Veracyte, Inc. — Q1 2016 Form 10-Q
Reporting period: Three months ended March 31, 2016. Veracyte is a molecular diagnostics company; all reported revenue to date came from its Afirma thyroid diagnostic solution. Percepta, its lung cancer test, launched in April 2015 but had not yet generated reported revenue.
Financial results and liquidity
| Metric | Q1 2016 | Q1 2015 |
|---|---|---|
| Revenue | $13.55 million | $11.22 million |
| Cost of revenue | $6.28 million | $4.57 million |
| Gross profit / margin | $7.27 million / 53.7% | $6.65 million / 59.3% |
| Operating expenses | $23.30 million | $18.77 million |
| Operating loss | $9.75 million | $7.55 million |
| Net loss | $10.08 million | $7.61 million |
| Net loss per share, diluted | $0.36 | $0.34 |
| Cash used in operations | $8.60 million | $8.87 million |
- Revenue grew 21%; GEC tests processed increased 33%, to 5,352 from 4,020. Cost of revenue grew 38%, faster than revenue, and gross margin declined to 53.7% from 59.3%.
- R&D expense rose 24% to $3.46 million; selling and marketing rose 26% to $7.07 million; G&A rose 7% to $6.23 million. Intangible amortization of $267,000 began following Percepta’s launch.
- Cash and cash equivalents were $47.46 million at quarter-end, versus $39.08 million at December 31, 2015. Current assets were $56.19 million and current liabilities $11.88 million. Management said cash and expected revenue should fund anticipated needs for at least 12 months.
- Investing cash outflow was $2.98 million, mainly facility and laboratory build-out. Financing provided $19.95 million, including $24.6 million net proceeds from new debt, offset by repayment of $5.0 million of prior debt and related fees and penalties.
- Long-term debt, net of issuance costs, was $24.45 million. The new Visium facility provided a $25 million initial term loan, with up to $15 million more available through June 30, 2017. It carries 12% annual interest, allows certain interest to be paid in kind, has an interest-only period through March 31, 2020, and matures March 31, 2022. It is secured by substantially all assets and includes financial and other covenants; the company reported compliance at quarter-end.
Material changes and notable items
- Revenue growth reflected higher Afirma adoption and more tests delivered, including a higher proportion of GEC tests, plus some increase in accrual-based revenue. Revenue recognized on a cash-received basis fell to $5.32 million from $5.83 million, while accrual revenue rose to $8.23 million from $5.39 million.
- Average GEC reimbursement was approximately $2,100 for the quarter, down from approximately $2,300 a year earlier. Medicare represented 31% of revenue, UnitedHealthcare 13%, and Cigna 6%.
- On March 9, 2016, Veracyte gave notice that it would end its U.S. Genzyme co-promotion agreement effective September 9, 2016. It was expanding its own sales force ahead of the transition; management expected higher selling and marketing expense in 2016 and the co-promotion fee to end after termination.
- The company replaced its previous loan with the Visium credit agreement in March. Q1 interest expense increased to $367,000 from $89,000, including costs associated with paying off the prior loan, such as a prepayment penalty, end-of-term payment, and debt-cost write-offs.
- At March 31, cumulative list-price billings for tests not yet recognized as revenue and not yet collected, confirmed as paid, or written off were approximately $149.8 million, versus $134.3 million at year-end. These amounts are not reported revenue or recognized receivables, and Veracyte cautioned that collection, timing, and realized amounts are uncertain.
Outlook, risks, and contingencies
- Management expected additional losses in 2016 and future years. It anticipated increased R&D investment in Afirma, Percepta, and an IPF/ILD product, which it planned to introduce in Q4 2016; the filing cautions that development and launch timing are uncertain. Selling and marketing expense was expected to continue increasing, while G&A was expected to remain flat for the rest of 2016.
- Revenue and cash collections may fluctuate because reimbursement is uncertain, many claims require appeals, and significant revenue is recognized only upon payer payment notification or cash receipt. The company had no contracted reimbursement for Percepta and said payer coverage and reimbursement for Afirma remained incomplete.
- Key risks include dependence on Afirma and a limited number of payers; reimbursement-rate or coverage changes, including uncertainty around Medicare’s gapfill process; successful transition from Genzyme; product development and commercialization execution; single-source suppliers and reliance on Thyroid Cytopathology Partners for cytopathology; and regulatory, laboratory licensing, billing, and collection risks.
- Operating leases totaled $21.88 million in minimum future payments, and supplies purchase commitments were approximately $813,000. The company reported no material litigation pending and no off-balance-sheet arrangements.
Most important facts for investors to verify
- Whether Afirma test volumes, payer coverage, reimbursement rates, and cash collections continue to support revenue growth; in particular, the effect of the lower average GEC reimbursement.
- Whether the $149.8 million of cumulative unrecognized billings results in collections, and how much revenue is recognized as cash is received versus accrued.
- Execution and cost of the September 2016 Genzyme transition, including whether internal sales efforts sustain Afirma volumes.
- Liquidity and covenant compliance under the 12% secured Visium debt, including any use of the optional second loan and the consequences of payment-in-kind interest or prepayment premiums.
- Gross-margin trajectory, continued operating losses, and timing and evidence for Percepta reimbursement and the planned IPF/ILD product launch.