Veracyte (VCYT) Moved to Hold
Veracyte recently reported and shares have been selling off. I’ve pored over the earnings report, the data on the nasal swab test, and listened to the conference call again to try and pull out the reasons why the stock has been weak after reporting Q3 results. There’s so much information about the recently reported data on the nasal swab test (for early detection of lung cancer, discussed on the call), where it could fit in the market, what pricing could be, and what the potential market size could be, that this conversation dominates the call. It seems analysts aren’t exactly sure how to measure up the potential for the test, which is proposed to launch sometime in 2021. At issue is the reality that, while lung cancer is a huge problem, screening for lung cancer is currently done in a very non-objective way. And while this test can help, it will likely require a new approach to segmenting patients for it to take off. That does create some questions.
The data shows that Veracyte’s test, which is much more objective, essentially puts people into two buckets; high risk, or low risk. Once in those buckets the docs can decide what the next steps are for the high-risk population and hopefully get those with confirmed lung cancer on treatment earlier. The low risk bucket can also be appropriately managed. Early estimates, assuming a price of $800 to $2,500 (a large range) per test, suggest a market size of roughly $2 billion in both the U.S. and Europe (almost $4 billion together). That said, the test isn’t on the market yet so it’s not 100% clear exactly what the next steps for these two buckets of people would be. And then there’s the remaining bucket of intermediate risk patients, which Veracyte says would be cut in half by its nasal swab test. But there would still be a good number left. Veracyte also has its Percepta test that’s used to diagnose lung cancer (typically after a bronchoscopy is inconclusive). So there could be some impact on that test’s sales. The data on the nasal swab test is new and not published in a major journal yet (management says it expects that will happen). None of this is bad per se. In fact, the test looks promising. But it’s just not 100% clear how the market demand will be for the test and how it will fit in with existing methods. Hence all the discussion on the call.
Stepping back to the big picture, the quarter looked good. Revenue was up 32% and EPS of -$0.02 beat by $0.05. Genomic test volume was up 24% to 9,941. Excluding biopharma (which includes revenue from collaborations, like the one with J&J for the nasal swab test), revenue was up 15%. The company has $196 million in cash and expects to reach cash flow breakeven by the end of the year. That’s good.
On guidance, management maintained forward guidance of $119 million to $122 million, which means consensus estimates of $120 million (up 33%) look very reasonable. One potential issue is that genomic testing revenue is seen up 20% in 2020 and management didn’t have anything to say about where biopharma revenue would be. This has been a significant line item this year so no guidance on that, even though it’s admittedly difficult to forecast, is a potential reason for the stock’s weakness.
Looking at the chart, Veracyte has been trading in the 21 to 31 range since we got into it. It looked to be heading to the high end of that range going into earnings. Now, it’s just below it (closing just below 21 today). That’s not a good sign, regardless of the potential.
We’ve had two tough days here and the plan is to watch the stock closely tomorrow morning. This could be a shakeout move that weeds out the weak hands. But we don’t have a lot of room to play with and if VCYT can’t jump back into its trading range quickly we’ll need to cut it loose. Moved to Hold. HOLD.