Veracyte Inc

NASDAQ:VCYT

Earnings Call Transcript 2017-Q4

[Operator]

Good afternoon, ladies and gentlemen, and welcome to Veracyte’s Fourth Quarter and Full-Year 2017 Financial Results Conference Call. At this time, all participants are in a listen only mode. Later we will conduct a question-and-answer session and instructions will be given at that time. [Operator Instructions] As a reminder, today’s conference is being recorded.

I would now like to turn the conference over to your host, Ms. Bonnie Anderson, Chairman of the Board and Chief Executive Officer. You may begin.

[Bonnie Anderson, Chairman and Chief Executive Officer]

Good afternoon everyone and thanks for joining us today for our fourth quarter and full-year 2017 financial results conference call. Joining me today are Keith Kennedy, Chief Financial Officer and Chris Hall, President and Chief Operating Officer.

Before we begin Keith will take us through the Safe Harbor statement.

[Keith Kennedy, Chief Financial Officer]

Good afternoon everyone. Before we begin, I would like to remind you that various statements that we 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 fact.

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 the company can give no assurance they will prove to be correct.

In addition to today’s press release, those risks and uncertainties are described in the company’s filings with the Securities and Exchange Commission. Additionally non-GAAP financial measures will be discussed on this conference call. Please refer to the tables in our earnings release and the investor relations portion of our website for a reconciliation of these measures to the most directly comparable GAAP financial measures.

Part of this call we announce our fourth quarter and full-year 2017 results which are available on our website, Veracyte.com, by clicking “Menus” on the top-right corner of our website and clicking-through to our “Investors” landing page and then “Press Releases.” We also released a financial presentation, which I'll reference later in the call when I cover our financial results.

You may find the financial presentation in the same “Investors” section, under “Events & Presentations.”

I will now turn the call over to Bonnie.

[Bonnie Anderson, Chairman and Chief Executive Officer]

Thank you, Keith. And now to recap our performance in 2017 a year of solid growth, product portfolio expansion, scientific innovation and reimbursement successes. I'm also pleased to update you on the foundational readiness of our sales and marketing operations to accelerate the growth of three commercial products which we believe will lead to a future of sustained growth. And most importantly, I'm excited to share our plans and expectations for 2018.

Let's begin with the 2017 recap using the key metrics we use throughout the year to define success. The first is revenue growth and commercial expansion. We grew revenue by 11% in 2017 closing out the year at $72 million coming in at the top of our previous guidance for the year. We grew our reported genomic test volume to just over 26, 000 for the year a 12% increase over 2016. Q4 was slightly higher in growth at 13% as we built momentum toward the end of the year.

We expanded Percepta adoption to over 70 institutions around the country by the end of 2017 and began booking revenue. We launched our next generation Afirma Genomic Sequencing Classifier or the GSC on our RNA sequencing and machine learning technology platform enabling 30% more patients to potentially avoid unnecessary surgery and thyroid cancer diagnosis. Response among our current customers has been strong.

Lastly, we expanded our multiproduct sales team by over 40% in 2017 setting the stage to drive Percepta growth in 2018 while further penetrating the Afirma market beyond the estimated 35% position we hold today. We also continue to work with the Quest AmeriPath relationship to drive further adoption into their physician networks.

The second is reimbursement progress. Coverage in reimbursement has been a pillar of Veracyte's success for years and 2017 was no exception. We secured a dozen new medical coverage policies for Afirma adding nearly 40 million covered lives from Anthem, a key milestone making Afirma one of the very few genomic tests in any indication to be covered by Medicare and all leading U.S. health insurers.

At the end of 2017 more than 275 million people including over 120 million Blues plans members had access to Afirma as a medically necessary benefit through their health plans. We increased the number of contracted lives for Afirma by nearly 20 million in 2017 bringing the total to over 175 million people including nearly 45 million Blues plans members. This progress is important because physicians are much more likely to order tests that are available in networks for their patients.

Through the implementation of PAMA we received a new Medicare rate for Afirma which increased the reimbursement rate from approximately 3200 per test to approximately 3600 per test as of January 1, 2018.

Lastly, in May of 2017 Medicare coverage for Percepta became effective through the MolDX program making the test available to nearly 60 million Medicare recipients and finally the modification of the CMS 14-day rule which removed challenging billing requirements for our institutional clients and will allow us to fully manage the billing process going forward, greately streamlines the sales process coming into 2018.

Our third measurement of success is evidence development. Here too we experienced significant success in 2017 with five publications and over 20 abstract presentations across our portfolio. We presented 14 abstracts on Afirma at key endocrinology conferences including positive data from four long-term clinical utility studies. This also included seven abstracts showcasing the performance of our new Afirma GSC. We published a cost effectiveness study for the Percepta Classifier in the Journal of Thoracic Oncology and presented three clinical utility studies at major medical meetings.

We also presented five abstracts for Envisia at key pulmonology meetings demonstrating that Genomic tests clinical validity, clinical utility, and analytical verification. We believe this robust clinical evidence will enable us to gain Medicare coverage for Envisia Genomic Classifier, the first diagnostic test to improve the diagnosis of idiopathic pulmonary fibrosis or IPF. Medicare coverage for Envisia is one of our key catalysts for 2018.

And our final success metric for 2017 was financial discipline. Our full year cash burn was $25.2 million, an improvement of 22% over 2016. We are pleased with the significant progress we've made in advancing our pipeline for future growth while managing our cash burn effectively. We believe we are on the pathway to profitable growth and want to remind you all that this remains a key important goal for us as a company.

To this end, in early 2018 we announced a strategic realignment of our business and new appointments to advance our commercial growth and ensure we are deploying our resources effectively and efficiently toward revenue generating activities. As we move into 2018 we are a stronger, more operationally efficient organization that is primed to advance growth in the three market leading genomic tests we have.

I will now turn the call over to Keith to review our financial results for the fourth quarter and full-year 2017.

[Keith Kennedy, Chief Financial Officer]

Thank you, Bonnie. As mentioned earlier, you may find our financial presentation on our website at www.veracyte.com under Investors and then Events & Presentations. I plan to speak about our fourth quarter and 2017 results and then conclude with 2018 guidance.

Turning to Page 3 of the presentation, our performance against six KPIs or key performance indicators for the fourth quarter of 2017 as compared to the prior year quarter, are as follows: Revenue of $19.6 million increased 7%. As noted in the drivers at the bottom of the page, revenue included cash revenue of $0.3 million in the current quarter and $2.6 million in the prior year quarter.

Cash revenue is the cash we project in the period for cash reporting prior periods at the time a testing reporting did not meet our revenue recognition standard. As a reminder, in the third quarter of 2016 we began accruing revenue for substantially all reported cash volume. Now we continue to pursue and welcome cash revenue it is becoming a smaller portion of our revenue.

Excluding the $0.3 million of cash revenue previously mentioned, accrued revenue was $19.3 million which included $2.5 million of cytopathology revenue. Accrued revenue grew 23% including cytopathology revenue and 25% excluding it. Given that we accrued substantially all reported cash volume in both periods, we believe accrued revenue more accurately reflects our revenue growth rate attributable to underlying reported volumes.

Moving to our second KPI, genomic volume of 7153 tests increased 13% and included 7073 Afirma reported test results and 80 Percepta reported test results. Our third KPI gross margin was 60% declined 400 basis points. Gross margins are favorably impacted by cash revenue collected on tests performed in prior periods. Gross margins with respect to accrued revenue improved from 58% to 60%.

Our fourth KPI operating expenses excluding cost of revenue was $17.9 million. The 16% increase was due principally to our investment in our sales and marketing organization, while our R&D and G&A spend declined. Our fifth KPI, net loss of $8.4 million increased 92% due to the items previously mentioned as well as a $1.5 million exit fee paid to refinance our senior secured loan which we recorded as interest expense.

And our sixth KPI, cash burn, a non-GAAP measure that we define as net cash used in operating activities plus net capital expenditure s of $6.1 million increased 31% to principally to a $1.6 million increase in net cash used in operating activities offset by a $0.2 million reduction in net purchases of property and equipment.

Turning to Page 4 of the presentation, our performance for the full year 2017 against these same KPIs as compared to the prior year are as follows: revenue of $72 million increased 11% and other than the drivers at the bottom of the page, revenue included $69.3 million of accrued revenue for tests that we reported in 2017 and $2.7 million of cash revenue for tests reported in prior periods.

Since we started accruing revenue for substantially all test volume in the third quarter of 2016 our full year comparison of accrued revenue against prior year results may be misleading and therefore is not shown. 2017 revenue includes $8.5 million from cytopathology services offered as part of our Afirma solution. Excluding cytopathology services, revenue grew 15% over the prior year.

Our second KPI, genomic volume of $26,000, 26 tests increased 12% and included 25,921 Afirma reported tests and 105 Percepta reported test results. Our third KPI, gross margin, was 61% and flat to the prior year. For the full year 2017 gross margins with respect to accrued revenue were 59%. Our fourth KPI, operating expenses excluding cost of revenue were $70.3 million. The 3% increase was due principally to our investment in our sales and marketing organization, while our R&D and G&A spend declined.

And our fifth KPI, net loss of $31 million decreased 1% and our sixth KPI, cash burn of $25.2 million in line with higher end of our guidance improved 22% or $7 million due principally to a $4.1 million improvement in net cash used in operating activities plus a $2.9 million reduction of net purchases of property and equipment.

The next six pages outline the sequential and year-over-year results underlying each of our financial KPIs. A few observations, on Page 5 revenue, we highlighted $3.5 million of incremental revenue that we recognized in the third quarter of 2016 when we began full year incurring revenue and the quarter we reported test results, instead of in the quarter of cash collection. As a result of our transition of full accrual of revenue in mid-2016, we do not believe we will have a transition adjustment upon adoption of ASC 606 on January 1, 2018.

As Bonnie previously mentioned, we made significant progress obtaining policy coverage as well as contracts for Afirma test. As a result our average reimbursement for Afirma test improved from $2100 to $2300 in 2016 to $2300 to $2500 in 2017, a 9% increase using the midpoint of both ranges.

Turning to Page 6, genomic volume, I would make two observations. First, as indicated in the year-over-year bar chart on the left, the green bars represent our genomic volume in growth compared to the prior year quarter. Sequentially our growth rate increased over year. And second, our business is inherently seasonal and we observed some more seasonal trends in 2017 than we observed in 2016. We would expect this to continue.

Turning to Slide 7, cost of revenue and gross margin, as stipulated earlier, our transition of full accrual in the third quarter of 2016, favorably impacted our gross margins. Gross margins with respect to accrued revenue for the second half of 2016 were 56%. The same measure for the second half and full year of 2017 was 59%.

Turning to Slide 8, operating expenses, over the last eight quarters, Q4 2015 to Q4 2017, genomic volume per quarter increased 28% and revenue per quarter increased 40% while operating expenses per quarter increased only 13%. In the third quarter of 2016, Genzyme co-promotion agreement terminated and over the four quarter period ended September 30, 2016 the average total expense for the Genzyme agreement was $1.7 million or 11% of revenue. There were no general Genzyme co-promotion expenses after the third quarter of 2016. We do not believe we were hiring sales staff early enough to account for the transition.

We made significant progress in the second half of 2017 and ended the year with approximately 65 sales staff in the field. Reductions in R&D and G&A spend offset the increase in sales and marketing spend.

Slides 9 to 11 provide more detail on our net loss, cash burn, and cash position. In 2017 we improved our loss ratio or loss from operations by 8%. We also recorded $4.9 million of interest expense including the $1.5 million exit fee we paid in Q4 2007 to refinance and lower our current interest rate on our senior secured debt facility. At December 31, 2017 we had cash and cash equivalents of $33.9 million.

Guidance, we expect to achieve the following results in 2018. Annual revenue in the range of $81 million to $83 million, an increase of 17% to 20% over our 2017 accrued revenue of $69 million, supported with an estimated 15% growth in genomic test volume over the prior year and annual cash burn of $18 million to $22 million an improvement of 20% over the prior year at the midpoint of the range. We continue to expect similar trends across our business including quarterly volume trends associated with seasonality across our business, namely our Q1 quarter-over-quarter decline of 5% to 10% from Q4 and a Q2 to Q3 flatness with Q2 and Q4 being our two growth quarters.

As we ramp volume in our [indiscernible] for the Afirma GSC and Percepta, we expect margins could be depressed 200 to 300 basis points earlier in the year and recover later in the year averaging some more margins as we generate in 2017. As previously announced we expect to increase our sales and marketing expenses by approximately $6 million from $32 million to $38 million. Our G&A and R&D spend is expected to increase in line with annual compensation inflation cost which we estimate at approximately 3% to 5%.

Compensation is approximately 55% to 60% of our operating cost excluding cost of revenue. As a result payroll taxes and benefits tend to be higher in the first quarter.

I will now turn the call back over to Bonnie to discuss corporate milestones for 2018.

[Bonnie Anderson, Chairman and Chief Executive Officer]

Thank you, Keith. There are five key metrics that we believe will drive our performance in 2018 and importantly set us up for long-term success. They are, commercial growth, reimbursement expansion, scientific innovation, evidence development and financial discipline. Commercial growth will be measured by the number of genomic tests reported and the revenue generated from those tests.

While we believe Afirma will fuel the vast majority greater than 95% of the expected revenue that Keith just laid out, we do expect to gain significant traction with Percepta now that we have nationwide Medicare coverage removal of the 14-day rule billing constraints and a significantly expanded and highly trained sales team coming into 2018.

At the early stage of the Percepta adoption, we will be monitoring the number of institutions and the physicians ordering the test to track our success. Our latest market research with pulmonologists is quite encouraging. It shows a significant planned uptake in Percepta utilization once physicians are aware of our product profile as a clinically proven compliment to lung cancer diagnostics bronchoscopy.

We know that physicians prefer bronchoscopy over other procedures to evaluate lung nodules because it is less expensive, much less risky and less costly. Because Percepta makes bronchoscopy more useful, physicians report that they will do nearly 40% more bronchoscopies shifting from other more invasive biopsies as a result of having Percepta.

So, we believe that exiting the year at a run rate of 500 to 1000 reported Percepta results per quarter, we'll be success as we build momentum throughout the year.

The second important metric of success is reimbursement expansion. We plan to generate positive coverage decisions for Percepta from commercial payers building on the strong foundation we've laid with Afirma. We believe our success with Percepta will be facilitated by the impressive collection of clinical utility evidence we've assembled including data showing that the use of the test among the existing users is reducing invasive procedures by over 50% among patients who classifies as low risk for cancer.

Also in pulmonology we are on track to secure Medicare coverage for Envisia with an eye toward expanding commercialization in early 2019. And for Afirma we'll focus on converting our network of payer coverage policies into in network contracts across the board to help fuel further adoptions.

Scientific innovation is our third key metric. Our team will continue to push the boundries of scientific innovation leveraging a world-class RNA sequencing and machine learning capabilities. First, we believe the array of genomic content we can extract from each sample surpasses in size and scope, anything else available on the market. We believe this rich genomic content and data can potentially inform treatment decisions across our clinical indications particularly as we dig deeper into the understanding the genomic underpinnings of disease.

We will deploy this capability first in thyroid cancer. In fact, I am pleased to announce the upcoming launch of our new Afirma Xpression Atlas Platform in the second quarter of 2018. Physicians tell us they want more genomic information to help guide surgery decisions and treatment options. This new extension to the Afirma GSC will provide data on over 760 variants and more than 130 fusions in over 500 genes as well as mitochondrial content and loss of heterozygosity and will further our approach of offering physicians a one-stop shop in thyroid cancer.

Our market research suggests that the product will fill an important need in the market and augment our current offering allowing us we believe to test more patients per account and then form a broader set of treatment decisions. We will share more about the product extension as we move through the second quarter.

Further, our ability to access rich genomic information including our expensive bio repository samples will help fuel our continued product innovation efforts and potentially be of interest to developers of precision medicine therapies. As the market leader in the diagnosis of thyroid cancer for example, our most advanced indication our database is significant. To date we've touched more than 325,000 patients with Afirma and have performed over 100, 000 genomic tests and these numbers are growing as we continue to penetrate this market.

Finally, our scientists will break new ground in lung cancer where we plan to collaborate with top thought leaders in the field to pursue a nasal swab cast that uses field of injury technology to better stratify patients who are at risk for lung cancer and to improve early detection. We plan to further build on the exciting findings published last year in the Journal of the National Cancer Institute in which Boston University researchers showed that the same field of injury lung cancer associated genomic changes found in the main lung airway and evaluated with Percepta can also be detected in the nose. We expect to enhance collaborations during the year to advance this significant program.

Our fourth driver of success is evidence development because scientific innovation is only part of the equation. It must be married with a deep library of evidence demonstrating the performance of our test and their ability to improve patient outcomes. This is key in driving test adoption and reimbursement and further establishing our task for standard of care.

To this end, we expect data from several key studies to be published or presented throughout the year. The clinical validation study for the Afirma GSC which shows the GSC can help 30% more patients avoid unnecessary surgery, the study utilizes the same prospectively collected examples from the nearly 50 site New England Journal of Medicine study of our original Afirma test.

This clinical validation data of our new Afirma Xpression Atlas which will show that our RNA sequencing platform allows us to detect vast amounts of genomic content including fusions, mutations and other abnormalities, which we believe is substantially more than other technological approaches. There in the clinical utility study for Percepta which would demonstrate the world impact of our test is having in lung cancer screening and diagnosis.

And last, Envisia, our prospective clinical validation study, known as BRAVE, which will demonstrate the performance of the first ever genomic test to improve diagnosis of IPF, as well as studies showing the test's ability to impact patient care decision-making. We also expect to see user experience data emerge from both Afirma and Percepta users as these new products gain traction in changing clinical practice in thyroid and lung cancer diagnosis respectively.

This is all exciting work that we believe will drive tremendous value for patients, physicians and payers and with our focus on creating shareholder value we remain committed to growing our business responsibly.

That brings me to the final success metric, financial discipline. We intend to continue reducing our cash burn in 2018 by careful management of spending and strategic use of resources. This will include ensuring that our integrated multiproduct sales structure is achieving our volume and revenue goals for both Afirma and Percepta. We believe that execution on these five metrics will position Veracyte exceptionally well for growth, both this year and into the future.

Moreover, we move into 2018 with three tests that change clinical care and improve patient outcomes. A robust reimbursement foundation and expanded integrated sales team to bring our tests to market and scientific expertise and platforms that will continue to fuel product innovation and set us up for future expansion.

I would now like to ask the operator to open the call up for questions.

[Operator]

Thank you. [Operator Instructions] Our first question comes from the line of Puneet Souda of LEERINK Partners. Your line is now open.

[Puneet Souda, LEERINK Partners]

Yes, hi Bonnie. Thanks for the question, so on Percepta, can you remind us again maybe I missed this, how much of that is in the 2018 guide and also could you give us a sense of how that could accelerate from those numbers potentially, I think you gave a 500 to 1000 test estimate correct?

[Bonnie Anderson, Chairman and Chief Executive Officer]

Yes, Chris why don’t you take that, you’re leading the commercial effort here?

[Christopher Hall, President and Chief Operating Officer]

Sure. Yes, we talked indeed about - in the script about is about getting to a run rate in Q4 of 500 to a 1000 tests and that's what we're shooting for. We're off to a tremendous start as we start the year. We took our field force at the beginning of this year which you'll remember is selling both of the products and we had them kick the year off selling both of the products and we've tasked our field force all of them to spend significant amount of time driving Percepta.

And we really feel like that's been going well to date through this quarter. One of the key things and Bonnie talked about this in the script is that the positioning of the product to improve the usefulness of bronchoscopy is really getting traction because it's hitting that sweet spot of what physicians do every day and making that more valuable. So as we come out - as we come into this year, we feel really optimistic about the product getting traction and driving from here.

[Bonnie Anderson, Chairman and Chief Executive Officer]

And Puneet just to add to that, if you think about our metric of existing this year with say 500 to 1000 reported tests and assume about 50% reimbursement from Medicare, then you can see that we'd be setting 19 up for a really solid year of strong revenue growth. We also talked to coming off of last year of having about 70 institutions submitting Percepta samples and we can tell you just so far this quarter we now are receiving samples from over a 100 institutions and over 200 MDs, so we feel like we have great metric sharing significant traction already this year.

[Puneet Souda, LEERINK Partners]

Okay, great and on the timing of product extension, could you provide that and maybe what changes do you have to make in your test analysis and production and what's the change in the COGS maybe if Keith can take that and do you have to file anything with the peers and CMS to include that and payment guidelines?

[Bonnie Anderson, Chairman and Chief Executive Officer]

Yes, actually Xpression outlets will launch in Q2 as we said. It will provide a portfolio of genomic changes, some which have reimbursement curves, others that will be used potentially to help guide other treatment decisions. We don't expect this year to see meaningful revenue from the Xpression outlets, but the platform and the extendibility of it across all of our indications certainly will bring future value.

[Keith Kennedy, Chief Financial Officer]

And on the gross margin side, I talked a little bit about that and when I covered guidance in terms of earlier in the year, that could be compressed 200, 300 basis points, but as you can appreciate our cost revenue is not a very big number in terms of million dollars can swing your margins 200, 300 basis points and we tend to buy these and large sequencing kits and things like that and the assay’s are fairly large purchases.

[Puneet Souda, LEERINK Partners]

Okay and the last one then in terms of the contracted firm up that you have currently, I think it's a $175 million that’s reported, could you remind us where that stood last year and what's your, how soon can you reach the sort of 90% contracted at this stage?

[Bonnie Anderson, Chairman and Chief Executive Officer]

Yes, I mean I think essentially the one major plan that we're working that we do have coverage from and have not yet contracted with [indiscernible], so that will be a key priority and key catalysts for 2018 and I'm sure when we achieve that the whole world will know.

[Puneet Souda, LEERINK Partners]

Okay, all right. Thanks guys.

[Bonnie Anderson, Chairman and Chief Executive Officer]

Thank you.

[Operator]

Thank you. Our next question comes from the line of Amanda Murphy of William Blair. Your line is now open.

[Amanda Murphy]

Hi, thanks. Just a follow up to Puneet’s question on Percepta, so I just was curious if you could, I know, I realize it’s a difference to the end user if you will that, may be just correlate the ramp and Percepta there what you saw with Afirma, is it trending in line with your expectations ahead and then maybe just what did you learn with Afirma that you're now applying to Percepta if anything in terms of how to drive adoption?

[Bonnie Anderson, Chairman and Chief Executive Officer]

Yes, great question. So there's a couple of different things about the market for Percepta that is difference from where we entered the market with Afirma, because with Afirma, we have the large base about 50% in the market were physician office practices where you really only had one stakeholder that would make a decision to adopt the test. And if you remember we focused ours and Genzyme's efforts almost exclusively into that segment of the market for the first few years of that we were driving adoption.

In 2014 we began then to operationalize Afirma to work better for the institutions where they would run their own cytopathology and need to collect and handle the sample operationally and get that sample to us following a cytopathology read and to-date that segment of the Afirma market have continued to be the most rapidly growing from '15, '16, and through '17.

So what we learned in those last three years with Afirma in the institutional segment is directly applicable to Percepta and that is that radiologists, surgeons and pathologists are all key stakeholders and decision making in institutions and health systems along with the specialist which would be endocrinologists for Afirma and pulmonologists for Percepta, but what we've learned in operationalizing and gaining pull through is very applicable and that's why we wanted to create a cell structure that would leverage that.

[Keith Kennedy, Chief Financial Officer]

Yes, I would just add this, Keith this point to Bonnie mentions about multiple stakeholders is so important in a hospital situation and we really learned that as we walked the commercial journey with Afirma and that's certainly been true with Percepta. I would say that the one part of that has been pleasantly surprising to me is that we have been able to leverage the relationships that we've made so far on Afirma to help us with Percepta.

There is an overlap spot there with the pathologist, some of the same people that know us in the hospital pathology labs are also reading these samples and have help to provide an introduction to the institution and we've gotten to know the processes, because you know all these institutions have their own way of doing business and so we've been able to leverage the relationships that the sales people have and many of the local institutions to get entrees in and feel good about the progress along that dimension.

[Amanda Murphy]

Okay, got it. And then Keith, while I have you, so in terms of the guidance for ’18 just I’m curious how to think about I guess realized price if you will or ASP it is given obviously you're continuing to gain traction in terms of Afirma and [indiscernible] not, but then you've got Percepta sort of ramping. So just curious if you can give any perspective on how to think about trends, probably I guess I don't know if you're right, I guess you're breaking out the two businesses now, but thinking about the aggregate.

[Keith Kennedy, Chief Financial Officer]

Yes, and I know the analysts, you are all - different people model in different ways, so let me try to give you some perspective on that just historically and what the growth rate looks like, but we started to increase from 23 to 25 to $100 on the Afirma side and with with the Medicare rate going up call that $100 impact on rate, so we'd expect so Afirma to be sort of 2,600 plus other hopefully contracted situations.

We improved on the managed care side, so its $2,600 to $2,700 per test. And then on the Percepta and I would see that increasing later in the year, so we generally see around the end of the third quarter is when we started getting more push on the contracting side that seems to be about the timing we had last year. So I’d say Medicare starts at the beginning of the year on Afirma and then sort of the end of the third quarter we see a little bit of a tick up there just for the fourth quarter.

Moving to Percepta, we're trying to figure out the funnel on that were establishing relationships and you're looking at what’s indication, what’s out of indication and coding and all those other stuff, so it's early and I think will continue to come back to you quarter-over-quarter. We don't expect as Bonnie as said that to be a very large number relative to our total revenue for the year and it surely won't be a big number in the first quarter, but the way I think about it is if the commercial team feels like they can get to 500 to a 1000 tests by the end of the year, and we look back at Afirma, we sort of did double that in the whole year

So in the first three quarters of the year, it's a very small number in the first quarter and it gets bigger and bigger and then the fourth quarter you have your best quarter which is our seasonally best quarter. So if I just assume you double that midpoint your 750 to say 1,500 tests and half of those are Medicare. We currently on Afirma accrued between 90% and 95% of those. I'm not sure what that's going to be, that percentage is going to be for Percepta yet, to just assume you get I'd say 92.5% midpoint, you end up at 6.70, 6.75 about that number and if you accrue those at 3,200 that gets you a couple million dollars in revenue for the year.

I don't know if that will, I not guiding at that, I'm just walking you through the map in terms of how you all model things. That would be a success in terms of revenue on the commercial side and I think that with Afirma we doubled our revenue the second year and now it's showing 50% increase in revenue and we would expect to do similar growth. This is early on and we will refine this and get better at it and so we do expect this growth rate to be significant relative to Afirma which is later stage product?

[Amanda Murphy]

Yes, that makes sense. Okay and then I hate to even ask this because you've done such a good job in terms of building out this sort of second and third leg of this in lung, but obviously you’ve got this underlying kind of proprietary gene collection methodology an algorithms and what not, so maybe could you just give us an update on how you are thinking about the pipeline beyond lung or at least Percepta, Envisia, I don't know of how much context you're getting there, but just curious how are you thinking about sort of the longer term there?

[Bonnie Anderson, Chairman and Chief Executive Officer]

Yes, I think because we've made the decision to develop our tests on this very extensive platform of genomic content, what it does is gives us an amazing bio repository from which we can continue to develop products. And leverage that content to answer other clinically important questions. And so when you look at what we've done bringing GSC out and then using virtually that exact same technology to then pull out some of these additional variants that can help physicians and form other treatment options.

So one of the things that's happening in thyroid cancer is that radioactive iodine is pretty toxic and so physicians would like to figure out other treatments that might be able to replace that over time and look at into when cancers that may not be so aggressive. So as you look at our pipeline slide in our deck you'll see a series of new clinical questions that we can answer. The same thing is true in our lung portfolio, both with the work that we're going to advance in field of injury in the nose by getting earlier the risk stratification and moving to even earlier lung cancer detection which is all early stage but very much on track.

And then thirdly within Envisia, once we launch Envisia we will be informing on patients that have IPF, the UIP pattern that’s used to diagnose IPF. Every one of those patient samples that come through our laboratory will have this rich genomic content collected on it which is - puts us in a great position to be able to inform in other clinical questions. So I think we've set ourselves up from a technology and platform capability with machine learning expertise that will allow us to continue to evolve and extend our product line without having to start over, with not having to start from scratch, it's very powerful.

[Amanda Murphy]

Got it. Thanks very much.

[Operator]

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

[Sung Ji Nam, BTIG]

Hi, thanks for taking the questions. I just have a whole bunch of quick clarification questions, so Bonnie, for Envisia are there outstanding items before you submit to the items to do before submitting to the dossier to the FDA or are you guide to be pretty much ready to go?

[Bonnie Anderson, Chairman and Chief Executive Officer]

We have assembled the entire dossier of what is needed to get a Medicare coverage decision and we believe the timing is right for us to be able to comment to getting that in 2018.

[Sung Ji Nam, BTIG]

Okay.

[Christopher Hall, President and Chief Operating Officer]

That’s CMS not the FDA.

[Bonnie Anderson, Chairman and Chief Executive Officer]

Yes, I'm sorry, yes Medicare.

[Sung Ji Nam, BTIG]

And then Keith, your first quarter guidance based on seasonality, does that also factor in the severe weather? A lot of your peers have commented on severe weather impacting or kind of bleeding through year-to-date in the first quarter and are you guys factoring that in as well?

[Keith Kennedy, Chief Financial Officer]

We currently do about a 100 to 110 tests a day on average, so you're talking weather can impact in any one quarter’s if there is some severe event, so call it two, or three days. We try not to use that as an excuse if we hit or don’t hit our numbers. But stats generally impact, we did see obviously the same impact other people saw, but we think, our guidance reflects what we think we're going to be able to accomplish year-over-year.

[Christopher Hall, President and Chief Operating Officer]

And I think I'll just add, I mean Keith talked about the seasonality that we see and we're seeing that traditional Q1 seasonality or it’s flat to slightly down quarter that we've traditionally seen in every year. This has been a tough weather year, but if you look back over the last two to three years there's been a chunk of bad weather years on the East Coast. I mean you all in New York of lived through some pretty nasty weather over the last three, four years and we've experienced all that, so we've thought through that as we did the guidance numbers.

[Sung Ji Nam, BTIG]

Okay and then finally in terms of your salesforce build out, I think last quarter you had mentioned getting up to around 85 by the end of the year and if I heard correctly, I think you mentioned 65 by the end of last year. Is that where you are or I guess could you may be give us some more color on that?

[Keith Kennedy, Chief Financial Officer]

Around 65 on the direct sales side and we expect to add 20 by the middle of the year.

[Christopher Hall, President and Chief Operating Officer]

And we're on our way already through that now and are building that out. I feel like we're in a good spot, we're on our internal plans for building out the group.

[Sung Ji Nam, BTIG]

Okay, great thank you.

[Bonnie Anderson, Chairman and Chief Executive Officer]

Thank you.

[Operator]

Thank you. Our next question comes from the line of Bill Quirk of Piper Jaffray. Your line is now open.

[AlexanderNowak]

Great, good afternoon everyone. This is Alex Nowak on for Bill. So something guidance, there is back end of November you guided 2018 to about 28% growth and now we're looking for closer to about 14% growth at the midpoint. So I'm just trying to get a sense of what happened between now and November?

[Keith Kennedy, Chief Financial Officer]

So we guided 15% volume and 20% top line growth all of accrued revenue. I mean you're looking at it from total revenue perspective and I think our guidance number it is 17% to 20% of our accrued revenue, so revenue is impacted, our cash revenue that prior to when we started occurring revenue. So if we did attach in 2015 and we collected cash in 2017, that cash hasn’t anything to do with any volume that we generated in 2017 and so when you look at this on an apples-to-apples basis, that's what we were talking about. I think that was not clearly understood by all. Some people did and some people didn't catch that nuance. It's been a difficult point to communicate to investors as we transition over to full accrual.

[Alexander Nowak, Piper Jaffray]

Okay, understood. So again just diving into the guidance, I guess, so if we screwed up the panel benefit and Percepta revenue roughly estimating both of those at all together 8% of the growth for 2018. So you're really calling for maybe around 10% growth to core from revenue during 2018? You stated in the press release that the market is only about 35% adopted for the test. I mean you have full reimbursement you're already in guidelines, you have a bigger sales force, so I'm just curious why we’re we seeing faster growth of Afirma at this point?

[Christopher Hall, President and Chief Operating Officer]

You want to me to take it? You can start with it.

[Keith Kennedy, Chief Financial Officer]

Okay, I think you are correct. That if you back into the midpoint of the guidance range gets to 10% on Afirma. Look we missed our guidance last year and we want to be clear with this three that we want to meet or exceed our guidance this year. And we're thoughtful about sort of the seasonality in our business and launching two products across the sales force. So hopefully we can continue to revisit this with you quarter-over-quarter. But we feel like our Afirma volume increased quarter-over-quarter. You saw last year our rate of growth year-over-year increased this year. We'd like to see that trend continue. We expect the trend to continue, so that's where we gave guidance to the Street.

[Bonnie Anderson, Chairman and Chief Executive Officer]

Now Alex, I think the other thing is, in their markets that we're serving with our products, we've going to get physicians to change practice, change care and sometimes it takes time to make that happen. And often not being in network with all the payers complicates that effort. So I think we're very encouraged with where we are. We had a strong, we have had an uptick of about 5% market penetration every single year with the introduction of the GSC and the new Xpression Atlas platform, we certainly are very confident, we can continue that upward penetration and you're right there's a lot of markets still to get, so we're confident we're in a great place to achieve that.

[Alexander Nowak, Piper Jaffray]

Okay that's helpful and then this one I just missed on the call, did you reiterate cash flow breakeven by the end of 2018?

[Keith Kennedy, Chief Financial Officer]

We didn't, I have spent a lot of time I've been here now about a year and two, three months, and so I got around the cash flow breakeven point. I believe the cash flow breakeven for this business is getting to around $27.5 million and $32.5 million of revenue a quarter. So take up midpoint of $30 million. And you need to get to $120 million call at midpoint revenue range and so how fast you get there and how diligent you are, in terms of what you spend in the clear lab getting your sales and marketing effectiveness and then maintaining your R&D and G&A at a low single digit increase is critical, but you're going to have to achieve close to 30% growth over two years and 20% growth over three years to get to that number.

And we're going to taking steps on two fronts, one we're taking steps to drive the top line. I'd say three steps. One we're taking steps on the top line to add to the products and accelerate that growth and we've learned commercially from the rollout of these products how to do that better, so I think we're getting better on the execution side.

Two, I think we have to continue to refine our cost of our products and what we learn through the lab. $100 change in the price of manufacturing our test is close to $3 million a year. So we've been conservative in terms of how we've sort of factored that into the number and we have consistently met our margins that we guided to the Street. The third thing is headcount represents 50% to 60% of our cost structure on our operating expense and as you saw in January we will and have taken active steps to manage our structure of our organization to be lean.

And we've found that as you look at our KPIs and hopefully you'll appreciate the way we're laying out our KPIs, you've seen that we have been able to very diligently manage, especially relative to our peer group, how we spend G&A dollars and how we spend R&D dollars and we think that the incremental investments that we're making on sales and marketing is driving that revenue and that book value for the shareholder, but we're in a step wise function this year and I wouldn't project that linearly because we're building a sales force that's carrying multiple products and we need to step up that function as we transition from Genzyme and we're behind. And so the burn doesn’t look as great, when you look at where it was last year, especially in the fourth quarter when we hike our Genzyme relationship, but we feel very confident that we are taking active steps internally to keep cash flow breakeven at the forefront of how we run the business.

[Alexander Nowak, Piper Jaffray]

Understood, thank you.

[Bonnie Anderson, Chairman and Chief Executive Officer]

Thank you.

[Operator]

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

[Carolina Ibanez-Ventoso]

Hi, thank you. This is Carolina Ibanez-Ventoso on for Paul Knight. Bonnie, can you remind us what is ahead of Percepta in terms of pricing? So the current pricing of the payers is similar to Afirma’s previous investment of $3200 to $3,300? So is this price going to be revised in the Annual [indiscernible] Republic Meeting in July when the basis of the payment [indiscernible] is going to determined?

[Bonnie Anderson, Chairman and Chief Executive Officer]

No.

[Keith Kennedy, Chief Financial Officer]

No, we priced our local Medicare intermediary price to product at 32,00 and we have not at this point chosen to try to get it its own individual code and that would kick off the whole gap walk, cross walk or gap fill cross-walk process and we have not - we've not pursued that as of now for Percepta. I think what needs to happen really to do that with these products is you really need to take them further along the commercial journey before you pull that trigger. During the early stage when you're not as well known and there isn't as much evidence as much payer evidence for Medicare to support long term pricing, puts you at a significant risk and so we're not going to pursue that, we're not pursuing that his year.

[Carolina Ibanez-Ventoso]

Yes, good, okay got it. And you also researched the several clinical utility of studies performed with Percepta, so have you reached a large enough body of clinical utility evidence now that to secure private reimbursements or do you think that you may need to still perform more studies on that?

[Bonnie Anderson, Chairman and Chief Executive Officer]

Well, the studies never end. I mean, as we say we have even published a lot of studies, presented a lot of data even for Afirma last year whereas long as that's been out. So the studies will continue, but certainly the evidence behind the studies that have been published and presented more will get published this year is definitely a library of evidence worthy of coverage decisions by private payers and that's a big priority for us to start that journey with Percepta this year.

[Carolina Ibanez-Ventoso]

Okay, great. Thank you so much.

[Bonnie Anderson, Chairman and Chief Executive Officer]

Thank you.

[Operator]

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

[Bonnie Anderson, Chairman and Chief Executive Officer]

Thank you for joining us today. We appreciate your commitment to Veracyte and for helping us achieve our goals of providing diagnostic answers that improve patient outcomes and reduce healthcare costs. I want to refer to the last slide in the financial presentation which summarizes and highlights our key catalysts for ’18. They include for our Afirma thyroid business, the launch of the Xpression Atlas platform and in that we're contract with Anthem and new data relating to the overall Afirma portfolio.

We expect Precepta to gain momentum from commercial payer coverage decision this year; guideline inclusion and new clinical utility data and the key catalysts for Envisia will be Medicare coverage. With these successes we look forward to keeping you updated on our progress and will speak to soon on our Q1 call. Thank you.

[Operator]

Thank you. This concludes today's conference call. Thank you for your participation. You may now disconnect.