Veracyte's (VCYT) CEO Bonnie Anderson on Q2 2016 Results - Earnings Call Transcript

| About: Veracyte, Inc. (VCYT)

Veracyte, Inc. (NASDAQ:VCYT)

Q2 2016 Results Earnings Conference Call

August 03, 2016 04:30 AM ET

Executives

Bonnie Anderson - President and CEO

Shelly Guyer - CFO

Chris Hall - COO

Analysts

Amanda Murphy - William Blair

Alex Nowak - Piper Jaffray

Carolina Ibanez-Ventoso - Janney Montgomery Scott

Bryan Brokmeier - Cantor Fitzgerald

Benny Varon - Wedbush Securities

Operator

Good afternoon, ladies and gentlemen. And welcome to Veracyte Second Quarter 2016 Financial Results Conference Call. As a reminder, today’s conference call is being recorded.

I’d now like to turn the conference over to your host, Ms. Shelly Guyer, Chief Financial Officer. Please go ahead.

Shelly Guyer

Good afternoon, everyone and thanks for joining us today for our second quarter 2016 financial results conference call. With me today are Bonnie Anderson, President and Chief Executive Officer; and Chris Hall, Chief Operating Officer.

During the course of this call, we may make forward-looking statements that are not purely historical regarding Veracyte’s or its management’s intention, beliefs, expectations and strategies for the future, including those relating to scale and sustainability, future growth, cash flow and profitability, future revenues and expenditures, coverage and reimbursement for thyroid and pulmonology tests, successive strategic initiatives, product launches and adoptions, clinical utility of products and market growth.

Because such statements deal with future events, they are subject to various risks and uncertainties and actual results may differ materially from the Company’s current expectations described in this call. Additional information concerning factors that could cause actual results to differ materially from those in the forward-looking statements can be found in Veracyte’s Annual Report on Form 10-K, Quarterly Reports on Form 10-Q and other filings with the U.S. Securities and Exchange Commission in addition to today’s press release.

The forward-looking statements in this call are valid as of August 03, 2016 and Veracyte assumes no obligation to publicly update these forward-looking statements. Our financial results press release for the second quarter ended June 30, 2016 crossed the wire a short while ago and is available on the Investor Relations page of our website at veracyte.com.

I will now turn the call over to Bonnie.

Bonnie Anderson

Thank you, Shelly. Good afternoon, everyone. And thanks for joining us today.

We delivered strong performance this quarter in our endocrinology business where we continued to drive a Afirma adoption across all market segments and executed on key payer initiatives that will help us accelerate future revenue growth. We also made great progress in our pulmonology business, where we have now amassed a comprehensive evidence including published clinical utility data demonstrating the Percepta classifier’s ability to reduce unnecessary surgical procedures in lung cancer diagnosis. We believe this positions us to secure Medicare coverage this year and prepare for commercial expansion and revenue going into 2017. And we remain on track to unveil independent validation data and commercially launch the Envisia classifier to aid in the diagnosis of idiopathic pulmonary fibrosis or IPF without the need for surgery, in the fourth quarter of this year.

I will now turn to our second quarter results focusing on the three key areas that define our success in 2016. First, Afirma growth and reimbursement expansion.

We experienced solid revenue and volume growth this quarter for Afirma as our genomic classifier increasingly becomes a new standard of care in thyroid cancer diagnosis. Our revenue for the quarter was $14.7 million, an increase of 23% compared to $11.9 million for the second quarter of 2015. We reported 5,832 Afirma GEC results in the quarter, also a 23% increase compared to the same quarter last year. We are pleased to achieve this level of volume growth despite the unusual situation as having two major clinical meetings the Endocrine Society and the American Association of Clinical Endocrinologists annual conferences occurred the same quarter, which took many of our customers away from their offices for two weeks.

Securing more in-network contracts is key to fueling expanded Afirma GEC adoption and revenue growth. On that note, I am pleased to report that we’re already benefitting from the agreement we assigned early in the second quarter with CareSource, the Blue Cross and Blue Shields Association’s internal group purchasing organization.

As outlined on our last call, we believe this agreement will enable us to accelerate in-network contracting with individual Blues plans across the country because it simplifies the often time consuming price negation process. and we believe it also raises our test profile within the Blues network. Just last month, we signed in-network contracts with two new Blues plans, CareFirst, the Blue Cross and Blue Shield plan covering Maryland, the District of Columbia and parts of Northern Virginia; and Blue Cross and Blue Shield of Illinois, one of the HCSC plans. This brings the total number of people having access to Afirma as an in-network service to over a 140 million including over 18 million members of Blues plans.

Additionally, we’ve reached agreement with Blues Shield of California and expect to execute that contract over the next several weeks. This is especially important because Blue Shield of California adjudicates all of our Afirma GEC claims for the 5 million federal employees and family members enrolled in the Blue Cross plans since we are a northern California based lab.

We also continued to expand and reinforce the clinical utility evidence for the Afirma GEC with two data presentations at the annual ENDO meetings in April. These included a meta-review of data from 13 studies involving more than 1,800 Afirma GEC patients which concluded that use of the Afirma GEC resulted in a 25% lower overall surgical rate among all patients being evaluated with the genomic tests. With these data and nearly 20 published studies to-date demonstrating the Afirma GEC’s clinical utility, we are delivering proof to physicians, patients and payers that our test’s changing care is intended delivering on the promise of reduced surgeries and costs and we have established a formidable barrier to any competitor trying to gain a foothold in this market.

Our R&D team also continues to provide scientific leadership in endocrinology. At the AACE meeting in May, our scientists gave two presentations highlighting new data and a study underway to advance understanding of how gene alternations can potentially help guide physician decision-making in thyroid cancer diagnosis. We intend to remain at the forefront of the field, both commercially and scientifically as we strengthen our significant first-mover advantage in this market.

Finally, just a quick note on the reimbursement and legislative front. We are encouraged that CMS has announced its intention to initiate market-based Medicare pricing for advanced genomic tests like the Afirma GEC, starting January 1, 2018. In June, the agency released its final rule outlining how it will implement the Protecting Access to Medicare Act or PAMA. We believe that PAMA implantation will bring important and much-needed transparency and certainty to Medicare pricing. We are pleased to be playing a key role along with our partners at the Coalition for 21st Century Medicine and engaging the CMS to help shape the legislation during the current comment [ph] period as the agency clarifies and works through the final details.

Prior to PAMA’s effective date, the Afirma GEC will be priced according to CMS’ gapfill methodology under the 2017 Clinical Lab Fee schedule. In June, the agency issued its preliminary gapfill rate in which the price of the Afirma GEC would be reduced to $2,240 due to what we believe was a flawed application of the gapfill pricing methodology. We are in active discussions with CMS on our own and with industry partners during the agency’s 60-day comment period and are optimistic that the final Medicare reimbursement rate for the Afirma GEC will match the current rate of $3,200. Medicare represents approximately 20% of our Afirma GEC tests volume. And of note, when the new PAMA rates go into effect in 2018, they will override the final rate determined for 2017.

Our second measurement of success is Percepta coverage. Medicare coverage for Percepta during 2016 remains our top goal for the product. And we believe we have assembled the library of evidence needed to achieve it. We now have published data for three clinical validation and two clinical utility studies as well as an analytical verification study. Additionally, four studies including compelling cost effectiveness data were presented in May at the American Thoracic Society or ATS Conference by Veracyte scientists and top academic thought leaders. One of the new studies suggests that use of the Percepta classifier would prompt a three-fold reduction in physicians’ recommendations for invasive procedures compared to their recommendations without the alpha genomic test results. This clinical utility study was concurrently published in BMC Pulmonary Medicine.

The Percepta classifier was also featured prominently at the ATS meeting in a packed [ph] keynote address session on the topic of one cancer detection and prevention in the precision medicine era, further elevating the test profile among the pulmonology community.

And third is the launch of Envisia. We are excited about planned fourth quarter launch of our Envisia genomic classifier which we believe will offer significantly improved diagnostic clarity to the quarter of a million patients who undergo a clinical workup each year for possible interstitial lung disease or ILD including IPF. Important data from four studies were presented at the ATS meeting, helping to lay the groundwork for launch. This included data demonstrating our test potential to significantly increase the accuracy of IPF diagnosis compared to the current standard of high resolution CT alone. Researchers from the Pulmonary Fibrosis Foundation or PFF also presented data which Veracyte sponsored that qualified the enormous rate of diagnostic delays, missed diagnoses and often surgical procedures that patients being worked up for possible ILD often undergo.

Of note, the PFF senior medical researcher also highlighted the Envisia classifier at a prominent clinical year in review session at ATS where our publication in The Lancet Respiratory Medicine from last May was showcased as one of the most important and influential papers in ILD in the last year. The paper detailed compelling data using cross-validation suggesting the Envisia classifier’s potential to improve IPF diagnosis without the need for invasive surgeries or other costly interventions.

We plan to unveil clinical validation data from our prospective multicenter double blinded study for the Envisia classifier later this year and initiate commercialization of the test using the proven playbook that we have used for Afirma and Percepta. Specifically, we will make the test available to a limited number of thought leading institutions as we build the clinical utility and other evidence to support Medicare reimbursement. We would expect revenue from the Envisia Classifier sometime in 2018.

I will now turn the call over to Shelly to review our financial results for the second quarter.

Shelly Guyer

Thanks Bonnie. As Bonnie indicated, we experienced solid revenue growth during the second quarter. Our revenue for the quarter was $14.7 million, up from $11.9 million for the same period in 2015, an increase of 23%. There was no significant difference in the onetime pick-ups from new accruals in this quarter compared to the year earlier period, $340,000 versus $240,000.

We accrued 64% of revenue in the second quarter compared to 55% in the same period of 2015. Of note, we accrued 47% of Afirma GEC volume in the quarter. The number of total FNA samples received in the second quarter increased by 10% over the prior year to 22,010. As Bonnie noted, our volumes were impacted by the timing of two of the industry’s biggest conferences, both of which fell in the second quarter this year. We reported 5,832 of Afirma GEC test results during the second quarter, a year-over-year increase of 23%. 14% of total FNAs received in the quarter were for GEC only testing, surpassing the prior year’s 11%. Afirma GEC only samples received increased 34% year-over-year and now represent 50% of our GEC reported number.

Our gross margin “for the second quarter” was 57%, which is back up to levels from prior quarters after a depressed first quarter and is equivalent to the levels from the second quarter of 2015. We have achieved consistently solid and improving GEC margins but are experiencing continued downward pressure on contracted cytopathology reimbursement rates, dampening the overall margin. As we’ve previously indicated, we expect our gross margin to remain relatively flat in 2016 until we obtain new payer contracts that will expand reimbursement for the Afirma GEC and until we achieve Medicare coverage and reimbursement for Percepta.

Operating expense for the second quarter was $25.2 million compared to $21 million for the comparable period in 2015. Let’s break this down by line item.

Cost of revenue for the quarter was $6.3 million compared to $5.1 million for the comparable quarter of 2015, an increase of 23%. The increase was due primarily to an increase in samples tested, especially the higher volume of the higher cost Afirma GEC related to the lower volume and the lower cost cytopathology. We also had a full quarter of increased facility costs for more expensive and larger lab space in our new facility.

Research and development expense for the quarter was $4.3 million compared to $3.1 million for the comparable quarter of 2015, an increase of 38%. The increase was due primarily to continued investment in clinical trials and product development especially materials purchased for research and development experiments which we expect to decrease in coming quarters as well as increases in personnel related expenses.

Selling and marketing expense for the quarter was $8.3 million compared to $6.9 million for the comparable quarter of 2015, an increase of 19%. This increase was due to an increase in Sanofi Genzyme co-promotion expense, reflecting an increase in cash collections, as well as increases in personnel related expense due to higher headcount in our sales team and the associated increases in commission. Expense was also higher because of multiple medical conferences in the same quarter. As part of our preparations to exit our Genzyme relationship in September, we hired eight more sales personnel in the first half of the year and incurred higher Afirma marketing expense this quarter, which we expect to continue.

General and administrative expense for the quarter was $6.1 million compared to $5.5 million for the comparable period of 2015, an increase of 10%. The increase was primarily due to personnel related expense including increased headcount, stock-based compensation expense and severance costs. There were also reductions in spend. Of note, now that we are in our new facility and completely exited the old facility, we no longer incur the excess rent payments which under GAAP flow to G&A, a charge we incurred in the year ago period. And finally, we continued to control G&A expense growth by dramatically decreasing consulting expenses as compared to last year, a trend which we expect will be sustained for the remainder of the year.

Operating loss for the quarter was $10.5 million compared to a loss of $9.1 million for the same period in 2015. Interest expense of $785,000 this quarter relates to interest on the $25 million term loan taken down at the end of March. We elected to pay 9% interest in cash and the remaining 3% interest was paid in kind and there $192,000 was added to the term loan outstanding principal business. We expect to continue to use the pick provisions in coming quarters.

Net loss for the quarter was $11.2 million or $0.40 per common share compared to a net loss of $9.1 million or $0.35 per common share for the same period of 2015. Cash and cash equivalents as of June 30th totaled $39 million with the additional $15 million of debt available at our option. At quarter-end, we had access to $54 million.

Our cash burn for the quarter was $8.5 million, much lower than adjusted $10.9 million burned in the first quarter. Of this amount, $2.1 million was paid to Genzyme under our co-promotion agreement. As noted previously, we expected the burn to be lower in the second quarter and we continue to anticipate a bigger decline in the back half of the year, especially after we exit the Genzyme relationship and begin to experience more efficiencies in the business.

I will now turn the call back over to Bonnie to provide closing remarks.

Bonnie Anderson

Thanks Shelly. As we look to the rest of the year, we’re focused on three key strategies to drive Afirma growth. First, we’ve completed expansion of our sales organization to ensure a seamless transition from our Genzyme relationship and the team is now fully trained and primed to advance the business forward. In addition to our product specialists and institutional sales associates, our sales organization now includes a group of account managers several of whom were hired in the first half of the year. The account managers are dedicated to serving existing accounts which frees up our product specialists to focus on brining in new business.

Looking ahead, we will expand our sales team by six associates over the coming two quarters. This will help us further drive our Afirma business through the end of 2016 and prepare for the expanded commercialization of Percepta following Medicare coverage. We anticipate having 45 field sales associates by the end of the year and a structure that will enable us to synergistically drive strong Afirma sales and ramp Percepta commercialization quickly and cost effectively.

Second, as we further evolve our Afirma solution and the diagnostic partner program which have fueled our success in the ambulatory and institutional market segments, we are directing attention to the small but relatively untapped radiology clinic market where an estimated 55,00 FNAs are performed annually. Radiology clinics often get referrals from primary care and OBGYN physicians who would be difficult for us to reach directly.

And third, we continue to engage Anthem in order to receive a positive medical policy by the end of the year. And we’re focused on adding to our growing roster of end network accounts. We will leverage the CareSource agreement to further drive more Blues payer contracts, as I outlined earlier.

As we cross the midyear mark, we are pleased with our progress and remain focused on execution, continuing to grow Afirma and advance our pulmonology business as we set our sights on being a cash flow positive business within the next 24 months. With first half 2016 revenue at $28.2 million and our Afirma GEC test volume at 11,184, we are on track to achieve our 2016 targets. We reiterate our 2016 guidance to achieve annual of $59 million to $63 million, and Afirma GEC volume in the range of 24,000 to 25,500 tests.

Before wrapping up, I’d like to add that were honored to be named to the Bay Area News Group’s Top Workplaces list in June. This is the third year in a row that we’ve received this prestigious award, which is given based on employee survey of the Bay Area companies. We truly believe that our employees are our best asset, and are humbled by the passion, energy and dedication that they bring to work every day.

I now ask the operator to open the call up for questions.

Question-and-Answer Session

Operator

Thank you. [Operator Instructions] And our first question comes from the line of Amanda Murphy with William Blair. Your line is now open. Amanda, please press check your mute button.

Unidentified Analyst

Arco [ph] in for Amanda. How are you?

Bonnie Anderson

Hi Arco. [Ph] Thanks for joining us.

Unidentified Analyst

Hi. Just a quick question on the institutional and community markets, just wondering if you could give us an update on the market share dynamics there, and a bit of an update on the community side business?

Bonnie Anderson

Yes, we’ve always included the radiology clinic market as part of the ambulatory setting because it’s really a place where patients come to get the FNAs collected. We would typically collect both the FNA for cytopathology there as well as the GEC, and that will come to us. And it’s not that we have not penetrated that small segment of the market at all. We have had some business in that segment in the past. But, we’re hunting them and I’m bringing a little more focus on helping these radiology clinics use Afirma as a top tier product to drive their business to their referral base, which is often these primary care physicians and OBGYNs.

So, we’re on track with where we expected to end the year in terms of overall market share, somewhere between 25% and 30% in the market overall. We will probably have a little bit higher share scale in the ambulatory segment coming out of the year, but have had very strong growth in the institutional market. And we will look at where we end the year and update those market share data.

Unidentified Analyst

I guess as a follow up on that is what are the some of the ways that you are driving the volume in that setting compared to previously?

Chris Hall

The dynamic is a little bit different between a free standing radiology center and a hospital situation. In a hospital situation, the patient is send into the hospital and the FNA is performed, but it’s in almost always to a lab inside of the hospital. And so, the way we’ve been penetrating that segment has been to enter into these Afirma diagnostic partnerships which have given the internal hospital lab the ability to take the sample when they do the FNA, save it and send it to us when they get indeterminate. As we’ve always said, that sales process is a little bit more complex, there are many more players involved because we’ve got to work through that process in the dynamics inside of a hospital. Now, in a free standing radiology center, the patients are sent there, instead of going to hospital, they’re sent to a free standing center, but there is no quote captive cytopathology group that’s associated with it. So, the radiologist just has to make the decision of where they send the sample. And there the sale cycle is we believe much simpler because we don’t need to engage them to bank the sample and send us the indeterminate. So, rather they can send us the paired solution, and we think that model really serves that segment well.

Now, as always, we’re going to be flexible and work the way they want to work. But we believe that the radiology segment by going into that aggressively allows us to rejuvenate some of the growth in the paired business because while it is quote institutional, it’s really business that ultimately we think will come through the paired channel. And so we’re excited about it and we’ve put a big effort at it starting this quarter.

Unidentified Analyst

Got it. Thanks that helps. And then one last is, could you give us an update on the conversation with Anthem and how do you feel about those conversations looking ahead?

Bonnie Anderson

Sure. So, Anthem updated their policy earlier in the year, but it was a timeframe that actually didn’t capture the review of some of our key evidence. We’ve pointed to the HealthCore study that got published in March as a really pivotal long-term outcome study for Afirma showing that patients that are followed to up to 40 months, remain surgery-free and that durability of the test result is there. But we are actively engaged with Anthem following that update as well as before, but the timing of cut-off, we kind of missed the update in May. It’s the similar situation that we had last year with HCSC where they had also done a mid-year natural update in a cycle. We were able to then get more attention on Afirma at that time and then they flipped that investigational decision positive for Afirma before the end of the year. So, we’re still very confident that we’re going to be able to move this along and get it done and I think that the engaged discussions are going very well.

Operator

Thank you. And our next question comes from the line of Bill Quirk with Piper Jaffray. Your line is now open.

Alex Nowak

Great, thanks. This is actually Alex Nowak filling in for Bill today. I was just wondering if you can give us any more color on the conversations you’re having with CMS on the pulmonary gapfill rates. Is there anything that you can give us to give us some more confidence that the final rates are going to be in line with your 2016 prices?

Bonnie Anderson

Well, we’ve had lots of activity and lot of feed on the ground in Washington, as you can imagine. We believe that the process that is being -- that was used to derive the gapfill rate was really flawed and that it was not consistent with the way the gapfill rate process has gone in the past. And specifically, as you know, there are like eight administrative regions that CMS goes out to get these gapfill rates. And many of these regions have no familiarity with some of the tests. In fact, in our case with Afirma, there are really only two regions that have ever fully evaluated and adjudicated claims for the GEC. But because of some nuanced instructions from CMS, each of the regions felt that they were being asked to submit some rate whether they had evaluated the evidence behind the test or not. And some of them just pulled the rates that have been used last fall, and that pulled the overall medians down.

So, what gives me confidence is that we have active attention and engagement with the folks administrating this whole process. And we believe that when you look at the requirements for the MACs [ph] to come up with a rate that is justified that they will not necessarily have that data and either have to pull their rates or they will revisit the rates that have been submitted by the MACs that are actually familiar with and have adjudicated these claims in the past, and will adopt their rate. So, as you know, right now, we’re in an open comment period. A lot of this activity and exchange and education is taking place. That will end in August and then we would expect to have final decisions and final rates released sometime in probably September, October.

Alex Nowak

Okay, great. That’s very helpful. And then, staying on the staying on the reimbursement topic…

Bonnie Anderson

Go ahead.

Alex Nowak

And then staying on the reimbursement topic, what conversations are you having with your local MAC that’s making you confident you will receive the local area covers decision for Percepta by the end of the year?

Chris Hall

Well, we’ve always said that we believe that it’s about amassing the data necessary to get the coverage put together, and we believe that it’s a library of data that we stitched together over the last 12 months, and continues to come together this quarter, puts us on a really strong position to achieve coverage by the end of the year. And indeed, as the test is being used and we have confidence that there is market need behind it and the test is being used the way we thought it would be used and the data is coming together, we believe that we’re really well-positioned to exit this year in a good spot with coverage.

Alex Nowak

Okay, great. And then, last question from me and then I’ll jump back into queue. Do you have estimate of what the volume and revenue impact was during the quarter by having those two conferences at the same time?

Bonnie Anderson

One of the reasons we don’t give quarterly guidance is because of at this stage in the Company and business quarterly nuances can definitely come into play. What we do know is that Q1 was a strong quarter for us and historically of course one of those major conferences have fallen in Q1. And so, you just think about it. In our case, doctors don’t order a test and then a patient go have a blood draw or you go pull a sample that was taken from a surgery a couple of months ago. For us, to get samples, they have to be taken the day before in a doctor’s office or a hospital environment, and the doctor has to be there basically collect the sample. So, we’ve mapped over the years that we always see suppression when we hit months where these meetings play. ATA as a September meeting in our lung business, although it doesn’t suppress revenue yet because we’re not booking any, but ATS meeting will be a key meeting along with test. But I think having those two fall in one month, we were quite pleased to come out with the volume growth that we had.

Operator

Thank you. And our next question comes from the line of Doug Schenkel with Cowen and Company. Your line is now open.

Unidentified Analyst

Hi, this is Chris on for Doug today. Thanks for taking my questions. First question on, so with pricing about as expected for the Blues payers you signed subsequent to the CareSource agreement. And it seems like the progress with CareSource is going quite well. So, can you provide an update on how you are thinking about Blues coverage over the balance of this year? And then, just lastly, how should we think about revenue contributions from the recent Blues payers related to CareSource this year and next year?

Bonnie Anderson

Well, as you’re now coming into the year, this was one of our top milestones. So, we are really excited about the progress we’re making. And I’ll have Chris fill in some of the color on what we’re doing with CareSource and the Blues.

Chris Hall

Yes, I think as we’ve said, the rates were pre-negotiated, so that the Blue Cross Blue Shield companies knew that they were getting the best available rates. And we don’t negotiate away from those rates, because that’s contractually what we’ve agreed to do. So, obviously by signing these agreements, they are in line with what we would expect and what is good for them and ultimately good for us. And this is really important to us to get these done for couple of reasons. One is that we always like to remind people that the situation with the Blue Cross Blue Shield plans have been tough for us because the checks go to the patient. And so by getting these network contracts done, it allows the money to flow to us rather than to the patient, which does a couple of things. First of all, it’s more likely to get it obviously; and secondly, it’s cheaper to get it because it’s really hard to go try to figure out all out and then chase down the patient.

And the second reason why this is critically important to us is that the single biggest reason physicians choose not to use Afirma is because of lack of network access. They get beaten up by the insurance companies for using out a network labs. And so by getting into contract, we remove a major barrier to ordering. And so, while it’s easy to focus on what the contracting means for us in terms of revenue upside because it ultimately makes it easier to collect the money, it also works on the other side, which is the samples because we’re more likely to get the sample because the barriers removed from the physician choosing to use the test. And this has been one of our top priorities this year. And we’ll continue to execute on Blue Cross Blue Shield plans, that we have not signed contracts that we have -- they have covered the test but we’ve not signed contracts with. And this is one of our top priorities this year because not only does it drive revenue but it drives samples hand in hand.

Bonnie Anderson

So, why don’t I cover a little bit on the financial side. So, from the numbers perspective, as we alluded to in the prepared remarks, these two signed contracts were 11 million contracted lives which takes us to about 80 million Blues under contract, which is impressive, but if you count the additional Blue Shield of California which also includes some of the federal employees, that’s about another 8 million. So, you are up to about 25 million Blues under contracts. One of the key things that you have to remember, not only Chris said that they now pay us directly, but if we can get some predictability of payment from those payers, then we are on our path to being able to accrue those payers. And so, to us that is a very significant potential next several quarters as we get that predictability of an estimable amount. So that’s important to understand that.

And the other point that I would make is that, we’ve been seeing a trending up that we’ve talked about of the average GEC price and sort of the estimate that we’ve been using for the last couple of quarters, if you take the amount of the GEC revenue and divide it by the number of tests in this quarter, which is a little bit of proxy for sort of where the payments are going, so we don’t have to wait for last [ph] payments a year later. We’ve added 2,250 in this quarter. And we would anticipate over the next several quarters, as we get in more contracts that by year-end, we’d probably be exiting the year with about 2,300 on average per GEC. And that reflects about a 10% increase during the year. So, we’re not going to give out x number of millions of dollars. But I think you back into it by all of those numbers, the number of covered lives and how much is going to change our GEC average price, you can get a pretty good proxy exiting this year.

The only other thing I would say is as Chris noted, we really believe that the CareSource contract will allow us to accelerate additional Blues into contract later this year. And so that’s obviously still a major effort for us.

Chris Hall

Yes, and we always focus on these calls right on what just happened in the quarter there was but obviously what’s important is the bricks that we’re laying in the foundation for the quarters in the future. And we really believe that these are important bricks that we’re laying to build the next couple of quarters forward and we’re really excited about the progress we’ve made on that front.

Unidentified Analyst

Thank you. That was super helpful. And then may be just a last question on the sales force. Could you talk about whether the hires you mentioned in your prepared remarks were incremental to those you announced last quarter? And sorry, if I missed this, but did you say part of the sales force would be selling both Percepta and Afirma at least initially and what are your plans for the dedicated sales force for Percepta? Thank you.

Bonnie Anderson

Yes, we have pointed to this opportunity to create an integrated team where we can start to get some leverage because it’s really hard to build these enterprises in a way that can achieve profitability without getting leverage on multiple products in the sales and marketing area. So, we’ve been very focused on that.

So, Chris, why don’t you talk about the build up? We’ve hired eight.

Chris Hall

Yes, we hired eight new heads and two more started in July, and those are actually consistent with what we signaled when we exit the Genzyme agreement. And those folks are in place and they are performing, and we feel really good about the progress that we’ve made there. I would note one of the things that we talked about in this call is that we’ve started -- a chunk of those were actually account managers. And those people are tasked with managing the accounts that are in place that are significant to us. Because in managing those accounts that frees up our current sales force to drive the business forward rather than spending their time maintaining the accounts that we have. And that really was key to us laying the proper groundwork to exit the Genzyme agreement. We feel like we’ve laid that. That’s gone really well for us this quarter and we feel good about it.

What we talked about in this call was that we’re going to hire an additional six people over the coming few quarters. And that will be a mix of people in different areas. And partly those people will obviously help with the Afirma and driving Afirma forward and really help us to have the staff up for 2017. But as we talked about, they will also help us prepare for the Percepta commercialization that we see on the back end of Medicare coverage happening.

We do believe that there are synergies to be gotten in the sales efforts. We are going to be marketing the products -- obviously there are two different call point at the pulmonologist rather than endocrinologist. But it all comes together in the hospital lab and the samples ultimately are processed and held and the underlying pathology is done in one a place in the hospital. And that’s actually, the key call point and what our sales channel spends a lot of time interfacing with those hospitals folks. And we really started to build a nice expertise in doing that. And so, we intend to leverage that as we commercialize Percepta because as we’ve talked about on multiple calls, we’re really focused on making this business profitable. And as we move towards go full commercialization as Percepta, we’re going to do that in a really smart way that gets leveraged with the existing sales channel, so that we can keep marching the business towards the profitable outlook.

Operator

Thank you. [Operator Instructions] And our next question comes from the line of Paul Knight with Janney Montgomery Scott. Your line is now open.

Carolina Ibanez-Ventoso

Hello, good afternoon. This is actually Carolina Ibanez-Ventoso on for Paul Knight. If can discuss your initiative, you mentioned that high precision CT imaging is the gold standard for the diagnosis of IPF. However, there are molecular biomarkers like inflammatory cytokines and chemokines that are also used to assess IPF in the clinic. I was wondering, what is the potential of your payers, against these other molecular biomarkers.

Bonnie Anderson

Well, there is really two standards of patients being worked up and diagnosed for IPF. High resolution CT is obviously the imaging modality that they go through looking for that fibrotic pattern or what is called a UIP pattern by imaging. And the other is the surgical procedure where an actual piece of tissue can be extracted in order to get a pathology pattern consistent with UIP. And so, what we’re doing with our first entry into this market is building a classifier that now has some really exciting data coming out at these meetings. And we’ll be advancing that more before the end of the year, showing that we have been able to build a classifier that reproduces this UIP pattern that might require a pathology surgery to get the tissue without the need to go through that surgery. And the reason we chose that path, obviously the guidance of all of our MDs and advisors and the multi-disciplinary investigators that have been part of all of this including the centers of excellence around the globe is because today surgical pathology UIP call is really considered the ultimate gold standard when combined with HRCT and the clinical picture for making a call. And obviously many patients in this indication are not able physically to withstand the surgery, and that’s why so many of these diagnoses, they remain ambiguous and misdiagnosed and delays in getting to actual diagnoses.

So, we’ve done whole genome work; this is a deep RNA sequencing platform that we’ve used where we squeeze a lot of genomic data and information out of that in order to come up with a classifier that’s going to provide a more accurate indication. And where we’re today that data looks like we’re going to have a very highly concordant classifier that can predict the UIP pattern of pathology without going to surgery to get it and that everyone is really excited about.

Carolina Ibanez-Ventoso

Thank you for all that color. I was wondering before your launch of Envisia, any data you may release or any presentation at conferences?

Bonnie Anderson

Well, we obviously cannot release the products for patient use without full validation data being unveiled. So, yes, we plan to launch in Q4 and in advance of that we will see more data unveiled including data from the multicenter prospective validation study. So, we’re heading into an exciting back-end of the year. Exiting 2016, we will have launched our third product as a Company, and really poised very well to continue the great growth that we’ve had and accelerate that on the back of more contracting for Afirma, coverage for Percepta and the launch of our third product in a really highly exciting field, IPF.

Operator

Thank you. And our next question comes from the line of Bryan Brokmeier with Cantor Fitzgerald. Your line is now open.

Bryan Brokmeier

Hi, good afternoon. Bonnie, you already talked about your discussions with CMS regarding Afirma reimbursement. Have you also made any progress towards working with the individual MACs that submitted the low reimbursement rates?

Bonnie Anderson

Yes, we’ve been engaged with all of the stakeholders from Washington to CMS to the MAC regions. And we aren’t just out there doing this alone either as key parts of a Coalition of 21st Century Medicine companies. We are sort of banding together because we know that we can make a lot more progress as we have historically as a group than single company. So, we’ve had a lot of great discussions, a lot of interactions around process at all levels within those organizations. And I think we remain confident that it’s going to come out on the right side. Keeping in mind that PAMA is really now teed up to go into effect for 2018, and we’re talking about this one year gap between where we are today with pricing of these tests and where pricing will be in 2018 when PAMA kicks in, for a company like us it’s a mass, the contracts and the level of reimbursement that we have. It really would be silly to see the price of a test drop and then come back up under the new process. So, we think CMS is going to be smart here and we’re really hoping this lands where it should.

Bryan Brokmeier

And Bonnie, do you have any contracts that come up for renewal in 2017 or what’s the process for payers to change reimbursement, which could allow for PAMA does not have the same effect that you’re anticipating?

Bonnie Anderson

We have not been approached by one payer nor do we have any of our major contracts coming up for renewal. And what’s pretty exciting about all of that is in the light of all of this we’re moving forward with contracting under our CareSource agreement which is very fair and very attractive pricing for us that has been established through that agreement. So, we remain very, very positive.

Bryan Brokmeier

And Chris or Bonnie, following up on some comments Chris made just made a little while ago on the sales force. Could you elaborate a little bit on the benefit that you’re seeing over the last six months since you added the account managers and the effect they are having on new -- on signing up new physician offices from the freed up time the sales reps have now?

Chris Hall

Yes, I mean the account manages, what we’re seeing is that -- well, we’re seeing a couple of things. One is that the we account managers are layering in and they are working to define set of accounts and those are our largest accounts. And we’re seeing that business remain very static, very constant and actually in some cases grow. And that’s being great. And that’s attributed to the [indiscernible] that’s it about region frequency and touching clients, and that’s been good for us. So we’ve seen some really nice sustained progress in our current accounts and actually some opportunity to grow them. Then, in our new account setup, we’ve continue to set up new accounts at a very high cliff, and we think that’s partly because of where we are in the market and the success we’ve had with data, but secondly because their sales reps have had more time to freed up rather than managing the account. So it works in both ways and we’re seeing that play out, which is why we’re continuing to invest in that channel.

Bryan Brokmeier

And given the conferences that you had earlier in the quarter, did you sign up new physician offices following the conference that aren’t reflecting a full quarter’s worth of revenue?

Chris Ball

There is a couple of things. I mean I think they have been all through the year, the sign ups -- and I don’t think we really see them. We always get new leads at these conferences, but what we find is that it takes a way lot of our existing business, and that’s the way it impacts our volume. We don’t see that there is a huge boost in new accounts that drive the business after these conferences. But we always find that there is new leads there that we are able to work. The time to set up the sales cycle for a payer account is relatively small when they move to us, they move to us with a single physician making a decision about what to do in their office. And a direct account, and our diagnostic solutions account that takes more time to get set up and get those accounts up to speed. So, they have a longer lead time and gestation period from start to full maturation.

Operator

Thank you. And our next question comes from the line of Benny Varon with Wedbush Securities Your line is now open.

Benny Varon

Yes, good afternoon. I was wondering if any of your test could be subject to competition of what we call the liquid biopsies and those tests that seek to replace being full price competitive procedures.

Bonnie Anderson

So, one of the things that we believe is really unique about what we’re doing at Veracyte is focusing in on areas of diagnostic workup today that yields a high rate of ambiguity where the next step in the process is typically a surgical procedure. And that creates a great pathway as we develop and position our test in back of that to have a very fast process for developing the evidence to show that we can replace the gold truth. So, I think that while it’s potentially possible to shift a sample to a blood sample, I am not sure in the case of thyroid speaking specifically to that that replacing a biopsy simple needle procedure in the doctor’s office with a blood sample would really be that feasible. And secondly, I think the studies that are going to be have to be conducted to prove performance around sensitivity and specificity are going to be expensive and take a long time to prove out. It’s very different than measuring something that’s detecting something for and or detecting a recurrence on something or in metastasis.

So, we’ve looked very closely at how these things may or may not impact our current existing business. And we’ll continue to look at on all the technology fronts as how we can continue to stay on the forefront.

Benny Varon

Very good. Thank you. And may be do you have a quick update on the CSO transition?

Bonnie Anderson

We have no update beyond what we announced couple of months ago when we announced that we would be doing a national search and that would be transitioning over a period of months and we’re still in that transition period now and expect to move through that recruiting process here in the next couple of months, and hopefully we’ll have an announcement down the road. Everything is going well.

Operator

[Operator Instructions] And I’m showing no further questions in the queue. I’d now like to turn the call back over to the Bonnie Anderson, President and Chief Executive Officer for closing remarks.

Bonnie Anderson

Thank you all for joining us today. As we prepare to launch our third commercial product later this year, we are reminded that our focus on resolving diagnostic ambiguity has really enabled us to carve out a truly differentiated position in genomic diagnostics. And it’s dramatically improving the lives of patients and reducing healthcare spending. Moreover, in an era when science and technology advances are fueling this relentless curiosity to know more about a patient’s health, we are providing clinically actionable information backed by rigorous evidence. Our products enable doctors to know what to do next with their patients and to give patients a clear path forward. We believe we’re fundamentally changing the importance of diagnostic testing. And we really appreciate your ongoing support of our business and mission. Thank you.

Operator

Thank you. Ladies and gentlemen, thank you for participating in today’s conference. This concludes this program. You may all disconnect. Everyone, have a great day.

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