Veracyte IPO Is Good On The Eyes

Oct.28.13 | About: Veracyte, Inc. (VCYT)

Veracyte, Inc. (NASDAQ:VCYT), a diagnostics company focused on the development of molecular cytology to pre-operatively diagnose diseases, plans to raise $65.8 million in its upcoming IPO. The San Francisco, California-based firm will offer 4.7 million shares at an expected price range of $13-$15 per share on Wednesday, October 30th. If the IPO can reach the midpoint of the expected range at $14 per share, MMI will command a market value of $316 million. See S-1;type=html

VCYT filed on September 20, 2013.
Joint Bookrunners: Morgan Stanley, Leerink Swann
Co-Manager: William Blair, Cowen & Company

VCYT is a diagnostics firm working to develop the field of molecular cytology, attempting to develop sophisticated methods of accurately diagnosing diseases without the need for invasive operations. The firm's first commercial solution is the Afirma Thyroid FNA Analysis, which permits physicians to accurately determine whether some thyroid nodules that have previously been classified as indeterminate can be reclassified as benign. Since the 2011 commercial launch of Afirma, VCYT has processed over 50,000 fine needle aspiration samples with Afirma. The firm is currently in the process of developing a similar diagnostic for idiopathic pulmonary fibrosis, an interstitial lung disease.

VCYT offers the following figures in its S-1 balance sheet for the six months ending June 30, 2013:
Revenue: $9,452,000
Net Loss: ($13,385,000)
Total Assets: $27,159,000
Accumulated Deficit: $73,455,000
Total Shareholders' Equity (deficit): ($70,788,000)

VCYT has seen explosive revenue growth since the launch of Afirma, increasing revenues from $2.6 million in 2011 to $17.1 million for the twelve months ending June 30, 2013.

With the company's success in launching a commercial product (which many medical innovation firms never achieve) and explosive revenue growth, we rate VCYT an aggressive buy for growth oriented investors if it prices in the $13 to $15 proposed range.

The firm has yet to turn a profit despite getting Afirma off the ground, and doesn't seem likely to do so in the near future. It also is vulnerable to the same risks as all medical firms - if another firm develops a superior or more cost-effective solution to the same problems that Afirma addresses, VCYT will be left out in the rain.

VCYT has received positive coverage decisions from healthcare payers that collectively cover over 100 million individuals. These payers include insurance giants Aetna (NYSE:AET), Humana (NYSE:HUM), and UnitedHealthcare (NYSE:UNH), along with Medicare. The firm has also entered a global co-promotion agreement with Genzyme a Sanofi (NYSE:SNY) company.

VCYT faces its most significant competition from the traditional methods used to diagnose the diseases it addresses (specifically cancer in the case of Afirma). There is often significant institutional resistance to moving away from traditional practices due to the costs of retraining and the trust that physicians place in proven methods that they have become accustomed to. VCYT also faces competition from commercial laboratories like Laboratory Corporation of America Holdings (NYSE:LH) and Quest Diagnostics (NYSE:DGX). Some of these firms are better capitalized and have developed superior infrastructures for the transition from clinical to commercial phases of treatment development.

Bonnie H. Anderson has served as VCYT's CEO since 2008, and was appointed President in August 2013. Ms. Anderson was previously a Vice President at Beckmam Coulter, Inc. She holds a B.S. in Medical Technology from Indiana University of Pennsylvania.

Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in VCYT over the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.