Veracyte, Inc.
Q3 2017 Earnings Call Transcript

Published: 7 Nov 2017

[Operator:]

Good afternoon, ladies and gentlemen, and welcome to Veracyte’s Third Quarter 2017 Financial Results Conference Call. [Operator Instructions] As a reminder, today’s conference call is being recorded. I’d now like to turn the conference over to Ms. Jackie Cossmon, Vice President of Investor Relations and Corporate Communications for Veracyte. Ms. Cossmon, you may begin.

[Jackie Cossmon:]

Thank you, Tiffany. Good afternoon, everyone, and thank you for joining us today for our third quarter 2017 financial results conference call. Bonnie Anderson, our Chairman and Chief Executive Officer will be leading the call today; and Keith Kennedy, our Chief Financial Officer, will be providing an update on the financial results for the third quarter. Chris Hall, our President and Chief Operating Officer, is also joining us on the call and will be available for questions. Before we begin, I’d like to remind you that various statements that we may 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 risks and uncertainties that may cause actual results and/or performance to differ materially from any future results, performance, or achievements discussed in, 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 risks and uncertainties are described in the company’s filings with the Securities and Exchange Commission. Prior to this call, we announced our third quarter 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 “Investors” landing page and then “Press Releases.” We also released a financial presentation, which Keith will reference later in the call when he covers our financial results. You may find the financial presentation in the same “Investors” section, under “Events & Presentations.” We will also post a transcript of our prepared remarks to our website immediately following this call. I will now turn the call over to Bonnie.

[Bonnie Anderson:]

Thank you, Jackie. And thanks, everyone, for joining us today. I want to start by saying that this is one of the most challenging quarters I have had to prepare for. On the one hand, we’ve had one of our most successful quarters in terms of advancing the core foundation of our business, but at the same time, we did not achieve the acceleration of growth in the quarter that we had anticipated and as a result we are adjusting our guidance for the year. Our revenue for the quarter was $17.5 million, compared to $18.6 million for the third quarter of 2016. Accrued revenue, which excludes cash collections for tests performed in prior periods grew 24% and genomic test volume grew 14% over prior year. This was our best growth quarter of the year and in a quarter, that is typically flat. We achieved all of this despite the impact of the hurricanes, which we estimate to be $500,000 and $600,000 for the year with the majority of this impacting the third quarter. The result of all of this, combined with slower acceleration of growth from key initiatives, has led us to adjust our 2017 revenue guidance to the range of $71million to $72 million. What I want to describe for you today is why that acceleration was delayed and what we have done to course-correct going forward. We believe the fundamentals of our business are quite strong and we are very optimistic about our strategy and our future. I will explain as I go through our progress in each of our product areas and will then turn the call over to Keith to review our financial results. I’ll start with Afirma. We have discussed several levers to accelerate Afirma growth. They are

[Keith Kennedy:]

Thank you, Bonnie. Good afternoon, everyone. As Jackie mentioned earlier, in addition to our earnings release, you may find our financial presentation on our website at www.veracyte.com under “Investors” and then “Events & Presentations” and under the November 3, 2017 third quarter financial call. Please review the Safe Harbor Statement on Page 2 of the presentation. I plan to speak about our third quarter and year-to-date 2017 results and will reference the relevant pages in the financial presentation as I cover the highlights. Turning to Page 3 of the presentation, this is the first quarter that we accrued substantially all billable tests in the current and prior year quarters, so our accrued revenue is directly comparable. The Financial Highlights for the third quarter 2017, as compared to the third quarter of 2016, are as follows

[Bonnie Anderson:]

I would like to wrap up today’s call with some highlights from the efforts we have underway to build a substantial franchise in the lung cancer space. Lung cancer is the biggest cancer killer in the United States, more than the next three leading cancers combined. It’s even more of an issue on a global scale, where it’s responsible for one in five deaths. Now, the movement to reduce lung cancer deaths through increased screening, and advancements in technology that enable earlier detection and treatment, is gaining significant momentum across the healthcare spectrum. We are excited to be taking a leadership role in these advances, as Percepta is well positioned to help make lung cancer screening safer and more effective. As we announced earlier in the quarter, we’ve introduced “Screen Together,” a lung cancer awareness and education initiative designed to encourage people at risk for lung cancer to get screened. To make this easier, our campaign encourages people at increased risk to pledge to be screened with a friend or loved one. We are piloting the program in North Carolina in partnership with the Lung Cancer Initiative of North Carolina, where we’ve also got customers like Duke University and University of North Carolina that can potentially help reach more patients with the program’s messages. Pending its success there, we plan to expand the “Screen Together” program to other key markets. More broadly, we see many opportunities to advance the fight against lung cancer and see Percepta as just the beginning. The novel “field of injury” technology that powers the Percepta classifier is already gaining significant traction among world-leading lung cancer authorities. Recently, the National Cancer Institute released its 2018 annual budget plan document, which profiled Dr. Avi Spira of Boston University, and how his “field of injury” discovery led to Percepta, which is already providing real benefits to patients. Dr. Spira also will be leading the Stand Up to Cancer organizations recently announced “Dream Team” comprised of researchers from top institutions including Stanford, Harvard, UCLA and others to identify and intercept lung cancer at its earliest stages. As an industry advisor to this program, we share in this goal and plan to also focus our R&D efforts on building genomic tests that further leverage the field of injury opportunity. This will include the use of a simple non-invasive nasal swab for early lung cancer detection and screening. We expect to see data beginning to emerge from these efforts next year. It’s an exciting time to be in the lung cancer space and we believe our technology positions us well to make significant inroads in the fight against this deadly disease. So, in conclusion as you can see, the news today is mixed, but, based on the great progress we’ve made in many foundational aspects of our business, our future is very bright. While we won’t provide guidance for 2018 until our Q4 call, we will provide some color as you think about the coming year. We expect to achieve a genomic test volume growth around 15% next year with a resulting revenue growth of about 20%. We continue to target cash flow breakeven by the end of 2018, but expect that this could shift by a quarter or so. We remain fully committed to achieving this important goal for the company and for our shareholders, but not at the risk of top line growth. I would now like to ask the operator to open up the call to questions.

[Operator:]

[Operator Instructions] Our first question comes from Bill Quirk from Piper Jaffray. Your line is now open.

[Bill Quirk:]

Great, thanks. Good afternoon. I guess the first question is, if I'm looking at the consensus correctly, I think it’s 100 million for 2018, so that’s a pretty significant delta, the roughly 20% guidance which would suggest closer to $86 million, so just trying to get a handle on some of the moving parts here Bonnie because again that’s a pretty significant difference from the Street.

[Bonnie Anderson:]

Yes, well I think that we, mostly around the levers that we spoke about for [indiscernible] I think we will see pick up from the GSC. We are cautious with the results that we can get with our partnership with Quest/Ameripath, but on the positive side Percepta is taking hold and while the sales cycle there is slower, we just want to manage our expectations on how quickly that new product will actually ramp. And then on the financial side, I think it would be good for Keith to just walk through the element of the cash versus accrued revenue, which we are now fully accruing.

[Keith Kennedy:]

Yes. I think what Bonnie is referring to is just the fact that we have been recognizing revenue this year and last half of 2016 for test performed prior to July 1 of 2016. And so that just creates the view - external view. If you just look at the top line that you are growing really rapidly, but if you look at the accrued revenue we’re growing 24%, our volume is growing 14%. So, we are having rate increases and volume increases, getting over this transition period where we’ve been converting from cash based revenue accrued revenue frankly - it's just been - challenging to predict where that was going to come out. And now when we sit in this current quarter where we have the first comparative quarter and maybe it’s our mistake for not having predicted this a year ago, what it would look like and how hard that really is to get there, but it just has posed a challenge on the top line and so we don't want to set the expectation been here and this is my 11th month here. I don't want to accept the expectation next year that we’re going to do something beyond what we really think we can do and when we look at the accrued revenue that’s why I laid that out for you and you look at that growth, I mean we think that growth in number is going to get you north of 20% topline growth next year. And now look we obviously hope to come back in the - with the fourth quarter results and give you more insight on that, give you more ability to model that.

[Bill Quirk:]

Keith, I appreciate all the color there, thanks, but question for you. I mean as you guys have continued to add lives under contract, particularly with the Blues, shouldn't theoretically the accrual number from an accounting standpoint inch higher over time? And are you assuming that in your rate 2018 guidance? Also, just out of curiosity, are you assuming that Afirma goes into effect on January 1, 2018, there’s obviously some forces in the lab industry that clearly don't want it to happen, it benefits to you guys, so I'm just trying to figure out if that is in there or not?

[Keith Kennedy:]

Yes. So, we’ve been accruing all of our volume since the third quarter, regardless if it’s under a contract or not, based on the historical cash collections. So even if we had a coverage decision for example, but did not have a contract, we reasonably expect to collect an amount we accrue based on the historical cash collections. So, it’s not necessarily we don't accrue until we get a contract. We accrue when there’s evidence of cash collection.

[Bonnie Anderson:]

But revenue is expected to continue to grow at a faster rate than volume because of that increased reimbursement expansion that we expect to get.

[Bill Quirk:]

And then PAMA is it in the 2018 assumption? Thanks.

[Bonnie Anderson:]

Yes, it’s small for us. I mean 20% of our test volume and it’s few hundred dollars per test, but we do have that build in.

[Bill Quirk:]

Got it, thank you.

[Bonnie Anderson:]

Thank you.

[Operator:]

Thank you. And our next question comes from Amanda Murphy from William Blair. Your line is now open.

[Amanda Murphy:]

Hi thanks. Just a question on volume, so obviously you have talked about moving parts of the hurricane and whatnot, and efforts from a commercial perspective, but can you just remind us again where you are at with Afirma from a market penetration perspective and so you mentioned some new accounts with the next gen assay, so maybe just talk a little bit about same-store sales versus new accounts and how much of the volumes growth dynamics is due to kind of, I guess the dynamics of trying to get new business versus more penetration with existing accounts?

[Bonnie Anderson:]

Yes, we do believe it to be a mix between the two because of the added content and the results that we can deliver from the GSC, but Chris why don't you give a little color on that from a commercial perspective?

[Chris Hall:]

Yes. Most of - I mean we think of the business, I mean, overall, I think we see our penetration at roughly 30% to 35% in that range and it’s we’ve seen a good chunk of the growth coming from the institutional segment. Within the institutional segment what’s driven the growth is two-fold. One is, it’s new accounts and going deeper, our new accounts within - in hospitals and new accounts in health systems, and new pathology lab accounts. Second, generally it is going deeper within the existing institutional accounts that we have. The institutional business, honestly, we’ve seen primarily growth by going deeper within accounts, but most of the top line new doctor growth has been in the institutional segment and we’ve talked about that over time as we’ve seen some of that shift. Most of the incremental growth that we have got from the GSC that we talked about with accounts was in the institutional segment, but we have consistently talked about the GSC to our existing customers is that, in ways that show the power of the GSC to go deeper within those accounts and we remain optimistic that we will continue - we will get more business from those existing accounts as we accelerate the rollout of it going through the next couple of quarters.

[Bonnie Anderson:]

Just to add to that, as you can see from the charts that Keith provides, it is the overall side of pathology and the pull-through of that. This is the business - so that has been the fastest and we kind of predict that business to either remain flat or slightly decline over time because once we opened up the model it has allowed people to do their own side of pathology. Some of that business got pulled through into that, but as an example our year-over-year growth on GEC samples received where we are only receiving a sample for just the GEC grew 34% over prior year. So that remains a very robust side of the business. That model is the strongest and that’s also where because of the adding content and the information on cancers we see the GSC going to be the strongest lever.

[Amanda Murphy:]

I was just going to ask, I mean, if you look at some other companies like Genomic Health who have got at this point 98% penetration in their base market. I know it is a little bit of a different dynamics, but I mean is there any reason structurally why over time you could not get into something like that rate. I don’t know, pick your number, but I suppose [indiscernible].

[Bonnie Anderson:]

Yes. We think we can get to that level of penetration I think. To Bills comment earlier, one of the key things is getting in network with Anthem because that’s a very, very large covered lives payer and one that if you are not in that work it’s hard to penetrate that business. And then, I think the enhancements of the GSC, I think you have to keep in mind that we’ve been running six years on the GEC as it was originally developed. And while early on in that process it was terrific that we could move 50% of the benign patients into a benign call to avoid surgery. The surgeons using the product still saw a high percent in their perception of a benign patient still undergoing that process. So, there’s been a lot of effort to see if there is other ways to define more aggressive cancers versus how they look at the nodules et cetera, et cetera. I think the GSC coming to market now really becomes the solution for everybody because of this significantly higher performance as the benign call rate combined with the added content that we can give on variance and fusion and markers that others have had an interest in seeing how those show up on cancer. And so, we think competitively this really sort of answers everyone's needs and we’re going to have a big push with it, with our expanded sales force and all forward end network contracts and maybe we will be able to drive more growth than what we’re anticipating now, but we want to look at realistically with where we are.

[Amanda Murphy:]

Okay. And then just last one following up on Bills question on the accrual, is it possible to put the numbers around what - so in terms of what you're occurring at this point per test, [indiscernible] cash collections in theory that would be a historical look back right? So, I guess I'm just wondering how much - can you put some numbers around what that number might look like over time?

[Bonnie Anderson:]

We’re accruing right now when average $2,400 to $2,500 a test. I think that is all disclosed. And that number will only move up as we collect more than what we’re occurring from payers. Most of that will be payers that are not yet under contracted rates or having covered, but all of them have pretty much covered now. That would go up slightly next year with the increase in Medicare, but there is room for that to continue expand, which is why we do predict the revenue will grow at a faster rate than just volume.

[Amanda Murphy:]

So, I mean, just thinking about your getting paid roughly, let’s call it 3,200 - pick a number, how long would it take to get to that from an accrual perspective or do you never get quite that high? I’m just trying to think that ramp in the next 3 years to 5 years?

[Bonnie Anderson:]

I think what we have pointed to historically is that once we get there with all payers and in contracted rates and PAMA and all of that in place, we could probably get to the 3,000 mark. My guess is that it could take another 18 months or so to get there, it won’t happen immediately.

[Amanda Murphy:]

Okay, thank you.

[Bonnie Anderson:]

Thank you.

[Operator:]

Thank you. And our next question comes from Sung Ji Nam from BTIG. Your line is now open.

[Sung Ji Nam:]

Hi, thanks for taking the questions. Bonnie, maybe a little deeper on the GEC to GSC conversion, are you seeing examples of physicians that were hesitant to use GEC, but are more interested in using GSC, and if so then what are the key drivers, is it just the sheer performance of GSC?

[Bonnie Anderson:]

Yes. So, there is a lot of interest and I think a lot of demand from the marketplace in getting converted over to the GSC. What we did with purposely slow things down a little bit, mostly because of the complexity in the laboratory. And when we bring our new accounts. which we have been very successful at doing with the GEC they typically take a little more handholding than existing clients and working through patient reports with them and helping them understand and interpret those results. So, I think it was pretty complex in the laboratory having a mix of, say, a bulls run on one line versus the other line and the inventory and cost and everything associated with all that, as well as the staff that was trained and in place to manage things across other equipment; and it just took us a little bit longer to keep things moving really smoothly without any hiccups, took us a little bit longer than what we anticipated. But as I indicated in the prepared remarks, we are beyond that now. I think things are starting to ramp and are going very well we haven't had any issues, so that’s really good news, and we still believe that we’ll have our clients fully converted over by early 2018. Chris, something to add?

[Chris Hall:]

We’ve always thought that the key driver of growth in the GSC wouldn't be as much of getting new accounts, although we do expect that to happen. And so, we expect to go deeper within the existing accounts that we have. The physicians that were reluctant to send this everything because we didn’t have as much genomic content or the benign call rate wasn't as high. We think we can extend the range of the GSC within especially institutional accounts to be able to ultimately win more business from those accounts and that’s been our assumption and we’re seeing some evidence that that’s starting to prove out in some of our early clients. So, we feel good about where we are.

[Sung Ji Nam:]

Okay, that’s helpful. And then maybe one on Percepta, and this maybe early, are you seeing any - would love to get any updates on the North Carolina Screen Together campaign, if you are seeing any increase in people signing up to get screened? And then also, if do you expand this campaign outside of North Carolina, do you think this could represent a meaningful expense side on or are there ways skews leverage, your partners like the lung cancer initiative?

[Bonnie Anderson:]

Yes, exactly. Great questions. I think somewhere in the neighborhood of 75 people have actually already signed up and pledged to go get screened, which is really pretty exciting for it being such a new program and only contain to really one stage. We will be able to consider getting leveraged with other organizations that want to drive - help drive these initiatives, and we also would pace the rollout of this in-line with the traction and top line growth that we're seeing as well. So, no, I don’t think we would ever go out on a [indiscernible] and drive more expense on this on than what we would be able to cover easily with dynamics there.

[Sung Ji Nam:]

Okay, great, that’s helpful. And then would you be able to break out what the volume was for Percepta this quarter? Was that meaningful?

[Bonnie Anderson:]

It was very small. The point was just that we did get that volume ramping and booked our first revenue. And I think as we look at providing guidance for next year as we come into 2018, we will look at all these metrics and try to decide what’s the best way to guide the business to give you more information than what we just provided now on how to think about it at this point in time as we look at a high-level.

[Sung Ji Nam:]

Okay, thank you so much.

[Bonnie Anderson:]

Thank you.

[Operator:]

Thank you. And our next question comes from Paul Knight from Janney Montgomery. Your line is now open.

[Paul Knight:]

Hi Bonnie, can you talk to Percepta what was physician response? What’s pricing talk on Percepta, a little more color around that test? Thanks.

[Bonnie Anderson:]

Yes. Well, I would say, as we always anticipated the sales cycle in driving adoption in years and institutions for Percepta is a much more complicated scenario than it was early on for Afirma and we anticipated that which is good. As I mentioned on the call, the current situation this year in getting institutions set up to use Percepta also required contracting with certain sites so that depending on how the test was ordered they would be set up to be able to build for it, probably one of the best news we have on the call was the 14-day rule change, which will take that away and will allow us to fully manage the billing, which is really good news. We’ve expanded to over 70 sites. I would say with the third test like this it’s still new, doctors want a lot of education. We have doctors and MSLs educating and we’re training speakers on the data. New data are emerging, the data that we presented at CHEST was very compelling. And I think now that doctors can wrap their arms around the clinical validity of the test and the value that it can bring safely moving intermediate risk patients to low risk and then moving them out of the surgical decision, combined with this recent data that’s emerging saying that doctors are actually doing that, and when they do that there is a 50% reduction in this patient of invasive procedures. These are all just really compelling data points that are needed to get out there and keep educating to keep that momentum going. So, I think we’re really very pleased where Percepta is, it’s all about more data, more experience more people using the product and more patients benefiting and that will help to then get more and more people on board. Combined with that, the fact that we are now going to ramp up even more reps and bring on even more pulmonary specialists as we think about accelerating Percepta through next year and Envisia, which is also a pulmonology product. That will give us broader coverage across the country and that combined in with 14-day rule opens up with more and more of landscape there that we can go after. So, I think we are on one hand extremely excited and encouraged. We see nothing that would give us pause that the test is being used inappropriately, in fact physicians are using it exactly as we had hoped they would and they are making decisions in patient care exactly as we had hoped they would. So, those are really, really good data points to get confirmed. I guess we just wanted to make sure that we don't get out of our skies [ph] in predicting the growth of a product that is going to have to take time to get in certain into institutional practice guidelines and a cancer that people will be very cautious and not switching quickly to a product that they don't have ultimate confidence in that they can manage patients safely by moving them to CT follow-up. And that’s our job to do and we plan to invest more and more in doing that, but we also want to manage our expectations that this will be the first full year of getting a brand-new product in a very highly focused cancer that you don't want to miss, and we’re going to be changing care in the way physicians do it today and that always takes time.

[Paul Knight:]

Okay, thank you.

[Bonnie Anderson:]

Thanks Paul.

[Operator:]

And our next question comes from Puneet Souda from LEERINK Partners. Your line is now open.

[Puneet Souda:]

Hi, Bonnie. I think a number of volume and pricing questions have been covered, so maybe can you tell us how many of the reps or what’s the allocation towards Percepta in terms of expenses and what’s the expectation of spend here specifically, and I don't know if you had laid that out already?

[Bonnie Anderson:]

I didn't, but I think Chris can probably is closest to that in terms of giving you a little additional cover on how that breaks down.

[Chris Hall:]

Yes, we talked about increasing the number of reps as we go through the year to build the sales organization. What we see is that as we go through next year, we expect about a third of our reps energy, it’s about a third of the commercial infrastructure would be devoted to driving Percepta, so, we’re really starting to focus on doing that. The time is right, but one of the things that we noted in the script was that we - with getting the 14-day rule changed, we will be able to offer the product to everyone in the country, all doctors where before only a fraction of the actual Medicare patients would actually be covered because the hospital would likely have to build their local Mac [ph] and that they may not be covered. So, now with us being able to build, we expect to be able to ramp that up and drive the product more rapidly around the country. So, we expect about a third of the number to be diluted to Percepta.

[Bonnie Anderson:]

And Puneet just to add to that, the other really positive thing that we’ve learned based on the accounts that have converted to a Percepta is that a brand reputation with Afirma in these institutions is definitely leverageable to get that institution to take an appointment and have a presentation and start talking about Percepta. So, while we will have additional people focused solely on pulmonology, we remain very committed and see it as a real success factor to have them very partnered in all these institutions with the same rep that is talking about Afirma. So that’s working well, we're just going to take that to the next level and we will be layering in reps on both of those sides so that we can continue to see that grow.

[Chris Hall:]

Right because of the core, most of the reps are actually working with both products. So, when I say a third, you know just underline, it’s not a dedicated pulmonary group. There is a dedicated pulmonary group and we also see next year that group is starting to spend some focus on Envisia because we’re going to start to drive that more aggressively into the market as we move through next year and prepare to what we believe will be Medicare coverage.

[Puneet Souda:]

Okay, and then one on, I don't know if this was covered already, but on pre-authorization are you seeing any impact that from that?

[Keith Kennedy:]

We haven't yet. We’ve monitored it and we keep our eye on it. As Bonnie noted, the UnitedHealthcare plan just started on November 1, and we’ve been keeping our physicians up to speed. One of the things about our test is that it is, both of the tests Afirma and Percepta are done in very focused ways and really easy to put a sense around it and ask for the prior off because it’s really clear where it’s being done and how to request for it. So, we’re cautiously optimistic we will work our way through it, and we will keep you Paul up to date, up to speed as we move through time.

[Puneet Souda:]

Okay. Thanks guys.

[Bonnie Anderson:]

Thank you.

[Operator:]

At this time, I’m showing no further questions in the queue. I’d like to turn the call back over to Ms. Bonnie Anderson for further remarks.

[Bonnie Anderson:]

Thank you. I do want to take a moment to thank our employees today for their unfailing dedication in driving high value diagnostic products to market and all the evidence that is really compelling for patients. And I also want to thank you, our stockholders for believing in us and continuing to support our vision of fundamentally changing patient care with diagnostics. Diagnostic tests that deliver value to stakeholders. And we look forward to keeping you up to date on our progress. Operator?

[Operator:]

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