Veracyte, Inc. — Q3 2019 Form 10-Q
Business context and reporting period. Veracyte is a genomic diagnostics company using RNA sequencing and machine learning. It sells tests primarily in thyroid, lung and interstitial lung disease, with most testing revenue historically from Afirma. This unaudited quarterly report covers the three and nine months ended September 30, 2019; comparisons are with the same 2018 periods.
Financial performance and position
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Revenue | $31.0 million | $23.5 million | $90.6 million | $66.3 million |
| Operating loss | $1.8 million | $4.3 million | $6.9 million | $19.2 million |
| Net loss | $0.7 million | $4.5 million | $5.1 million | $19.9 million |
| Net loss per share | $0.02 | $0.12 | $0.11 | $0.56 |
| Genomic classifiers reported | 9,941 | 8,006 | 28,766 | 22,556 |
- Growth and margins: Revenue increased 32% in Q3 and 37% for the nine months. Excluding biopharmaceutical services, revenue growth was 15% and 20%, respectively. Management reported gross margin of 71% for both periods, up 6 percentage points in Q3 and 8 points year to date; excluding biopharmaceutical services, margins were 66%, up 2 and 3 points, respectively.
- Expenses: Operating expenses excluding cost of revenue were $23.6 million in Q3, up 21%. For the nine months, they were $71.2 million, up 17%. Selling and marketing rose 30% in Q3 and 26% year to date, reflecting sales-force growth and promotion; R&D was down 11% year to date.
- Cash flow: For the nine months, operating cash use was $5.0 million versus $12.3 million in 2018; investing cash use was $1.6 million versus $1.4 million. Financing provided $124.3 million, primarily from the May equity offering, partly offset by debt repayments. The MD&A reports Q3 operating cash use of $1.6 million, 13% lower year over year.
- Liquidity and debt: At September 30, cash and cash equivalents were $195.7 million ($196.3 million including restricted cash), compared with $78.0 million and $78.6 million, respectively, at year-end 2018. Current assets were $228.1 million and current liabilities $16.8 million. Net debt obligation was $0.6 million; debt principal was $0.1 million, after $24.9 million of term-loan prepayments. The company also reported $13.2 million of operating lease liabilities.
- Capital and equity: The May 2019 public offering raised $137.8 million net from 6.325 million shares. Shares outstanding increased to 48.8 million from 40.9 million at December 31, 2018.
Material changes versus the prior period
- Test volume grew 24% in Q3 and 28% year to date. Q3 Afirma volume rose 17%, Percepta volume 112%, and Envisia volume was 72% above Q2.
- Biopharmaceutical services revenue increased to $4.3 million in Q3 from $0.3 million, and to $11.8 million year to date from $0.7 million. This materially contributed to reported revenue growth.
- Lower debt following the January and May repayments reduced interest expense 88% in Q3 and 58% year to date. Higher cash balances also increased interest income.
- Higher commercial investment and stock-based compensation contributed to expense growth. Stock-based compensation was $2.6 million in Q3 and $7.0 million year to date.
Outlook, commentary, risks and unusual items
- Management expects further losses for the remainder of 2019 and potentially in future years, but believes cash, available revolving credit and expected revenue will fund anticipated needs for at least the next 12 months. No specific revenue or earnings guidance is provided.
- Management is investing in adoption and reimbursement for Afirma, Percepta and Envisia, and continuing pipeline development. It highlighted preliminary data for a nasal lung-cancer risk classifier and the J&J collaboration on next-generation lung classifiers.
- Key risks include dependence on Afirma and a limited number of payers/customers; reimbursement decisions, collection timing and revenue-estimation uncertainty; payer cost controls and possible Medicare rate changes; continued operating losses; product development and adoption risks; regulatory and CLIA compliance; single-source suppliers; and reliance on Thyroid Cytopathology Partners for cytopathology services.
- Revenue is recognized using estimates of amounts expected to be collected. Prior-period collection estimate changes added $0.1 million to Q3 and $0.8 million to nine-month 2019 revenue. The filing states that $0.7 million of the year-to-date adjustment had been collected by September 30.
- J&J collaboration milestone revenue was $4.0 million in Q3; related receivables were $6.0 million at quarter-end. Up to $13.0 million of additional payments under the agreement remain contingent on milestones and were excluded from the transaction price until achievement became probable.
- The company adopted lease accounting guidance in January 2019, recording operating lease assets and liabilities; the reported impact on results and cash flows was immaterial. Management reported compliance with debt covenants and no pending litigation expected to materially affect the financial statements.
Important facts for investors to verify
- How much of future revenue growth is driven by recurring diagnostic testing versus biopharmaceutical services and milestone-related collaboration revenue.
- Whether test-volume growth, particularly in Percepta and Envisia, converts into sustainable collections and reimbursement at expected rates.
- Accounts receivable rose to $23.6 million from $13.2 million at year-end; review collection performance, payer concentration and the J&J receivable.
- Confirm ongoing cash burn, cash runway and capital needs against management’s at-least-12-month liquidity assessment.
- Monitor payer coverage and Medicare payment policies, including future Afirma rates under PAMA and coverage requirements for Percepta and Envisia.
- Assess dilution from equity issuance and stock-based compensation, and the company’s remaining debt, lease obligations and covenant requirements.