Veracyte, Inc. — Q2 2014 Form 10-Q
Reporting period: Three and six months ended June 30, 2014; filed August 14, 2014. Veracyte is a molecular diagnostics company whose revenue came entirely from its Afirma thyroid testing solution. The unaudited interim results are not necessarily indicative of full-year results.
Financial performance
| Metric | Q2 2014 | Q2 2013 | H1 2014 | H1 2013 |
|---|---|---|---|---|
| Revenue | $8.7 million | $5.1 million | $16.2 million | $9.5 million |
| Cost of revenue | $4.0 million | $3.2 million | $7.6 million | $6.0 million |
| Gross margin | 54.3% | 36.2% | 53.1% | 36.5% |
| Operating expenses | $15.2 million | $10.5 million | $29.3 million | $20.8 million |
| Operating loss | $(6.6) million | $(5.4) million | $(13.1) million | $(11.3) million |
| Net loss | $(6.7) million | $(6.5) million | $(13.3) million | $(13.4) million |
| Operating cash used | Not stated for quarter | Not stated for quarter | $(12.7) million | $(10.6) million |
Q2 and first-half revenue rose 71% year over year, which management attributed primarily to greater collections, higher payer reimbursement, and increased Afirma adoption. FNA samples received increased 32% in Q2 and 33% in H1. Cost of revenue grew more slowly than revenue, lifting gross margin; however, operating expenses rose 45% in Q2 and 41% in H1, with higher selling and marketing and general and administrative costs contributing to larger operating losses.
At June 30, cash and cash equivalents were $58.0 million, down from $71.2 million at December 31, 2013. Total current assets were $64.2 million and current liabilities $17.1 million. Debt was approximately $5.0 million net of discount, including $0.9 million current and $4.1 million long term. H1 investing cash use was $0.9 million; financing provided $0.3 million. Accumulated deficit was $99.0 million.
Material changes and investor considerations
- Revenue growth was accompanied by increased commercial spending: H1 selling and marketing expense rose 77% to $9.4 million, and general and administrative expense rose 43% to $7.9 million. Stock-based compensation was $1.4 million for H1, versus $0.5 million a year earlier.
- Revenue recognition and collections remain important uncertainties. The company said most revenue is recognized when payer payment notification or cash is received. Cumulative billed amounts not yet recognized or collected were $64.8 million at June 30, compared with $40.9 million at December 31; $4.8 million was collected against the earlier balance during H1. The filing cautions that future collections, if any, may differ from billed amounts.
- Medicare, Aetna, and UnitedHealthcare represented 55% of H1 revenue (28%, 11%, and 16%, respectively). Medicare accounted for 81% of accounts receivable at June 30.
- Genzyme co-promotion fees were 32% of Afirma cash receipts beginning March 2014. A subsequent binding agreement signed August 12 would reduce the rate to 15% beginning January 1, 2015, extend the earliest termination-for-convenience date to June 30, 2016, and require Veracyte to take on more sales and marketing responsibilities. The companies planned to renegotiate international arrangements country by country.
- Veracyte launched Afirma Malignancy Classifiers in May 2014 and is developing a product for interstitial lung disease. Afirma remained the sole revenue source during the reporting period.
Outlook, risks, and contingencies
Management expected continued operating losses and higher research and development and general and administrative spending. It anticipated increased selling and marketing expense over the next six months as it assumed additional commercial responsibilities, with the Genzyme fee reduction expected to offset some expense growth in 2015. Management believed cash at June 30 plus Afirma revenue would meet anticipated cash needs for at least 12 months; it also noted that further financing might be needed if revenue does not fund requirements.
Key risks include payer coverage, reimbursement and collection delays; reliance on a limited number of payers and on Afirma; possible changes in FDA oversight of laboratory-developed tests; single-source suppliers and dependence on Thyroid Cytopathology Partners for cytopathology services; execution and reimbursement risks for new products; and the possibility of needing additional capital. The company reported no litigation it believed would have a material adverse effect, no off-balance-sheet arrangements, and no material change in contractual obligations during H1. Its loan is secured by substantially all assets except intellectual property and includes customary restrictions and a provision allowing the lender to call the debt following a material adverse change; it has no financial covenants.
Important facts for investors to verify
- Whether payer collections support revenue growth, and the aging, recoverability, and eventual write-offs of the $64.8 million cumulative billed-but-unrecognized/uncollected balance.
- Changes in payer coverage, contracted reimbursement rates, payer concentration, and Medicare claim processing.
- Actual cash burn and whether management’s stated 12-month liquidity outlook remains valid as spending and commercial responsibilities increase.
- Implementation and economic impact of the amended Genzyme arrangement, including the lower fee, added Veracyte responsibilities, and international renegotiations.
- Adoption, regulatory status, reimbursement, and development timelines for the Malignancy Classifiers and the lung program.