Veracyte Inc (VCYT) 2016 Q1 法說會逐字稿

Good afternoon, ladies and gentlemen, and welcome to Veracyte's first quarter 2016 financial results conference call. (Operator Instructions) As a reminder, today's conference call is being recorded. I would now like to turn the conference over to your host, Ms. Shelly Guyer, Chief Financial Officer. Please go ahead.

Good afternoon everyone and thanks for joining us today for our first quarter 2016 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 and profitability, 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 May 5, 2016, and Veracyte assumes no obligation to publicly update these forward-looking statements.

Our financial results press release for the first quarter ended March 31, 2016, 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. We believe this will be a brief call since we just reported our first quarter and 2015 results a few weeks ago. However, the updates we will provide are pretty exciting. We are off to a terrific start in 2016. We delivered strong results this quarter, driving continued robust Afirma growth, and positioning ourselves for accelerated payer progress while significantly advancing our pulmonology business.

Turning to the first quarter call results, I will focus on the three areas of execution that will define our success in 2016. They are Afirma growth and reimbursement expansion, Percepta coverage, and the launch of our IPF test.

Number one, Afirma growth and reimbursement expansion. Our Afirma business continues its strong positive momentum in the first three months of 2016. Our revenue for the quarter was $13.6 million, an increase of 21% compared to $11.2 million for the first quarter of last year. Excluding a onetime revenue pick up in accruals and cash receipts in the first quarter of 2015, the revenue increase was 31%. We grew the number of Afirma GEC tests to 5,352, a 33% year-over-year increase. We expect that our revenue growth rate will expand as we increase our average reimbursement from payers. I am pleased to share some exciting progress on this front, which we believe will further fuel this process.

We recently signed an agreement with the Blue Cross and Blue Shield Association's internal group purchasing organization, Care Source, effective April 1. This agreement allows individual state Blue Cross and Blue Shield health plans to contract with Veracyte at established and competitive rates for our cytopathology and molecular testing services, specifically the Afirma GEC and Percepta classifier without having to negotiate contracted rates with each individual plan, which is often a time consuming process.

We believe this agreement will enable us to accelerate our ability to achieve in network contracts with Blue Cross and Blue Shield plans around the country, a top priority for us in 2016, and key to expanding our reimbursement levels. This is also important because physicians cite lack of in-network status as the single greatest deterrent to adoption of the Afirma GEC.

We believe that by achieving in-network status, we will be well positioned to drive adoption, test volume, and higher reimbursement rates for the GEC. Our expectations for revenue and Afirma GEC volume growth are really shored up with this agreement now in place.

While we work to advance in-network contracts, a coverage decision for the Afirma GEC by Anthem remains another key goal for this year. We believe the evidence is now published to support this and our team remains highly focused on driving this to completion.

Seventeen published studies now demonstrate the Afirma GEC's clinical utility. These include two positive long-term outcome studies that were published during the quarter showing that the use of the Afirma GEC helped keep patients out of surgery over the long-term. One study, based on Blue Cross and Blue Shield claims data, demonstrated the durability of a benign GEC result for up to 40 months of follow-up. Multiple clinical utility studies showing similarly positive results were also presented at the Endocrine Society's annual conference last month.

A final point on Afirma. On our last call, we shared that we will exit our relationship with Sanofi Genzyme in mid-September of this year. The transition is going smoothly and I'm pleased to say that we have already expanded our Afirma sales team to accommodate the change and achieve our Afirma growth goals for the year.

Our second measurement of success is Percepta coverage. Gaining Medicare coverage for Percepta is the number one priority in pulmonology for 2016. During the first quarter, we had significantly expanded our library of evidence, which we believe will drive this effort. In February, compelling clinical utility data for the Percepta classifier were published in the Journal Chest, suggesting that the use of the test could reduce unnecessary invasive procedures by 50% in patients being worked up for lung cancer, whose bronchoscopy results were inconclusive.

Analytical verification data were also published in BMC Cancer showing that the Percepta classifier demonstrates strong accuracy, specificity, sensitivity, and reproducibility under a range of conditions and variables. We believe that this evidence rounds out the requirements for Medicare coverage, and we remain confident that we will achieve Medicare coverage for Percepta this year.

We are looking forward to the American Thoracic Society's Annual Meeting, which will take place later this month in San Francisco, where top pulmonology thought leaders and Veracyte scientists will present additional compelling data supporting the use of the Percepta classifier. Two oral presentations and two poster presentations will demonstrate the test's clinical utility, cost effectiveness, and analytical validity.

Once we achieve Medicare reimbursement, we will ramp commercialization of the test beyond our three initial sales specialists and expand our customer base beyond the roughly 40 to 50 sites that are currently offering the test to their patients. We look forward to expanding access to patients across the country from whom the test can dramatically help change the trajectory of care.

Before I wrap up Percepta, I wanted to share two important points based on feedback from both academic and community based customers. First, physicians are using Percepta exactly as we had hoped they would within the clinical pathway of care. The sample is being collected at the time of the bronchoscopy and if results are inconclusive, they are ordering Percepta. And secondly, doctors already have confidence that with a low risk Percepta result, they can monitor their lung nodule patients with CT follow-up in lieu of an invasive diagnostic surgery.

It is truly gratifying to see Percepta impacting patients and their diagnostic pathway in exactly the way it was intended.

Our third performance metric is the launch of our IPF test. We are pleased to unveil the brand name for our IPF test, Envisia, as we advance toward its anticipated commercialization in the fourth quarter of 2016. The name Envisia speaks to the testability to aid physicians in the challenging diagnosis of interstitial lung diseases, or ILDs, including idiopathic pulmonary fibrosis, or IPF, which is among the deadliest of these lung-scarring diseases. Specifically, the test is designed to allow physicians to envision new and important information about how their patient's condition may progress without the need for an invasive surgery.

The upcoming ATS conference will be an important opportunity for us to showcase Envisia to the pulmonology community. Veracyte scientists and external researchers will present multiple posters demonstrating Envisia's potential to transform care among the hundreds of thousands of patients who present each year with a suspected ILD. Thought leader presentations will highlight the significant challenges in IPF diagnosis, particularly among physicians in community-based settings. Dr. Julia Kennedy, our Chief Scientific Officer, will present data demonstrating Envisia classifier's novel ability to use deep RNA sequencing based genomics to help distinguish patients with IPF from those with other ILDs without the need for surgery.

Data will also show the test potential to impact physician decision making and reduce healthcare costs. In addition to establishing the strong scientific and clinical foundation for the Envisia classifier, we look forward to unveiling independent clinical validation data from our BRAVE studies prior to the test's fourth quarter launch.

Finally, as we stand on the brink of having three commercialized products by the end of the year, we were pleased to secure up to $45 million in financing following an agreement with Visium Health Partners, which we announced on March 28th. We believe this financing gives us a funding and flexibility we need to grow our core business with financial discipline and measured investments, and to move forward on the pathway to profitability.

I will now turn the call over to Shelly to review our financial results for the first quarter.

Thanks, Bonnie. As Bonnie indicated, we experienced strong revenue growth during the first quarter. Our revenue for the quarter was $13.6 million, up from $11.2 million for the same period in 2015, an increase of 21%. Excluding one-time revenue pickups in accruals and cash receipts, the revenue increase was 31%. The one-time pickups include accruals of $325,000 in the first quarter of 2015 compared to $150,000 in the first quarter of 2016, and cash receipts of approximately $640,000 in the first quarter of 2015.

We accrued 61% of revenue in the first quarter compared to 48% in the same period of 2015. Of note, we accrued 46% of Afirma GEC volume in the quarter. The number of total FNA samples received in the first quarter increased by 24% over the prior year to 21,497. We reported 5,352 Afirma GEC test results during the first quarter, a year-over-year increase of 33%. The quarter-over-quarter volume reflected expected seasonality in the business. Thirteen percent of total FNAs received in the quarter were for GEC only testing, surpassing the prior year's 10%. Afirma GEC only samples received increased 51% year-over-year.

Our gross margin, quote-unquote, for the first quarter was 54%, which is down from previous quarters due to several factors. First, we had no significant one time revenue pickup in this quarter versus the year ago quarter. This had the greatest impact on reducing the gross margin. And second, we had higher cost of revenue this quarter, which I will discuss in a minute, which also put downward pressure on the gross margin.

As we previously indicated, we do not expect our gross margin to increase substantially in 2016 prior to obtaining new payer contracts that will expand reimbursement for the Afirma GEC.

Operating expenses for the first quarter was $23.3 million, compared to $18.8 million for the comparable period in 2015. Let's break this down by line item. Cost of revenue for the quarter was $6.3 million compared to $4.6 million for the comparable quarter of 2015, an increase of 38%. The increase was primarily due to an increase in samples tested, especially the growth of the higher cost of Afirma GEC relative to the lower cost cytopathology. Of particulate note, starting in this quarter and on an ongoing basis, we have increased facility costs as well as costs related to increasing volumes of Percepta tests processed. Finally, our cost of revenue was impacted by one-time costs related to our move.

Research and development expense for the quarter was $3.5 million compared to $2.8 million for the comparable quarter of 2015, an increase of 24%. The increase was due primarily to increases in personnel related expenses, including bonuses and stock-based compensation, and continued investment in product development. Selling and marketing expense for the quarter was $7.1 million compared to $5.6 million for the comparable quarter 2015, an increase of 26%. This increase was due to an increase in Genzyme co-promotion expense net reflecting an increase in cash collections, as well as increases in personnel related expense due to higher headcount of our sales and marketing team, and the associated increases in commissions, accrued bonuses, and related stock based compensation expense.

Recall that we indicated that we would start hiring sales personnel in the first quarter to begin the transition from our Genzyme relationship, which ends in September. General and administrative expense for the quarter was $6.2 million compared to $5.8 million for the comparable period of 2015, an increase of 7%. The increase was primarily due to personnel related expense, including increased headcount, accrued bonuses, and increased stock-based compensation expense. Additionally, there was a rent charge of $380,000 for the excess rent payments as we moved facilities, which under GAAP flows to G&A until we take occupancy.

This will be the last quarter for this expense now that we have fully occupied the new facility and have exited the lease at our former facility. Importantly, we controlled G&A expense growth by decreasing accounting, audit, legal, and consulting expenses.

Intangible asset amortization expense, a new line item as of the second quarter of 2015, was $270,000 in the quarter, which will be the amount in subsequent quarters. This is a non-cash item. Operating loss for the quarter was $9.8 million compared to a loss of $7.6 million for the same period in 2015. Of note, interest expense of $370,000 this quarter was higher due to exiting our prior loan agreement and incurring expenses related to an end of term payment, a prepayment penalty, and the write-off of debt issuance costs, and the debt discount.

Net loss for the quarter was $10.1 million or $0.36 per common share compared to a net loss of $7.6 million or $0.34 per common share for the same period in 2015. Excluding the one-time interest expense amounts from the debt transactions, and one time move related expense, our net loss for the quarter would have $9.6 million or $0.34 per common share.

Cash and cash equivalents as of March 31, 2016 totaled $47.5 million, which included net proceeds of $19.2 million from taking down the first tranche of the Visium debt and repaying our prior loan. With an additional $15 million of debt available at our option, at quarter end we had access to $62.5 million in funds.

Our cash burn for the quarter was $11.6 million or $10.9 million excluding loan-financing activities. To get to a more normalized burn, if we strip out the $2.2 million spend related to final payments for the build-out of our new headquarters and related move expenses, the burn is under $9 million. As noted in our last call, we expected this quarter to be higher burn quarter, especially with 2015 bonuses being paid out, but that the cash burn in the second quarter will trend back down. And we expect to experience a nice decline in the back half of the year, and especially in the fourth quarter as we exit the Sanofi Genzyme relationship and begin to experience more efficiencies in the business.

One final metric for the quarter that we included in our SEC filings is our average reimbursement for the GEC. It was down slightly at $2,100. Recall that this number is a lagging indicator, looking back to payments on tests that were conducted about a year ago. We have evidence that the average reimbursement has moved up recently, as we have achieved coverage with more Blues payers and we expect this metric to trend back up in the coming quarters. This metric will move more significantly when we sign Blues contracts and gain additional Blues coverage. And if one takes the revenue in the quarter divided by the volume of GEC tests in the quarter, as many of you do as a proxy, the average as remained just around $2,300 of the past two quarters.

Now, I'll turn the call back over to Bonnie to provide closing remarks.

Thanks, Shelly. Looking at the regulatory landscape, we anticipate that CMS will soon issue its Protecting Access to Medicare Act, or PAMA Rule, to bring market based pricing to advanced diagnostic tests, and FDA will likely move forward with guidance for regulating laboratory-developed tests. We believe we are extremely well positioned to thrive in both of these scenarios and look forward to putting these uncertainties behind us.

Before wrapping up, I'd like to add that we were quite honored to receive the 2016 Edison Award last month for the perceptive bronchial genomic classifier, a bronze award in the diagnostics and disease treatment category. In the spirit of the inventor, Thomas Edison, this prestigious award honors game changing products and services that demonstrate excellence in innovation. Our entire Company and our collaborators are proud of this honor, which underscores our commitment to providing genomic tests that are delivering on precision medicine's promise to improve patient care and reduce healthcare costs.

To close, we are pleased with our start to 2016 and are on track to achieve our business goals for the year and reiterate our annual Afirma GEC volume and revenue guidance. We are building a successful enterprise focused on resolving diagnostic ambiguity so that physicians can know what to do next for their patients, patients can avoid unnecessary surgeries and other procedures, and healthcare costs can be reduced.

I'd like to thank our employees for their incredible passion, hard work, and creativity along with our investors, collaborators, and partners, and others for their ongoing support of this mission. I'll now ask the operator to open the call up for questions please.

(Operator Instructions) Our first question or comment comes from the line of Bill Quirk with Piper Jaffray. Your line is now open.

Great, thanks and good afternoon everyone. Nice work on the quarter. First question is just I guess a reimbursement update. You obviously spoke to the Blue Cross Blue Shield deal, but any updates in terms of number of lives under coverage or lives under contract?

We remain the same in terms of still having 180 million lives under coverage decisions and over 130 million under contract at this point, but certainly believe that the execution of the Care Source agreement gives us a tremendous step forward at being able to secure additional Blues contracts as we go through the year. Chris, anything to add to that?

Yes. Bill, as you may know that Care Source is a group purchasing organization on Blue Cross Blue Shield. And the two things that you've got to deal with when you try to get a network with any of these insurance companies are first and foremost, can you figure out how to navigate the internal infrastructure of any of the company and who the decision makers are, and ensure that what you're doing is viewed as important enough to their members.

And we believe that being able to have the agreement with Care Source helps us give the mechanism to suggest that what we're doing is important enough for them to contract and also they can help navigate the internal workings of these companies. And secondly, and the biggest issue is how to negotiate price. Because you've got two pieces of data that are outstanding. One is the Medicare reimbursement of 3,200 and the second one is the retail price, which is much higher.

So the big question is where do you contract in between those two. So by being able to negotiate a national agreement then that -- then as somebody contracting with us at a local plan can have the confidence that they're getting a really good price, which takes that sort of issue off the table.

So we think overall that allows us to accelerate our ability to get contracts done. We're focused on doing that this year as we've said. That's one of our key goals. It both drives reimbursement but as you well know, one of the biggest reasons why physicians don't order the GEC is because of lack of network access. And so trying to get those Blue Cross Blue Shield plans locked down this year, we believe will ultimately help us propel our growth in the market even quicker.

Got it. And then I guess just two additional questions. So on the Care Source contract, I'm assuming that doesn?t change the mechanic of how you collect from the actual members themselves, correct. You still have to go and essentially get the checks, right?

So what the Care Source is, is just a group purchasing organization, and now we have to go out and get agreements done with every single local Blues plan. We think that this accelerates our ability to do that. But when we get the agreement done with the local Blues plan then that will be between us and the Blues plan and the money will flow from the Blues plan to us, just like it does with United, and Aetna, and Cigna, the other plans that were contracted with. And the Blue Cross plan will no longer send the check to the patient. So that's what we wrestle with now and obviously, there's a patient copay amount even in a contract environment. But the main payment won't go to the patient in a contracted environment, and we still need to get those contracts done.

So Care Source gives us a mechanism to accelerate that. Does that make sense?

It certainly does. And then I guess just one last quick one for me. Bonnie, based on your comments about PAMA and you remain very comfortable there, is it safe to assume then that whatever deal you negotiated with Care Source felt that the parameters, i.e. at least in line with Medicare so there isn't any risk there when the PAMA process actually starts?

That's correct. We're very confident that where we've landed with the pricing that's part of that national plan that we will be in good shape as PAMA moves forward.

And I would add there that it has been our philosophy for years that we will not sign contracts below the Medicare price. That just has been something that we have elected to do over the last several years.

And our next question or comment comes from the line of Amanda Murphy with William Blair. Your line is now open.

I guess the first one on the institutional sort of -- institutional versus community markets. Obviously, you're still getting quite a lot of traction on the institutional side. Could you just maybe update us on the -- where you're thinking about market share on both sides of the equation there, and then kind of how the community side of the -- obviously you talked about coverage -- but how that side of the business is doing as well.

Sure. That's correct. We were very pleased with the continued over 50% year-over-year growth in the -- what we're now calling our diagnostic partner model. So to be really specific, it's not just institutions and integrated networks. It does include some regional laboratories that have also been enabled to send us a GEC only, and that's going very well.

Interesting, though, the total FNA numbers received grew a 24% rate year-over-year, which actually was probably a little stronger than what had been predicted. So both sides of that business are going very well. We believe this puts us on really nice track with our guidance. You would expect at the end of the year we'd be somewhere between 25% and 30% market share overall with GEC and that exact point where it lands will be -- depend a little bit on which segment of the market they come in and how that computation works.

But we should be really coming close to a 30% share overall in the market by the end of the year.

Got it. Helpful. And then just a question on realized price on the GEC. So you know you had a nice tick up in accruals this quarter and obviously, there is some give and take there with contracts coming online. So just wondering how to think about kind of realized price, if you will, per GEC over time. Do you expect that eventually to start ticking up?

Yes, so the metric that we put in the SEC filings is a lagging indicator. So that is looking back at about a year ago. And as you may recall, about a year ago we had just flipped over to a few new contracts and so that impacted our first quarter of a year ago from the realized average price.

As we've been moving through the year, a more current number, as indicated in the prepared remarks, is that we've been seeing an uptick, especially because some of these Blues and others are paying at higher rates. And so we are confident that that rate is continuing to go up if you used a more recent metric, and yet we are only able to look at a lagging metric because it sometimes take some time to collect those dollars. But we are confident that we've seen recent upticks in that number.

Okay, got it. And then just last one, just thinking about your comments about profitability, how you're going to move towards that with the ramp of the lung franchise. So what's your latest thinking there on when we might think about positive -- I guess moving towards profitability over time.

I think I'll start and hand it over to Shelly. I mean, obviously as we said, coming to the end of the year, we will have three products commercialized, which really gives us the great confidence that we can begin to get the new leverage across the high cost that it takes to run and build these businesses. So that's the first (inaudible) coming and that's products out there that we can begin to see some leverage.

Shelly, do you want to walk through the elements of that?

Yes, so we do believe that our core business would be approaching profitability probably towards the back end of 2018 or so, or in 2019. In the meantime, we're going to be continuing to invest in growing the topline and doing a couple of things that we think we'll move us towards that profitability. So obviously, number one is to intently focus on increasing that reimbursement rate that we were just discussing. The Care Source agreement should be a great help in accelerating our reimbursement from the Blues.

And then on the other side, though, is terminating the Genzyme co-promotion agreement. So continuing to drive the cost down. That removes the 15% fee, as you know, as we get into the fourth quarter. And then as Bonnie mentioned, leveraging multiple products across a fixed infrastructure. We don't think that we're going to need to build the G&A as much over the coming period of time. We sort of have that infrastructure in place. And as you saw in this quarter, we really could control the growth in the G&A and we'll continue to do that.

And then from new products, obviously getting Medicare coverage for Percepta will be increasingly important as we can begin to have some revenue from that product.

The reimbursement dynamics are going to be a little bit different going forward than it has been historically, because of Percepta's rate of patients being 50% or more Medicare. Secondly, this vast backdrop of contracting that we have and will continue to increase in place we believe gives us great ability to accelerate the reimbursement for Percepta and Envisia over what we have done with Afirma where we were building that capability.

And then in terms of the target that you mentioned on the core business, how are you thinking about Anthem flowing in there? Are you assuming it eventually comes online or does that assume that it does not?

We've been pretty bullish, but we think we're teed up to get it this year and I think we remain confident that that will happen. So yes, that would flow into that type of scenario.

And our next question or comment comes from the line of Brian Brockmeyer with Cantor Fitzgerald. Your line is now open.

You talked about your focus on the GEC only volumes, but over the last couple of quarters as you pointed out earlier in the call, you've seen accelerating growth of FNAs. Are you pushing for that growth of the cytopathology samples again?

Yes, it's Chris. We've never taken our eye off the paired model. We believe that providing both the cytopathology sample paired with the GEC has made a tremendous difference in how these patients ultimately are diagnosed and we've built a tremendous center of excellence in our partnership with TCP and that model has really served us well. And we really pushed that model through this last couple years.

What was different is that we really put an increasing focus on doing that side by side with a model that worked with local hospitals, and integrated delivery networks, and some regional labs because to be standard of care, we knew we needed a model that embraced the diversity of the healthcare system. And so we really didn't shift gears but rather we've always looked at it as enlarging the patchwork of models that we work with in order to get the GEC pulled through. And you're right, I mean we've seen some tremendous growth this last quarter in the paired business and that's a tribute to the success that we've had, the legitimacy that that business model has created with physicians around the country.

And to be able to read this many of the thyroid FNAs that are done in the country by one center of expertise is a tremendous accomplishment by the team. And we haven't taken our foot off the pedal there at all and continue to drive that. Because we think there's a tremendous amount of value in doing that.

Okay, and another one on the Blues plans. You've already signed a few contracts with a couple of Blues. Will those contracts be affected by the Care Source agreement?

Yes, all the agreements within the Blue Cross Blue Shield network that we work with will work under the Care Source agreement. So yes, they'll ultimately be affected by it.

We have about five agreements right now with small Blue --

But they're all relatively small.

And does the Care Source agreement also apply then to the larger blues plans or do they sign entirely separate agreements with you?

Well, to be clear, I think that they -- I mean some of them will be through the Care Source. Some of them will be direct but it will all fall with under the Care Source umbrella, really the mechanics of the actual contracting to be based on state law and all kinds of different things, and how you actually contract with an insurance plan.

But yes, the big ones will go, absolutely. The whole network ultimately will ultimately be a part of it.

Okay Thank you.

(Operator Instructions) And at this time, I'm showing no further questions or comments. So with that said, I would like to turn the conference back over to President and CEO, Bonnie Anderson.

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

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program and you may now disconnect. Everyone enjoy the rest of your day.