Veracyte, Inc. — Q3 2015 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2015. Financial statements are unaudited. Unless noted, amounts are in millions of dollars.
Business context
Veracyte develops genomic diagnostic tests. All revenue through September 30, 2015 came from Afirma, its thyroid diagnostic solution. The company launched Percepta, a lung cancer classifier, in April 2015; it also planned to introduce a test for interstitial lung disease in 2016. The April 2015 private placement provided $37.3 million in net proceeds.
Financial results and liquidity
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Revenue | $12.3 | $9.8 | $35.5 | $26.0 |
| Cost of revenue | $5.6 | $4.2 | $15.3 | $11.7 |
| Gross margin | 54.4% | 57.6% | 56.8% | 54.8% |
| Operating expenses | $21.2 | $17.6 | $61.0 | $46.9 |
| Operating loss | $(8.9) | $(7.8) | $(25.5) | $(20.9) |
| Net loss | $(8.9) | $(7.9) | $(25.7) | $(21.2) |
| Net loss per share, basic and diluted | $(0.32) | $(0.37) | $(1.01) | $(0.99) |
- Revenue grew 25% in Q3 and 36% in the first nine months year over year. GEC tests processed increased 46% in Q3 and 38% year to date.
- Higher volume supported revenue growth, while operating costs increased. Nine-month research and development expense rose 43%, selling and marketing 24%, and general and administrative 25%. The company remained loss-making; net losses widened year over year.
- At September 30, cash and cash equivalents were $46.1, current assets $57.3, current liabilities $15.4, and long-term debt $5.0. The company reported $80.9 in total assets and an accumulated deficit of $140.7.
- Nine-month operating cash use was $24.1, investing cash use $2.5, and financing cash provided $37.7. Cash increased $11.1, principally reflecting the private placement.
- Management said existing cash and expected revenue should cover anticipated cash requirements for at least the next 12 months. The company nevertheless expected continued losses and stated it may need additional financing if revenue does not fund its requirements.
Material changes and notable items
- Revenue recognized on an accrual basis rose to $7.0 in Q3 from $2.5 a year earlier; revenue recognized when cash was received fell to $5.4 from $7.3. For the nine-month period, accrual revenue was $19.0 versus $7.5, while cash-basis revenue was $16.5 versus $18.5. Management noted this mix shift and payer-payment timing can make quarterly results fluctuate.
- CMS’s preliminary 2016 Clinical Laboratory Fee Schedule rate for Afirma’s new CPT code was $2,152, 33% below the company’s existing contracted Medicare rate of $3,200. Veracyte challenged the methodology; CMS’s final methodology was expected before December 1, 2015. Approximately 20% of GEC patients were covered by Medicare.
- The company reported approximately $118 million in cumulative list-price billings for tests for which revenue had not been recognized and for which payment had not been notified, collected, or written off. This is not reported revenue, and the filing gives no assurance about whether or when those amounts will be collected.
- The Genzyme U.S. co-promotion fee rate fell to 15% of Afirma cash receipts from 32% beginning January 1, 2015. Net co-promotion expense declined year over year, while the company’s own sales and marketing costs increased.
- Veracyte began amortizing the $16.0 Percepta-related intangible asset after the product launch; amortization is over 15 years and is expected to be approximately $1.1 annually.
Outlook, risks and commitments
- Management expected continued investment in Afirma evidence and commercialization, Percepta clinical utility studies, and research and development, including the planned interstitial lung disease program. The company expected its 2015 research and development, selling and marketing, and general and administrative expenses to increase.
- Key risks include Medicare and commercial reimbursement rates and coverage, payer concentration, delayed or denied claims, the company’s dependence on Afirma revenue, and its history of losses. Percepta had no contracted reimbursement at the time described.
- Other risks include dependence on single-source suppliers and the TCP pathology provider, execution of the new laboratory move, and potential regulatory requirements for laboratory-developed tests. The company reported no material litigation pending.
- The new South San Francisco lease runs through March 2026. Minimum operating lease payments totaled $22.4; the company estimated an additional $3.5 of facility build-out spending beyond approximately $3.3 in landlord funding. It also had approximately $1.0 in non-cancelable supply purchase commitments, expected to be paid in 2015.
- The $5.0 debt is secured by substantially all assets other than intellectual property and includes financial covenants; the company reported compliance at quarter-end. Additional $5.0 loan tranches were available subject to deadlines and, for the third tranche, a revenue milestone.
- Management reported effective disclosure controls and procedures and no material changes in internal control over financial reporting during the quarter.
Important facts for investors to verify
- CMS’s final 2016 Afirma rate and the resulting effect on Medicare and commercial reimbursement.
- Whether the company can collect accrued revenue and outstanding claims, including the unrecognized $118 million of cumulative list-price billings.
- Afirma test volume, reimbursement and cash collections, and whether revenue growth can outpace operating expenses and cash burn.
- Percepta’s clinical utility evidence, payer coverage and commercialization progress, and the timing and development risks for the planned interstitial lung disease test.
- Cash runway, planned facility spending, debt-tranche availability and covenants, and any need for additional capital.