Veracyte, Inc. (VCYT) Q4 2015 Earnings Report, Transcript and Summary

Good day ladies and gentlemen, and welcome to Veracyte’s Fourth Quarter and Full Year 2015 Financial Results Webcast. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session, and instructions will follow at that time. [Operator Instructions] I’d now like to introduce your host for today’s conference, Ms. Shelly Guyer, Chief Financial Officer. Please go ahead.

Good afternoon, everyone, and thanks for joining us today for our fourth quarter and full year 2015 financial results conference call. Joining me today are Bonnie Anderson, President and Chief Executive Officer; and Chris Hall, Chief Operating Officer. During the course of this call, we may make forward-looking statements that are not purely historical regarding Veracyte’s or its management’s intention, beliefs, expectations and strategies for the future, including those relating to scale and sustainability, future growth, future revenues and expenditures, coverage and reimbursement for thyroid and pulmonology test, strategic investments, product launches, geographic expansion and market growth. Because such statements deal with future events, they are subject to various risks and uncertainties and actual results may differ materially from the company’s current expectations described in this call. Additional information concerning factors that could cause actual results to differ materially from those in the forward-looking statements can be found in Veracyte’s annual report on Form 10-K, quarterly reports on Form 10-Q and other filings with the U.S. Securities and Exchange Commission in addition to today’s press release. The forward-looking statements in this call are valid as of March 10, 2016 and Veracyte assumes no obligation to publicly update these forward-looking statements. Our financial results press release for the fourth quarter and year ended December 31, 2015 crossed the wire a short while ago and is available on the Investor Relations page of our website at veracyte.com. I will now turn the call over to Bonnie.

Thank you, Shelly. Good afternoon everyone and thanks for joining us today. I’m excited for the call today and the opportunity to share with you that we achieved all the goals we set out to accomplish when we did this call a year ago. We have tremendous momentum coming off of a great 2015. I’m also eager to lay out another set of aggressive goals for the business in 2016, as we continue to resolve the important healthcare issue diagnostic ambiguity, delivering significant value to patients by helping them avoid surgeries they don’t need and saving the healthcare system money. We’re emerging as a growth story with a solid foundation to our business. I’d like to start with highlights of the each of the three that we’ve used to define success in 2015. Number one is the growth of Afirma. Our Afirma growth was robust in ‘15. We grew revenue by 30% to $49.5 million, compared to $38.2 million in 2014. We also increased Afirma Gene Expression Classifier or GEC test volume by 38% for the year to nearly 20,000 tests compared to just over 14,000 in 2014. Our focus in the follicle [ph] execution was key to our success. This included a growing body of powerful clinical evidence for Afirma, where we now have nearly 20 scientific studies published in peer review journals. Among these are more than a dozen clinical utility studies, including two recent long-term durability studies showing that the Afirma GEC safely reduces surgeries with up to three full years of follow up. We also achieved inclusion of the Afirma GEC in the American Thyroid Association’s clinical practice guidelines in October. The Afirma GEC is the only genomic test with a high enough sensitivity and negative predictive value proven in multiple rigorous clinical trials to be recommended as an option for ruling out cancer when a patient’s thyroid nodule is indeterminate. These and other practice guidelines are helping to firmly establish the Afirma GEC as the molecular test that helps keep patients out of the operating room. Lastly, we announced today that we’re concluding our US co-promotion with Sanofi Genzyme as of mid-September, which will allow us to expand our internal sales team and retain the full value of Afirma. This is a key component to our password of profitability and we would discuss the Sanofi Genzyme transition a bit more in detail later on. Number two is payer coverage and contracts. We delivered an exceptional year in this area. We added 40 million covered lives for the Afirma GEC since the beginning of 2015 the total to nearly 180 million covered lives today. We added seven new Blues Plans, a key target for us for a total of 15 covering Blues Plans representing more than 45 million members. We capped a successful year with a big win in December with HCSC, one of the nation’s largest two Blues Plans issuing a positive coverage policy for Afirma GEC deeming it medically necessary for their 60 million members. We also expanded the number in-network contracted lives for Afirma by 40 million, growing from approximately 19 million at the beginning of 2015 to nearly 130 million today. Key milestones were securing a contract with Aetna for its more than 23 members which we announced in July and also bringing five Blues Plans under in-network contracts during the year. We believe that the effectiveness and speed in which we have gained coverage and in-network contracts for the Afirma GEC is unmatched in our industry. We also believe that these achievements establish a crucial foundation for our future success by reinforcing the value of our tests and by providing tremendous leverage of reimbursement of Percepta, our test for IPF and for other products that we might commercialize. Lastly, advancement of our pulmonology program, our pulmonology business is off to an impressive start. We entered this market ahead of schedule in April, with the launch of Percepta Bronchial Genomic Classifier a nodule test designed to help reduce the number of unnecessary invasive procedures on potentially cancerous lung nodules that are found on CT scans. Pulmonologists are enthusiastic about Percepta and we’ve rapidly expanded initial adoption to about 40 clinical sites around the country. Strong clinical validation data for Percepta were published in the New England Journal of Medicine in July as well as in BMC Medical Genomics in May. Additionally, just last month our analytical verification data were published online in BMC Cancer establishing the quality and reproducibility of our testing process. And most importantly findings from our first clinical utility study were published online in the CHEST, suggesting that the test may help reduce unnecessary invasive procedures by nearly 50%. This significant clinical evidence puts us in a very strong position to secure Medicare coverage by the end of 2016. Reducing unnecessary surgical biopsies in lung cancer diagnosis becomes especially important to payers as 8 million Americans are beginning to enter the annual lung cancer screening programs which are now covered by insurance. Significant progress was also made in moving our second pulmonology product, our test to improve the diagnosis of interstitial lung diseases including idiopathic pulmonary fibrosis without the need for surgery toward launch. We presented strong data for IPF classifier at the Pulmonary Fibrosis Foundation Summit in November and prior to that at the American Thoracic Society International conference in May. We also partnered with the Pulmonary Fibrosis Foundation, a leading resource for the IPF community on a survey to define and quantify the significant diagnostic challenges faced by patients with suspected IPF or other ILDs. Results of this intensity survey were presented at the PFF Summit in November. We learned that 55% of ILD patients were misdiagnosed at least during their journey and the delays of up to a year in receiving an accurate diagnosis were quite common. We also presented data at the conference demonstrating the challenges that physicians face in ILD diagnosis. These findings further reinforced the significant opportunity for our test to change the trajectory of care for patients with IPF or any other ILD. I’d like to take a moment to speak to the challenge last fall when the Centers for Medicare and Medicaid Services or CMS announced preliminary pricing and which rates for the Afirma GEC would have been reduced. This was a surprising disappointment and was obviously unsettling to investors. Nevertheless, we prevailed when CMS made its final determination in November to gap fill the Afirma GEC rate based on current Medicare prices. With this process now underway and with the implementation of PAMA or the Protecting Access to Medicare Act, which is expected in early 2017 or 2018, we believe that for the first time we face stability around Medicare pricing for our products. Following PAMA implementation, Medicare rates will be based on private payer payment amounts which should benefit us. We also believe the FDA is progressing toward issuing guidance for how it plans to regulate laboratory developed test or LDTs such as ours. While details of the final FDA guidance remain to be seen, we are optimistic that the agency will implement its regulations in a manner that ensures a smooth transition for companies like ours that have proven their commitment to quality and clinical vigor. I mention these as we are optimistic that these two external matters coming to resolution, we can grow our company with greater clarity and investors will precede the increased certainty and stability of our business. Finally, at the corporate level, we strengthened our corporate structure in 2015 by recruiting Dr. Rob Epstein and Dr. Tina Nova to our board of directors and by adding Dr. Neil Barth as our new Chief Medical Officer. We are delighted to have a strong group of industry leaders and veterans now on our team. I will now turn the call back to Shelly to review our financial results for the fourth quarter and for the full year.

Thanks, Bonnie. As Bonnie indicated, we experienced strong revenue growth during 2015. Our revenue for the fourth quarter was $14 million, up from $12.2 million for the same period in 2015, an increase of 15%. Excluding onetime revenue pick up in the fourth quarter of 2014 of over $800,000, the revenue increase was 23% for the fourth quarter of 2015 compared to the same quarter of the prior year. Our revenue for 2015 was $49.5 million, 30% increase compared to 2014 revenue of $38.2 million. Of note we accrued 58% of revenue in the fourth quarter of 2015, up from 41% in the same period of 2014. For the full year we accrued 55% of revenue. We reported 5609 Afirma GEC test during the fourth quarter of 2015, a year-over-year increase of 38% and up 11% over the third quarter. 13% of total FNAs received in the fourth quarter were for GEC only testing predominantly our institutional accounts. For the full year 2015, we reported 19,421 Afirma GEC tests, a year-over-year increase of 38%. 12% of total FNAs received in 2015 were for GEC only testing, up significantly over the 7% rate in 2014. Our gross margin quote-unquote for the fourth quarter of 2015 was 56% which is comparable to previous quarters, for the full year we achieved a gross margin of 57%, the same as in 2014. We previously indicated that our gross margin would not increase substantially in 2015 because of our limited ability to expand reimbursement for the Afirma GEC without coverage from our major Blues Plan and because of continued pricing pressure on cytopathology reimbursement. Operating expense for the fourth quarter of 2015 was $22 million, compared to $20.3 million for the comparable period in 2014. Operating expense for full year 2015 was $83 million, compared to $67.2 million for 2014, a year-over-year increase of 23%. Let’s break this down by line item. Cost of revenue for the fourth quarter of 2015 was $6.2 million, compared to $4.9 million for the comparable period and quarter of 2014. For 2015, cost of revenue was $21.5 million, compared to $16.6 million in 2014, a year-over-year increase of 29%. The increase was due primarily to an increase in GEC testing which has a higher cost to run cytopathology, offset in part by continuing refinements in our test processes and economies of scale related to the increase in GEC test processed. Research and development expense for the fourth quarter of 2015 was $3.3 million, compared to $3.2 million for the comparable quarter in 2014. Research and development expense was $12.8 million for 2015, compared to $9.8 million for 2014, a year-over-year increase 31%. The increase was due primarily to increases in personnel, stock based compensation and laboratory expanses and the continued investment in product development in clinical studies to support Afirma, Percepta and our IPF test. Selling and marketing expense for the fourth quarter of 2015 was $6.7 million, compared to $7 million for the comparable quarter of 2014. For 2015, selling and marketing expense was $25.3 million compared to $21.9 million in 2014, a year-over-year increase of 15%. This increase was due to an increase in headcount of our sales force including commissions and related stock based compensation expense as well as increases in consulting and marketing expenses, offset by a decrease in the Sanofi Genzyme’s co-promotion fees as our rate dropped from 32% to 15% effective January 1. General and administrative expense for the fourth quarter of 2015 was $5.5 million, compared to $5.2 million for the comparable period of 2014. For 2015, G&A expense was $22.6 million, compared to $18.9 million in 2014, a year-over-year increase of 20%. We had increased expense due to headcount, accrued bonuses and stock based compensation as well as increases in professional fees including accounting, audit, legal and other corporate expenses. Note that in both years, there was hidden expense due to one term events, in 2014 related to the acquisition of Allegro and 2015 related to rent expense for a new facility. The latter is included in G&A prior to our beginning to utilize the space and totaled approximately $420,000 for the quarter and $1.1 million for the full year. Expense for a new facility will continue in the first quarter of 2016, as we complete our move and exit our old lease at quarter’s end. Intangible asset and amortization expense in new line item as of the second quarter of 2015 was $270,000 in the fourth quarter, which will be the amount in subsequent quarters. This is a non-cash item. Operating loss for the fourth quarter of 2015 was $8 million, compared to a net loss $8.1 million for the same period in 2014. Operating loss for 2015 was $33.5 million, compared to a loss of $29 million for 2014. Net loss for the fourth quarter of 2015 was $8 million or $0.29 per common share, compared to a net loss of $8.1 million or $0.36 per common share for the same period in 2014. Net loss for 2015 was $33. 7 million or $1.30 per common share, compared to a net loss of $29.4 million or $1.36 per share for 2014. Cash and cash equivalents as of December 31, 2015 totaled $39.1 million. Our total cash burn for the fourth quarter was $7 million, lower than expected due to the tenant improvement credits we received in the fourth quarter. For 2015, our burn excluding financing activities was $33.7 million versus $36.6 million in 2014. One final metric for 2015, our average reimbursement for the GEC was essentially flat at $2,200. Recall that this number is a lagging indicator looking back to payments on tests that were conducted about a year ago. This number will fluctuate quarterly as new contracted rates are established in co-pays and deductibles reset early in the year. Our average reimbursement rate has moved up recently as we’ve achieved coverage with more Blues payers, but we expect that this metric will likely only move significantly when we sign Blues contracts and gain additional Blues coverage. Before turning the call back to Bonnie to discuss our 2016 guidance and milestones, I would like to remind you a few historical trends that we expect to continue this year. First the seasonality, we typically have low to flat volume quarters in the first and third quarters and strong cash collections driving higher revenue in the fourth quarter. Secondly, we experienced one-time hiccups when we began to accrue revenue either due to new contracts or improved payment history. This can make our quarterly revenue a bit lumpy. Lastly, I would like to provide some color on our operating spending cash for 2016. Operating expense is expected to continue to decrease as a percentage of revenue in 2016 over 2015. Cash burn will be about the same in 2016 as it was in 2015. For both of these metrics however the first half of the year will be higher with a nice decline in the back half of the year as we exit the Sanofi Genzyme relationship and begin to experience more efficiency in the business. Finally, in terms of cash position, we anticipate needing additional capital to bring all three products to revenue generation and ultimately to achieve profitability. Given the current state of the equity markets we’ve decided to pursue a debt financing in order to increase our cash on hand. This will give us sufficient runway to execute our growth strategy while retaining flexibility to tap the equity markets if they improve. We will announce the details of this transaction when it is closed. I will now turn the call back over to Bonnie to discuss guidance and corporate milestones for 2016.

Thanks Shelly. We view 2016 as a breakout year for us. Within five years of launching our first test, we are now poised to have three commercial products by the end of the year, with all three generating revenue by the end of 2018. Our success this year will help give us a clear pathway to profitability and will firmly establish Veracyte on the map as a significant and differentiated provider of diagnostic solutions that deliver real clinical value to patients, physicians and payers. For 2016 guidance, we expect GEC test volume will be in the range of 24,000 to 25,500 tests. Annual revenue will be in the range of $59 million to $63 million. I would now like to conclude by discussing the metrics we will use to measure our success in 2016. They are Afirma growth and reimbursement expansion, Percepta coverage and the launch of our third commercial product for IPF. Some highlights on each of these. First, Afirma growth and reimbursement expansion, we would continue to drive growth of Afirma using our two proven models, the full solution and what we are now calling our Afirma Diagnostic Partner Model to further penetrate every segment of the market. We would expand our internal sales team and assume full sales and marketing responsibility for Afirma as we transition from our Sanofi Genzyme relationship. We would do this thoughtfully, in order to optimize the efficiency of our sales and marketing organization. The termination of our co-promotion agreement in the US as of mid-September will end the payment of 15% of Afirma revenue to Sanofi Genzyme and it will allow us to retain the full value of our Afirma solution. We’ve valued our relationship and are confident that both companies will work closely to ensure a smooth transition. To accommodate this change, we will hire approximately 10 new dedicated sales associates in addition to our current team of 28 to continue driving our business forward. And ultimately we will exit 2016 with reduced sales and marketing spend as a percent of revenue with a more efficient yet effective sales effort. Our top priority on reimbursement is securing additional payer coverage decisions especially from Anthem, the largest Blues plan with over 40 million covered lives. Additionally, we will continue to convert coverage decisions to contracts making us an in-network provider which facilitates further adoption and ultimately expansion of our GEC reimbursement rate. We anticipate publication of additional clinical evidence which we will further reinforce the Afirma GEC as a new standard of care in thyroid cancer diagnosis and finally our research and development team will continue to evaluate potential opportunities to use new genomic discoveries and technologies to provide clinically useful information that can further improve patient care. Our second metric for success is Percepta coverage, with the strong clinical evidence we have massed already, we plan to seek Medicare coverage for Percepta by the end of 2016. Once we obtain this, we will expand commercialization beyond our initial 50 targeted sides, ramp up our sales team and look for synergies in the institutional customer segment where Afirma is already offered. We will also continue to build out our library of clinical evidence to help drive test adoption and reimbursement. We reiterate that we do not expect to see meaningful revenue from Percepta until 2017. And third is the launch of our test for IPF. We are targeting the launch of our IPF test in the fourth quarter of 2016, when we plan to unveil clinical validation data from our multicenter prospective BRAVE studies involving more than 25 sites and investigators. We will then begin to amass and publish the evidence including clinical utility data as we pursue Medicare and private payer coverage following the same commercialization playbook that we use for Afirma and Percepta. We will accomplish all of our 2016 goals through a combination of focused execution, financial discipline and measured investments. To wrap up, we are delighted with all that Veracyte has accomplished to-date and have never been as excited about our future as we are now. We started eight years ago with a rather simple idea, if we could use advanced genomic technology to resolve the critical problem of diagnostic ambiguity and positions our test at the right point in the clinical pathway then we could help patients avoid unnecessary surgeries, enable doctors to make more informed patient care decisions earlier and take cost out of the healthcare system. We have proven with Afirma that our approach works and we are now seeing the success play out in pulmonology. We have a winning strategy and a significant gross trajectory as we begin to set our sights and profitability. 2016 is shaping up to be a big year for us and we are truly excited about where we are going. Thank you for your time and attention. I now like to ask the operator to open up the call for questions.

[Operator Instructions] And our first question comes from the line of Dan Leonard from Leerink, your line is open.

Thank you. So first off, I was hoping you could offer more color around your expectations for Afirma pricing in gross margin in 2016.

Sounds great Dan, I will start with the top line of that and then maybe turn it over to Shelly to add a little bit on the cost side. So we - for 2016, we’re kind of coming in the year where most of the payers that we’ve already had under contract or contracted rates, we obviously had a lot of success toward the back half of last year with some of the Blues Plans that brought a few more of these covered lives into in-network contracts, but the biggest Blues Plans that are going to have the biggest impact on our ability to greatly expand that reimbursement rate. HCSC which came at the very end of the year, which we have not, obviously seen any impact to yet as well as Anthem which has 40 million lives and will be the most important decision to get us to a point where we can start predicting the expansion to those GEC rate. Given that - I mean we are pretty confident giving the clinical studies that have been done on long-term utility that we will certainly get Anthem in 2016, it’s kind of difficult to predict when these things happen and so therefore we may see some modest increase in GEC rate this year, but we wouldn’t expect to get up to that 3,000 plus range where we think we can get until we get more of these Blues Plans under in-network contracts and those will be our two key priorities for reimbursement.

And I guess just from the spend side, we expect that will be relatively flat on the cost of revenue spend as a percentage of revenue, so that one go down dramatically. The real uptick that you will get in gross margin is when you experience the uptick in the reimbursement side as Bonnie just went over and so I think that’s where you really look for the move in the gross margin. So we are not predicting right now absence having the Blues come in and pay at substantially higher rates. We are not expecting that that gross margin would move significantly during the year.

Got it and then my follow up question, Bonnie when do you think it is right time to start talking more explicitly about Percepta volumes?

Yeah, so I think that the key there is when we get Medicare coverage, because what we’re trying to do right now is take a very cautious approach to ceding the market at important medical centers with important pulmonologist that can help us really establish the clinical value and utility for the test. But we don’t want to expand our footprint in sales and drive volume much higher than those initial 50 sites until we know we can secure reimbursement. So we expect that we will be in a position to secure Medicare reimbursement for Percepta this year, but our intention isn’t to focus on driving volume until after we get to that point. So depending on when that would happen in the year, if it would be earlier rather than latter there may be a bit of upside, but I think we would reserve providing any direction on that until we know what point in the year that even happens.

Okay, thank you.

Thank you. And our next question comes from the line of Amanda Murphy with William Blair, your line is open.

Hi, good afternoon. So I just had a quick one on I guess Medicare reimbursement, so I think there are couple of other companies who had new code in 2016 mentioned that there were some issue with just kind of the logistics of implementing a new code is in terms of collection, did you see anything like that or I guess it hasn’t started really until January 1, but I’m curious if you could provide any insight there that would be helpful.

Yeah, Amanda it’s Chris. We are in the process of implementing the new Afirma code. We have been working through with most of the payers, we don’t have all of them and we have not seen any issues to-date and in fact actually for us it’s has been a good thing. We have been receiving faster responses from payers and that the old miscellaneous code that we were using before always caused issues with payers because they were trying to figure out what it was for and to see is there other charges they get under that miscellaneous code. And so the feedback that we’ve gotten is that the specificity have been able to identify this is, Afirma has allowed them to know what it is and resolve it quicker. So we’ve seen this so far to be a net positive for us and we’ve not experienced any issues to-date.

Got it that’s helpful and then I guess a follow up to Dan’s question on guidance. Wondering if you can give a little bit of context around volume trends thinking about GEC only as a percentage of total and how do you expect that trend in ‘16 and then also realizing that you’re not giving FNA volume at this point but can you give us any even anecdotal commentary around or qualitative commentary around how FNA volumes might look relative to 2015.

Right yes, a very good question so I will start with GEC, our core driver of values. So we had estimated about 25% to 30% increase in volume and I think our range kind of sets right with into that projection. GEC only driven through this new partner models with labs and institutions will continue to be a key driver of that. If you compute the GEC volume breakout this quarter or for 2015, what you will see is that we’ve already achieved over 40% of our GEC volume now coming from these partnered accounts institutions and enabled labs. So it was - we wouldn’t expect to continue to grow GEC only test volume at the quite the same rate, we were about hundred percent year over year growth for 2015, but it will definitely be a key driver of growth. With that though we do expect to continue to see modest growth with FNAs coming in for continued cytopathology testing, it’s amazing how stable and how we have been able to continue to lift up that part of the market in continue to drive adoption there. So it might be more in the neighborhood of 10% on the cytopathology, 10% to 12%, where the biggest driver of growth is kind of come from more of these partnered accounts with GEC only.

Got it and then just thinking longer-term on that point and I think originally, you had talked about the community side being the larger opportunity in terms of market sizing. So where do you think ultimately the GEC only model would go, I mean maybe you can talk a little bit about the penetration on the community side over the longer-term.

Sure, yeah. Well, just as a point of reference and a little bit of history, as you remember when we launched Afirma, we launched the test using a total solution where GEC was the centerpiece of the overall Afirma solution and we went after initially the physician office market because quite frankly it was by far the easiest part of the market to penetrate and a lot of low hanging fruit. In order to have the product set neatly into the workflow it was much easier for these doctors to collect cytopathology sample along with GEC and send those both to us. So from the very beginning in 2011 of commercialization, we’ve seen an upward trajectory of penetration into that specific segment of the market. And last year we estimated that we were just under about 30% penetrated into that segment keeping in mind that it represents about 60% of the overall FNA volume. In 2014 we began expanding our sales team with institutional account managers to be able to really penetrate the institutions to a greater degree, knowing that cytopathology was going to be done on site and something we were perfectly fine with. We then operationalized a model that today we call this our Afirma Diagnostic Partner Model, where they collect the GEC and handle that sample appropriately and then send it to us for the GEC after the cytopathology is done and is indeterminate. In 2015, we also a walled at models to partner up with some other regional laboratories that had already secured a very strong history of business with some of the doctors’ offices that otherwise, we would have had to connect to with our total solution model. So what that has done is really set us up with a couple different solutions that can work differently for every customer in the market. And it’s really been a powerful evolution and as we come off of this year we can think about penetrating the physician office ambulatory segment both by continuing to drive that total solution, but will also capture some of the GECs out of the segment with our diagnostic partner program. And so it’s not black-and-white one solution for one market and the other solution for the other and that’s why the GEC only business will drive the predominant growth.

Got it, thanks very much.

Thank you.

Thank you. And our next question comes from the line of Doug Schenkel from Cowen and Company, your line is open.

Hi, good afternoon this is Chris on for Doug today. Thanks for taking my question. Maybe just start - could you tell us things about the pay thing that sales force hires related to the conclusion of Genzyme agreement and could you give us a sense of why this is the right time to make this decision.

Yeah, absolutely, so we talked about we’re going to layer in 10 additional sales folks and we are trying to frontload those towards the beginning of the year. You will see that most of those hires will occur and actually now towards the end of the first quarter and then some into the second quarter. It’s important for us to get those folks in and get them layered down and get them productive relatively early. We think that it takes anywhere from 3 to 6 months for sales reps to become - productive and get their arms around the market and then dynamics and so we’ll frontload that. The reason we thought now is the time quite frankly is that we really are very confident that we can take over the sales and marketing efforts for Afirma on our own. We’ve built a deep group of sales professionals now of 30 people that have a real depth in the market. We have longevity of our sales reps, these folks join us and the ones that have flourished and have stayed with us for quite some time, they’ve driven deep relationships, they’ve began to understand and really are probably experts in the construction of the FNA market and try to figure out how to go deeper into it. And we really believe that now is the right time for us to take it over and we have got the experience and skill set to be able to do it. In 2014, you remember we restructured the relationship where we took over the core sales efforts and Genzyme helped out with lead identification and account management. And that experience taught us that we were capable because in the midst of that we drove tremendous growth taking over the core sales piece and it really taught us that we were able to do us this on our own. We think know is the time to take over the account management piece of it and drive that forward. I would add additionally that we began hiring another layer of sales reps, so we’ve called the account managers and these folks taking on managing some of the relationships that we have in the field with existing doctors and that’s given us the ability to deepen the relationship with the clients that we have on the ground. And that also gives us - quite frankly one of the key things is that it gives us stability to do our sales and marketing more efficiently because we are dropping out 15% of our sales that we won’t be spending on Genzyme, we’ll be able to deploy a piece of that towards the force that we’re building out, but quite frankly wound up in of a much, much better spot in terms of our sales and marketing expense overall. And as Bonnie talked about, we’re really trying to drive the company closer to profitability this year and that really put this on the trajectory to be able to do that.

Great, that was super helpful, thank you and maybe just one more on guidance. Could you help us think about what are the key drivers that get you from lower end to higher end of revenue and volume guidance and I guess more specifically or additionally how those guidance impact potentially obtaining Anthem coverage, thank you.

I mean the key thing there - it’s Chris again. The key thing on the way to think about the lower and the higher end of the guidance is - I think about it as really pivoting around some of the insurance contract success. Getting the insurance contracts done for Blue Cross Blue Shield plans is critically important for us to drive a higher ASP, but the Blue Cross Blue Shield plans, because they send the checks to the patient, it’s doubly important, it’s important because we are able to yield more of the money because less gets applied to the coinsurance amount or co-payment for the patient, but secondarily we are more likely to get it because it comes to us rather than the patients, rather than us have to go get it from the patient. So that’s one piece of the number, but second piece and where it works synergistically volume, is the ability for us to get insurance contracts. We believe helps go deeper into doctors accounts because the single biggest thing that holds us back in terms of volume is the inability to have widespread insurance contracts and that usually means lack of Blue Cross Blue Shield because that’s most doctors’ single biggest payer that they see in the practice or patients from those insurance plans. So the key milestone to be watching this year is our ability to execute on getting Blue Cross Blue Shield contracts done and continuing to layer in those coverage and that’s kind of the way to think about the pivot from the load behind.

Great, thank you.

Thank you. Our next question comes from the line of Bill Quirk from Piper Jaffray, your line is open.

Great thanks, good afternoon everybody. First question Bonnie, you had your prepared comment around the PAMA I think for the first time in the recent prepared comment you made reference to potential implementation in ‘18. I guess I’m curious what are you guys are thinking about thinking PAMA in terms of when that would go into effect, it certainly seems like January of ‘17 is the pretty ambitious goal by them.

Yeah, so hi Bill, thanks for the question and joining our call today. Yeah, so the reference, I mean there has been obviously a lot of talk about whether or not that will be delayed to ‘18 and I think the point we’re trying to make is, because we are coming off of November decision whereby GEC will be actually be gap filled and that process is underway. We believe there will be no disruption to us continuing current Medicare rates probably through ‘18 whether PAMA gets implemented earlier or later, it kind of is irrelevant at this point for us for that product. And so it really does give us a time of stability and a little more predictability than what we’ve had in the past from the way that we view it. And by the time it gets implemented, if it’s in ‘18 then we’ll be using the private payer rates to direct what Medicare will be paying and we feel that provides continued security. So that was really the point, not that I have any specific insight or information, but I know there has been a lot of comments and things about the fact that may be delayed. My point was just that it really doesn’t matter so much for where we are.

Got it, okay and I appreciate the additional color on that, thanks Bonnie. And then I guess just kind of staying in macro topics again you touched on your prepared comments, but LDTs sufficed to say we’re probably not going to get this until late summer I suppose the best at least based on the FDAs meeting calendar, is that a fair assumption?

Yeah, I mean I think there have been some rumblings that they are trying to move forward with some notification legislatively. We all know that will give us still 60 days’ notice on when it might be implemented, but I think when you look at the bigger picture of LDT guidance at least from everything that we can see in the draft guidance and what has been talked about publicly, it appears that they are going to be thoughtful in how they grow this out with high risk test typically companion diagnostics coming first and then our ability to kind of role into that process by registering our other tests and having some number of years and to come in under our compliance. So we believe that it is important for investors to understand that these two issues that have historically, especially in the recent past created a lot of turmoil and uncertainty really are kind of come into the point where we could get those wrapped around, I mean that could take a lot of that uncertainty off the table and we see that is a really good thing.

Got it, understood, thanks Bonnie, I appreciate it.

Okay thanks.

Thank you. Our next question comes from the line of Karen Koski with BTIG, your line is open.

Thanks. Can you guys hear me okay?

Yes, you’re very clear.

Excellent, just my first question on reimbursement and I certainly understand that your main focus for Percepta reimbursement in ‘16 will be gaining Medicare coverage, but just given the success you’ve had gaining Afirma coverage among private payers and everything you’ve learned over the last couple of years, is there an opportunity to start kind of priming private payers, keeping in mind that they would - the decisions would still likely come after Medicare, but that maybe the time after Medicare coverage could be much shorter.

Yeah, so Karen I think that we kind of read these things together is that, we look at what is the driver that we can then back with growth and expanding our sales team, expanding our spend because not only do you then expand the sales team, it’s all the back office stuff that supports all of that. And given that Medicare covers about 50% of the patient population in this indication, we really think that that will be the key driver and the key pivot point where we’ll comfortable beginning to ramp up. All the rest of the payers that might have major roles for us in Afirma because of such a low Medicare population will have a less significant impact on the Percepta and ILD products. So while we think we are going to be terrific position to move Percepta and eventually ILD into all of those contracts we have been able to secure with Afirma, which is a real competitive advantage for us. We still believe that getting Medicare first is a really key decision because we are going to control our ramp and drive for growth on test volume on the back of that. And Chris do you have a few things to add to that.

We believe that one of the key things that we are building a value here is this network of insurance contracts that we have, because when we’re able to do that then we’re part of the family basically or part of their extended network and so we can go in, we can have those discussions about the products that we are bringing to market in a relatively easy way. There are lot of diagnostic players that are small that have a lot of test that range from poorly validated, well validated, anything in between and insurance companies have a hard time sorting through that all that. There is a lot of noise with what they see and what they get and just peer volume of it, so having to sit at the table we’ve always believed was important and would allow us to accelerate the launch of products 2, 3, 4, 5 et cetera into those carriers and hopefully accelerate coverage from what it would be without that. So absolutely the idea is to leverage although we’re building on Afirma with insurance contracts to go faster with Percepta and ILD.

Okay, great that’s very helpful. And then just a second question around international, I don’t think you really included it in your prepared remarks any update on progress with some of the partnerships you signed and I believe you also have an Ex-US agreement with Genzyme, I mean if that’s the case for you will you continue with that agreement?

Yeah, we have not broken out the international we’ve announced some of the co-promotion relationships or distributor relationships that we’ve developed over the years. We really see the big opportunities in the United States and it’s where we’ve been investing our time and energy both driving Afirma in the United States, but spending the investment dollars we have in opening up this pulmonology channel because we think we are solving a real problem for patients, payers and physicians in the United States since that’s really where we’re focusing our investment dollars and we think we get the best return for investors relative to international and we have not broken out in international, we don’t plan to do that. With the Genzyme deal the internationals are relatively small piece when we restructured it in 2014. We ended up with activities in a few countries, Brazil being the most important of those and that relationship continues as of now.

Okay, thanks so much.

Thank you. Our next question comes from the line of Steve Beuchaw from Morgan Stanley, your line is open.

Hi, good afternoon it will be just one for me, a two-parter and not just because I think here we want to make sure that Shelly has some fun on the call as well. So it relates to cash and cash flows, the guidance for cash burn for 2016 was a little higher than I expected, but I want to make sure we look at it in an apples to apples way. So I wonder if you could help us understand whether there are any idiocy chronic drivers of incremental cash spending cash burn in 2016, whether that’s new reps or whether that’s tied to may be facilities, incremental R&D spend and then what is the seasonality of cash burn look like over the course of the year so that we can get a better understanding for what the organic trend is thank you.

Great, thanks so much, happy to answer your question. As noted in my prepared remarks the cash burn should be about the same in ‘16 as it was in ‘15 and you’re right there will be some specific idiocy increases in the year. So our goal overall is to actively manage and drive down the cash burn for the year, but on a quarterly basis it is going to be frontloaded. So if you notice in the fourth quarter, the burn was only 7 million and in part that’s because we were reimbursed by the landlord for over $3 million, so that would’ve been a higher burn. We are finishing our facility in the first quarter, so we do expect that we will have a higher burn in the first quarter and also always in the first quarter you are going to have things such as stock bonuses, audit and legal fees, things that always come into the first quarter. So you should expect a higher burn in the first quarter. As we go into the year the second and third quarters will still moderate somewhat, but not drop significantly until the fourth quarter. And so I think as we begin to ramp up entirely on the sales and marketing side as we transition away from Genzyme, but we still pay the Genzyme fee until the middle of September, you will see that really drop off than in the fourth quarter and set us up really nicely for 2017.The final thing I would notice that from an R&D perspective, we are getting ready for a launch at the yearend and we will have three products by year end. And so we feel that it is smart to invest in that R&D for this year, it will be a little higher than you may have expected, but that will then go down next year also. So we are investing in three products we think that position us extremely well for coming out of the year and then for leveraging next year much more efficiently.

That’s just what we needed, thank you.

Great.

Thank you. [Operator Instructions] Our next question comes from the line of Paul Knight with Janney Montgomery. Your line is open.

Hi, Bonnie, the Percepta test, the specificity was 47% in both studies that have been performed AEGIS I and II, any comment on that 47% number should - what is ideal or what do you hope for, any color around that number?

Hi Paul, thanks for joining us. So I mean I’ll mention first the most important metrics for the performance of Percepta is sensitivity and negative predictive value. Because similar to what we’re doing in Afirma, what we’re trying to do with Percepta is following an inconclusive bronchoscopy result, give the physician the information about the level of risk to adapt patients nodule as cancer. So they can choose to follow the pathway which they would typically do which would be an invasive surgical biopsy versus feeling comfortable moving that patient to watch full follow up by CT scan which of course is non-invasive. In order to be confident that that is a safe decision to make, we want to have a very high sensitivity and negative predictive value and I think in AEGIS I, AEGIS II the sensitivity was around 92%. When you look at the negative predictive value or the sensitivity of the overall procedure combining Percepta with bronchoscopy you get to a 98% sensitivity 97%, 98% which means together with bronchoscopy we’re not missing many cancers. Now, what the specificity number tells us is how many patients then would we expect that we could move to watchful waiting that would be low-risk. And the studies would have indicated somewhere around 40% to 50% and I think we predicted that our actual ability to move patients out of that surgical decision to watchful waiting early on we thought might be in the 30% to 40% range, but early indications from the recent studies shows that that could be as high as 50% reduction in invasive procedures. So all the performance kind of threads together in a way that we would expect it to be to support the clinical decisions we want to make.

And you still think that test will be done in conjunction with the bronchoscopy?

It is, in fact our sample is collected at the same time the bronchoscopy is done. As you might recall there is about a quarter of a million patients every year that undergo a bronchoscopy procedure as part of their work up to diagnose a lung nodule. And the bronchoscopy yields inconclusive results on its own about 40% of the time roughly a 100,000 patients today per year in the US alone. And of course we might expect that number to grow significantly over the next couple of years as screening ramps up. Today the next step that typically would be done following that inconclusive result would be to take the patient into the operating room and get a needle biopsy which is quite invasive costly and risky and so physicians really don’t want to subject patients to that procedure unless it’s necessary. What we have done is position the Percepta test, so that it is collected at the same time the bronch is done. So that if the bronchoscopy is inconclusive the tested sample is already collected, the test can be run and those results delivered to the physician in time to help guide what he does next.

And what’s your - you have done I think 639 patients in those two trials is that, what’s your ultimate goal in terms of number of patients in the trials?

Yes, right now because we are in kind of the thoroughly commercialization mode, we will be ramping up, we have patients being enrolled and registering over a period of time just like we have done with Afirma where we just saw the 20th peer-review publication come out and many of those on clinical utility. We will be building an ongoing library as evident here just like we have with Afirma, but certainly by the time we get to a couple of hundred patients that have had the test you can look at what decisions we are impacting and have a pretty good prediction of utility. But we will continue to collect evidence overtime and build up the body of evidence which will mean more and more patient numbers in those studies.

And then lastly I’m assuming that you are really - you are not including a lot of international expansion in this guidance number we’re receiving today?

That’s correct, as Chris kind of articulated quite nicely early on, we do have some seeded partners in international and we have one individual who sort of looks after that business, but we’ve purposely made the decision to not invest what we think we would need to invest to make that a significant growth anthem for us. We are much better served by using our pulmonology products here in the US as that growth engine. Now, that might change two or three years down the road as we get these products here and get them reimbursed and paid for, then we can look at deploying cash in other regional areas where we might be able to drive additional growth. We see it as very opportunistic and very selective right now in terms of the countries and the partnerships we go after.

Okay, thanks.

Thank you. Our next question comes from the line of Bryan Brokmeier from Cantor Fitzgerald, your line is open.

Hi, good afternoon. Earlier this year the analytical verification study - verification data and the clinical utility data for Percepta were published in separate publications. Is there any other data that would be required for Medicare coverage or what other milestones this year do you need to complete in order to receive that Medicare coverage?

Yeah, what we believe is that we need to have studies for clinical validity and we’ve published two now, the BMC Genomics article and then obviously the New England Journal article and both of those show that when we give a low risk test result the patient is truly at low risk. And those were perspective and really high quality work. The second piece that we need is analytic validity studies which you just referenced and those studies basically show that the test gives the same answer run to run under different conditions and it’s kind of expected that you do that. The third is clinical utility studies and we published our first one and we will continue to invest in those. That is the essence of the library of studies that we’ll be building throughout the year and role our goals to have the product covered this year. There is no magic formula in terms of you need this and you need that and you need this, we think that it’s ultimately - we’ll end up with the really strong submission with strong data and we’ll end up right now with four sets of articles. And quite frankly, to have this much data on a test this early with the New England Journal anchoring it is truly a phenomenal spot for most companies to have in their first product to learn their second product. So we really feel like we’re well positioned and we’ll continue to invest in building data, not just to get Medicare coverage, but it’s a never ending journey. I mean we started the call I think Bonnie said, we had over 20 studies with Afirma and to be clear, we didn’t have anywhere near that when we had Medicare coverage there. So this is an endless journey that we just keep building the depth of evidence that gives physicians, patients and payers the confidence for getting quality results from us.

Okay and there have been number of competing thyroid tests introduced over the last year, have you seen any positive impact on the market awareness as a result of those competitors coming in?

Absolutely, we always remind people that most of these patients do not get a molecular test done, they get surgery done. And that’s unfortunately, sadly where 70% of them end up getting their thyroids removed and so what we’re all collectively doing, us and the other companies that create noise in the marketplace is we’re trying to dislodge surgery as the means to have these patients treated. And what we know because we’re by far the market leader as we’re successful in doing that, most of those tests end up coming to us. And so we think that having competitors and more discussion and more noise in the marketplace is a good thing as we try to make sure that patients get more data before they have surgery done. And what we know is that we end up shining whenever that happens and I think you can see this year, we just turned in a year of phenomenal growth and it was the year of competitive noise and discussion out there and we were able to perform well on that and we’ve always said, this is good for us and good for the markets and I think the numbers speak for themselves that it’s good for us to have this going on in the marketplace.

Great, thanks a lot.

Thanks, Bryan.

At this time I’m showing no further questions. I’d like to turn the call back over to Bonnie Anderson for any closing remarks.

Thank you all for joining us today. We appreciate your ongoing support and look forward to updating you on our progress next quarter.