Veracyte, Inc. — Q3 2017 Form 10-Q
Reporting period: Three and nine months ended September 30, 2017; unaudited. Veracyte is a genomic diagnostics company, with most revenue generated by its Afirma thyroid testing service. It also markets Percepta lung and Envisia interstitial lung disease tests.
Financial performance and liquidity
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Revenue | $17.5 million | $18.6 million | $52.4 million | $46.8 million |
| Operating expenses | $23.9 million | $23.5 million | $72.9 million | $72.0 million |
| Operating loss | $6.4 million | $4.9 million | $20.5 million | $25.1 million |
| Net loss | $7.0 million | $5.6 million | $22.6 million | $27.0 million |
| Net loss per share, diluted | $0.21 | $0.20 | $0.67 | $0.97 |
| Genomic classifiers reported | 6,533 | 5,740 | 18,873 | 16,924 |
Calculated gross margin was approximately 59% in Q3 2017 versus 66% in Q3 2016, and 61% for the first nine months of 2017 versus 60% in the prior-year period. The company reported no income tax provision or benefit and maintained a full valuation allowance on deferred tax assets.
Cash and cash equivalents were $41.2 million at September 30, 2017, down from $59.2 million at December 31, 2016. Current assets were $58.2 million and current liabilities $11.2 million. Net debt obligations were $25.0 million, representing $25.4 million principal less unamortized issuance costs. Stockholders’ equity was $42.8 million.
For the first nine months, operating activities used $18.1 million; investing activities used $0.9 million; and financing activities provided $1.0 million. Management-defined cash burn was $5.8 million for Q3, 23% lower year over year, and $19.1 million year to date, 31% lower. Management said cash, cash equivalents and expected revenue would cover anticipated requirements for at least 12 months, while also expecting further losses.
Changes versus comparable periods
- Q3 revenue declined 6% despite a 14% increase in test volume. Accrual-basis revenue rose 24%, but cash-basis revenue fell 94%, largely because Q3 2016 included collections on older tests.
- Nine-month revenue grew 12% and test volume grew 12%. Accrual-basis revenue increased 59%, while cash-basis revenue declined 85%.
- Q3 net loss increased 25%; nine-month net loss improved 16%. Operating expenses rose 2% in Q3 and 1% year to date.
- Cost of revenue rose 13% in Q3 and 8% year to date, reflecting Afirma volume, next-generation GSC costs and staffing. Selling and marketing expense rose 11% and 4%, respectively, as Veracyte built its own commercial organization after the U.S. Genzyme co-promotion arrangement ended.
Outlook, commentary and notable items
- Revenue estimates and collections: Revenue is recognized on an accrual basis when reimbursement can be reasonably estimated, and otherwise on a cash basis. Management cautioned that estimates, payer decisions and collection timing can make quarterly results volatile. At September 30, approximately $159.5 million in cumulative list-price billings for tests not recognized as revenue remained uncollected or unwritten off; the company gave no assurance as to whether or when these amounts would be collected.
- Commercial and reimbursement progress: Veracyte reported 100 new accounts for Afirma GSC, first commercial Percepta revenue and use at more than 70 institutions. It reported 176 million contracted lives for Afirma. Preliminary 2018 Medicare pricing indicated an increase from $3,220 to $3,600 per Afirma classifier, subject to finalization and public comment.
- Refinancing after quarter-end: On November 3, 2017, the company repaid and terminated the Visium facility, using a new Silicon Valley Bank $25.0 million term advance. The new facility provides up to a further $10.0 million revolving line, subject to an accounts-receivable borrowing base. Term-loan pricing is variable LIBOR plus 4.20%, with a 5.43% floor; the revolver has a 4.70% floor. Management said the new facility reduced the current variable interest rate by more than half and added liquidity. The filing expects approximately $1.9 million of prepayment-premium and debt-issuance-cost write-offs; it separately reports a $1.5 million exit fee paid to the former lender. New covenants include revenue tests, with a liquidity threshold of $40.0 million providing an exception to revenue-test default.
- TCP agreement: An October 2017 amendment extended the pathology-services agreement through October 2022. Veracyte agreed to pay the former management company $1.75 million over eight quarterly installments in exchange for lower per-test fees. Management expected the amendment to be immediately accretive to earnings and cash burn at current volumes.
- Principal risks: The company has a history of losses and relies mainly on Afirma. Key risks include payer coverage and reimbursement, collection and revenue-estimation uncertainty, adoption and execution of the Afirma GSC transition, reliance on Medicare and UnitedHealthcare, single-source suppliers, dependence on TCP, competition, potential changes in healthcare policy or FDA oversight, and the need for additional capital. Medicare and UnitedHealthcare represented 26% and 14% of nine-month revenue, respectively.
- Contingencies and controls: Veracyte said no pending litigation was expected to have a material adverse effect. Disclosure controls were deemed effective at a reasonable-assurance level; no material changes in internal control over financial reporting were reported for the quarter.
Key facts investors should verify
- Whether accrued reimbursement estimates convert to cash, including collection trends, receivables and the large pool of unrecognized billings.
- Final 2018 Medicare pricing and whether payer contracts, coverage and utilization support sustained revenue and test-volume growth.
- Actual cost savings and cash impact from the TCP amendment, including the $1.75 million payment obligation.
- Post-refinancing interest expense, covenant headroom, revolver availability and liquidity relative to the $40.0 million covenant threshold.
- Whether operating cash burn declines as management expects and whether the company can reduce losses without impairing product development or commercial expansion.