IPO Preview: Veracyte

Oct.30.13 | About: Veracyte, Inc. (VCYT)

Based San Francisco, CA, Veracyte (NASDAQ:VCYT) scheduled a $66 million IPO with a market capitalization of $316 million at a price range mid-point of $14, for Wednesday, October 30.

Nine operating company IPOs are scheduled for this week. The full IPO calendar can be found at IPOpremium.

S-1 filed October 17, 2013.

Manager, Joint Managers: Morgan Stanley; Leerink Swann
Co-Managers: William Blair; Cowen

Summary

VCYT reduces unnecessary surgeries through molecular cytology diagnostics.

Payer coverage is increasing. Collectively, these payers represent more than 100 million covered lives.

As of August 2013, the list price for the Gene Expression Classifier (NASDAQ:GEC) is $4,275. VCYT invoices for routine cytopathology at a standard price of $490. VCYT obtained Medicare coverage for the GEC effective in January 2012 which provides reimbursement at an agreed upon rate.

In addition, VCYT received positive coverage decisions for the GEC from UnitedHealthcare in March 2013, Aetna in June 2013 and Humana in July 2013, and also received positive coverage decisions from a number of other smaller payers.

Revenue for the six months ended June 30, 2013 vs, the year earlier period increased 138% to $9.5 million from $4 million. Losses increased to -$13 million from -$9 million.

Valuation

Valuation Ratios

Mrkt

Price /

Price /

Price /

Price /

% offered

annualizing June 6 mos

Cap (MM)

Sls

Erngs

BkVlue

TanBV

in IPO

Veracyte

$290

15.3

-11.1

4.3

4.3

23%

SCORECARD

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Market Do-

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Total

1-5, 5 is high

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mination

tary

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20 is perfect

2

2.5

1

2

C, 7.5

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As of June 30, 2013, VCYT had an accumulated deficit of $73.5 million.

Conclusion

Positive on VCYT on the IPO. Top line revenue is increasing, VCYT has a co-promotion agreement with Genzyme, a Sanofi (NYSE:SNY) company. SNY has a market cap of $136 billion, and it looks like VCYT is in the early phase of a sales/marketing rollout.

To put the conclusions and observations in context, the following is reorganized, edited and summarized from the full S-1 referenced above:

Business

Reducing unnecessary surgeries
VCYT is a diagnostics company pioneering the field of molecular cytology to improve patient outcomes and lower healthcare costs. It specifically targets diseases that often require invasive procedures for an accurate diagnosis - diseases in which many healthy patients undergo costly interventions that ultimately prove unnecessary.

VCYT improves the accuracy of diagnosis at an earlier stage of patient care by deriving clinically actionable genomic information from cytology samples collected in an outpatient setting.

Revenue

VCYT's revenue is generated from the sale of Afirma, a diagnostic solution for the assessment of thyroid nodules. VCYT generally bills third-party payers upon delivery of a patient report to the prescribing physician

First commercial solution

VCYT's first commercial solution, the Afirma Thyroid FNA Analysis, includes as its centerpiece a Gene Expression Classifier, which is referred to as the GEC.

The GEC helps physicians reduce the number of unnecessary surgeries by employing a proprietary 142-gene signature to preoperatively determine whether thyroid nodules previously classified by cytopathology as indeterminate can be reclassified as benign.

VCYT has demonstrated the clinical utility and cost effectiveness of the GEC in studies published in peer-reviewed journals and established the clinical validity of the GEC in a study published in The New England Journal of Medicine in 2012.

Since VCYT commercially launched Afirma in January 2011, the company has processed over 50,000 fine needle aspiration, or FNA, samples for evaluation using Afirma and performed more than 10,000 GECs to resolve indeterminate cytopathology results.

Sales & marketing

VCYT markets and sells its solution with a sales force consisting of own sales professionals and members of the Genzyme endocrinology sales team.

Genzyme co-promotion

About Genzyme - a Sanofi company. SNY has a market cap of $136 billion.

In January 2012, VCYT entered into a co-promotion agreement with Genzyme for the co-exclusive right to promote and market Afirma in the United States and in 40 countries pursuant to which we received a $10.0 million fee from Genzyme.

Under the agreement, VCYT is required to pay Genzyme a co-promotion fee that is equal to a percentage of cash receipts from Afirma.

As of August 2013, the list price for the Gene Expression Classifier (GEC) is $4,275. VCYT invoices for routine cytopathology at a standard price of $490. VCYT obtained Medicare coverage for the GEC effective in January 2012 which provides reimbursement at an agreed upon rate.

In addition, VCYT received positive coverage decisions for the GEC from UnitedHealthcare in March 2013, Aetna in June 2013 and Humana in July 2013, and also received positive coverage decisions from a number of other smaller payers.

Collectively, these payers represent more than 100 million covered lives. Reimbursement rates vary by payer.

Revenue

VCYT generates revenue from the sale of the Afirma solution. VCYT generally invoices third-party payers upon delivery of a patient report to the prescribing physician.

For tests performed where an agreed upon reimbursement rate and a predictable history of collections exists, such as in the case of Medicare, VCYT recognizes revenue upon delivery of a patient report to the prescribing physician based on the established billing rate less contractual and other adjustments, such as allowance for doubtful accounts, to arrive at the amount that VCYT expects to collect.

Intellectual Property

As of June 30, 2013, VCYT had six pending United States nonprovisional patent applications and one allowed patent application related to methods that are used in the Afirma diagnostic and one pending United States provisional patent application relating to its lung disease product under development. Many of these patent applications have also been filed in one or more foreign countries.

VCYT holds registered trademarks in the United States for "Veracyte" and "Afirma."

Competition

VCYT's principal competition for Afirma comes from traditional methods used by physicians to diagnose thyroid cancer.

Practice guidelines in the United States have historically recommended that patients with indeterminate diagnoses from cytopathology results be considered for surgery to remove all or part of the thyroid to rule out cancer.

This 'removal' practice has been the standard of care in the United States for many years. VCYT needs to educate physicians about the benefits of Afirma to change clinical practice.

VCYT also faces competition from commercial laboratories, such as Laboratory Corporation of America Holdings and Quest Diagnostics Incorporated, with strong infrastructure to support the commercialization of diagnostic services.

VCYT also faces potential competition from companies such as Life Technologies Corporation, which is currently expected to be acquired by Thermo Fisher Scientific Inc., and Illumina, Inc., both of which have recently announced their intention to enter the clinical diagnostics market.

Other potential competitors include companies that develop diagnostic products, such as Roche Diagnostics, a division of Roche Holding Ltd, Siemens AG and Qiagen N.V.

VCYT also faces competition from Asuragen Inc. and other companies that measure mutational markers such as BRAF and KRAS to identify nodules that are malignant instead of benign.

5% stockholders pre-IPO

Entities affiliated with Domain Partners 19.31%
KPCB Holdings, Inc. 22.22%
TPG Biotechnology Partners II, L.P 22.22%
Entities affiliated with Versant Ventures 22.62%

Use of proceeds

VCYT expects to net $59 million from its IPO. Proceeds are allocated as follows:

$20 million for sales and marketing activities, including expansion of VCYT's sales force to support the ongoing commercialization of its products;

$20 million for research and development, including medical and clinical costs, related to the continued support of Afirma as well as the development of its product pipeline; and

The remaining proceeds for working capital and other general corporate purposes.

Disclaimer: This VCYT IPO report is based on a reading and analysis of VCYT's S-1 filing, which can be found here, and a separate, independent analysis by IPOdesktop.com. There are no unattributed direct quotes in this article.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.