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Janney Upgrades Veracyte to Buy

NEW YORK (GenomeWeb) – Investment bank Janney upgraded Veracyte to Buy from Neutral today, noting the company's "disciplined" approach to test development, commercialization, and reimbursement makes it stand out among its peers in the diagnostics sector.

Janney has also doubled its fair value price for Veracyte's stock to $16 from $8 per share.

Recent problems in the diagnostics sector have created a "toxic investment sector," wrote Janney analyst Paul Knight in a note to investors. "The combination of uncertain FDA regulations, incomprehensible Medicare pricing actions, out-of-zip-code revenue misses, taking more years to achieve commercial traction than anticipated, and scandalous news around industry poster-child Theranos" have made it hard to find the bright spots.

Developers of specialized molecular diagnostics had speculated that tests could be developed in a few years, but that process has stretched out to six years to nine years in practice, Knight said. However, Veracyte has stood out in its ability to efficiently develop and commercialize these tests, and then proceed to reimbursement.

"Veracyte's current price does not reflect the value the company has created with one test fully commercial and two tests in the clinical utility and reimbursement phases," Knight wrote. "The company has reached significant achievements with its commercially approved and reimbursed Afirma test for thyroid cancer; its Percepta lung cancer test that has been commercial since 2Q15 and has started securing reimbursement coverage; and Envisia for idiopathic pulmonary fibrosis that was launched in 3Q16 and is in the process of clinical utility studies and gaining reimbursement."

Further, he added, the company has potential for growth and stock upsides from current levels. Janney's FY2018 estimates for the company's earnings assume that $94 million of the $105 million in expected revenues will come from the Afirma test. The investment bank further expects that, thanks to growth in sales of all three diagnostics in 2019 and 2020, the company will record $175 million in revenues and earnings per share of $.55 in 2020 compared to $105 million in revenues and a loss per share of $.60 in 2018.

"With its high-quality data, disciplined development and commercialization pathway, and accelerating revenue, we see the company share price as undervalued," Knight wrote. "At its current price of about $8 the company is valued at 2.7x 2018 revenue estimates relative to past industry M&A multiples that average about 5.5x."

Earlier this month, Veracyte reported that its third quarter revenues rose 51 percent to $18.6 million from $12.3 million in the year-ago quarter, beating the average Wall Street estimate of $16.7 million. This was largely due to strong sales of the Afirma test. Veracyte also reported that its Q3 net loss narrowed to $5.6 million, or $.20 per share, from $8.9 million, or $.32 a share, in the same period last year, easily beating analysts' average loss per share estimate of $.36.

Veracyte's shares rose more than 4 percent to $8.01 in morning trading on the Nasdaq.