Veracyte, Inc. — FY2017 Form 10-K
Business context and reporting period. Veracyte is a genomic diagnostics company whose principal products are Afirma for indeterminate thyroid nodules, Percepta for lung cancer assessment, and Envisia for differentiating idiopathic pulmonary fibrosis from other interstitial lung diseases. This annual report covers the year ended December 31, 2017; fourth-quarter comparisons are also summarized below. Most revenue continued to come from Afirma, and substantially all revenue was generated in the United States.
Financial performance
| Metric | Q4 2017 | FY 2017 | Comparison |
|---|---|---|---|
| Revenue | $19.6 million | $72.0 million | Up 7% and 11%, respectively |
| Reported genomic test volume | 7,153 | 26,026 | Up 13% and 12%, respectively |
| Gross margin | 60% | 61% | Q4 down 4 percentage points; FY flat |
| Operating expenses, excluding cost of revenue | $17.9 million | $70.3 million | Up 16% and 3%, respectively |
| Net loss | $8.4 million | $31.0 million | Q4 loss increased 92%; FY loss narrowed 1% |
| Basic and diluted loss per share | $0.24 | $0.91 | Q4 loss per share increased 71%; FY decreased 17% |
| Cash burn, non-GAAP | $6.1 million | $25.2 million | Q4 up 31%; FY improved 22% |
For FY2017, operating loss was $26.5 million, compared with $28.8 million in 2016. Interest expense rose to $4.9 million from $2.8 million, largely reflecting a $1.5 million prepayment penalty and related debt costs on repayment of the prior facility. Research and development expense fell 9% to $13.9 million, while selling and marketing expense increased 14% to $32.3 million as Veracyte expanded its internal commercial team. Stock-based compensation was $6.6 million.
Cash, liquidity and debt
- Cash and cash equivalents were $33.9 million at year-end, down from $59.2 million; working capital was $41.9 million, versus $62.1 million.
- Operating cash use was $23.9 million, compared with $28.0 million in 2016. Capital expenditures, net of asset-sale proceeds, were approximately $1.3 million; cash burn is the company’s non-GAAP measure.
- Long-term debt carrying value was $24.9 million. In November 2017, Veracyte refinanced its prior debt with a $25 million Silicon Valley Bank term loan and an undrawn revolving facility of up to $10 million, subject to a borrowing base. The term loan matures in October 2022 and has a variable rate of LIBOR plus 4.20%, with a 5.43% floor.
- The credit agreement is secured by substantially all assets other than intellectual property and includes revenue covenants, operating restrictions, and a $1.2 million final payment on the term loan. The company reported covenant compliance at year-end.
Material changes versus prior period
- FY revenue grew 11%, supported by higher Afirma adoption and higher estimated reimbursement; test volume grew 12%. The reported mix of revenue changed substantially: accrual-basis revenue rose to $69.3 million, or 96% of total, from $47.1 million, or 72%, in 2016. This reflects expanded use of accrual estimates, not solely a change in current-period cash collections.
- Q4 revenue rose 7%, but the quarterly net loss more than doubled year over year. Annual net loss was nearly unchanged, while loss per share improved partly alongside a higher weighted-average share count.
- Medicare’s Afirma rate increased from approximately $3,220 to $3,600 per test effective January 1, 2018, under PAMA. Percepta obtained Medicare coverage in May 2017; Envisia coverage had not yet been secured.
- Veracyte ended the Visium facility and entered the SVB agreement in November 2017. The old facility carried a 12% fixed interest rate and its repayment generated the prepayment charge.
Outlook, management commentary and risks
- Management expected additional losses in 2018 and future years and continued investment in sales, reimbursement, research and development, and new products. It believed cash on hand and expected revenue would fund anticipated needs through at least March 2019. This is management’s estimate, not a guarantee.
- Commercial priorities included transitioning customers to the next-generation Afirma GSC, growing Percepta following Medicare coverage, pursuing Medicare coverage for Envisia in 2018, and developing Afirma Xpression Atlas. The filing provides no quantified revenue or earnings guidance.
- Afirma was covered for more than 275 million people and contracted in-network for more than 175 million. Medicare accounted for 26% of FY2017 revenue and UnitedHealthcare for 14%, leaving meaningful payer concentration. Percepta revenue was not significant in 2017; Veracyte had not recognized Envisia revenue.
- At year-end, cumulative list-price billings for tests not recognized as revenue and not collected or written off were approximately $159.3 million, compared with $161.2 million a year earlier. These amounts are not a forecast of collections; payment timing and ultimate recovery are uncertain.
- Key risks include payer coverage, reimbursement reductions and collection delays; execution of the Afirma platform transition and adoption of newer products; ongoing losses and capital needs; the SVB covenants and secured debt; reliance on sole-source suppliers and Thyroid Cytopathology Partners; and possible changes to FDA oversight of laboratory-developed tests. The company reported no material pending legal proceedings.
Important facts for investors to verify
- Whether revenue growth and improved accrual recognition translate into cash collections; review receivables, payer adjustments, and the aged unrecognized-billings balance.
- Whether Afirma GSC adoption sustains volume and reimbursement, and whether Percepta and Envisia generate meaningful revenue after coverage and commercialization milestones.
- Whether cash use, covenant compliance, and liquidity support management’s stated runway; note the agreement’s $40 million liquidity alternative to meeting revenue covenant levels.
- Whether Medicare and commercial reimbursement rates remain favorable, particularly after future PAMA reporting and any Percepta code or payment changes.
- Whether reported test performance, clinical evidence, regulatory status, and product-market estimates support the company’s adoption and growth assumptions.