Earnings Call: Q3 2018

Oct 29, 2018

Good afternoon, ladies and gentlemen, and welcome to Veracyte's 3rd Quarter 2018 Financial Results Conference Call. At this time, all participants are in a listen only mode. Later, we will conduct a question and answer session and instructions will follow at that time. As a reminder, today's conference call is being recorded. I'd now like to turn the conference over to Andrew McCabe, Veracyte's Vice President of Investor Relations and Corporate Communications. Thank you, Howard. Good afternoon, everyone, and thanks for joining us today for a discussion of our Q3 2018 financial results. With me today are Bonnie Anderson, Veracyte's Chairman and Chief Executive Officer Keith Kennedy, our Chief Financial Officer and Chris Hall, our President and Chief Operating Officer. Before we begin, I'd like to remind you that the various statements that we may make during this call will include forward looking statements as defined under applicable securities laws. Forward looking statements include those 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. Additionally, non GAAP financial measures will be discussed during this call. Please refer to the tables in our earnings release and the Investor Relations portion of our website for a reconciliation of these measures to their most directly comparable GAAP financial measure. Prior to this call, we announced our Q3 2018 results, which are available on our website at veracyte.com. We also published a financial presentation, which Keith will reference during his remarks. The presentation is also available on our website. I will now turn the call over to Bonnie. Bonnie? Thanks, Angie, and thanks everyone for joining us today. We are very pleased to deliver excellent Q3 2018 results with strong revenue and volume growth and continued execution across the business. This afternoon, we reported Q3 2018 revenue of $23,500,000 representing a 34% increase over the Q3 of last year and genomic test volume of 8,006, an increase of 23 percent over the prior year's quarter. As a result of our performance in the Q3 and our outlook for the remainder of the year, we are raising our annual revenue guidance to a range of $90,000,000 to $91,000,000 and lowering our cash burn guidance to a range of 17 $1,000,000 to success measures for the quarter, discuss how we are positioned for the rest of the year and provide our early view of 2019. Then Keith will review our financial results in more detail and provide additional commentary on our revised 2018 guidance. I'll begin with our commercial growth measure of success. Our Afirma Genomic Sequencing Classifier or GSC continues to perform well and has reaccelerated our growth. We have transitioned all of our customers to the RNA sequencing based Afirma GSC, which helps physicians keep roughly 70% of patients with benign thyroid nodules from having surgeries they don't need. The Afirma GSC in combination with the Afirma Xpression Atlas has become the standard of care in thyroid nodule evaluation. We believe this comprehensive next generation offering is helping us to further penetrate existing accounts and secure new ones and along with our extensive intellectual property fortress establishes a competitive barrier against others trying to advance in this space. Our Percepta bronchial genomic classifier is approaching its 1st full year of commercialization. As a reminder, this novel field of injury technology detects genomic changes in airway epithelial brushings that are associated with lung cancer without the need to take a piece of tissue from the nodule itself, which would require an invasive procedure. While it's still early, the rate of adoption for the Percepta classifier continues to increase nicely with genomic test volume up 21% sequentially from the Q2. We received orders from nearly 200 physicians at 100 and 40 medical centers across the country and many of these are repeat orders demonstrating confidence in the clinical value of the test. We are on track to deliver the projected 500 to 1000 Percepta test results in the Q4 exiting the year with nice momentum. Applying the experience from our commercial playbook and successful product introductions, our team has done a great job laying the groundwork for commercial expansion of the Envisia genomic classifier, which is used to improve the diagnosis of idiopathic pulmonary fibrosis or IPF and we remain on track for a nationwide ramp in 2019. 15 medical centers around the country submitted patient samples for Envisia testing through our early access program to date and we expect to add a few more by the end of the year. Lastly, as it relates to commercial growth, we believe that our multi product sales strategy is one of the keys to building a profitable enterprise. We implemented this approach not only to drive growth, but to drive cost effective growth. We are pleased that this strategy is delivering results. In pulmonology, many of our Percepta commercial sites have also become early access sites for Envisia. Samples for Percepta and Envisia are now being collected from the same bronchoscopy suite. And even more evidence that this approach is working, 35% of our customers adopting Percepta are also using Afirma. Turning now to reimbursement expansion, our second measure of success. We are thrilled that at the end of August, received draft Medicare coverage through the MolDX program, which is administered by Palmetto GBA. We expect a final coverage decision in early 2019 and believe we are well positioned to ramp commercial adoption and begin to grow revenue next year for this high value test that improves the diagnosis of interstitial lung diseases, specifically IPF. Our 3rd measure of success is evidence development. We had a strong scientific showing at several recent industry conferences. At the American Cyber Association Annual Meeting earlier this month, researchers from leading institutions including Cleveland Clinic, Harvard and the Ohio State University highlighted positive real world study results for our Afirma classifier and expression atlas in a half dozen oral and poster presentations. Comparing their experience with the Afirma GSC to the original test, they showed that the Afirma GSC identified even more benign thyroid nodules and prevented even more unnecessary surgeries. Researchers also demonstrated the ability of the Afirma expression atlas to detect genomic variance on thyroid nodules to inform surgery and treatment decisions. This included the detection of rare gene mutations infusions such as TRK and RET as referenced in our agreement with Loxo Oncology earlier this year, which are targeted in new therapies. Positive data were also shared in oral presentations at the CHEST meeting this month, demonstrating the performance and value of our pulmonology products. This information included preliminary data from our ongoing Percepta registry trial showing that the use of our Percepta classifier led to a reduction in invasive diagnostic procedures at all evaluation points across all risk groups for up to 12 months compared to the physicians plans for these patients prior to Percepta testing. The researchers also found that there was a significant reduction in invasive procedures among patients with negative versus positive classifier results. We believe these findings further reinforce the value of the Percepta classifier brings to lung cancer outcomes. Also at CHEST, data were presented from our BRAVE trial confirming the ability of the Envisia genomic classifier to provide a more confident diagnosis of IPF without the need for surgery. We anticipate findings from the 26 site prospective clinical validation trial will be published in the coming months. Turning now to our scientific innovation, as I commented earlier, our growth has reaccelerated through the introduction of the Afirma GSC and Xpression Atlas. Physicians and their patients can now get a full range of diagnostic answers from a single FNA sample because we have sequenced the entire transcriptome. So when the GSC result does not classify a patient as benign, the expression Atlas can inform on the rare variance from hundreds of genes that might be helpful in determining treatment options including participation in clinical trials. In fact, we know of at least one case already where based on a rare variant detected by the Xpression Atlas, a physician referred his patient with fibrin cancer to a clinical trial for a new targeted therapy. We believe the Xpression Atlas's extensive genomic data coupled with our market leadership strongly position us for this era of precision medicine. As more is understood about the genomic underpinnings of disease, we believe our whole transcriptome sequencing using RNA Seq will fuel even greater innovation. To this point, we are pleased to share with you our plan to move the Percepta classifier to our powerful RNA sequencing platform next year to support the significant opportunities in lung cancer. This along with the progress we are making in developing a nasal swab test for early lung cancer detection, which will leverage the field of injury technology on which our Percepta classifier is based remain exciting avenues for the future of our business addressing significant market and patient opportunities to improve care and lower costs. We look forward to sharing more about these efforts in the coming months. Our final measure of success is financial discipline. Cash burn for the quarter was $2,400,000 an improvement of 58% compared with the Q3 of 2017. This reflects our continued focus on disciplined spending and strategic investments to grow the business and ultimately achieve sustained profitability in the long term. In summary, we are thrilled with our progress and strong momentum as we begin to wrap up 2018 and prepare for 2019 beyond. We expect to provide our 2019 guidance when we report our 4th quarter 2018 financial results. But as we look ahead to next year, we believe we are well positioned with 3 commercial revenue generating products that will continue driving attractive sustainable growth in the business. We expect to deliver both genomic test volume and revenue growth of over 20% in 2019. Our Afirma GSC Classifier and Xpression Atlas are expected to continue to deliver strong results. Adoption of our Percepta Classifier will continue ramping and commercial expansion of the Envisia Classifier is anticipated next year. In addition, we remain focused on operational execution and project that we will reach cash flow breakeven by the end of 2019. I'll now turn the call over to Keith to review our financial results for the Q3 of 2018 and provide some additional color on our revised 2018 guidance. Thank you, Bonnie. As Angie mentioned earlier, our Q3 2018 financial presentation is available under Events and Presentations in the Investor Relations section of our website. I plan to speak about our Q3 2018 results and to conclude with an update on our 2018 guidance. Turning to Page 3 of the presentation, our performance against 6 financial key performance indicators or KPIs for the Q3 of 2018 as compared to the prior year quarter are as follows. Revenue of $23,500,000 increased $5,900,000 or 34 percent. Genomic volume of 8,006 reported tests increased 23%. Gross margin of 65% increased 6%. Operating expenses excluding cost of revenue were $19,500,000 an increase of $2,800,000 or 17%. Net loss of $4,500,000 improved 37% and cash burn of $2,400,000 improved 58%. The next six pages outline the sequential and year over year results underlying each of our financial KPIs. A few observations. 1st, turning to Page 4. Revenue growth rates relative to the prior year quarter accelerated in each of the first three quarters in 2018 from 22% to 34% in the 3rd quarter. Turning to Page 5, we see similar genomic volume trends on a year over year basis. Sequentially, genomic volume increased 4% from the 2nd to Q3 of 2018. This was very positive when put in the context of the typical flat to down quarter you see in the sequential columns 2016 2017. Turning to Page 6, gross margins expanded in each of the first three quarters in 2018 from 61% to 65%, driven by a combination of higher valued molecular testing services, leverage from our rich genomic biorepository and financial discipline in our labs. Turning to Page 7. Operating expenses this quarter increased 17% year over year, principally from our investment in sales and marketing. Sequentially, total operating expenses declined this quarter. Our operating expenses are shown as a percentage of revenue on the right hand side of this page. We continue to focus incremental spend on revenue generating activities. Our average combined R and D and G and A quarterly spend year to date 2018 was just under $10,000,000 and on a combined basis improved from 54 percent to 44% of year to date 2017 to 2018 revenue. Turning to Page 8. Our net loss of $4,500,000 improved 37% and our net loss per share was $0.12 In July 2018, we issued and sold 5,750,000 shares of common stock in a registered public offering, raising net proceeds of $55,000,000 We estimate that our net loss per share would have been approximately $0.01 per share higher this quarter if we excluded the dilutive effect of the equity raise on our weighted average outstanding shares. Turning to Page 9. Cash burn of $2,400,000 improved 58%. And turning to Page 10, cash at September 30, 2018 was approximately $78,000,000 The high level cash bridge from June 30 to September 30, 2018 is as follows. We began the quarter with $23,800,000 in cash. We raised $55,000,000 in the previously mentioned equity raise. We had cash burn of $2,400,000 and we generated approximately $1,600,000 from the exercise of stock options and employee stock purchases. Before I turn the call back to Bonnie, let me address a few points on our guidance for 2018. As Bonnie stated earlier, we are increasing our 2018 revenue guidance to between $90,000,000 $91,000,000 from our previously updated guidance of between $87,000,000 $89,000,000 an improvement of 26% over the prior year at the midpoint of the range, supported by an estimated 18% to 20% growth in genomic test volume over the prior year. And we are narrowing our annual cash burn guidance to between $17,000,000 $18,000,000 from our previously updated guidance of between $18,000,000 $21,000,000 an improvement of 31% over the prior year at the midpoint of the range. I will now turn the call back over to Bonnie. Thank you, Keith. I want to close by reminding everyone that our unique combination of whole transcriptome sequencing and machine learning is enabling us to answer important clinical questions that are having a real impact on patient care and outcomes. As we leverage new opportunities in the rapidly evolving era of precision medicine, we remain committed to making a difference in the lives of patients, providing solutions to physicians to help better inform clinical decisions and delivering cost savings to the healthcare system. Howard, we will now open the call up for questions. Sorry? Howard, we're ready for Q and A. Can you not hear me, ma'am? No, I can't. We cannot. We could not. All right. Our first question or comment comes from the line of Sung Ji Nam from BTIG. Your line is open. Hi. Thanks for taking the questions and congratulations on the quarter. You're seeing nice uptake for Percepta. I was kind of curious as to if you might be able to comment on kind of how your conversations are going with the commercial payers at this point? Yes. Thanks, Sung Ji for the question and for joining us today. Chris, I'll pass that call over to you and maybe you can give her an update on where we are with commercial payers. Sure. We continue to have dialogues. We have nothing to update you on now, but we continue to be optimistic that the product is saving the healthcare system money and is being positively referred to. We were really excited that there was data shared coming out of the registry trial. And I think that as going forward, as that data ultimately comes together and gets published, it will prove to be one of the key things in helping to get the product covered by private insurance companies. Great. And I was wondering in terms of your cash burn or the cash flow breakeven guidance for next year, it's happening a bit earlier than I had expected. Was wondering what the maybe the biggest levers are to get to that level? Well, I think that we have always indicated that when our quarterly revenue gets to a range of between $28,000,000 $30,000,000 that given our spending profile and how we have focused increased spending into sales and marketing and really have gained a lot of operational leverage across the operation internally that that would be the point in time where we would hit that inflection point. So Keith, anything else to add on that? No, that's a good point. Okay, great. And maybe could you give us an update on the sales force expansion if that's pretty much completed or what are some of the outstanding items there? Yes, I mean thanks. I don't think that the expansion of the sales force is ever completed per se because we're always expanding the we'll always be expanding the field force in order to keep driving the growth. We exited the quarter this year with about 88 people in the field working with customers that was up from about 78 at the end of last quarter, plus or minus a few. So we continue to grow that nicely. We'll continue to grow that by a few more people coming out of this year and we see it growing to about $110,000,000 to $115,000,000 as we next year, sort of growing as we go. And we continue to be excited that we are attracting really high quality salespeople. We've been really impressed by the pipeline of folks that we're getting coming through because they're really attracted to this notion of selling multiple products. And so far as we've proceeded to grow the group, we've been really happy with the progress and the success that they're getting. And I think that shows in the numbers today. Great. Thank you very much. Thank you. Thank you. Our next question or comment comes from the line of Puneeti Souda from Leerink Partners. Your line is open. Yes. Hi, Bonnie. Thanks and congrats on the quarter. So and Affirma, if I could just try to understand, could you give us a sense of where we stand in the penetration today? You've clearly seen a strong momentum here. Is this some contribution coming out of the ATA? What's sort of what's driving it? And so what's your expectation given the level of penetration that we have in the market today? Yes. Thanks, Puneet for joining us and thanks for the question. We're really thrilled with the reacceleration of the Afirma business. When you consider our 1st generation product was launched back in 2011, I mean that was 7 years building a market on the back of a product without any really transformational improvement. But shifting our science platform over to deep RNA sequencing, it allowed us to do 2 things. 1, obviously we were able to increase the performance to the point where we are now keeping a significantly higher rate of benign patients out of surgery by being able to classify them benign with classifier. But the other side of it is because of the whole transcriptome backbone of our science now, we can aggressiveness we call out MTC, we can give indication of certain variants that are present that might be highly associated with cancer such BRAF. And then with the extension of that scientific platform on every sample we run through the lab, we have now been able to extend that through and to including the reporting on variants that are now becoming more of a hot topic in thyroid cancer for targeted therapy. We were really struck coming off the American Thyroid Association meeting earlier this month. The number of companies and presentations at this meeting which we've been attending now for a decade, but for the first time looking at ways that patients that aren't being cured with radioactive iodine and surgical treatment for fibrin cancer, which has been the mainstay with advanced cancers now or cancers that have returned and recurred the improvement in benefits that are being seen by some of these targeted therapies. So when we talk about detecting the whole transcriptome set of data in every patient sample we run, that means we're not just detecting the DNA mutation which historically have been the hallmark of precision medicine, but we're detecting these variants, infusions and copy number changes and other genomic content that are really critical in making the leaps forward on benefit. So I think it's the comprehensive nature of our science and our market leading position that we're able to penetrate our existing customer base further and of course convert new clients over to pharma and that's what's giving us the nice lift. Okay, thanks for the color. Keith, a question on Percepta. You're posting solid improvements in gross margin here. As Percepta comes on board with RNA sequencing platform, what's your expectation in gross margins there? We really like to we've been managing sort of trying to not overspend in any one category, but manage the return on investment with each dollar that we spend. So if we can hold our margins directionally at 64% plus or minus 1%, I think that's where we like to end up. And Steve, we expect to get leverage in the lab by having all of our assays converted to a single platform. Sample in the door that runs on a single unified assay and then the algorithms predict which patient report is generated. So it actually adds an efficiency to our lab when we only have one platform that our technicians have to run. And I'd just remind because the script this would go out to all investors that we do have about $9,000,000 $9,500,000 of our revenues cytopathology services, which is a low single digit margin product. So as we do more and more volume on the genomic side, our margins will approach 70%. So we do expect our margin expansion to continue. Okay. And then on Envisia briefly, just wanted to confirm on LCD finalization, what's the pricing expectations? I don't know if that was covered already, but I just wanted to see what if you had anything to add there? No. We're moving through the process for an open comment period today. We expect the LCD to be finalized in the early part of 2019 and at that point in time we'll know what the pricing will be. We would expect this test given the value it provides to patients to be in the similar range to our other tests. Okay, very helpful. Thank you. Thank you. Thank you. Our next question or comment comes from the line of Brian Weinstein from William Blair. Your line is open. Hey guys, thanks for taking the questions. Good afternoon. Just following up a little bit on Puneet's question there. Can you talk a little bit about the next gen offering here with Afirma and the ability to further penetrate existing accounts, and you also said securing new ones. Can you give us any additional color on that penetration? Or is it about the penetration more, is it about the securing new accounts that's really driving it more? No, that's a really good point and thanks for bringing that back up Brian and thank you for joining us today for your first call here with Veracyte. I did not answer that question around market share. So as we exited last year, we estimated that we had penetrated about 30%. With the projections we have through the end of the year, you would expect us to be 35 or slightly ahead of that on market penetration and that's definitely coming from us having the ability to go deeper into existing accounts along with converting new people. And I will mention that when we converted to the RNA Seq transcriptome data guiding the new classifier development, we were able to improve specificity in some of the more difficult to diagnose subclasses of thyroid biology and thyroid cancer. We refer to these subclasses, Herschel cells and they tend to be very difficult to differentiate under the microscope the adenoma benign conditions from the malignant. But because of the mitochondrial content in that extra genomic content in the So historically So historically some of our institutional accounts that were sending us GEC samples, if they saw hurtle cells in the cytopathology review of those cases, they may have not sent those samples to us as an example, one example of going deeper and now that we have greatly performed the performance improved the performance in that subclass, there's comfort on sending us more of those indeterminate samples. And then the fact that we are now informing on variance on the cancer side that gives a whole new area of questions that we can help inform as the medical centers become involved in more of these clinical trials and aim at helping to see how some of these new classes of drugs can be helpful in thyroid cancer. We're now able to attract their attention more than we would have earlier with the original version of the test. Wonderful. Thank you for that answer. Second question on sales force comp incentives. Where do you focus the reps? What are the comp incentives that you have kind of put in place as you expand your portfolio here? Yes. This year, we're comping the reps on both Afirma and Percepta, and they have accelerators in their plan that rewards them for hitting both sides of it, because we really are focused on making this work. So we've really focused on them executing on both of those and the way to really drive their comp is to execute on both. And we're seeing that model pay out, obviously, as you see by the numbers we've been reporting. So we've been happy with how that's worked. Great. And then last question for me is, can you talk at all about penetration that you've seen into large group practices or health networks for your products? How big of an opportunity is that for you guys still on the horizon? Thank you. Yes, we probably can't give any specific details and haven't typically haven't yet begun breaking that out. But for your benefit, the market of course for these 3 different products is a little bit different because roughly 40 percent of the market for Affirma is doctors offices and both pulmonology products are exclusively hospital based sample collection. Into more of these health systems and hospital based procedures that gave us the leverage to bring through Percepta and Envisia and we're certainly seeing great success at that. But the pulmonology products do not have the doctor's office portion of the market like Afirma did. And we'll be tracking and breaking out some effects of the marketplace probably as we see these products ramp and we get a little more experience. It's a little early for that right now. Okay. I appreciate the answers. Thank you. Thank you. I'm showing no additional audio questions in the queue at this time. I would like to thank ladies and gentlemen for participating in today's program. This concludes the presentation. You may now disconnect. Everyone have a wonderful day.