Good afternoon, ladies and gentlemen. And welcome to Veracyte’s Third Quarter 2016 Financial Results Conference Call. After the speakers’ remarks, there will be a question-and-answer session. [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 third quarter 2016 financial results conference call. With me today are Bonnie Anderson, President and Chief Executive Officer; Chris Hall, Chief Operating Officer; and Dr. Neil Barth, Chief Medical 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, our competitive position in the market, future growth, cash flow and profitability, predictability of payments from insurers, future revenues and expenditures, reimbursement coverage and rates for thyroid and pulmonology tests, product launches and adoption, clinical utility of products, healthcare cost savings 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 November 03, 2016, and Veracyte assumes no obligation to publicly update these forward-looking statements. Our financial results press release for the third quarter ended September 30, 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. Since our second quarter call, we have achieved several major successes across the business, and I look forward to updating you on all of those this afternoon. We delivered tremendous revenue growth in our Afirma business, where we are transforming the diagnosis of thyroid cancer. We achieved a major Medicare milestone for Percepta in lung cancer screening and diagnosis, and we launched our third commercial product, the Envisia Genomic Classifier to improve the diagnosis of idiopathic pulmonary fibrosis. We demonstrated a narrowing and discipline in cash burn for the quarter, and we will raise more than $32 million in an equity financing once closed. We are well positioned with the capital we made to achieve profitable revenue growth, as we pursue a combined market opportunity of over $2 billion across our current products. With that, I would turn to the third quarter results, focusing on the three areas we have used in 2016 to measure our success. First, Afirma growth and reimbursement expansion. We delivered robust revenue growth this quarter for Afirma, our flagship franchise, where our strategy and executions in achieving more predictable reimbursement and in-network contracts is paying off. Our revenue for the third quarter was $18.6 million, an increase of 51% compared to $12.3 million for the same period last year. We reported 5,740 Afirma Gene Expression Classifier or GEC results in the quarter, which was a 14% increase compared to the third quarter of last year. Our revenue included $3.5 million that previously would not have been recognized until the cash were received. The increase in accruals is important for several reasons. First, it underscores the growing predictability and history of Afirma GEC payments from insurers. It also reflects our success in converting payer…

Thanks Bonnie. Good afternoon, everyone. It's a pleasure to be here to highlight the scientific advances behind the Envisia Classifier and to describe how patients, physicians and healthcare system will benefit. Let's start with some foundational information. IPF is the most common and most deadly form of fibrotic interstitial lung disease, or ILD, a group of disorders that are characterized by chronic progressive fibrosis and scarring of the lungs. As Bonnie indicated, IPF is difficult to distinguish from other ILDs but its treatment in prognosis can vary greatly. Currently many symptomatic patients who present with suspected IPF may endure months to years of incorrect or delayed diagnosis, often while undergoing invasive risky and expensive surgical lung biopsies or receiving suboptimal and potentially harmful treatment. A diagnosis of IPF is typically made when a multidisciplinary team comprised of a pulmonologist, radiologist and pathologist, collaboratively evaluate information gathered during a thorough clinical work-up including whether a specific pattern called usual interstitial pneumonia, or UIP, is present. Presence of this UIP pattern is essential to the diagnosis of IPF and is identified through either a high resolution CT scan or from a surgical biopsy of the lung. A confident determination of UIP however can be difficult for even experienced radiologist and pathologist and substantial disagreement often exists between physicians evaluating the same case. When a UIP pattern is uncertain by high resolution CT scan or HRCT, which we believe is the case in about 80% to 85% of patients being evaluated for fibrotic interstitial lung disease, diagnostic lung surgery is often considered as the next step. However this surgery is invasive, risky and expensive with cost of over $40,000 per surgery and reported mortality rates ranging from 1.5% to 16%. Further many patients who are already compromised by their disease are not able…

Thanks, Neil. We plan to initially make Envisia available to a limited number of institutions around the country, as we build the clinical utility and other evidence that support coverage and reimbursement. We will use the same strategy that we have successfully used with Afirma and Percepta. Above all, we are motivated by the opportunity to make a significant difference in the diagnosis and course of treatment for patients with this challenging disease. Now I'd like to turn the call over to Shelly to review our financial results for the third quarter.

Thanks Bonnie. We saw substantial improvements in operating performance in the third quarter. Our GEC reimbursement per test increased. Our gross margins improved. And we made progress in controlling our operating expenses. The focus on more efficient growth with an eye on profitability is paying off. As Bonnie indicated, we experienced 51% revenue growth during the third quarter. Our revenue for the quarter was $18.6 million, up from $12.3 million for the same period of 2015. The $3.5 million pickup from new accruals in this quarter compared to approximately $130,000 in the same period of 2015. Our accrual criteria, is that when we can reasonably estimate future payments from test conducted, we should recognize and accrue that revenue in that period. For the GEC as well as our other Afirma tests, we now have sufficient history and experience with payers to estimate such amounts. In this quarter, 75% of revenue was accrued, compared to 57% in the same period of 2015, with the remaining revenue from cash collection for tests conducted in prior quarters. Our revenue from cash payers was $4.7 million and there were no large one-time increases in cash collections from payers, either in this quarter or the prior year quarter. We anticipate that these increases will be smaller in the future for Afirma, as 99% of our test volume is now accrued. Of course when we begin to accrue for Percepta, we will again experience such pickup. The other important factor in revenue is our average reimbursement rate. We noted that the ASP would increase as more payers come under coverage in contract. This quarter the rate was $2,200, up from $2,100 last quarter. Recall that this is a lagging indicator looking back one year. Our more recent experience is improved rate as we see the benefit…

Thanks Shelly. Based on our stronger-than-anticipated revenue growth to-date and visibility into the fourth quarter, we are increasing our 2016 annual revenue guidance to $62 million to $65 million. We expect Afirma GEC volume to come in at the lower end of the guided range of 24,000 to 25,500. As we approach the year’s end, we’d like to provide you with some directional thinking for the upcoming year. For Afirma, we will continue to focus on driving continued GEC volume growth, expanded reimbursements and revenue growth. For Percepta, we plan to expand patient access by increasing the number of accounts offering the product, while we secure additional coverage and contracts beyond the Medicare MolDx program. For Envisia, we will focus on developing strong published evidence that will position us for Medicare coverage. And lastly, we expect to continue our financial discipline, building on the progress we have made and would expect our cash burn per quarter to be in the $6 million range with some quarterly fluctuations. I'll now ask the operator to open up the call for questions.

[Operator Instructions]. Your first question comes from the line of Bill Quirk of Piper Jaffray. Your line is open.

Great. Thanks. [Technical Difficulty]. First question, your DSOs spiked up almost 50% in the quarter. Can you talk about this metric in light of how you’re moving to higher accrual revenue?

I don't know how you're calculating the DSO since we don't really provide that. So our collections are getting actually a lot more rapid in - now that we have a number of contracts and also as we have sort of longer term relationships with some of the other payers and under coverage decisions and such. So I would say that the time to collect is actually coming in appreciably. But we don't have a formal DSO number that we issue, so I don't know how it's being calculated.

Okay. And then on 2016 guidance, can you give us more color on the fourth quarter guidance in light of the third quarter GEC [ph]?

Yes, I think what we said is that we are increasing revenue guidance to $63 million to $65 million of revenue - $62 million to $65 million of revenue. And we would expect the GEC volume range to be directed towards the lower end of the guided range, 24,000 to 25,500. And that would be full-year number, so you can do the math on the year-to-date.

Okay. Thank you.

Thank you.

Your next question comes from the line of Amanda Murphy from William Blair. Your line is open.

Hi, this is Aurko in for Amanda. Congrats on a good quarter. I had a couple of questions. One related to the previous question, is that, guidance even if at the lower range would imply a pretty strong sequential pickup in volume, and tied to that, you had said that you now expect to exit the year with 50 sales reps. I was wondering if you could add some color on to the six sales reps that you were planning to add in the second half of the year and how many of those have come to fruition? And then the second part being is that kind of a linked initiative.

Yes. So yes, we've made a lot of progress, and you're right, it's been a terrific year and what a great quarter it was. We've made a lot of progress on the expansion of our sales team. I think we said earlier, our plan was to add 10 in the first half of the year, which we achieved, and we are well through the hiring of the additional six. So we are teed up. The reps are trained. They are energized. And I think that, on top of the fact that Q4 is always a really strong growth for quarter for us, we are very confident that we can deliver on those results.

Got it. And then you had previously said that you are planning to add fewer than 15 to 20 more per quarter. You had said, three to five sales reps per quarter over 2017, and now it looks the number is more like four to five. And is that three to four - four to five, could you give me some color on that, as to what caused the change there?

Yes, I think it's just three to five per quarter is really in line with what we would expect. I think we just rounded the number off to somewhere between 15 and 20. It could be 12 to 20, but it's just sort of a rounding error. The point being that we have now about 50 exiting this year. We have structured them in a manner that is going to allow us to get great leverage and build on the strength of the brand presence for Afirma in all of these institutional accounts where we’ve made terrific progress. I mean, as Shelly said, even with the soft quarter that we've spoken about in the past with doctor vacations in the physician office market, our GEC-only business remained very strong at 30% growth over prior year. So our presence in institutions and large integrated networks is very strong, and there is no reason why we can't gain a lot of leverage for that as we build the structure and bring Percepta into the market, targeting exactly those same institutional accounts followed by either preparation and leverage with Envisia when we begin to expand that on the back of Medicare coverage. So we've made phenomenal progress at setting ourselves out both with numbers of reps, but more importantly, with a structure in the sales organization that allows us to continue to grow Afirma, bring two new products through this channel to drive growth there, but do it without building single verticals that are much less efficient and do not provide you the leverage. So we think we’re positioned with a great team, good clinical, medical support of that team, junior set of account managers that can maintain our high-volume accounts those will remain mostly Afirma for the foreseeable future. And then the institutional channel managers that really are the driver of multi-stakeholder alignment around pathology, radiology, now bringing in that pulmonology stakeholder, that has been so effective in driving our institutional business. So I think we are very pleased with the progress that has been made there and will continue to be made and we're very excited about finishing a strong 2016 and entering ‘17 on the back of a phenomenal amount of momentum.

Great. Thanks. And last question for me. How are conversations with Anthem going on? Pardon me, if you’ve already discussed that.

Thank you for bringing that up. Okay. It was one item not in our script. We remain very bullish that we will, based on the data that’s been published, new data that was just presented at ATA by a lot of external investigators, I would say that combined with movement with thought leaders to stop the over-treatment and taking patients to surgery that don't need it, we really believe we are going to get Anthem there. And as we said when they made the update to their policy mid-year, which was sort of on their cycle and not including all of this new data, since then we've made a lot of progress in having them review this additional utility data, long-term outcome data, and we are still pretty confident we can get that done by year-end. There is no guarantee. It could flip into the beginning of next year. But keeping in mind that that metric, although it's remained a really important milestone catalyst for us and we continue to be bullish. Having that accomplished really was not an impetus to any of our revenue predictions or volume predictions per se. So we still hope to get it done in ‘16.

Great. Thanks. I'll hop back in queue.

[Operator Instructions]. Your next question comes from the line of Amanda Murphy William Blair. Your line is open.

Okay. I guess it’s me again. I guess my follow-up question is related to Anthem as well, as your reimbursement conversations are going on. Has the decision by Medicare to price lower prior to test had a 10% decline to your previously reimbursed rate. Has that influenced at all the kind of pricing that you're able to negotiate, and if - has it influenced the pricing to be able to negotiate with other private payers?

We have had no request for any opening of any negotiations around price with any of the payers. Keep in mind, the CareSource agreement as an example that we signed earlier this year is a five-year agreement and we continue to make a lot of progress per se. This is the result of our increased revenue and accruals, etcetera, on the back of that contract allowing us to bring more and more Blues plans under network. So we really believe that pending the success of our reconsideration, which we believe, we have a strong basis for and are hopeful that CMS will see it that way. Beyond that, we are sort of moving forward and looking forward to PAMA and getting this all set out. But no, we have not been under any real request or certainly not any pressure to make any changes to our private payer rate. Keep in mind that we really believe - and we've never really tied our contracted rates to Medicare per se, because what we negotiate on is the value of our test in saving $20,000 plus surgeries. And being able to replace a surgery for every two tests we perform with Afirma, we are giving the payers a big percent of the value. So I think that - where they are going to put pressure is not in areas where they are already gaining a significant financial benefit, but focus on other areas of their business, and that gives us the confidence that we’re going to be able to maintain our pricing. It's all based around the value we deliver.

Got it. And then final question from me before I actually stop. The last one is on the data shown by your CSO about the specificity increase that could potentially classified 70% to 80% of patients who they determined as benign, what are the kind of the milestones and steps of getting that on the market, and also covered? And what’s the timeline you foresee for that, if you were to pursue it?

Well, the actual launch of the product based on that validations data have happened. We will begin to build our sites for the registry study, which will continue - I’m sorry, I thought your question was about Envisia. My apologies. So we obviously have kind of held our card [ph] tight on that product for obvious competitive reasons, and we would not likely be throwing that card out there and sharing those great exciting data if we did not have something well on its way. I would expect it as we enter ‘17 and provide more specific guidance that we will be giving a little more direction on that as we go forward, but it's a very exciting development to maintain our sustained growth with Afirma.

Great. Thank you.

Thank you.

There are no further questions at this time. I'll now turn the call back to Bonnie Anderson, President and Chief Executive Officer for closing remarks.

Thank you. We are extremely pleased with the value, our pioneer approach is now delivering across the spectrum of disease areas. By asking the right clinical questions and using cutting-edge science, including machine learning and RNA sequencing, to provide actionable answers, we are fundamentally changing patient care. As we approach the end of the year, we are at a truly exciting point in our business. We now have three commercialized products that are targeting large untapped market, where we can make a significant positive difference in the life of patients, while reducing healthcare costs significantly. We are firing on all cylinders and now have the capital we need to achieve profitable growth. This is just a beginning. So thank you all for joining us to day. We appreciate your shared interest and support of our mission and look forward to keeping you updated on our progress.

This concludes today's conference call. Thank you for your participation. You may now disconnect.