Veracyte Inc (VCYT) 2015 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Veracyte first quarter 2015 financial results conference call. At this time, all participants are in a listen-only mode.

(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. Ma'am, please go ahead.

Good afternoon, everyone, and thank you for joining us today for first quarter 2015 financial results conference call. Joining me today are Bonnie Anderson, President and Chief Executive Officer, and Chris Hall, Chief Operating 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 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, positive influence of professional guidelines on physician adoption of our tests, growth in demand for our tests, driver of demand and expansion of our customer base, payer coverage, contracts and progress and reimbursement in patient access, our ability to collect from payers for tests performed, 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 annual report on Form 10-K, for the year ended December 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 first quarter 2015 crossed the wire earlier this afternoon, 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 had another strong quarter, in which we continued to drive Afirma growth, further establishing it as the new standard of care in thyroid nodule diagnosis. As we increased the breadth and depth of Afirma adoption, we also, last month, entered our second vertical market, pulmonology.

Turning to our first-quarter results, I will focus on the three key areas that we use to define success in 2015. They are growth of Afirma, coverage and reimbursement progress, and the advancement of our pulmonology program.

Number one, growth of Afirma. Our Afirma business continued its positive momentum in the first three months of 2015, and this is reflected in our financial results. Our revenue for the quarter was $11.2 million, an increase of 50% compared to $7.5 million for the first quarter of 2014. We grew the number of Afirma gene expression classifier, or GEC tests, to 4,020, a 30% increase compared to the same quarter of 2014.

We continue to drive adoption among institutions, which feature thought leader endocrinologists, and represent a higher-margin opportunity. As a reminder, we offer our Afirma-enabled model to institutional accounts comprising hospitals, academic centers and health systems, which handled the cytopathology at their in-house lab, and send us fine needle aspiration, or FNA, samples for GEC testing only, when their cytopathology results are indeterminate.

A couple of key points to note. The first, the number of GEC-only samples received increased by more than 100% in the first quarter of 2015, compared to the first quarter of 2014. And secondly, the number of FNAs received for GEC-only testing, as a percent of all FNA samples received during the first quarter of 2015, increased to 11%, up from 6% in the first quarter of 2014.

These numbers illustrate our ongoing success with institutional customers. At the same time, we continue to grow our FNA volume in the community physician office market, where we offer our full solution. We believe our strong growth, in both market segments, stems from the expansion of our sales team in 2014, which is working hand-in-hand with Genzyme's fully engaged sales force.

In April of this year, we entered our second international market for the Afirma GEC, through an exclusive agreement with NewBridge Pharmaceuticals, which commercialized our test in the Middle East and North Africa. As you know, our global strategy is to enter international markets where the adoption opportunity and reimbursement landscape are attractive, and our partners have a strong local track record for commercializing novel molecular diagnostics. NewBridge is a perfect example of this. They will exclusively promote Afirma in their territory, which is slightly different than our agreement in Brazil, where we partner with Fleury, a local lab, but drive adoption through Genzyme.

Our second key area is coverage and reimbursement progress. In April, we received coverage for the Afirma GEC from CareFirst, a Blue Cross Blue Shield plan covering the mid-Atlantic region. This follows the addition of another Blues plan during the first quarter, Hawaii Medical Service Association. These underscore our focus on achieving additional positive coverage policies, especially from the Blues network, to expand reimbursement.

We now have nearly 150 million covered lives for the Afirma GEC, including over 15 million lives through Blues plans. We continue to make payer coverage and contracts a top priority, with emphasis on the Blues plans, where we have the greatest opportunity for positive impact.

The results of the first quarter confirm we are on track to achieve the performance goals we established for 2015. We reiterate our 2015 guidance to achieve annual Afirma GEC volumes in the range of 19,000 to 21,000 reported tests, and annual revenue of $48 million to $53 million. At the midpoint, this represents a 32% increase in year-over-year revenue.

So to summarize, we continue to strengthen our Afirma franchise. We have momentum through in-network contracts with payers who have already issued positive medical coverage decisions for the GEC.

We have additional positive medical coverage policies to further expand reimbursement, particularly from the Blues plans. We expect continued uptake of our GEC test by institutions, where we've proven our Afirma-enabled model works. And finally, we expect new professional guidelines to positively influence physician adoption of Afirma.

Now, before I discuss the advancement of our pulmonology program, I will turn the call over to Shelly, to review our financial results for the first quarter of 2015, driven by our Afirma franchise.

Thanks, Bonnie. As Bonnie indicated, we experienced consistent Afirma revenue growth for the first quarter of the year. Our revenue for the first quarter 2015 was $11.2 million, up from $7.5 million for the same period in 2014, an increase of 50%. Of note in the first quarter, we accrued revenue of $5.4 million, or 48% of our total revenue, due to several new payers meeting our criteria of being able to make a reasonable estimate of reimbursement. This is up from 41%, which we accrued in the fourth quarter of 2014.

We reported 4,020 Afirma GEC tests during the first quarter 2015, a year-over-year increase of 30%. The number of GEC-only samples increased to 11% of all FNAs received during the first quarter, compared to 6% in the first quarter of the prior year. We caution that this percentage will continue to vary, as the number of full solution FNAs, versus GEC-only FNAs, fluctuates. Indeed, we did experience a seasonality that we expect to occur, as the number of tests conducted in the first quarter was slightly suppressed compared to the fourth quarter, due to weather, holidays, conferences and such, which is a pattern we've seen in the past. Recall that we typically see growth in the second quarter, on a seasonal basis.

Our gross margin, quote-unquote, for the first quarter of 2014, was 59%, which was aided by the additional accrual of one payer, which provided a bump of approximately $285,000, as well as some catch-up cash payments in the quarter. As noted previously, this percentage can change, due to the lumpiness of payments. And thus, we do not expect the gross margin to stay at these levels through the remainder of the year.

We anticipate that these margins will remain relatively flat in 2015, compared to 2014, absent an increase in the average reimbursement for the GEC, which, in this quarter, is over $2,200. And as previously noted, we believe the GEC reimbursement rate will remain fairly static, until we secure increased payments from major Blues plans that do not currently cover the test.

Operating expenses for the first quarter of 2015 were $18.8 million, compared to $14.1 million for the comparable period in 2014. Let's break this down into its component parts. Cost of revenue for the quarter ended March 31, 2015 was $4.6 million, compared to $3.6 million for the same period in 2014. The increase was due primarily to higher variable costs that are directly related to the growth in the number of samples received, offset in part by continuing refinements in our test process, and economies of scale related to the increase in tests processed.

Research and development expense for the first quarter of 2015 was $2.8 million, compared to $2.1 million for the same quarter in 2014. The increase was primarily due to direct R&D expenses related to increases in personnel and stock-based compensation expenses for new and existing employees, and to genome sequencing and other laboratory expenses. We expect that our research and development expense will increase, as we continue to invest in thyroid studies, clinical utility studies for Percepta, and product development and clinical trials for our IPF test.

Selling and marketing expense for the first quarter was $5.6 million, compared to $4.3 million in 2014. This increase was due to an increase in headcount of our sales force, and the associated costs for the additional personnel, including related stock-based compensation expense, as well as increases in marketing expenses. Notably, the selling and marketing expense decreased from $7 million in the fourth quarter of 2014, due to the reduction in the co-promotion percentage rate, payable to Genzyme, on US GEC sales, from 32% to 15%, on January 1. Looked at another way, the selling and marketing expense decreased from 57% of revenue in the fourth quarter of 2014, to 50% in the first quarter of 2015.

General and administrative expense for the first quarter of 2015 was $5.8 million, compared to $4 million in the same quarter of last year. The increase was due primarily to an increase in personnel-related expense from increased headcount, higher professional fees, including higher audit, legal and consulting, and other corporate expenses, including insurance.

Net loss for the first quarter of 2015 was $7.6 million, or $0.34 per common share, compared to a net loss of $6.7 million, or $0.32 per common share, for the same period in 2014. Cash and cash equivalents, as of March 31, 2015, total $25.8 million, compared to $35 million at the close of last year. As we guided during our 2014 year-end investor conference call, we expected our cash burn to be higher in the first quarter, as we incurred costs related to bonuses, payroll increases and annual audit and legal fees related to filings.

After the quarter on April 28, we completed a private placement of common stock to new and existing investors, with net proceeds of $37.3 million, after placement agent fees and expenses. We will be filing an F3 registration statement to register these shares.

A few important additional factors affecting our financials that should be noted, as investors and analysts model our business. First, when we acquired Allegro, the fair value of the IP R&D, of $16 million, was capitalized, as of the closing date of the merger, and was accounted for as an indefinite-lived tangible asset. With the launch of Percepta in April, we deem that we've completed R&D activities and, under our accounting policy for intangible assets, we now begin amortizing this amount, recording it on a straight-line basis over its estimated useful life of 15 years. This will be a non-cash item.

Second, in late April, we signed a lease for a new facility, enabling us to expand and scale our business. We will have some added costs in 2015, as we build out the facility, incur moving expenses, and as we pay for overlapping rents, until our existing lease expires in March 2016.

I'll now turn the call back over to Bonnie, to address our portfolio expansion strategy.

Thanks, Shelly. As we continued to establish our Afirma solution as the new standard of care in thyroid cancer diagnosis, we also made significant progress with Veracyte's pulmonology franchise. Last month, ahead of schedule, we launched our Percepta Bronchial Genomic Classifier, designed to improve lung cancer diagnosis. We made the Percepta test available to a limited number of institutions around the country, and I am pleased to report we've already begun testing patient samples in our CLIA certified laboratory.

The Percepta test is designed to reduce the number of invasive biopsies, and other procedures that can follow, when potentially cancerous lung nodules or lesions are found on CT scans. The test is used when results from a bronchoscopy are inconclusive, which occurs about 40% of the time. And when this happens, cancer cannot be ruled out. The Percepta test increases the sensitivity and utility of a bronchoscopy, by evaluating a nodule's likelihood of cancer, without the need to sample it directly.

The patient sample is collected when the bronchoscopy is conducted, and that helps to ensure that the test fits smoothly into the physician's existing workflow. The Percepta classifier is designed to identify patients whose lung nodules are at a low risk of malignancy, so that they can be monitored with CT scans, in lieu of invasive diagnostic procedures.

Our Percepta test has been validated in three large studies, with more than 1,000 patients enrolled in over 30 US and international sites. These studies include that AEGIS I and AEGIS II pivotal prospective multi-center clinical validation studies. Data from AEGIS II study will be presented nest week at the American Thoracic Society Conference. AEGIS I data were presented at the ATS meeting last year, and data from both studies have been submitted for publication in a top-tier medical journal.

Meanwhile, this week, we announced the publication of the derivation of the Genomic Classifier, coupled with a small independent test site, in the journal BMC Genomic Medicine. We are thrilled with the publication of key data, and our substantial library of clinical evidence, that will be used to secure coverage and reimbursement for Percepta.

Our entrance into the lung cancer market is timely. Earlier this year, more than eight million Americans at high risk for lung cancer have become eligible for annual CT screening, through new private insurer and Medicare coverage requirements. While this increased screening will undoubtedly save lives, it could increase the risk of unnecessary, invasive and costly procedures. This underscores the strong clinical and public health need for Percepta.

Commercially, we are offering Percepta at select sites, while we build the clinical evidence needed to support reimbursement. This includes demonstrating clinical utility, and how Percepta changes clinical practice. We're aiming 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 2016 launch of a second product targeting idiopathic pulmonary fibrosis, or IPF. Next week, also at the ATS conference, we will present initial clinical data demonstrating the performance of our IPF test on bronchoscopy samples, the type of sample we will use in commercialization. We also have submitted earlier proof of concept data for publication in a top-tier journal.

As we did with Afirma, we are deploying rigorous science and clinical studies, to develop and validate the performance of our lung disease tests. This up-front work will be key to our test's adoption and reimbursement, and ultimately, in changing the standard of care in disease diagnosis.

On an additional corporate note, last month, we announced a novel research collaboration with GE, to explore the notion of deriving innovative diagnostic approaches from a combination of digital imaging and genomic technologies. Importantly, this research opportunity is enabled by our expansive database of clinical, imaging and genomic data that we have amassed from the multi-center clinical trials that have been conducted to develop and validate our genomic test. We look forward to keeping you apprised of future progress with this novel program.

Thank you for your time and attention. I would now like to ask the operator to please open the call up for questions.

(Operator Instructions)

Doug Schenkel, Cowen and Company.

Hi, good afternoon. This is actually Chris on for Doug today. Thanks for taking my question. My first question would be, can you talk about the sales conversion process for new Afirma accounts? I was just wondering if this is getting quicker, given the amount of marketing and awareness for Afirma, the additional data you guys have and improved sales force productivity?

Chris, great to have you join us today on the call. Yes, we always felt that the expansion of our sales team last year, at the end of the year, set us up very nicely to drive accelerated growth in Afirma. And of course, we still retain the entire field force of Genzyme engaged, as well. So I think the -- both models are working. We're seeing more accelerated uptick, as we mentioned, in the institutional accounts. But continue to see great growth in the community practices, as well.

Okay, and then maybe on Percepta. Are there milestones that you could reach that will cause you to accelerate the investment in, I guess, the pulmonology sales force?

Our plan is to actually follow the same play book that we use with Afirma. And that is to manage, on a more limited basis, the adoption and volume drive of the test, in order to get to reimbursement and get that in place before we accelerate uptake. So the plan will be to bring on enough sites to make sure we have the data that's needed to support the evidence, that we have utility, and can show the change in patient care decisions.

We will obviously be working with sites across the country to do that. But ultimately plan to keep it somewhat limited, until we get the evidence package together and are able to get Medicare coverage, which we expect to happen in 2016. Which then we will follow with revenue ramp for the product.

Yes, the only thing I would add is, that we are really -- since we've done the acquisition, really our excitement for this product has continued to grow. If you read a lot of the local -- a lot of the press that has been occurring, and a lot of the media attention around the lung screening problem, has only accelerated since we've done the acquisition. And we have only continued to get even more positive feedback from the community about what we are doing. So we continue to remain really upbeat about the product, and its role to make a difference in patients' lives.

So some of the key milestones will include the publication of data. As we mentioned, we announced, just this week, actually, that first publication AEGIS II data will be presented next week at ATS. Both AEGIS I and AEGIS II data coming out in publication will be key. And then, there will be other publications, analytical, validity, et cetera, that we also expect to follow that. And that will allow you to monitor the progress of the program.

Okay, maybe just one final question for Shelly. So G&A expense increased 10%, Q-over-Q. We had expected G&A to increase only slightly from 2014 to 2015. Could you just talk about the pacing for G&A, for the rest of the year, please?

Yes, I think we had a big impact in this quarter. This is the quarter that we spend a lot on audit fees and such. Remember, we are a young company that needs to comply with SOX. And we spent money on consultants and such. And as a public company, we also, this year versus last year, have higher rates for insurance. And then I would add consultants and such that fall under G&A.

On a more regular, linear basis, we do have all of our billing, for instance, within G&A. And so that will continue to grow up, over time, as the volume increases. I don't think you'll have as much of a stepwise function, over the year, and as much of an increase from that perspective. But I do expect that it will continue on an upward trend, as we continue to grow the Company.

And as I noted in part of my discussion, we will be moving, this year. And that is something new that we have not talked about yet. So I would add some cost in, from that perspective. And we're not quite ready to talk details about that yet. But we -- since we've just signed that contract. But that is something that will be a higher spend for the coming six months, and probably nine months, than would have had before.

Great, thanks for taking my questions.

Thank you.

Amanda Murphy, William Blair.

Hi, good afternoon. So I just had a follow-up to Chris's question on Percepta. You mentioned, in the answer, the initial clinical reaction has been positive. I was curious if you could maybe expand on that a bit? Just how are --I know it's early -- but how are docs that are using it now incorporating it into practice? And then I'm assuming you're not recognizing any revenue at all from that, at this point. Is that true?

Hi, Amanda, thanks for your question and joining us today. Yes, that's true. We're not expecting to recognize revenue with Percepta this year. So as we bring the product to market, our expectation was that we would be able to position the test to inform on inconclusive bronchoscopies. As you may recall, bronchoscopies themselves have about a 40% rate of not being able to rule out malignancy. And we always felt that was one of the most challenging points in the diagnostic work-up, from a physician standpoint.

And I think our early feedback, from the clinical sites that are now adopting the test, are confirming that, that really is a great place to position a test to inform on that inconclusive result, so that the physician has better information. And can potentially use this test, that can reduce the risk of malignancy on some of those patients, so that they can adopt CT surveillance, in lieu of a diagnostic invasive biopsy or surgical procedure. And we are seeing that play out in the early pickup of the test.

And then I -- just thinking about that, given the commentary around revenue recognition expectations for Percepta. How do we -- I'm assuming that will then weigh on margin, over time, on gross margin. So I just wanted to walk through that a bit, over the next few quarters, how to think about margin, in lieu of the ramp of Percepta?

Right. So let me take the revenue, and then Shelly can talk a little bit more about the margin. Our reason for being cautious around when revenue will ramp is our expectation that we want to get through that reimbursement hurdle first. And at that point in time, of course, in 2016, 2017, our overall Afirma revenue will be quite significant. So when we say meaningful revenue attributed to the Percepta product, it will be top line, over and above where the GEC revenue will be at that point in time.

And from a, quote-unquote, gross margin, since we don't really have a gross margin, we would anticipate that these costs -- and obviously, we haven't had to deal with that in the first quarter. But from here on out, I would anticipate that those would go within the cost of revenue, sort of the COGS line. You won't have the countervailing revenue to take against it. So yes, it will be a drag on the gross margin.

We have indicated that we don't expect the gross margin to go up substantially this year. And that, in fact, this quarter was probably a little higher because of one-time factors. But I think that the volume amounts that we are talking about will be de minimus for this year, because we are just trying to get sites up and running. And it's not going to be a huge push, with a 30 person sales force, for instance. So it will be very measured, from that perspective. And I wouldn't think that there would be a large drag from that point of view.

Got it, that's helpful. And then just last one, on the Afirma side of the business. So obviously, you continue to have great growth there. And you talked -- the institutional traction you're getting. So I'm just curious, at this point, what is it that is -- is it just a function of getting the word out, in terms of continuing to drive adoption there?

Or is there anything that you need to overcome, in terms of physicians uses of the test. Obviously, you have some payers that are covering it still. But you have pretty broad adoption. So just wondering if there's anything, from a barrier perspective, that you need to work out, still, in that side of the business?

I think it's always about getting the word out. It's always about going in talking to physicians. And it's always about working in a labyrinth of people within institutions and within accounts. But I would say that, in all of our market research, and of all of our discussions with physicians, the one thing that keeps coming back that does hold us back, is the inability to be in all of these insurance companies contracts, and be covered.

Because what happens when that plays out, is that a physician orders our test, it's out of network. And then, automatically, an insurance company begins harassing the doctor, asking for why they went out of network for something. And that's a hassle factor. And it's easier sometimes to either niche the product with a payer where it's covered, and ignore all the others. Or just wait until it's further along in the adoption phase.

And so while we believe this product is the fastest adopted by insurance companies of any molecular diagnostic products, or certainly one of the fastest of any of them, it's a journey. And we still are working through the process of getting covered and contracted. And as that happens, the barriers to doing business with Veracyte go down dramatically. And it makes it really easy for a physician and a patient to refer samples to us.

Got it. Thanks very much.

Thank you.

Kevin Chen, Leerink Partners.

Good afternoon. I'm filling in for Dan today, and thank you for taking my questions. My first question is, I believe the GEC number came in a bit lower than expected. And were there any drivers, other than weather and seasonality?

No. In fact, I think that you've nailed it. We have always said, in the seasonality of the business, that Q1 tends to be light, either flat or slightly down to Q4. And of course, this year, as you know, the weather in January and February was quite severe in part of the country.

And so we expect the cadence of the business, through the rest of the year, to be what it has typically been in prior years. And feel very positive that the guidance that we set for the year, not giving annual -- quarterly guidance -- but the guidance that we've set for the year is very achievable, and we are right on track to do that.

Okay, great. And just to follow up, is there a wide dispersion in GEC utilization rates among the community doctors? And if so, what are the driving forces? Or is it just pretty well balanced, in general?

Utilization is -- there is a wide standard deviation around volume by account, because there are large group practices, with multiple doctors, that drive fairly high volumes. There are many doctors that practice in single practices, that may do as few as two to five FNAs a month. Chris, anything you can add to that?

Yes, the only thing, I think this is -- I think, if I understand the question right, the one thing that you do tend to see, and we see it, is that, again, it's these insurance issues that drive so much on the ground. And so in parts of the country where patients tend to have higher out-of-network benefits because there's a higher penetration of PPO plans, those tend to have higher adoption rates than places where HMOs tend to be much more pervasive.

I will say that one of our things within institutions, this last year was the year where we launched into a lot of institutions. And as this year goes on, we believe it's always an opportunity to go deeper within institutions. Because in some of these chains -- hospital chains, for example, there will be five chains. One will adopt Afirma, and then part of the sales challenge is to get the second, the third, the fourth, the fifth, and begin to drive that through the entire system. And that process is what we are in swing of, right now. Hopefully that helps, and that's what you were asking.

Yes, actually, it leads into my next question, which you kind of answered already. But maybe -- you guys have seen a lot of success in institutional accounts. Does that cross over? And does it have any impact on the sales process, in the community setting?

No, we have a sales team, along with Genzyme, that covers the whole market. Because as you know, some of these physician office practices are part of the institutional accounts. So there is some overlap in that regard.

But I think the reason the rate of growth is faster, currently in institutions, is because we had a lower market share there to begin with. So higher growth rate of smaller numbers. But we are pleased to see the continued momentum, in both segments of the market, because that means both of the business models are working well.

Great, thanks so much.

Thank you.

Steve Beuchaw, Morgan Stanley

Good afternoon, team. Thanks for taking the questions.

Hi, Steve.

Bonnie I wonder if we could start on the Blues. I wonder if you have any incremental thoughts, color, perspective on Anthem and HCSC? The remainder of that initiative there, to get into the Blues? Are you feeling any differently now, than you were at 90 days, about how the process is evolving?

I think, as we've always said, we feel like we're really making great progress with the Blues. And I think if you go back to mid-last year, every single quarter, now, we are taking more of those plans off the list. Including the two that just came on recently, in the first quarter and second quarter of this year.

So we now have over 15 million lives of the Blues. Certainly, the two big ones that we are working toward have not yet made those decisions. But we are feeling very good about the progress that's being made, and the way the discussions are evolving. And I think we're still very confident that we're going to be able to get the rest of the key Blues plans there.

Okay. I'll take that as an incremental positive. And then, Shelly, on the seasonality in the model, the pacing of volume over the course the year. If I look at the way that it's evolved over the last two years, what we saw here, in the first quarter, is frankly right around what he would've expected.

But if I just plug in seasonality from the last two years, I get something closer to the low end of the range. So I'm wondering, what about the seasonality this year is different from the prior two years? It is coverage? Is it weather? Is it sales force? What am I missing there? And that will be it for me. Thanks so much.

I'll start, and I'll let others jump in afterwards. We do always see seasonality between the fourth quarter and the first quarter. That is just a part of our business, as well as many other businesses in the diagnostics area. I would also say, we see seasonality and flatness between the second and third quarters.

At certain periods of time, those flat or down quarters, in volume, which are attributable to doctors taking vacations, patients taking vacations, conferences, et cetera, as well as winter, in the season that we just went through, you will continue to see those. Sometimes, those have been muted by various sales force factors. In the summer of 2012, I think it was, Genzyme had just come on, and we had a lot more feet on the street that summer, and so it went up a tad.

But in general, we do see flat to down, between the first and -- the fourth quarter and the first quarter, and between the second and third quarters, in terms of volume. So this is no different. I would say this was a particularly bad winter, in certain parts of the country where we do quite well. And therefore, we might have had a tad greater impact this year than we did even last year, which was also a bad winter.

Is the step-up, relative to last year, going to be bigger in 2Q versus 1Q, or 4Q versus 3Q? Where is the inflection there?

I think you -- so we were using a little bit different metrics last year on overall FNA number. Now, we are focused on GEC. And the reason that's important is, obviously, fewer samples may come in, given the GEC-only volume. So I think, as we look at our own plan through the year, we are actually right on track with where we expected the business to be, and feel very confident that, that will play out.

Okay, got it

So we have no -- there is no thought of changing any of that guidance. We are absolutely comfortable with where we are on that volume.

Thanks so much.

Okay, thank you.

Bill Quirk, Piper Jaffray

Great, good afternoon, everyone. This is actually Alex Nowak in for Bill. So does the guidance still assume GEC ASPs between $2,100 and $2,200? Because I believe you said it was just above this range, in this quarter.

Yes, so the guidance, we didn't give you exact numbers. We said we didn't think that it would change dramatically from what it was last year. It has inched up, but I would say inched, and I wouldn't say huge leaps and bounds. And as we reiterated, as we've said in the past, the Blues are the thing that will really change that, because they are the ones that are paying at the lower end of the scale, at this point.

That $2,100, now $2,200, all-in price that we get for the GEC, actually includes those that pay $0, those that pay low amounts, Medicare, and those that pay full amounts. So if we can bring up those that are paying at the lower end of the scale right now, and those happen to be more of the Blues than others, we will get a tick-up over time.

What we said when we gave the guidance is, we did not want you guys to build that in, because we don't control or have predictability about when various Blues will switch over to coverage or to contracts. So we're comfortable with where we have been, and it's a tad higher, probably not than we had in our models, but that we gave as guidance.

Okay, great, excellent. And then, are you starting to see any increase in volumes, or even payment, in March, due to the Category I CPT code?

Actually, the CPT code went effective, but won't actually go under implementation until the early part of 2016. So no, we have not seen any direct effects of that yet. But expect to have some positive effects from that as it gets implemented.

Okay, excellent. And then, final question, can you break out what the FNA volume was in the quarter, just to compare, year over year?

I think that we gave -- actually, did we --?

Yes, I'll look for that. We will come back to you. I thought we gave that number.

Okay, great, thanks.

Thank you.

Drew Jones, Stephens.

Thanks, good afternoon.

Good afternoon, Drew.

Could you guys give us an update on how the uptake on malignancy classifiers is going with Afirma?

It continues to grow, as a percent of the samples. We haven't broken it out or disclosed it. We've used it, primarily, as a way to cement the relationship, where the role of Afirma with physicians is a single one-stop shop for everything they could possibly need to know about thyroid FNAs before they make a surgery decisions, so that they don't have to do repeat biopsies. We've positioned -- over quite some time, we've positioned Afirma. And the best thing for the patient is to get all that you could possibly get on one FNA.

And so knowing that a patient is BRAF positive may mean, depending on how a physician wants to look at it, to definitely do a full thyroidectomy. Because BRAF, when it's there, means that the patient is almost always malignant. And MTC would suggest to do something more aggressive. And physicians can decide what to do with that, but that's how they often approach that.

So we continue to put it in there, and physicians can order that or not order that, depending on what they think is best for their patients and for their own treatment models. And it's helped to cement that relationship and has continued to gain traction, as time has gone on.

Are you seeing more demand for those with institutional accounts, or more in the community setting?

We see it in both places, honestly. We don't see one more of community and one more in institutional. It's neither.

Pretty consistent.

It's pretty consistent. The one thing that's consistent is that the main role of Afirma, and the main people like -- the reason why people choose us, and choose to do this approach, is they are trying to avoid surgery. They think that using Afirma, in lieu of surgery, and trying to re-sort patients to find some people to follow via ultrasound, over time, rather than just rush them to surgery and do a lot of benign surgeries. That's what driving our business, is that -- still that core value proposition.

And the BRAF and MTC fit in nicely with that. Because if you did a partial thyroidectomy, and the patient were BRAF positive, and you think you have to go back in and do a total, you'd rather have that information on the front end. And if you -- obviously, if you just do a thyroidectomy, and you don't to a full -- taking out the lymph nodes, and everything that you would do if the patient had MTC, then you have to go back in and do another surgery.

So both of those product's extensions fit nicely with the positioning of the product. But really just cement and underline Afirma's positioning. And that's how it's been seen.

Thanks.

Thank you.

Zarak Khurshid, Wedbush Securities.

Good afternoon, everybody, thanks for taking the questions. I realize it's early for pulmonology. But based on your experience to date, do you think Percepta will be an easier or tougher sell, compared to the Afirma experience?

That's a very good question, and thanks for joining us. It's probably a little early to make any real predictions on it. But I think the one thing that is really compelling is that, at this point in time, with programs for screening of high-risk patients ramping, there is a genuine concern that, while those programs ramp, in order to try to save lives through early detection, the backside of that has the potential to really create a lot more risk and invasive procedures and costs, associated with resolving the results that aren't clearly malignant or benign.

And I think the positioning of Percepta is ideal, because it fits right into the pathway for the physician who is working that patient up, and is collected at the same time bronchoscopy is collected, but is only performed when those results are inconclusive. And that's really the perfect place to position a test where you can very clearly show the value that you can create, through using the test, changing care decisions. And in a similar way to Afirma, being able to save procedures that actually are costly and risky, and therefore take a lot of cost out of the healthcare system.

So we are quite pleased with the continuity, and the continued value of our molecular cytology approach. And we think Percepta is going to be very well received and is hitting the market at probably a particularly timely moment.

Yes, I would just add -- Bonnie's dead-on right, it's way too early to tell. I would add that I suspect that as we get in and have discussions with insurance companies, which are also our customer, that they will get their arms wrapped around this story really quickly.

Because all the feedback is that insurance carriers are very worried about what they have to get into here, with all the screening, given the Affordable Care Act mandates. And I suspect that as we have those discussions, they will have their head wrapped around this story pretty quickly.

But we have some milestones to get through, data, publications, and continuing to build that evidence and get coverage, before we can start to see that unfold. Thank you for your question.

Thanks for the color, guys.

I would also like to note, as a response to Alex's question earlier, it certainly is in the Q, and will be reported. But the total number of FNAs for Q1 was 17,315 FNAs received. That, of course, would be FNAs for the full solution, as well as those received for GEC only.

Thank you.

(Operator Instructions)

Karen Koski, BTGI

Hi, guys. Can you hear me?

We can hear you

Just a couple of questions. Not to beat a dead horse here, and I know it's really hard to quantify what GEC growth could have been if the winter was more normal. But if you think about the accounts that you have in the parts the country that were more impacted by the harsh winter, and you looked at same-store sales, do you think it's fair to think that GECs would've grown sequentially, without the awful winter?

No, I think that when we set the tone and direction, even coming into the end of last year, we have always said that the seasonality really plays a factor. And we've had other years where it was flat to slightly down. And others, as Shelly -- where there maybe was maybe a slight uptick. But as we modeled out the cadence through the year, considering seasonality, we actually were very much in line with where we expected the business to be.

Okay. And the weather was worse than you expected, right? That's what (inaudible) said?

Yes, the weather was definitely a bigger factor, I think, this year, even than last year. So we were really quite pleased.

Okay. And then obviously, the direct GEC samples are growing quite nicely. And I know you mentioned before that this is a function of both going deeper and picking up new institutional accounts. But I'm wondering how much of a factor offering the Afirma-enabled model has been? And when you think about your pipeline of institutional accounts, are there a lot of accounts that are now coming on board, that maybe were a little bit hesitant before, because they were -- they wanted to do the cytopathology in-house?

I think we -- to put it in perspective, I think we mentioned that this quarter, 11% of the FNAs coming through the door were for GEC only. So that means 89% of the samples coming through the door were still for the full solution. So from that perspective, still a very strong part of our business.

I think GEC-only growth rate is significantly higher, because that obviously is still working up from a lower number, to begin with. The key takeaway, I think, is that with both models working, and strong growth coming from both segments of the market, that's really the -- that's a key take-home. Because a year ago, as we were sitting having this call, we had not yet demonstrated significant success in being able to convert institutions with the operational model we call the Afirma-enabled model.

So with where we sit now, we can continue to drive both of those models in the accounts, in the way that it fits best into their practice. And yes, we do think having both of those offerings, out there and available, does give physicians and institutions just a comfort in knowing that they can come on board in a model that's going to work best in their environment.

Okay, great. And then just my last question, on Percepta. Can you discuss any potential timelines around running a clinical utility and/or cost-effectiveness study?

Yes, so as we said, taking a controlled approach to the commercialization is to get sites seeded, so that we can indeed continue to enroll patients, and roll out clinical utility studies. It probably will not be just one, but we will have multiple ways of having looking at clinical utility. And then doing that in a manner that allows us to collect data showing that, since we're commercial, physicians are changing patient-care decisions based on the results of the test.

That all folds together, that cost-effectiveness, all goes hand-in-hand in having real commercial use of the test, and that's the stage we are in. We plan to continue to ramp that, build the level of evidence, get more of these studies published, and have a package that we're hoping can garner reimbursement we're targeting in 2016. And then that's the basis for sales ramp in 2017. So that's the way that we see it unfolding, and that's how that timeline fits together.

So you would think that we would see a clinical utility study published before that CMS reimbursement decision?

Yes, we would expect that we would have potentially utility studies, and other studies come out. As we said, both AEGIS studies still pending publication. And we will have to have a good library of evidence, in order to garner coverage by Medicare.

Okay, great. Thanks for taking the questions.

Thank you.

Zarak Khurshid, Wedbush Securities

Thanks for letting me squeeze in the follow-up. Just a question on guidance. I was wondering what that assumes, in the way of in-network contracts outside of the Blues this year? I guess, put another way, let's say you inked a few in-network contracts with large payers this year. What could that add on top of the guidance that you've laid out? Thanks a lot.

Yes, so I would say that we would provide a little caution in too much uptake coming from the conversion of a covered payer to one that would be in-network. Because we were pretty intently on once a coverage decision is made, to extract the value, by gaining those payments through appeals where we need to, once a medical policy is drafted.

And we have a lot of success doing that. We manage our billing and managed-care operations in-house. And so we've had a lot of success moving payers from no coverage to coverage, and seeing that uptick in the value that we're able to extract. But once a payer is under coverage, and we're seeing that success, the incremental of them moving from a coverage decision to contracting is really minimal, and possibly no incremental revenue.

Because we have such success under contract at getting our price that we bill for the test paid, that under contract, usually, you give up some sort of percent in order to get that contracted rate. But they will typically have less of it be the patient responsibility, which is a little bit harder to collect. So net-net, it ends up that we actually extract pretty close to the same revenue, from a coverage decision and in-network contract.

What can happen, as happened in the last quarter and what happened, to a smaller extent, in this quarter, is that if the contract then allows the revenue to meet criteria of being very predictable, then in the quarter at which we begin accruing, you get the benefit of the cash payments that came in prior to that accrue. And then whatever was accrued for that payer in that same quarter. And that was a little more extensive in Q4, and to a lesser degree, saw a little bit of uptick in that in Q1. So those are the variables that you want to keep a close eye on.

Thanks, Bonnie.

Thank you.

Thank you. And I'm showing no further questions at this time. And I'd like to turn the conference back to Ms. Bonnie Anderson for any closing remarks.

Thank you all for joining us today. As we approach the mid-year mark, our focus remains intently on further growing the Afirma business. And as we've said, we're on track with our revenue and growth expectations for the year. At the same time, we look forward to advancing our pulmonology program, as we leverage the potential of our molecular cytology franchise.

We appreciate your ongoing support of Veracyte and our mission, and we look forward to updating you on our progress in the future. Thank you.

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program, and you may all disconnect. Everyone, have a great day.