Veracyte Inc (VCYT) 2014 Q2 法說會逐字稿

Good afternoon, ladies and gentlemen, and welcome to Veracyte's second-quarter 2014 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 your host, Ms Shelly Guyer, Chief Financial Officer. Please go ahead.

Good afternoon and thank you for joining us today for our second-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, clinical outcomes and timing of clinical studies and the impacts of potential FDA regulation, constitute forward-looking statements within the meaning of the Safe Harbor provisions of the Private Securities Litigation Reform Act.

We refer you to our quarterly report on form 10-Q for the quarter ended March 31, 2014, 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 second quarter ended June 30, 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, and good afternoon, everyone.

Thank you for joining us today for our second-quarter 2014 results and business update at the midyear mark. Before I review our financial results, I'd like to share the impressive progress we've made since the beginning of the year across five core initiatives that form the foundation of the continued growth and future success of the business.

These initiatives are, inclusion in guidelines, positive coverage decisions, the launch of our second Afirma product in Endocrinology, the advancement of our pulmonology pipeline, and lastly, positioning ourselves for long-term profitability and growth. Our management team has been highly focused on driving forward each of these initiatives in order to create both short and long-term value.

First, inclusion in guidelines. As you are aware, we have always promoted the philosophy that the investment in the development of a deep library of clinical evidence drives the inclusion of a novel molecular diagnostic test in clinical practice guidelines, which ultimately drives positive coverage decisions that enable value-based reimbursement.

In June, we were pleased to announce the American Fiber Association's unveiling of their preliminary updated guidelines which we believe uniquely includes our Afirma gene expression classifier or GEC, given its high sensitivity and high negative predictive value. As a rule out test to help patients with indeterminate cytopathology results safely undergo watchful waiting in lieu of a diagnostic thyroidectomy.

With the issuance of the final guidelines anticipated later this year, we are confident that Afirma is well-positioned to become the standard of care for the management of patients with thyroid nodules. This is a significant achievement for Veracyte.

Second, positive coverage decisions. Since our last call, we have increase the number of lives under coverage for the GEC by 10 million with the inclusion of several Blues plans; namely Highmark, Horizon BlueCross/BlueShield of New Jersey and Wellmark BlueCross and BlueShield. In addition, our first managed Medicaid plan, AmeriHealth Caritas, has issued a positive coverage policy for the GEC.

By way of explanation, Medicaid benefits are frequently administered by private insurance companies or managed Medicaid plans like AmeriHealth Caritas which represent over 2 million managed Medicaid members in seven states across the US. As Medicaid patients continue to become a larger segment of the insured population, prompted by the provisions in the Affordable Care Act, we believe it will become an important avenue for reimbursement of the Afirma GEC.

\We've also executed contracts this quarter with a couple of small integrated healthcare delivery networks. We are pleased with the success our unique integrated managed care contracting and claims processing approach has demonstrated.

This brings our total covered lives to over 135 million, including 10 million BlueCross and BlueShield members, and positions us very well to convert coverage decisions in the contracts as we continue this push forward to maximize our reimbursement, create a pathway to more predictable quarterly revenue and support the upward trajectory that will result from the continued adoption of Afirma.

Third, the launch of our second endocrinology product. We believe our new Afirma Malignancy Classifiers, in combination with the GEC, will further reinforce Afirma's appeal to physicians as a comprehensive method for managing patients with thyroid nodules using one FNA sample collected in a single office visit.

Specifically, our Afirma Malignancy Classifiers comprise genomic tests for medullary thyroid cancer, a rare and aggressive type of thyroid cancer, and BRAF gene mutation status and are intended to provide pre-operative information to help guide surgical strategy for those patients who need surgery. Early feedback from our client base has been very positive. Anecdotally, in just one month, we provided positive MTC results on two patients with suspicious for malignancy calls by cytopathology, enabling these patients to obtain the right surgery the first time.

The reintroduction of the Afirma brand, including the new malignancy classifiers, was in the spotlight at the American Association of Clinical Endocrinologists' annual meeting in May and further comprehensive promotional campaign targeting endocrinologists. We are also initiating a patient awareness and educational campaign, an essential component to ultimately providing patients access to Afirma as a routine standard of care.

With regulatory approval for the New York State Department of Health for the extended Afirma offerings, including the malignancy classifiers, which we just received last week, the Afirma solution is now available to physicians and patients nationwide. This approval was achieved in what we believe to be record time.

Fourth, advancement of our pulmonology pipeline. We are very excited about the significant opportunity in pulmonology, a large clinical area that, like thyroid, is plagued by diagnostic ambiguity that results in invasive surgeries for patients and added cost to the healthcare system. We are making solid progress with the development of a molecular classifier to improve early, non-surgical diagnosis of interstitial lung diseases, particularly idiopathic pulmonary fibrosis, or IPF.

In June, our Chief Scientific Officer, Dr. Julian Kennedy, presented preliminary data at the American Thoracic Society's 2014 international conference, showing molecular classifier performance based on whole genome array and deep RNA sequencing data that accurately distinguished IPF from multiple interstitial lung diseases, including nonspecific interstitial pneumonia and hypersensitivity pneumonitis using surgical tissue samples. Our task is intended to enable more accurate and less costly diagnosis using samples obtained through less invasive bronchoscopy.

We are focused on IPF, because rapidly and definitively determining whether or not a patient with suspected ILD has IPF can dramatically alter the treatment pathway and outcome. This ability becomes especially important for patients diagnosed with IPF, as new therapies, currently under FDA review and available today internationally, offer potential improved outcomes. We are borrowing from the same playbook we used for Afirma as we develop and prepare to commercialize our first line product.

To accelerate the program, we initiated expanded clinical trial enrollment in our BRAVE studies at nearly 20 clinical sites across the United States and Europe. Our product development team is using these prospectively collective bronchoscopy samples, our lung cytology samples, to optimize the IPF molecular classifier. We have also established a world-class multidisciplinary team of experts in pathology, radiology and pulmonology to assign clinical truth against which we will measure the performance of our test.

This team comprises some of the top thought leaders in the world of ILDs and IPF. We remain on track for the planned 2016 launch of this first product in our pulmonology vertical. We believe pulmonology is a particularly attractive channel for expansion of our molecular cytology franchise, given the breadth of opportunities for vertical market extensions to improve patient care in several clinical areas. This includes the screening of patients at high risk for lung cancer to appropriately risk stratify those that can safely be followed with CT scans versus invasive procedures.

Fifth, position ourselves for long-term profitability and growth. We are pleased to announce, today, the continuation of our co-promotion agreement with Genzyme Corporation, a Sanofi company, under which we have agreed to amend terms that would retain the benefits of the co-promotion of two leading industry brands and access to a strong team of sales specialists focused on thyroid cancer while providing greater financial flexibility to Veracyte. Upon entering into an amendment, effective January 1, 2015, the co-promotion fees paid to Genzyme would be reduced from 32% of Afirma revenue to 15% of Afirma revenue in the US.

The companies would continue to jointly participate in key industry conferences and conduct medical education and speaker programs. We would increase our internal teams responsibility for front line sales conversion and utilize Genzyme's sales force for lead generation, as well as ongoing support of existing and new clients. Both companies believe, at this point in the adoption curve, that successful penetration into institutional accounts and integrated networks requires a more dedicated team approach.

We previously stated that we would double our sales force in 2014, compared to 2013, and we have nearly accomplished that goal going from 8 to 14 reps at the end of the second quarter. In the anticipation of our amended partnership with Genzyme, we now plan to hire up to an additional 10 people by the end of the year. We have already begun hiring additional sales specialist and institutional sales representatives, as well is marketing staff to assume an expanded role to drive Afirma adoption.

We have agreed with Genzyme to amend the agreement to optimize our joint presence internationally with a country by country decision to co-promote or to revert exclusivity back to Veracyte. This will give us optionality to drive new models in each market and more efficiently solidify the foundation of an international brand presence, retaining our Genzyme partnership in markets that make sense.

We will work with Genzyme over the coming months to determine the plans for international expansion, and we are pleased to have our relationship evolve into this next chapter and are committed to its continued success for both companies. Now, turning to our financials, we experienced continued robust momentum this quarter. Our revenue increased 71% to $8.7 million, compared to $5.1 million in the second quarter of 2013.

We received 16,458 FNAs during the second quarter of 2014, compared to 12,424 FNAs during the same period in 2013, an increase of 32%. However, our growth in FNAs does not fully illustrate some of the positive dynamics that play in our business. Our GEC test volume actually grew 50% in the second quarter of 2014 over the same period in the prior year.

The number of GEC test performed is a greater value driver of our business than the cytopathology portion given the uniqueness of the GEC test. Thus, it will have greater impact on our revenue over the long term and our drive to improved margins.

We have made stronger than anticipated progress converting of Afirma-enabled accounts, generally large academic and institutional customers, who send us samples for the GEC test only. Recall that these clients perform their own cytopathology on-site and, thus, we only receive the FNA sample for the GEC test when the cytopathology result is indeterminate.

With the success we have had in institutional and integrated network accounts, we've been receiving a higher rate of GEC only samples compared to FNAs. 7% of total FNAs received were for the GEC only, as opposed to our 5% historical rate.

The impact of this 2% increase is quite significant. Had these additional 330 GEC tests resulted from an FNA cytopathology reflex rate of 15% or approximately a ratio of almost 7 to 1, we would've received an additional 2,200 FNAs.

Thus, while we reported 16,458 FNAs received during the quarter, the adjusted or effective number of FNAs, if you include this 2% increase in GEC only tests, would have been equivalent to 18,650 FNAs, roughly a 50% increase in FNA volume in the second quarter of 2014, compared to the same period in the prior year. Therefore, due to this increase in GEC enabled accounts, we are changing our guidance for the number of FNAs expected for 2014 to 66,000 to 73,000, from 76,000 to 83,000.

We have factored in this range that the GEC rate is likely to continue to fluctuate but remain at the upper end of the previously guided 20% to 22% range of FNAs received. Although our FNA numbers are lower given the increased GEC test rate, we are making no changes to our guidance on revenue for 2014.

Before turning the call over to Shelly, I would like to briefly speak to one more topic that is top of mind for our industry and that is the FDA's recent notification to Congress of its intent to regulate laboratory developed tests or LDTs, such as our Afirma GEC. We are not surprised with this action, given the FDA's long history of efforts to develop an appropriate pathway for LDT regulation.

We have participated in those efforts and are encouraged that the proposed framework includes features that we support, such as a risk-based approach, consideration for current tests regulated by CLIA and an apparent reasonable timeframe to come under compliance. We are confident that with the level of scientific rigor we follow in our quality system and design controls, including well-designed prospective clinical validation and robust analytical validation, that we will be able to comply with the regulatory framework that is adopted.

Now, I would like to turn the call back over to Shelly who will review our financial results for the second quarter.

Thanks, Bonnie.

As Bonnie mentioned, we experienced solid momentum in our Afirma business for the second quarter of 2014. Revenue for the second quarter ended June 30, 2014, was $8.7 million, an increase of 71%, compared to $5.1 million for the second quarter of 2013. Our growth continued to be driven by increased adoption of our Afirma solution, as well as expanding payer coverage and reimbursement for our Afirma GEC.

Revenue for the six months ended June 30, 2014, was $16.2 million, compared to $9.5 million for the same period in 2013, also an increase of 71%. We received 16,458 FNA samples in the second quarter, compared to 12,424 FNA samples during the same period in 2013, an increase of 32%. Combined with the first quarter, we received 30,831 FNA samples year to date.

As Bonnie pointed out, our rate of GEC only FNA samples accounted for a growing portion of the FNA samples we received, due to the growth in business among institutional customers. On our last earnings call, we changed our guidance on the percentage of GEC tests performed relative to total FNAs we received from 18% to 20% to 20% to 22%. While our GEC rate continued to be slightly above 22% during the second quarter, we are keeping our guidance at 20% to 22%.

As indicated, we are changing guidance regarding the number of expected FNAs during the full year 2014 and reiterate the guidance we provided during that first quarter call for the full year 2014 revenue in the range of $38 million to $43 million. Because we currently collect a large percentage of our revenue on a cash basis, I would like to underscore that our cash collections remains lumpy quarter to quarter, but the fundamentals of our business are strong.

In terms of our agreement to amend the co-promotion agreement with Genzyme, we will continue to pay Genzyme 32% of Afirma revenue through December 2014. We anticipate increased selling and marketing costs during the third and fourth quarters of 2014 as we hire additional sales representatives and increase our marketing and medical education expenses.

The rate at which we pay Genzyme will decrease to 15% of Afirma cash receipts in the US beginning January 1, 2015. Upon the effective amendment, the final terms of each international market will be shared after agreement is reached with Genzyme, and although we have higher selling and marketing costs, due to ramping our internal spend, when combined with the lower Genzyme fees in 2015, we expect that our total selling and marketing spend will level off for 2015.

Cost of revenue for the quarter ended June 30, 2014, was $4 million, compared to $3.2 million in the same period of 2013. This increase was primarily due to increases in variable costs consistent with the increase in the number of FNAs received, offset, in part, by continuing refinements in our testing process and economies of scale related to the increase in FNAs processed.

Research and development expense for the quarter ended June 30, 2014, was $2.2 million, compared to $1.9 million in the same period of 2013. This increase was primarily due to increases in direct R&D expenses due to the timing of continued genome sequencing expenses and other laboratory expenses and increases in personnel and stock-based compensation expense due to increases in headcount. Selling and marketing expense for the second quarter of 2014 was $5.1 million, compared to $2.6 million in the same period of 2013.

This increase was due primarily to increases in fees associated with the Genzyme co-promotion agreement consistent with increases in cash related revenue, to hire personnel and stock-based compensation expense related to greater headcount as we expanded our sales force, and to increases in our direct marketing and other expenses.

General administrative expense for the quarter ended June 30, 2014, was $3.9 million, compared to $2.7 million in the same period in 2013. This increase was primarily due to higher costs associated with operating as a public company, increases in headcount and in stock based compensation expense.

Net loss for the quarter ended June 30, 2014, was $6.7 million or $0.31 per common share, compared with a net loss of $6.5 million or $7.53 per common share for the same period in 2013. Cash and cash equivalents as of June 30, 2014, totaled $58 million.

I will now turn the call back over to Bonnie for closing remarks.

Thanks, Shelly.

We've made strong progress this quarter, and, importantly, we believe we've laid a solid foundation with the core elements that will drive growth in Afirma and the long-term success of our business. We are excited about our progress in moving into our next vertical market in pulmonology and believe that our novel molecular cytology approach is truly changing how the base diagnosis is done enabling patients to avoid unnecessary invasive procedures and removing cost from the healthcare system.

Would the operator please open up the call for questions?

(Operator Instructions)

Dan Leonard, Leerink.

Bonnie, could you please walk me through the primary drivers of the reduction in FNA guidance?

I think to start with, as we were predicting the pace of growth in the two segments that we serve, which is the academic, institutional accounts where we get GEC only, versus the physician office practice where the preliminary adoption started, because those doctors have more ability to make decisions on what they adopt. We kind of anticipated, early on, that the pace of those would remain consistent through the year, but what we are seeing is actually a much more aggressive rate of adoption in the institutional accounts and academic centers than what we had anticipated.

So, when you think about the original volume of FNAs we were anticipating at a 5% rate of GECs coming in for -- samples coming into the GEC only, net-net, we would have been at roughly about 100,000 effective FNAs, counting those GECs only at a rate of about seven to one. So when you consider the higher rate of GEC only with the new range, you actually net-net about the same.

And the additional revenue that we will get from the increased GEC testing more than offsets the revenue coming from those FNAs that we lose the cytopathology on, and because the GEC drive a much more significant margin, gross margin in quotes, of course, to the business, it actually more than offsets that cytopathology loss. So, we are actually pleased with this.

Early on, we started with the overall solution where we had the package approach to the doctors offices and anticipated this enabled model being key to get into institutions. I think what we are able to now demonstrate, is that both market -- models are working quite well for us, and we think that's good.

Okay. The doc office, though, do know why -- why adoption there is falling below plan? And is there anything you can do to inflect that?

Well, it kind of comes down to the rest are focused on conversion in the market. Our original projection was more convergence would happened in the doctor's office than in institutions.

In actuality, we have more conversions in the institutional account. We have a little bit of an opportunity cost there, given that the reps have to spend their time in one market or the other.

I think what we're doing going forward, we will remain very focused on both of those markets, and I think coming back to our amendment with Genzyme and how we are going to be able to refocus their team on the support and maintenance and higher additional folks on our side to help drive into these more complex institutional accounts, we'll be able to continue to drive adoption in both.

Got it. That's helpful. My follow-up question. Do you anticipate the Genzyme renegotiation is going to have any impact on your projected sales trajectory, either positive or negative?

We have not filed any change in with regard to Genzyme, specifically. We really believe there can be some benefit in at the customer level in being able to have more feet on the ground that will help with ongoing maintenance and support, a higher touch, perhaps. Our increase that we stated in bringing on 10 more folks by the end of this year will really shore up our ability to have the strength that we need to focus more attention on the institutional accounts where our enabled model has shown to be quite successful and also give more granular coverage in those areas where we can continue that growth in the doctor's office market, as well.

Okay. Thank you.

Amanda Murphy, William Blair.

It's JP in for Amanda. I had one around the Genzyme deal.

What was the catalyst to get you guys back to the negotiating table? Was is their reps weren't pulling their weight? Or, you guys are just further along the adoption cycle that you could go back to them with some negotiating power?

Yes. I appreciate the question. I think the reality is, when we made the decision to team up with Genzyme for the early launch of Afirma, proved to be an excellent decision. You had a group of great fibroid cancer experts already with a lot of relationships, and that allowed us to really hit the ground running in year one. I think, because of the nature of how we negotiated that agreement with some flexibility for either side to terminate, gave us an avenue to come back to the table and negotiate at the point where it made sense.

I think, for us, as we look forward to positioning ourselves next year and over the next few years for greater profitability long-term, and as we look at the success that we've had in institutional accounts that are actually a little more complex from a selling model standpoint, we felt we needed to bring a little more of that strength to the table in the way to justify doing that, and having the financial resources to do that, was to trigger our opportunity to come back to the table with Genzyme and see what made sense for both companies.

Both companies are very committed, obviously, to keep the partnership that we have in place, continue to show a strong brand presence where it makes sense, and I think this will be a great next evolution of our relationship. And we look forward to sharing more about some of the international decisions, perhaps, in our next quarterly call as those get worked out, over the next few months.

Just a follow-up on Genzyme, how much does this pull forward long-term profitability for you guys? Is the negotiating going to be offset by your internal spend? Or could you guys even be profitable in 2016?

This is Shelly. We don't talk about profitability and give those projections. But I would say that as we noted in the script, we anticipate that we will increase our spend internally in the near-term, so the third and fourth quarters will continue with the hiring by 10 additional people. That will increase our costs in the next six months, obviously, layering in next year, the reduced percentage from 32% to 15% for the Genzyme portion.

Overall, the percentage of the spend as opposed to a proportion of revenue will be a lower percentage than it would have been, but we would expect that our total dollar spend will be about equivalence between the two years. So, there is a trade-off from the perspective of bringing on the additional costs internally, as opposed to paying that additional 17% externally.

One more, if I could. I know you guys don't give to GEC guidance. But, I just want to make sure the updated guidance all the moving parts they are -- given the GEC percentage, up 22%, it almost seems like the GEC guidance implied is relatively the same.

Even though FNA guidance came down, GEC is a higher percent, so you're GEC volume is going to be the same as you kind of thought at the beginning of the year. Is that fair?

Yes. Actually. I can walk you through some of those numbers, just to compare the different sub-segments of the product, was FNA growth -- pure FNAs in the door sample growth -- what you can compute is about a 15% Q1 over Q2 and 32%, as we said, year-over-year. GEC volume being just under 50% year-over-year grew 18% quarter to quarter. More significantly, the samples coming in from enabled accounts for GEC only contributed 90% growth from the same quarter last year to this year and a 29% growth Q1 to Q2. So the point being that the 7% of that GEC only rate goes up, it has a significant impact on the number of GECs.

So, therefore, we would project roughly the same number of GEC test through the year, which drive, obviously, the revenue. The dynamic going forward through the end of the year, however, with us bringing on new reps, we now have guidelines.

We've now expanded a significant coverage decisions, 10 million more lives just this quarter and, the initiative to reposition Genzyme and bring on new reps, we could see the momentum pick up in both of those segments of the market, which is why even though we see the GEC on the upper and, and as we pointed out for this last quarter was even slightly above that 22%, we think those rates can continue to fluctuate a little bit. But I think going back to the 95.5% moving from -- to 93.7% with the lower FNA volume gives you the metric to model that out.

Okay. Do you still expect seasonality, kind of a flat Q3 in FNA given the summer?

Yes. We are halfway through Q3. I can give you a little bit of color on Q3, which seems to be shaping up here right. Historically, we have always seen seasonality due to the summer months, and we are not completely through the quarter.

But FNA volumes, and I would say especially GEC tests are up for the portion of the quarter that we are through. Cash collections have been especially strong and, in fact, July was our strongest cash collection month ever. So, that's sort of where we are with Q3.

Great. Thank you very much.

Bill Quirk, Piper Jaffray.

Quick question. Not to beat a dead horse here around FNA volumes, but just trying to understand. Has the sales team changed their focus to be pushing more on the institution side?

Because, we are seeing more rapid adoption there and obviously those come in as GECs, and not necessarily FNAs. Or, is that a function of continuing after both groups, and it simply the physician office doctors taking longer to convert over.

It's Chris. I think what we are seeing is that they're going after both segments. We've always told them to go after both segments.

We are getting tremendous interest in the enabled segment and the institutional segment. That is a typically longer sales cycle. And we've seized that opportunity, so I think it's fair to say that the resources have started to be deployed on that, and there is an opportunity cost.

That's the way we see it internally. We think that's actually not a bad thing for the business, for how it plays out. It happened a little quicker that I think what we originally thought to be getting that segment, which historically is a tougher segment to get. And as guidelines and coverage all move in our direction relatively quickly, that segment is starting to go, and that's -- that opened up the need to try to get more resources on the ground and us taking on more of the sales challenge from -- that instituted the discussions with Genzyme.

So we will be deploying more reps on the ground and taking on more of that sales piece to be able to serve both of those channels. I think it's been more we've seen more and more interest and more and more demand so resources who have been focused there, rather than the physician segment moving slower than what we anticipated, per se.

Understood. To what extent can you talk to the impact of the guidance on this trend, is this having an impact? I would imagine it is. Perhaps it's still too early to tell?

If we go back to our original guidance at the midpoint, 76,000 to 83,000 and look at the imputed GEC rate from that 5%, we would have predicted about 4,000 GEC only's coming in under that scenario. What we would predict now, with the lower range of FNA samples, but a 7% GEC rate is actually 1,000 more GECs this year, which at a $3,500 revenue, rough revenue reimbursement value, at over a $3 million increase, and certainly the cytopathology testing that's lost from those FNAs doesn't come close to that.

So, we sort of introduced this idea, and we are learning about how probably, better ways to think about how we can continue as the business grows in these dynamics unfold in different segments to give an apples to apples comparison. One of the things we began doing inside the Company, is looking at total effective FNAs.

That takes each sample back to what was the original impact on FNAs received? When you look at that as 525,000 FNAs coming and being performed on patients, how are we impacting those FNAs?

It's probably a little bit better metric on the business. If you do the math -- and we don't need to walk through it, here, but you can have the models laid out to do it, we actually end up net-net on the effective FNAs that we would impact by both guidance models with the different rate of GEC direct coming in right around 100,000 for the year. That's just under about a 20% market share on the total FNAs done, and we feel that's been really good progress for this year.

So, I think bottom line, we are excited to see that this enabled model that was -- took a little while to get seeded has taken off and that we can now deploy different models in different market segments and see success with that.

Great. Just a question for Shelly. In terms of the sales force additions, the 10 -- sorry -- is that also include the marketing support people? Or, there'll be some additional people.

The second part to that question is regarding the expanded outreach to both patients as well as physicians and how you're thinking about the spend there. Thanks.

I will start with the first part and then hand it over to Chris on the second part. Yes. Out of those 10, some of those would be institutional sales folks, just as we had announced on the last quarter that we've had a lot of success with cur first person with that specialized focused, and I think we are seeing some of those results. We look continue to hire some of those folks.

I think we will also then hire a couple of additional marketing people, and then we also have ruled out additional marketing programs. And I will let Chris talk a little bit to that.

Yes. We've started to spend -- now is the time to get the word out about the evolving guidelines and making sure that physicians are up to speed on that. So, we've -- we're increasing our spend in reaching those physicians, both the conferences and direct efforts and reaching out to them that way. We are also -- this is also the time to start to reach out to patients.

We've started an effort both rebuilding websites and efforts online and directly to patients and making sure that patients is there searching for information before getting the FNA done, find out about Afirma and ask their physician about whether Afirma should be an option for them. And we are starting to get positive feedback from physicians signing up as clients or reinforcing their decision to be clients when patients come in, asking them about whether or not they'll have Afirma done to them. We are pushing more of the spending towards the patient.

We started that effort. We will increase that effort much more next year. By now, our focus has been on the physicians through the rest of the year and starting to amplify the message into the patient.

Got it. Thanks.

(Operator Instructions)

Doug Schenkel, Cowen.

This is Chris on for Doug today. I think weather negatively impacted volume last quarter. Was there a benefit from the lost volume from last quarter?

I'm sorry. You are referring to the slower takeoffs in the year in first quarter, where we had some impact from weather and things that impacted Q1? Is that correct?

That's correct.

Yes. We've certainly picked up a little bit, as you can see from the increase in volume Q2 over Q1 versus Q1 over Q4 of last year. As you know, in these businesses, it's always about being able to convert accounts in one quarter so that business pulls through on quarters ahead. I think we've made some of it up, but it did suppress the start of the year.

Okay. I think we previously talked about the benefit of FNA cytopathology volume going through Veracyte to control the GEC testing market. Does increased academic or institutional client sales mix change your thoughts on controlling the GEC testing market?

Related to that, can you talk about competitive dynamics? Has that changed over the past few quarters?

Great question. First of all, we've always known that there were two important segments that we would need to penetrate, one being the physician office practices, which is the simpler to penetrate, where they collect the sample and will send it off for testing. I think the decision to package the Afirma GEC as part of the whole solution, so the physician only has to collect one sample and can get the full complement of testing from that sample, has proven to work very, very well.

We have lots market yet to penetrate, and we really don't expect any slowdown in that ability to drive success in that market. At the same time, we also realized that institutional clients, integrated delivery networks, along with academic centers who probably were the earliest to adopt Afirma in the enabled model, we've always known that getting seeded into those accounts was the secondary really important part of the market.

But there, where cytopathology is really performed under one roof and samples can be collected simultaneously, and stored while the perform the cytopathology has never been a problem for us. We coined this phrase enabled model where we helped those physicians collect the samples, store it, give them supplies so they can send us a sample, the FNA sample for the GEC only. I think what was difficult to predict, maybe in the early part of the year -- I mean, we are still on a steep growth curve here, coming into the year, it was clear the majority of our business was coming from these community-based practices.

I think we anticipated that until we got into all the guidelines it might be hard to get the traction that we are seeing in the institutional accounts. So, again, if you look net-net at the effective FNAs we are impacting, it's really about the same.

This is just an issue of mix. We will continue to drive fully into both of those segments and expect to continue to see both of them continue to grow.

Because, we're probably penetrated from a percent market share about the same into both. So, you'll see continued traction and continued color on how that's unfolding as time goes on.

Competition, we've really not seen a significant change there. We did have one competitor that, in May at the ACC meeting, had a publication come out that didn't have glowing results on sensitivity,and they backed down a bit at the meeting.

There continues to be interest at the academic level in looking at other things that can be measured to answer the clinical question. There been a couple of companies say that they are in the development of things that might come out in the future. But, as you know, until you see the science and can see what people are doing, it's really hard to speculate on how successful they'll be at penetrating.

And this is Chris. Just to add, most of those efforts have always been focused on measuring mutational markers of malignancy. We've always maintained that's been the wrong way to approach the clinical problem.

As the guidelines have started to roll out, and those guidelines have reinforced the position that we've taken that you need a test with high negative predictive value to watch and wait with these patients rather than take them to surgery, that's been very gratifying, as it's underlined our approach.

Okay. Thanks for taking my question.

Paul Knight, Janney Capital.

This is actually [Brian Kip] on behalf of Paul. Just a quick one on the Medicaid announcement. Was there any threshold or any key things that AmeriHealth Caritas focused on, compared to the general payers, any threshold that you guys overcame recently, the key being on to release this positive coverage decision?

Chris, do you want to take that?

Yes. I think all these folks assessed the test based on multiple dimensions, analytical validity, clinical validity, clinical utility, cost-effectiveness. You can hypothesize that being cost effective really, really makes a difference in this segment, clearly, that's, to Afirma's positioning, that's incredibly strong.

But I honestly think they do it just like every other plan does it, based on the strength of the evidence. I think Afirma this -- I think Afirma is really well positioned, relative to payers that are focused on managing cost, because we are able to reduce cost within the plan window within a quick timeframe relative to the surgeries being reduced.

Dominoes sometimes fall a bit more quickly on the commercial side. Do expect that to be the case with this first Medicaid announcement?

Do you think some more of the governmental payers might be a little longer down the road, not saying it's months and quarters, but just the adoption curve might be a little bit slower? Or do think the pace is at a similar rate?

We haven't given guidance about how these things will fall. Quite frankly, it is what it is. We are focused -- I mean, we've said that this is the year and into next year that we are squarely focused on an organization around getting the BlueShield -- BlueCross/BlueShield companies what they need, because they insure a lot of Americans. And we are starting to see this year, as this year's unfolded and recently this quarter, with the announcements around Highmark and the announcement with Horizon covering the test, those are major BlueCross plans, that those efforts are starting to payoffs and we continue to be focused on the BlueCross/BlueShield plans because we think that will make the biggest difference in building the long-term reimbursement from the product.

Okay. Just a quick follow-up, here. Any pulse or any reading on ATA and the potential for them to augment their existing guidance or guidelines?

Are discussions accelerating or they kind of stay status quo as they were in prior quarters? Any expectations or thoughts around that would be helpful.

I think the expectation is that they had the guideline pretty well baked when they presented it for public comment. They might make some minor adjustments to it, but I think that all expectations are is that will get drafted and published and hopefully, come out in final format and publication before the end of the year.

Appreciate it. Thanks again.

Thanks for the question.

I am showing no further questions at this time. I would like to hand the conference back over to Ms Bonnie Anderson for closing remarks.

I would like to thank you all again for joining us today. We really appreciate your support of our mission to improve patient care, reduce healthcare costs. And, we are committed to building a growing, sustainable company that provides a value to our shareholders and look forward to updating you all on our progress on our third quarter call. Thank you.

Ladies and gentlemen, thank you for participating in today's conference. This concludes our program for today. You may all disconnect and have a wonderful day.