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Piper Jaffray Initiates Coverage of Veracyte with Overweight Rating

NEW YORK (GenomeWeb) – Investment bank Piper Jaffray on Thursday initiated coverage of Veracyte with an overweight rating on the firm's stock and a $21 price target.

The bank cited the South San Francisco, Calif.-based molecular diagnostics firm's position in the market for testing thyroid nodules, its potential to save the healthcare system money, and additional market opportunities as the reasons for the overweight rating. Veracyte sells the Afirma Thyroid FNA Analysis/GEC test, a 142-gene signature test used to reclassify as benign or suspicious the 15 percent to 30 percent of thyroid nodules identified as indeterminate by cytopathology.

Senior Research Analyst William Quirk wrote in a report on the firm that the test targets a $500 million market in the US and an $800 million market worldwide. Because the test is used prior to surgical procedures, it could enable physicians to properly classify thyroid nodules and potentially save the estimated $15,000 cost of surgery.

Quirk also noted that Veracyte has received favorable coverage decisions from several large insurers including Aetna, Cigna, Humana, UnitedHealthcare, and Medicare. "[W]e anticipate ongoing publications, Veracyte's compelling value proposition, as well as guideline inclusion to drive additional favorable coverage decisions going forward," he wrote.

Quirk further noted Veracyte's first quarter results, which included a roughly 34 percent increase in thyroid fine needle aspiration volume year over year to 14,373 and a 70 percent increase in revenues to $7.5 million. Veracyte has guided for revenues between $38 million and $43 million for FY 2014, and Piper Jaffray currently expects sales to come in at $40.9 million. The bank further estimates FY 2015 sales of around $77.1 million and FY 2016 revenues of $117.4 million.

In addition to the thyroid FNA market, Veracyte is targeting interstitial lung disease and expects to launch a product for that market in 2016. Other market opportunities could exist for skin, esophagus, liver, breast, pancreas, prostate, kidney, bladder, ovary, and testicular conditions, among others, "all representing attractive longer-term growth opportunities," according to Piper Jaffray.

Veracyte faces competition in the thyroid FNA market from Asuragen, which offers a miRNA test out of its CLIA lab. It could also face competition from Rosetta Genomics, which recently announced a collaboration with the Moffitt Cancer Center to develop a microRNA-based test for thyroid neoplasia. That test is expected to launch before the end of next year, but "it is unclear how competitive this product will be with Veracyte's Afirma GEC," Quirk wrote.

Piper Jaffray's $21 price target on the stock is based on 4.6x its FY 2016 revenue estimate at around 27.5 million shares outstanding, representing a 50 percent premium to Veracyte's small-to-mid-cap diagnostics/specialty lab peer group. "We believe a premium multiple is justified given the existing market opportunity as well as potential pipeline products in adjacent markets, private payer momentum, its higher growth profile as well as the potential positive impact from inclusion in [American Thyroid Association/American Association of Clinical Endocrinologists] guidelines," Quirk wrote.

In Friday morning trade on the Nasdaq, shares of Veracyte were up 2 percent at $15.38.