Veracyte, Inc.

they could be taken to surgery or put on treatment faster if they have lung cancer, or can avoid further workup, including risky invasive procedures, if their nodules are benign. Our Percepta Atlas will provide what we believe will be the most comprehensive gene alteration information in lung cancer, helping to direct patients to appropriate targeted therapies that are available or in development promptly at diagnosis. Importantly, it will also serve as a vehicle for building the first biorepository of lung cancer biology to include early stage cancers. We plan to hold a virtual investor R&D day on December 16th, focused on our lung cancer franchise. The event will allow us to share new data for our nasal swab tests and our Percept Atlas as they continue to advance in development. Investors will hear from thought leading physicians about how our lung cancer portfolio is positioned to positively impact patient care and we will provide a deeper look into our scientific approach and data. We'll provide updates on progress across our lung cancer portfolio which we estimate has a total addressable market of $40 globally. Stay tuned for more information about this event shortly. I will now turn the call over to Keith for a more detailed review of our third quarter 2020 financials.

Thank you, Bonnie. I'll also refer to our business and financial presentation, which you mentioned earlier and which is available on our website. Turning to slide six, the table and footnotes shown here, along with the details in our SEC filings, further explain how we recognize and report revenue under U.S. GAAP. For discussion purposes, we may combine testing and product revenue to describe our diagnostic testing business and biopharma and collaboration revenue to describe our strategic arrangements. As a reminder, net sales of data or other services to our customers are classified under biopharmaceutical revenue and all other non-customer revenue are classified under collaboration revenue and are consolidated statements of operations and comprehensive laws. Turning to slide seven, our performance against six key performance indicators or KPIs for the third quarter of 2020. compared to the prior year third quarter was as follows. Total revenue of $31.1 million was in line with the prior year quarter. Testing and product revenue of $30.3 million increased $3.6 million, or 13%. Biopharma revenue of $0.8 million decreased $3.4 million, principally due to the recognition in the prior year quarter of $4 million in revenue from Johnson & Johnson. Gross margin of 67 percent declined 400 basis points principally due to the decline in biopharma revenue. Gross margin excluding biopharma revenue was 66 percent in both the current and prior year quarter. Operating expenses excluding cost of revenue of 24.8 million increased 1.2 million. Net loss of 4.1 million increased 3.4 million due principally from lower biopharma revenue, reduction in interest income on invested cash, and higher amortization of our intangible assets. Net cash provided by operating activities was 1.8 million compared to $1.6 million used by operating activities in the prior year third quarter. The $3.3 million increase in cash flow from operations relative to the prior year quarter is due to a $4.9 million reduction in networking capital, a $1 million increase in depreciation and amortization, a $0.4 million increase in stock-based compensation, and a 0.4 million increase in other operating cash flow items, offset by a 3.4 million increase in our net loss. Genomic volume of 10,242 increased 3% and included 9,437 of FIRMA, 502 Percepta, and 303 Invisia-reported tests. From the second to third quarter of 2020, sequential reported test volume increased 97% for Afirma, 52% for Invisia, and 30% for Percepta. As Bonnie has mentioned, we expect the pace of recovery to remain more gradual for Percepta principally from fewer underlying procedures performed during the pandemic. Slide 8 provides a further breakdown of revenue into testing and product revenue, biopharm and collaboration revenue, and total revenue. As previously mentioned, testing and product revenue increased 13% or $3.6 million for the third quarter of last year, offset by a 3.4 million decline in biopharma revenue. Total revenue was slightly above the prior year quarter. Testing revenue of 28.2 million includes two million in cytopathology services. Slides nine and 10 illustrate our pacing and performance year to date against the same KPI metrics, as well as break down our revenue into testing and product biopharma and collaboration, and total revenue. Year-to-date, revenue is down 8% and genomic volume is down 9%, principally due to the impact of COVID in the second quarter. For the three months and nine months ended September 30, 2020, we accrued on average between $2,800 and $2,900 for both the Affirma classifier and Expression Atlas which met our revenue recognition standard. This was between 90 and 95 percent of the reported Affirma classifier test volume. The next eight slides outline the sequential and year-over-year results underlying each of the KPIs. Consistent with prior quarters, we present genomic volume trends on slide 12. Genomic volume includes commercial volume for Affirma, Percepta and Mendizia genomic classifiers. Genomic volume represents tests we perform in our CLIA laboratory. In December 2019, we acquired the Procigna breast cancer prognostic gene signature assay, which is the only commercial test we sell on the encounter platform as of September 30, 2020. We intend to expand our offering of diagnostic tests sold or distributed to third-party laboratories to run on the encounter platform, which we also intend to include in product revenue. To give investors insight into our total test volume trends, we added tests sold to third-party laboratories that met our revenue recognition standard to our genomic volume and showed those trends on slide 13. On the right-hand graphic of slide 13, we identified the quarterly volume of commercial ProSigna tests sold since we acquired the test in December 2019. For those of you that are not viewing the presentation, those volumes are 680 in Q4 2019, 2,482 in Q1 2020, 1,249 in Q2 2020, and 1,448 in Q3 2020. From the second to third quarter of 2020, the sequential reported test volume increased 16% for Prosigna. We expect the pace of recovery to remain more gradual for Prosigna, principally from fewer underlying procedures performed during the pandemic. We continue to see a rise in reported COVID cases and expect governments to continue to evaluate restrictive measures to attempt to contain the spread of the virus. We are uncertain that inter-quarter or seasonal trends we typically see in the business will hold in light of COVID. We have been encouraged by the recovery to date. As a result, a continued rise in cases in the impending flu season. We remain cautious about predicting the slope of the recovery. In light of uncertainty in the market, we are not currently returning to giving guidance. We continue to expect minimum corporate travel and expense associated with large group meetings, and we plan to continue to leverage digital and virtual selling. We believe it's prudent to plan for the impact of the pandemic through 2021, and we hope to continue to update you each quarter as we manage through this very challenging time. As shown on slide 18, we have $340 million in cash, and we believe we have significant resources available to manage through the pandemic. I will now turn the call back over to Bonnie.

Thanks, Keith. In closing, I'll refer you back to our key takeaways on slide four of our business and financial presentation. We are very pleased with our third quarter results as our business is rebounding from the pandemic ahead of schedule. We have significant momentum across all of our products, both our original test performed in our CLIA lab and our Persigna breast cancer assay. This includes strong revenue and volume growth along with reimbursement milestones and evidence development to further fuel progress. We are on track to launch four novel genomic tests in 2021, including our nasal swab test and Percepta Atlas as part of our expanding lung cancer portfolio. And we continue to exercise strong financial discipline with margins in line with expectations and positive cash flow from operations in the third quarter of 2020. Importantly, with our successful equity raise in August, we now have $345 million in the bank and no debt, giving us extensive strategic flexibility as we establish ourselves as a global genomic diagnostic leader and position the company for long-term profitable growth. With that, I will now ask the operator to open up the call for questions, please.