Veracyte, Inc. — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019. Veracyte is a genomic diagnostics company whose principal revenue source is Afirma thyroid testing, with Percepta and Envisia lung-related classifiers and biopharmaceutical collaborations also contributing. The interim financial statements are unaudited.
Financial performance and position
| Metric | Q1 2019 | Q1 2018 / comparison |
|---|---|---|
| Revenue | $29.5 million | $20.0 million; up 47% |
| Revenue excluding biopharmaceutical services | $25.4 million | Up 27% year over year |
| Gross margin | Approximately 71% | Approximately 61%; up 10 percentage points |
| Operating expenses, excluding cost of revenue | $23.1 million | Up 9% |
| Loss from operations | $2.1 million | $9.0 million loss |
| Net loss | $1.9 million | $9.2 million loss |
| Net loss per share, basic and diluted | $0.05 | $0.27 |
| Cash used in operating activities | $1.0 million | $7.4 million |
| Genomic classifiers reported | 9,162 | 6,864; up 33% |
Revenue growth reflected increased test volume and a higher Afirma accrual rate, as well as $4.1 million of biopharmaceutical services revenue, including $3.8 million recognized for data provided under the Johnson & Johnson Services, Inc. (JJSI) agreement. Percepta revenue was $0.9 million, versus $0.1 million a year earlier; Veracyte recognized Envisia revenue for the first time in Q1.
At March 31, cash and cash equivalents were $67.8 million ($68.4 million including restricted cash), versus $78.0 million at year-end. Accounts receivable was $16.6 million, up from $13.2 million. Total assets were $123.5 million and stockholders’ equity was $83.8 million. The accumulated deficit was $236.0 million.
Debt principal was $12.5 million, down from $25.0 million at year-end after a $12.5 million January prepayment; net debt was $12.9 million. The term loan’s effective interest rate was 9.39%, and the company reported compliance with its covenants. The $10 million revolving facility was undrawn and subject to a borrowing base. Operating lease liabilities totaled $13.8 million, in addition to finance lease obligations.
Changes, outlook, and material items
- Revenue increased 47%, while the net loss narrowed 79%; operating cash use improved by $6.4 million compared with Q1 2018.
- Cost of revenue rose 8%, slower than revenue, supporting the reported gross-margin improvement. The company attributed lower license fees and royalties partly to completing its transition to Afirma GSC in 2018.
- Veracyte prepaid $12.5 million of term debt in January, reducing debt and interest expense. Financing cash outflow was $8.4 million, primarily reflecting that prepayment, partly offset by $4.2 million from option exercises and employee stock purchases.
- Revenue estimates for tests delivered in prior quarters added $0.6 million to Q1 revenue and reduced loss per share by $0.02; $0.4 million had been collected by quarter-end. Revenue estimates depend on payer coverage, reimbursement and collections and may be adjusted later.
- The JJSI agreement provides for $7.0 million in payments for data, of which $5.0 million had been received by March 31; $1.2 million remained deferred. Up to $13.0 million of additional milestone payments were excluded from the transaction price because achievement was uncertain. The agreement also provides for payments to JJSI tied to future net cash collections from specified products.
- Management stated that cash, the available credit facility and expected revenue should fund anticipated cash requirements for at least 12 months. It nevertheless expected additional losses in 2019 and potentially future years. No specific revenue or earnings guidance was provided.
- Envisia received a final Medicare coverage determination effective April 1, 2019, covering nearly 60 million beneficiaries. Afirma received TRICARE coverage for approximately 9.4 million eligible people; Envisia also received New York State regulatory approval.
- Veracyte adopted the lease accounting standard on January 1, 2019, recording operating lease right-of-use assets and liabilities; the adoption had an immaterial effect on Q1 results and cash flows.
- The filing notes that Austin laboratory CLIA certification was reinstated effective February 2019 after being inactivated effective July 2018. Veracyte reversed $0.6 million of previously recognized revenue associated with cytopathology services claims for the intervening period.
Risks and contingencies
- Veracyte has a history of losses and remains dependent primarily on Afirma; positive coverage, reimbursement rates, physician adoption and successful collections are central to growth and profitability. Medicare and UnitedHealthcare represented 21% and 11% of Q1 revenue, respectively.
- Management disclosed approximately $159.3 million of cumulative list-price billings at December 31, 2018 for tests that had not been recognized as revenue and for which it had no expectation of future collection. This is not a stated receivable balance; it underscores the distinction between billings and recognized, collectible revenue.
- Payer denials, prior authorization, reimbursement reductions, PAMA rate-setting and coverage changes could constrain revenue and cash flow. Revenue accruals involve significant judgment and can fluctuate with collection experience.
- Additional risks include dependence on single-source suppliers and Thyroid Cytopathology Partners for Afirma cytopathology; laboratory capacity and regulatory compliance, including CLIA and state licensing; possible future FDA oversight of laboratory-developed tests; competition; and product-development and reimbursement uncertainty.
- The term loan carries variable-rate interest, is secured by substantially all assets other than intellectual property, and includes financial and operating covenants. The company also faces potential dilution or operating constraints if additional financing is needed.
- The filing reports no pending litigation believed likely to have a material adverse effect. It also reports a full valuation allowance against deferred tax assets and $2.8 million of unrecognized tax benefits.
Important facts for investors to verify
- How much of revenue growth is supported by recurring diagnostic test volume and reimbursement versus JJSI and other biopharmaceutical services, and whether JJSI revenue is recognized as contracted data obligations are completed.
- Whether Afirma accrual rates and actual cash collections remain consistent with estimates, including trends in accounts receivable, denials, appeals and payer reimbursement.
- Whether Envisia Medicare coverage effective April 1 translates into meaningful test volume and revenue, and whether reimbursement and physician adoption expand for Percepta and other products.
- Whether improved gross margin and lower operating cash use persist as the company invests in sales, marketing, research and development, and new products.
- Cash runway, future financing needs, debt covenant compliance and the effects of variable interest rates, scheduled debt payments and lease commitments.
- The operational and billing effects of the Austin CLIA interruption and reinstatement, and continued compliance at both laboratories.