Veracyte, Inc. (VCYT) Q3 2017 Earnings Report, Transcript and Summary

Good afternoon, ladies and gentlemen, and welcome to Veracyte’s Third Quarter 2017 Financial Results Conference Call. [Operator Instructions] As a reminder, today’s conference call is being recorded. I’d now like to turn the conference over to Ms. Jackie Cossmon, Vice President of Investor Relations and Corporate Communications for Veracyte. Ms. Cossmon, you may begin.

Thank you, Tiffany. Good afternoon, everyone, and thank you for joining us today for our third 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 third quarter. Chris Hall, our President and Chief Operating 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 attributes and pipeline, drivers of growth, expectations regarding reimbursement 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 in, 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 third 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 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.” We will also post a transcript of our prepared remarks to our website immediately following this call. I will now turn the call over to Bonnie.

Thank you, Jackie. And thanks, everyone, for joining us today. I want to start by saying that this is one of the most challenging quarters I have had to prepare for. On the one hand, we’ve had one of our most successful quarters in terms of advancing the core foundation of our business, but at the same time, we did not achieve the acceleration of growth in the quarter that we had anticipated and as a result we are adjusting our guidance for the year. Our revenue for the quarter was $17.5 million, compared to $18.6 million for the third quarter of 2016. Accrued revenue, which excludes cash collections for tests performed in prior periods grew 24% and genomic test volume grew 14% over prior year. This was our best growth quarter of the year and in a quarter, that is typically flat. We achieved all of this despite the impact of the hurricanes, which we estimate to be $500,000 and $600,000 for the year with the majority of this impacting the third quarter. The result of all of this, combined with slower acceleration of growth from key initiatives, has led us to adjust our 2017 revenue guidance to the range of $71million to $72 million. What I want to describe for you today is why that acceleration was delayed and what we have done to course-correct going forward. We believe the fundamentals of our business are quite strong and we are very optimistic about our strategy and our future. I will explain as I go through our progress in each of our product areas and will then turn the call over to Keith to review our financial results. I’ll start with Afirma. We have discussed several levers to accelerate Afirma growth. They are: The introduction of our next-generation Afirma Genomic Sequencing Classifier, or GSC, and the transition of our current and new customers to the state-of-the-art test; Number 2, our agreement with Quest/Ameripath, which provides expanded access to our Afirma classifier through their physician network; Number 3, expansion of our salesforce; and Number 4 continued reimbursement success. Looking at the transition from the Afirma GEC to the Afirma GSC, the demand for our new classifier among physicians is quite strong. We added 100 new accounts during the quarter and continued to convert existing Afirma accounts to the new platform. Despite that increased demand, our volume growth was slower than we had initially planned. This is due in part to our decision to take a more measured approach to transitioning customers to the GSC than originally anticipated. We did this to optimize workflow complexity in our CLIA lab, given that we are running two full technology platforms, both microarray and next-generation sequencing as we make the transition. The multiple workflow streams, utilization of staff and equipment, and coordination of multiple supplier inventories requires careful coordination to ensure optimal quality. That said, our lab operations ran smoothly without any issues and we delivered hundreds of patient results to physicians as intended. In fact, we have received tremendously positive feedback from the accounts that we’ve converted. We have now hit our stride and as we have moved into the fourth quarter, we have picked up the pace of transitioning customers. We expect to be fully converted to the new platform by early next year. In sum, we believe the Afirma GSC is allowing us to gain more business from our clients and are optimistic that it will positively impact our growth rate as we move forward. There is a strong backlog of customer demand for the Afirma GSC, following the impressive data that were unveiled at two major endocrinology conferences in the third quarter. Researchers shared findings in three oral and three poster presentations from studies at the World Congress on Thyroid Cancer and the American Thyroid Association’s annual meeting, which demonstrated the clinical performance of the Afirma GSC. The data reveal that the GSC’s unique combination of RNA sequencing and ensemble machine learning algorithms is enabling it to better provide answers to challenging clinical questions and to significantly improve patient care. At the World Congress on Thyroid Cancer, researchers showed that the Afirma GSC increases the number of benign patients that can potentially avoid an unnecessary surgery by 30%, without compromising the original test’s very low false negative rate. At the ATA meeting a couple of weeks ago, researchers shared data showing the classifiers’ ability to distinguish challenging-to-interpret thyroid cancer subtypes. This includes differentiating benign from cancerous Hurthle cells, which until now has largely eluded both traditional and genomic testing techniques. This ability will help many patients avoid surgery, which otherwise would have been a standard next step. We also shared data showing our ability to detect BRAF variants and medullary thyroid cancer with high levels of accuracy, providing physicians with important treatment information when surgery is needed. In total, these data show that the next-generation Afirma GSC brings to physicians the power to increase the number of benign patients that can avoid surgery and provide better treatment based on key information about the aggressiveness of cancers. It also provides us with an extendable platform for bringing additional answers to market, which could enable physicians to make better clinical-care decisions than ever before for their thyroid nodule patients. The second lever for accelerating growth is expanded access to Afirma through the Quest/Ameripath relationship. We have built a good working relationship with the Quest/Ameripath team and are encouraged with the traction we’re seeing, although that traction didn’t take hold until the last month of the quarter. We know that building a critical mass of users and volume takes time and remain cautiously optimistic about this opportunity and its contribution to accelerated Afirma growth. To that end, we’ve assigned a single point of contact within our commercial organization to take responsibility for the successful implementation of this relationship. The third lever is the continued expansion of our salesforce, not only to drive growth of Afirma, but to support the commercial expansion of Percepta and prepare for the launch of Envisia, our third commercial product, which we expect to begin ramping as early as next year. We’ve expanded our sales force to 61, as we continue to invest in executing our multiproduct sales strategy. We believe we’ve lagged in the speed at which we’ve hired sales associates to backfill for the transition from Genzyme last year. We’ve corrected this and have added new reps to strengthen regions where needed and have added pulmonary specialists with expertise that will be important for the adoption of both Percepta and Envisia. A group of these reps is recently hired and we expect to get the benefit of them as we move into 2018. We’ve determined that we’ll need additional reps to further support the push into two new indications and we’ll continue to hire through the remainder of this year and into early 2018. Our goal is to have a sales force of 85 in place by this time next year. Our fourth lever is reimbursement expansion, where we are a leader in the industry as one of the few companies with coverage for a genomic test from all major health plans across the country. Now that we have achieved this milestone for Afirma, we’re focused on converting these coverage policies into in-network contracts. This will help expand our reimbursement rate; save considerable time and resources in adjudicating claims disputes; and accelerate growth because physicians are more likely to order a genomic test when it’s provided by an in-network lab. We made excellent progress on this goal, executing five new contracts during the third quarter, four of which were Blues plans. This brings the total number of contracted lives to 176 million and increases the number of Blues contracted lives by 35% in the quarter, to 45 million. I want to address one reimbursement headwind that you may have heard about, which is the recently announced programs by UnitedHealthcare and Anthem to require prior authorization for molecular testing. We’ve been tracking and preparing for such potential requirements and believe we’re well positioned to handle them. Afirma and Percepta are both performed in very specific clinical scenarios and the medical necessity for our tests is well defined and documented for each patient sample we receive. In sum, we believe we have good processes in place to address this change in a way that minimizes disruption to our business. Lastly for Afirma, CMS announced its preliminary rates under the Protecting Access to Medicare Act, or PAMA, and our preliminary Afirma classifier Medicare rate will increase slightly, from $3,220 to $3,600. These new rates are expected to be finalized within the next few weeks and to become effective January 1, 2018. Medicare patients represent approximately 20% of our Afirma test volume. Now, I’ll turn to Percepta. We’re pleased to report that we booked our first Percepta classifier revenue this quarter. This is a really big milestone for our company. We’ve also expanded the test’s adoption to over 70 institutions around the country and, so far, the feedback from customers is terrific. They’re using the Percepta classifier as intended and the results are helping to impact their clinical decision-making in lung cancer screening and diagnosis. We believe our strategy of leveraging existing Afirma relationships to move Percepta into institutions is working well. Our sales reps are able to get access to decision makers, given that Veracyte is already known in the institution as providing well validated tests that solve important clinical problems. The sales cycle for Percepta is longer than that of Afirma because the decision-making process at institutions is more complex. We’ve been pleased with our progress so far, but we believe that our sales efforts will further benefit from an important change in CMS’s so-called 14-day rule, which has just been released. This change means that we will be able to bill CMS directly for all Percepta Medicare claims, rather than some claims needing to be submitted by the hospital. The change, which is scheduled to go into effect in January 2018, will deliver two benefits for us. First, it will mean that all Medicare recipients will be able to get access to Percepta as a covered test, regardless of their geography; and secondly, it should help speed up the sales cycle. All of these factors give us confidence that we will be successful in driving adoption of Percepta and creating significant value in the lung cancer space. With Medicare coverage in place, we’re focusing our efforts on private-payer coverage. We believe that here too we’ll be able to leverage our existing relationships through Afirma where we have developed a strong reputation for providing high-quality genomic tests that change patient care and reduce costs. To that end, we’re particularly excited about the real-world clinical utility data for the Percepta classifier, which were presented last week at the CHEST annual meeting. In a podium presentation, a researcher from Johns Hopkins University unveiled new data demonstrating that when the Percepta test classified patients from intermediate to low risk for lung cancer, there was a greater than 50% relative reduction in recommendations for risky, costly diagnostic procedures, compared to decisions made without the Percepta test result. What was equally impressive, and will be especially important to payer, is that this real-world analysis showed that physicians are using the test just as we intended. Our findings show that they elected to use the Percepta classifier 75% of the time in patients with the greatest probability to benefit from the test, those with low to intermediate pre-test risk of cancer. We believe these data will give physicians further confidence in monitoring patients with CT imaging, rather than directing them to surgery, and suggest that the use of the Percepta classifier can reduce costs in lung cancer screening and diagnosis. All of these findings are powerful, and we believe, have the potential to change guidelines. As we have discussed previously, guideline inclusion of our tests is a key factor in driving test coverage and reimbursement. I would like to close with an update on the Envisia Genomic Classifier. We’ve made great progress in building out the evidence demonstrating the Envisia classifier’s effectiveness in improving the diagnosis of idiopathic pulmonary fibrosis, or IPF. In addition to early clinical validation data that were published in late June in the Annals of the American Thoracic Society, which demonstrated the test’s performance, later this week, Dr. Neil Barth, our Chief Medical Officer, will present interim clinical utility study findings showing our test’s impact in real-world clinical scenarios. These findings will be shared during the Pulmonary Fibrosis Foundation’s bi-annual PFF Summit and I encourage you to keep your Google news alerts set for Veracyte on Thursday. We believe we have put together a comprehensive library of evidence that will meet the requirements for a Medicare coverage policy. We continue to believe that a coverage policy by the middle of next year is realistic. That would position us to potentially book our first revenue for the Envisia classifier by the time on our third-quarter call next year. And, more broadly, it would position us as one of the only genomic diagnostics companies to have three tests that are commercialized and covered by Medicare. With that, I would now like to turn the call over to Keith for our financial results review.

Thank you, Bonnie. Good afternoon, everyone. As Jackie mentioned earlier, in addition to our earnings release, you may find our financial presentation on our website at www.veracyte.com under “Investors” and then “Events & Presentations” and under the November 3, 2017 third quarter financial call. Please review the Safe Harbor Statement on Page 2 of the presentation. I plan to speak about our third quarter and year-to-date 2017 results and will reference the relevant pages in the financial presentation as I cover the highlights. Turning to Page 3 of the presentation, this is the first quarter that we accrued substantially all billable tests in the current and prior year quarters, so our accrued revenue is directly comparable. The Financial Highlights for the third quarter 2017, as compared to the third quarter of 2016, are as follows: revenue of $17.5 million declined 6%, driven principally by a $4.4 million or 94% decline in cash revenue for tests performed prior to July 1, 2016. Accrued revenue increased 24%, comprised almost equally by volume and rate tailwinds illustrated on the right side of the page. Genomic reported volume of 6,533 tests increased 14%. Total operating expenses of $23.9 million increased 2%. Net loss of $7 million increased 25%, driven principally by the impact of incremental cash revenue in the prior year. Our cost of revenue increased in-line with volume growth and other operating expenses declined by approximately $0.4 million, compared to prior year; Net loss per share of $0.21 increased $0.01 per share. Cash burn, defined as net cash used in operating activities and net capital expenditures of $5.8 million improved 23%; and we ended the quarter with $41.2 million in cash. Turning to Page 4 of the presentation, the Financial Highlights for the nine-months ended September 30 or year-to-date 2017, as compared to the year-to-date 2016, are as follows: revenue of $52.4 million increased 12%; genomic reported volume of 18,873 tests increased 12%; total operating expenses of $72.9 million increased 1%, principally driven by test volume; net loss of $22.6 million improved 16%; net loss per share of $0.67 improved 31%; and cash burn of $19.1 million improved 31%. Turning to Slide 5 and reported Genomic volume. Genomic volume includes reported Afirma GEC, Afirma GSC, and Percepta volume, but excludes reported clinical and registry volume. As shown in the chart on the left, specifically the green bars that illustrate 2017 quarterly volume relative to the prior year, continues to improve and grew 9% in the first quarter of 2017, 11% in the second quarter of 2017 and 14% in the third quarter of 2017. The chart on the right shows sequential change in volume, which gives investors insight into the seasonal impact on our business. In both 2015 and 2016, the fourth quarter was our best quarter with a range of 10% to 11% sequential growth over the third quarter. From 2015 to 2017, the change in Genomic volume growth from the second-to-third quarter was plus or minus 300 reported tests and relatively flat the last two years. Since the beginning of 2015, our first quarter has been our slowest volume quarter and sequentially in the range of a 0% to 10% decline relative to the fourth quarter. Turning to Slide 6 and revenue. In the third quarter of 2016, or the prior year quarter, we recognized $3.5 million of incremental revenue upon test delivery that previously would not have been recognized until cash was received. This number is especially important if you are comparing the third quarter of 2016 to any prior quarter, which is why we disclosed it in the third quarter of 2016. For comparisons of the third quarter of 2016 to any subsequent quarter where we accrue substantially all billable test volume in each quarter, then it is especially important to distinguish between accrued and cash-based revenue, as cash-based revenue principally reflects the cash we receive for tests performed prior to July 1, 2016 that did not meet our accrual criteria at the time, i.e., in the quarter of test delivery. As previously mentioned, we received $4.7 million in cash-revenue in the third quarter of 2016 and only $0.3 million in the third quarter of 2017, reflecting the fact that substantially all our test revenue is now recognized on an accrual basis. Turning to Slide 7 and the sequential change in accrued revenue, the purple bar indicates the change in revenue recognition between the second and third quarter of 2016 that I just mentioned. For the third quarter of 2017, on average, we accrued between $2,400 and $2,500 for the Afirma GEC or Afirma GSC test that met our revenue recognition criteria, which was between 90% and 95% of the reported Afirma volume. From the third quarter of 2016 to the third quarter of 2017, we accrued between $1.7 million and $2.2 million in revenue per quarter from providing cytopathology services associated with our Afirma solution. We made significant progress this quarter with key physician and institutional partners on the framework for acquiring, processing, and reporting Percepta Bronchial Genomic Classifier results. We accrued revenue for a small number of Percepta tests this quarter, but the revenue was immaterial to our results. Turning to Slide 8 and the sequential changes in cash revenue. The chart shows the quarterly trend in cash-revenue that we have collected principally for tests performed prior to July 1, 2016. Though we continue to appeal older claims, we believe we have substantially completed the cash collection for tests performed prior to July 1, 2016. As of September 30, 2017, we had $11.6 million in accounts receivable and our current days sales outstanding, or DSOs, excluding cash revenue, was 65 days. Now, turning to Slide number 9, we generated 59% gross margin in the third quarter 2017. Cost of revenue grew 13%, in-line with our 14% volume growth. Cash revenue, as well as adjustments to accrued revenue due to increases in cash collection trends, such as the 1 million adjustments in the second quarter of 2017, favorably impact our margins. On Slide 10, we further breakdown the components of our operating expenses and show the percentage of revenue for each category. Labor represents approximately 50% of our total cost structure, so while we are investing in our salesforce, we remain focused on getting to cash flow break-even and generating operating leverage across our business. Slides 11 through 13 cover the trends in our net loss, cash burn, and cash position. As of September 30, 2017, we were ahead of plan with $41.2 million in cash on-hand. Turning to Slide 14. On November 3, we closed a $35 million senior secured credit facility with Silicon Valley Bank, which includes a $25 million term loan plus a $10 million unfunded asset based revolving credit facility. The facilities mature in 5 years in October 2022. As explained on this slide, based on rates at the time of closing the new facility, we estimate that we have reduced the yield-to-maturity from 13.4% to 7% and we have added additional borrowing capacity at an even lower rate. Including the $1.5 million make-whole payment we made to refinance our previous credit facility, the adjusted yield-to-maturity and excess liquidity remain very attractive. The new facility is based on a 30-day Libor rate and we are looking to hedge at least a portion of the floating-rate risk through an interest rate swap or cap, which we are evaluating now. Our prior facility was priced at a 12% fixed-rate. Turning to Slide 15, in October 2017, we amended and restated our service agreement with TCP. In return for lower fees, we agreed to extend the term for 5 years and to pay $1.75 million to Pathology Resource Consultants, its previous management company, over 8 quarters. Based on current test volume, we expect quarterly savings from the lower rate to exceed cash payments. However, expected savings will vary based on volumes. For GAAP purposes, we currently expect to amortize the upfront payment over the five-year life of the deal. As Bonnie mentioned, we are updating our revenue guidance to $71 million to $72 million and narrowing the range of our cash burn guidance to $25 million to $26 million, which excludes the exit fee paid to refinance and significantly lower our borrowing costs. To achieve our revenue guidance, we must generate $18.6 million to $19.6 million in revenue in the fourth quarter of 2017. To achieve our cash burn guidance, our net cash used in operating activities and net capital expenditures, or cash burn, in the fourth quarter of 2017 must be between $5.9 million to $6.9 million. I will now turn the call back to Bonnie for closing remarks.

I would like to wrap up today’s call with some highlights from the efforts we have underway to build a substantial franchise in the lung cancer space. Lung cancer is the biggest cancer killer in the United States, more than the next three leading cancers combined. It’s even more of an issue on a global scale, where it’s responsible for one in five deaths. Now, the movement to reduce lung cancer deaths through increased screening, and advancements in technology that enable earlier detection and treatment, is gaining significant momentum across the healthcare spectrum. We are excited to be taking a leadership role in these advances, as Percepta is well positioned to help make lung cancer screening safer and more effective. As we announced earlier in the quarter, we’ve introduced “Screen Together,” a lung cancer awareness and education initiative designed to encourage people at risk for lung cancer to get screened. To make this easier, our campaign encourages people at increased risk to pledge to be screened with a friend or loved one. We are piloting the program in North Carolina in partnership with the Lung Cancer Initiative of North Carolina, where we’ve also got customers like Duke University and University of North Carolina that can potentially help reach more patients with the program’s messages. Pending its success there, we plan to expand the “Screen Together” program to other key markets. More broadly, we see many opportunities to advance the fight against lung cancer and see Percepta as just the beginning. The novel “field of injury” technology that powers the Percepta classifier is already gaining significant traction among world-leading lung cancer authorities. Recently, the National Cancer Institute released its 2018 annual budget plan document, which profiled Dr. Avi Spira of Boston University, and how his “field of injury” discovery led to Percepta, which is already providing real benefits to patients. Dr. Spira also will be leading the Stand Up to Cancer organizations recently announced “Dream Team” comprised of researchers from top institutions including Stanford, Harvard, UCLA and others to identify and intercept lung cancer at its earliest stages. As an industry advisor to this program, we share in this goal and plan to also focus our R&D efforts on building genomic tests that further leverage the field of injury opportunity. This will include the use of a simple non-invasive nasal swab for early lung cancer detection and screening. We expect to see data beginning to emerge from these efforts next year. It’s an exciting time to be in the lung cancer space and we believe our technology positions us well to make significant inroads in the fight against this deadly disease. So, in conclusion as you can see, the news today is mixed, but, based on the great progress we’ve made in many foundational aspects of our business, our future is very bright. While we won’t provide guidance for 2018 until our Q4 call, we will provide some color as you think about the coming year. We expect to achieve a genomic test volume growth around 15% next year with a resulting revenue growth of about 20%. We continue to target cash flow breakeven by the end of 2018, but expect that this could shift by a quarter or so. We remain fully committed to achieving this important goal for the company and for our shareholders, but not at the risk of top line growth. I would now like to ask the operator to open up the call to questions.

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

Great, thanks. Good afternoon. I guess the first question is, if I'm looking at the consensus correctly, I think it’s 100 million for 2018, so that’s a pretty significant delta, the roughly 20% guidance which would suggest closer to $86 million, so just trying to get a handle on some of the moving parts here Bonnie because again that’s a pretty significant difference from the Street.

Yes, well I think that we, mostly around the levers that we spoke about for [indiscernible] I think we will see pick up from the GSC. We are cautious with the results that we can get with our partnership with Quest/Ameripath, but on the positive side Percepta is taking hold and while the sales cycle there is slower, we just want to manage our expectations on how quickly that new product will actually ramp. And then on the financial side, I think it would be good for Keith to just walk through the element of the cash versus accrued revenue, which we are now fully accruing.

Yes. I think what Bonnie is referring to is just the fact that we have been recognizing revenue this year and last half of 2016 for test performed prior to July 1 of 2016. And so that just creates the view - external view. If you just look at the top line that you are growing really rapidly, but if you look at the accrued revenue we’re growing 24%, our volume is growing 14%. So, we are having rate increases and volume increases, getting over this transition period where we’ve been converting from cash based revenue accrued revenue frankly - it's just been - challenging to predict where that was going to come out. And now when we sit in this current quarter where we have the first comparative quarter and maybe it’s our mistake for not having predicted this a year ago, what it would look like and how hard that really is to get there, but it just has posed a challenge on the top line and so we don't want to set the expectation been here and this is my 11th month here. I don't want to accept the expectation next year that we’re going to do something beyond what we really think we can do and when we look at the accrued revenue that’s why I laid that out for you and you look at that growth, I mean we think that growth in number is going to get you north of 20% topline growth next year. And now look we obviously hope to come back in the - with the fourth quarter results and give you more insight on that, give you more ability to model that.

Keith, I appreciate all the color there, thanks, but question for you. I mean as you guys have continued to add lives under contract, particularly with the Blues, shouldn't theoretically the accrual number from an accounting standpoint inch higher over time? And are you assuming that in your rate 2018 guidance? Also, just out of curiosity, are you assuming that Afirma goes into effect on January 1, 2018, there’s obviously some forces in the lab industry that clearly don't want it to happen, it benefits to you guys, so I'm just trying to figure out if that is in there or not?

Yes. So, we’ve been accruing all of our volume since the third quarter, regardless if it’s under a contract or not, based on the historical cash collections. So even if we had a coverage decision for example, but did not have a contract, we reasonably expect to collect an amount we accrue based on the historical cash collections. So, it’s not necessarily we don't accrue until we get a contract. We accrue when there’s evidence of cash collection.

But revenue is expected to continue to grow at a faster rate than volume because of that increased reimbursement expansion that we expect to get.

And then PAMA is it in the 2018 assumption? Thanks.

Yes, it’s small for us. I mean 20% of our test volume and it’s few hundred dollars per test, but we do have that build in.

Got it, thank you.

Thank you.

Thank you. And our next question comes from Amanda Murphy from William Blair. Your line is now open.

Hi thanks. Just a question on volume, so obviously you have talked about moving parts of the hurricane and whatnot, and efforts from a commercial perspective, but can you just remind us again where you are at with Afirma from a market penetration perspective and so you mentioned some new accounts with the next gen assay, so maybe just talk a little bit about same-store sales versus new accounts and how much of the volumes growth dynamics is due to kind of, I guess the dynamics of trying to get new business versus more penetration with existing accounts?

Yes, we do believe it to be a mix between the two because of the added content and the results that we can deliver from the GSC, but Chris why don't you give a little color on that from a commercial perspective?

Yes. Most of - I mean we think of the business, I mean, overall, I think we see our penetration at roughly 30% to 35% in that range and it’s we’ve seen a good chunk of the growth coming from the institutional segment. Within the institutional segment what’s driven the growth is two-fold. One is, it’s new accounts and going deeper, our new accounts within - in hospitals and new accounts in health systems, and new pathology lab accounts. Second, generally it is going deeper within the existing institutional accounts that we have. The institutional business, honestly, we’ve seen primarily growth by going deeper within accounts, but most of the top line new doctor growth has been in the institutional segment and we’ve talked about that over time as we’ve seen some of that shift. Most of the incremental growth that we have got from the GSC that we talked about with accounts was in the institutional segment, but we have consistently talked about the GSC to our existing customers is that, in ways that show the power of the GSC to go deeper within those accounts and we remain optimistic that we will continue - we will get more business from those existing accounts as we accelerate the rollout of it going through the next couple of quarters.

Just to add to that, as you can see from the charts that Keith provides, it is the overall side of pathology and the pull-through of that. This is the business - so that has been the fastest and we kind of predict that business to either remain flat or slightly decline over time because once we opened up the model it has allowed people to do their own side of pathology. Some of that business got pulled through into that, but as an example our year-over-year growth on GEC samples received where we are only receiving a sample for just the GEC grew 34% over prior year. So that remains a very robust side of the business. That model is the strongest and that’s also where because of the adding content and the information on cancers we see the GSC going to be the strongest lever.

I was just going to ask, I mean, if you look at some other companies like Genomic Health who have got at this point 98% penetration in their base market. I know it is a little bit of a different dynamics, but I mean is there any reason structurally why over time you could not get into something like that rate. I don’t know, pick your number, but I suppose [indiscernible].

Yes. We think we can get to that level of penetration I think. To Bills comment earlier, one of the key things is getting in network with Anthem because that’s a very, very large covered lives payer and one that if you are not in that work it’s hard to penetrate that business. And then, I think the enhancements of the GSC, I think you have to keep in mind that we’ve been running six years on the GEC as it was originally developed. And while early on in that process it was terrific that we could move 50% of the benign patients into a benign call to avoid surgery. The surgeons using the product still saw a high percent in their perception of a benign patient still undergoing that process. So, there’s been a lot of effort to see if there is other ways to define more aggressive cancers versus how they look at the nodules et cetera, et cetera. I think the GSC coming to market now really becomes the solution for everybody because of this significantly higher performance as the benign call rate combined with the added content that we can give on variance and fusion and markers that others have had an interest in seeing how those show up on cancer. And so, we think competitively this really sort of answers everyone's needs and we’re going to have a big push with it, with our expanded sales force and all forward end network contracts and maybe we will be able to drive more growth than what we’re anticipating now, but we want to look at realistically with where we are.

Okay. And then just last one following up on Bills question on the accrual, is it possible to put the numbers around what - so in terms of what you're occurring at this point per test, [indiscernible] cash collections in theory that would be a historical look back right? So, I guess I'm just wondering how much - can you put some numbers around what that number might look like over time?

We’re accruing right now when average $2,400 to $2,500 a test. I think that is all disclosed. And that number will only move up as we collect more than what we’re occurring from payers. Most of that will be payers that are not yet under contracted rates or having covered, but all of them have pretty much covered now. That would go up slightly next year with the increase in Medicare, but there is room for that to continue expand, which is why we do predict the revenue will grow at a faster rate than just volume.

So, I mean, just thinking about your getting paid roughly, let’s call it 3,200 - pick a number, how long would it take to get to that from an accrual perspective or do you never get quite that high? I’m just trying to think that ramp in the next 3 years to 5 years?

I think what we have pointed to historically is that once we get there with all payers and in contracted rates and PAMA and all of that in place, we could probably get to the 3,000 mark. My guess is that it could take another 18 months or so to get there, it won’t happen immediately.

Okay, thank you.

Thank you.

Thank you. And our next question comes from Sung Ji Nam from BTIG. Your line is now open.

Hi, thanks for taking the questions. Bonnie, maybe a little deeper on the GEC to GSC conversion, are you seeing examples of physicians that were hesitant to use GEC, but are more interested in using GSC, and if so then what are the key drivers, is it just the sheer performance of GSC?

Yes. So, there is a lot of interest and I think a lot of demand from the marketplace in getting converted over to the GSC. What we did with purposely slow things down a little bit, mostly because of the complexity in the laboratory. And when we bring our new accounts. which we have been very successful at doing with the GEC they typically take a little more handholding than existing clients and working through patient reports with them and helping them understand and interpret those results. So, I think it was pretty complex in the laboratory having a mix of, say, a bulls run on one line versus the other line and the inventory and cost and everything associated with all that, as well as the staff that was trained and in place to manage things across other equipment; and it just took us a little bit longer to keep things moving really smoothly without any hiccups, took us a little bit longer than what we anticipated. But as I indicated in the prepared remarks, we are beyond that now. I think things are starting to ramp and are going very well we haven't had any issues, so that’s really good news, and we still believe that we’ll have our clients fully converted over by early 2018. Chris, something to add?

We’ve always thought that the key driver of growth in the GSC wouldn't be as much of getting new accounts, although we do expect that to happen. And so, we expect to go deeper within the existing accounts that we have. The physicians that were reluctant to send this everything because we didn’t have as much genomic content or the benign call rate wasn't as high. We think we can extend the range of the GSC within especially institutional accounts to be able to ultimately win more business from those accounts and that’s been our assumption and we’re seeing some evidence that that’s starting to prove out in some of our early clients. So, we feel good about where we are.

Okay, that’s helpful. And then maybe one on Percepta, and this maybe early, are you seeing any - would love to get any updates on the North Carolina Screen Together campaign, if you are seeing any increase in people signing up to get screened? And then also, if do you expand this campaign outside of North Carolina, do you think this could represent a meaningful expense side on or are there ways skews leverage, your partners like the lung cancer initiative?

Yes, exactly. Great questions. I think somewhere in the neighborhood of 75 people have actually already signed up and pledged to go get screened, which is really pretty exciting for it being such a new program and only contain to really one stage. We will be able to consider getting leveraged with other organizations that want to drive - help drive these initiatives, and we also would pace the rollout of this in-line with the traction and top line growth that we're seeing as well. So, no, I don’t think we would ever go out on a [indiscernible] and drive more expense on this on than what we would be able to cover easily with dynamics there.

Okay, great, that’s helpful. And then would you be able to break out what the volume was for Percepta this quarter? Was that meaningful?

It was very small. The point was just that we did get that volume ramping and booked our first revenue. And I think as we look at providing guidance for next year as we come into 2018, we will look at all these metrics and try to decide what’s the best way to guide the business to give you more information than what we just provided now on how to think about it at this point in time as we look at a high-level.

Okay, thank you so much.

Thank you.

Thank you. And our next question comes from Paul Knight from Janney Montgomery. Your line is now open.

Hi Bonnie, can you talk to Percepta what was physician response? What’s pricing talk on Percepta, a little more color around that test? Thanks.

Yes. Well, I would say, as we always anticipated the sales cycle in driving adoption in years and institutions for Percepta is a much more complicated scenario than it was early on for Afirma and we anticipated that which is good. As I mentioned on the call, the current situation this year in getting institutions set up to use Percepta also required contracting with certain sites so that depending on how the test was ordered they would be set up to be able to build for it, probably one of the best news we have on the call was the 14-day rule change, which will take that away and will allow us to fully manage the billing, which is really good news. We’ve expanded to over 70 sites. I would say with the third test like this it’s still new, doctors want a lot of education. We have doctors and MSLs educating and we’re training speakers on the data. New data are emerging, the data that we presented at CHEST was very compelling. And I think now that doctors can wrap their arms around the clinical validity of the test and the value that it can bring safely moving intermediate risk patients to low risk and then moving them out of the surgical decision, combined with this recent data that’s emerging saying that doctors are actually doing that, and when they do that there is a 50% reduction in this patient of invasive procedures. These are all just really compelling data points that are needed to get out there and keep educating to keep that momentum going. So, I think we’re really very pleased where Percepta is, it’s all about more data, more experience more people using the product and more patients benefiting and that will help to then get more and more people on board. Combined with that, the fact that we are now going to ramp up even more reps and bring on even more pulmonary specialists as we think about accelerating Percepta through next year and Envisia, which is also a pulmonology product. That will give us broader coverage across the country and that combined in with 14-day rule opens up with more and more of landscape there that we can go after. So, I think we are on one hand extremely excited and encouraged. We see nothing that would give us pause that the test is being used inappropriately, in fact physicians are using it exactly as we had hoped they would and they are making decisions in patient care exactly as we had hoped they would. So, those are really, really good data points to get confirmed. I guess we just wanted to make sure that we don't get out of our skies [ph] in predicting the growth of a product that is going to have to take time to get in certain into institutional practice guidelines and a cancer that people will be very cautious and not switching quickly to a product that they don't have ultimate confidence in that they can manage patients safely by moving them to CT follow-up. And that’s our job to do and we plan to invest more and more in doing that, but we also want to manage our expectations that this will be the first full year of getting a brand-new product in a very highly focused cancer that you don't want to miss, and we’re going to be changing care in the way physicians do it today and that always takes time.

Okay, thank you.

Thanks Paul.

And our next question comes from Puneet Souda from LEERINK Partners. Your line is now open.

Hi, Bonnie. I think a number of volume and pricing questions have been covered, so maybe can you tell us how many of the reps or what’s the allocation towards Percepta in terms of expenses and what’s the expectation of spend here specifically, and I don't know if you had laid that out already?

I didn't, but I think Chris can probably is closest to that in terms of giving you a little additional cover on how that breaks down.

Yes, we talked about increasing the number of reps as we go through the year to build the sales organization. What we see is that as we go through next year, we expect about a third of our reps energy, it’s about a third of the commercial infrastructure would be devoted to driving Percepta, so, we’re really starting to focus on doing that. The time is right, but one of the things that we noted in the script was that we - with getting the 14-day rule changed, we will be able to offer the product to everyone in the country, all doctors where before only a fraction of the actual Medicare patients would actually be covered because the hospital would likely have to build their local Mac [ph] and that they may not be covered. So, now with us being able to build, we expect to be able to ramp that up and drive the product more rapidly around the country. So, we expect about a third of the number to be diluted to Percepta.

And Puneet just to add to that, the other really positive thing that we’ve learned based on the accounts that have converted to a Percepta is that a brand reputation with Afirma in these institutions is definitely leverageable to get that institution to take an appointment and have a presentation and start talking about Percepta. So, while we will have additional people focused solely on pulmonology, we remain very committed and see it as a real success factor to have them very partnered in all these institutions with the same rep that is talking about Afirma. So that’s working well, we're just going to take that to the next level and we will be layering in reps on both of those sides so that we can continue to see that grow.

Right because of the core, most of the reps are actually working with both products. So, when I say a third, you know just underline, it’s not a dedicated pulmonary group. There is a dedicated pulmonary group and we also see next year that group is starting to spend some focus on Envisia because we’re going to start to drive that more aggressively into the market as we move through next year and prepare to what we believe will be Medicare coverage.

Okay, and then one on, I don't know if this was covered already, but on pre-authorization are you seeing any impact that from that?

We haven't yet. We’ve monitored it and we keep our eye on it. As Bonnie noted, the UnitedHealthcare plan just started on November 1, and we’ve been keeping our physicians up to speed. One of the things about our test is that it is, both of the tests Afirma and Percepta are done in very focused ways and really easy to put a sense around it and ask for the prior off because it’s really clear where it’s being done and how to request for it. So, we’re cautiously optimistic we will work our way through it, and we will keep you Paul up to date, up to speed as we move through time.

Okay. Thanks guys.

Thank you.

At this time, I’m showing no further questions in the queue. I’d like to turn the call back over to Ms. Bonnie Anderson for further remarks.

Thank you. I do want to take a moment to thank our employees today for their unfailing dedication in driving high value diagnostic products to market and all the evidence that is really compelling for patients. And I also want to thank you, our stockholders for believing in us and continuing to support our vision of fundamentally changing patient care with diagnostics. Diagnostic tests that deliver value to stakeholders. And we look forward to keeping you up to date on our progress. Operator?

Ladies and gentlemen, thank you for your participation in today's conference. This concludes the program. You may now disconnect. Everyone have a great day.