Veracyte, Inc. — 2019 Form 10-K Summary
Business context and reporting period
Veracyte is a genomic diagnostics company with commercial tests in thyroid, lung, idiopathic pulmonary fibrosis (IPF), and breast cancer. This annual report covers the fiscal year ended December 31, 2019; quarterly figures below refer to the three months ended December 31, 2019. Most revenue continued to come from U.S. testing, particularly Afirma.
Key financial metrics
| Metric | FY 2019 | FY 2018 / comparison |
|---|---|---|
| Total revenue | $120.4 million | $92.0 million; up 31% |
| Testing revenue | $107.4 million | $91.1 million; up 18% |
| Biopharmaceutical and collaboration revenue | $12.1 million | $1.0 million combined |
| Gross margin | 70% | 64%; up 6 percentage points |
| Operating expenses, excluding cost of revenue | $99.0 million | Up 22% |
| Loss from operations | $15.1 million | $22.2 million loss |
| Net loss and loss per share | $12.6 million; $0.27 per share | $23.0 million; $0.62 per share |
| Cash from operating activities | $3.2 million used | $13.5 million used |
| Cash and cash equivalents at year-end | $159.3 million | $78.0 million |
| Working capital at year-end | $170.2 million | $83.9 million |
| Debt carrying amount at year-end | $0.7 million, including end-of-term obligation | $25.3 million |
In Q4, revenue was $29.7 million, up 15% year over year; gross margin was 66%, unchanged; and net loss was $7.5 million, versus $3.1 million a year earlier. Operating cash flow was positive $1.8 million in Q4, compared with $1.2 million used in Q4 2018. Full-year genomic test volume rose 25% to 39,612 tests.
Material changes versus the prior comparable period
- Annual revenue growth reflected 25% higher genomic classifier volume, increased testing revenue, and new biopharma and collaboration revenue. Johnson & Johnson data services and milestone revenue contributed substantially to the latter.
- Annual net loss narrowed 45%, despite higher operating expenses. Selling and marketing expense rose 30%, principally with increased commercial staffing and spending; general and administrative expense rose 21%.
- Operating cash use improved to $3.2 million from $13.5 million. Investing cash use increased to $42.7 million, including $40.0 million paid for the NanoString diagnostics business. Financing provided $127.3 million, largely from the May 2019 stock offering, which generated $137.8 million net proceeds.
- Veracyte prepaid $24.9 million of term-loan principal during 2019; year-end principal outstanding was $0.1 million. It had not drawn on its revolving credit line.
Outlook, management commentary, risks and unusual items
- Management gave no specific numerical revenue or earnings guidance. It expects continued investment in research and development, selling and marketing, and growth of its product portfolio, and expects additional losses in 2020 and potentially later years. Management said existing cash, available credit, and expected revenue should cover anticipated cash needs for at least the next 12 months.
- The December 2019 NanoString transaction provided exclusive global diagnostic rights to the nCounter FLEX platform and the Prosigna breast cancer test, plus the in-development LymphMark test. Consideration was $40 million cash, $10 million in Veracyte shares, and up to $10 million additional cash contingent on commercial launch; the contingent liability was valued at $6.1 million at year-end.
- Commercial growth and profitability depend on test adoption, payer coverage and collection rates. Medicare and UnitedHealthcare represented 26% and 11% of 2019 revenue, respectively. Afirma’s Medicare rate of $3,600 was extended through 2021; Prosigna’s rate was scheduled to decline 15% in 2021 to approximately $2,134.
- Key risks include reliance on Afirma and a small number of payers; uncertainty in reimbursement and revenue estimates; execution and integration of the NanoString assets; regulatory changes affecting laboratory-developed tests and international kit sales; competition; and dependence on sole-source suppliers and the TCP pathology provider.
- Revenue is estimated at delivery of test results using expected collections and payer experience. The company disclosed approximately $159.3 million of cumulative list-price billings for tests for which revenue was not recognized and cash had not been collected; it stated it did not expect to collect those amounts. This is not reported as a current receivable.
- The independent auditor gave an unqualified opinion on the financial statements and internal controls. Critical audit matters included estimating diagnostic-services revenue and valuing NanoString-related intangible assets and contingent consideration. Management reported effective controls, but the acquired business was excluded from the internal-control assessment for 2019.
Important facts for investors to verify
- Whether test volume growth—especially Percepta and Envisia—translates into durable revenue, reimbursement, and collections.
- How much of future revenue and cash generation depends on Afirma and major payers, and whether reimbursement rates or coverage terms change.
- Progress integrating and commercializing the NanoString platform and Prosigna, and achievement of the launch milestones tied to up to $10 million of contingent consideration.
- The assumptions behind accrued testing revenue, payer collection estimates, and the company’s disclosure that it does not expect collection of the $159.3 million of unrecognized historical billings.
- Cash use, operating expense growth, remaining debt and credit availability, and management’s stated liquidity runway.