Good afternoon, ladies and gentlemen, and welcome to the Veracyte's Fourth Quarter and Full Year 2018 Financial Results Conference Call. [Operator Instructions] As a reminder, today's conference call is being recorded. I would now like to turn the conference over to Angie McCabe, Veracyte's Vice President, Investor Relations and Corporate Communications. You may begin.

Thank you, Katherine. Good afternoon, everyone, and thanks for joining us today for a discussion of our fourth quarter and full year 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 those 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/or performance to differ materially from any future results, performance, or achievements discussed and/or implied by such forward-looking statements, and the company can give no assurance they will prove to be correct and will not provide any further guidance or updates on our performance during the quarter unless we do so on a public forum. Please refer to the company's February 25, 2019 press release and the risk factors included in the company's filings with the SEC for discussion of important factors that may cause actual events or results to differ materially from those contained in our forward-looking statements. Additionally, non-GAAP financial measures will be discussed during this call. Please refer to the appendix section in our earnings release for a reconciliation of these measures to their most directly comparable GAAP financial measure. Prior to this call, we announced our fourth quarter and full year 2018 results, which are available on our website at veracyte.com under press releases in the Investor Relations section. We also published a financial presentation, which Keith will reference during his remarks. This presentation is also available on our website under Events & Presentations in the Investor Relations section of our website. With that I will now turn the call over to Bonnie Anderson, Veracyte CEO.

Thank you, Angie. And thank you everyone for joining us today as we discuss our 2018 fourth quarter and full-year results and provide you with our outlook for 2019. I am very pleased to report on an excellent 2018 which was a transformative year for Veracyte and one that we believe positions us for continued growth in 2019 and beyond. This afternoon we reported full year 2018 revenue of $92 million representing a 28% increase over 2017 and genomic test volume of nearly 32,000 an increase of 22% over the prior year. Cash burn for the full year 2018 was $15.4 million an improvement of 39% over 2017. Our fourth quarter 2018 results were particularly strong reflecting robust momentum as we closed out the year. Our revenue was $25.8 million an increase of 31% over the fourth quarter of 2017 and cash burn was $1.7 million an improvement of 73% over the prior year's fourth quarter. With a strong position as we enter this year we are guiding to full-year 2019 revenue in the range of $113 million to $117 million. This represents 25% growth at the midpoint compared with last year driven by the growth of our three commercials stage revenue generating products, as well as our biopharmaceutical collaborations. Also as Keith will speak to in more detail in his remarks, we are guiding to full-year 2019 net cash used in operating activities of $4 million to $6 million which includes $5 million of cash that we received from Johnson & Johnson in January 2019. At the midpoint of the range this represents a 63% improvement over last year. This afternoon I'll highlight our accomplishments in 2018 and Keith will review our financial results and add some additional color on our guidance for 2019. Then I will share our…

Thank you, Bonnie. As Angie mentioned earlier our fourth quarter and full year 2018 financial presentation is available under events and presentations in the Investor Relations section of our website. This afternoon, I will review our fourth quarter and full year 2018 results and conclude with remarks regarding our 2019 guidance. Turning to page 3 of our financial presentation, our performance against six financial key performance indicators or KPIs for the fourth quarter of 2018 as compared with the prior year's quarter including select highlights for each metric at the bottom of the page are as follows: revenue of 25.8 million increased 31%. Genomic volume of 9154 reported tests increased 28%. Gross margin of 66% increased 600 basis points. Operating expenses excluding cost of revenue increased 12%. Net loss of 3.1 million improved 63% and cash burn of 1.7 million improved 73%. Turning to Page 4 of the presentation, our performance for the full year 2018 against the same KPIs as compared with the prior year are as follows; revenue of 92 million increased 28%. Genomic volume of 31,710 reported tests increased 22%. Gross margin of 64% increased 300 basis points. Operating expenses excluding cost of revenue increased 15%. Net loss of 23 million improved 26% and cash burn of 15.4 million improved 39%. The next page, Page 5 shows our performance against the same six KPIs on a quarterly and annual basis for 2018. We saw revenue and genomic volume acceleration across our products and gross margin improvement as well as continued discipline and how we use shareholder money to fund our operations which resulted in significant improvement to cash burn. The next six pages outline the sequential and year-over-year results underlying each of the six financial KPIs a few observations. First turning to Page 6 revenue growth rates…

Thanks Keith. I will close today's call by speaking to the three transformative levers of value creation in our business. First is our strategic investment to advance three clinically impactful products to revenue generating stages in large markets. Our Afirma, Percepta and Envisia classifiers addressing a more than $2 billion market opportunity and are positioned as first to market and market-leading products. They will all be covered by Medicare pending a final positive coverage decision for Envisia expected in the near term. Importantly over the next five years, we anticipate significant revenue growth and operating leverage from the layering of effects of these products all positioned early in the clinical continuum of care relative to other downstream tests that focus on patients who have already been diagnosed with disease. Strategically this gives us the opportunity to answer more clinical questions at the same time as diagnosis and on the same nonsurgical sample driving value and improved efficiency for patient care decisions. Second is our innovative scientific platform utilizing RNA whole transcriptome sequencing and machine learning which we believe is a competitive differentiator. This platform serves as a basis for effective and efficient discovery, development and commercialization of our tests as well as for biopharmaceutical partnerships to advance clinical development programs in the same indication. Our decision to move our products to this platform position Veracyte with a very differentiated strategy for expansion along the clinical care continuum which we believe will deliver incredible value in our clinical indications over the long-term. Finally the third level of value creation is our compelling pipeline led by our development of the first nasal swab test for early lung cancer detection which we believe expands our addressable pulmonology market to over $30 billion globally. Against this strategic backdrop, we will focus our four metric…

[Operator Instructions] And our first question comes from Sung Ji Nam with BTIG. Your line is open.

Thanks for taking the questions and Chris congratulations and thank you for your contribution. So maybe for starting off your Percepta customers, I know this might be early but are you seeing an increase in bronchoscopy procedure even if anecdotally among the customers who are using Percepta or among those who have been using it for a while?

Chris why don't you take that.

Well I think that the overall position of the product is to do less invasive procedures because we resolve a good chunk of the bronchoscopies that are non-malignant and that's been the core value proposition. We've been really excited that that's been embraced. I think one of the challenges with lung cancer diagnosis is always been that patient sometimes goes straight to a TTNA or go straight to a surgical lung biopsy rather than a bronchoscopy. And we've always believe that the product successfully use my make bronchoscopy be more successful which would mean more invasive procedures to start, but it's too early to say that that's happening. I think that at this stage we're just really excited that the core value proposition of the product is being embraced.

And then on Envisia if I'm remembering this correctly, I feel like this is a product where you have engaged KOLs - not only from the U.S. but also from Europe from the very beginning. So was wondering if there might be efforts underway from a commercial standpoint could also be early here but was curious as if there are any kind of commercial strategies that you guys are putting together?

Yes, I think 2018 was interesting because of all of our products. This is the first product that we've ramped in early access program for mostly because of physician demand and we did hold a scientific advisory board meeting about a month ago. And we had participation from physicians in Europe where there is a lot of - it’s a small community of experts that drive excellence in care and trying to get these ILD patients diagnosed. We did have three to four of our clinical trial sites in Europe. So while we've always been hesitant to not to get too far out in front of spending to open up new markets outside the U.S. it's certainly something that we’re looking at but we have no immediate plans to go after that. I think right now we’re focused on the near-term goals of getting the Medicare decision finalized in getting our price established there. And ramping from - we have increased the early access sites by a few so we’re now up to 30 and then we’ll focus on the methodical expansion of that through 2019. And I think do some groundwork to see whether or not offering this test more broadly would make sense perhaps in 2020.

And then lastly from me just a housekeeping question for Keith, sorry if I missed it but is there incremental contribution from Loxo Oncology this year for pharma services?

So we are expecting another $1 million return 50,000 per quarter. That’s 1 million and it will be we've said 5 million from J&J so 6 million in biopharmaceutical revenue what we had last year.

Our next question comes from Puneet Souda with SVB Leerink. Your line is open.

Bonnie congrats on the quarter and Chris thanks for all the great work, we’ll definitely miss you. So, first one if I could ask on J&J just want to clarify the 15 million that you have potentially longer term. I just want to clarify 2019 you're baking in only 5 million of that or is there any additional contribution that you're expecting in later part of the year?

That’s right we’ll update you throughout the year.

And then nasal swab could you elaborate Bonnie just in term of the data when should we expect - you gave sort of sometime layer on data. But just wanted to understand of what sort of venue would this data be in and sort of how should we be benchmarking this data should this be compared with Percepta here. And then I just have a quick follow-up on Percepta as well?

Yes I think as our program is always unfold we usually - the first data that gets unveiled either at a meeting or sometimes we hold a special meeting to unveil data to key opinion leaders those involved in the clinical trials with us, I am sure that will involve J&J this year. Is usually looking at what early classifier development looks like and whether or not the performance goals that we set for our product which will be a little bit different for this product then it is for Percepta. Percepta is positioned to really improve with very high sensitivity, the ability to detect low risk patients so they can be halted from further invasive procedures and be followed by follow-up CT because we know those patients have nodules. There are a couple different places in the clinical pathway of care that we envision developing nasal swab tests. This first test we will reveal more about that positioning as time goes on, but I would say I know in the last half of the year we will be in a good position to see some of the early discovery data unveiled. And if we get more clarity on what and when I'm sure we’ll well show that with folks.

And then just on Percepta I know you started out the year with a thought so that you will exit 500 to a 1,000 on Percepta and you’re exiting at 650. So just wanted to get a sense of in 2019 how you're looking at Percepta overall and the contribution here and the reason, one of the reasons I ask is it new entrant to the market from a liquid biopsy I think and this position through a different pathway you are more closer to the pulmonologist in this. So maybe just educate us how you're thinking about positioning of Percepta in the market with some new entrants as they try to enter from a liquid biopsy? And thank you.

Yes, I think that we always talk a lot about one of our – one of the things that we believe we do really well as a company, is not just the development of the test but figuring out how to integrate the test into today's standard of care. So that it is positioned at a point where it really adds a lot of value to what the doctor is doing today and doesn't require the doctor to believe in the test to not do what they might do today as a standard of care procedure to get the diagnosis. And I think that is even more important in an aggressive cancer like lung cancer then it was with our Afirma program. And so I think with some of data that we shared in our prepared remarks of the number of doctors 300 now across 200 institutions ordering the product. We just came off of a meeting actually just in the last few days the lung cancer meaning where the team was quite excited with the reaction from the doctors in one form we were asking physicians what they want them for the future and they told us that they thought the current product was totally on point so just help them get it used more and more. These things are always anecdotal but pretty exciting news to hear. I think that are focus on having Percepta position to complement bronc and yield a 97% sensitivity. When you think about that when you combine our tests with its companion procedure we are only missing a small, small number of cancers in order to improve the overall care and reduce invasive procedures that’s the kind of stuff we look for. So if we were to come in advance of the procedure…

[Operator Instructions] And our next question comes from Paul Knight with Janney Montgomery. Your line is open.

Congratulations on the quarter and congratulations on the retirement? How much service are you expecting in the year 2019?

Biopharma service revenue?

Yes.

So we would estimate that now at about a total of $6 million in revenue that includes the estimate and $5 million from J&J that we spoke about on the back of that announcement and then about 1 million in addition to that. We think the majority of that given the structure of the J&J deal will be recognized in the first half of 2019. And it could be higher depending on the timing of some of the milestones achieved in the financial treatment of some of those milestones but that is our best directional guidance at this point.

And Bonnie J&J has made a large investment of over 3 billion for Auris to do, I guess next generation biopsy technology in the market. How do you feel that new generations of biopsy technologies fit in with your long tests I should say with house is it fit in with the continuum of the swab test someday and also Percepta?

I think it will end up being quite a compelling investment and compelling offering across the lung cancer area was quite excited to be a party to it. And I think as you think about where we are today what will happen out of all of these initiatives is the effort to get earlier and earlier at diagnosing and treating early cancers. And so through J&J's efforts at looking at ways they can do surgical procedures et cetera less and less invasively, but we’ll also be moving to earlier and earlier size nodules. And many of those nodules depending on the site couldn’t be reached by any bronchoscopy device. So I think the market is going to be really transformed for lung cancer the size and stage of cancers that are going to be detected three four years from now are not going to be the same as they were five years ago. When many of these clinical trial s were done and I think being teamed up with a consumer oriented company with their eye on early detection like J&J and our nasal program is going to position us very modernly with the testing of cohorts that represent what this new stage of patients is going to look like in lung cancer and unfold our programs for discovery and validation in that space where we will likely be in a leading position as that market changes over time. So we’re pretty excited about it.

And lastly Bonnie what is the sensitivity of traditional biopsy does it still not require. If I can do a biopsy could I not also use Percepta in conjunction if I can do a better biopsy?

Well biopsies by nature depending on the institution of course and the quality of the care center, sensitivity can be anywhere from 40% to 60% and that’s exactly the rationale behind us positioning Percepta as a complement to the bronchoscopy biopsy because we give the physician a reason to do the procedure and as one of our KOLs describes it, we save every biopsy by providing an answer. So we’re not having doctors stop doing what they do today that they're comfortable and confident in and having to develop confidence in a new test replaces that. We’re just increasing overall confidence in what they are doing today because our test is making it better. And we think that is a smart way to introduce tests into new markets and new indications and build the scientific credibility with these thought leaders and users of our tests so that down the road we might be able to evolve to bring test that are positioned differently. And that's exactly what we’re doing across our lung cancer portfolio.

And our next question comes from Brian Weinstein with William Blair. Your line is open.

Chris congratulations to you on the retirement. I know [indiscernible] is bumped that you beat him to retirement as he is already touched, so congrats. So I think a lot has been asked but just a couple of quick ones here. First Keith can you elaborate a little bit on the need for the specific investments that you guys are planning on for 2019 that will value you to grow with that 25% can you just be a little bit more specific on what you're doing there?

We’re investing again another year of putting our money into sales and marketing as I covered in the prepared remarks. We’re spending of around $10 million, $10.5 million on a quarterly basis last year. We’re going to 12 million to 13 million this year. We found that provides a very nice return investing in the sales force and touching physicians and ordering physicians. And so that's where we're continuing to push on that lever.

And then on Xpression Atlas, can you give us any idea about kind of contribution that is seeing at this point and the feedback you're getting and how do you move that beyond, I think you said it 30% of Afirma GSC orders are coming with that. But how do you technically kind of move that higher and do you have any thoughts about where that should be next year or even longer term?

Yes, well the way to think about it in terms of percentages is that when we do a genomic sequencing classifier test in thyroid today roughly 70% of those patients are going to be benign and so having 30% of the suspicious patients, the other 30% of the suspicious patient will be the ones that will benefit most from the Xpression Atlas because that's where you will guide extend a surgery and whether or not targeted therapies could be a consideration. And so we would never expect to get the number of orders coming in with Xpression Atlas super, super high, but what we want to do is make sure that it gets ordered on those that end up not being benign and driving those patient to a better quality of care. I think it’s early and I think we do have evidence that the new, the new brand material that was rolled out beginning actually the end in January/February. We always have a very massive national sales meeting at that time of the year and a lot of this new material and new data is just still coming out on Xpression Atlas. So I think it could edge up to perhaps may be pick 50%/60% of orders over time that the key will be getting those orders so that the patients that can benefit those will benefit. And in terms of the revenue piece, we don't track this product as a separate product you just end up getting into the weeds and all these things. We do bill, we do get incremental revenue from the product but we sort to track it as an overall number with our GSC and Afirma genomic testing. And that way it just kind of keeps it simple and not too many assumptions going in can be wrong and sort of magnify each other. Does that makes sense?

Yes, makes total sense. Thanks for the detail on that and congratulations on a really good strong solid 2018.

Thank you. And I’m showing no further questions. We would like to thank everyone for participating in today's conference. This does conclude today's program. You may all disconnect. Everyone have a great day.