Veracyte, Inc. — Q3 2021 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2021. Unaudited results; comparisons are with the corresponding 2020 periods. Veracyte is a diagnostics company; 2021 results include Decipher Biosciences from March 12 and HalioDx from August 2.
Financial performance
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Total revenue | $60.4m | $31.1m | $152.2m | $82.9m |
| Testing revenue | $50.9m | $28.3m | $134.8m | $70.5m |
| Operating loss | $(16.7)m | $(4.1)m | $(69.6)m | $(27.3)m |
| Net loss | $(14.1)m | $(4.1)m | $(65.0)m | $(26.9)m |
| Net loss per share, diluted | $(0.20) | $(0.08) | $(0.97) | $(0.52) |
| Operating cash flow | Not provided for quarter | Not provided for quarter | $(40.1)m | $(12.0)m |
Margins: Derived gross margin was approximately 64.1% in Q3 2021 versus 66.7% in Q3 2020, and 66.1% for the first nine months of 2021 versus 63.5% in 2020. Operating-loss margin was approximately 27.6% in Q3 2021 and 45.7% for the nine-month period.
Liquidity and debt: Cash and cash equivalents were $164.0m at September 30, 2021, down from $349.4m at December 31, 2020; including restricted cash, the balance was $164.8m. Current assets were $229.3m and current liabilities $50.0m. The company reported $1.075m of long-term debt on the balance sheet. The legacy Silicon Valley Bank term-loan principal was effectively $1; a $1.2m final payment is due in 2022. The $10m revolving facility was undrawn. Management said cash, the available credit line and expected revenue should fund anticipated requirements for at least 12 months from the filing date.
Changes versus comparable periods
- Q3 revenue rose 94%; nine-month revenue rose 83%. Diagnostic tests reported increased 84% in Q3 and 91% for the nine months; Decipher contributed $21.3m and $44.0m of revenue in those periods, respectively.
- HalioDx contributed $4.7m of Q3 revenue and $6.3m of operating loss after its August acquisition. Q3 biopharmaceutical and other revenue rose to $6.5m from $0.8m, including HalioDx activity.
- Operating expenses increased 119% in Q3 and 101% for the nine months, outpacing revenue growth in Q3. Higher spending included expanded sales, research and administrative teams, acquisition-related costs, and increased amortization of acquired intangible assets.
- Cash used in investing was $739.6m for the nine months, chiefly for Decipher ($574.4m, net of cash acquired) and HalioDx ($163.6m, net of cash acquired). Financing provided $596.1m, including $593.8m net proceeds from a February public offering.
Outlook, commentary and risks
- No specific revenue or earnings guidance was provided. Management expects additional losses for the remainder of 2021 and potentially future years, while stating that available resources should cover at least the next 12 months.
- Management said COVID-19 and the Delta variant continued to affect test volumes, particularly pulmonology procedures; reagent and supply availability remained a concern. The company cited single-source suppliers and limited visibility into vendors’ supply chains.
- Integration and execution risks include realizing benefits from the Decipher and HalioDx acquisitions, integrating operations and controls, and transferring nCounter test-kit manufacturing from NanoString to HalioDx. Purchase-price allocations for both acquisitions remained preliminary.
- Reimbursement and customer concentration remain material: Medicare represented 31% of nine-month revenue and UnitedHealthcare 10%. Coverage changes, payer denials, payment delays, coding changes and reimbursement-rate reductions could pressure revenue and collections.
- Other notable risks include continued losses, competition, regulatory requirements for laboratory-developed tests, and EU IVDR requirements expected to apply from May 2022. The filing reported no pending legal proceedings expected to have a material adverse effect and no off-balance-sheet arrangements.
Unusual items: The nine-month results included $25.1m of Decipher post-combination compensation expense and $7.7m of HalioDx transaction costs; acquisition-related stock compensation and professional fees also materially increased general and administrative expense. The company recognized a $5.3m income-tax benefit, primarily related to deferred tax liabilities assumed with Decipher and a release of valuation allowance. In connection with the Decipher acquisition, related-party payments of approximately $26.5m and $1.4m were made to two former Decipher directors, one of whom became Veracyte’s general manager.
Key facts for investors to verify
- How much of reported revenue growth reflects acquired businesses versus underlying test-volume growth, and how acquired operations affect margins and cash burn.
- Whether cash collections and payer reimbursement support reported testing revenue estimates; accounts receivable increased to $40.3m from $18.5m at year-end.
- Progress and cost of integrating Decipher and HalioDx, including manufacturing transfer plans and final acquisition valuations.
- Liquidity runway under continued operating losses, acquisition-related commitments and planned spending; confirm the timing and terms of the 2022 debt-related payment.
- Effects of COVID-19, supply constraints, payer concentration and evolving U.S. and European regulatory requirements on test volumes and reimbursement.