Veracyte, Inc. — Q2 2015 Form 10-Q
Reporting period: Three and six months ended June 30, 2015; balance sheet compared with December 31, 2014. Veracyte is a molecular diagnostics company. Through the period, all revenue came from its Afirma thyroid test. The company launched its Percepta lung classifier in April 2015.
Key financial results
Amounts below are in millions, except per-share data, percentages, and test volumes.
| Metric | Q2 2015 | Q2 2014 | Six months 2015 | Six months 2014 |
|---|---|---|---|---|
| Revenue | $11.9 | $8.7 | $23.1 | $16.2 |
| Cost of revenue | $5.1 | $4.0 | $9.7 | $7.6 |
| Gross profit / margin | $6.8 / 56.8% | $4.7 / 54.3% | $13.4 / 58.0% | $8.6 / 53.1% |
| Operating expenses | $21.0 | $15.2 | $39.8 | $29.3 |
| Operating loss | $(9.1) | $(6.6) | $(16.6) | $(13.1) |
| Net loss | $(9.1) | $(6.7) | $(16.7) | $(13.3) |
| Net loss per share, basic and diluted | $(0.35) | $(0.31) | $(0.69) | $(0.63) |
| GECs processed | 4,758 | 3,451 | 8,778 | 6,549 |
- Revenue growth: Up 37% in Q2 and 43% year to date. GEC volume rose 38% in Q2 and 34% year to date; FNA samples received increased 21% in both comparisons.
- Cash flow: Operating cash used was $20.3 million in the first half, versus $12.7 million a year earlier. Investing cash used was $1.4 million; financing provided $37.7 million, principally from the private placement. Cash and cash equivalents increased to $51.0 million from $35.0 million at year-end.
- Liquidity and debt: Current assets were $60.7 million and current liabilities $11.8 million at June 30. Long-term debt was $5.0 million. The company reported compliance with its loan covenants.
- Other balance-sheet items: Accounts receivable was $3.6 million; supplies inventory was $4.0 million. Accumulated deficit was $131.8 million. No income tax provision or benefit was recorded, and a full valuation allowance remained against net deferred tax assets.
Changes versus prior periods
- Revenue growth reflected increased Afirma adoption and more payers qualifying for accrual-based revenue recognition. Accrual revenue was $6.6 million in Q2, versus $2.6 million a year earlier; cash-basis revenue was $5.3 million, down from $6.0 million. For the first half, accrual revenue rose to $12.0 million from $5.0 million, while cash-basis revenue was approximately unchanged at $11.2 million.
- Operating expenses grew 38% in Q2 and 36% year to date, faster than revenue. Higher personnel, sales and marketing, R&D, and general and administrative costs contributed; 2015 also included $0.3 million of Percepta intangible amortization.
- Net loss widened to $9.1 million in Q2 and $16.7 million in the first half. Gross margin improved year over year in both periods, aided by process refinements and scale efficiencies.
- In April, Veracyte sold 4.9 million shares at $8.15 per share, receiving $37.3 million net. Shares outstanding were 27.6 million at June 30, versus 22.5 million at December 31, 2014.
Outlook, commentary, and risks
- Management expected additional losses in 2015 and future years and said it may never achieve profitability. It expected R&D spending to increase for Afirma, Percepta clinical utility studies, and interstitial lung disease (ILD) development; total selling and marketing and G&A expenses were also expected to rise.
- Management believed cash and cash equivalents of $51.0 million, together with anticipated Afirma revenue, would cover expected cash requirements for at least the next 12 months. This is an expectation, not a guarantee; the company identified possible future financing needs and resulting dilution or restrictions.
- Veracyte planned to introduce an ILD test in 2016, subject to development and validation. It increased Afirma’s GEC list price from $4,875 to $6,400 per test in July 2015, after the reporting period. The filing reported coverage representing nearly 150 million lives and contracts covering over 120 million lives, while noting that payer coverage and collections remain uncertain.
- Revenue is sensitive to payer decisions and collections. At June 30, $26.4 million of recent test billings at list price had not qualified for revenue recognition and had not been collected, notified for payment, or written off. The company warned that some unpaid claims may never be collected and actual reimbursement may differ from estimates.
- Material operating risks include dependence on Afirma and a limited number of payers; reimbursement and billing uncertainty; sole-source suppliers; reliance on Thyroid Cytopathology Partners for cytopathology services; competition; product development and clinical-validation risk; and potential changes in FDA oversight of laboratory-developed tests.
- The company signed a non-cancelable lease for a new 59,000-square-foot facility through March 2026. Minimum operating lease payments totaled $22.6 million; management estimated an additional $3.5 million of facility investment, alongside approximately $3.3 million in landlord tenant-improvement funding. The loan is secured by substantially all assets other than intellectual property and includes a material-adverse-change provision.
- A $125 million shelf registration statement was filed, including capacity for up to $25 million of common stock sales through an at-the-market program. The company reported no off-balance-sheet arrangements and no pending litigation believed likely to have a material adverse effect. Disclosure controls were deemed effective; no material change in internal control was reported.
Important facts for investors to verify
- Whether Afirma adoption, contracted reimbursement, collections, and cash conversion continue to support revenue growth; monitor the large balance of unrecognized billed tests and potential estimate adjustments.
- Whether Percepta gains clinical evidence, payer coverage, reimbursement, and commercial traction, and whether the planned ILD product remains on schedule.
- Whether expense growth and operating cash burn can be managed within available liquidity, including the costs of the new facility and ongoing research and commercialization.
- Whether additional equity or debt financing is needed, and the impact of potential dilution, shelf or ATM issuance, and loan covenants.
- Whether payer concentration, regulatory developments, supplier and TCP dependencies, and facility transition risks affect test processing, reimbursement, or results.