Veracyte Inc (VCYT) 2015 Q4 法說會逐字稿

Good day ladies and gentlemen and welcome to Veracyte's fourth-quarter and full-year 2015 financial results webcast.

(Operator Instructions)

I would like to introduce your host for today's conference, Ms. Shelly Guyer, Chief Financial Officer. Please go ahead.

Good afternoon everyone and thanks for joining us today for our fourth-quarter and full-year 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 or its management's intentions, beliefs, expectations and strategies for the future, including those relating to scale and sustainability, future growth, future revenues and expenditures, coverage and reimbursement for thyroid and pulmonology tests, strategic investments, product launches, 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 Security and Exchange Commission in addition to today's press release. The forward-looking statements as in this call are valid as of March 10, 2016, and Veracyte assumes no obligation to publicly update these forward-looking statements.

Our financial results press release for the fourth quarter and year ended December 31, 2015, crossed the wire a short while ago and is available on the investor relations page of our website at www.Veracyte.com. I will now turn the call over to Bonnie.

Thank you, Shelly. Good afternoon everyone and thanks for joining us today. I'm excited for the call today and the opportunity to share with you that we achieved all the goals we set out to accomplish when we did this call a year ago. We have tremendous momentum coming off of a great 2015.

I'm also eager to lay out another set of aggressive goals for the business in 2016 as we continue to resolve the important healthcare issue of diagnostic ambiguity, delivering significant value to patients by helping them avoid surgeries they don't need and saving the healthcare system money. We are emerging as a growth story with a solid foundation to our business.

I'd like to start with highlights of each of the three areas that we have used to define success in 2015. Number one is the growth of Afirma. Our Afirma growth was robust in 2015. We grew revenue by 30% to $49.5 million, compared to $38.2 million in 2014.

We also increased Afirma Gene Expression Classifier, or GEC, test volume by 38% for the year to nearly 20,000 tests, compared to just over 14,000 in 2014. Our focused and methodical execution was key to our success. This included a growing body of powerful clinical evidence for Afirma, where we now have nearly 20 scientific studies published in peer-reviewed journals. Among these are more than a dozen clinical utility studies including two recent long-term durability studies, showing that the Afirma GEC safely reduces surgeries with up to three full years of follow-up.

We also achieved inclusion of Afirma GEC in the American Thyroid Association's clinical practice guidelines in October. The Afirma GEC is the only genomic test with a high enough sensitivity and negative predictive value proven in multiple rigorous clinical trials to be recommended as an option for ruling out cancer when a patient's thyroid nodule is indeterminate. These and other practice guidelines are helping to firmly establish the Afirma GEC as the molecular test that helps keep patients out of the operating room.

Lastly, we announced today that we are concluding our US co-promotion with Sanofi Genzyme as of mid-September, which will allow us to expand our internal sales team and retain the full value of Afirma. This was a key component to our pathway to profitability and we will discuss the Sanofi Genzyme transition a bit more in detail later on.

Number two is payer coverage and contracts. We delivered an exceptional year in this area. We added 40 million covered lives for the Afirma GEC since the beginning of 2015, bringing the total to nearly 180 million covered lives today. We added seven new Blues plans, a key target for us for a total of 15 covering Blues plans, representing more than 45 million members.

We capped a successful year with a big win in December with HCSC, one of the nation's largest two Blues plans, issuing a positive coverage policy for the Afirma GEC, deeming it medically necessary for their 16 million members. We also expanded the number of in-network contracted lives for Afirma by 40 million, growing from approximately 90 million at the beginning of 2015 to nearly 130 million today.

Key milestones were securing a contract with Aetna for its more than 23 members which we announced in July, and also bringing five Blues plans under in-network contracts during the year. We believe that the effectiveness and speed in which we have gained coverage and in-network contracts for the Afirma GEC is unmatched in our industry. We also believe that these achievements establish a crucial foundation for our future success by reinforcing the value of our tests and by providing tremendous leverage for reimbursement of Percepta, our test for IPF, and for other products that we might commercialize.

Lastly, advancement of our pulmonology program. Our pulmonology business is off to an impressive start. We entered this market ahead of schedule in April with the launch of Percepta Bronchial Genomic Classifier, a novel test designed to help reduce the number of unnecessary invasive procedures on potentially cancerous lung nodules that are found on CT scans.

Pulmonologists are enthusiastic about Percepta, and we've rapidly expanded initial adoption to about 40 clinical sites around the country. Strong clinical validation data for Percepta were published in the New England Journal of Medicine in July, as well as in BMC Medical Genomics in May. Additionally, just last month our analytical verification data were published online in BMC cancer, establishing the quality and reproducability of our testing process.

Most importantly, findings from our first clinical utility study were published online in the journal CHEST, suggesting that the test may help reduce unnecessary invasive procedures by nearly 50%. This significant clinical evidence puts us in a very strong position to secure Medicare coverage by the end of 2016. Reducing unnecessary surgical biopsies and lung cancer diagnosis becomes especially important to payers, as 8 million Americans are beginning to enter the annual lung cancer screening programs which are now covered by insurance.

Significant progress was also made in moving our second pulmonology product, our test to improve the diagnosis of interstitial lung diseases including idiopathic pulmonary fibrosis, without the need for surgery toward launch. We presented strong data for IPF classifier at the pulmonary fibrosis foundation summit in November, and prior to that the American Thoracic Society international conference in May.

We also partnered with the Pulmonary Fibrosis Foundation, a leading resource for the IPF community, on a survey to define and quantify the significant diagnostic challenges faced by patients with suspected IPF, or other ILDs. Results of this intensity survey were presented at the PFF summit in November. We learned that 55% of ILD patients were misdiagnosed at least once during their journey, and that delays of up to a year in receiving an accurate diagnosis were quite common.

We also presented data at the conference demonstrating the challenges that physicians face in ILD diagnosis. These findings further reinforce the significant opportunity for our test to change the trajectory of care for patients with IPF or any other ILD.

I'd like to take a moment to speak to the challenge last fall when the Centers for Medicare and Medicaid services, or CMS, announced preliminary pricing which rates for the Afirma GEC would have been reduced. This was a surprising disappointment and was obviously unsettling to investors. Nevertheless, we prevailed when CMS made its final determination in November, to gap fill the Afirma GEC rate, based on current Medicare prices. With this process now underway, and with the implementation of PAMA or the Protecting Access to Medicare Act, which is expected in early 2017 or 2018, we believe that for the first time we face stability around Medicare pricing for our products. Following PAMA implementation, Medicare rates will be based on private payer payment amounts, which should benefit us.

We also believe the FDA is progressing toward issuing guidance for how it plans to regulate laboratory developed tests, or LDTs, such as ours. While details of the final FDA guidance remain to be seen, we are optimistic that the agency will implement its regulations in a manner that ensures a smooth transition for companies like ours that have proven their commitment to quality and clinical rigor. I mention these as we are optimistic that these two external matters coming to resolution we can grow our Company with greater clarity, and investors will appreciate the increased certainty and stability of our business.

Finally at the corporate level we strengthened our corporate structure in 2015 by recruiting Doctor Rob Epstein and Doctor Tina Nova to our Board of Directors, and by adding Doctor Neil Barth as our Chief, new Chief Medical Officer. We are delighted to have such a strong group of industry leaders and veterans now on our team. I will now turn the call back to Shelly to review our financial results for the fourth quarter and for the full year.

Thanks, Bonnie. As Bonnie indicated, we experienced strong revenue growth during 2015. Our revenue for the fourth quarter was $14 million, up from $12.2 million for the same period in 2014, an increase of 15%. Excluding one-time revenue pickup in the fourth quarter of 2014 of over $800,000, the revenue increase was 23% for the fourth quarter of 2015 compared to the same quarter of the prior year.

Our revenue for 2015 was $49.5 million, a 30% increase compared to 2014 revenue of $38.2 million. Of note, we accrued 58% of revenue in the fourth quarter of 2015, up from 41% in the same period of 2014. For the full year we accrued 55% of revenue.

We reported 5,609 Afirma GEC tests during the fourth quarter of 2015, a year-over-year increase of 38% and up 11% over the third quarter. 13% of total FNAs received in the fourth quarter were for GEC only testing, predominantly from our institutional accounts. For the full year 2015, we reported 19,421 Afirma GEC tests, a year-over-year increase of 38%. 12% of total FNAs received in 2015 were for GEC only testing, up significantly over the 7% rate in 2014.

Our gross margin, quote unquote, for the fourth quarter of 2015 was 56%, which is comparable to previous quarters. For the full year we achieved a gross margin of 57%, the same as in 2014. We had previously indicated that our gross margin would not increase substantially in 2015 because of our limited ability to expand reimbursement for the Afirma GEC without coverage from a major Blues plan, and because of continued pricing pressure on cytopathology reimbursement.

Operating expense for the fourth quarter of 2015 was $22 million, compared to $20.3 million for the comparable period in 2014. Operating expense for full year 2015 was $83 million, compared to $67.2 million for 2014, a year-over-year increase of 23%. Let's break this down by line item.

Cost of revenue for the fourth quarter of 2015 was $6.2 million, compared to $4.9 million for the comparable period and quarter of 2015. For 2015 cost of revenue was $21.5 million, compared to $16.6 million in 2014, a year-over-year increase of 29%. The increase was due primarily to an increase in GEC testing which has a higher cost to run than cytopathology, offset in part by continuing refinements in our test processes and economies of scale related to the increase in GEC tests processed.

Research and development expense for the fourth quarter of 2015 was $3.3 million, compared to $3.2 million for the comparable quarter in 2014. Research and development expense was $12.8 million for 2015, compared to $9.8 million for 2014, a year-over-year increase of 31%. The increase was due primarily to increases in personnel, stock-based compensation, and laboratory expenses and to continued investment in product development and clinical studies to support Afirma, Percepta, and our IPF test.

Selling and marketing expense for the fourth quarter of 2015 was $6.7 million, compared to $7 million for the comparable quarter of 2014. For 2015, selling and marketing expense was $25.3 million, compared to $21.9 million in 2014, a year-over-year increase of 15%. This increase was due to an increase in headcount of our sales force, including commissions and related stock-based compensation expense, as well as increases in consulting and marketing expenses, offset by a decrease in the Sanofi Genzyme co-promotion fees as our rate dropped from 32% to 15%, effective January 1.

General and administrative expenses for the fourth quarter of 2015 was $5.5 million compared to $5.2 million for the comparable period of 2014. For 2015, G&A expense was $22.6 million compared to $18.9 million in 2014, a year-over-year increase of 20%. We had increased expense due to headcount accrued bonuses and stock-based compensation, as well as increases in professional fees including accounting, audit, legal, and other corporate expenses.

Note that in both years, there was heightened expense due to one-time events in 2014 related to acquisition of Allegro, and in 2015 related to rent expense for our new facility. The latter is included in G&A prior to our beginning to utilize the space and totaled approximately $420,000 for the fourth quarter and $1.1 million for the full year. Expense our new facility will continue in the first quarter of 2016 as we complete our move and exit our old lease at quarter's end.

Intangible asset amortization expense, a new line item as of the second quarter of 2015, was $270,000 in the fourth quarter which will be the amount in subsequent quarters. This is a non-cash item. Operating loss for the fourth quarter of 2015 was $8 million, compared to a net loss of $8.1 million for the same period in 2014.

Operating loss for 2015 was $33.5 million compared to a loss of $29 million for 2014. Net loss for the fourth quarter of 2015 was $8 million, or $0.29 per common share, compared to a net loss of $8.1 million or $0.36 per common share for the same period in 2014. Net loss for 2015 was $33.7 million, or $1.30 per common share, compared to a net loss of $29.4 million or $1.36 per common share for 2014.

Cash and cash equivalents as of December 31, 2015, totaled $39.1 million. Our total cash burn for the fourth quarter was $7 million, lower than expected due to the tenant improvement credits we received in the fourth quarter. For 2015 our burn excluding financing activity was $33.7 million, versus $36.6 million in 2014.

One final metric for 2015. Our average reimbursement for the GEC was essentially flat at $2,200. Recall that this number is a lagging indicator, looking back to payments on tests that were conducted about a year ago. This number will fluctuate quarterly as new contracted rates are established and co-pays and deductibles reset early in the year.

Our average reimbursement rate has moved up recently as have achieved coverage with more Blues payers, but we expect that this metric will likely only move significantly when we sign Blues contracts and gain additional Blues coverage. Before turning the call back to Bonnie to discuss our 2016 guidance and milestones, I would like to remind you of a few historical trends that we expect to continue this year. First is seasonality.

We typically have low to flat volume quarters in the first and third quarters and strong cash collections driving higher revenue in the fourth quarter. Secondly, we experience one-time pickups when we begin to accrue revenue. Either due to new contracts or improved payment history. This can make our quarterly revenue a bit lumpy.

Lastly, I'd like to provide some color on our operating spend and cash for 2016. Operating expense is expected to continue to decrease as a percentage of revenue in 2016 over 2015. Cash burn will be about the same in 2016 as it was in 2015. For both of these metrics, however, the first half of the year will be higher, with a nice decline in the back half of the year as we exit the Sanofi Genzyme relationship and begin to experience more efficiencies in the business.

Finally in terms of our cash position, we anticipate needing additional capital to bring all three products to revenue generation and ultimately to achieve profitability. Given the current state of the equity markets, we've decided to pursue a debt financing in order to increase our cash on hand. This will give us sufficient runway to execute our growth strategy while retaining flexibility to tap the equity markets if they improve. We will announce the details of this transaction when it is closed. I will now turn the call back over to Bonnie to discuss guidance and corporate milestones for 2016.

Thanks, Shelly. We view 2016 as a breakout year for us. Within five years of launching our first test we are now poised to have three commercial products by the end of the year, with all three generating revenue by the end of 2018. Our success this year will help give us a clear pathway to profitability and will firmly establish Veracyte on the map as a significant and differentiated provider of diagnostic solutions that deliver real clinical value to patients, physicians, and payers.

For our 2016 guidance we expect GEC test volume will be in the range of 24,000 to 25,500 tests, annual revenue will be in the range of $59 million to $63 million. I would now like to conclude by discussing the metrics we will use to measure our success in 2016. They are Afirma growth and reimbursement expansion, Percepta coverage, and the launch of our third commercial product for IPF.

Some highlights on each of these. First, Afirma growth and reimbursement expansion. We will continue to drive growth of Afirma using our two proven models, the full solution and what we are now calling our Afirma diagnostic partner model, to further penetrate every segment of the market.

We will expand our internal sales team and assume full sales and marketing responsibility for Afirma as we transition from our Sanofi Genzyme relationship. We will do this thoughtfully in order to optimize the efficiency of our sales and marketing organization. The termination of our co-promotion agreement in the US as of mid-September will end the payment of 15% of Afirma revenue to Sanofi Genzyme, and it will allow us to retain the full value of our Afirma solution. We've valued our relationship and are confident that both companies will work closely to ensure a smooth transition. To accommodate this change, we will hire approximately 10 new dedicated sales associates in addition to our current team of 28, to continue driving our business forward. And ultimately, we will exit 2016 with reduced sales and marketing spend as a percent of revenue, with a more efficient, yet effective sales effort.

Our top priority on reimbursement is securing additional payer coverage decisions, especially from Anthem, the largest Blues plan with over 40 million covered lives. Additionally, we will continue to convert coverage decisions to contracts, making us an in-network provider which facilitates further adoption and ultimately expansion of our GEC reimbursement rate.

We anticipate publication of additional clinical evidence which we will further reinforce the Afirma GEC as the new standard of care in thyroid cancer diagnosis. And finally, our research and development team will continue to evaluate potential opportunities to use new genomic discoveries and technologies to provide clinically useful information that can further improve patient care.

Our second metric for success is Percepta coverage. With the strong clinical evidence we've amassed already, we plan to seek Medicare coverage for Percepta by the end of 2016. Once we obtain this we will expand commercialization beyond our initial 50 targeted sites, ramp up our sales team and look for synergies in the institutional customer segment where Afirma is already offered. We will also continue to build out our library of clinical evidence to help drive test adoption and reimbursement. We reiterate that we do not expect to see meaningful revenue from Percepta until 2017.

Third, is the launch of our test for IPF. We are targeting the launch of our IPF test in the fourth quarter of 2016, when we plan to unveil clinical validation data from our multi-center prospective BRAVE studies, involving more than 25 sites and investigators. We will then begin to amass and publish the evidence, including clinically utility data, as we pursue Medicare and private payer coverage following the same commercialization playbook that we used for Afirma and Percepta.

We will accomplish all of our 2016 goals through a combination of focused execution, financial discipline and measured investments. To wrap up, we are delighted with all that Veracyte has accomplished to date, and have never been as excited about our future as we are now. We started eight years ago with a rather simple idea, if we could use advanced genomic technology to resolve the critical problem of diagnostic ambiguity and position our tests at the right point in the clinical pathway, then we could help patients avoid unnecessary surgeries, enable doctors to make more informed patient care decisions earlier and take costs out of the healthcare system.

We have proven with Afirma that our approach works and we are now seeing the success play out in pulmonology. We have a winning strategy and a significant growth trajectory as we begin to set our sights on profitability. 2016 is shaping up to be a big year for us, and we are truly excited about where we are going. Thank you for your time and attention. I would now like to ask the operator to open up the call for questions.

(Operator Instructions)

Dan Leonard, Leerink.

Thank you. First off I was hoping you could offer more color around your expectations for Afirma pricing and gross margin in 2016?

Sounds great, Dan. I'll start with the top line of that, and then maybe turn it over to Shelly to add a little bit on the cost side. We, for 2016, we're kind of coming in the year where most of the payers that we've already had under contract are at contracted rates. We obviously had a lot of success toward the back half of last year with some of the Blues plans that brought a few more of these covered lives to in-network contracts.

But the biggest Blues plans that are going to have the biggest impact on our ability to greatly expand that reimbursement rate, HCSC which came at the very end of the year which we have not obviously seen any impact to yet, as well as Anthem, which is 40 million lives and will be the most important decision to get us to a point where we can start predicting the expansion to this GEC rate. Given that -- we are pretty confident given the clinical studies that have been done on long-term utility, that we will certainly get Anthem in 2016.

It's kind of difficult to predict when these things happen and so therefore we may see some modest increase in GEC rate this year, but we wouldn't expect to get up to that 3,000 plus range where we think we can get, until we get more of these Blues plans under in-network contracts. And those will be our two key priorities for reimbursement.

I guess just from the spend side, we expect that we will be relatively flat on the cost of revenue spend as a percentage of revenue, so that won't go down dramatically. The real uptick that you'll get in gross margins is when you experience the uptick in the reimbursement side as Bonnie just went over. And so I think that's where you really look for the move in the gross margins. We're not predicting right now absent having the Blues come in and pay at substantially higher rates, we're not expecting that that gross margin, quote unquote, would move significantly during the year.

Got it. And then my follow-up question, Bonnie, when do you think is the right time to start talking more explicitly about Percepta volumes?

I think that the key there is, when we get Medicare coverage, because what we were trying to do right now is take a very cautious approach to seeding the market at important medical centers with important pulmonologists that can help us really establish the clinical value and utility for the test. But we don't want to expand our footprint in sales and drive volume much higher than those initial 50 sites until we know can secure reimbursement.

We expect that we will be in a position to secure Medicare reimbursement for Percepta this year, but our intention isn't to focus on driving volume until after we get to that point. Depending on when that would happen in the year, if it would be earlier rather than later, there may be a bit of upside, but I think we would reserve providing any direction on that until we know what point in the year that event happens.

Okay. Thank you.

Our next question comes from the line of Amanda Murphy from William Blair. Your line is open.

Hi. Good afternoon. I just had a quick one on I guess Medicare reimbursement, so I think couple of other companies who had new codes in 2016 mentioned that there was some issue with just kind of the logistics of implementing a new code in terms of collections. Did you see anything like that or I guess hasn't started really until January 1. But I'm curious if you can provide any insight there, that would be helpful.

It's Chris. We're in the process of implementing the new Afirma code. We've been working through most of the payers. We don't have all of them and we haven't seen any issues to date. In fact, actually for us it's been a good thing.

We've been receiving faster responses from payers into the old miscellaneous code that we were using before, always caused issues with payers, because they were trying to figure out what it was for in the sea of their other charges they get under that miscellaneous code. And so the feedback that we've gotten is that the specificity of being able to identify these as Afirma has allowed them to know what it is and resolve it quicker. So we've seen this so far to be a net positive for us and we have not experienced any issues to date.

Got it. That's helpful, and I guess a follow-up to Dan's question on guidance. Wondering if you could give a little bit of context around volume trends, thinking about GEC only as a percentage of total and how do you expect that to trend in 2016? And then also realizing that you're not giving FNA volume at this point, but can you give us any even anecdotal commentary or quantitative commentary around how FNA volumes might look relative to 2015?

Yes. Very good question. I will start with the GEC, our core driver of values. We had estimated about a 25% to 30% increase in volume and I think our range kind of fits right with into that prediction. GEC-only driven through these new partner models with labs and institutions will continue to be a key driver of that.

If you compute the GEC volume breakout this quarter or for 2015, what you'll see is that we've already achieved over 40% of our GEC volume now coming from these partnered accounts, institutions, and enabled labs. We wouldn't expect to continue to grow GEC-only test volume at quite the same rate, we were about 100% year-over-year growth for 2015, but it will definitely be a key driver of growth.

With that though, we do expect to continue to see modest growth with FNAs coming in for continued cytopathology testing. It's amazing how stable and how we have been able to continue to lift up that part of the market and continue to drive adoption there. So it might be more in the neighborhood of 10% on the cytopathology, 10% to 12% where the biggest driver of growth is going to come from more of these partnered accounts with GEC-only.

Got it, and then just thinking longer term on that point, I think originally you had talked about the community side being the larger opportunity in terms of market sizing. Where do you think ultimately the GEC-only model will go? Maybe you could talk a little bit about penetration on the community side over the longer term.

Yes, just as a point of reference and a little bit of history, as you remember when we launched Afirma, we launched the test using a total solution where the GEC was the centerpiece of the overall Afirma solution. And we went after initially the physician office market because quite frankly it was by far the easiest part of the market to penetrate and a lot of low hanging fruit. In order to have the product fit neatly into the workflow it was much easier for these doctors to collect the cytopathology sample along with the GEC and send those both to us.

From the very beginning in 2011 of commercialization, we've seen an upward trajectory of penetration into that specific segment of the market. And last year we estimated that we were just under about 30% penetrated into that segment, keeping in mind that it represents about 60% of the overall FNA volume.

In mid 2014 we began expanding our sales team with institutional account managers to be able to really penetrate the institutions to a greater degree, knowing that cytopathology was going to be done on site and something that we were perfectly fine with. We then operationalized a model that today we call this our Afirma diagnostic partner model, where they collect the GEC and handle that sample appropriately and then send it to us for the GEC after the cytopathology is done, and is indeterminate.

In 2015 we also evolved that model to partner up with some of the regional laboratories that had already secured very strong history of business with some of the doctors' offices that otherwise we would have had to connect to with our total solution model. What that has done is really set us up with a couple of different solutions that can work differently for every customer in the market. And it's really been a powerful evolution and as we come off of this year, we can think about penetrating the physician office ambulatory segment, both by continuing to drive that total solution. But we'll also capture some of the GECs out of that segment with our diagnostic program.

So it's not black and white, one solution for one market and the other solution for the other, and that's why the GEC-only business will drive the predominant growth.

Got it. Thanks very much.

Thank you.

Our next question comes from the line of Doug Schenkel, Cowen and Company. Line is now open.

Good Afternoon. This is Chris on for Doug today. Thanks for taking my question. Let me just start, can you help us think about the pacing of the sales force hires related to the conclusion of the Genzyme agreement? And can you give us a sense of why this was the right time to make this decision?

Absolutely. We talked about where we're going to layer in 10 additional sales folks and we're trying to front load those towards the beginning of the year. You'll see that most of those hires will occur and actually now to toward the end of the first quarter and then some into the second quarter. It's important for us to get those folks in and get them layered in, and get them productive relatively early.

We think that it takes anywhere from three to six months for sales reps to become productive and get their arms around the market and the dynamics and so we'll front load that. The reason we though now was the time, quite frankly, is that we really are very confident that we can take over the sales and marketing efforts for Afirma on our own.

We have built a deep group of sales professionals now at 30 people that have a real depth in the market. We have longevity of our sales reps. These folks join us and the ones that have flourished and have stayed with us for quite some time, they've driven deep relationships. They've began to understand and really are probably experts in the construction of the FNA market and trying to figure out how to go deeper into it. And we really believe that now is the right time for us to take it over. We've got the experience and the skill set to be able to do it.

In 2014, you remember we restructured the relationship where we took over the core sales efforts and Genzyme helped out with lead identification and account management. And that experience taught us that we were capable, because in the midst of that we drove tremendous growth taking over that core sales piece and it really taught us that we were able to do this on our own. And we think now's the time to take over the account management piece of it and drive that forward.

I would add additionally that we've begun hiring another layer of sales reps that we've called account managers. And these folks are taking on managing some of the relationships that we have in the field with existing doctors, and that's given us the ability to deepen the relationship with the clients that we have on the ground and do that.

It also gives us, quite frankly, one of the key things is that it gives us the ability to do our sales and marketing more efficiently, because we are dropping out 15% of our sales that we won't be spending on Genzyme, we'll be able to deploy a piece of that towards the force that we're building out. But quite frankly we'll end up in a much, much better spot in terms of our sales and marketing expense overall. And as Bonnie talked about, we're really trying to drive the Company closer to profitabilty this year, and that really puts us on the trajectory to be able to do that.

Great, that was super helpful. Thank you. Maybe just one more on guidance. Could you help us think about what are the key drivers they get you from the lower end to higher end of revenue in volume guidance? And I guess more specifically or additionally, how does guidance affect the impact of potentially obtaining Anthem coverage?

The key thing there, it's Chris again. The key thing on the way to think about the lower and the higher end of the guidance is, as I think about it is, really pivoting around some of the insurance contract success. The -- getting the insurance contracts done for Blue Cross, Blue Shield plans is critically important for us to drive a higher ASP, but the Blue Cross, Blue Shield plans, because they send the checks to the patients, it's doubly important.

It's important because we're able to yield more of the money because lets gets applied to the coinsurance amount or co-pay amount for the patient, but secondarily we're more likely to get it, because it comes to us rather than to the patients, rather than us have to go get it from the patient. That's one piece of the number.

The second piece and where it works synergistically with volume, is the ability for us to get insurance contracts, we believe helps us go deeper into doctors' accounts. Because the single biggest thing that holds us back in terms of volume is the inability to have widespread insurance contracts, and that usually means lack of Blue Cross, Blue Shield, because that's most doctors' single biggest payer that they see in their practice, are patients from those insurance plans.

So the key milestone to be watching this year is our ability to execute on getting Blue Cross, Blue Shield contracts done and continuing to layer in those coverage and that's kind of the way to think about the pivot from the low to the high end.

Yes.

Great, thank you.

Thank you, our next question comes from the line of Bill Quirk with Piper Jaffray. Your line is open.

Great, thanks. Good afternoon, everybody. First question, Bonnie, you guys had a prepared comment around PAMA I think for the first time at least in the prepared comments you made reference to potential implementation in 2018. I guess I'm curious where, what are you guys thinking about PAMA in terms of when that would go into effect, it certainly seems like January 2017 is a pretty ambitious goal by them?

Yes, hi, Bill, thanks for the question and joining our call today. Yes, the reference, there's been obviously a lot of talk about whether or not that will be delayed to 2018, and I think the point we were trying to make is because we're coming off of a November decision whereby the GEC will actually be gap filled and that process is underway, we believe there will be no disruption to us continuing current Medicare rates. Probably through 2018 whether PAMA gets implemented earlier or later, it kind of is irrelevant at this point for us for that product.

And so it really does give us a time of stability and a little more predictability than what we've had in the past from the way that we view it. And by the time it gets implemented if it's in 2018, then we'll be using the private payer rates to direct what Medicare will be paying, and we feel that provides continued security. That was really the point.

Not that I have any specific insider information, but I know there's been a lot of comments and things about the fact that it may be delayed. My point just that it really doesn't matter so much from where we are.

Got it, I appreciate the additional color there. Thanks, Bonnie. And then I guess staying in macro topics, again you touched on it in your prepared comments, but LDTs suffice to say probably not going to get this until late summer, I suppose, at best, at least based on the FDA's meeting calendar. Is that a fair assumption?

Yes, I think there have been some rumblings that they are trying to move forward with some notification legislatively. We all know that will give us still 60 days notice on when it might be implemented.

But I think when you look at the bigger picture of LDT guidance, at least from everything that we can see in the draft guidance and what has been talked about publicly, it appears that they are going to be very thoughtful on how they roll this out, less high risk tests, typically companion diagnostics coming first. And then our ability to kind of roll into that process by registering our other tests and having some number of years to come in under compliance.

We believe that it's important for investors to understand that these two issues that have historically, especially in the recent past created a lot of turmoil and uncertainty really are coming to the point where we could get bows wrapped around them, and that can take a lot of that uncertainty off the table and we see that as a really good thing.

Got it. Understood. Thanks, Bonnie. Appreciate it.

Thanks.

Our next question comes from the line of Karen Koski from the BTIG. Your line is open.

Thanks. Can you guys hear me okay?

Yes. You are very clear.

Excellent. Just my first question on reimbursement, and I certainly understand that your main focus for Percepta reimbursement in 2016 will be getting Medicare coverage. But just given the success you had gaining Afirma coverage among private payers and everything you've learned over the last couple of years, is there an opportunity to start kind of priming private payers? Keeping in mind that the decisions would still likely come after Medicare, but that maybe the time after Medicare coverage could be much shorter?

Karen, I think the way we kind of thread these things together is that we look at what is the driver that we can then back with growth. And expanding our sales team, expanding our spend, because not only do you then expand the sales team, it's all the back-office stuff that supports all of that.

Given that Medicare covers about 50% of the patient population in this indication, we really think that that will be the key driver and the key pivot point where we will be comfortable beginning to ramp up. All the rest of the payers that might have major roles for us in Afirma because it's such a low Medicare population, will have a less significant impact on the Percepta and ILD products.

So while we think we are going to be a terrific position to move Percepta and eventually ILD into all of those contracts we've been able to secure, which is the real competitive advantage for us, we still believe that getting Medicare first is a really key decision because we are going to control our ramp and drive for growth on test volume on the back of that. Chris may have a few things to add to that.

We believe that one of the key things that we're building of value here is this network of insurance contracts that we have. Because when we are able to do that then we're part of the family, basically, we're part of their extended network and so can go in, we can have those discussions about the products that we're bringing to market in a relatively easy way.

There are a lot of diagnostic players that are small that have a lot of tests that range from poorly validated to well validated, anything in between, and insurance companies have a hard time sorting through all of that. There is a lot of noise with what they see and what they get and just the pure volume of it.

So having a seat at the table we've always believed was important and would allow us to accelerate the launch of products two, three, four, five, et cetera, into those carriers and hopefully accelerate coverage from what it would be without that. Absolutely, the idea is to leverage all that we're building on Afirma with insurance contracts to go faster with Percepta and ILD.

Okay, great. That's very helpful. And then just a second question around international. I don't think you really included it in your prepared remarks.

Any update on progress with some of the partnerships you've signed? I believe you also have an ex-US agreement with Genzyme and if that's the case, will you continue with that agreement?

Yes, we have not broken out the international. We've announced some of the co-promotion relationships or distributor relationships that we've developed over the years. We really see the big opportunities in the United States, and that's where we've been investing our time and energy, both driving Afirma in the United States, but spending the investment dollars we have and opening up this pulmonology channel.

Because we think we're solving a real problem for patients, payers, and physicians in the United States, and so that's really where we're focusing our investment dollars. And we think we can get the best return for investors relative to international and we have not broken out international. We don't plan to do that. The Genzyme deal, the international is a relatively small piece. When we restructured in 2014, we ended up with an activities in a few countries, Brazil being the most important of those and that relationship continues as of now.

Okay. Thanks so much.

Our next question comes from the line of Steve Vucco from Morgan Stanley. Your line is open.

Hi, good afternoon. It'll be just one for me, a two parter, and not just because I think we want to make sure that Shelly has some fun on the call as well. It relates to cash and cash flows.

The guidance for cash burn for 2016 was a little higher than I expected. But I want to make sure we look at it in an apples to apples way. So I wonder if you could help us understand whether there are any idiosyncratic drivers of incremental cash spending, cash burn in 2016, whether that's new reps, whether that's tied to maybe facilities, incremental R&D spend?

Then what does the seasonality of cash burn look like over the course of the year, so that we can get a better understanding for what the organic trend is? Thank you.

Great. Thanks so much. Happy to answer your question. As noted in my prepared remarks, the cash burn should be about the same in 2016 as it was in 2015, and you are right, there will be some specific idiosyncrasies in the year. Our goal overall is to actively manage and drive down the cash burn for the year, but on a quarterly basis, it's going to be front-loaded.

If you notice on the fourth quarter, the burn was only $7 million. And in part that's because we were reimbursed by the landlord for over $3 million, so that would have been a higher burn. We're finishing our facility in the first quarter, so we do expect that we will have a higher burn in the first quarter. And also always in the first quarter you're going to have things such as stock bonuses, audit and legal fees, things that always come into first quarter, so you should expect a higher burn in the first quarter.

As we go into the year, the second and third quarters will still moderate somewhat, but not drop significantly until the fourth quarter. And so I think as we begin to ramp up internally on the sales and marketing side, as we transition away from Genzyme but we still pay the Genzyme fee until the middle of September, you'll see that really drop off then in the fourth quarter and set us up really nicely for 2017.

The final thing I would note is that from an R&D perspective, we are getting ready for a launch at the year end, and we will have three products by year end. And so we feel that it is smart to invest in that R&D for this year, it will be a little higher than you may have expected, but that that will then go down next year also. So we are investing in three products we think that positions us extremely well for coming out of the year and then for leveraging in next year much more efficiently.

That is just what we needed. Thank you.

Great.

(Operator Instructions)

Paul Knight from Janney Montgomery. Your line is open.

Hi, Bonnie. The Percepta test of specificity was 47% in both studies that have been performed, the AEGIS I and II. Any comment on that 47% number, what's ideal? What do you hope for? Any color around that number?

Hi, thanks for joining us. I'll mention first that the most important metric for the performance of Percepta is sensitivity and negative predictive value. Because similar to what we're doing in Afirma, what we are trying to do with Percepta is following an inconclusive bronchoscopy result, give the physician information about the level of risks that that patient's nodule is cancer, so they can choose to follow the pathway which they would typically do, which would be an invasive surgical biopsy versus feeling comfortable moving that patient to watchful follow-up by CT scan, which of course is noninvasive.

In order to be confident that that is a safe decision to make, we want to have a very high sensitivity and negative predictive value, and I think in AEGIS I, AEGIS II, the sensitivity was around 92%. When you look at the negative predictive value or the sensitivity of the overall procedure combining Percepta with bronchoscopy, you get to a 98% sensitivity, 97%, 98%, which means together with bronchoscopy we're not missing many cancers.

Now what the specificity number tells us is how many patients then would we expect that we could move to watchful waiting that would be low risk? The studies would have indicated somewhere around 40% to 50%, and I think we predicted that our actual ability to move patients out of that surgical decision to watchful waiting early on, we thought might be in the 30% to 40% range. But early indications from the recent study shows that that could be as high as a 50% reduction in invasive procedures. All the performance threads together in a way that we would expect it to be to support the clinical decisions we want to make.

And you still think the test will be done in conjunction with the bronchoscopy?

It is. In fact our sample is collected at the same time the bronchoscopy is done. As you might recall, there is about a quarter of a million patients every year that undergo a bronchoscopy procedure as part of their work up to diagnose a lung module. And the bronchoscopy yields inconclusive results on its own about 40% of the time, roughly 100,000 patients today per year in the US alone. And of course we might expect that number to grow significantly over the next couple of years as screening ramps up.

Today, the next step that typically would be done following that inconclusive result would be to take the patient into the operating room and get a needle biopsy which is quite invasive, costly, and risky. Physicians really don't want to subject patients to that procedure unless it's necessary. What we've done is positioned the Percepta test so that it is collected at the same time the bronch is done, so that if the bronchoscopy is inconclusive, the test sample is already collected, the tests can be run, and those results delivered to the physician in time to help guide what he does next.

And what you've done I think, 639 patients in those two to trials, what's your ultimate goal in terms of number of patients for the trials?

Right now because we're in this early commercialization mode, we'll be ramping up, we have patients being enrolled in the registry. And over a period of time just like we've done with Afirma where we just saw the 20th peer-reviewed publication come out and many of those on clinical utility, we'll be building an ongoing library of evidence here just like we have with Afirma.

But certainly by the time we get to a couple hundred patients that have had the test, you can look at what decisions we are impacting and have a pretty good prediction of utility. But we'll continue to collect evidence over time and build up the body of evidence, which will mean more and more patient numbers in those studies.

Lastly, I'm assuming that you're not including a lot of international expansion in this guidance number we're receiving today?

That's correct. As Chris kind of articulated quite nicely early on, we do have some seeded partners in international, and we have one individual who sort of looks after that business. But we've purposely made the decision to not invest what we think we would need to invest to make that a significant growth engine for us.

We're much better served by using our pulmonology products here in the US as that growth engine. That might change two or three years down the road as we get these products here and get them reimbursed and paid for, then we can look at deploying cash in other regional areas where we may be able to drive additional growth. We see it as very optimistic and very selective right now in terms of the countries and the partnerships we go after.

Okay. Thanks.

Brian Brockmeyer, Cantor Fitzgerald.

Hi, good afternoon. Earlier this year the analytical verification study, or verification data, and the clinical data for Percepta were published in several publications. Is there any other data that will be required for Medicare coverage, or what other milestones this year do you need to complete in order to receive that Medicare coverage?

Yes, what we believe is that the that we need to have studies for clinical validity and we've published two now, the BMC genomics article and then obviously the New England Journal article. And both of those showed that when we give a low risk test result, the patient is truly low risk. And those were prospective and really high quality work.

The second piece that we need is analytic validity studies which you just referenced. Those studies basically show that the test gives the same answer run to run under different conditions, and it's kind of expected that you do that.

The third is clinical utility studies. We published our first one, and we will continue to invest in those. That is the essence of the library of studies that we'll be building throughout the year, and our goal is to have the product covered this year.

There is no magic formula in terms of you need this and you need that and you need to this. We think that it's, ultimately we'll end up with a really strong submission with strong data. And we'll end up right now with four set of articles, and quite frankly to have this much data on a test this early with the New England Journal anchoring it, is truly a phenomenal spot for most companies to have in their first product, let alone their second product.

We really feel like we're well-positioned and we'll continue to invest in building data, not just to get Medicare coverage, but it's a never ending journey. We started the call, I think Bonnie said we had over 20 studies now with Afirma. And to be clear, we didn't have anywhere near that when we had Medicare coverage there. So this is an endless journey that we just keep building adaptive evidence against physicians, patients, and payers, the confidence that they are getting quality results from us.

Okay, and there have been a number of competing thyroid tests introduced over the last year, have you seen any positive impact on the market awareness as a result of those competitors coming in?

Absolutely. We always remind people that most of these patients do not get a molecular test done. They get surgery done, and that is unfortunately sadly where 70% of them end up getting their thyroids removed. What we're all collectively doing, us and the other companies that create noise in the marketplace, is we're trying to dislodge surgery as the means to how these patients are treated.

And what we know because we're by far the market's leaders, is as we're successful in doing that most of those tests end up coming to us. So we think that having more competitors and more discussion and more noise in the marketplace is a good thing, as we try to make sure that patients get more data before they have surgery done. And what we know is that we end up shining whenever that happens.

And I think you can see this year, we just turned in a year of phenomenal growth and it was a year of competitive noise and discussion out there. And we were able to perform well in that, and we've always said this is good for us and good for the markets, and I think the numbers speak for themselves. It's good for us to have this going on in the marketplace.

Great, thanks a lot.

Thanks, Brian.

At this time I'm showing no further questions. I would like to turn the call back over to Bonnie Anderson for any closing remarks.

Thank you all for joining us today. We appreciate your ongoing support and look forward to updating you on our progress next quarter.

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