Veracyte, Inc. (VCYT) Q1 2016 Earnings Report, Transcript and Summary

Good afternoon ladies and gentlemen, and welcome to Veracyte's First Quarter 2016 Financial Results Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session, and instructions will be given at that time. [Operator Instructions] As a reminder today’s conference call is being recorded. I'd now like to turn the conference over to your host Ms. Shelly Guyer, Chief Financial Officer. Please go ahead.

Good afternoon, everyone, and thanks for joining us today for our first quarter 2016 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 and profitability, 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 May 05, 2016 and Veracyte assumes no obligation to publicly update these forward-looking statements. Our financial results press release for the first quarter ended March 31, 2016 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. We believe this will be a brief call since we just reported our fourth quarter in 2015 results a few weeks ago. However the updates we will provide are pretty exciting. We are off to a terrific start in 2016. We delivered strong results this quarter driving continued robust Afirma growth and positioning ourselves for accelerated payer progress while significantly advancing our pulmonology business. Turning to the first quarter results, I will focus on the three areas of executions that will define our success in 2016. They are Afirma growth and reimbursement expansion, Percepta coverage and the launch of our IPF test. Number one Afirma growth and reimbursement expansion. Our Afirma business continued its strong positive momentum in the first three months of 2016. Our revenue for the quarter was $13.6 million, an increase of 21% compared to $11.2 million for the first quarter of last year. Excluding a one-time revenue pickup in accruals and cash receipts in the first quarter of 2015, the revenue increase was 31%.We grew the number of Afirma GEC test to 5,352, a 33% year-over-year increase. We expected our revenue growth rate will expand as we increase our average reimbursement from payers. I am pleased to share some exciting progress on this front which we believe will further fuel this process. We recently signed an agreement with the Blue Cross and Blue Shield Associations internal group purchasing organization CareSource effective April 1. This agreement allows individuals state Blue Cross and Blue Shield health plans to contract with Veracyte at established and competitive rates for a cytopathology and molecular testing services, specifically the Afirma GEC and Percepta classifier without having to negotiate contracted rates with each individual plan which is often time consuming process. We believe this agreement will enable us to accelerate our ability to achieve in that work contracts with Blue Cross and Blue Shield plans around the country, a top priority for us in 2016 and key to expanding our reimbursement level. This is also important because physicians site lack of in network status as the single greatest deterrent to adoption of the Afirma GEC. We believe that by achieving a network status, we will be well positioned to drive adoption, test volume and higher reimbursement rates for the GEC. Our expectations for revenue and Afirma GEC volume growth are really short up with this agreement now in place. While we work to advance in network contract, a coverage decision for the Afirma GEC by Anthem remains another key goal for this year. We believe the evidence is now published to support this and our team remains highly focused on driving this to completion. Seventeen published studies now demonstrate the Afirma GECs clinical utility. These include two positive long term outcome studies that were published during the quarter showing that the use of the Afirma GEC helped to keep patients out of surgery over the long term. One study based on Blue Cross and Blue Shield claims data demonstrated the durability of the benign GEC results for up to 14 months of follow-up. Multiple clinical utility studies showing similarly positive results were also presented at the American Society's Annual Conference last month. A final point on Afirma, on our last call we shared that we will exit our relationship with Sanofi Genzyme in mid-September of this year. The transition is going smoothly and I'm pleased to say that we have already extended our Afirma sales team to accommodate the change and achieve our Afirma growth goals for the year. Our second measurement of success is Percepta coverage. Gaining Medicare coverage for Percepta is the number one priority in pulmonology for 2016. During the first quarter, we significantly expanded our library of evidence which we believe will drive this effort. In February, compelling clinical utility data for the Percepta classifier were published in the Journal CHEST suggesting that the use of the CHEST could reduce unnecessary invasive procedures by 50% in patients being worked up for lung cancer whose bronchoscopy results were inconclusive. Analytical verification data were also published in BMC cancer showing that the Percepta classifier demonstrates strong accuracy, specificity, sensitivity and reproducibility under a range of conditions and variables. We believe that this evidence runs out the requirements for Medicare coverage. And we remain confident that we will achieve Medicare coverage for Percepta this year. We are looking forward to the American Thoracic Society's Annual Meeting which will take place later this month in San Francisco where top pulmonology thought leaders and Veracyte scientists will present additional compelling data supporting the use of the Percepta classifier. Two oral presentations and two coaster presentations will demonstrate the test clinical utility, cost effectiveness and analytical validity. Once we achieve Medicare reimbursement, we will ramp commercialization of the test, beyond our three initial skill specialists and expand our customer base beyond the roughly 40 to 50 sites that are currently offering the test to their patients. We look forward to expanding access to patients across the country from whom the task can dramatically help change the trajectory of care. Before I wrap up Percepta, I wanted to share two important points based on feedback from both our academic and community based customers. First, physicians are using Percepta exactly as we had hoped they would within the clinical pathway of care. The sample is being collected at the time of the bronchoscopy and if results are inconclusive they're ordering Percepta. And secondly, doctors already have confidence that with a low risk Percepta results, they can monitor their lung nodule patients with CT follow-up in lieu of an invasive diagnostic surgery. It is truly gratifying to see Percepta impacting patients in their diagnostic pathway in exactly the way it was intended. Our third performance metric is the launch of our IPF test. We are pleased to unveil the brand name for our IPF test Envisia as we advanced toward its anticipated commercialization in the fourth quarter of 2016. The name Envisia speaks to the test ability to aid physicians in the challenging diagnosis of interstitial lung diseases or ILDs including idiopathic pulmonary fibrosis or IPF which is among the deadliest of these lung scoring diseases. Specifically, the test is designed to allow physicians to envision new and important information about how their patient's condition may progress without the need for an invasive surgery. The upcoming ATS Conference will be an important opportunity for us to showcase Envisia to the pulmonology community. Veracyte scientists and external researchers will present multiple posters demonstrating Envisia's potential to transform care among the hundreds of thousands of patients who present each year with a suspected ILD. Thought leader presentations will highlight the significant challenges in IPF diagnosis particularly among physicians and community based settings. Dr. Julia Kennedy, our Chief Scientific Officer will present data demonstrating Envisia's classifier, Envisia classifiers novel ability to use deep RNA sequencing base genomics to help distinguish patients with IPF from those with other ILDs without the need for surgery. Data will also show the test potential to impact physician decision making and reduce healthcare costs. In addition to establishing the strong scientific and clinical foundation for the Envisia classifier, we look forward to unveiling independent clinical validation data from our BRAVE studies prior to the test fourth quarter launch. Finally, as we stand on the brink of having three commercialized products by the end of the year, we were pleased to secure up to $45 million in financing with Visium health partners which we announced on March 28. We believe this financing gives us the funding and flexibility we need to grow our core business with financial discipline and measured investments and to move forward on the pathway to profitability. I will now turn the call over to Shelly to review our financial results for the first quarter.

Thanks Bonnie. As Bonnie indicated we experienced strong revenue growth during the first quarter. Our revenue for the quarter was $13.6 million up from $11.2 million for the same period in 2015, an increase of 21%. Excluding onetime revenue pick-ups in accruals and cash receipts the revenue increase was 31%. The one time pick-ups include accruals of $325,000 in the first quarter of 2015 compared to $150,000 in the first quarter of 2016 and cash receipts of approximately $640,000 in the first quarter of 2015. We accrued 61% of revenue in the first quarter compared to 48% in the same period of 2015. Of note, we accrued 46% of Afirma GEC volume in the quarter. The number of total FNA samples received in the first quarter increased by 24% over the prior year to 21,497. We reported 5,352 of Afirma GEC test results during the first quarter, a year-over-year increase of 33%. The quarter-over-quarter volume reflected expected seasonality in the business. 13% of total FNAs received in the quarter were for GEC only testing, surpassing the prior year's 10%. Afirma GEC only samples received increased 51% year-over-year. Our gross margin quarter-on-quarter for the first quarter was 54% which is down from previous quarters due to several factors. First, we had no significant one-time revenue pickup in this quarter versus the year ago quarter. This has the greatest impact on reducing the gross margin. And second, we had higher cost of revenue this quarter which I’ll discuss in a minute, which also put downward pressure on the gross margin. As we previously indicated, we do not expect our gross margin to increase substantially in 2016 prior to obtaining new payer contracts that will expand reimbursement for the Afirma GEC. Operating expense for the first quarter was $23.3 million compared to $18.8 million for the comparable period in 2015. Let's break this down by line item. Cost of revenue for the quarter was $6.3 million compared to $4.6 million for the comparable quarter of 2015, an increase of 38%. The increase was primarily due to an increase in samples tested especially the growth of the higher cost Afirma GEC relative to the lower cost side of pathology. A particular note, starting in this quarter and on an ongoing basis, we have increased facility cost as well as cost related to increasing volumes of Perceptatest process. Finally, our cost of revenue was impacted by one-time cost related to our move. Research and development expense for the quarter was $3.5 million compared to $2.8 million for the comparable quarter of 2015, an increase of 24%. The increase was due primarily the increases in personal related expenses including bonuses and stock based compensation and continued investment in product development. Selling and marketing expense for the quarter was $7.1 million compared to $5.6 million for the comparable quarter of 2015, an increase of 26%. This increase was due to an increase in Genzyme co-promotion expense net reflecting an increase in cash collection, as well as increases in personnel related expense due to higher headcount of our sale and marketing team and associated increases in commissions, accrued bonuses and related stock based compensation expense. Recall that we indicated that we would start hiring sales personnel in the first quarter to begin the transition from our Genzyme relationship which ends in September. General and administrative expense for the quarter was $6.2 million compared to $5.8 million for the comparable period of 2015, an increase of 7%. The increase was primarily due to personnel related expense including increased headcount, accrued bonuses and increased stock based compensation expense. Additionally, there was a rent charge of $380,000 for the excess rent payments as we moved facilities which under GAAP, flows to G&A until we take occupancy. This will be the last quarter for this expense now that we’ve fully occupied the new facility and have exited the lease at our former facility. Importantly, we controlled G&A expense growth by decreasing accounting, audit, legal, and consulting expenses. Intangible asset amortization expense, a new line item as of the second quarter of 2015 was $270,000 in the quarter which will be the amounts in subsequent quarters. This is a non-cash item. Operating loss for the quarter was $9.8 million compared to a loss of $7.6 million for the same period in 2015. Of note interest expense of $370,000 this quarter was higher due to exiting our prior loan agreement and incurring expenses related to an end of term payment of pre-payment penalty and the write-off of debt issuance cost and the debt discount. Net loss for the quarter was $10.1 million or $0.36 per common share compared to a net loss of $7.6 million or $0.34 per common share for the same period in 2015. Excluding the one-time interest expense amounts from the debt transactions and one time move related expense, our net loss for the quarter would have been $9.6 million or $0.34 per common share. Cash and cash equivalents as of March 31 2016, totaled $47.5 million which included net proceeds of $19.2 million from taking down the first [indiscernible] debt and repaying our prior loan. With an additional $15 million of debt available at our option, at quarter end we had access to $62.5 million in funds. Our cash burn for the quarter was $11.6 million or $10.9 million excluding loan financing activities. To get to a more normalized burn, if we strip out the $2.2 million spend related to final payments for the build out of our new headquarters and related move expenses, the burn is under $9 million. As noted in our last call, we expected this quarter to be higher burn quarter especially with 2015 bonuses being paid out. But that the cash burn in the second quarter will trend back down. And we expect to experience a nice decline in back half of the year and especially in the fourth quarter as we exit the Sanofi Genzyme relationship, and begin to experience more efficiencies in the business. One final metric for the quarter that we included in our SEC filings is our average reimbursement for the GEC. It was down slightly at $2100. Recall that this number is a lagging indicator looking back to payments on test that were conducted about a year ago. We have evidence that the average reimbursement has moved up recently as we have achieved coverage with more Blues payers and we expect this metric to trend back up in the coming quarters. This metric will move more significantly when we sign Blues contracts and gain additional Blues coverage. And if one takes the revenue in the quarter divided by the volume of GEC test in the quarter, as many of you do it as a proxy, the averages remain just around $2,300 of the past two quarters. Now I’ll turn the call back over to Bonnie to provide closing remarks.

Thanks Shelly. Looking at the regulatory landscape, we anticipate that CMS will soon issue its protecting access to Medicare Act or PAMA rule, to bring market based pricing to advanced diagnostic test, and that FDA will likely move forward with guidance for regulating laboratory developed tests. We believe we are extremely well positioned to thrive in both of these scenarios and look forward to putting these uncertainties behind us. Before wrapping up, I’d like to add that we are quite honored to receive the 2016 Edison Award last month for the Percepta Bronchial Genomic Classifier, a bronze award in the diagnostic and disease treatment category. In the spirit of the inventor Thomas Edison, this prestigious award honors game changing products and services that demonstrate excellence and innovation. Our entire company and our collaborators are proud of this honor which underscores our commitment to providing genomic test that are delivering on precision medicines premise to improve patient care and reduce healthcare cost. To close, we are pleased with our start to 2016 and are on track to achieve our business goals for the year and reiterate our annual Afirma GEC volume and revenue guidance. We are building a successful enterprise focused on resolving diagnostic ambiguity so that physicians can know what to do next for their patients. Patients can avoid unnecessary surgeries and other procedures and healthcare costs can be reduced. I’d like to thank our employees for their incredible passion, hard work and creativity along with our investors, collaborators, and partners and others for their ongoing support of this mission. I’ll now ask the operator to open the call up for questions please.

[Operator Instructions] Our first question or comment comes from the line of Bill Quirk with Piper Jaffray. Your line is now open.

Great, thanks and good afternoon everyone. Nice work on the quarter. First question is just a reimbursement update. You obviously spoke to the Blue Cross Blue Shield deal, but any update in terms of number of lives in their coverage or lives of their contracts?

We may remain the same in terms of still having a 180 million lives under coverage decision and over 130 million under contract at this point. But certainly believe that the execution of the care source agreement gives us a tremendous step forward at being able to secure additional Blue's contracts as we go through the year. Chris anything to add to that.

Yes, so I mean, Bill as you may know the CareSource, CareSource is a group purchasing organization of Blue Cross Blue Shield and the two things that you've got to deal with when you try to get a network with any of these insurance companies are first and foremost, can you figure out how to navigate the internal infrastructure of any of the company and who the decision makers are, and ensure that what you're doing is viewed as important enough to their members and we believe that being able to have the agreement with CareSource helps give us the mechanism to suggest that what we're doing is important enough for them to contract, and also they can help navigate the internal workings of these companies. And secondly the biggest issue is how to negotiate price, because you've got two pieces of data that are outstanding, one is the Medicare reimbursement of 3200, and the second one is the retail price which is much higher. So the big question is, where do you contract in between those two, so by being able to have negotiated an national agreement then that - then if somebody contracting with us at a local plan can have some confidence that there - can have the confidence that they're getting a really good price which takes that sort of issue off the table. So we think overall that allows us to accelerate our ability to get contracts done. We're focused on doing that this year as we've said that's one of our key goals. It both drives our reimbursement, but as you well know one of the biggest reasons why physicians don't order the GEC is because of lack of network access, and so trying to get those Blue Cross Blue Shield plan to lock down this year, we believe we’ll ultimately help us propel our growth in the market even quicker.

Got it. And then I guess just two additional question. So on the CareSource contract, I mean to me that doesn't change the mechanic of how you collect from the actual members themselves, you select the goal that's you get the checks right?

Yes, it will. So, what the CareSource is just a group purchasing organization and now we have to go out and get agreements done with every single local Blues plan. We think that exists, this accelerates our ability to do that, but when we get the agreement done with the local Blues plan, then that will be between us in the Blues plan and the money will flow from the Blues plan to us just like it does with United, Aetna and Cigna drive their plans they were contracted with and the Blue Cross plan will no longer send the check to the patient. So that's what we wrestle with now and obviously there's a patient co-pay amount even in a contract environment. But the main payment will go to the patient in a contracted environment and we still need to get those contracts done, so CareSource gives us a mechanism to accelerate that. Does that makes sense?

It certainly does. And then I guess just one last quick one for me, Bonnie based on your comment about PAMA you remain very comfortable there, is it safe to assume then that whatever deal you negotiated with CareSource dealt with the parameters i.e., at least in line with Medicare [indiscernible] will actually start?

That’s correct. We're very confident that where we planned with the pricing that's part of that national plan that we will be in good shape as PAMA moves forward.

And I would add there that, it has been our philosophy for years that we will not sign contracts below the Medicare price that it just has been something that we have elected to do over the last several years.

Very good, thanks so much.

And our next question or comment comes from the line of Amanda Murphy with William Blair. Your line is now open.

Hi, good afternoon. I guess just the first one on the institutional sort of - institutional versus community markets obviously you're still getting quite a lot of tracks on the institutional side, could you just maybe update us on the – where you’re thinking about market share on both sides of the equation there and then kind of how the community side of the - and obviously you’ve talked about coverage how that side of the business is doing as well.

Sure. That's correct. We were very pleased with the concern over 50% year-over-year growth - what we're now calling our diagnostic partner model. So to be really specific, it's not just institutions and integrated network that does include some regional laboratories that have also been enabled to send us the GEC only and that's going very well. Interesting though, the total FNA numbers received really at 24% rate year-over-year which actually was probably a little stronger than what have been projected, so both sides of that business are going very well. We believe this puts us on really nice track with our guidance you would expect at the end of the year we'd be somewhere between 25% and 30% market share overall with GEC and that exact point where it lands will be dependent a little bit on which segment of the market they come in and how that competition works. But we should be really coming close to a 30% share overall in the market by the end of the year. Q – Amanda Murphy: Got it. Okay, helpful. And then I just got a question on realized price on the GEC so you had a nice pick up in accruals this quarter. And obviously there is some give and take there with contracts coming on line. So just wondering how to think about realize price if you will per GEC over time do you expect that eventually to start picking up?

Yes, so the metric that we put in the SEC filing is a lagging indicator, so that is looking back at about a year ago and as you may recall about a year ago we had just flipped over to a few new contracts, and so that impacted our first quarter of a year ago from the realized average price. As we've been moving through the year, a more current number as I indicated in the prepared remarks, is that we've been seeing an uptick especially because some of these Blues and others are paying at higher rates. And so we are confident that that rate is continuing to go up if you used a more recent metric and yes we are only able to look at a lagging metric, because it sometimes takes some time to collect those dollars, but we are confident that we've seen recent upticks in that number.

Okay, got it. And then just last one just thinking about your comments around profitability, you are going to move towards that with the ramp of the wrong franchise, so what's your latest thinking they're on and when we might think about positive, I don't know I guess moving towards profitability overtime.

Yes, I think I'll start and hand it over to Shelly. I mean obviously as we said coming to the end of the year, we will have three products commercialized, which really gives us the great confidence that we can begin to get that leverage across the high cost that it takes to run and build these businesses. So that's the first having enough products out there that we can begin to see some leverage. Shelly do you want to walk through the elements of that? A – Shelly Guyer: Yes. So we do believe that our core business would be approaching profitability, probably towards the back end of 2018 or so or in 2019. In the meantime we're going to be continuing to invest in growing the top line and doing a couple things that we think will move us towards that profitability. So obviously number one is to intently focus on increasing that reimbursement rate that we were just discussing. The CareSource agreement should be a great help and accelerating our reimbursement from the Blues. And then on the other side though is terminating the Genzyme co-promotion agreement, so continuing to drive the cost down that removes the 15% fee as you know as we get into the fourth quarter. And then as Bonnie mentioned leveraging multiple products across a fixed infrastructure, we don't think that we're going to need to build the G&A as much over the coming period of time. We sort of have that infrastructure in place. And as you saw in this quarter, we really could control the growth in the G&A and we'll continue to do that. And then from new products obviously getting Medicare coverage for Percepta will be increasingly important as we can begin to have some revenue from that product.

The reimburse dynamics are going to be a little bit different going forward then it has been historically because of Percepta's rate of patients being 50% or more Medicare. Secondly the fastback problem contracting that we have and we’ll continue to increase in place, we believe gives us great ability to accelerate the reimbursement for Percepta and Envisia over what we have done with Afirma where we're building that capability.

And then in terms of the target that you’ve mentioned on the core business, how are you thinking about Anthem flowing in there are you assuming it eventually comes on mind or does that assume that it does not.

We've been pretty bullish that we think we're teed up to get up this year share and I think we remain confident that that will happen. So that would flow into that type of scenario.

Okay, perfect thanks so much.

And our next question or comment comes from the line Bryan Brokmeier with Cantor Fitzgerald. Your line is now open.

Hi, good afternoon. You talked about your focus on the GEC only volumes, but over the last couple of quarters as you pointed out in the earlier in the call you've seen accelerating growth of FNAs. Are you pushing for that growth of the cytopathology samples again?

Yeah. It’s Chris. We've never taken our eye off the paired model. We believe that providing both the cytopathology sample paired with the GEC is made a tremendous difference. And how these patients ultimately are diagnosed, and we build a tremendous center of excellence. And our partnership with TCP and that model has really served us well and we've really pushed that model through the last couple of years. What was different is that we really could an increasing focus on doing that side by side with a model that worked with local hospitals and integrated delivery networks in some regional labs because of this standard of care we knew we needed a model that embrace the diversity of the healthcare system. And so we really didn't shift gears, but rather we've always looked at it as enlarging the patchwork of models that we work with in order to get the GEC pulled through. And you're right, I mean we've seen some tremendous growth this last quarter in the paired business and that's a tribute to the success that we've had the legitimacy that business model has created with physicians around the country and to be able to read this many of the thyroid FNAs that are done in the country by one center of expertise is a tremendous accomplishment by the team and we have not taken - we haven't taken our foot off the pedal there at all and continued to drive that because we think there's a tremendous amount of value in doing that. Q – Bryan Brokmeier: Okay. Then another one on the Blues plans, you’ve already a sign a few contracts with a couple of Blues, will those contracts be affected by the CareSource agreement?

Yes. All the agreements within the Blue Cross Blue Shield network that we work with will work under that CareSource agreement, so yes, they will ultimately be affected by it.

We have about five agreements right now with small Blue -

There are relatively small.

Does the CareSource also apply then to larger Blues plans or to they sign entirely separate agreements with you.

Well to be clear I mean, I think that they - some of them will be through the CareSource, some of it will be direct, but all fall with under the CareSource umbrella really to the mechanics of the actual contracting can be based on state law and all kinds of different things how you actually contract within insurance plan. But yes the big ones will go absolutely the whole, the whole network off and ultimately be a part of it.

Okay. Thank you.

[Operator Instructions] And at this time, I'm showing no further questions or comments. So with that said, I'd like to turn the conference back over to the President and CEO, Bonnie Anderson.

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

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program. And you may now disconnect. Everyone, enjoy the rest of your day.