Veracyte, Inc. (VCYT) Q3 2018 Earnings Report, Transcript and Summary

Good afternoon, ladies and gentlemen, and welcome to Veracyte's Third 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, Angie McCabe, Veracyte's Vice President of Investor Relations & Corporate Communications.

Thank you, Howard. Good afternoon, everyone, and thanks for joining us today for a discussion of our third quarter 2018 financial results. With me today are Bonnie Anderson, Veracyte's Chairman and Chief Executive Officer; Keith Kennedy, our Chief Financial Officer; and Chris Hall, our President and Chief Operating Officer. Before we begin, 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 during this 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 third quarter 2018 results, which are available on our website, veracyte.com. We also published a financial presentation, which Keith will reference during his remarks. The presentation is also available on our website. I will now turn the call over to Bonnie. Bonnie?

Thanks Angie. And thanks again everyone for joining us today. We're very pleased to deliver excellent third quarter 2018 results with strong revenue and volume growth and continued execution across the business. This afternoon, we reported third quarter 2018 revenue of $23.5 million, representing a 34% increase over the third quarter of last year and genomic test volume of 8,006, an increase of 23% over the prior year's quarter. As a result of our performance in the third quarter and our outlook for the reminder of the year, we're raising our annual revenue guidance to a range of $90 million to $91 million and lowering our cash burn guidance to a range of $17 million to $18million for the full year 2018. This afternoon I'll review some of the key highlights of each of our success measures for the quarter to discuss how we're positioned for the rest of the year and provide our early view of 2019. Then Keith, will review our financial results in more detail and provide additional commentary on our revised 2018 guidance. I'll begin with our commercial growth measures success. Our Afirma Genomic Sequencing Classifier or GSC continues to perform well and has reaccelerated a growth. We have transitioned all of our customers to the RNA sequencing base to Afirma Genomic Sequencing Classifier which helps physicians keep roughly 70% of patients with benign thyroid nodules from having surgeries they don't need. The Afirma GSC in combination with the Afirma Xpression Atlas has become the standard of care in thyroid nodule evaluation. We believe this comprehensive next generation offering is helping us to further penetrate existing accounts and securing events and along with our extensive intellectual property fortress establishes a competitive barrier against others trying to advance in this space. Our Percepta Bronchial Genomic Classifier is approaching its first full year of commercialization. As a remainder this novel field of injury technology detects genomic changes in airway epithelial brushing that are associated with lung cancer without the need to take a part or piece of tissue from the nodule itself which would require an invasive procedure. While it's still early, the rate of adoption for the Percepta Classifier continues to increase nicely with genomic test volume up 21% sequentially from the second quarter. We received orders from nearly 200 physicians at 140 medical centers across the country and many of these are repaid orders demonstrating confidence in the clinical value of the test. We are on track to deliver the projected 500 to 1,000 Percepta test results in the fourth quarter exiting the year with nice momentum. Applying the experience from our commercial playbook and successful product introductions, our team has done a great job laying the ground work for commercial expansion of the Envisia Genomic Classifier, which is used to improve the diagnosis of idiopathic pulmonary fibrosis or IPF and we remain on track for a nationwide ramp in 2019. 15 medical centers around the country submitted patient samples for Envisia testing to our early access program to date and we expect to add a few more by the end of the year. Lastly, as it relates to commercial growth, we believe that our multiproduct sales strategy is one of the keys to building a profitable enterprise. We implemented this approach not only to drive growth, but to drive cost effective growth. We're pleased that the strategy is delivering results. In pulmonology many of our Percepta commercial sites have also become early access sites for Envisia. Samples for Percepta and Envisia are now being collected from the same bronchoscopic suite and even more evidence that this approach is working, 35% of our customers adopting Percepta are also using Afirma. Turning now to reimbursement expansion, our second measure of success, we are thrilled that at the end of August our Envisia Classifier received draft Medicare coverage through the MolDX program, which is administered by Palmetto GBA. We expect a final coverage decision in early 2019 and believe we are well positioned to ramp commercial adoption and begin to grow revenue next year for this high value test that improves the diagnosis of interstitial lung diseases IPF. Our third measure of success is evidence development. We had a strong scientific showing at several recent industry conferences. At the American Thyroid Association annual meeting earlier this month, researchers from leading institutions including Cleveland Clinic, Harvard and the Ohio State University highlighted positive real world study results for our Afirma Classifier and Xpression Atlas in a half dozen oral and poster presentations. Comparing their experience with the Afirma GSC to the original test, they showed that the Afirma GSC identified even more benign thyroid nodules and prevented even more unnecessary surgeries. Researchers also demonstrated the ability of the Afirma Xpression Atlas to detect genomic variants on thyroid nodules to inform surgery and treatment decisions. This included the detection of rare gene mutations and fusions such as TRK and RET as referenced in our agreement with Loxo Oncology earlier this year which are targeted in these therapies. Positive data were also shared in oral presentations at the CHEST meeting this month, demonstrating the performance and value of our pulmonology products. This information included preliminary data from our ongoing Percepta registry trial showing that the use of our Percepta Classifier led to a reduction in invasive diagnostic procedures at all evaluation points across all risk groups for up to 12 months compared to the physician's plans for these patients prior to Percepta testing. The researchers also found that there was a significant reduction in invasive procedures among patients with negative versus positive classifier results. We believe these findings further reinforce the value of the Percepta Classifier brings to lung cancer diagnosis. We look forward to sharing future updates from this study as we continue to follow these patients for outcomes. Also at CHEST data were presented from our BRAVE trial confirming the ability of the Envisia Genomic Classifier to provide a more confident diagnosis of IPF without the need for surgery. We anticipate findings from the 26 site prospective clinical validation trial will be published in the coming months. Turning now to our scientific innovation, as I commented earlier, our growth has reaccelerated through the introduction of the Afirma GSC and Xpression Atlas. Physicians and their patients can now get a full range of diagnostic answers from a single FNA sample because we sequenced the entire transcriptome. So when the GSC result does not classify a patient as benign, the Xpression Atlas can inform on the rare variance from hundreds of genes that might be helpful in determining treatment options including participation in clinical trials. In fact we know of at least one case already where based on a rare variant detected by the Xpression Atlas a physician referred as patient with thyroid cancer to a clinical trial for a new targeted therapy. We believe the Xpression Atlas's extensive genomic data coupled with our market leadership strongly position us for this era of precision medicine. As more is understood about the genomic underpinnings of disease, we believe our whole transcriptome sequencing using RNA-seq will fuel even greater innovation. To this point we are pleased to share with you our plan to move the Percepta Classifier to our powerful RNA sequencing platform next year to support the significant opportunities in lung cancer. This along with the progress we are making in developing a nasal swab test for early lung cancer detection, which will leverage the field of injury technology on which our Percepta Classifier is based remain exciting avenues for the future of our business addressing significant market and patient opportunities to improve care and lower costs. We look forward to sharing more about these efforts in the coming months. Our final measure of success is financial discipline. Cash burn for the quarter was $2.4 million an improvement of 58% compared with the third quarter of 2017. This reflects our continued focus on discipline spending and strategic investments to grow the business and ultimately achieve sustained profitability in the long term. In summary, we are thrilled with her progress and strong momentum as we begin to wrap up 2018 and prepare for 2019 and beyond. We expect to provide our 2019 guidance when we report our fourth quarter 2018 financial results, but as we look ahead to next year, we believe we are well positioned with three commercial revenue generating products that will continue driving attractive sustainable growth in the business. We expected to deliver both genomic test volume and revenue growth of over 20% in 2019. Our Afirma GSC Classifier and Xpression Atlas are expected to continue to deliver strong results. Adoption of our Percepta Classifier will continue ramping and commercial expansion of the Envisia Classifier is anticipated next year. In addition, we remain focused on operational execution and project that we will reach cash flow breakeven by the end of 2019. I'll now turn the call over to Keith, to review our financial results for the third quarter of 2018 and provide some additional color on our revised 2018 guidance.

Thank you, Bonnie. As Angie mentioned earlier, our third quarter 2018 financial presentation is available under events and presentations in the Investor Relations section of our website. I plan to speak about our third 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 key performance indicators or KPI's for the third quarter of 2018 as compared to the prior year quarter are as follows. Revenue of 23.5 million increased 5.9 million or 34%. Genomic volume of 8,006 reported test increased 23%. Gross margin of 65% increased 6%. Operating expenses excluding cost of revenue were 19.5 million, an increase of 2.8 million or 17%. Net loss of 4.5 million improved 37%. And cash burn of 2.4 million improved 58%. The next six pages outline the sequential and year-over-year results underlining each of our financial KPI's. A few observations, first turning to Page 4, revenue growth rates relative to the prior year quarter accelerated in each of the first three quarters in 2018 from 22% to 34% in the third quarter. Turning to Page 5, we see similar genomic volume trends on a year-over-year basis. Sequentially, genomic volume increased 4% from the second to third quarter of 2018. This was very positive when put in the context of the typical flat to down quarter you see in the sequential columns for 2016 and 2017. Turning to Page 6, gross margins expanded in each of the first three quarters in 2018 from 61% to 65% driven by a combination of higher valued molecular testing services, leverage from our rich genomic bio repository and financial discipline in our labs. Turning to Page 7, operating expenses this quarter increased 17% year-over-year, principally from our investment in sales and marketing. Sequentially total operating expenses declined this quarter. Our operating expenses are shown as a percentage of revenue on the right hand side of this page. We continue to focus incremental spend on revenue generating activities. Our average combined R&D and G&A quarterly spend year-to-date 2018 was just under $10 million and on a combined basis improved from 54% to 44% of year-to-date 2017 to 2018 revenue. Turning to Page 8, our net loss of $4.5 million improved 37% and our net loss per share was $0.12. In July 2018, we issued and sold 5.75 million shares of common stock in a registered public offering raising net proceeds of $55 million. We estimate that our net loss per share would have been approximately $0.01 per share higher this quarter if we excluded the dilutive effect of the equity raised on our weighted average outstanding shares. Turning to Page 9, cash burn of $2.4 million improved 58%. And turning to Page 10, cash at September 30, 2018 was approximately 78 million. The high level cash bridge from June 30 to September 30, 2018 is as follows. We began the quarter with 23.8 million in cash. We raised 55 million in the previously mentioned equity raise. We had cash burn of 2.4 million and we generated approximately 1.6 million from the exercise of stock options and employee stock purchases. Before I turn the call back to Bonnie, let me address a few points on our guidance for 2018. As Bonnie stated earlier, we are increasing our 2018 revenue guidance to between 90 million and 91 million from our previously updated guidance of between 87 million and 89 million, an improvement of 26% over the prior year at the midpoint of the range supported by an estimated 18% to 20% growth in gnomic test volume over the prior year. And we are narrowing our annual cash burn guidance to between 17 million and 18 million from our previously updated guidance of between 18 million and 21 million, an improvement of 31% over the prior year at the midpoint of the range. I'll now turn the call back over to Bonnie.

Thank you, Keith. I want to close by reminding everyone that our unique combination of whole transcriptome sequencing and machine learning is enabling us to answer important clinical questions that are having a real impact come patient care and outcomes. As we leverage new opportunities in the rapidly evolving era of precision medicine, we remain committed to making a difference in the lives of patients, providing solutions to physicians to help better inform clinical decisions and delivering cost savings to their health care system. Howard we will now open a call for questions.

[Operator Instructions] Our first question or comment comes from the line of Sung Ji Nam from BTIG. Your line is open.

Hi, thanks for taking the questions and congratulations on the quarter. You're seeing nice uptake for Percepta. I was kind of curious as to - if you might be able to comment on kind of how your conversations are going with the commercial payers at this point.

Yeah, thanks Sung Ji for the question and for joining us today. Chris, I'll pass that call over to you and maybe and give her an update on where we are with commercial payers.

Sure, we continue to have dialogues and nothing to update you on now, but we continue to be optimistic that the product is saving the health care system money and has been positively referred to. We were really excited that there was data shared coming out of the registry trial and I think that as going forward as that data ultimately comes together and gets published, it will prove to be one of the key things and help the - get the product covered by private insurance companies.

Great and I was wondering in terms of your cash burn - or the cash flow breakeven guidance for next year. It's happening a bit earlier than I had expected, I was wondering what the maybe the biggest levers are to get to that level.

Well, I think that we have always indicated that when our quarterly revenue gets to a range of between 20 million and thirty million that given our spending profile and how we have focused to increase spending in the sales and marketing and really have gained a lot of operational leverage across the operation internally that that would be the point in time where we would hit that inflection point, so Keith, anything else to add on that.

No, it's good point.

Okay, great and maybe could you give us an update on the sales force expansion, if that's pretty much completed or what are some of the outstanding items there?

Yeah, I mean tanks. Thanks, I don't think that the expansion of the sales force is ever completed per se because we're always expanding the - we'll always be expanding the field force in order to keep driving the growth. We exited the quarter this year with about 88 people in the field working with customers that was up from about 78 at the end of - at the end of last quarter plus or minus a few, so we continue to grow that nicely. We'll continue to grow that by a few more people coming out of this - coming out of this year and we see a growing to about 110 to 115 as we exit next year sort of growing as we as we go. And we continue to be excited that we are attracting really high quality salespeople. We've been really impressed by the pipeline of folks that we're getting - coming through because they're really attracted to this notion of selling multiple products and so far as we've proceeded to grow the group we've been really happy with the progress and the success they're getting and I think that shows in the numbers today.

Great thank you very much

Thank you.

Thank you. Our next question comes from the line Puneet Souda from Leerink Partners. Your line is open.

Yeah, hi, Bonnie, thanks and congrats on the quarter. So in Afirma, if I could just try to understand, could you give us a sense of where we stand the penetration today? You've clearly seen a strong momentum here, is this some contribution coming out of the ATA, what sort of - what's driving it and what's your expectation given the level of penetration that we have in the market today?

Yeah, thanks Puneet for joining us and thanks for the question. We're really thrilled with reacceleration of the Afirma business. When you consider our first generation product was launched back in 2011, I mean that was seven years building a market on the back of a product without any really transformational improvements, but shifting our science platform over to deep RNA sequencing, it allowed us to do two things. One, obviously we were able to increase the performance to the point where we are now keeping a significantly higher rate of the nine patients out of surgery. By being able to classify them benign with the classifier, but the other side of it is because of the whole transcriptome backbone of our science now, we can also inform on those patients that are likely cancer as to the types of cancer aggressiveness we call out MTC, we can give indication of certain variants that are present that might be highly associated with cancer such BRAF. And then with the extension of that scientific platform on every sample we run through the lab, we have now been able to extend that through and two including the reporting on variants that are now becoming more of a hot topic in thyroid cancer for targeted therapy. We were really struck coming off the American Thyroid Association meeting earlier this month, the number of companies and presentations at this meeting which we've been attending now for a decade. But for the first time looking at ways that patients that are being cured with radioactive iodine and surgical treatment for thyroid cancer which has been the mainstay with advanced cancers now or cancers that have returned in recurred the improvement in benefits that are being seen by some of these targeted therapies. So when we talk about detecting the whole transcriptome set of data in every patient sample we run that means we're not just detecting the DNA mutations that would have - which historically have been the hallmark of precision medicine, but we're detecting these variants and fusions and copy number changes and other genomic content that are really critical in making the leap forward on benefit. So I think it's that comprehensive nature of our science and our market leading position that we're able to penetrate our existing customer base further and of course convert new clients over to Afirma and that's what's giving us the nice lift.

Okay, thanks. Thanks for the color. Keith, a question on Percepta, you're posting solid improvements in gross margin here. AS Percepta comes on board with RNA sequencing platform, what's your expectation in gross margins there?

We really like to - we've been managing sort of trying to not overspend in any one category, but manage the return on investment with each dollar that we spend. So if we can hold our margins directionally of 64% plus or minus 1%, I think that's where we'd like to end up.

Okay.

And Puneet we expect to get leverage in the lab by having all of our assays converted into a single platform, sampling the door that runs on a single unified assay and then the algorithms project which patient report is generated. So it actually adds an efficiency to our lab when we only have one platform that our technicians have to run.

And I'd just remind because the script - this would go out to all investors that we do have about $9 million, $9.5 million of our revenues side of pathology services which is a low single digit margin product. So as we do more and more volume on the genomic side our margins will approach 70%, so we do expect our margin expansion to continue.

Okay and then on Envisia briefly, just wanted to confirm on LCD finalize issue, what's the pricing expectations? I don't know if that was covered already, but I just to see would - if you had anything to add there.

No, we're moving through the process, we're in open comment period today. We expect the LCD to be finalized in the early part of 2019 and at that point in time we'll know what the pricing will be. We would expect this test given the value it provides to patients to be in the similar range to our other tasks.

Okay, very helpful, thank you.

Thank you.

Thank you. [Operator Instructions] Our next question comes from Brian Weinstein from William Blair. Your line is open.

Hey guys, thanks for taking the questions. Good afternoon. Just following up a little bit on Puneet's question there, can you - could you talk a little bit about the next gen offering here with Afirma and the ability to further penetrate existing accounts? I mean, you also said securing new ones, can you give us any additional color on that penetration or is it about penetration more or is it about the securing new accounts that's really driving it more?

Now, that's a really good point and thanks for bringing that back up Brian and thank you for joining us today for your first call here at Veracyte. I did not answer that question around market share, so we exited last year we estimated that we have penetrated about 30%. With the projections we have through the end of the year you would expect us to be 35 or slightly ahead of that market penetration and that's definitely coming from us having the ability to go deeper into existing accounts along with converting new people. And I will mention that when we converted to the RNA-Seq transcriptome data guiding the new classifier development, we were able to improve specificity in some of the more difficult to diagnose subclasses of thyroid biology and thyroid cancer that we refer to these the subclass Hurthle cells. And they tend to be very difficult to differentiate under the microscope, the adenoma of benign conditions from the malignance, but because of the mitochondrial content and that extra genomic content in the transcriptome, we were able to increase our specificity in that subclass alone by like 30%. So historically, some of our institutional accounts that were sending us GEC samples, if they saw Hurthle cells in the cytopathology review of those cases, they may have not sent those samples to us as an example. One example of going deeper and now that we have greatly performed the performance - improved the performance in that subclass there is comfort on sending us more of those indeterminate sample. And then the fact that we are now informing on variants on the cancer side that gives a whole new area of questions that we can help inform as the medical centers become involved in more of these clinical trials and aim at helping to see how some of these new classes of drugs can be helpful in thyroid cancer, we're now able to attract their attention more than we would have earlier with the original version of the tasks.

Wonderful. Thank you for that answer. Second question on sales force comp incentives, where do you focus the reps, what are the comp incentives that you have kind of put in place as you expand your portfolio here?

Yeah, this year comping the reps on both the Afirma and Percepta and they have accelerators in their plan that rewards them for hitting both sides of it because we really are focused on making those work. So we've really focused on them executing on both of those and the way to really drive their comp is to execute on both and we're seeing that –that model play out obviously as you see by the numbers we've been reporting, so we've been happy with how that's worked.

Great and then last question for me is, can you talk at all about penetration that you've seen at the large group practices or health networks for your products, how big it is - how big of an opportunity is that for you guys still on the horizon? Thank you.

Yeah, we probably can't give any specific details and haven't typically - haven't yet become breaking that out, but for your benefit the market of course for these three different products is a little bit different because roughly 40% of the market for Afirma is the doctor's offices and both pulmonology products are exclusively hospital based sample collection. These are done in pulmonology suites of systems. So as we had ramped our Afirma business in '15 and '16 into more of these health systems than hospital based procedures, that gave us the leverage to bring through Percepta and Envisia and we're certainly seeing great success at that. But the pulmonology products do not have the doctor's office portion in the market like Afirma did. And we'll be tracking and breaking out some facts - the marketplace probably as we see these products ramp and we get a little more experienced, it's a little early for that right now.

Okay, I appreciate the answers. Thank you.

Thank you. I'm showing no additional audio questions in the queue at this time. I'd like thank ladies and gentlemen for participating in today's program. This concludes the presentation. You may now disconnect. Everyone have a wonderful day.