Dan Leonard - Leerink Swann Amanda Murphy - William Blair Doug Schenkel - Cowen and Company

Good day ladies and gentlemen and thank you for standing by and welcome to the Veracyte Fourth Quarter and Full Year 2013 Financial Results Conference Call. At this time all participants are in a listen only mode and later we’ll conduct a question-and-session and instructions will follow at that time. (Operator Instructions) As a reminder today’s conference call is being recorded. I will now like to turn the conference over to your host for today, Ms. Shelly Guyer, Chief Financial Officer. Ma’am you may begin when ready.

Good afternoon and thank you for joining us today for our fourth quarter and full year 2013 financial results conference call. Joining me today are Bonnie Anderson, President and Chief Executive Officer; Julie Brooks, General Counsel; Chris Hall, Chief Commercial Officer and Giulia Kennedy, Chief Scientific Officer. Before we begin I would like to remind you that various remarks that we make on this call that are not historical including those about our future financial and operating results, our plans and prospects, the success of our business strategy, attributes, benefits and value of our tests to patients, physicians and payers, growth opportunities and the size of potential market. Future products, product launches and our product pipeline, international expansion, demand for our tests and drivers of demand, payer coverage and progress reimbursement and patient access and clinical outcomes and timing of clinical studies, constitute forward-looking statements within the meaning of the safe-harbor provisions of the private securities litigation reform act. We refer you to our quarterly reports on Form 10-Q for the quarter ended September 30, 2013 filed with the SEC and in particular to the section entitled risk factors. For additional information on factors that could cause actual results to differ materially from our current expectations. These forward looking statements speak only as of the date of this call and we disclaim any obligation to update these forward-looking statements. Our earnings, press release for the fourth quarter and full year ended December 31, 2013 financial results and financial outlook crossed the wire a short while ago and is available on the investor relations page of our website at www.veracyte.com. I will now turn the call over to Bonnie.

Thank you Shelly, Good afternoon everyone and thank you for joining us today. We’re thrilled that we have had an opportunity to meet many of you in one-on-one discussions over the past several months and we look forward to continuing to address your questions as we go forward. We’re pleased with the progress we have made in achieving the milestones needed to continue to grow the business. With the updated guideline recommendations from the National Comprehensive Cancer Network or NCCN and over 120 million lives now under positive medical coverage policy, we’re positioned to accelerate adoption and revenue growth for our Afirma solution in 2014. In January of last year, we announced that the NCCN has updated their guidelines from managing patients with thyroid nodules and included a recommendation that uniquely points to the use of the Afirma Gene Expression Classifier or GEC to help move patients from diagnostic thyroid surgery to watchful waiting. The NCCN is an alliance of 23 of the world’s leading cancer centers. The NCCN guidelines indicate that when a thyroid nodule fine needle aspiration or FNA biopsy result is indeterminate using traditional cytopathology, physicians should consider using molecular testing to identify patients that could be safely monitored in lieu of diagnostic surgery, provided the test performance is similar in accuracy to benign diagnosis using cytopathology. This recommendation can enable tens of thousands of patients each year who avoid surgery that removes all or part of their thyroid potentially also saving them from lifelong thyroid hormone replacement therapy. We believe Afirma is the only thyroid diagnostic test with proven clinical validity published and well-designed prospects of multi-center clinical studies to meet the criteria established by the NCCN guidelines. We also believe the authors thoughtful recommendation provides an important thought leader perspective for many payers evaluating Afirma’s…

Thanks Bonnie. As Bonnie indicated, we made significant progress in revenue growth and increases in estimated volume for the fourth quarter and full year 2013. Revenue for the fourth quarter ended December 31, 2013 was $6.8 million, up from $4.5 million for the same period in 2012, an increase of 53%. Full-year 2013 revenue was $21.9 million compared to $11.6 million in 2012, an increase of 88%. Quarter-over-quarter and year-over-year increases were due to increased clinician adoption of our Afirma solutions combined with increased coverage of and reimbursement for our Afirma GEC. Cash collections, particularly with commercial payers, were especially strong in fourth quarter. We received 14,059 FNA samples in the fourth quarter compared to 9,303 samples during the same period in 2012, an increase of 51%. Total FNAs received in 2013 were 49,670 compared with 25,890 total FNA samples received in 2012, a year over year increase of 92%. The percentage of GEC tests in the quarter was slightly above our guided range of 18% to 20% of FNAs received. This was due to a relative increase in the number of samples submitted directly for GEC testing and was predominantly came from our academic customers. I’d like to take a moment to again address seasonal factors that affect our business. Our business is subject to fluctuations and FNA volumes throughout the year as a result of physician practices being close for holidays or medical meetings that are widely attended by our ordering physicians. Like other companies in our field vacations by physicians and patients can negatively affect our volumes more during the summer months and during the year and holidays compared to other times of the year. As we anticipated in our third quarter call, December FNA volumes were light for the last two weeks of the year because…

Thanks Bonnie. As Bonnie indicated, we made significant progress in revenue growth and increases in estimated volume for the fourth quarter and full year 2013. Revenue for the fourth quarter ended December 31, 2013 was $6.8 million, up from $4.5 million for the same period in 2012, an increase of 53%. Full-year 2013 revenue was $21.9 million compared to $11.6 million in 2012, an increase of 88%. Quarter over quarter and year over year increases were due to increased clinician adoption of our Afirma solutions combined with increased coverage of and reimbursement for our Afirma GEC. Cash collections particularly with commercial payers were especially strong in fourth quarter. We received 14,059 FNA samples in the fourth quarter compared to 9,303 samples during the same period in 2012, an increase of 51%. Total FNAs received in 2013 were 49,670 compared with 25,890 total FNA samples received in 2012, a year-over-year increase of 92%. The percentage of GEC tests in the quarter was slightly above our guided range of 18% to 20% of FNAs received. This was due to a relative increase in the number of samples submitted directly for GEC testing, which predominantly came from our academic customers. I’d like to take a moment to again address seasonal factors that affect our business. Our business is subject to fluctuations in FNA volumes throughout the year as a result of physician practices being close for holidays or medical meetings that are widely attended by our ordering physicians. Like other companies in our field, vacations by physicians and patients tend to negatively affect our volumes more during the summer months and during the year and holidays compared to other times of the year. As we anticipated in our third quarter call, December FNA volumes were light for the last two weeks of the…

Thanks, Shelly. We are pleased with our fourth quarter and full-year 2013 results and believe we’re well positioned to accelerate growth of our pharma solution 2014 and to significantly advance the development efforts of our first product in pulmonology, our next clinical area. We are truly excited about pioneering this new field of molecular cytology which we believe has a potential to transform diagnosis for a range of diseases to greatly improve patient care and reduce healthcare cost. With that operator please open up the call for questions.

(Operator Instructions) And presenters at this time, I’m showing our first question and it will come from the line of Dan Leonard with Leerink Swann. Please go ahead, your line is open.

On reimbursement, congratulations on getting a few small payers under contract. What are your expectations for contracting in 2014 with additional payers, and what is baked in the guidance?

Hi, Dan. Thanks for joining us and thank you for the call. So just to clarify the announcements that we made were more for additional coverage decisions, so as of right now Medicare is still the only contracted payer that we have. As you know because of those contracted rates, Medicare is the only revenue that we have accrued in addition to a couple of the small payers that we wouldn’t call out specifically that got added to that. I believe the accrued revenue rate was about 30%. Timing of these contracts as you know is always challenging to predict. Our first coverage decision of the major commercial payer was announced last March and that was United Healthcare and then we had a few larger commercial payers about midsummer and Cigna at very end of the year. We have certainly open discussions with some of these payers as appropriate but it is really just a process and a journey and difficult to predict exactly when those will happen. We will certainly as we did in this call bring those to your attention. Shelly is there anything else you would like to add to that.

In terms of our guidance so forward-looking, we do not make assumptions within our model on when we believe various payers will flip over to accruals, we think it’s very difficult to predict precisely when they will flip. In the quarter that we will begin to accrue, we will have an uptick in that and the bolus in that one particular quarter and it will sort steal from the next quarter and the quarter after that as you bring in those payments over time today and in the future with accruals it would come in one quarter. We thought it was unwise to predict that moving forward and so our models don’t predict exactly when accruals will cause a bump, but we will as Bonnie said let you know that when we do begin accruing.

Got it, thank you. And then, as we think about the volume -- the FNA volume cadence in 2014, given some of the seasonality you called out, and in particular with weather in the first quarter here, should we expect to see a wider gap between FNA volume in Q1 and Q4 than we've seen historically -- just a much wider range between those two?

Yes, so historically we have talked about seasonality and the F&A volume coming more between the Q2, Q3 area when the summer months hit us and the vacations that impact that. Now you might recall we mentioned on our Q3 call that we had anticipated that given Christmas and New Year’s both fell on Wednesdays last year that we may see a little softening in December of F&A volumes and I think the F&A volumes although you know quite exciting for us in Q4, we actually did see a softening in those last two weeks of December. So Q1 is typically a little flat, a little up from Q4, we usually see better growth in Q2 with a bit of a flattening due to summer vacations and seasonality going into Q3 and then as we saw last year Q4 tends to be our highest volume. So that’s how we would see the cadence through the year. Does that help?

That's helpful. And then my final question, do you have any feedback you could offer from your Afirma Malignant pilot program, whether or not docs are acting on the info, or is it too soon to tell?

The purpose of the pilot program is twofold, one is to certainly get physicians who are clients familiar with the product, and give them a chance to kind of test case when they would order the MTC and BRAF and how they would react to these results that are coming out, the MTC, specifically as part of the GEC results. Keeping in mind that we actually have provided the MTC as well as some of the other rare Neoplasm results we mentioned on the call earlier we have been providing all of that on an informational basis since we launched the GEC, so we’ve had a chance to see how doctor’s reaction to getting these results has been by making phone calls and informing them when these triggers occurred. And there has been a lot of enthusiasm with the MTC results being able to be provided preoperatively because today with cytopathology alone over half of those cases are not fully diagnosed as the aggressive form of MTC till after the patient’s gone to surgery. So these tend to give the doctors the information they have the consults with the surgeons and really plan even some work up on these patients before taking them into surgery. The second thing that we wanted to test during the pilot was just around internal processes, the patient report, which has changed, the ease of operating and understanding all the information and so far we’re getting very good feedback although this pilot has only been underway for a few weeks. We’re looking forward though in May at AACE in unveiling this in a larger scale and certainly expect that some of the impressions from our clients as well as more data will be unveiled as part of that launch.

Thank you, sir, our next phone question will come from Amanda Murphy with William Blair, please go ahead, your line is now open.

A quick question on the accrual, so, the number last quarter was just Medicare, right, at the 22%? I'm just trying to recall the number.

Yes, and actually the Medicare amount is about 23% and 24% of the test volume and then on the amount collected it has been more like 33% and it was the primary accrual that we did historically, this time we added a couple of very small payers and the amount was 30%, it’s lower because the other commercial payers that are paying on a cash basis were much higher in the quarter so that’s why you see that trending down a little bit from accrual perspective. We’d expect over time obviously that that would increase as more come under contract or we have predictability of their payments and we can begin to accrue them because of that predictability.

Got it. And then, in terms of 2014, what are you seeing now around ASP, if you think about those -- what you're booking on an accrual basis and what you're getting on a cash basis for the GEC? And then, the FNA reimbursement I think was pretty decent for 2014. So, just curious how to think about that, 2014, and then obviously going forward into 2015?

So I’ll start it now. I’ll hand it over to Shelly on the accrual question; we were really pleased with the cash collections in Q4 of course and we believe that that is the beginning of what we will begin to see once these coverage decisions are made. We would expect going forward in ’14 to see more of an impact given the number of other payers that came on board with coverage decisions midyear last year as well as Cigna as late as December. Shelly in terms of the accrual question.

So, I think one of the other questions that you had was basically the moving between the contracted payments amount of the general amount that we have been collecting, so I’d remind you that Medicare is the only contracted amount and that is between 3000 and 3500 and that’s very predictable and obviously been accrued. With the other ones who are under coverage and that would be the United and the Aetna and the Cigna. Our experience today is that we’ve seen that we’ve been paid a lot more quickly than historically we would have been before they had a coverage decision. So in the order of six to eight months historically and now, we see it more like three to four months. So we’re seeing a very big change and how quickly they’re paying. From the perspective how much they’re paying, it’s a little bit harder to tell since it’s early in the year and we are trying to do encourage them to pay under miscellaneous codes for 2013 which was different than the 2012 amount. On the blended rates then you also have those that do not yet have any coverage and those can pay across the broad at all different levels. When we look at a blended GEC reimbursed amount, the average reimbursement amount has moved up to about $2000 per GEC and that’s including everything from Medicare with the known amounts to those are paying zero on the test. So that’s the blended amount that for the GEC.

We expect to get some more color on how the coverage changes this dynamic as we go through the year and as we get more history beyond these payments.

How about the FNA side?

The FNA side has been quite stable and as you know it’s an amount that we are reimbursed by Medicare at about $150 per the global fee. And then beyond that the commercial payers can pay anywhere from out of network and they would don’t cover up to $490, which is our list price as you know. And so on average that has held up well for the commercial payers more on the order of about $200.

Got it. And then just last one on Genzyme: The color there was helpful in terms of the cash payments, but I'm curious how you're thinking about that relationship going forward, particularly as you continue to focus on international growth. I'm curious how your conversations with them are going around whatever payment structure you have in place.

Well, I think to-date I mean 2014 such a focus on accelerating growth, and as we mentioned, we’ve already effectively more than halfway met our goal of doubling our own sales team. But that really just augments the Genzyme team and gives us just much a deeper ability to serve the territories and a lot more granular coverage. So we really don’t see anything changing there this year. We’re excited about what Genzyme has brought to the table in terms of international expansion. We have made a lot of progress as we noted on product registrations and CE mark to cover Europe and some countries beyond that. And filings of dossiers around reimbursement all which has really been enabled through the local Genzyme team that has 20 people that are representatives and part of the Thyrogen business that can handle all of this for us. So we see that their priorities in terms of Afirma are going to maybe shift with more emphasis on helping us achieve these international milestones which are really important. But fully expect to continue to have a very fruitful and positive relationship as we’ve had with them since we announced the deal back in 2012.

Thank you, ma’am. (Operator Instructions) And our next phone question will come from the line of Doug Schenkel with Cowen and Company. Please go ahead. Your line is open.

A clarifying one: The three payers that you mentioned you're now accruing, are those not contracted? Did they just meet another threshold for you to now treat them from an accrual accounting standpoint?

Exactly, yes. So there was predictability and we looked at stability and predictability of the amount of the payment overtime. And I would note that they were quite small payers and that there was not a big bump in the quarter as we talked about from accruals. So that’s why I specifically noted that in our script.

Okay. You did talk about the historical difference between moving from non-covered to covered to contracted, in terms of what we should anticipate in terms of pricing differences. Is it worth talking about what type of pricing you're getting from these three small payers relative to CMS, or would you view that as not really indicative of where you can head moving forward?

Yes, it’s not really, that’s not what will determine, it’s not the rate at which they pay, it is the consistency that they paying at.

Okay and then on a, from a policy from a disclosure standpoint I guess I should say, I think the expectation of many of us on the line is that you move forward with contracted lives this year I think including you guys, will you make those announcement inter quarter or should we expect those only on the quarterly calls.

It most likely will be on the quarterly calls Doug, because it’s this is kind of a confidential discussion that takes place many times in negotiating these contracts and it’s not something that we would put out in our public press release but we will certainly note it on the calls.

Okay. And then one more on guidance. It looks like, as I'm playing with my model a little bit, that you guided FNA volumes a bit higher than we expected. Revenues also a little bit higher, but maybe not as high as I would have expected on the higher FNA volumes, and that's in spite of the addition of the Malignancy Classifier, progress you're making with covered lives, and an increase in list price. In response to one of Dan's questions earlier, you said you're not factoring in additional accruals into guidance, but it doesn't seem like you're factoring in much when it comes to the impact from the increase in the list price, the progress I think you're making towards contracted lives, which, as we talked about earlier, would likely bump up ASPs, and also the upside potential associated with additional revenue from the Malignancy Classifier. So, I just want to make sure we're not missing anything here, because it looks pretty conservative.

We’re pleased, actually this is our first guidance since becoming a public company and like many of the others in this space we’re providing guidance on revenue and F&A volumes but on an annual basis. The revenue guidance is actually in being between $38 million and $43 million of 2014 represents at the midpoint about an 85% increase in revenue year over year and we believe that’s quite respectable. Our guidance on test volume being between 76,000 and 83,000 at that midpoint represents about a 60% growth rate, again what we believe is pretty respectable given the run rates coming into the year and where you have to end the year on run rate to exiting in order to achieve that overall annual growth. The revenue is expected to increase greater than F&A volume but much of that is due to the factors around reimbursement rates that we believe will improve based on all the coverage decisions we have in place.

Now then, that makes sense, it’s helpful, it’s rare that I would ever say someone’s guiding conservatively when they’re guiding close to doubling revenues year over year but it did -- there’s some other things that could drive some upside so thank you.

Thank you, sir. And presenters currently at this I’m currently showing no additional phone questions in the queue, I’d like to turn the program back over to Bonnie Anderson, President, Chief Executive Officer for any additional or closing remarks.

Thank you, in closing we’d just like to thank all of you for joining us today. We also want to continue to thank our patients and physician clients, our employees and all of our shareholders whose strong support continues to help us achieve our goals of delivering the promise of molecular cytology. We really appreciate the confidence that you have in us and our business and we look forward to reporting our first quarter 2014 results in the spring, thank you.

Thank you presenters, and thank you ladies and gentlemen, this does conclude today’s call, thank you for your participation and have a wonderful day, attendees you may log off at this time.