Veracyte Inc (VCYT) 2017 Q4 法說會逐字稿

Good afternoon, ladies and gentlemen, and welcome to the Veracyte's Fourth Quarter and Full Year 2017 Financial Results Conference Call. (Operator Instructions) As a reminder, today's conference is being recorded.

I will now like to turn the conference over to your host, Miss Bonnie Anderson, Chairman of the Board and Chief Executive Officer. You may begin.

Good afternoon, everyone, and thanks for joining us today for our Fourth Quarter and Full Year 2017 Financial Results Conference Call. Joining me today are: Keith Kennedy, Chief Financial Officer; and Chris Hall, President and Chief Operating Officer.

Before we begin, Keith will take us through the Safe Harbor statement.

Good afternoon, everyone. Before we begin, I would like to remind you that various statements that we make during this call will include forward-looking statements as defined under applicable securities laws. Forward-looking statements include statements regarding our future plans, prospects and strategy, financial goals and guidance, product attributes and pipeline, drivers of growth, expectations regarding reimbursement and other statements that are not historical fact. Management's assumptions, expectations and opinions reflected in these forward-looking statements are subject to risk and uncertainties that may cause actual results and/or performance to differ materially from any future results, performance or achievements discussed and or implied by such forward-looking statements, and the company can give no assurance they will prove to be correct.

In addition to today's press release, those risk and uncertainties are described in the company's filings with the Securities and Exchange Commission. Additionally, non-GAAP financial measures will be discussed on this conference call.

Please refer to the tables in our earnings release in the Investor Relations portion of our website for reconciliation of these measures to their most directly comparable GAAP financial measure. Prior to this call, we announced our fourth quarter and full year 2017 results, which are available on our website, veracyte.com, by clicking menus on the top right corner of our website and clicking through to our Investor's landing page, and then, press releases. We also released a financial presentation, which I will reference later in the call when I cover our financial results. You may find a financial presentation in the same Investor's section under Events and Presentations.

I will now turn the call over to Bonnie.

Thank you, Keith. I need to recap our performance in 2017, a year of solid growth, product portfolio expansion, scientific innovation and reimbursement successes. I'm also pleased to update you on the foundational readiness of our sales and marketing operations to accelerate the growth of 3 commercial products, which we believe will lead to a future of sustained growth. And most importantly, I'm excited to share our plans and expectations for 2018.

Let's begin with the 2017 recap using the key metrics we used throughout the year to define success. The first is revenue growth and commercial expansion. We grew revenue by 11% in 2017, closing out the year at $72 million coming in at the top of our previous guidance for the year. We grew our reported genomic test volume to just over 26,000 for the year, a 12% increase over 2016. Q4 was slightly higher in growth at 13%, as we built momentum toward the end of the year.

We extended Percepta adoption to over 70 institutions around the country by the end of 2017 and began booking revenue. We launched our next generation Afirma Genomic Sequencing Classifier or the GSC on our RNA sequencing and machine learning technology platform, enabling 30% more patients to potentially avoid unnecessary surgery in thyroid cancer diagnosis. Response among our current customers has been strong.

Lastly, we expanded our multiproduct sales team by over 40% in 2017, setting the stage to drive Percepta growth in 2018, while further penetrating the Afirma market beyond the estimated 35% position we hold today. We also continue to work with the Quest/AmeriPath relationship to drive further adoption into their physician networks.

The second is reimbursement progress. Coverage and reimbursement has been a pillar of Veracyte's success for years and 2017 was no exception. We secured a dozen new medical coverage policies for Afirma, adding nearly 40 million covered lives from Anthem, a key milestone, making Afirma one of the very few genomic tests in any indication to be covered by Medicare in all leading U.S. health insurers.

At the end of 2017, more than 275 million people, including over 120 million Blues plans members have access to Afirma as a medically necessary benefit through their health plans. We increased the number of contracted lives for Afirma by nearly 20 million in 2017, bringing the total to over 175 million people, including nearly 45 million Blues plans members. This progress is important because physicians are much more likely to order tests that are available in-network for their patients.

Through the implementation of PAMA, we received a new Medicare rate for Afirma, which increased the reimbursement rate from approximately $3,200 per test to approximately $3,600 per test as of January 1, 2018. Lastly, in May of 2017, Medicare coverage for Percepta became effective through the multi-x program, making the test available to nearly 60 million Medicare recipients.

And finally, the modification of the CMS 14-day rule, which removed challenging billing requirements for our institutional clients and will allow us to fully manage the billing process going forward, greatly streamlines the sales process coming into 2018.

Our third measurement of success is evidence development. Here to we experienced significant success in 2017, with 5 publications in over 20 abstract presentations across our portfolio. We presented 14 abstracts on Afirma at key endocrinology conferences, including positive data from 4 long-term clinical utility studies. This also included 7 abstracts showcasing the performance of our new Afirma GSC.

We published a cost-effectiveness study for the Percepta classifier in the Journal of Thoracic Oncology and presented 3 clinical utility studies at major medical meetings. We also presented 5 abstracts for Envisia at key pulmonology meetings, demonstrating the genomic test clinical validity, clinical utility, and analytical verification. We believe this robust clinical evidence will enable us to gain Medicare coverage for Envisia genomic classifier, the first diagnostic test to improve the diagnosis of idiopathic pulmonary fibrosis or IPF. Medicare coverage for Envisia is one of our key catalysts for 2018.

And our final success metric for 2017 was financial discipline. Our full year cash fund was $25.2 million, an improvement of 22% over 2016. We are pleased with the significant progress we've made in advancing our pipeline for future growth while managing our cash burn effectively. We believe we are on the pathway to profitable growth and want to remind you all that this remains a key important goal for us as a company.

To this end, in early 2018, we announced a strategic realignment of our business and new appointments to advance our commercial growth and ensure we are deploying our resources effectively and efficiently toward revenue-generating activities. As we move into 2018, we are a stronger, more operationally-efficient organization that is primed to advance growth in the 3 market-leading genomic tests we have.

I will now turn the call over to Keith, to review our financial results for the fourth quarter and full year 2017.

Thank you, Bonnie. As mentioned earlier, you may find our financial presentation on our website at www.veracyte.com under Investors, and then Events and Presentations. I plan to speak about our fourth quarter and full year 2017 results, and then, conclude with 2018 guidance.

Turning to Page 3 of the presentation, our performance against 6 KPIs, or key performance indicators, for the fourth quarter of 2017 as compared to the prior-year quarter are as follows. Revenue of $19.6 million increased 7%, as noted in the drivers at the bottom of the page, revenue included cash revenue of $0.3 million in the current quarter and $2.6 million in the prior-year quarter. Cash revenue is the cash we collect in the period for tests reported in prior periods, but at that time, the test reporting did not meet our revenue recognition standard.

As a reminder, in the third quarter of 2016, we began accruing revenue for substantially all reported test volume. Though we continue to pursue and welcome cash revenue, it is becoming a smaller portion of our revenue. Excluding the $0.3 million of cash revenue previously mentioned, accrued revenue was $19.3 million, which included $2.5 million of cytopathology revenue. Accrued revenue grew 23%, including cytopathology revenue and 25% excluding it. Given that we accrued substantially all reported test volume in both periods, we believe accrued revenue more accurately reflects our revenue growth rate attributable to underlying reported volumes.

Moving to our second KPI, genomic volume of 7,153 tests increased 13% and included 7,073 Afirma reported test results and 80 Percepta reported test results. Our third KPI, gross margin, was 60%, declining 400 basis points. Gross margins are favorably impacted by cash revenue collected on tests performed in prior periods.

Gross margins, with respect to accrued revenue, improved from 58% to 60%. Our fourth KPI, operating expenses, excluding cost of revenue, were $17.9 million, the 16% increase was due principally to our investment in our sales and marketing organization, while our R&D and G&A spend declined.

Our fifth KPI, net loss of $8.4 million increased 92% due to the items previously mentioned, as well as a $1.5 million exit fee paid to refinance our senior secured loan, which we recorded as interest expense. And our sixth KPI, cash burn, a non-GAAP measure that we define as net cash used in operating activities plus net capital expenditures of $6.1 million, increased 31% due principally to a $1.6 million increase in net cash used in operating activities, offset by a $0.2 million reduction in net purchases of property and equipment.

Turning to Page 4 of the presentation. Our performance for the full year 2017 against these same KPIs as compared to the prior year are as follows. Revenue of $72 million increased 11%. As noted in the drivers at the bottom of the page, revenue included $69.3 million of accrued revenue for tests that we reported in 2017 and $2.7 million of cash revenue for tests reported in prior periods.

Since we started accruing revenue for substantially all test volume in the third quarter of 2016, our full year comparison of accrued revenue against prior year results may be misleading and therefore is not shown. 2017 revenue includes $8.5 million from cytopathology services offered as part of our Afirma solution. Excluding cytopathology services, revenue grew 15% over the prior year.

Our second KPI, genomic volume of 26,026 tests increased 12% and included 25,921 Afirma-reported tests and 105 Percepta-reported test results. Our third KPI, gross margin was 61% and flat to the prior year. For the full year 2017, gross margins, with respect to accrued revenue, were 59%. Our fourth KPI, operating expenses, excluding cost of revenue were $70.3 million. The 3% increase was due principally to our investment in our sales and marketing organization, while our R&D and G&A spend declined.

On our fifth KPI, net loss of $31 million decreased 1%. And our sixth KPI, cash burn of $25.2 million in line with the higher end of our guidance, improved 22% or $7 million due principally to a $4.1 million improvement in net cash used in operating activities, plus a $2.9 million reduction in net purchases of property and equipment. The next 6 pages outline the sequential and year-over-year results underlying each of our financial KPIs.

A few observations. On Page 5, revenue, we highlight the $3.5 million of incremental revenue that we recognized in the third quarter of 2016 when we began fully accruing revenue in the quarter we reported test results, instead of in the quarter of cash collection. As a result of our transition of full accrual of revenue in mid-2016, we do not believe we will have a transition adjustment upon adoption of ASC 606 on January 1, 2018.

As Bonnie previously mentioned, we've made significant progress obtaining policy coverage as well as contracts for Afirma tests. As a result, our average reimbursement per Afirma test improved from $2,100 to $2,300 in 2016 to $2,300 to $2,500 in 2017, a 9% increase using the midpoint of both ranges.

Turning to Page 6, genomic volume, I would make 2 observations. First, as indicated in the year-over-year bar chart on the left. The green bars represent our genomic volume and growth compared to the prior-year quarter. Sequentially, our growth rate increased over the year. And second, our business is inherently seasonal and we observed similar trends, seasonal trends, in 2017 that we observed in 2016. We would expect this to continue.

Turning to Slide 7. Cost of revenue and gross margin as stipulated earlier, our transition of full accrual in the third quarter 2016 favorably impacted our gross margins. Gross margins with respect to accrued revenue for the second half of 2016 were 56%. The same measure for the second half and full year of 2017 was 59%.

Turning to Slide 8. Operating expenses over the last 8 quarters, Q4 2015 to Q4 2017, genomic volume per quarter increased 28% and revenue per quarter increased 40% while operating expenses per quarter increased only 13%. In the third quarter of 2016, the Genzyme co-promotion agreement terminated, and over the four quarter period ended September 30, 2016, the average quarterly expense for the Genzyme agreement was $1.7 million or 11% of revenue. There were no material Genzyme co-promotion expenses after the third quarter of 2016.

We do not believe we ramped hiring sales staff early enough to account for the transition. We made significant progress in the second half of 2017 and ended the year with approximately 65 sales staff in the field. Reductions in R&D and G&A spend offset the increase in sales and marketing spend.

Slides 9 to 11 provide more detail on our net loss, cash burn and cash position. In 2017, we improved our loss ratio, our loss from operations by 8%. We also recorded $4.9 million of interest expense, including the $1.5 million exit fee we paid in Q4 2017 to refinance and lower our current interest rate on our senior secured debt facility.

At December 31, 2017, we had cash and cash equivalents of $33.9 million. Our guidance, we expect to achieve the following results in 2018. Annual revenue in the range of $81 million to $83 million, an increase of 17% to 20% over our 2017 accrued revenue of $69 million, supported with an estimated 15% growth in genomic test volume over prior year and annual cash burn of $18 million to $22 million, an improvement of 20% over the prior year at the midpoint of the range. We continue to expect similar trends across our business, including quarterly volume trends associated with seasonality across our business, namely, a Q1 quarter-over-quarter decline of 5% to 10% from Q4, and a Q2 to Q3 flatness with Q2 and Q4 being our 2 growth quarters.

As we ramp volume in our (inaudible) lab for the Afirma GSC and Percepta, we expect margins could be depressed 200 to 300 basis points earlier in the year and recover later in the year, averaging similar margins as we generate in 2017. As previously announced, we expect to increase our sales and marketing expenses by approximately $6 million from $32 million to $38 million. Our G&A and R&D spend is expected to increase in line with annual compensation inflation cost, which we estimate at approximately 3% to 5%.

Compensation is approximately 55% to 60% of our operating cost, excluding cost of revenue. As a result, payroll taxes and benefits tend to be higher in the first quarter.

I will now turn the call back over to Bonnie to discuss corporate milestones for 2018.

Thank you, Keith. There were 5 key metrics that we believe will drive our performance in 2018, and importantly, set us up for long-term success. They are commercial growth; reimbursement expansion; scientific innovation; evidence development; and financial discipline.

Commercial growth will be measured by the number of genomic tests reported and the revenue generated from those tests. While we believe Afirma will fill the vast majority, greater than 95% of the expected revenue that Keith just laid out, we do expect to gain significant traction with Percepta now that we have nationwide Medicare coverage, removal of the 14-day rule billing constraints, and a significantly expanded and highly-trained sales team coming into 2018.

At the early stages of Percepta adoption, we'll be monitoring the number of institutions and physicians ordering the tests to track our success. Our latest market research with pulmonologist is quite encouraging. It shows a significant planned uptake in Percepta utilization once physicians are aware of our product profile as a clinically-proven complement to lung cancer diagnostic bronchoscopy. We know that physicians prefer bronchoscopy over other procedures to evaluate lung nodules because it's less expensive, much less risky and less costly. Because Percepta makes bronchoscopy more useful, physicians report that they will do nearly 40% more bronchoscopies, shifting from other more invasive biopsies as a result of having Percepta.

So we believe that exiting the year at a run rate of 500 to 1,000 reported Percepta results per quarter will be a success as we build momentum throughout the year.

The second important metric of success is reimbursement expansion. We plan to generate positive coverage decisions for Percepta from commercial payers, building on the strong foundation we've laid with Afirma. We believe our success with Percepta will be facilitated by the impressive collection of clinical utility evidence we've assembled, including data showing that the use of the test among existing users is reducing invasive procedures by over 50% among patients that classifies as low risk for cancer.

Also, in pulmonology, we are on track to secure Medicare coverage for Envisia, with an eye toward expanding commercialization in early 2019. And for Afirma, we'll focus on converting our network of private payer coverage policies into in-network contracts across the board to help fuel further adoption.

Scientific innovation is our third key metric. Our team will continue to push the boundaries of scientific innovation, leveraging our world-class RNA sequencing and machine learning capabilities. First, we believe the array of genomic content we can extract from each sample surpasses in size and scope anything else available on the market. We believe this rich genomic content and data can potentially inform treatment decisions across our clinical indications, particularly, as we dig deeper into the -- understanding the genomic underpinnings of disease.

We will deploy this capability first in thyroid cancer. In fact, I am pleased to announce the upcoming launch of our new Afirma Xpression Atlas platform in the second quarter of 2018. Physicians tell us they want more genomic information to help guide surgery decisions and treatment options. This new extension to the Afirma GSC will provide data on over 760 variants and more than 130 fusions in over 500 genes as well as mitochondrial content and loss of heterozygosity and will further our approach of offering physicians a one-stop shop in thyroid cancer.

Our market research suggests that the product will fill an important need in the market and augment our current offering, allowing us, we believe, to test more patients per account and inform a broader set of treatment decisions. We'll share more about the product extension as we move through in the second quarter.

Further, our ability to access rich genomic information including our extensive biorepository of samples will help fuel our continued product innovation efforts and could potentially be of interest to developers of precision medicine therapies. As the market leader in the diagnosis of fibrin cancer, for example, our most advanced indication are database significant. To date, we've touched more than 325,000 patients with Afirma, and have performed over 100,000 genomic tests and these numbers are growing as we continue to penetrate this market.

Finally, our scientists will break new ground in lung cancer, where we plan to collaborate with top thought leaders in the field to pursue a nasal swab test that uses field-of-injury technology to better stratify patients who are at risk for lung cancer and to improve early detection.

We plan to further build on the exciting findings published last year in the Journal of The National Cancer Institute, in which Boston University researchers showed that the same field of injury lung cancer associated genomic changes found in the main lung airway and evaluated with Percepta can also be detected in the nose. We expect to announce collaborations during the year to advance this significant program.

Our fourth driver of success is evidence development because scientific innovation is only part of the equation. It must be married with a deep library of evidence, demonstrating the performance of our tests and their ability to improve patient outcomes. This is key in driving test adoption and reimbursement, and further establishing our tests as standard of care.

To this end, we expect data from several key studies to be published or presented throughout the year. The clinical validation study for the Afirma GSC, which shows that GSE can help 30% more patients avoid unnecessary surgery. The study utilizes same prospectively collected samples from the nearly 50-site New England Journal Medicine Study of our original Afirma test.

This clinical validation data of our new Afirma Xpression Atlas, which will show that our RNA sequencing platform allows us to detect vast amounts of genomic content, including fusions, mutations and other abnormalities, which we believe is substantially more than other technological approaches. Third, the clinical utility study for Percepta, which will demonstrate the real-world impact of our test is having in lung cancer screening and diagnosis.

And last, Envisia, our prospective clinical validation study known as BRAVE, which will demonstrate the performance of the first ever genomic test to improve diagnosis of IPF as well as a study showing the test's ability to impact patient care decision-making.

We also expect to see user experience data emerge from both Afirma and Percepta users as these new products gain traction in changing clinical practice in thyroid and lung cancer diagnosis, respectively.

This is all exciting work that we believe will drive tremendous value for patients, physicians and payers. And with our focus on creating shareholder value, we remain committed to growing our business responsibly.

That brings me to the final success metric, financial discipline. We intend to continue reducing our cash burn in 2018 by careful management in spending and strategic use of resources. This will include ensuring that our integrated multiproduct sales structure is achieving our volume and revenue goals for both Afirma and Percepta.

We believe that execution on these 5 metrics will position Veracyte exceptionally well for growth, both this year and into the future. Moreover, we move into 2018 with 3 tests that change clinical care and improve patient outcomes: a robust reimbursement foundation; an expanded integrated sales team to bring our tests to market; and scientific expertise and platforms that will continue to fuel product innovation and set us up for future expansion.

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

(Operator Instructions) Our first question comes in the line of Puneet Souda from Leerink Partners.

So on Percepta, can you remind us, again, maybe I missed this, how much of that is in the 2018 guide? And also, could you give us a sense of how that could accelerate from those numbers, potentially? I think you gave a 500 to 1,000 test estimate, correct?

Yes. Chris, why don't you take that? You're leading the commercial effort here.

Sure. Yes. We talked, Puneet, about -- in the script, about getting to a run rate in Q4 of 500 to 1,000 tests, and that's what we're shooting for. We're off to a tremendous start as we start the year. We took our field force at the beginning of this year, which you'll remember is selling both of the products, and we had them kick the year off selling both of the products and we've tasked our field force, all of them, to spend a significant amount of time driving Percepta. And we've -- we really feel like that's been going well to date through this quarter. One of the key things, and Bonnie talked about this in the script, is that the positioning of the product to improve the usefulness of bronchoscopy is really getting traction, because it's hitting that sweet spot of what physicians do every day and making that more valuable. So as we come out -- as we come into this year, we feel really optimistic about the product getting traction and driving from here.

And Puneet, just to add to that. If you think of our metric of exiting this year with, say, 500 to 1,000 reported tests and assume about 50% reimbursement from Medicare. Then, you can see that we'd be setting '19 up for a really solid year of strong revenue growth. We also talked, coming off of last year, of having about 70 institutions submitting Percepta samples and we can tell you just so far this quarter we now are receiving samples from over 100 institutions and over 200 MDs. So we feel like we have great metrics showing significant traction already this year.

Okay. Great. And on the timing of product extension. Could you provide that and maybe what changes do you have to make in your test analysis and production? And what's the change in COGS maybe if Keith can take that? And do you have to file anything with the pairs in CMS to include that in the payment guidelines?

Well, actually, Xpression Atlas will launch in Q2 as we said. It will provide a portfolio of genomic changes, some which have reimbursement codes. Others that will be used, potentially, to help guide other treatment decisions. We don't expect this year to see meaningful revenue from the expression Atlas, but the platform and the extendability of it across all of our indications, certainly, will bring future value.

And on the gross margin side -- on the gross margin side, I talked a little bit about that, and when I covered guidance in terms of earlier in the year, that could be compressed 200, 300 basis points. But as you can appreciate, our cost of revenue is not a big, big number in terms of -- a $1 million can swing your margins 200, 300 basis points, and we tend to buy these in large sequencing kits and things like that. The assays are fairly large purchases.

Okay. And the last one. In terms of the contracted for Afirma that you have currently. I think it's $175 million that's reported. Could you remind us where that stood last year? And what's your -- how soon can you reach the sort of 90% contracted state?

Yes. I mean, I think, essentially, the one major plan that we're working that we do have coverage from and have not yet contracted with is Anthem. So that will be a key priority and key catalyst for 2018. And I'm sure when we achieve that, the whole world will know.

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

Just a follow-up to Puneet's question on Percepta. So I just was curious if you could, I realize it's a different sort of end-user if you will, but maybe just correlate the ramp in Percepta with what you saw with Afirma. Is it trending in line with your expectations, ahead? And then, maybe, just what did you learn with Afirma that you're now applying to Percepta if anything, in terms of how to drive adoption?

Yes, great question. So there's a couple of different things about the market for Percepta that is different from where we entered the market with Afirma, because with Afirma, we had the large base, about 50% of the market were physician office practices, where you really only had one stakeholder that would make a decision to adopt the test. And if you remember, we focused our's and Genzyme's efforts almost excessively into that segment of the market for the first few years that we were driving adoption. In 2014, we began, then, to operationalize Afirma to work better for the institutions, where they would run their own cytopathology and need to collect and handle the sample operationally and get that sample to us following a cytopathology read. And to date, that segment of the Afirma market has continued to be the most rapidly growing from '15, '16, and through '17. So what we learned in those last 3 years with Afirma in the traditional segment is directly applicable to Percepta. And that is that radiologists, surgeons and pathologists are all key stakeholders in decision-making in institutions and health systems along with the specialists, which would be endocrinologists for Afirma and pulmonologists for Percepta. But what we've learned in operationalizing and gaining pull-through is very, very applicable. And that's why we wanted to create a sales structure that would leverage that. Chris?

Yes. I would just add, and this is Keith. This point that Bonnie mentions about multiple stakeholders is so important in a hospital situation, and we really learned that as he walked the commercial journey with Afirma. And that's certainly been true with Percepta. I would say that the one part of that that has been pleasantly surprising to me is that we have been able to leverage the relationships that we've made so far on Afirma to help us with Percepta. There is an overlap spot there with the pathologists. Some of the same people that know us in the hospital pathology labs are also reading these samples and have helped to provide an introduction to the institution. And we've gotten to know the processes because all these institutions have their own way of doing business. And so we've been able to leverage the relationships that the salespeople have in many of the local institutions to get on entrees in and feel good about the progress along that dimension.

Okay. Got it. And then, Keith, while I have you. So in terms of the guidance for '18, I just am curious how to think about, I guess, realized price if you will or ASP just given, obviously, you're continuing to gain traction in terms of Afirma and accruals and what not, but then you've got Percepta sort of ramping. So just curious if you could give any perspective on how to think about trends, broadly? I guess, I don't know if you are, I guess you're breaking out the 2 differences now, but what are you thinking about the aggregate?

Yes. And I know the analyst, you all -- different people model it different ways. So let me try to give you some perspective on that, just historically and what the growth rate looks like. But we've sort of increased from $2,300 to $2,500 on the Afirma side. And with the Medicare rate going up, call that $100 impact on rate. So we'd expect, so Afirma to be at sort of $2,600 plus other, hopefully, contracted situations, where we improve on the managed care side. So let's call that $2,600 to $2,700 per test. And then on the Percepta -- and I would see that increasing later in the year. So we generally see around -- the third quarter is when we start getting more push on the contracting side. That seems to be about the timing we had last year. So I'd say Medicare starts the beginning of the year on Afirma, and then sort of at the end of the third quarter, we'd see a little bit of a tick-up there for the fourth quarter. Moving to Percepta, we're trying to figure out the funnel on that and we're establishing relationships and looking at what's an indication? What's not an indication? And coding and all those other stuff. So it's early, and I think we'll continue to come back to you quarter-over-quarter. We don't expect, as Bonnie said it to be a very large number relative to our total revenue for the year, and it surely won't be a big number in the first quarter, but the way I think about it is if the commercial team feels like they can get to 500 to 1,000 tests by the end of the year and we look back at Afirma, we sort of did double that in the whole year. So in the first 3 quarters of the year, it's a very small number in the first quarter, and it gets bigger and bigger, and in the fourth quarter you have your best quarter, which is our seasonally best quarter. So if I just assumed you'd double that midpoint, use 750 to 1,500 tests, and half of those are Medicare. We currently, on Afirma, accrue between 90% and 95% of those. I'm not sure what that's going to be, that percentage is going to be for Percepta yet, but just assume you get in that same 92.5% midpoint, you end up at 670, 675, about that number. I mean, if you accrue those at $3,200, that gets you a couple of million dollars in revenue, for the year. I don't know if that will -- I'm not guiding to that, I'm just walking you through the math in terms of how you all model things. That would be a success in terms of revenue on the commercial side and I think that, with Afirma, we doubled our revenue the second year, about 250% increase in revenue and we would expect to do similar growth. This early on, and we will refine this and get better at it. And so we do expect this growth rate to be significant relative to Afirma, which is a later stage product.

Yes. That makes sense. Okay. And then, and I hate to even ask this because you've done such a good job in terms of building out this sort of second and third leg of this -- in lung. But obviously, you've got this underlying kind of proprietary gene collection methodology and algorithms and whatnot. So maybe, could you just give us an update on how you're thinking about the pipeline beyond lung? Or at least Afirma -- I'm sorry, Percepta, Envisia, I don't know how much context you're giving there, but just curious how you're thinking about sort of the longer-term there.

Yes. I think because we've made the decision to develop our tests on this very extensive platform of genomic content, what it does is gives us an amazing biorepository from which we can continue to develop products and leverage that content to answer other clinically-important questions. And so when you look at what we've done bringing the GSE out, and then using virtually that exact same technology to then pull out some of these additional variants that can help physicians inform other treatment options. So one of the things that is happening in thyroid cancer is that radioactive iodine is pretty toxic, and so physicians would like to figure out other treatments that might be able to replace that overtime, and look at -- into linked cancers that may not be so aggressive. So as you look at our pipeline slide in our deck, you'll see a series of new clinical questions that we can answer. The same thing is true in our lung portfolio, both with the work that we're going to advance in the field-of-injury in the nose, by getting earlier risk stratification and moving to even earlier lung cancer detection, which is all early-stage, but very much on track. And then thirdly, with Envisia, once we launch Envisia we will be informing on patients that have IPF, the UIP pattern that's used to diagnose IPF. Every one of those patient samples that come through our laboratory will have this rich genomic content collective on it, which is -- puts us in a great position to be able to inform in other clinical question. So I think we've set ourselves up from a technology and platform capability, with machine learning expertise that will allow us to continue to evolve them and extend our product line without having to start over, without having to start from scratch. It's very powerful.

Our next question comes from line of Sung Ji Nam of BTIG.

I just have a whole bunch of quick clarification questions. So Bonnie, for Envisia, are there outstanding items before you submit to the items-to-do before submitting to the -- submitting the dossier to the FDA? Or are you guys pretty much ready to go?

We have assembled the entire dossier of what is needed to get a Medicare coverage decision. And we believe the timing is right for us to be able to commit to getting that in 2018.

But CMS, not the FDA, Sung.

Yes. CMS, that's what I meant. Medicare.

And then, Keith, your first quarter guidance based on seasonality, does that also factor in the severe weather? A lot of your peers have commented on severe weather impacting or kind of bleeding through year-to-date in the first quarter? And are you guys factoring that in as well?

We are currently -- we do about 100 to 110 tests a day on average. So you're talking weather can impact -- in any one quarter there's some severe event. So I'd call that 2 or 3 days. We try not to use that as an excuse if we hit or don't hit our numbers. But that's generally the impact. We did see, obviously, the same impact other people saw, but we think our guidance reflects what we think we're going to be able to accomplish year-over-year.

I think -- I'd just add, I mean, Keith talked about the seasonality that we see and we're seeing that traditional Q1 seasonality where it's flat -- a flat to slightly down quarter that we've traditionally seen in every year. This has been a tough weather year, but if you look back over the last 2 to 3 years there has been a chunk of bad weather years on the East Coast. I mean you all in New York have lived through some pretty nasty weather over the last 3, 4 years and we've experienced all that. So we fought through that as we did the guidance numbers.

Okay. And then, finally, in terms of your sales force build out, I think last quarter you had mentioned getting up to around 85 by the end of the year. And if I heard correctly, I think you mentioned 65 by the end of last year, is that where you are? Or where -- I guess, could you maybe give us a little more color on that?

So we ended around 65 on the drug sales side, and we expect to add 20 by the middle of the year.

And we're on our way already through that now and are building that out. Feel like we're in a good spot. We're on our internal plans for building out the group.

Our next question comes from the line of Bill Quirk of Piper Jaffray.

This is Alex Nowak on for Bill. So just on the guidance, just back in November, you guided 2018 to about 20% growth and now we're looking for about -- closer to about 14% growth at the midpoint. So I'm just trying to get a sense about what happened between now and November?

So we guided 15% volume and 20% topline growth off accrued revenue. I mean, you're looking at it from total revenue perspective. And I think our guidance number is 17% to 20% off our accrued revenue. So revenue is impacted by cash revenue prior to when we started accruing revenue. So if we did a task in 2015 and we collected cash in 2017, that cash doesn't have anything to do with any volume that we generated in 2017. And so when you look at this on an apples-to-apples basis, that's what we were talking about. I think that was not clearly understood by all. Some people did and some people didn't catch that nuance. It's just -- it's been a difficult point to communicate to investors as we transitioned over to full accrual.

Okay. Understood. So again, just adding to the guidance again, so if we exclude out the PAMA benefit and Percepta revenue, roughly estimating both of those at altogether 8% to the growth for 2018, so you're really calling for, maybe, around 10% growth to core Afirma revenue during 2018. You stated in the press release that the market is only about 35% adopted for the test. I mean, you have full reimbursement, you're already in guidelines, you have a bigger sales force. So I'm just curious, why aren't we seeing faster growth of Afirma at this point?

You want me to take care of...

You can start with it.

Okay. I think you are correct, that if you back into the midpoint of the guidance range, that gets you 10% on Afirma. Look, we missed our guidance last year, and we want to be clear with The Street that we want to meet or exceed our guidance this year. And we're thoughtful about sort of the seasonality in our business and launching 2 products across our sales force. So hopefully, we can continue to revisit this with you quarter-over-quarter. But we feel like our Afirma volume increased quarter-over-quarter. As you saw last-year, our rate of growth year-over-year increased this year. We'd like to see that trend continue. We expect the trend to continue, but that's where we gave guidance to The Street.

Alex, I think the other thing is, in the markets that we're serving with our products, we've got to get physicians to change practice, change care, and sometimes it takes time to make that happen, and often not being in network with all the payers complicates that effort. So I think we're very encouraged with where we are. We had a strong -- we have had an uptick of about 5% market penetration every single year with the introduction in the GSC in the new Xpression Atlas platform. We certainly are very confident that we can continue that upward penetration. And you're right, there's a lot of market still to get. So we're confident we're in a great place to achieve that.

Okay. That's helpful. And then, this one I just missed on the call. Did you reiterate cash flow break-even by the end of 2018?

We didn't. I've spent a lot of time -- I've been here now about a year and 2, 3 months. So I've spent a lot of time on this cash flow break-even point. I believe that cash flow break-even for this business is getting to around $27.5 million, $32.5 million of revenue a quarter. So you sort of take a midpoint of $30 million. And you need to get to $120 million and call that midpoint revenue range. And so how fast you get there, and how diligent you are in terms of what you spend in the (inaudible) lab, getting your sales and marketing effectiveness, and then maintaining your R&D and G&A at a low single-digit increase is critical. But you're going to have to achieve, call it, close to 30% growth over 2 years and 20% growth over 3 years to get to that number. And we're taking steps on 2 fronts. One, we're taking steps to drive the top line -- actually 3 steps. One, we're taking steps on the top line to add to the products and accelerate that growth and we've learned commercially from the rollout of these products how to do that better. So I think we're getting better on the execution side. Two, I think we have to continue to refine the cost of our products and what we run through the lab. $100 and change in the price of manufacturing our tests is close to $3 million a year. So we've been conservative in terms of how we'd sort of factored that into the number, but we have consistently met our margins that we guided to The Street. The third thing is, headcount represents 50% to 60% of our cost structure on our operating expense. And as you saw in January, we will and have taken active steps to manage our structure of our organization to be lean. And we found that as you look at our KPIs, and hopefully, you'll appreciate the way we're laying out our KPIs, you've seen that we've been able to very diligently manage, especially relative to our peer group. How we spent G&A dollars? And how we spend R&D dollars? And we think that the incremental investments that we're making on sales and marketing is driving that revenue and that book value for the shareholder. But we're in a stepwise function this year, and I wouldn't project that linearly because we're building a sales force that's carrying multiple products, and we need to step up that function as we transition from Genzyme, and we're behind, and so the burn doesn't look as great when you look at what it was in -- last year, especially in the fourth quarter when we let go of the Genzyme relationship. But we feel very confident that we are taking active steps internally to keep cash flow breakeven at the forefront of how we run the business.

(Operator Instructions) Our next question comes on our Paul Knight of Janney.

This is Carolina Ibanez-Ventoso on for Paul Knight. Bonnie, can you remind us what is ahead of Percepta in terms of pricing? So the current pricing of the past is similar to Afirma's previous reimbursement of $3,200 to $3,300. So is this price going to be revised in the Annual Laboratory Public Meeting in July, when the basis of the payment, crosswalk or gapfill is going to be determined?

No. It will...

No. We priced -- our local Medicare intermediary priced the product at $3,200 and we have not at this point chosen to try to get it its own individual code. And that would kick-off the whole gap walk, crosswalk -- or gapfill crosswalk process. And we have not -- we've not pursued that as of now for Percepta. I think what needs to happen, really, to do that with these products is you really need to take them further along the commercial journey before you pull that trigger. Doing it early stage when you're not as well-known and there isn't as much evidence -- much payer evidence for Medicare to support long-term pricing, puts you at a significant risk and so we're not going to pursue -- we're not pursuing that this year.

Yes. Good. Okay. Got it. And you also referred to several clinical utility studies performed with Percepta. So have you reached a large enough bevy of clinical utility evidence now that -- to secure private reimbursement? Or you think that you may need to still perform more studies on that?

Well, the studies never end. I mean, as we say we published a lot of studies and presented a lot of data even for Afirma last year, where -- as long as that's been out. So the studies will continue, but certainly the evidence behind the studies that have been published and presented and more will get published this year, is definitely a library of evidence worthy of coverage decisions by private payers, and that's a big priority for us to start that journey with Percepta this year.

I'll now turn your call back over to Bonnie Anderson, Chairman and Executive Officer, for closing marks.

Thank you for joining us today. We appreciate your commitment to Veracyte, and for helping us achieve our goals of providing diagnostic answers that improve patient outcomes and reduce health care costs.

I want to refer to the last slide in the financial presentation, which summarizes and highlights our key catalyst for '18. They include, for our Afirma thyroid business, the launch of the Xpression Atlas platform, an in-network contract with Anthem, and new data relating to the overall Afirma portfolio. We expect Percepta to gain momentum from commercial payer coverage decisions this year, guideline inclusion, and new clinical utility data. And the key catalyst for Envisia will be Medicare coverage.

With these successes, we look forward to keeping you updated on our progress and we'll speak to you soon on our Q1 call.

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