Veracyte Inc (VCYT) 2014 Q1 法說會逐字稿

Good afternoon, ladies and gentlemen, and welcome to Veracyte's first-quarter 2014 financial results conference call.

(Operator Instructions)

As a reminder, today's conference call is being recorded. I'd now like to turn the conference over to your host, Ms. Shelly Guyer, Chief Financial Officer. Please go ahead.

Good afternoon and thank you for joining us today for our first-quarter 2014 financial results conference call. Joining me today are Bonnie Anderson, President and Chief Executive Officer, and Chris Hall, Chief Commercial Officer.

Before we begin, I'd like to remind you that various remarks that we make on this call that are not historical, including those about our future financial and operating results; our plans and prospects; the success of our business strategy; attributes, benefits and value of our test to patients, physicians, and payers; growth opportunities and the size of potential markets; future products; product launches and our product pipeline; international expansion; demand for our tests and drivers of demand; payer coverage and progress in reimbursement and patient access; and clinical outcomes and timing of clinical studies, constitute forward-looking statements, within the meaning of the Safe Harbor provisions of the Private Securities Litigation Reform Act.

We refer you to our annual report on Form 10-K for the year ended December 31, 2013, filed with the SEC, and in particular, to the section entitled Risk Factors, for additional information on factors that could cause actual results to differ materially from our current expectations. These forward-looking statements speak only as of the date of this call and we disclaim any obligation to update these forward-looking statements. Our financial results press release for the first quarter ended March 31, 2014 crossed the wire a short while ago and is available on the Investor Relations page of our website, at www.veracyte.com. I will now turn the call over to Bonnie.

Thank you, Shelly. Good afternoon, everyone. It has only been a few weeks since our last update with our Q4 2013 results, so we expect today's call to be relatively brief. We thank you for joining us and are pleased to present our first-quarter 2014 results and business progress.

As you know, the lab industry as a whole, experienced a rough first quarter in 2014, due to severe weather across much of the country, as fewer patients were able to get to their doctor's office. We, too, were affected by the harsh weather, but emerged strong, with a 34% increase in year-over-year Thyroid FNA volume in the quarter. Specifically, we received 14,373 FNAs during the first quarter of 2014 compared to 10,757 FNAs during the same period in 2013.

In addition to the strong FNA growth, we grew revenue by 71% to $7.5 million in the first quarter of 2014 compared to $4.4 million in the first quarter of 2013. These results build on the momentum from our 2013 accomplishments, which included incorporation of the Afirma Gene Expression Classifier into clinical practice guidelines, as well as positive coverage decisions throughout the year. We believe our strong first-quarter results also demonstrate our Afirma solutions' compelling value proposition of helping patients avoid unnecessary surgeries, while lowering healthcare costs, and that our message is resonating with physicians and payers.

We are continuing to make significant progress in 2014 with additional coverage decisions for Afirma from large regional payers, including Health Net on the west coast, Optima Health Plan in Virginia, and as previously reported, EmblemHealth in New York State. However, the most exciting news to share is that our first Blue Cross plan has issued a positive coverage policy decision for Afirma, Premera Blue Cross, one of the largest health plans in the Pacific northwest. Collectively, these new coverage decisions bring the number of covered lives for Afirma to over 125 million, and more importantly, Afirma has now gained positive coverage from a Blues payer. We will continue to focus on gaining additional coverage decisions in 2014.

We have also made progress in signing network contracts with a few of the smaller integrated delivery networks. In fact, we have moved from a coverage decision to a network contract with SelectHealth, a top-ranked integrated health system, and part of Intermountain Healthcare. In addition to providing more consistent levels of payment, such contracts give us in-network provider status, which we believe will facilitate physician adoption of Afirma.

The second area of significant progress is with our institutional client base, including integrated healthcare delivery networks, as we work to expand our market reach beyond community-based physician practices. Institutional accounts present a more complex selling and marketing opportunity for us and often lag in adoption until in-network status can be achieved. We are already seeing the positive impact of our success in this segment of the business.

Specifically, like academic medical centers, these accounts have there own cytopathology laboratories on site so we enable customers to collect FNA for both cytopathology and our Gene Expression Classifier, but then only send us indeterminate cytopathology case for the GEC test. As a result, the percentage of GEC tests we performed, relative to the total FNAs we received, increased to 22% in the quarter, and we are increasing our guidance from the GEC test rate from 18% to 20% to 20% to 22%. GEC growth remains a key driver in our Business.

We continue to publish clinical studies and expand our level of evidence for Afirma, which we believe provides the pathway to inclusion in additional guidelines, a key step in broad-based market adoption and coverage decisions. We anticipate, based on a statement issued by the American Thyroid Association, that details of their planned guideline update will be presented at the Endocrine Society meeting in June. While we are not privy to any specific information at this time, we are hopeful that the thought leaders drafting the new guideline will find Afirma's evidence compelling for inclusion in routine standard of care and to help reduce avoidable surgeries.

As anticipated, we are excited to officially launch our new Afirma Malignancy Classifiers next week at the American Association of Clinical Endocrinologists, or AACE meeting. The Afirma Malignancy Classifiers will help further establish our Afirma Thyroid FNA analysis as the most comprehensive approach for physicians to manage patients with thyroid nodules.

Specifically, with one FNA sample, physicians can obtain a confident cytopathology diagnosis through our cytopathology partner, TCP, then identify benign cases among those deemed indeterminate by cytopathology with the GEC, helping those patients avoid unnecessary surgery, and now, with the Afirma Malignancy Classifiers, obtain further pre-operative information for those patients who are headed to surgery, helping to guide which procedure to perform, which can thus reduce the need for follow-up surgeries. The upcoming launch follows a pilot program, in which we offered the comprehensive solution at approximately a dozen sites around the country over the course of the last couple of months.

We are scheduled to present four studies at the AACE meeting that support the Afirma Malignancy Classifiers and our enhanced offering. These include an oral and poster presentations demonstrating the clinical and analytical validity, respectively, of our Medullary thyroid cancer, or MTC test. We will also present posters on the clinical performance over our BRAF gene mutation test and of our Parathyroid Expression Classifier. The latter is offered for information use only, to help alert treating physicians when suspected thyroid nodule abnormalities may actually be caused by a parathyroid condition.

Two specific tests will be offered with the Afirma Malignancy Classifiers, a test for MTC, and aggressive form of thyroid cancer, and one for BRAF. The presence of MTC, which is not specifically diagnosed by cytopathology alone, and of a BRAF gene mutation, which we detect using RNA expression, often prompts physicians to perform more extensive thyroid surgeries. Today, many of these patients have to undergo a second completion surgery. Our goal, with the Afirma Malignancy Classifiers, is to provide physicians with this information before surgery to help ensure that the right patient gets the right surgery the first time.

As previously indicated, the MTC test result will be included as part of the patient report when a GEC is performed on any FNA that is indeterminate by cytopathology. Physicians will also be able to order it separately for FNAs that are malignant by cytopathology. We will only bill for the latter, for which the retail price will be $975.

This The BRAF test will only be performed when ordered specifically by the physician on either GEC-suspicious or malignant by cytopathology FNAs. The BRAF test will be billed when it is performed and the retail price for the BRAF test will be $475. As part of the introduction of our enhanced Afirma solution, with the new Afirma Malignancy Classifiers, we plan to launch at the AACE meeting, a comprehensive promotional campaign targeting endocrinologists, which will feature a range of activities, including targeted advertising, promotional pieces, and a product theater.

With the additional payer coverage policies, increased adoption by institutional clients, and the upcoming launch of our expanded offering, we believe Afirma is well-positioned for accelerated growth. To achieve this growth, we have expanded our sales territories from eight to 14, and have positioned three experienced sales managers as regional directors to facilitate rapid integration of our new reps into their territories, and coordinate efforts with Genzyme.

With the recent addition of a dedicated channel manager to lead the more complex institutional sales efforts, we are rapidly gaining the coverage and expertise needed at the sales level to achieve our goals. We expect to realize the near-term positive impact from our expanded sales force, given the level of field experience with Afirma at the regional director level, as well as our proven marketing tactics and strong medical education programs, delivered by both Veracyte and Genzyme.

We are also excited to announce our first international market entry in Brazil, which is enabled through a new partnership with Fleury Health and Medicine. Fleury is one of the largest and most respected diagnostic organizations in Brazil and currently offers FNA biopsy procedures, as well as the cytopathology testing, to patients across the country who visit the Fleury facilities to undergo FNA collection. With promotion of Afirma to physicians by both Genzyme and Fleury, we believe this partnership is ideal to drive adoption and to direct indeterminate thyroid nodule cases to the Afirma GEC, which we will continue to perform in our South San Francisco CLIA-certified laboratory.

We estimate that nearly 100,000 fibroid nodule FNAs are performed on patients in Brazil and that 15% to 30% are inconclusive by cytopathology, meaning that they would be candidates for the Afirma GEC. While we are pleased to have achieved the goal of international expansion for Afirma, we anticipate it will take some time for adoption to have a visible impact relative to the volume of testing generated from our rapidly growing US business.

Brazil is one of a handful of countries where we have been laying the groundwork for international expansion. Our decision to enter a given market rests in a number of factors, including the strength of Genzyme's market penetration, our ability to navigate local logistical issues, and the presence of local thought leaders who are passionate about making Afirma available to their patients to reduce unnecessary surgeries. We anticipate entry into additional international markets this year.

We also remain on track with our research and development for our first product in the next clinical indication, pulmonology. Specifically, we will focus on interstitial lung diseases, or ILDs, which comprise a number of lung diseases that are very difficult to diagnose, but for which the differential diagnosis significantly impacts treatment decisions. We are pleased to report that our abstract has been accepted for an oral presentation at the American Thoracic Society's 2014 international conference later this month.

Our Chief Scientific Officer, Giulia Kennedy, will share proof-of-concept data that shows our ability to develop a molecular classifier using tissue samples to differentiate ILDs, including idiopathic pulmonary fibrosis, or IPF. This need is increasingly important, given the expanding therapy pipeline, which makes life expectancy and quality-of-life improvements a possibility for patients who are accurately diagnosed with IPF.

We are developing a molecular classifier for use on minimally invasive bronchoscopy samples, as we believe the ability to deliver an early differential diagnosis without risky invasive surgery could lead to a significant improvement in treatment decisions for patients with suspected ILDs, while also reducing healthcare costs. We are on track to launch our ILD test in 2016. Now I will turn the call back over to Shelly, who will review our financial results for the first quarter.

Thanks Bonnie. As Bonnie pointed out, despite being affected by the horrible weather that impacted the lab industry as a whole, we had significant growth in revenue and FNA volume for the first quarter of 2014. Revenue for the first quarter ended March 31, 2014 was $7.5 million, an increase of 71%, compared to $4.4 million for the first quarter of 2013. Our growth continued to be driven by expanded clinical adoption of our Afirma solution, along with increased coverage and reimbursement for our Afirma GEC.

Cash collections were especially strong in the first quarter, and we believe that the growing number of coverage policies for Afirma will continue to have a positive impact on reimbursement levels. In fact, while our first quarter is traditionally lower in revenue than the fourth quarter preceding it, we did not see that same dip this quarter as we have seen in previous years, and believe this change resulted from the coverage decisions issued last year from multiple payers.

We received 14,373 FNA samples in the first quarter compared to 10,757 FNA samples during the same period in 2013, an increase of 34%. As Bonnie mentioned, we are shifting our guidance range of GECs to 20% to 22% of FNAs received, given the increase in the number of samples submitted directly for GEC testing from academic institutions and our growing number of institutional customers.

We remain on track with revenue and FNA growth for the 2014 guidance we provided on our last call of receiving between 76,000 and 83,000 FNA samples during the year. We also reiterate our guidance for full-year 2014 revenue in the range of $38 million to $43 million, which at the mid-point, would represent an 85% year-over-year growth.

Since several new contracts were just signed in early April, for instance with SelectHealth, we have not yet moved any additional contracted or other payers to accrual accounting. We thus continue to accrue Medicare and a handful of small payers we mentioned on our last call. Accrual accounts now represent approximately 32% of our revenue.

Research and development expenses for the quarter ended March 31, 2014 were $2.1 million compared to $2 million for the same period in 2013. This was primarily due to an increase in personnel expenses related to an increase in headcount. Selling and marketing expenses for the first quarter of 2014 were $4.3 million compared to $2.7 million for the first quarter of 2013. This increase was primarily due to a $900,000 increase in net expense recognized under our co-promotion agreement with Genzyme, partially offset by amortization of the deferred fee, as well as expenses due to a headcount increase and increase in other selling and marketing expenses.

General and administrative expenses for the quarter ended March 31, 2014 were $4 million compared to $2.8 million for the same period in 2013. This increase was due to higher costs associated with operating as a public Company, including increased personnel and professional fees, as well as increased stock-based compensation expense.

Net loss for the first quarter ended March 31, 2014 was $6.7 million, or $0.32 per common share, compared with a net loss of $6.9 million, or $9.04 per common share, for the same period in 2013. Cash and cash equivalents as of March 31, 2014 totaled $64.2 million. I should note that, effective in March 2014, the rate at which we pay Genzyme has been reduced from 40% of net revenues to 32% going forward, per the terms of our agreement. I will now turn the call back over to Bonnie for closing remarks.

Thanks, Shelly. We are pleased with our first-quarter results and believe we have generated considerable momentum that will continue to drive our Afirma business forward in 2014, as well as advance our development efforts for our first test in our next targeted vertical market in pulmonology. We would again like to thank all of the stakeholders who have helped us reach our goals to date. We look forward to continuing to advance the field of molecular cytology, with genomic-based solutions that improve patient outcomes and reduce the cost of care. Would the operator please open the call for questions?

(Operator Instructions)

Our first question comes from Dan Leonard of Leerink.

Thank you. Hi, Bonnie and Shelly. Is there any way to quantify the impact of weather on your volume in the quarter?

We certainly know from looking at the regions that were the hardest hit by the storms and shutdowns of airports and communication that January and February, specifically, were impacted. We would estimate probably around an 8% to 10% impact from those two quarters. We also believe, since we were successful in accelerating the addition of our sales reps into the field, that we're comfortable that we can make up that shortfall through the year. Thus our guidance has remained the same.

Okay. Thank you. And your gross margins were strong in the quarter. How do we think about that playing out throughout the year? Is this the new baseline, the 51% and change?

Remember that we don't technically have a GAAP-based gross margin, but of course you guys can subtract from the revenue line the cost of revenue, and that would yield 52%. It is a little higher than we would have anticipated, in part because the collections were so high and the number of FNAs were relatively lower, so it was really the collections impact that drove that top line. As we move forward, if the FNA volume ramps at a higher rate than those collections will ramp, that you could see it fluctuate somewhat, so I would not anticipate that you should just continue to increase that over the next several quarters. There will be some fluctuation in the gross margins, I would expect.

Got it. Thank you. Then my final question, how should we think about the potential impact of ATA guidance on your run rate, or how are you thinking about that in context of your guidance for the full year?

Chris, why don't you talk a little bit about what we expect the guidelines to do?

There is two big things that we think will -- that guidelines could affect us on. One is we believe that doctors are more likely to adopt something that is in guidelines versus not, and so we expect there to be an incremental gain in volume, assuming we get integrated into guidelines. That is especially true in institutional accounts, where institutional accounts and health plan accounts, and integrated health systems tend to match -- march very much to a guideline-driven policy and it has helped that we are an NCCNN and it's helped that we've been in up-to-date guidelines and we think ATA will further that shift.

The second big thing that it will do is reimbursement. We believe that the key to getting coverage -- we have always said and believe is getting into guidelines -- and helping build that, those groups of societies forward helps us ultimately get covered from the plans that have not yet covered us. And then lastly, we have already built this into the guidance estimates that we have provided you all.

Yes. We have anticipated that both ATA and AACE guidelines would likely be updated this year so we've built that in.

Okay, thank you.

Our next question comes from Amanda Murphy of William Blair. Your line is open, please go ahead.

Good afternoon, it is JP in for Amanda. I just had a question around your institutional pick up on the Afirma-enabled business model. Is this something you guys are focused on? As you said in the call, they are usually slower at to adopt. What is driving the strength there?

Hi, JP. Great to have you on the call. Thank you for joining us. We have always seen the market segregated between the institutional accounts and the community-based practices, thus, as we launched with a model that would serve both of those market segments, with a solution as well as the enabled model, we have anticipated that from the beginning. But I will turn it over to Chris and have him describe a little bit some of the focus and tactics that we have actually done over the course of the last few months to better penetrate that market. Chris?

There's a couple of things. We were focused on the top medical institutions when we went live with this model, because we really wanted to get them to have experience with it. But we have begun to enlarge our efforts at the integrated health systems and the tier of medical institutions in teaching hospitals that are at the very, very top. We have done that because we believe that they are more likely to respond now because of the guideline integration, number one, and number two, we are increasingly covered, and we move towards getting contracted, we become a network and those types of accounts tend to want to order in that environment versus a non-covered, non-contracted environment.

So we think the time is right, that it is better to move in that direction. Lastly, I would say that we hired, and Bonnie mentioned in her script, we hired an institutional channel manager, so we have begun focusing across all the reps with a sales/marketing type of a role where they both work to sell, but it is more of the channel management type of role, cutting across all the territories, and we think that focus has helped us. But like Bonnie said, this isn't a dramatic switch. We have always had this model, we've just continued to expand into deeper segments and we're starting to see the fruits of that.

Okay. And then could you talk about the Fleury deal? Is this how you plan to expand internationally or is this the opportunity worked out or what?

As we have said historically, we have been formulating a foundation in several different markets for international entry. We would expect actually that the different markets could have different models. Since Chris led the deal with Fleury, I will let him describe why Brazil ended up rolling it out the way it did and why we are excited about this first entry.

There were some dynamics in the Brazilian market that we thought made it a great place to start and also made Fleury a great place to start with. First of all, the size of the market. We had always said we wanted to start in places that were relatively. There was about 100,000 FNAs done in Brazil. Secondly, we want to find places where we can create a reimbursement beachhead, which means that either a vibrant cash pay market or there is a group of private insurance plans that we can start to create a beachhead before we move into the tougher government sectors to secure reimbursement and Brazil had those characteristics.

Thirdly, the Genzyme team locally is excited about this product and really drove a lot of energy and excitement to get this to the doctors there. Then lastly, Fleury gave us the successful implementation model to get the sample from the patient to us because the way that it works there is the doctor orders an FNA, refers the patient to a lab and then the lab does, so it's a little different flow there and Fleury was an ideal partner because of where they are positioned in the healthcare system.

But that's not always going to be the case. In some places, we can work this market directly with our partner Genzyme. We don't need another lab in place. In some places, there may be value in having a lab in place. It's really -- I don't think you should look at this as a template. You should look at this as we're just creatively focused on getting done what needs to get done to try to get the samples, to make a difference in these patients' care and this is just the right model, we think for Brazil.

Great. And then could I ask just one more on the -- could you give some initial feedback from the pilot program on the malignant side, and then maybe just quantify the market opportunity? Just for the malignant patients only?

For the Malignancy Classifier?

Yes.

We had a very positive reaction from the pilot program. Of course, as we pilot these, we are looking at ordering practices and level of interest but also making sure our internal processes are well honed, so that when we do make the leap to broad availability, that we can handle that transition. We were very pleased with the interest. We have quantified the market opportunity at about $40 million, just in the US market and that comprises the subset of populations that we mentioned earlier in the call, would be available for testing.

What we think is, in this market, the competitive environment has been such that many of the other players have looked to measure markers of malignancy and when we looked at the impact of that testing on patients in testing the full indeterminate population, it really had very little value. But since we cut that surgical pool in one-half with the GEC and pull out literally one-half of the benign patients from that indeterminate pool, we felt coming back with informing on the malignancies now has much more meaning. We are always tried to focus on ways to inform preoperatively on decisions that could impact surgery and that plays out here nicely with the Malignancy Classifiers being a follow-on to the GEC and not done in place.

Okay. Great, thank you very much.

Thank you. Our next question comes from the line of Doug Schenkel of Cowen and Company. Your line is open. Please go ahead.

Thank you, and good evening Bonnie, Shelly, and Chris. Thanks for taking my questions. One thing I just want to confirm is you did note, I believe, that volume growth was pretty strong as you exited the quarter. In the context of broader commentary on the impact of the quarter, I am just wondering if that pick-up at the end of the quarter, if you will, if I am hearing you right, was indicative of just recovering some of the volumes you have lost earlier or was there another dynamic in play?

Hi, Doug. Thanks for joining us and I appreciate the question. We think that the bounce back in March was really due to just a recovery of these accounts being back online. We don't believe it was a doubling of test volume that had been lost came in because we're seeing that continue into April. We believe some of that pick up has to do with our best efforts and success at getting the sales feet on the ground a little bit faster than what we had originally anticipated.

Originally, we thought we would double the sales force through the course of 2014, probably getting them into place by Q3. Some of the pick-up could have been for patients that didn't get to the doctor in January and February, making it in March, but seeing the theme play out in April, we think some of this has to do with just the granular coverage that we put in place, hoping that we could begin to accelerate the growth and we are pretty confident that we will be able to pick up that missed volume through the year.

Okay, that is really helpful and interesting. If you keep in mind that you reported results for last fiscal year pretty late in the quarter, because it was your first year-end as a public Company and you are now reporting in early May, in the grand scheme of things, it hasn't been that long since then. When you originally provided guidance, you guided the ratio of GECs on FNA volumes to 20% to 22%; of course, you've now increased to 22%, so a little bit higher in a short period of time. Should we view that as also being a function of increased success and productivity in the institutions related to some of the hires that you've accelerated and successfully made over the last several months?

Yes, the hires, especially the channel manager that we did bring on toward the end of last year, but as you know, in these institutional account, it takes a little bit of -- period of time for them to get to know all the players, which is why it tends to be a little more complex. We had prior guidance on GEC rates in the 18% to 20% range and have now shifted data, as we said, 22% this year -- or this quarter. As the FNA volume itself accelerates, though, we wouldn't necessarily see the GEC rate accelerate, because the FNA volume is going to go up and we expect it will stay in that 20% to 22% range, which is why we guide on a range and not a specific percent. Shelly, is there any additional color you think is important on that topic?

Just, historically, the range had been 18% to 20% and remember that this has two components to it. One is the indeterminate rate that we get out of the site of pathology from our partners at TCP and then you combine that with the rate of the GEC directs that we get from the enabled accounts and the other institutional accounts. The combination of those two aggregates to, in this quarter, 22%, but it could still fluctuate around. We are just guiding now to a different range of 20% to 22%, whereas previously it was more like 18% to 20%.

Okay, so somewhat related to my first two questions, if you think about what you just described in terms of some of the incremental success you are having recently within institutional accounts, the fact that you are tracking ahead of plan when it comes to sales force expansion, the Q1 results were better than most of us expected, and that was in spite of weather representing a headwind, which it doesn't sound like -- while you brought the accounts back online, it doesn't seem like you've recouped some of the volumes that were lost due to weather.

So really good quarter with some real nice dynamics where you beat the numbers in spite of some headwinds that were out of your control. That is without even mentioning the success you talked about with the Malignant Classifier pilot program. Did you contemplate maybe bumping up numbers and guidance? Or is there any reason that you didn't, based on what you were seeing, or is this the way we should think about how you're going to manage expectations early in the year?

We haven't provided increased guidance, as we go back and look at the full year and the tremendous growth we have built in, we would just reiterate -- I think I answered your question on the last call with the same comment -- but an 85% year-over-year growth is actually quite steep in this kind of business. We are thrilled to be on track -- the additional coverage, getting a Blues coverage, seeing some nice but very early momentum in institutional accounts, and having our first international entry, these are all great achievements in Q1. But all of these, if you recall, were on our list of catalysts that we expected to unfold in 2014, so we would just say these are supportive evidence that we believe that 85% growth is achievable.

Okay, I will get back in the queue, thank you very much.

Thanks, Doug.

Thank you. I will now turn the call back to Bonnie Anderson, President & Chief Executive Officer, for closing remarks.

Thank you. In closing, I would just like to thank you all again for joining us today. We are thrilled with the progress we are making to impact the lives of patients, lower healthcare costs, and build a growing, sustainable, and exciting molecular cytology business. We really appreciate your support of Veracyte in our mission and we look forward to updating you on the progress on our second-quarter call. Thank you all.

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