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Investment Banks Initiate Coverage of Veracyte

NEW YORK (GenomeWeb News) – Two investment banks today initiated coverage of Veracyte with Outperform ratings on the company's stock.

The coverage initiation by Cowen & Co., and Leerwink Swann follows Veracyte's announcement on Monday that revenues for its third quarter rose 75 percent year over year, as well as the South San Francisco, Calif.-based company's initial public offering earlier this month.

Cowen analyst Doug Schenkel cited the company's recent execution, growing payor coverage, and a large market opportunity in giving Veracyte its Outperform rating and a price target of $16 on the company's shares.

Veracyte targets the thyroid nodule risk classification market, which Schenkel estimated at $500 million in the US and $300 million internationally. The firm's test, called Afirma Gene Expression Classifier, is for predicting thyroid cancer in patients with indeterminate cytology test results and has a market of about 100,000 cases in the US annually, according to Schenkel.

In indeterminate cytology cases, surgery is often recommended, but "a vast majority of these patients turn out to be benign for cancer," Schenkel wrote in a research report," and added that a health economics report from 2011 estimated that Afirma GEC, if fully adopted, could save more than $500 million from the healthcare system in five years.

Afirma GEC was launched in 2011 and since then, companywide revenues have grown sharply. In 2013, revenues are projected to nearly double from 2012, and in 2014 revenues are again expected to double to about $42 million, Schenkel said.

He noted also that Veracyte has obtained National Comprehensive Cancer Network guideline recommendations and positive payor decisions from Medicare, UnitedHealthcare, Aetna, Humana, and others. In total more than 100 million lives are covered for Afirma GEC.

"While we acknowledge that the GEC test remains on the earlier stage of product adoption, we believe [Veracyte] is well positioned to gain additional payer coverage and physician adoption over the next several years," Schenkel said.

In the meantime, Leerink Swann's Dan Leonard has a price target of $17 on Veracyte's stock. Like Schenkel, Leonard noted the company's market opportunity, calling tools for improved thyroid cancer diagnosis "an underserved but growing market."

He called the firm's Afrima Thyroid Fine Needle Aspirate analysis "the only molecular cytology solution commercially available that identifies which thyroid nodules deemed indeterminate by traditional cytology are truly benign, thus enabling physicians and patients to confidently forgo unnecessary thyroid surgery."

Since the launch of Afirma GEC, Veracyte has processed more than 60,000 fine needle aspirates and performed about 12,000 GECS to clarify indeterminate results from cytology, Leonard said.

Veracyte also has a "number of R&D projects which offer upside" beyond Afirma GEC, he added, and highlighted the Afirma malignant test for helping guide physicians determine whether a patient may need surgery. The company expects to launch the test in the second quarter of 2014.

Additionally, it is developing a test for interstitial lung cancer for the improved diagnosis of idiopathic pulmonary fibrosis. The test would also provide clinicians information that would be useful in deciding a treatment strategy, and Leonard said that he expects it to launch in 2016.

In afternoon trading on the Nasdaq, shares of Veracyte were up 6 percent at $12.08

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