Veracyte Inc (VCYT) 2014 Q4 法說會逐字稿

Good afternoon, ladies and gentlemen, and welcome to Veracyte's fourth-quarter and full year 2014 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. 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. Ma'am, you may begin.

Good afternoon everyone, and thanks for joining us today for our fourth-quarter and full year 2014 financial results and 2015 financial outlook conference call. Joining me today are Bonnie Anderson, President and Chief Executive Officer; Chris Hall, Chief Operating Officer; and Giulia Kennedy, Chief Scientific Officer. Before we begin, I would 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 tests to patients, physicians and payers.

Growth opportunities and the size of potential markets, future products, product launches and our product pipeline, execution of our sales and marketing strategy, demand for our tests, drivers of demand, and expansion of our customer base, payer coverage, contracts, in progress and reimbursement, and patient access, our ability to collect from payers for tests performed, the impact of the Affordable Care Act and Medicare, 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 September 30, 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 fourth quarter and year ended December 31, 2014, crossed the wire earlier, 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, and thanks for joining us today. We wrapped up a great year of successful execution in 2014, and I'd like to give you some of the highlights. We added 30 million covered lives for the Afirma GEC, bringing the total to 145 million covered lives today. We secured in-network contracts with two of the largest commercial payers, United Healthcare and CIGNA, and now have nearly 100 million lives under contract. And we received a coverage policy from our first Blues payer, followed by seven more.

We are not aware of any other Genomic test that has achieved this level of rapid success with payers, including Medicare coverage within the first year of commercialization, and believe this reinforces our underlying strength of our reimbursement strategy. We amended our co-promotion agreement with Genzyme, enabling us to reduce the percentage of fees paid to them by more than half, while maintaining the engagement of their sales force and tripling the size of our own highly productive sales team.

We grew our thyroid nodule FNA volume in the community physician office market, and we made major inroads with institutional customers, which hold 40% of the thyroid FNA market, and heavily influence the other 60%, demonstrating that our two models for offering Afirma are working. We accelerated our move into pulmonology by acquiring Allegro Diagnostics, and are set to launch our lung cancer test earlier than expected, and at a time when the lung cancer screening market is primed to rapidly expand because of new payer coverage requirements.

Our test will be ideally situated in the clinical pathway, where it can help patients avoid surgery as the next step in their diagnostic work-up, and where it fits cleanly with the physician's current practice. And we are on track to bring our second test in pulmonology, for idiopathic pulmonary fibrosis, or IPS, to market in 2016. This means that we have gone from being a one-product Company a year ago, to one that is poised to have three commercialized products by the end of next year, with an addressable market of more than $2 billion.

Now let's talk about some of the specifics. Turning to our results for the fourth quarter of 2014 and full year, I'd like to focus on three key areas that define our ongoing success. They are the growth of Afirma, coverage and reimbursement progress, and advancement of our pulmonology pipeline. First, the growth of Afirma. We focused on execution of our Afirma business in 2014, and our achievements are reflected in our strong financial results. Our revenue for full year 2014 was $38.2 million, a 75% increase compared to full year 2013 revenue.

We grew the number of fine needle aspiration, or FNA, samples we received, including samples for the full cytopathology-based assessment, as well samples for just the Afirma GEC, by 33% in 2014, compared to 2013. Notably, we increased the number of GEC tests performed by 45% during the same period, and the number of GEC-only samples received by 73% in 2014, compared to 2013. These numbers underscore our success in penetrating the community-based physician practice market, as well as our strong early gains with institutional customers.

As a reminder, community physicians send us FNA samples for both cytopathology, and when those results are indeterminate, for the Afirma GEC testing. Deployed predominantly in institutional accounts, we offer our Afirma enabled model, in which the accounts handle cytopathology themselves, and only send us samples for GEC testing when their cytopathology results are indeterminate. The number of GEC-only samples increased to 9% of all FNAs received during the fourth quarter of 2014, up from just 6% earlier in the year, reflecting our strong progress with the Afirma enabled model in institutional accounts, which comprise the thought leader endocrinologists, and represent a higher margin opportunity.

We now estimate that we've captured approximately 20% of the community practice market, and 10% of the institutional market, with more than 2,000 physicians around the country using Afirma for their thyroid nodule patients. And in our march for Afirma to become the new standard of care, we expect the American Thyroid Association to publish its final clinical guidelines during the first half of 2015, with recommendations supporting the use of our test. This will be the third major guideline to do so, the others being the National Comprehensive Cancer Network and UpToDate.

We have significantly expanded our sales footprint in endocrinology, going from a team of 9, with 8 reps in the field, at the beginning of 2014, to a sales team of 26 at year's end. With our sales expansion in the amended co-promotion agreement with Genzyme in place, effective January 1 of this year, we are well-positioned to grow our Afirma business. We anticipate entering select international markets in 2015, provided the adoption opportunity and reimbursement landscape are attractive.

To that end, in February of this year, we entered into an ex-US agreement with Genzyme, under which Genzyme will promote Afirma in Brazil and Singapore, and Veracyte will pay 25% of the net revenue from these markets to Genzyme over a five-year period. The agreement also gives Genzyme the right of first negotiation for a limited term to enter into similar agreements to promote Afirma in Canada, the Netherlands and Italy. Both companies can also agree to a similar approach with other countries.

We've boosted our marketing efforts with a comprehensive promotional campaign targeting endocrinologists, and highlighting the patient benefit of Afirma. We've gotten great response to this from physicians, and we also expanded the program to reach patients who have been diagnosed with a thyroid nodule, educating them to ask for Afirma. The patient campaign centers on our new Afirma.com website, and also includes paid search, advertising in physician offices, and outreach to advocacy organizations. In January, for thyroid awareness month, we partnered with a leading advocacy group and a physician to reach consumers at more than 40 TV and radio stations around the country, with educational information about thyroid nodules and how to avoid unnecessary surgery as part of the diagnostic work-up.

We are further building our library of clinical evidence for Afirma, with more than a dozen studies and review articles now published in peer-reviewed journals supporting its use. We recently published strong analytical and clinical validation data for our Afirma BRAF test, and continue to gain traction with our malignancy classifiers. These tests, for both medullary thyroid cancer and BRAF gene mutation status, are designed to help inform surgical strategy for those patients headed to surgery following cytopathology and/or GEC testing.

We believe the malignancy classifiers increase the value of Afirma to physicians, with a comprehensive solution that reduces the number of unnecessary surgeries. And, when surgery is needed, helps ensure that the patients get the right surgery the first time. Finally, we have received an additional patent for the Afirma GEC in November. This brings our GEC patent portfolio to five, and helps further solidify the IP fortress around our test. In 2015, we will focus on sales execution for Afirma, supported by our expanded team and the strengthening of our marketing programs, and on explaining both Afirma models to drive GEC volume growth across all market segments.

Second is coverage and reimbursement progress. Since launching Afirma in 2011, we have achieved tremendous success in our coverage and reimbursement strategy, obtaining Medicare coverage in 2012, followed by United Healthcare, AETNA, CIGNA and Humana, among others, in 2013. 2014 continued that trend. We increased the number of covered lives to 145 million, from 115 million, adding coverage decisions for more than a dozen payers. Eight of those were Blues plans, which included Highmark, Horizon Blue Cross Blue Shield of New Jersey, and Blue Shield of California, our home plan. And most recently, Independence Blue Cross, with approximately 2.3 million covered lives.

Perhaps even more significant, we secured in-network contracts with United Healthcare and CIGNA in 2014, as well as a few other smaller plans, bringing the total number of contracted lives for Afirma to nearly 100 million, nearly doubling the prior-year number. Obtaining in-network status with payers is an important step forward for our business, as it further facilitates physician adoption, by given them permission, if you will, to use our test because we are an in-network provider. It also strengthens our business relationship with the healthcare plans, and ultimately, it provides us a pathway to more predictable revenue.

We have demonstrated remarkable success with reimbursement expansion, as evidenced by our revenue growth rate outpacing the rate of volume growth. At the same time, we should note that further expansion of our GEC reimbursement rate will be limited until further progress is made, predominantly with the Blues plans. Therefore, in 2015, we are focusing intensely on the Blue plans for additional coverage decisions, building on our strong momentum over the last 12 months.

Our efforts will be boosted by our recent attainment of a Category 1 CPT code for the Afirma GEC, which was issued by the AMA on March 1 of this year. Having our own code, particularly with a Category 1 designation, is important, because it removes barriers to getting paid and, we believe, will accelerate payer coverage decisions and contract discussions. We expect it will also give us increased access to hospital systems and other institutional accounts, which sometimes bill directly for the Afirma GEC because it provides greater certainty that they will get paid.

Third, our advancement of our pulmonology pipeline. We are thrilled to report that we plan to commercially launch are lung cancer test under the brand name Percepta Bronchial Genomic Classifier, ahead of schedule, by mid 2015. Our integration of Allegro has gone extremely well, as has the technology transfer and corresponding analytical verification studies, so that we can soon begin testing patient samples in our CLIA-certified laboratory. Percepta is a genomic test that identifies patients with lung nodules who are at low risk of cancer following a bronchoscopy that is non-diagnostic, meaning cancer cannot be ruled out. So that these patients can avoid invasive procedures and be monitored with CT scans instead. Percepta has been validated in more than 1,000 patients, at over 30 US and international sites, including through the AEGIS-1 and AEGIS-2 clinical validation studies.

The AEGIS-1 study was presented at the American Thoracic Society international conference last year, and demonstrated the test's strong performance, with a negative predictive value of greater than 90%, at identifying patients at low risk for cancer. The AEGIS-2 study has been accepted for presentation at the ATS 2015 international congress in May, and two papers have recently been submitted for publication on our validation studies, as well as on the development of the Percepta classifier. Our entrance into the lung cancer market is particularly timely, given new policy changes that we believe will significantly expand the number of patients who can potentially benefit from our test.

As of early this year, more than 8 million Americans at high risk for lung cancer have become eligible for annual CT screening through new Affordable Care Act and Medicare coverage provisions. Increased screening will save lives through early detection, but will also find many lung nodules that require a diagnostic work-up to prove to be benign. Approximately 40% of the estimated 250,000 bronchoscopies currently performed in the US each year are non-diagnostic, which can lead to unnecessary and invasive procedures for a definitive diagnosis.

The number of bronchoscopies and non-diagnostic results is expected to increase, given the new screening programs. We believe our test will complement this new screening paradigm quite nicely. We plan to begin offering Percepta at select sites across the nation, while we fill out our library of evidence support our request for Medicare coverage. This strategy worked very well for us with Afirma. We are working toward Medicare coverage in 2016, and reiterate our expectation that meaningful revenue from Percepta sales will ramp in 2017.

We also remain on track to expand our pulmonology offering, with the launch in 2016 of a second product targeting idiopathic pulmonary fibrosis, or IPF, a devastating and often fatal lung disease. This test is designed to pre-operatively identify patients with IPF among the nearly 200,000 patients across the US and major European countries who present each year with suspected interstitial lung disease, or ILD. We plan to present initial clinical data demonstrating the performance of our IPF test on bronchoscopy samples, the sample we plan to use in commercialization, at the ATS meeting in May.

At the corporate level, we are delighted to have recently welcomed another new member to our Board. Dr. Rob Epstein, a distinguished epidemiologist and managed healthcare veteran, has joined us, bringing significant expertise in helping companies navigate the complex payer landscape, and build the evidence for new products. He will be a tremendous asset to our reimbursement strategy for our expanding menu of products. His appointment follows that of John Bishop, Chairman and CEO of Cepheid, which we announced at our last quarterly call.

We also would like to acknowledge Brook Byers' decision to not stand for reelection to our Board. His retirement will become effective at our 2015 annual shareholders meeting on May 18. Brook is a Founding Director of Veracyte, and we have deeply appreciated his sage and invaluable advice as we have grown the Company. Before I turn the call over to Shelly, I would like to take a moment to discuss our 2015 guidance, as provided in our press release issued this afternoon.

In 2015, and moving forward, we believe our success should be measured by the volume of GEC tests, as they are the primary value driver of our current business. Given that GEC testing represents the significant majority of our revenue and gross profit, we will no longer provide guidance on the number of FNAs received. We appreciate that our investors and analysts have been patient over the past year, as we've refined how we communicate about our complex business, and your feedback influenced our decision to modify our guidance metrics.

As we focus on building Afirma GEC test volume, we expect additional traction due to several key positive factors in play that I mentioned earlier. To reiterate, these include gaining addition momentum with our existing payer contracts, additional positive coverage policies to expand reimbursement, especially from the Blues, more feet on the ground and a highly productive sales force that is three times larger than last year, continued expected uptake of our GEC test in institutions where we've proven the Afirma enabled model works, and new professional guidelines to influence physician adoption of molecular tests. In 2015, we are guiding to 19,000 to 21,000 GEC tests. This is a volume driven growth, with no anticipated change in the Afirma GEC net price. Therefore, we expect that revenue for 2015 will be in the range of $48 million to $53 million, which at the midpoint would represent a 32% increase in year-over-year revenue.

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

Thanks, Bonnie. As Bonnie indicated, we experienced strong revenue growth during 2014, driven by growing adoption of Afirma and increased reimbursement from payers. Our revenue for the fourth quarter was $12.2 million, up from $6.8 million for the same period in 2013, an increase of 78%. Our revenue for the full year 2014 was $38.2 million, a 75% increase compared to full year 2013 revenue of $21.9 million. Of note, in the fourth quarter, we accrued revenue of $5.1 million, or 41% of our total revenue.

And for the full year, we accrued $12.5 million, or 33% of our total revenue. The increase in the fourth-quarter percentage accrued was due to our beginning to accrue two new significant payers during the quarter, along with some smaller payers. We received 18,236 fibroid nodule FNA samples during the fourth quarter of 2014, compared to 14,059 FNA samples during that same period in 2013, an increase of 30%. The total FNA volume for 2014 was 65,848, compared to 49,670 FNAs received in 2013, an increase of 33%.

We performed 4,071 Afirma GEC tests during the fourth quarter, a year-over-year increase of 42%. Total GEC tests performed during 2014 were 14,061, a year-over-year increase of 45%. We expect this higher growth rate in the GEC test performed versus FNAs received to continue during 2015. Looked at another way, as Bonnie mentioned, the number of GEC-only samples increased to 9% of all FNAs received during the fourth quarter, compared to 6% early in the year, which reflects our growing success with the Afirma enabled model, in traction with institutional customers. We caution that this percentage will continue to vary as the number of full-solution FNAs versus GEC-only FNAs fluctuates. We note that the amount of GEC-only samples received increased by 73% during the full year 2014, compared to the full year 2013.

Our gross margin, quote-unquote, for 2014 was 57%, which we do not expect to increase substantially in 2015, since we have guided that the average reimbursement for the GEC, $2,100 to $2,200, will not change dramatically in 2015, unless we secure increased payments for major Blues plans that do not currently cover the test. Our gross margin, quote-unquote, for the fourth quarter of 2014 was 60%. This higher amount was due to new accruals, as well as greater cash collections from commercial payers, which we traditionally see in the fourth quarter.

Operating expenses for the fourth quarter of 2014 were $20.3 million, compared to $12.6 million for the comparable period in 2013. Cost of revenue for the year ended December 31, 2014 was $16.6 million, compared to $12.6 million for the same period in 2013. The increase was due primarily to higher variable costs that are directly related to the growth in the number of FNAs received, offset in part by continuing refinements in our test process and economies of scale related to the increase in FNAs processed.

Research and development expense for the year ended December 31, 2014 was $9.8 million, compared to $7.8 million for 2013. The increase was due primarily to direct R&D expenses related to increases in personnel and stock-based compensation expenses for new and existing employees, and a genome sequencing and other laboratory expenses. We expect that our research and development expense will increase as we continue to invest in thyroid studies, analytical verification and utility studies for Percepta, and product development and clinical trials for our [IPF] test.

Selling and marketing expense for the full year 2014 was $21.9 million, compared to $12.5 million in 2013. This increase was due to two primary reasons. First, an increase in headcount of our sales force and associated stock-based compensation expenses. And second, an increase in fees paid to Genzyme, reflecting a growth in cash collections, and partially offset by a reduction in the co-promotion percentage rate, payable to Genzyme in 2014, as compared to 2013.

General and administrative expense for the year ended December 31, 2014 was $18.9 million, compared to $12.1 million in 2013. The increase was due primarily to increases in headcount and in stock-based compensation expenses. The higher cost of operating as a public company for a full year, and costs associated with the acquisition of Allegro, including bonuses and severance pay to Allegro employees in consulting fees, and other fees related to the transaction.

Net loss for the fourth quarter of 2014 was $8.1 million, or $0.36 per common share, compared to a net loss of $5.9 million, or $0.42 per common share, for the same period in 2013. Net loss for the full year 2014 was $29.4 million, or $1.36 per common share, compared to a net loss of $25.6 million, or $6.15 per common share, for 2013. Cash and cash equivalents as of December 31, 2014 totaled $35 million. Our cash position was less than what might have been expected, due to Medicare payment delays in December of approximately $750,000, which were due to changes in the processing systems. All catch up amounts have been received now, and we are back on track with their payments.

We also had two payments to Genzyme in the quarter, including a deferred payment from the first quarter of 2014, totaling $2.8 million. Without the delayed Medicare payment and the extra payment to Genzyme, our cash spent for the final quarter of 2014 would have been nearly the same as the proceeding quarter, excluding the Allegro acquisition payments. We do expect our cash burn to increase in the first quarter, as we will incur costs related to bonuses, payroll increases and annual audit and legal fees related to filings. We believe our existing cash and cash equivalents, as of December 31, 2014, and our revenue from Afirma, will be sufficient to meet our anticipated cash requirements for at least the next 12 months.

A few additional factors affecting our business that should be noted are, as discussed previously, when we begin to accrue, either due to new contracts or due to improve payment history, we experience a one-time pickup in the quarter the accrual begins. In the fourth quarter, this pickup was approximately $800,000, which was not unanticipated. We expect that there will be other such pickups in the future. We experienced increased cash collections in the fourth quarter from commercial payers, consistent with historical trends of pulling fourth-quarter revenue forward from the first quarter of the following year.

As noted in several public forums before, we do expect to increase our R&D spend by about $2 million in 2015 over 2014, related to Percepta. And we anticipate pulmonology will add about $2 million in selling and marketing spend in 2015. Finally, I would also like to remind you of the historical seasonality that we experienced throughout the year, where the number of tests conducted in the first and third quarters have been flat to slightly suppressed, due to weather, holidays, conferences and such, from the stronger growth we typically see in the second and fourth quarters. We have no reason to believe that these seasonal trends will be any different in 2015.

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

Thanks, Shelly.

We believe 2015 will be a year of execution for Veracyte, as we further grow the Afirma business through additional payer coverage and contracts, our expanded sales team, and our two Afirma models, which are working across all market segments. We also look forward to expanding molecular cytology franchise into pulmonology, with the launch of Percepta, for improved lung cancer diagnosis. We believe our success with Afirma is already demonstrating the incredible ability of a molecular diagnostic test, when it answers the right clinical question and is placed at the right point in the clinical pathway, to dramatically change patient care and reduce healthcare costs.

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

(Operator Instructions)

Dan Leonard, Leerink.

Thank you. My first question, I'm trying to reconcile your commentary on pricing in 2015. You said you expect no change in price. Yet you're expecting volume to -- volume growth to outpace revenue growth by quite a bit. And I can't get there without assuming price goes down.

Hi, Dan, thanks for joining us today. No, we are continuing to predict that the GEC rate will stay pretty consistent with this year, unless we would happen to get a larger coverage decision that might change that. At which point, depending on when that might happen in the year, we would provide an update to that.

But also keeping in mind that, on our Q3 call, we also indicated that we expect cytopathology rates to be suppressed, as well, as we enter into some of these national contracts with some of our in-network contracts. We do expect that cytopathology AFP to be suppressed. And so that, together with the guidance that we've given on [touch] volume growth, gets us to where we are confident in guiding.

Okay. And then my follow-up question. What are you assuming, regarding new rep production in 2015? Are you assuming an adequate lag period before reps are fully productive?

Yes. I'll let Chris take a shot at that. I will mention we brought about half the new sales force on at the beginning half of the year, and the other half on the last half of the year. So some of them may have a couple more months to get up to speed. But, Chris?

Yes, we're -- that's exactly right, Dan. We're assuming that there is a lag in getting up and being productive. And like Bonnie said, roughly half the field force expansion was early in the year. We are starting to see them hit on all strides, and firing really well right now. And feeling really good about that. And then the other bolus that brought in are coming up that curve quite well.

I'd remind you that that second bolus that -- of sales reps that came in, we've hired to focus on the institutional market. And that's where a lot of the greatest growth we see, untapped potential that we're really attacking this year. And so we expect that rep group to be productive throughout the year, but certainly become more productive as the year goes on. Because they're going at a segment that we've got relatively low market share in, because we just have not attacked it until now.

And keeping in mind for those, as well, that we still have the full engagement of the Genzyme team across the entire market segment as well. So we're very pleased with how we're positioned with the sales footprint coming into 2015 versus where we were back in -- at this time last year.

Thank you.

Thank you.

Amanda Murphy, William Blair.

Good afternoon. Just a question on the broader market. You made some comments about market penetration, thinking about historically, you've had more penetration with institutional accounts than you maybe thought historically. So I'm taking a step back, how do we think about that going forward? So obviously, you've got the community side and the institutional side, in terms of market opportunity. And you've had this great traction on the institutional side.

And that's impacted FNA volumes, and I appreciate you're not giving guidance around that, going forward. But just trying to think about, longer-term, how to model this. Can you give any more context around -- three years from now, how this might look, in terms of penetration rate? And then thinking about the FNA business, because obviously, it's still there, and we have to model something going forward. And you've had the pricing pressure you spoke to there. But any more context you could give would be helpful. Thanks.

Okay, we'll try. I'll start, and then hand it over here to my COO expert on it as well. So one thing that we did provide some direction to, that we would remain standing behind, is that we would expect FNAs coming from -- for the full solution, cytopathology, plus the GEC when it's indicated, to continue to grow at about the same overall FNAs received rate that we saw coming out of 2014. So that would be roughly around the 30% range, plus or minus.

So as that continues and then thinking back to the split of the business between these two segments of the market. When we launched the product, the easiest market to tackle was in the community ambulatory setting, where physicians are in their own practice, and can make the decision on their own what to use. We've been really effective at converting that business at a really pretty good pace of growth from 2011, when we launched the product focused on that segment of the market.

And then following that with some acceleration in 2012, when we teamed up with Genzyme, and had their feet on the ground helping, on through 2013 and 2014. Prior to 2014, we really had minimal traction in the institutional accounts. And that was predominately because we needed to work out the type of model that would really work best to allow us to continue to offer the greatest patient benefit. What we really want accounts to focus on is being able to have Afirma offered with the first FNA in a single-patient visit, so that patients don't have to come back.

And within two weeks, the physician gets a full set of results to make the next decision on what to do with the patient. In 2014, that model of offering the Afirma-enabled approach became perfected. That, then, was the launch of seeing some accelerated uptick. That led us to the expansion of the institutional channel account managers, where we are today. And that will then fuel greater penetration into that segment of the market, where we estimate we really only have somewhere -- 9% to 10% market share, as opposed to a little bit more than 20% in the community practices. So that's how we see the world in the continued uptake in both. Anything to add?

I think you've covered a lot of it. I think the only thing, Amanda, is how we see that progressing over time. And I think that it's fair that we see the --remember that the institutional segment, we think, is about 40% of the market. So where we have about 10%-ish. And the community based is about 60%. And we have a little bit around 20%-ish.

We see the community-based segment growing at a really nice clip, as Bonnie indicated. But we see the institutional segment growing over the next several years at a faster clip, where at some point, it will eventually catch up. And the two will probably grow in a more consistent manner together. And that's our view of the longer-term trends.

So there's no reason to think you can't be at the 20% penetration in institutional over whatever time period?

We would estimate, based on the guidance numbers that we gave you, and what you would predict as the split between the two accounts, using an equivalent FNA calculation, that we would end 2015 somewhere between 25% and 30% share of the overall market.

Okay, helpful. And last one on the pricing, on the GEC side. I think that's pretty consistent with what you said, as of late, which is that you're not anticipating any incremental, relative to now, changes in contracting or covered (inaudible). I wanted to make sure that was still right. Obviously, you've made a ton of progress with the Blues, but there is a couple big ones that are still out there. I wanted to make sure that we're still in the same spot, in terms of how you're thinking about pricing on the GEC side?

Right. It is predominately because right now, we're sitting on such success, with having so many coverage decisions, and now a contract for about 100 million covered lives, that average price is pulled down from the larger plans that haven't yet covered. So keep in mind that on the portion of our revenue that is still cash-based, we will continue to see the lag in payment, just like we have historically. And that if we would be successful at getting a big contract, or a big coverage decision from one of those plans, it would really depend when that would take place in the year, whether or not it would have an upside to the year. And so we do see that as a potential upside, but have chosen to not build that into the base model

Yes, we're driving for it.

Okay, thanks very much.

Thank you.

Bill Quirk, Piper Jaffray.

Great, thanks, and good afternoon everybody.

Hi, Bill.

First question, Bonnie. I guess back to guidance. As we consider the puts and takes between lower average pricing for FNAs, as you guys go into contract, and take that with the guide -- with the, excuse me, the volume comments that you mentioned, what are you assuming for growth, in terms of the FNA-only revenue? Are you assuming that grows? Are you assuming that stays flat? I'm just trying to get back to the GEC contribution versus the FNA contribution for 2015.

The GEC is going to continue to be the stronger portion of the growth, and the biggest strength there, both in revenue. And ultimately, down the road, in margin, as well, which is why we're really focusing in on that. Now from a volume, we're predicting FNAs to continue, as we said, at roughly 30% growth.

I think on our Q3 call, we gave some directional insight that with cytopathology becoming contracted and much more of a commodity price, that that's where we will see some suppression on the actual cyto revenue. We don't ever typically break those two revenue pieces out, and so we're not really prepared to do that. But those two things together lead us to the $48 million to $53 million range.

Got it, okay, perfect. And then just thinking about the transition with Genzyme, would love to hear any comments about how the lead generation, and how the transition is going here? Albeit 2.5 months into it. But nevertheless, would love any commentary there.

Honestly, Bill, we started this little [tightened] journey with them last summer. So we're actually five months into it, and I -- we just did another national sales meeting together, where we kicked off the year. It was probably -- we all agree that the management level is one of the best ones. Probably the best ones we have ever had. The energy remains incredibly high. There was a huge amount of collaboration. They have gotten into a really great rhythm of working with us on lead generation, and then account maintenance.

And the account maintenance works so well, because they're integrating it into their sales calls on Thyrogen. But I'll be quite honest with you. I actually think we're in a better groove than we've ever been with them. Because we've got enough resources now, right in the middle of the sales process, to do the transactions. And so we've got a really clearly defined process that we've laid out to all of the reps, about how to work together, and how to make this -- make the -- drive the business forward, that's coherent. And we're all staffed to do it, and it's been in a really good groove.

Bill, I'd like to also, bringing it up, we gave you a little bit of commentary on the call, on the international side, where we continue to make some progress. But I think that we are very focused on the opportunities in the US, especially with the introduction this year of Percepta into the US market. We will continue to exploit selective opportunities, as they make sense. Such as our deal in Brazil, where we have both [flurry] and Genzyme promoting, as well as some of the other key target markets we pointed to. But we continue to model the international pretty modestly

Yes, understood. Okay, no, that's some great color on both domestic, as well as international. And the last question for me, Shelly, thanks a lot for all the operating expense commentary. Was hoping you could maybe throw your two cents there into G&A, as well? And how should we expect that to trend in 2015? Obviously, it has been up a fair amount here for the last couple of quarters. Thank you.

Yes, so remember that for us, the G&A includes not only what you traditionally might include in the G&A, but also includes our billing and things like that. So those will grow according to how the business grows. I think that you did see, last year, a big uptick, from the perspective of filings as a public company, and all those sorts of things like insurance, and everything else, that goes up dramatically as a public company. We do not see those going down, obviously.

And I think we do need to continue to build out some of the functions in the G&A area. Not because of the Allegro transaction. There will be very little from that perspective. But you will have some patent filings and such. But from a personnel perspective, to be able to scale this Company over time, as we now look forward to three new products. And so I think that you can anticipate that the G&A side will be going up, not just because of Allegro, but because of other factors of growth.

Got it, thank you.

Thank you.

(Operator Instructions)

Steve Beuchaw, Morgan Stanley.

Good afternoon, everyone.

Hi, Steve. Thanks for joining us.

My pleasure. First one for Shelly. Shelly, sorry if I missed it. Did you give the cash burn in the quarter?

The cash burn at the end of the third quarter was $44 million. At the end of this quarter, $35 million. And I think, as I indicated, it was -- probably, it looks a little worse than the actual burn would have been. The Medicare cash payments were deferred until the beginning of January, due to some changes in their system. And so that was the primary change there.

Right. On Medicare, and then the payment to Genzyme.

Correct, sorry. Yes, the payment to Genzyme, also.

For 2015, how would you expect the cash plan to compare to 2014?

I think in the first quarter, we do expect that it will be heightened in the first quarter. We will have some additional one-time annual type things, like audit fees and things like that, which can be high in the beginning of the year. I would anticipate, over time, as the revenue side grows, that we will be able to have that moderate the burn.

And also Genzyme. We did renegotiate that from 32% to 15%. And recall that last year, we front-ended a lot of our investment into our sales and marketing force. And so in the third and fourth quarters, before we had that downtick from 32% to 15%, we were paying for that up front. So I think you'll see a moderation from that perspective. So I would think, over time, that we will be spending a bit more, but also our revenue, obviously, will go up.

Moderation relative to that first-quarter run rate?

Correct.

Okay. And then for Bonnie and maybe Chris as well. Now that we have wins under our belt, and we're at 145 million lives at the end of 2014, how are you framing the outlook? Let's maybe think of it over a two-year horizon, for incremental wins. I don't want to put you on a specific timeline, because I knows these Blues are somewhat hard to predict. But can you help us think about the runway with a longer-term perspective? Thanks.

Yes. I think that we continue to believe that the evidence behind the product is what is really ultimately going to allow us to continue to capture more of the coverage decisions. And it's not that we have not been meeting with, and having discussions with, these payers, all of them. We have. So we're pretty confident that we will have some success in that area this year. And then we would look for more payers moving to contacts, after we are under coverage with them for a while

I would just add, Steve, I've always believed that the Blue Cross/Blue Shield plans are where the challenge has been because there is so many of them in the country and moving that needle dramatically is what ultimately moves our ASP. And I always believed, and I still believe, that getting a few of them to start to fall is the beginning of a sea change in them started to fall. And the progress that we have made this year has been tremendous.

And while there's only been a few larger ones, like Horizon and Highmark, that have flipped, the fact that they are starting to fall, and we're at the number we are, including our home plan, we believe is a really good indication of where this ultimately will end up. Because they tend to want to move together because that's one of the benefits of being a part of the Blue Cross/Blue Shield system is that they tend to have relatively consistent medical policies.

And then I would note, secondarily, that a lot of this is also putting the groundwork in place for rapid expansion into new verticals. And we believe that getting contracts done really sets us up nicely to be able to have discussions with payers that are much more rational than standing outside the healthcare tent and flinging new products at them, hoping they'll notice. So being a part of the network, and being part of the family, allows you to sit down and have those dialogues, which we believe will help us drive Percepta, and then ultimately the IPF product, on a faster timeline. So that's the strategy over the next few years.

Clearly, our number one managed-care priority in 2015 is the Blues coverage. And also, you may have noted, we did slip in one new coverage decision that just happened, with Independence, that we just announced on the call. So as Chris said, we're in a good mode of momentum with them, and we expect that to continue.

Great, thank you so much.

Doug Schenkel, Cowen and Company.

Thank you, and good afternoon.

Hi, Doug.

I just wanted to try to clarify a few of your revenue guidance assumptions. Some of this has been touched upon earlier. But I think there's just a few things that may still need to be addressed. So just to clarify, on GEC ASPs, is it sounds like you said you expect stable pricing, but then you noted that adding contracted lives, as a percentage of mix, does typically depress price a little bit.

So is the right way to think about this that your guidance assumes no incremental pricing pressure relative to Q4 levels? Given you are not factoring in any assumption for additional contracted lives? But that given the timing of the contracts you've entered into over the last several quarters, that overall GEC ASPs will be a bit lower in 2015, on average, than they were in 2014. Is that the right way to think about it?

No. Actually, we -- the suppression is going to come just on the cytopathology side.

So it's all cyto now? Okay.

That's all cyto. The GEC, it's, I think as Shelly said, between, say $2,100, $2,200, that average. That includes everything from full pay to no pay. We -- that is -- right now, that average is really pulled down by the large plans that have not yet made a coverage decision. So what we just want to be transparent about is, until we are able to capture one of those, it will be difficult to see that pushed up.

And again, when that happens, obviously, we will be revealing that. And depending on when it happens in the year, there could be some upside. But it is out of our control. And if it came close to the end of the year, it likely would set us up great for 2016, but may not have that much expansion room to 2015. Shelly, anything to add to that?

No, I think that's exactly right. When we enter into these contracts, the novel technology that we bring is the GEC. And that is very valuable, given the savings to the system, et cetera. What we do find, as was mentioned in prior calls, is that the cytopathology really is routine and is done by many different parties. And so that is where we have the pressure because they may have other contracts, with other providers, that are at much lower volume discounts

(multiple speakers) Keep in mind, also, Doug, that we are really incented to not enter into contracts with commercial payers that could ultimately have an impact on our Medicare pricing. So we view the coverage decision as the one that allows us to maintain really attractive reimbursement. Because we appeal those to list price. But once we make a decision to contract, we really have no incentive to enter a contract that would be at an unacceptable value to the test, which we believe is at the Medicare rate or higher.

Okay, that's really helpful. So just a couple of follow-ups. What is the percentage decline that is factored into guidance for FNA ASPs, for the reasons that you just described?

I think one of the things that we look at is that, if traditionally commercial payers did pay quite a bit over what Medicare paid -- and Medicare does pay $150 for those -- you are going to see, probably, pricing that will land you quite a bit off of where that Medicare rate is today. And that will be for some -- not all -- of the various payers, and different regions. But I would say below what the Medicare rate is today.

And the -- how much capture of previously non-accrued revenue is factored in? I guess really, what is the mix of non-accrued versus accrued revenue, which is built into your guidance range?

I don't think that we're disclosing that. What we have agreed is that we will disclose what the percentages are. In this last fourth quarter, it was 41%. We do have, in our models, when we anticipate that various payers will go into an accrual status. But I think it's very hard for us to give any forward predictions to any of you, to build into your models.

And we will tell you when there is a larger spike of something coming into a quarter. Because as you understand, it pulls it from later quarters because the cash is coming in, usually over a lag period of time. So we don't give -- we're not giving guidance on what we think that percentage rate will be next year, and it's also pretty hard if we, all of a sudden, got a number of big Blues plans, and they all started paying a lot more, as we did last year. We went from the accrued rates of 35% to 38%, and then down to 30% and 25%. So it moves all over, depending on various payers. And this fourth quarter was 41%.

And United, on that topic, with United and CIGNA contracts going into place at the end of 2014, or certainly over the last couple of months, is it possible those turn into accruing revenues this year? Or is that something that's more likely 2016?

We won't disclose exact names of which payers when they move to accrual. We will obviously tell you when various payers move to contracts. And it's just a question of when we can have some reasonable estimates of those reimbursements, based on payment history and such.

Okay. Two more quick ones. No assumption for Percepta in guidance, in terms of revenue contribution? Is that correct?

Yes. (multiple speakers) Minimis. Because what we anticipate is that this year, we will make it available commercially. And yet, we will be conducting those clinical utility studies, and getting the dossier ready to submit for Medicare. Medicare is over 50% of the population in this segment. And therefore, it's important for us to be able to make the strongest case possible to them, just as we did with thyroid. We don't want to begin to ramp huge amounts of volume and sales, when there is no reimbursement available for it. So we've traditionally said in the past that we don't anticipate significant revenue for the Percepta product until 2017

And that's based on also assuming Medicare coverage would come in 2016.

Got it, okay. Very last one. It's really late in the quarter, only about a week or so left. Seems like you would have pretty good visibility, at this point, on any surprises that popped up, positive or negative. Is there anything that you'd want to call out, in terms of weather impact, or any other dynamics that may have come into play that caught you by surprise?

You did talk about seasonality before. That's typical. But anything abnormal that's worth us contemplating, as we build out our models, given your visibility at this point in the quarter?

Certainly, our guidance for 2015 does reflect what we anticipate the first-quarter performance to be. But just to reiterate, the seasonality that we have seen historically does have impact in Q1, when there is severe weather. We had some of that last year. We certainly have had a tough January/February, especially in the Northeast. So we would expect that seasonality, and impact of weather, to be there. And then also, just as a reminder, we also have historically seen seasonality between Q2/Q3, because so much of our business is doctors' office related. And when they take vacations, and attend conferences, et cetera, we have that impact as well.

And then, as we saw this year, and have seen in prior years, usually, Q4 is our larger cash collections month. And then of course, depending on how accruals versus cash-based revenue floats through the year, that can have a more significant or less significant impact. But we expect the cadence to the business to be very similar to the cadence that we've seen, where Q1 is usually at or slightly below where we've come in on Q4.

Okay, thanks a lot.

Showing no further questions at this time. I would like to hand the conference over to Ms. Bonnie Anderson, President and Chief Executive Officer.

Thank you all for joining us today. We really appreciate the ongoing support of Veracyte and our mission. And we look forward to updating you on our progress in the near future, on our Q1 call. Thank you for joining us.

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