Good afternoon, ladies and gentlemen, and welcome to the Veracyte Second 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 time. [Operator Instructions]. As a reminder, today’s conference is being recorded. I’d now like to turn the conference over to Jackie Cossmon, Vice President of Investor Relations and Corporate Communications. You may begin.

Thank you, Tanya. Good afternoon, everyone, and thank you for joining us today for our second quarter 2017 financial results conference call. Bonnie Anderson, our Chairman and Chief Executive Officer will be leading the call today and Keith Kennedy, our Chief Financial Officer will be providing an update on the financial results for the second quarter. John Hanna, our Chief Commercial Officer is also joining us on the call and will be available for questions. Before we begin, I’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. 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 these forward-looking 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. In addition to today’s press release, those risks and uncertainties are described in the company's filings with the Securities and Exchange Commission. Prior to this call, we announced our second quarter 2017 results, which are available on our Web site at veracyte.com, by clicking Menus on the top right corner of our Web site and clicking through to our Investors landing page and then Press Releases. We also released a financial presentation which Keith will reference later in the call when he covers our financial results. You may find the financial presentation in the same Investors section under Events & Presentations. At this time, I’d like to turn the call over to Bonnie.

Thank you, Jackie, and thanks everyone for joining us today. Our strong execution in the second quarter paved the way for continued revenue growth in the second half of 2017 and beyond. Our standout achievements include the launch of our second generation Afirma Genomic Sequencing Classifier or GSC, the highly anticipated positive coverage determination for Afirma by Anthem, our execution on initiating the Quest/AmeriPath agreement, and the receipt of our first commercial orders for the Percepta genomic classifier. I’ll talk about these and the other key milestones within the framework of the four metrics used to measure our success in 2017. They are revenue growth, reimbursement expansion, evidence development and financial discipline. Let’s start with revenue growth. We delivered revenue of $18.4 million for the quarter, a growth of 25% over prior year and believe we are well positioned to sustain strong growth through the second half of the year. One of the key drivers of our continued momentum is the successful conversion of our first customers to the Afirma GSC this quarter, which has reenergized our sales team. We are pleased with the positive responses from physicians and are on track to complete the transitioning of our tests to the new platform by early 2018. The Afirma GSC is being premiered with a new multichannel marketing campaign to heighten awareness amongst physicians and patients of the gravity of unnecessary thyroid surgery and to encourage more patient-shared decision making in the assessment of thyroid nodules. Our research demonstrates that most patients would elect to preserve their thyroid gland if a safe and effective test like our Afirma classifier were available to them. In addition to the Afirma GSC launch and promotional push, we have now implemented access to the Afirma classifier through Quest/AmeriPath division enabling the laboratory’s broad national network…

Thank you, Bonnie. Good afternoon, everyone. As Jackie mentioned earlier, in addition to our earnings release, you may find our financial presentation on our Web site at www.veracyte.com under Investors and then Events & Presentations. I plan to speak about our second quarter 2017 results and will reference the relevant pages in the financial presentation as I cover the highlights. Turning to Page 2 of the presentation, the financial highlights for the second quarter of 2017 as compared to the second quarter of 2016 are as follows. Revenue of 18.4 million increased 25%. Afirma reported volume of 6,500 tests increased 11%. Total operating expenses of 25 million declined 1%. Net loss of 7.3 million improved 35%. Net loss per share of $0.22 improved 45%. Cash burn, defined as net cash used in operating activities, and net capital expenditures of $5 million improved 41% and we ended the quarter with 46.5 million in cash. We continue to drive operating leverage across the business. To illustrate this point, for the second quarter of 2017, we generated 3.7 million of incremental revenue over the prior year quarter, our loss from operations improved 3.9 million and our cash burn improved 3.4 million. On a year-to-date basis, we generated 6.6 million of incremental revenue over the prior year period, while our loss from operations improved 6.1 million and our cash burn improved 6.6 million. Turning to Slide 3. Second quarter of 2017 revenue of 18.4 million included 15.9 million in revenue from genomic testing services principally from our Afirma genomic classifier, 1.7 million from cytopathology services and 0.8 million in cash-based revenue. For the second quarter, we reported 6,500 Afirma genomic classifier reports of which between 90% and 95% met our revenue recognition criteria. On average, we accrued between $2,400 and $2,500 for each test…

Before we go to Q&A, I’d like to take a moment to introduce Jackie Cossmon, our new Vice President of Investor Relations and Corporate Communications. For those of you who haven’t met Jackie yet, I’m thrilled to introduce her. We care deeply about our active and ongoing communications with the financial community and Jackie has joined us to ensure that we are best-in-class in this regard. She comes to Veracyte with over 20 years of Investor Relations experience in healthcare, has an MBA and is an Investor Relations Charterholder. Please don’t hesitate to reach out to Jackie if you have any questions or need further information about our business. I would like to now ask the operator to open the call for questions.

[Operator Instructions]. Our first question comes from Paul Knight of Janney Montgomery. Your line is open.

Hi. Regarding your discussion earlier, Bonnie, on the pulmonary market regarding the 350,000 bronchs a year, what’s your pricing thoughts on the Percepta tests?

So our Medicare rate we have not released specific rates, but we have said that it is very similar pricing to Afirma. And I think that that value is upheld specifically because of the point in the clinical pathway that we chose to position the tests. We like intervening, if you will, at the point where the current clinical care pathway has inconclusive results that the next step that we save is one of invasive and risky and costly, so that our tests can achieve and we can develop the evidence to show that we’re creating high value in that scheme of patient care. So I think the savings of surgery in the pulmonology side are a little bit costlier than what we save in Afirma, but certainly that price range is really upheld with the value that we will bring.

And then the next question would be regarding Afirma, the Quest relationship. What – I think the market seen JVs that have not been as successful as hoped. What gives you confidence in that channel?

Well, I’ve got a little bit of perspective and that’s a great question which I’ll pass over to John Hanna, our Chief Commercial Officer who has really been instrumental in pulling this together. I think what is exciting to us is that Quest has had a longstanding business in the thyroid-endocrinology area. Many of you that have been around as long as me remember the acquisition they made of Nichols Institute which was one of the very first endocrinology testing laboratories. And so they certainly want to be seen as continued leaders in endocrinology and we’re pleased to be able to get access to Afirma as a market leading product for their physicians. John, do you have anything to add?

Yes, absolutely. Thanks for the question, Paul. I think as we said previously we really like the engagement with Quest at this point in the lifecycle of the product, because we’ve already reached near universal coverage for the Afirma test across the managed care market. And that enables the Quest reps to really go out and sell the product without any concern around reimbursement or managed care agreement and smooth the process to getting the samples into the lab, they read the cytology at the AmeriPath labs and then pass the molecular test on to Veracyte for testing. So we’ve got a real headwind – I’m sorry, not a headwind. We’ve got a real opportunity tailwind behind us as we go into the second half of the year now that the AmeriPath reps are all trained up on the product. They have a strong familiarity of the use of Afirma in their endo, ENT and radiology practices. And we expect that in the second half of 2017 we’ll really see the volume move.

Thank you very much.

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

Great. Thanks. Good afternoon, everybody. I guess first just a couple of housekeeping questions from me. Just first off is thanks for the updated lives, contracted lives but can you just remind us the total lives on the contract and then specifically the Blues? And then I guess part to the housekeeping question is the Percepta outcomes data, Bonnie, that you cited greater than 450 patients in there thus far. When is that expected to be fully complete? And then when will we be expected to see the full data readout?

Yes. The interim data readout is expected to come out this year and we will continue the study, because as we have done for Afirma having long-term follow-up and long-term outcomes comes from establishing these registries and being able to follow data over time. So the data points that I gave on that real world data and an interim point showing that low-risk patients defined by Percepta that we are reducing the invasive procedures on them by 50% is real data on a substantial number of patients, 450. I’ll ask John – I think what we said was our total contracted lives are now at 161 million and the contracted Blues level, John?

The contracted Blues lives is at 34 million currently.

Okay, got it. And then just pivoting real quick to the next-generation sequencing version of Afirma, can you talk about – I realize it’s not fully rolled out yet. We’re initiating that. But can you talk a little bit about I guess the initial experiences from some of the physicians? Have you been able to use the incremental data to win over some physicians that may have been holding out and not adopting the previous version of Afirma? Thanks.

Yes, so I think we’re seeing a tremendous amount of enthusiasm just coming back myself from the World Thyroid Congress. I think the market had anticipated Veracyte would be the first to bring a next generation out that would be based on some of the newer advances in technology. And certainly the sequencing platform, the RNA sequencing platform gives us a really unique capability in combining and probably the richest genomic data that can be collected cost effectively today with our expertise on machine learning which was deployed even in our first Afirma classifier and through all the products we’ve developed. And so that has resulted in a pretty significant improvement in the percent of patients tested that we will call benign and that’s the data point that the physicians see every week when they send us samples. And more importantly, not only are we moving more of these patients into the benign bucket but we’re going to be able to help inform on other clinical questions on those that are left behind that are suspicious for cancer. And so some of the fusions and variance that I pointed to are just taking advantage of the technology richness and picking and choosing the variance we report that have some clinical significance already published in literature. John, any other color you can add on reactions from customers?

Yes. I was at the conference this weekend with Bonnie. It was really amazing. The volume of clinicians coming into the exhibit hall wanting to talk about the new product, asking when they can get access to the new product. And one of the keys there and we had a number of scientific presentations at the meeting is around the management of these Hurtle cell lesions that Bonnie described previously in her script where we go from about 12% to 15% specificity to over 50%specificity in calling those lesions benign and that’s one of the most complex lesions that you can get out of a thyroid tumor that often cytopathologists and endocrinologists really struggle with. And so the improvement there and the performance of the product is something that has a lot of clinicians really excited about the Afirma GSC and wanting to gain some experience with it. So we’re really happy with that. We’ve gotten a lot of interest. We’re queuing up customers to move them over on the platform and we’re going to take a cautious approach to make sure that we do this in a very structured way. But it definitely is increasing demand and it’s something that’s new and exciting that gets our reps in the door and talking with clinicians and gets them exciting about Afirma.

We certainly expect to bring some new folks over to this platform as well. Thanks for the question.

Our next question comes from Puneet Souda of LEERINK Partners. Your line is open.

Hi. Thanks for taking my questions. Bonnie, if you could help us understand what are the next step for the nasal swab studies? It appears that this is a completely noninvasive approach. And do you think in the longer run this could present a better avenue compared to liquid biopsy approaches since its closer to the site of injury?

Well, we’re certainly enthusiastic with the technology and I think the early data that has emerged out of the work from Dr. Spira’s lab and others that he’s been working with over the course of years is certainly quite intriguing. It’s early, so there’s a lot of work to be done. But we do have early evidence that the technology can detect that field of injury that potentially could pick up patients and advances them going on to develop cancer. This is an idiologic field of injury that many have talked about for years. But now the data that’s emerging looks pretty encouraging and promising. So we’re quite excited because I think that we chose the place to position Percepta in lung cancer workup where it is easiest to have a test that physicians want to adopt because you’re giving them data at a point where they really have no data to decide what to do next. And of course we pick that point because we can save downstream surgeries that are unnecessary, so we have a very solid economic value. But what we also know is first move or advantage in this space allows you to get deeply seated into a standard of care. And from there we’ve always believed we could move either later in the process if we had control of the sample and other data would be helpful following the detection of patients with cancer. We have also always believed that moving earlier could be very valuable. But one of the challenges in trying to intervene at an earlier stage in the clinical pathway is that you need to be better than the way physicians classify risk today. And also we’ll be looking at ways that perhaps this technology could come in, in the very, very early range of maybe better identifying patients at risk and then look for ways to integrate it across the clinical pathway to improve both early at-risk detection as well as early detection of cancer. And over the next 18 months, we would expect to see more data emerge out of these efforts and we’ll keep everyone posted.

Okay. Thanks for that. And just briefly in terms of the sales reps guidance that you have and if you could frame that in the context of your cash burn guidance, how should we think about the pick up here? Obviously, you have Percepta and folks are excited about GSC already in place. So just give us a sense of how we should think about the sales force?

We said previously that we are going to try to grow the sales force 15 to 20 heads this year. And we expect to do that and we expect to have enough cash on hand to get through the point where we’re cash flow breakeven.

Got it, okay. Thanks for taking my questions.

Thank you.

[Operator Instructions]. We do show a question from Amanda Murphy of William Blair. Your line is open.

Hi. Thanks. I just had a question on guidance for the year. So you did talk a bit about the range of expectations in terms of growth on the top line. So I was wondering – you’ve got some moving parts there in terms of Anthem potentially benefiting as you sign the contracts individually and then obviously Percepta. So I was wondering if you could help us understand kind of where you think the drivers could fall. Is it more Percepta, for example, or is it more Anthem? And then just kind of help us think about the range there? It is a little bit broad in terms of the back half ramp there growth?

Yes, I think for now we chose to leave the range which maybe felt a little bit broad in the business. We set it that way at the beginning of the year because a lot of the uncertainties in all these series of catalysts you have just mentioned; GSC getting launched and the adoption in pickup, Quest getting fully up and running and how well they will do at bringing their clients over to this new product, and of course Percepta and these were all back in the end of the year catalysts. And so we think for now we leave the range as it is and perhaps as we get closer to coming off of maybe our Q3 call, we’ll be able to provide a little more clarity on where that range ends up at the end of the year. Keith?

Yes, I agree with all that. I think we’ve gotten a lot of momentum on the managed care in the contracting side. And I think last year we spent a lot of time on the coverage, obtaining coverage and this year we’re spending a lot more time on the contracting side and that will make a lot of things simpler in terms of the back end of the process. But getting feet on the street and really covering the United States is something we’re focused in on and getting the headcount up and the right people trained is really important to us as we – especially as we roll into 2018 and we’re really excited about 2018.

Okay, got it. And then there’s been some discussion around PAMA just in terms of obviously a proposal to maybe try and delay that a bit and whatnot. And I think for you guys it’s given the differential in payment rates. It could potentially be a positive for you. So I just was wondering if you could give a little bit of an update there on what the expectations are. I think some of the larger labs talked about the broader industry proposals but specifically what you – I guess what your perspective is on that front?

Well, I’m definitely going to hand that one to John Hanna. I think he is one of our industry experts on all this. John?

Yes, thanks, Amanda. We don’t anticipate any delay in the implementation of PAMA currently. CMS hasn’t signaled that they intend to delay the rule, implementation of the rule. As far as we’ve heard from most stakeholders, the data collection process went smooth. It was smooth for us. And we intend on commenting in the rulemaking cycle here as they have asked for feedback from providers that participated it in that we feel the process went as was intended.

Okay, got it. And then just last one and I’m sorry if you said it, but have you talked about – it’s obviously a bit early on Percepta and you’ve got Medicare coverage, but have you talked about what your thoughts are around kind of private reimbursement on the Percepta line?

Yes, absolutely. As Bonnie mentioned earlier, with Percepta the cost of lung surgery is significantly higher than even what we see in the thyroid surgery space and so the value proposition around Percepta enabling half of patients with non-diagnostic bronchoscopies to avoid those invasive procedures is incredible. And so we believe we have a very strong value story with Percepta and we’re going to first start with engaging with our payers where we have managed care contracts already in place on Afirma. We have strong relationships and we intentionally build those relationships as we add these follow-on products, be it Percepta, Envisia and hopefully the nasal classifier at some point down the road, we can roll the products into those managed care agreements and lock up great rates for the products and get them accessible to physicians really fast.

Okay, got it. Thanks.

Thank you.

As I am showing no further questions at this time, I would now like to turn the conference back to Bonnie Anderson for closing remarks.

Thank you all again for joining us today and for your continued support of Veracyte. We look forward to updating you on our progress next quarter. Thank you.

Ladies and gentlemen, this concludes today’s conference. Thank you for your participation and have a wonderful day.