Seeking Alpha
Long/short equity, special situations, value
Profile| Send Message|
( followers)  

Veracyte (VCYT) made its public debut on Wednesday, October 30th. Shares of the diagnostics company which focuses on molecular cytology ended their first day with modest gains of 1.9% at $13.25 per share.

Given the modest market capitalization and the very strong revenue growth being reported, Veracyte might be worth the gamble. That being said, I will await the first quarterly earnings report to make up my opinion on the stock.

The Public Offering

Veracyte is a diagnostics company which pioneers in the field of molecular cytology to improve patient outcomes and lower healthcare costs.

Veracyte targets diseases which typically require invasive procedures for an accurate diagnosis. Typically healthy patients undergo costly interventions which often prove to be unnecessary.

The company improves the accuracy of the diagnosis at an earlier stage of patient care by deriving clinically actionable genomic information from cytology samples.

Veracyte sold 5.0 million shares for $13 apiece, thereby raising $65 million in gross proceeds. All of the shares were being sold by the company, with no shares being offered by selling shareholders.

Initially, bankers and the firm set an initial price range of $13-$15 per share. Shares were eventually sold at the low end of the initial public price range.

Some 24% of the total shares were offered in the public offering. At Friday's closing price of $12.30 per share, the firm is valued at $255 million.

The major banks that brought the company public were Morgan Stanley (MS), Leerink Swann, William Blair and Cowen and Company.

Valuation

Veracyte has developed its first commercial solution, the Afirma Thyroid FNA Analysis. This includes the centerpiece Gene Expression Classifier. The GEC helps physicians to reduce unnecessary surgeries by employing a 142-gene signature to determine whether thyroid nodules can be reclassified as benign pre-operatively.

Since the launch of Afirma in January of 2011, the company has processed over 50,000 fine needle aspirations. The company has performed over 10,000 GECs to resolve cytopathology results. The company has already received positive coverage from insurers like Aetna (AET), Humana (HUM), Medicare and UnitedHealthcare (UNH), representing over 100 million potential clients.

Veracyte has entered into a promotion agreement with Genzyme on a global basis to sell its product.

For the year of 2012, Veracyte generated annual revenues of $11.6 million, up from just $2.6 million a year earlier. Net losses increased from $14.4 million to $18.9 million.

For the first six months of 2013, Veracyte generated revenues of $9.5 million, compared to just $3.9 million a year ago. Losses increased from $8.9 million to $13.4 million, in the meantime.

The company operates with $20.7 million in cash and equivalents and no debt outstanding. As such, Veracyte will operate with a net cash position of around $75 million.

With the equity in the business being valued around $180 million, Veracyte is valued at 15.5 times annual revenues based on 2012's reported financial results.

Investment Thesis

As noted above, the offering of Veracyte has been a bit disappointing. The company priced the offering at $13 per share, some 7.1% below the midpoint of the original preliminary offering range. Factoring in losses in the days following, shares are now trading some 12.1% below the midpoint of the original offering range.

Note that there are some key risks as well. Veracyte has its own sales team, but also works together with Genzyme's sales time, as it entered in to a deal with Genzyme in January of last year, under which Veracyte received a $10 million fee from the company.

Note that for 2012, Veracyte sold 25,890 fine needle aspirations, with the current list pricing of a GEC standing at $4,275. Growth will furthermore increase as positive coverage decisions from UnitedHealthcare, Aetna and Humana were only taken this year.

So growth is expected to continue, driven by these coverage decisions. Key risks include obviously the losses at the moment and competition from the likes of Quest Diagnostics (DGX) and Laboratory Corporation of America (LH). These firms are competing for the estimated $500 million market with 525,000 FNAs being performed per annum.

I am cautiously optimistic on the prospects for Veracyte. Revenue growth is strong and will most likely accelerate on recent positive coverage decisions, which should allow the company to break-even rather soon. As such, the current market capitalization is rather limited, especially if revenue growth continues going forward.

I will await the first quarterly report following the public offering, looking for better indications for true revenue growth going forward, and the impact on margins.

Source: Veracyte - Weak Offering Of This High Growth Medical Stock