Veracyte, Inc. — Q3 2023 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2023. Financial statements are unaudited. Veracyte is a diagnostics company; its principal tests include Afirma and Decipher, with operations spanning U.S. laboratory testing and international in-vitro diagnostic (IVD) products.
Financial performance
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Total revenue | $90.1m | $75.6m | $262.9m | $216.2m |
| Testing revenue | $82.0m | $64.6m | $236.2m | $180.3m |
| Product revenue | $4.0m | $3.3m | $11.9m | $9.4m |
| Biopharmaceutical and other revenue | $4.1m | $7.7m | $14.8m | $26.6m |
| Operating loss | $(31.7)m | $(9.7)m | $(50.3)m | $(35.7)m |
| Net loss | $(29.6)m | $(8.7)m | $(46.1)m | $(32.7)m |
| Net loss per share, diluted | $(0.41) | $(0.12) | $(0.64) | $(0.46) |
- Revenue grew 19% in Q3 and 22% over nine months. Diagnostic test volume increased 23% in Q3 and 25% year to date; Afirma and Decipher Prostate primarily drove testing growth.
- Biopharmaceutical and other revenue fell 47% in Q3 and 44% year to date, which management attributed mainly to fewer customer projects amid industry spending constraints.
- Gross profit, calculated as revenue less the three cost-of-revenue categories, was approximately $62.5m in Q3 and $167.2m year to date. Corresponding gross margins were approximately 69% and 64%.
- Operating expenses included a $34.9m Q3 impairment of the nCounter Dx license. Excluding that charge, the reported Q3 operating loss was still $3.2m greater than the prior-year quarter; the filing does not present an adjusted operating result.
- Research and development expense rose 24% in Q3 and 32% year to date, including continued clinical studies for Percepta Nasal Swab and investment in IVD development. Selling and marketing expense declined 5% in Q3 but rose 4% year to date; general and administrative expense declined 7% in Q3 and rose 14% year to date.
Cash, liquidity and obligations
- At September 30, 2023, cash and cash equivalents were $202.5m, with $0.9m of restricted cash; there were no short-term investments. Cash and cash equivalents were $154.2m at December 31, 2022.
- For the first nine months, operating cash flow was positive $28.7m, compared with a $2.2m use in 2022. Investing activities provided $17.6m, largely reflecting investment maturities and sales, while capital expenditures were $7.5m. Financing activities provided $2.2m.
- Veracyte reported $70.9m of total liabilities and $1.1bn of stockholders’ equity. The balance sheet reports no conventional borrowings; operating lease liabilities were $13.7m, and acquisition-related contingent consideration totaled about $3.1m.
- Management said existing cash and expected cash flows would meet anticipated requirements for at least 12 months from the filing date. The company nevertheless expects further losses and may seek financing if revenue cash flows do not cover requirements.
Material changes, outlook and risks
- The multi-platform IVD strategy prompted the $34.9m write-down of the nCounter Dx license and a reduction in the fair value of contingent consideration. The company said the strategy is intended to expand global patient access; it expects to move away from commercializing several tests on nCounter.
- Management provided no specific numerical revenue or earnings guidance in the supplied filing text. It expects continued investment in research and development, commercial operations and multiple-platform test development, and anticipates additional losses for the remainder of 2023 and potentially future years.
- Key risks include dependence on Afirma and Decipher, payer coverage and reimbursement, Medicare concentration (32% of revenue for the nine months; UnitedHealthcare accounted for 10%), and the uncertainty of collecting estimated test reimbursement. Single-source reagent and equipment suppliers, competition, regulatory requirements and successful execution of the IVD strategy also pose risks.
- The FDA issued a proposed rule on October 3, 2023 to phase out its general enforcement-discretion approach for laboratory-developed tests. If finalized, it could add regulatory obligations, costs and potential delays; the filing says the proposal’s final status and impact are uncertain.
- Other exposures include inflation, foreign-exchange movements, European energy and supply disruptions, and banking-system uncertainty. Veracyte reported no pending litigation it believed would have a material financial impact, and said disclosure controls were effective.
Important facts for investors to verify
- Whether test-volume growth and reimbursement translate into durable revenue growth and collections, particularly given payer concentration and the decline in biopharmaceutical revenue.
- The assumptions and remaining carrying values behind the nCounter Dx impairment, and the costs, timelines and commercial progress of the multi-platform IVD strategy.
- Whether operating cash generation continues as the company funds clinical studies, product development and commercial expansion; compare cash burn and liquidity with management’s 12-month assessment.
- Developments in Medicare and commercial coverage, reimbursement rates and the FDA’s proposed laboratory-developed-test rule.
- Future contingent consideration and lease commitments, supplier continuity, and the ability to integrate acquired businesses and maintain international operations.