Good afternoon, ladies and gentlemen, and welcome to Veracyte Second Quarter 2014 Financial Results Conference Call. At this time, all participants are in a listen-only mode. Later, we’ll conduct a question-and-session and instructions will be given at that time. (Operator Instructions) And as a reminder, today’s conference call is being recorded. I would now like to turn the conference over to your host, Ms. Shelly Guyer, Chief Financial Officer. Please go ahead.

Good afternoon, and thank you for joining us today for our second-quarter 2014 financial results conference call. Joining me today are Bonnie Anderson, President and Chief Executive Officer; and Chris Hall, Chief Commercial Officer. Before we begin, I'd 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 markets; future products, product launches and our product pipeline; international expansion; demand for our tests and drivers of demand; payer coverage and progress in reimbursement and patient access; clinical outcomes and timing of clinical studies, and the impacts of potential FDA regulation 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 report on Form 10-Q for the quarter ended March 31, 2014, 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 financial results press release for the second quarter ended June 30, 2014 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, and good afternoon, everyone. Thank you for joining us today for our second quarter 2014 results and business update at the mid-year mark. Before we view our financial results, I’d like to share the impressive progress we’ve made since the beginning of the year across five core initiatives that form the foundation of the continued growth and future success of the business. These initiatives are inclusion in guidelines, positive coverage decisions, the launch of our second Afirma product in endocrinology, the advancement of our pulmonology pipeline, and lastly, positioning ourselves for long-term profitability and growth. Our management team has been highly focused on driving forward each of these initiatives in order to create both short and long-term value. First, inclusion in guidelines. As you are aware, we have always promoted the philosophy that the investment in the development of a deep library of clinical evidence drives the inclusion of a novel, molecular diagnostic test in clinical practice guidelines, which ultimately drives positive coverage decisions that enable value-based reimbursement. In June, we were pleased to announce the American Thyroid Association’s unveiling of their preliminary updated guidelines, which, we believe, uniquely includes our Afirma Gene Expression Classifier, or GEC, given its high sensitivity and high negative predictive value as a Rule Out test to help patients with indeterminate cytopathology results safely under the watchful waiting in lieu of a diagnostic thyroidectomy. With the issuance of the final guidelines anticipated later this year, we are confident that Afirma is well positioned to become the standard of care for the management of patients with thyroid nodules. This is a significant achievement for Veracyte. Second, positive coverage decisions. Since our last call, we have increased the number of lives under coverage for the GEC by 10 million, with the inclusion of several…

Thanks, Bonnie. As Bonnie mentioned, we experienced solid momentum in our Afirma business for the second quarter of 2014. Revenue for the second quarter, ended June 30, 2014, was $8.7 million, an increase of 71%, compared to $5.1 million for the second quarter of 2013. Our growth continued to be driven by increased adoption of our Afirma solution, as well as expanding payer coverage and reimbursement for our Afirma GEC. Revenue for the six months, ended June 30, 2014, was $16.2 million, compared to $9.5 million for the same period in 2013, also an increase of 71%. We received 16,458 FNA samples in the second quarter, compared to 12,424 FNA samples during the same period in 2013, an increase of 32%. Combined with the first quarter, we received 30,831 FNA samples year-to-date. As Bonnie pointed out, our rate of GEC-only FNA samples accounted for a growing portion of the FNA samples we received, due to growth in business among institutional customers. On our last earnings call, we changed our guidance on the percentage of GEC tests performed relative to total FNAs we received from 18% to 20% to 20% to 22%. While our GEC rate continued to be slightly above 22% during the second quarter, we are keeping our guidance at 20% to 22%. As indicated, we are changing guidance regarding the number of expected FNAs during the full-year 2014 and reiterate the guidance we provided during our first quarter call for full-year 2014 revenue in the range of $38 million to $43 million. Because we currently collect a large percentage of our revenue on a cash basis, I would like to underscore that our cash collections remains lumpy quarter-to-quarter but the fundamentals of our business are strong. In terms of our agreement to amend the co-promotion agreement with Genzyme,…

Thanks, Shelly. We’ve made strong progress this quarter and importantly, we believe we’ve laid a solid foundation with the core elements that will drive growth in Afirma and the long-term success of our business. We are excited about our progress in moving into our next vertical market in pulmonology and believe that our novel molecular cytology approach is truly changing how this diagnosis is done, enabling patients to avoid unnecessary invasive procedures and removing cost from the healthcare system. Operator, please open up the call for questions.

(Operator Instructions) And our first question comes from Dan Leonard from Leerink. Your line is open. Please go ahead.

Bonnie, could you please walk me through the primary drivers of the reduction in FNA guidance?

To start with, as we were predicting the pace of growth in the two segments that we serve, which is the academic institutional accounts where we get GEC-only versus the physician office practice, which is where the preliminary adoption started, because those doctors have more ability to make decisions on what they adopt, we kind of anticipated early on that the pace of those would remain consistent through the year, but what we’re seeing is actually a much more aggressive rate of adoption in the institutional accounts and academic centers than what we had anticipated. So, when you think about the original volume of FNAs, we were anticipating, out of 5% rate of GECs coming in for - samples coming into the GEC-only, net-net, we would have been at roughly about 100,000 effective FNAs counting those GEC-only at a rate of about 7 to 1. So, when you consider the higher rate of GEC-only with the new range, you’re actually, net-net, about the same, and the additional revenue that we will get from the increased GEC testing more than offsets the revenue coming from those FNAs that we lose the cytopathology on and because the GEC drives a much more significant margin, gross margin in quotes, of course, to the business, it actually more than offsets that cytopathology loss. So we’re actually pleased with this. Early on, we started with the overall solution where we had the package approach to the doctors’ offices and anticipated this enabled model being key to get into institutions, and I think what we’re able to now demonstrate is that both models are working quite well us, and we think that’s good.

I guess, the doc office, do you know why adoption there is falling below plan? And is there anything you can to do to reflect that?

I think that it kind of comes down to -- the rest are focused on conversions in the market, and our original projection was more conversions would happen in the doctor’s office than in institutions. In actuality, we’ve had more conversions in the institution accounts, so we don’t - you have a little bit of an opportunity cost there given that the reps have to spend their time in one market or the other. I think what we’re doing going forward, we remain very focused on both of those markets, and I think coming back to our amendment with Genzyme and how we are going to be able to refocus their team on the support and maintenance and hire additional folks on our side to help drive into these more complex institutional accounts, we’ll be able to continue to drive adoption in both.

And then, my follow-up question, do you anticipate the Genzyme renegotiation is going to have any impact on your projected sales trajectory, either positive or negative?

We have not done any change in with regard to Genzyme specifically. We really believe there can be some benefits at the customer level in being able to have more feet on the ground that will help with ongoing maintenance and support, a higher touch perhaps. Our increase that we stated in bringing on 10 more folks by the end of this year will really shore up our ability to have the strength that we need to focus more attention on the institutional accounts where our enabled model I assume to be quite successful and also give more granular coverage in those areas where we can continue that growth in the doctors’ office market as well.

Thank you. Our next question comes from Amanda Murphy from William Blair. Your line is open. Please go ahead.

Hi, everyone, it’s JP in for Amanda, and thanks for taking my question.

Hi, JP. Thanks for joining in the call.

I had one around the Genzyme deal. What kind of was the catalyst to get you guys back to the negotiating table? Was it - maybe their reps weren’t pulling their weight or you guys are just further along the adoption cycle that you could go back to them with some negotiating power?

I appreciate the question. I think the reality is when we made the decision to team up with Genzyme for the early launch of Afirma, it proved to be an excellent decision. You had a group of great thyroid cancer experts already in the field with a lot of relationships, and that allowed us to really hit the ground running in year one. I think because of the nature of how we negotiated the agreement with some flexibility, for either side to terminate, gave us an avenue to come back to the table and negotiate at the point where it made sense. I think for us as we look forward to positioning ourselves next year and over the next few years for greater profitability long term and as we look at the success that we’ve had in institutional accounts that are actually a little more complex from a selling model standpoint, we felt we needed to bring a little more of that strength to the table in the way to justify doing that and having the financial resources to do that was to kind of trigger our opportunity to come back to the table with Genzyme and see what made sense for both companies. And so, both companies are very committed obviously to keep the partnership that we have in place, continue to show a strong brand presence where it makes sense, and I think this will be a great next evolution of our relationship, and we look forward to sharing more about some of the international decisions perhaps at our next quarterly call as those get worked out over the next few months.

And then, just a follow up on Genzyme. How much is the pull forward kind of long-term profitability for you guys? I mean is the negotiation going to be offset by your internal spend or could you guys even be profitable in 2016?

This is Shelly. So we don’t talk about profitability and give those projections. But I would say that, as we noted in the script, we anticipate that we will increase our spend internally in the near term, and so in the third and fourth quarters we’ll continue with the hiring of the 10 additional people, and so that will increase our costs in the next six months, and then, obviously layering in next year, the reduced percentage from 32% to 15% for the Genzyme portion. So, overall the percentage of the spend, as a proportionate of revenue, will be a lower percentage than it would have been, but we would expect that our total dollar spent will be about equivalent between the two years, and so there is a trade-off from the perspective of bringing on the additional cost internally as opposed to paying that additional 17% externally.

And then, just one more, if I could, I know you guys don’t give GEC guidance, but I just want to make sure kind of the updated guidance, all the moving parts there. Given the GEC percentage up 22%, it almost seems like the GEC guidance implied is relatively the same. Even though FNA guidance came down, GEC is a higher percent, so your GEC volumes are going to be the same as you kind of thought at the beginning of the year? Is that fair?

GEC volume being just under 50% year-over-year, grew 18% quarter-to-quarter, but more significantly the samples coming in from enabled accounts for GEC-only contributed 90% growth the same quarter last year to this year and a 29% growth Q1 to Q2. So, the point being that the 7%, as that GEC-only rate goes up, it has a significant impact on the number of GECs, so therefore we would predict roughly the same number of GEC tests during the year, which drives obviously the revenue. The dynamic going forward through the end of the year, however, with us bringing on new reps, we now have guidelines, we’ve now expanded significant coverage decisions, 10 million more lives just this quarter, and the initiative to reposition Genzyme and bring on new reps, we could see the momentum pick up in both of those segments of the market, which is why even though we see the GEC on the upper end, and as we pointed out for this last quarter, with even slightly above that 22%, we think those rates could continue to fluctuate a little bit. But I think going back to the [95.5%] [ph] moving to [93.7%] [ph] with the lower FNA volume gives the best metric to model that out. GEC volume being just under 50% year-over-year, grew 18% quarter-to-quarter, but more significantly the samples coming in from enabled accounts for GEC-only contributed 90% growth the same quarter last year to this year and a 29% growth Q1 to Q2. So, the point being that the 7%, as that GEC-only rate goes up, it has a significant impact on the number of GECs, so therefore we would predict roughly the same number of GEC tests during the year, which drives obviously the revenue. The dynamic going forward through the end of the year, however, with us bringing on new reps, we now have guidelines, we’ve now expanded significant coverage decisions, 10 million more lives just this quarter, and the initiative to reposition Genzyme and bring on new reps, we could see the momentum pick up in both of those segments of the market, which is why even though we see the GEC on the upper end, and as we pointed out for this last quarter, with even slightly above that 22%, we think those rates could continue to fluctuate a little bit. But I think going back to the [95.5%] [ph] moving to [93.7%] [ph] with the lower FNA volume gives the best metric to model that out.

And then, do you still expect seasonality kind of flat Q3 in FNAs given the summer?

Yeah, we are half way through Q3. I can give you a little bit of color on Q3 which seems to be shaping up, you’re right, historically we’ve always seen seasonality due to the summer months, and we’re not completely through the quarter, but FNA volumes, and I would say especially GEC tests are up for the portion of the quarter that we’re through, cash collections have been especially strong and in fact July was our strongest cash collection month ever. So that’s sort of where we are with Q3.

Thank you. And our next question comes from Bill Quirk from Piper Jaffray. Your line is open. Please go ahead.

Quick question. So, I guess, not to beat a dead horse here around FNA volumes, but just trying to understand, has the sales team kind of changed their focus to be pushing more on the institution side because we’re seeing more rapid adoption there and obviously those are coming in as GECs and not necessarily FNAs? Or is it a function of continuing after both groups and it simply the physician office doctors taking longer to convert over?

Bill, it’s Chris. I think what we’ve seen is that they are going after both segments. We’ve always told them to go after both segments, but we’re getting tremendous interest in the enabled segment and the institutional segment. That is a typically longer sales cycle and we’ve seized that opportunity, so I think it’s fair to say that the resources have started to be deployed on that and there is an opportunity cost, that’s the way we’ve seen it internally. We think that’s actually not a bad thing for the business for how it plays out. It’s happened a little quicker than, I think, what we originally thought to be getting that segment, which historically is a tougher segment to get in as guidelines and coverage are all moving in our direction relatively quickly, that segment is starting to go. That opened up the need to try to get more resources on the ground and us taking on more of the sales challenge that instituted the discussions with Genzyme, so we’ll be deploying more reps on the ground and taking on more of that sales piece to be able to serve both of those channels. So I think it’s been more of a - we’ve seen more and more interest and more and more demands, so resources have been focused there rather than the physician segment moving slower than what we anticipated per se.

And then, to what extent can you talk to maybe the impact of the guidance on this trend? Is that having an impact? I would imagine it is, perhaps it’s still too early to tell.

So if we back to our original guidance at the midpoint 76,000 to 83,000 and look at the imputed GEC rate from that 5%, we would have predicted about 4,000 GEC-only coming in under that scenario. What we would predict now with the lower range of FNA samples, but a 7% GEC rate is actually a 1,000 more GECs this year, which had a $3,500 revenue, rough revenue reimbursement value over a $3 million increase, and certainly the cytopathology testing that’s lost from those FNAs doesn’t come close to that. So we’ve sort of introduced this idea and we’re learning about probably better ways to think about how we can continue as the business grows and these dynamics unfold in different segments to give an apples-to-apples comparison, and one of the things we began doing inside the company is looking at total effective FNAs and that kind of takes each sample back to what was the original impact on FNAs received, and when you look at that as 525,000 FNAs coming in being performed on patients, how are we impacting those FNAs, it’s probably a little bit better metric on the business, and if you do the math, and we don’t need to walk through it here, but you can have the models laid out to do it. We actually end up, net-net, on the effective FNAs that we would impact by both guidance models with the different rate of GEC direct coming in right around 100,000 for the year, and that’s just under about a 20% market share on the total FNAs done, and we feel that’s been really good progress for this year. So, I think bottom line, we’re excited to see that this enabled model that was -- took a little while to get seated, has taken off and that we can now deploy different models in different market segments and see success with that.

And then, just a question for Shelly, in terms of the sales force additions, the 10, is that also include the marketing and support people or there will be some additional people? And then, I guess, second part to that question is regarding the expanded outreach to both patients as well as physicians and how you are thinking about the spend there? Thanks.

I’ll start with the first part and then hand it over to Chris on the second part. So, yes, out of those 10, some of those would be institutional sales folks just as we had announced on the last quarter that we’ve had a lot of success with our first person with that specialized focus, and I think we’re seeing some of those results, so we will continue to hire some of those folks. I think we will also then hire a couple of additional marketing people, and then we also have rolled out additional marketing programs, and I’ll let Chris talk a little bit to that.

We started to spend, I mean now is the time to get the word out about the evolving guidelines and making sure that physicians are up to speed on that, and so we’re increasing our spend in reaching those physicians both at conferences and direct efforts and reaching out to them that way. This is also the time to start to reach out to patients, so we started an effort both rebuilding websites and efforts online and directly to patients and making sure that patients is there searching for information before getting the FNA done, find out about Afirma and ask their physician about whether Afirma should be an option for them. And we’re starting to get positive feedback from physicians signing up as clients or reinforcing their decision to be clients when patients come in asking them about whether or not they’ll have Afirma done to them. So we’re pushing more of the spending towards the patient. We’ve started that effort, we will increase that effort much more next year. Right now, our focus has been on the physicians through the rest of the year and starting amplifying the messaging to the patients.

(Operator Instructions) And our next question comes from Doug Schenkel from Cowen. Your line is open. Please go ahead.

Hi, this is Chris on for Doug today, thanks for taking my question. To start I think weather negatively impacted volume last quarter, so was there a benefit from the lost volume from last quarter?

So, you’re referring to the slower take off in the year in first quarter where we had some impact from weather and things that impacted Q1. Is that correct?

That’s correct.

So we’ve certainly picked up a little bit as you can see from the increase in volume Q2 over Q1 versus Q1 over Q4 of last year, but as you know in these businesses, it’s always about being able to convert accounts in one quarter so that business pulls through on quarters ahead, so I think we’ve made some of that up, but it did suppressed the start of the year.

I think we previously talked about the benefits of FNA cytopathology volume going through Veracyte to control the GEC testing market. So I guess, does the increased academic or institutional client sales mix sort of change your thoughts on controlling the GEC testing market? And then, related to that, can you talk about competitive dynamics? Has that changed over the past few quarters?

So, first of all, we’ve always known that there were two important segments that we would need to penetrate. One being the physician office practices, which is the simpler to penetrate where they collect the sample and we’ll send it off for testing, and I think the decision to package the Afirma GEC as part of the whole solution so that physician only has to collect one sample and get the full complement of testing from that sample has proven to work very, very well. We have lots of market yet to penetrate and we’ve really don’t expect any slowdown in that ability to drive success in that market. At the same time, we also realized that institutional clients’ integrated delivery networks along with academic centers who probably were the earliest to adopt Afirma in the enabled model, we’ve always known that getting seated into those accounts was the secondary really important part of the market, but there where cytopathology has really performed under one roof and samples can be collected simultaneously and stored while they perform the cytopathology has never been a problem for us. So we coined this phrase enabled model where we help those physicians collect the samples to store, give them supply so that they can send us the sample, the FNA samples, for the GEC-only. I think what was difficult to predict maybe in the early part of the year, I mean we’re still on a steep growth curve here. Coming into the year, it was clear the majority of our business was coming from these community-based practices. I think we anticipated that until we got into all the guidelines, it might be hard to get the traction that we’re seeing in the institutional accounts. So, again, if you look, net-net, at the effective FNAs we’re impacting, it’s really about the same. This is just an issue of mix. We will continue to drive fully into both of those segments and expect to continue to see both of them continue to grow because we’re probably penetrated from a percent market share about the same into both. So, you’ll see continued traction and continued color on how that’s unfolding as time goes on. In competition, we’ve really not seen a significant change there. We did have one competitor that in May at the AACC meeting had a publication come out that didn’t have glowing results on sensitivity and they backed down a bit at the meeting. There continues to be interest at the academic level in looking at other things that can be measured to answer the clinical question. There have been a couple of companies say that they are in the development of things that might come out in the future, but as you know, until you see the science and can see what people are doing, it’s really hard to speculate on how successful they will be at penetrating.

And this is Chris, just to add, most of those efforts have always been focused on measuring mutational markers of malignancy, and we’ve always maintained that’s been the wrong way to approach the clinical problem and as the guidelines started to roll out, and those guidelines have reinforced the position that we’ve taken that you need a test with high negative predictive value to watch and wait with these patients rather than take them to surgery that’s been very gratifying as it’s underlined our approach.

Thank you. Our next question comes from Paul Knight from Janney Capital Markets. Your line is open. Please go ahead.

This is actually Bryan Kipp in behalf of Paul, thanks for taking the questions.

Hi, Bryan, thanks for joining us today.

Just a quick one on the Medicaid announcement, was there any threshold or any key things that AmeriHealth Caritas focused on compared to just the general payers, any threshold that you guys overcame recently that really keyed in on to release this positive coverage decision?

Chris, do you want to take that?

I think I mean all these folks asked for the tests based on multiple dimension to analytical validity, clinical validity, clinical utility, cost effectiveness. I mean you can hypothesize that being cost effective really, really makes a difference in this segment. Clearly, that’s to Afirma’s positioning that’s incredibly strong, but I honestly think they do it just like every other plan does it based on the strength of the evidence. I think Afirma is really well positioned relative to payers that are focused on managing costs because we are able to reduce costs within the plan window or within a quick time frame relative to the surgeries being reduced.

And dominos sometimes fall a little more quickly on the commercial side, do you expect that to be the case, with this first Medicaid announcement, do you think more the governmental payers might be a little longer down the road not saying it’s month and quarters, but just the adoption curve might be a little bit slower, or do you think it could pace a similar rate?

We haven’t given guidance about how these things will fall, and quite frankly, it is what it is. We are focused - we’ve said that this is a year and into next year that we are squarely focused, as an organization, around getting the Blue Cross Blue Shield companies what they need, because they insure a lot of Americans. And we’re starting to see this year, as this year’s unfolded and recently this quarter with the announcements around Highmark and the announcements with Horizon covering the tests, those are major Blue Cross plans, that those efforts are starting to pay off and we continue to be focused on the Blue Cross Blue Shield plans because we think that it will make the biggest difference in building the long-term reimbursement from the product.

Just a quick follow-up here, any pulse or any reading on ATA and the potential for them to augment their existing guidance or guidelines? Are discussions accelerating on the kind of status quos they were prior quarters? Any expectations or thoughts on that would be helpful.

I think the expectation is that they had the guideline pretty well baked when they presented it for public comment. They might make some minor adjustments to it, but I think that all expectations are is that that will get drafted and published and hopefully come out in final format and publication before the end of the year.

Thank you. I’m showing no further questions at this time. I would like to hand the conference back over to Ms. Bonnie Anderson for closing remarks.

I would like to thank you all again for joining us today. We really appreciate your support of our mission to improve patient care, reduce healthcare costs, and we’re committed to building and growing a sustainable company that provides the value to our shareholders, and look forward to updating you on our progress on our third quarter call. Thank you.

Ladies and gentlemen, thank you for participating in today’s conference. This concludes our program for today. You may all disconnect, and have a wonderful day.