1, and the company had not drawn its $10 million revolving line. A $1.2 million final debt payment is due in 2022. The company reported compliance with debt covenants.
Material changes and notable items
- Revenue rose 166% year over year in Q2 and 77% for the first half. Reported genomic classifier volume increased 253% in Q2 and 96% in the first half. Comparisons are affected by the pandemic-related downturn in 2020 and by Decipher’s inclusion in 2021 results.
- Decipher contributed $18.9 million of Q2 revenue and $22.7 million for the six-month period. Management attributed much of the increase in testing revenue to higher test volume, including Decipher prostate tests.
- Despite the revenue growth, first-half net loss more than doubled year over year. General and administrative expense included $25.1 million of nonrecurring Decipher-related compensation expense and $10.6 million of Decipher acquisition costs; these items materially affected the comparison.
- Q2 general and administrative expense also included higher costs associated with the pending HalioDx acquisition. First-half results included a $3.9 million income tax benefit, primarily from deferred tax liabilities recognized with Decipher and a partial release of the valuation allowance.
- In February, Veracyte raised $593.8 million net through a public stock offering. Investing cash use of $574.1 million in the first half was primarily for the Decipher acquisition.
- Decipher acquisition accounting remained preliminary. Veracyte recorded $469.0 million of goodwill and $155.7 million of intangible assets at June 30; the purchase-price allocation could still be revised.
Outlook, risks and contingencies
- The filing provides no specific numerical revenue or earnings guidance. Management expects additional losses for the remainder of 2021 and potentially future years, but said existing cash, the available credit line and anticipated revenue should cover expected requirements for at least 12 months from the filing date.
- On July 13, 2021, after quarter-end, Veracyte agreed to acquire HalioDx for approximately €260 million, comprising approximately €147 million cash and up to €113 million in stock, subject to adjustments and closing conditions. The transaction was expected to close in Q3 2021; foreign investment approval in France was among the conditions.
- COVID-19 remained a material source of uncertainty. Management said pulmonary testing could remain affected by restrictions on hospital procedures and the Delta variant. Pandemic-related demand, supply-chain interruptions and availability of reagents could also affect volumes and costs.
- Key business risks include reliance on Afirma and Decipher tests and a limited number of payers; reimbursement, coverage and collection uncertainty; dependence on some single-source suppliers; regulatory and clinical-development risks; and execution and integration risks for Decipher and the pending HalioDx acquisition.
- Medicare represented 34% of Q2 revenue and 31% of first-half revenue; UnitedHealthcare represented 10% in each period. The company identified no pending legal proceeding expected to have a material adverse effect.
- Foreign exchange exposure is notable: $81.2 million of cash deposits were denominated in euros. The filing estimates a hypothetical 10% U.S. dollar appreciation or depreciation versus the euro would have changed first-half net loss by $8.1 million.
- Related-party disclosures state that Decipher equity awards and incentive payments resulted in approximately $26.5 million paid to Dr. Tina Nova and $1.4 million to Dr. Robert Epstein in connection with the acquisition. Dr. Nova left Veracyte’s board and became a general manager; Dr. Epstein remained a director.
Important facts for investors to verify
- How much of the reported revenue and volume growth reflects sustained demand and reimbursement versus Decipher’s consolidation and comparison with pandemic-depressed 2020 results.
- Whether test-level reimbursement, collections and payer concentration support the reported revenue estimates and future cash generation.
- The size and duration of acquisition-related and ongoing operating costs, and progress toward reducing operating losses and cash burn.
- Final Decipher purchase accounting, integration progress, and whether the HalioDx transaction closes on expected terms and delivers anticipated benefits without excessive dilution or cash strain.
- Exposure to COVID-19, supply constraints, foreign-exchange movements, regulatory changes and reimbursement-rate revisions.