Good afternoon, ladies and gentlemen, and welcome to the Veracyte first quarter 2017 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 follow at that. [Operator Instructions]. As a reminder, this conference call is being recorded. I’d now like to turn the conference over to your host, Ms. Bonnie Anderson, Chief Executive Officer and Chairman of the Board.

Good afternoon, everyone. And thanks for joining us today for our first quarter 2017 financial results conference call. Joining me today are Keith Kennedy, Chief Financial Officer, and Chris Hall, President and Chief Operating Officer. Before we begin, Keith will talk us through the Safe Harbor statement.

Good afternoon, everyone. We’d like to remind you that various statements that we may make during this call will include forward-looking statements as defined under applicable securities laws. The forward-looking statements include statements regarding our future plans, prospects and strategy, financial goals and guidance, product pipeline and other statements that are not historical fact. Management's assumptions, expectations and opinions reflected in those statements are subject to risks and uncertainties that may cause actual results and/or performance to differ materially from any future results, performance or achievements discussed and/or implied by such forward-looking statements, and the company can give no assurance they will prove to be correct. Those risks and uncertainties are described in the company's filings with the Securities and Exchange Commission in addition to today's press release. Prior to this call, we announced our first quarter 2017 results, which are available on our website, veracyte.com, by clicking menus on the top right corner of our website and clicking through to our investors landing page and then press releases. We also released a financial presentation which I will reference later in the call when I cover our financial results. You may find the financial presentation in the same Investors section under Events and Presentations. I will now turn the call over to Bonnie.

Thank you, Keith. And thanks again everyone for joining us today. We think this will be a brief call since we just reported our fourth quarter and full year 2016 results a few weeks ago. However, we’re excited about the updates we have to share today. We delivered a solid first quarter with results in line with our expectations and we’re off to a terrific start in 2017. Our revenue and Afirma GEC volume growth were strong and we made significant progress toward our financial discipline goals. We have great momentum across the business and a lot to be excited about as we head into the second quarter and through the end of the year. Looking at our first-quarter results, I’ll focus on the four metrics that we use to measure success in 2017. They are revenue growth, reimbursement expansion, evidence development and financial discipline. Let's start with revenue growth. We continued our strong revenue growth with Afirma revenue for the quarter of $16.4 million, an increase of 21% compared to $13.6 million during the first quarter of 2016. Because virtually all test volume shifted to accrual-based revenue in Q3 of 2016, cash-based revenue declined significantly in the first quarter as expected. Afirma GEC volume, following the typical quarter-over-quarter cadence coming into the new year, was 5,834, a 9% growth over prior year. This includes a 26% year-over-year increase from GEC-only accounts, showing our continued strength in driving this higher-margin segment of our business. We are well-positioned to accelerate growth across both our Afirma and Percepta portfolios, with our expanded sales team, which now comprises nearly 50 associates. To further boost our sales efforts, we’ll soon launch a series of Afirma-focused marketing campaigns to drive demand and adoption among endocrinologists and pathologists, as well as patients. These campaigns will use…

Thank you, Bonnie. Good afternoon, everyone. As I mentioned earlier, in addition to our earnings release, you may find our financial presentation on our website at veracyte.com under Investors and then Events and Presentations. I plan to speak about our first quarter 2017 results and will reference the relevant pages in the financial presentation as I cover the highlights. Turning to page two of the presentation, the financial highlights for the first quarter 2017 as compared to the first quarter of 2016 are as follows. Revenue of $16.4 million increased 21%. Afirma GEC reported volume of 5,834 tests increased 9%. Total operating expenses of $23.9 million increased 3%. Net loss of $8.2 million improved 18%. Net loss per share of $0.24 improved 33%. Cash burn, defined as net cash used in operating activities, and net capital expenditures of $8.3 million improved 28% and we ended the quarter with $51.5 million in cash. The next three slides in the financial presentation depict quarterly revenue trends. For the first quarter of 2017, on average, we accrued between $2,300 and $2,400 for the Afirma GEC test that met our revenue recognition standard, which was between 90% and 95% of the reported Afirma GEC test volume. Over the eight quarters ended March 31, 2017, we generated between $2.1 million to $2.7 million in revenue per quarter from providing cytopathology services as part of our Afirma solution. Prior to July 1, 2016, we accrued less than 50% of the billed Afirma test volume per physical period. Starting in the quarter ended September 30, 2016, we had sufficient cash collection history to reasonably estimate the amount of revenue to accrue upon test delivery. Thus, we began accruing substantially all GEC test volume in Q3 2016 that met our revenue recognition criteria. Page four of the presentation…

Thanks, Keith. To wrap up, we’re extremely pleased with our first quarter accomplishments and believe we are positioned to deliver great results in 2017. During the quarter, we put a number of pieces in place to accelerate growth, including 11 additional Blues Plans now covering the Afirma test, our Quest agreement which is signed and ready to launch, and the advancement of our next-generation GEC. We secured Percepta coverage and pricing for Medicare patients and can now accelerate commercial adoption. We are on track to achieve our business goals for the year and reiterate our 2017 annual revenue guidance of $76 million to $84 million and annual cash burn of $25 million to $27 million. Moreover, we’re forging new ground in the genomic diagnostics field. In an era when science and technology advances are feeling a relentless thirst for more data about people's health, we provide clinically useful results that are backed by rigorous evidence and enable physicians to make different patient care decisions. Our powerful combination of machine learning expertise and deep clinical and genomic knowledge is enabling us to bring new solutions to bear as we ask the right clinical question to inform meaningful changes to patient care. We are creating a new standard of genomic truth and resolving the critical problem of diagnostic uncertainty by providing answers without the need for risky, costly, and often unnecessary surgery. This is the age of evidence and we are clearly leading in it. Thank you for your time and attention today. I’d now like to ask the operator to open the call up for questions.

Thank you. [Operator Instructions] Our first question comes from the line of Puneet Souda from LEERINK Partners. Your line is open.

Yeah. Hi, Bonnie and Keith. Thank you for taking the question. So, could you give us a sense of the progress that's being made so far? Obviously, you have more improved reimbursement with the new test coming at ACE. Could you give us a sense of – where do we stand in penetration currently? How far do you see that ramping through the year? The guidance is somewhat unchanged. So, could you give us a little bit more color there?

Yeah. Thanks, Puneet, for joining us and for the question. I think that the introduction of the next generation of the GEC, following what has been five years from the introduction of the first test, is quite timely. It’s pretty amazing that we’ve penetrated the market by nearly 30% with that first test. And when you think about the value that payers are reimbursing for, for Afirma, it is a combination of their confidence that the clinical results are accurate and, B, the value that is being delivered in removing patients that don't need to undergo surgery from the operating room. And what we're really thrilled about with the results on the GEC is the fact that we will be maintaining the same high sensitivity and validated the test in a way that will drive confidence from payers that we will actually deliver more value. We will be able to increase by 30% the number of patients kept out of surgery. So, we believe this is really timely introduction. This week, the data will be unveiled and we will begin – we already have a list of interested parties for early adoption and that adoption will ramp as we transition, but also bring new people into the Afirma family, with the introduction of this new product. And we think that, combined with the relationship we've built with Quest, will really fuel some great growth coming into the back half of the year with Afirma. Chris, is there anything you'd like to add to that.

The only thing I would is that we made significant progress this quarter and continuing to expand our sales team. We’re now nearly at 50 professionals in the field and we believe that that extended reach throughout the country is setting this up to be able to go deeper into accounts, do more calls into those accounts, to drive greater penetration and we’re excited that we’re on pace to do that. And the second thing that they’ve started to do is drive the dialogue with Percepta and to help systems and hospitals and we’re seeing some success in those dialogues. So, really, sit here at the end of the first quarter, excited with all these different trends coming together.

Okay, great. Thanks for that. And on Percepta briefly, looking at the rest of the year, with the pricing already in place and having more clarity there, do you think that – could you give us a sense potentially around the ramp there? And thanks for the comments on the sales force. But do you think that the sales force is adequate enough to support that brand through the year?

Yeah, it’s Chris. We do. We thought very deeply as we started the year how many people we needed in the field to be able to drive the Percepta product. And one of the key things I’d remind you that we’re trying to accomplish in this rollout is to manage it with one sales force with Afirma and Percepta in order to continue to drive the company towards profitability, and you see we made a lot of progress towards that this quarter. And so, combining the sales force and having them be cross-trained and we’re seeing them starting to make calls on Afirma and Percepta – and remember, a lot of those clients are in the same hospital. So, it all comes together in the hospital-based lab. We think we’re on pace to make that successful and we’re seeing some early signs of it. We ramped the sales force early this year. If you remember, we started layering in people early through the year because we wanted to be able to get the folks in place to be trained, to be able to carry the product as we came through the midpoint of the year and really started to get traction with Percepta. So, where we are right now, we’re on pace with where we thought and feel like it's been a good quarter with some early successes.

Okay, great. Thanks for taking my questions.

Thank you.

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

Hi, thanks. I guess I just had a follow-up to that, maybe for Keith. So, just thinking about guidance for the year, I just was curious how you’re approaching the Quest agreement. Obviously, that hasn’t started to ramp yet. So, I just wanted to get a sense of how much upside there might be from that relative to the guidance. And then also, I guess, more broadly, are you thinking about expanding that beyond – I know it hasn't really started yet, so it may not be a fair question. But just expanding kind of that type of relationship beyond Quest.

I’ll leave the expanding the relationship beyond Quest to Chris. He’s probably the best person to address that. In terms of our goals for the year and affirming our guidance, we’re on track to achieve our guidance and our business goals that we gave last quarter and reaffirmed this quarter. Our revenue guidance implies a 17% to 29% increase year-over-year and we hit 21% this quarter, which we believe keeps us on track for the year. In terms of Percepta, as we said last quarter, we advised people to look back at Afirma and the rollout that we had in Afirma back in 2011 and to sort of best shot at giving you idea is what we did there. And so, it's not a huge contributor to this year, but we expect it to be a much more significant contributor next year. Chris, you want to…

I’ll just say that – a couple of trends coming together, right, where we are in the market and the adoption of Afirma. One is that, there's a lot of deep relationships between cytopathologists and MDs reading these slides and we've had phenomenal success building Afirma with an integrated model and building a beachhead that is by far the market leader at providing cytopathology services to the community. But the reality is that there is a lot of deep trusted long-term relationships. And so, the last couple of years, we really focused on partnering with local cytopathologists, regional labs and now a big lab with Quest to be able to ensure that Afirma is offered because of the second trend, which is Afirma is now standard of care. And I think physicians increasingly expect it to be able to be – that they’re able to get access to it and patients certainly are asking for it. And so, what we’ve positioned ourselves and will continue to position ourselves is to partner with labs – local, large regional, etc. – to be able to continue to fuel the growth because that's key to being standard of care. Does that answer your question, Amanda?

Yes, thanks. I just had another one on just kind of what you’re seeing in the market. I think there was some conversation around other assays that have gotten coverage and whatnot. So, I just wanted to kind of talk about that. And then also, from a GCS perspective, just wanted to get a sense of – that may be positions you competitively as well longer-term.

Sure. Yeah, we are aware of a new policy that came out, actually about a week ago, from UnitedHealthcare that was an update to their policy. But I believe from going through that policy, the Afirma GEC was still the only product covered by United in thyroid cancer workup. So, we were pleased to be able to see this policy updated and the policy remain intact and in place for the Afirma GEC. When you think about the GSC transition, as I mentioned earlier, the key point of payers continuing to reimburse and us transitioning them with the GSC is the phenomenal confidence they have because our validation studies are large-scale prospective and blinded. And in fact, with the GSC, we followed the guidance documents that anyone would follow around platform transitions and validated the test using the same blinded cohort that was used for the GEC. So, doctors will have lots of confidence and payers will have confidence that those test results can be trusted and, in fact, deliver greater value to patients. So, I think when you look at really quality designed studies that predict the kind of performance that we’re seeing not only with the GEC, which has been market-leading, but now even going beyond that with the GEC, the ability to report on some of the rare mutations and fusions such as BRAF and RET/PTC, which will be part of this new set of results, and then the potential to go beyond that just because of the richness of the technology platform. We are just thrilled to be able to not only maintain our significant market-leading edge, but further strengthened that competitive position. So, it’s going to be a fun ACE and meeting through the rest of the year for the Afirma team.

Got it, thanks very much.

Thanks, Amanda.

Your next question from the line of Bill Quirk from Piper Jaffray. Your line is open.

Great. Thanks. Good afternoon, everyone. This is Alex Nowak on for Bill today.

Hi, Alex.

Hi, Bonnie. Just a three-part question on Afirma GSC. One, we still use the current CPT code on the new test. I think you do. Just want to confirm that. Second, is there any cost benefit to using – to run the Afirma GSC versus the gene expression test? And then I guess third question, looking out at 2018, do you expect the transition over to GSC to slow down any efforts to sign up new accounts, just given reps might be busier contacting prior or old accounts that educate them on the change in the test?

Great questions. So, we do intend to use the same code to build the GSC and description of Afirma will be maintained under that code. So, that should be fine. In terms of cost-benefit, I think that the way that we’re looking at some of the benefits from our own operations, and we've sort of alluded to this in the call, we now have two products, the Envisia product along with now the GSC, running on a single automated line with the same technology and platform. And so, as you can imagine, over time, as samples come in the door and go on to the platform in an automated way and run down that pipeline, then the only difference at the end of that assay is which algorithm is triggered to generate the patient results. So, it does create efficiency of scale, automation and will give us nice operational leverage over time. I would say you’re not going to see that operational leverage in the next year because we’ll still be running under capacity with Envisia and will be running under capacity with Percepta, which is currently still in another platform. But, over time and long term, we do expect to gain great efficiencies from a single platform in the lab. And then the last question was the transition. So, we think that there will be – how do I explain. So, there are a combination of ways that the GEC is going to really further solidify Afirma in the market. It will be new accounts that get excited about the new technology and the fact that fewer and fewer patients that are suspicious and go to surgery are found to be benign. So, we think that’s going to have a great value in pulling more doctors in. There are…

Okay, thank you. That is very hopeful. And then, just second question from me on the sales and marketing. It came up a bit in the quarter, but I think this was given the investments you made with the sales force.

Yeah.

Should we expect about $7 million per quarter to be a good run rate during 2017? Or do you think there could be other sales and marketing investments you need to make for the Percepta launch in the second half of 2017?

We grew the sales force, as we said, this quarter pretty nicely and you see that in the ramp. We’ll continue to grow it as we go through the year, so we expect a little bit more trend upwards in that, So, it’ll continue to trend as we layer in some more people. We’re still short of our overall hiring plan for the year; and this quarter, we’re in the process of layering in a few more people in some key territories. So, we’ll see it go up a little bit, but I won’t go up dramatically. Anything to add to that, Keith?

Yeah, thank you. See something like probably 10% growth in that number over the rest of the year on a quarterly basis, my guess.

Yes.

Okay, perfect. Thank you very much.

Thank you.

[Operator Instructions]. Your next question comes from the line of Bryan Brokmeier from Cantor Fitzgerald. Your line is open.

Hi, good afternoon.

Good afternoon.

I understand that Quest has just – has begun offering Afirma. How much training is their sales force undergoing and where are they in that training? And are there any early signs of adoption by new physicians through Quest?

Bryan, it’s Chris. We just started the journey. So, we’re early to really have anything significant to report to you. We have put together with them, we think, a pretty comprehensive training plan for them to be able to work with their clients, but I would add too that their cytopathologists are involved in that because the cytopathologists, I think, are also excited to have access, and so they’re part of telling the story and that's always a better place to have physicians telling the story. And so, they’ve been well-trained. And I think that there's – and there’s certainly linkages in the field between reps where appropriate. And so, I feel like we’re in a good spot, but we’re really just in that early part of the journey with the implementation. And so, I think we’ll have better insight into that on the next call.

Yeah. I think to add to that, we, I think, originally thought that it would get kicked off by the end of Q2. The good news is we’re right in that kickoff.

We’re right in that kickoff phase.

Okay. And it's been almost a year since Anthem updated its coverage decision and…

Right.

…they didn’t provide any coverage for Afirma still. We thought that there might be a policy update off-cycle, but it's now due for their annual review. Have you had any recent discussions with them and give a sense for what’s delaying them?

We’re always sharing information because the evidence of Afirma gets deeper and deeper as we go and there's been some really great clinical utility studies published this last year and we certainly made them aware of it. And I think actually the deepening of the literature around Afirma making a difference in the treatment of patients has really driven the 11 Blue Cross Blue Shield plans that did flip this quarter and started to cover the product. So, we believe and we continue to be optimistic that Anthem will get there. And you’re right, this is – they’re coming through their normal cycle and didn't happen off cycle as we thought it might. But I can never guess and we’ve always said we can never guess when these things may happen. But we think that they – that the evidence is in place and most of the other Blue Cross Blue Shield payers have agreed, and so we continue to be optimistic.

We’ve actually been quite pleased with the incredible progress we've made with the rest of the Blues Plans in light of that. But we’re still very optimistic that we’ll get there.

The good news is most Americans with a Blue Cross Blue Shield plan now have access to Afirma as it’s medically necessary.

Okay, thank you.

Thank you.

Your next question comes from the line of Paul Knight from Janney Montgomery. Your line is open.

Hi. This is Carolina Ibanez-Ventoso on for Paul Knight. I was wondering if you could provide an update on any progress attained in building clinical utility evidence for Envisia. And also, when can we expect that data readout for this program?

Hi, Carolina. It’s nice to have you on the call for Paul. So, our Envisia sites, as you know, we began the early access and continuation of access through our prior clinical trial sites for Envisia and are actively collecting the – I think I'm maybe getting confused with Percepta. Were you asking Envisia or Percepta on clinical utility?

Envisia, yes.

Okay. All right. That’s a little bit earlier stage. That's right. Now, we’re advancing that on the Percepta. And Envisia is in the early stage. We’re getting site set up under a registry. We've got protocols for clinical utility studies and studies that have been conducted, not the long prospective ones, but other studies on that data that look very encouraging. And there is actually a lot of enthusiasm. Our team has worked extensively with the Pulmonary Fibrosis Foundation and the centers of excellence and some of that top leaders in IPF. Doctor Neil Barth, our Chief Medical Officer, is that very actively working with all of them as these protocols and execution of that comes together. So, it's a little early, but we are very encouraged with where we are and are looking forward actually to accelerating and the deepening of the evidence around Envisia Genomic Classifier. So, that will be the key part of pulling this package together to take to Medicare. We still believe that next year will be our Medicare coverage point. And then, just a reminder, I did mention that, at the ATS meeting, we’re going to have four abstracts there at that meeting on Envisia and that will really be key to rounding out the evidence that we’ll take for coverage. So, it’s moving right along.

And then, for the CMA’s coverage, is it reasonable to expect a draft from CMA within the same timeframe that it happened with Percepta, like about 70 months post-launch?

We have pointed to expecting early 2018 would be that timeframe. And I think we see nothing that would change our thoughts on that. And everything is moving along nicely on that track.

Okay, thank you very much.

You're welcome. Thank you.

We have no further questions at this time. I will now turn the call back over to Bonnie Anderson, Chief Executive Officer and Chairman of the Board, for closing remarks.

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

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