Veracyte Inc

NASDAQ:VCYT

Earnings Call Transcript 2019-Q1

[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]

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, Chairman and Chief Executive Officer]

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 keep even more benign patients from surgeries they don't need while guiding more informed treatment decisions for suspecting cancer patients.

All from the same assay on the original fine needle aspiration sample collected for thyroid nodule diagnosis. Our success was also the result of executing additional contracts with payers including Anthem last year.

We recently executed a contract with Blue Cross Blue Shield of Tennessee making us an in network service lab for their 3.5 million members. In addition, we are thrilled that the Afirma GSC recently became a covered service for the nearly 9.4 million uniformed service members, retirees, and their families through the U.S. Department of Defense TRICARE Program.

Our Percepta Bronchial Genomic Classifier in lung cancer diagnosis continued to gain momentum in the first quarter with a 195% growth in reported test volume over the prior years quarter. This is a terrific start to 2019. We continue to expect Percepta volume of approximately 3,000 tests in 2019, which is double it's 2018 test volume.

We achieved an important milestone in the first quarter with the recognition of revenue for the Envisia Genomic Classifier for the first time. The Envisia Classifier is used to improve diagnosis of idiopathic pulmonary fibrosis or IPF. We also received a final Medicare coverage policy through the MolDX program, which became effective April 1. The policy means the test is now covered for the nation's nearly 60 million Medicare beneficiaries.

With that coverage in hand, we are now beginning to expand commercialization of the test nationwide and believe our efforts will be accelerated by the Early Access Program we launched last year.

Currently 33 institutions including many leading centers of excellence across the country have adopted the test and the feedback we are getting from physicians continues to be quite positive. We continue to expect reported test volume of 500 to 1,000 tests for the year.

Clearly our multiproduct sales strategy and execution is working as our team is successfully driving growth across multiple products by effectively leveraging common stakeholders within client institutions and optimally managing their time between the products.

As a reminder, we believe our success in driving revenue from a single sales team structure is key to our goal of delivering long term profitable growth for shareholders. Our strong financial results in the first quarter also came from higher than expected biopharmaceutical services revenue from our Loxo Oncology and J&J collaborations.

We achieved key milestones ahead of plan for the development of our second generation Percepta Classifier and our first nasal swab test for lung cancer. As a reminder, we expect that our biopharmaceutical services revenue will continue to be choppy given the nature of this business.

Our next metric of success is Evidence Development where we had a tremendous success also in the first quarter. Earlier this month, clinical validation and clinical utility data for the Envisia Classifier were published in the Lancet Respiratory Medicine. The studies demonstrate the tests’ ability to identify the telltale pattern of IPF while minimizing false positives and the tests usefulness in giving physicians more confidence in their diagnosis of patients being evaluated for interstitial lung disease, including IPF without the need for surgery.

This evidence is pivotal in driving physician confidence and working toward guideline inclusion and eventual commercial payer coverage. Additionally, multiple Afirma studies were published and presented during the quarter. This includes real world clinical utility data published in the Journal Thyroid, which showed that at Brigham and Women's Hospital use of the next generation Afirma GSC increased the number of benign thyroid nodules found by nearly 40% compared to the original Afirma test.

These results are even stronger than those in our clinical validation study published last year in JAMA Surgery. We also published a paper in BMC systems biology detailing our development of the Afirma GSC and its ability to distinguish benign from cancerous forms of a common thyroid nodule subtype known as Hürthle cells. Our original classifier with bias to safely default to a suspicious result for this challenging subtype.

With our Afirma GSC, however, our machine learning algorithms were able to utilize the mitochondrial content from the RNA whole-transcriptome sequencing assay to distinguish benign cases within this subtype. This was an exciting improvement for the second generation test.

Finally, at ENDO 2019, the Annual Meeting of the Endocrine Society, we presented new findings from our Afirma Xpression Atlas characterizing the genomic foundation of a rare, that aggressive form of fibrin cancer known as medullary thyroid cancer. These new insights underscore the wealth of information that our RNA whole-transcriptome sequencing platform can provide both to help inform treatment decisions for physicians today as well as to potentially inform precision medicine advances of tomorrow.

Our third measure of success is pipeline advancement. We made significant progress in our work in lung cancer, fueled by our collaboration with J&, which is bringing more patient samples and resources to bear on our efforts. We have now optimized the Percepta classifier for RNA whole-transcriptome sequencing platform and are on track to introduce the next generation test in the middle of 2019. We believe this test will deliver increased value to physicians and patients while also adding efficiencies to our operations and providing a strong platform for continued innovation, given the wealth of data that our platform generates.

We remain excited about our work to develop the first nasal swab test for early lung cancer detection. We believe such a test will address a critical global healthcare need, especially since lung cancer is the leading cause of cancer deaths worldwide, and will also expand our addressable market to over $30 billion.

We have already received nasal samples and clinical data from the clinical cohorts that we can access through our J&J collaboration. As these additional samples are sequenced on our novel whole-transcriptome unified essay, we will advance the machine learning tools and models for detecting cancer in the nose and we'll prepare to unveil early cross-validation data before the end of the year.

At that time, we expect to provide more information on the opportunities for this first nasal swab test for early lung cancer detection, including our planned positioning of the test within the current clinical pathway of care. So stay tuned.

Finally, financial discipline is our fourth metric of success. Our cash used in operating activities for the fourth quarter of 2019 was only $1 million, which is an 86% improvement compared with the first quarter of last year. This significant progress reflects our continued discipline in using our resources efficiently and investing strategically in activities that drive the business.

This includes investment in our multi-product sales team, which is providing its ability to drive growth across our products as well as the continued investment in our R&D pipeline where we have demonstrated through the launch of five major products over the course of just the 11 years that we are setting the pace for R&D productivity among advanced genomic testing companies.

We continue to expect that we will achieve operating cash flow break-even before the end of this year and we remain committed to achieving and sustaining long-term profitable growth.

I will now turn the call over to Keith to go over our financial results for the first quarter of 2019.

[Keith Kennedy, Chief Financial Officer]

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% increase over last year. Consistent with our prior guidance, we continue to expect net cash used in operating activities of $4 million to $6 million for the full year. At the midpoint of the range, this represents a 63% improvement over last year.

Generating positive operating cash flow remains a key goal for us, and we expect to achieve cash flow breakeven before the end of this year. This quarter, our net loss was $1.9 million, which included $2.7 million of depreciation, amortization and stock-based compensation expense. To add some additional color on our outlook for 2019, we expect the following: our annual revenue guidance implies genomic test volume growth of between 20% to 25% over last year.

Our revenue and cash flow guidance includes $8 million and anticipated service revenue including approximately $7 million for anticipated milestone achievements through collaboration with Johnson & Johnson. We continue to expect to receive $0.25 million per quarter in service revenue as well as cash collections from Loxo Oncology.

We expect the positive revenue in genomic volume trends from the layering in of multiple products to continue to positively impact seasonal trends in 2019. As Bonnie mentioned, for 2019, we continue to expect Percepta genomic volume of approximately 3,000 tests and Envisia genomic volume of 500 to 1,000 tests. We expect to generate approximately $1,300 in revenue per reported test for both Percepta and Envisia in 2019.

We expect to recognize approximately $8 million to $9 million in revenue for cytopathology services in 2019. We expect gross margins, excluding the impact of biopharmaceutical service revenue to be stable within the 64% to 66% range. We expect our average quarterly spend for sales and marketing to stay within $1 million band around the average quarterly spend of $13 million. And our average quarterly spend for combined G&A and R&D spend to stay within $1 million band around the combined average quarterly spend of $10 million.

I will now turn the call back over to Bonnie.

[Bonnie Anderson, Chairman and Chief Executive Officer]

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

[Puneet Souda, SVB Leerink]

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, Chairman and Chief Executive Officer]

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, Chief Financial Officer]

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, SVB Leerink]

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, Chairman and Chief Executive Officer]

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]

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

[Sung Ji Nam, BTIG]

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, Chairman and Chief Executive Officer]

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, President and Chief Operating Officer]

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, Chairman and Chief Executive Officer]

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, BTIG]

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, Chairman and Chief Executive Officer]

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, BTIG]

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, Chief Financial Officer]

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, BTIG]

Great. Thank you so much.

[Operator]

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

[Andrew Brackmann, William Blair]

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, Chairman and Chief Executive Officer]

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, President and Chief Operating Officer]

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, William Blair]

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, Chairman and Chief Executive Officer]

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, William Blair]

Great. Thank you.

[Bonnie Anderson, Chairman and Chief Executive Officer]

Thank you

[Operator]

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

[Paul Knight, Janney]

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, Chairman and Chief Executive Officer]

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, Janney]

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, Chief Financial Officer]

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, Janney]

Okay. Thank you.

[Bonnie Anderson, Chairman and Chief Executive Officer]

Thank you.

[Operator]

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