Veracyte Inc (VCYT) 2015 Q2 法說會逐字稿

Good afternoon, ladies and gentlemen, and welcome to Veracyte's second quarter 2015 financial results conference call.

(Operator Instructions)

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

Good afternoon, everyone, and thanks for joining us today for our second quarter 2015 financial results conference call. Joining me today are Bonnie Anderson, President and Chief Executive Officer, and Chris Hall, Chief Operating Officer. During the course of this call, we may make forward-looking statements that are not purely historical regarding Veracyte's [core] Management's intentions, beliefs, expectations, and strategies for the future, including those related to scale and sustainability, future growth, future revenues, strategic investments, product expansion, geographic expansion, and market growth.

Because such statements deal with future events, they are subject to various risks and uncertainties and actual results may differ materially from the Company's current expectations described in this call. Additional information concerning factors that could cause actual results to differ materially from those in the forward-looking statements can be found in Veracyte's annual report on Form 10-K, quarterly reports on Form 10-Q and other filings with the US Securities and Exchange Commission, in addition to today's press release.

The forward-looking statements in this call are valid as of August 13, 2015 and Veracyte assumes no obligation to publicly update these forward-looking statements. Our financial results press release for the second quarter of 2015 crossed the wire a short while ago and is available on the Investor Relations page of our website at veracyte.com.

I will now turn the call over to Bonnie.

Thank you, Shelly. Good afternoon, everyone, and thanks for joining us today.

We executed very well in the second quarter, driving growth for our Afirma Gene Expression Classifier, which we believe has created a new standard of care in thyroid nodule diagnosis. Thousands of physicians are ordering Afirma and approximately 150 million patients nationwide are now covered for the test through their insurers. In the first half of 2015, our revenue was $23.1 million, a 43% increase in revenue compared to the first half of 2014. At the midpoint of the year, we are pleased with the progress we're seeing as we launch our Percepta Bronchial Genomic Classifier into our next clinical area, pulmonology.

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

Number one, growth of Afirma, an increasing number of community endocrinologists and institutions are using the Afirma GEC, given it is demonstrated value in helping patients with fibroid nodules that are suspicious for cancer avoid unnecessary surgery. We are on track to achieve our 2015 goals for Afirma. Our revenue for the second quarter was $11.9 million compared to $8.7 million for the second quarter in 2014, a 37% increase.

We reported 4,758 Afirma GEC tests in the quarter, a 38% increase compared to the same quarter of 2014 and an 18% increase over the first quarter of 2015. Combined with the first quarter, we've reported 8,778 Afirma GECs year-to-date.

We continue to leverage our flexible business model to meet the diverse needs of our customers. Specifically, it is common for community physicians to utilize our full solution. They send their fine needle aspiration, or FNA, samples to Veracyte for cytopathology testing and we perform the GEC if that cytopathology result is indeterminate.

We also now offer our Afirma-enabled model to a number of regional laboratories that provide cytopathology services to community-based physician practices. Thus, if the community physician sends their FNA samples to a preferred pathology lab for cytology, then that lab sends us the samples for the GEC testing only if the cytopathology is indeterminate. Institutions such as hospitals and academic centers and health systems can offer either model, although most institutions typically have an in-house or contracted pathology lab and thus adjusted advantage of our enabled model.

Our Afirma-enabled model continues to fuel our test volume growth and also represents a higher-margin opportunity. We are reporting that in the second quarter of 2015, the number of GEC-only samples received increased by 102% compared to the second quarter of 2014. Additionally, the total number of FNAs received in the quarter was 19,986. In samples received for GEC-only testing as a percent of all FNAs received during the quarter was over 11%, up from less than 7% in the second quarter of 2014.

We believe our strong growth across both market segments also stems from the expansion of our sales team in 2014, which is working hand-in-hand with Genzyme's fully engaged sales force. Our highly productive sales team offers a unique value proposition to our customers, specifically Afirma is unmatched in its proven ability based on multiple rigorous and published studies to help reduce unnecessary surgeries and lower healthcare costs.

Our value is further reinforced by our track record of having received over 165,000 FNA samples to date for evaluation using Afirma. We've performed yearly 40,000 GECs to result indeterminate side pathology results and estimate that we've saved approximately half of those patients from an unnecessary thyroid surgery.

We also remain optimistic about our ability to continue our aggressive growth. Our customers are happy. In recent survey, more than 90% of physicians indicated they are satisfied with Afirma and the services that we provide.

Additionally, we're gaining insights about the institutional market as we deepen our sales and marketing efforts there and believe we have a significant opportunity to further penetrate that segment. We also see expansion opportunities for the community-based market, these include reaching more community physicians through the regional laboratories with our Afirma-enabled model, as well as targeting a growing number of radiology clinics to which community physicians often refer their thyroid nodule patients, rather than performing those FNAs themselves.

Outside of the US, we signed an exclusive agreement with Pronto Diagnostics to promote the Afirma GEC in Israel. Pronto Diagnostics is a leading molecular diagnostic test developer and distributor of several leading brands, non-competitive brands, in that country. As discussed on our first quarter conference call, we also entered into an exclusive agreement in April for the Afirma GEC with NewBridge Pharmaceuticals covering the Middle East and North Africa.

Both of these moves adhere to our strategy of opportunistically entering international markets where we can either team with Genzyme or a distribution partner with a great track record and where we also have strong adoption opportunity and an attractive reimbursement landscape. We reiterate that the international opportunities for sales of Afirma are relatively small as compared to the opportunity in the US in the near-term.

Our second key area for growth is coverage and reimbursement progress. In June, we signed a contract with Aetna that establishes Veracyte as an in-network provider to the insurer's more than 23 million medical members. This is important because a contract helps ensure consistent and timely payment, but it also facilitates adoption because physicians are more likely to order a test if they know the patient's insurance provider will pay for it.

Additionally, in the second quarter, we signed our second Blues contract for Afirma with Premera Blue Cross, one of the largest health plans in the Pacific Northwest. We are pleased with our momentum across the Blues network, as Afirma is now covered for approximately 20 million Blue Cross Blue Shield members with approximately 2 million of those under contract.

In total, we have approximately 115 million covered lives for the Afirma GEC and more than 120 million lives now under contract. This is impressive traction. We continue to make payer coverage and contracts a top priority with emphasis on the broad network of Blues where we have the greatest opportunity for a positive impact.

The results of the second quarter confirm that 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 and annual revenue of $48 million to $53 million.

So to summarize, we will continue to strengthen our Afirma franchise and achieve our 2015 goals by increasing the number of in-network contracts we sign with payers who have already issued positive medical coverage decisions for the GEC, securing additional positive medical coverage policies to further expand reimbursement, particularly the from the Blues plans. And driving continued uptakes of our GEC test via at the two Afirma models, but particularly are proven Afirma-enabled model across all market segments.

Before I discuss the advancement of our pulmonology program, I will turn the call over to Shelly to review our financial results for the second quarter of 2015.

Thanks, Bonnie. As Bonnie indicated, we have had a great quarter, including completing some significant accomplishments on the financial side.

In April, we executed a $40 million private placement of common stock to new and existing investors, with net proceeds of approximately $37.3 million. Additionally, in June, as a good housekeeping measure, we filed an S-3 Universal Shelf Registration statement, which provides the ability to offer for sale up to $125 million of securities in a primary offering, including the flexibility to opportunistically offer for sale up to $25 million of our common stock in aftermarket transactions.

Additionally, we have registered up to 5 million secondary shares. The shelf, which is now effective, is good for three years.

Now let me go through our financial details for the quarter. Our revenue growth was driven by additional traction in our Afirma business. Revenue for the second quarter of 2015 was $11.9 million, up from $8.7 million for the same period in 2014, an increase of 37%. Revenue for the six months ended June 30, 2015 was $23.1 million compared to $16.2 million for the same period in 2014, an increase of 43%.

Our revenue recorded for the second quarter was aided in part by the one-time pickup of approximately $240,000 as we begin to accrue several new payers. Recall that the pickup in the first quarter was approximately $285,000 and in the fourth quarter of 2014 was approximately $800,000. Note that in the second quarter, we accrued revenues of $6.6 million or 55% of our total revenue due to several new payers meeting our criteria to make a reasonable estimate of reimbursement. This is up from 30% accrual rate in the second quarter of 2014.

We reported 4,758 Afirma GEC tests during the second quarter of 2015, a year-over-year increase of 38%. Of note, we did experience the typical seasonality that we expect to occur as the number of tests conducted in a second quarter was 18% higher than the preceding quarter of 2015.

Our gross margin, quote/unquote, for the second quarter of 2015 was 57%. Our gross margin percentage can change due to the lumpiness of payments. We expect the gross margin to fluctuate quarterly.

As we previously indicated, our annual 2015 gross margin will be relatively flat compared to 2014, absent an increase in the average reimbursement for the GEC. We believe the GEC reimbursement rate will remain fairly static until we secure coverage or contracts that yield increased payments from major Blues plans.

Operating expense for the second quarter 2015 was $21 million compared to $15.2 million for the comparable period in 2014. Let's break this down into its component parts.

Cost of revenue for the quarter ended June 30, 2015 was $5.1 million compared to $4 million in the comparable period in 2014. The increase was due primarily to higher variable costs related to the higher number of samples processed.

Research and development expense for the second quarter of 2015 was $3.1 million compared to $2.2 million for the same quarter in 2014. The increase was due primarily to increases in personnel and stock-based compensation and a consulting facility and equipment charges.

We expect that our research and development expense will increase as we continue to invest in Afirma, Percepta clinical utility studies, and clinical validation studies in our ILD program. Selling and marketing expense for the second quarter of 2015 was $6.9 million compared to $5.1 million in the second quarter of 2014. This increase was due to an increase in headcount of our sales force and the associated costs of the additional personnel, including related stock-based compensation expense, as well as increases in marketing expenses, offset by a decrease in the Genzyme co-promotion fees.

Recall that our rate for Genzyme payments was reduced to 15% of US cash received effective January 1. We expect our selling and marketing expense will increase in 2015 due to investment in our lung product portfolio stemming from our launch of Percepta ahead of plan.

General administrative expense for the second quarter of 2015 was $5.5 million compared to $3.9 million in the same quarter of last year. The increase was due primarily to an increase in personnel and stock-based compensation, higher professional fees, including higher accounting, audit, legal, and consulting, and other corporate expenses.

Importantly, we announced, in April, the signing of a new lease on an adjacent building to enable us to scale the organization. Thus, our spend for the remainder of the year in the first quarter of 2016 will increase. While we do not begin to make rental payments for our new headquarters space until April of 2016, following the expiration of our current lease and build-out of our new facility, in accordance with generally accepted accounting principles, the rent is expensed on a straight-line basis over the lease period. Prior to beginning to utilize the space, this rent expense is being charged to G&A and the amount is approximately $500,000 per quarter.

Intangible asset amortization, a new line item this quarter, began when we launched Percepta in April. We reclassified the indefinite live intangible asset for IP R&D to a finite live intangible asset with a cost of $16 million and will amortize it over 15 years. The estimated useful life of the asset using the straight line method. The expense in the quarter was $270,000 which will be the amount in subsequent quarters. This is a non-cash item.

Net loss for the second quarter of 2015 was $9.1 million or $0.35 per common share compared to a net loss of $6.7 million or $0.31 per common share for the same period in 2014. Cash and cash equivalents as of June 30, 2015 totaled $51 million compared $25.8 million at the close of the first quarter. This includes proceeds from the previously mentioned pipe financing in April.

In terms of cash burn, we had higher operating expenses, which resulted in higher net loss. We incurred the final of our catch-up payments to Genzyme from the restructuring of our relationship back in 2013 equalling $2.7 million. We significantly brought down our payables and finally, we experienced higher receivables with certain payers that we accrue, which accrue which we believe is reversing itself this quarter.

We do expect that our cash burn for the remaining two quarters of the year will moderate, but will still be above last year's quarterly burn level, without M&A-related expenses, due to some one-time spend related to the costs of building out our new facility and our move.

With that, I will now turn the call back over to Bonnie to address our portfolio expansion strategy.

Thanks, Shelly. Let's now move to the third key area that defines our success, the advancement of our pulmonology program.

The expansion of our product portfolio is underway as we engage with early adopters of our Percepta Bronchial Genomic Classifier designed to help patients avoid unnecessary invasive procedures as part of lung cancer diagnosis. We are focused on building the clinical evidence needed to secure coverage for the test.

Three months ago, ahead of schedule, we launched Percepta and began testing patient samples in our CLIA-certified laboratory. As we did with Afirma, our goal is to work with a limited number of sites, approximately 50 to 75, as we fine-tune our service delivery and compile the clinical data needed to approach Medicare for reimbursement. This includes studies to demonstrate how Percepta changes clinical practice. We are well on our way with nearly 25 sites signed on or in the process of signing on to get their patients access to the Percepta test.

Our initial efforts have been listed publication of our AEGIS I and II clinical validation studies in the New England Journal of Medicine in conjunction with our presentation at the American Thoracic Society International Conference. Many of you joined us for conference call from ATS in which Dr. Avi Spira, Professor of Medicine at Boston University School of Medicine, provided insight into how the test can help pulmonologists identify patients whose lung nodules are at low risk for malignancy following and inconclusive bronchoscopy. This enables these patients to be monitored with CT scans in lieu of an invasive diagnostic procedure.

Our Percepta-related milestones include completing and publishing our clinical utility and analytical validity studies so that we can approach Medicare for coverage. We reiterate our expectation that meaningful revenue from Percepta sales will not occur until 2017. We also remain on track to expand our pulmonology offering with the 2016 launch of a second product, this one targeting idiopathic pulmonary fibrosis or IPF.

Our IPF product generated significant excitement at the ATS conference where Veracyte's Chief Scientific Officer, Julia Kennedy, presented initial clinical data demonstrating the ability of the molecular classifier to help distinguish IPF from other interstitial lung diseases using samples obtained for bronchoscopy, the same type of sample we will use in commercialization. The ATS presentation was amplified by the publication of a paper outlining the classifiers development, which appeared in the Journal Lancet Respiratory Medicine.

Similar to Afirma, we are deploying rigorous science and clinical studies to develop and validate the performance of our pulmonology offering. This upfront work will be key to adoption and reimbursement and ultimately, in changing the standard care in lung disease diagnosis.

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

(Operator Instructions)

Dan Leonard, Leerink.

Thank you. To start off, can you comment at all about the pacing of your thyroid volume expectations through the balance of year? Are you still expecting seasonality in Q3 and a big pop in Q4?

Yes, we would expect the cadence for the year to be very similar to the way it has mapped through the quarters in prior year. The difference is, I think, with our Afirma-enabled model showing such momentum and driving a significant part of the GEC growth, we have an institution portion of that business that hasn't been as significant in prior years. But the expanded sales team, coupled with Genzyme team, is up to speed. The covered lives now with that being over 150 million and the in-network contracts that we have obtained, we believe we're in excellent position to continue to drive the growth to achieve those goals.

Got it. My follow-up question, Bonnie or Chris, can you comment on the impact of the new sales reps and how the productivity is comparing versus expectations?

Yes, this is Chris.

We're right on plan with what I expected. Typically it takes folks some time to get up to speed and get nimble in being able to talk about the product and navigate through it and you can see that in the results this quarter. We expected people to be hitting full productivity around now and we're seeing that happen. We feel like they're right on track and tracking really well. I would add that the relationship with Genzyme continues to go well and continue to work really in synergistic ways.

The new reps that we've had in the field have really gotten into a nice rhythm working with them. Because if you remember, the relationship and the responsibilities changed a bit where they would help us focus on identifying leads and maintaining accounts, and our folks would focus on the transaction engine in between those two things. That rhythm has really gotten into a nice cadence and you see that with a tremendous quarter-over-quarter growth, and then, obviously, annual growth.

Okay, thank you.

Thank you, Dan.

Amanda Murphy, William Blair.

Hi, good afternoon.

Just a question on the impact of in-network contracts. Can you remind us again, I know obviously there's presumably a volume benefit from the contracted, Aetna, United, et cetera. But can you remind us how that works in terms of ASP and from a P&L impact so we have that all set?

Yes, it is Chris.

First of all, the most significant impact from in-network from contract status with these insurance players or insurance plans is that it gives the physicians the confidence to be able to order the test and order the services that we provide without fear of the insurance company harassing them for having used an out-of-network vendor. That pressure is significant that the insurance companies put on community physicians or actually any physician, quite frankly, to not use non-contracted players.

So removing that barrier, we think, helps and is really key, ultimately, to unlocking growth. When you talk to people about the single biggest thing that holds them back in market surveys, et cetera, some of which have been published, it's the payer issues. It's not just coverage, but it's primarily contracting.

The way it works with price is that we typically, our strategy has been to focus on getting the product covered and then appealing the claims close to the contract -- the billed price. The reason that we do that is we want to establish as much leverage as we can in the negotiating discussion.

When you contract, the payor expects -- the payer typically expects to get a discount off of what they've been paying because they're letting you into their network. So you end up getting less on an allowable basis, that's that number that appears on an EOB that says this is how much is allowed. That's typically less when you're contracted than when you're non-contracted.

But the patient ends up paying less because contracted patients that are being adjudicated in-network typically can end up paying a much smaller piece than out-of-network patients. While we try to collect that, it's always tougher to collect those amounts from patients than it is. So you end up -- we always think we end up at roughly the same spots across the board, but there is some shifting. Does that make sense, Amanda?

Yes.

I think one of the things you had talked about initially was, as you shift to accrual accounting that would drive this inflation of realized ASP over time, over the course of many years. Is that still the way to think about it?

Or as you bring these contracted payers online, is it going to be more? I realize when you give guidance for this year, but just thinking long-term, is it going to be more of a flat dynamic as you have the puts and takes of the contracted payers coming online?

It's Shelly. A couple of answers to that, first, on contracts, we're obviously probably going to have an easier time getting a reasonable estimate of what we expect to collect quicker than we would for those who are not under contract. So that's the criteria for being able to accrue, that's one.

Two, you will then get a bump in the first quarter when you're able to accrue new contracted payers or other payers. So we do try to point that out to you.

I think over a period of time, as you get more and more under contract, and you have less patient pays and such, we should be able to see that rate of collections go up. But I would say that, for this year, we have indicated it would be fairly flat and it's just over $2,200 now.

We don't expect that to move a lot until some of the Blues, more of the Blues, begin to switch over into either coverage or contracts. As you're asking out several years, yes, of course, we would expect that the average collection rate would go up over time as more come into contract and into coverage.

Got it.

Last one, switching gears to Percepta. I know it's early, but now that you have that launched and commercial, what's the initial feedback in terms of how physicians are using it relative to our expectations? Recognizing it's early, but are people using it in line with how you thought in terms of dictating central treatment options and whatnot?

We are actually pretty enthused to have 25 sites in play. We have a number of sites that have already sent repeat samples from their own institutions for testing, which is good. They are using the product right in line with the way that we planned on positioning the product, which is to test patients post-bronchoscopy to be able to risk stratify those patients and then follow them as opposed to taking them in for an invasive procedure when the results are reduced to low risk.

We're very pleased. I think a lot of confidence was built when the validation studies came out in the New England Journal of Medicine. It was a huge win and a very timely for us and I think that's driven a lot of the confidence and the enthusiasm to make the test available to patients.

Got it. Thanks very much.

Thank you.

Bill Quirk, Piper Jaffray.

Great, thanks. Good afternoon, everybody.

Good afternoon.

First question is just thinking -- again, going back to the GEC guidance, Bonnie, can you help us think a little bit about what the biggest swing factors would be between the low end of that and the high end of that?

Yes, I think that the factor that's having more of an impact this year on driving the growth rate quarter over quarter is the enabled model. Where we are now feeding that in institutions, which is driving nice growth, but also beginning to tap some of the physician offices that may have been blocked because of the cytopathology piece being able to now enable some of these regional laboratories to pull through the physician office business as GEC only.

So as we see the new accounts that are being set up and brought on board, the opportunity to go deeper in these larger institutional accounts, which is a little bit different dynamic in driving the growth there than in the physician office where you don't have as much opportunity to drive deeper growth. All of those metrics are lining up quite nicely with the way that we expect the volume to grow from this point through the end of the year.

Okay, got it. Then one for Shelly, regarding the big increase here in sales and marketing expenses, were there any one-time or extraordinary spending at all that happened in the quarter? Obviously we heard your comment that we should expect this to continue to rise to support several different programs, but just curious if there's anything, like I said, extraordinary in this quarter's print?

I'll start and then I'll turn it over to Chris if he has anything to add. First off, we do have some variations in things like bonus payments, one quarter versus another quarter. We do have the full complement of heads that we hired last year who are now on track to have a full-year. We have that whole group now for the full quarter, obviously, that has increased. We have the reduction, of course, of the Genzyme payment, which is why we hired a lot of those folks earlier last year, in preparation for that, so that went from 32 to 50 and that's an offsetting factor.

We have begun to do some marketing, specifically for Percepta, and we always indicated that we would have some pulmonology marketing spend this year, so that has also appeared in this quarter. So those are some of the biggest variables that impacted this quarter.

Those are the bigger variables. The only thing I would add is that we did do some step-ups in marketing spend that are one time to invest more in some segmentation work around the community or not the community, the institutional markets. Because as we are getting traction there, wanted to make sure that we really understood what was going on in that segment. There is some one-time stuff there around market intelligence that we spent.

Okay, very good, thank you.

Market intelligence segmentation, I should say, for Afirma.

Very clear, thank you.

Steve Beuchaw, Morgan Stanley.

Hi, good afternoon, everyone. I have one for Chris and then one for Shelly and Bonnie. Chris, nice to see the progress continue with some of the Blues plans. There are, of course, still a couple of big fish out there.

Just curious if you had any new thoughts around how progress is going? If there's been any incremental progress with the Blues, more broadly? Then again for Shelly or maybe Bonnie, I actually would build on Bill's question regarding the spend in the quarter.

When I look the spend in the quarter, the capital raise, and the shelf registration, it makes me wonder about the ambitions of the Company in a bigger way and maybe even a longer-term way. I look at this and I think wow, these guys want to invest more aggressively to build and perhaps even to think about acquiring additional or new technologies. Am I on the right track here, and can you give us any perspective on how you're thinking about the business with that much access to capital?

Thanks so much.

Sounds good, Steve.

I will start with the Blues covered lives. Like we said, we're at around 20 million and the two big ones we still need to get under our belts are Anthem, which has about 37 million, and HCSC, which is the Blue Cross holding company, if you will, for Illinois and Texas, along with, I think, another one. There at about 16 million and then there's a bunch of other Blues plans that at 24, that tend to be smaller and so we just keep at it.

This is -- getting contracting is a commercial discussion, but getting covered is not. Getting covered is their medical policy folks working to understand the evidence, et cetera. And I would say that there continues to be evidence that is published showing that physicians are following GEC benign patients and indeed, those results are durable. Those studies have been published throughout time, where centers are publishing their perspectives and that's all been consistently positive.

We feel good that, as time goes on, the tests will be covered and I've always believed and said that these test don't get stuck here, it's only a matter of time before they fall, but I can't predict when that happens because it's not really a sales cycle where we are engaged in discussions on an ongoing basis with them, we tend to send them evidence and they move at the rate that they move.

That's just the way the medical policy works, but we're really gratified that we are where we are and that we've made as much progress as we've made with the Blues because it is the toughest nut to crack and we feel like we're making significant headway with it.

Chris, you've been doing this for a while, have you found that one Blues plan tends to have influence on another, just by virtue of being a part of that Blues group?

Absolutely. It has always been my belief that the most influential Blues plans to get is your home state. Because the old way that the Blue card program used to work, which is no longer in existence, was that you would send all your claims through your home state and then the claims would be adjudicated according to the policy of your home state. So the historical legacy of the entire Blues system was that your home state was key.

That's not really the case anymore, but if you can't get your home state, you're not going to be able to get some of the other Blue Cross plans to jump on board and cover you. Blue Shield of California covered us at the end of last year and we always thought that was a really big deal and showing that, indeed in our own backyard, Afirma was a covered product.

I've always believed that was the most important to signaling to the rest of the Blues that this is something that's valuable and is worth covering. As that's happened, we've seen them continue to fall. But this is a journey, we've always said that.

Thanks.

With regard to the spend and the shelf and some of the financing aspects, clearly, we are in a position to continue invest and make sure that the accelerated growth of Afirma and the GEC continue and that's our number one priority and we intend to do that. With the introduction of Percepta this year, while the spend is not significant, we do want to be very prepared in advance of being able to ramp very quickly once we do achieve success in getting a Medicare coverage decision.

We think having the New England Journal of Medicine article under our belt was a great step forward in building the type and level of evidence that they're going to want to see in making that decision. A little bit of the timing of the shelf is more the good housekeeping of just getting things in place so that we are prepared if we need to pull any of those levers at the time when it makes sense to do so.

Keeping in mind, we have the ILD product for IPF coming to market next year. It won't get a huge significant investment until we get it to the point of being able to gain coverage, but we've built quite an amazing type line. We believe the timing of each of these products and the one and a half to two year span between them sets us up really nicely to continue to grow the top line for a period of time and we want to make sure we're prepared and ready to make those investments at the right time. We certainly have been transparent that we would not be opposed to finding other Allegro-like assets.

Being able to acquire a product and bring it to market within six months with a $17 million investment and begin building the growth that will give us a great ROI on that is probably more cost effective in some ways quicker returns than you get on your internal programs because of the length of time it takes to get these products from concept to launch. We feel like we're in really good shape with $51 million in the bank now and the moderation of spending going through the back half of year that Shelly mentioned.

We do think that cash will last us for a good amount of time and no need to worry about doing anything immediately, but when the need comes up, we now have all the tools in place that we think we'll need.

The only other thing I would add is, as we think about scaling the organization, we will have some of this upcoming cost for moving facilities and that should enable us, that lease is for a long time, so that should enable us to grow as quickly as we would like to grow. So those will be new costs coming up and we just started experiencing some of those costs in the second quarter, so that is all related to growth.

Then also the IP R&D amortization, which started in this period, which will aggregate over -- just over $1 million out over the straight line 15-year period and so those are additional costs when you look at what the spend was in this quarter. We do expect that those will go down in the next two quarters.

Very helpful. Thanks, everyone.

Okay, thank you.

Doug Schenkel, Cowen and Company.

Hello, this is Chris on for Doug today. Thanks for taking my question.

Can you help us think about how the recent merger activity in the health care insurance world impacts reimbursement for Veracyte? Cigna and Aetna are important payers for you, so any insight as to what may happen over the next few quarters would be appreciated.

We think that it'll be interesting to see how it all evolves and how it unfolds in front of us. We think that, in general, that keeping the network integrity together is important to them, and we've been led to believe that any changes they make will be made over time. So there some risk in this happening, but there's some upside in this happening, quite frankly, as they try to harmonize things.

So I think it works both ways for us. But overall, we think that they're more likely to continue to cover and provide Afirma to their members and enlarge that than anything else. Because taking away services is typically not what they're going to do as result of this, because they're not going to try to make their service offering less compelling by taking things away. That's how we view it.

But it's going to take time for these mergers to come together and work through regulatory pieces, and as they harmonize and put things together, we don't expect the medical policy stuff to come together at any rapid rate. But I think there's upsides to this as much is there's downsides, and that's how we're viewing it.

Not relatedly, but I wanted to get some more detail on a sequential Afirma volume growth. Last year, Q1 to Q2 volumes increased about 600 sequentially, this year increased about 700 sequentially. Now you have a larger sales force and there have been other marketing efforts undertaken, so I guess the question is, is the sequential pick up in volumes this year where you would have expected?

Last year, our Q2 growth over Q1 was about 11% in GECs reported. That grew to 18% quarter over quarter this year. So we're really pleased with that greater acceleration moving into Q2.

Last year, we saw seasonality, as we have in prior years, in terms of Q2 to Q3. As I said, we have predicted that in our own model, but may see some offsetting of that given that the institution part of our business is coming on stronger this year than what we had last year. Then the end of the year is always our biggest growth quarter of the year.

People deductibles are used up and a lot of people try to get elective testing and things like this done before the end of the year. So with the cadence that we would expect being at just almost 9,000 samples mid-year with the type of growth we would expect going through the next two quarters, we think we're very nicely set up to achieve the goal.

Okay, great. Thanks for taking my questions.

You're welcome Thank you for the call.

Karen Koski, BTIG Research.

My first question, there's definitely been a tad more noise out there about potential Afirma competition as of late. Obviously, you have a nice head start in the market. You have excellent data, good progress with insurers, et cetera.

Are you seeing competitive reps in the field at all? Given the penetration remains quite low in the market, is it fair to think that these additional players might actually help boost market growth?

Yes, so there's been noise -- actually some of the competitive noise started several years ago when Asuragen was trying to bring their products to market. While usually the noise is posters and new data and things at shows, we actually have not had tremendous impact at the commercial level with any of the competition. I'll let Chris speak to that more carefully.

But the surveys that we do continue to support that Afirma is the, by far, most well-recognized brand; that customers and even non-customers have a very, very strong opinion of the quality of the brand; that it is recognized as the test that is validated and that has gained their confidence in being able to keep patients out of surgery. So all of the stars align with continuing to support the robust growth we've seen and I think the broader competitive landscape is still pretty much the status quo: patients being taken to surgery because that's what physicians have been comfortable doing for years.

That doesn't come up as competition, but clearly, that is the number one competitor to the use of Afirma. As Chris mentioned earlier, not having all insurance carriers, having us under in-network status, that, too, is one of the barriers in continuing to drive and accelerate the growth.

Chris, any other color?

I think your point, Karen, is dead on that we're making a market here and as you make a market, the more noise that's created by other people out there actually helps you make a market. So I think on balance, this is all positive to have all these folks out talking about different approaches and products and Afirma just shines in that environment.

Great, that's very, very helpful. Then, just thinking about Percepta, it's a different test than Afirma. It's a different market, different doctors. You are at a different place as far as reimbursement. But can you compare and contrast what's been similar so far? Maybe what's gone better than you expected and what seems to be taking a little bit longer?

Yes, so it is very early, but we're repeating the same playbook we used with Afirma. Probably the one key difference is the fact that most of the Percepta samples will be collected in the institutional setting as opposed to doctors' offices, because that's where pulmonologists practice. So the amount of knowledge that we have gained over the course of the last 12 months with our entry and acceleration in this institution side of the business actually is quite useful and helpful in leveraging that to know how to navigate some of these institutions.

We have some sites that were Afirma sites that came on as early adopters for Percepta. I think that some of that comes from the reputation that we have built with the Afirma and GEC, as well as the study, the validation studies getting published in a top-tier journal. So we expect that the playbook will be getting the published evidence out there, which is what we are very focused on. We hope that the published evidence will move guidelines and that guidelines will drive reimbursement.

We will be in a situation where we will be already considered an in-network service provider to many of these payers by the time we start having those conversations. Medicare covers over half the patients for Percepta where they only cover about 20% for Afirma.

So there are differences, but we think where we have the ability to leverage what we've already done, follow that same playbook, learn from the institutional model from Afirma to drive acceleration into these institutions. And lastly, we're going to be in very different place on the payer contract and reimbursement side with Afirma because of all the relationships we'll already have as in-network providers. Chris, anything to add?

No. I think that covers it well.

That's great color. Thanks so much for taking the question.

Thank you.

(Operator Instructions)

I am showing no final questions. I would now like to turn the call back over to Bonnie Anderson, President and Chief Executive Officer, for closing remarks.

Thank you, operator.

At the mid-year mark, our focus remains intently on further growing our Afirma business. We are on track with our revenue and volume 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.

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