Good afternoon, ladies and gentlemen, and welcome to Veracyte's Second Quarter 2018 Financial Results Conference Call. [Operator Instructions] And as a reminder, today's conference call is being recorded. I would now like to turn the conference over to your host, Ms. Bonnie Anderson, Chairman and Chief Executive Officer. You may begin.

Good afternoon, everyone, and thanks for joining us today for our second quarter 2018 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 take us through the safe harbor statement.

Good afternoon, everyone. I would 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 facts. Management's assumptions, expectations, and opinions reflected in these forward-looking statements are subject to risks and uncertainties that may cause actual results and our 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. Additionally, non-GAAP financial measures will be discussed on this conference call. Please refer to the tables on our earnings release in the Investor Relations portion of our website for a reconciliation of these measures to their most directly comparable GAAP financial measure. Prior to this call, we announced our second quarter 2018 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 a financial presentation in the same Investors section under Events & Presentations. I will now turn the call over to Bonnie.

Thanks Keith. And thanks again everyone for joining us today. We delivered another outstanding quarter of growth, stemming from solid execution. Revenue for the second quarter was $22.8 million, which marks a 24% increase over prior year and reflects the strong momentum we see across the business. Let's review the highlights driving our results. I'll begin with commercial growth. Our reported genomic test volume for the quarter was 7,686, an 18% increase over the same period last year. The strong growth was fueled largely by our nearly complete transition to the next generation Afirma GSC, which is enabling us to grow business among existing clients and attract new customers who are sold on the ability to prevent significantly more surgeries compared to the original GEC. This transition is punctuated by regulatory approval from the New York State Department of Health, which we received earlier this month making the Afirma GSC nationally available to 100% of customers. We launched our Afirma Xpression Atlas in May, which enables us to extract deep RNA sequencing data across the genome for every sample we run with the GSC. The Xpression Atlas is garnering growing interest from physicians due to its ability to inform surgery strategy and treatment decisions for patients with suspected thyroid cancer. This rich genomic content, as well as our market-leading access to large numbers of diverse thyroid samples is also of significant interest to developers of precision medicine therapies. To that end, we are pleased to report that we booked our first biopharmaceutical service revenue based on the Xpression Atlas platform. We are also extremely pleased with the market reaction to an early traction of our Percepta Bronchial Genomic Classifier, which is resonating with physicians because of its ability to improve the performance of bronchoscopy in lung cancer diagnosis and thus…

Thank you, Bonnie. As mentioned earlier, you may find our financial presentation on our website at www.veracyte.com, under Investors, and then Events and Presentations. I plan to speak about our second quarter 2018 results, and to conclude with an update on our 2018 guidance. Turning to Page 3 of the presentation, our performance against six financial KPIs or key performance indicators for the second quarter of 2018, as compared to the prior year quarter are as follows; Revenue of $22.8 million increased $4.3 million or 24%. The strength in our core business plus the impact of new products and services drove another strong quarter. Genomic volume of 7,686 reported tests increased 18% and included 7,373 Afirma tests, 308 Percepta tests, and 5 Envisia tests, our first commercial reported test for Envisia. Gross margin was 64%, an increase of 2%. Leverage from higher-margin genomic and biopharmaceutical service revenue positively impacted gross margins partially offset by the cost of running dual platforms as we complete the transition of our customers to our next generation Afirma GSC. Operating expenses excluding cost of revenue were $20.4 million, an increase of $2.4 million or 13% driven by incremental sample sequence in R&D, and an incremental investment in our field sales organization offset by lower G&A spend. Net loss of $6.2 million, improved 14% due to the items previously mentioned; and cash burn of $3.6 million, improved 28%, driven by the improvement and our net loss and positive changes to networking capital, offset by slightly higher capital expenditures. The next six pages outline the sequential and year-over-year results underlying each of our financial KPIs, a few observations. Turning to Page 4, a few comments on revenue. First, the launch of Afirma GSC and a pull through from incremental variant reporting, as well as cytopathology services, contributed…

Thanks Keith. This is truly an exceptional quarter and we are delighted by the robust momentum we've generated across the three products, testimony to the value we're delivering to patients, physicians, and payers. We are equally excited by the innovative work we're doing to expand our pipeline. We believe our groundbreaking genomic science RNA sequencing technology and machine learning capabilities in tandem with the foothold we've established in the current way physicians workup patient’s uniquely positions us to answer important clinical questions along the continuum of care. We are excited about the evolving opportunities in precision medicine and ultimately the opportunity to transform care for patients. I would now like to ask the operator to open the call up for last questions

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

A quick question on the cash collection piece, it sounds like you had a pretty good quarter and you’ve had a little bit few prior period collections which I think was actually a little bit down from the quarter before. But I guess I was just wondering how we should think about that going forward. I know it’s a small piece at this point. And then just generally as you’ve gone more networks and getting more improvements so we expect the cash collection piece to have continued to improve overtime, and obviously that’s also contributing to your gross margin I presume?

Hi Amada its Keith Kennedy. I believe you may be confusing cash revenue versus cash collections. Our cash collections have been very strong sequentially quarter-over-quarter and in relative to our total revenue, I believe the number was around 97% of our revenue we collected in cash relative to total revenue last quarter, and in this quarter it was over 100% of our revenues. We had $22.9 million in cash collections this quarter, which exceeded our revenue of $22.7 million. So we expect that to continue and that's what's driving our incremental revenue that were recognized on claims. Looking back, we’re collecting more than we originally accrue on these claims. So we had 500,000 this quarter, we had 700,000 in Q1 that we collected in excess of what we originally estimated.

And that’s mostly a result of the great progress we’ve made especially with the Blues plans over the last year of moving them to both coverage and then contracted status.

You’re not [ph] curious to about the Affirma piece, so the 500 million you spoke to is that - I guess is that Loxo or is that something else, it seems like I wasn’t [multiple speakers]?

Yes, so it’s just - go ahead.

I guess I was going to ask just I know it was kind of early, only recently when you found that, so I was just trying to get a perspective of -- because that was a bit surprising to the upside that you were able to recognize revenue already. So have you kind of thought about what that contract or the relationship could look like for you in terms of revenue over time. And then I know people have asked what the broader pharma opportunity might look like. I know it’s only one quarter later, but - just like I was throwing that out there [ph] with the questions.

So the Loxo agreement is new this quarter and we had to work through the ASC 606 revenue recognition which I talked about on the last call. And we delivered samples to Loxo and that's where the revenue is this quarter. And then we have information program as part of that agreement, and we’re recognizing as I said in my prepared remarks $250,000 per quarter in Q3 and another $250,000 in Q4, and we haven’t said anything more about any future revenue on that, but Bonnie can talk about our effort to monetize our biorepository.

Yes I think we would expect it to continue relatively small as it has been and we’ll obviously look for opportunities to leverage our capabilities and assets as we go forward but right now this is the only one that we've announced, but we’re excited about being in a position to be able to better leverage the technology backbone that we've built the company on, it’s very exciting.

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

So first couple of questions from me, I guess first thing is Bonnie, I think I heard you correctly but with this New York approval we’re virtually going to have a 100% conversion to the GSC, did I hear you correctly?

That’s correct, yes that’s correct.

And then with respect to the comment around Percepta revenue, Keith, thanks for the color around that. I was hoping you could tease out a little bit on the volume side, obviously you spoke to the fact that you had 50% increase in physicians. Should we assume that their ordering patterns are going to be similar to the prior ones. In other words, you had about 50% sequential increase in volume for Percepta as well?

Right so.

I think it’s hard to draw too much data that can be used to predict the future with Percepta because we’re very early. And as you know, we are believing that we are really on track to achieve the volume that we’ve predicted we will be at coming at the end of the year. But it's still very early, so we’ve got to get these doctors to adopt the tests and often they'll try to test out not on all their patients the first time around but they will choose patients and get comfortable with the test. So we’re looking for the dynamics like that to - as we learn from those to give us better mechanisms and metrics to predict the future. But I think as Keith pointed out in his prepared remarks, we’re at about a little over 300 tests this quarter. And I think that combined with the increase in doctors using the test gives us a lot of encouraging foundation to feel that we’re really on track to make this another successful product.

And then just last one from me, Percepta reimbursement Bonnie can you - I guess how should we think about the - I guess perhaps the piecing of some of the private payer contracts over the ensuing year?

Right, so I mean we’re beginning that process obviously and beginning to move some of the private payer discussions forward. We think we’re in a great position to be able to do that with the level of contracted relationships that we now have. But at the same time as you know it's hard to predict when those might fall. Anything you'd like to add Chris?

I will note that that we’ve been - as we do contracts we include all of our tests into those contracts. So we’ve been negotiating the prices along the way. The issue is getting the products obviously moved to positive coverage termination and that’s the process that we’re starting. So one of the reasons we think will accelerate this from an Afirma it was a two-step process, get the coverage and then the contract lag significantly behind because of the negotiation. We’ve condensed that period from coverage to pricing because we’ve already negotiated many of the prices already in that process.

Our next question is from the line of Sung Ji Nam of BTIG. Your line is open.

Congrats on the quarter and just couple of quick ones. For the Afirma GSC are you guys providing the Xpression Atlas for every test? And also I mean I’m trying to figure out the improving ASP obviously we expected that throughout the year, but it’s kind of happening at a faster rate than I've been modeling and was wondering if there is further upside if that's driven by Xpression Atlas - so how should we think about that going forward? Thank you.

Keith and I can tag team us. I’ll start - the way the Xpression Atlas orders its an add-on product that is only offered or available on an Afirma suspicious result. Because those are patients that may need their test results to be further stratified and the physician orders at either at the time that they do the biopsy or they call in an order it later you know send us add-on test report if they want us to run it. But it’s not run by default on everyone and it’s never provided on benign patients because we know there are certainly some mutation and fusions that are present in benign patients. So it's really to help stratify risk for patients who are classified as Afirma suspicious and that's where the value is being found.

So when you think about modeling the products historically we talked about Afirma cytopathology business Percepta sort of separately. And then previously prior to 606 we started our cash revenue, but now we have biopharmaceutical revenues we’re filling and that four slot on revenue. So when I think about Afirma and you think about modeling our business. I roll in a pull through volume from variance because it's related to the Afirma product. So as you think through we did about 13,600 reported Afirma tests in the first half of this year. And as you build out - sort of midpoint of your guidance we have sort of flat Q3, we end up around 7300 tests in the third quarter obviously these are plus or minus the range of this. And then we typically have seasonality in the fourth quarter is really good. So we tend to see about a 10% sequential growth in Q3 and Q4. So hopefully that should put you in the midpoint somewhere around 15,000 tests and that will put you around 13% growth in those products. And if accrue the midpoint to 90% to 95% or 92% the midpoint there, in time by the midpoint of that accrual rate that we talked about the 2700 to 2800 that will get you to where you should think about Afirma. And then on cyto as we said before we think that is around $2 million a quarter. And then we previously walk to the Percepta revenue which at this point we’re still working through the funnel on that business. So from a high level I look at that as reported volume times around $1000 a test plus or minus couple $100. And so you can - if we get to 500 to a 1000 by Q4 that’s budget by 750 in the midpoint, times that by a 1000 and that will give you the revenue for Percepta. And then our biopharmaceutical revenue which is the fourth element of our revenue that should come in at about $1.25 million each quarter and that should get you somewhere really close to the midpoint of your guidance range.

And then just a quick follow-up on - could you remind me again on the sales force expansion for the rest of the year is that almost completed. And then you talked about synergies across Percepta and Envisia. In the past you talked about having just one sales force for all your products, I was wondering if you’re seeing synergies across Afirma as well as other products as well? Thank you.

Yes sure couple of parts. As the year goes on we are currently at about 80 sales reps as Keith said in the field. We envision that going to about 90 as we come through Q3 and out of the year. Those will be mostly an incremental set of account managers that are working to manage the accounts that we already got in place. It also helps build some capacity and run way into the organization as we come in 2019. So we feel good about that and we’re starting to execute on that. And the other question was…

Selling organization and product…

The selling organization, yes and we continue to believe and we're getting traction with the combination of Percepta and Envisia and we’ve always believed that we’ve had traction between Percepta and Afirma because those relationships in the labs and in the hospitals they knew who we were. Lab managers knew who we were, the compliance people, the hospital administrators often did. And so, we’ve been able to leverage that and now we’re in the palm sweet, and we’re able to leverage that in Envisia. So we envision all of our reps ultimately when we are at full commercialization been able to work with and manage all three products. And we think that’s the path forward and we believe we’re getting some real tremendous success on that journey and really confident that we’re doing the right thing.

And I would add on the financial discipline side of that, we factored in the things Chris was talking about sort of in our guidance and we’ve been pretty impressed with the people inside the business and what they've done to control spend. Just for example we’re on average about 250 people in the business for the second quarter, that's only up four people versus the prior quarter its up 20 people companywide year-over-year. So that’s 9% increase in average headcount and that's 50% of our cost structure, but of the 20 people we’ve increased, we've increased our direct sales force on average 27 people year-over-year. So the rest of the business is really operating efficiently and the shareholders are benefiting from that.

Our next question is from the line of Puneet Souda of Leerink Partners. Your line is open.

So if I could look at in the guide again, thanks for the comments earlier Keith but as you look at the overall guide the increase guide and the momentum you have so far and the GSC and now Percepta is ramping and biopharma collaboration is coming in. You do have easier comps in the second half of the year and I appreciate the comments around the fourth quarter seasonality. So why shouldn't we expect a slightly even higher growth in the back half especially as we go towards the year-end and the ASPs continue to improve here?

We were very comfortable with where we put guidance Keith.

Yes I think we’re very focused and on making sure we give you number. We feel confident we’re going to hit and that’s how we get there. And maybe you look at where we started out the year with a midpoint of $82 million, a midpoint of our range we’re up to $88 million we’re up $6 million in revenues, it’s pretty great results given all the launches that Bonnie is talking about that we made this year and the progress on the commercial side. So we’re pretty - we’re trying to be disciplined about it. We’re trying not to over sell where we are, but we’re also trying to deliver.

So Puneet I think when you backup from that the successes come from very well orchestrated execution on all of the things that had to happen and had to happen while this year. The GSC and getting at the New York State approval so that we could literally roll that out to the whole country, giving the Anthem agreement in place the contract there so we could be in network coming into the year. We did not have all of those in site. Percepta is still as I said early so even though work we’re encouraged with those results we certainly don't want to get out - in front of us because these products are very hard to drive into these institutions and make them standard of care, and we won't be claiming victory until we are being coming standard of care. Envisia will really not contribute this year we’re getting the foundation built with Envisia because we learned this was important with Percepta to build that grand foundation in advance of the Medicare coverage decisions so that teases up we believe for a better next year. And then Xpression Atlas was new and that product has taken off very well. But we certainly didn't anticipate being able to enter our first biopharmaceutical relationship as a result of that technology. So I think that we are fortunate that all of the levers that had to be executed very well have happened that way and that's why we’re in a position to be increasing the view for the year.

So another question I have is Bonnie you always talked about building three test franchise and as you get closer to that you're almost there, but in terms of getting Envisia on board. Help us understand how do you look at additional products, are you looking at them externally or is it should we continue to expect more organic test development like the nasal and noninvasive test and continued improvements of the current test?

Yes, I think that it could be a combination. We certainly have a very rich pipeline internally we’re excited about the proof-of-concept Classifier that's underway on the nose. We will also continue to look at how we can answer other clinical questions within the indications we’re in because those are the most profitable and obvious things to do. At the same time I think we’re open if the right thing would be available to do another tuck-on. You have to remember that Percepta and that whole field of injury technology came to us through the acquisition we did back in 2014 of Allegro. So I think we’re in a good position to follow any of those. And just need to keep focused as we have been and continue to execute.

And Keith last one, how should we think about the spend on Envisia can you just remind me there and in terms of study that you have lined up or additional publications that we should be expecting there?

I don’t think there’ll be any significant spends for the rest of the year on Envisia that moved the needle in terms of the investors relative to what we have given in guidance.

Yes, the most costly studies are the clinical validation studies. It have to be orchestrated before we have a launch of product. And those are usually the large-scale multicenter studies where we’re collecting a lot of data points in building our truth label that we can validate against. And of course those studies were done before we ever launched the test. At this point, we'll be selling out clinical utility data and starting to monitor how doctors use the test to inform patient decisions, and I think early signs are that we could be in a very attractive position with that product in the marketplace with the huge unmet need.

[Operator Instructions] Our next question is from the line of Paul Knight with Janney Montgomery Scott. Your line is open.

This is Casey Woodring, on behalf of Paul Knight. Congrats on the great quarter. My question is for Keith, and I apologize if I had missed this before, but what was the average price per each test in this past quarter?

We gave a range on Afirma of $2700 to $2800 per test. And you just take the revenue over the reported volume for Percepta, we had about $1300 per reported test this quarter. Some of that was from cash collections. We obviously build for that test even though we don't have contracts so we are collecting on that test. So, we had nice revenue collection per reported test. But on average we're looking around $1000 per accrued test going forward. Well, obviously that hopefully will increase over time. And then the biopharmaceutical I gave you just a fix dollar amount for the next two quarters.

Thank you. I will now turn the call back over to Ms. Bonnie Anderson, Chairman and Chief Executive Officer, for closing remarks.

Thank you all for joining us today. We appreciate your ongoing support and look forward to keeping you updated on our progress. Thank you.