Veracyte, Inc. — Form 10-Q Summary
Reporting period: Quarter and six months ended June 30, 2016; filed August 3, 2016. Veracyte is a molecular diagnostics company. All reported revenue was from Afirma; Percepta was launched in 2015, and Envisia was in development.
Financial performance
| Metric | Q2 2016 | Q2 2015 | Six months 2016 | Six months 2015 |
|---|---|---|---|---|
| Revenue | $14.7m | $11.9m | $28.2m | $23.1m |
| Gross profit | $8.4m | $6.8m | $15.6m | $13.4m |
| Gross margin | 57.1% | 56.8% | 55.4% | 58.0% |
| Operating loss | $(10.5)m | $(9.1)m | $(20.2)m | $(16.6)m |
| Net loss | $(11.2)m | $(9.1)m | $(21.3)m | $(16.7)m |
| Net loss per share | $(0.40) | $(0.35) | $(0.77) | $(0.69) |
Revenue grew 23% in Q2 and 22% for the first half, mainly from increased Afirma adoption and reported GEC tests. GEC reports increased 23% in Q2 and 27% for the first half. Operating expenses rose 20% and 22%, respectively, outpacing revenue growth in the first half. Higher interest expense reflected the new debt and costs related to repaying prior borrowings.
At June 30, cash and cash equivalents were $39.0m, versus $39.1m at year-end 2015. Current assets were $47.4m and current liabilities $11.8m. Operating cash use was $16.3m for the half, capital expenditures drove investing cash use of $3.6m, and financing provided $19.8m. The company reported a $170.0m accumulated deficit.
Long-term debt, net of issuance costs, was $24.7m. The March 2016 Visium facility provided a $25m initial term loan, bearing 12% annual interest and maturing in 2022; principal payments are deferred through March 2020. The company elected to pay 3 percentage points of the rate in kind for Q2. A further loan of up to $15m may be requested by June 30, 2017. Debt is secured by substantially all assets and includes financial and other covenants; Veracyte reported compliance at quarter-end.
Material changes and management outlook
- Veracyte gave notice to end its U.S. Genzyme co-promotion agreement effective September 9, 2016. It expanded its internal sales force in preparation; management expects the end of co-promotion fees to offset some transition costs, but warns that unsuccessful transition could reduce test volumes.
- CMS’s preliminary 2017 Medicare gapfill rate for Afirma GEC was $2,240, down from the 2016 rate of $3,200. Veracyte said it would appeal; the final rate was still pending. Medicare accounted for about 20% of GEC volume. Average GEC reimbursement was approximately $2,100 in Q2 2016, versus $2,300 a year earlier.
- Percepta was being commercialized with a focus on clinical evidence and securing reimbursement; the company reported more than 40 institutions offering it. Envisia, for suspected idiopathic pulmonary fibrosis, was planned for introduction in Q4 2016, subject to development and validation.
- Management expected additional losses during the remainder of 2016 and future years, but believed cash on hand and revenue would meet anticipated cash needs for at least the next 12 months. The filing gives no specific revenue or earnings guidance.
Risks, contingencies and unusual items
- Revenue depended entirely on Afirma and was exposed to reimbursement uncertainty, claim denials, collection delays and significant payer concentration. Medicare and UnitedHealthcare represented 30% and 12% of first-half revenue, respectively.
- Management disclosed approximately $167.1m of cumulative billed test charges not recognized as revenue and not yet collected, written off or otherwise resolved. The filing cautions that collection timing and amounts are uncertain.
- Costly investment in R&D, sales and marketing, and the new laboratory facility contributed to continuing losses and cash use. The company also cited single-source supply dependencies and reliance on Thyroid Cytopathology Partners for cytopathology services.
- Operating lease commitments totaled $21.4m, and non-cancelable supply purchase commitments were approximately $1.1m. No pending litigation was identified as likely to have a material adverse effect; no off-balance-sheet arrangements were reported.
- The company reported effective disclosure controls and no material changes in internal control over financial reporting during the quarter.
Key facts for investors to verify
- Final 2017 Medicare reimbursement for Afirma GEC and the outcome of Veracyte’s appeal.
- Afirma test volumes, payer collections, and whether accrued revenue estimates translate into cash.
- Execution and cost of the transition from Genzyme to Veracyte’s internal sales organization after September 9, 2016.
- Percepta reimbursement progress and Envisia development, validation and launch timing.
- Cash burn, covenant compliance and the company’s ability to manage its high-interest secured debt and continuing operating losses.