Veracyte, Inc. — Q2 2019 Form 10-Q
Reporting period: Three and six months ended June 30, 2019. Veracyte is a genomic diagnostics company whose principal products address thyroid, lung and interstitial lung disease; Afirma remained its main revenue source. Figures are unaudited.
Financial performance
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Revenue | $30.1 million | $22.8 million | $59.7 million | $42.8 million |
| Gross margin | 71% | 64% | 71% | 62% |
| Operating expenses, excluding cost of revenue | $24.5 million | $20.4 million | $47.5 million | $41.6 million |
| Operating loss | $3.1 million | $5.9 million | $5.2 million | $14.9 million |
| Net loss | $2.5 million | $6.2 million | $4.4 million | $15.4 million |
| Net loss per share | $0.05 | $0.18 | $0.10 | $0.45 |
| Genomic classifiers reported | 9,663 | 7,686 | 18,825 | 14,550 |
Q2 revenue increased 32% year over year; excluding $3.5 million of biopharmaceutical services revenue, it increased 20%. Six-month revenue grew 39%; excluding $7.6 million of biopharmaceutical services revenue, it grew 23%. Management attributed growth chiefly to increased test volume and a higher Afirma accrual rate. Q2 test volume increased 26%; six-month volume increased 29%.
For the six months, operating cash used was $3.5 million, compared with $10.5 million in 2018; investing cash used was $1.4 million versus $0.8 million. Financing provided $119.5 million, primarily from the May equity offering, partly offset by debt repayments. The MD&A reports Q2 operating cash use of $2.5 million, but the filing’s cash flow statement presents six-month, not quarterly, cash flows.
Liquidity, debt and capital
- At June 30, cash and cash equivalents were $192.6 million; total current assets were $220.0 million and current liabilities were $15.3 million.
- Total liabilities were $28.1 million and stockholders’ equity was $224.2 million. Long-term debt principal was $0.1 million; the reported net debt obligation, including the end-of-term obligation, was $0.6 million.
- The company received approximately $137.8 million net from a May public offering of 6.325 million shares at $23.25 per share. It prepaid $24.9 million of term-loan principal during the first half; the offering and repayments materially changed cash, debt and share count.
- A $10 million revolving credit line remained undrawn. The company was in compliance with debt covenants at quarter-end and stated that cash, the available line and anticipated revenue should meet requirements for at least the next 12 months.
- Adoption of lease accounting in January 2019 added operating lease right-of-use assets and liabilities; management said the adoption had an immaterial effect on results and cash flows.
Material changes and management outlook
- Gross margin improved from the prior year, with management citing volume leverage, supply pricing and efficiencies after the transition from the prior Afirma test. Selling and marketing expense rose 45% in Q2, primarily reflecting a 44% increase in average headcount and higher related expenses; general and administrative expense rose 17%.
- Percepta GSC launched in June, completing the transition of the company’s classifiers to its RNA whole-transcriptome sequencing platform. Envisia volume and ordering sites each increased more than 100% sequentially from Q1, to 130 tests and 76 sites.
- Veracyte received final Medicare coverage for Envisia, effective April 1, 2019, and reported in-network status with four additional Blue Cross Blue Shield plans covering nearly 8.5 million members.
- The J&J development collaboration contributed $3.2 million of Q2 and $7.0 million of six-month revenue, including data provision and milestone-related revenue. Up to $13 million of additional milestone payments were possible but excluded from the transaction price because achievement was uncertain. The agreement also provides for future payments to J&J tied to net cash collections on specified products.
- No specific revenue or earnings guidance was provided. Management expected further losses in 2019 and potentially later years, and anticipated continued investment in sales and marketing, research and development, and infrastructure. It said R&D spending would increasingly support pipeline products.
Risks, contingencies and unusual items
- Veracyte had a $238.5 million accumulated deficit and stated it might never achieve or sustain profitability. Revenue remained concentrated in Afirma; Medicare and UnitedHealthcare represented 24% and 11% of six-month revenue, respectively.
- Revenue depends on payer coverage, reimbursement, collections and estimates of amounts ultimately collectible. Prior-period collection estimate changes added $0.1 million to Q2 revenue and $0.8 million to first-half revenue. Accounts receivable rose to $19.6 million from $13.2 million at year-end.
- The filing describes payer denials and reimbursement reductions, changing Medicare rates and policies, regulatory uncertainty for laboratory-developed tests, billing and collection complexity, reliance on single-source suppliers and TCP, and the need to scale laboratory operations as significant risks.
- The company reversed $0.6 million of previously recognized revenue related to cytopathology services following the temporary inactivation of its Austin laboratory CLIA number. CMS reinstated that number effective February 2019. Management reported no pending litigation it believed would materially affect the financial statements.
- Other notable exposures include variable-rate debt, operating lease commitments of $17.7 million in undiscounted minimum payments, and unrecognized tax benefits of $2.8 million. The company maintained a full valuation allowance on deferred tax assets.
Important facts for investors to verify
- How much reported growth reflects recurring diagnostic testing versus J&J collaboration revenue, and whether Afirma growth and reimbursement rates persist.
- Whether Percepta and Envisia adoption, coverage and collections develop as expected, including Medicare and commercial payer reimbursement.
- Whether receivables and estimated collectible revenue convert to cash without material future adjustments or denials.
- Whether increased commercial spending and test volumes improve operating leverage while the company continues to report losses.
- Cash use, remaining debt and covenant headroom, including the terms and availability of the revolving line and future lease obligations.
- Potential dilution and the impact of the 2019 offering, alongside execution risks involving CLIA compliance, TCP, suppliers and laboratory capacity.