Veracyte, Inc. — FY2014 Form 10-K
Reporting period: Fiscal year ended December 31, 2014; filed March 24, 2015. The filing is an annual report, not a standalone fourth-quarter filing. All financial amounts below are in U.S. dollars.
Business context
Veracyte is a molecular diagnostics company. In 2014, substantially all revenue came from its Afirma thyroid FNA testing solution, including the Gene Expression Classifier (GEC). The company launched Afirma Malignancy Classifiers in May 2014 and acquired Allegro Diagnostics in September 2014 to advance its planned lung diagnostics business. Management described endocrinology and pulmonology as its principal growth areas.
Financial performance and liquidity
| Metric | FY2014 | FY2013 |
|---|---|---|
| Revenue | $38.2 million | $21.9 million |
| Cost of revenue | $16.6 million | $12.6 million |
| Gross profit and approximate gross margin | $21.6 million; 56.5% | $9.3 million; 42.4% |
| Operating expenses | $67.2 million | $45.1 million |
| Operating loss | $29.0 million | $23.2 million |
| Net loss | $29.4 million | $25.6 million |
| Operating cash flow | $(27.6) million | $(19.2) million |
| Cash and cash equivalents at year-end | $35.0 million | $71.2 million |
| Long-term debt, net carrying value | $4.9 million | $4.9 million |
| Working capital | $26.2 million | $61.0 million |
Revenue grew 75%, attributed to greater Afirma adoption, higher collections and reimbursement, and a larger share of GEC-only samples. FNA samples received rose 33% to 65,848. Selling and marketing expense increased 75% to $21.9 million, while R&D rose 26% to $9.8 million and G&A rose 56% to $18.9 million. The company remained loss-making; accumulated deficit reached $115.0 million. The filing reports no separate annual EBITDA measure.
Cash used in investing activities was $9.0 million, including approximately $6.9 million of net cash paid for Allegro and $2.0 million of capital expenditures. Financing activities provided $0.4 million. Management said year-end cash and expected 2015 Afirma revenue should cover anticipated cash needs for at least 12 months, while also expecting further losses.
Material changes and unusual items
- Afirma revenue remained the company’s sole revenue source through year-end. Revenue recognized when cash was received was $25.7 million; $12.5 million was recognized on an accrual basis.
- At year-end, $47.1 million of billed tests at list price had not met revenue-recognition criteria and had not been paid, notified as payable, or written off. This is not recorded revenue and collection timing and amounts were uncertain.
- Allegro acquisition consideration totaled $17.1 million, including $10.1 million in Veracyte shares, $2.7 million in cash and settlement of $4.3 million of Allegro debt. Veracyte recorded $16.0 million of acquired in-process R&D and $1.1 million of goodwill. Acquisition-related costs and employee bonuses/severance were expensed.
- The Genzyme U.S. co-promotion fee fell from 32% to 15% of Afirma GEC cash receipts beginning January 1, 2015. FY2014 co-promotion expense was $12.0 million before the $2.3 million amortization credit for the upfront fee.
- Quarterly revenue rose from $7.5 million in Q1 to $12.2 million in Q4 2014. Q4 net loss was $8.1 million, compared with $5.9 million in Q4 2013. Management noted seasonal and payer-collection timing can affect quarterly results.
Outlook, commentary and principal risks
- Management planned to launch Percepta, its lung cancer classifier, by mid-2015 and expected meaningful revenue in 2017. Its IPF test was planned for launch in 2016. These are plans, not guaranteed outcomes.
- Management expected 2015 R&D and total selling and marketing expenses to increase, including investment in pulmonary products; Afirma selling and marketing expense was expected to remain relatively flat as lower Genzyme fees offset increased internal sales costs. G&A was also expected to increase.
- Management cited reimbursement uncertainty, dependence on a limited number of payers, complex billing and collections, and revenue-recognition estimates as key business risks. Medicare, UnitedHealthcare and Aetna represented 26%, 18% and 11% of FY2014 revenue, respectively.
- Other material risks include continued losses and potential need for financing; successful product development, launch and payer coverage; possible future FDA oversight of laboratory-developed tests; reliance on sole-source suppliers and Thyroid Cytopathology Partners; and acquisition integration and operational scaling.
- The amended loan provided up to $15 million in three tranches, but only the first $5 million tranche had been drawn by year-end; additional tranches were subject to availability dates and conditions. Debt was secured by substantially all assets other than intellectual property and certain other assets, and included financial covenants. Veracyte reported compliance at December 31, 2014.
- No material legal proceedings were reported. Management concluded disclosure controls and internal control over financial reporting were effective at the reasonable assurance level; the auditor did not provide an internal-control attestation.
Investor facts to verify
- Whether Afirma volume, reimbursement rates, contracted coverage and cash collections continue to grow—and how much of the $47.1 million billed-but-unrecognized balance is ultimately collected.
- Whether Percepta launches on schedule, obtains required laboratory and state approvals, secures payer coverage, and produces revenue consistent with management’s timeline.
- Cash burn, available liquidity and loan covenant compliance, including whether additional debt tranches or other financing will be needed.
- Whether the Allegro-acquired R&D asset retains its value and whether the planned IPF program progresses toward launch.
- Effects of payer concentration, revenue-recognition judgments, and possible regulatory changes on reported revenue, margins and cash flow.