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Veracyte, Inc. (VCYT)

Q1 2019 Earnings Call· Tue, Apr 30, 2019

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Transcript

Operator

Operator

Good afternoon, ladies and gentlemen, and welcome to the Veracyte's First Quarter 2019 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 Ms. Angie McCabe, Veracyte's Vice President, Investor Relations and Corporate Communications. You may begin.

Angie McCabe

Analyst

Thank you, Kyle. Good afternoon, everyone, and thank you for joining us today for a discussion of our first quarter 2019 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'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 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 in or implied by such forward-looking statements, and that Company can give no assurance that will prove to be correct, it will not provide any further guidance or updates on our performance during the quarter unless we do so in a public forum. Please refer to the Company's April 30, 2019 press release and the risk factors included in the Company's filings with the Securities and Exchange Commission for a discussion of important factors that may cause actual events or results to differ materially from those contained in our forward-looking statements. Prior to this call, we announced our first quarter 2019 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. The presentation is also available on our website under Events & Presentations in the Investor Relations section. I will now turn the call over to Bonnie Anderson, our Chairman and CEO.

Bonnie Anderson

Analyst

Thank you Angie, and thanks everyone, for joining us today for our first quarter 2019 earnings call. I want to begin with the financial highlights. As we continued to build on the strong momentum we had coming into 2019 by delivering excellent first quarter results, we generated revenue of $29.5 million an increase of 47% over the prior year's quarter. Excluding Biopharmaceutical service revenue of $4.1 million revenue increased by 27% to $25.4 million. And our genomic test volume during the quarter grew to 9,162 tests an increase of 33%. At the same time, we’ve reduced our cash used in operating activities to $1 million an improvement of 86% compared with prior year. As a result of our exceptional performance in the first quarter and increased visibility into the remainder of the year, we are raising our full year 2019 revenue guidance to a range of $117 million to $121 million. We continue to expect net cash used in operations of $4 million to $6 million for the full year. Now, I'll walk you through our business highlights for the first quarter using the metrics we have established to measure our success in 2019. The first is revenue growth. As we've previously noted, our expectations for revenue growth in 2019 and for the next three to five years will be driven by the layering effect of our commercial stage revenue generating Afirma, Percepta and Envisia classifiers, which are used to improve diagnostic accuracy and inform treatment decisions. The strength of our performance in the first quarter was driven primarily by solid growth in our Pharma business where revenue increased by 23% year-over-year. This was driven by the positive response by physicians to our RNA whole-transcriptome based Afirma Genomic Sequencing Classifier, or GSC coupled with Xpression Atlas delivering results that helped…

Keith Kennedy

Analyst

Thank you, Bonnie. As Angie mentioned earlier, our first quarter 2019 financial presentation is available under Events & Presentations in the Investor Relations section of our website. Turning to Page 3 of our financial presentation. Our performance against six financial key performance indicators, or KPIs, for the first quarter of 2019 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 $29.5 million, increased 47%, excluding $4.1 million of biopharma service revenue of $25.4 million, increased 27%. Genomic volume of 9,162 reported tests, increased 33%; gross margin of 71%, increased 10 percentage points. Excluding biopharma services, gross margin was 56%, an increase of six percentage points. Operating expenses, excluding cost of revenue, increased 9%; net loss of $1.9 million, improved 79% and net cash used in operating activities of $1 million, improved 86%. The next six pages outline the sequential and year-over-year results underlying each of the six financial KPIs. A few observations. As illustrated by the revenue in genomic volume trends on Slides 4 and 5, we continue to see positive momentum across the business. As Bonnie mentioned earlier, we recognized revenue for our Envisia Classifier for the first time in the first quarter of 2019. Our lung portfolio represented approximately 700 tests or 8% of our genomic volume this quarter. Turning to Page 10. Cash at March 31, 2019 was $68 million. As previously announced, we prepaid $12.5 million of our principal debt balance or 50% of our total interest-bearing debt in January, 2019. Turning to Page 11 and our 2019 guidance. As Bonnie stated earlier in her remarks, we are increasing our revenue guidance to a range of $117 million to $121 million. At the midpoint of the range, this represents a 29%…

Bonnie Anderson

Analyst

Thanks, Keith. To summarize, we had a strong quarter in which we accomplished much. We exceeded our revenue expectations. We delivered robust test volume growth. We executed on our key business drivers, including receiving final Medicare coverage for Envisia classifier and published key clinical evidence for Envisia as well. And we advanced our pipeline all, while moving significantly closer to our goal of reaching operating cash flow break-even this year. In short, we remain on track toward accomplishing what we said we would in 2019. Moreover, we are delivering on the promise of genomic diagnostics to improve patient outcomes, enhance physician decision-making and reducing healthcare inefficiencies. We are doing this by extracting maximum information and value out of a minimally invasive patient sample to answer our important clinical questions across the patient care continuum. And in a healthcare landscape, we're distinguishing between what is real and what is hype can be challenging. I assure you what we are doing is real. I will now ask Kyle to open up the call for questions.

Operator

Operator

[Operator Instructions] Your first question comes from the line of Puneet Souda from SVB Leerink. Your line is now open.

Puneet Souda

Analyst

Yes. Hi Bonnie, thank you. Congrats on the quarter. So first of all, I just wanted to get a sense of Envisia and Percepta contribution in the quarter. And then broadly just like how to think about throughout the year in terms of cadence of those products. And then, on the guide, if I could, I just wanted to clarify that includes – if that includes the J&J as is an incremental to that or J&J is included in that guide and if there is any further details there. Thank you.

Bonnie Anderson

Analyst

Thank you for joining our call today, Puneet and for the questions. So regarding Envisia and Percepta, I think Envisia was a very small amount of revenue for this quarter because actually our effective date on our Medicare was effective April 1. So this is commercial payments that we've actually received and booked as revenue. And I think that as you think about the year going forward, it will follow similar cadence to the way Percepta was last year where you kind of will see it grow through the year, we would expect Q4 to be our largest quarter as is always the case. And that we will land the full year between 500 and 1,000 as Keith mentioned. Percepta, we are predicting will double over last year, we did see 195% growth actually over – the first quarter last year was very minimal. So I think the cadence will follow similar to that. And our new guidance does include the additional services revenue that Keith mentioned from J&J, $8 million.

Keith Kennedy

Analyst

Yes. So I'll – let me just give you a little bit more detail on the service revenue now. I think about that for the $8 million for the year, we recognized $3.8 million in the first quarter, Puneet, for meeting milestones. And we recognized about $300,000 on Loxo Oncology. We would expect to recognize the $1.2 million, it makes up the $5 million remaining amount that we received in cash in the second quarter. And we've added $2 million, which we expect currently to recognize in the third quarter. Now the third quarter $2 million will probably or expect that we would receive that cash probably in the fourth quarter because they have 90 days to pay that. That's sort of how that plays out for the rest of the year. And we continue to expect Loxo Oncology to be $0.25 million per quarter.

Puneet Souda

Analyst

Okay. All right, great. And then just briefly if you could provide me on sort of the nasal swab and how should we think about the data, what's sort of the way to benchmark it and the timing of when should we expect to see that data? Thank you.

Bonnie Anderson

Analyst

Yes, I think we've consistently said that we hope to expect to unveil our early data likely cross-validation data before the end of the year. We're very much on track for that. That's about as much direction as we've given but thank you. Thanks for joining.

Operator

Operator

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

Sung Ji Nam

Analyst

Hi, thanks for taking the questions and congrats on the quarter as well. Just on Envisia, Bonnie, if you could talk about kind of your commercial strategy, now you have the Medicare LCD behind you as well as the New York state approval. I was curious as to do you anticipate expanding beyond the 30 plus sites this year or how should we think about kind of what your near-term commercial strategy there might be?

Bonnie Anderson

Analyst

Yes, thanks for the question and thanks for joining us, Sung Ji. So I think that we’ll take this moment to remind everyone the structure that we're commercializing these products under because it becomes really important as you think about Envisia kind of just getting off the ground. So we have our broad-based Veracyte experts that basically have responsibility for both Afirma and Percepta now, ultimately down the road we expect that team will have responsibility for all products, but because Percepta and Envisia are in the early stages. Our pulmonology specialist team, which is distributed across all of the regions, will be the only group this year that we anticipate will drive the uptake of Envisia through the year. We certainly expect to grow beyond that 33 accounts that was built up as part of our early access program. So there is good demand. We'll be heading to the American Thoracic Society meeting next month, which we expect to be a great show for us for both Percepta as well as Envisia. And so we think that sites will begin to be added and our pulmonology specialist team will do a great job of driving that while also looking after Percepta this year. Chris, anything you want to add to that?

Chris Hall

Analyst

I think that covers it. We expect the number sites to keep growing and also the depth within the sites because it's not just setting up a site but it's layering in additional doctors in the site and that's always a journey. So those 33, the sites we have set up now, it's going deeper within those sites and then continuing to grow. We expect that all to occur as we go through the year.

Bonnie Anderson

Analyst

Yes. Ultimately to get all of our products to standard of care, we want to drive operational use where they are used as part of the workup process within each institution. And that's the key to success. Thanks for your question.

Sung Ji Nam

Analyst

Great. That makes sense. And then just one other one on Envisia. So we're seeing a number of IPF therapies entering Phase 3 in clinical development. Was curious as to whether there might be opportunities for you guys as these companies are starting to recruit patients for these trials?

Bonnie Anderson

Analyst

Yes. I mean, I think that speaks to or laying out some of our strategy that bridges the work we do, the vast number of sites we involve, the deep science and deep cohorts that we build on the front end of all of these programs. Envisia was certainly no exception to that. I think we probably have the richest interstitial lung disease and IPF biorepository of anyone in the world. Now with that product has advanced to commercial stage and we have a classifier where we can confidently help physicians make a diagnosis even when the HRCT image is not highly confident. This means not only could it be an opportunity for us, it could be a real opportunity for patients. Because prior to this, often it was required to have a confident HRCT to be able to be eligible and enrolled in a trial. So, we're hopeful it won't happen, overnight by any means. These things never do. But we do believe that Envisia is going to be very nicely positioned to change the landscape in this way and be a product that could really help bring patients diagnosis forward and help more and more patients get enrolled in these trials and that should help these companies accelerate the trial enrollment. And hopefully we'll see better and improved therapies for patients with this devastating disease down the road.

Sung Ji Nam

Analyst

Great. And then just lastly, one for Keith. You maintained your genomic volume guidance of 20% to 25%. And this is on the back of 30 plus percent growth this quarter. I'm just trying to figure out if there is anything to read into that if you anticipate, if there was an unusual pull forward in the first quarter. If you could talk to that, that would be great. Thank you.

Keith Kennedy

Analyst

No, we continue to expect our genomic volume will do well and hopefully we can do even better. So there's no change in that. We obviously our Afirma volume did very well, totally our Percepta and Envisia volume this quarter. Some of the assumptions around what the implied growth rate is depends on sort of assumptions around funnels and pricing and all that and we tried to just keep that straight forward. So, that would be my statement.

Sung Ji Nam

Analyst

Great. Thank you so much.

Operator

Operator

Your next question comes from the line of Brian Weinstein from William Blair. Your line is now open.

Andrew Brackmann

Analyst

Hi, good afternoon. This is actually Andrew on for Brian. Thanks for taking the questions. Maybe we could talk a little bit more on the Percepta ramp and maybe at some additional color on what you're seeing there in terms of the biggest drivers of growth in the quarter and what sort of implied throughout the year in terms of new account ads and then increasing utilization within the accounts that are already ordering it. Thanks.

Bonnie Anderson

Analyst

Sure. Thanks Andrew for joining us. Yeah, I mean it's very difficult to get too deep into metrics on those items when a product does so early because we have a combination of new sites coming on board as well as existing sites where we're trying to drive deeper utilization within the accounts. We're really very pleased with where Percepta is coming into the new year. Chris you want to talk a little bit more about how that dynamic is playing out at the field level?

Chris Hall

Analyst

Yeah, absolutely. I mean there's been a couple drivers that are really been causing that product to accelerate nicely in the market. The first is that the sales group that we have in the field has, is trained nicely trained right now and has a good set of experience that they bring to that product. And I think always in a sales situation, having confidence with a product helps to drive success. I think we're starting to hit that, hit that nice stride right now. Secondly, physicians are just getting more experienced with the product, and you think that the adoption of these products, should just kind of happen overnight in binary ways, but they never do. They happen a little bit here and a little bit there within these accounts. And the more success and the more, the more success that clinicians get with the product in actually using it on their patients, the more that we see them going deeper, which is really, which is really tremendous. The third thing that we're seeing and we've seen this in our market research is a really deep, deep in the market knowledge of Percepta. You know, we do what we call internally, brand trackers trying to understand how these different brands that we have a Afirma and Envisia and Percepta perceived how well known they are. And we started this last year with Percepta. Really wasn't well known at all. But now, we've moved the needle dramatically in terms of the number of physicians that know Percepta, the number of physicians which are looking forward to using the product and the quality of the product is perceived by the community and our sales reps. So I think we're starting to really hit a critical mass with the product and the community and feel really good that we're, that we're on – we're on a nice path there.

Andrew Brackmann

Analyst

Great. That's helpful. Thank you. And then maybe just as a follow up, thanks for the help with the additional pieces of data and evidence that came out throughout the quarter any one that you'll call out for the second quarter that we should keep an eye on.

Bonnie Anderson

Analyst

Thank you. We'll always put out a pre-conference release for any highlights that we'll have at the conferences unless those are at a private event where we usually don't announce, those until they happen. But we'll keep you posted as new evidence and publications and presentations on unfold.

Andrew Brackmann

Analyst

Great. Thank you.

Bonnie Anderson

Analyst

Thank you

Operator

Operator

[Operator Instructions] Your next question comes from the line of Paul Knight from Janney. Your line is now open.

Paul Knight

Analyst

Hi Bonnie, Congratulations. Could you talk about them – I just can't grab here the number of Percepta tests you're targeting for 2019.

Bonnie Anderson

Analyst

Sure. Thanks for joining us Paul and thanks for the congrats. Yeah, we expect that this year we will double the volume of our 2018, which will put us right around 3000 tests for the year. And as I said earlier, we expect that to be a cadence of continued growth through the year. And Q4 of course is typically always our strongest quarter. So, we would expect it to follow that, that typical pathway.

Paul Knight

Analyst

And then Keith, it seems to me as you're making a dramatic traction in achieving your profit goal. I think it was previously, it could be a Q4, obviously. Do you think it's quicker than that?

Keith Kennedy

Analyst

As I laid out in my prepared remarks. We essentially were EBITDA positive, we don't report EBITDA. But if you add that depreciation, amortization and stock based comp we are EBITDA positive for the first time this quarter. And some of this depends on when, cash flow comes in relative to service revenue. We're focused in on our sort of product revenue and looking at product revenues separate from service revenue to determine, the core business generating cash flow. So, it's possible it could happen earlier. We were obviously very close this quarter and this is a quarter when, you know, we pay corporate bonuses and things like that but we'll have to see how it goes throughout the year.

Paul Knight

Analyst

Okay. Thank you.

Bonnie Anderson

Analyst

Thank you.

Operator

Operator

Ladies and gentleman, this concludes our call today. Thank you for joining us. You may now disconnect.