Veracyte Inc (VCYT) 2016 Q2 法說會逐字稿

Good afternoon, ladies and gentlemen, and welcome to Veracyte's second-quarter 2016 financial results conference call. As a reminder, today's conference call is being recorded. I'd 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 second-quarter 2016 financial results conference call. With 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, cash flow, and profitability, future revenues and expenditures, coverage and reimbursement for thyroid and pulmonology tests, success of strategic initiatives, product launches and adoption, clinical utility of products, 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 3, 2016, and Veracyte assumes no obligation to publicly update these forward-looking statements. Our financial results press release for the second quarter ended June 30, 2016, 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 delivered strong performance this quarter in our endocrinology business, where we continued to drive Afirma adoption across all market segments and executed on key payer initiatives that will help us accelerate future revenue growth.

We also made great progress in our pulmonology business, where we have now amassed a comprehensive evidence, including published clinical utility data, demonstrating the Percepta classifier's ability to reduce unnecessary surgical procedures in lung cancer diagnosis. We believe this positions us to secure Medicare coverage this year and prepare for commercial expansion and revenue growth going into 2017. And we remain on track to unveil independent validation data and commercially launch the Envisia classifier to aid in the diagnosis of idiopathic pulmonary fibrosis, or IPF, without the need for surgery in the fourth quarter of this year.

I will now turn to our second-quarter results, focusing on the three key areas that define our success in 2016. First, Afirma growth and reimbursement expansion: we experienced solid revenue and volume growth this quarter for Afirma, as our genomic classifier increasingly becomes a new standard of care in thyroid cancer diagnosis. Our revenue for the quarter was $14.7 million, an increase of 23% compared to $11.9 million for the second quarter of 2015.

We reported 5,832 Afirma GEC results in the quarter, also a 23% increase compared to the same quarter last year. We are pleased to have achieved this level of volume growth despite the unusual situation of having two major clinical meetings -- the Endocrine Society and the American Association of Clinical Endocrinologists' annual conferences occur during the same quarter, which took many of our customers away from their offices for two weeks.

Securing more in-network contracts is key to fueling expanded Afirma GEC adoption and revenue growth. On that note, I'm pleased to report that we are already benefiting from the agreement we had signed early in the second quarter with CareSource, the Blue Cross and Blue Shield Association's internal group purchasing organization.

As outlined on our last call, we believe this agreement will enable us to accelerate in-network contracting with individual Blues plans across the country, because it simplifies the often time-consuming price negotiation process. And we believe it also raises our test profile within the Blues network.

Just last month we signed in network contracts with two new Blues plans: CareFirst, the Blue Cross and Blue Shield plan covering Maryland, the District of Columbia, and parts of northern Virginia; and Blue Cross and Blue Shield of Illinois, one of the HCSC plans. This brings the total number of people having access to Afirma as an in-network service to over 140 million, including over 18 million members of Blues plans.

Additionally, we've reached agreement with Blue Shield of California and expect to execute that contract over the next several weeks. This is especially important because Blue Shield of California adjudicates all of our Afirma GEC claims for the 5 million federal employees and family members enrolled in the Blue Cross plans, since we are a Northern California-based lab.

We also continued to expand and reinforce the clinical utility evidence for the Afirma GEC with two data presentations at the annual Endo Meeting in April. These included a meta-review of data from 13 studies involving more than 1,800 Afirma GEC patients, which concluded that use of the Afirma GEC resulted in a 25% lower overall surgical rate among all patients being evaluated with the genomic test.

With these data and nearly 20 published studies to date demonstrating the Afirma GEC's clinical utility, we are delivering proof to physicians, patients, and payers that our test is changing care, as intended, delivering on the promise of reduced surgeries and costs. And we've established a formidable barrier to any competitor trying to gain a foothold in this market.

Our R&D team also continues to provide scientific leadership in endocrinology. At the ACE Meeting in May, our scientists gave two presentations highlighting new data and a study underway to advance understanding of how gene alterations can potentially help guide physician decision-making in thyroid cancer diagnosis. We intend to remain at the forefront of the field both commercially and scientifically as we strengthen our significant first-mover advantage in this market.

Finally, just a quick note on the reimbursement and legislative front. We are encouraged that CMS has announced its intention to initiate market-based Medicare pricing for advanced genomic tests like the Afirma GEC starting January 1, 2018. In June the Agency released its final rule outlining how it will implement the Protecting Access to Medicare Act, or PAMA.

We believe that PAMA implementation will bring important and much needed transparency and certainty to Medicare pricing. We are pleased to be playing a key role, along with our partners at the Coalition for 21st Century Medicine, in engaging with CMS to help shape the legislation during the current comment period as the Agency clarifies and works through the final details.

Prior to PAMA's effective date, the Afirma GEC will be priced according to CMS's gap fill methodology under the 2017 clinical lab fee schedule. In June, the Agency issued its preliminary gap fill rate, in which the Afirma GEC would be reduced to $2,240, due to what we believe was a flawed application of the gap fill pricing methodology.

We are in active discussions with CMS, on our own and with industry partners, during the Agency's 60-day comment period and are optimistic that the final Medicare reimbursement rate for the Afirma GEC will match the current rate of $3,200. Medicare represents approximately 20% of our Afirma GEC test volume. And of note: when the new PAMA rates go into effect in 2018, they will override the final rate determined for 2017.

Our second measurement of success is Percepta coverage. Medicare coverage for Percepta during 2016 remains our top goal for the product, and we believe we have assembled the library of evidence needed to achieve it. We now have published data for three clinical validation and two clinical utility studies, as well as an analytical verification study.

Additionally, four studies, including compelling cost-effectiveness data, were presented in May at the American Thoracic Society, or ATS, Conference by Veracyte scientists and top academic thought leaders. One of the new studies suggests that use of the Percepta classifier would prompt a threefold reduction in physicians' recommendations for invasive procedures compared to their recommendations without the genomic test results. This clinical utility study was concurrently published in BMC Pulmonary Medicine. The Percepta classifier was also featured prominently at the ATS Meeting in a packed keynote address session on the topic of lung cancer detection and prevention in the precision medicine era, further elevating the test profile among the pulmonology community.

And third is the launch of Envisia. We are excited about the planned fourth-quarter launch of our Envisia genomic classifier, which we believe will offer significantly improved diagnostic clarity to the 0.25 million patients who undergo a clinical workup each year for possible interstitial lung disease, or ILD, including IPF. Important data from four studies were presented at the ATS meeting, helping to lay the groundwork for launch. This included data demonstrating our test's potential to significantly increase the accuracy of IPF diagnosis compared to the current standard of high-resolution CT alone.

Researchers from the Pulmonary Fibrosis Foundation, or PFF, also presented data which Veracyte sponsored that quantified the enormous rate of diagnostic delays, misdiagnoses, and often surgical procedures that patients being worked up for possible ILD often undergo. Of note, the PFF senior medical researcher also highlighted the Envisia classifier at a prominent clinical year-end review session at ATS, where our publication in The Lancet Respiratory Medicine from last May was showcased as one of the most important and influential papers in ILD in the last year. The paper detailed compelling data using cross validation, suggesting the Envisia classifier's potential to improve IPF diagnosis without the need for invasive surgeries or other costly interventions.

We plan to unveil clinical validation data from our prospective multicenter double-blinded study for the Envisia classifier later this year and initiate commercialization of the test using the proven playbook that we have used for Afirma and the Percepta. Specifically, we will make the test available to a limited number of thought-leading institutions as we build the clinical utility and other evidence to support Medicare reimbursement. We would expect revenue from the Envisia classifier sometime in 2018.

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

Thanks, Bonnie. As Bonnie indicated, we experienced solid revenue growth during the second quarter. Our revenue for the quarter was $14.7 million, up from $11.9 million for the same period in 2015, an increase of 23%. There was no significant difference in the one-time pickups from new accruals in this quarter compared to the year-earlier period: $340,000 versus $240,000.

We accrued 64% of revenue in the second quarter compared to 55% in the same period of 2015. Of note, we accrued 47% of Afirma GEC volume in the quarter.

The number of total FNA samples received in the second quarter increased by 10% over the prior year to 22,010. As a Bonnie noted, our volumes were impacted by the timing of two of the industry's biggest conferences, both of which fell in the second quarter this year.

We reported 5,832 Afirma GEC test results during the second quarter, a year-over-year increase of 23%. 14% of total FNAs received in the quarter were for GEC-only testing, suppressing the prior year's 11%. Afirma GEC-only samples received increased 34% year-over-year and now represents 50% of our GEC reported number.

Our gross margin, quote-unquote, for the second quarter was 57%, which is back up to levels in prior quarters after a depressed first quarter, and is equivalent to the level from the second quarter of 2015. We have achieved consistently solid and improving GEC margins but are experiencing continued downward pressure in contracted cytopathology reimbursement rates, dampening the overall margin. As we previously indicated, we expect our gross margin to remain relatively flat in 2016 until we obtain new payer contracts that will expand reimbursement for the Afirma GEC and until we achieve Medicare coverage and reimbursement for Percepta.

Operating expense for the second quarter was $25.2 million compared to $21 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 $5.1 million for the comparable quarter of 2015, an increase of 23%. The increase was due primarily to an increase in samples tested, especially the higher volume of the higher cost Afirma GEC relative to the lower volume in the lower cost cytopathology. We also had a full quarter of increased facility costs from more expensive and larger lab space in our new facility.

Research and development expense for the quarter was $4.3 million compared to $3.1 million for the comparable quarter of 2015, an increase of 38%. The increase was due primarily to continued investment in clinical trials and product development -- especially materials purchased for research and development experiments, which we expect to decrease in coming quarters -- as well as increases in personnel-related expenses.

Selling and marketing expense for the quarter was $8.3 million compared to $6.9 million for the comparable quarter of 2015, an increase of 19%. This increase was due to an increase in the Sanofi Genzyme copromotion expense, reflecting an increase in cash collections, as well as increases in personnel-related expense due to higher headcount in our sales team and the associated increases in commission. Expense was also higher because of multiple medical conferences in the same quarter. As part of our preparations to exit our Genzyme relationship in September, we hired eight more sales personnel in the first half of the year and incurred higher Afirma marketing expense this quarter, which we expect to continue.

General and administrative expense for the quarter was $6.1 million compared to $5.5 million for the comparable period of 2015, an increase of 10%. The increase was primarily due to personnel-related expense, including increased headcount, stock-based compensation expense, and severance costs. There were also reductions in spend.

Of note, now that we are in our new facility and have completely exited the old facility, we no longer incur the excess rent payments which under GAAP flowed to G&A, a charge we incurred in the year-ago period. And finally, we continue to control G&A expense growth by dramatically decreasing consulting expenses as compared to last year, a trend which we expect will be sustained for the remainder of the year.

Operating loss for the quarter was $10.5 million compared to $9.1 million for the same period in 2015. Interest expense of $785,000 this quarter relates to interest on the $25 million term loan taken down at the end of March. We elected to pay 9% interest in cash, and the remaining 3% interest was paid in kind; and thus $192,000 was added to the term loan's outstanding principal balance. We expect to continue to use the PIK provisions in coming quarters.

Net loss for the quarter was $11.2 million or $0.40 per common share compared to a net loss of $9.1 million or $0.35 per common share for the same period in 2015. Cash and cash equivalents as of June 30 totaled $39 million. With the additional $15 million of debt available at our option, at quarter-end we had access to $54 million.

Our cash burn for the quarter was $8.5 million, much lower than the adjusted $10.9 million burn in the first quarter. Not this amount, $2.1 million was paid to Genzyme under our copromotion agreement. As we noted previously, we expected the burn to be lower in the second quarter, and we continue to anticipate a bigger decline in the back half of the year, especially after we exit the Genzyme relationship and begin to experience more efficiencies in the business.

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

Thanks, Shelly. As we look to the rest of the year, we are focused on three key strategies to drive Afirma growth. First, we have completed expansion of our sales organization to ensure a seamless transition from our Genzyme relationship, and the team is now fully trained and primed to advance the business forward.

In addition to our product specialists and institutional sales associates, our sales organization now includes a group of account managers, several of whom were hired in the first half of the year. The account managers are dedicated to serving existing accounts, which frees up our product specialists to focus on bringing in new business.

Looking ahead, we will expand our sales team by six associates over the coming two quarters. This will help us further drive our Afirma business through the end of 2016 and prepare for the expanded commercialization of Percepta following Medicare coverage. We anticipate having 45 field sales associates by the end of the year and a structure that will enable us to synergistically drive strong Afirma sales and ramp Percepta commercialization quickly and cost-effectively.

Second, as we further evolve our Afirma solution and the diagnostic partner program which have fueled our success in the ambulatory and institutional market segments, we are directing attention to the small but relatively untapped radiology clinic market, where an estimated 55,000 FNAs are performed annually. Radiology clinics often get referrals from primary care and OB/GYN physicians, who would be difficult for us to reach directly.

And third, we continue to engage Anthem in order to receive a positive medical policy by the end of the year, and we are focused on adding to our growing roster of in-network accounts. We will leverage the CareSource agreement to further drive more Blues payer contracts, as I outlined earlier.

As we cross the mid-year mark, we are pleased with our progress and remain focused on execution -- continuing to grow Afirma and advance our pulmonology business as we set our sights on being a cash flow positive business within the next 24 months. With first-half 2016 revenue at $28.2 million and our Afirma GEC test volume at 11,184, we are on track to achieve our 2016 targets. We reiterate our 2016 guidance to achieve annual revenue of $59 million to $63 million and Afirma GEC volume in the range of 24,000 to 25,500 tests.

Before wrapping up, I'd like to add that we were honored to be named to the Bay Area News Group's top workplaces list in June. This is the third year in a row that we have received this prestigious award, which is given based on employee survey of the Bay Area companies. We truly believe that our employees are our best asset and are humbled by the passion, energy, and dedication that they bring to work every day.

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

(Operator Instructions) Amanda Murphy, William Blair.

This is Aurko in for Amanda. Just a quick question on the institutional and community markets. Just wondering if you could give us an update on the market share dynamics there and a bit of update in the community side of the business.

Yes, we've always included the radiology clinic market as part of the ambulatory setting, because it's really a place where patients come to get the FNAs collected. We would typically collect both the FNA for cytopathology there as well as the GEC, and that will come to us.

And it's not that we have not penetrated that small segment of the market at all. We've had some business in that segment in the past. But we're honing in on bringing a little more focus on helping these radiology clinics use Afirma as a top-tier product to drive their business to their referral base, which is often these primary care physicians and OB/GYN.

So we're on track with where we expected to end the year in terms of overall market share, somewhere between 25% and 30% in the market overall. We will probably have a little bit higher share still in the ambulatory segment coming out of the year, but have had very strong growth in the institutional market. And we will look at where we end the year and update those market share data.

I guess as a follow-up on that: what are some of the ways that you are driving the volume in that setting compared to previously?

The dynamic is a little different between a freestanding radiology center and a hospital situation. In a hospital situation, the patient is sent into the hospital and the FNA is performed, but it's sent almost always to a lab inside of the hospital.

So the way we have been penetrating that segment has been to enter into these Afirma diagnostic partnerships, which have given the internal hospital lab the ability to take the sample when they do the FNA, save it, and send it to us when they get an indeterminate. As we've always said, that sales process is a little bit more complex. There are many more players involved, because we've got to work through that process and the dynamics inside of a hospital.

Now, in a freestanding radiology center, the patients are sent there; instead of going to the hospital, they are sent to a freestanding center. But there is no, quote, captive cytopathology group that's associated with it. So the radiologist just has to make the decision of where they send the sample.

And there the sales cycle is, we believe, much simpler, because we don't need to engage them to bank the sample and send us the indeterminates. But rather they can send us the paired solution, and we think that model really serves that segment well.

Now, as always, we're willing to be flexible and work the way they want to work. But we believe that the radiology segment, by going into that aggressively, allows us to rejuvenate some of the growth in the paired business. Because while it is, quote, institutional, it's really business that ultimately we think will come through the paired channel. And so we're excited about it, and we put a big effort at it starting this quarter.

Got it. Thanks. That helps. And then one last is: could you give us a bit of an update on the conversations with Anthem? And how do you feel about those conversations, looking ahead?

Sure. So, Anthem updated their policy earlier in the year, but it was a time frame that actually didn't capture the review of some of our key evidence. We've pointed to the HealthCore study that got published in March as a really pivotal, long-term outcome study for Afirma, showing that patients that are followed to up to 40 months remain surgery free, and that durability of the test result is there. But we are actively engaged with Anthem following that update, as well as before. But the timing of cutoff -- we kind of missed the update in May.

It's a similar situation that we had last year with HCSC, where they had also done a mid-year natural update in a cycle. We were able to then get more attention on Afirma at that time, and then they flipped that investigational decision positive for Afirma before the end of the year. So we're still very confident that we're going to be able to move this along and get it done. And I think the engaged discussions are going very well.

Great. Thank you.

Bill Quirk, Piper Jaffray.

This is actually Alex Nowak filling in for Bill today. I was just wondering if you could give us any more color on the conversations you're having with CMS on the preliminary gap fill rates. Is there anything that you can give us to give us some more confidence that the final rates are going to be in line with your 2016 prices?

Well, we've had lots of activity and a lot of feet on the ground in Washington, as you can imagine. We believe that the process that was used to derive the gap fill rate was really flawed, and that it was not consistent with the way the gap fill rate process has gone in the past.

And specifically, as you know, there are like eight administration regions that CMS goes out to get these gap fill rates. And many of these regions have no familiarity with some of the tests. In fact, in our case with Afirma, there are really only two regions that have ever fully evaluated and adjudicated claims for the GEC.

But because of some nuanced instructions from CMS, each of the regions felt that they were being asked to submit some rate, whether they had evaluated the evidence behind the test or not. And some of them just pulled the rates that had been used last fall, and that pulled the overall medians down.

So what gives me confidence is that we have active attention and engagement with the folks administrating this whole process, and we believe that when you look at the requirements for the MACs to come up with a rate that is justified, that they will not necessarily have that data and either have to pull their rate, or they will revisit the rates that have been submitted by the MACs that are actually familiar with and have adjudicated these claims in the past and will adopt their rate.

So as you know, right now we're in an open comment period. A lot of this activity and exchange and education is taking place. That will end in August, and then we would expect to have final decisions and final rates released sometime in probably September/October.

Okay, great. That's very helpful. And then staying on the reimbursement topic -- sorry, was there another comment there?

Go ahead.

Okay.

No, go ahead.

And then staying on the reimbursement topic, what conversations are you having with your local MAC that's making you confident you'll receive the local area coverage decision for Percepta by the end of the year?

Well, we've always said that we believe that it's about amassing the data necessary to get the coverage put together. And we believe that the library of data that we have staged together over the last 12 months -- and continues to come together this quarter -- puts us on a really strong position to achieve coverage by the end of the year.

And indeed, as the test is being used, and we have confidence that there's market energy behind -- there's market need behind it, the test is being used the way we thought it would be used, and the data is coming together, we just believe that we're really well positioned to exit this year in a good spot with coverage.

Okay. Great. And then a last question for me, and then I will jump back in the queue. But do you have any estimate of what the volume and revenue impact was during the quarter by having those two conferences at the same time?

No, one of the reasons we don't give quarterly guidance is because of -- you know, at this stage in a company in business, the quarterly nuances can definitely come into play. What we do know is that Q1 was a strong quarter for us, and historically of course one of those major conferences had fallen in Q1. And so you just think about it.

In our case, doctors don't order a test and then patient go have a blood draw, or you go pull a sample that was taken from a surgery a couple months ago. For us to get samples, they have to be taken the day before in a doctor's office or a hospital environment, and the doctor has to be there and basically collect the sample.

So we have mapped over the years that we always see suppression when we hit months where these meetings play. ATA is a September meeting in our lung business, although it doesn't surprise revenue yet, because we're not booking any. But ATS meeting will be a key meeting, along with CHEST. But I think having those two fall in one month, we were quite pleased to come out with the volume growth that we had.

Okay, great. Thank you.

Doug Schenkel, Cowen and Company.

This is Chris on for Doug today. Thanks for taking my question. Just first question on -- so was pricing about as expected for the two Blues payers you signed subsequent to the CareSource agreement?

And it seems like the progress with CareSource is going quite well, so you can provide an update on how you're thinking about Blues coverage over the balance of this year? Then just lastly, how should we think about revenue contributions from the recent Blues payers related to CareSource this year and next year?

Well, as you know, coming into the year, this was one of our top milestones. So we are really excited about the progress we're making. And I'll have Chris fill in some of the color on what we're doing with CareSource and the Blues.

Yes. I think as we said, the rates were pre-negotiated so that the Blue Cross Blue Shield companies knew that they were getting the best available rates. And we don't negotiate away from those rates, because that's contractually what we've agreed to do. So obviously, by signing these agreements, they are in line with what we would expect and what is good for them and ultimately good for us.

And this is really important to us -- to get these done -- for a couple of reasons. One is that we always like to remind people of that the situation with the Blue Cross Blue Shield plans have been tough for us, because the checks go to the patient. And so by getting these network contracts done, it allows the money to flow to us rather than to the patient, which does a couple things.

First of all, it's more likely to get it, obviously. And secondly, it's cheaper to get it, because it's really hard to go try to figure out it all out and then chase down the patient. And the second reason why this is critically important to us is that the single biggest reason physicians choose not to use Afirma is because of lack of network access. They get beaten up by the insurance companies for using out-of-network labs. And so by getting into contract, we remove a major barrier to ordering.

And so while it's easy to focus on what the contracting means for us in terms of revenue upside, because it ultimately makes it easier to collect the money, it also works on the other side, which is the samples, because we're more likely to get the sample because the barrier is removed from the physician choosing to use the test.

And this has been one of our top priorities this year. We will continue to execute on Blue Cross Blue Shield plans that we have not signed contracts -- that have covered the test, but we've not signed contracts with. And this is one of our top priorities this year, because not only does it drive revenue, but it drives samples hand-in-hand.

So why don't I cover a little bit on the financial side? So from the numbers perspective, as we alluded to in the prepared remarks, these two signed contracts were 11 million contracted lives, which takes us to about 18 million Blues under contract, which is impressive.

But if you count the additional Blue Shield of California, which also includes some of the federal employees, that's about another 8 million. So you are up to about 25 million Blues under contract.

One of the key things that you have to remember -- not only as Chris said, do they now pay us directly, but if we can get some predictability of payment from those payers, then we are on our path to be able to accrue those payers. So to us that is a very significant potential over the next several quarters as we get that predictability of an estimatable amount. So that's important to understand that.

And the other point that I would make is that we've been seeing a trending up that we've talked about of the average GEC price. And the estimate that we've been using for the last couple of quarters -- if you take the amount of the GEC revenue and divide it by the number of tests in this quarter, which is a little bit of a proxy for where the payments are going, so we don't have to wait for lab payments a year later, it was about $2,250 in this quarter. And we would anticipate over the next several quarters as we get in more contracts, that by year end we'd probably be exiting the year with about $2,300 on average per GEC. And that reflects about a 10% increase during the year.

So we're not going to get out X number of millions of dollars, but I think if you back into it by all of those numbers -- the number of covered lives and how much it's going to change our GEC average price, you can get a pretty good proxy exiting this year. The only other thing I'd say is, as Chris noted, we really believe that the CareSource contract will allow us to accelerate additional Blues into contract later this year. And so that's obviously still a major effort for us.

Yes, we always focus on these calls on what just happened in the quarter that was, but obviously what's important is the bricks that we are laying in the foundation for the quarters in the future. And we really believe that these are important bricks that we are laying to build the next couple quarters forward, and we're really excited about the progress we've made on that front.

Thank you. That was super helpful. And then maybe just a last question on the sales force: can you talk about whether the hires you mentioned in your prepared remarks were incremental to those you announced last quarter? And sorry if I missed this, but did you say part of the sales force would be selling both Percepta and Afirma, at least initially? And what are your plans for the dedicated sales force for Percepta? Thank you.

Yes, we have pointed to this opportunity to create an integrated team where we can start to get some leverage, because it's really hard to build these enterprises in a way that can achieve profitability without getting leverage on multiple products in the sales and marketing area. So we've been very focused on that. So Chris, why don't you talk about the build-up? We hired eight.

Yes, we hired eight new heads and two more started in July, and those are actually consistent with what we signaled when we exited the Genzyme agreement. And those folks are in place, and they are performing. And we feel really good about the progress that we've made there.

I would note one of the things that we talked about in this call is that we've started -- a chunk of those were actually account managers, and those people are tasked with managing the account that are in place that are significant to us, because in managing those accounts, that frees up our current sales force to drive the business forward rather than spending their time maintaining the accounts that we have.

And that really was key to us laying the proper groundwork to exit the Genzyme agreement. We feel like we've laid that. That's gone really well for us this quarter, and we feel good about it.

What we talked about in this call was that we were going to hire an additional six people over the coming few quarters. And that will be a mix of people in different areas, and partly those people will obviously help with the Afirma, in driving Afirma forward, and really help us half the staff up for 2017. But as we talked about, they will also help us prepare for the Percepta commercialization that we see on the back half -- on the back end of Medicare coverage happening.

We do believe that there's synergies to be gotten in the sales effort. We are going to be marketing the products obviously to a different call point -- at the pulmonologist rather than the endocrinologist, but it all comes together in the hospital lab. And these samples ultimately are processed and held, and the underlying pathology is done at one place in the hospital, and that's actually the key point or the key call point.

And a lot of our -- our sales channel spends a lot of time interfacing with those hospital folks. And we've really started to build a nice expertise in doing that. And so we intend to leverage that as we commercialize Percepta. Because as we have talked about on multiple calls, we are really focused on making this business be profitable. And as we move towards full commercialization of Percepta, we're going to do that in a really smart way that gets leverage with the existing sales channel so that we can keep marching the business towards a profitable outlook.

Okay, great. Thanks so much for taking my questions.

(Operator Instructions) Paul Knight, Janney Montgomery Scott.

This is actually Carolina Ibanez-Ventoso on for Paul Knight. If we can shift gears and now discuss your Envisia test -- you mentioned that the high precision CT imaging is the gold standard for the diagnosis of IPF. However, there are molecular biomarkers like pro-inflammatory cytokines and chemokines that are also used to assess IPF in the clinic. I was wondering, what is the potential of your test against these other molecular biomarkers?

Well, there's really two standards of patients being worked up and diagnosed for IPF. High resolution CT is obviously the imaging modality that they go through, looking for that fibrotic pattern or what is called a UIP pattern by imaging. And the other is the surgical procedure, where an actual piece of tissue can be extracted in order to get a pathology pattern consistent with UIP.

And so, what we're doing with our first entree into this market is building a classifier that now has some really exciting data coming out at these meetings -- and we'll be advancing that more before the end of the year -- showing that we have been able to build a classifier that reproduces this UIP pattern that might require a pathology surgery to get the tissue without the need to go through that surgery.

And the reason we chose that path -- obviously the guidance of all of our MDs and advisers and the multidisciplinary investigators that have been part of all of this, including the Centers of Excellence around the globe -- is because today surgical pathology UIP call is really considered the ultimate gold standard when combined with HRCT in the clinical picture for making a call.

And obviously many patients in this indication are not able physically to withstand a surgery, and that's why so many of these diagnoses remain ambiguous, and misdiagnosed, and delays in getting to actual diagnoses. So we've done whole genome work; this is a deep RNA sequencing platform that we've used, where we squeeze a lot of genomic data and information out of that in order to come up with a classifier that's going to provide a more accurate indication.

And where we are today, the data looks like we're going to have a very highly concordant classifier that can predict that UIP pattern of pathology without going to surgery to get it. And that everyone is really excited about.

Okay, thank you for all that color. I was wondering, before your launch of Envisia, any data you may release or any presentation of this data at conferences?

Well, we obviously cannot release the product for patient use without full validation data being unveiled. So yes, we plan to launch in Q4. And in advance of that we'll see more data unveiled, including data from the multicenter prospective validation study.

So we're heading into an exciting back end of the year. Exiting 2016, we will have launched our third product as a company, and really poised very well to continue the great growth that we've had and accelerate that on the back of more contracting for Afirma, coverage for Percepta, and the launch of our third product in a really highly exciting field, IPF.

Okay. Thank you very much. Thank you.

Bryan Brokmeier, Cantor Fitzgerald.

Bonnie, you already talked about your discussions with CMS regarding Afirma reimbursement. Have you also made any progress towards working with the individual MACs that submitted the low reimbursement rates?

Yes. We have been engaged with all of the stakeholders, from Washington to CMS to the MAC regions. And we weren't just out there doing this alone, either. As key parts of the Coalition of 21st Century Medicine companies we are sort of banding together, because we know that we can make a lot more progress, as we have historically, as a group than single companies. So we've had a lot of great discussions, a lot of interactions around process at all levels within those organizations. And I think we remain confident that it's going to come out on the right side.

You know, keeping in mind that PAMA is really now teed up to go into effect for 2018, and we're talking about this one-year gap between where we are today with pricing of these tests and where pricing will be in 2018 when PAMA kicks in. You know, for a company like us that has amassed the contracts and the level of reimbursement that we have, it really would be silly to see the price of a test drop and then come back up under the new process. So we think CMS is going to be smart here, and we're really hoping this lands where it should.

And Bonnie, do you have any contracts that come up for renewal in 2017? Or what's the process for payers to change reimbursement, which could allow for PAMA to not have the same effect that you are anticipating?

Yes, we have not been approached by one payer; nor do we have any of our major contracts coming up for renewal. And what's pretty exciting about all of that is in the light of all of this, we're moving forward with contracting under our CareSource agreement, which has a very fair and very attractive pricing for us that has been established through that agreement. So we remain very, very positive.

And Chris or Bonnie, following up on some comments Chris made on this -- just made a little while ago on the sales force, could you elaborate a little bit on the benefit that you're seeing over the last, I think, six months since you added the account managers, and the effect they're having on signing up new physician offices from the freed up time the sales reps have now?

Yes. The account managers -- what we're seeing is that -- well, we're seeing a couple of things. One is that the account managers are layering in and they're working a defined set of accounts, and those are our largest accounts. And we're seeing that business remain very static, very constant; and actually, in some cases, grow. And that's been great.

And that's a tribute to the old adage that it's about reaching frequency and touching clients. And that's been good for us. So we've seen some really, really nice, sustained progress in our current accounts and actually some opportunity to grow them.

Then in our new account set-up, we have continued to set up new accounts at a very high clip. And we think that's partly because of where we are in the market and the success we've had with the data, but secondly because their sales reps have had more time to -- freed up rather than managing the accounts. So it works in both ways. And we are seeing that play out, which is why we are continuing to invest in that channel.

And given the conferences that you had earlier in the quarter, did you sign up new physician offices following the conference that aren't reflecting a full quarter's worth of revenue?

There's a couple things. I mean, I think they happen all through the year, the sign-ups. And I don't think we really see them.

We always get new leads at these conferences, but what we find is that it takes away a lot of our existing business, and that's the way it impacts our volume. We don't see that there's a huge boost in new accounts that drive the business after these conferences, but we always find that there's new leads there that we are able to work.

The time to set up -- you know, the sales cycle for a paired account is relatively small. When they move to us, they move to us. It's a single physician making a decision about what to do in their office.

In a direct account, in our diagnostic solutions account, that takes more time to get set up and get those accounts up to speed. So they have a longer lead time and gestation period from start to full maturation.

Okay, great. Thanks a lot.

Benny Varon, Wedbush Securities.

I was wondering if any of your tests could be subject to competition with what we call the liquid biopsies, and those tests that seek to replace painful, pricey, complicated procedures?

So one of the things that we believe is really unique about what we're doing at Veracyte is focusing in on areas of diagnostic workup today that yield a high rate of ambiguity, where the next step in the process is typically a surgical procedure. And that creates a great pathway as we develop and position our test in back of that to have a very fast process for developing the evidence to show that we can replace the gold truth.

So I think that a while it's potentially possible to shift a sample to a blood sample, I'm not sure in the case of thyroid -- speaking specifically to that -- that replacing a biopsy, simple needle procedure in the doctor's office with a blood sample would really be that feasible. And secondly, I think the studies that are going to have to be conducted to prove performance around sensitivity and specificity are going to be quite expensive and take a long time to prove out.

It's very different than measuring something that's detecting something foreign, or detecting a recurrence in something, or a metastasis. So we've looked very closely at how these things may or may not impact our current existing business, and we'll continue to look at -- on all the technology fronts of how we can continue to stay on the forefront.

Very good. Thank you. And maybe do you have a quick update on the CFO transition?

We have no update beyond what we announced a couple of months ago, when we announced that we would be doing a national search and that Shelly would be transitioning over a period of months. And we're still in that transition period now and expect to move through that recruiting process here in the next couple of months. And hopefully we'll have an announcement down the road. Everything is going well.

Very good. Thank you.

(Operator Instructions) And I'm showing no further questions in the queue. I would now like to turn the call back over to Bonnie Anderson, President and Chief Executive Officer, for closing remarks.

Thank you all for joining us today. As we prepare to launch our third commercial product later this year, we are reminded that our focus on resolving diagnostic ambiguity has really enabled us to carve out a truly differentiated position in genomic diagnostics. And it's dramatically improving the lives of patients and reducing healthcare spending.

Moreover, in an era where science and technology advances are fueling this relentless curiosity to know more about a patient's health, we are providing clinically actionable information backed by rigorous evidence. Our products enable doctors to know what to do next for their patients and to give patients a clear path forward. We believe we are fundamentally changing the importance of diagnostic testing, and we really appreciate your ongoing support of our business and mission. Thank you.

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